Commercial-Law-2022-Ust-Golden-Notes-Confidential PDF

FACULTY OF CIVIL LAW (1734)
COMMERCIAL LAW
2022 GOLDEN NOTES

FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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Released in the Philippines, 2022.

Faculty of Civil Law (1734)
ACADEMIC YEAR 2021-2022

CIVIL LAW STUDENT COUNCIL
NATHAN RAPHAEL D.L. AGUSTIN PRESIDENT
STEPHEN FLOYD A. GOPEZ VICE PRESIDENT INTERNAL
NICOLO B. BONGOLAN VICE PRESIDENT EXTERNAL
PATRICIA INGRID M. SEE SECRETARY
JULIENNE CELINE G. OGAYON TREASURER
JANNODIN D. DIPATUAN AUDITOR
IVAN ARNIE C. QUIAMCO PUBLIC RELATIONS OFFICER
KAREN DARYL L. BRITO CHIEF-OF-STAFF
UST BAR-OPS
SARAH ANGELA D. EVA CHAIRPERSON

JUSTINE RENEE GERVACIO VICE-CHAIRPERSON
MA. ANDREA D. CABATU SECRETARY
JAN YSABEL U. DE LEON HEAD, PUBLIC RELATIONS OFFICER
PAULINNE STEPHANY G. SANTIAGO HEAD, FINANCE COMMITTEE
KAREN DARYL L. BRITO HEAD, HOTEL ACCOMMODATIONS COMMITTEE
RALPH DOMINIC V. MARTINEZ HEAD, LOGISTICS COMMITTEE
JEDIDIAH R. PADUA SENIOR MEMBER
SABINA MARIA H. MABUTAS SENIOR MEMBER
JOSEPHINE GRACE W. ANG SENIOR MEMBER
REBECCA JOY M. MALITAO SENIOR MEMBER
JOHN FREDERICK A. NOJARA SENIOR MEMBER
ATTY. AL CONRAD B. ESPALDON

ADVISER
ACADEMICS COMMITTEE 2022

FRANCINE BLAISE M. LOJA SECRETARY GENERAL
JOANNA NICOLE A. PAZ SECRETARY GENERAL
MARC GABRIEL A. ABELLA EXECUTIVE COMMITTEE for LEGAL ETHICS
KIARA LOUISE T. BALIWAG EXECUTIVE COMMITTEE for CRIMINAL LAW
EXECUTIVE COMMITTEE for LABOR LAW AND
DANIELLE B. BARANDA
SOCIAL LEGISLATION
MA. CARMINA A. DIETA EXECUTIVE COMMITTEE for CIVIL LAW
DAINIELE RENEE R. FAJILAGUTAN EXECUTIVE COMMITTEE for REMEDIAL LAW
GEORJHIA CZARINAH Q. MALALUAN EXECUTIVE COMMITTEE for COMMERCIAL LAW
MARIA CRISANTA M. PALOMA EXECUTIVE COMMITTEE for POLITICAL LAW
MIKAELA CECILLE S. SILVERIO EXECUTIVE COMMITTEE for TAXATION LAW
JERICHO SIMON H. DU COVER DESIGN ARTIST
COMMERCIAL LAW COMMITTEE 2022

EPHRAIM P. BIE
COMMERCIAL LAW SUBJECT HEAD
PAULINE ABEGAIL P. FRIVALDO ASST. HEAD,

INSURANCE, TRANSPORTATION LAW, and ANTI-
MONEY LAUNDERING ACT
ANGELYNN C. SALAZAR ASST. HEAD,

INTELLECTUAL PROPERTY LAW, ELECTRONIC
COMMERCE ACT, and FINANCIAL
REHABILITATION AND INSOLVENCY ACT
JEAN ALMIRA S. BULONG ASST. HEADS, CORPORATION LAW
ANGELICA M. TAMAYO
MEMBERS
PRINCESS MONIQUE M. AGPAOA ELLINE M. MANEJA
SOFIA MARIE B. CLARIÑO PRECIOUS JOY D. PACIONELA
IANA CASSANDRA, Y. ESMILE ANGELICA ROSCEA S. QUIAMBAO
MOREL DEI G. FALGUI MONIQUE E. RENS
JAMIE ANNE G. JORGE BRYAN JAY L. SANTOS
PIA AILA D. MARTINEZ
ATTY. MARIAN JOANNE K. CO-PUA

ATTY. ALLAN B. GEPTY
ATTY. AMADO E. TAYAG
ADVISERS

UNIVERSITY OF SANTO TOMAS
ACADEMIC OFFICIALS
ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.
DEAN REGENT
ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY
ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC
JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR
LENY G. GADIANA, R.G.C.

GUIDANCE COUNSELOR
OUR DEEPEST APPRECIATION TO OUR

MENTORS AND INSPIRATION
Dean Nilo T. Divina Atty. Marian Joanne K. Co-Pua
Dean Amado L. Dimayuga Atty. Allan B. Gepty
Dean Eduardo Juan F. Abella Atty. Jacinto D. Jimenez
Justice Japar B. Dimaampao Atty. Albert R. Palacios
Justice Gabriel T. Robeniol Atty. Mercy Jane B. Paras-Leynes
Judge Maria Ella Cecilia D. Escalante Atty. Teofilo R. Ragadio
Judge Edith Cynthia A. Wee Atty. Amado E. Tayag
Atty. Emma Ruby Aguilar-Aprado Atty. Janna Mae B. Tecson
Atty. Fe T. Becina-Macalino Atty. Maria Zarah R. Villanueva-

Castro
For being our guideposts in understanding the intricate sphere of Commercial Law.
– Academics Committee 2022
DISCLAIMER
THE RISK OF USE OF THIS BAR

REVIEW MATERIAL SHALL BE
BORNE BY THE USER
TABLE OF CONTENTS
I. INSURANCE.................................................................................................................................................................................. 1
A. BASIC CONCEPTS ......................................................................................................................................................................................1

1. WHAT MAY BE INSURED ................................................................................................................................................................. 4
2. INSURABLE INTEREST...................................................................................................................................................................... 5
3. DOUBLE INSURANCE AND OVERINSURANCE..................................................................................................................... 14
4. NO FAULT, SUICIDE, AND INCONTESTABILITY CLAUSES ............................................................................................. 19
B. PERFECTION OF THE INSURANCE CONTRACT ....................................................................................................................... 24
C. RIGHTS AND OBLIGATIONS OF PARTIES ................................................................................................................................... 34
D. RESCISSION OF INSURANCE CONTRACTS ................................................................................................................................. 39
II. TRANSPORTATION LAW .................................................................................................................................................... 50
A. COMMON CARRIER ............................................................................................................................................................................... 50

1. CONCEPT .............................................................................................................................................................................................. 50
2. COMMON CARRIER vs. PRIVATE CARRIER .......................................................................................................................... 53
3. DILIGENCE REQUIRED OF COMMON CARRIERS ............................................................................................................... 53
B. OBLIGATIONS AND LIABILITIES .................................................................................................................................................... 56
1. VIGILANCE OVER GOODS .............................................................................................................................................................. 59
2. SAFETY OF PASSENGERS .............................................................................................................................................................. 64
C. DEFENSES AVAILABLE TO A COMMON CARRIER .................................................................................................................. 70
1. PROOF OF NEGLIGENCE................................................................................................................................................................ 70
2. DUE DILIGENCE IN THE SELECTION AND SUPERVISION OF EMPLOYEES ........................................................... 71
3. FORTUITOUS EVENT ...................................................................................................................................................................... 71
4. CONTRIBUTORY NEGLIGENCE .................................................................................................................................................. 73
5. DOCTRINE OF LAST CLEAR CHANCE ...................................................................................................................................... 74
D. EXTENT OF LIABILITY ........................................................................................................................................................................ 75
1. RECOVERABLE DAMAGES ............................................................................................................................................................ 75
2. STIPULATIONS LIMITING LIABILITY ...................................................................................................................................... 76
3. LIMITATIONS UNDER THE MONTREAL CONVENTION .................................................................................................. 80
III. CORPORATION LAW .......................................................................................................................................................... 91
A. GENERAL PRINCIPLES ........................................................................................................................................................................ 91

1. NATIONALITY OF CORPORATIONS .......................................................................................................................................... 97
a. CONTROL TEST ............................................................................................................................................................................ 97
b. GRANDFATHER RULE ............................................................................................................................................................... 98
2. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY .................................................................................................. 103
3. DOCTRINE OF PIERCING THE CORPORATE VEIL ........................................................................................................... 112
B. DE FACTO CORPORATIONS VERSUS CORPORATIONS BY ESTOPPEL ......................................................................... 120
C. CORPORATE POWERS ...................................................................................................................................................................... 123
1. HOW POWERS ARE EXERCISED ............................................................................................................................................. 123
a. ULTRA VIRES DOCTRINE ...................................................................................................................................................... 139
b. TRUST FUND DOCTRINE ...................................................................................................................................................... 145
D. BOARD OF DIRECTORS AND TRUSTEES.................................................................................................................................. 147
1. BASIC PRINCIPLES ........................................................................................................................................................................ 147
a. DOCTRINE OF CENTRALIZED MANAGEMENT ........................................................................................................... 147
b. BUSINESS JUDGMENT RULE ................................................................................................................................................148
2. TENURE AND QUALIFICATIONS OF DIRECTORS OR TRUSTEES ............................................................................. 149
3. ELECTION AND REMOVAL OF DIRECTORS OR TRUSTEES ......................................................................................... 153
4. DUTIES, RESPONSIBILITIES, AND LIABILITIES FOR UNLAWFUL ACTS ............................................................... 158
E. STOCKHOLDERS AND MEMBERS ................................................................................................................................................171
1. RIGHTS AND OBLIGATIONS OF A STOCKHOLDER AND MEMBER .......................................................................... 171
a. DOCTRINE OF EQUALITY OF SHARES .............................................................................................................................172
2. PARTICIPATION IN MANAGEMENT ......................................................................................................................................176
a. PROXY.............................................................................................................................................................................................177
b. VOTING TRUST ..........................................................................................................................................................................179
c. CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED .......................................................................................... 182
i. BY A MAJORITY VOTE .........................................................................................................................................................183
ii. BY A TWO-THIRDS VOTE.................................................................................................................................................183
iii. BY CUMULATIVE VOTING ..............................................................................................................................................186
3. PROPRIETARY RIGHTS ................................................................................................................................................................186
a. RIGHT TO DIVIDENDS.............................................................................................................................................................186
b. RIGHT OF APPRAISAL.............................................................................................................................................................187
c. RIGHT TO INSPECT...................................................................................................................................................................189
d. PREEMPTIVE RIGHT ...............................................................................................................................................................192
e. RIGHT OF FIRST REFUSAL ....................................................................................................................................................193
4. REMEDIAL RIGHTS........................................................................................................................................................................193
5. INTRA-CORPORATE DISPUTES (INDIVIDUAL vs. REPRESENTATIVE vs. DERIVATIVE SUITS) ................. 194
F. CAPITAL STRUCTURE........................................................................................................................................................................203
1. SHARES OF STOCK .........................................................................................................................................................................204
a. NATURE OF SHARES OF STOCK .........................................................................................................................................205
b. CONSIDERATION FOR SHARES OF STOCK ....................................................................................................................206
c. WATERED STOCKS ...................................................................................................................................................................210
d. SITUS OF SHARES OF STOCK ...............................................................................................................................................211
e. CLASSES OF SHARES OF STOCK .........................................................................................................................................211
2. CERTIFICATE OF STOCK .............................................................................................................................................................216
a. NATURE OF THE CERTIFICATE ..........................................................................................................................................216
b. UNCERTIFICATED SHARES ..................................................................................................................................................217
c. NEGOTIABILITY; REQUISITES FOR VALID TRANSFER OF STOCKS ................................................................... 217
d. ISSUANCE .....................................................................................................................................................................................220
e. LOST OR DESTROYED CERTIFICATES .............................................................................................................................221
3. DISPOSITION AND ENCUMBRANCE OF SHARES .............................................................................................................222
a. SALE OF SHARES .......................................................................................................................................................................222
b. ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES ....................................................................................... 223
c. REQUISITES OF A VALID TRANSFER ...............................................................................................................................223
d. INVOLUNTARY DEALINGS....................................................................................................................................................223
G. DISSOLUTION AND LIQUIDATION ..............................................................................................................................................224
1. MODES OF DISSOLUTION ...........................................................................................................................................................225
a. VOLUNTARY AND INVOLUNTARY DISSOLUTION .....................................................................................................225
2. METHODS OF LIQUIDATION .....................................................................................................................................................229
H. OTHER CORPORATIONS ..................................................................................................................................................................233
1. CLOSE CORPORATION .................................................................................................................................................................233
2. NON-STOCK CORPORATION .....................................................................................................................................................236
3. FOREIGN CORPORATIONS .........................................................................................................................................................241
a. WHAT CONSTITUTES “DOING BUSINESS” ....................................................................................................................242
b. NECESSITY OF A LICENSE TO DO BUSINESS ...............................................................................................................244
c. REQUISITES FOR ISSUANCE OF LICENSE ...................................................................................................................... 245
d. RESIDENT AGENT .................................................................................................................................................................... 247
e. PERSONALITY TO SUE AND SUABILITY ........................................................................................................................ 249
4. ONE-PERSON CORPORATIONS ............................................................................................................................................... 253
I. MERGERS AND CONSOLIDATIONS .............................................................................................................................................. 257
1. CONCEPT .......................................................................................................................................................................................... 257
2. EFFECTS AND LIMITATIONS.................................................................................................................................................... 263
IV. INTELLECTUAL PROPERTY CODE ............................................................................................................................... 267
A. PATENTS ................................................................................................................................................................................................ 275

1. PATENTABLE VS. NON-PATENTABLE INVENTIONS .................................................................................................... 276
2. OWNERSHIP OF A PATENT....................................................................................................................................................... 280
3. GROUNDS FOR CANCELLATION OF A PATENT ............................................................................................................... 282
4. PATENT INFRINGEMENT .......................................................................................................................................................... 287
B. TRADEMARKS ...................................................................................................................................................................................... 292
1. MARKS vs. COLLECTIVE MARKS vs. TRADE NAMES ...................................................................................................... 292
2. ACQUISITION OF OWNERSHIP ................................................................................................................................................ 295
a. CONCEPT OF ACTUAL USE ................................................................................................................................................... 297
b. EFFECT OF REGISTRATION ................................................................................................................................................. 301
3. WELL-KNOWN MARKS ............................................................................................................................................................... 305
4. RIGHTS CONFERRED BY REGISTRATION .......................................................................................................................... 307
5. CANCELLATION OF REGISTRATION ..................................................................................................................................... 308
6. TRADEMARK INFRINGEMENT ................................................................................................................................................ 310
7. UNFAIR COMPETITION............................................................................................................................................................... 313
C. COPYRIGHT ........................................................................................................................................................................................... 318
1. COPYRIGHTABLE WORKS ......................................................................................................................................................... 319
2. NON-COPYRIGHTABLE WORKS .............................................................................................................................................. 320
3. RIGHTS CONFERRED BY COPYRIGHT .................................................................................................................................. 322
4. OWNERSHIP OF A COPYRIGHT ............................................................................................................................................... 326
5. LIMITATIONS ON COPYRIGHT ................................................................................................................................................ 329
6. DOCTRINE OF FAIR USE ............................................................................................................................................................. 331
7. COPYRIGHT INFRINGEMENT ................................................................................................................................................... 334
V. THE ANTI-MONEY LAUNDERING ACT OF 2001 ........................................................................................................ 340
A. COVERED INSTITUTIONS AND THEIR OBLIGATIONS ....................................................................................................... 340

B. COVERED AND SUSPICIOUS TRANSACTIONS ....................................................................................................................... 342
C. SAFE HARBOR PROVISION ............................................................................................................................................................. 344
D. WHEN IS MONEY LAUNDERING COMMITTED (INCLUDING PREDICATE CRIMES) ............................................ 345
E. AUTHORITY TO INQUIRE INTO BANK DEPOSITS ................................................................................................................ 347
F. FREEZING AND FORFEITURE........................................................................................................................................................ 350
VI. ELECTRONIC COMMERCE ACT OF 2000 .................................................................................................................... 357
A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES, DOCUMENTS, AND SIGNATURES ....................... 357
B. PRESUMPTION RELATING TO ELECTRONIC SIGNATURES ............................................................................................ 358
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT ................................................................................................................................................................................................ 359
D. OBLIGATION OF CONFIDENTIALITY......................................................................................................................................... 360
VII. FINANCIAL REHABILITATION, INSOLVENCY, LIQUIDATION and SUSPENSION OF PAYMENTS .......... 361
A. BASIC CONCEPTS ................................................................................................................................................................................362

1. REHABILITATION ..........................................................................................................................................................................362
2. INSOLVENT .......................................................................................................................................................................................362
3. LIQUIDATION ...................................................................................................................................................................................362
4. SUSPENSION OF PAYMENTS.....................................................................................................................................................363
B. MODES OF REHABILITATION........................................................................................................................................................367
1. COURT-SUPERVISED REHABILITATION .............................................................................................................................367
a. VOLUNTARY VS. INVOLUNTARY .......................................................................................................................................367
b. COMMENCEMENT ORDER (INCLUDING STAY ORDER).......................................................................................... 368
c. REHABILITATION RECEIVER AND MANAGEMENT COMMITTEE ...................................................................... 375
d. DETERMINATION OF CLAIMS.............................................................................................................................................378
e. REHABILITATION PLAN ........................................................................................................................................................379
f. CREDITOR APPROVAL AND CONFIRMATION ..............................................................................................................380
g. FAILURE OF REHABILITATION ..........................................................................................................................................381
2. PRE-NEGOTIATED REHABILITATION ..................................................................................................................................381
a. HOW INITIATED ........................................................................................................................................................................381
b. PERIOD AND EFFECT OF APPROVAL ..............................................................................................................................381
3. OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENT OR REHABILITATION PLAN ................ 382
a. MINIMUM REQUIREMENTS .................................................................................................................................................382
b. STANDSTILL PERIOD ..............................................................................................................................................................382
c. CRAM DOWN EFFECT..............................................................................................................................................................382
C. LIQUIDATION ........................................................................................................................................................................................384
1. VOLUNTARY LIQUIDATION VS. INVOLUNTARY LIQUIDATION VS. CONVERSION .......................................... 384
2. PROCEDURE .....................................................................................................................................................................................389
a. LIQUIDATION ORDER; EFFECTS ........................................................................................................................................389
3. DETERMINATION OF CLAIMS ..................................................................................................................................................390
D. SUSPENSION OF PAYMENTS; SUSPENSION OF PAYMENT ORDER ............................................................................. 392
Insurance
I of the Insurance Code.

I. INSURANCE
(P.D. No. 162, as amended by R.A. No. 10607) “Doing an insurance business” or “transacting
an insurance business”
The term “doing an insurance business” or

Laws Governing Contracts of Insurance in the
“transacting an insurance business” means:
Philippines
(I-S-R-A)
1. Insurance Code (IC) (R.A. No. 10607, enacted on
1. Making or proposing to make, as Insurer, any
23 July 2012, further amending P.D. No. 612);
insurance contract;
2. New Civil Code (NCC);
3. Special Laws.
2. Making or proposing to make, as Surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate
A. BASIC CONCEPTS business or activity of the surety;
3. Doing any kind of business, including a

Contract of Insurance Reinsurance business, specifically recognized
as constituting the doing of an insurance
It is an agreement whereby one undertakes for a business within the meaning of the Insurance
consideration to indemnify another against loss, Code (IC);
damage or liability arising from an unknown or
contingent event. (Sec. 2(a), Insurance Code [IC]) 4. Doing or proposing to do Any business in
substance equivalent to any of the foregoing in
A contract of insurance, to be binding from the date a manner designed to evade the provisions of
of application, must have been a completed the IC.
contract. (Perez v. CA, G.R. No. 112329, 28 Jan. 2000)
NOTE: In the application of the provisions of the IC,
Thus, it must have all the essential elements of a the fact that no profit is derived from the making of
valid contract: (SM-Co-Me) insurance contracts, agreements or transactions or
that no separate or direct consideration is received
1. Subject Matter in which the insured has an therefor, shall not be deemed conclusive to show
insurable interest; that the making thereof does not constitute the
doing or transacting of an insurance business. (Sec.
2. Consideration, which is the premium paid by 2(b), IC)
the insured, for the insurer’s promise to
indemnify the former upon the happening of Q: The parties’ CBA contains the following
the event or peril insured against; and provision, “The COMPANY shall obtain group
hospitalization insurance coverage or assume
3. Meeting of the minds of the parties. (Art. 1318, under a self-insurance basis hospitalization for
New Civil Code) the dependents of regular employees.”
Eventually, three members of Mitsubishi Motors
Event or Peril Insured Against Philippines Salaried Employees Union
(MMPSEU) filed claims for reimbursement of
It is any contingent or unknown event, whether past hospitalization expenses of their dependents. In
or future, which may damnify a person having an turn, Mitsubishi Motors Philippines Corporation
insurable interest, or create a liability against him (MMPC) paid only a portion of their
may be insured, subject to the provisions of Chapter hospitalization insurance claims, not the full
1 UNIVERSITY OF SANTO TOMAS

Commercial Law
amount. However, MMPSEU insists that MMPC is Insurance as Contracts of Adhesion (Fine Print
also liable for the amounts covered under other Rule)
insurance policies; otherwise, MMPC will
unjustly profit from the premiums the While generally stipulations in a contract come
employees contribute through monthly salary about after deliberate drafting by the parties
deductions. Is MMPSEU’s contention, correct? thereto, there are certain contracts in which almost
all the provisions of which have been drafted only
A: NO. Since the subject CBA provision is an by one party, usually a corporation. Such contracts
insurance contract, the rights and obligations of the are called contracts of adhesion because the only
parties must be determined in accordance with the participation of the other party is the signing of his
general principles of insurance law. Being in the signature or his 'adhesion' thereto. Insurance
nature of a non-life insurance contract and contracts fall into this category (Sweet Lines, Inc. v.
essentially a contract of indemnity, the CBA Teves, G.R. No. L-37750, 19 May 1978). An illustration
provision obligates MMPC to indemnify the covered of a contract of adhesion is when the insurer used
employees’ medical expenses incurred by their “fine print” letters in conditions stated in a contract
dependents but only up to the extent of the of insurance. (Ibid)
expenses actually incurred. This is consistent with
the principle of indemnity which proscribes the Rules in the Construction or Interpretation of
insured from recovering greater than the loss. Insurance Contracts
(Mitsubishi Motors Philippines Salaried Employees
Union v. Mitsubishi Motors Phil. Corp, G.R. No. GR: If the terms of the contract clearly show the
175773, 17 June 2013) intention of the parties, there shall be no room for
interpretation.
Insurance as an Uberrimae Fides contract (1993
BAR) XPN: If there are ambiguities in the terms of an
insurance contract, they have to be resolved in favor
The contract of insurance is one of perfect good of the insured and strictly against the insurer
faith (uberrimae fidei) not for the insured alone, because an insurance contract being a contract of
but equally so for the insurer; in fact, it is more so adhesion, most of its terms is not a product of
for the latter, since its dominant bargaining position mutual negotiation between the parties as they are
carries with it stricter responsibility. (Qua Chee Gan prepared by the insurance company in final printed
v. Law Union and Rock Insurance, Co. Ltd., G.R. No. L- forms. (De Leon, 2014)
4611, 17 Dec. 1955)
Elements of an Insurance Contract (S-P-E-A-R)
It requires the parties to the contract to
communicate that which a party knows and ought 1. Scheme to distribute losses – Such assumption of
to communicate, that is, the duty to disclose in good risk is part of a general scheme to distribute
faith all facts material to the contract. This doctrine actual losses among a large group or substantial
is essential on account of the fact that the full number of persons bearing a similar risk.
circumstances of the subject matter of insurance
are, as a rule, known to the insured only and the 2. Payment of premium – As consideration for the
insurer, in deciding whether or not to accept a risk, insurer’s promise, the insured makes a ratable
must rely primarily upon the information supplied contribution called “premium” to a general
to him by the applicant. (Sundiang Sr. & Aquino, insurance fund.
2014)
3. Existence of insurable interest – The insured
possesses an interest of some kind, susceptible
of pecuniary estimation known as “insurable
interest.”
UNIVERSITY OF SANTO TOMAS 2

2022 GOLDEN NOTES
Insurance
4. Assumption of risk – The insurer assumes that XPNs: Insurance contracts that may be required by
risk of loss for a consideration. law such as:
5. Risk of loss – The insured is subject to a risk of a. For motor vehicles;

loss through the destruction or impairment of b. As a condition to granting a license to conduct
that interest by the happening of the designated business or calling affecting the public safety
peril. or welfare;
c. For employees; or
NOTE: The inherent uncertainty of events is d. Social insurance for members of the GSIS and
normally described in terms of risk. A contract for employees of the private sector covered by
possessing only the last three elements enumerated the SSS.
above is a risk-shifting device, but NOT a contract
of insurance which is a risk-distributing device. (De 3. Aleatory
Leon, 2006)
The liability of the insurer depends upon some
Moral Hazard Phenomenon contingent event, the happening of an uncertain
future event. Thus, it is not a contract of chance. In
Consequently, however, the existence of insurance an insurance contract, each party takes a risk:
could have the perverse effect of increasing the
probability of loss. This is when the insured, having a. For the insurer – risk of having to pay the
in mind the indemnification for loss or damage indemnity if the contingent event happens.
caused by the happening of the event insured
against, would have reduced incentive to take steps b. For the insured – risk of paying the premium
to protect himself or his property, subject of without receiving anything therefor if the
insurance. (Ibid) contingent event does not happen except
protection, which in itself is a valuable
Characteristics and Nature of Insurance consideration. (De Leon, 2014)
Contracts (Con3-Vol-A-Uni-Per)
4. Unilateral
The following are the characteristics and nature of
an insurance contract: It imposes legal duties only on the insurer who
promises to indemnify the insured. It is executed as
1. Consensual to the insured after payment of the premium, and
executory on the part of the insurer in the sense that
It is perfected by the meeting of the minds of the it is not executed until payment for a loss. (De Leon,
parties as to the object, cause and consideration of 2014)
the insurance contract. There should be acceptance
of the application for insurance. 5. Conditional
2. Voluntary It is subject to conditions the principal one of which

is the happening of the event insured against.
GR: The parties may incorporate such terms and
conditions as they may deem convenient: Provided 6. Contract of Indemnity
they do not contravene any provision of law and are
not opposed to public policy, law, morals, good Recovery is commensurate with the amount of the
customs, or public order. loss suffered.
GR: The insurer promises to make good only the

loss of the insured.

Commercial Law
XPN: The principle is not applicable to life and enemy's property and repay in insurance the
accident insurance where the result is death value of what has been so destroyed. (Filipinas
because life is not capable of pecuniary estimation. Compaña de Seguros v. Christern, Huenefeld and Co.,
Inc., G.R. No. L- 2294, 25 May 1951)
The only situation where the principle of indemnity
is applicable to life insurance is when the interest of Q: May a member of the MILF or its breakaway
a person insured is capable of exact pecuniary group, the Abu Sayyaf, be insured with a
measurement. (e.g., where a creditor insures the life company licensed to do business under the
of his debtor to the extent of the latter’s debt) Insurance Code of the Philippines? Explain.
(2000 BAR)
7. Personal
A: YES, a member of the MILF or Abu Sayyaf may be
It is personal between the insurer and insured. Each insured with a company licensed to do business
party having in view the character, credit and under the Insurance Code of the Philippines. What
conduct of the other. is prohibited is to be insured is a public enemy. A
public enemy is a citizen or national of a country
NOTE: Since insurance is a contract, such is with which the Philippines is at war. Such member
considered a property in legal contemplation. of the MILF or Abu Sayyaf is not a citizen or national
However, unlike property policies, life insurance of another country, but of the Philippines.
policies are generally assignable like any chose in
action. (De Leon, 2014) Subject Matter of a Contract of Insurance
1. WHAT MAY BE INSURED Anything having an appreciable pecuniary value,

which is subject to loss or deterioration, or of which
Persons who May be Insured (2000 BAR) one may be deprived so that his pecuniary interest
is or may be prejudiced.
Anyone except a public enemy may be insured. (Sec.
7, IC) Consent of Spouse NOT Necessary
A public enemy is a nation at war with the The consent of the spouse is not necessary for the
Philippines and every citizen or subject of such validity of an insurance policy taken out by a
nation. It does not include mobs, thieves or robbers. married person on his or her life or that of his or her
(Bouvier’s Law Dictionary) children. (Sec. 3, IC)
If majority of the stockholders of the corporation Consent of the Person Insured is NOT Essential
were subjects who became an enemy corporation to the Validity of the Policy
upon the outbreak of the war between two states, it
stands to reason that an insurance policy ceases to So long as it could be proved that the insured has an
be allowable as soon as an insured becomes a public insurable interest at the inception of the policy, the
enemy. Hence, any contingency which may occur insurance is valid even without such consent. (Sec.
during or after said war cannot be indemnified 10, IC)
under a policy issued before said war. However,
elementary rules of justice and in the absence of Effect of Death of Policy’s Original Owner
specific provision in the Insurance Law require that
the premium paid by the insured for the period All rights, title and interest in the policy of insurance
covered by its policy should be returned. The taken out by an original owner on the life or health
purpose of war is to cripple the power and of the person insured shall automatically vest in the
exhaust the resources of the enemy, and it is latter upon the death of the original owner, unless
inconsistent that one country should destroy its otherwise provided for in the policy. (Sec. 3, IC)

2022 GOLDEN NOTES
Insurance
NOTE: Prior to the effectivity of the Insurance Code NOTE: The existence of insurable interest is a
of 2013, the term used was “minor” instead of “the matter of public policy and is not susceptible to the
person insured.” A minor cannot enter into any principle of estoppel. The existence of an insurable
contract of insurance with any insurance company. interest gives a person the legal right to insure the
subject matter of the policy of insurance. (Violeta.
Games of Chance Cannot be Insured Lalican v. Insular Life Assurance Co. Ltd., G.R. No.
183526, 25 Aug. 2009)
An insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a Mere Hope or Expectancy is NOT Insurable
lottery drawing a prize is not authorized. (Sec. 4, IC)
A mere contingent or expectant interest in anything,
Void Stipulations in an Insurance Contract not founded on an actual right to the thing, nor upon
any valid contract for it, is not insurable. (Sec. 16, IC)
The following are void stipulations in an insurance
contract which provides: When does a Person have Insurable Interest?
1. For the payment of loss whether the person GR: A person is deemed to have an insurable
insured has or has no interest in the property interest in the subject matter insured when a person
insured; or has a relation or connection with or concern in the
2. That the policy shall be received as proof of such subject matter, such that he will derive pecuniary
interest; and benefit or advantage from its preservation and will
3. Every policy executed by way of gaming or suffer pecuniary loss from its destruction or injury
wagering. (Sec. 25, IC) by the happening of the event insured against.
NOTE: The Insurance Code provides that a policy XPN: However, in some cases, expectation of benefit
may declare that a violation of specified provisions from the continued life of that person need not
thereof shall avoid it. Thus, in fire insurance policies, necessarily be of pecuniary nature to have an
which contain provisions that if the claim be in any insurable interest in the life of a person. (De Leon,
respect fraudulent or if any false declaration be 2010)
made or used in support thereof, all the benefits
under the policy, shall be forfeited, a fraudulent Insurable Interest in Life Insurance vs. Insurable
discrepancy between the actual loss and that Interest in Property Insurance (2002 BAR)
claimed in the proof of loss voids the insurance
policy. Mere filing of such a claim will exonerate the LIFE PROPERTY
insurer. (United Merchants Corp. v. Country Bankers As to Extent
Insurance Corp, G.R. No. 198588, 11 July 2012)
GR: Every person
has an unlimited
2. INSURABLE INTEREST
insurable interest in
his own life.
An insurable interest is that interest which a
person is deemed to have in the subject matter Limited to the actual
insured, where he has a relation or connection with XPN: Where life
value of the
or concern in it, such that the person will derive insurance is taken
property.
pecuniary benefit or advantage from the out by a creditor on
preservation of the subject matter insured and will the life of the debtor,
suffer pecuniary loss or damage from its insurable interest is
destruction, termination, or injury by the happening limited to the
of the event insured against. amount of debt.

Commercial Law
As to When must Insurable Interest Exist 4. A transfer of

GR: Must exist twice, interest by one of
i.e., both at the time several partners,
the policy takes joint owners, or
effect and the time of owners in common,
loss but need not who are jointly
exist in the period in insured, to the
between. (Sec. 19, IC) others, does not
avoid an insurance
XPNs: even though it has
been agreed that the
1. A change in insurance shall cease
interest in a thing upon an alienation of
insured, after the the thing insured.
occurrence of an (Sec. 24, IC)
injury which results
in a loss, does not 5. Every stipulation
affect the right of the in a policy of
insured to indemnity insurance for the
for the loss. (Sec. 21, payment of loss
Must exist at the time IC) whether the person
the policy takes insured has or has
effect and need not 2. A change of not any interest in
exist thereafter. (Sec. interest in one or the property
19, IC) more several distinct insured, or that the
things, separately policy shall be
insured by one received as proof of
policy, does not such interest, and
avoid the insurance every policy
as to the others. (Sec. executed by way of
22, IC) gaming or wagering,
is void. (Sec. 25, IC)
3. A change of As to the Beneficiary’s Interest
interest, by will or GR: The beneficiary
succession, on the need not have The beneficiary must
death of the insured, insurable interest have insurable
does not avoid an over the life of the interest over the
insurance; and his insured if the thing insured.
interest in the insured himself
insurance passes to secured the policy. NOTE: Insurable
the person taking his interest is an
interest in the thing XPN: However, if the indispensable
insured. (Sec. 23, IC) life insurance was requirement.
obtained by the

2022 GOLDEN NOTES
Insurance
beneficiary, the schedule of values attached to the policy.

latter must have (Gercio v. Sun Life Assurance of Canada, supra)
insurable interest
5. The insured cannot take the cash surrender
over the life of the
value assign or even borrow on said policy
insured.
without the consent of the beneficiary.
Change of Beneficiary
Effects of Revocable Designation of a Beneficiary
GR: The insured shall have the right to change the

The insured may change the beneficiary during his
beneficiary he designated in the policy.
lifetime, add a beneficiary or exclude a beneficiary
in case of joint designation of beneficiaries.
XPN: If the insured expressly waived this right in
the said policy.
The same rule applies in case the policy is silent on
the nature of the designation, for in such case, the
Notwithstanding the foregoing, in the event the
designation is deemed to be revocable. (Sec. 11, IC;
insured does not change the beneficiary during his
Divina, 2021)
lifetime, the designation shall be deemed
irrevocable. (Sec. 11, IC)
Q: Shortly after Yin and Yang were wed, they
each took out separate life insurance policies on
NOTE: Under Art. 64 of the Family Code, the their lives, and mutually designated one another
innocent spouse is allowed to revoke the as sole beneficiary. Both life insurance policies
designation of the other spouse as irrevocable provided for a double indemnity clause, the cost
beneficiary upon the finality of a decree of legal for which was added to the premium rate.
separation. During the last 10 years of their marriage, the
spouses had faithfully paid for the annual
Effects of Irrevocable Designation of a premiums over the life policies from both their
Beneficiary (2005 BAR) salaries.
1. The insured cannot assign the policy without Unfortunately, Yin fell in love with his
the written consent of the beneficiary if the officemate, Yessel, and they carried on an affair.
designation of the beneficiary is irrevocable. After two years, their relationship bore them a
The irrevocable beneficiary has a vested right. daughter named Yinsel. Without the knowledge
(2005 BAR; Sundiang Sr. & Aquino, 2014) of Yang, Yin changed the designation of the
beneficiary to an "irrevocable designation" of
2. The beneficiary designated in a life insurance Yinsel and Yessel jointly. When Yang learned of
contract cannot be changed without the written the affair, she was so despondent that, having
consent of the beneficiary. (Gercio v. Sun Life chanced upon Yin and Yessel on a date, she
Assurance of Canada, G.R. No. 23703, 28 Sept. rammed them down with the car she was
1925) driving, resulting in Yin's death and Yessel's
complete loss of mobilization. Yang was sued for
3. A new beneficiary cannot be added to the parricide, and while the case was pending, she
irrevocably designated beneficiary without the filed a claim on the proceeds of the life insurance
latter’s written consent for this would in effect of Yin as irrevocable beneficiary, or at least his
reduce the latter’s vested rights. (Go v. Redfern, legal heir, and opposed the claims on behalf of
G.R. No. L-47705, 25 Apr. 1941) Yessel and her daughter Yinsel.
4. The irrevocably designated beneficiary may Yang claimed that her designation as beneficiary
obtain a policy loan to the extent stated in the in Yin's life insurance policy was irrevocable, in

Commercial Law
the nature of one "coupled with interest," since b. Any person on whom he depends wholly or
it was made in accordance with their mutual in part for Education or support, or in
agreement to designate one another as sole whom he has a pecuniary interest.
beneficiary in their respective life policies. Is c. Of any person under a Legal obligation to
Yang correct in saying that her designation as him for the payment of money, or
beneficiary was irrevocable? (2018 BAR) respecting property or services, of which
death or illness might delay or prevent the
A: Yang is not correct. The insured shall have the performance.
right to change the beneficiary he designated in the d. Of any person upon whose life any estate or
policy, unless he has expressly waived this right in interest vested in him Depends. (Sec. 10, IC)
the policy. There is nothing in the life insurance
policy taken by Yang which indicated that the NOTE: In paragraph (a) of Sec. 10 of the Insurance
designation of Yin is irrevocable. As such, it is Code, mere relationship is sufficient while the rest
deemed to be revocable. (pars. b, c, and d) requires pecuniary interest. Thus,
the interest of the creditor over the life of the debtor
INSURABLE INTEREST IN LIFE/HEALTH ceases upon full payment. (Sundiang Sr. & Aquino,
2009)
Two (2) General Classes of Life Policies
Q: Does a person have insurable interest on the
1. Insurance upon one’s life – are those taken out life of his parents?
by the insured upon his own life for the benefit
of: (H-E-T) A: By express exclusion under par. (a) of Sec. 10 of
the Insurance Code, a person has no insurable
a. Himself; interest on the life of his parents and other
b. His Estate, in case it matures only at his ascendants unless he depends upon them for
death; or education and/or support. (par. b.) The rationale for
c. Third person who may be designated as their exclusion in par. (a) is that the parents are
beneficiary. logically expected to predecease their children.
(Divina, 2021)
The question of insurable interest is immaterial
where the policy is procured by the person whose Q: On July 3, 1993, Delia Sotero (Sotero) took out
life is insured. A person who insures his own life can a life insurance policy from Ilocos Bankers Life
designate any person as his beneficiary, whether or Insurance Corporation (Ilocos Life) designating
not the beneficiary has an insurable interest in the Cresencia Aban (Aban) her niece, as her
life of the insured subject to the limits under Art. beneficiary. Ilocos Life issued Policy No. 747,
2012 in relation to Art. 739 of the New Civil Code. with a face value of P100,000, in Sotero’s favor
(De Leon, 2010) on Aug. 30, 1993, after the requisite medical
examination and payment of the premium.
(See discussion on Persons Prohibited from being
Designated as Beneficiaries – page 9) On Apr. 10, 1996, Sotero died. Aban filed a claim
for the insurance proceeds on July 9, 1996,
2. Insurance upon life of another – are those
Ilocos Life conducted an investigation into the
taken out by the insured upon the life of
claim and came out with the following findings:
another. Where a person names himself
1. Sotero did not personally apply for
beneficiary in a policy, he takes on the life of
insurance coverage, as she was illiterate.
another, he must have insurable interest in the
2. Sotero was sickly since 1990.
life of the latter. This class includes the
3. Sotero did not have the financial capability
following: (SC-E-L-D)
to pay the premium on the policy.
4. Sotero did not sign the application for
a. His Spouse and of his Children.

