LASALLIAN COMMISSION ON BAR OPERATIONS
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LASALLIAN COMMISSION ON
BAR OPERATIONS
FREQUENTLY ASKED BAR EXAM
QUESTIONS & TOPICS
COMMERCIAL LAW
ACADEMICS COMMITTEE 2015-2016
Committee Head for Academics:
OLIVE GRACE MA. P. CACHAPERO
Deputy Head:
ANA KATRINA O. CONSTANTINO
Commercial Law Team
Subject Chair for Criminal Law:
JOCELYN BAYLON
Assistant: RUBY REYES
Subject Head for Negotiable Instruments Law - REBECCA
FLORES
Member: METHA OROLFO
Subject Head for Insurance Code – BIEN DE GUZMAN
Members: KRYSTELLE CANDOR, RC ALFAFARA, DJ EMPLEO,
SARAH CALICA, JADE LORENZO, LOREN VICENDO
Subject Head for Transportation Laws –AIYU MALLARI
Subject Head for Corporation Law – KAYE LAT
Members: ALVIN RUFINO, BERNINA PASCUAL, KIM
MEDRANO
Subject Head for Intellectual Property Law - JOCELYN BAYLON
Subject Head for Banking - NIKKI ANDRADE
FREQUENTLY ASKED QUESTIONS & TOPICS
(1995-2014 Bar Examinations)
BANKING LAWS
BANKING LAWS
Q: What are the grounds for receivership and
liquidation of a bank? (Bar 1997, 2006, 2009)
The grounds for receivership and liquidation are as follow:
a) The bank is unable to pay its liabilities as they
become due in the ordinary course of business:
Provided, That this shall not include inability to pay
caused by extraordinary demands induced by
financial panic in the banking community;
b) Has insufficient realizable assets, as determined by
the Bangko Sentral, to meet its liabilities; or
c) cannot continue in business without involving
probable losses to its depositors or creditors; or
d) has willfully violated a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation
of the assets of the institution; in which cases, the
Monetary Board may summarily and without need
for prior hearing forbid the institution from doing
business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver
of the banking institution. (Section 30, New Central
Bank Act)
NOTE: The Monetary Board may order the closure of a bank
upon receipt of the Supervising and Examining Department
(SED) enumerated in Section 30.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business, the Monetary
Board shall notify in writing the Board of Directors of its
findings and direct the receiver to proceed with the liquidation
of the institution.
Q: What are the different classifications of Banks?
(Bar 2002, 2010)
GENERAL BANKING ACT OF 2000 (R.A. 8791)
SECTION 3. Definition and Classification of Banks.
3.1. "Banks" shall refer to entities engaged in the lending of
funds obtained in the form of deposits.
(2a) xxx
The different classification of Banks under Section 3.2 of the
General Banking Law are as follow:
a) Universal Banks – banks that have authority to
exercise, in addition to the powers and function of
commercial banks, powers of an investment house
and the power to invest in non-allied enterprises.
b) Commercial Banks – banks that are given all such
power necessary to engage in commercial banking in
addition to general corporate powers; commercial
banking includes the power to accept drafts, issue
letters of credits, discounting and negotiation of
negotiable instruments and evidence of debt, accept
and create demand deposits and the like.
c) Rural Banks – banks that are created to make
needed credit available and readily accessible in the
rural areas for the purpose of promoting
comprehensive rural development.
d) Thrift Banks – include savings and mortgage banks,
private development banks, and stock savings and
loan associations
e) Cooperative Banks – banks that primarily provide
financial, banking and credit services to cooperative
organizations and their members
f) Islamic Banks
g) Other classification of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas.
(Aquino and Sundiang. Reviewer on Commercial
Law [2014])
Q: What are the restrictions on bank exposure
imposed by law to directors, officers, stockholders
and their related interests (DOSRI)? (Bar 2002, 2006)
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According to Sec. 36 of the General Banking Act of
2000, the restrictions on bank exposure imposed by law to
DOSRI are the following:
1) No director or officer of any bank shall, directly or
indirectly, for himself or as the representative or agent of
others, borrow from such bank;
2) He cannot become a guarantor, indorser 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:
a) Provided, that a written approval shall not be
required for loans, other credit accommodations
and advances granted to officers under a fringe
benefit plan approved by the Bangko Sentral.
b) The required approval shall be entered upon the
records of the bank and a copy of such entry shall
be transmitted forthwith to the appropriate
supervising and examining department of the
Bangko Sentral.
3) Dealings of a bank with any of its directors, officers or
stockholders and their related interests shall be upon
terms not less favorable to the bank than those offered
to others.
NOTE: The General Banking Law of 2000 has not entirely
prohibit an officer of the bank, directly or indirectly, from
borrowing from the bank. The GBL provides additional
restriction to the bank before it can lend to its directors or
officers. A written approval of the majority vote of all directors
of the bank, excluding the director concerned is required.
Ramoso vs. Court of Appeals, G.R. No. 117416 [December 8,
2000]).
NOTE: After due notice to the board of directors of the bank,
the office of any bank director or officer who violates the
provisions Section 36 may be declared vacant and the director
or officer shall be subject to the penal provisions of the New
Central Bank Act.
The limit on loans, credit accommodations and guarantees
prescribed shall not apply to loans, credit accommodations and
guarantees extended by a cooperative bank to its cooperative
shareholders. (Section 36, General Banking Act of 2000)
NOTE: Monetary Board, in its Resolution No. 241 dated
February 26, 2004 stated that “Related Interest” shall refer
to any of the following:
1) Spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption, of
a director, officer or stockholder of the bank;
2) Partnership of which a director, officer, or stockholder
of a bank or his spouse or relative within the first degree
of consanguinity or affinity, or relative by legal adoption,
is a general partner;
3) Co-owner with the director, officer, stockholder or his
spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption, of
the property or interest or right mortgaged, pledged or
assigned to secure the loans or other credit
accommodations, except when the mortgage, pledge or
assignment covers only said co-owner's undivided
interest;
4) Corporation, association, or firm of which a director or
officer of the bank, or his spouse is also a director or
officer of such corporation, association or firm, except
(a) where the securities of such corporation, association
or firm are listed and traded in the big board or
commercial and industrial board of domestic stock
exchanges and less than fifty percent (50%) of the voting
stock thereof is owned by any one person or by persons
related to each other within the first degree of
consanguinity or affinity; or (b) where the director,
officer or stockholder of the bank sits as a representative
of the bank in the board of directors of such corporation:
Provided, That the bank representative shall not have
any equity interest in the borrower corporation except
for the minimum shares required by law, rules and
regulations, or by the by-laws of the corporation:
Provided, further, that the borrowing corporation is not
among those mentioned in items e(5), e(6), e(7) and
e(8) of this Section;
5) Corporation, association or firm of which any or a group
of directors, officers, stockholders of the lending bank
and/or their spouses or relatives within the first degree
of consanguinity or affinity, or relative by legal adoption,
hold or own at least twenty percent (20%) of the
subscribed capital of such corporation, or of the equity
of such association or firm;
6) Corporation, association or firm wholly or majority-
owned or controlled by any related entity or a group of
related entities mentioned in Items e (2), e(4) and e(5)
of this Section.
7) Corporation, association or firm which owns or controls
directly or indirectly whether singly or as part of a group
of related interest at least twenty percent (20%) of the
subscribed capital of a substantial stockholder of the
lending bank or which controls majority interest of the
bank pursuant to Subsection X303.1 of the MOR.
8) Corporation, association or firm in which the lending
bank and/or its parent/subsidiary holds or owns at least
twenty percent (20%) of the subscribed capital of such
corporation, or in the equity of such association or firm,
or has an existing management contract or any similar
arrangement with the lending bank or its
parent/subsidiary.
Q: What is the rule on the right of redemption? (Bar
2002, 2007)
GENERAL RULE: there is no right of redemption within one
year from registration of the sale with the Registry of Deeds.
The EXCEPTION allowed is when the mortgagee is a bank and
the mortgagor is a juridical person. In such a case, the period of
redemption is: three months after foreclosure or before
registration of the sale, whichever is earlier. (Section 47,
General Banking Act of 2000)
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Q: What acts of bank directors or officers are
penalized after a bank becomes insolvent? (Bar 2000,
2007)
Sec. 70 of the General Banking Act states that any director
or officer of any bank declared insolvent or placed under
receivership by the Monetary Board who:
1) refuses to turn over the bank's records and assets to
the designated receivers, or
2) tampers with banks records, or
3) appropriates for himself or another party or destroys
or causes the misappropriation and destruction of the
bank's assets, or
4) receives or permits or causes to be received in said
bank any deposit, collection of loans and/or
receivables, or
5) pays out or permits or causes to be paid out any funds
of said bank, or
6) transfers or permits or causes to be transferred any
securities or property of said bank
Shall be subject to the penal provisions of the New Central
Bank Act.
The appointment of a receiver operates to suspend the
authority of the bank and of its directors and officers over its
property and effects, such authority being reposed in the
receiver.(Abacus Real Estate Development Center, Inc. v. The
Manila Banking Corporation, G.R. No. 162270 [April 6,
2005]).
Q: What is the doctrine of secrecy of bank deposits?
(Bar 1994, 1995, 1997, 1998, 2000, 2001, 2004, 2005,
2006)
SECRECY OF BANK DEPOSIT ACT (R.A. 1405)
Sec. 2. 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, are hereby considered as of an absolutely
confidential nature and may not be examined, inquired or
looked into by any person, government official, bureau or
office, except upon written permission of the depositor, or in
cases of impeachment, or upon order of a competent court
in cases of bribery or dereliction of duty of public officials, or
in cases where the money deposited or invested is the
subject matter of the litigation.
GENERAL RULE:
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, are hereby considered as
of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official,
bureau or office:
EXCEPTIONS:
a) upon written permission of the depositor, or
b) in cases of impeachment, or
c) upon order of a competent court in cases of bribery
or dereliction of duty of public officials, or
d) in cases where the money deposited or invested is
the subject matter of the litigation
e) upon order of the competent court or tribunal in
cases involving unexplained wealth under the Anti-
Graft and Corrupt Practices Act (Bangko Filipino v.
Purisima, 161 SCRA 576)
f) Upon inquiry by the Commissioner of Internal
Revenue for the purpose of determining the net
estate of a deceased depositor;
g) Upon the order of a competent court or in proper
cases by the Anti-Money Laundering Council where
there is probable cause of money laundering and in
some instances even without court order (Section 11,
R.A. No. 9160)
h) Disclosure to the Treasurer of the Philippines for
dormant deposits for at least 10 years under
Unclaimed Balances Act (Section 2, R.A. No. 3936)
i) Report of banks to Anti-Money Laundering Council
(AMLC) of covered and or suspicious transactions
(Section 9, R.A. No. 9160 as amended)
j) Upon order of the Court of Appeals, examination by
law enforcement officers in terrorism cases under the
Human Security Act of 2007 (Secs. 27 and 28, R.A.
No. 8372).
Topic: Secrecy of Bank Deposits (Bar 1994, 1995, 1997,
1998, 2000, 2001, 2004, 2005, 2006)
Q: A withdrew without authority funds of the
partnership in the amounts of P500th and US$50th
for services he claims he rendered for the benefit of
the partnership. He deposited the P500th in his
personal peso current account with Generosity Bank
and the US$50th in his personal foreign currency
savings account with Eastern Bank. The partnership
instituted an action in court against A, Generosity,
and Eastern to compel A to return the subject funds to
the partnership and pending litigation to order both
banks to disallow any withdrawal from his accounts.
At the initial hearing of the case the court ordered
Generosity to produce the records of A‘s peso current
account, and Eastern to produce the records of his
foreign currency savings account. Can the court
compel Generosity and Eastern to disclose the bank
deposits of A?
As for the peso account, Yes, Generosity Bank can be
compelled by the court to disclose the bank deposits of A. Sec
2 of RA 1405 allows the disclosure of bank deposits in case
where the money deposited is the subject matter of litigation.
Since the case filed against A is aimed at recovering the
amount he withdrew from the funds of the partnership, which
amount he allegedly deposited in his account, a disclosure of
his bank deposits would be proper. However, the Court cannot
compel Eastern to disclose the dollar deposits of A. Under the
Foreign Currency Law, the exemption to the prohibition
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against disclosure of information concerning bank deposits is
the written consent of the depositor.
Q: What are the disclosure requirements in extending
credit to a debtor? (Bar 2000, 2009)
TRUTH IN LENDING ACT (R.A. 3765)
Section 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
regulations prescribed by the Board, the following
information:
1) the cash price or delivered price of the property or
service to be acquired;
2) the amounts, if any, to be credited as down
payment and/or trade-in;
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.
Topic: Truth in Lending Act (Bar 2000, 2009)
Q: A loan agreement which provides that the debtor
shall pay interest at the rate determined by the bank’s
branch manager violates the disclosure requirement
of the Truth in Lending Act. True or False?
True. This is contrary to the duty of the creditor to disclose in
detail the interests, charges and other figures indicating in
detail the cost of the credit granted to the debtor (United
Coconut Planters Bank v. Beluso, 530 SCRA 567, 2007).
Q: What institutions are covered in under the Anti-
Money Laundering Act? What are the obligations of
these institutions? (Bar 2006, 2007)
"Covered institution" refers to:
a) banks, non-banks, quasi-banks, trust entities, and
all other institutions and their subsidiaries and
affiliates supervised or regulated by the
BangkoSentral ng Pilipinas (BSP);
b) insurance companies and all other institutions
supervised or regulated by the Insurance
Commission; and
c) (i) securities dealers, brokers, salesmen, investment
houses and other similar entities managing
securities or rendering services as investment
agent, advisor, or consultant, (ii) mutual funds,
close-end investment companies, common trust
funds, pre-need companies and other similar
entities, (iii) foreign exchange corporations, money
changers, money payment, remittance, and transfer
companies and other similar entities, and (iv) other
entities administering or otherwise dealing in
currency, commodities or financial derivatives
based thereon, valuable objects, cash substitutes
and other similar monetary instruments or property
supervised or regulated by Securities and Exchange
Commission and Exchange Commission. (Section 3,
Anti Money Laundering Law)
The obligations of the covered institutions are as follow:
a) To establish and record, and maintain a system of
verifying, the true identities of clients including the
legal existence and structure of corporate clients
and their representatives based on their official
documents;
b) To keep record for five years
c) To report covered transaction and suspicious
transactions to anti-money laundering council,
within 5 years working days from occurrence which
shall not thereby violate the secrecy of bank deposit,
FCDU LAW and GENERAL BANKING LAW of
2000.
BULK SALES LAW
(ACT 3952, as amended by R.A. 111)
Q: When is a sale considered in bulk? (Bar 1994, 1995,
1997, 2005, 2006, 2007, 2010
A sale is considered in bulk within the contemplation of the
Bulk Sales Law when:
a) there is a sale, transfer, mortgage or assignment of a
stock of goods, wares, merchandise, provisions, or
materials other than in the ordinary course of trade
and the regular prosecution of the business of the
vendor, mortgagor, transferor, or assignor, or sale,
transfer, mortgage or assignment of all, or
substantially all, of the business or trade theretofore
conducted by the vendor, mortgagor, transferor, or
assignor, or;
b) the sale is of all, or substantially all, of the fixtures and
equipment used in and about the business of the
vendor, mortgagor, transferor, or assignor.
However, if such vendor, mortgagor, transferor or assignor,
produces and delivers a written waiver of the provisions of this
Act from his creditors as shown by verified statements, then,
and in that case, the provisions of the Bulk Sales Law shall not
apply.(Section 2, Bulk Sales Law)
Q: What are the formalities required by the Bulk Sales
Law? (Bar 2000, 2001, 2005, 2007)
Sections 3 and 4 of the Bulk Sales Law provides the
following formalities required:
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a) The sale in bulk to be accompanied by sworn
statement of the vendor/mortgagor listing the names
and addresses of, and amounts owing to, creditors;
b) The sworn statement shall be furnished to the buyer;
c) The seller is required to prepare an inventory of stock
to be sold; and
d) The seller is required to notify the creditors of
projected sale at least 10 days before such sale.
(Aquino and Sundiang, Reviewer on Commercial
Law [2014])
However, such formalities/requirements need not be complied
with in the following situations:
a) Sale is made in the ordinary course of business;
b) There is a waiver from all the creditors and it must be
in writing
c) Sale is by virtue if a judicial order; an
d) Those sold by assignee in insolvency or those beyond
the right of creditors (Aquino and Sundiang,
Reviewer on Commercial Law [2014])
Q: What are the effects of violations of the Bulk Sales
Law? (Bar 2001, 2005, 2007, 2009, 2010)
BULK SALES LAW (ACT 3952, AS AMENDED BY
R.A. 111)
Sec. 4. Fraudulent and void sale, transfer or mortgage. —
Whenever any person shall sell, mortgage, transfer, or
assign any stock of goods, wares, merchandise, provisions or
materials, in bulk, for cash or on credit, and shall receive any
part of the purchase price, or any promissory note, or other
evidence of indebtedness for said purchase price or advance
upon mortgage, without having first delivered to the vendee
or mortgagee or to his or its agent or representative, the
sworn statement provided for in section three hereof, and
without applying the purchase or mortgage money of the
said property to the pro rata payment of the bona fide claim
or claims of the creditors of the vendor or mortgagor, as
shown upon such sworn statement, he shall be deemed to
have violated this Act, and any such sale, transfer or
mortgage shall be fraudulent and void.
Violation of the Bulk Sales Law makes the sale in bulk valid
between the parties, but void as to affected creditors. Thus, the
purchaser holds the property in trust for the seller and said
purchaser is liable to seller’s creditors for properties forming
part of the bulk and already disposed by him.
Q: What are the requirements for a valid sale? (Bar
2005, 2007)
According to Sec. 5 of the Bulk Sales Law, it shall be the
duty of every vendor, transferor, mortgagor, or assignor, at
least ten days before the sale, transfer or execution of a
mortgage upon any stock of goods, wares, merchandise,
provisions or materials, in bulk:
a) to make a full detailed inventory thereof and
b) to preserve the same showing the quantity and, so far
as is possible with the exercise of reasonable
diligence, the cost price to the vendor, transferor,
mortgagor or assignor of each article to be included
in the sale, transfer or mortgage, and;
c) to notify every creditor whose name and address is
set forth in the verified statement of the vendor,
transferor, mortgagor, or assignor, at least ten days
before transferring possession thereof, personally or
by registered mail, of the price, terms conditions of
the sale, transfer, mortgage, or assignment.
Q: What is the penalty for violation of the Bulk Sales
Law?
BULK SALES LAW (ACT 3952, AS AMENDED BY
R.A. 111)
Sec. 11. Any person violating any provision of this Act shall,
upon conviction thereof, be punished by imprisonment not
less than six months, nor more than five years, or fined in
sum not exceeding five thousand pesos, or both such
imprisonment and fine, in the discretion of the court.
CORPORATION CODE OF THE PHILIPPINES
(B.P. 68)
Q: What are the attributes of a corporation under the
Corporation Code? (Bar 1995, 1996, 1998,1999, 2009)
CORPORATION CODE (B.P. 68)
Section 2. Corporation defined. – 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.
The following are the attributes of a corporation:
1) It is an artificial being – as such it is not entitled to
moral damages as it has no feelings, no emotions and
no senses.
2) Created by operation of law
3) With right of succession
4) Has the powers, attributes and properties expressly
authorized by law or incident to its existence. (Lex
Pareto 2014)
NOTE: Consequences of Separate and Distinct Personality
1) As to property – It is entitled to own properties in its
own name and its properties are not the properties of
its stockholders, directors and officers (Wise vs. Man
Sung Lung, 69 Phil 309). Consequently the properties
of its stockholders, directors and offices are not the
properties of the corporation (Saw vs. Court of
Appeals, 159 SCRA 740)
2) As to obligations – it can incur obligations and its
obligations are not the obligation of its stockholders,
directors and officers (Vasquez vs. De Borja74 Phil
560). Corollary to this, the obligations of the
stockholders, directors and officers are not the
obligations of the corporation (EPG Construction Co.,
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Inc. et. al vs. CA. et. al. 210 SCRA 230 [1992]; Lex
Pareto 2014):
Doctrine of Piercing the Veil of Corporation
The veil of corporate fiction may be pierced by proving in court
that the notion of legal entity is:
1) Used to defeat public convenience
2) Used to justify wrong
3) Used to protect fraud
4) Used to defend crime
5) Dominated by officers or stockholders or other person
or entity to the extent that the corporation is a mere
alter ego, adjunct or business conduit
6) Used to evade obligations to employees or used as a
pretext to dismiss employees
7) Used to evade lawful obligations or a money judgment
8) Used to confuse legitimate legal or judicial issues
9) Used to perpetuate deception or otherwise circumvent
the law. (Lex Pareto 2014)
The pierce of the veil of corporate fiction is employed only to
hold officers and stockholders directly liable for a corporate
debt or obligation (Umali vs. CA, 189 SCRA 529 [1990])
Topic: Doctrine of Piercing the Corporate Veil (Bar 2001,
2008)
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court‘s decision, X
Corporation was found to be without assets.
