An insurance contract is an agreement where one person, for consideration, agrees to indemnify another against loss, damage or liability

due to an unknown or contingent event. A contract of suretyship becomes an insurance contract if the surety is engaged in the insurance business. It is a "risk-distributing device" because the insurer distributes the risk to a large number of insured who will all pay their contributions/premiums. The premiums will be used to pay for the losses. It becomes a "risk-shifting device" if the insurer obliges himself to assume the risk of loss which the insured, who has an insurable interest, is subject to. The insurer, therefore, agrees to bear the burden of having to suffer the loss. The Insurance Code classifies insurance contracts as either life, non-life or surety. Life Insurance Policy Insurance upon life is made payable on the death of the person, his surviving a specified period or otherwise contingently on the continuance or end of life. 1.) Ordinary Premiums are regularly paid, usually on a yearly basis, throughout the insured's life. The beneficiary will be paid only when the insured dies. The policy may provide for a "cash surrender value," which is paid if the policy is cancelled, or a "loan value" that the insured can borrow. 2.) Limited Premiums are paid only for an agreed period (ex. 5 years, etc.) The beneficiary is paid only when the insured dies. The premium payment is relatively higher than in an ordinary life policy. 3.) Term Insurance Covers only an agreed limited term (ex. 20 years, etc.) The beneficiary will be paid only if the insured dies within the covered term; if he survives beyond the covered term, the contract is terminated. The premium is relatively higher than in 1 and 2. 4.) Endowment Insurer will pay the insured if he survives an agreed period. If the insured dies within the period, the insurer will pay the beneficiary. This is usually availed of for retirementpurposes. The premium payment is also relatively higher. Non-life Insurance Policy Also termed "property insurance." The insured is indemnified for loss due to damage to/destruction of his property or for damages he may be held legally liable as a result of injuries to other persons or damage to their property. 1.) Marine/transportation Covers perils that may be encountered while the property is in transit and may include ocean marine insurance involving sea perils and inland marine insurance involving landtransportation perils. 2.) Fire The owner is indemnified for loss or damage to his property due to fire, earthquake, lightning windstorm and other allied risks.

3.) Casualty Covers loss or liability due to accident or mishap but excludes those that fall under the other types of insurance contracts. Surety The surety guarantees the obligee the performance of the obligation/undertaking of the principal/obligor; this is because it's a collateral contract in relation to the principal one between the obligor and obligee. It includes official recognizances, bonds, undertakings or stipulations issued by any company. The surety bond is the evidence of a contract of surety and the surety's liability is in solidum. The obligor is to execute an indemnity agreement to indemnify the surety against loss. If an insurance company isn't authorized to issue surety bonds but it does so, it is estopped from claiming its lack of authority (Pryce vs. CA, 230 SCRA 164.)
NEGOTIABLE INSTRUMENTS LAW NEGOTIABLE INSTRUMENT Written contract for the payment of money, by its form intended as substitute for money and intended to pass from hand to hand to give the holder in due course the right to hold the same and collect the sum due PROMISSORY NOTE unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time a sum certain in money to order or to bearer where a note is drawn to the makers own order, it is not complete until indorsed by him BILL OF EXCHANGE unconditional order in writing addressed by one person to another signed by the person giving it requiring the person to whom its addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer Check: bill of exchange drawn on a bank payable on demand.

Kinds of checks: 1. personal check 2. managers/cashiers check drawn by a bank on itself. Issuance has the effect of acceptance 3. memorandum check memo is written across its face, signifying that drawer will pay holder absolutely without need of presentment 4. crossed check Effects: a. check may not be encashed but only deposited in bank b. may be negotiated only once, to one who has an acct. with a bank c. warning to holder that check has been issued for a definite purpose so that he must inquire if he received check pursuant to such purpose, otherwise not HDC Kinds: a. general (no word between lines, or co between lines) b. special (name of bank appearing between parallel lines) BEARER Person in possession of a bill/note payable to bearer HOLDER Payee or indorsee of a bill or note who is in possession of it, or the bearer thereof. THE LIFE OF A NEGOTIABLE INSTRUMENT: 1. issue 2. negotiation

3. presentment for acceptance in certain bills 4. acceptance 5. dishonor by on acceptance 6. presentment for payment 7. dishonor by nonpayment 8. notice of dishonor 9. protest in certain cases 10. discharge NEGOTIABILITY REQUISITES 1. in writing and signed by maker or drawer no person liable on the instrument whose signature does not appear thereon ( subject to exceptions) one who signs in a trade or assumed name liable to the same extent as if he had signed in his own name signature of any party may be made by a duly authorized agent, no particular form of appt. necessary

2. unconditional promise or order to pay

unqualified order or promise to pay is unconditional though coupled with a. an indication of a particular fund out of which reimbursement to be made, or a particular account to be debited with amount, or b. a statement of the transaction which gives rise to the instrument an order or promise to pay out of a particular fund is not unconditional

a sum certain in money even if stipulated to be paid--a. with interest, or b. by stated installments, or c. by stated installments with a provision that upon default in payment of any installment/interest, the whole shall become due, or d. with exchange, whether at a fixed rate or at the current rate, or e. with costs of collection or an attorneys fee, in case payment not made at maturity 3. payable on demand, when expressed to be payable on demand, or at sight, or on presentation; when no time for payment expressed, or where an instrument is issued, accepted or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand or at a fixed or determinable future time when its expressed to be payable at a fixed period after date or sight, or on or before a fixed or determinable future time fixed therein, or on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain an instrument payable upon a contingency not negotiable, and happening of event doesnt cure it * relate to sec. 11 ( presumption as to date) and sec. 17 (construction where instrument ambiguous) * note effect of acceleration provisions, p. 30 Campos * note effect of provisions extending time of payment, p. 40 Campos 4. payable to order where it is drawn payable to the order of a specified person or to him or his order. May be drawn payable to order of --a. a payee not the maker/drawer/drawee, or b. drawer or maker, or c. drawee, or d. two or more payees jointly, or e. holder of an office for time being when the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty or bearer, when expressed to be so payable when payable to person named therein or bearer

when payable to order or fictitious/non-existent person, and such fact known to the person making it so payable, or when name of payee doesnt purport to be the name of any person, or when the only/last indorsement is in blank

5. where addressed to drawee: such drawee named/ indicated therein with reasonable certainty bill may be addressed to two or more drawees jointly, whether partners or not, but not to two or more drawees in the alternative or in succession bill may be treated as a PN, at option of holder, where a. drawer and drawee are same person b. drawee is fictitious/incapacitated EFFECT OF ADDITIONAL PROVISIONS Gen. Rule: order/promise to do any act in addition to the payment of money renders instrument nonnegotiable. Exception: negotiability not affected by provisions w/c 1. authorize sale of collateral security if instrument not paid at maturity 2. authorize confession of judgment 3. waives benefit of any law intended for advantage/protection of obligor 4. give holder election to require something to be done in lieu of money CONTINUATION OF NEGOTIABLE CHARACTER Until 1. restrictively indorsed 2. discharged by payment or otherwise TRANSFER DELIVERY NI incomplete and revocable until delivery for the purpose of giving effect thereto as between a. immediate parties b. a remote party other than holder in due course delivery, to be effectual, must be made by or under the authority of the party making/drawing/accepting/indorsing in such case delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument PRESUMPTION OF DELIVERY Where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved (*if in the hands of a HDC, presumption conclusive) NEGOTIATION When an instrument is transferred from one person to another as to constitute the transferee the holder thereof. If payable to BEARER, negotiated by delivery; if payable to ORDER, negotiated by indorsement of holder + delivery INDORSEMENT Indorser generally enters into two contracts: 1. sale or assignment of instrument 2. to pay instrument in case of default of maker Sec. 31 (how indorsement made) Sec. 41 (where payable to two or more) Sec. 43 (indorsement where name misspelled) Sec. 48 (cancellation of indorsement) Sec. 45, 46 (presumptions) Indorsement must be of entire instrument. (cant be indorsement of only part of amount payable, nor can it be to two or more indorsees severally. But okay to indorse residue of partially paid instrument) Sec. 67 (liability of indorser where paper negotiable by delivery) Sec. 63 (when person deemed indorser) KINDS OF INDORSEMENT

A. As to manner of future method of negotiation 1. Special specifies the person to whom/to whose order the instrument is to be payable; indorsement of such indorsee is necessary to further negotiation. 2. Blank specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated by delivery The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement

B. as to kind of title transferred 1. restrictive prohibits further negotiation of instrument, constitutes indorsee as agent of indorser, or vests title in indorsee in trust for another rights of indorsee in restrictive ind.: Receive payment of inst. Bring any action thereon that indorser could bring Transfer his rights as such indorsee, but all subsequent indorsees acquire only title of first indorsee under restrictive indorsement 2. non-restrictive C. as to kind of liability assumed by indorser 1. Qualified-constitutes indorser as mere assignor of title (e.g. without recourse) 2. unqualified D. as to presence/absence of express limitations put by indorser upon primary obligors privileges of paying the holder 1. Conditional additional condition annexed to indorsers liability. Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make payment to the indorsee or his transferee, whether condition has been fulfilled or not Any person to whom an instrument so indorsed is negotiated will hold the same/proceeds subject to rights of person indorsing conditionally 2. unconditional INDORSEMENT OF BEARER INSTRUMENT Where an instrument payable to bearer is indorsed specially, it may nevertheless be further negotiated by delivery Person indorsing specially liable as indorser to only such holders as make title through his indorsement UNINDORSED INSTRUMENTS Where holder of instrument payable to his order transfers it for value without indorsing, transfer vests in transferee 1. such title as transferor had therein 2. right of transferee to have indorsement of transferor for purposes of determining HDC negotiation effective upon actual indorsement HOLDER IN DUE COURSE HOLDER Sec. 191 RIGHTS OF HOLDER 1. sue thereon in his own name 2. payment to him in due course discharges instrument HOLDER IN DUE COURSE: REQUISITIES 1. complete and regular upon its face sec. 124 (effect of alteration) sec. 125 (what constitute material alterations) 2. holder became such before it was overdue, without notice of any previous dishonor sec. 53 (demand inst. nego after unreasonable length of time: not HDC) sec. 12 (effect antedating/postdating)

3. taken in good faith and for value sec. 24 (presumption of consideration) sec 25 (definition. of value) sec. 26 (definition. holder for value) sec. 27 (lien as value) 4. at time negotiated to him, he had no notice (sec. 56-def; 54-notice before full amt. paid) of --a. infirmity in instrument b. defect in title of person negotiating (1) instrument/signature obtained through fraud, etc., illegal consideration/means, or (2) instrument negotiated in breach of faith, or fraudulent circumstances RIGHTS OF HOLDER IN DUE COURSE 1. holds instrument free of any defect of title of prior parties 2. free from defenses available to prior parties among themselves 3. may enforce payment of instrument for full amount, against all parties liable * If in the hand of any holder (note definition of holder) other than a HDC, vulnerable to same defenses as if non-negotiable RIGHTS OF PURCHASER FROM HOLDER IN DUE COURSE General Rule: in the hands of any holder other than a HDC, NI is subject to same defenses as if it were nonnegotiable. Exception: holder who derives title through HDC and who is not himself a party to any fraud or illegality has all rights of such former holder in respect to all parties prior to the latter. WHO DEEMED HDC prima facie presumption in favor of holder but when shown that title of any person who has negotiated instrument was defective (sec. 55when title defective): burden reversed (now with holder) but no reversal if party being made liable became bound prior to acquisition of defective title (i.e., where defense is not his own) DEFENSES AND EQUITIES KINDS OF DEFENSES 1. real defense attaches to instrument; on the principle that the right sought to be enforced existed/there was no contract at all 2. personal defense growing out of agreement; renders it inequitable to be enforced vs. defendant DEFENSES 1. INCAPACITY: real; indorsement/assign by corp/infant: passes property but corp/infant no liability 2. ILLEGALITY: personal, even if no K because void under CC 1409 3. FORGERY: real (lack of consent): a. forged b. made without authority of person whose signature it purports to be General Rule: a. wholly inoperative b. no right to retain instrument, or give discharge, or enforce payment vs. any party, can be acquired through or under such signature (unless forged signature unnecessary to holders title) Exception: Unless the party against whom it is sought to enforce such right is precluded from setting up forgery/want of authority Precluded: a. parties who make certain warranties, like a general indorser or acceptor b. estopped/negligent parties * Note rules on Acceptance/Payment under Mistake as applied to: 1. overdraft 2. stop payment order 3. forged indorsements 4. MATERIAL ALTERATION Where NI materially altered w/o assent of all parties liable thereon, avoided, except as vs. a never

1. party who has himself made, authorized or assented to alteration 2. and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a HDC not a party to the alteration, HDC may enforce payment thereof according to orig. tenor Material Alteration 1. 2. 3. 4. 5. change date sum payable, either for principal or interest time of payment number/relations of parties medium/currency of payment, adds place of payment where none specified, other change/addition altering effect of instrument in any respect

*material alteration a personal defense when used to deny liability according to org. tenor of instrument, but real defense when relied on to deny liability according to altered terms. 5. FRAUD a. fraud in execution: real defense (didnt know it was NI) b. fraud in inducement: personal defense (knows its NI but deceived as to value/terms) 6. DURESS Personal, unless so serious as to give rise to a real defense for lack of contractual intent 7. COMPLETE, UNDELIVERED INSTRUMENT Personal defense (sec. 16) If instrument not in poss. Of party who signed, delivery prima facie presumed If holder is HDC, delivery conclusively presumed 8. INCOMPLETE, UNDELIVERED INSTRUMENT Real defense (sec. 15) Instrument will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery 9. INCOMPLETE, DELIVERED Personal defense (sec. 14) 2 Kinds of Writings: 1. Where instrument is wanting in any material particular: person in possession has prima facie authority to complete it by filing up blanks therein 2. Signature on blank paper delivered by person making the signature in order that the paper may be converted into a NI: prima facie authority to fill up as such for any amount In order that any such instrument, when completed, ma be enforced vs. any person who became a party thereto prior to its completion: 1. must be filled up strictly in accordance w/ authority given 2. within a reasonable time but if any such instrument after completion is negotiated to HDC, it's valid for all purposes in his hands, he may enforce it as if it had been filled up properly

LIABILITIES OF PARTIES A. PRIMARY PARTIES Person primarily liable: person who by the terms of the instrument is absolutely required to pay the same. Sec. 70 (effect of want of demand on principal debtor) 1. Liability of Maker a. Promises to pay it according to its tenor b. admits existence of payee and his then capacity to indorse 2. Status of drawee prior to acceptance or payment sec. 127 (bill not an assignment of funds in hands of drawee) sec. 189 (when check operates as assignment) 3. Liability of Acceptor Promises to pay inst according to its tenor

Admits the following: a. existence of drawer b. genuineness of his signature c. his capacity and authority to draw the instrument d. existence of payee and his then capacity to endorse sec. 191, 132, 133, 138 --- formal requisites of acceptance sec. 136, 137, 150 --- constructive acceptance sec. 134, 135 --- acceptance on a separate instrument

Kinds of Acceptance: 1. general 2. qualified a. conditional b. partial c. local d. qualified as to time e. not all drawees * sec. 142 (rights of parties as to qualified acceptance) Certification: Principles 1. when check certified by bank on which its drawn, equivalent to acceptance 2. where holder of check procures it to be accepted/certified, drawer and all indorsers discharged from al liability 3. check not operate as assignment of any part of funds to credit of drawer with bank, and bank is not liable to holder, unless and until it accepts or certifies check 4. certification obtained at request of drawer: secondary parties not released 5. bank which certifies liable as an acceptor 6. checks cannot be certified before payable

B. SECONDARY PARTIES 1. Liability of Drawer a. Admits existence of payee and his then capacity to endorse b. Engages that on due presentment instrument will be accepted, or paid, or both, according to its tenor and that c. If it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to an subsequent indorser who may be compelled to pay it drawer may insert in the instrument an express stipulation negativing / limiting his own liability to holder

2. Liability of Indorsers: Qualified Indorser and one Negotiating by Delivery a. Instrument genuine, in all respects what it purports to be b. good title c. all prior parties had capacity to contract d. he had no knowledge of any fact w/c would impair validity of instrument or render it valueless in case of negotiation by delivery only, warranty only extends in favor of immediate transferee Liability of a General or Unqualified Indorser a. instrument genuine, good title, capacity of prior parties b. instrument is at time of indorsement valid and subsisting c. on due presentment, it shall be accepted or paid, or both, according to tenor d. if it be dishonored, and necessary proceedings on dishonor be duly taken, he will pay the amt. To holder, or to any subsequent indorser who may be compelled to pay it Order of Liability among Indorsers 1. among themselves: liable prima facie in the order they indorse, but proof of another agreement admissible 2. but holder may sue any of the indorsers, regardless of order of indorsement 3. joint payees/indorsees deemed to indorse jointly and severally

3. Liability of Accomodation Party Definition: one who signed instrument as maker/drawer/acceptor/ indorser w/o receiving value thereof, for the purpose of lending his name to some other person

AP liable on the instrument to holder for value even if holder, at time of taking instrument, knew he was only an AP Liability of Irregular Indorser Where a person not otherwise a party to an instrument, places thereon his signature in blank before delivery, hes liable as an indorser, in accordance w/ these rules: 1. Instrument payable to order of 3rd person: liable to payee and to all subsequent parties 2. Instrument payable to the order of maker/drawer, or payable to bearer: liable to all parties subsequent to maker/drawer 3. Signs for accommodation of payee, liable to all parties subsequent to payee Sadaya v Sevilla Rules: 1. a joint and several accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amt. That he paid to the payee 2. a joint and several accommodation maker who pays on the said promissory note may directly demand reimbursement from his co-accommodation maker without first directing his action vs. the principal debtor provided: a. he made the payment by virtue of a judicial demand b. or the principal debtor is insolvent 4. Liability of an Agent Signature of any party may be made by duly authorized agent, establish as in ordinary agency Where instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal, he is not liable on the instrument if he was duly authorized, but the mere addition of words describing him as an agent without disclosing his principal, does not exempt from personal liability. Signature per procuration operates as notice that the agent has but a limited authority to sign, and the principal is bound on ly in case the agent in so signing acted within the actual limits of his authority Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities in Sec. 65, unless he discloses name of principal and fact that hes only acting as agent I. Presentment For Acceptance When presentment for acceptance must be made 1. bill payable after sight, or in other cases where presentment for acceptance necessary to fix maturity 2. where bill expressly stipulates that it shall be presented for acceptance 3. where bill is drawn payable elsewhere than at residence / place of business of drawee When failure to present releases drawer/indorser Failure to present for acceptance of negotiate bill of exchange within reasonable time Reasonable Time Must consider 1. nature of instrument 2. usage of trade or business with respect to instrument 3. facts of each case How and When Made Sec. 145, 146, 147 When Excused Sec. 148 Dishonor and Effects sec. 149 (when dishonored by non-acceptance) sec. 150 (duty of holder where bill not accepted) sec. 151 (rights of holder where bill not accepted) sec. 89 (to whom notice of dishonor must be given) sec. 117 (effect of omission to give notice of non-acceptance) II. For Payment Where necessary Sec. 70 Where not necessary Sec. 79, 80, 82, 151, 111 Date and time of presentment of instrument bearing fixed maturity Sec. 71, 85, 86, 194 Date of presentment Where instrument not payable on demand: presentment must be made on date it falls due Where payable on demand: presentment must be made within reasonable time after issue, except that in case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable

time after last negotiation (but note: though reasonable time from last negotiation, it may be unreasonable time from issuance thus holder may not be HDC under sec. 71) Check must be presented for payment within reasonable time after its issue or drawer will be discharged from liability thereon to extent of loss caused by delay

Delay excused Sec. 81 Manner Sec. 74, 72, 75 Place Sec. 73 To Whom Sec. 72, 76, 77, 78 Dishonor by nonpayment Sec. 83, 84 Notice of Dishonor General rule: to drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged Form, Contents, Time Sec. 95, 96, 102, 103, 104, 105, 106, 108, 113 By Whom Given By or on behalf of the holder or any party to the instrument who may be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given Notice of dishonor may be given by an agent either in his own name or in the name of any party entitled to give notice, whether that party be his principal or not Where instrument has been dishonored in hands of agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal (as if agent an independent holder) In whose favor notice operates 1. when given by/on behalf of holder: insures to benefit of a. all subsequent holders and b. all prior parties who have a right of recourse vs. the party to whom its given 2. Where notice given by/on behalf of a party entitled to give notice: insures for benefit of a. holder , and b. all parties subsequent to party to whom notice given Waiver Sec. 109, 110 Where not necessary to charge drawer 1. drawer/drawee same person 2. drawee fictitious, incapacitated 3. drawer is person to whom instrument is presented for payment 4. drawer has no right to expect/require that drawee/acceptor will honor instrument 5. drawer countermanded payment Where not necessary to charge indorser 1. drawee fictitious, incapacitated, and indorser aware of the fact at time of indorsement 2. indorser is person to whom instrument presented for payment 3. instrument made/accepted for his accommodation Protest Definition: testimony of some proper person that the regular legal steps to fix the liability of drawer and indorsers have been taken When necessary: sec. 152, Form and contents: sec. 153 By whom made: sec. 154 Time and Place: sec. 155, 156 For better security: sec. 158 Excused: sec. 159 Waiver: sec. 111 Acceptance for Honor Sec. 161, 131, 171 Bills in Set: 178-183 DISCHARGE A. Of the Instrument 1. payment in due course by or on behalf of principal debtor

Payment in due course: 1. made at or after maturity 2. to the holder thereof 3. in good faith and without notice that his title is defective

2. payment in due course by party accommodated where party is made/ accepted for accommodation 3. intentional cancellation by holder If unintentional or under mistake or without authority of holder, inoperative. Burden of proof on party which alleges it was unintentional, etc. 4. any other act which discharges a simple contract 5. principal debtor becomes holder of instrument at or after maturity in his own right 6. renunciation of holder: holder may expressly renounce his rights vs. any party to the instrument, before or after its maturity absolute and unconditional renunciation of his rights vs. principal debtor made at or after maturity discharges the instrument Renunciation does not affect rights of HDC w/o notice. Renunciation must be in writing unless instrument delivered up to person primarily liable thereon 7. material alteration (sec. 124: material alteration w/o assent of all parties liable avoids instrument except as against party to alteration and subsequent indorsers) B. 1. 2. 3. 4. 5. 6. Of secondary parties any act which discharges the instrument intentional cancellation of signature by holder discharge of prior party valid tender of payment made by prior party release of principal debtor, unless holders right of recourse vs. 2ndary party reserved any agreement binding upon holder to extend time of payment, or to postpone holders right to enforce instrument, unless made with assent of party secondarily liable, or unless right of recourse reserved. 8. Failure to make due presentment (sec. 70, 144) 9. failure to give notice of dishonor 10. certification of check at instance of holder 11. reacquisition by prior party where instrument negotiated back to a prior party, such party may reissue and further negotiate, but not entitled to enforce payment vs. any intervening party to whom he was personally liable where instrument is paid by party secondarily liable, its not discharged, but a. the party so paying it is remitted to his former rights as regard to all prior parties b. and he may strike out his own and all subsequent indorsements, and again negotiate instrument, except where its payable to order of 3rd party and has been paid by drawer where its made/accepted for accommodation and has been paid by party accommodated
PURPOSE OF CODIFICATION Chief purpose was to produce uniformity in the laws of the different states upon this important subject, so that the citizens of each state might know the rules which would be applied to their notes, checks, and other negotiable paper in every other state in which the law was enacted, since it is an absolute impossibility for the commercial purchaser Second purpose was to preserve the law as nearly as possible as it then existed COMMON FORMS OF NEGOTIABLE INSTRUMENTS 1. 2. 3. Promissory notes Bills of exchange Checks, which are also bills of exchange, but of a special kind Negotiable Instruments - General Principles

PROMISSORY NOTE, SECTION 184 A negotiable promissory note, within the meaning of this act, is an unconditional promise in writing by one person to another, signed by the maker (1), engaging to pay on demand or at a fixed or determinable future time (2), a sum certain in money (3) to order or to bearer (4). Where a note is drawn to the makers own order, it is not complete until indorsed by them.