2022 GOLDEN NOTES
Insurance
insurance Persons Prohibited from being Designated as

5. Aban was the one who filed the insurance Beneficiaries (1998 BAR)
application and designated herself as the
beneficiary. Under the Art. 739 in relation to Art. 2012 of the
New Civil Code, the following are prohibited
For the above reasons and claiming fraud, Ilocos designation of beneficiaries:
Life denied Aban’s claim on Apr. 16, 1997, but
refunded the premium paid on the policy. May 1. Those made between persons who were guilty
Sotero validly designate her niece as of adultery or concubinage at the time of
beneficiary? (2014 BAR) donation.
A: YES. Sotero may validly designate her niece as NOTE: The guilt of the donor and donee may be
beneficiary. The same is not prohibited under the proved by preponderance of evidence in the
Insurance Code or any other laws pertinent to the same civil action.
problem.
2. Those made between persons found guilty of
Q: Carlo and Bianca met in the La Boracay the same criminal offense, in consideration
festivities. Immediately, they fell in love with thereof.
each other and got married soon after. They
have been cohabiting blissfully as husband and 3. Those made to a public officer or his wife,
wife, but they did not have any offspring. As the descendants or ascendants by reason of his
years passed by, Carlo decided to take out office.
insurance on Bianca’s life for P1 million with
him as sole beneficiary, given that he did not The designation of the above-enumerated persons
have a steady source of income and he always is void but the policy is binding. The estate will get
depended on Bianca both emotionally and the proceeds. (Sundiang Sr. & Aquino, 2009)
financially.
Art. 2012, NCC. Any person who is forbidden from
During the term of the insurance, Bianca died of receiving any donation under Art. 739 cannot be
what appeared to be a mysterious cause so that named beneficiary of a life insurance policy by the
Carlo immediately requested for an autopsy to person who cannot make any donation to him,
be conducted. It was established that Bianca according to said article.
was transgender all along – a fact unknown to
Carlo. Can Carlo claim the insurance benefit? Rationale for Prohibition
(2014 BAR)
A beneficiary in a life insurance policy is no different
A: YES, Carlo can claim the insurance benefit. He from a donee. Both are recipients of pure
had insurable interest on Bianca’s life under Sec. beneficence. So long as marriage remains the
10(b) of the Insurance Code as the problem states threshold of family laws, reason and morality
that Carlo “always depended on Bianca both dictate that the impediments imposed upon married
emotionally and financially.” The insurable interest couple should likewise be imposed upon extra-
upon the life of another under the aforesaid marital relationship. If legitimate relationship is
provision need not be based on kinship or legal circumscribed by these legal disabilities, with more
obligation to give support. The fact that their reason should an illicit relationship be restricted by
marriage may be void is irrelevant. these disabilities. (Insular Life v. Ebrado, G.R. No. L-
44059, 28 Oct. 1977)

Commercial Law
Beneficiary Willfully brought about the Death of Since Purita is a common-law wife of Juan, she falls
the Insured (2008 BAR) squarely into this category; therefore, she is
disqualified to receive insurance proceeds and
GR: The interest of a beneficiary in a life insurance when this happens, the estate of the deceased is the
policy shall be forfeited when the beneficiary is the one entitled to the proceeds. (Insular Life v. Ebrado,
principal, accomplice, or accessory in willfully supra)
bringing about the death of the insured. In such a
case, the share forfeited shall pass on to the other Q: Loreto designated Eva, his common-law wife,
beneficiaries, unless otherwise disqualified. In the and illegitimate children as beneficiaries in his
absence of other beneficiaries, the proceeds shall be life insurance policies. Loreto was killed and
paid in accordance with the policy contract. If the Eva was the prime suspect in his death. The
policy contract is silent, the proceeds shall be paid legitimate wife and children of Loreto asked for
to the estate of the insured. (Sec. 12, IC) the insurance proceeds contending that
illegitimate family is disqualified from being
XPNs: (I-U-D) beneficiaries and that the insurance benefits
1. Insanity of the beneficiary at the time he killed must redound to the benefit of the estate of
the insured; Loreto. Will the claim of the legitimate family
2. The insured’s death was Unintentionally caused prosper?
(e.g., thru accident); and
3. The beneficiary acted in self-Defense. A: NO. The insurance proceeds shall be applied
exclusively to the proper interest of the person in
Q: Juan de la Cruz was issued Policy No. 8888 of whose name or for whose benefit it is made unless
the Midland Life Insurance Co. on a whole life otherwise specified in the policy.
plan for P20,000 on Aug. 19, 1989. Juan is
married to Cynthia with whom he has three While the share of Eva must be forfeited, the
legitimate children. He, however, designated designation of the illegitimate children as
Purita, his common-law wife, as the revocable beneficiaries remains valid. There is no proscription
beneficiary. Juan referred to Purita in his in naming illegitimate children as beneficiaries. It is
application and policy as the legal wife. Three only in cases where the insured has not designated
(3) years later, Juan died. Purita filed her claim any beneficiary or when the designated beneficiary
for the proceeds of the policy as the designated is disqualified by law to receive the proceeds, that
beneficiary therein. The widow, Cynthia, also the policy proceeds shall redound to the benefit of
filed a claim as the legal wife. To whom should the estate of the insured. Thus, the proceeds of the
the proceeds of the insurance policy be policy must be awarded to the illegitimate children,
awarded? (1998, 2012 BAR) to the exclusion of the legitimate family. (Heirs of
Loreto Maramag v. Maramag, G.R. No. 181132, 05
A: The estate is entitled to claim for the proceeds June 2009)
of the insurance policy. As a general rule, the
insured may designate anyone he wishes to be INSURABLE INTEREST IN PROPERTY
his/her beneficiary. However, Art. 2012 of the Civil
Code, which applies suppletorily to the Insurance Insurable interest in property is every interest in
Code, provides that any person who is forbidden property, whether real or personal, or any relation
from receiving any donation under Art. 739 cannot thereto, or liability in respect thereof, of such nature
be named beneficiary of a life insurance policy by that a contemplated peril might indirectly damnify
the person who cannot make any donation to him, the insured. It may consist of an existing interest, an
according to said article. Art. 739 specifically bars inchoate interest founded on an existing interest, or
the donations as between persons who were guilty an expectancy coupled with an existing interest in
of adultery or concubinage. that out of which the expectancy arises. (Secs. 13 and
14, IC; 2019 BAR)

2022 GOLDEN NOTES
Insurance
Insurable Interest in Property may Consist of contributing installed equipment and infusing a
the Following (1991, 2019 BAR): (Ex-In-Ex) capital.
1. An Existing interest – The existing interest in the In 2009, Milestone and Asgard took out an
property may be legal or equitable title. Industrial All Risk Policy insurance from UCPB
Insurance to insure Asgard’s corrugating
Examples of insurable interest arising from machine and equipment of every kind and
legal title: description in Novaliches, Quezon City.
a. Trustee, as in the case of the seller of Afterwards, Milestone pulled out its stocks,
property not yet delivered; machinery, and equipment from Asgard’s plant
b. Mortgagor of the property mortgaged; or in Novaliches for relocation to Milestone own
c. Lessor of the property leased. (De Leon, premises in Laguna. In the course thereof, it
supra) caused damage to several Asgard machinery and
equipment. Due to this, Asgard notified UCPB
Examples of insurable interest arising from about the loss and filed an insurance claim
equitable title: under the Policy based on Malicious Damage
a. Purchaser of property before delivery or Endorsement provision. However, UCPB
before he has performed the conditions Insurance denied the claim explaining that the
of the sale; Policy had no cross-liability cover, and the
b. Mortgagee of property mortgaged; or malicious damage was committed by Milestone,
c. Mortgagor, after foreclosure but before one of the named insured, and not committed by
the expiration of the redemption period. a third party.
(De Leon, 2010)
Asgard filed a Complaint for Sum of Money with
2. An Inchoate interest founded on an existing application for writ of preliminary attachment
interest. and praying for actual damages against UCPB
Insurance. Does Milestone have insurable
Example: A stockholder has an inchoate interest interest over Asgard’s machine at the time of the
in the property of the corporation of which he is loss or damage?
a stockholder, which is founded on an existing
interest arising from his ownership of shares in A: NO. Sec. 13 of the Insurance Code defines
the corporation. (De Leon, 2014) insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or
3. An Expectancy coupled with an existing interest liability in respect thereof, of such nature that a
in that out of which the expectancy arises. contemplated peril might directly damnify the
insured." Parenthetically, under Sec. 14 of the same
NOTE: Existence of insurable interest is a matter of Code, an insurable interest in property may consist
public policy. Hence, the principle of estoppel in: (a) an existing interest, like that of an owner or
cannot be invoked. (Sundiang Sr. & Aquino, 2014) lienholder; (b) an inchoate interest founded on
existing interest, like that of a stockholder in
Q: Asgard and Milestone entered into a Toll corporate property; or (c) an expectancy, coupled
Manufacturing Agreement (TMA) whereby with an existing interest in that out of which the
Asgard undertook to perform toll- expectancy arises, like that of a shipper of goods in
manufacturing of paper products for Milestone, the profits he expects to make from the sale thereof.
effective until Jan. 31, 2008. Sometime later,
Asgard needed additional capital to purchase Where the interest of the insured in, or his relation
new equipment for its manufacturing plant. It to, the property is such that he will be benefitted by
invited Milestone to invest in the company and its continued existence, or will suffer a direct
the latter accepted the invitation by pecuniary loss by its destruction, his contract of

Commercial Law
insurance will be upheld, although he has no legal or Change of Interest in Any Part of a Thing Insured
equitable title.
“Change of interest” contemplated by law is an
An insurable interest in property does not absolute transfer of the insured’s entire interest in
necessarily imply a property interest in, or a lien the property insured to one not previously
upon, or possession of, the subject matter of the interested or insured. (Perez, 2006)
insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an GR: A change of interest in any part of a thing
interest. It is sufficient that the insured is so situated insured unaccompanied by a corresponding change
with reference to the property that he would be in interest in the insurance suspends the insurance
liable to loss should it be injured or destroyed by the to an equivalent extent, until the interest in the thing
peril against which it is insured. Anyone has an and the interest in the insurance are vested in the
insurable interest in property who derives a benefit same person. (Sec. 20; Sec. 58, IC)
from its existence or would suffer loss from its
destruction. (UCPB General, Insurance Co. Inc. v. XPNs: (P-L-A-D-S-Jo-F)
Asgard Corrugated Box Manufacturing Corp., G.R. No.
244407, 26 Jan. 2021) 1. When there is a Prohibition against alienation
or change of interest without the consent of the
Measure of Insurable Interest in Property (2000 insurer in which case the policy is not merely
BAR) suspended but avoided. (Sundiang & Aquino,
2014., citing Curtis v. Girard Fire and Marine Ins.,
Under Sec. 17, the measure of insurable interest in 11 SE 3, 190 Ga. 954)
property is the extent to which the insured might be
damnified by loss or injury thereof. Insurable 2. In Life, accident, and health insurance. (Sec. 20,
interest in property does not necessarily imply a IC)
property interest in, or lien upon, or possession of,
the subject matter of the insurance, and neither title 3. A change of interest in a thing insured, After the
nor a beneficial interest is requisite to the existence occurrence of an injury which results in a loss
thereof. It is sufficient that the insured is so situated does NOT affect the right of the insured to
with reference to the property that he would be indemnity for loss. (Sec. 21, IC)
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an NOTE: After the occurrence of the peril insured
insurable interest in property who derives a benefit against, the insured acquired a vested right over
from its existence or would suffer loss from its the proceeds of the policy.
destruction. (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, 08 June 4. A change of interest in one or more Distinct
2006) things, separately insured by one policy does
NOT avoid the insurance as to the others. (Sec.
A Common Carrier or Depository’s Extent of 22, IC)
Insurable Interest in a Thing Held by Him
5. A change of interest by will or Succession, on
A carrier or depositary has an insurable interest in the death of the insured, does NOT avoid an
a thing held by him as such, to the extent of his insurance; and his interest in the insurance
liability but not to exceed the value thereof, because passes to the person taking his interest in the
the loss of the thing by the carrier or depositary may thing insured. (Sec. 23, IC)
cause liability against him to the extent of its value.
(Sec 15., IC) 6. A transfer of interest by one of several partners,
Joint owners, or owners in common, who are
jointly insured, to the others does NOT avoid an

2022 GOLDEN NOTES
Insurance
insurance even though it has been agreed that Extent of Insurable Interest of Mortgagor and
the insurance shall cease upon an alienation of Mortgagee (1999 BAR)
the thing insured. (Sec. 24, IC)
1. Mortgagor – The mortgagor of property, as
7. When the policy is so Framed that it will inure owner, has an insurable interest to the extent of
to the benefit of whomsoever, during the its value even though the mortgage debt equals
continuance of the risk, may become the owner such value.
of the interest insured. (Sec. 57, IC)
2. Mortgagee – The mortgagee as such has an
Instances where More than One Insurable insurable interest in the mortgaged property to
Interest may Exist in the Same Property the extent of the debt secured; such interest
continues until the mortgage debt is
1. Trust – both trust or and trustee have insurable extinguished. (Sundiang Sr. & Aquino, 2014)
interest over the property in trust;
NOTE: In case of an insurance taken by the
2. Corporation – both the corporation and its mortgagee alone and for his benefit, the mortgagee,
stockholders have insurable interest over the after recovery from the insurer, is not allowed to
assets; retain his claim against the mortgagor but it passes
by subrogation to the insurer to the extent of the
3. Partnership – both the firm and partners have insurance money paid. (De Leon, 2010)
insurable interest over its assets;
Q: What are the effects if the mortgagee
4. Assignment – both the assignor and assignee procures separate insurance coverage without
have insurable interest over the property reference to the right of the mortgagor?
assigned;
A: The effects are as follows:
5. Lease – the lessor, lessee and sub-lessees have
insurable interest over the property in lease; a. The mortgagee may collect from the insurer to
and the extent of his credit.
6. Mortgage – both the mortgagor and mortgagee b. The insurer, after payment to the mortgagee, is
have insurable interest over the property subrogated to the rights of the latter against the
mortgaged. mortgagor and may collect the debt of the latter
to the extent of the amount paid to the
Insurable Interest of Mortgagor and Mortgagee mortgagee. This principle applies only where
in case of a Mortgaged Property are NOT the the policy obtained by the mortgagee covers his
Same (1999, 2010 BAR) interest alone.
Each has an insurable interest in the property c. The mortgagee-insured can no longer collect
mortgaged and this interest is separate and distinct the mortgagor’s indebtedness after receiving
from the other. Therefore, insurance taken by one in full payment of the credit from the insurer since
his name only and in his favor alone does not inure the latter acquires the right to collect from the
to the benefit of the other. The same is not open to mortgagor by virtue of the subrogation.
objection that there is double insurance. (RCBC v. However, if the mortgagee is not able to collect
CA, G.R. Nos. 128833-34, 128866, 20 April 1998; Sec the whole amount of the credit, he may still
8, IC) collect the deficiency from the mortgagor.
(Divina, 2021)

Commercial Law
Q: To secure a loan of P10 million, Mario 3. DOUBLE INSURANCE AND OVERINSURANCE

mortgaged his building to Armando. In
accordance with the loan arrangements, Mario Double Insurance (2005 BAR)
had the building insured with First Insurance
Com for P10 million, designating Armando as Double insurance exists where the same person is
the beneficiary. Armando also took an insurance insured by several insurers separately, in respect to
on the building upon his own interest with the same subject and interest. (Sec. 95, IC)
Second Insurance Company for P5 million.
Requisites of Double Insurance (S-T-R-I-P)
The building was totally destroyed by fire, a
peril insured against under both insurance 1. Subject matter is the same;
policies. It was subsequently determined that 2. Two (2) or more insurers insuring separately;
the fire had been intentionally started by Mario 3. Risk or peril insured against is the same;
and that in violation of the loan agreement, he 4. Interest insured is the same; and
had been storing inflammable materials in the 5. Person insured is the same.
building.
There is no double insurance even though two
a. How much, if any, can Armando recover
policies were both issued over the same subject
from either or both insurance companies?
matter, and both covered the same peril insured
b. What happens to the P10 million debt of
against if the two policies were issued to two
Mario to Armando? Explain. (2010 BAR)
different entities which have separate and distinct
insurable interest over the said subject matter.
A:
(Malayan Insurance Co. v. Philippine First Insurance
a. Armando can receive P5 million from
Co., G.R. No. 184300, 11 July 2012)
Second Insurance Company. As mortgagee, he
had an insurable interest in the building.
Double Insurance is NOT Prohibited by Law
Armando cannot collect anything from First
Insurance Co., since the latter is not liable for
It is not contrary to law and hence, in case of double
the loss of the building. First, it was due to a
insurance, the insurers may still be made liable up
willful act of Mario, who committed arson.
to the extent of the value of the thing insured but not
Second, fire insurance policies contain a
to exceed the amount of the policies issued.
warranty that the insured will not store
hazardous materials within the insured
A provision in the policy that prohibits double
premises. Mario breached this warranty when
insurance is valid. However, in the absence of such
he stored inflammable materials in the building.
prohibition, double insurance is allowed. (Perez,
These two factors exonerate First Insurance Co.
2006)
from liability to Armando as mortgagee even
though it was Mario who committed them. (Sec.
Q: TRUE OR FALSE: The law on life insurance
8; Sec. 87, IC)
prohibits double insurance. (2017 BAR)
b. Since Armando would have collected P5 million

A: FALSE. Double insurance only applies to
from Second Insurance Company, this amount
property insurance.
should be considered as partial payment of the
loan. Armando can only collect the balance of P5
Nature of the Liability of the Several Insurers in
million. Second Insurance Co. can recover from
Double Insurance (2005 BAR)
Mario the amount of P5 million it paid, because
it became subrogated to the rights of Armando.
In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
to the loss in proportion to the amount for which he

2022 GOLDEN NOTES
Insurance
is liable under his contract. This is known as the 1. Northern Insurance Corp. — P20M
“principle of contribution” or “contribution 2. Southern Insurance Corp. — P30M
clause.” (Sec. 96(e), IC) 3. Eastern Insurance Corp. — P50M
Q: X borrowed from CCC Bank. She mortgaged a. Is the owner's taking of insurance for the
her house and lot in favor of the bank. X insured building with three (3) insurers valid?
her house. The bank also got the house insured. Discuss.
a. Is this double insurance? Explain your b. The building was totally razed by fire. If the
answer. owner decides to claim from Eastern
b. Is this legally valid? Explain your answer. Insurance Corp, only P50M, will the claim
c. In case of damage, can X and CCC Bank prosper? Explain. (2008 BAR)
separately claim for the insurance
proceeds? (2013 BAR) c. Can the owner claim from Northern
Insurance and Southern Insurance
A: Corporation?
a. NO, there is no double insurance. Double
insurance exists where the same person is A:
insured by several insurers separately with a. Taking out insurance covering the same
respect to the same subject and interest. (Sec. property, same insurable interest and same risk
93, IC) with three insurance companies is “double
insurance,” recognized under Sec. 93 of the
b. YES, X and CCC Bank can both insure the house Insurance Code. However, in American Home
as they have different insurable interest Assurance Co. v. Chua, G.R. No. 130421, 28 June
therein. X, the borrower mortgagor, has an 1999, the court referred to the common
insurable interest in the house being the owner inclusion of the “other insurance clause” in fire
thereof while CCC Bank, the lender, also has an insurance policies, requiring disclosure of co-
insurable interest in the house as mortgagee insurance of the same property with other
thereof. insurers.
c. YES. If X obtained an open policy then she could ALT. ANSWER: The taking of insurance from the
claim an amount corresponding to the extent of three (3) insurers is valid, there being no stipulation
the damage based on the value of the house against obtaining additional insurance. It is a case of
determined as of the date the damage occurred, “double insurance.” Double insurance is valid. What
but not to exceed the face value of the insurance is prohibited is for the insured to recover more than
policy; however, if she obtained a valued policy his interest or value of the property as this will
then she could claim an amount corresponding violate the indemnity principle of an insurance
to the extent of the damage based on the agreed contract.
upon valuation of the house.
b. Insured can recover from Eastern Insurance
As for CCC Bank, it could claim an amount Corp. up to the extent of his loss. However,
corresponding to the extent of the damage but Eastern may refuse to pay if the policy contains
not to exceed the amount of the loan it extended an “other insurance clause” stipulating that
to X or so much thereof as may remain unpaid. non-disclosure of double insurance will avoid
the policy (Geagonia v. Country Bankers
Q: Terrazas de Pation Verde, a condominium Insurance, G.R. No. 114427, 06 Feb. 1995). As
building, has a value of P50M. The owner there is no indication of a contractual
insured the building against fire with three (3) prohibition on double or other insurance, all
insurance companies for the following amounts: insurance contracts over the building are

Commercial Law
deemed valid and enforceable. the insured.

As to the Number of Insurers
Since Eastern insured the property up 50% of
There may be only
the total coverage, it is liable for only 50% of the
one (1) insurer, with
total actual loss. Eastern insurance Corp. is There are two (2) or
whom the insured
liable to the extent of its coverage but may more insurers insuring
takes insurance
recover one-half of the total indemnity from the the same subject matter.
beyond the value of
co-insurers in the proportion of 60% (Southern
his insurable interest.
Insurance) – 40% (Northern Insurance).
Rules when the Insured in a Policy Other than

ALT. ANSWER: YES, the owner may legally claim
Life is Over Insured by Double Insurance
the entire P50M from Eastern Insurance Corp. The
Insurance Code provides that where the insured is
1. The insured, unless the policy otherwise
over-insured by double insurance, the insured,
provides, may claim payment from the insurers
unless the policy otherwise provides, may claim
in such order as he may select, up to the amount
payment from the insurers in such order as he may
which the insurers are severally liable under
select, up to the amount for which the insurers are
their respective contracts;
severally liable under their respective contracts.
Each insurer is bound, as between himself and the
2. Where the policy under which the insured
other insurers, to contribute ratably to the loss in
claims is a valued policy, any sum received by
proportion to the amount for which he is liable
him under any other policy shall be deducted
under his contract.
from the value of the policy without regard to
the actual value of the subject matter insured;
c. If the owner has been paid in full by Eastern
Insurance, he can no longer recover from any of
3. Where the policy under which the insured
Northern and Southern Insurance
claims is an unvalued policy, any sum received
Corporations. Otherwise, the owner can
by him under any policy shall be deducted
recover P20M and P30M, respectively. The
against the full insurable value, for any sum
owner can choose who he wants to claim
received by him under any policy;
against to recover the full indemnity provided
that the claim will not exceed the face value of
4. Where the insured receives any sum in excess
the insurer’s respective insurance policies.
of the valuation in the case of valued policies, or
(Divina, 2021)
of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the
Over Insurance
insurers, according to their right of contribution
among themselves; and
There is over insurance whenever the insured
obtains a policy in an amount exceeding the value of
5. Each insurer and the other insurers, to
his insurable interest. (Perez, 2006)
contribute ratably to the loss in proportion to
the amount for which he is liable under his
DOUBLE INSURANCE OVER INSURANCE
contract. (Sec. 96, IC)
As to the Amount of Insurance
There may be no over Additional or Other Insurance Clause (2008
When the amount of
insurance as when the BAR)
the insurance is
sum total of the
beyond the value of
amounts of the policies A clause in the policy that provides that the policy
the insured’s
issued does not exceed shall be void if the insured procures additional
insurable interest.
the insurable interest of insurance without the consent of the insurer.
(Pioneer Insurance and Surety Corp v. Yap, G.R. No. L-

2022 GOLDEN NOTES
Insurance
36232, 19 Dec. 1974) claiming indemnity from Malayan?
The insurer may insert an “other insurance clause” A: NO. The interest of Wyeth over the property
to prevent the danger that the insured will over subject matter of both insurance contracts is
insure his property and thus avert the possibility of different and distinct from that of Reputable’s. The
perpetration of fraud. It is lawful and specifically policy issued by PFIC was in consideration of the
allowed under Sec. 75 of the Insurance Code which legal and/or equitable interest of Wyeth over its
provides that “a policy may declare that a violation own goods. On the other hand, what was issued by
or a specified provision thereof shall avoid it, Malayan to Reputable was over the latter’s
otherwise the breach of an immaterial provision insurable interest over the safety of the goods,
does not avoid it.” which may become the basis of the latter’s liability
in case of loss or damage to the property and falls
Waiver of Violation within the contemplation of Sec. 15 of the IC.
Therefore, even though the two concerned
When the insurer, with the knowledge of the insurance policies were issued over the same goods
existence of other insurances, which the insurer and cover the same risk, there arises no double
deemed a violation of the contract, preferred to insurance since they were issued to two different
continue the policy, its action amounted to a waiver persons/entities having distinct insurable interests.
of annulment of the contract. (Perez, 2006 citing Necessarily, over insurance by double insurance
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co., cannot likewise exist. (Malayan Insurance Co., Inc., v.
G.R. No. L-33131, 13 Dec. 1930) Philippine First Insurance Co., Inc. and Reputable
Forwarder Services, Inc., G.R. No. 184300, 11 July
Q: Wyeth Philippines, Inc. (Wyeth) procured a 2012)
marine policy from Philippines First Insurance
Co., Inc. (PFIC) to secure its interest over its own Q: X Corp. took out a Fire Policy Insurance from
products while the same were being Easter Insurance in the amount of
transported or shipped in the Philippines. P10,000,000.00. The properties insured were
Thereafter, Wyeth executed its annual contract the pieces of machinery and equipment, tools,
of carriage with Reputable Forwarder Services, spare parts and accessories stored at Buildings
Inc. (Reputable). 1 and 2, PTA Compound, No. 26 Isidro Francisco
Street, Malinta, Valenzuela, Metro Manila,
Under the contract, Reputable undertook to Manila.
answer for all risks with respect to the goods
and shall be liable to Wyeth, for the loss, He took another Fire Policy Insurance from
destruction, or damage of the goods/products Northern Insurance for P7,000,000.00, covering
due to any and all causes whatsoever, including the pieces of machinery and equipment, tools,
theft, robbery, flood, storm, earthquakes, spare parts, and accessories excluding mould,
lightning, and other force majeure while the and stocks of manufactured goods and/or goods
goods/products are in transit and until actual still in process, raw materials and supplies
delivery to the customers, salesmen, and found in the PTA Central Warehouse Compound,
dealers. The contract also required Reputable to Building 1, No. 26 Isidro Francisco Street, Brgy.
secure an insurance policy on Wyeth’s goods. Vicente Reales, Dalandan, Valenzuela, Metro
Thus, Reputable signed a Special Risk Insurance Manila.
Policy (SR Policy) with Malayan Insurance Co.,
Inc., (Malayan) for the amount of P1,000,000.00. He took a third Fire Policy Insurance from
Southern Insurance covering the same
Is there is double insurance (as prohibited machinery and equipment located at Building 1,
under Sec. 5 of the SR Policy between Malayan PTA Compound, No. 26 Francisco St., Malinta,
and Reputable) so as to preclude PFIC from Valenzuela, Metro Manila.

Commercial Law
A fire broke out in PTA Compound causing were many other insurance policies on the same
damages and loss on property. X Corp tried to property, it could have hesitated or plainly desisted
claim from the 3 insurance companies but the from entering into such contract. (Perez, 2006)
same were denied on the ground of violation of
the policy condition (Policy Condition No. 3) on No Policy of Insurance shall be Cancelled Except
non-disclosure of insurance policies already upon Notice thereof to the Insured
acquired or thereafter may be acquired
regarding the same properties, which ultimately Q: The Peninsula Insurance Company offered to
results in the avoidance of the insurance policy. insure Francis' brand-new car against all risks in
Are the insurance policies avoided? the sum of P1 million for one year. The policy
was issued with the premium fixed at
A. YES. Policy Condition No. 3 is clear that it P60,000.00 payable in 6 months. Francis only
obligates X Corp, as insured, to notify the insurer of paid the first two months installments. Despite
any insurance effected to cover the insured items demands, he failed to pay the subsequent
which involve any of its property or stocks in trade, installments.
goods in process and/or inventories and that non-
disclosure by the insured of other insurance policies Five months after the issuance of the policy, the
obtained covering these items would result in the vehicle was carnapped. Francis filed with the
forfeiture of all the benefits under the policy. To be insurance company a claim for its value.
regarded as a violation of Policy Condition No. 3, the However, the company denied his claim on the
other existing but undisclosed policies must be ground that he failed to pay the premium
upon the same matter and with the same interest resulting in the cancellation of the policy. Can
and risk. The records of this case show that Francis recover from the Peninsula Insurance
petitioner obtained fire insurance policies from the Company? (2006 BAR)
3 insurance companies covering the same matter
and the same risk, i.e., the policies uniformly cover A: YES. As a general rule, no policy is binding unless
fire losses of petitioner’s machinery and equipment. the premiums thereof have been paid. However, one
of the exceptions is when there is an agreement
In American Home Assurance Company v. Chua, the allowing the insured to pay the premium in
Court held that where the insurance policy specifies installments and partial payment has been made at
as a condition the disclosure of existing co-insurers, the time of loss. In the case at hand, Francis already
non-disclosure thereof is a violation that entitles the paid two installments at the time of the loss and as
insurer to avoid the policy. This condition is such may recover on the policy (Makati Tuscany
common in fire insurance policies and is known as Condominium Corp. v. CA, G.R. No. 95546, 6 Nov.
the “other insurance clause”. (Multi-ware 1992). Furthermore, the contention of the insurer
Manufacturing Corporation v. Cibeles Corporation, that the failure to pay premium resulted in the
G.R. No. 230528, 1 Feb. 2021) cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon
Absence of Notice of Existence of Other notice thereof to the insured. (Sec. 64, IC)
Insurance constitutes Fraud
Cancellation of Policy of Insurance by reason of
When the insurance policy specifically requires that Over Insurance
notice should be given by the insured of the
existence of other insurance policies upon the same Sec. 64 of the IC provides that upon discovery of
property, the lack or absence of such notice nullifies other insurance coverage that makes the total
the policy. Such failure to give notice of the existence insurance in excess of the value of the property
of other insurance on the same property when insured, the insurer may cancel such policy of
required to do so constitutes deception and it could insurance; provided there is prior notice and such
be inferred that had the insurer known that there circumstance occurred after the effective date of the

2022 GOLDEN NOTES
Insurance
policy. 6. In all cases, the right of the party paying the

claim to recover against the owner of the
4. NO FAULT, SUICIDE, AND INCONTESTABILITY vehicle responsible for the accident shall be
CLAUSES maintained. (Ibid)
NO FAULT INDEMNITY CLAUSE The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as the
No Fault Indemnity Clause (1994 BAR) law, by using the word "shall,” makes it mandatory
that the claim be made against the insurer of the
It is a clause where the insurer is required to pay a vehicle in which the occupant is riding, mounting or
third party injured or killed in an accident without dismounting from. That said vehicle might not be
the necessity of proving fault or negligence on the one that caused the accident is of no moment
the part of the insured. There is a stipulated since the law itself provides that the party paying
maximum amount to be recovered. may recover against the owner of the vehicle
responsible for the accident. (Perla Compania de
It is a clause that gives the victim (injured person or Seguros, Inc. v. Ancheta, G.R. No. L-49599, 8 Aug.
heirs of the deceased) an option to file a claim for 1988)
death or injury without the necessity of proving
fault or negligence of any kind to guarantee This no-fault claim does NOT apply to property
compensation or indemnity to injured persons in damage. If the total indemnity claim exceeds
motor vehicle accidents. P15,000 and there is controversy in respect thereto,
the finding of fault may be availed of by the insurer
Rules under the “no fault indemnity clause” only as to the excess. The first P15,000 shall be paid
without regard to the fault. (CMVLI, supra)
1. The total indemnity in respect of any one
person shall not exceed P15,000 for all motor Q: X is a passenger of a jeepney for hire being
vehicles. (Ins. Memo. Circ. No. 4-2006, otherwise driven by Y. The jeepney collided with another
known as the Compulsory Motor Vehicle License passenger jeepney being driven by Z who was
Insurance (CMVLI)) driving recklessly. As a result of the collision, X
suffered injuries. Both passenger jeepneys are
2. Proof of loss: covered by Comprehensive Motor Vehicular
a. Police report of accident Insurance Coverage. If X wants to claim under
b. Death certificate and evidence sufficient to the "no fault indemnity clause", his claim lie
establish proper payee against? – (2012 BAR)
c. Medical report and evidence of medical or
hospital disbursement. (Sec. 391(b)(3), IC) A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. The
3. Claim may be made against one motor vehicle Insurance Code states that in the case of an occupant
only. (Sec. 391(c), IC) of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding,
4. In case injury of an occupant of a vehicle, the mounting or dismounting from.
claim shall lie against the insurer of the vehicle
in which the occupant is riding, mounting or SUICIDE CLAUSE
dismounting from. (Ibid)
Liability of the Insurer in case of Suicide
5. In any other case (not an occupant), claim shall
lie against the insurer of the directly offending The insurer shall be liable in case of suicide by the
vehicle. (Ibid) insured if: (F-I-Sh)

Commercial Law
1. The suicide is committed after the policy has been in force for period of two years from date of
been in Force for a period of two (2) years from issue or last reinstatement, unless the policy
the date of its issue or of its last reinstatement. provides for a shorter period. If the suicide is
committed in the state of insanity, it shall be
2. The suicide is committed in the state of Insanity compensable regardless of the date of commission
regardless of the date of commission. (Sec. 183, IC).
3. The suicide is committed within a Shorter The insurer is not liable only if the suicide is an
period as provided in the policy. (Sec. 183, IC) excepted risk.
NOTE: Any stipulation extending the 2-year period In this case, not only is the policy in force for a
is null and void. period of two years from the date of the commission
of suicide, the suicide was also committed in the
Q: Twenty-five months after a life insurance state of insanity. There is likewise no showing that
policy had been issued, the insured committed suicide is an excepted risk. Thus, the insurer is
suicide. Upon investigation, the insurance liable.
company discovered that the insured had been
living with an undiagnosed Major Depressive Q: Sun Insurance Co. issued to Tan a life policy
Disorder for the past year before the suicide. having this provision: “the company shall not be
Under the Diagnostic and Statistical Manual of liable in respect of ‘bodily injury’ consequent
Mental Disorders Fifth Edition (DSM-5), a upon the insured person who willfully exposes
guidebook used by many professionals to himself to needless peril except in an attempt to
diagnose various mental health conditions, save human life." Tan designated his wife,
Major Depressive Disorder is recognized as a Beverly, as beneficiary. One evening, Tan, while
mental disorder. playing with his hand gun, suddenly stood in
front of his secretary and pointed the gun at her.
Would the beneficiaries of the insured's life Startled, she pushed the gun aside and said that
insurance policy still be entitled to receive its it may be loaded. Thus, Tan, to assure her that it
proceeds? Explain briefly. (2020-21 BAR) was not loaded, pointed it at his temple. The next
moment, there was an explosion and Tan
A: YES, the life insurance beneficiaries will be slumped to the floor lifeless.
entitled to the proceeds. The insured had no
concealment because he did not neglect to disclose Beverly then claimed the proceeds from Sun
his mental disorder, which he did not know. Insurance, but the latter rejected her claim on
the ground that the death of Tan was not
In addition, the suicide happened 25 months after accidental. Beverly sued the insurer. Will
the policy was issued, hence, after the 2-year Beverly’s claim prosper? (1993, 1994 BAR)
incontestability period. The Insurance Company can
no longer rescind the contract for concealment. A: YES. Beverly can recover the proceeds of the
(Manila Bankers Life Insurance v. Aban, G.R. No. policy from the insurer. The death of the insured
175666, 29 July 2013; Tan v. CA, G.R. No. 48049, 29 was not due to suicide or willful exposure to
June 1989; and Sunlife Assurance v. Bacani, G.R. No. needless peril which are excepted risks. The
105135, 22 June 1995) insured’s act was purely an act of negligence which
is covered by the policy and for which the insured
ALT. ANSWER: Yes, the beneficiaries of the got the insurance for his protection. In fact, he
insured's life insurance policy are entitled to its removed the magazine from the gun and when he
proceeds. Under the Insurance Code, the insurer in pointed the gun to his temple he did so because he
a life insurance contract shall be liable in case of thought that it was safe for him to do so. He did so
suicide when it is committed after the policy has to assure his sister that the gun was harmless. There

