La Li Lu Le Lo

LETTERS OF CREDIT
A. Definition and Nature of Letter of Credit

DEFINITION

1. Transfield Philippines, Inc. v. Luzon hydro A letter of credit is a written instrument whereby
Corp., 443 SCRA 307 (2004) the writer requests or authorizes the addressee to
pay money or deliver goods to a third person and
assumes responsibility for payment of debt
therefor to the addressee

2. Prudential Bank v. Intermediate Appellate A letter of credit is an engagement by a bank or

Court, 216 SCRA 257 (1992); Bank of Commerce other person made at the request of a customer
v. Serrano 451 SCRA 484 (2005) that the issuer will honor a draft or other demands
for payments or other complaints with the
conditions

3. Art. 2, Uniform Customs & Practice for It is any arrangement, however named or
Documentary Credits described, whereby a bank (issuing bank), acting
at the request and on the instructions of a
customer (applicant) or on its own behalf, binds
itself to:

1. Pay to the order of, or accept and pay

drafts drawn by a third party (Beneficiary),
or
2. Authorize another bank to pay or to
accept and pay such drafts, or
3. Authorizes another bank to negotiate,
against stipulated documents(s),
Provided, the terms and conditions of the credit
are complied with.

NATURE

1. Transfield Philippines, Inc. v. Luzon Hydro A letter of credit is a financial device developed by
Corp., 443 SCRA 307 (2004); Land bank of the merchants as a convenient and relatively safe
Philippines v. Monets Export and Manufacturing mode of dealing with sale of goods to satisfy the
Corp., 453 SCRA 173 (2005) seemingly irreconcilable interest of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the
goods before paying. The use of credits in
commercial transactions serves to reduce the risk
of nonpayment of the purchase price under the
contract for the sale of goods. However, letters of
credits are also used in non-sale settings where
they serve to reduce the risk of non-performance.
Generally credits in the non-sale settings have
come to be known as standby credits

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- The relationship between the beneficiary

and the issuer of a letter of credit is not
strictly contractual, because both privity
and a meeting of the minds are lacking,
yet strict compliance with its terms is an
enforceable right.
- Nor is it a third-party beneficiary contract,
because the issuer must honor drafts
drawn against a letter regardless of
problems subsequently arising in the
underlying contract.
- Since the banks customer cannot draw on
the letter, it does not function as an
assignment by the customer to the
beneficiary.
- Nor, if properly used, is it a contract of
suretyship or guarantee, because it entails
a primary liability following a default.
- Finally, it is not in itself a negotiable
instrument, because it is not payable to
order or bearer and is generally
conditional, yet the draft presented under
it is often negotiable.

B. Parties to a Letter of Credit

1. Bank of America, NT & SA v. Court of a. Buyer/Applicant/Importer procures

Appeals, G.R. No. 105395, 228 SCRA 357 the letter of credit and obliges himself
(1993) to reimburse Issuing Bank upon receipt
of the documents of title
b. Issuing Bank undertakes to pay Seller
upon receipt of the draft and proper
documents if titles and to surrender the
documents to Buyer upon
reimbursement
c. Seller/Beneficiary/Exporter who in
compliance with the contract of sale
ships the goods to Buyer and delivers
the documents of title and draft to the
Issuing Bank to recover payment

The parties may be increased. Modern letters

of credit usually involve bank-to-bank
transactions
a. Advising/notifying bank the
correspondent bank (agent) of the

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issuing bank through which it advises

the beneficiary of the LC
b. Confirming bank bank which, upon
the request of the beneficiary,
confirms the LC issued.
c. Paying bank bank on which the drafts
are to be drawn, which may be the
issuing bank or another bank not in the
city of the beneficiary
d. Negotiating Bank bank in the city of
the beneficiary which buys or
discounts the drafts contemplated by
the LC, if such draft is to be drawn on
the opening bank not in the city of the
beneficiary

1. Rights and Obligations of Parties

BAR QUESTION 2002: Explain the three (3) distinct but intertwined contract relationship that
are indispensable in a letter of credit transaction

1.Between The buyer is the one who Their relationship is

applicant/buyer/importer and procures the letter of governed by the
beneficiary/seller/importer credit while the seller is contract of sale
the one who in
compliance with the
contract of sale ships the
goods to the buyer and
delivers the documents of
title and draft to the
issuing bank to recover
payment for the goods.

2. Between the issuing bank and The issuing bank is the Their relationship is
the beneficiary/seller/exporter one that issues the letter governed by the
of credit and undertakes terms of the LC
to pay the seller upon
receipt of the draft and
proper documents of
title. On the other hand,
the seller surrenders the
document of title to the
bank in compliance with
the terms of the LC.

3. Between the issuing bank and The buyer obliges himself Their relationship is
the applicant/buyer/importer to reimburse the issuing governed by the
bank upon receipt of the terms of the
documents of title. application for the
issuance of the

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letter of credit by
the bank

Liabilites of Correspondent Banks (Feati bank & Trust Company v. Court of Appeals, G.R. No.
94209, 196 SCRA 576 [1991])

Notifying/Advising Bank - Serves as an agent of - Does not incur any

the issuing bank obligation more than
- Warrants the just notifying the
apparent seller/beneficiary of
authenticity of the LC the opening of the LC
after it has determined
its apparent authority
- Not liable for damages
unless the document
on its face is
manifestly fake

Confirming Bank Lends credence to the LC Direct obligation, as if it is the

issued by a lesser-known one which issued the LC
bank

Negotiating Bank Buys the sellers draft and Depends on the stage of the
later on sells the draft to the negotiation:
issuing bank
- Before negotiation
no liability with
respect to the seller.
Merely suggest its
willingness to
negotiate
- After negotiation a
contractual
relationship will arise,
making the bank liable

Paying Bank May either be the issuing Direct obligation

bank or any other bank in the
place of the beneficiary

RELATED JURISPRUDENCE

Feati bank & Trust Company v. Court of - Since a bank deals only with
Appeals, G.R. No. 94209, 196 SCRA 576 documents, it is not in apposition
(1991) to determine whether the
documents required by the letter
of credit re material or superfluous.
The mere fact that the documents
was specified therein readily

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means that the documents is of

vital importance to the buyer
- The absence of any documents
required in the documentary credit
justifies the refusal by the
correspondent bank to negotiate,
accept or pay the beneficiary, as it
is not its obligation to look beyond
the document.

Transfield Philippines, Inc. v. Luzon While the bank is bound to honor the
Hydro Corp., 443 SCRA 307 (2004) credit, it is the beneficiary who has the right
to ask the bank to honor the credit by
allowing him to draw thereon, and not the
buyer

Metropolitan Waterworks v. Daway, - Obligation of the banks issuing the

432 SCRA 559 (2004) letters of credit is solidary with that
of the person or entity requesting
for its issuance, the same being a
direct primary, absolute and
definite undertaking to pay the
beneficiary upon the presentation
of the set of documents required
therein
- Is an issuing bank a guarantor?
No, the concept of guarantee vis--
vis the concept of irrevocable LC is
inconsistent with each other. LCs
are primary obligations and not
security contracts and while they
are security arrangements, they
are not converted thereby into
contracts of guaranty

Prudential Bank v. Intermediate When is the bank entitled to

Appellate Court, G.R. No. 74886, Dec. 8, reimbursement? Once the issuing bank
1992 shall have paid the beneficiary after the
latters compliance with the terms of the
LC. Presentment for acceptance to the
customer/applicant is not a condition sine
qua non for reimbursement

Rodzssen Supply Co. v. Far East Bank What is the consequence of payment upon
and Trust Co., G.R. No. 109087, May 9, an expired LC? An issuing bank which paid
2001 the beneficiary of an expired letter of credit
can recover the payment from the
applicant which obtained the goods from
the beneficiary to prevent unjust
enrichment

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C. Basic Principles of Letter of Credit

1. Doctrine of Independence

BPI v. De Reny Fabric Industries, Inc., L-2481, The relationship of the buyer and the bank is
Oct. 16, 1970 separate and distinct from the relationship of
the buyer and the seller in the main contract;
the bank is not required to investigate if the
contract underlying the LC has been fulfilled or
not because in transactions involving LC,
banks deal only with documents and not
goods

The buyer has no course of action against the

issuing bank

Reliance Commodities, Inc. v. Daewoo What is the effect of the buyers failure to
Industrial Co. Ltd., G.R. No. 100831, Dec 17, procure an LC to the main contract? the LC
1993 is independent from the contract of sale.
Failure of the buyer to open the LC does not
prevent the birth of the Sales Contract

The opening of the LC is only a mode of

payment and is not an essential requisite of
the contract of sale

Insular Bank of Asia & America v. In a contract of loan secured by standby LC,
Intermediate Appellate Court, Nov. 17, 1988 can the partial payments made on the loan be
added in computing the issuing banks liability
under its own standby LC? No, although
these payments could result in the reduction
of the actual amount, which, could ultimately
be collected from the issuing bank, the latters
separate undertaking under its letters of
credit remain. This is because the LC is an
absolute and primary undertaking which is
separate and distinct from the contract
underlying it

2. Fraud Exception Principle

Transfield Philippines, Inc. v. Luzon Hydro - Untruthfulness of a certificate

Corp., 443 SCRA 307 (2004) accompanying a demand for payment
under a standby LC may qualify as fraud
sufficient to support an injunction
against payment
- Exception to the independence
principle

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- Requirements:
a. There is a clear proof of fraud
b. Fraud constitutes fraudulent
abuse of the independent
purpose of the LC and not only
fraud under the main
agreement
c. Irreparable injury might follow
if injunction is not granted or
the recovery of damages would
be seriously damaged

3. Doctrine of Strict Compliance

Feati bank & Trust Company v. Court of The document tendered by the
Appeals, G.R. No. 94209, 196 SCRA 576 seller/beneficiary must strictly conform to the
(1991) terms of the letters of credit. The tender of
documents must include all documents
required by the letter.

Thus, a correspondent bank which departs

from what has been stipulated under the LC
acts on its own risk and may not be thereafter
be able to recover from the buyer or the
issuing bank, as the case may be, the money
thus paid to the beneficiary

MISCELANEOUS PRINCIPLES

What is the duration of LC 1. Upon the period fixed by the parties; or

2. if none is fixed:

a. 6 months from its date if used in the

Philippines
b. 12 months if used abroad (Art. 572,
Uniform Customs & Practice for
Documentary Credits)

Is irrevocable letter of credit and confirmed letter No

of credit synonymous?
In an irrevocable letter of credit, the issuing bank
may not, without the consent of the beneficiary
and the applicant, revoke its undertaking under
the letter

In a confirmed letter of credit, the correspondent

bank gives an absolute assurance to the
beneficiary that it will undertake the issuing
banks obligation as its own according to the terms
and conditions if the credit (Prudential Bank and

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Trust Company v. IAC, G.R. No. 74886, Dec. 8

1992)

Can a court order the release to the applicant the No, it violates the nature of an irrevocable letter
proceeds of an irrevocable letter of credit of credit. The terms of an irrevocable letter of
without the consent of the beneficiary? credit cannot be changed without the consent of
both parties. (Phil. Virginia Tobacco
Administration v. De Los Angeles, G.R. No. L-
27829, Aug. 19, 1988)

What are the essential conditions of LC? 1. Issued in favor of a definite person
2. Limited to a fixed or specified amount, or
to one or more amounts, but with a
maximum stated limit (Art. 568, Uniform
Commercial Practice for Documentary
Credits)

If any of these essential conditions is not present,

the instrument is merely considered as a letter of
recommendation

In case the buyer was not able to pay its No. The opening of a LC did not vest ownership of
obligation under the LC, can the bank take the goods in the bank in the absence of a trust
possession over the goods covered by the said receipt agreement. (Transfield Philippines, Inc. v.
LC? Luzon Hydro Corp., 443 SCRA 307 [2004])

What are the stages of LC? 1. Contract of sale between the buyer and
seller
2. Application for LC by the buyer with the
issuing bank
3. Issuance of LC by the bank
4. Shipping of goods by seller
5. Execution of draft and tender of
documents by the seller
6. Redemption of draft(payment) and
obtaining of documents by the issuing
bank
7. Reimbursement to the bank and obtaining
of documents by the buyer

Effect of Applicant Being under Rehabilitation The effect of the stay order under Se. 6(b), Rule 4
Proceedings of the Interim Rules of Procedure for Corporate
Rehabilitation which enjoins the enforcement of
all claims against guarantors and sureties who
are not solidarily liable with the debtor, cannot
apply to the LC issued in behalf of the debtor-
applicant since the obligation of the issuing bans
under the letter of credit is primary and solidary.
(Metropolitan Waterworks and Sewerage System
v. Hon. Reynaldo B. Daway and Maynilad Water
services, Inc., G.R. No. 160732, June 21, 2004)

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Are Letters of Credit and Trust Receipts No. However, drafts issued in connection with a
negotiable instruments? Letter of Credit are negotiable instruments (Mico
Metals Corp. v. Court of Appeals and Philippine
Bank of Communications, G.R. No. 117914, Feb. 1,
2002)

BANKING LAWS

A. The New Central Bank Act (R.A. No. 7653)

1. State Policies

- The State shall maintain a central monetary authority that shall function and operate as
an independent and accountable body corporate in the discharge of its mandated
responsibilities concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary authority
established under this Act, while being a government-owned corporation, shall enjoy
fiscal and administrative autonomy. (Sec. 1)

2. Responsibility and Primary Objective of the BSP

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

The primary objective of the Bangko Sentral is to maintain price stability conducive to a
balanced and sustainable growth of the economy. It shall also promote and maintain
monetary stability and the convertibility of the peso. (Sec. 3)

3. Monetary BoardPowers and Functions

a. Issue rules and regulations it considers necessary for the effective discharge of the
responsibilities and exercise of the powers vested upon the Monetary Board and the
Bangko Sentral
b. Direct the management, operations, and administration of the Bangko Sentral, reorganize
its personnel, and issue such rules and regulations as it may deem necessary or convenient
for this purpose. The legal units of the Bangko Sentral shall be under the exclusive
supervision and control of the Monetary Board;
c. Establish a human resource management system which shall govern the selection, hiring,
appointment, transfer, promotion, or dismissal of all personnel.
d. Adopt an annual budget for and authorize such expenditures by the Bangko Sentral as are
in the interest of the effective administration and operations of the Bangko Sentral in
accordance with applicable laws and regulations
e. Indemnify its members and other officials of the Bangko Sentral, including personnel of
the departments performing supervision and examination functions against all costs and
expenses reasonably incurred by such persons in connection with any civil or criminal
action, suit or proceedings to which he may be, or is, made a party by reason of the
performance of his functions or duties, unless he is finally adjudged in such action or
proceeding to be liable for negligence or misconduct.