Essentially a promise in writing to pay a sum certain in money The promise is to pay on demand or on a fixed or determinable future time General characteristics: amount; place where contract to pay is executed; due date; absolute promise to pay something; payable to order/bearer; payee; maker of the note BILL OF EXCHANGE, SECTION 126 A bill of exchange is an unconditional order in writing addressed by one person to another signed by the person giving it (1), requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time (2) a sum certain in money (3) to order or to bearer General characteristics: the order or command to pay; drawer/maker; drawee

CHECK 1. 2. 3. A bill of exchange drawn on a bank payable on demand Bearer Order To a specified person TO WHOM INSTRUMENTS MAY BE PAYABLE

WHEN IS IT PAYABLE TO BEARER? 1. 2. When it is expressed to be so payable When it is payable to a person named therein or bearer

WHEN IS IT PAYABLE TO ORDER? 1. 2. When it is expressed to be payable to the order of a specified person To a specified person or his order

WHEN IS IT PAYABLE TO A SPECIFIED PERSON? When the instrument is payable to a specified person named in the instrument and no other PARTIES TO A PROMISSORY NOTE 1. Makerthe person who executes the written promise to pay 2. Payee, if the instrument is payable to orderthe person in whose favor the promissory note is made payable 3. Bearer, if the instrument is payable to bearer PARTIES TO A BILL OF EXCHANGE 1. Drawerthe person who executes the written order to pay 2. Payee, if the instrument is payable to orderthe person in whose favor a bill of exchange is drawn payable 3. Bearer, if the instrument is payable to bearer 4. Acceptorthe drawee who signifies his assent to the order of the drawer. It is only when he accepts the bill that he becomes a party thereto and liable thereon. OTHER PARTIES TO NEGOTIATED INSTRUMENTS 1. 2. 3. 4. Indorser and Indorsee, in the case of instruments payable to order Persons negotiating by mere delivery Persons to whom the instrument is negotiated by delivery

INDORSER AND INDORSEE When the negotiation is by indorsement completed by delivery, the parties added are the indorser and indorsee Indorserthe one who negotiates the instrument Indorseethe one to whom the instrument is negotiated by indorsement WHERE INSTRUMENT IS PAYABLE TO BEARER

Where the instrument is payable to bearer, it can be negotiated by mere delivery without necessity of indorsement HOLDER The payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof If the instrument is payable to order, he who is the payee or indorsee and who is in possession thereof If the instrument is payable to bearer, he who is in possession thereof

ISSUE First delivery of the instrument, complete in form to a person who takes it as a holder

DELIVERY Consists principally of placing the transferee in possession of the instrument, but it must be accompanied by the intent to transfer title every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto NEGOTIATION Transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument Mode of transferring an instrument Effect is to make the transferee the holder of the instrument HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED May be negotiated by mere delivery

HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED Must be negotiated by indorsement completed by delivery Indorsement is necessary to make the transferee the indorsee and delivery is necessary to place the transferee in possession of the instrument INDORSEMENT Legal transaction, effected by the writing of ones own name on the back of the instrument or upon a paper attached thereto, with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers ones full legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid SPECIAL INDORSEMENT Specifies the person to whom or to whose order the instrument is to be payable

BLANK INDORSEMENT One that doesnt specify the person to whom or to whose order the instrument is to be payable

NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED. 1. Indorsement is merely the first step in the process of negotiating an instrument which is payable to order 2. Where the instrument is payable to order, neither is delivery equivalent to negotiation 3. But where the instrument is payable to bearer, delivery is equivalent to negotiation PRESENTMENT FOR ACCEPTANCE Exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent to the order or command of the drawer ACCEPTANCE Signification of the drawee of his assent to the order of the drawer

DISHONOR BY ACCEPTANCE Where the bill is presented for acceptance, and acceptance is refused by the drawee, or cannot be obtained, or where presentment for acceptance is excused, and the bill is not accepted PRESENTMENT FOR PAYMENT

Consists of exhibiting the instrument to the person primarily liable thereon and demanding payment form him on the date of maturity DISHONOR BY NON-PAYMENT Where the instrument is presented for payment and payment is refused or cannot be obtained, or where presentment for payment is excused and the instrument is overdue and unpaid NOTICE OF DISHONOR When an instrument has been dishonored by non-payment or non-acceptance

DISCHARGE An instrument is discharged by payment in due course by or on behalf of the principal debtor

PARTIES PRIMARILY AND SECONDARILY LIABLE Under the Negotiable Instruments Law, the person primarily liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same All other parties are secondarily liable IN BILLS OF EXCHANGE The acceptor is the one primarily liable He is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of his acceptance SECONDARY LIABILITY OF DRAWER By the mere drawing of the instrument, the drawer assumes the liability stated in Section 61 The general tenor of the liability of the drawer is that he will pay the bill if the drawee doesnt accept or pay the bill. In other words, he is not absolutely required to pay the billif the drawee pays, then he is not required to pay. It is only when the drawee doesnt pay that he will be required to pay. SECONDARY LIABILITY OF INDORSER He will pay the instrument if the person primarily liable will not pay.

SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY By merely delivering an instrument payable to bearer, without saying anything more, the person negotiating by mere delivery assumes the liability mentioned in Section 65. Under said section, the general tenor of liability is similar to that of an indorser IN PROMISSORY NOTES The maker is primarily liable Agreement of the maker is that he will pay the instrument according to the tenor

FUNCTION OF NEGOTIABLE INSTRUMENTS 1. 2. Substitute for money Increase the purchasing medium in circulation

PAYMENT BY NEGOTIABLE INSTRUMENTS W/N the giving and taking of a promissory note or bill of exchange is prima facie absolute payment as in the case of money or merely a prima facie conditional payment? The delivery of the promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when, through the fault of the creditor, they have been impaired PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS 1. 2. Negotiability Accumulation of secondary contracts as they are transferred from one person to another

NEGOTIABILITY Attribute or property whereby a bill, note or check passes or may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and collect the sums payable for himself

free from defense. PRIMARY PURPOSE OF NEGOTIABILITY To allow bills and notes the effect which money, in the form of government bills or notes, supplies in the commercial world ACCUMULATION OF SECONDARY CONTRACTS Most important characteristic of negotiable instruments is the accumulation of secondary contracts which they pick up and carry with them as they are negotiated from one person to another Advantage: they improve as they pass from hand to hand, as more debtors are added

Definition and attributes of a corporation

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes: (1) (2) (3) (4) It is an artificial being; Created by operation of law; With right of succession; Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONS Stock v. Non-Stock Corporations

Stock Definition Non-Stock

Corporations which have capital stock All other private corporations (3) divided into shares and are authorized to distribute to the One where no part of its income is holders of shares dividends or distributable as dividends to its allotments of the surplus profits on the members, trustees or officers. (87) basis of the shares (3) Primarily to make profits for its shareholders May be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agricultural and like chambers, or any combination thereof. (88) Whatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members. Members

Purpose

Distribution of Profits

Profit is distributed to shareholders

Composition

Stockholders

Scope of right to vote

Each stockholder votes according to the proportion of his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6) May be denied by the AOI or the bylaws. (Sec. 89) May be authorized by the by-laws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89)

Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or bylaws. (Sec. 89)

Voting by proxy Voting by mail

Cannot be denied. (Sec. 58) Not possible.

Who exercises Corporate Board of Directors or Trustees Powers 23 Governing Board

Members of the corporation

Board of Directors or Trustees, Board of Trustees, which may consist consisting of 5-15 directors / trustees. of more than 15 trustees unless otherwise provided by the AOI or bylaws. (Sec, 92) or Directors / trustees shall hold office for Board classified in such a way that the 1 year and until their successors are term of office of 1/3 of their number elected and qualified (Sec. 23). shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92) Officers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97) Officers may directly elected by the members UNLESS the AOI or by-laws provide otherwise. (Sec. 92)

Term of trustees

directors

Election of officers

Place of meetings

Any place within the Philippines, if Generally, the meetings must be held provided for by the by-laws (Sec. 93) at the principal office of the corporation, if practicable. If not, then anyplace in the city or municipality where the principal office of the corporation is located. (Sec. 51) Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90) See Sec. 94.

Transferability of interest Transferable. or membership

Distribution of assets in case of dissolution

FORMATION AND ORGANIZATION OF CORPORATION Requirements in the formation of a corporation

Who may form a corporation (See SEC. 10) INCORPORATORS Definition REQUIREMENTS stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the articles COMMENTS compare with Corporators which include all stockholders or members, whether incorporators or joining the corporation after its incorporation.

of incorporation as originally forming and composing the corporation and who are signatories thereof Characteristic natural persons excludes corporations and partnerships may be more than 15 for non-stock corp. except educational corp. does not prevent the one-man (person) corporation wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal

Number

not less than 5; not more than 15

Age Residence

of legal age majority should be residents of the Philippines residence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools

Steps in the formation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation

12345-

Organize and establish a corporation Comply with requirements of corporation code Contribute capital/resources Mode of use of capital/resource and control/management of capital/resource distribution/disposition of capital/resource (embodied in constitutive documents) COMMENTS Promoter

STEPS a. Promotional Stage (See SEC. 2. Definitions)

brings together persons who become interested in the enterprise aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself formulates the necessary initial business and financial plans and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same.

b. Drafting articles of incorporation

(See SEC. 14) c. Filing of articles; payment of fees.

(see chart below)

AOI & the treasurers affidavit duly signed & acknowledged must be filed w/ the SEC & the corresponding fees paid failure to file the AOI will prevent due incorporation of the proposed corporation & will not give rise to its juridical personality. It will not even be a de facto corp. Under present SEC rules, the AOI once filed , will be published in the SEC Weekly Bulletin at the expense of the corp. (SEC Circular # 4, 1982).

d. Examination of articles; approval or rejection by SEC.

Process: a) SEC shall examine them in order to determine whether they are in conformity w/ law.

b) If not, the SEC must give the incorporators a reasonable time w/in w/c to correct or modify the objectionable portions. Grounds for rejection or disapproval of AOI: a) AOI /amendment not substantially in accordance w/ the form prescribed b) purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules & regulations; c) Treasurers Affidavit is false; d) required percentage of ownership has not been complied with (Sec. 17) e) corp.s establishment, organization or operation will not be consistent w/ the declared national economic policies (to be determined by the SEC, after consultation w/ BOI, NEDA or any appropriate government agency -- PD 902-A as amended by PD 1758, Sec. 6 (k)) Decisions of the SEC disapproving or rejecting AOI may be appealed to the CA by petition for review in accordance w/ the ROC.

e. Issuance of certificate of incorporation.

Certificate of Incorporation will be issued if: a) SEC is satisfied that all legal requirements have been complied with; and b) there are no reasons for rejecting or disapproving the AOI. It is only upon such issuance that the corporation acquires juridical personality. (See Sec. 19. Commencement of corporate existence) Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC, after proper notice & hearing.

c. Drafting articles of incorporation (See SEC. 14)

CONTENTS OF AOI Corporate Name COMMENTS

Essential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts A corporate name shall be disallowed by the SEC if the proposed name is either: (1) identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or patently deceptive, confusing or contrary to existing laws. (Sec. 18)

(2)

LYCEUM OF THE PHILS. VS. CA (219 SCRA 610) The policy underlying the prohibition against the registration of a corporate name which is identical or deceptively or confusingly similar to that of any existing corporation or which is patently deceptive or patently confusing or contrary to existing laws is: 1. the avoidance of fraud upon the public which would have occasion to deal with the entity concerned;

2.

the prevention of evasion of legal obligations and duties, and 3. the reduction of difficulties of administration and supervision over corporations. Purpose Clause

A corporation can only have one (1) primary purpose. However, it can have several secondary purposes. A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary to accomplish its purposes & those which may be incident to its existence. Corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy

Principal Office

must be within the Philippines specify city or province street/number not necessary important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered cannot specify term which is longer than 50 years at a time may be renewed for another 50 years, but not earlier than 5 years prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension. names, nationalities & residences of the incorporators; names, nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected; treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation, all subscriptions /contributions paid by them. amount of its authorized capital stock in lawful money of the Philippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated for a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each 25% of 25% rule to be certified by Treasurer paid up capital should not be less than P5,000 Classes of shares into w/c the shares of stock have been divided; preferences of & restrictions on any such class; and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles. If the corporation is engaged in a wholly or partially nationalized business or activity, the AOI must contain a prohibition against a transfer of stock which would reduce the Filipino ownership of its stock to less than the required minimum.

Term of Existence

Incorporators and Directors

Capital Stock

Other matters

Any corporation may be incorporated as a close corporation, except: a) mining or oil companies; b) stock exchanges; c) banks; d) insurance companies; e) public utilities;

f) educational institutions; & g) corporations declared to be vested w/ public interest

De Facto Corporations: Requisites User of Corporate Powers

What is a de facto corporation? A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present: (1) That there is an apparently valid statute under which the corporation with its purposes may be formed; (2) That there has been colorable compliance with the legal requirements in good faith; and, (3) That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation.

Formation under apparently valid statute.

Colorable compliance with the legal requirements in good faith. CORPORATION BY ESTOPPEL
(Sec. 21)

Distinguish a de facto corporation from a corporation by estoppel.

The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de facto corporation are present, then the defectively organized corporation will have the status of a de jure corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.

(De facto has status of de jure corpo, except separate personality against State, provided all requisites are present)

What are the effects of a Corporation by Estoppel in suits brought:

(1) against the Corporation? Considered a corporation in suits brought against it if it held itself out as such and denies capacity to be sued; (2) against third party? Third party cannot deny existence of corporation if it dealt with it as such.

BY-LAWS (Sec. 46 & 47)

When adopted: (a) No later than one (1) month after receipt from SEC of official notice of issuance of Cert. of incorporation. Requirement: Affirmative vote of stockholders representing at least majority of outstanding capital stock (Stock Corp.) or members (Non-Stock) Must be signed by stockholders or members voting for them

(b) Prior to incorporation

Requirement: Where kept: When effective: Approval of all incorporators; must be signed by all of them

(1) In the principal office of the corporation ; and (2) Securities and Exchange Commission Only upon the SECs issuance of a certification that the by-laws are not inconsistent with the Corporation Code.

Special corporations: By-laws and/or amendments thereto must be accompanied by a certificate of the appropriate government agency to the effect that such by-laws / amendments are in accordance with law. banks or banking institutions building and loan associations trust companies insurance companies public utilities educational institutions other special corporations governed by special laws

Contents of By-laws - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its bylaws for: 1) 2) 3) 4) 5) 6) 7) 8) 9) the time, place and manner of calling and conducting regular or special meetings of the directors or trustees; the time and manner of calling and conducting regular and special meetings of the stockholders or members; the required quorum in meetings of stockholders or members and the manner of voting herein; the form for proxies of stockholders and members and the manner of voting them; the qualifications, duties and compensation of directors or trustees, officers and employees; the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; the manner of election or appointment and the term of office of all officers other than directors or trustees; the penalties for violation of the by-laws; in the case of stock corporations, the manner of issuing certificates; and

10) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.

THE CORPORATE ENTITY The Theory of Corporate Entity

When does the corporations existence as a legal entity commence?
Upon issuance by the SEC of the certificate of incorporation (Sec. 19)

What rights does the corporation acquire?

The right to: 1) 2) 3) sue and be sued; hold property in its own name; enter into contracts with third persons; &

4)

perform all other legal acts.

Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares.

PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity?
A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations and transactions of the latter.

Q: When Can the Veil of Corporate Entity be Pierced?

A: The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.

Q: What are the effects of disregarding the corporate veil?

(1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at least for the purpose of the particular situation involved is ignored. (3) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved.

Contrary to law / public policy; evasion of liability to government Evasion of liability to creditors Evasion of liability / obligation to employees Evasion of liability on contract

Parent-Subsidiary Relationship
Q: What is the general rule governing parent-subsidiary relationship?
A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not alone sufficient to justify their being treated as one entity.

Q:

When may it be disregarded by the courts?

(1) if the subsidiary was formed for the payment of evading the payment of higher taxes (2) where it was controlled by the parent that its separate identity was hardly discernible (3) parent corporations may be held responsible for the contracts as well as the torts of the subsidiary

Q: What are the criteria by which the subsidiary can be considered a mere instrumentality of the parent company?
1. 2. 3. 4. the parent corp. owns all or most of the capital stock of the subsidiary. the parent and subsidiary have common directors and officers the parent finances the subsidiary the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation 5. the subsidiary has grossly inadequate capital 6. the parent pays the salaries and other expenses or losses of the subsidiary 7. the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or by the parent corp.

8.

in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division of the parent corp. or its business or financial responsibility is referred as the parents own 9. the parent uses the property of the subsidiary as its own 10. the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corp. in the latters interest 11. the formal legal requirements of the subsidiary are not observed

PROMOTERS CONTRACTS PRIOR TO INCORPORATION Liability of Corporation for Promoters Contracts

While a corporation could not have been a party to a promoter's contract since it did yet exist at the time the contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may make the contracts its own and become bound thereon if, after incorporation, it: (1) (2) Adopts or ratifies the contract; or Accepts its benefits with knowledge of the terms thereof.

It must be noted, however, that the contract must be adopted in its entirety; the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.

Corporate Rights under Promoters Contracts

Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified the contract may either sue for: (1) (2) Specific performance; or Damages resulting from breach of contract.

The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.

Personal Liability of Promoter on Pre-Incorporation Contracts

GENERAL RULE: EXCEPTION: Promoters are personally liable on their contracts made on behalf of a corporation to be formed. If there is an express or implied agreement to the contrary. It must be noted that the fact that the corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a novation was intended.

CORPORATE POWERS General Powers of Corporation (Sec. 36)

To sue and be sued in its corporate name; Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; To adopt and use a corporate seal; To amend its articles of incorporation in accordance with the provisions of this Code;

To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a nonstock corporation; To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; (NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold properties:

(1) that the property must be reasonable and necessarily

required by the transaction of its lawful business, and

(2) that the power shall be subject to the limitations prescribed

by other special laws and the Constitution.) To adopt any plan of merger or consolidation as provided in this Code; To make reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided that: no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;

To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.

Specific Powers of Corporation

Extension or shortening of the corporate term (Sec. 37) Increase or decrease of the capital stock (Sec. 38) Incur, create or increase bonded indebtedness (Sec. 38) Denial of the pre-emptive right (Sec. 39) Sale or other disposition of substantially all its assets. (Sec. 40)

A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated.

Acquisition of its own shares. (Sec. 41) Investment in another corporation or business. (Sec. 42) Declaration of dividends. (Sec. 43) Entering into management contracts. (Sec. 44)

Implied Powers
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires.

A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority; it will, in the absence of proof to the contrary, be presumed valid.

The Ultra Vires Doctrine

Blacks Law Dictionary Definition: Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws of state of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it irregularly.

Q: What are the consequences of ultra vires acts?

The corporation may be dissolved under a quo warrranto proceeding. The Certificate of Registration may be suspended or revoked by the SEC. Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides. Neither party can ask for specific performance, if the contract is executory on both sides. The contract, provided that it is not illegal, will be enforced, where one party has performed his part, and the other has not with the latter having benefited from the formers performance. Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors maybe filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. When the suit against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purposes clause. Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are prejudiced thereby, or unless the acts are illegal.

CONTROL AND MANAGEMENT Allocation of Power and Control

Q: What are the three levels of corporate control/power?
Board of directors or trustees- responsible for corporate policies and the general management of the business and affairs of the corporation. Officers- execute the policies laid down by the board. Stockholders or members- have residual power over fundamental corporate changes like amendments of articles of incorporation.

Who Exercises Corporate Powers Board of directors or trustees

Q: What are the powers of the BOD?
The BOD is responsible for corporate policies and the general management of the business affairs of the corporation. (See Citibank v Chua) (a) Authority (Sec. 24) (b) Requirements (i) Qualifying share (Sec. 24)

(ii) (iii) (iv)

Residence (Sec. 24) Nationality Disqualifications (Sec. 27) conviction by final judgment of offense punishable > 6 yrs. prison violation of Corporation code within 5 years prior to date of election or appointment

(c)

How elected (Sec. 24) The formula for determining the number of shares needed to elect a given number of directors is as follows: X = Y x N1 N+1 +1

X = being the number of shares needed to elect a given number of directors Y = being the total number of shares present or represented at the meeting N1 = being the number of directors desired to be elected N = being the total number of directors to be elected (d) How removed (Sec. 28) By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of at least 2/3 of the members entitled to vote, provided that such removal takes place at either a regular meeting of the corporation or at a special meeting called for the purpose. In both cases, there must be previous notice to the SHs / members of the intention to propose such removal at the meeting. Removal may be with or without cause. However, removal without cause may not be used to deprive minority SHs or members of the right of representation to which they may be entitled under Sec. 24 of the Code. (e) How vacancy filled (Sec. 29) If vacancy due to removal or expiration of term: Must be filled by the SHs in a regular or special meeting called for that purpose. or

If "vacancy" due to increase Only by means of an election at a regular or special SHs in number of directors meeting duly called for the purpose, or in the same trustees: meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. All other vacancies: May be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum.

Note: (f)

Directors or trustees so elected to fill vacancies shall be elected only for the unexpired term of their predecessors in office.

How compensated (Sec. 30) If provided in by-laws: If not provided in by-laws: That compensation stated in the by-laws. Directors shall not receive any compensation other than reasonable per diems, as directors. However, compensation other than per diems may be granted to directors by a majority vote of the SHs at a regular or special stockholders' meeting.

Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year. (g) Matters requiring Board of Directors' action

(h) Liability (See subsequent discussion under Duties of Directors and Controlling Stockholders.) (i) In general (Sec. 31) (ii) Business judgment rule (iii) Dealings with the corporation (Sec. 32) (iv) Contracts between corporations with interlocking directors (Sec. 33) (v) Disloyalty (Sec. 34)

(vi) (i)

Watered stocks (Sec. 65)

Executive Committee (Sec. 35) See subsequent discussion under Board Committees.

Corporate officers and agents

(a) Minimum set of officers and their qualifications ( Sec. 25) The minimum set of officers are: (1) president (who shall be a director); (2) secretary (who shall be a resident and Filipino citizen); and (3) treasurer (who may or may not be a director) The by-laws, however, may provide for other officers. Any 2 or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary, or (b) president and treasurer at the same time. (b) Disqualifications (Sec. 27) - Conviction by final judgment of an offense punishable by imprisonment > 6 yrs. (c) Violation of Corporation Code committed within 6 yrs. prior to the date of election or appointment

Liability in general (Sec. 31) See discussion under Duties of Directors and Controlling Stockholders. .

(d) Dealings with the corporation (Sec. 32) Generally voidable (See discussion under Duties of Directors and Controlling Stockholders)

What is the doctrine of apparent authority?

The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent where the representation was made by the agent in the course of business and acting within his/her general scope of authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his/her principal or some other person for his/her own ultimate benefit.

Board Committees
The By-laws of the corporation may create an executive committee, composed of not less than 3 members of the Board, to be appointed by the Board. The executive committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on a majority vote of the board. However, the following acts may never be delegated to an executive committee: (1) (2) (3) (4) approval of any action for which shareholders' approval is also required; the filling of vacancies in the board (refer to Sec. 29); the amendment or repeal of by-laws or the adoption of new by-laws; the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.

Stockholders or Members
In the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is not final, and approval of the stockholders or members would be necessary: (1) (2) (3) (4) (5) Amendment of articles of incorporation; Increase and decrease of capital stock; Incurring, creating or increasing bonded indebtedness; Sale, lease, mortgage or other disposition of substantially all corporate assets; Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized; (6) Adoption, amendment and repeal of by-laws;

(7) Merger and consolidation; (8) Dissolution of corporation In all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote. (Sec. 6)

VOTING
Pledgors, mortgagors, executors, receivers, and administrators (Sec. 55)
- Pledgors or mortgagors have the right to attend and vote at stockholders' meetings. Exception: If the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. - Executors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.

Joint owners of stock (Sec. 56)

- Generally, consent of all co-owners shall be necessary.

Treasury shares (Sec. 57)

- Treasury shares have no voting right for as long as such shares remain in the Treasury.

Proxies (Sec. 58)

- Proxies must be in writing, signed by the stockholder/member, filed before the scheduled meeting with the corporate secretary. - Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. - Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59) - It must be noted however that directors or trustees cannot vote by proxy at board meetings. (Sec. 25) - Note that in Sec. 89, non-stock corporations are permitted to waive the right to use proxies via their AOI or by-laws.

Voting trust (Sec. 59)

- Voting trusts must be in writing, notarized, specifying the terms and conditions thereof, certified copy filed with SEC. Failure to comply with this requirement renders the agreement ineffective and unenforceable. - As a general rule, voting trusts are valid for a period not exceeding 5 years at any one time, and automatically expire at the end of the agreed period unless expressly renewed. However, in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may exceed 5 years but shall automatically expire upon payment of the loan. - Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59)

Pooling agreement - Pooling agreements refer to agreements between 2 or more SHs to vote their shares the same
way. They are different from voting trust agreements in that they do not involve a transfer of stocks but are merely private agreements between 2 or more SHs to vote in the same way. - Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in close corporations. Although there is no equivalent provision for widely-held corporations, Justice and Prof. Campos are of the opinion that SHs of widely-held corporations should not be precluded from entering into voting agreements if these are otherwise valid and are not intended to commit any wrong or fraud on the other SHs that are not parties to the agreement.

Non-voting shares (Sec. 6) - Preferred or redeemable shares. ITF shares And/or shares (Sec. 56) - Any one of the joint owners can vote said shares or appoint a proxy thereof.

Devices Affecting Control Proxy Device

Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and by death, except when coupled with interest or is a security.

Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from the voting rights, the usual aim being to insure the retention of incumbent directors and remove from the stockholders the power to change the management for the duration of the trust.

Advantages
Accumulates power. Small shareholders are given the chance to have a representation in the BOD or at least a spokesperson during stockholders meetings. Continuity of management. More effective than proxies because it is irrevocable. Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations.

Disadvantages
Stockholders give up rights (voting and naked title) Susceptible to abuse Not used in widely held corporations

Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the trustee:
Voting rights Proprietary rights/naked title/legal ownership Incidental rights such as to attend meetings, to be elected, to receive dividends)

Rights retained by the shareholder

Beneficial or equitable ownership Right to revoke VTA in case of breach by trustee Regain full ownership after the lapse of the period Right to an accounting by the trustee after the period of the VTA

How is a voting trust created?