2022 GOLDEN NOTES
Insurance
is none in the policy that would relieve the insurer 2. The policy is in force for at least two (2) years
of liability for the death of the insured since the from its date of issue as appearing in the policy
death was an accident. (Sun Insurance v. CA, G.R. Nos. or of its last reinstatement.
79937-38, 13 Feb. 1989)
NOTE: The two-year period is NOT reckoned
INCONTESTABILITY CLAUSE from date of receipt but from issuance of the
policy or last reinstatement. (Divina, 2021)
Incontestability Clause (1991, 1994, 1996, 1998,
2012 BAR) Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
After the policy of life insurance made payable on Insurance Corporation (Ilocos Life) designating
the death of the insured shall have been in force Cresencia Aban (Aban) her niece, as her
during the lifetime of the insured for a period of two beneficiary. Ilocos Life issued Policy No. 747,
(2) years from the date of its issue or its last with a face value of P100,000, in Sotero’s favor
reinstatement, the insurer cannot prove that the on August 30, 1993, after the requisite medical
policy is void ab initio (construed as voidable) or is examination and payment of the premium.
rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent. On April 10, 1996, Sotero died. Aban filed a claim
(Sundiang Sr. & Aquino, 2014, citing Sec. 48, IC; for the insurance proceeds on July 9, 1996,
Florendo v. Philam Plans, G.R. No. 186983, 22 Feb. Ilocos Life conducted an investigation into the
2012) claim and came out with the following findings:
Rationale: The “Incontestability Clause” under 1. Sotero did not personally apply for
Sec. 48 of the Insurance Code regulates both the insurance coverage, as she was illiterate.
actions of the insurers and prospective takers of life 2. Sotero was sickly since 1990.
insurance. It gives insurers enough time to inquire 3. Sotero did not have the financial capability
whether the policy was obtained by fraud, to pay the premium on the policy.
concealment, or misrepresentation; on the other 4. Sotero did not sign the application for
hand, it forewarns scheming individuals that their insurance.
attempts at insurance fraud would be timely 5. Aban was the one who filed the insurance
uncovered – thus deterring them from venturing application and designated herself as the
into such nefarious enterprise. (Manila Bankers Life beneficiary.
Insurance Corporation v. Cresencia Aban, G.R. No.
175666, 29 July 2013) For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997, but
NOTE: The period of two (2) years may be refunded the premium paid on the policy. May
shortened but it cannot be extended by stipulation. the incontestability period set in even in cases of
fraud as alleged in this case? (2014 BAR)
Requisites of the Incontestability Clause
A: YES. The incontestability period applies even in
1. The insurance is a life insurance policy payable cases of fraud. Sec. 48 regulates both the actions of
on the death of the insured. the insurers and prospective takers of the life
insurance. It gives insurers enough time to inquire
NOTE: The clause is therefore NOT applicable whether the policy was obtained by fraud,
to annuity because the annuitant pays lump concealment, or misrepresentation; on the other
sum to the insurer and gets a certain amount hand, it forewarns scheming individuals that their
from the insurer every year until the attempts at insurance fraud would be timely
annuitant/insured dies. uncovered. Legitimate policy holders are absolutely
protected from unwarranted denial of their claims

Commercial Law
or delay in the collection of insurance proceeds CAVEAT: Based on Aban and Sibya cases, there are
occasioned by allegations of fraud, concealment, or now two (2) incontestability clauses.
misrepresentation by insurers, claims which may no
longer be set up after the two-year period expires. 1. Two (2) years had lapsed from issuance of the
policy or last reinstatement.
Sec. 48 prevents a situation where the insurer 2. The insured died within two (2) years from
knowingly continues to accept annual premium issuance of the policy.
payments, only to later on deny a claim on the policy
on specious claims of fraudulent concealment or The second application, however, goes against the
misrepresentation. (Manila Bankers Life Insurance rationale of the incontestability clause. It precludes
Corp. v. Aban, supra) the insurer from conducting investigation if the
insured committed concealment and/or
Q: Sibya applied for life insurance with Sun Life. misrepresentation, particularly if the insured died
He indicated therein that he sought advice for shortly after the issuance of the policy. It is
kidney problems. Sun Life approved the submitted that this ruling should be re-assessed.
application and issued an insurance policy. (Divina, 2021)
Three months after, Sibya died as a result of a
gunshot wound. His beneficiary, Daisy, filed a Q: In Jan. 2016, Mr. H was issued a life insurance
claimant’s statement with Sun Life to seek death policy by XYZ Insurance Co., wherein his wife,
benefits but was denied by the latter stating that Mrs. W, was designated as the sole beneficiary.
Sibya did not disclose his previous medical Unbeknownst to XYZ Insurance Co., however,
treatment at National Kidney Transplant Mr. H had been previously diagnosed with colon
Institute. cancer, the fact of which Mr. H had concealed
during the entire time his insurance policy was
According to Sun Life, the undisclosed fact was a being processed.
“renal failure” and a high-risk medical
condition. On the other hand, Daisy averred that In Jan. 2019, Mr. H unfortunately committed
Sibya was in good faith since he authorized Sun suicide. Due to her husband's death, Mrs. W, as
Life to inquire into his medical history. The RTC beneficiary, filed a claim with XYZ Insurance Co.
held that Sibya did not commit material to recover the proceeds of the late Mr. H's life
concealment and misrepresentation when he insurance policy. However, XYZ Insurance Co.
applied for life insurance. Is the court correct? resisted the claim, contending that:
A: YES. Sec. 48, as held in Manila Bankers Life 1. The policy is void ab initio because Mr. H
Insurance Corporation v. Aban, serves a noble fraudulently concealed or misrepresented
purpose, as it regulates the actions of both the his medical condition, i.e., his colon cancer;
insurer and the insured. Under the provision, an and
insurer is given two years – from the effectivity of a 2. As an insurer in a life insurance policy, it
life insurance contract and while the insured is alive cannot be held liable in case of suicide.
– to discover or prove that the policy is void ab initio
or is rescindible by reason of the fraudulent Rule on each of XYZ Insurance Co. 's contentions.
concealment or misrepresentation of the insured or (2019 BAR)
his agent. After the two-year period lapses, or when
the insured dies within the period, the insurer must A: The first contention is not tenable. Under the
make good on the policy, even though the policy was incontestability clause, after a policy of life
obtained by fraud, concealment, or insurance made payable upon the death of the
misrepresentation. (Sun Life of Canada v. Sibya III, insured shall have been in force during the lifetime
G.R. No. 211212, 8 June 2016) of the insured for a period of two years from the
issuance of the policy or last reinstatement, the

2022 GOLDEN NOTES
Insurance
insurer must make good on the policy even though issue or of its last reinstatement, the insurer cannot
the policy was obtained through fraud, concealment prove that the policy is void ab initio or is
or misrepresentation. (Sec. 48, IC; Manila Bankers v. rescindible by reason of the fraudulent concealment
Aban, G.R. No. 175666, 29 July 2013; Sun Life of or misrepresentation of the insured or his agent.
Canada v. Sibya, G.R. No. 211212, 08 June 2016) The reinstatement of the insured’s policy is to be
reckoned from the date when the application was
Even if Mr. H had concealed or misrepresented that processed and approved by the insurer. To reinstate
he was previously diagnosed with colon cancer, XYZ a policy means to restore the same to premium-
can no longer rescind the policy since it has been in paying status after it has been permitted to lapse.
force already for three years. (The Insular Life Assurance Company, Ltd. v. Khu, G.R.
No. 195176, 18 Apr. 2016)
On the second contention, XYZ Insurance is
liable despite the suicide of Mr. H. Under the Defenses that are NOT Barred by the
Insurance Code, the insurer is liable when suicide is Incontestability Clause (P-I-P-E-T-F-C)
committed after the policy has been in force for a
period of two years from the date of issue or its last 1. That the person taking the insurance lacked
reinstatement (Sec. 180-A, IC). In this case, Mr. H Insurable interest as required by law;
committed suicide three years after issuance of the 2. That the cause of the death of the insured is an
policy; thus, XYZ should be liable to the beneficiary Excepted risk;
of Mr. H. 3. That the Premiums have not been paid; (Secs.
77, 233(b), 236(b), IC)
Q. Felipe applied for the reinstatement of his life 4. That the Conditions of the policy relating to
insurance policy. Insular Life advised Felipe that military or naval service have been violated;
his application for reinstatement may only be (Secs. 233(b), 234(b), IC)
considered if he agreed to certain conditions. 5. That the Fraud is of a particularly vicious type;
Felipe agreed and paid additional premium on 6. That the beneficiary failed to furnish Proof of
Dec. 27, 1999, and as a result, the Letter of death or to comply with any condition imposed
Acceptance was given to him which indicated by the policy after the loss has happened; or
that the reinstated policy will be effective on 7. That the action was not brought within the
June 22, 1999. On Jan. 7, 2000, Insular Life Time specified. (Sundiang Sr. & Aquino, 2014)
issued an Endorsement regarding the policy.
On Sept. 22, 2001, Felipe died. Subsequently,

Felipe’s beneficiaries filed with Insular Life a
claim for benefit under the reinstated policy.
This claim was denied. Instead, Insular Life
advised Felipe’s beneficiaries that it had decided
to rescind the reinstated policy on the grounds
of concealment and misrepresentation by
Felipe. However, the respondents contend that
policy cannot be rescinded as it is already
incontestable. Is Felipe’s reinstated life
insurance policy already incontestable at the
time of his death?
A: YES. Under Sec. 48 of the IC, after a policy of life

insurance made payable on the death of the insured
shall have been in force during the lifetime of the
insured for a period of two years from the date of its

Commercial Law
insured shall be ascertained at the time of the

B. PERFECTION OF THE INSURANCE CONTRACT loss. (Sec. 60, IC)
2. Valued – is one which expresses on its face an

agreement that the thing insured shall be
Policy of Insurance
valued at a specific sum. (Sec. 61, IC)
It is the written instrument in which the contract of

3. Running – one which contemplates successive
insurance is set forth. (Sec. 49, IC)
insurances, and which provides that the object
of the policy may be from time to time defined,
It is the written document embodying the terms and
especially as to the subjects of insurance, by
stipulations of the contract of insurance between
additional statements or indorsements. (Sec. 62,
the insured and insurer.
IC)
The policy is not necessary for the perfection of the

Basic Contents of a Policy (P3-A-I-R2)
contract. (Sundiang Sr. & Aquino, 2014)
1. Parties;
Form of an Insurance Contract
2. Period during which the insurance is to
continue
1. The policy shall be in printed form which may
3. Property or life insured;
contain blank spaces to be filled in.
4. Amount of insurance, except in open or running
policies;
2. Any rider, clause, warranty, or endorsement
5. Interest of the insured in the property if he is
purporting to be part of the contract of
not the absolute owner;
insurance, and which is pasted or attached to
6. Risk insured against; and
said policy is not binding on the insured, unless
7. Rate of premium. (Sec. 51, IC)
the descriptive title or name of the rider, clause,
warranty, or endorsement is also mentioned
Rider
and written on the blank spaces provided in the
policy.
An attachment to an insurance policy that modifies
the conditions of the policy by expanding or
3. Unless applied for by the insured or owner, any
restricting its benefits or excluding certain
rider, clause, warranty, or endorsement issued
conditions from the coverage. (Black’s Law
after the original policy shall be countersigned
Dictionary)
by the insured or owner.
Riders are not binding on the insured unless the

NOTE: Notwithstanding the foregoing, the policy
descriptive title or name thereof is mentioned and
may be in electronic form subject to the pertinent
written on the blank spaces provided in the policy.
provisions of R.A. No. 8792, otherwise known as the
It should be countersigned by the insured or owner
‘Electronic Commerce Act’ and to such rules and
unless he was the one who applied for the same.
regulations as may be prescribed by the
(Sec. 50, IC)
Commissioner. (Sec. 50, IC)
Cover Notes
Types of Policy of Insurance (O-Va-R)
Persons who wish to be insured may get protection
1. Open – one in which the value of the thing
before the perfection of the insurance contract by
insured is not agreed upon, and the amount of
securing a cover note. The cover note issued by the
the insurance merely represents the insurer’s
insurer shall be deemed an insurance contract as
maximum liability. The value of such thing
contemplated under Sec. 1(1) of the Insurance Code

2022 GOLDEN NOTES
Insurance
subject to the following rules: (Enriquez v. Sun Life Assurance Co., G.R. No. L-15895,
29 Nov. 1920)
1. The cover note shall be issued or renewed only
upon prior approval of the Insurance Q: On June 1, 2011, X mailed to Y Insurance Co.
Commission; his application for life insurance. On July 21,
2. The cover note shall be valid and binding for not 2011, the insurance company accepted the
more than sixty (60) days from the date of its application and mailed, on the same day, its
issuance; acceptance plus the cover note. It reached X's
3. No separate premium (separate from the policy residence on Aug. 11. On Aug. 4, 2011, X figured
or main contract) is required for the cover note; in a car accident. He died a day later. May X's
4. The cover note may be canceled by either party heirs recover on the insurance policy? (2011
upon prior notice to the other of at least seven BAR)
(7) days;
5. The policy should be issued within sixty (60) A: NO. X had no knowledge of the insurer's
days after the issuance of the cover note; acceptance of his application before he died. What is
6. The sixty (60)-day period may be extended being followed in insurance contracts is what is
upon written approval of the Insurance known as the “cognition theory”. Where the
Commission; and applicant died before he received notice of the
8. The written approval of the Insurance acceptance of his application for the insurance,
Commission is dispensed with upon the there is no perfected contract. (Perez v. CA, G.R. No.
certification of the president, vice-president, or 112329, 28 Jan. 2000)
general manager of the insurer that the risk
involved, the values of such risks and premium Q: Jason is the proud owner of a newly-built
therefor, have not as yet been determined or house worth P5 million. As a protection against
established and the extension or renewal is not any possible loss or damage to his house, Jason
contrary to or is not for the purpose of violating applied for a fire insurance policy thereon with
the Insurance Code or any rule Shure Insurance Corporation (Shure) on Oct. 11,
2016 and paid the premium in cash. It took the
OFFER AND ACCEPTANCE/CONSENSUAL company a week to approve Jason's application.
Perfection of an Insurance Contract On Oct. 18, 2016, Shure mailed the approved
policy to Jason which the latter received five (5)
The contract of insurance is perfected when the days later. However, Jason's house had been
assent or consent is manifested by the meeting of razed by fire which transpired a day before his
the offer and the acceptance upon the thing and the receipt of the approved policy. Jason filed a
cause which are to constitute the contract. Mere written claim with Shure under the insurance
offer or proposal is not contemplated. (De Lim v. Sun policy. Shure prays for the denial of the claim on
Life Assurance Co., G.R. No. L-15774, 29 Nov. 1920) the ground that the theory of cognition applies
to contracts of insurance. Decide Jason's claim
Cognition Theory with reasons. (2016 BAR)
Mere submission of the application without the A: Jason’s claim should be denied. What governs
corresponding approval of the policy does not result insurance contract is the cognition theory whereby
in the perfection of the contract of insurance. the insurance contract is perfected only from the
time the applicant came to know of the acceptance
Insurance contracts through correspondence follow of the offer by the insurer. In this case, the loss
the “cognition theory” wherein an acceptance made occurred a day prior to Jason’s knowledge of the
by letter shall not bind the person making the offer acceptance by Shure of Jason’s application. There
except from the time it came to his knowledge.

Commercial Law
being no perfected insurance contact, Jason is not a. By mail –If policy was mailed already and
entitled to recover from Shure. premium was paid and nothing is left to be
done by the insured, the policy is
Offer in Property and Liability Insurance considered constructively delivered if
insured died before receiving the policy.
It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counter- b. By agent –If delivered to the agent of the
offer. The offer is usually accepted by an insurance insurer, whose duty is ministerial, or
agent on behalf of the insurer. (De Leon, 2010) delivered to the agent of the insured, the
policy is considered constructively
Offer in Life and Health Insurance delivered. (De Leon, 2010)
It depends upon whether the insured pays the PREMIUM PAYMENT

premium at the time he applies for insurance.
Insurance Premium
1. If he does not pay the premium, his application
is considered an invitation to the insurer to It is the amount of money a person pays for an
make an offer, which he must then accept insurance policy, in consideration for the
before the contract goes into effect. assumption by the insurance of the risk of loss as a
result of the happening of the designated peril.
2. If he pays the premium with his application, (Divina, 2021)
his application will be considered an offer. (De
Leon, 2010) Payment of Premiums
Delivery of Policy The burden is on an insured to keep a policy in force

by the payment of premiums, rather than on the
Delivery is not necessary in the formation of the insurer to exert every effort to prevent the insured
contract of insurance since the contract of insurance from allowing a policy to elapse through a failure to
is consensual. (Sundiang Sr. & Aquino, 2014) make premium payments. The continuance of the
insurer's obligation is conditional upon the payment
The mere delivery of an insurance policy to of premiums, so that no recovery can be had upon a
someone does not give rise to the formation of a lapsed policy, the contractual relation between the
contract in the absence of proof that he had agreed parties having ceased. (Philippine Phoenix Surety &
to be insured. Insurance Company v. Woodworks, Inc., G.R. No. L-
25317, 6 Aug. 1979)
The contract may be completed prior to delivery of
the policy or even without the delivery of the policy Acceptance of Premium
depending upon the intention of the parties. The
policy may contain a provision that states that the Acceptance of premium within the stipulated period
insurance is not effective until the delivery of the for payment thereof, including the agreed grace
policy. (De Leon, 2010) period, merely assures continued effectivity of the
insurance policy in accordance with its terms.
Two (2) Types of Delivery (Stokes v. Malayan Insurance Co., Inc., G.R. No. L-
34768, 24 Feb. 1984)
1. Actual – delivery to the person of the insured;
and Payment of the premium to agent of the insurance
company is binding on it. (Malayan Insurance v.
2. Constructive Arnaldo, G.R. No. L-67835, 12 Oct. 1987, and Areola v.
CA, G.R. No. 95641, 22 Sept. 1994)

2022 GOLDEN NOTES
Insurance
NOTE: An insurance company which delivers a credit extension is given. No credit extension to
policy to an insurance broker, is deemed to have a duly licensed intermediary should exceed
authorized the latter to receive the payment of the ninety (90) days from date of issuance of the
premium. (Sec. 306, IC) policy. (Sec. 77, IC)
Premium vs. Assessment 5. When there is Acknowledgment in a policy of a

receipt of premium, which the law declares to be
PREMIUM ASSESSMENT conclusive evidence of payment, even if there is
As to their Purpose stipulation therein that it shall not be binding
Levied and paid to until the premium is actually paid. This is
Collected to meet actual without prejudice however to right of insurer to
meet anticipated
losses. collect corresponding premium. (Sec. 77, IC)
losses.
As to whether it is a debt or not
Assessment when 6. When the Public interest so requires, as
properly levied is a determined by the Insurance Commissioner
Premium is not a debt.
debt, unless otherwise
expressly agreed. Example: In compulsory motor vehicle
insurance, if the policy was issued without
“Cash and carry” Rule (2003 BAR) payment of premium by the vehicle owner, the
insurer will still be held liable. To rule
GR: No policy or contract of insurance issued by an otherwise would prejudice the 3rd party victim.
insurance company is valid and binding unless and
until the premium thereof has been paid. Any Q: Will an insurance policy be binding even if
agreement to the contrary is void. premium is unpaid? What if partially paid?
(2015 BAR)
XPNs: (I-C-E G-A-P)
A policy is valid and binding even when there is non- A: As a general rule, the insurance policy is not valid
payment of premium: and binding, unless the premium thereof has been
paid. This is the cash-and-carry rule under the
1. When there is an agreement allowing the Insurance Code. Premium is the consideration for
insured to pay the premium in Installments and the undertaking of the insurer to indemnify the
partial payment has been made at the time of insured against a specified peril. There are
loss. (Makati Tuscany Condominium Corp. v. CA, exceptions, however, one of them is, when there is
G.R. No. 95546, 6 Nov. 1992) an agreement allowing the insured to pay the
premium in installments and partial payment has
2. When there is an agreement to grant the been made at the time of the loss. (Makati Tuscany
insured Credit extension for the payment of the Condominium Corporation v. CA, G.R. No. 95546, 06
premium and loss occurs before the expiration Nov. 1992)
of the credit term. (2007 BAR; Art. 1306, NCC;
UCPB General Insurance v. Masagana Telemart, 1. Payment in Installments
G.R. No. 137172, 4 Apr. 2001)
Q: American Home Assurance Co. (AHAC), issued
3. When Estoppel bars the insurer to invoke non- in favor of Makati Tuscany Condominium
recovery on the policy. Corporation insurance policies for 2 years. The
premiums were paid by Tuscany on
4. In case of life or industrial life policy whenever installments. The policy was again renewed,
the Grace period provision applies, or whenever however, Tuscany thereafter refused to pay the
under the broker and agency agreements with balance of the premium. AHAC filed an action to
duly licensed intermediaries, a ninety (90)-day recover the unpaid balance. Tuscany contended

Commercial Law
that payment by installment of the premiums payment had not yet elapsed. The owner may
due on an insurance policy invalidates the recover from Peninsula Insurance Company, but the
contract of insurance and no risk attached to the latter has the right to deduct the amount of unpaid
policy. The policy was never binding and valid, premium from the insurance proceeds.
and no risk attached to the policy. Is the
contention of Tuscany valid? 2. Credit Extension
A: NO. The subject policies are valid even if the Under Sec. 77 as amended by R.A. No. 10607, a
premiums were paid on installments. The records ninety (90)-day credit extension may be given
clearly show that Tuscany and AHAC intended the whenever credit extension is given under the broker
subject insurance policies to be binding and and agency agreements with duly licensed
effective notwithstanding the staggered payment of intermediaries. The requisites are as follows:
the premiums. For 3 years, the insurer accepted all
the installment payments. Such acceptance of 1. The credit extension must be provided for
payments speaks loudly of the insurer’s intention to under the broker and agency agreements; and
honor the policies it issued to Tuscany. 2. The credit extension to a duly licensed
intermediary should not exceed ninety (90)
While the import of Sec. 77 is that prepayment of days from date of issuance of the policy.
premiums is strictly required as a condition to the (Sundiang Sr. & Aquino, 2014)
validity of the contract, Sec. 78 of the IC in effect
allows waiver by the insurer of the condition Q: Stable Insurance Co. (SIC) and St. Peter
prepayment by making an acknowledgment in the Manufacturing Co. (SPMC) have had a long-
insurance policy of receipt of premium as standing insurance relationship with each
conclusive evidence of payment so far as to make other; SPMC secures the comprehensive fire
the policy binding despite the fact that premium is insurance on its plant and facilities from SIC. The
actually unpaid. (Makati Tuscany Condominium standing business practice between them has
Corp. v. CA, supra) been to allow SPMC a credit period of 90 days
from the renewal of the policy within which to
Q: The Peninsula Insurance Company offered to pay the premium.
insure Francis' brand new car against all risks in
the sum of PI Million for 1 year. The policy was Soon after the new policy was issued and before
issued with the premium fixed at 160,000.00 premium payments could be made, a fire gutted
payable in 6 months. Francis only paid the first the covered plant and facilities to the ground.
two months installments. Despite demands, he The day after the fire, SPMC issued a manager's
failed to pay the subsequent installments. Five check to SIC for the fire insurance premium, for
months after the issuance of the policy, the which it was issued a receipt; a week later SPMC
vehicle was carnapped. Francis filed with the issued its notice of loss. SIC responded by issuing
insurance company a claim for its value. its own manager's check for the amount of the
However, the company denied his claim on the premiums SPMC had paid and denied SPMC's
ground that he failed to pay the premium claim on the ground that under the "cash and
resulting in the cancellation of the policy. Can carry" principle governing fire insurance, no
Francis recover from the Peninsula Insurance coverage existed at the time the fire occurred
Company? (2006 BAR) because the insurance premium had not been
paid. Is SPMC entitled to recover for the loss
A: YES. When insured and insurer have agreed to from SIC? (2003, 2013 BAR)
the payment of premium by installments and partial
payment has been made at the time of loss, then the A: YES. St. Peter Manufacturing Company is entitled
insurer becomes liable. When the car loss happened to recover for the loss from Stable Insurance
on the 5th month, the six months agreed period of Company. Stable Insurance Company granted a

2022 GOLDEN NOTES
Insurance
credit term to pay the premiums. This is not against actually paid the premium. The insured must pay
the law, because the standing business practice of the premium because the insurer was at risk. It
allowing St. Peter Manufacturing Company to pay could be unjust and equitable if the insurer, after
the premiums after 60 or 90 days, was relied upon taking on the risk of indemnifying, cannot recover
in good faith by SPMC. Stable Insurance Company is the premiums on policies for which it had
in estoppel. (UCPB General Insurance Company, Inc. consistently granted credit terms. (Chartis
v. Masagana Telemart, Inc., G.R. No. 137172, 4 Apr. Philippines Insurance, Inc. v. Cyber City Teleservices,
2001) Ltd., G.R. No. 234299, 3 Mar. 2021)
Q: CCTL, through its broker and agent JLT, 3. Estoppel

applied with Chartis for professional indemnity
insurance and fidelity insurance. On Jan. 20, Q: Maxilite and Marques entered into a trust
2005, JLT transmitted Placing Instructions to receipt transaction with FEBTC for the shipment
Chartis informing the latter that CCTL had of various high-technology equipment. FEBIBI,
accepted the terms. The premium payment term upon the advice of FEBTC, facilitated the
is 90 days from the inception of the policies. On procurement and processing from Makati
the same day, Chartis also paid the DST due for Insurance Company of four separate and
the said policies. JLT, on behalf of CCTL, independent fire insurance policies over the
requested extensions of the credit term. Chartis merchandise. Maxilite agreed that FEBTC would
agreed and gave CCTL more time to pay the debit Maxilite’s account for the premium
premiums and the DST. payments. However, said premiums were not
paid.
Finally, on June 15, 2005, no payment having
been made by then, Chartis issued notices of A fire gutted Maxilite’s office and warehouse. As
cancellation. Chartis demanded payment of the a result, Maxilite suffered losses amounting to at
premiums but to no avail. It then sued CCTL for least P2.1 million, which Maxilite claimed
payment of sum of money with damages. CCTL against the fire insurance policy with Makati
invoked Sec. 77 of the Insurance Code and Insurance Company. Makati Insurance Company
argued that since no payment of premiums had denied the fire loss claim on the ground of non-
been made, the policies took no effect at all. payment of premium. FEBTC and FEBIBI
disclaimed any responsibility for the denial of
Is Chartis entitled to the payment of the the claim. Will the claim of Maxilite prosper?
premiums and SDT?
A: YES. The claim of Maxilite will prosper. FEBTC is
A: YES. If the insured did not actually pay the estopped from claiming that the insurance premium
premium but the parties have agreed that the has been unpaid. That FEBTC induced Maxilite to
insurer’s liability has attached, then the insured is believe that the insurance premium has in fact been
considered to have extended credit on the premium. debited from Maxilite’s account is grounded on the
When the insured accepts the terms of the credit, following facts: (1) FEBTC represented and
there is a valid and binding contract of insurance. committed to handle Maxilite’s financing and capital
The insured must pay the premium before the end requirements, including the insurance of the trust
of the credit term; otherwise, he cannot demand receipted merchandise; (2) the premiums of prior
indemnification in case of loss. The insurer may insurance policies had been paid through automatic
demand the premium, whether or not loss occurred. debit arrangement; (3) FEBIBI sent FEBTC, not
Maxilite, to debit Maxilite’s account; (4) there was
Here, the premiums were advanced on credit. The no written demand from FEBTC or Makati
parties had agreed that Chartis was already liable to Insurance Company for Maxilite to pay the
indemnify CCTL if the contingencies occurred from insurance premium; (5) the subject insurance policy
20 Jan. 2005 onward, even though CCTL had not remained uncancelled despite the alleged non-

Commercial Law
payment of the premium, making it appear that the NOTE: Payment by means of a check or note,
insurance policy remained in force and binding. accepted by the insurer, bearing a date prior to the
Thus, Maxilite can still claim from FEBTC. (Jose loss, assuming availability of the funds thereof,
Marques and Maxilite Technologies, Inc. v. FEBTC, would be sufficient even if it remains unencashed at
G.R. Nos. 171379, 171419, 10 Jan. 2011) the time of the loss. The subsequent effects of
encashment would retroact to the date of the
4. Grace Period instrument and its acceptance by the creditor.
(2007 BAR)
In case of individual life or endowment insurance
and group life insurance, the policyholder is entitled NOTE: This is not applicable in case of post-dated
to a grace period of either 30 days or 1 month within checks. The payment of a promissory note or
which the payment of any premium after the first postdated check at a stated maturity subsequent to
may be made. (Secs. 233(a) and 234(a), IC) the loss, is insufficient to put the insurance into
effect. (Vitug, Commercial Laws and Jurisprudence,
In case of industrial life insurance, the grace period 2006, Vol. I, p. 250)
is 4 weeks, where premiums are payable monthly,
either 30 days or 1 month. (Sec. 236(a), IC) Q: If the applicant failed to pay the premium and
instead executed a promissory note in favor of
5. Acknowledgment of Receipt of Premium the insurer payable within 30 days which was
accepted by the latter, is the insurer liable in
Acknowledgment of receipt of premium is case of loss?
conclusive evidence of its payment, in so far as to
make the policy binding, notwithstanding any A: YES. The insurer is liable because there has been
stipulation therein that it shall not be binding until a perfected insurance contract. The insurer
the premium is actually paid. (Sec. 79, IC) accepted the promise of the applicant to pay the
insurance premium within thirty 30 days from the
When the policy contains such written effective date of policy. By so doing, it has implicitly
acknowledgment, it is presumed that the insurer agreed to modify the tenor of the insurance policy
has waived the condition of prepayment. It hereby and in effect, waived any provision therein that it
creates a legal fiction of payment. The presumption would only pay for the loss or damage in case the
is however, extended only to the question of the same occurs after the payment of the premium.
binding effect of the policy. Considering that the insurance policy is silent as to
the mode of payment, insurer is deemed to have
As far as the payment of the premium itself is accepted the promissory note in payment of the
concerned, the acknowledgment is only prima facie premium. This rendered the policy immediately
evidence of the fact of such payment. The insurer operative on the date it was delivered. (Capital
may still dispute its acknowledgment but only for Insurance & Surety Co. Inc. v. Plastic Era Co., Inc., G.R.
the purpose of recovering the premium due and No. L-22375, 18, July 1975)
unpaid. Whether payment was indeed made is a
question of fact. Q: On Sept. 25, 2013, Danny Marcial (Danny)
procured an insurance on his life with a face
Payment of Premium by Post-dated Check value of P5 million from RN Insurance Company
(RN), with his wife Tina Marcial (Tina) as sole
Delivery of a promissory note or a check will not be beneficiary. On the same day, Danny issued an
sufficient to make the policy binding until the said undated check to RN for the full amount of the
note or check has been converted into cash. This is premium. On Oct. 1, 2013, RN issued the policy
consistent with Art. 1249 of the New Civil Code. covering Danny’s life insurance. On Oct. 5, 2013,
Danny met a tragic accident and died. Tina
claimed the insurance benefit, but RN was quick

2022 GOLDEN NOTES
Insurance
to deny the claim because at the time of Danny’s out and destroyed the building owned by
death, the check was not yet encashed and Alfredo. May Alfredo recover on the insurance
therefore the premium remained unpaid. policy? (2007 BAR)
a. Is RN correct? A: YES. Alfredo may recover on the policy. It is valid

b. Will your answer be the same if the check is to stipulate that the insured will be granted credit
dated Oct. 15, 2013? (2014 BAR) term for payment of premium. Payment by means of
a check which was accepted by the insurer, bearing
A: a date prior to the loss, would be sufficient. The
a. NO. RN Insurance is not correct. The facts of the subsequent effects of encashment retroact to the
case show that Danny procured insurance on date of the check. (UCPB General Insurance Co., Inc.
his life on Sept. 25, 2013, with his wife Tina as v. Masagana Telamart, Inc., G.R. No. 137172, 4 Apr.
beneficiary, and on that same day, he issued an 2001)
undated check to RN for the full amount of the
premium. Since the undated check was issued Non-payment of Premiums
to RN on Sept. 25, 2013, it will be considered
dated as of the same day. Non-payment of the premium will not entitle the
insured to recover the premium from the insurer.
RN Insurance denied the claim of Tina because The continuance of the insurer’s obligation is
at the time of Danny’s death, the check was not conditioned upon the payment of the premium, so
yet encashed, therefore, the premium remained that no recovery can be had upon a lapsed policy,
unpaid. The payment by means of a check or the contractual relation between the parties having
note, accepted by the insurer, bearing a date ceased. If the peril insured against had occurred, the
prior to the loss, assuming the availability of the insurer would have had a valid defense against
funds thereof, would be sufficient even if it recovery under the policy.
remains unencashed at the time of the loss. The
subsequent effects of encashment would Non-payment of the first premium prevents the
retroact to the date of the mercantile contract from becoming binding notwithstanding
instrument. the acceptance of the application or the issuance of
the policy, unless waived. But nonpayment of the
b. NO. The answer would not be the same if the balance of the premium due does not produce the
check were dated Oct. 15, 2013. The payment cancellation of the contract.
of a promissory note or postdated check at a
stated maturity subsequent to the loss, is With respect to subsequent premiums, non-payment
insufficient to put the insurance into effect. does not affect the validity of the contracts unless,
(Vitug, Commercial Laws and Jurisprudence, by express stipulation, it is provided that the policy
2006, Vol. I, p. 250) shall in that event be suspended or shall lapse. (De
Leon, 2010)
If it were RN Insurance who dated the check
Oct. 15, 2013, then my answer would be the Non-payment of Premiums by reason of the
same as my answer to the first question. Circumstances or Conduct of the Insurer
Q: Alfredo took out a policy to insure his GR: Non-payment of premiums does not merely
commercial building from fire. The broker for suspend but put an end to an insurance contract
the insurance company agreed to give a 15-day since the time of the payment is peculiarly of the
credit within which to pay the insurance essence of the contract. (De Leon, 2010)
premium. Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check payable XPNs: (I-W-W)
on May 30, 2006. On May 28, 2006, a fire broke

Commercial Law
1. The insurer has become Insolvent and has REINSTATEMENT OF A LAPSED POLICY
suspended business, or has refused without OF LIFE INSURANCE
justification a valid tender of premiums;
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, 29 Purpose of the Reinstatement Provision
Oct. 1952)
2. Failure to pay was due to the Wrongful The purpose of the provision is to clarify the
conduct of the insurer; or requirements for restoring a policy to premium-
3. The insurer has Waived his right to demand paying status after it has been permitted to lapse.
payment.
The law requires that the policy owner be
Fortuitous events will not prevent forfeiture of the permitted to reinstate the policy, subject to the
policy when the premium remains unpaid. Hence, violations specified, any time within three (3)
non-payment of premium by reason of a fortuitous years from the date of default of premium
event is not an excuse. payment. A longer period, being more favorable to
the insured, may be used.
Non-payment of premiums occasioned by war
causes complete abrogation of the insurance. Hence, Reinstatement is not an absolute right of the
war does not excuse non-payment. (Constantino v. insured, but discretionary on the part of the
Asia Life Insurance Company, G.R. No. L-1669-70, 31 insurer, which has the right to deny reinstatement
Aug. 1950) if it were not satisfied as to the insurability of the
insured, and if the latter did not pay all overdue
NON-DEFAULT OPTIONS IN LIFE INSURANCE premiums and other indebtedness to the insurer.
(McGuire v. Manufacturer’s Life Ins. Co., G.R. No. L-
Non-Default or Forfeiture Options in Whole Life 3581, 21 Sept. 1950)
Insurance
Q: A life insurance policy lapsed. The insured
1. Extended term insurance, where the policy’s applied for reinstatement of the policy and paid
available cash value will be used as single only a part of the overdue premiums.
premium to purchase a term insurance. Subsequently, the insured died. Was the insurer
liable?
2. Reduced paid up cash value, where the policy’s
available cash value will be used to purchase a A: The insurer is not liable as the policy was not
paid up insurance providing a coverage with reinstated. The failure to pay the balance of the
term equivalent to the original policy but lower overdue premiums prevented reinstatement and
amount. recovery of the face value of the policy. (Andres v.
Crown Life Ins. Co., G.R. No. L-10874, 28 Jan. 1958)
3. Cash surrender value, where the cash value of
the policy is paid to the insured upon surrender Q: Eulogio took out a life insurance policy which
of the policy. However, once policy is contained a provision which allows for
surrendered, it can’t be reinstated. reinstatement any time within three years after
it lapsed. Eulogio paid the premiums due on the
Refund of premium is not recoverable in life first two months. However, he failed to pay
insurance but the insured has non-default or subsequent premiums. One month after the
forfeiture options. (Divina, 2021) policy lapsed, he filed an application for the
reinstatement of his policy. He deposited the
NOTE: Whole life or permanent insurance is one overdue premiums and signed a reinstatement
where the insurer pays benefits whenever the policy stating that the payment deposit only
insured dies. (Divina, 2021) and shall not bind the Company until this
application is finally approved. Hours later,