Thereafter plaintiffs filed an action against its present
and past stockholder Y Corporation which owned
substantially all of the stocks of X Corporation. The
two corporations have the same board of directors
and Y Corporation financed the operations of X
Corporation. May Y Corporation be held liable for the
debts of X Corporation? Why?
Yes, Y Corporation may be held liable for the debts of X
Corporation. The doctrine of piercing the veil of corporation
fiction applies to this case. The two corporations have the same
board of directors and Y Corporation owned substantially all of
the stocks of X Corporation, which facts justify the conclusion
that the latter is merely an extension of the personality of the
former, and that the former controls the policies of the latter.
Added to this is the fact that Y Corporation controls the
finances of X Corporation, which is merely an adjunct, business
conduit or alter ego of Y Corporation (CIR vs. Norton &
Harrison Co 11 SCRA 714, 1964).
Q: Distinguish a stock corporation from Non-stock
corporation. (Bar 2001, 2004)
A stock corporation is a corporation in which capital stock
is divided into shares and is authorized to distribute to holders
thereof such shares dividends or allotments of the surplus
profits on the basis of the shares held. In Collector of Internal
Revenue vs. Club Filipino de Cebu (5 SCRA 321 [1962]), the
Supreme Court ruled that even if there is a statement of capital
stock, the corporation is still not a stock corporation if
dividends are not supposed to be declared, that is, there is no
distribution of retained earning. (Sundiang and Aquino.
Reviewer on Commercial Law [2014].)
Non-stock corporation is a corporation which does not
issue stocks and does not distribute dividends to their
members. (Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
Topic: Difference between a Stock and Non-stock Corporation
(Bar 2001, 2004)
Q: XY is a recreational club which was organized to
operate a golf course for its members with an original
authorized capital stock of P100M. The articles of
incorporation nor the by-laws did not provide for
distribution of dividends although there is a provision
that after its dissolution, the assets shall be given to a
charitable corporation. Is ―XYa stock corporation?
Give reasons for your answer.
XY is a stock corporation because it is organized as a stock
corporation and there is no prohibition in its Articles of
Incorporation or its by-laws for it to declare dividends. When a
corporation is organized as a stock corporation and its articles
of Incorporation or By-Laws are silent, the corporation is
deemed to have the power to declare dividends under Sec 43.
Since it has the power to declare dividends, XY is a stock
corporation.
The provision of the Articles of Incorporation that at
dissolution the assets of the corporation shall be given to a
charitable corporation does not prohibit the corporation from
declaring dividends before dissolution.
Q: What are the items required to be included in the
articles of incorporation? (Bar 1990, 2002)
According to Sec. 14 of the Corporation Code, the
following items must be included in the articles of
incorporation:
1) The name of the corporation;
2) The specific purpose or purposes for which the
corporation is being incorporated.
3) The place where the principal office of the corporation is
to be located, which must be within the Philippines;
4) The term for which the corporation is to exist;
5) The names, nationalities and residences of the
incorporators;
6) The number of directors or trustees, which shall not be
less than five (5) nor more than fifteen (15);
7) The names, nationalities and residences of persons who
shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in
accordance with e Corporation Code;
8) If it be a stock corporation, the amount of its authorized
capital stock in lawful money of the Philippines, the
number of shares into which it is divided, and in case the
share are par value shares, the par value of each, the
names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each
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on his subscription, and if some or all of the shares are
without par value, such fact must be stated;
9) If it be a non-stock corporation, the amount of its capital,
the names, nationalities and residences of the
contributors and the amount contributed by each; and
10) Such other matters as are not inconsistent with law and
which the incorporators may deem necessary and
convenient.
NOTE: The Securities of Exchange Commission (SEC) shall
not accept the articles of incorporation of any stock corporation
unless:
1) Accompanied by a sworn statement of the Treasurer
2) Showing that at least twenty-five percent (25%) of the
total authorized capital stock was subscribed
3) That the twenty-five percent (25%) of the total
subscribed stock must be paid-up; and
4) Such paid-up capital must not be less than five thousand
(P5,000.00) pesos.
Q: What is a de facto corporation? (Bar 1994, 2004)
CORPORATION CODE (B.P. 68)
Section 20. De facto corporations. – The due
incorporation of any corporation claiming in good faith to be
a corporation under this Code, and its right to exercise
corporate powers, shall not be inquired into collaterally in
any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.
It is a corporation where there exists a flaw in its incorporation.
The requisites are the following:
1) A valid law to organize a corporation with powers
assumed right be incorporated
2) A bona fide attempt to organize corporation under
such law.
3) Actual user or exercise in good faith of corporation
powers conferred upon it by law, and
4) SEC issuance of certificate of incorporation (Arnold
Hall vs. Piccio 86 Phil 604[1950])
NOTE: Differentiate de facto corporation from de jure
corporation (Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
De Jure De Facto
One created in strict or One which actually exists
substantial conformity with for all practical purposes as
the statutory requirements for a corporation but which has
incorporation no legal right to corporate
existence as against the
State.
Right to exist cannot be Right to exist can be
successfully attacked even in a successfully attacked in a
direct proceeding by the State. direct proceeding by the
State (Quo Warranto)
Q: When are directors, trustees or officers liable?
(Bar 1996, 1997)
According to Sec. 31 of the Corporation Code, a director,
trustee, or officer is liable if he:
1) Willfully and knowingly vote for or assent to patently
unlawful acts of the corporation and
2) Guilty of gross negligence or bad faith in directing the
affairs of the corporation
3) Acquire any personal or pecuniary interest in conflict
of duty.(Tramat Mercantile Inc., et. al., vs. CA et. al.,
GR 111008, November 7, 1994; 238 SCRA 14)
Q: In dealing with the directors, trustees or officers of
the corporation, what conditions should be followed
in order to deem the contract valid? (Bar 1995, 1996,
2001, 2002, 2008, 2010)
According to Sec. 32 of the Corporation Code, The
contract between the corporation and the self-dealing
director/trustee/officer is voidable unless the following
requirements for its validity are present:
1) That the presence of such director or trustee in the
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
2) That the vote of such director or trustee was not
necessary for the approval of the contract;
3) That the contract is fair and reasonable under the
circumstances; and
4) That in case of an officer, the contract has been
previously authorized by the board of directors.
NOTE: Being its agents and entrusted with the management of
its affairs, the directors or trustees and other officers of a
corporation occupy a fiduciary relations towards it and cannot
be allowed to contract with the corporation, directly or
indirectly or to sell property to it, or purchase from it, where
they act both for the corporation and for themselves. This
section does not require that the corporation suffers injury or
damage as a result of the contract. (Lex Pareto 2014)
Topic: Self-Dealing Directors (Bar 1995, 1996, 2001,
2002, 2008, 2010)
Q: Suppose that the by-laws of X Corp, a mining
firmprovides that ―The directors shall be relieved
from all liability for any contract entered into by the
corporation with any firm in which the directors may
be interested.‖ Thus, director A acquired claims which
overlapped with X‘s claims and were necessary for the
development and operation of X‘s mining properties.
(A) Is the by-law provision valid? Why?
(B) What happens if director is able to
consummate his mining claims over and
above that of the corporation‘s claims
(A) No. It is in violation of Sec. 32 of the Corp Code.
(B) A should account to the corporation for the profits which
he realized from the transaction. He grabbed the business
opportunity from the corporation. (Section 34, Corp Code)
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Q: What is the doctrine of corporate opportunity?
(Bar 2001, 2005)
Under the Doctrine of Corporate Opportunity, a director
who, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation is guilty
of disloyalty and should therefore account to the latter for all
such profits by refunding the same, notwithstanding that he
risked his funds in the venture. This doctrine rests
fundamentally on the unfairness of an officer or director in
taking advantage of an opportunity for his own personal profit
when the interest of the corporation justly calls for protection
(Paulman vs. Kritzer 291 N.E 2d541)
If there is presented to a corporate director a business
opportunity which:
a) corporation is financially able to undertake
b) from its nature, is in line with corporations business
and is of practical advantage to it; and
c) one in which the corporation has an interest or a
reasonable expectancy
By embracing the opportunity, the self-interest of the director
will be brought into conflict with that of his corporation.
Hence, the law does not permit him to seize the opportunity
even if he will use his own funds in the venture.
If a director seizes the opportunity thereby obtaining profits to
the expense of the corporation, he must account all profits by
refunding the same to the corporation unless the act has been
ratifies by a vote of the stockholders owning or representing at
least two-thirds of the outstanding capital stock.
Q: Enumerate the express powers of a corporation.
(Bar 1998, 2000)
According to Sec. 36 of the Corporation Code, the
following are the express powers of the corporation:
1) To sue and be sued in its corporate name
2) Right to a succession
3) Adopt and use a corporate seal
4) Amend Articles of Incorporation
5) To adopt, amend or repeal by-laws;
6) For a stock corporation – to issue stocks to subscribers
and to sell treasury stocks for non-stock corporation – to
admit members
7) To purchase, receive, take, or grant, hold, convey, sell
lease pledge, mortgage and otherwise deal with real and
personal property pursuant to its lawful business
8) To enter into merger or consolidation
9) To make reasonable donations for public welfare
hospital, charitable, cultural, scientific, civil or similar
purposes. Prohibited for partisan political activity
10) To establish pension, retirement and other plans for the
benefit of directors, trustees, officers and employees and
11) Such other powers essential or necessary to carry out its
purpose.
Q: What are the ways to increase and decrease the
capital stock? (Bar 1998, 2001)
According to Section 38 of the Corporation Code, the
following are the ways to increase authorized capital stock:
1) By increasing the number of shares and retaining the
par value
2) By increasing the par value of existing shares without
changing the number of shares and
3) By increasing the number of shares and increasing the
par value
Meanwhile, the following are the ways to decrease the capital
stock:
1) By decreasing the number of shares and retaining the
par value;
2) By decreasing the par value of the existing hares
without changing the number of shares; or
3) By decreasing the number of shares and decreasing
the par value.
NOTE: Practical reasons for a corporation to increase its
capital:
1) To generate more working capital
2) To have more shares with which to pay for the
acquisition of more assets like acquisition of company
car, stocks, house, machinery or business; and
3) To have extra shares with which to cover or meet the
requirement for declaration of stock dividend. (Lex
Pareto 2014)
Q: What is a pre-emptive right? (Bar 1999, 2004,
2001)
CORPORATION CODE (B.P. 68)
Sec. 39. Power to deny pre-emptive right. - All stockholders
of a stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such
right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right
shall not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith with the
approval of the stockholders representing two-thirds (2/3)
of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously
contracted debt.
A pre-emptive right is the shareholders’ right to subscribe to
all issues or disposition of shares of any class in proportion to
his present stockholdings, the purpose being to enable the
shareholder to retain his proportionate control n the
corporation and to retain his equity in the surplus. (Sundiang
and Aquino. Reviewer on Commercial Law [2014].)
Pre-emptive right is not available in the following:
1) Shares to be issued to comply with laws requiring
stock offering or minimum stock ownership by the
public
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2) Shares issued in good faith in exchange for property
needed for corporate purposes
3) Shares issued in payment of previously contracted
debts
4) In case the right is denied in the Articles of
Incorporation; and
5) If one shareholder does not want to exercise his pre-
emptive right, the other shareholders are not entitled
to purchase the corresponding shares of the
shareholder who declined. But if nobody purchased
the same and later on the board re-issued the shares
the pre-emptive right applies. (Sundiang and Aquino.
Reviewer on Commercial Law [2014].)
Topic: Pre-Emptive Right (Bar 1999, 2004, 2001)
Q: The Board of Directors of ABC, Inc., a domestic
corporation, passed a resolution authorizing
additional issuance of shares of stocks without notice
nor approval of the stockholders. DX, a stockholder,
objected to the issuance, contending that it violated
his right of pre- emption to the unissued shares. Is his
contention tenable?
Yes. DX's contention is tenable. Under Sec. 39 of the
Corporation Code, all stockholders of ABC, Inc. enjoy
preemptive right to subscribe to all issues of shares of any
class, including the reissuance of treasury shares in proportion
to their respective shareholdings.
Q: What are the requisites of sale of all or
substantially all properties by a corporation? (Bar
1996, 2005)
The following are the requisites of sale of all or substantially all
properties by a corporation:
1) Approval of majority of the directors or trustees
2) Assent of stockholder representing 2/3 of outstanding
capital or 2/3 of member in a meeting duly called for
the purpose after written notice; and
3) It must comply with the formalities of the Bulk Sales
Law. (Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
NOTE: A sale or other disposition shall be deemed to cover
substantially all corporate property and assets if thereby the
corporation would be rendered incapable of continuing
business or accomplishing the purpose for which it was
incorporated.
Effect on creditors:
GENERAL RULE:
The transferee/buyer of all or substantially all of the assets (or
even shares) will not be liable for the debts of the transferor
EXCEPTIONS:
1) If there is an express assumption of liabilities
2) There is a consolidation or merger
3) If the purchase was in fraud of creditors; and
4) If the purchaser becomes a continuation of the seller.
(Sundiang and Aquino. Reviewer on Commercial Law
[2014].)
Topic: Sale of All or Substantially All Assets (Bar 1996,
2005)
Q: Divine Corporation is engaged in the manufacture
of garments for export. In the course of its business, it
was able to obtain loans from individuals and
financing institutions. However, due to the drop in the
demand for garments in the international market,
Divine Corporation could not meet its obligations. It
decided to sell all its equipment such as sewing
machines, perma-press machines, high speed sewers,
cutting tables, ironing tables, etc., as well as its
supplies and materials to Top Grade Fashion
Corporation, its competitor.
(A) How would you classify the transaction?
(B) Can Divine Corporation sell the aforesaid
items to its competitor, Top Grade Fashion
Corporation? What are the requirements to
validly sell the items?
(A) The transactions can be classified as a sale of
"substantially all of the assets of Divine Corporation
complying with the test under Sec. 40 of the Corporation
Code, the transactions not being "in the ordinary course of
business," and one "thereby the corporation would be
rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated."
COPORATION CODE (B.P. 68)
Sec. 40. Xxx A sale or other disposition shall be deemed to
cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated. xxx
Alternative answer:
It is a sale and transfer in bulk in contemplation of the Bulk
Sales Law. Under Sec. 2 of the Bulk Sales Law, a bulk sale
includes any sale, transfer, mortgage, or assignment of all, or
substantially all, of the business or trade theretofore conducted
by the vendor, mortgagor, transferor, or assignor. This is
exactly what happened in the case at bar.
BULK SALES LAW
Sec. 2. Sale and transfer in bulk. — Any sale, transfer,
mortgage or assignment of a stock of goods, wares,
merchandise, provisions, or materials otherwise than in the
ordinary course of trade and the regular prosecution of the
business of the vendor, mortgagor, transferor, or assignor,
or sale, transfer, mortgage or assignment of all, or
substantially all, of the business or trade theretofore
conducted by the vendor, mortgagor, transferor, or assignor,
or of all, or substantially all, of the fixtures and equipment
used in and about the business of the vendor, mortgagor,
transferor, or assignor, shall be deemed to be a sale and
transfer in bulk, in contemplation of this Act: Provided,
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however, That if such vendor, mortgagor, transferor or
assignor, produces and delivers a written waiver of the
provisions of this Act from his creditors as shown by verified
statements, then, and in that case, the provisions of this
section shall not apply.
(B) For such a transaction to be valid, it requires not only the
favorable resolution of the Board of Directors of Divine
Corporation, but also the ratificatory vote of stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, as mandated under Sec. 40 of the
Corporation Code. The sale would be void in case of failure
to meet the twin approvals. (Islamic Directorate of the
Philippines v. Court of Appeals, G.R. No. 117897, May 14,
1997)
Alternative answer:
Divine Corporation can sell the items to its competitor,
Top Grade Fashion Corporation. However, Divine
Corporation must comply with the provisions of Sections
3, 4 and 5 of the Bulk Sales Law namely:
1) deliver sworn statement of the names and
addresses of all the creditors to whom the vendor
or mortgagor may be indebted together with the
amount of indebtedness due or owing to each of
the said creditors;
2) apply the purchase or mortgage money to the
pro-rata payment of bona fide claims of the
creditors; and
3) make a full detailed inventory of the stock of
goods, wares, merchandise, provisions or
materials, in bulk, and notify every creditor at
least ten (10) days before transferring possession.
Q: Can a corporation acquire its own shares? (Bar
1991, 1992, 2005)
Yes. Pursuant to Sec. 41 of the Corporation Code, the
following are the instance when a corporation may acquire its
own shares:
1) The corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or
acquired
2) For a legitimate corporate purpose including but not
limited to the following:
a) to eliminate fractional shares arising out of
stock dividends
b) 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 the
sale; and
c) to pay dissenting or withdrawing stockholders
entitled to payment of their shares. (Sundiang
and Aquino. Reviewer on Commercial Law
[2014].)
Q: Give the requisites for a corporation to invest
corporate funds in another corporation or business
for any other purpose. (Bar 1995)
According to Sec. 42 of the Corporation Code, private
corporation may invest its funds in any other corporation or
business or for any other purpose other than the primary
purpose for which it was organized. The following are the
requisites:
a) It must be approved by a majority of the board of
directors or trustees;
b) Ratified by the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or by at
least two-thirds of the members in the case of non-
stock corporation; and
c) Written notice of the proposed investment and the
time and place of the meeting shall be addressed to
each stockholder or member at his place of residence.
(Lex Pareto 2014)
Q: Are stock corporations prohibited from retaining
surplus profits in excess of 100% of their paid in
capital stock? (Bar 2001, 2002, 2005, 2008, 2009)
CORPORATION CODE (B.P. 68)
Sec. 43. Power to declare dividends. - The board of
directors of a stock corporation may declare dividends out of
the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis
of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to
the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding capital stock at
a regular or special meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus
profits in excess of one hundred (100%) percent of their
paid-in capital stock, except:
1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or
2) when the corporation is prohibited under any loan
agreement with any financial institution or
creditor, whether local or foreign, from declaring
dividends without its/his consent, and such
consent has not yet been secured; or
3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in
the corporation, such as when there is need for
special reserve for probable contingencies.
Following the general rules, yes. However, the following are
exceptions:
a) When justified by definite corporate expansion projects
or programs approved by the board of directors; or
b) When the corporation is prohibited under any loan
agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends
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without its/his consent, and such consent has not yet
been secured; or
c) When it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (Lex Pareto 2014)
Q: What are ultra vires acts of a corporation? (Bar
1993, 2009)
CORPORATION CODE (B.P. 68)
Sec. 45. Ultra vires acts of corporations. - No corporation
under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its articles
of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred.
These are acts performed by a corporation in excess of its
corporate powers and which are generally not binding on the
corporation. (Lex Pareto 2014)
When a corporation does an act or engages in an activity which
is outside of its express, implied or incidental powers set out in
its article of incorporation, the act is deemed to be ultra vires.
Q: What are the requisites of the by-laws of a
corporation? (Bar 2000, 2001)
According to Sec. 46 of the Corporation Code, the
following are the requisites of the by-laws of a corporation:
1) It must not be contrary to existing law and
inconsistent with the Code (Sec. 35(5)]
2) It must not be contrary to morals and public policy
(Sec. 36(5)] see Fletcher vs. Nolasco, 47 Phil 583
3) It must not impair obligations of contract
4) It must be general and uniform in their operation and
not directed against particularly individuals
5) It must be consistent with the charter or articles of
incorporation, and
6) It must be reasonable. (Lex Pareto 2014)
Topic: By-Laws (Bar 2000, 2001)
Q: Is a by-law provision of X Corporation ―rendering
ineligible or if elected, subject to removal, a director if
he is also a director in a corporation whose business is
in competition with or is antagonistic to said
corporation‖ valid and legal? State your reasons.
Yes, the by-law provision is valid. It is the right of a
corporation to protect itself against possible harm and
prejudice that may be caused by its competitors. The position
of director is highly sensitive and confidential. To say the least,
to allow a person, who is a director in a corporation whose
business is in competition with or is antagonistic to X
Corporation, to become also a director in X Corporation would
be harboring a conflict of interest which is harmful to the latter
(Gokongwei Jr v SEC 89 S 336 (1979); 97 S 78 (1980)).
Q: What is certificate of stock? (Bar 1996, 2004)
CORPORATION CODE (B.P. 68)
Sec. 63. Certificate of stock and transfer of shares. - The
capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by
delivery of the certificate or certificates endorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation.
It is a written evidence of the share of stock but it is not the
share itself (Lincoln Philippines Life vs. CA, 293 SCRA 92)
(Sundiang and Aquino. Reviewer on Commercial Law
[2014].)