(1) A VTA is prepared in writing, notarized, and filed with the corporation and SEC.

(2) The certificates of stock covered by the VTA are cancelled and new ones (voting trust certificates) are issued in the name of the trustee/s stating that they are issued pursuant to the VTA. (3) The transfer is noted in the books of the corporation. (4) The trustee/s execute and deliver to transferors the voting trust certificates. (Note that these certificates shall be transferable in the same manner and with the same effect as certificates of stock.) (5) At the end of the period of the VTA ( or the full payment of the loan to which the VTA is made a condition, as the case may be), in the absence of any express renewal, the voting trust certificates as well as the certificates of stock in the name of the trustee/s shall be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.

Pooling and voting agreements

What are the advantages/disadvantages of a pooling agreement?
Advantages: 1. there is a commitment to agree to a certain manner of voting 2. minority stockholders are able to control the corpo Disadvantages: 1. possibility of disagreement thus the need for an arbitration clause 2. there is no compelling reason for stockholders to act together

What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as agents. However, the will of the parties may not be carried out due to non-compliance with the pooling agreement.

Cumulative voting (see sec. 24)

Methods of Voting
1. Straight voting: If A has 100 shares and there are 5 directors to be elected, he shall multiply 100 by five (equals 500) and distribute equally among the five candidates without preference If A has 100 shares and there are 5 directors to be elected, he shall multiply 100 by five (equals 500) and he can vote the 500 for only one candidate.

2.

Cumulative voting: (one candidate)

3.

Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and he only (multiple candidates) wants to vote for two nominees, he can divide 500 votes between the two, giving each one 250 votes.

How to compute votes needed to get a director elected by cumulative voting:

1. Freys formula (minimum no. of votes to elect one director) X= # of shares required Y= # of outstanding votes Z= # of directors to be elected X = _ Y__ + 1 Z+1 2. Baker & Carys formula (minimum no. of votes needed to elect multiple directors) X= # of shares required Y= # of shares represented at meeting D= # of directors the minority wants to elect D= total # of directors to be elected X= Y x D + 1 D' + 1

NOTES

Levels playing field or at least ensures that the minority can elect at least one representative to the board of directors (BOD) Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the majoritys control By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24.

Classification of shares (see sec. 6)

Type of shares
1. 2. 3. Common: Preferred: share with right to vote share has preference over dividends and distribution of assets upon liquidation; right to vote may be restricted (Sec. 6)

Redeemable: share is purchased or taken up by the corporation upon the expiration of a fixed period (Sec. 8); right to vote may be restricted (Sec. 6)

NOTES
Stock can also be both preferred and redeemable. Even though the right to vote of preferred and redeemable shares may be restricted, owners of these shares can still vote on certain matter provided for in Sec. 6. SEC requires that where no dividends are declared for three consecutive years, in spite of available profits, preferred stocks will be given the right to vote until dividends are declared.

Restriction on transfer of shares

Peculiar to close corporations. Most common restriction: granting first option to the other stockholders and/or the corporation to acquire the shares of a stockholder who wishes to sell them. Restrictions on shares of stock must conform to the requirements in Sec. 98 This gives to the corporation and/or to its current management the power to prevent the transfer of shares to persons who they may see as having interests adverse to theirs.

Prescribing qualifications for directors; founders shares

Directors (See Sec. 23, 27, 47)
As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly deprive the minority of their rightful representation in the BOD, such provisions are within the power of the majority to provide in the bylaws. According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide for the disqualification of anyone in direct competition with the corporation.

Founders shares
See Sec. 7 for definition Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and redeemable shares

If founders shares enjoy the right to vote, this privilege is limited to 5 years upon SECs approval, so as to prevent the perpetual disqualification of other stockholders.

Management contracts (sec. 44)

Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid down by the board of the managed corporation. BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act as a governing body by giving absolute power to officers or others, by way of a management contract or otherwise. It must retain its control over such officers so that it may recall the delegation of power whenever the interests of the corporation are seriously prejudiced thereby.

Device Cumulative voting Classification of shares

Favorable To:
MINORITY: assures them of representation on the board MINORITY: so long as they hold more common stock as opposed to the majority who holds more preferred stock

Limitations
Cant give minority control of corp. affairs Preferred and redeemable stock can still vote on certain matters as provided in Sec. 6 or as may be provided by the corp.

Restriction on transfer of shares *applicable only to close corporations Prescribing qualifications for directors; founders shares Management contracts

MAJORITY: they can choose See Sec. 98 whether to keep or release shares and they can prevent opposition from acquiring shares MAJORITY: theyre the ones who can prescribe the qualifications in the by-laws MAJORITY: allows them to delegate certain functions and duties without losing control over the corporation Qualifications must be reasonable and do not deprive minority of representation on the board Cannot exceed five years BOD must retain control over corp. policies BOD must have power to recall contract

Unusual voting and quorum MINORITY: gives them stronger veto power in certain corp. affairs requirements

Subject to the limitations in Sec. 103.

MEETINGS Meetings of Directors / Trustees

KINDS: Meetings of the Board of Directors or Trustees may be either regular or special. (Sec. 49) REGULAR: SPECIAL: NOTICE: Held monthly, unless otherwise provided in the by-laws. (Sec. 53) At any time upon call of the president or as provided in the bylaws.

Must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws. Note: Notice may be waived expressly or impliedly. (Sec. 53)

WHERE: QUORUM:

Anywhere in or outside the Philippines, unless the by-laws provide otherwise. Generally, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business. (Sec. 25) Exceptions:

(1) If the AOI or by-laws provide for a greater majority; (2) If the meeting is for the election of officers, which requires the vote of a majority of all the members of the Board WHO PRESIDES: The president, unless the by-laws provide otherwise. (Sec. 54)

Meetings of Stockholders / Members

KINDS: Meetings of stockholders or members may be either regular or special. (Sec. 49) REGULAR: Held annually on a date fixed in the by-laws. If no date is fixed, on any date in April of every year as determined by the Board of Directors or trustees.

Notice: Written, and sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws. SPECIAL: At any time deemed necessary or as provided in the by-laws.

Notice: Written, and sent to all stockholders or members of record at least 1 week prior to the meeting, unless otherwise provided in the by-laws. Note: WHERE: Notice of any meeting may be waived expressly or impliedly by any SH or member. (Sec. 50)

In the city of municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. Metro Manila is considered a city or municipality. (Sec. 51) Generally, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock, or a majority of the members. Exception: If otherwise provided for in the Code or in the by-laws.

QUORUM:

WHO PRESIDES:

The president, unless the by-laws provide otherwise. (Sec. 54)

WHAT IS THE EFFECT IF A STOCKHOLDER'S MEETING IS IMPROPERLY HELD OR CALLED? Generally, the proceedings had and/or any business transacted shall be void. However, the proceedings and/or transacted business may still be deemed valid if: (1) Such proceedings or business are within the powers or authority of the corporation; and (2) All the stockholders or members of the corporation were present or duly represented at the meeting. (Sec. 51)

DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS Duties and Liabilities of Directors

WHAT IS THE 3-FOLD DUTY THAT DIRECTORS OWE TO THE CORPORATION? (1) Diligence (2) Loyalty (3) Obedience Obedience - directors must act only within corporate powers and are liable for damages if they acted beyond their powers unless in good faith. Assuming that they acted within their powers, liability may still arise if they have not observed due diligence or have been disloyal to the corporation.

WHEN DOES LIABILITY ON THE PART OF DIRECTORS, TRUSTEES OR OFFICERS ARISE?

In general, liability of directors, trustees or officers arises when they either: (1) willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or (2) are guilty of gross negligence of bad faith in directing the affairs of the corporation; or (3) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees. In such cases, the directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which would otherwise have accrued to the corporation. (Sec. 31) In addition to this general liability, the Corporation Code provides for specific rules to govern the following situations: (1) (2) (3) (4) Self-dealing directors (Sec. 32) Contracts between interlocking directors (Sec. 33) Disloyalty to the corporation (Sec. 34) Watered stocks (Sec. 65)

Duty of Diligence: Business Judgment Rule.

WHAT IS THE BUSINESS JUDGMENT RULE? As a general rule, directors and trustees of the corporation cannot be held liable for mistakes or errors in the exercise of their business judgment, provided they have acted in good faith and with due care and prudence. Contracts intra vires entered into by the board of directors are binding upon the corporation, and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. However, if due to the fault or negligence of the directors the assets of the corporation are wasted or lost, each of them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or omissions. Where there exists gross negligence or fraud in the management of the corporation, the directors, besides being liable for damages, may be removed by the stockholders in accordance with Sec. 28 of the Code. (Campos & Campos) GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the corporation and courts will not interfere. EXCEPTION: When such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. WHAT KIND OF DILIGENCE IS EXPECTED OF DIRECTORS? Directors are expected to manage the corporation with reasonable diligence, care and prudence, i.e. the degree of care and diligence which men prompted by self-interest generally exercise in their own affairs. Thus, they can be held liable not only for willful dishonesty but also for negligence. Although they are not expected to interfere with the day-to-day administrative details of the business of the corporation, they should keep themselves sufficiently informed about the general condition of the business. WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE DILIGENCE HAS BEEN EXERCISED? The nature of the business, as well as the particular circumstances of each case. The court should look at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subsequently took place. (Litwin v. Allen)

The self-dealing director

WHAT IS A SELF-DEALING DIRECTOR? (Sec. 32) A self-dealing director is one who enters into a contract with the corporation of which he is a director.

WHAT IS THE NATURE OF CONTRACTS ENTERED INTO BY SELF-DEALING DIRECTORS? Voidable at the option of the corporation, whether or not it suffered damages. It is possible that the self-dealing director may have the greatest interest in its welfare and may be willing to deal with it upon reasonable terms. However, such contract may be upheld by the corporation if all of the following conditions are present: (1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a quorum for such meeting; (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract; (3) The contract is fair and reasonable under the circumstances; (4) In the case of an officer, the contract has been previously authorized by the Board of Directors. In the event that either of or both conditions (1) and (2) are absent ( i.e., the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. DOCTRINE: A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." (Prime White Cement Corp. v. IAC, 220 SCRA 103; 1993)

Using inside information

USE OF INSIDE INFORMATION: Do directors and officers of a company owe any duty at all to stockholders in relation to transactions whereby the officers and directors buy for themselves shares of stock from the stockholders? MINORITY RULE: YES. Directors and officers have an obligation to the stockholders individually as well as collectively. MAJORITY the RULE: all NO. Directors and officers owe no fiduciary duty at to stockholders, but may deal with them at arms length. No duty of disclosure of facts known to director or officer exists. Nondisclosure cannot constitute constructive fraud.

SPECIAL

FACTS

DOCTRINE: IT DEPENDS. Where special circumstances or facts are present which make in inequitable to withhold information from the stockholder, the duty to disclose arises, and concealment is fraud.

In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the Supreme Court, quoting from the US case of Pepper v. Litton (308 U.S. 295-313; 1939) stated that a director cannot, "by the intervention of a corporate entity violate the ancient precept against serving two masters He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis."

Seizing Corporate Opportunity (Sec. 34)

If a director acquires for himself, by virtue of his office, a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of the corporation, he must account to the corporation for all such profits by refunding the same. However, if his act was ratified by 2/3

stockholders' vote, he need not refund said profits. This provision applies even though the director may have risked his own funds in the venture. Note: This provision is to be distinguished from Sec. 32 on contracts of self-dealing directors: contracts of self-dealing directors are voidable at the option of the corporation even if it has not suffered any injury; on the other hand, Sec. 34 applies only if the corporation has been prejudiced by the contract.

Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR? An interlocking director is one who occupies a position in 2 companies dealing with each other. WHAT IS THE RULE ON CONTRACTS INVOLVING INTERLOCKING DIRECTORS? Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between 2 or more corporations having interlocking directors shall not be invalidated on that ground alone. This practice is tolerated by the Courts because such an arrangement oftentimes presents definite advantages to the corporations involved. However, if the interest of the interlocking director in one corporation is substantial ( i.e., stockholdings exceed20% of the OCS) and his interest in the other corporation or corporations is merely nominal, he shall be subject to the conditions stated in Sec. 32, i.e., for the contract not to be voidable, the following conditions must be present: (1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a quorum for such meeting; (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract; (3) The contract is fair and reasonable under the circumstances; (4) In the case of an officer, the contract has been previously authorized by the Board of Directors. In the event that either of or both conditions (1) and (2) are absent ( i.e., the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. Note: The Investment House Law prohibits a director or officer of an investment house to be concurrently a director or officer of a bank, except as otherwise authorized by the Monetary Board. In no event can a person be authorized to be concurrently an officer of an investment house and of a bank except where the majority or all of the equity of the former is owned by the bank. (P.D. 129, Sec. 6, as amended) The Insurance Code likewise prohibits a person from being a director and/or officer of an insurance company and an adjustment company. (Sec. 187)

Watered stocks (Sec. 65)

Any director or officer of the corporation: (1) consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or (2) who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporation secretary shall be solidarily liable with the stockholders concerned to the corporation and its creditors for the difference between the fair value received at the time of the issuance of the stock and the par or issued value of the same.

Fixing compensation of directors and officers

GENERAL RULE: EXCEPTIONS: Directors as such are not entitled to compensation for performing services ordinarily attached to their office. If the articles of incorporation so provide; (2) If a contract is expressly made in advance. (1) or the by-laws expressly

WHO FIXES THE COMPENSATION? EXCEPTION:

The stockholders only (majority of the OCS)

Per diems, which can be fixed by the directors themselves

APPLICABILITY OF COMPENSATION: Only to future and NOT past services. MAXIMUM AMOUNT ALLOWED BY LAW: Total yearly income of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year (Sec. 30)

Close Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the stockholders rather than the BoD. So long as this provision continues in effect: No stockholders meeting need be called to elect directors; Generally, stockholders deemed to be directors for purposes of this Code, unless the context clearly requires otherwise; Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders instead of by the BoD.

Further, Sec. 100 provides that for stockholders managing corp. affairs: They shall be personally liable for corporate torts (unlike ordinary directors liable only upon finding of negligence) If however there is reasonable adequate liability insurance, injured party has no right of action v. stockholders-managers

Duty of Controlling Interest

A SH/director is still entitled to vote in a stockholders meeting even if his interest is adverse to a corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to the corp. and the minority. Persons with management control of corporation hold it in behalf of SHs and can not regard such as their own personal property to dispose at their whim. The ff. acts are legal: Transfer of managerial control through BoD resignation & seriatim election of successors if concomitant with the sale and actual transfer of majority interest or that which constitutes voting control; Disposal by controlling SH of his stock at any time & at such price he chooses

The ff. are illegal: Selling corp. office or management control by itself, that is NOT accompanied by stocks or stocks are insufficient to carry voting control; Transferring office to persons who are known or should be known as intending to raid the corporate treasury or otherwise improperly benefit themselves at the expense of the corp. (Insuranshares Corp. V. Northern Fiscal); Receiving a bonus or premium specifically in consideration of their agreement to resign & install the nominees of the purchaser of their stock, above and beyond the price premium normally attributable to the control stock being sold;

Duty to Creditors
General rule: Corporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent corp. If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets with due consideration to the creditors interest. If directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.

Personal Liability of Directors

In what instances does personal liability of a corporate director, trustee or officer validly attach together with corporate liability? When the director / trustee / officer: I. (1) assents to a patently unlawful act of the corporation; (2) is in bad faith or gross negligence in directing the affairs of the corporation; (3) creates a conflict of interest, resulting in damages to the corporation, its stockholders or other persons Consents to the issuance of watered stocks, or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; Agrees to hold himself personally and solidarily liable with the corporation; Is made, by a specific provision of law, to personally answer for his corporate action.

II. III. IV.

CORPORATE BOOKS AND RECORDS AND THE RIGHT OF INSPECTION Corporate Books and Records
WHAT BOOKS AND RECORDS MUST A CORPORATION KEEP? (Sec. 74) (1) (2) (3) (4) Record of all business transactions; Minutes of all meetings of stockholders or members; Minutes of all meetings of Board of Directors or Trustees; Stock and Transfer book

WHAT IS A STOCK AND TRANSFER BOOK? (Sec. 75) A stock and transfer book is a record of all stocks in the names of the stockholders alphabetically arranged. It likewise contains the following information: Installments paid and unpaid on all stock for which subscription has been made, and the date of any installment; A statement of every alienation, sale or transfer of stock made, the date thereof, and by whom and to whom made; Such other entries as the by-laws may prescribe

The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent, and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. WHAT IS A STOCK TRANSFER AGENT? (Sec. 75) A stock transfer agent is one who is engaged principally in the business of registering transfers of stocks in behalf of a stock corporation. He or she must be licensed by the SEC; however, a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee, shall be applicable. WHO IS THE CUSTODIAN OF CORPORATE RECORDS? In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes the proper and necessary entries. (Torres, et al. vs. CA, 278 SCRA 793; 1997)

Basis of the Right of Inspection

Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of the corp. are run by the directors. The law therefore gives them the right to know not only the financial health of the corp. but also how its affairs are managed so that if they find it unsatisfactory, they can seek the proper remedy to protect their investment. WHAT IS THE NATURE OF THE RIGHT TO INSPECT? PREVENTIVE : REMEDIAL: deterrent to an ill-intentioned management knowing its acts are subject to scrutiny; and A dissatisfied SH may avail of this right as a preliminary step towards seeking more direct and appropriate remedies against mismanagement.

What Records Covered

1. Records of ALL business transactions This includes book of inventories and balances, journal, ledger, book for copies of letters and telegrams, financial statements, income tax returns, vouchers, receipts, contracts, papers pertaining to such contracts, voting trust agreements (sec. 59) 2. By-laws These are expressly required to be open to inspection by SH/members during office hours (Sec. 46). Note: There is no similar provision as to AOI, but these are filed with the SEC anyway. 3. Minutes of directors meetings This is to inform stockholders of Board policies. Such right arises only upon approval of the minutes, however. 4. 5. Minutes of stockholders' meetings Stock and transfer books These are records of all stocks in the names of the stockholders alphabetically arranged. contain all names of the stockholders of record. Useful for proxy solicitation for elections. SEC has however ruled that a SH cannot demand that he be furnished such a list but he is free to examine corp. books. 6. Most recent financial statement Sec. 75 of the Code provides that within 10 days from the corporation's receipt of a written request from any stockholder or member, the corporation must furnish the requesting party with a copy of its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year. Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the corporation are NOT open to inspection, EXCEPT under the following circumstances: (1) Upon written consent of concerned depositor (presumably the corporation); (2) In cases of impeachment; (3) Upon court order in cases of bribery or dereliction of duty of a public official; and (4) In cases where the money deposited / invested is the subject matter of litigation (5) Upon order of a competent court in cases of unexplained wealth under RA 3019 or the Anti-Graft and Corrupt Practices Act (6) Upon order of the Ombudsman

Extent and Limitations on Right

1. The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the right to information. Otherwise, the corp. might be impaired, its efficiency in operations hindered, to the prejudice of SHs.

2. 3.

Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and 46). A corp. may regulate time and manner of inspection but provisions in its by-law which gives directors absolute discretion to allow or disallow inspection are prohibited. Limitations as to time and place: Exercise of right only at REASONABLE HOURS on BUSINESS DAYS. Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to merely a few days within the year. (Pardo v. Hercules Lumber)

4. 5. 6. 7.

By-laws cannot prescribe that authority of president must first be obtained. Inspection should be made in such a manner as not to impede the efficient operations Place of inspection: Principal office of the corp. SH cannot demand that such records be taken out of the principal office. As to purpose: PRESUMPTION: that SHs purpose is proper. Corp. cannot refuse on the mere belief that his motive is improper (sec 74). BURDEN OF PROOF: lies with corp. which should show that purpose was illegal. To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as such, and it is not contrary to the interests of the corporation. Legitimate: Not legitimate: inquiry about failure to declare dividends for mere satisfaction or speculation.

Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven unfounded. If motive can be clearly shown as inimical to corp., right may be denied.

Who May Exercise Right

Every director, trustee, stockholder, member may exercise right personally or through an agent who can better understand and interpret records (impartial source, expert accountant, lawyer). As to VTA: both voting trustee and transferor SH of parent corp. over subsidiary: If the two are operated as SEPARATE entities : NO right of inspection

If they are ONE AND THE SAME with respect to management and control, and inspection is demanded due to mismanagement of subsidiary by the parents directors who are also directors of the subsidiary : With right of inspection If the subsidiary is wholly-owned by the parent, and its books & records are in the possession and control of the parent corporation

: With right of inspection (Gokongwei v. SEC)

Remedies available if Inspection Refused

WHAT REMEDIES ARE AVAILABLE IF INSPECTION IS REFUSED BY THE CORPORATION? (1) Writ of mandamus.

NOTE: Writ shall not issue where it is shown that the petitioners purpose is improper and inimical to the interests of the corporation. Writ should be directed against the corporation. The secretary and the president may be joined as party defendants. (2) Injunction (3) Action for damages against the officer or agent refusing inspection. Also, penal sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144) What defenses are available to the officer or agent? (1) The person demanding has improperly used any information secured through any prior examination; or (2) Was not acting in good faith; or (3) The demand was not for a legitimate purpose.

DERIVATIVE SUITS Nature and Basis of derivative suit

Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other persons: a. b. c. Individual suits - wrong done to stockholder personally and not to other stockholders (ex. When right of inspection is denied to a stockholder) Class suit - wrong done to a group of stockholders (ex. Preferred stockholders' rights are violated) Derivative suit - wrong done to the corporation itself Cause of action belongs to the corp. and not the stockholder But since the directors who are charged with mismanagement are also the ones who will decide WON the corp. will sue, the corp. may be left without redress; thus, the stockholder is given the right to sue on behalf of the corporation. An effective remedy of the minority against the abuses of management An individual stockholder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the officials of the corp. refuse to sue or are the ones to be sued or hold the control of the corp. Suing stockholder is merely the nominal party and the corp. is actually the party in interest. A SH can only bring suit for an act that took place when he was a stockholder; not before. (Bitong v. CA, 292 SCRA 503)

Requirements Relating to Derivative Suits

WHAT ARE THE LEGAL PRINCIPLES CONCERNING DERIVATIVE SUITS? 1) 2) Stockholder/ member must have exhausted all remedies within the corp. Stockholder/ member must be a stockholder/ member at the time of acts or transactions complained of or in case of a stockholder, the shares must have devolved upon him since by operation of law, unless such transaction or act continues and is injurious to the stockholder. Any benefit recovered by the stockholder as a result of bringing derivative suit must be accounted for to the corp. who is the real party in interest. If suit is successful, plaintiff entitled to reimbursement from corp. for reasonable expenses including attorneys' fees.

3) 4)

FINANCING THE CORPORATION

Sources of Financing
WHERE CAN CAPITAL TO FINANCE THE CORPORATION BE SOURCED? 1) 2) 3) Contributions (stockholders); also known as stockholder equity/equity investment Loans or advances (creditors) Profits (corporation itself)

Capital Structure
WHAT IS MEANT BY CAPITAL STRUCTURE? This refers to the aggregate of the securities -- instruments which represent relatively long-term investment -- issued by the corporation. There are basically 2 kinds of securities: shares of stock and debt securities.

Capital and Capital Stock Distinguished

CAPITAL STOCK DEFINITION the amount fixed, usually by the corporate charter, to be subscribed and paid in or secured to be paid in by the SHS of a corporation, and upon which the corporation is to conduct its operation CONSTANT, unless amended by the AOI CAPITAL actual property of the corporation, including cash, real, and personal property. Includes all corporate assets, less any loss which may have been incurred in the business. FLUCTUATING

CONSTANCY

Shares of Stock: Kinds

COMMON DEFINITION Stock which entitles the owner of such stocks to an equal pro rata division of profits PREFERRED Stock which entitles the holder to some preference either in the dividends or distribution of assets upon liquidation, or in both PAR NO PAR* TREASURY Shares that have been issued and fully paid but subsequently reacquired by the issuing corporation by lawful means. REDEEMABLE FOUNDERS

Shares issued by Special shares the corporation that whose exclusive may be taken up rights and by the corporation privileges are upon expiration of determined by a fixed period. the AOI. regardless of the existence of unrestricted retained earnings

VALUE

Depends if its Stated par value Fixed in the Value not fixed par or no par AOI, and in the AOI, and indicated in therefore not the stock indicated in the certificate. stock May be sold atcertificate. a value Price may be higher, but not set by BOD, lower, than SHs or fixed in that fixed in the AOI the AOI. eventually. Usually vested Can vote only with the under certain exclusive right circumstances to vote Depends if its Depends if its No voting rights Usually denied common or common or for as long as voting rights. preferred. preferred. such stock remains in the

VOTING RIGHTS

treasury (Sec. 57) PREFERENCE No advantage, First crack at UPON priority, or dividends / LIQUIDATION preference over profits / any other SH in distribution of the same class assets NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code) EXCEPTION: As otherwise provided in the Corporation Code. * No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies, public utilities, building & loan association (Sec. 6)

Nature of Subscription Contract

WHAT IS A SUBSCRIPTION CONTRACT? It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. This is notwithstanding the fact that the parties refer to it as a purchase or some other contract. (Sec. 60) WHAT IS THE NATURE OF A SUBSCRIPTION CONTRACT? Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of their claims. The assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A subscription contract is INDIVISIBLE (Sec. 64). A subscription contract subsists as a liability from the time that the subscription is made until such time that the subscription is fully paid.

Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a continuing offer to the corporation, but also to have contracted with each other as well. Thus, no one may revoke the contract even prior to incorporation without the consent of all the others. WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE? 1) For a period of at least 6 months from the date of subscription; EXCEPTIONS: (1) unless all revocation; or of the other subscribers consent to the

(2) unless the incorporation of said corporation fails to materialize within the said period or within a longer period as may be stipulated in the contract of subscription 2) After the AOI have been submitted to the SEC (Sec. 61)

Post-incorporation subscription
NOTE: Under the Corporation Code, there is no longer any distinction between a subscription and a purchase. Thus, a subscriber is liable to pay for the shares even if the corporation has become insolvent.

The Preemptive Right to Shares

WHAT IS THE PRE-EMPTIVE RIGHT? It is the option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation, before the same can be disposed of in favor others. WHY A PRE-EMPTIVE RIGHT? To protect existing stockholder equity. If the right is not recognized, the SHs interest in the corporation will be diluted by the subsequent issuance of shares.

Basis of Right; Common Law Rule

Under the prevailing view in common law, the preemptive right is limited to shares issued in pursuance of an increase in the authorized capital stock and does not apply to additional issues of originally authorized shares which form part of the existing capital stock. This common law principle which was generally understood to be applicable in this jurisdiction has now to give way to the express provisions of the Corporation Code on the matter.

Extent and Limitations of Preemptive Right under the Code

WHAT IS THE EXTENT OF THE PRE-EMPTIVE RIGHT? All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or dispositions of shares of any class, in proportion to their respective shareholdings. Exception: When such right is denied by the AOI or an amendment thereto. LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39) 1) 2) Initial Public Offerings (IPOs); Issuance of shares in exchange for property needed for corporate purposes, including cases wherein an absorbing corporation issues new stocks to the SHs in pursuance to the merger agreement (Sec. 39) Why? (a) Because it is beneficial for the corporation to save its (b) A swap is more expedient than determining the monetary equivalent of the property. cash;

3)

Issuance of shares in payment of a previously contracted debt (Sec. 39) Why? (a) The obligation is extinguished outright; (b) Corporation does not have to shell out money to fulfill its obligations; (c) Money that would have otherwise been used for interest payments can be channelled to corporate activities.

more

productive

Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or 2/3 of total members.

In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including re-issuance of treasury shares, EXCEPT if provided otherwise by the AOI. (Sec. 102). Note that the limitations in Sec. 39 do not apply.

Waiver of Preemptive Right

The waiver of the preemptive right must appear in the Articles of Incorporation or an amendment thereto in order to be binding on ALL stockholders, particularly future stockholders. (Sec. 39) If it appears merely in a waiver agreement and NOT in the AOI, and was unanimously agreed to by all existing stockholders: The existing stockholders cannot later complain since they are all bound to their private agreement. However, future stockholders will NOT be bound to such an agreement. Any stockholder who has not exercised his preemptive right within a reasonable time will be deemed to have waived it.

When the issue is in breach of trust

The issue of shares may still be objectionable if the Directors have acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to freeze out the minority interest.

Remedies when right violated/denied

WHAT ARE THE REMEDIES WHEN THE PRE-EMPTIVE RIGHT IS UNLAWFULLY DENIED? (1) (2) (3) (4) Injunction; Mandamus; Cancellation of the shares (NOTE: but only if no innocent 3rd parties are In certain cases, a derivative suit

prejudiced)

Debt Securities Borrowings

Borrowings are usually represented by promissory notes, bonds or debentures. Oftentimes, a financial institution will be willing to lend large amounts to private corporations only on the condition that such institution will have some representation on the Board of Directors. The role of such representative is to see to it that his institution's investment is protected from mismanagement or unfavorable corporate policies.

Bonds and Debentures

BONDS: secured by a mortgage or pledge of corporate property

must be registered with the SEC, as provided by Sec. 38 of the

Corporation Code DEBENTURES: issued on the general credit of the corporation not secured by any collateral; THEREFORE, are not bonded indebtedness in the true sense, and stockholder approval is NOT required ( although it would generally be a good idea to obtain it)

Convertible securities; stock options

NOTE: Under the SEC rules, stock option must first be approved by the SEC. Also, if the stock option is granted to non-stockholders, or to directors, officers, or managing groups, there must first be SH approval of 2/3 of the OCS before the matter is submitted to the SEC for approval. Of course it goes without saying that the corporation must set aside enough of the junior securities in case the holders of the option decide to exercise such option.

Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock which approximates the characteristics of debt securities. Hybrid securities, as the name implies, therefore combine the features of preferred shares and bonds. Determining the true nature of the security is crucial for tax purposes. The American courts use the following criteria:

(1) Is the corporation liable to pay back the investor at a fixed maturity date? (2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings? (3) Does the security rank at least equally with the claims of other creditors, or is it subordinate to them?
WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE? BONDS WHAT IS PAID? Interest Dividends STOCK

TO WHOM PAID? WHEN PAID? NATURE TAXABILITY MATURITY DATE? RANK ON DISSOLUTION

Creditor-investor Whether the corporation has profits or not Expense Can be deducted for tax purposes Yes

Stockholder Only if there are profits Not an expense CANNOT be deducted No

Ranked together with other Superior to stockholders, corporate creditors inferior to corporate creditors

The trust indenture

Here, the bond issue usually involves 3 parties:

(1) debtor-corporation (2) creditor-bondholder (3) trustee: representative of all the bondholders

CONSIDERATION FOR ISSUANCE OF SHARES Form of Consideration

WHAT FORMS OF CONSIDERATION ARE ACCEPTABLE FOR ISSUANCE OF SHARES? cash; property actually received by the corporation: must be necessary or convenient for its use and lawful purposes; labor performed for or services actually rendered to the corporation (NOTE: Future services are NOT acceptable!); previously incurred indebtedness by the corporation; amounts transferred from unrestricted retained earnings to stated capital; outstanding shares exchange for stocks in the event of reclassification or conversion

WHAT FORMS ARE UNACCEPTABLE? future services promissory notes value less than the stated par value

HOW IS THE ISSUED PRICE OF NO-PAR SHARES FIXED? It may be fixed as follows: (1) In the AOI; or (2) By the BOD pursuant to authority conferred upon it by the AOI or the by-laws; or (3) In the absence of the foregoing, by the SHs representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose ( Sec. 62) IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH, HOW IS THE VALUE THEREOF DETERMINED? It is initially determined by the incorporators or the Board of Directors, subject to approval by the SEC. (Sec. 62)

Watered Stocks
WHAT IS WATERED STOCK? Stocks issued as fully paid up in consideration of property at an overvaluation. Oftentimes, the consideration received is less than the par value of the share. NOTE: No-par shares CAN be watered stock: when they are issued for less than their issued value as fixed by the corp. in accordance with law.

WHAT ARE THE WAYS BY WHICH WATERED STOCK CAN BE ISSUED? (1) (2) (3) (4) Gratuitously, under an agreement that nothing shall be paid to the corporation; Upon payment of less than its par value in money or for cost at a discount; Upon payment with property, labor or services, whose value is less than the par value of the shares; and In the guise of stock dividends representing surplus profits or an increase in the value of property, when there are no sufficient profits or sufficient increases in value to justify it.

WHAT IS THE LIABILITY OF DIRECTORS FOR THE ISSUANCE OF WATERED STOCK? Directors and officers who consented to the issuance of watered stocks are solidarily liable with the holder of such stocks to the corp. and its creditors for the difference between the fair value received at the time of the issuance and the par or issued value of the share. The liability will be to all creditors, whether they became such prior or subsequent to the issuance of the watered stock. Reliance by the creditors on the alleged valuation of corporate capital is immaterial and fraud is not made an element of liability. NOTE: In the Philippines, it is the statutory obligation theory that is controlling (cf. Sec. 65).

Issuance of Certificate Certificate of stock

CONDITION FOR ISSUANCE: payment of full amount of subscription price plus interest, if any is due (Sec. 64)

CERTIFICATION THAT: person named therein is a holder or owner of a stated number of shares in the corporation. INDICATES: 1. kind of shares 2. date of issuance 3. par value, if par value shares Signatures of the proper officers, usually president or secretary, as well as the corporate seal For no more than the number of shares authorized in articles of incorporation; excess would be void

BEARS: AMOUNT ISSUED:

Nature and function of a certificate of stock

A certificate of stock is not necessary to render one a stockholder in a corporation. Nevertheless, a certificate of stock is the paper representation or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the shares represented thereby, but is not in law

the equivalent of such ownership. It expresses the contract between the corporation and the SH, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. (Tan v. SEC, 206 SCRA 740)

Requisites for valid issuance of formal certificate of stock (Sec. 63)

(1) The certificates must be signed by the President / Vice-President, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a SH of the extent of his ownership in a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. (Bitong v. CA, 292 SCRA 503) (2) Delivery of the certificate There is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company. (Bitong v. CA, 292 SCRA 503) (3) Par value of par value shares / Full subscription of no par value shares must be fully paid. (4) Surrender of the original certificate if the person requesting the issuance of a certificate is a transferee from a SH.

Unpaid Subscriptions
Unpaid subscriptions are not due and payable until a call is made by the corporation for payment. (Sec. 67) An obligation arising from non-payment of stock subscriptions to a corporation cannot be offset against a money claim of an employee against the employer. (Apodaca v. NLRC, 172 SCRA 442) Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by-laws. If there is none, it shall be the legal rate. (Sec. 66)

How Payment of Shares Enforced

HOW ARE UNPAID SUBSCRIPTIONS COLLECTED? (1) Call for payment as necessary, i.e. the BOD declares the unpaid subscriptions due and payable (Sec. 67); (2) Delinquency sale (Sec. 68; to be discussed in the next section) (3) Court action for collection (Sec. 70)

Rights and Obligations of Holders of Unpaid but Non-delinquent Stock

WHAT ARE THE RIGHTS OF UNPAID SHARES? Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (Sec. 72)

Effect of delinquency
WHAT IS DELINQUENT STOCK? (Sec. 67) Stock that remains unpaid 30 days after the date specified in the subscription contract or the date stated in the call made by the Board. WHAT ARE THE EFFECTS OF DELINQUENCY?

1. 2.

The holder thereof loses all his rights as a stockholder except only the rights to dividends; Dividends will not be paid to the stockholder but will be applied to the unpaid balance of his subscription plus costs and expenses. Also, stock dividends will be withheld until full payment is made. Such stockholder cannot vote at the election of directors or at any meeting on any matter proper for stockholder action. Stockholder cannot be counted as part of the required quorum. Stockholder cannot be voted for as director of the corporation.

3. 4. 5.

WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec. 68) (1) Issuance of Board resolution The BOD issues a resolution ordering the sale of delinquent stock, specifically stating the amount due on each subscription plus all accrued interest, and the date, time and place of the sale. Note: The sale shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. (2) Notice of sale and publication Notice of the date of delinquency sale and a copy of the resolution is sent to every delinquent stockholder either personally or by registered mail. The notice is likewise published once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. (3) Sale at public auction If the delinquent stockholder fails to pay the corporation on or before the date specified for the delinquency sale, the delinquent stock is sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. (4) Transfer and issuance of certificate of stock The stock so purchased is transferred to such purchaser in the books of the corporation and a certificate of stock covering such shares is issued. If there is no bidder at the public auction who offers to pay the full amount of the balance on the subscription and its attendant costs, the corporation may bid for the shares, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the Code. Note that this is subject to the restrictions imposed by the Code on corporations as regards the acquisition of their own shares. (See the discussion under Dividends and Purchase by Corporation of its Own Shares.) CAN A DELINQUENCY SALE BE QUESTIONED? (Sec. 69) Yes. This is done by filing a complaint within 6 months from the date of sale, and paying or tendering to the party holding the stock the sum for which said stock was sold, with interest at the legal rate from the date of sale. No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock unless these requirements are complied with.

Lost or Destroyed Certificate

WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO REPLACE THOSE STOLEN, LOST OR DESTROYED? (Sec. 73)

(1) File an affidavit in triplicate with the corporation. The affidavit must state the following: (a) Circumstances as to how the certificates were SLD;

(b) Number of shares represented; and (c) Serial number of the certificate (d) Name of issuing corporation (2) The corporation will publish notice after the affidavit and other information and evidence have
been verified with the books of the corporation, ( Note however that this is not mandatory. The corporation has the discretion to decide whether to publish or not.) The notice will contain the following information: (a) (b) (c) (d) (e) Name of the corporation Name of the registered owner; Serial number of the certificate; Number of shares represented by the certificate; Effect of expiration of 1 year period from publication and failure to present contest within that period.

(3) SLD certificate is removed from the books if after one year from date of last publication, no
contest is presented. NOTE: One-year period will not be required if the applicant files a bond good for 1 year. (4) The corporation will then issue new certificates. However, if a contest has been presented to the corporation, or if an action is pending court regarding the ownership of the SLD certificate, the issuance of the new certificate shall be suspended until the final decision by the court. NOTE: Should corporation issue new certificates without the conditions being fulfilled and a third party proves that he is the rightful owner of the shares, the corporation may be held liable to the latter EVEN IF it acted in good faith. NOTE: Even if the above procedure was followed, if there was fraud, bad faith, or negligence on the part of the corporation and its officers, the corporation may be held liable.

TRANSFER OF SHARES
HOW ARE SHARES OF STOCK TRANSFERRED? By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. (Sec. 63) WHAT ARE THE REQUISITES FOR A VALID TRANSFER? (1) Delivery; (2) Indorsement by the owner or his attorney-in-fact or other persons legally authorized to make the transfer Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. (Razon v. CA, 207 SCRA 234) (3) Recording of the transfer in the books of the corporation ( so as to make the transfer valid as against third parties) Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee cannot enjoy the status of a SH: he cannot vote nor be voted for, and he will not be entitled to dividends.

Restrictions on Transfer; Close Corporations

General rule: Shares of stock are freely transferable, without restriction. Exception: In close corporations, restrictions may be placed on the transfer of shares. Such restrictions must appear in the AOI and in the by-laws, as well as in the certificate of

stock. Otherwise, the restriction shall not be binding on any purchaser thereof in good faith. The restrictions imposed shall be no more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If this option is not exercised upon the expiration of the period, the transferring stockholder may sell his shares to any third person. (Sec. 98) WHAT IS THE EFFECT OF ISSUANCE OR TRANSFER OF STOCK IN BREACH OF THE RESTRICTIONS? The corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. (Sec. 99.4) However, this shall not be applicable if the transfer, though otherwise contrary to subsections (1), (2) and (3) of Sec. 99, has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its AOI in accordance with Title XII of the Code. For his part, the transferee may rescind the transfer or recover from the transferor under any applicable warranty, whether express or implied.

UNAUTHORIZED TRANSFERS Certificates indorsed in blank; when quasi-negotiable

A possessor, even without authority, may transfer good title to a bona fide purchaser if: the real owner endorses the certificate in blank the conveyance is for purposes other than transfer that relying on the stock certificate, the purchaser believes the possessor to be the owner thereof or has authority to transfer the same. This proceeds from the theory of quasi-negotiability which provides that in endorsing a certificate in blank, the real owner clothes the possessor with apparent authority, thus, estopping him later from asserting his rights over the shares of stock against a bona fide purchaser. Quasi-negotiability does not apply in cases where the real owner: a. b. did not entrust the certificate to anyone; and is not otherwise guilty of estoppel

For example, in case the transfer is made by a finder or a thief.

Forged Transfers
A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant to a forged transfer. It can always recall from the person the certificate issued, for cancellation. In case where the certificate so issued comes into the hands of a bona fide purchaser for value from the original purchaser, the corporation is estopped from denying its liability. It must recognize both the original and the new certificate. But if recognition results to an over-issuance of shares, only the original certificate may be recognized, without prejudice to the right of the bona fide purchaser to sue the corporation for damages.

Collateral Transfers
Shares of stock are personal property. Thus, they can either be pledged or mortgaged. However, such pledge or mortgage cannot have any legal effect if it is registered only in the corporate books. Where a certificate is delivered to the creditor as a security, the contract is considered a pledge, and the Civil Code will apply. If the certificate of stock is not delivered to the creditor, it must be registered in the registry of deeds of the province where the principal office of the corporation is located, and in case where the domicile of the stockholder is in a different province, then registration must also be made there.

In a situation where, the chattel mortgage having been registered, the stock certificate was not delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide purchaser for value is bound by the registration in the chattel mortgage registry. It is said that such a rule tends to impair the commercial value of stock certificates.

NON-TRANSFERABILITY IN NON-STOCK CORPORATIONS

Although shares of stock are as a rule freely transferable, membership in a non-stock corporation is personal and non-transferable, unless the articles of incorporation or by-laws provide otherwise. The court may not strip him of his membership without cause. (Sec. 90)

DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN SHARES Form of Dividends

IN WHAT FORMS CAN DIVIDENDS BE ISSUED? 1. 2. 3. Cash Property scrip - certificate issued to SHs instead of cash dividends which entitles them to a certain amount in the future Stock dividends Stock dividends are distribution to the SHs of the companys own stock. Stock dividends cannot be declared without first increasing the capital stock unless unissued shares are available. New shares are issued to the SHs in proportion to their interest. No new income unless sold for cash. Civil fruits belong to the usufructuary and not to the naked owner. Can only be issued to SHs. Whenever fractional shares result, corp may pay in cash or issue fractional share warrants.

DIFFERENTIATE BETWEEN CASH DIVIDENDS AND STOCK DIVIDENDS. Cash Dividend Voting requirements for issuance Effect on delinquent stock Board of Directors Stock Dividend Board of Directors + 2/3 OCS

Shall be applied to the unpaid Shall be withheld from the balance on the subscription delinquent stockholder until plus costs and expenses. his unpaid subscription is fully paid. No. (Sec. 35) No, since this requires SH approval. (Sec. 35)

Can this be issued by Executive Committee?

When Right to Dividends Vests; Rights of Transferee

WHEN DOES THE RIGHT TO DIVIDENDS VEST? As soon as the BoD has declared dividends. From this time, it becomes a debt owed by the corporation, and therefore can no longer be revoked (McLaran v. Crescent Planning). EXCEPTION: stockholders. If the declaration has not yet been announced or communicated to the

NOTE: When no dividends are declared for 3 consecutive years, preferred SHs are given the right to vote for directors until dividends are declared. NOTE: The extent of the SHs share in the dividends will depend on the capital contribution; NOT the number of shares he has.

Liability for Illegal Dividends

WHAT ARE ILLEGAL DIVIDENDS? Illegal dividends are dividends declared in violation of law. WHAT ARE THE EFFECTS OF THE ILLEGAL DECLARATION OF DIVIDENDS? (1) If the directors acted wilfully, or with negligence or in bad faith, they will be liable to the corporation. If the corporation has become insolvent, they are liable to the corporation's creditors for the amount of dividends based out of capital. (Based on Sec. 31) (2) If the directors cannot be held liable because they acted with due diligence and in good faith, in the absence of an express provision of law, an innocent stockholder is not liable to return the dividends received by him out of capital, unless the corporation was insolvent at the time of payment. (Majority view; Campos)

Purchase by Corporation of its own shares

WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS OWN SHARES? (Sec. 41) 1. 2. unrestricted retained earnings to cover the shares to be acquired; legitimate corporate purpose

FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. 41) 1. 2. 3. To eliminate fractional shares arising out of stock dividends; To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; To pay dissenting or withdrawing stockholders entitled to payment for their shares under the Corporation Code (Appraisal Right).

Appraisal Right (Sec. 81)

WHAT IS THE APPRAISAL RIGHT? The appraisal right refers to the right of a stockholder who dissented and voted against a proposed fundamental corporate action to get out of the corporation by demanding payment of the fair value of his shares. IN WHAT INSTANCES CAN THE APPRAISAL RIGHT BE EXERCISED? The Corporation Code lists 4 instances: (1) In case any amendment to the AOI has the effect of changing or restricting the rights of any SH or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence (Sec. 81); (2) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in this Code ( Sec. 81; Sec. 40); (3) In case of merger or consolidation (Sec. 81); (4) In case the corporation invests its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized ( Sec. 42)

WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT? (Sec. 82) (1) (2) (3) (4) (5) SH must have voted against he proposed corporate action; Written demand on the corporation for payment of the fair value of his shares; Such demand must have been made within 30 days after the date on which the vote was taken; Surrender of the stock certificate/s representing his shares; Unrestricted retained earnings in the books of the corporation to cover such payment.

WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE APPRAISAL RIGHT? (Sec. 83) All rights accruing to the shares, including voting and dividend rights, are suspended in accordance with the Corporation Code, except for the right of the SH to receive payment of the fair value thereof. Such suspension shall be from the time of demand until either: (1) abandonment of the corporate action involved; or (2) the purchase of the said shares by the corporation. However, if said dissenting SH is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. WHAT ARE THE DUTIES OF THE DISSENTING STOCKHOLDER IN RELATION TO THE EXERCISE OF THE APPRAISAL RIGHT? The dissenting SH must submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares within 10 days after demanding payment for his shares. Failure to do so shall, at the option of the corporation, terminate his rights under Title X of the Corporation Code. (Sec. 86)

WHAT ARE THE EFFECTS OF TRANSFER OF THE CERTIFICATES BEARING THE NOTATION THAT THEY REPRESENT DISSENTING SHARES? If the certificates are consequently cancelled, the rights of the transferor as a dissenting SH cease and the transferee has all the rights of a regular stockholder. All dividend contributions which would have accrued on the shares will be paid to the transferee. (Sec. 86)

AMENDMENTS OF CHARTER
The charter of a private corporation consists of its articles of incorporation as well as the Corporation Code and such other law under which it is organized.

Amendment by Legislature
Subject to the limitation that no accrued rights or liabilities be impaired, the legislature has the power to make changes in existing corporations through an amendment to the Corporation Code.

Amendment by Stockholders
One of the powers expressly granted by law to all corporations is the power to amend its articles of incorporation. This, in effect, is a grant of power to owners of 2/3 of the outstanding stocks to change the basic agreement between the corporation and its stockholders, making such change binding on all the stockholders, subject only to the right of appraisal, if proper.

WHAT ARE THE LIMITATIONS ON THE POWER TO AMEND? PURPOSE: VOTE: (1) must be legitimate 2/3 of OCS / membership

The appraisal right must be recognized in case the amendment has the effect of changing rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or extending or shortening the term of corporate existence. Extension of corporate term cannot exceed 50 yrs. in any one instance A copy of the amended articles should be filed with the SEC, and with the proper governmental agencies, as appropriate (e.g., in the case of banks, public utilities, etc.) Original and amended articles should contain all matters required by law to be set out in said articles. An amendment to increase/decrease capital stock as well as to extend/shorten corporate term cannot be made under Sec. 16, but must be made under Sec. 37-38, respectively, both of which require a meeting; and Amendment must be in the form prescribed by the Code

(2) (3) (4) (5)

(6)

ON WHAT GROUNDS CAN THE SEC DISAPPROVE THE PROPOSED AMENDMENTS? The same grounds as for the disapproval of the original articles ( Sec. 17): Not substantially in accordance with the form prescribed by the Code; Purpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; Treasurers Affidavit concerning amount of capital stock subscribed/paid is false; Required percentage of ownership of capital stock to be owned by citizens of the Phils. has not been complied with as required by the Constitution or existing laws; Absence of a favorable recommendation from the appropriate government agency.

Amendment changing stockholders rights

The law expressly allows amendments which would change or restrict existing rights of stockholders or any class of shares. (Sec. 81)

Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such approval or rejection must be made within six months of filing of amendment; otherwise it shall take effect even w/o such approval (as of the date of filing), unless cause of delay is attributable to the corporation. (Sec. 16)

Special amendments

Increase of capital stock

After the authorized capital stock has been fully subscribed and the corporation needs to increase its capital, it will have to amend its articles to increase its capital stock. A corporation does not have the implied power to increase capital stock; such a power can only be granted by law. The power to increase or decrease capital stock must be exercised in accordance with the provisions of Sec. 38 of the Code.

Reduction of capital stock

Reduction of capital stock is not allowed if it will prejudice the rights of corporate creditors.

Change in corporate term

The Code allows a corporation not only to extend but also to shorten its term of existence. As in the case of increase/decrease of capital stock, change must be approved at a members/stockholders meeting by 2/3 of the members/outstanding capital stock.

Amendments in close corporations

To recall, the provisions required to be contained in the AOI of a close corporation:

(1) All issued stock of all classes should be held by not more than 20; (2) All issued stock shall be subject to one or more specified restrictions on transfer permitted by
law;

(3) Corporation should not be listed in the stock exchange or make any public offering of its
stock. If any of these are deleted, then the corporation will cease to be a close corporation and will lose the special privileges of such corporations. Thereafter, it will be governed by the general provisions of the Code. Since such amendment involves a change in the nature of the corporation, even non-voting stocks are given a voice in the decision. A stockholders meeting is required and a 2/3 vote must approve the amendment, unless otherwise provided by the articles of incorporation.