2022 GOLDEN NOTES
Insurance
Eulogio died of electrocution. The insurance when such contract is subsequently annulled
company denied the claim of his beneficiaries under the provisions of the New Civil Code.
stating that the policy was never approved. Is
the contention of the insurance company valid? A person insured is not entitled to a return of
premium if the policy is annulled, rescinded or if a
A: YES. The stipulation in a life insurance policy claim is denied by reason of fraud. (Sec. 82, IC)
giving the insured the privilege to reinstate it upon
written application does not give the insured 2. Pro rata (DO)
absolute right to such reinstatement by the mere a. When the insurance is for a Definite period
filing of an application. The insurer has the right to and the insured surrenders his policy
deny the reinstatement if it is not satisfied as to the before the termination thereof; except:
insurability of the insured and if the latter does not
pay all overdue premium and all other i. Policy not made for a definite period
indebtedness to the insurer. After the death of the of time;
insured, the Insurance Company cannot be ii. Short period rate is agreed upon; or
compelled to entertain an application for iii. In life insurance policy.
reinstatement of the policy because the conditions
precedent to reinstatement can no longer be b. When there is Over-insurance. The
determined and satisfied. (Violeta Lalican v. Insular premiums to be returned shall be
Life, G.R. No. 183526, 25 Aug. 2009) proportioned to the amount by which the
aggregate sum insured in all the policies
REFUND OF PREMIUM exceeds the insurable value of the thing at
risk. (Sec. 83, IC)
Instances when the Insured Entitled to Recover
Premiums Already Paid or a Portion thereof i. In case of over-insurance by double
(2000 BAR) insurance, the insurer is not liable for
the total amount of the insurance
1. Whole or Full Amount (E-F-I-De-R) taken, his liability being limited to the
a. When no part of the thing insured has been property insured. Hence, the insurer
Exposed to any of the perils insured is not entitled to that portion of the
against. (Sec. 80, IC) premium corresponding to the excess
b. When the contract is voidable because of of the insurance over the insurable
the Fraud or misrepresentations of the interest of the insured. (1990 BAR)
insurer of his agent. (Sec. 82, IC)
ii. In case of over-insurance by several
c. When the insurance is voidable because of insurers, the insured is entitled to a
the existence of facts of which the insured ratable return of the premium,
was Ignorant without his fault. (Sec. 82, IC) proportioned to the amount by which
the aggregate sum insured in all the
d. When the insurer never incurred any policies exceeds the insurable value of
liability under the policy because of the the thing insured. (Sec. 83, IC)
Default of the insured other than actual
fraud. (Sec. 82, IC) Illustration:
e. When Rescission is granted due to insurer’s Where there is a total over insurance of
breach of contract. (Sec. 74, IC) P500,000.00 in an aggregate P2,000,000.00
policy (P1,500,000.00 is only the insurable
NOTE: When the contract is voidable, a person value), 25% (proportion of P500k to P2M)
insured is entitled to a return of the premium

Commercial Law
of the premiums paid to the several

insurers should be returned. C. RIGHTS AND OBLIGATIONS OF PARTIES
When the Insured is NOT Entitled to Return of

Premiums Paid (L-I2-F-E)
Parties to the Contract of Insurance
1. In Life insurance policies; (Sec. 80(b), IC)

1. Insurer – party who assumes or accepts the risk
2. If contract is Illegal and the parties are in pari
of loss and undertakes for a consideration to
delicto;
indemnify the insured on the happening of a
3. If the policy is annulled, rescinded or if a claim
specified contingency or event.
is denied by reason of Fraud; (Sec. 82, IC) or
4. If the peril insured against has Existed, and the
2. Insured – person in whose favor the contract is
insurer has been liable for any period, the peril
operative and who is indemnified against or is
being entire and Indivisible. (Sec. 81, IC)
to receive a certain sum upon the happening of
a specified contingency or event.
Q: Teodoro Cortez, applied for a 20-year
endowment policy with Great Pacific Insurance
NOTE: The insured is not always the person to
Corporation (Great Pacific). His application,
whom the proceeds are paid.
with the requisite medical examination, was
accepted and approved by the Great Pacific and
NOTE: An insured may be considered a
in due course, an endowment policy was issued
policyholder under the Insurance Code. The
in his name. Thereafter, Great Pacific advised
Insurance Commission defines a policyholder as
Cortez that the policy was not in force.
the named owner of the insurance policy who
may be the insured or assured in life or nonlife
To make it enforceable and operative, Cortez
insurance policy or a beneficiary as may be
was asked to remit the balance to complete his
applicable. (Aquino, 2018)
initial annual premium and to see Dr. Felipe V.
Remollo for another full medical examination at
Assured or Beneficiary
his own expense. Because of this, Cortez
informed that it that he was cancelling the policy
An Assured/Beneficiary is a person designated by
and he demanded the return of his premium
the terms of the policy to receive the proceeds of the
plus damages. Great Pacific ignored his demand.
insurance. He may be the insured or a third party in
Is Cortez entitled to a refund of his premium?
the contract for whose benefit the policy is issued
and to whom the loss is payable.
A: YES. Great Pacific should have informed Cortez of
the deadline for paying the first premium before or
Insurer
at least upon delivery of the policy to him, so he
could have complied with what was needful and
Every corporation, partnership, or association duly
would not have been misled into believing that his
authorized to transact insurance business as
life and his family were protected by the policy,
elsewhere provided in the Insurance Code, may be
when actually they were not. And, if the premium
an insurer. (Sec. 6, IC)
paid by Cortez was unacceptable for being late, it
was the company's duty to return it. Since his policy
The term “insurer” no longer includes “individuals”
was in fact inoperative or ineffectual from the
under R.A. No. 10607. Hence, an individual natural
beginning, the company was never at risk, hence, it
person is no longer allowed to be an insurer. The
is not entitled to keep the premium. (Great Pacific
term, however, includes the following:
Life Insurance Corp. v. CA, et al., G.R. No. L-57308, 23
Apr. 1990)
1. Professional reinsurer – any person,
partnership, association or corporation that

2022 GOLDEN NOTES
Insurance
transacts solely and exclusively reinsurance principal objectives, the business is that of
business in the Philippines. insurance. But if they are merely incidental and
service is the principal purpose, then the business is
2. Mutual Insurance Companies – The law also not insurance.
provides for the procedure for mutualization of
domestic stock life insurance companies. A new Philippine Health Care Providers appears to provide
provision on RA 10607 is on demutualization or insurance-type benefits to its members (with
conversion of mutual insurance companies into respect to its curative medical services), but these
stock corporations. (Sec. 280, IC) are incidental to the principal activity of providing
them medical care. The “insurance-like" aspect of
3. Cooperatives – are now expressly included in Philippine Health Care Providers’ business is
the term “insurer” or “insurance company.” miniscule compared to its noninsurance activities.
However, the cooperative must: (Su-C-A) Therefore, since it substantially provides health
care services rather than insurance services, it
a. Have Sufficient capital and assets required cannot be considered as being in the insurance
under the Insurance Code and the pertinent business. (Philippine Health Care Providers Inc., v.
regulations issued by the Commission. (Sec. CIR, G.R. No. 167330, 18 Sept. 2009)
192, IC)
Rights and Obligations of the Parties in an
b. Have a Certificate of Authority to operate Insurance Contract
issued by the Commission which should be
renewed every year. (Sec. 193, IC; Sundiang The rights and obligations of the parties must be
Sr. & Aquino, 2014) determined by the terms of their contract, taking
into consideration its purpose and always in
(See also definition of “doing an insurance business” accordance with the general principles of insurance
or “transacting an insurance business” – page 1) law. (Aquino, 2018)
Q: Philippine Health Care Providers, Inc. is Each party to a contract of insurance is bound to
engaged in operating a prepaid group practice know all the general causes which are open to his
health care delivery system or a health inquiry, equally with that of the other, and which
maintenance organization (HMO) to take care of may affect the political or material perils
the sick and disabled persons enrolled in the contemplated; and all general usages of trade. (Sec.
health care plan. Individuals enrolled in its 32, IC)
health care programs pay an annual
membership fee and are entitled to various Right to Information of Material Facts
medical services provided by its duly licensed
physicians, specialists and other professional The right to information of material facts may be
technical staff participating in the group waived, either by the terms of insurance or by
practice health delivery system at a hospital or neglect to make inquiry as to such facts, where they
clinic operated or accredited by it. Is Philippine are distinctly implied in other facts of which
Health Care Providers, Inc. an insurance information is communicated. (Sec. 33, IC)
company or HMO?
Rights of Policyholders (F-A-IL-O-IBEO-R-C-ES-
A: HMOs are not insurance businesses. One test that SC-A)
they have applied is whether the assumption of risk
and indemnification of loss (which are elements of 1. Right to a Financially sound and viable
an insurance business) are the principal object and insurance company;
purpose of the organization or whether they are 2. Right to Access insurance companies’ official
merely incidental to its business. If these are the financial information;

Commercial Law
3. Right to be Informed of the License status of beneficiary’s designation shall be deemed

insurance companies, intermediaries, and irrevocable. (De Leon, 2014)
soliciting agents;
4. Right to be Offered a duly approved insurance Where Right to Change is Waived
product;
5. Right to be Informed of the Benefits, Exclusions, If the right to change the beneficiary is expressly
and Other provisions under the policy; waived in the policy, then the insured has no power
6. Right to Receive the policy; to make such change without the consent of the
7. Right to Confidentiality of information; beneficiary. (De Leon, 2014)
8. Right to Efficient Service from insurance
companies, intermediaries, and soliciting The insured does not even retain the power to
agents; destroy the contract by refusing to pay premiums
9. Right to prompt and fair Settlement of Claims; for the beneficiary can protect his interest by paying
and the premiums for the reason that the fulfillment of
10. Right to seek Assistance from the Insurance an obligation may be made by a third person even
Commission. (Aquino, 2018) against the will of the debtor and if he has an
interest in the fulfillment of the obligation, even
Insured’s Right to Change Designated against the will of the creditor. (Art. 1236, NCC)
Beneficiaries
Insurer’s Right of Subrogation
The insured shall have the right to change the
beneficiary he designated in the policy, unless he If the plaintiff's property has been insured, and he
has expressly waived this right in said policy. has received indemnity from the insurance
Notwithstanding the foregoing, in the event the company for the injury or loss arising out of the
insured does not change the beneficiary during his wrong or breach of contract complained of, the
lifetime, the designation shall be deemed insurance company shall be subrogated to the rights
irrevocable. (Sec. 11, IC) of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by
(See also discussion on Change of Beneficiary – the insurance company does not fully cover the
page 7) injury or loss, the aggrieved party shall be entitled
to recover the deficiency from the person causing
Limitations in the Appointment of Beneficiary the loss or injury. (Art. 2207, NCC)
Any person who is forbidden from receiving any The insurer, after paying the amount covered by the
donation under Art. 739 cannot be named policy, steps into the shoes of the insured, availing
beneficiary of a life insurance policy by the person himself the latter’s rights that exist against the
who cannot make any donation to him, according to wrongdoer at the time of the loss. (De Leon, 2014).
said article. (Art. 2012, NCC)
Payment by the Insurer to the Assured Operates
(See discussion on Persons Prohibited from being as an Equitable Assignment
Designated as Beneficiaries – page 9)
Payment by the insurer to the assured operates as
Effect of Death of Insured an equitable assignment to the insurer of all
remedies, which the assured may have against the
The right must be exercised specifically in the third party whose negligence or wrongful act
manner provided in the policy or contract. However, caused the loss.
the insured’s power to extinguish the beneficiary’s
interest ceases at his death, and cannot be exercised The right of subrogation is not dependent upon, nor
by his personal representatives or assignees. The does it grow out of any privity of contract or upon

2022 GOLDEN NOTES
Insurance
written assignment of claim. It accrues simply upon has in good faith settled the assured’s claim for
payment of the insurance claim by the insurer. (Pan loss; and
Malayan Insurance Corporation v. CA, G.R. No. 81026,
03 Apr. 1990) 3. Where the insurer pays the assured for a loss
which is not a risk covered by the policy, thereby
Effects of Legal Subrogation under Art. 2207 of effecting “voluntary payment”. (Pan Malayan
the NCC Insurance Corporation v. CA, supra)
Legal subrogation produces the same effects as of Prescriptive Period in cases where the Insurer is
assignment and no new obligation is created Subrogated to the Rights of the Insured against
between the subrogee and debtor. the Wrongdoer
The effect of legal subrogation is to transfer to the Following the principles of subrogation, the insurer
new creditor the credit and all the rights and actions inherits only the remaining period within which
that could have been exercised by the former the insured may file an action against the
creditor either against the debtor or against third wrongdoer.
persons, be they guarantors or mortgagors.
The ruling in Henson v. UCPB General Insurance Co.,
Simply stated, except only for the change in the Inc. (G.R. No. 223134, 14 Aug. 2019) abandoned the
person of the creditor, the obligation subsists in all ruling in the case of Vector Shipping v. American
respects as before the novation. However, unlike Home Assurance Company (G.R. No. 159213, 03 July,
assignment, legal subrogation, to produce effects, 2013) with regard the prescriptive period in cases
does not need to be agreed upon by the subrogee where the insurer is subrogated to the rights of the
and subrogor. (Henson Jr. v. UCPB General Insurance insured against the wrongdoer.
Co., Inc., G.R. No. 223134, 14 Aug. 2019)
Vector Shipping v. American Home Assurance
Reasons behind the Right of Subrogation Company became final on Aug. 15, 2013 while
Henson v. UCPB General Insurance Co., Inc. became
1. To make the person who caused the loss legally final on Aug. 14, 2019.
responsible for it; and
2. To prevent the insured from having double Guidelines to the Application of the Henson
recovery from the wrongdoer and insurer. (De Ruling regarding the prescriptive period of filing
Leon, 2014) claims
Right of Subrogation Applicable Only to The Henson Ruling will only apply prospectively.
Property Insurance
First Guideline: For actions of such nature that have
The value of human life is incapable of pecuniary already been filed and are currently pending before
estimation. In addition, Art. 2207 of the NCC refers the courts at the time of the finality of this Decision,
only to property. (De Leon, 2014) the rules on prescription prevailing at the time the
action is filed would apply.
XPNs to the Right of Subrogation:
1. For cases that were filed by the subrogee-
1. If the insured, by his own act, releases the insurer prior to the applicability of the Vector
wrongdoer from liability; ruling (i.e., before Aug. 15, 2013), the
prescriptive period is four (4) years from the
2. Where the insurer pays the assured the value of time the tort is committed against the insured
the lost goods without notifying the carrier who by the wrongdoer.

Commercial Law
2. For cases that were filed by the subrogee- period in the policy subject to the limitation under
insurer during the applicability of the Vector Sec. 63 of the IC which states that “a condition,
ruling (i.e., from Vector's finality on Aug. 15, stipulation, or agreement in any policy of insurance,
2013 up until the finality of this Decision on limiting the time for commencing an action
Aug. 14, 2019), the prescriptive period is ten thereunder to a period of less than one (1) year from
(10) years from the time of payment by the the time when the cause accrues, is void. (Aquino,
insurer to the insured, which gave rise to an 2018)
obligation created by law.
Final Rejection of the Claim
Second Guideline: For actions of such nature that
have not yet been filed at the time of the finality of The prescriptive period for the insured’s action for
this Decision: indemnity should be reckoned from the final
rejection of the claim. The final rejection simply
1. For cases where the tort was committed and the means denial by the insurer of the claims of the
consequent loss/injury against the insured insured and not the rejection or denial by the
occurred prior to the finality of this Decision insurer of the insured’s motion or request for
(Aug. 14, 2019), the subrogee-insurer is given reconsideration. The rejection referred to should be
an additional four (4) years from the time of the construed as the rejection in the first instance.
finality of this Decision to file the action against (Alpha Plus International Enterprises Corp. v.
the wrongdoer; but the total period to file such Philippine Charter Insurance Corp, G.R. No. 203756,
case shall not exceed ten (10) years from the 10 Feb. 2021)
time the insurer is subrogated to the rights of
the insured.
2. For cases where the tort was committed and the

consequent loss/injury against the insured
occurred only upon or after the finality of this
Decision, the prescriptive period is four (4)
years from the time the tort is committed
against the insured by the wrongdoer. The
Vector doctrine would hold no application.
(Henson Jr. v. UCPB General Insurance Co., Inc.,
G.R. No. 223134, 14 Aug. 2019)
Right to the Recovery of the Proceeds of the

Insurance
The named beneficiary is the person designated by

the terms of the policy as the one to receive the
proceeds of the insurance. (Aquino, 2018)
Prescriptive Period for Filing of a Complaint for

the Recovery of the Proceeds of the Insurance
The Insurance Code does not provide for a

prescriptive period for the filing of a complaint for
the recovery of the proceeds of the insurance.
However, the parties may stipulate a prescriptive

2022 GOLDEN NOTES
Insurance
Notice of Cancellation of the Contract

D. RESCISSION OF INSURANCE CONTRACTS
All notices of cancellation shall be in writing, mailed
or delivered to the named insured at the address
shown in the policy, or to his broker provided the
Instances wherein a Contract of Insurance may
broker is authorized in writing by the policy owner
be Rescinded (1991, 1994, 1996, 1998 BAR)
to receive the notice of cancellation on his behalf,
(Co-M-B)
and shall state:
1. Concealment
1. Which of the grounds set forth in Sec. 64 is
2. Misrepresentation/ omission
relied upon; and
3. Breach of warranties
2. That, upon written request of the named
insured, the insurer will furnish the facts on
Instances wherein a Contract of Insurance may
which the cancellation is based. (Sec. 65, IC)
be Canceled by the Insurer
(N-C-D-P-Discovery of Fra-M-E-W-O-R)
CONCEALMENT
1. Nonpayment of premium;
Concealment is a neglect to communicate that
which a party knows and ought to communicate.
2. Conviction of a crime arising out of acts
(Sec. 26, IC)
increasing the hazard insured against;
Under Sec. 27 of the IC, “a concealment entitles the

3. A Determination by the Commissioner that the
injured party to rescind a contract of insurance.”
continuation of the policy would violate or
Moreover, under Sec. 168 of the IC, the insurer is
would place the insurer in violation of the
entitled to rescind the insurance contract in case of
Insurance Code;
an alteration in the use or condition of the thing
insured. (Malayan Insurance Company v. PAP Co.,
4. Physical changes in the property insured which
G.R. No. 200784, 7 Aug. 2013, in Divina 2014)
result in the property becoming uninsurable;
Requisites: (Ne-D-NoW-NoM-Ma)
5. Discovery of Fraud or Material
misrepresentation;
1. A party knows a fact which he Neglects to
communicate or disclose to the other party;
6. Discovery of other insurance coverage that
2. Such party concealing is Duty bound to disclose
makes the total insurance in Excess of the value
such fact to the other;
of the property insured; or
3. Such party concealing makes No Warranty as to
the fact concealed;
7. Discovery of Willful or Omissions or Reckless
4. The other party has No Means of ascertaining
acts increasing the hazard insured against. (Sec.
the fact concealed; and
64, IC)
5. The fact must be Material.
No policy of insurance other than life shall be

Test of Materiality (2000 BAR)
canceled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation
It is determined not by the event, but solely by the
shall be effective unless it is based on the
probable and reasonable influence of the facts upon
occurrence, after the effective date of the policy, of
the party to whom the communication is due, in
one or more of the abovementioned instances. (Sec.
forming his estimate of the disadvantages of the
64, Ibid)
proposed contract, or in making his inquiries. (Sec.
31, IC)

Commercial Law
NOTE: As long as the facts concealed are material, corresponding adjustment for a higher premium or
concealment, whether intentional or not, entitles rejecting the same. (Sunlife Assurance Company of
the injured party to rescind. (Sec. 27, IC) Canada v. CA, G.R. No. 105135, 22 June 1995 in Divina,
2021)
Facts not conveyed to the insurer raises
presumption that the failure of the insured to In order for Concealment to Produce the Effect
communicate must have been intentional rather of Avoiding the Policy, it should Take Place at the
than inadvertent. Good faith is not a defense Time the Contract is Entered into
because of the Uberrimae Fidei Doctrine.
Concealment should take place at the time the
Rules on Concealment contract is entered into and not afterwards in order
that the policy may be avoided. The duty of
1. If there is concealment under Sec. 27, the disclosure ends with the completion of the contract.
remedy of the insurer is rescission since Waiver of medical examination in a non-medical
concealment vitiates the contract of insurance; insurance contract renders even more material the
(1996 BAR) information required of the applicant concerning
previous condition of health and diseases suffered,
2. The party claiming the existence of for such information necessarily constitutes an
concealment must prove that there was important factor which the insurer takes into
knowledge of the fact concealed on the part of consideration in deciding whether to issue the
the party charged with concealment.; policy or not. Failure to communicate information
acquired after the effectivity of the policy will not be
3. Good faith is NOT a defense in concealment. a ground to rescind the contract.
Concealment, whether intentional or
unintentional entitles the injured party to NOTE: The reason for this rule is that if concealment
rescind the contract of insurance; (Sec. 27, IC) should take place after the contract is entered into,
the information concealed is no longer material as it
4. The matter concealed need not be the cause of will no longer influence the other party to enter into
loss; (Sec. 31, IC) and such contract.
5. To be guilty of concealment, a party must have Q: Joanna applied for a non-medical life
knowledge of the fact concealed at the time of insurance. Joanna did not inform the insurer
the effectivity of the policy. that one week prior to her application for
insurance, she was examined and confined at St.
Q: Should the fact/s concealed be the proximate Luke’s Hospital where she was diagnosed for
cause of the loss in order to constitute lung cancer. The insured soon thereafter died in
concealment? a plane crash. Is the insurer liable considering
that the fact concealed had no bearing with the
A: NO, the facts concealed need not be the proximate cause of death of the insured? Why? (2001 BAR)
cause of the loss in order to constitute concealment.
Materiality is to be determined not by the event, but A: NO. The insurer is not liable. The concealed fact
solely by the probable and reasonable influence of is material to the approval and issuance of the
the facts upon the party to whom the insurance policy. It is well settled that the insured
communication is due, in forming his estimate of the need not die of the disease she failed to disclose to
disadvantages of the proposed contract, or in the insurer. It is sufficient that his nondisclosure
making his inquiries. The test is whether the misled the insurer in forming his estimate of the
matters concealed would have definitely affected risks of the proposed insurance policy or in making
the insurer’s action on the application of the inquiries. (Sun Life v. CA, supra)
insured, either by approving it with the

2022 GOLDEN NOTES
Insurance
Q: On June 21, 2008, Yate took out a life or last reinstatement. The rule, however, admits
insurance policy on her life in the amount of PhP of an exception so that when suicide is
10 million and named her husband Vandy and committed in the state of insanity, it shall be
daughter as joint irrevocable beneficiaries. compensable regardless of the date of
Before the policy was issued and the premiums commission. (Sec. 183, IC)
were paid, Yate underwent a medical checkup
with a physician accredited by the insurer, and In the facts given, Yate was diagnosed with
the only result found was that she was suffering psychotic tendency that graduated into extreme
from high blood pressure. despondency; thus, even though Yate
committed suicide 36 months from issuance of
Yate was previously diagnosed by a private the policy, the insurer is liable.
physician of having breast cancer which she did
not disclose to the insurer in her application, Concealment in Marine Insurance
nor to the insurer's accredited physician
because by then, she was told that she was Rules on concealment are stricter in marine
already cancer-free after undergoing surgery insurance since the insurer would have to depend
which removed both her breasts. She was later almost entirely on the matters communicated by the
diagnosed with psychotic tendency that insured. Thus, in addition to material facts, each
graduated into extreme despondency. party must disclose all the information he possesses
which are material or the information of the belief
She was found dead hanging in her closet 36 or expectation of a third person, in reference to a
months after the issuance of the policy. The material fact. But concealment in a marine
police authorities declared it to be a case of insurance in any of the following matters
suicide. The policy did not include suicide as an enumerated under Sec. 112 of the IC does not vitiate
excepted risk. the entire contract, but merely exonerates the
insurer from a loss resulting from the risk
a. Can the insurer raise the issue of failure to concealed.
disclose that she had cancer as a cause for
denying the claim of the beneficiaries? Test in Ascertaining the Existence of
Concealment
b. Are the beneficiaries entitled to receive the
proceeds of the life insurance If the applicant is aware of the existence of some
notwithstanding the fact that the cause of circumstances which he knows would probably
death was suicide? (2018 BAR) influence the insurer in acting upon his application,
good faith requires him to disclose that
A: circumstance, though unasked.
a. The insurer cannot raise the issue of
concealment, because only material facts Matters that Need NOT be Disclosed
known to the insured at the time of the issuance
of the policy should be disclosed to the insurer GR: The parties are not bound to communicate
(Sec. 28, IC). Yate’s previous cancer diagnosis is information of the following matters:
no longer a material fact at the time she (O-W-K-E-R-I)
procured the policy.
1. Those which, in the exercise of ordinary care,
b. YES. The beneficiaries are entitled to receive the other Ought to know and of which, the
the proceeds. The rule is that the insurer in life former has no reason to suppose him ignorant;
insurance is liable in case of suicide only when 2. Those of which the other Waives
it is committed after the policy has been in force communication;
for a period of two years from the date of issue 3. Those which the other Knows;

Commercial Law
4. Those which prove or tend to prove the however, that his frequent headache is really
Existence of a risk excluded by a warranty, and caused by his being hypertensive. In his
which are not otherwise material; application form for a life insurance for himself,
5. Those which Relate to a risk excepted from the he did not put a check to the question if he is
policy and which are not otherwise material; suffering from hypertension, believing that
and because of his active lifestyle, being
6. The nature or amount of the Interest of one hypertensive is a remote possibility. While
insured, except if he is not the owner of the playing golf one day, X collapsed at the fairway
property insured. (Sec. 34, IC) and was declared dead on arrival at the
hospital. His death certificate stated that X
XPN: In answer to inquiries of the other. (Sec. 30, IC) suffered a massive heart attack.
NOTE: Neither party is bound to communicate, even a. Will the beneficiary of X be entitled to the
upon inquiry, information of his own judgment, proceeds of the life insurance under the
because such would add nothing to the appraisal of circumstances, despite the non-disclosure
the application. (Sec. 35, IC) that he is hypertensive at the time of
application?
Matters that Must be Disclosed Even in the
Absence of Inquiry b. If X died in an accident instead of a heart
attack, would the fact of X's failure to
1. Those material to the contract; disclose that he is hypertensive be
2. Those which the other has no means of considered as material information? (2016
ascertaining; and BAR)
3. Those as to which the party with the duty to
communicate makes no warranty. A:
a. NO, the beneficiary of X is not entitled to the
NOTE: Matters relating to the health of the insured proceeds of the life insurance. The
are material and relevant to the approval of the hypertension of X is a material fact that should
issuance of the life insurance policy as these have been disclosed to the insurer. The
definitely affect the insurer’s action to the concealment of such material fact entitles the
application. It is well-settled that the insured need insurer to rescind the insurance policy.
not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure b. It is still a material information. It is settled that
misled the insurer in forming his estimates of the the insured cannot recover even though the
risks of the proposed insurance policy or in making material fact not disclosed is not the cause of
inquiries. (Sunlife Assurance Co. of Canada v. CA, the loss.
supra)
Evidence of Insurability
Information as to the nature of interest need not be
disclosed except in property insurance if the Evidence of Insurability is a broader phrase than
insured is not the owner. If somebody is insuring “Evidence of Good Health” and includes such other
properties of which he is not the owner, he must factors as the insured’s occupation, habits, financial
disclose why he has insurable interest that would condition, and other risk selection factors.
entitle him to ensure it, and the extent thereof. (Secs.
34 and 51(e), IC) Q: Ngo Hing filed an application with the Great
Pacific Life Assurance Company (Pacific Life) for
Q: X insured his life for P20 million. X plays golf a twenty-year endowment policy on the life of
and regularly exercises everyday, hence is his one-year-old daughter Helen Go. Ngo Hing
considered in good health. He did not know, supplied the essential data and filed the

2022 GOLDEN NOTES
Insurance
application to Mondragon, the branch manager. A: YES. The insurance company correctly rescinded
After some time, Helen Go died of influenza with the policy because of concealment. Benny did not
complication of bronchopneumonia. disclose that he was suffering from diabetes,
Thereupon, Ngo Hing sought the payment of the hypertension, and hepatoma. The concealment is
proceeds of the insurance, but having failed in material because these are serious ailments. Also,
his effort, he filed the action for the recovery of Benny died less than two years from the date of the
the same. Did Ngo Hing conceal the state of issuance of the policy, hence rescission is still
health and physical condition of Helen Go, which possible. (Sec. 26; Sec. 48, IC)
rendered void the binding receipt?
Right to Information of Material Facts May be
A: YES. Ngo Hing intentionally concealed the state of Waived
health of his daughter Helen Go. He was fully aware
that his child was a typical mongoloid child upon 1. Expressly by the terms of the contract; or
filling out the application form. It is evident that he 2. Impliedly the failure to make an inquiry as to
withheld a fact material to the risk to be assumed by such facts, where they are distinctly implied in
the insurance company had the plan be approved. other facts from which information is
communicated. (Sec. 33, IC)
The contract of insurance is one of perfect good
faith, uberrimae fides, absolute and perfect candor; Q: Kwong Nam applied for a 20-year endowment
the absence of any concealment or demotion. insurance on his life with his wife, Ng Gan Zee as
Concealment is a neglect to communicate that which beneficiary. On the same date, Asian Crusader,
needs to be communicated whether intentional or upon receipt of the required premium from the
unintentional. In case of concealment, the insurer is insured, approved the application and issued
entitled to rescind the contract of insurance. In the the corresponding policy. Kwong Nam died of
case at bar, the respondent is guilty of such cancer of the liver with metastasis. All
concealment. Ultimately, there was no perfected premiums had been paid at the time of his death.
contract of insurance since the conditions in the
binding receipt were not complied with by the Ng Gan Zee presented a claim for payment of the
applicant. (Great Pacific Life Assurance Company v. face value of the policy. Asian Crusader Life
CA, G.R. No. L-31845, 30 Apr. 1979) Assurance denied the claim on the ground that
the answers given by the insured to the
Q: Benny applied for life insurance for Php 1.5 questions in his application for life insurance
Million. The insurance company approved his were untrue, claiming Kwong Nam's
application and issued an insurance policy misrepresentation when he answered "No" to
effective 6 Nov. 2008. Benny named his children the question appearing in the application for life
as his beneficiaries. On 6 Apr. 2010, Benny died insurance. Also, it was alleged that Kwong Nam
of hepatoma, a liver ailment. was examined in connection with his application
for life insurance, but he gave the medical
The insurance company denied the children's examiner false and misleading information as to
claim for the proceeds of the insurance policy on his ailment and previous operation by saying
the ground that Benny failed to disclose in his that it was associated with ulcer of the stomach.
application two previous consultations with his Asian Crusader contended that he was operated
doctors for diabetes and hypertension, and that on for peptic ulcer 2 years before the policy was
he had been diagnosed to be suffering from applied for and that he never disclosed such an
hepatoma. The insurance company also operation. Was there concealment?
rescinded the policy and refunded the
premiums paid. Was the insurance company A: NO, concealment exists where the assured has
correct? (2013 BAR) knowledge of fact material to the risk, and honesty,
good faith, and fair dealing require that he should

Commercial Law
communicate it to the assurer, but he designedly insurance company, tending to induce the insurer to
and intentionally withholds the same. In the assume the risk.
absence of evidence that the insured had sufficient
medical knowledge as to enable him to distinguish Under Sec. 37, representation should be made,
peptic ulcer and a tumor, his statement that said altered or withdrawn at the time of or before the
tumor was associated with ulcer of the stomach, issuance of the policy. It may be altered or
should be construed as an expression made in good withdrawn before the insurance is effected, but not
faith of his belief as to the nature of his ailment and afterwards. (Sec. 34, IC)
operation. (Ng Gan Zee v. Asian Crusader Life
Assurance Corporation, G.R. No. L-30685, 30 May Characteristics of Representation (C-OW-D-AW-
1983 cited in Divina, 2021) BA)
Indeed, such statement must be presumed to have 1. Not a part of the contract but merely a Collateral
been made by him without knowledge of its inducement to it;
incorrectness and without any deliberate intent on 2. Oral or Written;
his part to mislead Asian Crusader. While it may be 3. Must be presumed to refer to the Date the
conceded that, from the viewpoint of a medical contract goes into effect;
expert, the information communicated was 4. Altered or Withdrawn before the insurance is
imperfect, the same was nevertheless sufficient to effected but not afterwards; and
have induced Asian Crusader to make further 5. Made Before or At the time of issuing the policy
inquiries about the ailment and operation of the and not after. (Sec. 42, IC)
insured. (Ng Gan Zee v. Asian Crusader Life Assurance
Corporation, supra) Similarities of Concealment and Representation
Instances whereby Concealment Made by an 1. Both refer to the same subject matter and both
Agent Procuring the Insurance Binds the take place before the contract is entered.;
Principal 2. Concealment or representation prior to loss or
death gives rise to the same remedy; that is
1. Where it was the duty of the agent to acquire rescission or cancellation;
and communicate information of the facts in 3. The test of materiality is the same; (Secs. 31, 46,
question; or IC)
4. The rules of concealment and representation
2. Where it was possible for the agent, in the are the same with life and non-life insurance;
exercise of reasonable diligence to have made 5. Whether intentional or not, the injured party is
such communication before the making of the entitled to rescind a contract of insurance on
insurance contract. ground of concealment or false representation;
and
NOTE: Failure on the part of the insured to disclose 6. Since the contract of insurance is said to be one
such facts known to his agent, or wholly due to the of utmost good faith on the part of both parties
fault of the agent, will avoid the policy, despite the to the agreement, the rules on concealment and
good faith of the insured. representation apply likewise to the insurer.
MISREPRESENTATION/OMISSIONS Kinds of Representation
Representation 1. Oral or written (Sec. 36, IC);

2. Affirmative (Sec. 42, IC); and
An oral or written statement of a fact or condition 3. Promissory (Sec. 39, IC).
affecting the risk made by the insured to the

2022 GOLDEN NOTES
Insurance
Affirmative Representation Gan Zee v. Asian Crusader Life Assurance Corp.,

supra)
Any allegation as to the existence or non-existence
of a fact when the contract begins (e.g., the NOTE: In the absence of evidence that the insured
statement of the insured that the house to be has sufficient medical knowledge to enable him to
insured is used only for residential purposes is an distinguish between “peptic ulcer” and “tumor”, the
affirmative representation). statement of deceased that said tumor was
“associated with ulcer of the stomach” should be
Promissory Representation considered an expression in good faith. Fraudulent
intent of insured must be established to entitle
Any promise to be fulfilled after the contract has insurer to rescind the insurance contract.
come into existence or any statement concerning Misrepresentation, as a defense of the insurer to
what is to happen during the existence of the avoid liability, is an affirmative defense which must
insurance. be proved. The duty to establish such a defense by
satisfactory and convincing evidence rests upon the
Representation as to a Future Undertaking defendant. (Ng Gan Zee v. Asian Crusader Life
Assurance Corp., G.R. No. L- 30685, 30 May 1983)
A representation as to the future is to be deemed a
promise unless it appears that it was merely a Requisites of Misrepresentation (U-K-Ma)
statement of belief or an expectation that is
susceptible to present, actual knowledge. (Sec. 39, 1. The insured stated a fact which is Untrue;
IC) 2. Such fact was stated with Knowledge that it is
untrue and with intent to deceive or which he
An Erroneous Opinion or Belief will NOT Avoid states positively as true without knowing it to
the Insurance Policy be true and which has a tendency to mislead;
and
The statement of an erroneous opinion, belief, or 3. Such fact in either case is Material to the risk.
information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless A representation cannot qualify an express
fraudulent. provision in a contract of insurance, but it may
qualify an implied warranty. (Sec. 40, IC)
To avoid liability, the insurer must prove both
materiality of the insured’s opinion and the latter’s Test of Materiality
intention to deceive.
It is to be determined not by the event, but solely by
Omission the probable and reasonable influence of the facts
upon the party to whom the representation is made,
The failure to communicate information on matters in forming his estimates of the disadvantages of the
proving or tending to prove the falsity of warranty. proposed contract or in making his inquiries. (Sec.
In case of omission, the aggrieved party may rescind 46, IC)
the contract of insurance.
Effects of Misrepresentation
Misrepresentation
1. It renders the insurance contract voidable at
It occurs when the facts fail to correspond with its the option of the insurer, although the policy is
assertions or stipulations. Misrepresentation is an not thereby rendered void ab initio. The injured
affirmative defense. To avoid liability, the insurer party entitled to rescind from the time when the
has the duty to establish such a defense by representation becomes false; and
satisfactory and convincing evidence. (Sec. 44, IC; Ng

Commercial Law
2. When the insurer accepted the payment of Q: Alvarez applied for and was granted a housing
premium with the knowledge of the ground for loan by Union Bank. The said loan was secured
rescission, there is waiver of right of rescission. by a promissory note, a real estate mortgage
over the lot, and a mortgage redemption
Concealment vs. Misrepresentation insurance taken on the life of Alvarez with Union
Bank as beneficiary. Later Alvarez passed away.
CONCEALMENT MISREPRESENTATION
As to their Definition Union Bank filed with Insular Life a death claim
The insured makes under Alvarez's name. However, Insular Life
The insured withholds erroneous statements denied the claim after determining that Alvarez
the information of of facts with the intent was not eligible for coverage as he was
material facts from of inducing the insurer supposedly more than 60 years old at the time of
the insurer. to enter into the his loan's approval. It asserts that Alvarez's
insurance contract. concealment of his age, whether intentional or
As to Kind of Act unintentional, entitles it to rescind the
Concealment is a insurance contract. It claims that proof of
negative act, meaning fraudulent intent is not necessary for the
Misrepresentation is a insurer to rescind the contract on account of
the neglect to
positive act as the concealment. Is Insular Life correct?
communicate
insured volunteers such
information as to
fact. A: NO. Sec. 44 of the IC states, "A representation is
material facts known
to the insured. to be deemed false when the facts fail to correspond
As to When Made with its assertions or stipulations." In relation to
Concealment usually Misrepresentation may this, Sec. 45 of the Insurance code provides that, If a
occurs prior to the be made at the time of, representation is false in a material point, whether
making of the or prior, to the issuance affirmative or promissory, the injured party is
insurance contract. of the insurance policy. entitled to rescind the contract from the time when
the representation becomes false.
As to Necessity of Proof of Fraudulent Intent
Not necessary in Necessary in case of
The recession under Sec. 45 remains subject to the
rescission due to rescission due to
basic precept of fraud having to be proven by clear
concealment misrepresentation
and convincing evidence. Fraud is never presumed
and fraudulent misrepresentation as a defense of
While there are distinctions between the two,
the insurer to avoid liability must be established by
concealment has the same effect as
convincing evidence. Consistent with the
misrepresentation in terms of entitling the insurer
requirement of clear and convincing evidence, it
to rescind the insurance policy. (Divina, 2021)
was Insular Life's burden to establish the merits of
its own case. (The Insular Assurance Co. v. Heirs of
Application of Concealment and
Alvarez, G.R. No. 207526, 03 Oct. 2018)
Misrepresentation in case of Loss or Death
Theory of Imputed Knowledge

GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can
This means that if the insured furnished the agent
cancel the policy. If the discovery is after loss or
the needed information and delegated to him/her
death, the insurer can refuse to pay.
the filling up of the insurance application, then,
he/she acted on the insured’s, instruction, not that
XPN: The incontestability clause under Sec. 48(2) of
of the insurer. If the agent answered the application
the IC.
differently, the insured is bound by the statements
and information contained in the application, unless

2022 GOLDEN NOTES
Insurance
there is connivance between the insurer and the insurer was in fact prejudiced by such untruth or
agent. (Florendo v. Philam Plans, G.R. No. 186983, 22 non-fulfillment render the policy voidable by the
Feb. 2012, cited in Divina, 2021) insurer.
This theory, however, was not applied in property Purpose of Warranties

insurance. In one case, it was held that the insurer is
not liable despite the claim of the insured that the To eliminate potentially increasing moral or
insurance agent knew about other insurance physical hazards which may either be due to the acts
covering the same property against fire and of the insured or to the change of the condition of
knowledge of the agent is not tantamount to the property.
knowledge of the insurer. (New Life Enterprises v.
CA, G.R. No. 94071, 31 March 1992, cited in Divina, Basis of Warranties
2021)
The insurer took into consideration the condition of
Effect of Collusion between the Insurer’s Agent the property at the time of effectivity of the policy.
and the Insured
Kinds of Warranties (A-P-I-E)
It vitiates the policy even though the agent is acting
within the apparent scope of his authority. The 1. Affirmative warranty – one which relates to
agent ceases to represent his principal. He, thus, matters which exist at or before the issuance of
represents himself; so, the insurer is not estopped the policy;
from avoiding the policy.
2. Promissory warranty – one in which the insured
Remedy of the Injured Party in case of undertakes that something shall be done or
Misrepresentation omitted after the policy takes effect and during
its continuance;
If there is misrepresentation, the injured party is
entitled to rescind from the time when the 3. Express warranty – a statement in a policy, of a
representation becomes false. matter relating to the person or thing insured,
or to the risk, as a fact; and
Exercise of the Right to Rescind the Contract
4. Implied warranty – an agreement or stipulation
In non-life insurance policy, it must be exercised not expressed in the policy but the existence of
previous to the commencement of an action on the which is admitted or presumed from the fact
contract, -the action referred to is that to collect a that the contract of insurance has been
claim on the contract. (Sec. 48(1), IC) executed.
In life insurance policy, the defenses mentioned in Warranty vs. Representation

Sec. 48(2) of the IC are available only within the 2-
year incontestability period. (De Leon, 2014) WARRANTY REPRESENTATION
As to their Nature
BREACH OF WARRANTIES
Considered parts of the Collateral inducement
contract. to the contract.
Warranties (1993 BAR)
As to their Form
Statements or promises by the insured set forth in Always written on the
May be written in a
the policy itself or incorporated in it by proper face of the policy,
totally disconnected
reference, the untruth or non-fulfillment of which in actually or by
paper or may be oral.
any respect, and without reference to whether the reference.