NOTE:
1) The certificate is merely prima facie evidence of
ownership and evidence can be presented to determine
the real owner of the shares (Bitong vs. CA, 292 SCRA.
2) Delivery is also essential do its issuance . (Sundiang
and Aquino. Reviewer on Commercial Law [2014].)
Q: When can a certificate of stock be issued? (Bar
2004, 2005, 2008, 2009)
CORPORATION CODE (B.P. 68)
Sec. 64. Issuance of stock certificates. - No certificate of
stock shall be issued to a subscriber until the full amount of
his subscription together with interest and expenses (in case
of delinquent shares), if any is due, has been paid.
According to Section 64 of the Corporation Code, a certificate
of stock can be issued only when the full amount of the
subscription together with the interest and expenses (in case of
delinquent shares) has been paid.
Q: What is the period to pay an unpaid subscription?
(Bar 1994, 1997)
According to Sec. 67 of the Corporation Code,
stockholders have the period of within 30 days from the date
specified in the contract of subscription or in the call otherwise
all the stocks covered by the subscription shall be declared
delinquent and shall be subject to sale.
A call is a declaration by the board of directors that the unpaid
subscriptions are due and payable to the corporation.
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1) A call is necessary if no time to make payment is stated
in the subscription agreement. A call is not necessary if
there is a time fixed in the agreement for payment or (2)
if the corporation becomes insolvent
2) Notice of call is necessary to bind the stockholders
(Baltazar vs. Lingayen Gulf Electric Power, 14 SCRA
522, Lex Pareto 2014)
Q: What are the effects if a stock is delinquent? (Bar
1997, 2008)
CORPORATION CODE (B.P. 68)
Sec. 71. Effect of delinquency. - No delinquent stock shall
be voted for be entitled to vote or to representation at any
stockholder's meeting, nor shall the holder thereof be
entitled to any of the rights of a stockholder except the right
to dividends in accordance with the provisions of this Code,
until and unless he pays the amount due on his subscription
with accrued interest, and the costs and expenses of
advertisement, if any.
1) It deprives the stockholder the right
a) To be voted for, or
b) To be entitled to vote, or
c) To representation at any stockholders’ meeting.
2) Delinquent stockholder shall not be entitled to any of
the rights of a stockholder but he shall still be entitled to
receive dividends
3) Delinquent stocks shall be subject to delinquency sale
Topic: Stock Delinquency (Bar 1994, 1997)
Q: The Board of Directors (BOD) of a corporation, by a
vote of ten in favor of one against, declared due and
payable all unpaid subscription to the capital stock.
The lone dissenting director failed to pay on due date,
i.e., 19 Sept 1997, his unpaid subscription. Other than
the shares wherein he was unable to complete
payment, he did not own any share in the corporation.
On 23 Sept 1997, he was informed by the BOD that,
unless due payment is meanwhile received, he:
(A) could no longer serve as a director of the
corporation forthwith:
(B) would not be entitled to the cash and stock
dividends which were declared and payable on
24 Sep 1997; and
(C) could not vote in the stockholders meeting
scheduled to take place on 26 Sept 1997.
Was the action of the BOD on each of the foregoing
matters valid?
(A) No. The action of the BOD is not valid. Since 19
September 1997 is the due date, the lone dissenting
director has already defaulted on his payment which
made the stocks he own, delinquent. However, a
delinquent stockholder who is a director shall
continue to be a director but he cannot run for re-
election. (Aquino and Sundiang, Commercial Law
Reviewer [2014], at p.266).
(B) No. The action of the BOD is not valid. The
delinquency did not deprive the stockholder of his
right to receive dividends declared. However, the cash
dividend declared may be applied by the corporation
to the unpaid subscription. (Section 71, Corporation
Code)
(C) Yes. The action of the BOD is valid. One of the effects
of delinquency is the removal of a stockholder’s right
to vote until and unless he pays the amount due on his
subscription with accrued interest, and the costs and
expenses of advertisement, if any.(Section 71,
Corporation Code)
Q: When can appraisal rights be exercised? (Bar 1999,
2007)
Sec. 81 of the Corporation Code provides that any
stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following
instances:
1) In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
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 the
Code; and
3) In case of merger or consolidation.
NOTE: The appraisal right is the right of a stockholder who
dissents from certain corporate actions to demand payment of
the fair value of his or her shares. The right of appraisal may be
exercised when there is a fundamental change in the charter or
articles of incorporation substantially prejudicing the rights of
the stockholders. It does not vest unless objectionable
corporate action is taken. It serves the purpose of enabling the
dissenting stockholder to have his interests purchased and to
retire from the corporation.(Turner v. Lorenzo Shipping
Corporation, G.R. No. 157479 [November 24, 2010]).
Q: What are the procedures to be followed in a case of
voluntary dissolution where creditors are affected?
(Bar 2001, 2002)
According to Sec. 119 of the Corporation Code, in a case of
voluntary dissolution where creditors are affected, the
following procedures must be observed:
1) The voluntary dissolution should have the approval of
stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of members
in a meeting called for that purpose.
2) A petition should then be filed with the Securities and
Exchange Commission (SEC) signed by majority of
directors or trustees or other officers having the
management of its affairs verified by the President or
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Secretary or Director. Claims and demands must be
stated in the petition
3) If Petition is sufficient in form and substance, the SEC
shall issue on Order fixing a hearing date for
objections;
4) A copy of the Order shall be published at least once a
week for 3 consecutive weeks in a newspaper of
general circulation or if there is no newspaper in the
municipality or city of the principal office, posting for
3 consecutive weeks in 3 public places is sufficient
5) Objections must be filed no less than 30 days nor
more than 60 days after the entry of the Order
6) After the expiration of the time to file objections, a
hearing shall be conducted upon prior five-day notice
to hear the objections
7) Judgment shall be rendered dissolving the
corporation and directing the disposition of assets;
the judgment may include appointment of a receiver.
(Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
Topic: Voluntary Dissolution (Bar 2001, 2002)
Q: Name three methods by which a stock corporation
may be voluntarily dissolved. Explain each method.
The three methods by which a stock corporation may be
voluntarily dissolved are:
1) Voluntary Dissolution where no creditors are affected.
This is done by a majority vote of the directors, and
resolution of at least 2/3 vote of stockholders,
submitted to the Securities and Exchange
Commission .(Section 118, Corporation Code)
2) Voluntary dissolution where creditors are affected.
This is done by a petition for dissolution, which must
be filed with the Securities and Exchange
Commission, signed by a majority of the members of
the board of directors, verified by the president or
secretary, and upon affirmative vote of stockholders
representing at least 2/3 of the outstanding capital
stock. (Section 119, Corporation Code)
3) Dissolution by shortening of the corporate term. This
is done by amending of the articles of incorporation.
(Section 120, Corporation Code)
Q: What are the modes in corporate liquidation? (Bar
1997, 2000, 2001, 2005)
CORPORATION CODE (B.P. 68)
Sec. 122. Corporate liquidation. - Every corporation whose
charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for
which it was established.
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of the corporate affairs, 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.
Except by decrease of capital stock and as otherwise allowed
by this Code, no corporation shall distribute any of its assets
or property except upon lawful dissolution and after
payment of all its debts and liabilities.
Liquidation is the process by which all the assets of
corporation are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors, and the
remaining balance if any is to be distributed to the
stockholders. The following are the modes of liquidation:
1) By the Board of Directors;
2) Through a trustee to whom the properties are
conveyed; or
3) By management committee or rehabilitation receiver.
(Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
Topic: Corporate Liquidation (Bar 1997, 2000, 2001,
2005)
Q: The SEC approved the amendment of the Articles of
Incorporation of GHQ Corp shortening its corporate
life to only 25 years in accordance with Sec 120 of the
Corporation Code. As shortened, the corporation
continued its business operations until May 30, 1997,
the last day of its corporate existence. Prior to said
date, there were a number of pending civil actions, of
varying nature but mostly money claims filed by
creditors, none of which was expected to be completed
or resolved within five years from May 30, 1997.
If the creditors had sought your professional help at
that time about whether or not their cases could be
pursued beyond May 30, 1997, what would have been
your advice?
I would advise the creditors that their cases may be pursued
even beyond the last day of GHQ’s corporate existence which is
May 30, 1997. The Corporation continues as a body corporate
for three years for the purposes of winding up or liquidation. It
is only upon the expiration of the three year winding up period
that the corporation would cease to exist for all purposes. Thus,
the cases may be filed by the creditors within the three-year
period. (Section 122, Corporation Code)
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Q: What is a foreign corporation? (Bar 1998, 2005)
CORPORATION CODE (B.P. 68)
Sec. 123. Definition and rights of foreign corporations. -
For the purposes of this Code, a foreign corporation is one
formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country
or state. It shall have the right to transact business in the
Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and a
certificate of authority from the appropriate government
agency.
A Foreign corporation is a corporation formed, organized
or existing under any law other than those of the Philippines,
and whose laws allow Filipino citizens and corporations to do
business in its own country or state.
On the power of a foreign corporation to sue and be sued:
1) Suit by a Foreign Corporation – the foreign
corporation transacting business in the Philippines
without a license to do business shall not be permitted
to maintain or intervene in any action, suit or
proceeding in any court or administrative agency
2) Suit Against a Foreign Corporation – any foreign
corporation transacting business in the Philippines
whether or not with a license, may be sued against
before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine
laws. (Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
Q: How can a foreign corporation be considered as
“doing business” in the Philippines? (Bar 1998, 2002)
CORPORATION CODE (B.P. 68)
Sec. 133. Doing business without a license. - No foreign
corporation transacting business in the Philippines without
a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in
any court or administrative agency of the Philippines; but
such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
Under the continuity test, doing business implies a
continuity of commercial dealings and arrangements and
contemplates to some extent the performance of acts or works
or the exercise of some of the functions normally incident to
and in progressive prosecution of, the purpose or object of its
organization (Metholatum vs. Managaliman)
The Supreme Court held that under the Contract test, a foreign
corporation that was not doing business in the Philippines
when it entered into a contract with a domestic corporation
providing for the delivery and payment of corporation from the
Philippines where the said contract was negotiated, perfected
and performed in the United States. Thus, solong as the
perfection and consummation of series of transactions are
done outside Philippine territorial jurisdiction, the same would
not constitute doing business in the Philippines even if the
products themselves be manufactured or processed in the
Philippines (Pacific Vegetable Oil Corp vs. Singson April 1955)
(Lex Pareto 2014)
Topic: “Doing Business” (Bar 1998, 2002)
Q: What is the legal test for determining if an
unlicensed foreign corporation is doing business in
the Philippines?
FOREIGN INVESTMENTS ACT OF 1991 (REPUBLIC
ACT NO. 7042, AS AMENDED)
Section 3(d). The phrase "doing business" shall include
soliciting orders, service contracts, opening offices, whether
called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines
or who in any calendar year stay in the country for a period
or periods totaling one hundred eighty (180) days or more;
participating in the management, supervision or control of
any domestic business, firm, entity, or corporation in the
Philippines; and any other act or acts that imply a continuity
of commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and
in the progressive prosecution of, commercial gain or of the
purpose and object of the business organization.
The test is, as embodied in Sec. 3(d) of the Foreign
Investments Act of 1991, whether or not the unlicensed
foreign corporation has performed an act or acts that imply a
continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or
the exercise of some of the functions normally incident to, and
in progressive prosecution of, commercial gain or of the
purpose and object of the business corporation.
INSOLVENCY LAW (ACT 1956, AS AMENDED)
Q: Differentiate Suspension of Payments from
Insolvency. (Bar 1995, 1998)
INSOLVENCY LAW (ACT 1956, AS AMENDED)
Sec. 2. Petition. — The debtor who, possessing sufficient
property to cover all his debts, be it an individual person, be
it a sociedad or corporation, foresees the impossibility of
meeting them when they respectively fall due, may petition
that he be declared in the state of suspension of payments by
the court, or the judge thereof in vacation, of the province or
of the city in which he has resided for six months next
preceding the filing of his petition.
He shall necessarily annex to his petition a schedule and
inventory in the form provided in sections fifteen, sixteen,
and seventeen of this Act, in addition to the statement of his
assets and liabilities and the proposed agreement he
requests of his creditors.
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under the New Civil Code do under Arts. 2236 and 2251 of
not apply. the New Civil code apply.
SUSPENSION OF
INSOLVENCY
PAYMENTS Q: Who may apply for voluntary insolvency? (Bar
The debtor has sufficient 1995, 1998)
The debtor does not have
property but he foresees the
sufficient property to pay his
impossibility of meeting his INSOLVENCY LAW (ACT 1956, AS AMENDED)
debts.
debts as they fall due VOLUNTARY INSOLVENCY
The purpose is to discharge Sec. 14. Application. — An insolvent debtor, owing debts
The purpose is to suspend or
the debtor from payment of exceeding in amount the sum of one thousand pesos, may
delay the payment of debts
certain debts. apply to be discharged from his debts and liabilities by
The amount of indebtedness Some of the creditors may petition to the Court of First Instance of province or city in
is not affected receive less than their credits which he has resided for six months next preceding the filing
In case of involuntary of such petition. In his petition he shall set forth his of
The number of creditors is
insolvency, three or more residence, the period of his residence therein immediately
immaterial
creditors are required. prior to filing said petition, his inability to pay all his debts
May be applied for by both in full, his willingness to surrender all his property, estate,
Can be applied by individual
juridical and individual and effects not exempt from execution for the benefit of his
debtors only (FRIA)
debtors (FRIA) creditors, and an application to be adjudged an insolvent.
(Table from Lex Pareto 2014) He shall annex to his petition a schedule and inventory in
the form herein-after provided. The filing of such petition
NOTE: Suspension of Payments, according to FRIA, may be shall be an act of insolvency.
applied only by individual debtors who possess sufficient
property to cover all his debts but can foresee the impossibility According to Sec. 14 of the Insolvency Law, the following are
of meeting them when they respectively fall due. the requirements to apply for voluntary insolvency:
1) The person applying must be an insolvent debtor;
FINANCIAL REHABILITATION AND INSOLVENCY 2) He must owe debts exceeding in amount the sum of
ACT (FRIA) OF 2010 (REPUBLIC ACT NO. 10142) one thousand pesos.
SUSPENSION OF PAYMENTS
Sec. 94. Petition. - An individual debtor who, possessing Being such, he may apply to be discharged from his debts and
sufficient property to cover all his debts but foreseeing the liabilities by petition to the Regional Trial Court of the province
impossibility of meeting them when they respectively fall or city in which he has resided for six months next preceding
due, may file a verified petition that he be declared in the the filing of such petition.
state of suspension of payments by the court of the province
or city in which he has resides for six (6) months prior to the NOTE: According to the Financial Rehabilitation and
filing of his petition. He shall attach to his petition, as a Insolvency Act of 2010, an insolvent individual debtor can
minimum: apply for voluntary liquidation when his properties are not
a) a schedule of debts and liabilities; sufficient to cover his liabilities and he owes debts exceeding
b) an inventory of assess; and Php500,000.
c) a proposed agreement with his creditors.
FINANCIAL REHABILITATION AND INSOLVENCY
ACT (FRIA) OF 2010 (REPUBLIC ACT NO. 10142)
SUSPENSION OF Sec. 103. Application. - An individual debtor whose
LIQUIDATION
PAYMENTS properties are not sufficient to cover his liabilities, and
Debtor is not insolvent – The Debtor is insolvent – His owing debts exceeding Five hundred thousand pesos
debtor has sufficient assets assets are insufficient to (Php500,000.00), may apply to be discharged from his
to cover its liabilities cover the debtor’s liabilities debts and liabilities by filing a verified petition with the
Payment of obligation is The obligations are court of the province or city in which he has resided for six
stayed discharged (6) months prior to the filing of such petition. He shall
Proceeding can cover attach to his petition a schedule of debts and liabilities and
Applies only to individual an inventory of assets. The filing of such petition shall be an
juridical persons and
debtor act of insolvency.
individual debtors
May be initiated by the
May be filed by the debtor Meanwhile, an insolvent juridical debtor may apply for
debtor or the creditors
There is no minimum It is required that the debt of voluntary liquidation by filing a petition for liquidation with
amount of liabilities the individual debtor is not the court. The petition shall establish the insolvency of the
prescribed less than P500,000. debtor and shall contain the following:
The rules on concurrence The rules on concurrence a) a schedule of the debtor's debts and liabilities including a
and preference of credits and preference of credits list of creditors with their addresses, amounts of claims
and collaterals, or securities, if any;
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b) an inventory of all its assets including receivables and or demands accrued in the Philippine Islands, and the
claims against third parties; and amount of which credits or demands are in the aggregate not
c) the names of at least three nominees to the position of less than one thousand pesos: Provided, That none of said
liquidator. creditors has become a creditor by assignments, however
made, within thirty days prior to the filing of said petition.
FINANCIAL REHABILITATION AND INSOLVENCY Such petition must be filed in the Court of First Instance of
ACT (FRIA) OF 2010 (REPUBLIC ACT NO. 10142) the province or city in which the debtor resides or has his
Sec. 90. Voluntary Liquidation. - An insolvent debtor may principal place of business, and must be verified by at least
apply for liquidation by filing a petition for liquidation with three of the petitioners. Xxx
the court. The petition shall be verified, shall establish the
insolvency of the debtor and shall contain, whether as an NOTE: According to Section 105 of the FRIA, any creditor or
attachment or as part of the body of the petition; group of creditors with a claim of, or with claims aggregating at
a) a schedule of the debtor's debts and liabilities including least Five hundred thousand pesos (Php500, 000.00) may file
a list of creditors with their addresses, amounts of a verified petition for liquidation with the court of the province
claims and collaterals, or securities, if any; or city in which the individual debtor resides.
b) an inventory of all its assets including receivables and
claims against third parties; and The following are considered acts of insolvency:
c) the names of at least three (3) nominees to the position a) That such person is about to depart or has departed
of liquidator. from the Republic of the Philippines, with intent to
defraud his creditors;
At any time during the pendency of court-supervised or pre- b) That being absent from the Republic of the
negotiated rehabilitation proceedings, the debtor may also Philippines, with intent to defraud his creditors, he
initiate liquidation proceedings by filing a motion in the remains absent;
same court where the rehabilitation proceedings are pending c) That he conceals himself to avoid the service of legal
to convert the rehabilitation proceedings into liquidation process for the purpose of hindering or delaying the
proceedings. The motion shall be verified, shall contain or liquidation or of defrauding his creditors;
set forth the same matters required in the preceding d) That he conceals, or is removing, any of his property
paragraph, and state that the debtor is seeking immediate to avoid its being attached or taken on legal process;
dissolution and termination of its corporate existence. e) That he has suffered his property to remain under
attachment or legal process for three (3) days for the
If the petition or the motion, as the case may be, is sufficient purpose of hindering or delaying the liquidation or of
in form and substance, the court shall issue a Liquidation defrauding his creditors;
Order mentioned in Section 112 hereof. f) That he has confessed or offered to allow judgment in
favor of any creditor or claimant for the purpose of
hindering or delaying the liquidation or of defrauding
Q: Differentiate voluntary insolvency from any creditors or claimant;
involuntary insolvency. (Bar 1995, 2005) g) That he has willfully suffered judgment to be taken
against him by default for the purpose of hindering or
VOLUNTARY INVOLUNTARY delaying the liquidation or of defrauding his creditors;
INSOLVENCY INSOLVENCY h) That he has suffered or procured his property to be
Three or more creditors are taken on legal process with intent to give a preference
One creditor is sufficient to one or more of his creditors and thereby hinder or
required
Filed by three or more delay the liquidation or defraud any one of his
Filed by the debtor creditors;
qualified debtors
Debtors must have i) That he has made any assignment, gift, sale,
No need for commissions of conveyance or transfer of his estate, property, rights
committed one or more acts
acts of insolvency or credits with intent to hinder or delay the
of insolvency
Amount of indebtedness liquidation or defraud his creditors;
Indebtedness must not be j) That he has, in contemplation of insolvency, made any
must exceed one thousand
less than one thousand pesos payment, gift, grant, sale, conveyance or transfer of
pesos
Petition must e accompanied his estate, property, rights or credits;
Bond is not required k) That being a merchant or tradesman, he has generally
by a bond
(Table from Lex Pareto 2014) defaulted in the payment of his current obligations for
a period of thirty (30) days;
l) That for a period of thirty (30) days, he has failed,
INSOLVENCY LAW (ACT 1956, AS AMENDED)
after demand, to pay any moneys deposited with him
Involuntary Insolvency or received by him in a fiduciary; and
Sec. 20. Petition; Acts of insolvency. - An adjudication of m) That an execution having been issued against him on
insolvency may be made on the petition of three or more final judgment for money, he shall have been found to
creditors, residents of the Philippine Islands whose credits
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be without sufficient property subject to execution to
satisfy the judgment.