DISSOLUTION Modes of Dissolution

HOW MAY A CORPORATION BE DISSOLVED?

(1) Failure to organize and commence business (Sec. 22);

(2) Cessation of business for 5 years (Continuous inoperation; Sec. 22); (3) Expiration of original, extended, or shortened term;

(4) Voluntary dissolution (Sec. 118-119);

(a) Where no creditors are affected (Sec. 118) This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note the special notice requirements.) The copy of the resolution authorizing the dissolution shall be certified by a majority of the BOD and countersigned by the secretary of the corporation. THE SEC shall thereupon issue the certificate of dissolution. (b) Where creditors are affected (Sec. 119) (1) Filing of petition for dissolution with SEC A petition for dissolution must be filed with the SEC after having been signed by a majority of the BOD, verified by the president or secretary or one of the directors, and resolved upon by the affirmative vote of 2/3 of the OCS or members. The petition must set forth all claims and demands against the corporation, and the fact that the dissolution was approved by the SHs with the requisite 2/3 vote. (2) Fixing of date by SEC for filing of objections to petition If the petition is sufficient in form and substance, the SEC shall fix a date on or before which objections thereto may be filed by any person. Date: not less than 30 days nor more than 60 days after the entry of the order (3) Publication of order Before the date fixed by the SEC, the SEC order shall be published and posted accordingly. Newspaper: Once a week for 3 weeks in a newspaper of general circulation published in the municipality or city where the corporation's principal office is situated, or there be no such newspaper, in a newspaper of general circulation in the Philippines For 3 consecutive weeks in 3 public places in the city or municipality where the corporation's principal office is situated

Posting:

(4) Hearing of the petition for dissolution Upon 5 days notice, given after the date on which the right to file objections to the order has expired, the SEC shall proceed to hear the petition and try any issue made by the objections filed. If no objection is sufficient, and the material allegations are true, the SEC shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires. Note: The SEC may appoint a receiver to collect such assets and pay the debts of the corporation.

(3) Involuntary dissolution (Sec. 121):

(a) Revocation of Certificate of Registration by SEC (Sec. 121)

A corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations.

(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of

Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings involving corporation. Under the Securities Regulation Code or RA 8799, however, the jurisdiction of the SEC over all cases enumerated under Sec. 5 of PD 902-A have been transferred to the Regional Trial Courts. The grounds for involuntary dissolution of a corporation under quo warranto proceedings are: (1) When the corporation has offended against a provision of an act for its creation or renewal; (2) When it has forfeited its privileges and franchises by non-user; (3) When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises; (4) When it misused a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law (PNB v. CFI, 209 SCRA 294; 1992) (4) Shortening of corporate term (Sec. 120) NOTE: The simplest and most expedient way of effecting dissolution is by shortening the corporate term and waiting for such term to expire.

Dissolution of close corporations

In close corporations, any stockholder may, by written petition to the SEC, compel the dissolution of such corporation when: (1) Any of the acts of the directors, officers, or those in control of the corporation is: Illegal; Fraudulent; Dishonest; Oppressive or unfairly prejudicial to the corporation or any other SH;

(2) Corporate assets are being misapplied or wasted. (Sec. 105)

Effects of Dissolution
WHAT ARE THE EFFECTS OF DISSOLUTION? Corporation ceases to be a juridical person and consequently can no longer continue transacting its business. Corporate existence continues for 3 years following dissolution for the ff. purposes only:

(a) winding up of affairs; and (b) liquidation of corporate assets.

Corporation can no longer continue its business, except for winding up. Corporation CANNOT even be a de facto corporation. Corporate existence may be subject to COLLATERAL attack.

NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers. (Sec. 145)

Loss of juridical personality

Can an action commenced within 3 years after the abolition of plaintiff corporation be continued by the same after the expiration of said period? The Corp. Law allows a corporation to continue as a body for 3 years after the time when it would have been dissolved for the purposes of prosecuting and defending suits by or against it. But at any time during the 3 years, the corporation should convey all its property to trustees so that the latter may be the ones to continue on with such prosecution, with no time limit on its hands. Since the case against Pore was strong, the corp.'s amended complaint was admitted and the case was remanded to the lower court.

Executory contracts
The prevailing view is that executory contracts are not extinguished by dissolution. Sec. 145 of the Code states that "No right or remedy in favor of or against any corporation.nor any liability incurredshall be removed or impaired either by the subsequent dissolution of said corp. or by any subsequent amendment or repeal of this Code or of any part thereof."

Liquidation
WHAT IS LIQUIDATION? (Sec. 122) Liquidation, or winding up, refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of the remaining assets, if any, among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests. WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY UNDERTAKE THE LIQUIDATION OF A CORPORATION? 1. Liquidation by the corporation itself through its board of directors Although there is no express provision authorizing this method, neither is there any provision in the Code prohibiting it. 2. Conveyance of all corporate assets to trustees who will take charge of liquidation . If this method is used, the 3-year limitation will not apply provided the designation of the trustees is made within said period. There is no time limit within which the trustee must finish liquidation, and he may sue and be sued as such even beyond the 3-year period unless the trusteeship is limited in its duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore, supra) 3. Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing the dissolution of the corp. As with the previous method, the three-year rule shall not apply. However, the mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its corporation rights. FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN? Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3 years after the time when it would have so dissolved. (Sec. 122) However, it was held in the case of Clemente v. CA (supra)that if the 3-year period has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the BOD itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION? (Sec. 122)

(1) (2) (3) (4)

Collection of corporate assets and property; Conveyance of all corporate property to trustees for the benefit of SHs, members, creditors, and other persons in interest; Payment of corporation's debts and liabilities; Distribution of assets and property

Distribution of assets after payment of debts

GENERAL RULE: EXCEPTION: No corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (Sec. 122) In cases of decrease of capital stock, and as otherwise allowed by the Corporation Code

WHAT HAPPENS IF AN ASSET CANNOT BE DISTRIBUTED TO THE PERSON ENTITLED TO IT? Any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. (Sec. 122)

Distribution of assets of non-stock corporations

WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK CORPORATIONS? (Sec. 94-95) (1) (2) All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or adequate provision shall be made therefor. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, education or similar purposes, but not subject to condition (2) above, shall be transferred or conveyed to one or more corporations, societies or organization engaged in activities in the Philippines substantially similar to those of the dissolving corp. according to a plan of distribution adopted pursuant to Sec. 95 of the Code. Assets other than those mentioned in preceding paragraphs shall be distributed in accordance with the AOI or by-laws. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to Sec. 95.

(3)

(4) (5)

* The plan of distribution of assets may be adopted by a majority vote of the Board of trustees and approval of 2/3 of the members having voting rights present or represented by proxy at the meeting during which said plan is adopted. It must be noted that the plan of distribution of assets must not be inconsistent with the provisions of Title XI of the Code.

CORPORATE COMBINATIONS Techniques to achieve corporate combinations

WHAT ARE THE TECHNIQUES TO ACHIEVE A CORPORATE COMBINATION?

(1) Merger (A + B = A) (2) Consolidation (A + B = C) (3) Sale of substantially all corporate assets and purchase thereof by another corporation; (4) Acquisition of all / substantially all of the stock of one corporation from its SHs in exchange
for the stock of the acquiring corporation

Merger or Consolidation
WHAT IS THE PROCEDURE FOR MERGER OR CONSOLIDATION? (1) Board of Directors of the constituent corporations must prepare and approve a plan of merger or consolidation. (2) 2/3 vote of OCS of the constituent corporations. (3) Execution of the Articles of Merger/Consolidation, to be signed by the Pres/VP and certified by the secretary / assistant secretary. (4) Submission to the SEC for approval. WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION? (Sec. 80) (1) The constituent corporation shall become a single corporation: If merger: the surviving corporation designated in the plan of merger

If consolidation: the consolidated corporation designated in the plan of Consolidation. (2) The separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation. (3) The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Corporation Code. (4) The surviving or consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; (5) All property (real or personal) and all receivables due on whatever account ( including subscriptions to shares and other choses in action) , and all and every other interest of, or belong to, or due to each constituent corporation, shall be deemed transferred and vested in such surviving or consolidated corporation without further act or deed. (6) The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. (Note: The merger or consolidation does not impair the rights of creditors or liens upon the property of any such constituent corporations.) WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A FOREIGN CORPORATION LICENSED IN THE PHILIPPINES? (Sec. 132) A foreign corporation authorized to transact business in the Philippines may merge or consolidate with any domestic corporation if such is permitted under Philippine law and by the law of its incorporation. The requirements on merger or consolidation as provided in the Corporation Code must be complied with. Whenever a foreign corporation authorized to transact business in the Philippines is a party to a merger or consolidation in its home country or state, such foreign corporation shall file a copy of the articles or merger or consolidation with the SEC and the appropriate government

agencies within 60 days after such merger or consolidation becomes effective. Such copy of the articles must be duly authenticated by the proper officials of the country or state under the laws of which merger or consolidation was effected. If the absorbed corporation in such a merger / consolidation happens to be the foreign corporation doing business in the Philippines, it shall file a petition for withdrawal of its license in accordance with Sec. 136.

Sale of substantially all corporate assets

WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY ALL THE CORPORATE PROPERTY AND ASSETS? If by the sale the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. (Sec. 40)

WHAT ARE THE REQUIREMENTS? (Sec. 40) (1) Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the purpose; (2) Compliance with the laws on illegal combinations and monopolies Note, however, that after such approval by the SHs, the BOD may nevertheless, in its discretion, abandon such sale or other disposition without further action or approval by the SHs. This, of course, is subject to the rights of third parties under any contract relating thereto.

WHEN IS SH APPROVAL NOT NECESSARY FOR THE ABOVE DISPOSITION?

(1) If the disposition is necessary in the usual and regular course of business; or (2) If the proceeds of the disposition be appropriated for the conduct of its remaining business
(Sec. 40) IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS? Yes. However, it must be stressed that this right is generally available only to dissenting stockholders of the selling corporation, not the purchasing corporation. (It can be argued, though, that in instances wherein the purchase constitutes an investment in a purpose other than its primary purpose, stockholders' approval of such investment is necessary, and anyone who objects thereto will have the appraisal right under Sec. 42.)

Exchange of stocks
In this method, all or substantially all the stockholders of the "acquired" corporation are made stockholders of the acquiring corporation. With the exchange, the acquired corporation becomes a subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses under a single corporation as in merger and sale of assets, from the point of view of the acquiring (parent) corporation, there is hardly any difference between owing the acquired corporation's business directly and operating it through a controlled subsidiary. In fact, the parent corporation would have the power to buy all the subsidiary's assets and dissolve it, achieving the same result as in the other methods of combination. (Campos & Campos)

FOREIGN CORPORATIONS
WHAT IS A FOREIGN CORPORATION? (Sec. 123)

A corporation formed and organized under laws other than those of the Philippines, regardless of the citizenship of the incorporators and stockholders. Such corporation must have been organized and must operate in a country which allows Filipino citizens and corporations to do business there. In times of war: For purposes of security of the state, the citizenship of the controlling stockholders determines the corporations nationality.

IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.? (1) Wholly-owned subsidiary; or (2) Branch office; or (3) Joint venture with a local partner.

Permitted areas of investment

100% EQUITY: Mass media, except recording The practice of a profession (law, medicine, etc.) Operation of rural banks Cooperatives Private security agencies Small-scale mining Utilization of marine resources Ownership, operation, and management of cockpits; Manufacture, repair, stockpiling of nuclear, biological, chemical, and radiological weapons;

Note: Retail trade is no longer required to be 100% Filipino-owned on account of the Retail Trade Liberalization Act. 75%-25% EQUITY: Inter-island shipping (R.A. 1937, Sec. 8) Private recruitment Contracts for construction and repair of locally-funded public works Except: Public works that would fall under the BuildOperate-Transfer Law, as well as those that are foreignfunded 70%-30% EQUITY: 60%-40% EQUITY: Advertising Other industries.

WHAT IS THE SO-CALLED "GRANDFATHER RULE"? Where a domestic corporation which has both Philippine and foreign stockholders is an investor in another domestic corporation which has also both Philippine and foreign stockholders, the so-called "grandfather rule" is used to determine whether or not the latter corporation is qualified to engage in a partially nationalized business, i.e. by determining the extent of Philippine equity therein. Under present SEC rules, if the percentage of Filipino ownership in the first corporation is at least 60%, then said corporation will be considered as a Philippine national and all of its investment in the second corporation would be treated as Filipino equity. On the other hand, if the Philippine equity in the first corporation is less than 60%, then only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. (See SEC Rule promulgated on 28 Feb. 1967, cited in Opinion # 18, Series of 1989, Department of Justice, dated 19 January 1989.) NOTE: The reader would be well-advised to cross-reference this definition of the "grandfather rule" with a trusted commentary.

Legal Requirements Prior to Transaction of Business Documentary Requirements (Sec. 125)

(1) BOI certificate The BOI certificate is issued upon a finding of the Board of Investments that the business operations of the foreign corp. will contribute to the sound and balanced development of the national economy on a self-sustaining basis. (See Omnibus Investments Code, Sec. 48-49) NOTE: Applications, if not acted upon within 10 days from official acceptance thereof, shall be considered automatically approved! (Art. 53, Omnibus Investments Code) (2) SEC license to do business (Sec. 125) Application under oath setting forth the information specified in Sec. 125; Additional information as may be necessary or appropriate to enable the SEC to determine whether the corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable; Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's incorporation, attesting to the fact that the laws of the country of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing; Statement under oath of the president or any other person authorized by the corporation showing that the applicant is solvent and in good financial condition, and setting forth the assets and liabilities of the corporation within 1 year immediately prior to the application.

(3) Certificate from appropriate government agency NOTE: Certain sectors such as banking, insurance, etc. require prior approval from the government agencies concerned. (Sec. 17)

Deposit requirement (Sec. 126)

Within 60 days after the issuance of the license, the licensee shall deposit with the SEC securities with an actual market value of at least P 100,000.00. These securities are for the benefit of present and future creditors, and shall consist of any of the following: Bonds or other evidence of indebtedness of the Government or its instrumentalities, etc.; Shares of stock in "registered enterprises" as defined in R.A. 5186; Shares of stock in domestic corporations registered in the stock exchange; Shares of stock in domestic insurance companies and banks.

Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned, upon the licensee's application and proof to the satisfaction of the SEC that the licensee has no liability to Philippine residents or the Philippine government. Note: Foreign banking and insurance corporations are the exceptions to this requirement.

Designation of a resident agent (Sec. 128)

The designation of a resident agent is a condition precedent to the issuance of the license to transact business in the Philippines. WHO: PURPOSE: A resident of the Philippines. To be served any summons and other legal processes which may be served in all actions or other legal proceedings against such corporation. Service upon such resident shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office.

Laws applicable to foreign corporations

Foreign corporations lawfully doing business in the Philippines are bound by all laws, rules and regulations applicable to domestic corporations of the same class. Exceptions: (1) As regards the creation, formation, organization or dissolution of the corporation; (2) As regards the fixing of relations, liabilities, responsibilities, or duties of stockholders, members, or officers or corporations to each other or to the corporation (Sec. 129)

Effects of License

Failure

to

Secure

SEC

WHAT ARE THE EFFECTS OF FAILURE TO SECURE A LICENSE?

(1) The corporation will not be permitted to maintain agency in the Philippines; (2) The corporation will be subject to penalties and fines; (3) The corporation will not be permitted to maintain or intervene in any action before Philippine
courts or administrative agencies; it can be SUED.

Isolated transactions

Curing of defect Protection of intellectual property rights

What Constitutes Transacting Business
WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE LICENSING REQUIREMENT? Mere investment as a shareholder and the exercise of the rights as such investor; Having a nominee director or officer represent the foreign investors interests; Appointing a representative or distributor in the Philippines who transacts business in his own name and for his own account Example: Rustans exclusive distributorship of Lacoste t-shirts

Publication of a general advertisement; NOTE: Under the Code of Commerce, the publication of an ad is prima facie evidence (or at least creates a presumption) of doing business in the Philippines.

Maintaining stock of goods for processing by another entity in the Philippines; Consignment of equipment to be used in processing products for export; Collecting information in the Philippines; Performing services incidental to an isolated contract of sale Example: Installing machinery sold by a foreign corporation to a Philippine buyer

WHAT IS THE TEST OF DOING BUSINESS IN THE PHILIPPINES? Whether or not there is continuity of transactions which are in pursuance of the normal business of the corporation. (Metholatum v. Mangaliman)

How Courts Acquire Jurisdiction over Foreign Corporations

As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons on its resident agent. If there is no assigned resident agent, the government official designated by law can receive the summons on their behalf and transmit the same to them by registered mail within 10 days. This will complete the service of the summons. Summons can also be served on any of the corporation's officers or agents within the Philippines. (See Sec. 128; Rule

14, Sec. 12, Rules of Court. Note that while Sec. 128 presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.) Note that if there is a designated agent, summons served upon the government official is not deemed a valid process. Johnlo Trading case holds that the service on the attorney of an FC who was also charged with the duty of settling claims against it is valid since no other agent was duly appointed. Service on Officers or Agents of an foreign corporations domestic subsidiary will only vest jurisdiction if there is sufficient ground to disregard the separate personalities.

Withdrawal of Foreign Corporation (Sec. 136)

HOW: By filing a petition for withdrawal of license REQUISITES FOR ISSUANCE OF CERTIFICATE OF WITHDRAWAL: (1) All claims which have accrued in the Philippines have been paid, compromised and settled; (2) All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and (3) The petition for withdrawal of license has been published once a week for 3 consecutive weeks in a newspaper of general circulation in the Philippines.

Revocation and Suspension of License

(Sec. 134)

WHAT ARE THE GROUNDS FOR REVOCATION OR SUSPENSION OF A LICENSE OF A FOREIGN CORPORATION? (1) (2) (3) (4) (5) (6) (7) (8) (9) Failure to file its annual report or pay any fees as required by the Corporation Code; Failure to appoint and maintain a resident agent in the Philippines as required; Failure, after change of resident agent or of his address, to submit to the SEC a statement of such change; Failure to submit to the SEC an authenticated copy of any amendment to its AOI or by-laws or of any articles of merger or consolidation within the time prescribed by the Code; A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to Title XV; Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine government or any of its agencies or political subdivisions; Transacting business in the Philippines outside of the purpose/s for which such corporation is authorized under its license; Transacting business in the Philippine as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or Any other ground as would render it unfit to transact business in the Philippines.

SPECIAL AND MISCELLANEOUS PROVISIONS Educational corporations

(Sec. 106-108)

Educational corporations other than government-run institutions are governed first by special laws, second, by the special provisions of the Corporation Code, and lastly, by the general provisions of the Corporation Code. (Sec. 106) At least 60% of the authorized capital stock of educational corporations must be owned by Filipino citizens, and Congress may require increased Filipino equity participation therein. (With the exception of educational institutions established by religious groups and mission boards, which are

not subject to this equity requirement.) However, control and administration of educational institutions must be vested exclusively in citizens of the Philippines. (Art. XIV, Sec. 4 (2), 1987 Constitution) This means that no alien may be elected as a member of the BOD nor appointed as Principal or officer thereof. Once a school, college or university has been granted government recognition by the DECS, it must incorporate within 90 days from the date of such recognition, unless it is expressly exempt by DECS for special reasons. (Act 2706, Sec. 5) In addition, it must file a copy of its AOI and by-laws with the DECS. Without the favorable recommendation of the DECS Secretary, the SEC will not accept or approve such articles. (Sec. 107, Corporation Code)

Religious corporations

(Sec. 109-116)

Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and by the general provisions of the Code on non-stock corporations insofar as they may be applicable. (Sec. 109)

Corporation sole (Sec. 110-115)

A corporation sole is an incorporated office, composed of a single individual who may be a bishop, priest, minister or presiding officer of a religious sect, denomination or church. Its purpose is to administer and manage as trustee the property and affairs of such religious sect, denomination or church, within the territorial jurisdiction of such office. (Sec. 110; Sec. 111 (3)) In case of death, resignation, transfer or removal of the person in office, his successor replaces him and continues the corporation sole. The property is not owned but is merely administered by the corporation sole, and ownership pertains to the church or congregation he represents. On the other hand, he is the person authorized by law as the administrator thereof and the court may take judicial notice of such fact and of the fact that the parish priests have no control over such property. In determining whether the constitutional provision requiring 60% Filipino capital for corporation ownership of private agricultural lands, the Supreme Court has held that it is the nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the office, which must be taken into consideration. Thus, where at least 60% of the constituents are Filipinos, land may be registered in the name of the corporation sole, although the holder of the office is an alien. This ruling is based on the fact that the corporation sole is not the owner but merely the administrator of the property, and that he holds it in trust for the faithful of the diocese concerned. (See Gana v. Roman Catholic Archbishop of Manila, 43 O.G. No. 8, 3225; 1947)

Religious societies (Sec. 116)

In contrast to a corporation sole, religious societies are composed of more than one person. The requirements for incorporation of such societies are set forth in Sec. 116 of the Code.

Close Corporations

(Sec. 96-105)

WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96) A close corporation, within the meaning of the Corporation Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons not exceeding 20; (2) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by Title XII of the Code; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notes: A narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural and Steel Fabricators v. CA, 296 SCRA 631) A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.

CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A STOCKHOLDER IN A CLOSE CORPORATION? YES, provided that said corporation owns less than 2/3 of voting stock or voting rights. WHAT ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS? ( Sec. 96) Mining Oil Stock Exchange Bank Insurance Public Utilities Educational Institutions Corporations declared vested with public interest

DISTINGUISH CLOSE CORPORATIONS FROM REGULAR CORPORATIONS. Close Corporation No. of stockholders Management Meetings Quorum and Voting Pre-emptive right Buy-back of shares Resolution of deadlocks Not more than 20 (Sec. 96) Can be managed by the stockholders (Sec. 97) "Regular" Corporation No limit Managed by Board of Directors

May be dispensed with (Sec. 101) Actual meetings are required. Greater quorum and voting requirements allowed. (Sec. 97) Extends to all stock, includingDoes not extend to treasury treasury shares (Sec. 102) shares. Must be > par value (Sec. 105) SEC has the power to arbitrate disputes in case of deadlocks, upon written petition by any stockholder. (Sec. 104) This includes the power to appoint a provisional director, as well as to dissolve the corporation. May be petitioned by anyGenerally requires a 2/3 vote of stockholder whenever any of thethe stockholders and a majority acts of the directors or officers orvote of the BOD. those in control of the corporation is illegal, fraudulent, dishonest,(Note however that in case of oppressive or unfairly prejudicial toinvoluntary dissolution under the corporation or any stockholder,Sec. 121, a corporation may be or whenever corporate assets aredissolved by the SEC upon being misapplied or wasted. (Sec. filing of a verified complaint 105) and after proper notice and hearing.) May be < par value

Dissolution

WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104) A provisional director is an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose qualifications, if any, may be determined by the SEC. He is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. However, he has all the rights and powers of a duly-elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the SEC or by all the stockholders. (Sec. 104) COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. (Sec. 105)

Withdrawal Right Type of involved corporation Close corporation For any reason (Sec. 105)

Appraisal Right "Regular" corporation Only the grounds enumerated in Sec. 81 and Sec. 42 May be < par or issued value

When availed of

Fair value of shares

Must be > par or issued value (Sec. 105)

Miscellaneous Provisions

(Sec. 137-149)

The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the Code, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. (Sec. 143) Whenever the SEC conducts any examination of the operations, books and records of any corporation, the results thereof must be kept strictly confidential, unless the law requires them to be made public or where they are necessary evidence before any court. (Sec. 142) All domestic and foreign corporations doing business in the Philippines must submit an annual report to the SEC of its operations, with a financial statement of its assets and liabilities and such other requirements as the SEC may impose. (Sec. 141) No right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers, may be removed or impaired by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code. (Sec. 145) Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a fine of not less than P 1,000.00 but not more than P 10,000.00 or by imprisonment for not less than 30 days but not more than 5 years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may be dissolved in appropriate proceedings before the SEC. (Sec. 144)

BANKING LAWS GOVERNING LAW Banking Institution are governed by the following laws: A. General banking laws General Banking Law (R.A. No. 8791) . New Central Bank Act (R.A. No. 7653) B. Special banking laws New Rural Banks Act (R.A. No. 7353) Private Development Banks Act (R.A. No. 4093) Savings and Loan Association Act . Thrift Banks Act (R.A. No. 7906)

(R.A. No. 3779)

C. Other laws affecting banks Secrecy of Bank Deposits Law (R.A. No. 1405) Unclaimed Balances Law (Act No. 3936) Philippine Deposit Insurance Corporation Act (R.A. No. 3591) The general banking laws above mentioned are applicable to government banks like DBP and PNB. The Al- Amanah Islamic Bank is subject to all banking and pertinent laws.

(Bar Review Materials

in Commercial Law, Jorge Miravite, 2002

ed.)