Commercial Law
As to their Compliance 1997. The policy expressly stated that the

Must be strictly Only substantial proof insured properties were located at “Sanyo
complied with. is required. Precision Phils. Building Phase III Lots 4 and 6
As to Effect of their Falsity or Non-fulfillment Block 15 PEZA, Rosario, Cavite.” Before its
Its falsity or non- Its falsity renders the expiration, the policy was renewed on “as is”
fulfillment operates as policy void on the basis for another year or until May 13, 1998.
a breach of contract. ground of fraud. The subject properties were later transferred to
As to their Materiality Pace Factory also in PEZA. On Oct. 12, 1997,
Insurer must show its during the effectivity of the renewed policy, a
Presumed material. materiality in order to fire broke out at the Pace Factory which totally
defeat an action on the burned the insured properties.
policy.
The policy forbade the removal of the insured
Effects of Breach of Warranty properties unless sanctioned by Ilocano.
Condition 9 (c) of the policy provides that “the
1. Material – insurance ceases to attach as regards the
property affected unless the insured, before the
GR: Violation of material warranty or of occurrence of any loss or damage, obtains the
material provision of a policy will entitle the sanction of the company signified by
other party to rescind the contract. endorsement upon the policy x x x (c) if the
property insured is removed to any building or
XPN: (with regard to “promissory” warranties) place other than in which is herein stated to be
a. Loss occurs before the time of performance insured.” PAM claims that it has substantially
of the warranty; complied with notifying Ilocano through its
b. The performance becomes unlawful at the sister company, the RBC which in fact, referred
place of the contract; or PAM to Ilocano for the insurance coverage. Is
c. Performance becomes impossible. (Sec. 73, Ilocano liable under the policy? (2014 BAR)
IC)
A: NO. Ilocano Insurance is not liable under the
2. Immaterial – policy. By the clear and express condition in the
renewal policy, the removal of the insured property
GR: It will not avoid the policy. to any building or place required the consent of
Ilocano. Any transfer effected by PAM, Inc. without
XPN: When the policy expressly provides, or Ilocano’s consent would free the latter from any
declares that a violation thereof will avoid it. liability. (Malayan Insurance Company, Inc v. PAP CO,
Ltd., G.R. No. 200784, 7 Aug. 2013)
For instance, an “Other Insurance Clause” which
is a condition in the policy requiring the insured Effect of a Breach of Warranty Without Fraud
to inform the insurer of any other insurance
coverage of the property. A violation of the The policy is avoided only from the time of breach
clause by the insured will not constitute a and the insured is entitled:
breach unless there is an additional provision
stating that the violation thereof will avoid the 1. To the return of the premium paid at a pro rata
policy. (Sec. 75, IC) from the time of breach or if it occurs after the
inception of the contract; or
Q: On May 13, 1996, PAM Inc. obtained a P15 2. To all premiums if it is broken during the
million fire insurance policy from Ilocano inception of the contract.
Insurance covering its machineries and
equipment effective for one year or until 14 May

2022 GOLDEN NOTES
Insurance
Effect of Breach of Warranty With Fraud:
1. Policy is avoided ab initio and never became

binding; or
2. Insured is not entitled to the return of the
premium.

Transportation Law
II. TRANSPORTATION LAW A. COMMON CARRIER
Laws that govern contracts of transportation 1. CONCEPT
Contracts of transportation, whether by land, sea, or Requisites for an entity to be classified as a

air, (i) if within the Philippines; or (ii) if the common carrier (1996, 1997, 2000, 2002 BAR)
transportation of goods be from a foreign country to (Pecofa-B-LAW-F-P)
the Philippines, shall be governed by the following
laws, arranged by order of application: (Ci-Co-Spec) 1. Must be a Person, corporation, firm, or
association;
1. Provisions of the New Civil Code on Common 2. Engaged in the Business of carrying or
Carriers; transporting passengers or goods or both;
2. Code of Commerce; and 3. The carriage or transport must either be by
3. Special laws such as Carriage of Goods by the Land, Water or Air;
Sea (COGSA); Salvage Law; Public Service Act; 4. The service is for a Fee; and
Land Transportation and Traffic Code; Tariff 5. The service is offered to the Public. (Art. 1732,
and Customs Code; and Civil Aeronautics Act. NCC)
(Art. 1753 and 1766, NCC; American President
Lines, Ltd. v. Klepper, G.R. No. L-15671, 29 Nov. NOTE: A pipeline operator who carries oil and other
1960) petroleum products through pipes or pipelines is a
common carrier. The law does not distinguish as to
NOTE: In case of international carriage in air the means by which transportation is carried out, as
transportation, (i) the Montreal Convention as long as it is by land, water, or air. Neither does the
ratified by the Philippines in 2015; (ii) the Warsaw law require that transportation be through a motor
Convention; and (iii) the Civil Aviation Authority vehicle. (First Phil. Industrial Corp. v. CA, G.R. No.
Act, may be applicable. 125948, 29 Dec. 1998)
If the goods are to be transported from the Q: The Pereñas were engaged in the business of
Philippines to a foreign country, the law of the latter transporting students from their respective
country shall govern the transportation contract. residences in Parañaque City to Don Bosco in
(Art. 1753, NCC; NDC. v. CA, G.R. No. L-49407, 19 Aug. Pasong Tamo, Makati City and back. They
1988) employed Alfaro as driver of the van. The
Zarates contracted the Pereñas to transport
their son, Aaron, to and from Don Bosco.
However, a train hit the rear end of the van
driven by Alfaro, and the impact threw nine (9)
students in the rear, including Aaron, out of the
van. Aaron landed on the path of the train, which
dragged his body and severed his head,
instantaneously killing him.
The Zarates commenced an action for damages

against Alfaro, the Pereñas, PNR, and Alano. The
Zarates’ claim against the Pereñas was based on
breach of the contract of carriage and based on

2022 GOLDEN NOTES
Commercial Law
quasi-delict under Art. 2176 of the Civil Code service” under the Public Service Act results in the
against PNR. application of the following rules or principles:
The Pereñas argued that they exercised the 1. Art. 1732 makes no distinction between one
diligence of a good father of a family in the whose principal business activity is the carrying
selection and supervision of Alfaro by making of persons or goods or both, and one who does
sure that Alfaro had been issued a driver’s such carrying only as an ancillary activity. (De
license and had not been involved in any Guzman v. CA, G.R. No. L-47822, 22 Dec. 1988)
vehicular accident prior to the collision. Is the
operation of a school bus service considered as 2. Art. 1732 also carefully avoids making any
a private carrier? distinction between a person or enterprise
offering transportation service on a regular or
A: NO. The Pereñas, as the operators of a school bus scheduled basis and one offering such service
service, were: on an occasional, episodic, or unscheduled
basis. (Ibid.)
1. Engaged in transporting passengers generally
as a business, not just as a casual occupation; 3. Art. 1732 does not distinguish between a
2. Undertaking to carry passengers over carrier offering its services to the “general
established roads by the method by which the public,” and one who offers services or solicits
business was conducted; and its business only from a narrow segment of the
3. Transporting students for a fee. general population. (Ibid.)
Despite catering to a limited clientèle, the Pereñas 4. A person or entity is a common carrier and has
operated as a common carrier because they held the obligations of the common carrier under the
themselves out as a ready transportation Civil Code even if he did not secure a Certificate
indiscriminately to the students of a particular of Public Convenience. (Ibid.)
school living within or near where they operated the
service and for a fee. (Sps. Pereña v. Sps. Zarate, G.R. 5. The Civil Code makes no distinction as to the
No. 157917, 29 Aug. 2012) means of transporting, as long as it is by land,
water or air. (First Philippine Industrial
Test for determining whether one is a common Corporation v. CA, G.R. No. 125948, 29 Dec. 1998)
carrier (1996 BAR)
6. The Civil Code does not provide that the
The true test for a common carrier is not the transportation should be by motor vehicle.
quantity or extent of the business actually (Ibid.)
transacted, or the number and character of the
conveyances used in the activity, but whether the 7. A person or entity may be a common carrier
undertaking is a part of the activity engaged in by even if he has no fixed and publicly known
the carrier that he has held out to the general public route, maintains no terminals, and issues no
as his business or occupation. The question must be tickets. (Asia Lighterage and Shipping, Inc. v. CA,
determined by the character of the business actually G.R. No. 147246, 19 Aug. 2003)
carried on by the carrier, not by any secret intention
or mental reservation it may entertain or assert 8. A person or entity need not be engaged in the
when charged with the duties and obligations that business of public transportation for the
the law imposes. (Sps. Pereña v. Sps. Zarate, supra) provisions of the Civil Code on common carriers
to apply to them. (Fabre, Jr. v. CA, G.R. No.
The concept of common carriers contemplated 111127, 26 July 1996)
under Art. 1732 of the NCC and the fact that the said
concept corresponds to the concept of “public

Transportation Law
9. The carrier can also be a common carrier even barge traversed Pasig River, the goods got wet as
if the operator does not own the vehicle or it was found that the barge had a hole, thereby
vessel that he or she operates. (Cebu Salvage allowing river water to flow inside the same.
Corporation v. Philippine Home Assurance Corp., This resulted to the goods being wet which now
G.R. No. 150403, 25 Jan. 2007; Aquino and became inedible. Pauline asserted her
Hernando, 2016) insurance claim with PH Insurance, to which the
latter paid. PH Insurance now filed a claim
Q: Alejandro Camaling is engaged in buying against B Brokerage and AVL Shipping. AVL
copra, charcoal, firewood, and used bottles and Shipping contends that its barge, ANYA-I cannot
in reselling them in Cebu City. He uses two (2) be considered as a common carrier. Is ANYA-I a
big Isuzu trucks for the purpose; however, he common carrier?
has no certificate of public convenience or
franchise to do business as a common carrier. A: YES. ANYA-I is a common carrier. Art. 1732 of the
On the return trips to Alegria, he loads his trucks NCC defines common carriers as “persons,
with various merchandise of other merchants in corporations, firms, or associations engaged in the
Alegria and in the two neighboring business of carrying or transporting passengers or
municipalities. He charges them freight rates goods or both, by land, water, or air, for
much lower than the regular rates. In one of the compensation, offering their services to the public”.
return trips, one cargo truck was loaded with Art. 1732 does not make any distinction between
several boxes of sardines, owned by Pedro one whose principal business activity is the carrying
Rabor. While passing the zigzag road between of persons or goods or both, and one who does the
Carcar and Barili, the truck was hijacked by carrying only as an ancillary activity; between a
three (3) armed men who took all the boxes of person or enterprise offering transportation service
sardines and kidnapped the driver and his on a regular or scheduled basis, and one offering the
helper, releasing them only two (2) days later. service on an occasional, episodic or unscheduled
Rabor sought to recover from Alejandro the basis; and a carrier offering its services to the
value of the sardines. The latter argued that he general public, and one who offers services or
is not a common carrier. If you were the judge, solicits business only from a narrow segment of the
would you sustain the contention of Alejandro? general population. (C.V. Gaspar Salvage &
(1991 BAR) Lighterage Corporation v. LG Insurance Company
Ltd., G.R. Nos. 206892 & 207035, 3 Feb. 2021)
A: NO. If I were the judge, I would rule that
Alejandro is a common carrier. A person who offers Private Carrier
his services to carry passengers or goods for a fee is
a common carrier, regardless of whether he has a A private carrier is one who, without making the
certificate of public convenience or not, whether it activity a vocation, or without holding himself or
is his main business or is incidental to such itself out to the public as ready to act for all who may
business, whether it is scheduled or unscheduled desire his or its services, undertakes, by special
service, and whether he offers his services to the agreement in a particular instance only, to transport
general public or to a limited few. (De Guzman v. CA, goods or persons from one place to another either
G.R. No. 47822, 27 Dec. 1988) gratuitously or for hire. (Sps Pereña v. Sps Zarate,
supra) A carrier which does not qualify under the
Q: Maria shipped 3,000 bags of Australian requisites of a common carrier is deemed a private
delicacies to Pauline in the Philippines. Such carrier. (National Steel Corporation v. CA, G.R. No.
goods were insured with PH insurance. Pauline 112287, 12 Dec. 1997)
then hired B Brokerage as its customs broker.
When the goods arrived at the Port of Manila,
the same was loaded into the barge owned by
AVL Shipping’s barge, called ANYA-I. When the

2022 GOLDEN NOTES
Commercial Law
2. COMMON CARRIER vs. PRIVATE CARRIER 3. DILIGENCE REQUIRED OF COMMON

CARRIERS
Common Carrier vs. Private Carrier (2002
BAR) The diligence required of common carriers is
extraordinary diligence. (Art. 1733, NCC)
COMMON CARRIER PRIVATE CARRIER
To whom the carrier caters its services Extraordinary diligence is that extreme measure of
Carriage is generally care and caution which persons of unusual
undertaken by special prudence and circumspection use for securing and
Undertakes to carry
agreement and it does preserving their own property or rights. The law
passengers or goods
not hold itself out to requires common carriers to render service with
for the public
carry goods for the the greatest skill and utmost foresight.
general public (Loadmasters Services v. Glodel Brokerage, G.R.
Governing laws 179446, 10 Jan. 2011)
Civil Code Provisions
on Common Carriers, Reasons for the requirement of extraordinary
Public Service Act, and diligence:
other Special laws Civil Code provisions
relating to on ordinary contracts 1. Because of the nature of the business of
transportation common carrier which is public service; and
2. For public policy consideration - the common
(CICOCA-PSA-SPEC) carriers are supposed to serve the public
Degree of Diligence required interest and therefore, they have to exercise
Ordinary diligence or extraordinary diligence. (Martin, 1989)
Extraordinary
diligence of a good
diligence Q: Are common carriers liable for injuries to
father of a family
Presumption of Negligence passengers even if they have observed ordinary
1. If the goods are lost, diligence and care? Explain. (2015 BAR)
destroyed or
No presumption as to A: YES, common carriers are liable to injuries to
deteriorated
negligence passengers even if the carriers observed ordinary
2. In case of death of or
injuries to passengers diligence and care because the obligation imposed
upon them by law is to exercise extraordinary
Whether subject to regulation or not
diligence. Common carriers are bound to carry the
NOT subject to
Subject to regulation passengers safely as far as human care and foresight
regulation by a
by a regulatory agency can provide, using the utmost diligence of very
regulatory agency
cautious persons with a due regard for all the
Exemption from liability
circumstances.
A common carrier
cannot stipulate that it
is exempt from liability A private carrier may
for negligence of its validly enter into a
agents or employees. stipulation exempting
Such stipulation is void it from liability.
as it is against public
policy

Transportation Law
Exercise of extraordinary diligence in the The requirement to observe extraordinary diligence

carriage of goods and transport of passengers begins with the actual delivery of the goods for
transportation, and not merely with the formal
EXTRAORDINARY DILIGENCE execution of a receipt or bill of lading; the issuance
Transport of of a bill of lading is not necessary to complete
Carriage of Goods
Passengers delivery and acceptance by the carrier. (Compañia
Commencement Maritima v. Insurance Co. of North America, G.R. No.
Commences from the L-18965, 30 Oct. 1964)
Commences from the
moment the person
time the goods are Q: In cases where the cargoes are damaged when
who purchases the
unconditionally placed it is being unloaded from the vessel, is the vessel
ticket from the carrier
in the possession of owner relieved of its responsibility to observe
presents himself at the
and received by the extraordinary diligence from the moment the
proper place and in a
carrier for cargoes were delivered to the arrastre
proper manner to be
transportation. operator?
transported.
Duration
1. GR: Continues until A: NO. Under the Civil Code, other pertinent laws
the goods are and jurisprudence, the extraordinary responsibility
delivered, actually or of common carriers lasts until the time the goods
constructively, by the are actually or constructively delivered by the
carrier to the carrier to the consignee or the person who has the
consignee or to the right to receive. There is actual delivery in contracts
person who has a right for the transport of goods when possession has been
to receive them, and turned over to the consignee or to his duly
even when they are authorized agent and a reasonable time is given him
temporarily unloaded to remove the goods. In this case, since the
or stored in transit discharging of the containers had not yet been
completed at the time the damage occurred, there
XPN: The shipper or was still no delivery, actual or constructive, of the
Continues until the cargoes. (Westwind Shipping Corp v. UCPB General
owner had made use of
passenger has been Insurance Co., G.R. No. 200289, 25 Nov. 2013)
the right or stoppage in
landed at the port of
transit.
destination and has left Q: X, while driving his Toyota Altis, tried to cross
the vessel owner’s the railway tract of PNR along Blumentritt
2. Continues even
dock or premises. Avenida Ext., Manila. The train, as it approached
during the time the
goods are stored in a Blumentritt Avenida Ext., applied its horn as a
warehouse of the warning to all the vehicles that might be
carrier at the place of crossing the railway tract, but there was really
destination until the nobody manning the crossing. X was listening to
consignee has been his lpod Touch, hence, he did not hear the sound
advised of the arrival of of the horn of the train and so his car was hit by
the goods and has been the train. As a result of the accident, X suffered
given a reasonable some injuries and his car was totally destroyed
opportunity thereafter as a result of the impact. Is PNR liable? (2012
to remove them or BAR)
otherwise dispose of
them. A: NO. PNR is not liable because X should have
known that he was crossing a place designated as

2022 GOLDEN NOTES
Commercial Law
crossing for train, and therefore should have been vehicle and his driver is
more careful. joint and several. (J.
Dimaampao, citing Tiu v.
Causes of Action for Failure to Observe Diligence Arriesgado, G.R. No.
Required 138060, 01 Sept. 2004)
BASIS OF CAUSE OF Q: Fil-Asia Air Flight 916 was on a scheduled

PERSON WHO HAS ACTION AGAINST passenger flight from Manila when it crashed as
CAUSE OF ACTION THE COMMON it landed at the Cagayan de Oro airport. The pilot
CARRIER miscalculated the plane's approach and
Third person who Tort (extra-contractual undershot the runway. Ten passengers died at
suffered damages negligence) the crash scene.
Breach of the contract
Shipper of the goods
of carriage (Culpa One of them managed to leave the plane but was
damaged
Contractual) run over by an ambulance coming to the rescue.
Heir/s of the deceased Another was an airline employee who hitched a
passengers or the Breach of the contract free ride to Cagayan de Oro and who was not in
passenger himself for of carriage (Culpa the passenger manifest.
the injuries sustained Contractual)
by him The Civil Aeronautics Authority investigation
showed that the co-pilot who had control of the
CAUSE OF ACTION plane's landing had less than the required flying
OF THE INJURED and landing time experience, and should not
BASIS OF CAUSE OF have been in control of the plane at the time. He
PASSENGER OR HIS
ACTION was allowed to fly as a co-pilot because of the
HEIRS, IF THE
PASSENGER DIES: scarcity of pilots - Philippine pilots have been
Culpa criminal recruited by foreign airlines under vastly
improved flying terms and wages so that newer
If the driver is convicted and less trained pilots are being locally
and it turns out that he deployed. The main pilot, on the other hand, had
is insolvent, the a very high level of blood alcohol at the time of
heirs/passengers may the crash.
Against the negligent
run after the employer
driver You are part of the team that the victims hired to
of the driver, pursuant
to the employer’s handle the case for them as a group. In your case
subsidiary liability conference, the following questions came up:
under Art. 103, in
relation to Arts. 100 and a. Explain the causes of action legally possible
102, RPC. under the given facts against the airline and
Against the carrier the pilots; whom will you specifically
and driver operating Tort implead in these causes of action?
the other b. How will you handle the cases of the
Culpa Contractual; passenger run over by the ambulance and
Direct and primary the airline employee allowed to hitch a free
ride to Cagayan de Oro? (2013 BAR)
Against the common
The liability of the
carrier at fault A:
common carrier and his
driver as well as the a. A complaint for breach of contract of carriage
operator of the other can be filed against Fil-Asia Air for failure to

Transportation Law
carry the passengers safely as far as human care

and foresight can provide, using the utmost B. OBLIGATIONS AND LIABILITIES
diligence of a very cautious person, with a due
regard for all the circumstances. (Art. 1755,
NCC)
Presumption of negligence in the carriage of
goods (1997, 2001, 2008 BAR)
A complaint based on a quasi-delict can be filed
against the pilots because of their fault and
GR: There is a presumption of negligence if the
negligence. (Art. 2176, NCC) Fil-Asia Air can be
goods are lost, destroyed, or deteriorated.
included for negligence in the selection and
supervision of the pilots. (Art. 2180, NCC)
XPNs: (Di-Ca-W-A-C-O-A-ED)
A third cause of action may be a criminal

1. Natural Disaster or Calamity which is the
prosecution for the reckless imprudence
proximate cause of the loss (flood, storm,
resulting in homicide against two pilots. The
earthquake, lightning);
airline will be subsidiary liable for the civil
2. Acts of public enemy in War, whether
liability, only after the pilots are convicted and
international or civil;
found to be insolvent.
3. Act or omission of the shipper or the owner of
the goods;
b. It is the driver of the ambulance and his
4. Character of the goods or defects in the packing
employer who should be held liable for
or container;
damages because a passenger was run over.
5. Order or Act of competent public authority (Art.
This is in accordance with Arts. 2176 and 2180
1734, NCC); or
of the NCC. There could also be a criminal
6. Exercise of Extraordinary Diligence. (Art. 1735,
prosecution for reckless imprudence resulting
NCC)
in homicide against the ambulance driver and
his consequent civil liability.
Presumption of Negligence in the transportation
of passengers (1990, 1994 BAR)
Since the airline employee was being
transported gratuitously, Fil-Asia Air was not
In case of death of or injuries to passengers,
required to exercise extraordinary diligence for
common carriers are presumed to have been at fault
his safety and only ordinary care. (Lara v.
or to have acted negligently. (Art. 1756, NCC)
Valencia, G.R. No. L-9907, 30 June 1958)
However, such presumption may be refuted by
proving observance of extraordinary diligence as
prescribed by Art. 1733 of the NCC.
Q: Is it important that the plaintiff still prove

that the subject shipment suffered actual
shortage before the burden is shifted to the
defendant common carrier to prove that it
exercised extraordinary diligence?
A: YES. Though it is true that common carriers are

presumed to have been at fault or to have acted
negligently if the goods transported by them are
lost, destroyed, or deteriorated, and that the
common carrier must prove that it exercised
extraordinary diligence in order to overcome the
presumption, the plaintiff must still, before the

2022 GOLDEN NOTES
Commercial Law
burden is shifted to the defendant, prove that the adduce proof of specific acts of negligence
subject shipment suffered actual shortage. This can committed by the carrier. It is for the carrier to
only be done if the weight of the shipment at the rebut such presumption.
port of origin and its subsequent weight at the port
of arrival have been proven by a preponderance of Presumption of Negligence
evidence, and it can be seen that the former weight
is considerably greater than the latter weight, taking The court need not make an express finding of fault
into consideration the exceptions provided in or negligence of common carriers, the law imposes
Article 1734 of the Civil Code. (Asian Terminals, Inc. liability upon common carriers, as long as it shown
v. Simon Enterprises, Inc., G.R. No. 177116, 27 Feb. that: (Con-Lo-D-I-D)
2013)
1. There exists a Contract between the passenger
Q: Peter hailed a taxicab owned and operated by or the shipper and the common carrier; and
Jimmy Cheng and driven by Hermie Cortez. On 2. That the Loss, Deterioration, Injury or Death
the way to Malate, the taxicab collided with a took place during the existence of the contract.
passenger jeepney, as a result of which Peter’s (Air France v. Gillego, G.R. No. 165266, 15 Dec.
left leg was fractured. Peter sued Jimmy for 2010)
damages, based on contract of carriage, and
Peter won. Jimmy wanted to challenge the Q: SEACOL, a foreign company, received
decision before the SC on the ground that the shipment of musical instruments from
trial court erred in not making an express Melbourne, Australia for delivery at the port of
finding as to whether or not Jimmy was Manila. Upon arriving in Manila, the shipment
responsible for the collision and, hence, civilly was received by Unitrans Inc., which delivered
liable to Peter. He went to see you for advice. the same to the consignee, where it was found
What will you tell him? Explain. (1990 BAR) that said instruments were damaged and could
no longer be used. After paying the consignee,
A: I will advise Jimmy to desist from challenging the ICNA filed a complaint to recover from the
decision. The action of Peter being based on culpa marine insurance coverage on the imported
contractual, the carrier’s negligence is presumed instruments against SEACOL doing business in
upon the breach of contract. The burden of proof the Philippines through its local ship agent
instead would lie on Jimmy to establish that despite Unitrans Inc. Unitrans Inc. denied liability
an exercise of utmost diligence, the collision could alleging that it is not a ship agent of SEACOL but
not have been avoided. was only engaged by the consignee as customs
broker for the subject shipment with the limited
Q: In a court case involving claims for damages obligation to pay fees in the BOC and to
arising from death and injury of bus transport and deliver the said shipment to the
passengers, counsel for the bus operator filed a consignee’s premises in good condition.
demurrer to evidence arguing that the
complaint should be dismissed because the Is Unitrans Inc.’s contention tenable?
plaintiffs did not submit any evidence that the
operator or its employees were negligent. If you A: NO. Emphasis must be placed on the fact that
were the judge, would you dismiss the Unitrans itself admitted that in handling the subject
complaint? (1997 BAR) shipment and making sure that it was delivered to
the consignee’s premises in good condition as the
A: NO. In the carriage of passengers, the failure of delivery/forwarding agent, Unitrans was acting as a
the common carrier to bring the passengers safely freight forwarding entity and an accredited non-
to their destination immediately raises the vessel operating common carrier.
presumption that such failure is attributable to the
carrier’s fault or negligence, the plaintiff need not

Transportation Law
Jurisprudence holds that a common carrier is is relieved from any liability due to any of its
presumed to have been negligent if it fails to prove negligent acts. In China Air Lines, Ltd. v. CA, while
that it exercised extraordinary vigilance over the not exactly in point, however, illustrates the
goods it transported. When the goods shipped are principle which governs this particular situation. In
either lost or arrived in damaged condition, a that case, the carrier (PAL), acting as an agent of
presumption arises against the carrier of its failure another carrier, was also liable for its own negligent
to observe that diligence, and there need not be an acts or omission in the performance of its duties. Far
express finding of negligence to hold it liable. To East Airlines may also file a third-party complaint
overcome the presumption of negligence, the against PAL for the purpose of determining who was
common carrier must establish by adequate proof primarily at fault between them. It is but logical, fair,
that it exercised extraordinary diligence over the and equitable to allow Far East Airlines to sue PAL
goods. It must do more than merely show that some for indemnification, if it is proven that the latter’s
other party could be responsible for the damage. negligence was the proximate cause of Vivian’s
(Unitrans International Forwarders, Inc. v. Insurance unfortunate experience, instead of totally absolving
Company of North America, G.R. No. 203865, 13 Mar. PAL from any liability. (British Airways v. CA, G.R. No.
2019) 121824, 29 Jan. 1998)
Effect of Acquittal Transport Network Company (TNC)
The acquittal of the employee of the common carrier It refers to a person or entity that provides pre-
in the criminal case is immaterial to the case for arranged transportation services for compensation
breach of contract. (Heirs of Marcial K. Ochoa v. G&S using an internet-based technology application or
Transport Corp., G.R. Nos. 170071 and 170125, 09 digital platform technology to connect passengers
Mar. 2011) with drivers using their personal vehicles. (Sec. 1,
[Department of Transportation] Department Order
Q: Vivian Martin was booked by PAL, which No. 2018-012, 11 June 2018)
acted as ticketing agent of Far East Airlines, for a
round trip flight on the latter’s aircraft, from Transport Network Vehicle Service
Manila–Hong Kong-Manila. The ticket was cut by
an employee of PAL. The ticket showed that It refers to a TNC-accredited private vehicle owner,
Vivian was scheduled to leave Manila at which is a common carrier, using internet-based
5:30p.m. Vivian arrived at NAIA an hour before technology application or digital platform
the time scheduled in her ticket, but was told her technology transporting passengers from one point
flight had left at 12:10 p.m. It turned out that the to another, for compensation.
ticket was inadvertently cut and wrongly
worded. PAL employees nevertheless scheduled The TNVS cannot operate as a common carrier
her to fly two hours later aboard their plane. She outside of or independent from the use of the
agreed and arrived in Hong Kong safely. The internet-based technology of the TNC or TNCs to
aircraft used by Far East Airlines had an engine which they are accredited. (Sec. 2, [Department of
trouble, and did not make it to HK but returned Transportation] Department Order No. 2018-012, 11
to Manila. Vivian sued both PAL and Far East. June 2018)
Could either or both airlines be held liable to
Vivian? Why? (2003 BAR) TNVS and TNCs are classified as Public Utilities
A: Only Far East Airline is liable. The instant The Department of Transportation issued
petition was based on breach of contract of carriage; Department Order no. 2018-012, dated 11 June
therefore, Vivian can only sue Far East Airlines 2018 in which it recognized the roles of TNVS and
alone, and not PAL, since the latter was not a party TNCs in providing transport services to the public
to the contract. However, this is not to say that PAL and as such they should be treated as engaged in the

2022 GOLDEN NOTES
Commercial Law
operation of a public utility. They are considered exercised due diligence to forestall or prevent
engaged in the business of carrying or transporting loss. (Art 1742, NCC)
passengers for compensation and offering their
services to the public. NOTE: If the fact of improper packing is known
to the carrier or its servants, or apparent upon
Therefore, the operation of TNVS and TNCs is ordinary observation, but it accepts the goods
imbued with public interest and must submit to the notwithstanding such condition, it is not
full regulation by the State. relieved from responsibility for loss or injury
resulting therefrom. (Southern Lines Inc., v. CA,
1. VIGILANCE OVER GOODS G.R. No. L-16629, 31 Jan. 1962)
Presumption on the loss, destruction, or 5. Order or act of competent authority; provided,

deterioration of goods the authority is with power to issue the order.
(Art. 1743, NCC)
GR: The common carrier is presumed to have been
at fault or to have acted negligently when the goods NOTE: There must be an order or act of
transported are lost, destroyed, or deteriorated. competent public authority through which the
(Art. 1735, NCC) goods are seized or destroyed. (Art. 1734, NCC)
XPNs: When the same is due to any of the following If the officer acts without legal process or
causes only: (F-A2–C-O) authority, the common carrier will be held
liable. (Ganzon v. CA, G.R. No. L-48757, 30 May
1. Fortuitous events (flood, storm, earthquake, 1988)
lightning, or other natural disaster or calamity).
Provided, the following conditions are present: In all cases other than those enumerated above,
a. Natural disaster was the proximate and there is presumption of negligence even if there is
only cause; an agreement limiting the liability of the common
b. Carrier exercised due diligence to prevent carrier in the vigilance over the goods.
or minimize loss before, during, and after
the occurrence of the natural disaster; and Common Carrier’s Liability for the Acts of
c. The common carrier has not negligently Strangers or Criminals
incurred delay in transporting the goods.
(Art. 1739-1740, NCC) GR: A common carrier is liable even for acts of
strangers like thieves or robbers.
2. Act of the public enemy in war, whether
international or civil, provided: XPN: Where such thieves or robbers acted "with
a. Act was the proximate and only cause; and grave or irresistible threat, violence or force." The
b. Carrier exercised due diligence to prevent common carrier is not liable for the value of the
or minimize loss before, during, and after undelivered merchandise which was lost because of
the act. (Art. 1739-1740, NCC) an event that is beyond his control. (De Guzman v.
CA, supra)
3. Act or omission of the shipper or owner of the
goods, provided: Q: M. Dizon Trucking entered into a hauling
a. If proximate and only cause – exempting contract with Fairgoods Co. whereby the former
b. If contributory negligence – mitigating bound itself to haul the latter’s 2000 sacks of
soya bean meal from Manila Port Area to
4. The Character of the goods or defects in the Calamba, Laguna. To carry out faithfully its
packing or in the containers; provided, carrier obligation, Dizon subcontracted with Enrico
Reyes the delivery of 400 sacks of the soya bean

Transportation Law
meal. Aside from the driver, three male reasonable, given their minimal intrusiveness, the
employees of Reyes rode on the truck with the gravity of the safety interests involved, and the
cargo. While the truck was on its way to Laguna, reduced privacy expectations associated with
two strangers suddenly stopped the truck and airline travel. Indeed, travelers are often notified
hijacked the cargo. Investigation by the police through airport public address systems, signs and
disclosed that one of the hijackers was armed notices in their airline tickets that they are subject
with a bladed weapon while the other was to search and, if any prohibited materials or
unarmed. For failure to deliver the 400 sacks, substances are found, such would be subject to
Fairgoods sued Dizon for damages. Dizon in turn seizure. These announcements place passengers on
set up a third-party complaint against Reyes notice that ordinary constitutional protections
which the latter registered on the ground that against warrantless searches and seizures do not
the loss was due to force majeure. Did the apply to routine airport procedures. (People
hijacking constitute force majeure to exculpate v. Suzuki, G.R. No. 120670, 23 Oct. 2003)
Reyes from any liability? (1995 BAR)
Other Invalid Defenses
A: NO. The hijacking in this case cannot be
considered as force majeure. Only one of the two Explosion. Damage to cargo from explosion of
hijackers was armed with a bladed weapon. As another cargo is not ordinarily attributable to peril
against four male employees of Reyes, two (2) of the sea or accidents of navigation particularly
hijackers, with only one of them being armed with a where it occurs after the vessel has ended its voyage
bladed weapon, cannot be considered force and is finally moored to unload.
majeure. In De Guzman vs. Court of Appeals, the
Supreme Court held that hijacking, not being Worms and Rats. Whenever the ship is damaged by
included in the provisions of Article 1734, must be worms resulting in damage to the cargo, the carrier
dealt with under the provisions of Article 1735 and cannot cite the same as an excuse. The same is true
thus, the common carrier is presumed to have been with respect to damage of the cargo by rats whether
at fault or negligent. To exculpate the carrier from the cargo was directly damaged by the rats or by the
liability arising from hijacking, he must prove that water let in through holes gnawed by rats in the ship
the robbers or the hijackers acted with grave or or her fixtures.
irresistible threat, violence, or force. (Bascos v. CA,
G.R. No. 101089, 07 Apr. 1993) Water Damage. Damage by seawater is not a valid
excuse where the water gains entrance through a
When an airline company was not authorized to port that had been left open or insufficiently
search passengers for firearms, the loss of the fastened on sailing.
jewelry and cash of a passenger because of an armed
robbery committed by other passengers is a force Barratry. The ship owner cannot escape liability to
majeure, for which the airline company is not liable. third persons if the cause of damage is barratry. It is
(Quisumbing v. CA, G.R. No L-50076, 14 Sept. 1990) an act committed by the master or crew of the ship
for some unlawful or fraudulent purpose, contrary
NOTE: With increased concern over airplane to their duty to the owner. (Aquino and Hernando,
hijacking and terrorism has come increased security 2016)
at the nation’s airports. Passengers attempting to
board an aircraft routinely pass-through metal Rules regarding the time of delivery of goods
detectors; their carry-on baggage as well as checked and delay
luggage are routinely subjected to x-ray
scans. Should these procedures suggest the 1. If there is an agreement as to time of delivery
presence of suspicious objects, physical searches – delivery must be within the time stipulated in
are conducted to determine what the objects the contract or bill of lading.
are. There is little question that such searches are