Q: What is/are the effect/s of the filing of a petition for
involuntary insolvency? (Bar 1996, 2002)
The following are the effects of filing a petition for involuntary
insolvency:
1) the clerk of the court shall, by an instrument under his
hand and seal of the court, assign and convey to the
assignee all the real and personal property, estate, and
effects of the debtor with all his deeds, books, and
papers relating thereto, and(Section 32, Insolvency
Law)
2) such assignment shall relate back to the
commencement of the proceedings in insolvency, and
(Section 32, Insolvency Law)
3) shall relate back to the acts upon which the
adjudication was founded, and (Section 32, Insolvency
Law)
4) by operation of law shall vest the title to all such
property, estate, and effects in the assignee, although
the same is then attached on mesne process, as the
property of the debtor. (Section 32, Insolvency Law)
5) Such assignment shall operate to vest in the assignee
all of the estate of the insolvent debtor not exempt by
law from execution. (Section 32, Insolvency Law)
6) It shall also dissolve any attachment levied within one
month next preceding the commencement of the
insolvency proceedings and vacate and set aside any
judgment entered in any action commenced within
thirty days immediately prior to the commencement of
insolvency proceedings and shall vacate and set aside
any execution issued thereon and shall vacate and set
aside any judgment entered by default or consent of the
debtor within thirty days immediately prior to the
commencement of the insolvency proceedings.(Section
32, Insolvency Law)
7) The assignment to the assignee of all real and personal
property, estate and effects of the debtor made by the
clerk of the court shall vacate and set aside any
judgment entered in any action commenced within
thirty days immediately prior to the commencement of
the insolvency proceedings. (Radiola-Toshiba Phil. Inc.
v. Intermediate Appellate Court, et.al. G.R. No. 75222
[July 18, 1991]).
Q: What is the order of preference of payments during
an insolvency? (Bar 2002, 2007)
After the debtor’s assets have been liquidated, unless such a
composition has been agreed upon by the debtor’s creditors,
obligations of the debtor shall be paid in the following order:
1) Equitable claims as enumerated under Section 48;
2) Preferred claims under Article 2241 and 2242 of the
Civil Code;
3) Preferred claims under 2244 of the Civil Code;
4) Ordinary claims under Section 49, which are claims
other than above, duly proved and allowed in the
solvency proceedings, which shall share pro rata in
the remainder of the debtor’s property, without any
priority or preference. (Lex Pareto Notes [2014]).
Q: What are the obligations of the insolvent debtor?
(Bar 1997, 2005)
INSOLVENCY LAW (ACT 1956, AS AMENDED)
SECTION 68. Debts not released under this Act — No tax
or assessment due the Insular Government or any provincial
or municipal government, whether proved or not as
provided for in this Act, shall be discharged. Nor shall any
debt created by the fraud or embezzlement of the debtor, or
by his defalcation as a public officer or while acting in a
fiduciary capacity, be discharged under this Act, but the debt
may be proved, and the dividend thereon shall be a payment
on account of said debt. No discharge solvent granted under
this Act shall release, discharge, or affect any person liable
for the same debt, for or with the debtor, either as partner,
joint contractor, indorser, surety, or otherwise.
The following are the obligations of the insolvent debtor:
1) Taxes or assessment due to the National or local
government;
2) Debt created by fraud or embezzlement;
3) Debts created by defalcation by public officer or while
acting in fiduciary capacity;
4) Claims of secured creditors.
INSURANCE CODE OF THE PHILIPPINES
(P.D. 1460, AS AMENDED)
Q: Who may be insured? (Bar 2000)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 7. Anyone except a public enemy may be insured.
A public enemy is a nation, including its citizens or subjects,
with whom the Philippines is at war. With respect to
corporations, the nationality is determined by the controlling
stockholders irrespective of the place of incorporation. An
insurance policy ceases to be allowable as soon as the insured
becomes a public enemy. (Filipinas Compania de Seguros v.
Christern Huenefeld and Co., 89 Phil. 54 [1951]).
Q: Do the mortgagor and the mortgagee have the same
insurable interest over a mortgaged property? (Bar
1999)
INSURANCE CODE (P.D. 1460, as amended)
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Sec. 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or
assigns a policy of insurance to a mortgagee, the insurance is
deemed to be upon the interest of the mortgagor, who does
not cease to be a party to the original contract, and any act of
his, prior to the loss, which would otherwise avoid the
insurance, will have the same effect, although the property is
in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein named, with the
same effect as if it had been performed by the mortgagor.
Sec. 9 If an insurer assents to the transfer of an insurance
from a mortgagor to a mortgagee, and, at the time of his
assent, imposes further obligation on the assignee, making a
new contract with him, the act of the mortgagor cannot
affect the rights of said assignee.
No. The mortgagor of the property, as owner, has an insurable
interest as to the extent of its value. The mortgagee has an
insurable interest in the mortgaged property to the extent of
the debt secured, since the property is relied upon as a security
thereof, and in insuring he is not insuring the property itself
but his interest or lien thereon. The mortgagee’s interest on the
property mortgaged continues until the mortgage is
extinguished.
“As to a mortgaged property, the mortgagor and the mortgagee
have each an independent insurable interest therein and both
interests may be one policy, or each may take out a separate
policy covering his interest, either at the same or at separate
times. The mortgagor's insurable interest covers the full value
of the mortgaged property, even though the mortgage debt is
equivalent to the full value of the property. The mortgagee's
insurable interest is to the extent of the debt, since the property
is relied upon as security thereof, and in insuring he is not
insuring the property but his interest or lien thereon. His
insurable interest is prima facie the value mortgaged and
extends only to the amount of the debt, not exceeding the value
of the mortgaged property. Thus, separate insurances covering
different insurable interests may be obtained by the mortgagor
and the mortgagee.” (Armando Geagonia v. Court of Appeals,
241 SCRA 152, 161 [1995])
A mortgagor may, however, take out insurance for the benefit
of the mortgagee, which is the usual practice. The mortgagee
may be made the beneficial payee in several ways:
a) He may become the assignee of the policy with the
consent of the insurer; or
b) the mere pledgee without such consent; or
c) the original policy may contain a mortgage clause; or
d) a rider making the policy payable to the mortgagee "as
his interest may appear" may be attached; or
e) A "standard mortgage clause," containing a collateral
independent contract between the mortgagee and
insurer, may be attached; or
f) The policy, though by its terms payable absolutely to
the mortgagor, may have been procured by a
mortgagor under a contract duty to insure for the
mortgagee's benefit, in which case the mortgagee
acquires an equitable lien upon the proceeds.”
(Armando Geagonia v. Court of Appeals, 241 SCRA
152, 161 [1995])
Q: In a Life Insurance Policy, who is considered to
have insurable interest? (Bar 1997, 2000, 2002)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 10. Every person has an insurable interest in the life
and health:
a) Of himself, of his spouse and of his children;
b) Of any person on whom he depends wholly or in
part for education or support, or in whom he has a
pecuniary interest;
c) Of any person under a legal obligation to him for
the payment of money, or respecting property or
services, of which death or illness might delay or
prevent the performance; and
d) Of any person upon whose life any estate or
interest vested in him depends.
NOTE: In general, the test is whether or not the person is
interested in the preservation of the insured life despite the
insurance. In Section 10(a), mere relationship is sufficient
while the rest requires pecuniary interest. Thus, the interest of
the creditor over the life of the debtor ceases upon full
payment. (Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
A corporation has an insurable interest in the life of an officer
whose services the corporation depends for its prosperity, and
whose death will be the cause of substantial pecuniary loss. (El
OrienteFrabrica de Tabacos vs. Juan Posadas, G.R. No.
34774, September 21, 1931.)
Q: Who may be designated as a beneficiary of a Life
Insurance Policy? (Bar 1998, 2005)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 11. The insured shall have the right to change the
beneficiary he designated in the policy, unless he has
expressly waived this right in said policy.
GENERAL RULE: A person may take out a policy in his own
life and make it payable to whoever he pleases, irrespective of
the beneficiary’s lack of insurable interest, provided he acts in
good faith and without intent to make the transaction merely a
cover for a forbidden wagering contract.
EXCEPTION: Any person who is forbidden from receiving any
donation cannot be assigned beneficiary of a life insurance
policy by the person who cannot make any donation to him.
(Arts. 2012 and 739 of the Civil Code)
THE NEW CIVIL CODE, REPUBLIC ACT NO. 386
Article 739. The following donations shall be void:
1) Those made between persons who were guilty of
adultery or concubinage at the time of the donation;
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2) Those made between persons found guilty of the same
criminal offense, in consideration thereof;
3) Those made to a public officer or his wife, descendants
and ascendants, by reason of his office.
In the case referred to in No. 1, the action for declaration of
nullity may be brought by the spouse of the donor or donee;
and the guilt of the donor and donee may be proved by
preponderance of evidence in the same action.
Q: What is required for an insurance policy on
property to be enforceable? (Bar 1994, 1997, 2000,
2001, 2002, 2009)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 18. No contract or policy of insurance on property shall
be enforceable except for the benefit of some person having
an insurable interest in the property insured.
An insurance policy on property is required to be for the
benefit of some person having an insurable interest in the
property insured. Thus, an insurance taken out by a person on
a property in which he has no insurable interest is void.
An insurable interest in a property may be:
a) An existing interest;
b) An inchoate interest founded on an existing interest;
or
c) An expectancy, coupled with an existing interest in
that out of which the expectancy arises. (Section 14,
Insurance Code)
Insurable interest in property vs. Insurable interest in life:
a) As to extent: Insurable interest in life is unlimited (save
in life insurance effected by a creditor on the life of the
debtor); insurable interest in property is limited to the
actual value of the interest thereon.
b) As to time when insurable interest must exist: In life
insurance, it is enough that the insurable interest exists
at the time the policy takes effect and need not exist at
the time of the loss; while in property insurance, it is
necessary that the insurable interest exists when the
insurance takes effect and when the loss occurs, but
need not exist in the meantime.
c) As to expectation of benefit to be derived: In life
insurance, the expectation of the benefit to be derived
need not have any legal basis; in property insurance,
there must be a legal basis.
d) As to the beneficiary’s interest: The beneficiary must
have insurable interest over the thing insured in
property insurance. In life insurance, the beneficiary
need not have insurable interest over the ife of the
insured if the insured himself secured the policy.
However, if the life insurance was obtained by the
beneficiary, the latter must have insurable interest over
the life of the insured.(Sundiang and Aquino.
Reviewer on Commercial Law [2014].)
Q: Can the insurer be given the right to rescind the
contract of life insurance? (Bar 1994, 1996, 1997,
1998)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 48. Whenever a right to rescind a contract of insurance
is given to the insurer by any provision of this chapter, such
right must be exercised previous to the commencement of
an action on the contract.
After a policy of life insurance made payable on the death of
the insured shall have been in force during the lifetime of
the insured for a period of two years from the date of its
issue or of its last reinstatement, the insurer cannot prove
that the policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of the
insured or his agent.
Yes. An insurer can be given the right to rescind a contract of
life insurance. Under Sec. 48 of the Insurance Code, an
insurer is given two years – from the effectivity of a life
insurance contract and while the insured is alive – to discover
or prove that the policy is void ab initio or is rescindible by
reason of the fraudulent concealment or misrepresentation of
the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make
good on the policy, even though the policy was obtained by
fraud, concealment, or misrepresentation. This is not to say
that insurance fraud must be rewarded, but that insurers who
recklessly and indiscriminately solicit and obtain business
must be penalized, for such recklessness and lack of
discrimination ultimately work to the detriment of bona fide
takers of insurance and the public in general. (Manila Bankers
Life Insurance Corporation v. Aban, G.R. No. 175666 [July 29,
2013]).
THE INCONTESTABILITY CLAUSE
“The "incontestability clause" is a provision required in
law where the insurer, in a life insurance policy, payable upon
the death of the insured, can no longer contest the validity of
the policy by reason of fraudulent concealment or
misrepresentation of the insured after the lapse of two years
from the date of its issue or reinstatement.
The purpose of the law is to give protection to the insured or
his beneficiary by limiting the rescinding of the contract of
insurance on the ground of fraudulent concealment or
misrepresentation to a period of only two (2) years from the
issuance of the policy or its last reinstatement.
The insurer is deemed to have the necessary facilities to
discover such fraudulent concealment or misrepresentation
within a period of two (2) years. It is not fair for the insurer to
collect the premiums as long as the insured is still alive, only to
raise the issue of fraudulent concealment or misrepresentation
when the insured dies in order to defeat the right of the
beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last
reinstatement, the beneficiary is given the stability to recover
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under the policy when the insured dies. The provision also
makes clear when the two-year period should commence in
case the policy should lapse and is reinstated, that is, from the
date of the last reinstatement.
After two years, the defenses of concealment or
misrepresentation, no matter how patent or well-founded, will
no longer lie.” (Manila Bankers Life Insurance Corporation, v.
Cresencia P. Aban, G.R. No. 175666 [July 29, 2013]).
Q: What is a warranty? (Bar 1991, 1993)
A warranty is a statement or promise set forth in the policy,
or by reference incorporated therein, the untruth or non-
fulfillment of which in any respect, and without reference to
whether the insurer was in fact prejudiced by such untruth or
non-fulfillment, renders the policy voidable by the insurer.
(Prudential Guarantee and Assurance Inc., v. Trans-Asia
Shipping Lines, Inc., G.R. No. 151890 [June 20, 2006]).
NOTE: Sec. 74 of the Insurance Code provides that, "the
violation of a material warranty, or other material provision of
a policy on the part of either party thereto, entitles the other to
rescind."
Q: What is a premium? (Bar 2006, 2007)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 77. An insurer is entitled to payment of the premium
as soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision
applies.
An insurance premium is the consideration paid an insurer for
undertaking to indemnify the insured against a specified peril.
In fire, casualty, and marine insurance, the premium payable
becomes a debt as soon as the risk attaches. (Gulf Resorts,
Inc., v. Philippine Charter Insurance Corporation, G.R. No.
156167, May 16, 2005).
Q: When can there be considered a double insurance?
(Bar, 1999, 2005, 2008)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 93. A double insurance exists where the same person is
insured by several insurers separately in respect to the same
subject and interest.
The requisites of Double Insurance are:
a) The person insured is the same;
b) There are two or more insurers insuring separately;
c) The subject matter is the same;
d) The risk or peril insured against is likewise the same.
NOTE: Double insurance is not prohibited by law but may be
prohibited by “other insurance clause.” (Aquino and Sundiang,
Reviewer on Commercial Law [2014] at p. 132.
NOTE: The other insurance clause is a clause in the policy
which provides that the policy shall be void if the insured
procures additional insurance without the consent of the
insurer. The purpose is to prevent over-insurance and thus
avert the possibility of perpetration of fraud. (Pioneer
Insurance and Surety Corporation v. Yap, 61 SCRA 426
[1974]).
Q: What are the rules for payment of claims where
there is over-insurance by double insurance? (Bar
1990, 2005)
INSURANCE CODE (P.D. 1460, as amended)
Sec. 94. Where the insured is over-insured by double
insurance:
a) The insured, unless the policy otherwise provides,
may claim payment from the insurers in such order
as he may select, up to the amount for which the
insurers are severally liable under their respective
contracts;
b) Where the policy under which the insured claims is
a valued policy, the insured must give credit as
against the valuation for any sum received by him
under any other policy without regard to the actual
value of the subject matter insured;
c) Where the policy under which the insured claims is
an unvalued policy he must give credit, as against
the full insurable value, for any sum received by
him under any policy;
d) Where the insured receives any sum in excess of
the valuation in the case of valued policies, or of the
insurable value in the case of unvalued policies, he
must hold such sum in trust for the insurers,
according to their right of contribution among
themselves;
e) Each insurer is bound, as between himself and the
other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable
under his contract.
Q: When can there be proper deviation? (Bar 2000,
2005)
INSURANCE CODE (P.D. 1460
Sec. 124. A deviation is proper:
a) When caused by circumstances over which neither the
master nor the owner of the ship has any control;
b) When necessary to comply with a warranty, or to avoid
a peril, whether or not the peril is insured against;
c) When made in good faith, and upon reasonable grounds
of belief in its necessity to avoid a peril; or
d) When made in good faith, for the purpose of saving
human life or relieving another vessel in distress.
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Q: What is covered in casualty insurance? (Bar 1995, which can be more than what the infringer (Johann)
1995, 2004) received,
4) attorney’s fees and cost.
INSURANCE CODE (P.D. 1460, as amended)
Q: Differentiate infringement of trademark from
Sec. 174. Casualty insurance is insurance covering loss or unfair competition. (Bar 1996, 2009)
liability arising from accident or mishap, excluding certain
types of loss which by law or custom are considered as INFRINGEMENT OF
falling exclusively within the scope of other types of UNFAIR COMPETITION
TRADEMARK
insurance such as fire or marine. It includes, but is not unfair competition under the
limited to, employer's liability insurance, motor vehicle In infringement of trademark, IPC involves passing off one’s
liability insurance, plate glass insurance, burglary and theft there is unauthorized use of goods as those of another and
insurance, personal accident and health insurance as written the trademark giving one’s goods the
by non-life insurance companies, and other substantially appearance of that of another
similar kinds of insurance.
It is NOT necessary to
it is necessary to establish
establish fraudulent intent in
NOTE: "Intentional" as used in an accident policy excepting fraudulent intent in an unfair
a case of infringement of
intentional injuries inflicted by the insured or any other competition case
trademark
person, etc., implies the exercise of the reasoning faculties,
Registration of the trademark prior registration of a
consciousness and volition. Where a provision of the policy
is necessary for the filing of an trademark is not necessary in
excludes intentional injury, it is the intention of the person
action for infringement of unfair competition
inflicting the injury that is controlling. If the injuries suffered
trademark
by the insured clearly resulted from the intentional act of a
Unfair competition is broader
third person the insurer is relieved from liability as stipulated.
Infringement of Trademark is as it includes cases that are
(Biagtan v. The Insular Life Assurance Co., Ltd., G.R. No. L-
an offense which covers the covered not only by the IPC
25579 [March 29, 1972]).
Intellectual Property Code but also by Art. 27 of the New
only Civil Code.
INTELLECTUAL PROPERTY CODE (R.A. 8293, AS (Aquino and Sundiang, Reviewer on Commercial Law [2014]
AMENDED BY R.A. 9 at p. 543)
INTELLECTUAL PROPERTY CODE Test of Dominancy – it focuses on the similarity of the
(R.A. 8293, as amended by R.A. 9150) prevalent features of the competing trademarks which might
cause confusion or deception and thus constitutes
Q: What are the remedies of the true and actual infringement.
inventor? (Bar 1993, 2005)
If the competing trademark contains the main or essential or
INTELLECTUAL PROPERTY CODE dominant features of another and confusion and deception is
Section 68. Remedies of the True and Actual Inventor. - If likely to result, infringement takes place. Duplication or
a person, who was deprived of the patent without his imitation is not necessary; nor is it necessary that the
consent or through fraud is declared by final court order or infringing label should suggest an effort to imitate. The
decision to be the true and actual inventor, the court shall question at issue in cases of infringement of trademarks is
order for his substitution as patentee, or at the option of the whether the use of the marks involved would be likely to cause
true inventor, cancel the patent, and award actual and other confusion or mistakes in the mind of the public or deceive
damages in his favor if warranted by the circumstances. purchasers. (Amigo Manufacturing v. Peabody Co. GR
(Sec. 33, R.A. No. 165a) 139300, 14 March 2001)

Topic: Remedies of a True and Actual Inventor (Bar 1993,
2005)
Q: Ferdie is a patent owner of a certain invention. He
discovered that his invention is being infringed by
Johann. What are the remedies available to Ferdie
against Johann?
The following remedies are available to Ferdie:
1) seize and destroy,
2) injunction,
3) damages in such amount may have been obtained
from the use of the invention if properly transacted
Q: What are the intellectual properties protected by
the law on copyright? (Bar 1995, 2007. 2008)
INTELLECTUAL PROPERTY CODE
Section 172. Literary and Artistic Works. –
172.1. Literary and artistic works, hereinafter referred to as
"works", are original intellectual creations in the literary and
artistic domain protected from the moment of their creation
and shall include in particular:
a) Books, pamphlets, articles and other writings;

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b) Periodicals and newspapers;
c) Lectures, sermons, addresses, dissertations prepared
for oral delivery, whether or not reduced in writing or
other material form;
d) Letters;
e) Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb shows;
f) Musical compositions, with or without words;
g) Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or
designs for works of art;
h) Original ornamental designs or models for articles of
manufacture, whether or not registrable as an industrial
design, and other works of applied art;
i) Illustrations, maps, plans, sketches, charts and three-
dimensional works relative to geography, topography,
architecture or science;
j) Drawings or plastic works of a scientific or technical
character;
k) Photographic works including works produced by a
process analogous to photography; lantern slides;
l) Audiovisual works and cinematographic works and
works produced by a process analogous to
cinematography or any process for making audio-visual
recordings;
m) Pictorial illustrations and advertisements;
n) Computer programs; and
o) Other literary, scholarly, scientific and artistic works.