Three kinds of entities that introduce funds into the economy: 1. banks : entities that obtains funds from the public in the form of deposits and re-lend it to the public; 2. quasi-banks : those that obtain funds in the form of deposit substitutes and re-lend the same and not from the public or depositors. 3. Finance companies and other financial intermediaries: those that lend funds from their own assets. Five Persons Primarily Interested in the Business of Banking 1. Government 2. Depositors 3. Investors 4. Creditors 5. Borrowers

BAR QUESTION: JOINT ACCOUNT VS. PARTNERSHIP (2000) Distinguish joint account from partnership. (3%) SUGGESTED ANSWER The following are the distinctions between joint account and partnership: 1) A partnership has a firm name while a joint account has none and is conducted in the name of the ostensible partner. 2) WHILE A PARTNERSHIP HAS JURIDICAL PERSONALITY AND MAY SUE OR BE SUED UNDER ITS FIRM NAME, A JOINT ACCOUNT HAS NO JURIDICAL PERSONALITY AND CAN SUE OR BE SUED ONLY IN THE NAME OF THE OSTENSIBLE PARTNER. 3) While a partnership has a common fund, a joint account has none. 4) While in a partnership, all general partners have the right of management, in a joint account, the ostensible partner manages its business operations. 5) While liquidations of a partnership may, by agreement, be entrusted to a partner or partners, in joint account liquidation thereof can only be done by the ostensible partner.

BAR QUESTION: Theory of Cognition vs. Theory of Manifestation (1997) The Civil Code adopts the theory of cognition, while the Code of Commerce generally recognizes the theory of manifestation, in the perfection of contracts. How do these two theories differ? SUGGESTED ANSWER: Under the theory of cognition, the acceptance is considered to effectively bind the offeror only from the time it came to his knowledge. Under the theory of manifestation, the contract is perfected at the moment when the acceptance is declared or made by the offeree.

GENERAL BANKING LAW OF 2000 (GBL) (RA No. 8791)

Purpose: To promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy (Sec. 2). Scope of Application: The GBL primarily governs universal banks and commercial banks. It suppletorily governs thrift banks, rural banks and other banking institutions. GENERAL CONCEPTS BANKS Entities engaged in the lending of funds obtained in the form of deposits (Sec. 2) Entities duly authorized by the Monetary Board to engage in the business of regularly lending funds obtained regularly from the public through the receipt of deposits of any kind. An investment company that performs function as such is NOT a bank. Thus an investment company that is engage solely in investing, reinvesting or trading in securities is not engage in banking. ( Banas vs. Asia Pacific Finance Corp., Oct. 18, 2000). However, an investment company which loans out money of its customers, collects interest, and charges a commission to both lender or borrower is engage in banking (Republic vs. Security Credit and Acceptance Corp.) QUASI-BANKS Entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes (Sec. 95) Entities authorized to perform universal or commercial banking functions may also engage in quasi-banking functions. FINANCIAL INTERMEDIARIES Persons or entities whose principal functions include the lending, investing or placement of funds on evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. ORGANIZATION AND OPERATION A. Authority to Register/Incorporate The SEC shall not register the articles of incorporation of any bank or any amendment thereto unless accompanied by a certificate of authority issued by the Monetary Board under its seal (Sec. 14). The certificate of authority shall not be issued unless the Monetary Board is satisfied: 1. That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with; 2. That the public interest and economic conditions, both general and local, justify the authorization; and 3. That the amount of the capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators, reasonably assure the safety of deposits and the public interest (Sec. 14). Organization of a Bank or Quasi-Bank Requirements: 1. The entity is a stock corporation; 2. Its funds are obtained from the public, i.e. 20 or more persons; and 3. The minimum capital requirements prescribed by the Monetary Board are satisfied (Sec. 8). Note: In Quasi banks, Deposit substitute are alternative forms of obtaining funds for the public, other than deposit, through the issuance, endorsement, or acceptance of debt instrument for the

borrowers own account, for the purpose of relending or purchasing of receivables and other obligations.in banking or quasi-banking functions A person or entity cannot engage in banking or quasi-banking functions without a certificate of authority from the BSP (Sec. 6). The determination of whether a person or entity is performing banking or quasi-banking functions without BSP authority shall be decided by the Monetary Board. NATURE OF BANKING BUSINESS Impressed with public interest where the trust and confidence of the public in general is of paramount importance such that: 1. The appropriate standard of diligence must be very high, if not the highest, degree of diligence; highest degree of care (PCI Bank vs. CA, 350 SCRA 446, PBCom vs. CA, G.R. No. 121413, 29 Jan. 2001) This applies only to cases where banks are acting in their fiduciary capacity, that is, as depository of the deposits of their depositors (Reyes vs. CA, G.R. No. 118492, 15 Aug. 2001). 2. Subject to reasonable regulation under the police power of the state. While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title, in case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon on what is or is not annotated on the title. Reason: Before a loan is approved, representatives are sent to the premises offered as collaterals so as to investigate who the real owners are (DBP vs. CA, 331 SCRA 267). The business of a bank is one affected by public interest for which reason the bank should guard against loss due to negligence and bad faith. It is expected to ascertain and verify the identities of the persons it transacts business with (UCPB vs. Ramos, G.R. No. 147800, November 11, 2003, Callejo, J.). Due diligence required of banks extend even to persons, or institutions like the GSIS, regularly engaged in the business of lending money secured by real estate mortgages (GSIS vs. Eduardo Santiago, G.R. No. 155206. October 28, 2003). CONSEQUENCES OF NATURE OF BUSINESS: 1. It is subject to heavy and close supervision and/or regulation by the BSP (Central Bank of the Phils. v. CA, 208 SCRA 652). 1. It is required to exercise utmost diligence in the handling of deposits (Simex International Manila Inc., 183 SCRA 361). 2. Special rules on strikes and lockouts: any strike or lockout involving banks, if unsettled after 7 calendar days shall be reported by the BSP to the Sec. of Labor who has 2 options: a. He may assume jurisdiction over and decide the dispute; or b. certify it to the NLRC for compulsory arbitration The President may also intervene at any time and assume jurisdiction over such labor dispute in order to settle or terminate the same. CLASSIFICATION OF BANKS (SEC. 3) 1. Universal banks - Primarily governed by the General Banking Law (GBL), can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization requirement. 2. Commercial banks - Ordinary banks governed by the GBL which have a lower capitalization requirement than universal banks and can neither exercise the powers of an investment house nor invest in non-allied enterprises. 3. Thrift banks These are a) Savings and mortgage banks; b) Stock savings and loan associations; c) Private development banks, which are primarily governed by the Thrift Banks Act (R.A. 7906). 4. Rural banks Mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA 7353).

5. Cooperative banks Those banks organized whose majority shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. It shall include cooperative rural banks. They are governed primarily by the Cooperative Code (RA 6938). 6. Islamic banks Banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari a, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by RA 6848. 7. Other classification of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.

ORDINARY CORPORATION May be a stock or non-stock corporation May issue par value or no par value stocks. May be registered with the SEC without any certificate of authority issued by a government agency. May purchase/acquire its own shares for a legitimate corporate purpose; provided that, it has unrestricted retained earnings in its books to cover the shares to be purchased/ acquired.

BANKING CORPORATION Must generally be a stock corporation Shall issue par value stocks only (Sec. 9). Must secure a certificate of authority from the Monetary Board before it can register with SEC. May not purchase/ acquire its shares or accept them as security for a loan. Except: when authorized by the Monetary Board. In such case, the bank must sell or dispose of said shares within 6 months from the time of their acquisition (Sec. 10). Also composed of 5 to 15 directors. In case of merger or consolidation, the number of directors shall not exceed 21 (Sec. 17). May not declare dividends, if any of the conditions set forth under Sec. 57 are present.

Must be composed of 5 to 15 directors, each of whom shall own at least one (1) share of the capital stock of the corporation. May declare dividends out of its unrestricted retained earnings.

UNIVERSAL BANK

COMMERCIAL BANK

Authority to No such additional exercise additional powers powers other than those authorized for commercial banks May invest in the May only invest in equities of allied, equities of allied whether financial enterprises, whether or non-financial, financial or nonand non-allied financial enterprises (Sec. 24) Powers 1. The powers 1. General powers authorized for a incident to commercial corporations bank; 2. Such powers as 2. The powers of may be necessary an investment to carry on the house; and business of 3. The power to commercial invest in nonbanking: allied a. Accepting enterprises drafts and issuing (Sec. 23). letter of credits; b. Discounting and negotiating promissory notes, drafts, bills of exchange and other evidence of debt; c. Accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; d. Buying and selling foreign exchange and other debt securities; e. Extending credit. (Sec. 29)

UNIVERSAL & COMMERCIAL BANK Authorized to engage in quasibanking functions without need for approval May accept or create demand deposits without need for approval

OTHER BANKS

Not so authorized

Must seek approval of Monetary Board before accepting or creating demand

Demand deposits Liabilities of the BSP and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks (Sec. 58, NCBA).

deposits. (Sec. 33)

EQUITY INVESTMENTS UNIVERSAL POINT OF BANK DISTINCTIO (Sec. 24-28) N Total 50% investment in of net worth allied enterprises Total 50% investment in of net worth non-allied enterprises Equity 25% investment in of net worth any one enterprise Equity investment in 100% financial of equity allied enterprise: thrift bank, rural bank or any financial allied enterprise (Sec. 25) ? A publiclylisted bank may own up to 100% of the voting stock of only one other UB / CB (Sec. 25). Equity investment in non-financial allied enterprises Equity investment in a single nonallied enterprise

COMML BANK (Sec. 30-32) 35% of net worth

N/A

25% of net worth (Allied only)

100% of equity In other financial allied enterprises, investment shall remain a minority holding (Sec. 31).

100% of equity

100% of equity

Shall not exceed 35% of the total equity in that enterprise nor shall it exceed 35% of the voting

N/A

stock in that enterprise Equity investment in Quasi-Banks

40%

40%

Allied Enterprises those entities which enhance or complement banking Non-Financial Allied Enterprises pertains to activities that do not involve money matters (such as warehousing, safety deposit boxes) NET WORTH The total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net valuation reserves and other adjustments as may be required by the Bangko Sentral (Sec. 24). RISK BASED CAPITAL The minimum ratio prescribed by the Monetary Board which the net worth of a bank must bear to its total risk assets which may include contingent accounts. However, the Monetary Board may require or suspend compliance with such ratio whenever necessary for a maximum period of one year; PROVIDED that, such ratio shall be applied uniformly to banks of the same category (Sec. 34). Effect of non-compliance with the prescribed minimum ratio: 1. Distribution of net profits may be limited or prohibited and MB may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met; or 2. Acquisition of major assets and making of new investments may be restricted. EXCEPT: purchases of evidence of indebtedness guaranteed by the Government (Sec. 34). 3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by BSP, the MB may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio. Effects of non-compliance with the prescribed minimum ratio: 1. Distribution of net profits may be limited or prohibited and MB may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met; or 2. Acquisition of major assets and making of new investments may be restricted. EXCEPT: purchases of evidence of indebtedness guaranteed by the Government. 3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by BSP, the MB may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio.

FUNCTIONS OF BANKS BASIC FUNCTIONS: 1. Loan Function 2. Deposit Function OTHER FUNCTIONS Universal banks and commercial banks may also exercise any of the following functions: a. Receive in custody funds, documents and valuable objects;

b. c. d. e.

Act as financial agent and buy and sell, by order of and for the account of their customer, shares, evidences of indebtedness and types of securities; Make collection and payments for the account of others and perform such other services for their customer as are not incompatible with banking business; Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/ advisory/consultancy accounts; and Rent out safety deposit boxes.

The depositary would be liable if in performing its obligation it is found guilty of fraud, negligence; in the absence of any stipulation prescribing the degree of diligence required, that of a good father of the family is to be observed. Any stipulation exempting the depositary from any liability arising from loss on account of fraud, negligence would be void for being contrary to public policy (CA-Agro Devt vs. CA, 219 SCRA 426, March 5, 1993). Note: The bank acting as depositary or as an agent shall keep the funds, securities and other effects which it receives duly separated from its own assets and liabilities. (Sec. 53) A. LOAN FUNCTION Requirement for Grant of Loans Before granting a loan, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. Rules: 1. A bank may demand from its applicants a statement of their assets and liabilities and of their income and expenditures and other information. 2. Should such statements prove to be false or incorrect , the bank may terminate any loan granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of obligation (Sec. 40).

Classification of Loans UNCLASSIFIED CLASSIFIED LOANS LOANS Those that do not Those that have have a greater extraordinary risks thannormal risk of loss in collection and the borrower due to some defects have apparent such as bad debts ability to satisfy it or those under in full and no loss litigation. in ultimate collection is anticipated.

Limit on loans, credit accommodations and guarantees (Sec. 35) 1. Single Borrowers Limit (SBL) Rules b. The total amount of loans extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed 20% of the net worth of such bank.

c. The total amount of loans may be increased by an additional 10% of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance; Exclusions (NON-RISK LOANS): 1. Loans secured by obligations of the Bangko Sentral or the Philippine Government; 2. Loans fully guaranteed by the government; 3. Loans covered by assignment of deposits maintained in the lending bank and held in the Philippines; 4. Loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and 5. Other loans or credit accommodations which the MB may specify as non-risk items. Joint and Solidary Signature (JSS) Practice A common banking practice requiring as an additional security for a loan granted to a corporation the joint and Solidary signature of a major stockholder or corporate officer of the borrowing corporation (Security Bank vs. Cuenca, 341 SCRA 781). Reasons: a. In case of default, creditors recourse is not limited to corporate properties but extends to personal assets of the surety; b. Surety would be compelled to ensure that the loan would be used for the purpose intended. Note: While R.A. 8791 provides for the rates of 20% and 10% respectively, the Bangko Sentral has not yet implemented such rates. The prevailing rates are 25% and 15% respectively. 2. DOSRI Accounts (Directors, Officers, Stockholders, and Related Interests) Requisites (BSP Circular No. 170): a. The borrower is director, officer, or any stockholder of a bank and related interest. b. He contracts a loan or any form of financial accommodation c. The loan or financial accommodation is from (1) his bank or (2) a bank that is a subsidiary of a bank holding company of which both his bank and lending bank are subsidiaries, (3) a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; and d. The loan or financial accommodation of the DOS, singly or with that of his related interest, is in excess of 5% of the capital and surplus of the lending bank or in the maximum amount permitted by law, whichever is lower. Who are covered (BSP Circular No. 170): 1. Directors Directors of the lending bank 2. Officers Either identified in the by-laws or are generally known as such 3. Stockholders those whose stockholdings, individually and/or together with any of the following persons, amount to 2% or more of the total subscribed capital stock of the bank: a. His spouse or relative within the first degree of affinity/consanguinity or relative by legal adoption, partnership wherein any of the foregoing is a general partner; and b. A co-owner, with the stockholder or the stockholders spouse, or relative mentioned above, of property/right/interest (mortgaged, pledged or assigned to secure the loan or credit accommodations, except when the mortgage, pledge or assignment covers only said co-owners undivided interest. 4. Related Interest a. Spouse, relatives within first degree of consanguinity or affinity, or relative by legal adoption of a DOS, partnerships of which a DOS or any of the foregoing is a general partner. b. Co-owner, with the DOS or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property/interest/ right mortgaged, pledged, assigned to secure the loans or credit accommodations, except when the mortgage, pledge or assignment covers only said coowners undivided interest. c. Corporation with inter-locking directors or where 20% of the capital stock is owned by the DOS and/or their spouses or relatives mentioned above, or wholly or majority owned or controlled by any related entity or a group of related entities in items (b), (d), and (e).

Restrictions under the GBL and NCBA: a. No director or officer of any bank shall, directly or indirectly, borrow from such bank nor shall be guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank, except with the written approval of the majority of all the directors of the bank, excluding the director concerned. The written approval shall not be required for loans granted to officers under a fringe benefit plan approved by the Bangko Sentral. b. Dealings of a bank with any of its DOSRI shall be upon terms not less favorable to the bank than those offered to others (ARMS LENGTH RULE). c. Loans extended to DOSRI shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank. Except: i. Loans, credit accommodations, and guarantees secured by assets considered as non-risk by the Monetary Board. ii. Loans, credit accommodations, and advances to officers in the form of fringe benefits. iii. Cooperative banks with regard to their cooperative shareholders. d. The resolution approving the loan shall be entered in the records of the bank and transmitted to the BSP. e. Waiver of secrecy of deposits of whatever nature in all banks in the Philippines by the borrower. No waiver is required if the related interests are the borrower. b. Information obtained from examination is strictly confidential.

3. Rules on amount of secured loans a. Those secured by real estate shall not exceed 75% of the appraised value of the real estate security, plus 60% of the appraised value of the insured improvements (Sec. 37). b. Those secured by chattels and intangible properties (such as patents, trademarks, trade names and copyrights) shall not exceed 75% of the appraised value of the security (Sec. 38). BAR QUESTION: BANKS; RESTRICTIONS ON LOAN ACCOMMODATIONS (2006) Pio is the president of Western Bank. His wife applied for a loan with the said bank to finance an internet cafe. The loan officer told her that her application will not be approved because the grant of loans to related interests of bank directors, officers, and stockholders is prohibited by the General Banking Law. Explain whether the loan officer is correct. (5%) SUGGESTED ANSWER: Section 36 of the General Banking Law of 2000 does not entirely prohibit directors or officers of the bank, directly or indirectly, from borrowing from the bank. In this case, Pio is the president of Western Bank, which makes him an officer, director and stockholder of the said bank. The General Banking Law provides for additional restrictions to the bank before it can lend to its directors or officers. A written approval of the majority vote of all the directors of the bank, excluding the director concerned, is required. Furthermore, such dealings must be upon terms not less favorable to the bank than those offered to others (Section 1326, Central Bank's "Manual of Regulations for Banks and Other Financial Intermediaries, cited in Ranioso v. CA, G.R. No. 117416, December 8, 2000 ). A violation of this provision will cause his or her position to be declared vacant and the erring director or officer subjected to the penal provisions of the New Central Bank Act. COLLATERALS 1. Value of collaterals The loan shall not exceed 75% of the appraised value of the real property plus 60% of the appraised value of the improvements or 75% of the appraised value of the chattel ( Secs. 37 & 38, GBL ) B. DEPOSIT FUNCTION Kinds of Deposits between a Bank and its Depositor 1. As debtor-creditor a. Savings b. Time

c. Demand Characteristics: i. In the nature of irregular deposits (Serrano vs. Central Bank, 96 SCRA 96) ii. Contract of loan/mutuum with the depositor as creditor iii. Bank acquires ownership of the thing deposited and the right to use and dispose iv. Money deposited is commingled with the other money, constituting a common fund. v. Not preferred credits (Central Bank vs. Morfe, 20 SCRA 507). 2. As lessor-lessee a. Safety deposit boxes the relation between a bank renting out safety deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee the bailment for hire and mutual benefit has been adopted in this jurisdiction. It cannot be considered as a contract of lease because the full possession and control of the safety deposit box is not given to the renters (Sia vs. CA, 222 SCRA 24 [1993]). 3. As trustee-trustor a. Trust account 4. As bailee-bailor a. Deposit strictly for safekeeping and for specific purposes 5. As agent-principal: a. Deposit of check for collection b. Deposit for specific purpose c. Deposit for safekeeping Depositors: 1. Minors : a. at least seven years of age b. able to read and write c. not disqualified by any incapacity d. it should only be savings or time deposits Note: Parents may deposit for their minor children or wards (Sec.1 PD No.734) If the guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made to the guardian. (Sec. 22, Thrift Banks Act of 1995) Married Women are allowed to open bank accounts without assistance of their husbands (RA No. 7192 Kinds of Deposits DEMAND DEPOSITS Only a universal or commercial bank can accept or create demand deposits. A bank other than a universal bank or commercial bank CANNOT accept demand deposit SAVINGS ACCOUNT Evidenced by a passbook.

Temporary overdrawing against current accounts shall not be allowed unless caused by normal bank charges and other fees

Banks are prohibited from issuing / accepting withdrawal slips or other similar instruments to effect withdrawals without the passbooks except for bank authorized by the BSP to adopt the no passbook withdrawal system. A bank is negligent if it allows the withdrawal without requiring the presentation of a passbook. (BPI v. CA)

incidental to handling such accounts. Drawings against uncollected deposits (uncleared checks) are generally prohibited.

NOW ACCOUNTS (Negotiable Order of Withdrawal) Interest bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings account.

TIME DEPOSITS An account with fixed term

Note: Demand, savings, NOW accounts, time deposits and deposit substitutes shall not be subject to interest ceilings. A bank other than a universal or commercial bank must seek approval of Monetary Board before accepting or creating demand deposits. (Sec. 33) Anonymous accounts are prohibited. ( R.A. No 9160 as amended by RA 9194; BSP Circular No. 251, July 21, 2000) exception: Foreign currency deposits may be a numbered account. However, the law requires that the necessary measures are undertaken by the bank to record and establish the true identity of the depositor. Joint account may be the subject of a survivorship agreement whereby the co-depositor agree to permit either of them to withdraw the whole deposit during their lifetime and transferring the balance to the survivor upon the death of one of them ( Vitug vs, CA., March 29, 1990) Types of deposit accounts (Handbook on Bank Deposits, A. Viray, 1998 ed.) 1. Individual 2. Joint a. And account Co-ownership The signatures of both co-depositors are required for withdrawals. b. And/or account Either one of the co-depositors may deposit and withdraw from the account without the knowledge, consent and signature of the other. And upon the death of one, the survivor may withdraw the entire balance on deposit. The account may be deemed a survivorship agreement depending on the intention of the parties; aleatory contract supported by a lawful consideration which is valid unless when made as a mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir (Rivera vs. Peoples Bank and Trust Co., 73 Phil. 546 [1942]). Deposit substitutes An alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of re-lending or purchasing of receivables and other obligations (Sec. 95, RA 7653).

DEPOSIT No security given to guarantee repayment; the depositor relies on the stability and reputation of the bank.

DEPOSIT SUBSTITUTE Guaranteed by certificates and other instruments. (Handbook on Bank Deposits, A. Viray, 1998 ed.)

A bank has the right to set-off the deposits in its hands for the payment of any outstanding indebtedness to it on the part of the depositor (Gullas vs. PNB, 62 Phil. 519; PNB vs. CA, 272 SCRA 291). The fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan and not a breach of trust. The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors, under a similar contract of simple loan (CBTC vs. CA, G.R. No. 138569, September 11, 2003). This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family (CBTC vs. CA, Ibid.). Suspension of Payment on its Deposit Liabilities In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than 30 days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation (Sec. 53). The depositary would be liable if in performing its obligation it is found guilty of fraud, negligence; in the absence of any stipulation prescribing the degree of diligence required, that of a good father of the family is to be observed. Any stipulation exempting the depositary from any liability arising from loss on account of fraud, negligence would be void for being contrary to public policy (CA-Agro Devt vs. CA, 219 SCRA 426, March 5, 1993). Note: The bank shall act as depositary or as an agent shall keep the funds, securities and other effects which it receives duly separated from its own assets and liabilities (Sec. 53)

PROHIBITIONS

A. ON BANKS :
1. To directly act as insurer (Sec. 54) 2. For banks or quasi-banks to declare dividends, if at the time of declaration: a. its clearing account with the Bangko Sentral is overdrawn; b. it is deficient in the required liquidity floor for government deposits for 5 or more consecutive days; c. it does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or d. It has committed a major violation as may be determined by the Bangko Sentral (Sec. 57). 3. To conduct business in an unsafe or unsound manner (Sec. 56); 4. Publication of capital stock (Sec. 62); 5. Unauthorized advertisement or business representation (Sec. 64); or

6. To employ casual or non-regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits (Sec. 55). Rationale: To prevent violation of Bank Secrecy Law.

B. ON DIRECTORS, OFFICERS, EMPLOYEES, OR AGENTS

OF BANKS :

1. Make false entries in any bank report or statement or participate in any fraudulent

transaction; any private

2. Without order of a court of component jurisdiction, disclose to any unauthorized person information relative to the funds or properties in the custody of the bank belonging to individuals, corporations, or any other entity;

3. Accept gifts or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank; 4. Overvalue or aid in overvaluing any of the bank or any bank; or security for the purpose of influencing in any way the actions entity to

5. Outsource inherent banking functions a bank cannot engage the services of another receive deposits on its behalf; the bank has to do it by itself.

Rationale: To prevent violation of Bank Secrecy Law (Handbook on Bank Deposits, A. Viray, 1998 ed.). However, a bank may outsource, upon prior approval of the Monetary Board the following functions:

a. All information technology systems and processes, except for certain functions affecting the ability of the bank to ensure the fit of technology services deployed to meet its strategic and business objectives and comply with pertinent laws and regulations; b. Data imaging, storage, and other related systems; c. Clearing and processing of checks not included in the Philippine Clearing House System; d. Printing of bank statements; e. Credit card services; f. Printing of bank loan statements and other non-deposit records, bank forms and promotional materials; g. Credit investigation and collection; h. Processing of export, import and other trading transactions;. i. Transfer agent services for debt and equity services; j. Property appraisal; k. Property management services; l. Messenger, courier and postal services; m. Security guard services; n. Vehicle service contracts o. Janitorial services; wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Other services as determined by the Monetary Board.