2022 GOLDEN NOTES
Commercial Law
2. If there is no agreement – delivery must be Although the delivery of the suitcase of a passenger
within a reasonable time. (Saludo, Jr. v. CA, G.R. was delayed by eleven days, an airline company
No. 95536, 23 Mar. 1992) cannot be held liable for moral damages, exemplary
damages, and attorney’s fees, where the airline
Delay in the delivery of goods company was not guilty of bad faith and exerted
efforts in tracing the suitcase. (Philippine Air Lines v.
The carrier shall be liable for damages immediately Miano, G.R. No. 106664, 08 Mar. 1995)
and proximately resulting from such neglect of duty.
(Ibid; Art. 1170, NCC) Due Diligence to Prevent or Lessen Loss
Effects of delay of delivery of goods To free the common carrier from liability in case of
flood, storm or other natural disaster or an act of a
In the absence of a special contract, a carrier is not public enemy:
an insurer against delay in the transportation of
goods. The effects of delay are as follows: 1. The common carrier must exercise due
diligence to prevent or minimize loss before,
1. If the common carrier, without just cause, during, and after the occurrence. (Art., 1739,
delays the transportation of the goods or NCC)
changes the stipulated or usual route, the 2. The natural disaster or the act of the public
contract limiting the common carrier’s liability enemy is the proximate and only cause of the
cannot be availed of in case of the loss, loss. (Art. 1739, NCC)
destruction, or deterioration of the goods. (Art.
1747, NCC) NOTE: If the common carrier negligently incurs
delay in transporting the goods, a natural disaster
NOTE: An agreement limiting the common shall not free such carrier from responsibility.
carrier’s liability for delay on account of strikes
or riots is valid. (Art. 1748, NCC) Loss due to Character of the Goods or the Faulty
Nature of its Containers
2. Excusable delay in carriage merely suspends
and generally does not terminate the contract of If the loss, destruction, or deterioration of the goods
carriage; was caused by the character of the goods, or the
faulty nature of the packing or the containers, the
3. The carrier shall be made liable when vessel or common carrier must exercise due diligence to
vehicle is unreasonably delayed; forestall or lessen the loss.
4. Carrier remains duty bound to exercise Q: Because of spillage of the rice during the trip
extraordinary diligence; and from Davao to Manila due to the bad condition of
the sacks, there was a shortage in the rice
5. Natural disaster shall not free the carrier from delivered by the Provident Lines Inc. to the
responsibility. (Dimaampao & Dumlao- consignee XYZ Import and Export Corporation.
Escalante, 2014) The carrier accepted the shipment, knowing
that the sacks had holes, and some had broken
However, where the delay in the transportation of strings. When sued, Provident Lines, Inc. alleged
the remains of a deceased person was due to the that the loss was caused by the spillage of the
fault of the mortuary service, who erroneously rice on account of the defective condition of the
switched the casket with that of another deceased sacks, at the time it received the shipment, and
person, the airline company cannot be held liable for therefore, it cannot be held liable. Decide. Give
damages because of the delay. (Saludo v. CA, supra) reasons. (1978 BAR)

Transportation Law
A: The maritime carrier is liable. Where the fact of Party to whom delivery should be made
improper packing is known to the carrier or its
servants, or apparent upon ordinary observations, It must be delivered, actually or constructively, to
but the carrier accepts the goods notwithstanding the consignee or to the person who has a right to
such conditions, it is not relieved of liability for loss receive them. (Art. 1736, NCC)
or injury resulting therefrom. (Southern Lines, Inc. v.
CA, G.R. No. L-16629, 31 Jan. 1962) Delivery of the cargo to the customs authorities is
not delivery to the consignee, or to the person who
Duration of Liability has a right to receive them. (Lu Do & Lu Ym Corp. v.
Binamira, G.R. No. L-9840, 22 Apr. 1957)
The New Civil Code is explicit when it comes to the
duration of extraordinary responsibility with Constructive Delivery
respect to goods. Such responsibility lasts from the
time the goods are unconditionally placed in the There is constructive delivery when delivery is
possession of and received by the carrier for effected not by actually transferring the possession
transportation. Until the same are delivered, of thing to the vendee (in this case, the other party,
actually or constructively, by the carrier to the either the carrier or the consignee) but by legal
consignee, or to the person who has a right to formalities or by symbolic tradition. (Pineda, 2010)
receive them. (Art. 1736, NCC)
NOTE: Delivery of the cargo to the customs
The carrier’s responsibility terminates in any of the authorities is not delivery of the cargo to the
following cases: consignee, or to the person who has a right to
receive them", contemplated in Art. 1736, because
1. When the goods are delivered actually or in such case the goods are still in the hands of the
constructively by the carrier to the consignee or Government and the owner cannot exercise
to the person who has a right to receive them dominion over them. However, the parties may
(Art. 1736, NCC); agree to limit the liability of the carrier considering
2. When the goods are temporarily unloaded or that the goods have still to go through the inspection
stored in transit by reason of the exercise of the of the customs authorities before they are actually
shipper or owner of his right of stoppage in turned over to the consignee. It is a situation where
transit; or the carrier losses control of the goods because of a
3. When the consignee has been advised of the custom regulation and it is unfair that it be made
arrival of the goods at the place of destination responsible for what may happen during the
and has had reasonable opportunity to remove interregnum. This stipulation is not contrary to
them or dispose of them from the warehouse of morals or public policy. (Lu Do v. Binamira, G.R. No.
the carrier at the place of destination. (Art. L-9840, 22 Apr. 1957)
1738, NCC)
Misdelivery by a carrier who was chosen by the
Delivery of Goods to Common Carrier buyer
The goods are deemed delivered to the carrier when Misdelivery of the goods is attributable to the
the goods are ready for and have been placed in the carrier and not to the seller. And, since the carrier
exclusive possession, custody and control of the was chosen and authorized to make the delivery by
carrier for the purpose of their immediate the buyer itself, the seller cannot be held
transportation and the carrier has accepted them. responsible for such misdelivery. (Smith Bell & Co.
When the carrier has thus accepted such delivery, [Phils.] v. Gimenez, G.R. No. L-17617, 29 June 1963)
the liability of the carrier commences. (Saludo, Jr. v.
CA, G.R. No. 95536, 23 Mar. 1992, citing 13 Am. Jur.
2d, Carriers, 763-764)

2022 GOLDEN NOTES
Commercial Law
Right of Stoppage In Transitu NOTE: If the seller instructs to deliver it somewhere

else, a new contract of carriage is formed and the
It is the right exercised by the seller by stopping the carrier must be paid accordingly.
delivery of the goods, in case of insolvency of the
buyer or consignee, when such goods are already in Liability for Baggage of Passengers
transit. (Art. 1530, NCC)
Baggage is any personal property carried by the
The seller may exercise this right either: passenger, either check-in or hand-carry. (Sec. 2.1,
Air Passenger Bill of Rights)
1. By obtaining actual possession of the goods; or
2. By giving notice of his claim to the carrier or Checked-in Baggage
other bailee in whose possession the goods are.
The provisions of Articles 1733 to 1753, NCC shall
NOTE: Notice may be given either to the person apply. (Art. 1754, NCC)
in actual possession of the goods or to his
principal. In the latter case, the notice, to be An airline company is liable for moral damages
effectual, must be given at such time and under where it left behind the luggage of a passenger, and
such circumstances that the principal, by the its employees did not assist the passenger in
exercise of reasonable diligence, may prevent a locating his luggage but instead treated him
delivery to the buyer. (Art. 1532, NCC) boorishly. (Pan American World Airways v. IAC, G.R.
No. 68988, 21 June 1990)
GR: The common carrier’s duty to observe
extraordinary diligence in the vigilance over the In one case, the Court held that the cause of the loss
goods remains in full force and effect even when was the negligence of the carrier in not ensuring
they are temporarily unloaded or stored in transit. that the doors of the baggage compartment of the
bus were securely fastened. (Sarkies Tours
XPN: When the shipper or owner has made use of Philippines, Inc. v. CA, G.R. No. 108897, 02 Oct. 1997)
the right of stoppage in transitu. (Art. 1737, NCC)
Baggage in Possession of Passengers
The diligence required is merely ordinary diligence
because of the following: The rules in Arts. 1998 and 2000 to 2003, NCC
concerning the responsibility of hotel-keepers for
1. It is holding the goods in the capacity of an necessary deposit shall be applicable.
ordinary bailee or warehouseman and not as a
carrier. 1. The common carrier shall be responsible for
2. There is a change of contract from a contract of shipper’s baggage as depositaries, provided
carriage to a contract of deposit. (Art. 1737, that:
NCC)
a. notice was given to them, or to their
Obligation required of the common carrier in employees, of the effects brought by
case of stoppage in transitu the guests; and
b. on the part of the shipper, they take the
When notice of stoppage in transitu is given by the precautions which said common
seller to the carrier, he must redeliver the goods to, carriers or their substitutes advised
or according to the directions of, the seller. The relative to the care and vigilance of
expenses of such delivery must be borne by the their effects. (Art. 1998, NCC)
seller. (Art. 1532, NCC)
2. The responsibility shall include the loss of, or
injury to the personal property of the shipper

Transportation Law
caused by the employees of the common carrier 2. SAFETY OF PASSENGERS

as well as strangers; but not that which may
proceed from any force majeure. (Art. 2000, A common carrier is bound to carry the passengers
NCC) safely as far as human care and foresight can
provide, using the utmost diligence of very cautious
3. The act of a thief or robber, who has entered the persons, with a due regard for all the circumstances.
carrier, is not deemed force majeure, unless it is (Art. 1755, NCC)
done with the use of arms or through an
irresistible force. (Art. 2001, NCC) Who are not considered passengers (W-A-M-U)
4. The common carrier is not liable for 1. One who has boarded a Wrong vehicle, has been
compensation if the loss is due to the acts of the properly informed of such fact, and on alighting,
shipper, his family, or servants, or if the loss is injured by the carrier.
arises from the character of the things brought 2. Invited guests and Accommodation passengers.
into the carrier. (Art. 2002, NCC) 3. One who attempts to board a Moving vehicle,
although he has a ticket, unless the attempt be
5. The common carrier cannot free himself from with the knowledge and consent of the carrier.
responsibility by posting notices to the effect 4. One who remains on a carrier for an
that he is not liable for the articles brought by Unreasonable length of time after he has been
the passenger. Any stipulation between the afforded every safe opportunity to alight.
common carrier and the shipper whereby the
responsibility of the former as set forth in Arts. The carrier is thus NOT obliged to exercise
1998 to 2001 is suppressed or diminished shall extraordinary diligence but only ordinary diligence
be void. (Art. 2003, NCC) in these instances.
Q: Pasahero, a paying passenger, boarded a Assumption of risk on the part of passengers

Victory Liner bus bound for Olongapo. He chose
a seat at the front near the bus driver. Pasahero Passengers must take such risks incident to the
told the bus driver that he had valuable items in mode of travel. The passenger must observe the
his bag which was placed near his feet. Since he diligence of a good father of a family to avoid injury
had not slept for 24 hours, he requested the to himself. (Art. 1761, NCC)
driver to keep an eye on the bag should he doze
off during the trip. While Pasahero was asleep, Carriers are not insurers of any and all risks to
another passenger took the bag away and passengers and goods. It merely undertakes to
alighted at Guagua, Pampanga. Is Victory Liner perform certain duties to the public as the law
liable to Pasahero? Explain. (1987 BAR) imposes and holds itself liable for any breach
thereof. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
A: YES. The responsibility of common carriers in the
case of loss or damage to hand-carried baggage is Q: Wisconsin Transportation Co., Inc. (WTC)
governed by the rule on necessary deposits. The owned and operated an inter-island deluxe bus
common carrier is thus liable for the loss of the service plying the Manila-Batangas-Mindoro
personal property caused by its employees or by route. Three friends, namely: Aurelio, Jerome
strangers. In this case, the passenger told the driver and Florencio rode on the same WTC bus from
that he had valuable item placed beside the driver’s Manila bound for Mindoro. Aurelio purchased a
seat. If the driver exercised due diligence, he could ticket for himself. Jerome, being a boyhood
have prevented the loss of the bag. friend of the bus driver, was allowed a free ride
by agreeing to sit during the trip on a stool
placed in the aisle. Florencio, already penniless
after spending all his money on beer the night

2022 GOLDEN NOTES
Commercial Law
before, just stole a ride in the bus by hiding in the intention of becoming a passenger, will
the on-board toilet of the bus. During the trip, ordinarily be viewed as assuming the status of a
the bus collided with another bus coming from passenger. (LRTA v. Navidad, G.R. No. 145804, 06 Feb.
the opposite direction. The three friends all 2003, citing 10 Am. Jur. 30)
suffered serious physical injuries. What are
WTC's liabilities, if any, in favor of Aurelio, Trains
Jerome and Florencio? Explain your answer.
(2017 BAR) The carrier is supposed to exercise extraordinary
diligence although the passenger is still waiting for
A: As a common carrier, WTC is liable to Aurelio for a coach on the platform of the train station. (LRTA v.
breach of contract of carriage, the latter being a Navidad, G.R. No. 145804, 06 Feb. 2003)
passenger who purchased a ticket for himself. WTC
is also liable to Jerome for breach of contract of However, there is no obligation on the part of a
carriage because he was a passenger although he street railway company to stop its cars to let on
was being transported gratuitously. However, WTC intending passengers at other points than those
has no liability in favor of Florencio for breach of appointed for stoppage. (Del Prado v. Manila Electric
contract of carriage. A stowaway like Florencio, who Co., G.R. No. L-29462, 7 Mar. 1929)
secures passage by fraud, is not considered as a
passenger. Q: City Railways, Inc. (CRI) provides train
service, for a fee, to commuters from Manila to
NOTE: As accommodation passengers or invited Calamba, Laguna. Commuters are required to
guests, defendant as owner and driver of the pick- purchase tickets and then proceed to designated
up owes to them merely the duty to exercise loading and unloading facilities to board the
reasonable care so that they may be transported train. Ricardo Santos purchased the ticket for
safely to their destination. The rule is established by Calamba and entered the station. While waiting,
the weight of authority that the owner or operator he had an altercation with the security guard of
of an automobile owes the duty to an invited CRI leading to a fistfight. Ricardo Santos fell on
guest to exercise reasonable care in its operation, the railway just as a train was entering the
and not unreasonably to expose him to danger and station. Ricardo Santos was run over by the
injury by increasing the hazard of travel. (Articles train. He died. CRI contented that the mishap
1755 and 1756, NCC, Lara v. Valencia, G.R. No. L- occurred before Ricardo Santos boarded the
9907, 30 June 1958) train and that it was not guilty of negligence.
Decide. (2008 BAR)
Duration of Liability
A: The contention of CRI must fail. The duty of a
Observance of extraordinary diligence in common carrier to provide safety to its passengers
transportation of goods commences from the is not only during the course of the trip but for so
moment the person who purchases the ticket from long as the passengers are within its premises and
the carrier presents himself at the proper place and where they ought to be in pursuance to the contract
in a proper manner to be transported and continues of carriage. Furthermore, the common carrier will
until the passenger has been landed at the port of still be liable even though its employees acted
destination and has left the vessel owner’s dock or beyond the scope of their work. (LRTA vs. Navidad,
premises. G.R. No. 145804, 6 Feb. 2003)
Waiting for Carrier or Boarding of Carrier Q: P, a salesgirl in a flower shop at the Ayala
Station of the MRT bought two (2) tokens or
A proper person whom the carrier would be bound tickets, one for her ride to work and another for
to accept who enters upon the carrier’s premises her ride home. She got to her flower shop where
such as a station, ticket office, or waiting room, with she usually worked. While P was attending to

Transportation Law
her duties at the flower shop, two (2) crews of A: YES. Santiago may hold GL Transit liable for
the MRT got into a fight near the flower shop, breach of contract of carriage. It was the duty of the
causing injuries to P in the process. Can P sue the driver, when he stopped the bus, to do no act that
MRT for contractual breach as she was within would have the effect of increasing the peril to a
the MRT premises where she would shortly take passenger such as Santiago while he was attempting
her ride home? (2011 BAR) to board the same. When a bus is not in motion there
is no necessity for a person who wants to ride the
A: NO. P had no intention to board an MRT train same to signal his intention to board. A public utility
coach when the incident occurred. bus, once it stops, is in effect making a continuous
offer to bus riders. It is the duty of common carriers
Carriage by Sea of passengers to stop their conveyances while they
are doing so. Santiago, by stepping and standing on
The duty of the carrier commences as soon as a the platform of the bus is already considered as a
person with bona fide intention of taking passage passenger and is entitled to all the rights and
places himself in the care of the carrier or its protection pertaining to a contract of carriage.
employees and is accepted as passenger. (Aquino (Dangwa Transportation Co., Inc. v. CA, supra)
and Hernando, 2016, citing 80 C.J.S. 1085)
When a Public Utility Vehicle is not in motion, it
Land Transportation is not necessary for a person who wants to ride
the same to signal his intention to board
The act of the driver in stopping their conveyances
is a continuous offer to riders (continuing offer rule). When the bus is not in motion, there is no necessity
The passenger is deemed to be accepting the offer if for a person who wants to ride the same to signal his
he is already attempting to board the conveyances intention to board. A public utility bus, once it stops,
and the contract of carriage is perfected from that is in effect making a continuous offer to bus riders.
point. Hence, it becomes the duty of the driver and the
conductor, every time the bus stops, to do no act that
It is the duty of common carriers of passengers, would have the effect of increasing the peril to a
including common carriers by railroad train, passenger while he was attempting to board the
streetcar, or motorbus, to stop their conveyances a same. The premature acceleration of the bus in this
reasonable length of time in order to afford case was a breach of such duty.
passengers an opportunity to board and enter, and
they are liable for injuries suffered by boarding A person, by stepping and standing on the platform
passengers resulting from the sudden starting up or of the bus, is already considered a passenger and is
jerking of their conveyances while they are doing so. entitled all the rights and protection pertaining to
(Dangwa Transportation Co., Inc. vs. CA, G.R. No. such a contractual relation. Hence, it has been held
95582, 07 Oct. 1991) that the duty which the carrier owes to its patrons
extends to persons boarding cars as well as to those
Q: A bus of GL Transit on its way to Davao alighting therefrom. (Dangwa Transportation Co.,
stopped to enable a passenger to alight. At that Inc. vs. CA, supra)
moment, Santiago who had been waiting for a
ride, boarded the bus. However, the bus driver Liability for death or injury to passengers upon
failed to notice Santiago who was still standing Arrival at Destination
on the bus platform and stepped on the
accelerator. Because of the sudden motion, Once created, the relationship will not ordinarily
Santiago slipped and fell down suffering serious terminate until the passenger has, after reaching his
injuries. Is GL Transit liable? (1996 BAR) destination, safely alighted from the carrier's
conveyance or had a reasonable opportunity to
leave the carrier's premises. All persons who

2022 GOLDEN NOTES
Commercial Law
remain on the premises a reasonable time after family in the selection and supervision of their
leaving the conveyance are to be deemed employees. (Art. 1759, NCC)
passengers, and what is a reasonable time or a
reasonable delay within this rule is to be NOTE: By express provision of Art. 1759, it is no
determined from all the circumstances, and defense that the employee acted beyond the scope
includes a reasonable time to see after his baggage of his authority because the riding public is not
and prepare for his departure. (La Mallorca v. CA, expected to inquire from time to time before they
G.R. No. L-21486, 14 May 1966) board the carrier whether or not the driver or any
other employee is authorized to drive the vehicle or
Carrier-passenger relationship continues until the that said driver is acting within the scope of his
passenger has been landed at the port of destination authority and observing the existing rules and
and has left the vessel-owner’s premises. The regulations required of him by management.
victim’s presence in a vessel after one (1) hour from (Aquino and Hernando, 2016)
his disembarkation is not enough in order to
absolve the carrier from liability in his death. Q: At around 8:45 in the morning, A, after having
(Aboitiz Shipping Corporation v. CA, G.R. No. 84458, alighted from a passenger bus in front of
06 Nov. 1989) Robinsons Galleria along the north-bound lane
of EDSA, was hit and run over by a bus driven by
Q: Robert De Alban and his family rode a bus B, who was then employed by C Transport
owned by Joeben Bus Company. Upon reaching Company. A was immediately rushed to the
their desired destination, they alighted from the hospital where she was pronounced dead on
bus, but Robert returned to get their baggage. arrival. By reason of the quasi-delict, who
However, his youngest daughter followed him should be held liable for the death of A? B, the
without his knowledge. When he stepped into bus driver, C Transport Company, or both?
the bus again, the bus accelerated that resulting
to Robert’s daughter death. The bus ran over A: Both B and C Transport Company should be held
her. Is the bus company liable? solidarily liable as joint tortfeasors. Under Art. 2180
of the NCC, employers are liable for the damages
A: YES. The relation of carrier and passenger does caused by their employees acting within the scope
not cease at the moment the passenger alights from of their assigned tasks. Once negligence on the part
the carrier’s vehicle at a place selected by the carrier of the employee is established, a presumption
at the point of destination but continues until the instantly arises that the employer was remiss in the
passenger has had a reasonable time or reasonable selection and/or supervision of the negligent
opportunity to leave the carrier’s premises. (La employee. It is incumbent upon the employer to
Mallorca v. CA, G.R. No. L-20761, 27 July 1966) rebut this presumption by presenting adequate and
convincing proof that it exercised the care and
Liability for acts of others diligence of a good father of a family in the selection
and supervision of its employees. Failing to do this,
1. Employees – Common carriers are liable for a common carrier cannot avoid liability for the
the acts of their employees quasi-delict committed by its negligent employee.
The responsibility of two or more persons who
Common carriers are liable for the death of or are liable for a quasi-delict is solidary. (R
injuries to passengers through the negligence or Transport Corporation vs. Luisito G. Yu, G.R. No.
willful acts of the former’s employees, although such 174161, 18 Feb. 2015)
employees may have acted beyond the scope of
their authority or in violation of the orders of the
common carriers. The liability of the common
carriers does not cease upon proof that they
exercised all the diligence of a good father of a

Transportation Law
2. Other passengers and strangers b. If it were an airline company involved,

would your answer be the same? (1992
The registered owner of the vehicle may be held BAR)
liable for damages suffered by a third person in
the course of the operation of the vehicle A:
a. NO. The operator is not liable for damages. In
The registered owner of a public service vehicle is overland transportation, the common carrier is
responsible for damages that may arise from not bound nor empowered to make an
consequences incident to its operation or that may examination on the contents of packages or
be caused to any of the passengers therein. (Gelisan bags, particularly those hand carried by
vs. Alday, G.R. No. L-30212, 30 Sept. 1987) passengers. (Nocum vs. Laguna Tayabas Bus
Company, G.R. No. L-23733, 31 Oct. 1969)
Extent of Liability of Common Carriers for Acts
of Co-Passengers or Strangers (1997, 2005 BAR) b. NO. The common carrier should be made liable.
In case of air carriers, it is unlawful to carry
A common carrier is responsible for injuries flammable materials in passenger aircrafts, and
suffered by a passenger on account of the willful acts airline companies may open and investigate
or negligence of other passengers or of strangers, if suspicious packages and cargoes pursuant to
the carrier’s employees through the exercise of the R.A. No. 6235.
diligence of a good father of a family could have
prevented or stopped the act or omission. (Art. Q: Marites, a paying bus passenger, was hit
1763, NCC) above her left eye by a stone hurled at the bus by
an unidentified bystander as the bus was
Q: P rode a Sentinel Liner bus going to Baguio speeding through the National Highway. The bus
from Manila. At a stop-over in Tarlac, the bus owner’s personnel lost no time in bringing
driver, the conductor, and the passengers Marites to the provincial hospital where she was
disembarked for lunch. P decided, however, to confined and treated. Marites wants to sue the
remain in the bus, the door of which was not bus company for damages and seeks your advice
locked. At this point, V, a vendor, sneaked into whether she can legally hold the bus company
the bus and offered P some refreshments. When liable. What will you advise her? (1994 BAR)
P rudely declined, V attacked him, resulting in P
suffering from bruises and contusions. Does he A: I will advise Marites that she cannot legally hold
have cause to sue Sentinel Liner? (2011 BAR) the bus company liable if the stone throwing was
entirely unforeseeable and the carrier exercised
A: YES, since the carrier's crew did nothing to utmost diligence. However, I will also inform her
protect the passenger P who remained in the bus that the burden is on the carrier to prove such
during the stop-over. exercise of due diligence. If she decides to file a case
in court, all that she will prove is that she was a
Q: In a jeepney, Angela, a passenger, was injured passenger and she was injured while on board the
because of the flammable material brought by bus. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
Antonette, another passenger. Antonette denied
her baggage to be inspected invoking her right Liability for Delayed Voyage
to privacy.
Delayed voyage refers to a voyage involving:
a. Should the jeepney operator be held liable 1. Late departure of the ship from its port of
for damages? origin; or
2. Late arrival to its port of destination for a period
of time not exceeding twenty-four (24) hours
from the Certificate of Public Convenience

2022 GOLDEN NOTES
Commercial Law
(CPA)-authorized time of departure or arrival of more than eight (8) but not
of the ship. (Sec. III, Maritime Industry Authority exceeding 24 hours.
Circular No. 2018-07)
NOTE: The passengers shall be entitled to these
Rights of passengers in case of delayed voyages amenities for as long as may be required by the
period for which they have to wait for their next
In case of delay of the voyage attributable to the scheduled voyage.
operator, a passenger shall have the following
rights: 4. Right to Compensation
As an alternative to providing accommodation
1. Right to Information or whenever the provision of the same is not
The operator shall, within thirty (30) minutes practicable, the operator may offer the
from receipt of information or from knowledge passengers corresponding compensation:
that the voyage shall be delayed, but not later
than one (1) hour before the CPC-authorized a. In an amount equivalent to the
departure schedule, inform the passengers of prevailing market price of a decent and
the delay and the cause thereof, as well as of the clean accommodation in the
new departure or expected arrival time. immediate or adjacent locality of the
ship’s point of departure;
NOTE: The information shall be made by public b. Subject to the same limitation of a
announcement through the Public maximum of three (3) nights per
Announcement System, written and/or passenger. (Sec. V, Maritime Industry
published notice, or through SMS, electronic or Authority Circular No. 2018-07)
any other available means.
5. Right to Remain on Board
2. Right to Refund or Revalidation In case the departure of the vessel is delayed,
Should the delay be for more than three (3) the passengers have a right to remain on board
hours, the passenger shall be offered by the and to be furnished with food for the account of
operator the option to request a refund of the the vessel, unless the delay is due to an
ticket price or for the revalidation of the ticket. accidental cause or to force majeure. (Art. 698,
Code of Commerce [COC])
3. Right to Amenities
The operator shall provide, free of charge, the 6. Right to Return
passengers waiting for their re-scheduled trip If the delay should exceed ten (10) days, the
with the following: passengers who request it shall be entitled to
the return of the passage. (Art. 698, COC)
a. Snacks or refreshments, or meals
during mealtime; 7. Right to Damages
b. Free access to first aid/relief medicine, If the delay were due exclusively to the captain
if necessary; or agent, the passengers may furthermore
c. Free access to communication facilities demand indemnity for losses and damages. (Art.
or services, if necessary; 698, COC)
d. Free, decent, and clean accommodation
that must be located near or accessible Liability for Defects in Equipment and Facilities
from the port; and
e. Free transportation to and from the The carrier, while not an insurer of the safety of his
port and place of accommodation, passengers, should nevertheless be held to answer
should the delay require a waiting time for the flaws of his equipment if such flaws were at
all discoverable.

Transportation Law
The preponderance of authority is in favor of the

doctrine that a passenger is entitled to recover C. DEFENSES AVAILABLE TO A COMMON
damages from a carrier for an injury resulting from CARRIER
a defect in an appliance purchased from a
manufacturer, whenever it appears that the defect
would have been discovered by the carrier if it had
Defenses available to a Common Carrier (F-E-D-
exercised the degree of care which under the
Co-L)
circumstances was incumbent upon it, with regard
to inspection and application of the necessary tests.
1. Fortuitous event
2. Exercise of extraordinary diligence
The manufacturer is considered in law the agent or
3. Due Diligence in the selection and supervision
servant of the carrier, as far as regards the work of
of employees.
constructing the appliance. According to this theory,
4. Contributory negligence of passengers – it does
the good repute of the manufacturer will not relieve
not bar recovery of damages for death or injury
the carrier from liability. (Necesito v. Paras, G.R. No.
if the proximate cause is the negligence of the
L-10605, 30 June 1958)
common carrier but the amount of damages
shall be equitably reduced. (Art. 1762, NCC)
Rationale of the Carrier’s Liability
5. Doctrine of Last Clear Chance
The rationale is the fact that the passenger has

1. PROOF OF NEGLIGENCE
neither choice nor control over the carrier in the
selection and use of the equipment and appliances
in use by the carrier. Having no privity whatever The diligence of the passenger may be
with the manufacturer or vendor of the defective considered in determining liability in case of
equipment, the passenger has no remedy against injury
him , while the carrier usually has. (Ibid)
The passenger must observe the diligence of a good
father of a family or ordinary diligence to avoid
injury to himself. (Art. 1761, NCC) This means that if
the proximate cause of the passenger’s injury is his
negligence, the common carrier is not liable.
Proof that the Common Carrier exercised

extraordinary diligence in the performance of
its duties
Under Art. 1733 of the NCC, common carriers are

required to observe extraordinary diligence for the
safety of the passenger transported by them,
according to all the circumstances of each case.
In addition, Art. 1756 of the NCC, in creating a

presumption of fault or negligence on the part of the
common carrier when its passenger is injured,
merely relieves the latter, for the time being, from
introducing evidence to fasten the negligence on the
former, because the presumption stands in the place
of evidence.

2022 GOLDEN NOTES
Commercial Law
Being a mere presumption, however, the same is 3. FORTUITOUS EVENT

rebuttable by proof that the common carrier had
exercised extraordinary diligence as required by Art. 1174 of the NCC provides that no person shall
law in the performance of its contractual obligation, be responsible for a fortuitous event which could
or that the injury suffered by the passenger was not be foreseen, or which, though foreseen, was
solely due to a fortuitous event. (Jose Pilapil v. CA, inevitable.
G.R. No. 52159, 22 Dec. 1989)
Requisites of a fortuitous event (F-EV-UN-I)
2. DUE DILIGENCE IN THE SELECTION AND
SUPERVISION OF EMPLOYEES 1. The common carrier must be Free from any
participation in or aggravation of the injury to
Liability of Common Carriers does not cease the creditor;
upon proof that they exercised due diligence in 2. The EVent must be such as to render it
the selection and supervision of their employees impossible for the common carrier to fulfill his
obligation in a normal manner;
Common carriers are liable for the death of or 3. The event must be UNforeseen or unavoidable;
injuries to passengers through the negligence or and
willful acts of the former's employees, although such 4. The cause of the breach of obligation must be
employees may have acted beyond the scope of Independent of the will of the common carrier.
their authority or in violation of the orders of the (Real v. Belo, G.R. No. 146224, 26 Jan. 2007)
common carriers. This liability of the common
carriers does not cease upon proof that they A mechanical defect is not fortuitous event
exercised all the diligence of a good father of a
family in the selection and supervision of their Mechanical defects in the carrier are NOT
employees. (Art. 1759, NCC) considered a caso fortuito that exempts the carrier
from responsibility. (Sweet Lines, Inc. v. CA, G.R. No.
NOTE: The carrier, unlike in suits for quasi-delict, L-46340, 28 Apr. 1983)
may not escape liability by proving that it has
exercised due diligence in the selection and Tire blowout of a jeep is not a fortuitous event
supervision of its employees. (Art. 1759, NCC; where there exists a specific act of negligence by the
Cangco vs. Manila Railroad Co., G.R. No. L-12191, 14 carrier consisting of the fact that the jeepney was
Oct. 1918; Prado vs. Manila Electric Co., G.R. No. L- overloaded and speeding at the time of the incident.
29462, 7 Mar. 1929) (Juntilla v. Fontanar, GR No. L-45637, 31 May 1985)
Q: Why is the defense of due diligence in the Defective brakes cannot be considered fortuitous in
selection and supervision of an employee not character. (Vergara v. CA, G.R. No. 77679, 30 Sept.
available to a common carrier? (2002 BAR) 1987)
A: The defense of due diligence in the selection and Fire is not considered a natural disaster
supervision of an employee is not available to a
common carrier because the degree of diligence GR: Fire arises almost invariably from some act of
required of a common carrier is not the diligence of man or by human means. It does not fall within the
a good father of a family but extraordinary diligence, category of an act of God.
i.e., diligence of the greatest skill and utmost
foresight. XPN: If the fire is caused by lightning or by other
natural disaster or calamity. (Eastern Shipping Lines
v. IAC, G.R. No. L-69044, 29 May 1987)

Transportation Law
NOTE: In case that the goods have already been seven days. The vessel ran out of provisions for
deposited in the warehouse of the Bureau of its passengers. Consequently, the vessel
Customs and the goods were then destroyed by fire, proceeded to Leyte to replenish its supplies.
the carrier is not anymore liable. (Servando v. Assuming that the cargo was damaged because
Philippine Steam Navigation, G.R. No. L-36481-2, 23 of such deviation, who between the insurance
Oct. 1982) company and the owner of the cargo bears the
loss? Explain. (2005 BAR)
Typhoon as a Fortuitous Event
A: The insurance company is liable. It is an instance
GR: If all the elements of a natural disaster or of a valid deviation because the strong typhoon is a
calamity concur and there was no contributory fortuitous event over which neither the master nor
negligence or delay, the occurrence of a typhoon is a the owner has any control. Deviation is likewise
fortuitous event. This holds true especially if the proper in order to avoid a peril. Common carriers
vessel was seaworthy at the time it undertook that are responsible for the loss, destruction,
fateful voyage and that it was confirmed with the deterioration of the goods unless the same is due to
Coast Guard that the weather condition would any of the causes provided by law – which includes,
permit safe travel of the vessel to its destination. among others, is when there is flood, storm,
(PhilAm Gen. v. MGG Marine Services, Inc., G.R. No. earthquake, lightning, or other natural disaster or
135645, 08 Mar. 2002) calamities. Moreover, even in cases where a natural
disaster is the proximate and only cause of the loss,
The loss of cargoes due to the sinking of a seaworthy a common carrier is still required to exercise due
tugboat which was suddenly tossed by waves of diligence to prevent or minimize loss before, during
extraordinary height is due to a force majeure. and after the occurrence of the natural disaster, for
(PhilAm Gen. v. PKS Shipping Company, G.R. No. it to be exempt from liability under the law for the
149038, 09 Apr. 2003) loss of the goods. Such deviation is just proper in its
exercise of extraordinary diligence. (The Philippine
XPN: If a vessel sank due to a typhoon, and there American General Insurance Co., Inc. v. MGC Marine
was failure to ascertain the direction of the storm Services, Inc. and Gaerlan, G.R. No. 135645, 08 Mar.
and the weather condition of the path they would be 2002)
traversing, it constitutes lack of foresight and
minimum vigilance over its cargoes taking into Q: Philip Mauricio shipped a box of cigarettes to
account the surrounding circumstances of the case. a dealer in Naga City through Bicol Bus Company
Thus, the common carrier will still be liable. (Arada (BBC). When the bus reached Lucena City, the
v. CA, G.R. No. 98243, 01 July 1992) bus developed engine trouble. The driver
brought the bus to a repair shop in Lucena
Where a vessel encountered stormy weather and where he was informed by the mechanic that an
the coils of wire it was transporting became rusty extensive repair was necessary, which would
because rain entered the hatch of the vessel, the take at least 2 days. While the bus was in the
damage was not due to a fortuitous event, because repair shop, Typhoon Coring lashed Quezon
heavy rains are foreseeable, and rain would not Province. The cargoes inside the bus, including
have entered the hatch if it was closed properly. Mauricio’s cigarettes, got wet and were totally
(Eastern Shipping Lines v. CA, G.R. No. 97412, 12 July spoiled. Mauricio sued BBC for damage to his
1994) cargoes. Decide. (1987 BAR)
Q: On a clear weather, M/V Sundo, carrying A: BBC is liable for damages to the cargoes lost by
insured cargo, left the port of Manila bound for Mauricio. A natural disaster would relieve liability if
Cebu. While at sea, the vessel encountered a it is the proximate and only cause of the damage.
strong typhoon forcing the captain to steer the The carrier itself, in this case, had been negligent.
vessel to the nearest island where it stayed for The presumption of negligence in culpa contractual

2022 GOLDEN NOTES
Commercial Law
is not overcome by invoking the defense that there of death of the victims. Further, Sonnel
has been engine trouble, for such defense does not Construction, exercised due diligence in the
preclude it having been due to the fault of the selection and supervision of its employees.
common carrier. The fact that an extensive repair
work was necessary which, in fact, took 2 days to b. YES. Both taxicab owner and driver may be held
complete, somehow justifies an impression that the liable based on breach of contract of carriage
engine trouble could have been detected, if not and negligence in the selection and supervision
already known, well before the actual breakdown. of employees for quasi-delict. The driver can be
held criminally liable for reckless imprudence
4. CONTRIBUTORY NEGLIGENCE resulting to homicide and for damages under
quasi-delict as provided in Article 2176 of the
Contributory negligence is the failure of a person Civil Code while the employer may be held
who has been exposed to injury by the fault or liable under Article 2180 of the same Code— an
negligence of another, to use such degree of care for employer may be held solidarily liable for the
his safety and protection an ordinarily prudent man negligent act of his employee acting within the
would use under the circumstances. (Martin, 1989, scope of their assigned task. Hence, in this case,
citing Rakes v. Atlantic Gulf Co., G.R. No. 1719, 23 Jan. the taxicab owner is exempted from liability
1907) while the taxicab driver is liable solely and
personally for criminal prosecution.
NOTE: Contributory negligence on the part of the
passenger does not justify the common carrier’s Q: A and his classmates took a bus from UP to
exemption from liability. (Martin, 1989) Quiapo. On the way, another Quiapo-bound bus
tries to overtake them. A and his classmates
Q: Nelson owned and controlled the Sonnel dared the bus driver to run faster and race with
Construction Company. Acting for the company, the other bus. The driver takes their dare, to the
Nelson contracted the construction of a building. delight of A and his friends who cheered him. On
Without first installing a protective net atop the rounding the curve, the bus driver fails to slow
sidewalks adjoining the construction site, the down and the bus turns turtle, resulting in the
company proceeded with the construction work. death of A and injuries to the other passengers.
One day, a heavy piece of lumber fell from the The bus carried the following sign: “Do not talk
building. It smashed a taxicab which at that time to driver while bus is on motion, otherwise the
had gone off-road and onto the sidewalk in company will not assume liability for any
order to avoid the traffic. The taxicab accident.” Explain briefly the extent of the
passengers died as a result. liability, if any, of the bus company, giving the
legal provisions and principles involved. (1983
a. If you were the counsel for Sonnel BAR)
Construction, how would you defend your
client? What would be your theory? A: The bus company is liable for damages to A’s
heirs and to all the injured passengers. Under the
b. Could the heirs hold the taxicab owner and Civil Code, a common carrier is duty bound to
driver liable? Explain. (2008 BAR) exercise extraordinary diligence in carrying its
passengers through the negligence or willful acts of
A: its employees even if the latter have acted beyond
a. I shall raise the affirmative defense of the scope of their authority or in violation of their
contributory negligence. The proximate cause orders. This liability cannot be eliminated or limited
of death is the violation of the taxi driver of by stipulation or by posting notices. Although it may
traffic rules and regulations when it drove off- be argued that A was guilty of contributory
road to avoid heavy traffic. The lumber that fell negligence, such an argument loses its force in the
from the building was only the immediate cause face of the driver’s recklessness in taking the dare.