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4. How the BSP Handles Banks in Distress

a. Conservatorship

- When Whenever on the basis of the report of the MB, the bank or quasi-bank is in
a state of inability or unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors (Sec. 29, NCBA)
- Powers of a conservator
a. Take charge of the assets, liabilities and management of the bank
b. Reorganize the management of the bank
c. Collect all monies and debts due to the bank/quasi-bank
d. Exercise all powers necessary to restore the viability of the bank/quasi-bank

*The conservator also has the power to overrule or revoke the actions of the
previous management and board of directors (Sec. 29 NCBA)
*The conservator cannot revoke perfected and enforceable contracts. This
will be an infringement of the non-impairment clause guaranteed by the
Constitution (First Bank v. CA, 252 SCRA 259)
- Duration shall not exceed 1 year; there will be an automatic termination of
conservatorship upon the lapse of the 1 year period.
- The MB may terminate the conservatorship under the following instances
a. When the bank can continue to operate on its own
b. When the continuance in business of the bank, on the basis of the report of
the conservator or on its own findings, would involve probable loss to
depositors and other creditors (Sec. 29, NCBA)
- The actions of the MB under Secs. 29 and 30 of R.A. No. 7653 may not be restrained
or set aside by the court except on petition for certiorari on the ground that the
action taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction (BSP-MB v. Antonio-Valenzuela, 602 SCRA
698, 2 Oct. 2009)

b. Closure

- The power and authority of the MB to close banks and liquidate them thereafter
when public interest so requires is an exercise of police power of the State (Miranda
v. PDIC, 501 SCRA 288 [2006])
- Under the law, the sanction of closure could be imposed upon a bank by the BSP even
without notice and hearing this close now, hear later scheme is grounded on
practical and legal considerations to prevent unwarranted dissipation of the banks
assets and as a valid exercise of police power to protect depositors, creditors,
stockholders, and the general public (BSP-MB v. Antonio-Valenzuela, 602 SCRA 698,
2 Oct. 2009)
- It is well settled that the closure of a bank may be considered as an exercise of police
power; action of the monetary board on this matter is final and executory (Rural Bank
of San Miguel Inc. v. MB, 516 SCRA 154 [2007])

c. Receivership

- Receivership is the summary closure of a bank by the BSP without prior notice and
hearing after a finding that the continuance in business would involve probable loss
to its depositors and creditors
- Instances when a bank maybe placed under receivership

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a. It 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. Insufficient realizable assets, as determined by the BSP, to meet its liabilities
c. It cannot continue in business without involving probable losses to its
depositors or creditors
d. Willfully violated a cease and desist order under Sec. 37 of the NCBA that has
come final, involving acts or transactions which amount to fraud or a
dissipation of the assets of the institution
e. When a bank notifies the BSP or publicly announces a bank holiday (a
situation where a bank or a quasi-bank suspends the payment of its deposit
liabilities continuously for more than 30 days)
- Powers of a receiver
a. Immediately gather and take charge of all assets and liabilities of the bank
b. Administer the assets and liabilities of the bank for the benefit of its creditors
c. Exercise the general powers of the receiver under the Rules of Court
d. Deposit or place funds of the institution in non-speculative investments
e. Determine as soon as possible, but not later than 90 days from take-over, if
the bank may be rehabilitated, or be permitted to resume its business subject
to the approval of the MB
- Action of the receiver when the bank can no longer be rehabilitated
a. Filed ex-parte with the proper RTC, without need or prior notice or any other
action, a petition for assistance in the liquidation of the bank pursuant to a
liquidation plan adopted by the PDIC for general application to all closed
banks
b. Convert the assets of the banks to money, dispose of the same to creditors
and to other parties for the purpose of paying the debts of the bank in
accordance with the rules on concurrence and preference of credits
c. Institute actions to collect and recover accounts and assets of, and defend
any action against the bank (Sec. 30, NCBA)
- The remedy of the depositors in case of a liquidation proceeding is to intervene.
There will be no preference even if the claimant depositor obtained a writ of
preliminary attachment (Provident Savings Bank v. CA, 222 SCRA 125)

d. Liquidation

- In case the voluntary liquidation of any bank organized under the laws of the
Philippines, or of any branch or office in the Philippines of a foreign bank, written
notice of such liquidation shall be sent to the Monetary Board before such
liquidation is undertaken and the monetary Board shall have the right to intervene
and take such steps as may be necessary to protect the interests of creditors (Sec.
68, GBA)

5. Legal Tender Power

- All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the Philippines
for all debts, both public and private: Provided, however, That, unless otherwise fixed by
the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos
(P50.00) for denominations of Twenty-five centavos and above, and in amounts not
exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less. (Sec. 52)

6. Foreign Exchange Operations

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- In order that the Bangko Sentral may at all times have foreign exchange resources
sufficient to enable it to maintain the international stability and convertibility of the peso,
or in order to promote the domestic investment of bank resources, the Monetary Board
may require the banks to sell to the Bangko Sentral or to other banks all or part of their
surplus holdings of foreign exchange. (Sec. 76)
- The Monetary Board may require the banks to maintain a balanced position between their
assets and liabilities in Philippine pesos or in any other currency or currencies in which
they operate. The banks shall be granted a reasonable period of time in which to adjust
their currency positions to any such requirement. (Sec. 77)
- The banks shall bear the risks of non-compliance with the terms of the foreign exchange
documents and instruments which they buy and sell, and shall also bear any other typically
commercial or banking risks, including exchange risks not assumed by the Bangko Sentral
under the provisions of the preceding section. (Sec. 79)

B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)

1. Purpose

- R.A. 1405 has two allied purpose. It hopes to discourage private hoarding and the same
time encourage the people to deposit their money in banking institutions, so that it may
be utilized by way of authorized loans and thereby assist in economic development. Owing
to this piece of legislation the confidentiality of bank deposits remains to be a basic state
policy in the Philippines. (BSP Group Inc. v. Sally Go, G.R. no. 168644, 16 Feb. 2010)

2. Prohibited Acts

- It shall be unlawful for an official or employee of a bank to disclose to any person other
than those mentioned in Section two hereof, or for an independent auditor hired by a
bank to conduct its regular audit to disclose to any person other than a bank director,
official or employee authorized by the bank, any information concerning said deposits
(Sec. 3 as amended by PD No. 1792)

3. Deposits Covered

- All deposits of whatever nature including investments in government bonds (Sec. 2)

- Sec. 2 of RA 1405 is broad enough to cover trust accounts. The phrase of whatever
nature proscribes any restrictive interpretation of deposits. Moreover, it is clear from
Sec. 2 of RA 1405 that, generally, the law applies not only to money which is deposited
but also to those which are invested. (Ejercito v. Sandiganbayan, G.R. Nos. 157294-95, 30
Nov. 2006)
- If the money deposited under an account may be used by banks for authorized loans to
third persons, then such amount, regardless of whether it creates a creditor-debtor
relationship between the depositor and the bank, falls under the category of accounts
which the law precisely seeks to protect for the purpose of boosting the economic
development of the country. (ibid)

4. Exceptions

- Under Sec. 2
a. Written permission of the debtor
b. In cases of impeachment
c. Upon order of a competent court in cases of bribery or dereliction of duty of public
officials
d. In cases where the money deposited or invested is the subject matter of litigation

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The subject matter of litigation cannot be limited to bank accounts under the
name of the accused alone, but must include those accounts to which the
money purportedly acquired illegally or a potion was alleged to have been
transferred (Ejercito v. Sandiganbayan, ibid.)
- In case of inquiry of the BIR of bank accounts of a decedent for estate tax purposes or in
case of a tax compromise (Sec. 6[F], NIRC)
- Incidental disclosure of unclaimed balances under the Unclaimed Balances Law
- In cases falling under the AMLA
- Examination of a bank account based on Sec. 10, Rule 57 of the Rules of Court
- In cases falling under the Human Security Act
- The PDIC and/or the BSP may inquire into or examine deposit accounts and all information
related thereto in case there is a finding of unsafe or unsound banking practice (Sec. 8
R.A. No. 3591 [PDIC Law] as amended by R.A. No. 9576, June 1, 2009)
- The AMLC in cases dealing under the Terrorism Financing Prevention and Suppression Act
of 2012 (R.A. No. 10168)

5. Garnishment of Deposits, including Foreign Deposits

a. China Bank v. Ortega, 49 SCRA 356 (1973)

- The garnishment of bank deposit of a defendant does not involve examination or
inquiry into the deposit, but is merely to inform the court whether defendant has
a deposit in the bank, which may be garnished. It does not violate R.A. No. 1405
- There is no real inquiry in case of garnishment and if the existence of the deposit
is disclosed, the disclosure is purely incidental to the execution process
- The notice of garnishment does not order any inquiry or examination of the
amount deposited. The garnishment simply orders that the amount deposited be
left intact for the time being until further orders of the court. It was not the
intention of the lawmakers by enacting R.A. No. 1405 to place bank deposits
beyond the reach of execution to satisfy a final judgment.

b. RCBC v. de Castro, 168 SCRA 49

- The bank is not liable to reimburse the depositor for releasing the money to the
sheriff even if afterwards the order directing the payment to the sheriff is
reversed and set aside. The bank merely dutifully complied with the order of the
court. A bank is not duty bound to inquire into the legality of the writ of execution
and notice of garnishment issued against the funds of a depositor.

c. Fernandez v. Anion, G.R. No. 138967, 24 Apr. 2007

- It is in the nature of joint accounts that anyone of the depositors has access to the
entire funds therein and therefore subject to garnishment on account of the
liability of one of them.
d. A foreign currency deposit shall be exempt from attachment, garnishment or any other
order or process of any court, legislative body, government agency or any administrative
body whatsoever (Sec. 8, Foreign Currency Deposits Act)
- Exception when it falls under Sec. 11 of the AMLA (When it has been established
that there is a probable cause that the deposits involved are in any way related to
a money laundering offense.
- Inapplicable to foreign transients. It only applies to accounts of lenders and
investors. (Salvacion et. al. v. CA, 278 SCRA 27)

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C. General Banking Law of 2000 (R.A. No. 8791)

1. Definition and Classification of Banks

Banks (Sec. 3.1)

Shall refer to entities engaged in the lending of funds obtained in the form of deposits
Banks operate (and earn income) by extending credit facilities financed primarily by
deposits from the public. They plough back the bulk of said deposits into the economy in
the form of loans. Since banks deal with the publics money, their viability depends largely
on their ability to return those deposits on demand. (BDO-EPCI, Inc. v. JAPRL Devt Corp.,
G.R. No. 179901, 14 Apr 2008)
The essence of banking is the taking of deposits from the public and lending out these
funds. The basic banking function is the mobilization of savings (through deposit taking)
and allocating resources (through lending). Thus, a financial institution obtaining deposits
from the public, which was lent to persons deemed suitable by it, is engaged in banking
(Republic v. Security Credit & acceptance Corp., 19 SCRA 58 [1967])
However, an investment firm that purchased a promissory note on discount, which was
secured by a Chattel Mortgage and a Continuing Undertaking, for purposes of reinvesting,
is not engaged in a loan transaction or banking but is purely a purchase of receivables at
a discount. (Baas v. Asia Pacific Corp., 343 SCRA 527 [2000])

Classifications of Banks (Sec. 3.2)

1. Universal banks primarily governed by the General Banking Law, can exercise the
powers of an investment house and invest in non-allied enterprises and have the highest
capitalization requirement
2. Commercial banks ordinary banks governed by the GBL which have a lower
capitalization requirement than universal banks and can neither exercise the powers of
an investment house nor invest in non-allied enterprise
3. Thrift banks (Thrift Banks Act, R.A. No. 7906)
i. Savings and mortgage banks
ii. Stock savings and loan associations
iii. Private development banks
4. Rural banks (R.A. No. 7353) - those mandated to make needed credit available and readily
accessible in rural areas on reasonable terms.
5. Cooperative banks (R.A. No. 6938) banks organized whose majority shares are owned
and controlled by cooperatives, primarily to provide financial and credit services to the
members of the cooperative. It shall include cooperative rural bank.
6. Islamic banks (R.A. No. 6848) banks whose business dealings and activities are subject
to the basic principles and ruling of Islamic Sharia
7. Others
i. Development Bank of the Philippines (E.O. No. 81)
ii. Land Bank of the Philippines (R.A. No. 3844)

What distinguishes a universal bank from a commercial bank?