C. ON BORROWERS:
1. Fraudulently overvalue property offered as security for a loan from the bank; 2. Furnish false or make misrepresentations or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or extending the period thereof; 3. Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or 4. Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

D. ON EXAMINERS , BSP OR GOVERNMENT OFFICERS AND EMPLOYEES ASSIGNED TO SUPERVISE , EXAMINE , ASSIST OR RENDER TECHNICAL ASSISTANCE TO ANY BANK :

Commit any of the acts enumerated in Sec. 55 or aid in the commission of the same. The making of false reports or misrepresentations or suppression of material facts by personnel of the BSP shall constitute fraud and shall be subject to administrative and criminal sanctions.

CONDUCTING BUSINESS IN AN UNSAFE OR UNSOUND MANNER (SEC. 56) In determining whether a particular act or omission, which is not otherwise prohibited by law, rule or regulation affecting banks, quasi-banks, or trust entities, may be deemed as conducting business in an unsafe or unsound manner, the MB shall consider any of the following circumstances: 1. The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution; 2. The act or omission has resulted or may result in material loss or damage, or abnormal risk to the institutions depositors, creditors, investors, and stockholders or to the BSP or to the public in general; 3. The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; 4. The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby. OWNERSHIP OF STOCKS OF A DOMESTIC BANK 1. Filipino In case of a Filipino individual or a domestic non-bank corporation, each may own up to 40% of the outstanding voting stock of a local bank. 2. Foreign Foreign individuals and non-bank corporations may own or control up to an aggregate of 40% of the voting stock of a domestic bank. The percentage of foreign-owned voting stocks in a bank shall be determined: (GRANDFATHER RULE) a. If individuals: by the citizenship of the individuals b. If corporations: by the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation (Sec. 11). ACT LIBERALIZING ENTRY OF FOREIGN BANKS (R.A. NO. 7721) The Monetary Board authorizes foreign banks to operate through any of the following modes of entry: 1. By acquiring, purchasing or owning up to 2. By investing in up to 60% of the voting Philippines; 60% of the voting stock of an existing bank;

stock of a new banking subsidiary

incorporated under laws of

3. By establishing branches with full banking authority, provided: a. foreign bank may avail itself of only one mode of entry; and b. Foreign bank or Philippine corporation may own up to 60% of the voting stock of only one domestic bank or new banking subsidiary (Sec. 2). Entries under the second and third modes are restricted to banks which are among the top 150 foreign banks in the world or top 5 banks in their country of origin. Minimum capitalization: 1. For locally incorporated subsidiaries equal to that of domestic banks of the same category 2. For foreign bank branches not less than the US$ equivalent of P210M Amendments introduced by GBL 2000

1. Within seven years from effectivity of the GBL (June 13, 2000), foreign banks may be allowed to own up to 100% equity of only one domestic bank as a mode of entry if authorized by the Monetary Board (Sec. 73, GBL). 2. Other foreign individuals and non-bank corporations may own up to 40% of the voting stock of a domestic bank; the nationality of the controlling shareholders of the non-bank corporations will be traced to determine the foreign ownership of the domestic bank (Sec. 11, GBL).

FOREIGN BANKS (SECS. 7278) 1. Entry: Governed by the provisions of the Foreign Bank Liberalization Act and the Offshore Banking System Decree (Sec. 72) 2. Revocation of license to do business in the Philippines: The Monetary Board may revoke such license on the grounds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it (Sec. 78). Stockholdings of Family groups or Related Interest The law does not prohibit ownership of the stock by members of the same family or related interest. However, the law provides that stockholdings of individuals related to each other within the 4 th degree of consanguinity or affinity, legitimate or common law, shall be considered family groups or related interest and must be fully disclosed in all transaction by such individual with the bank. (Sec 12, GBL) Two or more corporations owned and controlled by the same family group or same group of person shall be considered related interest and must be fully disclosed in all transaction by such corporations or related group of person with the bank. (Sec 13, GBL) Unlike the former law, the GBL does NOT impose a limit on the number of shares that can be owned by the same family or related interest. However this should not be without prejudice to the 40% restriction imposed by Sec 11of the GBL.

OWNERSHIP OF REAL PROPERTY GENERAL RULE: A bank cannot acquire and own real property. Rationale: Banks are not engaged in the business of acquiring and possessing real property. Also, banks must maintain liquidity at all times to enable it to perform its functions. Thus, banks must as much as possible retain only assets that are easily marketable. EXCEPTIONS: 1. As shall be necessary for its own use in the conduct of its business, provided: a. The total investment in such real estate and improvements shall not exceed 50% of the combined capital accounts; and b. the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board (Sec. 51).

2. As mortgaged to it in good faith by way of security for debts, conveyed to it in satisfaction of a debt previously contracted in the course of its dealings, and such as it shall purchase at forced sales or to secure debts; provided, however, that property acquired under such circumstances shall be disposed of by the bank within a period of 5 years; provided that the bank may after said period continue to hold the property for its own use, subject to (1) (Sec. 52).

RULES ON FORECLOSURE OF A REAL ESTATE MORTGAGE BY A MORTGAGEE-BANK Application: Judicial or extrajudicial foreclosure JUDICIAL EXTRAJUDICIAL Right of redemption Within 1 year from 1. Mortgagor is a registration of the natural person foreclosure sale Within one year (exception to Rule after the 68) registration of sale with the Register of Deeds (Sec. 1(3) SC Cir. AM No. 99-10-05) 2. Mortgagor is a juridical person At any time before the registration of the certificate of foreclosure sale which in no case shall be more than 3 months after foreclosure, whichever is earlier. Redemption price: Amount due under the mortgage deed + interest + all the cost and expenses incurred by the bank or institution from the sale and custody of the property less the derived income (Sec 78; Union Bank vs. CA, GR 134068, June 25, 2001) Right of purchaser to possess property: Immediately after the date of the confirmation of the auction sale.

To enjoin or restrain the conduct of foreclosure proceedings, the petitioner must file a bond conditioned that he will pay all the damages which the bank may suffer by the injunction (Sec. 47). A bank may be bound by an agreement providing for a longer redemption period (Ibaan Rural Bank vs. CA, 321 SCRA 83); thus, converting it to conventional redemption or by estoppel if the extension was unilaterally made.

DIRECTORS & OFFICERS Fit and Proper Rule

To maintain the quality of bank management and afford better protection to depositors and the public, in general, the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed as bank directors or officers and disqualify those found unfit (Sec. 16) Independent Director A person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. Prohibition on Public Officials GENERAL RULE: No appointive or elective official, whether full-time or part-time, shall, at the same time, serve as an officer of any private bank (Sec. 19). EXCEPTIONS: 1. As otherwise provided under Sec. 5 of the Rural Bank Act 2. Where such service is incidental to financial assistance provided by the government-owned or -controlled corporation to the bank 3. As otherwise provided under existing laws. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shirk from its responsibility for such frauds, even though no benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114). Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit (Philippine Banking Corp. vs. CA and Marcos, G.R. No. 127469. January 15, 2004).

TRUST OPERATIONS (SECS. 79-93) Only a stock corporation or a person duly authorized by the Monetary Board shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behalf of others (Sec. 79) Trust Business- any activity resulting from a trustor-trustee relationship involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit, advantage of trustor or others called beneficiaries.

Powers of trust entities: 1. Act as trustee on any mortgage or bond issued by any municipality, corporation or body politic and to accept and execute any trust consistent with law 2. Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or incompetent person, and as receiver and depositary of any money paid into court by parties to any legal proceedings 3. Act as the executor of any will when it is named the executor thereof 4. Act as administrator of the estate of any deceased person, with the will annexed, or when there is no will 5. Accept and execute any trust for the holding, management and administration of any estate, real or personal, and the rents, issues, and profits thereof 6. Establish and manage common trust funds (Sec. 83) Prohibitions: 1. No trust entity shall, for account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign or lend money or property to, purchase debt from instruments of, any of the departments, directors, officers, stockholders or employees of the trust entity, including relatives within the 1st degree of consanguinity or affinity, or the related interests, of such directors, officers and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the

other party involved in the transaction is fully disclosed to the trustor or beneficiary of the trust prior to the transaction (Sec. 80, GBL). 2. The trust business and all funds, properties or securities received by any trust entity as executor, administrator, guardian, trustee, receiver or depositary shall be kept separate and distinct from the general business, including all other funds, properties, and assets, of such trust entity (Sec. 87, GBL).

PENALTIES FOR VIOLATION OF THE GBL (SEC. 66) 1. 2. 3. 4. As provided by specific provisions Sections 34-37 of RA 7653 (by excluding the bank from clearing) Suspension or removal of the director or officer Dissolution of the corporation by quo warranto proceedings

THE NEW CENTRAL BANK ACT (NCBA) (R.A. No. 7653) Purpose: To maintain a central monetary authority that shall function and operate as an independent and accountable body in the discharge of its responsibilities concerning money, banking and credit. BANGKO SENTRAL NG PILIPINAS (BSP) The states central monetary authority; it is the government agency charged with the responsibility of administering the monetary, banking and credit system of the country and is granted the power of supervision and examination over bank and non-bank financial institutions performing quasi-banking functions, including savings and loan associations (Busuego vs. CA, 151 SCRA 376 [1987]).

Primary objectives: 1. To maintain price stability conducive to a balanced and sustainable growth of the economy. 2. To promote and maintain monetary stability and the convertibility of the peso.

Responsibilities: 1. To provide policy directions in the areas of money, banking, and credit 2. To supervise bank operations 3. To regulate the operations of finance companies and non-bank financial institutions performing quasibanking functions, and similar institutions (Sec. 3)

Powers/functions: 1. Issuer of currency (Sec. 49-60) 2. Custodian of reserves (Secs. 64-66, 94, 103) 3. Clearing channel or house; especially where the PCHC does not operate (Sec. 102) 4. Banker of the government the BSP shall be the official depository of the Government and shall represent it in all monetary fund dealings (Secs. 110- 116) 5. Financial advisor of the government (Secs. 123-124) Under Article VII, Sec. 20 of the 1987 Constitution, the President may contract or guarantee foreign loans but with the prior concurrence of the Monetary Board. 6. Source of credit (Secs. 61-63, 81-89, 109) 7. Supervisor of the banking system (Sec. 25) shall include the power to:

a. Examine, extending to enterprises wholly or majority-owned or controlled by the bank (Sec. 7, RA 8791); this power may not be restrained by a writ of injunction unless there is convincing proof that the action of the BSP is plainly arbitrary (Sec. 25) b. Place a bank under receivership or liquidation (Sec. 30) c. Initiate criminal prosecution of erring officers of banks 8. Government agent (Secs. 117-122)

MONETARY BOARD (MB) The body by which the powers and functions of the Bangko Sentral are exercised (Sec.6). Composition: Seven members consisting of: 1. Chairman: Governor of the BSP 2. A member of the cabinet to be designated by the President of the Philippines 3. Five (5) members who shall come from the private sector, all of whom shall serve full-time.

Note: The degree of diligence required of the members of the MB, officials and employees of the BSP in the performance of their functions is extraordinary diligence (Sec.16, NCBA).

Qualifications of Members of the Monetary Board: 1. must be natural-born citizens of the Philippines, 2. at least 35 years of age, with the exception of the Governor who should at least be 40 years of age, 3. of good moral character, of unquestionable integrity, of known probity and patriotism, and 4. with recognized competence in social and economic disciplines. Disqualifications and Inhibition on Governor and Board Members: 1. 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 (Sec. 9); 2. those coming from the private sector shall not hold any other public office or public employment during their tenure (Sec. 9); 3. cannot be 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 (Sec. 9); 4. cannot 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 (Sec. 9); 5. the Governor of the Bangko Sentral and the full-time members of the Board shall limit their professional activities to those pertaining directly to their positions with the Bangko Sentral. Accordingly, they may not accept any other employment, whether public or private, remunerated or ad honorem, with the exception of positions in eleemosynary, civic, cultural or religious organizations or whenever, by designation of the President, the Governor or the full-time member is tasked to represent the interest of the Government or other government agencies in matters connected with or affecting the economy or the financial system of the country (Sec. 20); 6. in case any member of the Monetary Board with personal or pecuniary interest in any matter in the agenda of the Monetary Board shall disclose his interest to the Board and shall retire from the meeting when the matter is taken up (Sec. 14).

Supervision and Examination of Banks The BSP 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. Subsidiary a corporation more than 50% of the voting stock of which is owned by a bank or quasi-bank

Affiliate a corporation the voting stock of which, to the extent of 50% or less, is owned by a bank or quasibank or which is related or linked to such institution or intermediary through common stockholders or other factors determined by the Monetary Board. NO RESTRAINING ORDER AGAINST BSP 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. Refusal to Make Reports or Permit Examination. - Any officer, owner, agent, manager, director or officer-in-charge of any institution subject to the supervision or examination by the Bangko Sentral who, being required in writing by the Monetary Board or by the head of the supervising and examining department willfully refuses to file the required report or permit any lawful examination into the affairs of such institution shall be punished under the Act. (Sec. 34) False Statement. - The willful making of a false or misleading statement on a material fact to the Monetary Board or to the examiners of the Bangko Sentral shall be punished. (Sec. 35) PROHIBITIONS ON BANK OFFICERS, DIRECTORS, LAWYERS, AGENTS Personnel of the Bangko Sentral are hereby prohibited from: 1. 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; Exception: 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; 2. 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; 3. revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, information relating to the condition or business of any institution; 4. 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. (Sec. 27)

CORPORATE POWERS OF THE BSP 1. 2. 3. 4. 5. To adopt, alter and use a corporate seal which shall be judicially noticed To enter into contracts To lease, own, and sell property To sue and be sued To acquire and hold such assets and incur such liabilities in connection with its operations or as are essential to the proper conduct of operation 6. To compromise, condone, or release any claim of, or settled liability to the BSP 7. To do and perform such other necessary powers CONSERVATORSHIP OF A BANK OR QUASI-BANK Ground: State of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. A conservator appointed by the BSP may take over without the need of first declaring the bank insolvent. Duration: Not to exceed 1 year Effects: 1. Bank/quasi-bank retains juridical personality 2. Not a precondition to the designation of a receiver Powers of conservator: 1. To take charge of the assets, liabilities, and the management thereof; 2. Reorganize the management; 3. Collect all monies and debts due said bank; and

4. Exercise all powers necessary to restore its viability, with the power to overrule or rebuke the actions of the previous management and board of directors of the bank or quasi-bank. The powers must be related to preservation of assets, reorganization of management and the restoration of viability. Such power to revoke cannot extend to post-facto repudiation of perfected transactions, otherwise they would infringe the non-impairment clause of the Constitution. The power to revoke contracts only covers those that are deemed defective i.e., void, voidable, unenforceable or rescissible (First Phil. Intl Bank vs. CA, 252 SCRA 259). The conservators power is not unilateral and he cannot simply repudiate valid obligations of the bank. His authority would be only to bring actions to assail the same. Termination: 1. When the MB is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary; 2. But if the continuance in business of the bank would involve probable loss to its depositors or creditors, proceedings for receivership and liquidation shall be pursued (Sec. 29). RECEIVERSHIP OF A BANK OR QUASI-BANK/CLOSURE Receivership is equivalent to an injunction to restrain the bank in any way. Thus, the appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property and effects (Villanueva vs. CA, 244 SCRA 395 [1995]). Grounds: Under NCBA 1. Inability to pay liabilities as they become due in the ordinary course of business, but not including inability to pay those caused by extraordinary demands induced by financial panic in the banking community; 2. Insufficiency of realizable assets to meet its liabilities; Under GBL 1. Notification to the BSP or public announcement of a bank holiday (Sec. 53, GBL)

2. Suspension of payment of deposit liabilities continuously for more than 30 days (Sec. 53, GBL) 3. Persistence in conducting business in an unsafe or unsound manner. (Sec. 56, GBL)

3. Inability to continue business without involving probable losses to its depositors or creditors; or 4. Willful violation of a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution (Sec. 30)

Receiver: 1. Banks PDIC

2. Quasi-banks Any person of recognized competence in banking or finance Functions: 1. Immediate gathering and taking charge of all the assets and liabilities of the institution and administering them for the benefit of creditors 2. General powers of a receiver 3. Determination ASAP but not later than 90 days, whether the institution should undergo rehabilitation or liquidation. Note the distinctions between rehabilitation and liquidation.

CLOSE NOW, HEAR LATER SCHEME Sec. 29 of the Central Bank Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of a subsequent judicial review. The purpose of the scheme is to protect the depositors, creditors, stockholders and general public (Central Bank vs. CA, 220 SCRA 536). Only stockholders representing the majority of the capital stock of a bank have the personality to file a petition for certiorari to be filed within 10 days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. Reason: Stockholders owning a majority of the shares are expected to be more objective in determining whether the resolution is plainly arbitrary and issued in bad faith (Sec. 30, NCBA; Central Bank vs. CA, G.R. No. 76118, March 30, 1993).

CASE DIGEST Central Bank of the Philippines vs. Court of Appeals, 220 SCRA 536 Facts: Based on the financial reports submitted to the Central Bank, which states that the Financial condition of The Triumph Savings Bank (TSB) is one of insolvency and its continuance in the business world involve probable loss to its depositors and creditors, the Monetary Board issued a Resolution ordering the closure of TSB, forbidding it from doing business in the Philippines, placing it under receivership and appointing Ramon V. Taiaoqi as receiver. The TSB filed a complaint assailing the resolution on the ground of lack of prior notice and hearing Issue: Whether or not a Monetary Board Resolution be annulled on the ground of lack of prior notice and hearing. Ruling: Section 29 of the Central Bank Act does not contemplate prior notice and hearing before a bank may be declared to stop operations and placed under receivership. When it provides for the filing of the case within 10 days after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the case. Plainly, the legislature could not have intended or authorize no prior notice and hearing in the closure of the bank and at the same time allow the suit to annul it on the basis of the absence thereof. This close now and hear later scheme is grounded on practical and legal consideration to prevent the unwarranted dissipation of the banks asset and as a valid exercise of the police power to protect the depositors, creditors, stockholders and the general public.

1. 2. 3. 4.

MANDATORY REQUIREMENTS FOR BANK CLOSURE Examination by the appropriate BSP department as to the condition of the bank Examination shows that the condition of the bank is one of insolvency Director shall inform the MB in writing of such fact If the MB shall find the statement of the department to be true, it shall appoint a receiver of the assets and liabilities of the bank (Banco Filipino vs. MB, 204 SCRA 519 [1991]).

5. Within 60 days, the MB shall determine and confirm if the bank is insolvent, and if public interest requires, shall order the liquidation of the bank.

LIQUIDATION Grounds: 1. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its depositors and creditors. 2. A determination by the MB that the bank cannot be rehabilitated. Procedure: 1. Receiver shall file ex parte, with the proper RTC, 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. 2. He shall convert the assets of the institution to money for the purpose of paying the debts of the institution (Sec. 30). 3. Payment shall be in accordance with the rules on concurrence and preference of credits. Regular courts have no jurisdiction over actions filed by claimants against an insolvent bank (Ong vs CA, 253 SCRA 105).

EFFECTS OF APPOINTMENT OF RECEIVER/ LIQUIDATION 1. Suspension of operation 2. The assets under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall be exempt from garnishment, levy, attachment or execution (Sec. 30). 3. Bank is not liable to pay interest on deposits during the period of suspension of operation (Overseas Bank vs. CA, 113 SCRA 778 [1982]) 4. The corporation retains its legal personality (Teal Motor Co. vs. CFI, 51 Phil. 549 [1928]) 5. Deposits do not become preferred credits (CB vs. Morfe, 20 SCRA 507 [1967])

LEGAL TENDER All notes and coins issued by the Bangko Sentral are fully guaranteed by the Republic and shall be legal tender in the Philippines for all debts, both public and private (Sec. 52) Legal tender power of coins 1. 1-Peso, 5-Peso and 10-Peso coins: In amounts not exceeding P1,000.00 2. 25 centavo coin or less: In amounts not exceeding P100.00 (Circular No. 537, 2006) BSP Authority to Replace 1. Notes for any series or denomination More than 5 years old 2. Coins More than 10 years old Rules: 1. Notes and coins called in for replacement shall remain legal tender for a period of one year from the date of call.

2. After that period, they shall cease to be legal tender during the following year or for such longer period as MB may determine. 3. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a liability of BSP and shall be demonetized (Sec. 57). Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor. However, a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account (Sec. 60).

MONETARY STABILIZATION 3 IMPORTANT TOOLS TO ACHIEVE PRICE STABILITY 1. Loans to Banks (Sec. 83) (Rediscounting) a. If BSP wants to increase money supply, it opens the rediscount window by reducing interest on loans b. If BSP wants to decrease money supply, it closes the rediscount window or charges very high interest rates for rediscounted notes

2. Open Market Operations (Sec. 90) a. If BSP wants to increase money supply, it buys government securities b. If BSP wants to decrease money supply, it sells government securities

3. Reserve Requirements (Sec. 94) - where a certain percentage of the deposit is set aside and cannot be lent out a. if the volume of money is high, BSP will raise reserve requirement b. if the volume of money is low, reserve requirement is reduced. Rules: 1. The required reserves of each bank shall be proportional to the volume of its deposit liabilities. 2. Since the required reserves are imposed primarily to control the volume of money, the Bangko Sentral shall not pay interests thereon (Sec. 94). Deposits maintained with the Bangko Sentral as part of the reserve requirements shall be exempt from attachment, garnishment, or any other order or process of any court or agency (Sec. 103). 4. No increase of more than 4% point within 30-day period.
3.

PROHIBITIONS ON THE BSP 1. It shall not acquire shares of any kind or accept them as collateral, and shall not participate in the ownership or management of any enterprise, either directly or indirectly; and 2. It shall not engage in development banking and financing (Sec. 128). SECRECY OF BANK DEPOSITS LAW (R.A. No. 1405) Purposes: 1. To encourage people to deposit in banks 2. To discourage private hoarding so that banks may lend such funds and assist in the economic development Coverage:

All deposits of whatever nature with banks or banking institutions in the Philippines, including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities. PROHIBITED ACTS: 1. Examination and inquiry or looking into all deposits, of whatever nature, with the banks in the Philippines including investments in bonds issued by the Government. 2. Any disclosure by any official or employee of any bank to any unauthorized person of any information concerning the said deposits. GENERAL RULE: The deposits covered by law are considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, governmental bureau, or office. EXCEPTIONS: A. F ROM R.A. N O . 1405 1. Upon written permission of the depositor; 2. In cases of impeachment; 3. Upon order of a competent court in cases of bribery or dereliction of duty of public officials; 4. In cases where the money deposited or invested is the subject matter of the litigation; (Sec. 2)

BAR QUESTION: Banks: Secrecy of Bank Deposits; Garnishment (2004) CDC maintained a savings account with CBank. On orders of the MM Regional Trial Court, the Sheriff garnished P50,000 of his account, to satisfy the judgment in favor of his creditor, MO. CDC complained that the garnishment violated the Law on the Secrecy of Bank Deposits because the existence of his savings account was disclosed to the public. (5%) Is CDC's complaint meritorious or not? Reason briefly. SUGGESTED ANSWER No. CDC's complaint is not meritorious. It was held in China Banking Corporation v. Ortega, 49 SCRA 355 (1973) that peso deposits may be garnished and the depositary bank can comply with the order of garnishment without violating the Law on the Secrecy of Bank Deposits. Execution is the goal of litigation as it is its fruit. Garnishment is part of the execution process. Upon service of the notice of garnishment on the bank where the defendant deposited funds, such funds become part of the subject matter of litigation. B. From other laws 1. Anti-Graft and Corrupt Practices Act cases (R.A. No. 3019; added by analogy in PNB vs. Gancayco, 15 SCRA 91 [1965]); 2. NIRC - Inquiry by the Commissioner of Internal Revenue into bank deposits of: a. A decedent to determine his gross estate; b. A taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. He must file a written waiver of his privilege under RA 1405 or other general or special laws (Sec. 6[f], NIRC). 3. Inquiry or examination by the Anti-Money Laundering Council (AMLC) of any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of the Anti-Money Laundering Law, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering offense, except that no court order shall be required in the following unlawful activities: a. Kidnapping for ransom under Art. 267 RPC; b. Comprehensive Dangerous Drugs Act of 2002 (RA No. 9165); c. Hijacking and other violations under RA 6235; destructive arson and murder under RPC. Including those perpetrated by terrorists against non-combatant persons and similar targets (Sec. 11, R.A. No. 9160 as amended by Sec. 8 of RA 9194) 4. Disclosure to the Treasurer of the Philippines of dormant deposits for at least 10 years under the Unclaimed Balances Act (Act No. 3936).