Transportation Law
And even if such argument would be accepted, at passengers and the driver of the oncoming vehicle,
most it can only mitigate the amount of damages, who might have fallen asleep or suddenly fallen ill at
since the proximate cause of the accident was the the wheel, C coldly and uncaringly stood his ground,
driver’s willful and reckless act in running a race closed his eyes, and left everything to fate, without
with the other bus. due regard for the consequences. Such a suicidal
mindset cannot be tolerated, for the grave danger it
Rule if there is Contributory Negligence on the poses to the public and passengers availing of
part of the shipper petitioners' services. Where both parties are
negligent but the negligent act of one is appreciably
If the shipper or owner merely contributed to the later in point of time than that of the other, or where
loss, destruction, or deterioration of the goods, the it is impossible to determine whose fault or
proximate cause thereof being the negligence of the negligence brought about the occurrence of the
common carrier, the latter shall be liable for incident, the one who had the last clear opportunity
damages, which however, shall be equitably to avoid the impending harm but failed to do so, is
reduced. (Art. 1741, NCC) chargeable with the consequences arising
therefrom. In this case C, clearly had the Last Clear
5. DOCTRINE OF LAST CLEAR CHANCE Chance, thus he should be the one liable for having
failed to avert the clearly imminent danger.
The doctrine of last clear chance provides that (Greenstar v. Universal Robina, G.R. No. 205090, 17
where both parties are negligent but the negligent Oct. 2016)
act of one is appreciably later in point of time than
that of the other, or where it is impossible to The doctrine of “last clear chance” cannot apply
determine whose fault or negligence brought about if the: (Co-In2)
the occurrence of the incident, the one who had the
last clear opportunity to avoid the impending harm 1. Negligence of the plaintiff is Concurrent with
but failed to do so, is chargeable with the that of the defendant (in pari delicto);
consequences arising therefrom. 2. Party charged is required to act
Instantaneously;
Stated differently, the rule is that the antecedent 3. Injury cannot be avoided despite the
negligence of a person does not preclude recovery application at all times of all the means to avoid
of damages caused by the supervening negligence of the injury (after the peril is or should have been
the latter, who had the last fair chance to prevent the discovered), at least in all instances where the
impending harm by the exercise of due diligence. previous negligence of the party charged cannot
(Greenstar v. Universal Robina, G.R. No. 205090, 17 be said to have contributed to the injury at all.
Oct. 2016) (O'Mally vs. Eagan, 77 ALR 582)
Q: B Traversing EDSA swerved then collision NOTE: It goes without saying that the plaintiff
took place with B barely encroaching on C’s lane. himself was not free from fault, for he was guilty of
Prior to and at the time of collision, C did not antecedent negligence in planting himself in the
take any defensive maneuver to prevent the wrong side of the road. But as we have already
accident and minimize the impending damage to stated, the defendant was also negligent; and in such
life and property, which resulted in the collision case the problem always is to discover which agent
in the middle of the highway, where a vehicle is immediately and directly responsible. It will be
would normally be traversing. Is C liable for his noted that the negligent acts of the two parties were
lack of care in driving? not contemporaneous, since the negligence of the
defendant succeeded the negligence of the plaintiff
A: YES. The collision was certainly foreseen and by an appreciable interval. Under these
avoidable, but C took no measures to avoid it. Rather circumstances, the law is that a person who has the
than exhibit concern for the welfare of his last clear chance to avoid the impending harm and

2022 GOLDEN NOTES
Commercial Law
fails to do so is chargeable with the consequences,

without reference to the prior negligence of the D. EXTENT OF LIABILITY
other party. (Picart v. Smith, GR. No. L-12219, 15 Mar.
1918)
1. RECOVERABLE DAMAGES
The last clear chance doctrine of the common law
was imported into our jurisdiction by Picart v. Smith
Kinds of damages that may be recovered in case
but it is a matter for debate whether, or to what
of death of a passenger (De-Lo-M-E-At-I-H)
extent, it has found its way into the Civil Code of the
Philippines. The historical function of that doctrine
1. An indemnity for the Death of the victim
in the common law was to mitigate the harshness of
2. An indemnity for Loss of earning capacity of the
another common law doctrine or rule—that of
deceased
contributory negligence.
3. Moral damages
4. Exemplary damages
The common law rule of contributory negligence
prevented any recovery at all by a plaintiff who was
NOTE: Carrier is not liable for exemplary
also negligent, even if the plaintiff’s negligence was
damages where there is no proof that it acted in
relatively minor as compared with the wrongful act
a wanton, fraudulent, reckless, oppressive or
or omission of the defendant. The common law
malevolent manner.
notion of last clear chance permitted courts to grant
recovery to a plaintiff who had also been negligent
5. Attorney's fees and expenses of litigation
provided that the defendant had the last clear
6. Interest in proper cases (Briñas v. People, G.R.
chance to avoid the casualty and failed to do so.
No. L-30309, 25 Nov. 1983)
Accordingly, it is difficult to see what role, if any, the
7. Hospital and funeral expenses
common law last clear chance doctrine has to play
in a jurisdiction where the common law concept of
NOTE: In case of death, the plaintiff is entitled
contributory negligence as an absolute bar to
to the amount he spent during the wake and
recovery by the plaintiff, has itself been rejected, as
funeral of the deceased. However, it has been
it has been in Art. 2179 of the NCC. (Phoenix
ruled that expenses after the burial are not
Construction, Inc. and Carbonel v. IAC, G.R. No. L-
compensable. (Victory Liner, Inc. v. Heirs of
65295, 10 Mar. 1987)
Andres Malecdan, G.R. No. 154278, 27 Dec. 2002)
Damages in Personal Injury Cases
Personal injury and even death entitles claimant to

all medical expenses as well as other reasonable
expenses that he incurred to treat his or his
relative’s injuries. Medical expenses may even
include the amount spent for plastic surgery of the
plaintiff or any procedure to restore the part of the
body that was affected. (Sps. Ong v. CA, G.R. No.
117103, 21 Jan. 1999)
Loss of Earning Capacity
The formula for the computation of unearned

income is:

Transportation Law
1. Net Earning Capacity = Life Expectancy x (Gross Q: Judith and Joyce were on board a passenger
annual income - Reasonable and necessary bus operated by Eduardo. The bus was driven at
living expenses). a fast speed by the driver, Rolando, when it
2. Life expectancy is determined in accordance crashed into a truck parked on the shoulder of
with the formula: 2/3 x (80 – age of deceased at the Kennon Road. As a result, Judith and Joyce
the time of death). (Heirs of Ochoa vs. G & S suffered injuries. Eduardo and Rolando paid for
Transport Corporation, G.R. No. 170071, 09 Mar. their medical and hospitalization expenses.
2011) Nonetheless, Judith and Joyce filed a complaint
against Eduardo and Rolando for breach of
NOTE: When there is no showing that the living contract of carriage caused by Rolando’s
expenses constituted the smaller percentage of the reckless and negligent driving. As relief, they
gross income, the Court fixes the living expenses at prayed for moral and exemplary damages.
half of the gross income. Eduardo and Rolando refused to pay moral
damages on the ground that there was neither
Moral Damages proof nor allegation that they acted fraudulently
or in bad faith. Are Eduardo and Rolando liable
GR: Moral damages are not recoverable for breach for moral damages?
of contract of carriage, because such contract cannot
be considered included in the “analogous cases” A: NO. In an action for breach of contract, moral
used in Art. 2219 of the NCC. Also, Art. 2176 of the damages may be recovered only when a) death of a
NCC, which is the provision on quasi-delict, passenger results; or b) the carrier was guilty of
expressly excludes the cases where there is a “pre- fraud and bad faith even if death does not result. In
existing contractual relation between the parties” the case, Judith and Joyce impute negligence when
from recovering damages. (Versoza v. Baytan, et al., the bus collided with another vehicle. While they
G.R. L-14092, 29 Apr. 1960) propounded on negligence, they did not discuss or
impute fraud or bad faith, or such gross negligence
XPNs: (De-Fra-G) which would amount to bad faith. There being
1. Where the mishap results in the Death of the neither allegation nor proof that respondents acted
passenger; (Art. 1764, NCC) in fraud or in bad faith in performing their duties
2. Where it is proved that the common carrier was arising from their contract of carriage, they are not
guilty of Fraud or bad faith, even if death does liable for moral damages. Since moral damages
not result; or cannot be awarded, it follows that the award of
3. Where the negligence of the carrier is so Gross exemplary damages is also not available, since this
and reckless as to virtually amount to bad faith. kind of damages may only be awarded in addition to
(PAL v. CA et al., G.R. No. 123238, 22 Sept. 2008) moral, temperate, liquidated, or compensatory
damages. (Darines v. Quiñones, G.R. No. 206468, 02
Although the relation of passenger and carrier is Aug. 2017)
"contractual both in origin and nature"
nevertheless, “the act that breaks the contract may 2. STIPULATIONS LIMITING LIABILITY
be also a tort" when said act is done with gross
negligence or with bad faith. (Air France v. Valid stipulations that a common carrier of
Carrascoso, G.R. No. L-21438, 28 Sept. 1966) goods may indicate in a contract in order to
escape liability
NOTE: The current jurisprudential award for the
loss of life of a passenger is P100,000 by way of 1. A stipulation limiting the liability of the
moral damages. (Heirs of Ochoa vs. G & S Transport common carrier for the loss, destruction, or
Corporation, G.R. No. 170071, 09 Mar. 2011) deterioration of the goods to a degree less than
extraordinary diligence, provided it be:

2022 GOLDEN NOTES
Commercial Law
a. In writing, signed by the shipper or Void stipulations in a contract of carriage of

owner; goods (C-R2-U-E-L-E-D)
b. Supported by a valuable consideration
other than the service rendered by the 1. That the common carrier need not observe any
common carrier; and diligence in the Custody of the goods;
c. Reasonable, just, and not contrary to 2. That the goods are transported at the Risk of
public policy. the owner or shipper;
3. That the common carrier’s liability for acts
2. An agreement limiting the common carrier's committed by thieves, or of Robbers who do not
liability for delay on account of strikes or riots. act with grave or irresistible threat, violence or
(Art. 1748, NCC) force, is dispensed with or diminished;
4. Any similar stipulation that is Unreasonable,
3. A stipulation that the common carrier's liability unjust and contrary to public policy;
is limited to the value of the goods appearing in 5. That the common carrier shall Exercise a
the bill of lading unless the shipper or owner degree of diligence less than that of a good
declares a greater value. (Art. 1749, NCC; 1998, father of a family, or a man of ordinary
2002 BAR) prudence in the vigilance over the movables
transported;
4. A contract fixing the sum that may be recovered 6. That the common carrier will not be liable for
by the owner or shipper for the loss, any Loss, destruction, or deterioration of the
destruction, or deterioration of the goods. (Art. goods;
1750, NCC) 7. That the common carrier shall not be
responsible for the acts or omissions of his or its
NOTE: The contract limiting the common carrier's Employees; and
liability cannot be availed of in case of loss, 8. That the common carrier is not responsible for
destruction, or deterioration of the goods, if the the loss, destruction, or deterioration of goods
common carrier, without just cause: on account of the Defective condition of the car,
vehicle, ship, airplane or other equipment used
1. Delays the transportation of the goods; or in the contract of carriage. (Art. 1745, NCC)
2. Changes the stipulated or usual route. (Art.
1747, NCC) Q: Discuss whether the following stipulations in
a contract of carriage of a common carrier are
Even if there is an agreement limiting the liability of valid:
the common carrier in the vigilance over the goods,
the common carrier is still disputably presumed to a. A stipulation limiting the sum that may be
have been negligent in case of its loss, destruction or recovered by the shipper or owner to 90%
deterioration. (Art. 1752, NCC) of the value of the goods in case of loss due
to theft.
Annulment of a stipulation limiting the common
carrier’s liability by the shipper or owner b. A stipulation that in the event of loss,
destruction, or deterioration of goods on
A stipulation limiting the common carrier’s liability account of the defective condition of the
may be annulled by the shipper or owner if the vehicle used in the contract of carriage, the
common carrier refused to carry the goods unless carrier’s liability is limited to the value of
the shipper or owner agreed to such stipulation. the goods appearing in the bill of lading
(Art. 1746, NCC) unless the shipper or owner declares a
higher value. (2002 BAR)

Transportation Law
A: A: YES. There is a legal basis for the claim of Martin

a. Invalid. Article 1745 of the Civil Code provides Nove. The stipulation limiting the carrier’s liability
that a stipulation which dispenses or up to a certain amount “regardless of the actual
diminishes the common carrier’s liability for value of such cargo, whether declared by its shipper
acts committed by thieves or robbers who do or otherwise,” is violative of the requirement of Art.
not act with grave and irresistible force, threat 1750 of the NCC, which provides that stipulations
or violence is unreasonable, unjust, and limiting liability should be fairly and freely agreed
contrary to public policy. upon. A stipulation that denies to the shipper the
right to declare the actual value of his cargoes and
b. Valid. Article 1749 provides that a stipulation to recover, in case of loss or damage, on the basis of
limiting the carrier’s liability to the value of the such stipulation would be invalid.
goods appearing in the bill of lading unless the
shipper or owner declares a higher value, is Limitation of Liability in the Absence of
binding. Declaration of Greater Value
Limitation of Liability to Fixed Amount GR: The liability of the common carrier shall not
exceed the stipulation in a contract of carriage, even
A contract fixing the sum that may be recovered for if the loss or damage results from the carrier's
the loss, destruction, and deterioration of goods is negligence. (Eastern and Australian Shipping Co. v.
binding provided that it is: Great American Insurance Co., GR No. L-37604, 23
Oct. 1981)
1. Just and reasonable under the circumstances;
and XPN: Common carrier’s liability may be extended
2. Has been fairly and freely agreed upon. (Art. beyond the specified amount mentioned if the
1750, NCC) shipper or owner of the goods:
The liability of a common carrier may, by contract, 1. Declares a greater value and;
be limited to a fixed amount, but the agreement 2. Pays corresponding freight. (Art. 1749, NCC)
must be in writing and signed by the shipper or
owner of the goods, besides the other requirements The liability of an airline company for lost baggage
of the law. (Shewaram v. PAL, G.R. No. L-20099, 07 is limited to the amount stated in the ticket unless
July 1966) the passenger declared a higher valuation and paid
additional fare. (Pan American World Airways, Inc. v.
Q: Martin Nove shipped an expensive video IAC, G.R. No. 70462, 11 Aug. 1988)
equipment to a friend in Cebu. Martin had
bought the equipment from Hong Kong for Q: X took a plane from Manila bound for Davao
US$5,000. The equipment was shipped through via Cebu where there was a change of planes. X
M/S Lapu-Lapu under a bill of lading which arrived in Davao safely but to his dismay, his two
contained the following provision in big bold suitcases were left behind in Cebu. The airline
letters: “The limit of the carrier’s liability for any company assured X that the suitcases would
loss or damage to cargo shall be P200 regardless come in the next flight, but they never did. X
of the actual value of such cargo, whether claimed P2,000.00 for the loss of both suitcases,
declared by shipper or otherwise.” The cargo but the airline was willing to pay only P500.00
was totally damaged before reaching Cebu. because the airline ticket stipulated that unless
Martin Nove claimed for the value of his cargo a higher value was declared, any claim for loss
($5,000 or about P100,000) instead of just P200 cannot exceed P250 for each piece of luggage. X
as per the limitation on the bill of lading. Is there reasoned out that he did not sign the stipulation
any legal basis for Nove’s claim? (1987 BAR) and in fact had not even read it. X did not declare
a greater value despite the fact that the clerk had

2022 GOLDEN NOTES
Commercial Law
called the attention to the stipulation in the them. (Maranan vs. Perez, GR No. L-22272, 26 June
ticket. (1998 BAR) 1967)
A: X is bound by the stipulation written in the ticket Q: The AAA Bus Company picks up passengers
because he consented to the terms and conditions along EDSA. X, the conductor, while on board the
thereof from the moment he availed the services of bus, drew his gun and randomly shot the
the carrier. The fact that he did not sign the ticket passengers inside. As a result, Y, a passenger,
and he was not able to declare the true value of his was shot and died instantly. Is AAA Bus Company
luggage is not a valid claim in order for the carrier liable? (2012 BAR)
to pay for the value of the lost luggage. As a general
rule, the liability of the common carrier shall not A: YES. The bus company is liable because common
exceed the stipulation in a contract of carriage even carriers are liable for the negligence or willful act of
if the loss or damage results from the carrier’s its employees even though they acted beyond the
negligence However, it is subject to an exception scope of their responsibility.
provided under Art. 1749 of NCC, as when the
shipper or owner of the goods declares a greater NOTE: Willful acts of the employees include theft. It
value and pays corresponding freight. X, therefore, should be pointed out that the Code of Commerce
is only entitled to P500 for the two pieces of luggage expressly provides that the captain shall be civilly
lost. (Eastern and Australian Shipping Co. v. Great liable to the naviero and the latter to third persons
American Insurance Co., G.R. No. L-37604, 23 Oct. for all thefts committed by the crew, reserving the
1981) right of action against the guilty party. (Aquino and
Hernando, 2016)
But when the goods being shipped are packed in
cartons placed in containers supplied by the carrier Stipulations limiting the liability of common
and the number of cartons is disclosed in the carrier in case of injury or death:
shipping documents, it is the number of cartons and
not of the containers that should be used in GR: The responsibility of a common carrier for the
computing the liability of the carrier for the loss of safety of passengers cannot be dispensed with or
the goods, as it is the cartons that constitute the lessened by stipulation, by posting of notices, by
packages. (Eastern Shipping Lines, Inc. vs. IAC, G.R. statements on tickets, or otherwise. (Art. 1757, NCC)
No. L-71478, 29 May 1987)
XPN: When a passenger is carried gratuitously, a
Liability of the common carrier as regards the stipulation limiting the common carrier’s liability
acts of employees may not be limited by for negligence is valid. (Art. 1758, NCC)
stipulation
NOTE: The passenger must be carried gratuitously.
The common carrier’s responsibility cannot be If it is only a reduction of fare, then any limitation of
eliminated or limited by stipulation, by the posting the common carrier’s liability is not justified. (2001,
of notices, by statements on the tickets or otherwise. 2009 BAR)
(Art. 1760, NCC)
XPN to the XPN: Notwithstanding the exception,
Rationale: The basis of the carrier's liability for common carriers will be liable nevertheless for
assaults on passengers committed by its drivers willful acts or gross negligence.
rests on the principle that it is the carrier's implied
duty to transport the passengers safely. As between
the carrier and the passenger, the former must bear
the risk of wrongful acts or negligence of the
carrier's employees against passengers, since it, and
not the passengers, has power to select and remove

Transportation Law
3. LIMITATIONS UNDER THE MONTREAL place within the territory of another State is not
CONVENTION international carriage for the purposes of the
Montreal Convention. (Art. 1(2), MC)
Montreal Convention
Q: How is carriage performed by several
On 10 Aug. 2015, the Philippine Senate ratified the successive air carriers treated under the
Convention for the Unification of Certain Rules for Montreal Convention?
International Carriage by Air, Montreal, 28 May
1999. A: Carriage to be performed by several successive
carriers is deemed, for the purposes of this
Warsaw Convention Convention, to be one undivided carriage if it has
been regarded by the parties as a single operation,
The Warsaw Convention for Unification of Certain whether it had been agreed upon under the form of
Rules Relating to International Carriage by Air (WC) a single contract or of a series of contracts, and it
provides for rules applicable to international does not lose its international character merely
transportation by air. The Philippines is one of the because one contract or a series of contracts is to be
signatories to the Warsaw Convention. (Santos III v. performed entirely within the territory of the same
Northwest Orient Airlines, G.R. No. 101538, 23 June, State. (Art. 1(3), MC)
1992)
Right of Disposition of Cargo
One of the purposes of the Montreal Convention
(MC) was to harmonize and consolidate the Warsaw Subject to its liability to carry out all its obligations
Convention and related instruments. (Preamble, under the contract of carriage, the consignor has the
MC) right to dispose of the cargo by:
Applicability of the Montreal Convention 1. Withdrawing it at the airport of departure

or destination; or by
The Montreal Convention applies to all 2. Stopping it in the course of the journey on
international carriage of persons, baggage or cargo any landing; or by
performed by aircraft for reward. It applies equally 3. Calling for it to be delivered at the place of
to gratuitous carriage by aircraft performed by an destination or in the course of the journey
air transport undertaking. (Art. 1(1), MC) to a person other than the consignee
originally designated; or by
International Carriage 4. Requiring it to be returned to the airport of
departure. (Art. 12, MC)
International carriage means any carriage in which,
according to the agreement between the parties, the The consignor must not exercise this right of
place of departure and the place of destination, disposition in such a way as to prejudice the carrier
whether or not there be a break in the carriage or a or other consignors and must reimburse any
transshipment, are situated either: expenses occasioned by the exercise of this right.
(Ibid.)
1. Within the territories of two States Parties; or
2. Within the territory of a single State Party if If it is impossible to carry out the instructions of the
there is an agreed stopping place within the consignor, the carrier must so inform the consignor
territory of another State, even if that State is forthwith. (Ibid.)
not a State Party.
If the carrier carries out the instructions of the
Carriage between two points within the territory of consignor for the disposition of the cargo without
a single State Party without an agreed stopping requiring the production of the part of the air

2022 GOLDEN NOTES
Commercial Law
waybill or the cargo receipt delivered to the latter, If the carrier admits the loss of the checked
the carrier will be liable, without prejudice to its baggage, or if the checked baggage has not
right of recovery from the consignor, for any arrived at the expiration of twenty-one days
damage which may be caused thereby to any person after the date on which it ought to have arrived,
who is lawfully in possession of that part of the air the passenger is entitled to enforce against the
waybill or the cargo receipt. (Ibid.) carrier the rights which flow from the contract
of carriage. (Art. 17(3), MC)
The right conferred on the consignor ceases at the
moment when that of the consignee begins in Unless otherwise specified in the Montreal
accordance with the Convention’s provisions on Convention, the term “baggage” means both
delivery of the cargo. Nevertheless, if the consignee baggage and unchecked baggage. (Art. 17(4),
declines to accept the cargo, or cannot be MC)
communicated with, the consignor resumes its right
of disposition. (Ibid.) 3. Damage sustained in the event of the
destruction or loss of, or damage to, cargo upon
Where the supervisor of the consignee signed the condition only that the event which caused the
delivery receipt for the goods shipped, the damage so sustained took place during the
consignee cannot sue the shipping company for carriage by air. (Art. 18(1), MC)
non-delivery of the goods. (National Trucking and
Forwarding Corporation v. Lorenzo Shipping NOTE: The carrier is not liable if and to the
Corporation, G.R. No. 153563, 7 Feb. 2005) extent it proves that the destruction, or loss of,
or damage to, the cargo resulted from one or
Liability under the Montreal Convention more of the following:
The carrier is liable for damage under the following a. Inherent defect, quality or vice of that
instances: cargo;
b. Defective packing of that cargo performed
1. Damage sustained in case of death or bodily by a person other than the carrier or its
injury of a passenger upon condition only that servants or agents;
the accident which caused the death or injury c. An act of war or an armed conflict; or
took place on board the aircraft or in the course d. An act of public authority carried out in
of any of the operations of embarking or connection with the entry, exit or transit of
disembarking; (Art. 17(1), MC) the cargo. (Art. 18(2), MC)
2. Damage sustained in case of destruction or loss For purposes of Art. 18(1), MC, carriage by air
of, or of damage to, checked baggage upon comprises the period during which the cargo is
condition only that the event which caused the in the charge of the carrier. (Art. 18(3), MC)
destruction, loss or damage took place on
board the aircraft or during any period within The period of the carriage by air does not
which the checked baggage was in the charge extend to any carriage by land, by sea or by
of the carrier. (Art. 17(2), MC) inland waterway performed outside an airport.
If, however, such carriage takes place in the
NOTE: The carrier is not liable if and to the performance of a contract for carriage by air,
extent that the damage resulted from the for the purpose of loading, delivery or
inherent defect, quality or vice of the baggage. transshipment, any damage is presumed,
In the case of unchecked baggage, including subject to proof to the contrary, to have been
personal items, the carrier is liable if the the result of an event which took place during
damage resulted from its fault or that of its the carriage by air. If a carrier, without the
servants or agents. (Ibid.) consent of the consignor, substitutes carriage

Transportation Law
by another mode of transport for the whole or Destruction, loss, damage or delay in carriage of
part of a carriage intended by the agreement baggage
between the parties to be carriage by air, such
carriage by another mode of transport is In the carriage of baggage, the liability of the carrier
deemed to be within the period of carriage by in the case of destruction, loss, damage or delay is
air. limited to 1,000 Special Drawing Rights for each
passenger unless the passenger:
4. Damage occasioned by delay in the carriage by
air of passengers, baggage or cargo. 1. Has made, at the time when the checked
baggage was handed over to the carrier, a
NOTE: The carrier shall not be liable for special declaration of interest in delivery at
damage occasioned by delay if it proves that it destination, and
and its servants and agents took all measures 2. Has paid a supplementary sum if the case so
that could reasonably be required to avoid the requires. (Ibid.)
damage or that it was impossible for it or them
to take such measures. NOTE: In that case the carrier will be liable to
pay a sum not exceeding the declared sum,
Compensation in Case of Damage unless it proves that the sum is greater than the
passenger’s actual interest in delivery at
Death or bodily injury of a passenger destination. (Ibid.)
For damages arising in case of death or bodily Destruction, loss, damage or delay in carriage of
injury of a passenger not exceeding 100,000 cargo
Special Drawing Rights for each passenger, the
carrier shall not be able to exclude or limit its In the carriage of cargo, the liability of the carrier
liability. in the case of destruction, loss, damage or delay is
limited to a sum of 17 Special Drawing Rights per
The carrier shall not be liable for damages arising in kilogram, unless the consignor:
case of death or bodily injury to the extent that
they exceed for each passenger 100,000 Special 1. Has made, at the time when the package
Drawing Rights if the carrier proves that: was handed over to the carrier, a special
declaration of interest in delivery at
1. Such damage was not due to the negligence or destination; and
other wrongful act or omission of the carrier or 2. Has paid a supplementary sum if the case so
its servants or agents; or requires. (Ibid.)
2. Such damage was solely due to the negligence or NOTE: In that case the carrier will be liable to
other wrongful act or omission of a third party. pay a sum not exceeding the declared sum,
(Art. 21, MC) unless it proves that the sum is greater than the
consignor’s actual interest in delivery at
Delay in carriage of persons destination. (Ibid.)
In the case of damage caused by delay in the Weight to be considered in case of destruction,
carriage of persons, the liability of the carrier for loss, damage or delay in carriage of cargo
each passenger is limited to 4,150 Special Drawing
Rights. (Art. 22, MC) In the case of destruction, loss, damage or delay of
part of the cargo, or of any object contained therein,
the weight to be taken into consideration in
determining the amount to which the carrier’s

2022 GOLDEN NOTES
Commercial Law
liability is limited shall be only the total weight of terms of the Special Drawing Right at the date
the package or packages concerned. of the judgment. (Art. 23, MC)
Nevertheless, when the destruction, loss, damage or When Limits Not Applicable
delay of a part of the cargo, or of an object contained
therein, affects the value of other packages covered The provisions concerning the limitation of liability
by the same air waybill, or the same receipt or, if in cases of death or bodily injury of a passenger
they were not issued, by the same record preserved and delay in carriage of persons shall not apply if
by other means, the total weight of such package or it is proved that the damage resulted from:
packages shall also be taken into consideration in
determining the limit of liability. (Ibid.) 1. An act or omission of the carrier, its
servants or agents;
As of 28 Dec. 2019, limits of liability have been 2. Done with intent to cause damage or
increased to the following: recklessly; and
3. With knowledge that damage would
1. Passenger death or bodily injury (Art. 17[1],
probably result; and
MC) – no financial limits, however, the carrier
4. In the case of such act or omission of a
shall not be liable for damages exceeding 128,
servant or agent, it is also proved that such
821 Special Drawing Rights (approximately
servant or agent was acting within the
US$183,782) if it proves that it was not
scope of its employment. (Ibid.)
negligent or at fault or such damages is solely
attributable to the negligence or fault of third
Court Not Prevented From Awarding Costs,
parties. The air carrier may make an advance
Expenses
payment to meet the immediate economic
needs of the person entitled to claim
The limitations of liability shall not prevent the
compensation.
court from awarding, in accordance with its own
law, in addition, the whole or part of the court costs
2. Destruction, loss of, or damage or delay to
and of the other expenses of the litigation incurred
baggage (Art. 22(2), MC) – 1,288 Special
by the plaintiff, including interest.
Drawing Rights (approximately US$1,836) per
passenger.
The foregoing provision shall not apply if the
amount of the damages awarded, excluding court
3. Damage caused by delay in the carriage by
costs and other expenses of the litigation, does not
air of passengers (Art. 22(1), MC) – 5,346
exceed the sum which the carrier has offered in
Special Drawing Rights (approximately
writing to the plaintiff within a period of six months
US$7,625). (2019 Revised Limits of Liability
from the date of the occurrence causing the damage,
Under the Montreal Convention of 1999, icao.int)
or before the commencement of the action, if that is
later. (Ibid.)
NOTE: The sums mentioned in terms of Special
Drawing Right in this Convention shall be
Venue for Actions under Montreal Convention
deemed to refer to the Special Drawing Right as
defined by the International Monetary Fund.
An action for damages must be brought, at the
option of the plaintiff, in the territory of one of the
As of 30 June 2021, one (1) SDR is equivalent
States Parties, either before the court of:
to US$1.426420. (International Monetary Fund
SDR Valuation, imf.org)
1. The domicile of the carrier; or
2. Of its principal place of business; or
Conversion of the sums into national currencies
3. Where it has a place of business through which
shall, in case of judicial proceedings, be made
the contract has been made; or
according to the value of such currencies in

Transportation Law
4. Before the court at the place of destination. complaint within the reglementary period. (United
(Art. 33(1), MC) Airlines vs. Uy, G.R. No. 127768, 19 Nov. 1999)
In respect of damage resulting from the death or A claim covered by the Warsaw Convention can no
injury of a passenger, an action may be brought longer be recovered under local law, if the statute of
before one of the aforementioned courts, or: limitations of two years has already lapsed. (PAL. v.
Savillo, G.R. No. 149547, 4 July 2008)
1. In the territory of a State Party in which at the
time of the accident the passenger has his or However, the action filed by a passenger of an
her principal and permanent residence; and airline company for loss of his luggage is not barred
2. To or from which the carrier operates services by the two-year prescriptive period under the
for the carriage of passengers by air, either on Warsaw Convention, where the passenger
its own aircraft, or on another carrier’s aircraft immediately made a demand upon the airline
pursuant to a commercial agreement; and company and the action was delayed because of the
3. In which that carrier conducts its business of evasion of the airline company. (United Air Lines, Inc.
carriage of passengers by air from premises v. CA, G.R. No. 124110, 20 Apr. 2001)
leased or owned by the carrier itself or by
another carrier with which it has a commercial Where an airline company failed to deliver the
agreement. (Art. 33(2), MC) baggage of a passenger on time, a passenger may
maintain an action for damages under the Civil Code
NOTE: Questions of procedure shall be even if he did not file a claim with the airline
governed by the law of the court seized of the company within fourteen days as required by the
case. Warsaw Convention, for he may still sue under the
Civil Code. (Luna v. CA, G.R. No. 100374-75, 27 Nov.
Limitation of Actions 1992)
The right to damages shall be extinguished if an Exoneration from Liabilities

action is not brought within a period of two (2)
years, reckoned from: If the carrier proves that the damage was caused or
contributed to by the negligence or other wrongful
1. The date of arrival at the destination; or from act or omission of the person claiming
2. The date on which the aircraft ought to have compensation, or the person from whom he or she
arrived; or from derives his or her rights, the carrier shall be wholly
3. The date on which the carriage stopped. (Art. or partly exonerated from its liability to the
35, MC) claimant to the extent that such negligence or
wrongful act or omission caused or contributed to
The method of calculating that period shall be the damage.
determined by the law of the court seized of the
case. (Ibid.) When by reason of death or injury of a passenger
compensation is claimed by a person other than the
Despite the express mandate that an action for passenger, the carrier shall likewise be wholly or
damages should be filed within 2 years from the partly exonerated from its liability to the extent that
arrival at the place of destination, such rule shall not it proves that the damage was caused or contributed
be applied where delaying tactics were employed to by the negligence or other wrongful act or
by airline itself in a case where a passenger wishes omission of that passenger. (Art. 20, MC)
to settle his complaint out-of-court but the airline
gave him the runaround, answering the passenger’s NOTE: This exoneration provisions applies to all
letters but not giving in to his demands, hence, liability provisions in the Montreal Convention.
giving the passenger no time to institute the (Ibid.)

2022 GOLDEN NOTES
Commercial Law
Stipulation on Limits, Invalidity of Contractual The air waybill or the cargo receipt shall include:
Provisions and Freedom to Contract
1. An indication of the places of departure and
A carrier may stipulate that the contract of carriage destination;
shall be subject to: 2. If the places of departure and destination are
within the territory of a single State Party, one
1. Higher limits of liability than those provided or more agreed stopping places being within
for in this Convention; or to the territory of another State, an indication of
2. No limits of liability whatsoever. (Art. 25, MC) at least one such stopping place; and
3. An indication of the weight of the consignment.
Any provision tending to relieve the carrier of (Art. 5, MC)
liability or to fix a lower limit than that which is laid
down in this Convention shall be null and void. (Art. Non-compliance with documentary requirements
26, MC) shall not affect the existence or the validity of the
contract of carriage, which shall, nonetheless, be
NOTE: The nullity of any such provision does not subject to the rules of the Convention including
involve the nullity of the whole contract, which shall those relating to limitation of liability. (Art. 9, MC)
remain subject to the provisions of this Convention.
(Ibid.) Advance Payments
Nothing contained in this Convention shall prevent In the case of aircraft accidents resulting in death or
the carrier from refusing to enter into any contract injury of passengers, the carrier shall, if required by
of carriage, from waiving any defenses available its national law, make advance payments without
under the Convention, or from laying down delay to a natural person or persons who are
conditions which do not conflict with the provisions entitled to claim compensation in order to meet the
of this Convention. (Art. 27, MC) immediate economic needs of such persons. Such
advance payments shall not constitute a recognition
Documentary Requirements of liability and may be offset against any amounts
subsequently paid as damages by the carrier. (Art.
In respect of carriage of passengers, an individual 28, MC)
or collective document of carriage shall be delivered
containing: Basis of Claims
1. An indication of the places of departure and In the carriage of passengers, baggage and cargo,
destination; and any action for damages, however founded, whether
under this Convention or in contract or in tort or
2. If the places of departure and destination are otherwise, can only be brought subject to the
within the territory of a single State Party, one conditions and such limits of liability as are set out
or more agreed stopping places being within in this Convention without prejudice to the question
the territory of another State, an indication of as to who are the persons who have the right to
at least one such stopping place. (Art. 3, MC) bring suit and what are their respective rights.
In respect of the carriage of cargo, an air waybill In any such action, punitive, exemplary or any other
shall be delivered. Any other means which non-compensatory damages shall not be
preserves a record of the carriage to be performed recoverable. (Art. 29, MC)
may be substituted for the delivery of an air waybill.
(Art. 4, MC)

Transportation Law
Servants, Agents; Aggregation of Claims If no complaint is made within the times aforesaid,
no action shall lie against the carrier, save in the
If an action is brought against a servant or agent of case of fraud on its part. (Art. 31, MC)
the carrier arising out of damage to which the
Convention relates, such servant or agent, if they Death of Person Liable
prove that they acted within the scope of their
employment, shall be entitled to avail themselves of In the case of the death of the person liable, an action
the conditions and limits of liability which the for damages lies in accordance with the terms
carrier itself is entitled to invoke under this of this Convention against those legally
Convention. representing his or her estate. (Art. 32, MC)
The aggregate of the amounts recoverable from the Arbitration

carrier, its servants and agents, in that case, shall not
exceed the said limits. The parties to the contract of carriage for cargo may
stipulate that any dispute relating to the liability of
Save in respect of the carriage of cargo, the the carrier under this Convention shall be settled by
foregoing provisions shall not apply if it is proved arbitration. (Art. 34(1), MC)
that the damage resulted from an act or omission of
the servant or agent done with intent to cause Such agreement shall be in writing. (Ibid.)
damage or recklessly and with knowledge that
damage would probably result. (Art. 30, MC)
Timely Notice of Complaints
Receipt by the person entitled to delivery of checked

baggage or cargo without complaint is prima facie
evidence that the same has been delivered in good
condition and in accordance with the document of
carriage or with the record preserved by the other
means provided by the Convention.
In the case of damage, the person entitled to

delivery must complain to the carrier forthwith
after the discovery of the damage, and, at the latest:
1. Within seven (7) days from the date of receipt

in the case of checked baggage; and
2. Fourteen (14) days from the date of receipt in
the case of cargo; and
3. In the case of delay, the complaint must be
made at the latest within twenty-one (21) days
from the date on which the baggage or cargo
have been placed at his or her disposal.
Every complaint must be made in writing and given

or dispatched within the times aforesaid.