172.2. Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as well as of
their content, quality and purpose. (Sec. 2, P.D. No. 49a)
(Lex Pareto, 2014)
(A) Original works – literary and artistic works – these are
original intellectual creation in the literary and artistic
domain protected from the moment of their creation.
(infringement could be committed from the moment the
defendant copies the copyrighted material. The right
subsists from the moment of creation)
(B) Derivative Works (Sec 173) –
a) Dramatizations, translations, adaptations,
abridgements, arrangements, and other alterations of
literary or artistic works; and
b) collections of literary, scholarly or artistic works, and
compilations of data and other materials which are
original by reason of the selection or coordination
arrangement of their contents.
Topic: Copyright (Bar 1995, 1997, 2008)
Q: Eloise, an accomplished writer, was hired by
Petong to write a bimonthly newspaper column for
Diario de Manila, a newly-established newspaper of
which Petong was the editor-in-chief. Eloise was to be
paid P1,000 for each column that was published. In
the course of two months, Eloise submitted three
columns which, after some slight editing, were
printed in the newspaper. However, Diario de Manila
proved unprofitable and closed only after two months.
Due to the minimal amounts involved, Eloise chose
not to pursue any claim for payment from the
newspaper, which was owned by New Media
Enterprises. Three years later, Eloise was planning to
publish an anthology of her works, and wanted to
include the three columns that appeared in the Diario
de Manila in her anthology She asks for you legal
advice: Does Eloise have to secure authorization from
New Media Enterprises to be able to publish her
Diario de Manila columns in her own anthology?
Eloise may publish the columns without securing authorization
from New Media Enterprises. Under Sec. 172 of the
Intellectual Property Code, original intellectual creations
in the literary and artistic domain are protected from the
moment of their creation and shall include those in periodicals
and newspapers. Under Sec. 178, copyright ownership shall
belong to the author. In case of commissioned work, the person
who so commissioned work shall have ownership of work, but
copyright shall remain with creator, unless there is a written
stipulation to the contrary.
Q: What are the economic rights of authors? (Bar
1994, 2008)
The economic rights of authors shall consist of the exclusive
right to a) carry out, b) authorize, or (c) prevent the following
facts:
1) Reproduction of the work or substantial portion of the
work.
2) Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work
3) The first public distribution of the original and each
copy of the work by sale or other forms of transfer of
ownership
4) Rental of the original or a copy of an audiovisual or
cinematographic work.
5) Public display of the original or a copy of the work
6) Public performance of the work
7) Other communication to the public of the work. (Section
177, Intellectual Property Code)
Topic: Economic Rights of Authors (Bar 1994, 2008)
Q: Eloise, an accomplished writer, was hired by
Petong to write a bimonthly newspaper column for
Diario de Manila, a newly-established newspaper of
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which Petong was the editor-in-chief. Eloise was to be
paid P1,000 for each column that was published. In
the course of two months, Eloise submitted three
columns which, after some slight editing, were
printed in the newspaper. However, Diario de Manila
proved unprofitable and closed only after two months.
Due to the minimal amounts involved, Eloise chose
not to pursue any claim for payment from the
newspaper, which was owned by New Media
Enterprises.
Assume that New Media Enterprises plans to publish
Eloise’s columns in its own anthology entitled, ―The
Best of Diario de Manila. Eloise wants to prevent the
publication of her columns in that anthology since she
was never paid by the newspaper. Name one
irrefutable legal argument Eloise could cite to enjoin
New Media Enterprises from including her columns in
its anthology.
INTELLECTUAL PROPERTY CODE (R.A. 8293, AS
AMENDED BY R.A. 9150)
Section 177. Copyright or Economic Rights. - Subject to the
provisions of Chapter VIII, copyright or economic rights
shall consist of the exclusive right to carry out, authorize or
prevent the following acts:
177.1. Reproduction of the work or substantial portion
of the work; xxx
Section 178. Rules on Copyright Ownership. - Copyright
ownership shall be governed by the following rules:
178.1 Subject to the provisions of this section, in the case of
original literary and artistic works, copyright shall belong to
the author of the work; xxx
178.3. In the case of work created by an author during and
in the course of his employment, the copyright shall belong
to:
a) The employee, if the creation of the object of
copyright is not a part of his regular duties even if
the employee uses the time, facilities and materials
of the employer.
b) The employer, if the work is the result of the
performance of his regularly-assigned duties,
unless there is an agreement, express or implied, to
the contrary.
Sec. 178.1 of the Intellectual Property Code provides that
the copyright or economic rights to an original literary work
belongs to the author of the work. Although Eloise was
employed with Diario de Manila, she was never properly
compensated for the job she did there, and thus, she remains
the copyright owner of the work she authored. She can, thus
invoke her economic rights under section 177.1, specifically the
right to “authorize or prevent” reproduction of the work,
including the public distribution of the original and each copy
of the work “by sale or other forms of transfer of ownership.”
Q: What is the rule in case of work commissioned by a
person other than one’s employer? (Bar 2004, 2010)
Section 178.4 of the Intellectual Property Code provides
that in the case of a work commissioned by a person other than
an employer of the author and who pays for it and the work is
made in pursuance of the commission, the person who so
commissioned the work shall have ownership of the work, but
the copyright thereto shall remain with the creator, unless
there is a written stipulation to the contrary.
NOTE: Ownership of commissioned work shall belong to the
person who commissioned the work. In ownership of the
copyright, it shall remain with the creator unless there is a
written stipulation to the contrary.
Q: What are the limitations on copyright such that it
won’t be tantamount to copyright infringement? (Bar
1994, 1998, 2006)
INTELLECTUAL PROPERTY CODE
Section 184. Limitations on Copyright. –
184.1. Notwithstanding the provisions of Chapter V, the
following acts shall not constitute infringement of copyright:
a) The recitation or performance of a work, once it has
been lawfully made accessible to the public, if done
privately and free of charge or if made strictly for a
charitable or religious institution or society; (Sec. 10(1),
P.D. No. 49)
b) The making of quotations from a published work if they
are compatible with fair use and only to the extent
justified for the purpose, including quotations from
newspaper articles and periodicals in the form of press
summaries: Provided, That the source and the name of
the author, if appearing on the work, are mentioned;
(Sec. 11, third par., P.D. No. 49)
c) The reproduction or communication to the public by
mass media of articles on current political, social,
economic, scientific or religious topic, lectures,
addresses and other works of the same nature, which
are delivered in public if such use is for information
purposes and has not been expressly reserved:
Provided, That the source is clearly indicated; (Sec. 11,
P.D. No. 49)
d) The reproduction and communication to the public of
literary, scientific or artistic works as part of reports of
current events by means of photography,
cinematography or broadcasting to the extent necessary
for the purpose; (Sec. 12, P.D. No. 49)
e) The inclusion of a work in a publication, broadcast, or
other communication to the public, sound recording or
film, if such inclusion is made by way of illustration for
teaching purposes and is compatible with fair use:
Provided, That the source and of the name of the
author, if appearing in the work, are mentioned;
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f) The recording made in schools, universities, or
educational institutions of a work included in a
broadcast for the use of such schools, universities or
educational institutions: Provided, That such recording
must be deleted within a reasonable period after they
were first broadcast: Provided, further, That such
recording may not be made from audiovisual works
which are part of the general cinema repertoire of
feature films except for brief excerpts of the work;
g) The making of ephemeral recordings by a broadcasting
organization by means of its own facilities and for use in
its own broadcast;
h) The use made of a work by or under the direction or
control of the Government, by the National Library or
by educational, scientific or professional institutions
where such use is in the public interest and is
compatible with fair use;
i) The public performance or the communication to the
public of a work, in a place where no admission fee is
charged in respect of such public performance or
communication, by a club or institution for charitable
or educational purpose only, whose aim is not profit
making, subject to such other limitations as may be
provided in the Regulations; (n)
j) Public display of the original or a copy of the work not
made by means of a film, slide, television image or
otherwise on screen or by means of any other device or
process: Provided, That either the work has been
published, or, that the original or the copy displayed has
been sold, given away or otherwise transferred to
another person by the author or his successor in title;
and
k) Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a
legal practitioner. Xxx
Topic: Limitation to Copyright (Bar 1994, 1998, 2006)
Q: In a written legal opinion for a client on the
difference between apprenticeship and learnership,
Liza quoted without permission a labor law expert's
comment appearing in his book entitled "Annotations
on the Labor Code." Can the labor law expert hold
Liza liable for infringement of copyright for quoting a
portion of his book without his permission?
Liza cannot be held liable for infringement of copyright since
under the Intellectual Property Code, one of the limitations to
the copyright is the making of quotations from a published
work for purpose of any judicial proceedings or for giving of
professorial advice by legal practitioner, provided that the
source and name of the author are identified.
NOTE: Under Sec. 184.1 of the Intellectual Property
Code, the following acts shall not constitute infringement of
copyright:
a) The recitation or performance of a work, once it has
been lawfully made accessible to the public, if done
privately and free of charge or if made strictly for a
charitable or religious institution or society; (Sec. 10(1),
P.D. No. 49)
b) The making of quotations from a published work if
they are compatible with fair use and only to the extent
justified for the purpose, including quotations from
newspaper articles and periodicals in the form of press
summaries: Provided, That the source and the name of
the author, if appearing on the work, are mentioned;
(Sec. 11, third par., P.D. No. 49)
c) The reproduction or communication to the public by
mass media of articles on current political, social,
economic, scientific or religious topic, lectures,
addresses and other works of the same nature, which
are delivered in public if such use is for information
purposes and has not been expressly reserved:
Provided, That the source is clearly indicated; (Sec. 11,
P.D. No. 49)
d) The reproduction and communication to the public of
literary, scientific or artistic works as part of reports of
current events by means of photography,
cinematography or broadcasting to the extent
necessary for the purpose; (Sec. 12, P.D. No. 49)
e) The inclusion of a work in a publication, broadcast, or
other communication to the public, sound recording or
film, if such inclusion is made by way of illustration for
teaching purposes and is compatible with fair use:
Provided, That the source and of the name of the
author, if appearing in the work, are mentioned;
f) The recording made in schools, universities, or
educational institutions of a work included in a
broadcast for the use of such schools, universities or
educational institutions: Provided, That such recording
must be deleted within a reasonable period after they
were first broadcast: Provided, further, That such
recording may not be made from audiovisual works
which are part of the general cinema repertoire of
feature films except for brief excerpts of the work;
g) The making of ephemeral recordings by a broadcasting
organization by means of its own facilities and for use
in its own broadcast;
h) The use made of a work by or under the direction or
control of the Government, by the National Library or
by educational, scientific or professional institutions
where such use is in the public interest and is
compatible with fair use;
i) The public performance or the communication to the
public of a work, in a place where no admission fee is
charged in respect of such public performance or
communication, by a club or institution for charitable
or educational purpose only, whose aim is not profit
making, subject to such other limitations as may be
provided in the Regulations;
j) Public display of the original or a copy of the work not
made by means of a film, slide, television image or
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otherwise on screen or by means of any other device or
process: Provided, That either the work has been
published, or, that the original or the copy displayed
has been sold, given away or otherwise transferred to
another person by the author or his successor in title;
and
k) Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a
legal practitioner.
MARITIME COMMERCE – CODE OF COMMERCE
MARITIME COMMERCE – CODE OF COMMERCE
Q: What is the doctrine of limited liability? (Bar 1994,
1997, 1999, 2000, 2004, 2008)
“No vessel, no liability.”
The doctrine of limited liability means that “the
shipowner's or agent's liability is merely co-extensive with his
interest in the vessel such that a total loss thereof results in its
extinction. The total destruction of the vessel extinguishes
maritime liens because there is no longer any res to which it
can attach. This doctrine is based on the real and hypothecary
nature of maritime law which has its origin in the prevailing
conditions of the maritime trade and sea voyages during the
medieval ages, attended by innumerable hazards and perils. To
offset against these adverse conditions and to encourage
shipbuilding and maritime commerce, it was deemed necessary
to confine the liability of the owner or agent arising from the
operation of a ship to the vessel, equipment, and freight, or
insurance, if any.” (Monarch Ins. Co. v. Court of Appeals, G.R.
No. 92735 [June 8, 2000]).
The Doctrine of Limited Liability is applicable on the
following cases:
a) Civil liability for indemnities in favor of third persons
which arise from the conduct of the captain in the care
of the goods which the vessel carried (Art. 587, Code
of Commerce);
b) Civil liability arising from collisions (Art. 837, Code of
Commerce);
c) Unpaid wages of the captain and the crew if the vessel
and its cargo are totally lost by reason of capture or
shipwreck (Art. 643, Code of Commerce)
The exceptions are:
a) When the injury to or death of a passenger is due
either to the fault of the shipowner, or to the
concurring negligence of the shipowner and the
captain;
b) When the vessel is insured (to the extent of the
insurance proceeds); and
c) In Workmen’s Compensation claims (Yangco v.
Laserna, G.R. No. L-47447-47449 [October 29, 1941])
NOTE: The limited liability rule does not apply if the carrier
failed to overcome the presumption of negligence. (Monarch
Ins. Co. v. Court of Appeals, G.R. No. 92735 [June 8, 2000]).
Topic: Doctrine of Limited Liability (Bar 1994, 1997, 1999,
2000, 2004, 2008)
Q: MV Mariposa, one of five passenger ships owned by
Marina Navigation Co., sank off the coast of Mindoro
while en route to Iloilo City. More than 200
passengers perished in the disaster. Evidence showed
that the ship captain ignored typhoon bulletins issued
by Pag-asa during the 24-hour period immediately
prior to the vessel’s departure from Manila. The
bulletins warned all types of sea crafts to avoid the
typhoon’s expected path near Mindoro. To make
matters worse, he took more load than was allowed
for the ship’s rated capacity. Sued for damages by the
victim’s surviving relatives, Marina Nav. Co.
contended 1) that its liability, if any, had been
extinguished with the sinking of MV Mariposa; and 2)
that assuming it had not been so extinguished, such
liability should be limited to the loss of the cargo. Are
these contentions meritorious in the context of
applicable provisions of the Code of Commerce?
Yes. The contentions of Marina Navigation Co. are
meritorious. The captain of MV Mariposa is guilty of negligence
in ignoring the typhoon bulletins issued by PAGASA and in
overloading the vessel. Since only the captain of the vessel MV
Mariposa is guilty of negligence and the ship owner is not, the
ship owner can invoke the doctrine of limited liability.
Q: What is a charter party? What should be included
in it? (Bar 2004, 1991)
A charter party is a contract by which an entire ship, or
some principal part thereof, is let by the owner to another
person for a specified time or use; a contract of affreightment is
one by which the owner of a ship or other vessel lets the whole
or part of her to a merchant or other person for the conveyance
of goods, on a particular voyage, in consideration of the
payment of freight. (Caltex Philippines, Inc., v. Sulpicio Lines,
Inc., G.R. No. 131166 [September 30, 1999]).
The charter party shall contain, besides the conditions freely
stipulated, the following circumstances:
1) The kind, name, and tonnage of the vessel.
2) Its flag and port of registry.
3) The name, surname, and domicile of the captain.
4) The name, surname, and domicile of the ship agent, if
the latter should make the charter party.
5) The name, surname, and domicile of the charterer;
and if he states that he is acting by commission, that
of the person for whose account he makes the
contract.
6) The port of loading and unloading.
7) The capacity, number of tons or the weight or
measurement which they respectively bind themselves
to load and to transport, or whether the charter party
is total.
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8) The freightage to be paid, stating whether it is to be a
fixed amount for the voyage or so much per month, or
for the space to be occupied, or for the weight or
measure of the goods of which the cargo consists, or
in any other manner whatsoever agreed upon.
9) The amount of primage to be paid to the captain.
10) The days agreed upon for loading and unloading.
11) The lay days and extra lay days to be allowed and the
demurrage to be paid for each of them.(Article 652,
Code of Commerce)
Q: What is a bill of lading? What should it contain?
(Bar 1992, 1998)
A bill of lading is a written acknowledgment of the receipt of
the goods and an agreement to transport and deliver them at a
specified place to a person named or on his order. Such
instrument may be called a shipping receipt, forwarder's
receipt and receipt for transportation. (Saludo Jr. v. Court of
Appeals, G.R. No. 95536 [March 23, 1992]).
The bill of lading should be drawn by the captain of the vessel
and the shipper and should contain the following:
1) The name, registry, and tonnage of the vessel.
2) The name of the captain and his domicile.
3) The port of loading and that of unloading.
4) The name of the shipper.
5) The name of the consignee, if the bill of lading is
issued in the name of a specified person.
6) The quantity, quality, number of packages and marks
of the merchandise.
7) The freightage and the primage stipulated.(Article
706, Code of Commerce)
Q: In collision of vessels, what is the rule if both
vessels are at fault? (Bar 1995, 1998)
MARITIME COMMERCE - CODE OF COMMERCE
ARTICLE 827. If the collision is imputable to both vessels,
each one shall suffer its own damages, and both shall be
solidarily responsible for the losses and damages occasioned
to their cargoes.
In Government of the Philippine Islands v. Philippine
Steamship Co., Inc., G.R. No L-19957 [January 16, 1923], the
Court stated that Article 827 of the Code of Commerce provides
that where both vessels are to blame, both shall be solidarily
responsible for the damage occasioned to their cargoes.
Q: In case of collision of vessels, what is the rule if the
cause of the collision cannot be determined? (Bar
1995, 1997, 1998)
MARITIME COMMERCE - CODE OF COMMERCE
ARTICLE 828. The provisions of the preceding article are
applicable to the use in which it cannot be determined which
of the two vessels has caused the collision.
In case of collision of vessels where the cause of the collision
cannot be determined, each vessel shall suffer its own damages
and both shall be solidarily responsible for the losses and
damages occasioned to their cargoes.
Topic: Doctrine of Inscrutable Fault (Bar 1995, 1997, 1998)
Q: Explain the doctrine in Maritime accidents –
Doctrine of Inscrutable Fault
The doctrine of inscrutable fault states that in a collision, the
vessel at fault shall indemnify the damages sustained or losses
incurred and if both vessels were at fault, each shall suffer its
own damages, and both shall be solidarily liable.(Aquino and
Sundiang, Reviewer on Commercial Law [2014].
Topic: Doctrine of Inscrutable Fault (Bar 1995, 1997, 1998)
Q: A severe typhoon was raging when the vessel SS
Masdaam collided with MV Princes. It is conceded
that the typhoon was the major cause of the collision,
although there was a very strong possibility that it
could have been avoided if the captain of SS Masdaam
was not drunk and the captain of the MV Princes was
not asleep at the time of collisions. Who should bear
the damages to the vessels and their cargoes?
Under the doctrine of inscrutable fault, the shipowners of the
two vessels shall each bear their respective loss of vessels. As
for the losses and damages to their cargoes, the shipowners
should be held solidarily liable.
Topic: Averages: Types (Bar 2003, 2010)
Q: What are the types of averages in marine
commerce?
The types of average are particular and general (Article 808 of
the Code of Commerce).
a) Particular averages include all expenses and
damages caused to the vessel or to the cargo which did
not inure to the common benefit and profit of all the
persons interested in the vessel and the cargo (Article
809 of the Code of Commerce).
b) General averages include all damages and
expenses which are deliberately caused to save the
vessel, its cargo, or both at the same time, from a real
and known risk (Article 811 of the Code of
Commerce).
Topic: Carriage of Goods; Deviation; Liability (Bar 2005,
2009)
Q: Global Transport Services, Inc. (GTSI) operates a
fleet of cargo vessels plying interisland routes. One of
its vessels, MV Dona Juana, left the port of Manila for
Cebu laden with, among other goods, 10,000
television sets consigned to Romualdo, a TV retailer in
Cebu. When the vessel was about ten nautical miles
away from Manila, the ship captain heard on the radio
that a typhoon which, as announced by PAG-ASA, was
on its way out of the country, had suddenly veered
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back into Philippine territory, the captain realized
that MV Dona Juana would traverse the storm’s path,
but decided to proceed with the voyage. True enough,
the vessel sailed into the storm. The captain ordered
the jettison of the 10, 000 television sets, along with
some other cargo, in order to lighten the vessel and
make it easier to steer the vessel out of the path of the
typhoon. Eventually, the vessel, with its crew intact,
arrived safely in Cebu.
(A) Will you characterize the jettison of
Romualdo’s TV sets as an average? If so, what
kind of an average, and why? If not, why not?
(B) Against whom does Romualdo have a cause of
action for indemnity of his lost TV sets?
(A) Yes, the jettison of Romualdo’s TV sets is an average. It is
a general average loss because the reason for the jettison is
to stir the vessel out of the path of the typhoon and to,
eventually, save the vessel.