- A universal bank can exercise all the powers and functions of a commercial bank. In
addition, a universal bank can perform functions of an investment house as well as invest
in non-allied enterprises without prior approval of the Monetary Board of the BSP, unlike
a commercial bank which needs prior BSP approval.

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May a universal bank exercise the powers of an investment house? May it invest in non-allied
enterprises?
- Yes, a universal bank is a commercial bank with the authority to exercise the powers of an
investment house and invest in non-allied enterprises. (Sec. 23)
Allied enterprises are either financial allied enterprises (e.g. Credit card, leasing
companies, investment houses, financing insurance companies) and non-financial
allied enterprise (e.g. warehousing, safety deposit box, providing computer
services)
Non-allied enterprise an activity that has no relation at all to banking (e.g.
construction, trading, manufacturing, mining)

Is there any limitation in the investment of a universal bank in allied or non-allied enterprise?
- Yes, the total investment in equities of allied and non-allied enterprises shall not exceed
50% of the total net worth of the universal bank. The equity investment in any one
enterprise, whether allied or non-allied, shall not exceed 25% of the net worth of the bank
(Sec. 24)
Net worth the total and unimpaired paid-in capital including paid-in surplus,
retained earnings and undivided profit, net valuation of reserves and other
adjustment as may be required by the BSP (Sec. 24)

May a commercial bank invest in non-allied enterprises?

- No, it can only invest in allied enterprises (Sec. 30)

2. Distinction of Banks from Quasi-Banks and Trust Entities

Quasi-banks entities engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes for purposes of relending or
purchasing of receivables and other obligation

Deposit substitutes alternative form of obtaining funds from the public, other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the borrowers own
account, for the purpose of relending or purchasing of receivables and other obligations. It may
include to bankers acceptances, promissory notes, participations, certificates of assignment and
similar instruments with recourse, and repurchase agreements.

With Recourse term which may be used in indorsing negotiable instrument and by which the
endorser indicates that he remains liable for payment of the instrument

Distinction

Banks Quasi-banks and other trust entities

Obtains funds from the public in the form of Quasi-banks - Obtain funds in the form of
deposits and re-lend it to the public deposit substitutes and re-lend them the same
but not from the public or depositors

Other trust entities lend funds from their

own assets

3. Bank Powers and Liabilities

a. Corporate Powers

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Sec. 23. Powers of a Universal Bank A universal bank shall have the authority to
exercise, in addition to the powers authorized for a commercial bank in Section 29, x
x x (emphasis provided)

Sec. 29. Powers of a Commercial Bank A commercial bank shall have, in addition to
the general powers incident to corporations x x x (emphasis provided)

b. Banking and Incidental Powers

Sec. 23. Powers of a Universal Bank

- Powers authorized for a commercial bank

- The powers of an investment house
- Power to invest in non-allied enterprises

Sec. 29. Powers of a Commercial bank

- Such powers as may be necessary to carry on the business of commercial banking:
a. Accepting drafts and issuing letters of credits
b. Discounting and negotiating promissory notes, drafts, bills of exchange
and other evidence of debt
c. Accepting or creating demand deposits; receiving other types of deposits
and deposit substitutes
d. Buying and selling foreign exchange and other debt securities
e. Extending credit

4. Diligence Required of Banks Relevant Jurisprudence

a. BPI v. Lifetime Marketing Corp., G.R. No. 176434, 25 June 2008; Associated Bank v. Tan,
446 SCRA 282 [2004] The fiduciary nature of banking, previously imposed by case law,
is now enshrined in R.A. No. 8791 or the General banking Law of 2000. Section 2 thereof
specifically says that the state recognizes the fiduciary nature of banking that requires
high standards of integrity and performance
b. Consolidated Bank v. CA, 410 SCRA 562, 11 Sept. 2003 The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that of a good father of a
family. Article 1172 of the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, absent such stipulation then the diligence of
a good father of a family. Section 2 of RA 8791 prescribes the statutory diligence required
of from banks that banks must observe high standards of integrity and performance
in servicing their depositors
c. BPI v. IAC, 206 SCRA 408 The bank is under obligation to treat the accounts of its
depositors with meticulous care always having in mind the fiduciary nature of their
relationship
While a banks negligence may not have been attached with malice and bad faith,
nevertheless it caused serious anxiety, embarrassment and humiliation to the
depositors for which they are entitled to recover reasonable moral damages
Exception: However, the higher degree of diligence is not expected to be exerted by
banks in commercial transactions that do not involve their fiduciary relationship with
their depositors (Reyes v. CA, 15 August 2001)
d. PSBANK v. Chowking Food Corp., 557 SCRA 318 (2008) Consequently, the diligence
required of banks is more than that of a Roman pater familias or a good father of a family.
The highest degree of diligence is expected

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e. BPI v. Casa Montessori, 403 SCRA 261 (2004) Depositors are not estopped from
questioning wrongful withdrawals, even if they have failed to question those errors in the
statements sent by the bank to them for verification.
f. PCIBank v. CA 350 SCRA 446 (2001); Westmont bank v. de la Rosa-Ramos, 682 SCRA 429,
24 Oct. 2012 A banks liability is not merely vicarious but primary; the defense of exercise
of due diligence in the selection and supervision of its employees is of no moment
g. Solidbank Corporation, et. al. v. Sps. Tan, G.R. No. 167346, 2 Apr. 2007 Like a common
carrier whose business is also imbued with public interest, a bank should exercise
extraordinary diligence to negate its liability

5. Nature of Bank Funds and Bank Deposits

- All kinds of deposits whether fixed or current are to be treated as loans and are to be
covered by the law on loans (People v. Ong, 204 SCRA 942)
- Money deposited in banks, whether fixed, savings and current are really loans to a bank
because the bank can use the same for its ordinary transactions and for banking business
in which it is engaged.

6. Stipulation on Interests

- The interest rate must be in writing and signed by the parties

- Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to
temper interest rates when necessary. (Philippines v. Roblett Industrial Construction
Corporation, G.R. No. 139290, 9 May 2006)
- In absence of such stipulations the rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in judgments, in the absence of an express
contract as to such rate of interest, shall be 6 percent per annum. (BSP Circ. No. 799)

7. Grant of Loans and Security Requirements

a. Ratio of Net Worth to Total Risk Assets

- Sec. 34. Risk-Based Capital The Monetary Board shall prescribe the minimum
ratio which the net worth of a bank must bear to its total risk assets which may
include contingent accounts.
For purposes of this Section, the Monetary Board may require that such ratio be
determined on the basis of the net worth and risk assets of a bank and its
subsidiaries, financial or otherwise, as well as prescribe the composition and the
manner of determining the net worth and total risk assets of banks and their
subsidiaries
Xxx
In case a bank does not comply with the prescribed minimum ratio, the Monetary
Board may limit or prohibit the distribution of net profits by such banks and may
require that part or all of the net profits be used to increase the capital accounts
of the bank until the minimum requirement has been met, the Monetary Board
may furthermore, restrict or prohibit the acquisition of major assets and the
making of new investments by the bank with the exception of purchases of readily
marketable evidences of indebtedness of the Republic of the Philippines and of
the Bangko Sentral ng Pilipinas and any other evidences of indebtedness or
obligations the servicing and repayment of which are fully guaranteed by the
Republic, until the minimum required capital ratio has been restored. X x x

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- Banks must stay liquid, meaning risk bearing assets like real property acquired
from foreclosure of mortgages must be liquidated or converted into cash.

b. Single Borrowers Limit

- SBL is the limit of the amount of loan, credit accommodation or guarantees that
may be extended by a bank to any person, partnership, association, corporation
or other entity, which shall at no time exceed 25% of the net worth of such bank
(Sec. 35.1, GBL and BSP Circ. No. 425)
- The SBL may be increased by an additional 10% of the net worth of such bank
provided the additional liabilities of any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts or other similar documents
transferring or securing title covering readily marketable, non-perishable goods
which must be fully covered by insurance.
- The primary purpose of the SBL is to avoid the concentration of risk in one or few
borrowers

c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their

Related Interests) (Sec. 36)

- Related Interests (BSP Circ. No. 170, 05 Aug. 1998)

1. Spouse or relative within the 1st 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 or his spouse or
relative within the first degree of consanguinity or affinity, relative by
legal adoption, is a general partner
3. Co-owner with the director, officer or stockholder or his spouse or relative
within the first degree of consanguinity or affinity, relative by legal
adoption of the property or interest or right mortgage, pledged or
assigned to secure the loans or credit accommodations, except when the
mortgage, pledge or assignment covers only said co-owners 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, less than 50% of the voting stock
thereof is owned by any one person or by persons related to each other
within the 3rd degree of consanguinity or affinity; or (b) where the
director, officer or stockholder of the lending bank sits as a representative
of the bank in the board of directors of such corporation: Provided, that a
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 under (a) or (b) is not among those mentioned
in Items (5) and (6)
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 1st degree of consanguinity or affinity, or relative by
legal adoption hold/own more than 20% of the subscribed capital of such
corporation, or of the equity of such association or firm;

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6. Corporation, association or firm wholly or majority-owned or controlled

by any related entity or a group of related entities mentioned in items (2),
(4) and (5) hereof
- Sec. 36 does not prohibit loans on related interests but are merely restricted or
regulated
- Requirements for DOSRI Loans
1. Written approval of the majority of all the directors of the bank, excluding
the director concerned
2. Loan shall not be less favorable to the bank than those offered to others
3. There is a waiver of the Secrecy of Bank Deposits Law
4. A ceiling/limitation must be observed
- Ceiling/limitation on the amount of DOSRI Loans amount equivalent to their
respective unencumbered deposits and book value of their paid-in capital
contribution in the bank
Excluded from such limits are loans, credit accommodations and guarantees:
Secured by assets considered as non-risk by the Monetary Board
In the form of fringe benefits granted in accordance with rules as may be
prescribed by the Monetary Board
Extended by a cooperative bank to its cooperative shareholders
- Elements for violation
1. Offender is a director or officer of any banking institution
2. The offender, either directly or indirectly, for himself or as a representative
or agent of another, performs any of the following acts:
He borrows any of the deposits or funds of such bank
He becomes a guarantor, indorser, or surety for loans from such
banks to others
He becomes in any manner an obligor for money borrowed from
bank or loaned by it.
3. The offender has performed any such acts without approval of the majority
of the directors of the bank, excluding the offender, as the director
concerned.
- Sanctions against the director or officer after due notice to the board of directors
of the bank, the office of any bank director or officer may be declared vacant and
the director or officer shall be subject to the penal provisions of the New Central
Bank Act
- Rationale Banks were not created for the benefit of their directors and officers;
they cannot use the assets of the bank for their own benefit, except as may be
permitted by law. Congress has thus deemed it essential to impose restrictions on
borrowings by bank directors and officers in order to protect the public, especially
the depositors (Go v. BSP, 604 SCRA 322, 29 Oct. 2009)
- The prohibition is broad enough to cover various modes of borrowing. It covers
loans by a bank director or officer which are made either: (1) directly, (2)
indirectly, (3) for himself, (4) or as a representative or agent of others. It even
applies even if the director or officer is a mere guarantor, indorser or surety for
someone else. (Soriano v. People, G.R. No. 162336, 01 Feb. 2010)
- Other terms for DOSRI self-dealing transaction, insider lending or related party
lending.

SPECIAL LAWS

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A. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194, R.A.
No. 10167 and R.A. No. 10365)
1. Policy of the Law (Sec. 1, R.A. 9160)

- To protect and preserve the integrity and confidentiality of bank accounts and to ensure
that the Philippines shall not be used as a money laundering site for the proceeds of any
unlawful activity

2. Covered Institutions (Sec. 1, R.A. 10365)

What are covered institutions?

1. Banks, Non-banks, quasi-banks, trust entities and all other institutions supervised or
regulated by the Bangko Sentral ng Pilipinas
2. Insurance companies and all other institutions supervised or regulated by the Insurance
Commission
3. (i) securities dealers, brokers, salesmen, investment houses and other similar persons
managing securities or rendering services as investment agent, advisor, or consultant;
(ii) Mutual funds, close-end investment companies, common trust funds, and other similar
persons;
(iii) Other entities administering or otherwise dealing in currency, commodities or
financial derivatives based thereon, valuable objects, cash substitutes and other similar
monetary instruments or property supervised or regulated by the Securities and Exchange
Commission
4. Jewelry dealers in precious metals, who, as a business trade in precious metals, for
transactions in excess of 1 million pesos
5. Jewelry dealers in precious stones, who, as a business trade in precious metals, for
transactions in excess of 1 million pesos
6. Company services providers which, as a business, provide for any of the following services
to third parties:
- acting as formation agent of juridical persons
- acting as a director or corporate secretary of a company, a partner of a partnership,
or similar position in relation to other juridical persons
- providing a registered office, business address or accommodation, correspondence
or administrative address for a company, a partnership or any other legal person or
arrangement acting as a nominee shareholder for another person
7. persons who provide any of the following services:
- managing of client money, securities or other assets
- management of bank, savings or securities accounts
- organization of contributions for creation, operation or management of
companies
- creation, operation or management of juridical persons or arrangements, and
buying and selling business entities

Are lawyers and accountants included in the term covered persons?