OTHER LAWS RELATING TO SECRECY OF BANK DEPOSITS

A. Foreign Currency Deposit Act (R.A. No. 6426): B. Extends confidentiality to foreign currency deposits, but the law contains only one ground authorizing examination: upon written permission of the depositor. C. General Banking Law of 2000 (R.A. No. 8791): 1. No bank shall employ casual or non-regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits (Sec. 55.4). 2. No director, officer, employee, or agent of any bank shall, without court order, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity, provided that with respect to bank deposits, the provisions of existing laws shall prevail (Sec. 55[b]). 3. Outsourcing of inherent bank functions D. New Central Bank Act (R.A. No. 7653): 1. DOSRI loans 2. Periodic and special examinations by the BSP (Sec. 25) E. Anti-Money Laundering Act (R.A. No. 9160) Provides for another exception to confidentiality, which is applicable to both peso and foreign currency deposits. Garnishment of bank deposit of judgment debtor does not violate RA 1405. It was not the intention of the legislature to place bank deposits beyond the reach of execution to satisfy a final judgment. Its purpose is merely to secure information as to the name of the depositor and whether or not the defendant had a deposit in said bank, only for purposes of garnishment. Any disclosure is purely incidental to the execution process (China Banking Corporation vs. Ortega, 49 SCRA 355). Illegally acquired property extends to cases where property is concealed by being held by or recorded in the name of respondents spouse, ascendants, descendants, relatives, or any other persons (Banco Filipino Savings and Mortgage Bank vs. Purisima, 161 SCRA 576). Money-market placement is not covered by RA 1405 because it is not deposited in the bank. BAR QUESTION: BANKS: APPLICABILITY: FOREIGN CURRENCY DEPOSIT ACT & SECRECY OF BANK DEPOSITS (2005) Hi Yielding Corporation filed a complaint against five of its officers for violation of Section 31 of the Corporation Code. The corporation claimed that the said officers were guilty of advancing their personal interests to the prejudice of the corporation, and that they were grossly negligent in handling its affairs. Aside from documents and contracts, the corporation also submitted in evidence records of the officers U.S. Dollar deposits in several banks overseas - Boston Bank, Bank of Switzerland, and Bank of New York. For their part, the officers filed a criminal complaint against the directors of Hi Yielding Corporation for violation of Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines. The officers alleged that their bank deposits were illegally disclosed for want of a court order, and that such deposits were not even the subject of the case against them. a) Will the complaint filed against the directors of Hi Yielding Corporation prosper? Explain SUGGESTED ANSWER: No, because the Foreign Currency Deposit Act (R.A. No. 6426), including its punitive provisions, refers to foreign currency deposits accounts constituted within the Philippines. It has no application at all to accounts, even though they are banks, opened and constituted abroad b) Was there a violation of the Secrecy of Bank Deposits Law (Republic Act No. 1405)? Explain. SUGGESTED ANSWER: No, because the punitive provisions of the Secrecy of Bank Deposits Law (R.A. No. 1405), including the statutory exemptions provided therein, are not applicable to FCDU accounts, even when constituted locally. (Intengan v. Court of Appeals, G.R. No. 128996, February 15, 2002 )

REQUISITES FOR IN-CAMERA INSPECTION OF BANK DEPOSITS MARQUEZ VS. DESIERTO, G.R. NO. 135882, JUNE 27, 2001 1. 2. 3. 4. 5. Pending case before a court of competent jurisdiction Account must be clearly identified The inspection is limited to the subject of the pending litigation. The bank personnel and account holder must be present during the inspection. The inspection must cover only the account identified in the pending case.

R.A. NO. 1405 VIS--VIS POWER OF THE BSP TO CONDUCT PERIODIC AND/OR SPECIAL EXAMINATIONS (SEC. 4, GBL & SEC. 25, NCBA) Prof. Aquino and Prof. Viray believe that the general rule still applies. Hence, the deposit remains confidential. Penalties Imprisonment of not more than 5 years or a fine not more than P20,000 or both, in the discretion of the court. Impeachment In impeachment proceedings, the impeachment court may inquire into bank deposits. Thus, during the impeachment proceedings against former President Estrada, Chief Justice Davide ruled that Clarissa Ocampo could testify on the Jose Estrada/Jaime Dichaves accounts maintained with Equitable PCIB Bank, over the objections of the defense that this would violate the Bank Secrecy Law. Basis for this ruling was that the inquiry would be made in the course of an impeachment proceeding.

Written Permission of Depositor A bank may allow an inquiry into a deposit with the written consent of the depositor. An oral or implied authorization does not suffice. This consent may be given voluntarily. In some cases, however, the consent is involuntary because the law requires it. Thus, Section 26 of the New Central Bank Act as implemented by BSP Circular No. 170, series of 1998, requires a director, officer or stockholder of a bank or their related interests to submit a written waiver of the secrecy of all his deposits of whatever nature in all banks of the Philippines in favor of the Bangko Sentral, if he applies for a DOSRI loan. However, the information obtained from the examination remains confidential and may be used by BSP examiners only in legal action it may initiate involving the said deposits. A waiver of the Bank Secrecy Law is also required in case of loans secured by a hold-out or an assignment of certificates of time deposits. (Section X315, Manual of Regulations for Banks). Where Funds Deposited are Subject of Litigation Case Digest Onate v Hon Zeus Abrogar, 230 SCRA 181 Facts: Sun Life brought a collection case to recover the proceeds of a check it had issued, the insurance company wanted to determine how the defendant had applied the proceeds of the check. The trial court allowed Sun Life to examine pertinent records of the bank in which the check was deposited. Ruling: The Supreme Court held that the examination was authorized by Section 10 of Rule 57, on the examination of a person whose property has been attached and person indebted to him or controlling his property. The Court struck down the argument that the examination would violate the Bank Secrecy Law, explaining that the examination fell within the exception in cases where the money deposited or invested is the subject matter of litigation. The Court added that the examination of bank records was not a fishing expedition, but rather a method by which Sun Life could trace the proceeds of the check that it paid to the petitioners.

 In another case, Mellon Bank remitted $1 million rather that an intended $1,000 to the recipient, who deposited part of the remittance in a local bank. When personnel of the depositary bank testified on the bank deposits, the defense moved to strike out the testimonies of the depositary banks witnesses. The Supreme Court allowed their testimonies to remain on the record, stating Section 2 of said law allows the disclosure of bank deposits in cases where the money deposited is the subject matter of the litigation. (Mellon Bank v. Magsino, 190 SCRA 633.

UNEXPLAINED WEALTH (RA3019) Although the Bank Secrecy Law did not include cases covered by the Anti-Graft Law among the exceptions, the Supreme Court held that they should be included. The only conclusion possible is that Section 8 of the Anti-Graft Law is intended to amend Section 2 of Republic Act No. 1405 by providing an additional exception to the rule against disclosure of band deposits. (PNB v. Gancayco, 15 SCRA 91 (1965). This overturned an earlier case decided by the High Court where it held that a prosecution under the Anti-Graft Law was not embraced within any of the exceptions to the Bank Secrecy Law that would allow disclosure by a bank of information concerning a deposit. (Tatalon Bario Council v. Bank of PI, 7 SCRA 10 (1963). In another case, the Supreme Court expanded the exception under the Anti-Graft Law, when it allowed an examination not only of the accuseds deposits, but also those of his spouse, ascendant, descendants and relatives, and other persons as well. ( Banco Filipino v. Hon. Fidel Purisima, 161 SCRA 576 (1988). Here, the Court declared as proper the production by subpoena duces tecum of bank records of transactions by or in the names of the wife, children and friends of a special agent of the Bureau of customs accused of having allegedly acquired property manifestly out of proportion to his salary and lawful income. The Court explained: To sustain the petitioners theory, and restrict the inquiry only to property held by or in the name of the government official or employee, or his spouse and unmarried children, is unwarranted in the light of the provisions of the statutes in question, and would make available to persons in government who illegally acquire property an easy and fool-proof means of evading investigation and prosecution; all they would have to do would be to simply place the property in the possession or name of persons other than their spouse and unmarried children. This is an absurdity that we will not ascribe to the lawmakers. Upon Order of the Ombudsman Although Section 8 of the law that created the Office of the Ombudsman expressly granted the Ombudsman the power to administer oaths, issue subpoena and subpoena duces tecum and take testimony in any investigation or inquiry, including the power to examine and have access to bank accounts and records, the Supreme court held that the Ombudsman could not inquire into bank deposits until there was a pending case in court involving the deposits .(Marquez v. Desierto, 359 SCRA 772 (2001) Unclaimed Balances Law The Unclaimed Balances Law (Republic Act No. 3936) requires each bank to file a sworn statement with the Treasurer of the Philippines stating the deposits that the bank holds in the names of persons known to be dead or who have not made deposits or withdrawals during the preceding ten years or more. It is also requires the bank to post a copy of the sworn statement in the bank premises. However, this is done only after the bank shall have first communicated with the depositor at his last known residence or post office address. Such a disclosure of the deposits and the depositors, does not violate the Bank Secrecy Law. Garnishment of Bank Deposit In China Banking Corporation v. Court of Appeals , (193 SCRA 452 (1991) the Supreme Court held that the garnishment of a bank deposit does not violate the Bank Secrecy Law. Said the court: It is clear from the discussion of the conference committee report on x x x Republic Act. No. 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act No. 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed, there is no real inquiry in such a case, and if the existence of the deposit is disclosed, the disclosure to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.(Phil. Commercial & International Bank v. Court of Appeals, 93 SCRA 452 (1991). BAR QUESTION:

Banks; Secrecy of Bank Deposits (2000) GP is a suspected Jueteng lord who is rumored to be enjoying police and military protection. The envy of many drug lords who had not escaped the dragnet of the law, GP was summoned to a hearing of the Committee on Racketeering and Other Syndicated Crimes of the House of Representatives, which was conducting a congressional investigation in aid of legislation on the involvement of police and military personnel, and possibly even of local government officials, in the illegal activities of suspected gambling and drug lords. Subpoenaed to attend the investigation were officers of certain identified banks with a directive to them to bring the records and documents of bank deposits of individuals mentioned in the subpoenas, among them GP. GP and the banks opposed the production of the banks records of deposits on the ground that no such inquiry is allowed under the Law on Secrecy of Bank Deposits (RA 1405 as amended). Is the opposition of GP and the banks valid? Explain. SUGGESTED ANSWER: Yes. The opposition is valid. GP is not a public official. The investigation does not involve one of the exceptions to the prohibition against disclosure of any information concerning bank deposits under the Law on Secrecy of Bank Deposits. The Committee conducting the investigation is not a competent court or the Ombudsman authorized under the law to issue a subpoena for the production of the bank record involving such disclosure. ANTI-MONEY LAUNDERING ACT OF 2001 (R.A. No. 9160, as amended by R.A. 9194)

Purposes:

1. To protect and preserve the integrity and confidentiality of bank accounts, to ensure that the Philippines shall not be used as a site for unlawful money laundering activities; and 2. To pursue States foreign policy to extend cooperation in transnational investigations and prosecution on money laundering activities. Covered Entities: 1. Banks 2. Non-banks 3. Quasi-banks 4. Trust entities 5. All other institutions, their subsidiaries and affiliates supervised or regulated by the BSP COVERED TRANSACTION: Transaction, in cash or other equivalent monetary instrument in excess of P500,000, within one banking day. Suspicious Transactions: Transactions with covered institutions regardless of the amounts involved, where any of the following circumstances exists: 1. There is no underlying legal or trade obligation 2. Client is not properly identified 3. Amount involved is not commensurate with the business or financial capacity 4. Taking into account all known circumstances, it may be perceived that the clients transaction is structured in order to avoid being the subject of reporting requirements under the Act

5. Any circumstance relating to the transaction which is observed to deviate from the profile and/or the clients past transactions with the covered institution 6. Transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed 7. Analogous transactions to any of the foregoing MONEY LAUNDERING:

A crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following: 1. Any person knowing that any monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to transact said monetary instrument or property. 2. Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense referred to in number 1 above. 3. Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the AMLC fails to do so.

Prevention of Money Laundering 1. Customer Identification Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying their clients and in case of corporate client, require a system of verifying their legal existence and organizational structure, s well as the authority and identification of all person purporting to act on their behalf. 2. Record Keeping- All records of all transaction of covered institution shall be maintained and safely stored for 5 years from the dates of transaction. With respect to closed accounts, the records on customer identification, account files and business correspondence, shall be preserved and safely stored for at least 5 years from the dates when they were closed. 3. Reporting of Covered and Suspicious Transactions. Covered institution shall report to the AMLC all covered and suspicious transactions within 5 working days from the occurrence thereof, unless the Supervising Authority prescribes a longer period not exceeding 10 working days.

Jurisdiction: All cases: RTC Public officers and private persons in conspiracy with them: Sandiganbayan

Power to Freeze Accounts The power of the AMLC to freeze accounts has been deleted under RA 9194 The Court of Appeals may issue a freeze order, which shall be effective immediately and for a period of 20 days, unless extended by the court, only: a. upon ex parte application of AMLC; and b. after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity.

BAR QUESTION: BANKS; SECRECY OF BANK DEPOSIT; AMLC (2006) Rudy is jobless but is reputed to be a Jueteng operator. He has never been charged or convicted of any crime. He maintains several bank accounts and has purchased 5 houses and lots for his children from the Luansing Realty, Inc. Since he does not have any visible job, the company reported his purchases to the Anti-Money Laundering Council (AMLC). Thereafter, AMLC charged him with violation of the Anti-Money Laundering Law. Upon request of the AMLC, the bank disclosed to it Rudy's bank deposits amounting to P100 Million. Subsequently, he was charged in court for violation of the Anti-Money Laundering Law. 1. Can Rudy move to dismiss the case on the ground that he has no criminal record? (2.5%)

SUGGESTED ANSWER: No. Under the Anti-Money Laundering Law, Rudy would be guilty of a "money laundering crime" committed when the proceeds of an "unlawful activity," like Jueteng operations, are made to appear as having originated from legitimate sources. The money laundering crime is separate from the unlawful activity of being a Jueteng operator, and requires no previous conviction for the unlawful activity (See also Sec. 3, Anti-Money Laundering Act of 2001). 2. To raise funds for his defense, Rudy sold the houses and lots to a friend. Can Luansing Realty, Inc. be compelled to transfer to the buyer ownership of the houses and lots? (2.5%)

SUGGESTED ANSWER: Luansing Realty, Inc. is a real estate company, hence it is not a covered institution under Section 3 of the Anti-Money Laundering Act. Only banking institutions, insurance companies, securities dealers and brokers, pre-need companies and other entities administering or otherwise dealing in currency, commodities or financial derivatives are covered institutions. Hence, Luansing Realty, Inc. may not use the Anti-Money Laundering Act to refuse to transfer to the buyer ownership of the houses and lots. 3. In disclosing Rudy's bank accounts to the AMLC, did the bank violate any law? (2.5%) SUGGESTED ANSWER: No, the bank did not violate any law. The bank being specified as a "covered institution" under the AntiMoney Laundering Law, is obliged to report to the AMLC covered and suspicious transactions, without thereby violating any law. This is one of the exceptions to the Secrecy of Bank Deposit Act. 4. Supposing the titles of the houses and lots are in possession of the Luansing Realty, Inc., is it under obligation to deliver the titles to Rudy? (2.5%) SUGGESTED ANSWER: Yes, it has an obligation to deliver titles to Rudy. As Luansing Realty, Inc. is not a covered institution under Section 3 of the Anti-Money Laundering Act, it may not invoke this law to refuse delivery of the titles to Rudy. BAR QUESTION: BANKS; SECRECY OF BANK DEPOSITS (1991) The law (RA 6832) creating a Commission to conduct a Thorough Fact-Finding Investigation of the Failed Coup detat of Dec 1989, Recommend Measures to Prevent the Occurrence of Similar Attempts At a Violent Seizure of Power and for Other Purposes, provides that the Commission may ask the Monetary Board to disclose information on and/or to grant authority to examine any bank deposits, trust or investment funds, or banking transactions in the name of and/or utilized by a person, natural or juridical, under investigation by the Commission, in any bank or banking institution in the Philippines, when the Commission has reasonable ground to believe that said deposits, trust or investment funds, or banking transactions have been used in support or in furtherance of the objectives of the said coup detat. Does the above provision not violate the Law on Secrecy of Bank Deposits (RA 1405)?

SUGGESTED ANSWER: The Law on Secrecy of Bank Deposits is itself merely a statutory enactment, and it may, therefore, be modified, or amended (such as by providing further exceptions therefrom), or even repealed, expressly or impliedly, by a subsequent law. The Secrecy of Bank Deposits Act did not amount to a contract between the depositors and depository banks within the meaning of the non-impairment clause of the Constitution. Even if it did, the police power of the State is superior to the non- impairment clause. RA 6832, creating a commission to conduct an investigation of the failed 1989 coup detat and to recommend measures to prevent similar attempts to seize power is a valid exercise of police power. PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC) ACT (R. A. 9302)

Purposes: 1. To create a government-owned entity, the PDIC; 2. To insure the deposit liability of banks in an account up to P250,000 for every single depositor of each bank irrespective of the number of accounts therewith. PHILIPPINE DEPOSIT INSURANCE CORPORATION Functions: A. Insurance The PDIC assesses and collects insurance assessments from member-banks to insure member-banks deposit accounts. In case of bank closures, the PDIC processes and services claim for insured deposits. Deposits are insured up to a maximum coverage of P250,000 per depositor. B. Bank Examination Under the new law, PDIC's authority to examine its member banks, with prior approval by the Monetary Board, has been restored. C. Bank Rehabilitation The PDIC may grant financial assistance to distressed banks if it is proven to be a less costly alternative than closure. D. Receivership of closed banks Once a bank is ordered closed by the Monetary Board (MB) of the Bangko Sentral ng Pilipinas, the PDIC is designated as statutory receiver. The PDIC upon receipt of the MB resolution ordering the closure of a bank, immediately physically takes over the closed bank. Receivership is the stage within which the PDIC manages the affairs of the closed bank and preserves its assets for the benefit of creditors. E. Liquidation of closed banks After it is determined that the closed bank can not be rehabilitated, the PDIC shall recommend the liquidation of the assets of the closed bank. Liquidation refers to the recovery and conversion of assets into cash for distribution to all creditors in accordance with the order of creditor preference pursuant to law INSURANCE FUNCTION 1. Nature: Compulsory insurance on all bank deposits 2. Coverage: Insured deposits - the net amount due to any depositor for deposits in an insured bank, after deducting unpaid loans and other obligations of the depositor to the closed bank. In no case shall insured deposit exceed P250,000 per depositor. 3. Specific risk insured against: Bank closure only. Thus, losses due to a bank robbery are not covered. 4. Amount of insurance: Maximum of P250,000.00 per deposit (RA 9302) 5. Condition precedent for entitlement to payment: Filing of claim within twenty-four months from order of closure

6. Manner of payment: a. Cash b. Transferred deposit A deposit in an insured bank made available to a depositor by the PDIC as payment of the insured deposit of such depositor in a closed bank and assumed by another insured bank. 7. Effect of payment by the PDIC to the depositor of his insured deposit: a. Discharges the PDIC from further liability b. Subrogates the PDIC to all the rights of the depositor against the closed bank to the extent of such payment. The fact that a bank instrument provides that the certificate is insured by the PDIC does not ipso facto make the latter liable for the same; the deposit liability of the PDIC is determined by the provisions of RA 3519 (PDIC vs. CA, 283 SCRA 462).

Case Digest PDIC vs. CA, 283 SCRA 462 Facts: The plaintiffs invested in the money market placement with the Premier Financing Corporation (PFC) but when they went to PFC to encashed the checks and promissory notes corresponding to their investment the PFC referred them to the Regent Savings Bank (RSB). Instead of paying the promissory notes and checks, the RSB issued 13 certificate of time deposit which was insured with the PDIC. The bank failed to pay the corresponding amount of the time deposit on its maturity date due to insolvency and advised the plaintiffs to file a claim with the PDIC. But the PDIC refused to pay the claim for it is not included in the list of duly recorded liabilities of the RSB. Issue: Whether or not the PDIC is liable for the plaintiffs claims. Ruling: The fact that the certificate state that the certificates are insured by PDIC does not ipso facto make the latter liable for the same should the contingency insured against arise. The deposit liability of the PDIC is determined by the provisions of R.A. 3519 and statements in the certificate that the same are insured by PDIC are not binding upon the latter.

Insured deposits The net amount due to any depositor for deposits in an insured bank, after deducting offsets, less any part thereof which is in excess of P250,000. Trust funds and safety deposit boxes are not covered. After deducting offsets Consistent with the rulings in Gullas vs. PNB, 62 Phil. 519 and Republic vs. CA, G.R. No. 15012, July 22, 1975 recognizing the debtor-creditor relationship of the bank and the depositor, set-off takes place ipso jure with respect to the depositors bank deposit and his matured loan with the bank. Transferred deposits A deposit in an insured bank made available to a depositor by the PDIC as payment of the insured deposit of the depositor in a closed bank and assumed by another insured bank. SPECIAL RULES 1. PDIC liability is on a per bank basis. Accounts in a bank, even though in several branches, are to be added together, provided that they are maintained in the same capacity and the same right for his benefit either in his own name or in the name of others. Capacities: individual account, joint and account, joint and/or account. 2. The insurance premiums are to be paid by the insured bank, not the depositors. 3. In case the depositors account is more than the insurance coverage, the balance may still be recovered from the PDIC after the final liquidation of the remaining assets of the closed bank. 4. a. If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there

are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit. b. If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity: Provided, further, That the aggregate of the interests of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of Two hundred fifty thousand pesos (P250,000.00). Authority to terminate insured status 1. Non-payment of insurance premiums 2. Continued engagement in unsafe and unsound banking practices Sec. 9 of RA 6426 (An Act Instituting a Foreign Currency Deposit System in the Philippines, and for Other Purposes") and Sec. 79 of Central Bank (CB) Circular No. 1389, dated August 13, 1993, mandate that foreign currency deposits shall be insured under the provisions of RA 3591, as amended. Under CB Circular No. 1389, depositors are entitled to receive payment in the same currency in which the insured deposit is denominated. Note: The PDIC law is not applicable to Offshore Banking Units (P.D. No. 1034).

UNCLAIMED BALANCES LAW (R.A. No. 3936) ELEMENTS OF UNCLAIMED BALANCES 1. There must be a claim or deposit of: a. Money; b. Bullion; c. Security; or d. other evidence of indebtedness. 2. The credit or deposit must be with a bank, building and loan association, or trust corporation; and a. b. more. Demand drafts cannot be escheated but telegraphic notes can be escheated (Republic vs. FNCB, 3 SCRA 851 [1961]). who is dead, or who has not made further deposits or withdrawals during the preceding 10 years or

3. The credit or deposit is in favor of a person:

LEGAL CONSEQUENCE The unclaimed balances may be subject of escheat proceedings, after proper publication and the depositors still do not lay claim to them. FOREIGN CURRENCY DEPOSIT ACT (R.A. No. 6426) FOREIGN CURRENCY DEPOSIT

PESO DEPOSIT

Governed by R.A. No. 1405 4 exceptions + exceptions found in special laws May be garnished or attached (not a violation of R.A. No. 1405)

Governed by R.A. No. 6426 1 exception + 1 provided under AMLA (R.A. No. 9160) GENERAL RULE: Exempt from attachment, garnishment, and other court order and processes. EXCEPTION: Salvacion vs. CB (278 SCRA 27)

OTHER FEATURES: 1. Authorized banks may adopt a numbered account system for recording and servicing deposits in non-checking accounts

2. Foreign currency deposits are exempt from taxes except the interests 3. In the event a new enactment or regulation is issued decreasing the rights granted under the law, it shall not apply to FCDs already made or existing at the time of the issuance of such new regulation or enactment. In a sui generis case, the SC allowed garnishment of such deposits of a transient American tourist arising out of a heinous crime committed against a Filipino minor since to hold otherwise would result to injustice to a citizen perpetrated by a foreigner (Salvacion, et al. vs. Central Bank et al., 278 SCRA 27). Note: This case does not constitute another exception, the SC only ruled as such due to the special circumstances of the said case.

REPEALING LAW TO UNIFORM CURRENCY ACT (R.A. NO. 8183) All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment (Sec. 1). TRUTH IN LENDING ACT ( RA 3765) The law assures full disclosure by requiring the lender to give the borrower all the details regarding the transaction. Under Sec. 4, any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulation prescribed by the Board the following informations: 1. The cash price or delivered price of the property or service required; 2. The amounts, if any to be credited as down payment and/or trade-ins; 3. The difference between the amounts set forth under clauses 1 and 2; 4. The charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit. 5. The total amount to be financed;

6. The finance charge expressed in terms of pesos and centavos; and 7. The percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. BAR QUESTION: TRUTH IN LENDING ACT (1991) Dana Gianina purchased on a 36 month installment basis the latest model of the Nissan Sentra Sedan car from the Jobel Cars Inc. In addition to the advertised selling price, the latter imposed finance charges consisting of interests, fees and service charges. It did not, however, submit to Dana a written statement setting forth therein the information required by the Truth in Lending Act (RA 3765). Nevertheless, the conditional deed of sale which the parties executed mentioned that the total amount indicated therein included such finance charges. Has there been substantial compliance of the aforesaid Act? If your answer to the foregoing question is in the negative, what is the effect of the violation on the contract? In the event of a violation of the Act, what remedies may be availed of by Dana? SUGGESTED ANSWER: a) There was no substantial compliance with the Truth in Lending Act. The law provides that the creditor must make a full disclosure of the credit lost. The statement that the total amount due includes the principal and the financial charges, without specifying the amounts due on each portion thereof would be insufficient and unacceptable. b) A violation of the Truth in Lending Act will not adversely affect the validity of the contract itself. c) It would allow Dana to refuse payment of financial charges or, if already paid, to recover the same. Dana may also initiate criminal charges against the creditor.

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