(B) Romualdo has a cause of action against the shipowner and
the owners of the cargoes saved by the jettison. Since the
jettison of Romualdo’s TV sets is a general average loss, it
entitles him to compensation or indemnification from the
shipowner and the owners of the cargoes saved by the
jettison.
Topic: Carriage of Goods by Sea Act; Prescription of
Claims/Action (Bar 1995, 2000, 2004, 2010)
Q: AA entered into a contract with BB for the latter to
transport ladies wear from Manila to France with
transshipment via Taiwan. Somehow the goods were
not loaded in Taiwan on time, hence, these arrived in
France ―off-season. AA was only paid for one half the
value by the buyer. AA claimed damages from BB. BB
invoked prescription as a defense under the Carriage
of Goods by Sea Act Considering the ―loss of value of
the ladies wear as claimed by AA, is BB’s defense
tenable?
The defense of BB is not tenable. The one-year prescriptive
period given in the Carriage of Goods Sea Act is applicable only
in cases where the goods were not delivered or were delivered
in a damaged or deteriorated condition. It does not include
damages as a result of delay in the delivery of the goods. The
prescription of the action filed by AA is governed by Article
1144 of the Civil Code, which provides for a prescriptive period
of ten years in case of actions based on a written contract
(Mitsui O.S.K. Lines Ltd. v. Court of Appeals, 287 SCRA 366
(1998)).
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Q: What are the requisites of a negotiable instrument?
(Bar 1992, 1993, 1996, 1998, 1999, 2002, 2007)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Section 1. Form of negotiable instruments. - An
instrument to be negotiable must conform to the following
requirements:
a) It must be in writing and signed by the maker or
drawer;
b) Must contain an unconditional promise or order to
pay a sum certain in money;
c) Must be payable on demand, or at a fixed or
determinable future time;
d) Must be payable to order or to bearer; and
e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
Topic: Requisites of a Negotiable Instrument (Bar 1992,
1993, 1996, 1998, 1999, 2002, 2007)
Q: R issued a check for P1m which he used to pay S for
killing his political enemy. Can be the check be
considered a negotiable instrument?
Yes, the check can be considered a negotiable instrument even
if it was issued to pay S to kill his political enemy. The validity
of the consideration is not one of the requisites of a negotiable
instrument (Section 1, Negotiable Instruments Law.) it merely
constitute a defect of title (Section 55, Negotiable Instruments
Law).
Topic: Requisites of a Negotiable Instrument (Bar 1992,
1993, 1996, 1998, 1999, 2002, 2007)
Q: A document, dated July 15, 2009 that reads: ―Pay
to X or order the sum of 5,000.00 five days after his
pet dog, Sparky, dies. Signed Y - is a negotiable
instrument. True or false?
True. The document is subject to a term and not a condition.
The dying of the dog is a day which is certain to come.
Therefore, the order to pay is unconditional, in compliance
with Section 1 of the Negotiable Instruments Law (NIL).
Q: What are the instances when the value is
considered certain as to sum? (Bar 1993, 2000)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 2. What constitutes certainty as to sum. - The sum
payable is a sum certain within the meaning of this Act,
although it is 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 or of 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 attorney's fee, in case
payment shall not be made at maturity.
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A sum is certain within the contemplation of Section 1(b) of the
NIL if the amount that is to be unconditionally paid by the
maker or drawee can be determined on the face of the
instrument even if it requires mathematical computation,
(Sundiang and Aquino. Reviewer on Commercial Law, 2014)
Q: Does requiring the holder to do something in lieu of
payment of money affect the negotiability of an
instrument?(Bar 2002)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 5. Additional provisions not affecting negotiability. -
An instrument which contains an order or promise to do any
act in addition to the payment of money is not negotiable.
But the negotiable character of an instrument otherwise
negotiable is not affected by a provision which: xxx ) gives
the holder an election to require something to be donein lieu
of payment of money.But nothing in this section shall
validate any provision or stipulation otherwise illegal.
No. It does not affect the negotiability of the instrument. If the
instrument gives the holder an election to require something to
be done in lieu of payment of money, the instrument is still
negotiable (Sec 5.[d]).
Example:
Where the maker promises to pay P1,000,00 or a sack of rice at
the option of the holder, (Sundiang and Aquino. Reviewer on
Commercial Law [2014].)
Topic: Provisions not affecting negotiability (Bar 2002)
Q: Which of the following stipulations or features of a
promissory note (PN) affect or do not affect its
negotiability, assuming that the PN is otherwise
negotiable? Indicate your answer by writing the
paragraph number of the stipulation or feature of the
PN as shown below and your corresponding answer,
either ―Affectedor ―Not affected. Explain.
1) The date of the PN is ―February 30, 2002.
2) The PN bears interest payable on the last day
of each calendar quarter at a rate equal to
five percent (5%) above the then prevailing
91-day Treasury Bill rate as published at the
beginning of such calendar quarter.
3) The PN gives the maker the option to make
payment either in money or in quantity of
palay or equivalent value.
4) The PN gives the holder the option either to
require payment in money or to require the
maker to serve as the bodyguard or escort of
the holder for 30 days.
(A) Paragraph 1 – negotiability is ―NOT AFFECTED. The date
is not one of the requirements for negotiability.
(B) Paragraph 2 – negotiability is ―NOT AFFECTED. The
interest is to be computed at a particular time and is
determinable. It does not make the sum uncertain or the
promise conditional.
(C) Paragraph 3 – negotiability is ―AFFECTED. Giving the
maker the option renders the promise conditional
(D) Paragraph 4 – negotiability is ―NOT AFFECTED. Giving
the option to the holder does not make the promise
conditional.
Q: What are the omissions made in an instrument that
do not affect negotiability? (Bar 1997, 2000, 2002)
The omissions not affecting negotiability are the following:
a) Non-dating of instrument;
b) Non specification of value given, or that any value had
been given;
c) Non-specification of place where it is drawn or place
where it is payable;
d) Bears a seal;
e) Designation of particular kind of currency in which
payment is to be made(Section 6, Negotiable
Instruments Law)
NOTE: Date may be inserted by the holder in the following
instances: when date is necessary in order to determine the
maturity of the instrument. Examples (1) where an instrument
expressed to be payable at a fixed period after is issued undated
(2) where the acceptance of an instrument payable at a fixed
period after sight is undated. (Sundiang and Aquino. Reviewer
on Commercial Law [2014].)
Q: When is an instrument payable to bearer? (Bar
1997, 2002)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 9. When payable to bearer. - The instrument is
payable to bearer:
a) When it is expressed to be so payable; or
b) When it is payable to a person named therein or
bearer; or
c) When it is payable to the order of a fictitious or
non-existing person, and such fact was known to
the person making it so payable; or
d) When the name of the payee does not purport to be
the name of any person; or
e) When the only or last indorsement is an
indorsement in blank.
NOTE: In letter (c), the payee need not be actually fictitious or
non-existent. It can still be payable to bearer even if the payee
is existing if the maker or drawer does not intend the payee to
have any right over the instrument (Sundiang and Aquino.
Reviewer on Commercial Law [2014].)
Topic: Instrument Payable to Bearer (Bar 1997, 2002)
Q: A delivers a bearer instrument to B. B then
specially indorses it to C and C later indorses it in
blank to D. E steals the instrument from D and,
forging the signature of D, succeeds in ―negotiating‖ it
to F who acquires the instrument in good faith and for
value.
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a) If, for any reason, the drawee bank refuses to
honor the check, can F enforce the instrument
against the drawer?
b) In case of the dishonor of the check by both
the drawee and the drawer, can F hold any of
B, C and D liable secondarily on the
instrument?
a) Yes. The instrument was payable to bearer as it was a
bearer instrument. It could be negotiated by mere delivery
despite the presence of special indorsements. The forged
signature is unnecessary to presume the juridical relation
between or among the parties prior to the forgery and the
parties after the forgery. The only party who can raise the
defense of forgery against a holder in due course is the
person whose signature is forged.
b) Only B and C can be held liable by F. The instrument at the
time of the forgery was payable to bearer, being a bearer
instrument. Moreover, the instrument was indorsed in
blank by C to D. D, whose signature was forged by E
cannot be held liable by F.
Q: When may blanks be filled in a negotiable
instrument? (Bar 1997, 2004, 2006, 2005, 2008)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 14. Blanks; when may be filled. - Where the
instrument is wanting in any material particular, the person
in possession thereof has a prima facie authority to complete
it by filling up the blanks therein. And a signature on a blank
paper delivered by the person making the signature in order
that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill it up as
such for any amount. In order, however, that any such
instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it
must be filled up strictly in accordance with the authority
given and within a reasonable time. But if any such
instrument, after completion, is negotiated to a holder in
due course, it is valid and effectual for all purposes in his
hands, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a
reasonable time.
According to Sec. 14 of the Negotiable Instruments Law,
a person in possession of a negotiable instrument has a prima
facie authority to fill it up when it is found wanting of any
material particular.
NOTE:
Right of a holder in due course: the defense that the
instrument had not been filled up in accordance with the
authority given and within a reasonable time is not available as
against a holder in due course.
Topic: Blanks in a Negotiable Instrument (Bar 1997, 2004,
2006, 2005, 2008)
Q: AB Corporation drew a check for payment to XY
Bank. The check was given to an officer of AB
Corporation who was instructed deliver it to XY Bank.
Instead, the officer intending to defraud the
Corporation, filled up the check by making himself as
the payee and delivered it to XY Bank for deposit to
his personal account. XY Bank debited AB
Corporation’s account. AB Corporation came to know
of the officer’s fraudulent act after he absconded. AB
Corporation asked XY Bank to recredit its amount. XY
Bank refused.
A) If you were the judge, what issues would you
consider relevant to resolve the case? Explain.
B) How would you decide the case? Explain.
Answer:
A) The filling up by the officer of his name as payee does
not constitute forgery, and contemplates a
mechanically incomplete but delivered instrument.
Under Sec. 14 of the NIL, in order to enforce an
incomplete but delivered instrument against a prior
party, it must be filled-up strictly in accordance with
the authority given. The doctrine of comparative
negligence provides that AB Corp. is deemed negligent
for having issued the check with a blank payee section
that facilitated the fraud; it should be AB Corp. that
must bear the loss, and not XY Bank.
B) I would find AB Corp. liable for its negligence in
delivering an incomplete instrument to XY Bank (Sec.
14, NIL).
Q: What is the effect of an incomplete and undelivered
instrument? (Bar 2000, 2006)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it 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.
In Ching v. Nicdao, where the complainant admitted that the
check in his possession was a blank check and was
subsequently completed by him alone without authority from
the petitioner. The Court stated that inasmuch as the check was
incomplete and undelivered in the hands of the complainant,
he did not acquire any right or interest and cannot, therefore,
assert any cause of action founded on said stolen check.(Ching
v. Nicdao and Court of Appeals, G.R. No. 141181 [April 27,
2007]).
NOTE: Non-delivery of an incomplete instrument is a real
defense (Sec. 15, NIL) (Sundiang and Aquino. Reviewer on
Commercial Law [2014].)
Q: What are the rules to be followed when the
language of the instrument is ambiguous or has
omissions?
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
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Sec. 17. Construction where instrument is ambiguous. -
Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction
apply:
a) Where the sum payable is expressed in words and
also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum
payable; but if the words are ambiguous or
uncertain, reference may be had to the figures to fix
the amount;
b) Where the instrument provides for the payment of
interest, without specifying the date from which
interest is to run, the interest runs from the date of
the instrument, and if the instrument is undated,
from the issue thereof;
c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
d) Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail;
e) Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may
treat it as either at his election;
f) Where a signature is so placed upon the instrument
that it is not clear in what capacity the person
making the same intended to sign, he is to be
deemed an indorser;
g) Where an instrument containing the word "I
promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable
thereon.
Q: When is a signature forged? What is the effect of a
forged signature? (Bar 1990, 1997, 1999, 2004, 2006,
2008)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 23. Forged signature; effect of. - When a signature is
forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of
authority.
NOTE: The persons precluded from setting up the defense of
forgery are the following:
1) Those who by their acts, silence, or negligence, are
estopped from setting up the defense of forgery and
2) Those who warrant or admit the genuineness of the
signatures in question, namely: indorsers, acceptors
and persons negotiating by delivery.(Lex Pareto 2014)
Rules in relation to forgery:
1) Only the forged signature is wholly inoperative not the
instrument itself, and not the genuineness signatures;
2) In case of forgery of an indorsement of an instrument
payable to order, it is not only the person whose
signature was forged who would not be liable but also
the parties prior to such person. Payment under a
forged indorsement is not to the drawer’ s order.
3) Despite the forgery of the signature, there may be
parties who shall be precluded from setting up forgery
(see above)
4) The general rule is that in case of forgery of the
indorsement of the payee of the check the drawee
bank cannot debit the drawer’s account and that loss
shall be borne by the drawee bank. The depositary or
collecting bank is liable to the drawee in case of forged
indorsement because it guarantees all prior
indorsement.
5) If the signature of the drawer in a check is forged, the
drawer cannot charge the account of the drawer and
the drawee cannot recover from the collecting bank.
(Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
Q: What is the presumption when a negotiable
instrument is issued? (Bar 2000, 2009)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
Q: What is the effect of absence or failure of
consideration? (Bar 1996, 2007)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 28. Effect of want of consideration. - Absence or
failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is
an ascertained and liquidated amount or otherwise.
Absence or failure of consideration is a personal defense.
Personal defense being only available against the holder who
stands in privity with the party who is entitled to set up or
those who are not or do not have the rights of a holder in due
course. Sundiang and Aquino. Reviewer on Commercial Law
[2014].)
NOTE: These are only personal defenses. However, with
respect to illegality, the exceptional case when it is a real
defense is if the statute declares the instrument void for any
purpose. Sundiang and Aquino. Reviewer on Commercial Law
[2014].)
Topic: Failure of Consideration (Bar 1996, 2007)
Q: On March 1, 1996, Pentium Company ordered a
computer from CD Bytes, and issued a crossed check
in the amount of P30,000 post-dated Mar 31, 1996.
Upon receipt of the check, CD Bytes discounted the
check with Fund House. On April 1, 1996, Pentium
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stopped payment of the check for failure of CD Bytes
to deliver the computer. Thus, when Fund House
deposited the check, the drawee bank dishonored it. If
Fund House files a complaint against Pentium and CD
Bytes for the payment of the dishonored check, will
the complaint prosper? Explain.
The complaint against Pentium will not prosper. The check it
issued to CD Bytes was crossed and this should have put Fund
House on inquiry. The crossing of a check should have the
following effects:
a) the check may not be encashed but only deposited in
the bank;
b) the check may be negotiated only once — to one who
has an account with a bank;
c) and the act of crossing the check serves as warning to
the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the
check pursuant to that purpose, otherwise, he is not a
holder in due course. (Bataan Cigar and Cigarette
Factory vs. CA, et al , GR No. 93048 [March 3, 1994])
Since CD Bytes failed to deliver the computer, Pentium had the
right to stop payment of the check it delivered to CD Bytes.
Fund House was not a holder in due course of the check.
However, the complaint against CD Bytes will prosper. Being
primarily liable of delivering the check to Fund House and
receiving compensation for it, CD Bytes should be held liable
for the amount it garnered from Fund House.
Q: Who is an accommodation party? State the
liabilities of an accommodation party.(Bar 1998, 1996,
2005, 2008)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 29. Liability of accommodation party. - An
accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument
to a holder for value, notwithstanding such holder, at the
time of taking the instrument, knew him to be only an
accommodation party.
An accommodation party is one who has signed the
instrument as maker, drawer or acceptor or indorser without
receiving value therefore for the purpose of lending his name to
some other person.
An accommodation party is liable to holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party. The
fourth condition in Sec. 52(d) of the NIL (Lack notice in the
infirmity of the instrument or defect in the title of the person
negotiating it), has no application but only with respect to
absence of consideration.
NOTE: A corporation cannot act as an accommodation party.
The issue or endorsement of negotiable instrument by a
corporation without consideration and for the accommodation
of another is ultra vires. (Crisologo vs. CA, 117 SCRA 594)
Sundiang and Aquino. Reviewer on Commercial Law [2014].)
Q: What does negotiation mean? (Bar 1995, 1997,
2002)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 30. What constitutes negotiation. - An instrument is
negotiated when it is transferred from one person to another
in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the
holder and completed by delivery.
Negotiation is the transfer of an instrument from one person
to another in such a manner as to constitute the transferee a
holder thereof. A holder is the payee or indorsee of a bill or
note who is in possession of it, or the bearer there of (Sec 30
and 191, NIL) (Sundiang and Aquino. Reviewer on
Commercial Law [2014].)
If payable to bearer, it is negotiated by delivery. If payable to
order, it is negotiated by the indorsement of the holder and
completed by delivery. (Lex Pareto 2014)
NOTE: The negotiability of an instrument is determined by
considering the instrument in its entirety and only what
appears on its face. It must comply with the requirements
under Section 1 of the NIL (CaltePhils v Ca, 212 SCRA 448)
(Sundiang and Aquino. Reviewer on Commercial Law
[2014].)
Q: Who is a holder in due course? (Bar 1993, 2007)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 59. Who is deemed holder in due course. - Every
holder is deemed prima facie to be a holder in due course;
but when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on
the holder to prove that he or some person under whom he
claims acquired the title as holder in due course. But the
last-mentioned rule does not apply in favor of a party who
became bound on the instrument prior to the acquisition of
such defective title.
Q: What constitutes a holder in due course? (Bar
1993, 1994, 1996, 2000)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 52. What constitutes a holder in due course. - A holder
in due course is a holder who has taken the instrument
under the following conditions:
a) That it is complete and regular upon its face;
b) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
c) That he took it in good faith and for value;
d) That at the time it was negotiated to him, he had no
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notice of any infirmity in the instrument or defect
in the title of the person negotiating it.
Topic: Holder in due course (Bar 1993, 1994, 1996, 2000)
Q: X makes a promissory note for P10,000 payable to
A, a minor, to help him buy school books. A endorses
the note to B for value, who in turn endorses the note
to C. C knows A is a minor. If C sues X on the note, can
X setup the defenses of minority and lack of
consideration?
Yes. C is not a holder in due course. To be a holder in due
course, the instrument should be complete and regular upon its
face. To be considered complete and regular, Section 1(d) of
the Negotiable Instruments Law provide that it must be
payable to order or bearer. The promissory note is not a
negotiable instrument as it does not contain any word of
negotiability, that is, order or bear, or words of similar
meaning or import. The promissory note not being a negotiable
instrument constitutes C not being a holder in due course.
Thus, C is to subject such personal defenses of minority and
lack of consideration. C is a mere assignee who is subject to all
defenses.
Alternative Answer: No. X cannot set up the defense of the
minority of A. The defenseof minority is available to the minor
only. Such defense isnot available to X.(Section 22, Negotiable
Instruments Law)
Sec. 1. Form of negotiable instruments. - An instrument to be
negotiable must conform to the following requirements:
a) It must be in writing and signed by the maker or
drawer;
b) Must contain an unconditional promise or order to
pay a sum certain in money;
c) Must be payable on demand, or at a fixed or
determinable future time;
d) Must be payable to order or to bearer; and
Q: What are the rights of a holder in due course? (Bar
1998, 2007, 2009)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 57. Rights of holder in due course. - A holder in due
course holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties
liable thereon.
The rights of a holder in due course are the following:
a) A holder in due course holds the instrument free
from any defect of title of prior parties
b) Free from defenses available to prior parties among
themselves; and
c) May enforce payment of the instrument for the full
amount thereof against all parties liable thereon (Lex
Pareto, 2014).
NOTE: A holder in due course is free from personal defenses
but is not free from real defenses.
GENERAL RULE: A holder not in due course is subject to
personal and real defenses.
EXCEPTION: A holder who is not a holder in due course but he
derived title from a holder in due course. (Sec. 58, NIL)
Topic: Rights of a Holder in Due Course (Bar 1998, 2007,
2009)
Q: R issued a check for P1m which he used to pay S for
killing his political enemy.
A. Can be the check be considered a negotiable
instrument?
B. Does S have a cause of action against R in case
of dishonor by the drawee bank?
C. It S negotiated the check to T, who accepted it
in good faith and for value, may R be held
secondarily liable by T?Reason Briefly in (a),
(b) and (c).
(A) Yes, the check can be considered a negotiable instrument
even if it was issued to pay S to kill his political enemy. The
validity of the consideration is not one of the requisites of
a negotiable instrument(Section 1, Negotiable Instruments
Law.) it merely constitute a defect of title (Section 55,
Negotiable Instruments Law).
(B) No, S does not have a cause of action against R in case of
dishonor of the check by the drawee bank. S is not a holder
in due course, thus, R can raise the defense that the check
was issued for an illegal consideration (Section 58,
Negotiable Instruments Law).
(C) Yes, R may be held secondarily liable by T who took the
check in good faith and for value. T is a holder in due
course. R cannot raise the defense of illegality of the
consideration, because T took the check from the defect of
title of S (Section 57, Negotiable Instruments Law).