- Notwithstanding the foregoing, the term covered persons shall exclude lawyers and
accountants acting as independent legal professionals in relation to information
concerning their clients or where disclosure of information would compromise client
confidences or the attorney-client relationship: Provided, that these lawyers and
accountants are authorized to practice in the Philippines and shall continue to be subject

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to the provisions of their respective codes of conduct and/or professional responsibility

(Sec. 3[a], R.A. 10365)(Italics provided)

3. Obligations of Covered Institutions

What is required of covered persons in cases of occurrence of covered and suspicious

transactions?

Reporting: Covered persons shall report to the AMLC all covered transactions and suspicious
transactions within 5 working days from occurrence thereof, unless the AMLC prescribes a
different period not exceeding 15 working days (Rule 9[C], RIRR)
Record Keeping: Covered persons shall maintain and safely store for five (5) years from the dates
of transactions all records of customer identification and transaction documents. (Rule 9[B], RIRR)

Lawyers and accountants acting as independent legal professionals are not required to
report covered and suspicious transactions if the relevant information was obtained in
circumstances where they are subject to professional secrecy or legal professional privilege
(Sec. 7, R.A. 10365)

Is there a violation of the secrecy of bank deposits law and similar laws when reporting covered
or suspicious transactions?

- SAFE HARBOR PROVISION no administrative, criminal or civil proceedings shall lie against
any person for having made a covered or suspicious transaction report in the regular
performance of his duties and in good faith, whether or not such reporting results in any
criminal prosecution under this Act or any other Philippine law (Rule 9[C.3], RIRR)

Exception: When reporting covered or suspicious transactions, covered persons, and their
officers and employees, are prohibited from communicating, directly or indirectly, in any
manner or by any means, to any person or entity, or the media, the fact that a covered or
suspicious transaction has been or is about to be reported, the contents of the report, or any
other information in relation thereto.

Any information about such reporting shall not be published or aired, in any manner or form,
by the mass media, or through electronic mail, or other similar devices.

In case of violation thereof, the concerned officer, and employee, of the covered person and
media shall be held criminally liable. Rule 9[C.2], RIRR)

4. Covered Transactions

What are Covered Transactions?

- It is a transaction in cash or other equivalent monetary instrument involving a total amount

in excess of 500,000.00 within 1 banking day (Sec. 1, R.A. 9194)

What are Monetary Instruments?

1. Coins or currency of legal tender of the Philippines, or of any other country;
2. Credit instruments, including bank deposits, financial interest, royalties, commissions, and
other intangible property;
3. Drafts, checks, and notes;

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4. Stocks or shares, participation or interest in a corporation or in a commercial enterprise or

profit-making venture and evidenced by a certificate, contract, instrument, whether written or
electronic in character, including those enumerated in Section 3 of the Securities Regulation
Code;
5. A participation or interest in any non-stock, non-profit corporation;
6. Securities or negotiable instruments, bonds, commercial papers, deposit certificates, trust
certificates, custodial receipts, or deposit substitute instruments, trading orders, transaction
tickets, and confirmations of sale or investments and money market instruments;
7. Contracts or policies of insurance, life or non-life, contracts of suretyship, pre-need plans, and
member certificates issued by mutual benefit association; and
8. Other similar instruments where title thereto passes to another by endorsement, assignment,
or delivery. (Rule 3[N], RIRR)

5. Suspicious Transactions

These are transactions regardless of amount, where any of the following circumstances exists:

a. There is no underlying legal or trade obligation, purpose or economic justification;

b. The client is not properly identified; (Know Your Client Rule numbered accounts are
allowed provided is identified)
c. The amount involved is not commensurate with the business or financial capacity of the
client;
d. Taking into account all known circumstances, it may be perceived that the clients
transaction is structured in order to avoid being the subject of reporting requirements
under this Act;
e. Any circumstance relating to the transaction which is observed to deviate from the profile
of the client and/or the clients past transactions with the covered institution;
f. The transaction is in a way related to an unlawful activity or any money laundering activity
or offense under this Act that is about to be, is being or has been committed;
g. Any transaction that is similar, analogous or identical to any of the foregoing (Rule 3[H],
RIRR)

6. When Is Money Laundering Committed

Money Laundering is committed by any person who, knowing that any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful activity:

a. Transacts said monetary instrument or property;

b. Converts, transfers disposes of, moves, acquires, possesses or uses said monetary
instrument or property;
c. Conceals or disguises the true nature, source, location disposition, movement or
ownership of or rights with respect to said monetary instrument or property;
d. Attempts or conspires to commit money laundering offenses referred to paragraphs (a),
(b) or (c);
e. Aids, abets, assists in or counsels the commission of the money laundering offenses
referred to in paragraphs (a), (b) or (c) above;
f. Performs or fails to perform, any act as a result of which he facilitates the offense of
money laundering referred to in paragraph (a), (b) or (c) above.

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Money laundering is also committed by any covered person who, knowing that a covered or
suspicious transaction is required under this ACT to be reported to the AMLC, fails to do so (Sec.
4 as amended by RA 10365)

7. Unlawful Activities or Predicate Crimes

Unlawful activity refers to any act or omission or series or combination thereof involving or
having direct relation to the following:

1. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised
Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended, otherwise
known as the Anti-Graft and Corrupt Practices Act;
4. Plunder under Republic Act No. 7080, as amended;
5. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised
Penal Code, as amended;
6. Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;
7. Piracy on the high seas under the Revised Penal Code, as amended and Presidential
Decree No. 532;
8. Qualified theft under Article 310 of the Revised Penal Code, as amended;
9. Swindling under Article 315 and Other Forms of Swindling under Article 316 of the Revised
Penal Code, as amended;
10. Smuggling under Republic Act Nos. 455 and 1937;
11. Violations of Republic Act No. 8792, otherwise known as the Electronic Commerce Act of
2000;
12. Hijacking and other violations under Republic Act No. 6235; destructive arson and murder,
as defined under the Revised Penal Code, as amended;
13. Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3
and 4 of Republic Act No. 9372;
14. Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and
8 of Republic Act No. 10168, otherwise known as the Terrorism Financing Prevention and
Suppression Act of 2012:
15. Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and
Corruption of Public Officers under Article 212 of the Revised Penal Code, as amended;
16. Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the
Revised Penal Code, as amended;
17. Malversation of Public Funds and Property under Articles 217 and 222 of the Revised
Penal Code, as amended;
18. Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Revised
Penal Code, as amended;
19. Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
20. Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise
known as the Revised Forestry Code of the Philippines, as amended;
21. Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise known
as the Philippine Fisheries Code of 1998;
22. Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known as
the Philippine Mining Act of 1995;
23. Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise known
as the Wildlife Resources Conservation and Protection Act;
24. Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National Caves
and Cave Resources Management Protection Act;
25. Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of 2002,
as amended;

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26. Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, otherwise
known as the decree Codifying the Laws on Illegal/Unlawful Possession, Manufacture,
Dealing In, Acquisition or Disposition of Firearms, Ammunition or Explosives;
27. Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law;
28. Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant Workers
and Overseas Filipinos Act of 1995, as amended by Republic Act No. 10022;
29. Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code of
the Philippines;
30. Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo and
Video Voyeurism Act of 2009;
31. Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child
Pornography Act of 2009;
32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No. 7610,
otherwise known as the Special Protection of Children Against Abuse, Exploitation and
Discrimination;
33. Fraudulent practices and other violations under Republic Act No. 8799, otherwise known
as the Securities Regulation Code of 2000; and
34. Felonies or offenses of a similar nature that are punishable under the penal laws of other
countries. (Sec. 3[i] as amended by R.A. 10365)

8. Anti-Money Laundering Council

The composition of the AMLC

Chairman BSP Governor

Members 1. Commissioner of the Insurance Commission

2. Chairman of the Securities and Exchange Commission

The AMLC shall act unanimously in the discharge of its functions. In case of incapacity,
absence, or disability of any member, the officer duly designated or authorized to
discharge the functions of the Governor of the BSP, the Commissioner of the IC, and
the Chairperson of the SEC, as the case may be, shall act in his stead in the AMLC. (Rule
7[A], RIRR)

9. Functions

The functions of the AMLC are:

1. to require and receive covered or suspicious transaction reports from covered persons;
2. to issue orders addressed to the appropriate Supervising Authority or the covered person
to determine the true identity of the owner of any monetary instrument or property
subject of a covered or suspicious transaction report, or request for assistance from a
foreign State, or believed by the AMLC, on the basis of substantial evidence, to be, in
whole or in part, wherever located, representing, involving, or related to, directly or
indirectly, in any manner or by any means, the proceeds of any unlawful activity;
3. to institute civil forfeiture proceedings and all other remedial proceedings through the
Office of the Solicitor General;
4. to file complaints with the Department of Justice or the Office of the Ombudsman for the
prosecution of money laundering offenses and other violations under the AMLA;
5. to investigate suspicious transactions and covered transactions deemed suspicious after
investigation by the AMLC, money laundering activities and other violations of the AMLA;
6. to file with the Court of Appeals, ex parte, through the Office of the Solicitor General: (a)
a petition for the freezing of any monetary instrument or property that is in any way

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related to an unlawful activity; or (b) an application for authority to inquire into or

examine any particular deposit or investment, including related accounts, with any
banking institution or non-bank financial institution;
7. to formulate and implement such measures as may be necessary and justified under the
AMLA to counteract money laundering;
8. to receive and take action in respect of any request from foreign states for assistance in
their own anti-money laundering operations as provided in the AMLA;
9. to develop educational programs, including awareness campaign on the pernicious
effects, the methods and techniques used, and the viable means of preventing money
laundering and the effective ways of prosecuting and punishing offenders;
10. enlist the assistance of any branch, department, bureau, office, agency or instrumentality
of the government, including government-owned and -controlled corporations, in
undertaking any and all anti-money laundering operations, which may include the use of
its personnel, facilities and resources for the more resolute prevention, detection and
investigation of money laundering offenses and prosecution of offenders.
11. Impose administrative sanctions for the violation of laws, rules, regulations, orders, and
resolutions issued pursuant thereto.
12. Require the Land Registration Authority and all its Registries of Deeds to submit to the
AMLC, reports on all real estate transactions involving an amount in excess of Five
Hundred Thousand Pesos ( 500,000.00) within fifteen (15) days from the date of
registration of the transaction, in a form to be prescribed by the AMLC. The AMLC may
also require the Land Registration Authority and all its Registries of Deeds to submit copies
of relevant documents of all real estate transactions. (Rule 7[B], RIRR)

10. Freezing of Monetary Instrument or Property (Rule 9, RIRR)

Form Verified petition by the AMLC and after determination of probable

cause

Probable Cause That any monetary instrument or property is in any way related to
an unlawful activity,

Jurisdiction Court of Appeals

Effectivity The Court of Appeals shall resolve the petition to freeze

within twenty-four (24) hours from filing thereof.
The freeze order shall be effective immediately and shall
not exceed six (6) months depending upon the
circumstances of the case. On motion of the AMLC filed
before the expiration of the original period of the freeze
order, the court may, for good cause shown, extend its
effectivity. Upon the timely filing of such motion and
pending resolution by the Court of Appeals, the freeze
order shall remain effective. (The effectivity of a freeze
order may be extended indefinitely provided that the
motion is filed before such expiration)

Freezing of Considering the intricate and diverse web of interlocking accounts

Related Accounts that a person may create in different covered persons, and the
and Materially- high probability that these accounts are utilized to divert, move,
Linked Accounts. conceal, and disguise the monetary instrument or property subject

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of the freeze order, the AMLC may include in its petition the
freezing of related and materially-linked accounts.

Related Accounts Refers to those accounts, the funds and sources of which
originated from and/or are materially-linked to the monetary
instruments or properties subject of the freeze order or an order
of inquiry.

Materially-Linked 1. All accounts or monetary instruments under the name of

Accounts the person whose accounts, monetary instruments, or
properties are the subject of the freeze order or an order
of inquiry;
2. All accounts or monetary instruments held, owned, or
controlled by the owner or holder of the accounts,
monetary instruments, or properties subject of the freeze
order or order of inquiry, whether such accounts are held,
owned or controlled singly or jointly with another person;
3. All In Trust For accounts where either the trustee or the
trustor pertains to a person whose accounts, monetary
instruments, or properties are the subject of the freeze
order or order of inquiry;
4. All accounts held for the benefit or in the interest of the
person whose accounts, monetary instruments, or
properties are the subject of the freeze order or order of
inquiry; and
5. All other accounts, shares, units, or monetary instruments
that are similar, analogous, or identical to any of the
foregoing.