Q: What are the liabilities of a maker? (Bar 1990,
1995, 2001)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 60. Liability of maker. - The maker of a negotiable
instrument, by making it, engages that he will pay it
according to its tenor, and admits the existence of the payee
and his then capacity to indorse.
The primary liabilities of the maker are the following:
1) engages to pay according to the tenor of the
instrument; and
2) admits the existence of the payee and his capacity to
endorse. (Sundiang and Aquino. Reviewer on
Commercial Law [2014].)
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Topic: Liabilities in a Negotiable Instrument (Bar 1990,
1995, 2001)
Q: A issued a promissory note payable to B or bearer.
A delivered the note to B. B indorsed the note to C. C
placed the note in his drawer, which was stolen by the
janitor X. X indorsed the note to D by forging C’s
signature. D indorsed the note to E who in turn
delivered the note to F, a holder in due course,
without indorsement. Discuss the individual liabilities
to F of A, B and C.
A is liable to F. As the maker of the promissory note, A is
directly or primarily liable to F, who is a holder in due course.
Section 60 of the Negotiable Instruments Law provides
that, “The maker of a negotiable instrument, by making it,
engages that he will pay it according to its tenor, and admits
the existence of the payee and his then capacity to indorse.”
The instrument is a bearer instrument and thus, A is to be held
liable for the instrument by anyone holding it until it is
indorsed restrictively.
B, as a general indorser, is liable to F secondarily, and warrants
that the instrument is genuine and in all respects what it
purports to be; that he has good title to it; that all prior parties
had capacity to contract; that he has no knowledge of any fact
which would impair the validity of the instrument or render it
valueless; that at the time of his indorsement, the instrument is
valid and subsisting; and that on due presentment, it shall be
accepted or paid, or both, according to its tenor, and that if it
be dishonored and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay.(Section
66, Negotiable Instruments Law)
C is not liable to F since the latter cannot trace his title to the
former. The signature of C in the supposed indorsement by him
to D was forged by X. C can raise the defense of forgery since it
was his signature that was forged.(Section 23, Negotiable
Instruments Law)
Q: What are the liabilities of an acceptor? (Bar 1992,
1998)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 62. Liability of acceptor. - The acceptor, by accepting
the instrument, engages that he will pay it according to the
tenor of his acceptance and admits:
a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw
the instrument; and
b) The existence of the payee and his then capacity to
indorse.
The primary liabilities of an acceptor (and drawee who pays
without accepting the instrument) are the following:
1) To engage in paying according to the tenor of his
acceptance;
2) To admit the existence of the drawer, the genuineness
of his signature and his capacity and authority to draw
the instrument; and
3) To admit the existence of the payee and his capacity to
indorse
NOTE: The drawee bank must exercise the highest diligence in
safeguarding the accounts of its client-depositors (Philippine
National Bank vs. Quimpo, 158 SCRA 582)
Q: What are the warranties of a general indorser?
(Bar 2001, 1995, 2005)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 66. Liability of general indorser. - Every indorser who
indorses without qualification, warrants to all subsequent
holders in due course:
a) The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding section; and
b) That the instrument is, at the time of his
indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it
shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it.
Every indorser who indorses without qualification, warrants to
all subsequent holders in due course:
1) That the instrument is genuine and in all respect what
it purports to be
2) That he has a good title to it
3) That all prior parties had capacity to contract
4) That the instrument is at the time of his indorsement
valid and subsisting and
5) He engages that on due presentment, the instrument
shall be accepted or paid, or both, as the case may be
according to its tenor, and that if it be dishonored, be
duly taken, he will pay the amount thereof to the
holder, or to any a subsequent indorser who may be
compelled to pay it. (Lex Pareto 2014)
Topic: Irregular Indorser vs. General Indorser (Bar 2001,
1995, 2005)
Q: Distinguish an irregular indorser from a general
indorser.
An Irregular Indorser, pursuant to Section 64 of the
Negotiable Instruments Law refer to a person, not otherwise a
party to an instrument, but places his signature in blank before
delivery. He is liable in the following instances:
a) If the instrument is payable to the order of a third
person, he is liable to the payee and to all subsequent
parties.
b) If the instrument is payable to the order of the maker
or drawer, or is payable to bearer, he is liable to all
parties subsequent to the maker or drawer.
c) If he signs for the accommodation of the payee, he is
liable to all parties subsequent to the payee.
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Meanwhile, a General Indorser, according to Sec. 66 of
the Negotiable Instruments, refers to a person who
indorses without qualification, and warrants to all subsequent
holders in due course:
a) The matters and things mentioned in subdivisions
i) That the instrument is genuine and in all
respects what it purports to be),
ii) That he has a good title to it), and
iii) That all prior parties had capacity to
contract) of Section 65; and
b) That the instrument is, at the time of his indorsement,
valid and subsisting;
And, in addition, he engages that, on due presentment, it shall
be accepted or paid, or both, as the case may be, according to
its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may
be compelled to pay it.
Q: What are the requisites of a sufficient presentment
for payment? (Bar 1994, 2002)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 72. What constitutes a sufficient presentment. -
Presentment for payment, to be sufficient, must be made:
a) By the holder, or by some person authorized to
receive payment on his behalf;
b) At a reasonable hour on a business day;
c) At a proper place as herein defined;
d) To the person primarily liable on the instrument, or
if he is absent or inaccessible, to any person found
at the place where the presentment is made.
NOTE: Reasonable time means not more than six (6)
months from the date of issue. Beyond this period, it is
unreasonable time and the negotiable instrument (check)
becomes stale. (Lex Pareto 2014)
to the obligation of a party. In other words, a material
alteration is one which changes the items which are required to
be stated under Section 1 of NIL. (Lex Pareto 2014)
Alteration of the serial number of a check does not constitute
material alteration. Serial number is not an essential requisite
for negotiability under Section 1 of NIL, and does not change
the relationship of the parties (PNB v. CA 256 SCRA 491) (Lex
Pareto 2014)
Effect of material alteration – it avoids the instrument,
except as against the party who made, authorized, or assented
to the alteration and subsequent indorsers. A holder in due
course can enforce it according to its original tenor. (Sundiang
and Aquino. Reviewer on Commercial Law [2014].)
As to altered checks, the new rules provide that the drawee
bank can still return them even after 4:00 p.m. of the next day
provided it does so within twenty four hours from discovery of
the alteration but in no event beyond the period fixed or
provided by law for the filing of a legal action by the returning
bank against the bank securing the same (Central Bank
Circular No. 580, dated September 19, 1977)
Q: What is a check? (Bar 1991, 1994, 1995, 1996, 2002,
2004, 2005)
NEGOTIABLE INSTRUMENTS LAW (ACT 2031)
Sec. 185. Check, defined. - A check is a bill of exchange
drawn on a bank payable on demand. Except as herein
otherwise provided, the provisions of this Act applicable to a
bill of exchange payable on demand apply to a check.
A check is a bill of exchange drawn on a bank payable on
demand. (Sundiang and Aquino. Reviewer on Commercial
Law [2014].)
NOTE: Bill of exchange vs. Check

Q: What is an altered instrument and what is its Ordinary bill of Check

effect? (Bar 2000, 2002) exchange
Not drawn on a deposit. It is
NEGOTIABLE INSTRUMENTS LAW (ACT 2031) not necessary that a drawer
Sec. 124. Alteration of instrument; effect of. - Where a of a bill of exchange should
negotiable instrument is materially altered without the have funds in the hands of
assent of all parties liable thereon, it is avoided, except as the drawee.
against a party who has himself made, authorized, or Death of the drawer of a bill
assented to the alteration and subsequent indorsers. of exchange with the
knowledge of the bank, does
But when an instrument has been materially altered and is not revoke the authority of
in the hands of a holder in due course not a party to the the banker to pay.
alteration, he may enforce payment thereof according to its May be presented for
original tenor. payment within a reasonable
time after its last negotiation
Alteration is said to be material if it alters the effect of the (Sec. 71)
instrument. It means the unauthorized change in an
instrument that purports to modify in any respect the
obligation of party or an unauthorized addition of words or
numbers or other change to an incomplete instrument relating SECURITIES REGULATION CODE (R.A. 8799)
It is necessary that a check is
drawn on a deposit.
Otherwise, there would be
fraud.
Death of the drawer of a
check, with knowledge by
the bank revokes the
authority of the banker to
pay.
Must be presented for
payment within a reasonable
time after its issue (Sec. 186)
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Q: What are Securities? (Bar 1996, 2010)
SECURITIES REGULATION CODE (R.A. 8799)
Section 3. Definition of Terms. –
3.1. "Securities" are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character. It
includes:
a) Shares of stocks, bonds, debentures, notes
evidences of indebtedness, asset-backed securities;
b) Investment contracts, certificates of interest or
participation in a profit sharing agreement,
certifies of deposit for a future subscription;
c) Fractional undivided interests in oil, gas or other
mineral rights;
d) Derivatives like option and warrants;
e) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments
f) Proprietary or nonproprietary membership
certificates in corporations; and
g) Other instruments as may in the future be
determined by the Commission.
An investment contract is a contract, transaction, or
scheme where a person invests his money in a common
enterprise and is led to expect profits primarily from the efforts
of others. (Securities and Exchange Commission v.
Prosperity.com, Inc., G.R. No. 164197 [January 25, 2012]).
The requisites of an investment contract are:
a) An investment of money;
b) In a common enterprise,
c) With expectation of profits,
d) Primarily from efforts of others. (Power Homes
Unlimited Corp vs. SEC, G.R. No. 164182, February
26, 2008)
Q: Who are considered “insiders”? (Bar 1994, 1995,
2004, 2008)
SECURITIES REGULATION CODE (R.A. 8799)
Section 3. Definition of Terms. xxx
3.8. "Insider" means
a) the issuer;
b) a director or officer (or any person performing
similar functions) of, or a person controlling the
issuer;
c) gives or gave him access to material information
about the issuer or the security that is not generally
available to the public;
d) A government employee, director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material
information about an issuer or a security that is not
generally available to the public; or
e) a person who learns such information by a
communication from any forgoing insiders.
Q: Which instrumentality has jurisdiction over cases
enumerated under Section 5 of PD 902-A? (Bar 1994,
1995, 1996, 1997, 1999, 2006, 2009)
SECURITIES REGULATION CODE (R.A. 8799)
Section 5. Powers and Functions of the Commission- xxx
5.2. The Commission’s jurisdiction over all cases
enumerated under section 5 of Presidential Decree No. 902-
A is hereby transferred to the Courts of general jurisdiction
or the appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may designate
the Regional Trial Court branches that shall exercise
jurisdiction over the cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution which should be
resolved within one (1) year from the enactment of this
Code. The Commission shall retain jurisdiction over pending
suspension of payment/rehabilitation cases filed as of 30
June 2000 until finally disposed.
NOTE: The following cases are now under the jurisdiction of
the RTC:
a) Devices or schemes employed by or any acts, of the
board of directors, business associates, its officers
or partnership, amounting to fraud and
misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder,
partners, members of associations or organizations
registered with the Commission.
b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members, or associates; between any
or all of them and the corporation, partnership or
association of which they are stockholders,
members or associates, respectively; and between
such corporation, partnership or association and
the state insofar as it concerns their individual
franchise or right to exist as such entity;
c) Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations.(Section
5 of P.D. 902-A)
An intra-corporate controversy is one which pertains to
any of the following relationships:
1) between the corporation, partnership or association
and the public;
2) between the corporation, partnership or association
and the State insofar as its franchise, permit or license
to operate is concerned;
3) between the corporation, partnership or association
and its stockholders, partners, members or officers;
and
4) among the stockholders, partners or associates
themselves. Thus, under the relationship test, the
existence of any of the above intra-corporate relations
makes the case intra-corporate.
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Under the nature of the controversy test, "the controversy
must not only be rooted in the existence of an intra-corporate
relationship, but must as well pertain to the enforcement of the
parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-corporate
regulatory rules of the corporation." In other words,
jurisdiction should be determined by considering both the
relationship of the parties as well as the nature of the question
involved. (Medical Plaza Makati Condominium
Corporation, v. Robert H. Cullen, G.R. No. 181416 [November
11, 2013]).
Q: What is a “tender offer”? What are the instances
where tender offer is mandatory? (Bar 2002, 2010)
Tender offer is a publicly announced intention by a person
acting alone or in concert with other persons to acquire equity
securities of a public company. (Cemco Holdings, Inc., v.
National Life Insurance Company Of The Philippines, Inc.,
G.R. No. 171815 [August 7, 2007]).
A tender offer is mandatory in the following circumstances:
a) Any person or group of persons acting in concert, who
intends to acquire 35% or more of equity shares in a
public company.
(Note: They must disclose their intention to acquire
the shares contemporaneously with the tender offer.)
b) Any person or group of persons acting in concert, who
intends to acquire 35% or more of equity shares in a
public company in one or more transactions within a
period of 12 months.
c) If any acquisition of even less than 35% would result
in ownership of over 51% of the total outstanding
equity securities of a public company. [SRC Rule 19(2)
(a) – (c)]
Q: What happens when a beneficial owner, director or
officer gains profit from unfair use of information?
(Bar 1994, 1995)
SECURITIES REGULATION CODE (R.A. 8799)
Section 23. Transactions of Directors officers and
Principal Stockholders.- xxx
23.2. For the purpose of preventing the unfair use of
information which may have been obtained by such
beneficial owner, director or officer by reason of his
relationship to the issuer, any profit realized by him from
any purchase or sale, or any sale or purchase, of any equity
security of such issuer within any period of less than (6)
months unless such security was acquired in good faith in
connection with a debt previously contracted, shall inure to
and be recoverable by the issuer, irrespective of any
intention of holding the security purchased or of not
repurchasing the security sold for a period exceeding six (6)
months. Suit to recover such profit may be instituted before
the Regional Trial Court by the issuer, or by the owner of
any security of the issuer in the name and in behalf of the
issuer if the issuer shall fail or refuse to bring such suit
within sixty (60) days after request or shall fail diligently to
prosecute the same thereafter, but not such shall be brought
more than two years after the date such profit was realized.
This Subsection shall not be construed to cover any
transaction were such beneficial owner was not such both
time of the owner or the sale, or the sale of purchase, of the
security involved, or any transaction or transactions which
the Commission by rules and regulations may exempt as not
comprehended within the purpose of this subsection.
According to Section 23 of the Securities Regulation
Code, any profit realized due to the unfair use of information
by a beneficial owner, director or officer by reason of his
relationship to the issuershall inure to and be recoverable by
the issuer, irrespective of any intention of holding the security
purchased or of not repurchasing the security sold for a period
exceeding six (6) months.
NOTE: A “shortswing” is a transaction where a person buys
securities and sells or disposes of the same within a period of
six months.
Q: What acts are prohibited under the Securities
Regulation Code? (Bar 2001)
Under Sec. 24 of the SRC, the following are the prohibited
acts:
1) Creating false or misleading appearance of active trading
[Sec. 24.1(a)]
2) Series of transactions intended to raise/depress prices
[Sec. 24.1(b)]
a) Making the close – buying and selling at the close
of the market to alter the closing price of the
security
b) Painting the tape – engaging in a series of
transaction in securities that are reported
publicly to give the impression of activity or price
movement in a security
c) Squeezing the float – taking advantage of a
shortage of securities in the market by controlling
the demandside and exploiting the market
congestion during such shortages in a way as to
create artificial prices
d) Hype and dump – engaging in buying activity at
increasingly higher prices and then selling
securities in the market at the higher prices
e) Boiler room operations – use of high pressure
sales to sell stocks to clients who are “cold called”
or called randomly, most likely after being picked
out of a phone directory.
3) Dissemination of false or misleading information [Sec.
24.1 (c)]
4) False or misleading statements with respect to material
facts [SRC Sec. 24.1(d)]
5) Fixing, pegging or stabilizing the price of securities – [SRC
24.1(e)]
A wash sale occurs when a customer enters a purchase order
and a sale order at the same time through the same
broker/dealer. The ownership of the stock does not change.
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This would normally be done to create the appearance of
activity in a security. (U.S. v. Minuse, 114 F. d. 36, 38 [1940].)
Q: What is the insider’s duty when trading? (Bar
2004, 2008)
According to Sec. 27 of the Securities Regulation Code,
the insider has the duty to disclose when trading. Thus, it shall
be unlawful for an insider to do the following:
(A) to sell or buy a security of the issuer, while in possession of
material information with respect to the issuer or the
security that is not generally available to the public,
unless:
d) The insider proves that the information was not
gained from such relationship; or
e) If the other party selling to or buying from the
insider (or his agent) is identified, the insider
proves:
(i) that he disclosed the information to the
other party, or
(ii) that he had reason to believe that the
other party otherwise is also in
possession of the information.
(B) To communicate material nonpublic information about
the issuer or the security to any person who by virtue of
the communication becomes an insider, where the insider
communicating the information knows or has reason to
believe that such person will likely buy or sell a security of
the issuer whole in possession of such information
(C) where a tender offer has commenced or is about to
commence for:
a) Any person (other than the tender offeror) who
is in possession of material nonpublic
information relating to such tender offer, to buy
or sell the securities of the issuer that are sought
or to be sought by such tender offer if such
person knows or has reason to believe that the
information is nonpublic and has been acquired
directly or indirectly from the tender offeror,
those acting on its behalf, the issuer of the
securities sought or to be sought by such tender
offer, or any insider of such issuer; and
b) Any tender offeror, those acting on its behalf,
the issuer of the securities sought or to be
sought by such tender offer, and any insider of
such issuer to communicate material nonpublic
information relating to the tender offer to any
other person where such communication is
likely to result in a violation of Subsection 27.4
(a)(i).
NOTE: “The insider's misuse of nonpublic and undisclosed
information is the gravamen of illegal conduct. The intent of
the law is the protection of investors against fraud, committed
when an insider, using secret information, takes advantage of
an uninformed investor. Insiders are obligated to disclose
material information to the other party or abstain from trading
the shares of his corporation. This duty to disclose or abstain is
based on two factors: first, the existence of a relationship giving
access, directly or indirectly, to information intended to be
available only for a corporate purpose and not for the personal
benefit of anyone; and second, the inherent unfairness involved
when a party takes advantage of such information knowing it is
unavailable to those with whom he is dealing.” (Securities And
Exchange Commission, v. Interport Resources Corporation,
et.al, G.R. No. 135808 [October 6, 2008]).
TRANSPORTATION LAWS
Q: What are common carriers? (Bar 1996, 1997,
2000, 2002, 2008)
COMMON CARRIER - CIVIL CODE PROVISIONS
Article 1732. Common carriers are persons, corporations,
firms or associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or
air, for compensation, offering their services to the public.
Q: What degree of diligence is required of common
carriers? (Bar 2002, 2005, 2008)
COMMON CARRIER - CIVIL CODE PROVISIONS
Article 1733. Common carriers, from the nature of their
business and for reasons of public policy, are bound to
observe extraordinary diligence in the vigilance over the
goods and for the safety of the passengers transported by
them, according to all the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods
is further expressed in articles 1734, 1735, and 1745, Nos. 5,
6, and 7, while the extraordinary diligence for the safety of
the passengers is further set forth in articles 1755 and 1756.
According to Art. 1733 of the Civil Code, extraordinary
diligence is expected of common carriers on the vigilance over
the goods and for the safety of its passengers.
“The extraordinary diligence in the vigilance over the goods
tendered for shipment requires the common carrier to know
and to follow the required precaution for avoiding damage to,
or destruction of the goods entrusted to it for safe carriage and
delivery. It requires common carriers to render service with the
greatest skill and foresight and ‘to use all reasonable means to
ascertain the nature and characteristic of goods tendered for
shipment, and to exercise due care in the handling and stowage
including such methods as their nature requires.’” (Compania
Maritima v. Court of Appeals and Concepcion, G.R. No. L-
31379 [August 29, 1988]).
“Under Article 1733 of the Civil Code, common carriers are
required to observe extraordinary diligence for the safety of the
passenger transported by them, according to all the
circumstances of each case. The requirement of extraordinary
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diligence imposed upon common carriers is restated in Article
1755: "A common carrier is bound to carry the passengers
safely as far as human care and foresight can provide, using the
utmost diligence of very cautious persons, with due regard for
all the circumstances." Further, in case of death of or injuries to
passengers, the law presumes said common carriers to be at
fault or to have acted negligently.” (Pilapil v. Court of Appeals
and Alatco Transportation Company, Inc., G.R. No. 52159
[December 22, 1989]).