No Prior Criminal No prior criminal charge, pendency of or conviction for an

Charge, Pendency unlawful activity or money laundering offense is necessary for
of or Conviction the commencement or the resolution of a petition for freeze
Necessary order.

Lifting of Freeze The freeze order shall be deemed ipso facto lifted after
Order its expiration, unless a money laundering complaint
against the person whose monetary instrument or
property was frozen, or a petition for civil forfeiture
against the frozen monetary instrument or property, has
been filed, in which case the freeze order shall remain
effective until the money laundering case is terminated
or an asset preservation order is issued, respectively.

Upon the expiration of the freeze order, the covered

person shall secure a written confirmation from the
AMLC Secretariat to ascertain if a petition for civil
forfeiture or money laundering complaint has been filed.
A person whose monetary instrument or property has
been frozen may file a motion to lift the freeze order.
The court must resolve the motion before the expiration
of the freeze order.

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Injunction No court shall issue a temporary restraining order or a writ of

injunction against any freeze order, except the Supreme Court.

11. Authority to Inquire Into Bank Deposits

What is the basis of bank inquiry?

- When it has been established that there is probable cause that the deposits or investment,
including related accounts are involved, are related to an unlawful activity as defined in
Section 3(i) or a money laundering offense under Sec. 4
- Bank inquiry maybe made in the event of violation of the AMLA and does not presuppose the
pre-existence of a money laundering offense case already filed in court. The phrase in Section
11, RA 9160, upon order of any competent court in cases of violation of this Act, should be
interpreted to mean in the event there are violations of the AMLA, and not that there are
already cases pending in court for such violations (Republic v. Eugenio, Jr., 545 SCRA 384
[2008])

Bank inquiry with Court Order

- Notwithstanding the provisions of Republic Act No. 1405 (Secrecy of Bank Deposits), as
amended; Republic Act No. 6426 (Foreign Currency Deposits Act), as amended; Republic Act
No. 8791 (General Banking Law), and other laws, the AMLC may inquire into or examine any
particular deposit or investment account, including related accounts, with any banking
institution or non-bank financial institution, upon order by the Court of Appeals based on an
ex parte application in cases of violation of the AMLA when it has been established that
probable cause exists that the deposits or investments involved, including related
accounts, are in any way related to an unlawful activity or a money laundering offense.
(Rule 11[A], RIRR)(emphasis provided)
- Inquiry includes related accounts which shall refer to accounts, the funds and sources of
which originated from and/or are materially linked to the monetary instrument/s or
property/ies subject of the freeze order
- The Court of Appeals shall act on the application to inquire into or examine any deposit or
investment with any banking institution or non-bank financial institution within twenty-four
(24) hours from filing of the application. (Sec. 2, R.A. 10167)
- The authority to inquire into or examine the main account and the related accounts shall
comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which
are hereby incorporated by reference. Likewise, the constitutional injunction against ex post
facto laws and bills of attainder shall be respected in the implementation of this Act. (Sec. 11,
R.A. 10365)

Bank Inquiry without Court Order

- The AMLC shall issue a resolution authorizing the AMLC Secretariat to inquire into or examine
any particular deposit or investment account, including related accounts, with any banking
institution or non-bank financial institution and their subsidiaries and affiliates when it has
been established that probable cause exists that the deposits or investments involved,
including related accounts, are in any way related to any of the following unlawful activities:
1. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous Drugs Act of 2002;

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3. Hijacking and other violations under Republic Act No. 6235; destructive arson and
murder, as defined under the Revised Penal Code, as amended;
4. Felonies or offenses of a nature similar to those mentioned in Section 3(i) (1), (2) and
(12) of the AMLA which are punishable under the penal laws of other countries;
5. Terrorism and conspiracy to commit terrorism as defined and penalized under Republic
Act No. 9372; and
6. Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7
and 8 of Republic Act No. 10168, otherwise known as the Terrorism Financing Prevention
and Suppression Act of 2012. (Rule 11[B], RIRR)

Duties of Covered Persons upon Receipt of Bank Inquiry Order

- The concerned covered persons shall immediately, upon receipt of the court order or AMLC
Resolution, give the AMLC and/or its Secretariat full access to all information, documents or
objects pertaining to the deposit, investment, account and/or transaction.
- Certified true copies of the documents pertaining to deposit, investment, account and/or
transaction subject of the bank inquiry shall be submitted to the AMLC Secretariat, within
five (5) working days from receipt of the court order or AMLC Resolution.

Authority of the BSP to Inquire into or examine bank accounts

- In the course of a periodic or special examination, the BSP may inquire into or examine bank
accounts, including customer identification, account opening, and transaction documents,
for the purpose of checking compliance by covered persons under its supervision or
regulation with the requirements of the AMLA, this RIRR, and other AMLC issuances.

B. Foreign Investments Act (R.A. No. 7042)

1. Policy of the Law (Sec. 2)

i. It is the policy of the State to attract, promote and welcome productive investments in
activities which significantly contribute to national industrialization and socio-economic
development to the extent that foreign investment is allowed in such activity by the
Constitution and relevant laws from
a. Foreign Individuals
b. Partnership
c. Corporations
d. Government, including their political subdivisions
ii. Foreign investments shall be encouraged in the enterprises that significantly expand
livelihood and employment opportunities for Filipinos by
a. Enhancing economic value of farm products
b. Promoting the welfare of Filipino consumers
c. Expanding the scope, quality and volume of exports and their access to foreign
markets
d. And/or transferring relevant technologies in agriculture, industry and support
services
iii. Foreign investments shall be welcome as a supplement to Filipino capital and technology
in those enterprises serving mainly the domestic market
iv. As a general rule, there are no restrictions on extent of foreign ownership of export
enterprises. In domestic market enterprises, foreigners can invest as much as 100% equity
U in areas included in the negative list

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v. Foreign-owned firms catering mainly to the domestic market shall be encouraged to

undertake measures that will gradually increase Filipino participation in their businesses
by
a. Taking in Filipino partners
b. Electing Filipinos to the board of directors
c. Implementing transfer of technology to Filipinos
d. Generating more employment for the economy and
e. Enhancing skills of Filipino workers

2. Definition of Terms

Foreign shall mean as equity investment made by a non-Philippine

Investment national in the form of foreign exchange and/or other assets
actually transferred to the Philippines and duly registered with
the Central Bank which shall assess and appraise the value of
such assets other than foreign exchange; (Sec.3[c])

Doing Business a. Soliciting orders, services contracts, and opening offices

in the Philippines b. Appointing representatives, distributors domiciled in the
Philippines or who stay for a period/s totaling 180 days
or more
c. Participating in the management, supervision or control
of any domestic business, firm, entity, or corporation in
the Philippines
d. Any act or acts that imply a continuity of commercial
dealings or arrangements and contemplate to some
extent the performance of acts or works or the exercise
of some functions normally incident to and in
progressive prosecution of, the purpose and object of its
organization (Sec.3[d])

Export Enterprise An enterprise wherein a manufacturer processor or service

[including tourism] enterprise exports 60% or more of its output,
or when a trader purchases products domestically and exports
60% or more of such purchases

Domestic Market An enterprise which produces goods for sale or renders

Enterprise services to the domestic market entirely or if exporting a
portion of its output fails to consistently export at least
60% thereof
Non-Philippine nationals may own up to 100% of
domestic market enterprises unless foreign ownership
therein is prohibited or limited by the Constitution and
existing law or the Foreign Investment Negative (Sec.7)

C. Financial Rehabilitation and Insolvency Act of 2010 (R.A. No. 10142)

1. Types of Rehabilitation Proceedings

a. Court Supervised

i. Voluntary Proceedings (Sec. 12)

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Required Sole Proprietorship Owner

Approval Partnership Majority of the Partners
Corporation - by a majority vote of the
board of directors or trustees and
authorized by the vote of the stockholders
representing at least two-thirds (2/3) of
the outstanding capital stock
Nonstock Corporation by the vote of at
least two-thirds (2/3) of the members, in
a stockholder's or member's meeting duly
called for the purpose

Form and The petition shall be verified to establish the

Contents insolvency of the debtor and the viability of its
rehabilitation, and include, whether as an
attachment or as part of the body of the petition,
as a minimum the following:

a. Identification of the debtor, its principal

activities and its addresses;
b. Statement of the fact of and the cause of
the debtor's insolvency or inability to pay
its obligations as they become due;
c. The specific relief sought pursuant to this
Act;
d. The grounds upon which the petition is
based;
e. Other information that may be required
under this Act depending on the form of
relief requested;
f. Schedule of the debtor's debts and
liabilities including a list of creditors with
their addresses, amounts of claims and
collaterals, or securities, if any;
g. An inventory of all its assets including
receivables and claims against third
parties;
h. A Rehabilitation Plan;
i. The names of at least three (3) nominees
to the position of rehabilitation receiver;
and
j. Other documents required to be filed with
the petition pursuant to this Act and the
rules of procedure as may be promulgated
by the Supreme Court.

Grounds A group of debtors may jointly file a petition for

rehabilitation under this Act:

1. When one or more of its members foresee

the impossibility of meeting debts when
they respectively fall due, and
2. The financial distress would likely
adversely affect the financial condition
and/or operations of the other members
of the group and/or the participation of

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the other members of the group is

essential under the terms and conditions
of the proposed Rehabilitation Plan.

ii. Involuntary Proceedings

Who may Any creditor or group of creditors with a claim of,

initiate? or the aggregate of whose claims is:

a. at least One Million Pesos

(Php1,000,000.00); or
b. at least twenty-five percent (25%) of the
subscribed capital stock or partners'
contributions, whichever is higher (Sec.
13)

Grounds a. There is no genuine issue of fact on law

on the claim/s of the petitioner/s, and
that the due and demandable payments
thereon have not been made for at least
sixty (60) days or that the debtor has
failed generally to meet its liabilities as
they fall due; or
b. A creditor, other than the petitioner/s,
has initiated foreclosure proceedings
against the debtor that will prevent the
debtor from paying its debts as they
become due or will render it insolvent.
(Sec. 13)

Contents of the The creditor/s' petition for rehabilitation shall be

Petition verified to establish the substantial likelihood that
the debtor may be rehabilitated, and include:

a. identification of the debtor its principal

activities and its address;
b. the circumstances sufficient to support a
petition to initiate involuntary
rehabilitation proceedings under
Section 13 of this Act;
c. the specific relief sought under this Act;
d. a Rehabilitation Plan;
e. the names of at least three (3) nominees
to the position of rehabilitation receiver;
f. other information that may be required
under this Act depending on the form of
relief requested; and
g. Other documents required to be filed
with the petition pursuant to this Act
and the rules of procedure as may be
promulgated by the Supreme Court.
(Sec. 14)

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b. Pre-Negotiated (Sec. 76)

- An insolvent debtor, by itself or jointly with any of its creditors, may file a verified
petition with the court for the approval of a pre-negotiated Rehabilitation Plan.
- It must have been endorsed or approved by creditors holding at least two-thirds (2/3)
of the total liabilities of the debtor which includes

secured creditors holding more than fifty percent (50%) of the total secured
claims of the debtor and
Unsecured creditors holding more than fifty percent (50%) of the total
unsecured claims of the debtor.

- The petition shall include as a minimum:

a. a schedule of the debtor's debts and liabilities;

b. an inventory of the debtor's assets;
c. the pre-negotiated Rehabilitation Plan, including the names of at least three
(3) qualified nominees for rehabilitation receiver; and
d. Summary of disputed claims against the debtor and a report on the
provisioning of funds to account for appropriate payments should any such
claims be ruled valid or their amounts adjusted.

c. Out of Court or Informal

- Requirements:
1. The debtor must agree to the out-of-court or informal restructuring/workout
agreement or rehabilitation plan;
2. It must be approved by creditors representing at least 67% of the secured
obligations of the debtor
3. It must be approved by creditors representing at least 75% of the unsecured
obligations of the debtor; and
4. It must be approved by creditors holding at least 85% of the total liabilities,
secured and unsecured, of the debtor (Sec. 84)
- Standstill Period:
- A standstill period that may be agreed upon by the parties pending
negotiation and finalization of the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan contemplated
herein shall be effective and enforceable not only against the contracting
parties but also against the other creditors
- Requirements:
1. Agreement is approved by creditors representing more than 50% of
the total liabilities of the debtor
2. Notice thereof is published in a newspaper of general circulation in
the Philippines at least once a week for 2 consecutive weeks
The notice must invite creditors to participate in the
negotiation for out-of-court rehabilitation or restructuring
agreement and notify them that said agreement will be
binding on all creditors if the required majority votes
prescribed in Section 84 of this Act are met.
3. The standstill period does not exceed 120 days from date of
effectivity (Sec. 85)

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2. Commencement Order

Court Action on a. Court finds the petition for rehabilitation sufficient in form
the Petition and substance
(Sec. 15) Issue a Commencement Order within 5 working
days from the filing of the petition
b. Court finds the petition deficient in form or substance
The Court in its discretion, give the petitioner a
reasonable period of time within which to amend
or supplement the petition, or to submit such
documents as may be necessary or proper to put
the petition in proper order
In such case, the 5 working day period for the
issuance of the commencement Order shall be
reckoned from the date of the filing of the
amended or supplemental petition or submission
of such documents

Contents of the a. identify the debtor, its principal business or activity/ies and
Commencement its principal place of business;
Order (Sec. 16)
b. summarize the ground/s for initiating the proceedings;

c. state the relief sought under this Act and any requirement
or procedure particular to the relief sought;

d. state the legal effects of the Commencement Order,

including those mentioned in Section 17 hereof;

e. declare that the debtor is under rehabilitation;

f. direct the publication of the Commencement Order in a

newspaper of general circulation in the Philippines once a
week for at least two (2) consecutive weeks, with the first
publication to be made within seven (7) days from the time
of its issuance;

g. If the petitioner is the debtor direct the service by personal

delivery of a copy of the petition on each creditor holding
at least ten percent (10%) of the total liabilities of the
debtor as determined from the schedule attached to the
petition within five (5) days; if the petitioner/s is/are
creditor/s, direct the service by personal delivery of a copy
of the petition on the debtor within five (5) days;

h. appoint a rehabilitation receiver who may or not be from

among the nominees of the petitioner/s and who shall
exercise such powers and duties defined in this Act as well
as the procedural rules that the Supreme Court will
promulgate;

i. summarize the requirements and deadlines for creditors to

establish their claims against the debtor and direct all
creditors to their claims with the court at least five (5) days
before the initial hearing;

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j. direct Bureau of internal Revenue (BIR) to file and serve on

the debtor its comment on or opposition to the petition or
its claim/s against the debtor under such procedures as the
Supreme Court provide;

k. prohibit the debtor's suppliers of goods or services from

withholding the supply of goods and services in the ordinary
course of business for as long as the debtor makes
payments for the services or goods supplied after the
issuance of the Commencement Order;

l. authorize the payment of administrative expenses as they

become due;
m. set the case for initial hearing, which shall not be more than
forty (40) days from the date of filing of the petition for the
purpose of determining whether there is substantial
likelihood for the debtor to be rehabilitated;

n. make available copies of the petition and rehabilitation plan

for examination and copying by any interested party;

o. indicate the location or locations at which documents

regarding the debtor and the proceedings under Act may be
reviewed and copied;

p. state that any creditor or debtor who is not the petitioner,

may submit the name or nominate any other qualified
person to the position of rehabilitation receiver at least five
(5) days before the initial hearing;

q. includes Stay or Suspension Order which shall:

(1) suspend all actions or proceedings, in court or

otherwise, for the enforcement of claims against
the debtor;

(2) suspend all actions to enforce any judgment,

attachment or other provisional remedies against
the debtor;

(3) prohibit the debtor from selling, encumbering,

transferring or disposing in any manner any of its
properties except in the ordinary course of
business; and

(4) Prohibit the debtor from making any payment

of its liabilities outstanding as of the
commencement date except as may be provided
herein.

Effects of the 1. vest the rehabilitation with all the powers and functions
Commencement provided for this Act, such as the right to review and
Order (Sec. 17) obtain records to which the debtor's management and
directors have access, including bank accounts or
whatever nature of the debtor subject to the approval by

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the court of the performance bond filed by the

rehabilitation receiver;
2. prohibit or otherwise serve as the legal basis rendering
null and void the results of any extrajudicial activity or
process to seize property, sell encumbered property, or
otherwise attempt to collection or enforce a claim against
the debtor after commencement date unless otherwise
allowed in this Act, subject to the provisions of Section 50
hereof;
3. serve as the legal basis for rendering null and void any
setoff after the commencement date of any debt owed to
the debtor by any of the debtor's creditors;
4. serve as the legal basis for rendering null and void the
perfection of any lien against the debtor's property after
the commencement date; and
5. Consolidate the resolution of all legal proceedings by and
against the debtor to the court, Provided however, that
the court may allow the continuation of cases on other
courts where the debtor had initiated the suit.

Attempts to seek legal of other resource against the debtor outside

these proceedings shall be sufficient to support a finding of indirect
contempt of court.

Effectivity of Unless lifted by the court, the Commencement Order shall be for
Commencement the effective for the duration of the rehabilitation proceedings for
Order (Sec. 21) as long as there is a substantial likelihood that the debtor will be
successfully rehabilitated.

3. Rehabilitation Receiver

- Sec. 16 (h) - The rehabilitation proceedings shall commence upon the issuance of the
Commencement Order, which shall: x x x (h) appoint a rehabilitation receiver who may or
not be from among the nominees of the petitioner/s and who shall exercise such powers
and duties defined in this Act as well as the procedural rules that the Supreme Court will
promulgate;
- Rehabilitation receiver shall refer to the person or persons, natural or juridical, appointed
as such by the court pursuant to this Act and which shall be entrusted with such powers
and duties as set forth herein. (Sec. 4 [hh])

Who may serve Any qualified natural or juridical person may serve as a
as a rehabilitation receiver
Rehabilitation
Receiver (Sec. Provided, That if the rehabilitation receiver is a juridical entity, it
28) must designate a natural person/s who possess/es all the
qualifications and none of the disqualifications as its
representative, it being understood that the juridical entity and the
representative/s are solidarily liable for all obligations and
responsibilities of the rehabilitation receiver.

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Qualifications 1. A citizen of the Philippines or a resident of the Philippines in

(Sec. 29) the six (6) months immediately preceding his nomination;
2. Of good moral character and with acknowledged integrity,
impartiality and independence;
3. Has the requisite knowledge of insolvency and other
relevant commercial laws, rules and procedures, as well as
the relevant training and/or experience that may be
necessary to enable him to properly discharge the duties
and obligations of a rehabilitation receiver; and
4. Has no conflict of interest: Provided, that such conflict of
interest may be waived, expressly or impliedly, by a party
who may be prejudiced thereby.
5. Other qualifications and disqualifications of the
rehabilitation receiver shall be set forth in procedural rules,
taking into consideration the nature of the business of the
debtor and the need to protect the interest of all
stakeholders concerned.

Powers, Duties The rehabilitation receiver shall be deemed an officer of the court
and with the principal duty of preserving and maximizing the value of
Responsibilities the assets of the debtor during the rehabilitation proceedings,
determining the viability of the rehabilitation of the debtor,
of the
preparing and recommending a Rehabilitation Plan to the court, and
Rehabilitation implementing the approved Rehabilitation Plan.
Receiver (Sec.
31) To this end, and without limiting the generality of the foregoing, the
rehabilitation receiver shall have the following powers, duties and
responsibilities:

a. To verify the accuracy of the factual allegations in the

petition and its annexes;
b. To verify and correct, if necessary, the inventory of all of the
assets of the debtor, and their valuation;
c. To verify and correct, if necessary, the schedule of debts
and liabilities of the debtor;
d. To evaluate the validity, genuineness and true amount of all
the claims against the debtor;
e. To take possession, custody and control, and to preserve
the value of all the property of the debtor;
f. To sue and recover, with the approval of the court, all
amounts owed to, and all properties pertaining to the
debtor;
g. To have access to all information necessary, proper or
relevant to the operations and business of the debtor and
for its rehabilitation;
h. To sue and recover, with the. approval of the court, all
property or money of the debtor paid, transferred or
disbursed in fraud of the debtor or its creditors, or which
constitute undue preference of creditor/s;
i. To monitor the operations and the business of the debtor
to ensure that no payments or transfers of property are
made other than in the ordinary course of business;
j. With the court's approval, to engage the services of or to
employ persons or entities to assist him in the discharge of
his functions;
k. To determine the manner by which the debtor may be best
rehabilitated, to review) revise and/or recommend action

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on the Rehabilitation Plan and submit the same or a new

one to the court for approval;
l. To implement the Rehabilitation Plan as approved by the
court, if 80 provided under the Rehabilitation Plan;
m. To assume and exercise the powers of management of the
debtor, if directed by the court pursuant to Section 36
hereof;
n. To exercise such other powers as may, from time to time,
be conferred upon him by the court; and
o. To submit a status report on the rehabilitation proceedings
every quarter or as may be required by the court motu
proprio, or upon motion of any creditor, or as may be
provided, in the Rehabilitation Plan.

Unless appointed by the court, pursuant to Section 36 hereof, the

rehabilitation receiver shall not take over the management and
control of the debtor but may recommend the appointment of a
management committee over the debtor in the cases provided by
this Act.

Removal of the The rehabilitation receiver may be removed at any time by the court
Rehabilitation either motu proprio or upon motion by any creditor/s holding more
Receiver (Sec. than fifty percent (50%) of the total obligations of the debtor, on
such grounds as the rules of procedure may provide which shall
32)
include, but are not limited to, the following:

a. Incompetence, gross negligence, failure to perform or

failure to exercise the proper degree of care in the
performance of his duties and powers;
b. Lack of a particular or specialized competency required by
the specific case;
c. Illegal acts or conduct in the performance of his duties and
powers;
d. Lack of qualification or presence of any disqualification;
e. Conflict of interest that arises after his appointment; and
f. Manifest lack of independence that is detrimental to the
general body of the stakeholders.

Compensation The rehabilitation receiver and his direct employees or independent

and Terms of contractors shall be entitled to compensation for reasonable fees
Service (Sec. 33) and expenses from the debtor according to the terms approved by
the court after notice and hearing.

Prior to such hearing, the rehabilitation receiver and his direct

employees shall be entitled to reasonable compensation based on
quantum meruit. Such costs shall be considered administrative
expenses.

Oath and Bond Prior to entering upon his powers, duties and responsibilities, the
of the rehabilitation receiver shall take an oath and file a bond, in such
Rehabilitation amount to be fixed by the court, conditioned upon the faithful and
Receiver (Sec. proper discharge of his powers, duties and responsibilities.
34)

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4. Management Committee

Displacement of Upon motion of any interested party, the court may appoint a
Existing management committee that will undertake the management of
Management the debtor upon clear and convincing evidence of any of the
by the following circumstances:
Management
Committee a. Actual or imminent danger of dissipation, loss, wastage or
(Sec. 36) destruction of the debtors assets or other properties;
b. Paralyzation of the business operations of the debtor; or
c. Gross mismanagement of the debtor, or fraud or other
wrongful conduct on the part of, or gross or willful violation
of this Act by existing management of the debtor Or the
owner, partner, director, officer or representative/s in
management of the debtor.

Role of the When appointed pursuant to the foregoing section, the

Committee management committee shall take the place of the management
(Sec. 37) and the governing body of the debtor and assume their rights and
responsibilities.

The specific powers and duties of the management committee,

whose members shall be considered as officers of the court, shall be
prescribed by the procedural rules.
Qualifications The qualifications and disqualifications of the members of the
(Sec. 38) management committee shall be set forth in the procedural rules,
taking into consideration the nature of the business of the debtor
and the need to protect the interest of all stakeholders concerned.

Disqualifications of the Rehabilitation Receiver and Management Committee; conflict of

Interest

Grounds for An individual shall be deemed to have a conflict of interest if he is

Conflict of so situated as to be materially influenced in the exercise of his
Interest (Sec. judgment for or against any party to the proceedings.
40)
Without limiting the generality of the foregoing, an individual shall
be deemed to have a conflict of interest if:

a. he is a creditor, owner, partner or stockholder of the

debtor;
b. he is engaged in a line of business which competes with that
of the debtor;
c. he is, or was, within five (5) years from the filing of the
petition, a director, officer, owner, partner or employee of
the debtor or any of the creditors, or the auditor or
accountant of the debtor;
d. he is, or was, within two (2) years from the filing of the
petition, an underwriter of the outstanding securities of the
debtor;
e. he is related by consanguinity or affinity within the fourth
civil degree to any individual creditor, owners of a sale
proprietorship-debtor, partners of a partnership- debtor or
to any stockholder, director, officer, employee or
underwriter of a corporation-debtor; or

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f. he has any other direct or indirect material interest in the

debtor or any of the creditors

Duty to Disclose Any rehabilitation receiver, member of the management committee

(Sec. 40) or persons employed or contracted by them possessing any conflict
of interest shall make the appropriate disclosure either to the court
or to the creditors in case of out-of-court rehabilitation proceedings.

Any party to the proceeding adversely affected by the appointment

of any person with a conflict of interest to any of the positions
enumerated above may however waive his right to object to such
appointment and, if the waiver is unreasonably withheld, the court
may disregard the conflict of interest, taking into account the
general interest of the stakeholders

5. Rehabilitation Plan

- If the court gives due course to the petition, the rehabilitation receiver shall confer with
the debtor and all the classes of creditors, and may consider their views and proposals in
the review, revision or preparation of a new Rehabilitation Plan
- Creditor Action on the Rehabilitation Plan (Sec. 64)
Notification Upon giving due course by the Court, the Rehabilitation
Receiver shall notify the creditors and stakeholders that
the plan is ready for their examination

Within 20 days from said notification, the rehabilitation

receiver shall convene the creditors, either as a whole or
per class, for purposes of voting on the approval of the
Plan

Voting The Plan shall be deemed rejected unless approved by all

classes of creditors w hose rights are adversely modified
or affected by the Plan.

For purposes of this section, the Plan is deemed to have

been approved by a class of creditors if members of the
said class holding more than fifty percent (50%) of the
total claims of the said class vote in favor of the Plan.