Q: What events exempt a common carrier from
liability? (Bar 1994, 1995, 1996, 1997, 2001, 2008)
The general rule is that common carriers are responsible for
the loss, destruction or deterioration of goods. There is a
presumption of negligence on their part. However, common
carriers are exempted from liability if the loss, destruction or
deterioration of goods are due to the following causes:
1) Flood, storm, earthquake, lightning, or other natural
disaster or calamity;
2) Act of the public enemy in war, whether international
or civil;
3) Act or omission of the shipper or owner of the goods;
4) The character of the goods or defects in the packing or
in the containers;
5) Order or act of competent public authority.(Article
1734, Civil Code)
Q: Is a stipulation limiting a common carrier’s liability
to the value of goods appearing in the bill of lading
binding? (Bar 1998, 2002)
COMMON CARRIER - CIVIL CODE PROVISIONS
Article 1749. A stipulation that the common carrier's
liability is limited to the value of the goods appearing in the
bill of lading, unless the shipper or owner declares a greater
value, is binding.
A stipulation limiting a common carrier’s liability to the value
of goods appearing in the bill of lading is binding, unless the
shipper or owner declares a greater value. The purpose of
limiting the liability based on what is stated in the bill of lading
is to protect the common carrier.
Q: What is the responsibility of a common carrier?
(Bar 1996, 2009)
COMMON CARRIER - CIVIL CODE PROVISIONS
Article 1755. A common carrier is bound to carry the
passengers safely as far as human care and foresight can
provide, using the utmost diligence of very cautious persons,
with a due regard for all the circumstances.
A person who is transported gratuitously because he/she won a
riding pass is a passenger under the concept of the law.
Q: What is the presumption in case of death or
injuries to passengers? (Bar 1994, 2013)
COMMON CARRIER - CIVIL CODE PROVISIONS
Article 1756. In case of death of or injuries to passengers,
common carriers are presumed to have been at fault or to
have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in articles 1733 and
1755.
Topic: Carriage; Breach of Contract; Presumption of
Negligence (Bar 1994, 2013)
Q: Fil-Asia Flight 916 was on a scheduled passenger
flight from Manila when it crashed as it landed at the
Cagayan de Oro airport; the pilot miscalculated the
plane’s approach and undershot the runway. Of the
150 people on board, ten (10) passengers died at the
crash scene.
Of the ten who died, one was a passenger who
managed to leave the plane but was run over by an
ambulance coming to the rescue. Another was an
airline employee who hitched a free ride to Cagayan
de Oro and who was not in the passenger manifest.
It appears from the Civil Aeronautics Authority
investigation that the co-pilot who had control of the
plane’s landing had less than the required flying and
landing time experience, and should not have been in
control of the plane at the time. He was allowed to fly
as a co-pilot because of the scarcity of pilots –
Philippine pilots have been recruited by foreign
airlines under vastly improved flying terms and wages
so that newer and less trained pilots are being locally
deployed. The main pilot, on the other hand, had a
very high level of blood alcohol at the time of the
crash.
You are part of the team that the victims hired to
handle the case for them as a group. In your case
conference, the following questions came up:
(A) Explain the causes of action legally possible under
the given facts against the airline and the Pilots;
whom will you specifically implead in these causes
of action?
(B) How will you handle the cases of the passenger
run over the ambulance and the airline employee
allowed to hitch a free ride to Cagayan de Oro?
Answer:
(A) The victims can file a complaint for breach of contract of
carriage against Fil-Asia for its failure to exercise
extraordinary diligence in transporting the passengers
safely from their point of embarkation to their destination
(Article 1755, Civil Code). Also, the victims can file a
complaint based on quasi-delict against the pilots because
of their fault and negligence (Article 2176, Civil Code). Fil-
Asia Air can be included in the suit for their negligence in
the selection and supervision of the pilots (Article 2180,
Civil Code). Lastly, a criminal case for reckless imprudence
resulting in homicide can be filed against the two pilots.
The airline can be held subsidiarily liable for the civil
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liability after the pilots are convicted and found to be
insolvent.
(B) The driver of the ambulance and his employer should be
held liable for damages, because a passenger was run over
in accordance with Articles 2176 and 2180 of the Civil
Code. A criminal case for reckless imprudence resulting in
homicide with the consequent civil liability can be filed
against the ambulance driver. Since the airline employee
was being transported gratuitously, Fil-Asia Air is not
required to exercise extraordinary diligence for his safety
and only ordinary care. (Lara v. Valencia, 104 Phil. 65,
1958).
Q: What is the effect of carriage at a reduced rate or
fare? (Bar 2001, 2009)
COMMON CARRIER - CIVIL CODE PROVISIONS
Article 1758. When a passenger is carried gratuitously, a
stipulation limiting the common carrier's liability for
negligence is valid, but not for wilful acts or gross
negligence. The reduction of fare does not justify any
limitation of the common carrier's liability.
The reduction of fare does not justify any limitation to the
liability of the common carrier.
Q: What is the liability of a common carrier in case of
negligence? (Bar 1997, 2005)
COMMON CARRIER - CIVIL CODE PROVISIONS
Article 1763. A common carrier is responsible for injuries
suffered by a passenger on account of the wilful acts or
negligence of other passengers or of strangers, if the
common carrier's employees through the exercise of the
diligence of a good father of a family could have prevented
or stopped the act or omission.
“A tort committed by a stranger which causes injury to a
passenger does not accord the latter a cause of action against
the carrier. The negligence for which a common carrier is held
responsible is the negligent omission by the carrier's
employees to prevent the tort from being committed when the
same could have been foreseen and prevented by them.
Further, under the same provision, it is to be noted that when
the violation of the contract is due to the willful acts of
strangers, as in the instant case, the degree of care essential to
be exercised by the common carrier for the protection of its
passenger is only that of a good father of a family.” (Pilapil v.
Court of Appeals and Alatco Transportation Company, Inc.,
G.R. No. 52159 [December 22, 1989]).
Q: What is the rule on loss and/or damage of property
entrusted to a common carrier? (Bar 1995, 2000,
2004, 2010)
The rules on loss and/or damage of property entrusted to a
common carrier are as follow:
a) A notice of loss or damage with the general nature of
such loss or damage should be given in writing to the
carrier or his agent at the port of discharge or at the
time of the removal of the goods into the custody of
the person entitled to delivery under the contract of
carriage. The removal shall be considered prima facie
evidence of delivery as described in the bill of lading.
b) The notice in writing need not be given if the state of
the goods has at the time of their receipt been the
subject of joint survey or inspection.
c) If there is patent damage, the shipper should file a
claim with the carrier immediately upon delivery;
d) If there is latent damage, the shipper should file a
claim with the carrier within three days from delivery.
e) An action for loss or damage to the cargo should be
brought within one year after delivery of (damaged)
goods or scheduled date of delivery (in case of non-
delivery). If not, the carrier and the ship shall be
discharged from all liability in respect of loss or
damage.
f) In the case of any actual or apprehended loss or
damage, the carrier and the receiver shall give all
reasonable facilities to each other for inspecting and
tallying the goods.(Section 3(6), Carriage of Goods by
Sea Act)
OTHER LAWS
Q: What can be the subject of a chattel mortgage? (Bar
1999)
CHATTEL MORTGAGE LAW (ACT 1508)
Sec. 2. All personal property shall be subject to mortgage,
agreeably to the provisions of this Act, and a mortgage
executed in pursuance thereof shall be termed chattel
mortgage.
The following can be the subject of a chattel mortgage:
a) All personal or movable properties coonremplated
under Articles 416 and 417 of the New Civil Code
including shares and interest in business
b) Shares of stocks
c) Machinery, if not installed by the owner, not intended
by the owner of the tenement for an industry or work
being carried on in a building or piece of lands; and
does not tend directly to meet the needs of the said
industry or works
d) Vessels
e) Motor Vehicles
f) Buildings, if the chattel mortgage over it is considered
valid as between the parties on the basis of estoppel
bur not against third persons.(Aquino and Sundiang,
Reviewer on Commercial Law [2014])
Q: What are the registration requirements to make a
chattel mortgage binding against third parties? (Bar
1999, 2009)
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The chattel mortgage must be registered in the Chattel
Mortgage Register of the Register of Deeds where the
mortgagor resides or if he resides outside of the Philippines, in
the place where the property is situated. If the place where the
property is situated and the place of residence of the mortgagor
are different, the mortgage must be registered in the registers
of both cities or provinces. (Seciton 4, Chattel Mortgage Law)
NOTE: An affidavit of Good faith is a subscribed statement in
a contract of chattel mortgage wherein the parties severally
swear that the mortgage is made for the purpose of securing
the obligation specified in conditions thereof, and for no other
purpose, and the same is a just and valid obligation and one
not entered into for the purpose of fraud. (Section5, Chattel
Mortgage Law as decribed in Aquino and Sundiang, Reviewer
on Commercial Law [2014]).
Q: What happens after the foreclosure of a chattel
mortgage? (Bar 1996, 1997, 2005, 2008)
CHATTEL MORTGAGE LAW (ACT 1508)
Sec. 14. Sale of property at public auction; Officer's
return; Fees; Disposition of proceeds. — The mortgagee, his
executor, administrator, or assign, may, after thirty days
from the time of condition broken, cause the mortgaged
property, or any part thereof, to be sold at public auction by
a public officer at a public place in the municipality where
the mortgagor resides, or where the property is situated,
provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public
places in such municipality, and the mortgagee, his
executor, administrator, or assign, shall notify the
mortgagor or person holding under him and the persons
holding subsequent mortgages of the time and place of sale,
either by notice in writing directed to him or left at his
abode, if within the municipality, or sent by mail if he does
not reside in such municipality, at least ten days previous to
the sale.
The officer making the sale shall, within thirty days
thereafter, make in writing a return of his doings and file the
same in the office of the register of deeds where the
mortgage is recorded, and the register of deeds shall record
the same. The fees of the officer for selling the property shall
be the same as in the case of sale on execution as provided in
Act Numbered One hundred and ninety, 4 and the
amendments thereto, and the fees of the register of deeds
for registering the officer's return shall be taxed as a part of
the costs of sale, which the officer shall pay to the register of
deeds. The return shall particularly describe the articles
sold, and state the amount received for each article, and
shall operate as a discharge of the lien thereon created by
the mortgage. The proceeds of such sale shall be applied to
the payment, first, of the costs and expenses of keeping and
sale, and then to the payment of the demand or obligation
secured by such mortgage, and the residue shall be paid to
persons holding subsequent mortgages in their order, and
the balance, after paying the mortgages, shall be paid to the
mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer
as required by section sixteen of Act Numbered Eleven
hundred and forty-seven 5 shall be issued by the treasurer of
the municipality where the sale was held to the purchaser
thereof.
The property shall be subjected to a sale at a public auction.
After the sale at public auction, the mortgagor is entitled to the
balance of the proceeds upon satisfaction of the principal
obligation and costs.
GENERAL RULE:
Creditors shall always be entitled to collect the deficiency
judgment. When the proceeds of the sale are insufficient to
cover the debts in an extrajudicial foreclosure of chattel
mortgage, the mortgagee is entitled to claim the deficiency
from the debtor. (SIHI vs. Court of Appeals, 217 SCRA 32)
EXCEPTION:
Recto Law, sale of personal property on installments.
Topic: Chattel Mortgage; Foreclosure (Bar 1997, 2008,
2009)
Q: On January 1, 2008, Al obtained a loan of P10,000
from Bob to be paid on January 30, 2008, secured by
a chattel mortgage on a Toyota motor car. On
February 1, 2008, Al obtained another loan ofP10,000
from Bob to be paid on February 15, 2008. He secured
this by executing a chattel mortgage on a Honda
motorcycle. On the due date of the first loan Al failed
to pay. Bob foreclosed the chattel mortgage but the car
was bidded for P6,000 only. Al also failed to pay the
second loan due on February 15, 2008. Bob filed an
action for collection of sum of money. Al filed a
motion to dismiss claiming that Bob should first
foreclose the mortgage on The Honda motorcycle
before he can file the action for sum of money. Decide
with reasons.
Bob has the legal right to file a collection suit for a sum of
money in lieu of foreclosing on the chattel mortgage. The
preference of which suit to pursue is upon Bob. However, the
filing of the collection suit constitutes a waiver of the chattel
mortgage (Land Settlement and Dev. Corp. v. Carlos, 22 SCRA
202, 1968). Even if the collection suit included the recovery of
the P6,000 deficiency on the first loan, it is valid because
unlike in a pledge the lender has the legal right to recover the
deficiency incurred on the foreclosure of a chattel mortgage
(PAMECA Wood Treatment v. CA, G.R. No. 106435, 14 July
1999).
Q: Can a real estate mortgage be enforced together
with an action for payment of debt? (Bar 2001, 2008)
No. For non-payment of a note secured by mortgage, the
creditor has a single cause of action against the debtor. This
single cause of action consists in the recovery of the credit with
execution of the security. In other words, the creditor in his
action may make two demands, the payment of the debt and
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the foreclosure of the mortgage. But both demands arise from
the same cause, the non-payment of the debt, and, for that
reason, they constitute a single cause of action. Though the
debt and the mortgage constitute separate agreements, the
latter is subsidiary to the former, and both refer to one and the
same obligation. Consequently there exists only one cause of
action for a single breach of that obligation. By allowing the
creditor to file two separate complaints simultaneously or
successively, one to recover his credit and another to foreclose
his mortgage, we will, in effect, be authorizing him plural
redress for a single breach of contract at much cost to the
courts and with so much vexation and oppression to the
debtor.(Danao v. Court of Appeals, G.R. No. 48276
[September 30, 1987]).
Topic: Mortgage; Foreclosure (Bar 2003, 2010, 2012)
Q: Ozamis Paper Corporation secured loans from ABC
Universal Bank in the aggregate principal amount of
P100 million, evidenced by several promissory notes,
and secured by a continuing guaranty of its principal
stockholder Menandro Marquez; a pledge of
Marquez’s shares in the corporation valued at P45
million; and a real estate mortgage over certain
parcels of land owned by Marquez. The corporation
defaulted and the bank extra-judicially foreclosed on
the real estate mortgage. The bank which was the sole
bidder for P75 million, won the award.
(A) Can the bank sue Marquez for the Deficiency
of P25 million? Explain.
(B) If the bank opts to file an action for collection
against the corporation, can it afterwards
institute a real action to foreclose the
mortgage? Explain.
Answer:
(A) Yes, the bank can sue Marquez for the deficiency of
P25million. In an extrajudicial foreclosure of a real estate
mortgage, if the proceeds of the sale are insufficient to pay
the debt, the mortgagee has the right to sue for the
deficiency (Suico Rattan and Buri Interiors, Inc. v. Court
of Appeals, 490 SCRA 560 (2006)).
(B) No, the bank can no longer file an action to foreclose the
real estate mortgage. When it filed a collection case, it was
deemed to have abandoned the real estate mortgage (Bank
of America, NT and SA v. American Realty Corporation,
321 SCRA 659(1999)).
Q: What constitutes a trust receipt transaction? (Bar
2005, 2007, 2008)
A trust receipt transaction is one where the entrustee has
the obligation to deliver to the entruster the price of the sale, or
if the merchandise is not sold, to return the merchandise to the
entruster. There are, therefore, two obligations in a trust
receipt transaction: the first refers to money received under the
obligation involving the duty to turn it over (entregarla) to the
owner of the merchandise sold, while the second refers to the
merchandise received under the obligation to "return" it
(devolvera) to the owner.” (Ng v. People, G.R. No.
173905[April 23, 2010]) (Please see Section 4 of the Trust
Receipts Law)
Q: What remedies are available under to the entruster
under the Trust Receipts Law? (Bar 1997, 2006)
According to Section 13 of the Trust Receipt Law, the
remedies available to the entruster are the following:
(A) If the goods are sold or disposed by the entrustee and the
latter did not remit the proceeds:
1) file estafa case against the entrustee; or
2) file a separate case to collect the proceeds or
money obligation secured by the trust
receipt.
(B) If the goods are unsold and are still with the entrustee:
1) cancel the trust and take possession of the
goods, documents or instruments subject of
the trust;
2) after taking possession sell the goods and
apply the proceeds of the sale to the expenses
of sale and retaking of the goods and the
indebtedness; and
3) as an alternative to retaking possession and
sale, the entruster can file a case to collect
the indebtedness secured by the trust receipt.
(Aquino and Sundiang, Reviewer on
Commercial Law [2014] at p. 397).
NOTE: “…the Trust Receipts Law declares the failure to
turn over the goods or the proceeds realized from the sale
thereof, as a criminal offense punishable under Art. 315 (1)
(b) of the RPC. The law is violated whenever the entrustee or
the person to whom the trust receipts were issued in favor of
fails to:
1) return the goods covered by the trust receipts; or
2) return the proceeds of the sale of the said goods. The
foregoing acts constitute estafa punishable under
Article 315 (1) (b) of the Revised Penal Code.”
(Metropolitan Bank and Trust Company v. Tonda,
G.R. No. 134435 [August 16, 2000]).
Q: What are the 3 distinct but intertwined contract
relationships that are indispensable in a letter of
credit? (Bar 2002, 2008)
1) The contract of sale between the
applicant/buyer/importer and the beneficiary/seller
/exporter;
2) The contract between the applicant/buyer/importer
and the issuing bank;
3) The contract between the beneficiary/seller/exporter
and the issuing bank.(Lex Pareto 2014)
Q: What is a certificate of public convenience? (Bar
1995, 1998)
Certificates of public convenience authorize the operation
of public service within the Philippines whenever the
Commission finds that the operation of the public service
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proposed and the authorization to do business will promote the
public interest in a proper and suitable manner. Provided, That
thereafter, certificates of public convenience and necessity will
be granted only to citizens of the Philippines or of the United
States or to corporations, co-partnerships, associations or
joint-stock companies constituted and organized under the
laws of the Philippines; Provided, That sixty per centum of the
stock or paid-up capital of any such corporations, co-
partnership, association or joint-stock company must belong
entirely to citizens of the Philippines or of the United States:
Provided, further, That no such certificates shall be issued for a
period of more than fifty years.(Section 16(a) The Public
Service Law)
Q: What constitutes “doing business” in the
Philippines under the Foreign Investment Law? (Bar
1995, 2002)
Sec. 3(d) of the Foreign Investment Act of 1991 deems
the following as doing business in the Philippines:
1) soliciting orders,
2) entering into service contracts,
3) opening offices, whether called "liaison" offices or
branches;
4) appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred
eighty (180) days or more; participating in the
management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
and
5) any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization.
NOTE: The phrase "doing business: shall not be deemed to
include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or
the exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such corporation;
nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for
its own account. (Section 3(d), Foreign Investment Act of 1991)
Q: What are the requirements for operation of Public
Utilities? (Bar 2000, 2004)
Art. XII, Section 11 of the 1987 Constitution provides for
the following requirements to operate Public Utilities:
a) Must be a citizen of the Philippines or a corporation
or an association organized under the laws of the
Philippines, at least sixty per centum of whose capital
is owned by such citizens;
b) The franchise, certificate, or authorization shall not be
exclusive in character or for a longer period than fifty
years.
c) It shall be subject to amendment, alteration, or repeal
by the Congress when the common good so requires.
The State shall encourage equity participation in
public utilities by the general public. The participation
of foreign investors in the governing body of any
public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive
and managing officers of such corporation or
association must be citizens of the Philippines.
Topic: Letter of Credit; Liability of a Notifying Bank (Bar
2003, 2008)
Q: X Corporation entered into a contract with PT
Construction Corp. for the latter to construct and
build a sugar mill with six (6) months. They agreed
that in case of delay, PT Construction Corp. will pay X
Corporation P100,000 for every day of delay. To
ensure payment of the agreed amount of damages, PT
Construction Corp. secured from Atlantic Bank a
confirmed and irrevocable letter of credit which was
accepted by X Corporation in due time. One week
before the expiration of the six (6) month period, PT
Construction Corp. requested for an extension of time
to deliver claiming that the delay was due to the fault
of X Corporation. A controversy as to the cause of the
delay which involved the workmanship of the building
ensued. The controversy remained unresolved.
Despite the controversy, X Corporation presented a
claim against Atlantic Bank by executing a draft
against the letter of credit.
a) Can Atlantic Bank refuse payment due to the
unresolved controversy? Explain.
b) Can X Corporation claim directly from PT
Construction Corp.? Explain.
Answer:
a) No, Atlantic Bank cannot refuse payment to the
unresolved controversy between the two companies.
Atlantic Bank is solidarily liable to pay based on the terms
and conditions of the Letter of Credit.An irrevocable letter
of credit is independent of the contract between the buyer-
applicant and the seller-beneficiary. (FEATI Bank c. CA,
G.R. No. 94209, [April 30, 1991]).
b) Yes, X Corporation can claim directly from PT
Construction Corp. The irrevocable letter of credit was
merely a security arrangement that did not replace the
main contract between the two companies. Opening a
letter of credit does not involve a specific appropriation of
money in favor of the beneficiary. It only signifies that the
beneficiary may draw funds up to the designated amount.
It does not mean that a particular sum of money has been
specifically reserved of held in trust.(FEATI Bank c. CA,
G.R. No. 94209, [April 30, 1991]).
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