The votes of the creditors shall be based solely on the

amount of their respective claims based on the registry
of claims submitted by the rehabilitation receiver
pursuant to Section 44 hereof

Court Confirmation Notwithstanding the rejection of the Rehabilitation Plan,

the court may confirm the Rehabilitation Plan if all of the
following circumstances are present:

(a)The Rehabilitation Plan complies with the

requirements specified in this Act.

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(b) The rehabilitation receiver recommends the

confirmation of the Rehabilitation Plan;

(c) The shareholders, owners or partners of the

juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan;
and

(d) The Rehabilitation Plan would likely provide

the objecting class of creditors with
compensation which has a net present value
greater than that which they would have
received if the debtor were under liquidation.

- Submission of the Plan and Objections

Submission to the Within 5 days from receipt of the Rehabilitation Plan, the
Court court shall notify the creditors that the Rehabilitation
Plan has been submitted for confirmation, that any
creditor may obtain copies of the Rehabilitation Plan and
that any creditor may file an objection thereto (Sec. 64)

Filing of Objections A creditor may file an objection to the Rehabilitation Plan

within twenty (20) days from receipt of notice from the
court that the Rehabilitation Plan has been submitted for
confirmation.

Objections to a Rehabilitation Plan shall be limited to the

following:

(a) The creditors' support was induced by fraud;

(b)The documents or data relied upon in the

Rehabilitation Plan are materially false or
misleading; or

(c)The Rehabilitation Plan is in fact not

supported by the voting creditors. (Sec. 65)
Hearing on the If objections have been submitted during the relevant
Objections and period, the court shall issue an order setting the time and
Approval of the date for the hearing or hearings on the objections.
Plan
If the court finds merit in the objection, it shall order the
rehabilitation receiver or other party to cure the defect,
whenever feasible. If the court determines that the
debtor acted in bad faith, or that it is not feasible to cure
the defect, the court shall convert the proceedings into
one for the liquidation of the debtor under Chapter V of
this Act (Sec. 67)

If no objections are filed within the relevant period or, if

objections are filed, the court finds them lacking in merit,
or determines that the basis for the objection has been
cured, or determines that the debtor has complied with
an order to cure the objection, the court shall issue an
order confirming the Rehabilitation Plan.

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The court may confirm the Rehabilitation Plan

notwithstanding unresolved disputes over claims if the
Rehabilitation Plan has made adequate provisions for
paying such claims.

For the avoidance of doubt, the provisions of other laws

to the contrary notwithstanding, the court shall have the
power to approve or implement the Rehabilitation Plan
despite the lack of approval, or objection from the
owners, partners or stockholders of the insolvent
debtor: Provided, That the terms thereof are necessary
to restore the financial well-being and viability of the
insolvent debtor. (Sec. 68)
Effect of a. The Rehabilitation Plan and its provisions shall
Confirmation of be binding upon the debtor and all persons who
the Rehabilitation may be affected by it, including the creditors,
whether or not such persons have participated
Plan (Sec. 69)
in the proceedings or opposed the Rehabilitation
Plan or whether or not their claims have been
scheduled;
b. The debtor shall comply with the provisions of
the Rehabilitation Plan and shall take all actions
necessary to carry out the Plan;
c. Payments shall be made to the creditors in
accordance with the provisions of the
Rehabilitation Plan;
d. Contracts and other arrangements between the
debtor and its creditors shall be interpreted as
continuing to apply to the extent that they do
not conflict with the provisions of the
Rehabilitation Plan;
e. Any compromises on amounts or rescheduling of
timing of payments by the debtor shall be
binding on creditors regardless of whether or
not the Plan is successfully implement; and
f. Claims arising after approval of the Plan that are
otherwise not treated by the Plan are not subject
to any Suspension Order.
g. The approval of the Plan shall not affect the
rights of creditors to pursue actions against the
general partners of a partnership to the extent
they are liable under relevant legislation for the
debts thereof.
h. Amounts of any indebtedness or obligations
reduced or forgiven in connection with a Plan's
approval shall not be subject to any tax in
furtherance of the purposes of this Act.

Contents of the a. specify the underlying assumptions, the financial

Rehabilitation Plan goals and the procedures proposed to
(Sec. 62) accomplish such goals;
b. compare the amounts expected to be received
by the creditors under the Rehabilitation Plan
with those that they will receive if liquidation
ensues within the next one hundred twenty
(120) days;
c. contain information sufficient to give the various
classes of creditors a reasonable basis for

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determining whether supporting the Plan is in

their financial interest when compared to the
immediate liquidation of the debtor, including
any reduction of principal interest and penalties
payable to the creditors;
d. establish classes of voting creditors;
e. establish subclasses of voting creditors if prior
approval has been granted by the court;
f. Indicate how the insolvent debtor will be
rehabilitated including, but not limited to, debt
forgiveness, debt rescheduling, reorganization
or quasi-reorganization. dacion en pago, debt-
equity conversion and sale of the business (or
parts of it) as a going concern, or setting-up of a
new business entity or other similar
arrangements as may be necessary to restore
the financial well-being and visibility of the
insolvent debtor;
g. specify the treatment of each class or subclass
described in subsections (d) and (e);
h. provide for equal treatment of all claims within
the same class or subclass, unless a particular
creditor voluntarily agrees to less favorable
treatment;
i. ensure that the payments made under the plan
follow the priority established under the
provisions of the Civil Code on concurrence and
preference of credits and other applicable laws;
j. maintain the security interest of secured
creditors and preserve the liquidation value of
the security unless such has been waived or
modified voluntarily;
k. disclose all payments to creditors for pre-
commencement debts made during the
proceedings and the justifications thereof;
l. describe the disputed claims and the
provisioning of funds to account for appropriate
payments should the claim be ruled valid or its
amount adjusted;
m. identify the debtor's role in the implementation
of the Plan;
n. state any rehabilitation covenants of the debtor,
the breach of which shall be considered a
material breach of the Plan;
o. identify those responsible for the future
management of the debtor and the supervision
and implementation of the Plan, their affiliation
with the debtor and their remuneration;
p. address the treatment of claims arising after the
confirmation of the Rehabilitation Plan;
q. require the debtor and its counter-parties to
adhere to the terms of all contracts that the
debtor has chosen to confirm;
r. arrange for the payment of all outstanding
administrative expenses as a condition to the
Plan's approval unless such condition has been
waived in writing by the creditors concerned;

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s. arrange for the payment" of all outstanding

taxes and assessments, or an adjusted amount
pursuant to a compromise settlement with the
BlR Or other applicable tax authorities;
t. include a certified copy of a certificate of tax
clearance or evidence of a compromise
settlement with the BIR;
u. include a valid and binding resolution of a
meeting of the debtor's stockholders to increase
the shares by the required amount in cases
where the Plan contemplates an additional
issuance of shares by the debtor;
v. state the compensation and status, if any, of the
rehabilitation receiver after the approval of the
Plan; and
w. Contain provisions for conciliation and/or
mediation as a prerequisite to court assistance
or intervention in the event of any disagreement
in the interpretation or implementation of the
Rehabilitation Plan.

6. Cram Down Effect

- Sec. 86 - A restructuring/workout agreement or Rehabilitation Plan that is approved

pursuant to an informal workout framework referred to in this chapter shall have the
same legal effect as confirmation of a Plan under Section 69 hereof. The notice of the
Rehabilitation Plan or restructuring agreement or Plan shall be published once a week
for at least three (3) consecutive weeks in a newspaper of general circulation in the
Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon
the lapse of fifteen (15) days from the date of the last publication of the notice thereof.
- The Rehabilitation Plan (including pre-negotiated plans) confirmed by the Court shall
be binding upon the debtor and all persons who may be affected by it, including
creditors, whether or not such persons have participated in the proceedings, opposed
the Plan or whether their claims have been scheduled. (Sec. 69, 82 and 86)

7. Stay or Suspension Order

- The issuance of a Commencement Order shall include Stay or Suspension Order which
shall:

(1) Suspend all actions or proceedings, in court or otherwise, for the enforcement of
claims against the debtor;

(2) Suspend all actions to enforce any judgment, attachment or other provisional
remedies against the debtor;

(3) Prohibit the debtor from selling, encumbering, transferring or disposing in any
manner any of its properties except in the ordinary course of business; and

(4) Prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date except as may be provided herein. (Sec. 16[q])

- Rationale:

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1. To enable the rehabilitation receiver to effectively exercise its/his powers free

from or unburdened by any judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor company
2. To enable the management committee or the rehabilitation receiver to
substitute the defendant in any pending action against it before any court,
tribunal, board, or body (Philippine Airlines v. Sps. Sadic and Aisha Kurangking,
et. al., G.R. No. 146698, Sept 24, 2002)

- Exception to the Stay or Suspension Order:

a. to cases already pending appeal in the Supreme Court as of commencement
date Provided, That any final and executory judgment arising from such appeal
shall be referred to the court for appropriate action;
b. subject to the discretion of the court, to cases pending or filed at a specialized
court or quasi-judicial agency which, upon determination by the court is
capable of resolving the claim more quickly, fairly and efficiently than the
court: Provided, That any final and executory judgment of such court or agency
shall be referred to the court and shall be treated as a non-disputed claim;
c. to the enforcement of claims against sureties and other persons solidarily
liable with the debtor, and third party or accommodation mortgagors as well
as issuers of letters of credit, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation of the debtor as
determined by the court upon recommendation by the rehabilitation receiver;
d. to any form of action of customers or clients of a securities market participant
to recover or otherwise claim moneys and securities entrusted to the latter in
the ordinary course of the latter's business as well as any action of such
securities market participant or the appropriate regulatory agency or self-
regulatory organization to pay or settle such claims or liabilities;
e. to the actions of a licensed broker or dealer to sell pledged securities of a
debtor pursuant to a securities pledge or margin agreement for the settlement
of securities transactions in accordance with the provisions of the Securities
Regulation Code and its implementing rules and regulations;
f. the clearing and settlement of financial transactions through the facilities of a
clearing agency or similar entities duly authorized, registered and/or
recognized by the appropriate regulatory agency like the Bangko Sentral ng
Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or
entities to reimburse themselves for any transactions settled for the debtor;
and
g. Any criminal action against individual debtor or owner, partner, director or
officer of a debtor shall not be affected by any proceeding commend under
this Act. (Sec. 18)

8. Liquidation

a. Kinds of Debtors

i. Juridical Debtors

Voluntary (Sec. 90) Involuntary (Sec. 91)

Who initiates? Insolvent Debtor 3 or more creditors the

aggregate of claims is:

a. at least
1,000,000; or
b. at least 25% of
the subscribed
capital stock or

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partners
contributions of
the debtor
whichever is higher

Nature of the Petition for liquidation Petition for liquidation

suit

Form and verified there is no genuine

Contents of establish the issue of fact or law
Petition insolvency of the on the claims of the
debtor petitioners, and that
schedule of the due and
debtors debts and demandable
liabilities including a payments thereon
list of creditors with have not been made
their addresses, for at least 180 days,
amounts of claims or that the debtor
and collaterals has failed generally
securities, if any to meet its liabilities
inventory of all of its as they fall due
assets including there is no
receivables and substantial
claims against third likelihood that the
parties debtor may be
names of at least 3 rehabilitated
nominees to the
position of
liquidator
Motion to When At any time When At any time
convert during the pendency of during the pendency of
rehabilitation the court-supervised or the court-supervised or
proceedings pre-negotiated pre-negotiated
to liquidation rehabilitation rehabilitation
proceedings proceedings proceedings

Venue same court Venue same court

where the rehabilitation where the
proceedings are pending rehabilitation
proceedings are
Contents verified, pending
same contents as that of
a petition for liquidation, Contents verified, and
and state that the debtor has the same contents
is seeking immediate as that of a petition for
dissolution and liquidation
termination of its
corporate existence
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx If the petition or motion
is sufficient in form and

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substance, the court

shall issue an Order:

(1) Directing the

publication of the
petition or motion in a
newspaper of general
circulation once a week
for two (2) consecutive
weeks; and

(2) Directing the debtor

and all creditors who
are not the petitioners
to file their comment on
the petition or motion
within fifteen (15) days
from the date of last
publication.

ii. Individual Debtors

1) Suspension of Payments

Who initiates the petition? - An individual debtor who, possessing

sufficient property to cover all his debts but foreseeing the impossibility
of meeting them when they respectively fall due

Form of petition verified petition praying that the debtor be declared in

the state of suspension of payments

Venue court of the province or city in which he has resided for 6 months
prior to the filing of the petition

Contents - (a) a schedule of debts and liabilities; (b) an inventory of assess;

and (c) a proposed agreement with his creditors. (Sec. 94)

Action on the petition If the court finds the petition sufficient in form
and substance, it shall, within five (5) working days from the filing of the
petition, issue an Order:

a. Calling a meeting of all the creditors named in the schedule of

debts and liabilities at such time not less than fifteen (15) days nor
more than forty (40) days from the date of such Order. The
purpose of the meeting is to allow such creditors to prepare and
present written evidence of their claims;
b. The order shall be published in a newspaper of general circulation
in the province or city in which the petition is filed once a week
for 2 consecutive weeks, the first publication must be made
within the first 7 days from the time of the issuance of the;
c. The Clerk of court shall send a copy of the order by registered
mail, postage prepaid, to the named creditors in the schedule of
debts and liabilities;
d. The order shall also forbid the individual debtor from selling,
transferring, encumbering or disposing in any manner of his
property, except those used in the ordinary operations of
commerce or of industry in which the petitioning individual

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debtor is engaged so long as the proceedings relative to the

suspension of payments are pending;
e. It shall also prohibit the individual debtor from making any
payment outside of the necessary or legitimate expenses of his
business or industry, so long as the proceedings relative to the
suspension of payments are pending; and
f. Appointing a commissioner to preside over the creditors'
meeting. (Sec. 95)

Creditors Meeting

- The presence of creditors holding claims amounting to at least 3/5

of the liabilities of the debtor must be present, in which case the
commissioner shall declare the meeting open for business
- The claims must be recorded by the clerk which shall be examined
by the commissioner
- A proposed agreement must be had which will be subjected to a
vote, upholding the proposition gaining majority votes.
- All protests made against the majority vote shall be drawn up, and
the commissioner and the individual debtor together with all
creditors taking part in the voting shall sign the affirmed
propositions. Grounds for objection:
defects in the call for the meeting, in the holding thereof
and in the deliberations had thereat which prejudice the
rights of the creditors;
fraudulent connivance between one or more creditors
and the individual debtor to vote in favor of the proposed
agreement; or
Fraudulent conveyance of claims for the purpose of
obtaining a majority.
- No creditor who incurred his credit within ninety (90) days prior
to the filing of the petition shall be entitled to vote (Sec. 97)
- The proposed agreement shall be deemed rejected if the number
of creditors required for holding a meeting do not attend thereat,
or if the two (2) majorities mentioned in Section 97 hereof are not
in favor thereof. In such instances, the proceeding shall be
terminated without recourse and the parties concerned shall be
at liberty to enforce the rights which may correspond to them.
(Sec. 99)

2) Voluntary Liquidation

- An individual debtor whose properties are not sufficient to cover his

liabilities, and owing debts exceeding Five hundred thousand pesos
( 500,000.00), may apply to be discharged from his debts and
liabilities by filing a verified petition with the court of the province or
city in which he has resided for six (6) months prior to the filing of
such petition. He shall attach to his petition a schedule of debts and
liabilities and an inventory of assets. The filing of such petition shall
be an act of insolvency. (Sec. 103)

3) Involuntary Liquidation

Who initiates? - Any creditor or group of creditors with a claim of, or with
claims aggregating at least Five hundred thousand pesos (Php500, 000.00)
(Sec. 105)

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Venue - court of the province or city in which the individual debtor resides
(Sec. 105)

Grounds for the petition the petition for liquidation shall set forth or
allege at least one of such acts:

(a) That such person is about to depart or has departed from the Republic
of the Philippines, with intent to defraud his creditors;

(b) That being absent from the Republic of the Philippines, with intent to
defraud his creditors, he remains absent;

(c) That he conceals himself to avoid the service of legal process for the
purpose of hindering or delaying the liquidation or of defrauding his
creditors;

(d) That he conceals, or is removing, any of his property to avoid its being
attached or taken on legal process;

(e) That he has suffered his property to remain under attachment or legal
process for three (3) days for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;

(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 any creditors or claimant;

(g) That he has willfully suffered judgment to be taken against him by

default for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;

(h) That he has suffered or procured his property to be taken on legal

process with intent to give a preference to one or more of his creditors
and thereby hinder or delay the liquidation or defraud any one of his
creditors;

(i) That he has made any assignment, gift, sale, conveyance or transfer of
his estate, property, rights or credits with intent to hinder or delay the
liquidation or defraud his creditors;

(j) That he has, in contemplation of insolvency, made any payment, gift,

grant, sale, conveyance or transfer of his estate, property, rights or
credits;

(k) That being a merchant or tradesman, he has generally 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, after demand, to pay
any moneys deposited with him or received by him in a fiduciary; and

(m) That an execution having been issued against him on final judgment
for money, he shall have been found to be without sufficient property
subject to execution to satisfy the judgment. (Sec. 105)

Bond - The petitioning creditor/s shall post a bond in such as the court
shall direct, conditioned that if the petition for liquidation is dismissed by
the court, or withdrawn by the petitioner, or if the debtor shall not be

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declared an insolvent the petitioners will pay to the debtor all costs,
expenses, damages occasioned by the proceedings and attorney's fees.
(Sec. 105)

Order to Individual Debtor - The court shall issue an Order requiring the
individual debtor to show cause, at a time and place to be fixed by the
said court, why he should not be adjudged an insolvent (Sec. 106)

Action of the Court to the show cause - Upon good cause shown, the
court may issue an Order forbidding the individual debtor from making
payments of any of his debts, and transferring any property belonging to
him (Sec. 106)

If the individual debtor shall default or if, after trial, the issues are found
in favor of the petitioning creditors the court shall issue the Liquidation
Order mentioned in Section 112 hereof (Sec. 107)

In all cases where the individual debtor resides out of the Republic of the
Philippines; or has departed therefrom; or cannot, after due diligence, be
found therein; or conceals himself to avoid service of the Order to show
cause, or any other preliminary process or orders in the matter, then the
petitioning creditors, upon submitting the affidavits requisite to
procedure an Order of publication, and presenting a bond in double the
amount of the aggregate sum of their claims against the individual debtor,
shall be entitled to an Order of the court directing the sheriff of the
province or city in which the matter is pending to take into his custody a
sufficient amount of property of the individual debtor to satisfy the
demands of the petitioning creditors and the costs of the proceedings
(Sec. 108)

b. Procedure

i. Conversion of Rehabilitation Proceedings to Liquidation Proceedings

A. During the pendency of court-supervised or pre-negotiated rehabilitation

proceedings, the court may order the conversion of rehabilitation
proceedings to liquidation proceedings pursuant to (a) Section 25(c) of
this Act; or (b) Section 72 of this Act; or (c) Section 75 of this Act; or (d)
Section 90 of this Act; or at any other time upon the recommendation of
the rehabilitation receiver that the rehabilitation of the debtor is not
feasible. Thereupon, the court shall issue the Liquidation Order
mentioned in Section 112 hereof (Sec. 92)
B. Within ten (10) days from receipt of the report of the rehabilitation
receiver mentioned in Section 24 hereof the court may convert the
proceedings into one for the liquidation of the debtor upon a finding that:
1. the debtor is insolvent; and
2. There is no substantial likelihood for the debtor to be successfully
rehabilitated as determined in accordance with the rules to be
promulgated by the Supreme Court. (Sec. 25[c])
C. If no Rehabilitation Plan is confirmed within the said period, the
proceedings may upon motion or motu propio, be converted into one for
the liquidation of the debtor. (Sec. 72)
D. If the termination of proceedings is due to failure of rehabilitation or
dismissal of the petition for reasons other than technical grounds, the

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proceedings shall be immediately converted to liquidation as provided in

Section 92 of this Act. (Sec. 75)
E. Voluntary Liquidation Proceedings (Sec. 90) and Involuntary Liquidation
Proceedings (Sec. 94)
F. If the court determines that the debtor or creditors supporting the
Rehabilitation Plan acted in bad faith, or that the objection is non-curable,
the court may order the conversion of the proceedings into liquidation
(Sec. 80)

ii. Liquidation Order

Contents of the Order

a. declare the debtor insolvent;

b. order the liquidation of the debtor and, in the case of a juridical debtor,
declare it as dissolved;
c. order the sheriff to take possession and control of all the property of the
debtor, except those that may be exempt from execution;
d. order the publication of the petition or motion in a newspaper of general
circulation once a week for two (2) consecutive weeks;
e. Direct payments of any claims and conveyance of any property due the
debtor to the liquidator;
f. prohibit payments by the debtor and the transfer of any property by the
debtor;
g. direct all creditors to file their claims with the liquidator within the period
set by the rules of procedure;
h. authorize the payment of administrative expenses as they become due;
i. state that the debtor and creditors who are not petitioner/s may submit
the names of other nominees to the position of liquidator; and
j. Set the case for hearing for the election and appointment of the
liquidator, which date shall not be less than thirty (30) days nor more than
forty-five (45) days from the date of the last publication. (Sec. 112)

iii. Effects of the Liquidation Order

1. The Juridical debtor shall be deemed dissolved and its corporate or

juridical existence terminated
2. Legal title to and control of all the assets of the debtor, except those that
may be exempt from execution shall be deemed vested in the liquidator
or, pending his election or appointment, with the court
3. All contracts of the debtor shall be deemed terminated and/or breached,
unless the liquidator, within 90 days from the date of his assumption of
office, declares otherwise and the contracting party agrees
4. No separate action for the collection of an unsecured claim shall be
allowed
5. No foreclosure proceeding shall be allowed for a period of 180 days (Sec.
113)

iv. Rights of Secured Creditors

The Liquidation Order shall not affect the right of a secured creditor to enforce his
lien in accordance with the applicable contract or law. A secured creditor may:

(a) Waive his right under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or

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(b) Maintain his rights under the security or lien:

If the secured creditor maintains his rights under the security or lien:

(1) The value of the property may be fixed in a manner agreed upon by the creditor
and the liquidator. When the value of the property is less than the claim it secures,
the liquidator may convey the property to the secured creditor and the latter will
be admitted in the liquidation proceedings as a creditor for the balance. If its value
exceeds the claim secured, the liquidator may convey the property to the creditor
and waive the debtor's right of redemption upon receiving the excess from the
creditor;

(2) The liquidator may sell the property and satisfy the secured creditor's entire
claim from the proceeds of the sale; or

(3) The secure creditor may enforce the lien or foreclose on the property pursuant
to applicable laws. (Sec. 114)

v. Powers, Duties, and Responsibilities of the Liquidator

The liquidator shall be deemed an officer of the court with the principal duly of
preserving and maximizing the value and recovering the assets of the debtor, with
the end of liquidating them and discharging to the extent possible all the claims
against the debtor. The powers, duties and responsibilities of the liquidator shall
include, but not limited to:

(a) To sue and recover all the assets, debts and claims, belonging or due to the
debtor;

(b) To take possession of all the property of the debtor except property exempt
by law from execution;

(c) To sell, with the approval of the court, any property of the debtor which has
come into his possession or control;

(d) To redeem all mortgages and pledges, and so satisfy any judgement which may
be an encumbrance on any property sold by him;

(e) To settle all accounts between the debtor and his creditors, subject to the
approval of the court;

(f) To recover any property or its value, fraudulently conveyed by the debtor;

(g) to recommend to the court the creation of a creditors' committee which will
assist him in the discharge of the functions and which shall have powers as the
court deems just, reasonable and necessary; and

(h) Upon approval of the court, to engage such professional as may be necessary
and reasonable to assist him in the discharge of his duties.

In addition to the rights and duties of a rehabilitation receiver, the liquidator, shall
have the right and duty to take all reasonable steps to manage and dispose of the
debtor's assets with a view towards maximizing the proceedings therefrom, to pay
creditors and stockholders, and to terminate the debtor's legal existence. Other
duties of the liquidator in accordance with this section may be established by
procedural rules.

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 La Li Lu Le Lo

A liquidator shall be subject to removal pursuant to procedures for removing a

rehabilitation receiver. (Sec. 119)

vi. Determination of Claims

Registry of Claims - Within twenty (20) days from his assumption into office the
liquidator shall prepare a preliminary registry of claims of secured and unsecured
creditors. Secured creditors who have waived their security or lien, or have fixed
the value of the property subject of their security or lien by agreement with the
liquidator and is admitted as a creditor for the balance, shall be considered as
unsecured creditors. (Sec. 123)

Opposition or Challenge to Claims - Within thirty (30) days from the expiration of
the period for filing of applications for recognition of claims, creditors, individual
debtors, owner/s of the sole proprietorship-debtor, partners of the partnership-
debtor and shareholders or members of the corporation -debtor and other
interested parties may submit a challenge to claim or claims to the court, serving
a certified copy on the liquidator and the creditor holding the challenged claim.

Upon the expiration of the (30) day period, the rehabilitation receiver shall submit
to the court the registry of claims containing the undisputed claims that have not
been subject to challenge. Such claims shall become final upon the filling of the
register and may be subsequently set aside only on grounds or fraud, accident,
mistake or inexcusable neglect. (Sec. 125)

vii. Liquidation Plan

- Within three (3) months from his assumption into office, the Liquidator shall
submit a Liquidation Plan to the court. The Liquidation Plan shall, as a
minimum enumerate all the assets of the debtor and a schedule of liquidation
of the assets and payment of the claims. (Sec. 129)
- It shall be the duty of the court, upon petition and after hearing, to exempt
and set apart, for the use and benefit of the said insolvent, such real and
personal property as is by law exempt from execution, and also a homestead
(Sec. 130)
- The sale of the assets of the debtor shall be made in a public auction
However, a private sale may be allowed with the approval of the
court if:
a. the goods to be sold are of a perishable nature, or are liable
to quickly deteriorate in value, or are disproportionately
expensive to keep or maintain; or
b. The private sale is for the best interest of the debtor and his
creditors. (Sec. 131)
- The Liquidation Plan and its Implementation shall ensure that the
concurrence and preference of credits as enumerated in the Civil Code of the
Philippines and other relevant laws shall be observed, unless a preferred
creditor voluntarily waives his preferred right (Sec. 133)

Say Peace

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