2022 GOLDEN NOTES
Commercial Law
Montreal Convention vs. Warsaw Convention
MONTREAL CONVENTION WARSAW CONVENTION

Applicability
The Montreal Convention applies to all international The Warsaw Convention applies to all international
carriage of persons, baggage or cargo performed carriage of persons, luggage or goods performed by
by aircraft for reward. It applies equally to gratuitous aircraft for reward. It applies equally to gratuitous
carriage by aircraft performed by an air transport carriage by aircraft performed by an air transport
undertaking. (Art. 1(1), MC) undertaking. (Art. 1(1), WC)
Liabilities
The carrier is liable for damage under the following The carrier is liable under the following instances:
instances: 1. Damage sustained in the event of the death or
wounding of a passenger taking place on board
1. Damage sustained in case of death or bodily injury the aircraft or in the course of any of the
of a passenger upon condition only that the operations of embarking or disembarking;
accident which caused the death or injury took
place on board the aircraft or in the course of any of 2. Loss or damage to any check baggage or goods
the operations of embarking or disembarking; (Art. sustained during the transport by air;
17(1), MC)
3. Delay in the transport by air of passengers,
2. Damage sustained in case of destruction or loss baggage or goods.
of, or of damage to, checked baggage upon
condition only that the event which caused the NOTE: The list is not exclusive.
destruction, loss or damage took place on board the
aircraft or during any period within which the
checked baggage was in the charge of the carrier.
(Art. 17(2), MC)
3. Damage sustained in the event of the destruction

or loss of, or damage to, cargo upon condition
only that the event which caused the damage so
sustained took place during the carriage by air. (Art.
18(1), MC)
4. Damage occasioned by delay in the carriage by air

of passengers, baggage or cargo.
Limitation of Liability
Death or bodily injury of a passenger In the transportation of passengers the liability of
the carrier for each passenger shall be limited to the
For damages arising in case of death or bodily injury sum of 125,000 francs. Where, in accordance with
of a passenger not exceeding 100,000 Special the law of the court to which the case is submitted,
Drawing Rights for each passenger, the carrier shall damages may be awarded in the form of periodical
not be able to exclude or limit its liability. payments, the equivalent capital value of the said
payments shall not exceed 125,000 francs.
The carrier shall not be liable for damages arising in Nevertheless, by special contract, the carrier and the
case of death or bodily injury to the extent that they passenger may agree to a higher limit of liability.
exceed for each passenger 100,000 Special
Drawing Rights if the carrier proves that:

Transportation Law
In the transportation of checked baggage and of

1. Such damage was not due to the negligence or other goods, the liability of the carrier shall be limited to a
wrongful act or omission of the carrier or its sum of 250 francs per kilogram, unless the
servants or agents; or consignor has made, at the time when the package
was handed over to the carrier, a special declaration
2. Such damage was solely due to the negligence or of the value at delivery and has paid a supplementary
other wrongful act or omission of a third party. (Art. sum if the case so requires. In that case the carrier will
21, MC) be liable to pay a sum not exceeding the declared sum,
unless he proves that the sum is greater than the
Delay in carriage of persons actual value to the consignor at delivery.
In the case of damage caused by delay in the carriage As regards objects of which the passenger takes
of persons, the liability of the carrier for each charge himself the liability of the carrier shall be
passenger is limited to 4,150 Special Drawing limited to 5,000 francs per passenger.
Rights. (Art. 22, MC)
Destruction, loss, damage or delay in carriage of

baggage
In the carriage of baggage, the liability of the carrier

in the case of destruction, loss, damage or delay is
limited to 1,000 Special Drawing Rights for each
passenger unless the passenger:
1. Has made, at the time when the checked baggage

was handed over to the carrier, a special
declaration of interest in delivery at destination,
and
2. Has paid a supplementary sum if the case so
requires. (Ibid.)
Destruction, loss, damage or delay in carriage of

cargo
In the carriage of cargo, the liability of the carrier in

the case of destruction, loss, damage or delay is
limited to a sum of 17 Special Drawing Rights per
kilogram, unless the consignor:
1. Has made, at the time when the package was

handed over to the carrier, a special declaration of
interest in delivery at destination; and
2. Has paid a supplementary sum if the case so
requires. (Ibid.)
As of 28 Dec. 2019, limits of liability have been

increased to the following:

2022 GOLDEN NOTES
Commercial Law
1. Passenger death or bodily injury (Art. 17[1], MC)

– no financial limits, however, the carrier shall not
be liable for damages exceeding 128, 821 Special
Drawing Rights (approximately US$183,782) if it
proves that it was not negligent or at fault or such
damages is solely attributable to the negligence or
fault of third parties. The air carrier may make an
advance payment to meet the immediate economic
needs of the person entitled to claim compensation.
2. Destruction, loss of, or damage or delay to

baggage (Art. 22(2), MC) – 1,288 Special Drawing
Rights (approximately US$1,836) per passenger.
3. Damage caused by delay in the carriage by air of

passengers (Art. 22(1), MC) – 5,346 Special
Drawing Rights (approximately US$7,625). (2019
Revised Limits of Liability Under the Montreal
Convention of 1999, icao.int)
Venue for Filing
An action for damages must be brought, at the option An action for damage must be brought at the option of
of the plaintiff, in the territory of one of the States the plaintiff, in the territory of one of the High
Parties, either before the court of: Contracting Parties, either before the court:
1. The domicile of the carrier; or 1. Of the domicile of the carrier; or

2. Of its principal place of business; or 2. Of his principal place of business; or
3. Where it has a place of business through which the 3. Where the ticket was purchased; or
contract has been made; or
4. At the place of destination. (Art. 28(1), WC)
4. Before the court at the place of destination. (Art.
33(1), MC)
In respect of damage resulting from the death or

injury of a passenger, an action may be brought
before one of the aforementioned courts, or:
1. In the territory of a State Party in which at the time

of the accident the passenger has his or her
principal and permanent residence; and
2. To or from which the carrier operates services for

the carriage of passengers by air, either on its own
aircraft, or on another carrier’s aircraft pursuant to
a commercial agreement; and
3. In which that carrier conducts its business of

carriage of passengers by air from premises leased

Transportation Law
or owned by the carrier itself or by another carrier

with which it has a commercial agreement. (Art.
33(2), MC)
Notice of Claim
Receipt by the person entitled to delivery of checked Under the Warsaw Convention, complaint must be
baggage or cargo without complaint is prima facie filed within the following period:
evidence that the same has been delivered in good
condition and in accordance with the document of 1. Three days from receipt of baggage;
carriage or with the record preserved by the other
means provided by the Convention. 2. Seven days from receipt of goods; or
In the case of damage, the person entitled to delivery 3. Fourteen days, in case of delay, counted from the
must complain to the carrier forthwith after the time the baggage was placed at the disposal of the
discovery of the damage, and, at the latest: passenger. (Aquino and Hernando, 2016)
1. Within seven (7) days from the date of receipt in

the case of checked baggage; and
2. Fourteen (14) days from the date of receipt in the
case of cargo; and
3. In the case of delay, the complaint must be made at
the latest within twenty-one (21) days from the
date on which the baggage or cargo have been
placed at his or her disposal.
Prescriptive Period
The right to damages shall be extinguished if an Claim for damages must be brought within two years
action is not brought within a period of two (2) years, reckoned:
reckoned from:
1. From the date of arrival at the destination; or
1. The date of arrival at the destination; or from
2. The date on which the aircraft ought to have 2. From the date on which the aircraft ought to have
arrived; or from arrived; or
3. The date on which the carriage stopped. (Art. 35,
MC) 3. From the date on which the carriage stopped. (Art.
29, WC)

2022 GOLDEN NOTES
Corporation Law
7. The development and implementation of an

III. CORPORATION LAW electronic filing and monitoring system was
prescribed. (Sec. 180, RCC)
(Provisions of B.P. Blg. 68, as amended by
R.A. No. 11232) 8. Stock corporations shall not be required to have
a minimum capital stock, except as otherwise
provided by special law. (Sec. 12, RCC)
R.A No. 11232, otherwise known as the Revised

9. No foreign corporation shall give donations in
Corporation Code of the Philippines (RCC), took
aid of any political party or candidate or for
effect on February 23, 2019, upon completion of its
purposes of partisan political activity. (Sec. 35,
publication in the Manila Bulletin and the Business
RCC)
Mirror on Saturday, February 23, 2019.
10. An arbitration agreement may be provided in

Salient Changes
the AOI or bylaws of an unlisted corporation.
(Sec. 181, RCC)
1. The minimum number of incorporators
required to organize a corporation was
removed, unlike its predecessor – B.P. 68, which
mandated that the number of incorporators A. GENERAL PRINCIPLES
should not be less than five (5). (Sec. 10, RCC)
2. The formation of one-person corporation with Definition of Corporation

a single stockholder is now allowed. (Sec. 10,
RCC) A corporation is an artificial being created by
operation of law, having the right of succession and
3. Corporations now have perpetual existence the powers, attributes, and properties expressly
unless otherwise stated in their articles of authorized by law or incidental to its existence. (Sec.
incorporation (AOI). (Sec. 11, RCC) 2, RCC)
4. Participation and voting via remote Attributes of a Corporation (A-L-S-P-A-P-I)

communication or in absentia is now allowed
during stockholders’ and members’ meetings. 1. It is an Artificial being;
(Secs. 23, 49, 57, and 88, RCC) 2. It is created by operation of Law;
3. It enjoys the right of Succession; and
5. A corporate name has to be distinguishable 4. It has the Powers, Attributes, and Properties
from one already reserved or registered for the expressly authorized by law or Incidental to its
use of another corporation, and no corporate existence.
name shall be allowed if such name is already
protected by law, or its use is contrary to 1. ARTIFICIAL BEING
existing law, rules, and regulations. (Sec. 17,
RCC) A corporation is a legal or juridical person with a
personality separate and distinct from its individual
6. A vacancy in the Board may be temporarily stockholders or members and from any other legal
filled from among the officers of the corporation entity into which it may be connected or related.
when a vacancy prevents the remaining
directors from constituting a quorum and an
emergency action is required to prevent grave,
substantial, and irreparable loss or damage to
the corporation. (Sec. 28, RCC)

Commercial Law
2. CORPORATION AS A CREATION OF LAW OR GOVERNMENT CORPORATIONS

BY OPERATION OF LAW
Q: A Special Audit Team from COA audited the

A corporation is not created by mere agreement of
accounts of Leyte Metropolitan Water District
the incorporators nor by their execution of the AOI.
(LMWD). Subsequently, LMWD received a
There ought to be a law from which the corporation
request for payment of auditing fees from
derives its legal existence. This may be a general law
COA. LMWD General Manager Feliciano sent a
governing the formation of private corporations,
reply informing COA that the water district
which is the RCC, or a special law passed by
could not pay the auditing fees, citing as basis for
Congress to create a government-owned and
his action P.D. 198 as well as R.A. No.
controlled corporation.
6758. Thereafter, Feliciano asked COA for a
refund of all auditing fees LMWD previously
Since Feb. 8, 1935, the legislature has not passed a
paid to COA. The COA Chairman denied LMWD’s
single law creating a private corporation. This is
request.
because the Constitution itself precludes the
passage of such statute, particularly, Sec. 16, Art. XII
Feliciano maintains that Local Water Districts
of the 1987 Constitution which states that “The
(LWDs) are not GOCCs with original charters. He
Congress shall not, except by general law, provide
argues that LWDs are private corporations, and
for the formation, organization, or regulation of
thus, not subject to COA’s jurisdiction. Is an LWD
private corporations.” (Divina, 2020)
created under P.D. 198, as amended, a GOCC
subject to the audit jurisdiction of COA?
The Creation of a Corporation is by Operation of
Law
A: YES. LWDs are GOCCs subject to the audit
jurisdiction of COA. The Constitution and existing
NOTE: Philippine jurisprudence adopted the
laws mandate COA to audit all government agencies,
Concession or Fiat Theory, which states that a
including GOCCs with original charters. An LWD is a
corporation is conceived as an artificial person
GOCC with an original charter.
owing its existence through creation by a sovereign
power. Further, a corporation is without any
The Constitution recognizes two classes of
existence until it has received the imprimatur of the
corporations. The first refers to private
State acting according to law, through the SEC.
corporations created under a general law. The
(Tayag v. Benguet Consolidated, Inc., G.R. No. L-
second refers to GOCCs created by special charters.
23145, 29 Nov. 1968)
Congress cannot enact a law creating a private
corporation with a special charter. Such legislation
Q: Since Feb. 8, 1935, the legislature has not
would be unconstitutional. Private corporations
passed even a single law creating a private
may exist only under a general law. The Constitution
corporation. What provision of the constitution
authorizes Congress to create GOCCs through
precludes the passage of such law? (2008 BAR)
special charters. Since private corporations cannot
have special charters, it follows that Congress can
A: Sec. 16, Art. XII of the 1987 Constitution provides
create corporations with special charters only if
that the Congress shall not, except by general law,
such corporations are government-owned or
provide for the formation, organization, or
controlled. Obviously, LWDs are not private
regulation of private corporations. Government-
corporations because they are not created under the
owned and controlled corporations may be created
Corporation Code. (Feliciano v. COA, et al., G.R. No.
or established by special charters in the interest of
147402, 14 Jan. 2004)
the common good and subject to the test of
economic viability.
Q: Is the Philippine National Red Cross (“PNRC”)
a GOCC?

2022 GOLDEN NOTES
Corporation Law
A: Initially, the Supreme Court held PNRC is not a in these particular matters, the PNRC can be treated
GOCC. Although the PNRC was created by a special as a GOCC. (Liban, et al., v. Gordon, G.R. No. 175352,
charter, it cannot be considered a GOCC in the 18 Jan. 2011, in Divina, 2020; Torres v. De Leon, G.R.
absence of the essential elements of ownership and No. 199440, 18 Jan. 2016)
control by the government. In creating the PNRC as
a corporate entity, Congress was in fact creating a Q: Pursuant to E.O. 123, the Ministry of National
private corporation. However, the constitutional Defense and the Philippine Tourism Authority
prohibition against the creation of private executed a MOA for the development of
corporations by special charters provides no Corregidor. The Philippine Tourism Authority
exception even for non-profit or charitable Board of Directors adopted a Resolution,
corporations. Consequently, the PNRC Charter, approving the creation of a foundation for the
insofar as it created the PNRC as a private development of Corregidor. The Corregidor
corporation and granted it corporate powers, is void Foundation, Inc. was incorporated.
for being unconstitutional.
The Commission on Audit (COA) issued an Audit
Upon a motion for reconsideration, however, the Observation Memorandum noting that certain
Supreme Court held that while PNRC does not have personnel of the Philippine Tourism Authority
government assets and does not receive any who were concurrently rendering services in
appropriation from the Philippine Congress, this Corregidor Foundation, Inc. received honoraria
does not mean that the charter of PNRC is and cash gifts. The Legal and Adjudication
unconstitutional. PNRC has a sui generis status. Office-Corporate of the COA issued Notice of
Disallowance, disallowing in audit the
Although it is neither a subdivision, agency, or honoraria and cash gift paid to said personnel.
instrumentality of the government nor a The personnel argue that Corregidor
government-owned or -controlled corporation or a Foundation, Inc. is a private corporation created
subsidiary thereof, so much so that Senator Gordon under the Corporation Code and, therefore,
was correctly allowed to hold his position as cannot be audited by the COA. Is Corregidor
Chairman thereof concurrently while he served as a Foundation, Inc. a GOCC under the audit
Senator, such a conclusion does not ipso facto imply jurisdiction of the COA?
that the PNRC is a “private corporation” within the
contemplation of the provision of the Constitution A: YES. The Corregidor Foundation, Inc. is a
that must be organized under the Corporation Code. government-owned or controlled corporation
The PNRC enjoys a special status as an important under the audit jurisdiction of the COA. Corregidor
ally and auxiliary of the government in the Foundation, Inc. was organized as a non-stock
humanitarian field in accordance with its corporation under the Corporation Code. It was
commitments under international law. The court issued a certificate of registration by the SEC on 28
cannot all of a sudden refuse to recognize its Oct. 1987 and, according to its Articles of
existence, especially since the issue of the Incorporation, Corregidor Foundation, Inc. was
constitutionality of the PNRC Charter was never organized and to be operated in the public interest.
raised by the parties. (Liban, et al., v. Gordon, G.R. Corregidor Foundation, Inc. was organized
No. 175352, 18 Jan. 2011, in Divina, 2020) primarily to maintain and preserve the war relics in
Corregidor and develop the area's potential as an
As to what sui generis means, the Supreme Court international and local tourist destination.
ruled that the sui generis character of the Philippine Corregidor Foundation, Inc.'s purposes as stated in
National Red Cross requires the Court to approach its AOI are related to the promotion and
controversies involving the PNRC on a case-to-case development of tourism in the country, a declared
basis. The Civil Service Commission has jurisdiction state policy and, therefore, a function public in
over the PNRC if the issue at hand is the character. Even a cursory reading of the statutory
enforcement of labor laws and penal statutes, thus, definitions of "government owned-or controlled

Commercial Law
corporation" readily reveals that a non-stock In order to qualify as a GOCC, a corporation must
corporation may be government-owned or also, if not more importantly, be owned by the
controlled. Further, there is nothing in the law government.
which provides that government-owned or
controlled corporations are always created under The government owns a stock or non-stock
an original charter or special law. (Oriondo v. COA, corporation if it has controlling interest in the
G.R. No. 211293, 04 June 2019) corporation. In a stock corporation, the controlling
interest of the government is assured by its
Q: Dennis A.B. Funa requested the COA for a copy ownership of at least fifty-one percent (51%) of the
of the latest financial and audit report of the corporate capital stock. In a non-stock corporation,
Manila Economic and Cultural Office (MECO). like MECO, jurisprudence shows that the controlling
MECO was organized as a non-stock, non-profit interest of the government is affirmed when "at
corporation under the Corporation Code, in least majority of the members are government
view of the desire of the Philippines and Taiwan officials holding such membership by appointment
to maintain an unofficial relationship in lieu of or designation" or there is otherwise "substantial
official diplomatic ties severed by the One-China participation of the government in the selection" of
policy. Upon receipt of COA’s reply that it does the corporation’s governing board. None of MECO’s
not audit MECO, Funa filed a petition for members, officers or trustees were found to be
mandamus to compel COA to audit MECO as the government appointees or public officers
latter was a GOCC as it performs functions designated by reason of their office.
relating to public needs and is controlled by the
government through the appointment of its The Supreme Court ruled that MECO is a sui generis
board of directors. Is Funa correct? private entity especially entrusted by the
government with the facilitation of unofficial
A: NO. MECO is not owned or controlled by the relations with the people in Taiwan without
government, hence it is not a GOCC or a government jeopardizing the country’s faithful commitment to
instrumentality. GOCCs are "stock or non-stock" the One China policy of the PROC. However, despite
corporations "vested with functions relating to its non-governmental character, MECO handles
public needs" that are "owned by the Government government funds in the form of the "verification
directly or through its instrumentalities." By fees" it collects on behalf of the DOLE and the
definition, three attributes thus make an entity a "consular fees" it collects under Sec. 2(6) of E.O. 15,
GOCC: s. 2001. Hence, under existing laws, the accounts of
MECO pertaining to its collection of such
a. First, its organization as stock or non-stock "verification fees" and "consular fees" are subject to
corporation; the audit jurisdiction of COA. (Funa v. Manila
b. Second, the public character of its function; and Economic and Cultural Office and COA, G.R. No.
c. Third, government ownership over the same. 193462, 4 Feb. 2014)
Possession of all three attributes is necessary to 3. RIGHT TO SUCCESSION

deem an entity a GOCC. In this case, there is not
much dispute that MECO possesses the first and The right of succession of a corporation does not
second attributes. It is the third attribute, which connote that a corporation is immortal. It simply
MECO lacks. means that it has the power to exist continuously,
either by opting to have perpetual existence or to
MECO is not owned or controlled by the extend its corporate life if a fixed term is specified in
government. Organization as a non-stock its AOI. Its capacity for continued existence is not
corporation and the mere performance of functions affected by any changes in the composition of
with a public aspect, however, are not by corporators. (Divina, 2020)
themselves sufficient to consider MECO as a GOCC.

2022 GOLDEN NOTES
Corporation Law
4. POWERS, ATTRIBUTES AND PROPERTIES OF Q: May a corporation enter into a joint venture?
A CORPORATION (1996 BAR)
This means that a corporation can only exercise A: YES. A corporation may enter into a joint venture
powers conferred upon it by law, its AOI, those with another where the nature is in line with the
implied from the conferred powers, or incidental to business authorized by its charter. (Tuason v.
its existence. Any act of the corporation contrary to Bolaños, G.R. No. L-4935, 28 May 1954)
or outside these powers is ultra vires. (Divina, 2020)
As far back as the case of Aurbach v. Sanitary Wares
TEST: Whether the corporate act or transaction is Manufacturing Corporation, (G.R. No. 75875, 75951,
related to or in furtherance of the purposes of the 75975-76, 15 Dec. 1989) the Supreme Court had
corporation. already ruled that a joint venture is a form of
partnership and should thus be governed by the law
For instance, whether or not a corporation may of partnerships. The Supreme Court, however,
acquire property will not only be tested by the recognized a distinction between these two
lawfulness of the consideration but whether such business forms and held that although a corporation
property is necessary to achieve the purpose of the cannot enter into a partnership contract, it may
corporation. however engage in a joint venture with others.
(Divina, 2020)
Thus, a corporation engaged in mining cannot
acquire properties for urban development. (Heirs of Advantages vs. Disadvantages of a Corporation
Antonio Pael v. CA, G.R. No. 133547, 07 Dec. 2001) A (Divina, 2020)
corporation organized as a lending investor cannot
engage in pawnbroking. (Divina, 2020) ADVANTAGES DISADVANTAGES
It may sue and be
The ability of the
Engagement into a Contract of Partnership or a sued, enter into
stockholder to transfer
Joint Venture contracts, and acquire
shares without having
properties in its own
to secure the consent of
Corporations are empowered to enter into a name and in its own
the corporation and/or
partnership, joint venture, merger, consolidation, or right.
other stockholders may
any other commercial agreement with natural and Stockholders are not
result in persons having
juridical persons. (Sec. 35(h), RCC) liable for the
conflicting interests
obligations of the
against the same
Another significant revision under the new law is corporation beyond
corporation.
the express grant of power to corporations to enter their subscription.
into any commercial agreement, including but not It is subject to more
limited to partnership, joint venture, merger, It continues to exist
stringent
consolidation. despite changes in
administrative and
corporators’
reportorial
It shall be noted that under Sec. 36 of the OCC, composition.
requirements.
corporations were expressly allowed to only enter Shares are
into merger or consolidation with other Minority stockholders
transferable even
corporations as a form of corporate combination. may be denied the right
without the consent of
to actively participate
the corporation and
In the past, jurisprudence is replete with cases in the management of
other stockholders.
prohibiting a corporation from entering into a the corporation and are
Management is clearly
partnership contract. (Divina, 2020) subject to the will of the
defined and
majority stockholders.
centralized through its

Commercial Law
board of directors or The term of a Incorporation by the

trustees. partnership may be SEC.
Business activities are established for any
It can mobilize more limited by the powers period of time Has perpetual
capital through the provided by law, its stipulated by the existence, unless its
issuance of its shares. AOI, and those which partners. AOI provide otherwise.
are incidental thereto. Number of Formators
Any person,
Joint Account vs. Partnership (Divina, 2020)
partnership,
association, or
JOINT ACCOUNT PARTNERSHIP
corporation, singly or
Has no firm name and jointly with others but
is conducted in the May be organized by at not more than 15.
Has a firm name.
name of the ostensible least 2 persons.
partner. NOTE: A corporation
with a single
Has no juridical
Has juridical stockholder is
personality and can sue
personality and may considered a One
or be sued only in the
sue or be sued under Person Corporation.
name of the ostensible
its firm name
partner. Powers
Has no common fund. Has a common fund. GR: May exercise any
power authorized by
The ostensible partner All general partners May exercise only such
the partners.
manages its business have the right of powers as may be
operations. management. conferred by law and
XPN: Acts which are
its AOI, those implied
contrary to law,
Liquidation may, by therefrom or incidental
Liquidation thereof can morals, good customs,
agreement, be thereto.
only be done by the public order, public
entrusted to a partner policy.
ostensible partner.
or partners.
Management
Partnership vs. Corporation Managed by the

The business of a
Managing Partner, or
corporation is
PARTNERSHIP CORPORATION in the absence of
generally conducted by
As to Creation and Governing Law designation, by any of
the Board of Directors.
Created by the the General Partners.
Created by mere
operation of law and
agreement of the Extent of Liability to Third Persons
governed by the
parties and governed
Revised Corporation
by the Civil Code. GR: Partners are liable
Code.
personally and
Commencement of Juridical Personality and Stockholders are liable
subsidiarily
Term of Existence only to the extent of the
(sometimes solidarily)
Existence of the shares subscribed by
From the moment of for partnership debts
corporation them whether paid or
the meeting of minds to third persons,
commences from the not.
of the partners.
date of issuance of the XPN: Limited partner
Certificate of

2022 GOLDEN NOTES
Corporation Law
Right of Succession in the 60-40 Filipino equity ownership requirement

in the corporation, then it may apply the
No right of succession.
"grandfather rule." With that, the use of the
(i.e., a partnership
Has right of succession. Grandfather Rule as a “supplement” to the Control
dissolves upon death
Test is not proscribed by the Constitution or the
of a partner)
Philippine Mining Act of 1995.
Transferability of Interest
A stockholder has the The Grandfather Rule implements the intent of the
A partner cannot Filipinization provisions of the Constitution. (Narra
right to transfer his
transfer his interest in Nickel Mining and Development Corp., et al. v.
shares without prior
the partnership Redmont Consolidated Mines Corp., G.R. No. 195580,
consent of the other
without the consent of 28 Jan. 2015; SEC Opinion No. 16-15)
stockholders, subject to
all the other existing
limitations embodied in
partners.
the AOI. a. CONTROL TEST
Dissolution
It is a mode of determining the nationality of a
May be dissolved any
Can only be dissolved corporation engaged in nationalized areas of
time by the will of any
with the consent of the activities, provided for under the Constitution and
or all of the partners.
State. other applicable laws, where corporate
shareholders with foreign shareholdings are
Death, civil
Death or insolvency of present, by ascertaining the nationality of the
interdiction, and
shareholders will note controlling stockholder of the corporation. If the
insolvency of a partner
result to dissolution of capital of the investing Corporation is at least 60%
dissolve the
the corporation. owned by Filipinos, then the entire shareholdings of
partnership.
the investing Corporation shall be recorded as
Filipino-owned thus making both the investing and
1. NATIONALITY OF CORPORATIONS investee - corporations Philippine national. (Divina,
2021)
Tests in Determining the Nationality of
Corporations In determining the nationality of a corporation, the
control test uses the nationality of the controlling
1. Place of Incorporation test stockholders or members of the corporation.
2. Control test
3. Grandfather rule A corporation organized/incorporated abroad and
registered as doing business in the Philippines
There are various tests to determine the nationality under the Corporation Code, of which 100% of the
of a corporation. The place of incorporation test is capital stock outstanding and entitled to vote is
applied if the corporation is not engaged in activities wholly owned by Filipinos, may be considered a
reserve, in whole or in part, for Filipinos. Under such Philippine National under the Foreign Investments
test, the nationality of the corporation is determined Act of 1991. This is the only exception to the place
by the state of incorporation. of incorporation test. (SEC Opinion No. 04-14, 3
Mar. 2004; De Leon, 2010).
However, with respect to a corporation engaged in
nationalized areas of activities, provided for under Who are Considered as Philippine Nationals
the Constitution and other laws, the primary mode
of determining the nationality is the control test. Under R.A. No. 7042 (Foreign Investments Act of
1991), other than a citizen of the Philippines, the
When in the mind of the Court, there is doubt, based following are also considered Philippine Nationals:
on the attendant facts and circumstances of the case,

Commercial Law
1. Corporations organized under Philippine laws nationality of the second or even subsequent tier of
of which at least sixty percent (60%) of the ownership to determine the nationality of the
capital stock outstanding and entitled to corporate shareholder.
vote is owned and held by Filipino citizens.
Thus, to arrive at the actual Filipino ownership and
2. Corporations organized abroad and registered control in a corporation, both the direct and indirect
as doing business in the Philippines under the shareholdings in the corporation are determined. In
Corporation Code of which 100% of the the case of a multi-tiered corporation, the stock
capital stock outstanding and entitled to attribution rule must be allowed to run
vote is wholly owned by Filipinos or a trustee continuously along the chain of ownership until it
of funds for pension or other employee finally reaches the individual stockholders. (Divina,
retirement or separation benefits, where the 2020)
trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the The purpose of this rule is to trace the nationality of
benefit of Philippine nationals: the stockholder of investor corporations to
ascertain the nationality of the corporation where
NOTE: R.A. No. 7042 provides that where a the investment is made. (SEC Opinion, 4 May 1987,
corporation and its non-Filipino stockholders as cited in Divina, 2020)
own stocks in a SEC-registered enterprise, at
least 60% of the capital stock outstanding and Rules Governing the Application of the
entitled to vote of each of both corporations and Grandfather Rule
at least 60% of the members of the Board of
Directors of each of both corporations must be 1. The grandfather rule should be used in
citizens, in order that the corporation shall be determining the nationality of a corporation
considered a Philippine national. (DOUBLE engaged in a partly nationalized activity. This
60% RULE) applies in cases where the stocks of a
corporation are owned by another corporation
NOTE: The fact that the religious organization has with foreign stockholders exceeding 40% of the
no capital stock does not suffice to escape the capital stock of the corporation. (SEC-OGC
constitutional inhibition, since it is admitted that its Opinion No. 10-31, 9 Dec. 2010)
members are of foreign nationality. The purpose of
the 60% requirement is obviously to ensure that 2. The Grandfather Rule will not apply in cases
corporations or associations allowed to acquire where the 60-40 Filipino-alien equity
agricultural land or to exploit natural resources ownership in a particular natural resource
shall be controlled by Filipinos; and the spirit of the corporation is not in doubt. If the stockholder
Constitution demands that in the absence of capital corporation is 60% or more owned by Filipinos,
stock, the controlling membership should be all the stock held by the stockholder
composed of Filipino citizens. (Register of Deeds v. corporation is deemed to be held by Filipinos.
Ung Siu Si Temple, G.R. No. L-6776, 21 May 1955) (DOJ Opinion No. 19, s. 1989)
b. GRANDFATHER RULE 3. When there is doubt as to the actual extent of

Filipino equity in the investee corporation, the
This is the method by which the percentage of SEC is not precluded from using the
Filipino equity in a corporation engaged in Grandfather Rule. (SEC-OGC Opinion No. 22-07,
nationalized and/or partly nationalized areas of 7 Dec. 2007)
activities, provided for under the Constitution and
other applicable laws, is accurately computed, in
cases where corporate shareholders with foreign
shareholdings are present, by attributing the

2022 GOLDEN NOTES
Corporation Law
Q: What is the prevailing mode of determining ownership. The application of the control test will
the nationality of corporations engaged in already yield the result that the company is a
nationalized activities? Philippine national. The grandfather rule no longer
applies. (Leo Querubin v. COMELEC, G.R. No. 218787,
A: The "control test" is the prevailing mode of 08 Dec. 2015; Divina, 2021)
determining the nationality of corporations
engaged in nationalized activities. However, when Q: Redmont, a mining company, sought to
in the mind of the Court there is doubt as to where invalidate the Mining Production and Sharing
beneficial ownership and control reside, based on Agreement (MPSA) applications of three
the attendant facts and circumstances of the case, domestic mining companies, namely: Narra,
then it may apply the "grandfather rule." Tesoro and McArthur, on the ground that at least
60% of the capital stock of Narra, Tesoro, and
In fact, the Control Test can be, as it has been, McArthur are owned and controlled by MBMI, a
applied jointly with the Grandfather Rule to 100% Canadian corporation; thus they were
determine the observance of foreign ownership disqualified to engage in mining activities
restriction in nationalized economic activities. The through MPSAs, which are reserved only for
Control Test and the Grandfather Rule are not, as it Filipino citizens.
were, incompatible ownership-determinant
methods that can only be applied alternative to each Narra, Tesoro, and McArthur claimed that the
other. Rather, these methods can, if appropriate, be issue on nationality should not be raised since
used cumulatively in the determination of the they are in fact Philippine Nationals as 60% of
ownership and control of corporations engaged in their capital is owned by citizens of the
fully or partly nationalized activities. (Narra Nickel Philippines. They asserted that though MBMI
Mining and Development Corp. v. Redmont owns 40% of the shares of PLMDC, SMMI, and
Consolidated Mining Corp., G.R. No. 195580, 21 April MMC (which in turn each own majority shares of
2014) Narra, McArthur, and Tesoro, respectively), the
shares of MBMI will not make it the owner of at
The Grandfather Rule, standing alone, should not be least 60% of the capital stock of each of
used to determine the Filipino ownership and petitioners. They added that the best tool used
control in a corporation, as it could result in an in determining the nationality of a corporation
otherwise foreign corporation rendered qualified to is the “control test,” embodied in Sec. 3 of RA
perform nationalized or partly nationalized 7042 or the Foreign Investments Act of 1991.
activities. Hence, it is only when the Control Test is
first complied with that the Grandfather Rule may The controversy reached the CA, which used the
be applied. Put in another manner, if the subject grandfather rule to hold that MBMI in effect
corporation's Filipino equity falls below the owned majority of the common stocks of Narra,
threshold of 60%, the corporation is immediately et al., and thus the latter were foreign
considered foreign-owned, in which case, the need corporations.
to resort to the Grandfather Rule disappears. (Narra
Nickel Mining and Development Corp. v. Redmont a. Was the CA wrong in applying the
Consolidated Mining Corp., G.R. No. 195580, 28 Jan. Grandfather Rule instead of the Control
2015) Test?
The Supreme Court stressed, however, that when b. Will the Grandfather Rule apply only when
the 60% Filipino ownership, is never in doubt, the less than 60% of the capital stock are
control test prevails. In the relevant case, it was held Filipino-owned? (2016 BAR)
that the petition is severely wanting in facts and
circumstances to raise legitimate challenges to the
joint venture company's 60-40 Filipino-Foreigner

Commercial Law
A: exists in the present case that gives rise to a

a. NO. Basically, there are two acknowledged tests reasonable suspicion that the Filipino
in determining the nationality of a corporation: shareholders do not actually have the requisite
the control test and the grandfather rule. The number of control and beneficial ownership in
"control test" is still the prevailing mode of petitioners Narra, Tesoro, and McArthur.
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Moreover, the ultimate Filipino ownership of
Art. XII, of the 1987 Constitution, entitled to the shares must first be traced to the level of the
undertake the exploration, development, and Investing Corporation and added to the shares
utilization of the natural resources of the directly owned in the Investee Corporation.
Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and Concluding from the above-stated facts, it is
circumstances of the case, in the 60-40 Filipino- quite safe to say that petitioners McArthur,
equity ownership in the corporation, then it Tesoro and Narra are not Filipino since MBMI, a
may apply the "grandfather rule". 100% Canadian corporation, owns 60% or
more of their equity interests. Such conclusion
b. NO. The assertion of Narra, et al. that “doubt” is derived from grandfathering petitioners’
only exists when the stockholdings are less than corporate owners, namely: MMI, SMMI and
60% fails to convince this Court. It would be PLMDC.
ludicrous to limit the application of the said
word only to the instances where the Hence, the Court is correct in using the
stockholdings of non-Filipino stockholders are Grandfather Rule in determining the nationality
more than 40% of the total stockholdings in a of the petitioners. (Narra Nickel Mining and
corporation. The corporations interested in Development Corp. v. Redmont Consolidated
circumventing our laws would clearly strive to Mines Corp, G.R. No. 195580, 28 Jan. 2015)
have “60% Filipino Ownership” at face value. It
would be senseless for these applying NOTE: "Corporate layering" is admittedly allowed
corporations to state in their respective articles by the FIA; but if it is used to circumvent the
of incorporation that they have less than 60% Constitution and pertinent laws, then it becomes
Filipino stockholders since the applications will illegal.
be denied instantly. Thus, various corporate
schemes and layerings are utilized to Nationalized Activities Reserved for Filipinos
circumvent the application of the Constitution. under the Constitution and Special Laws (12th
Negative List, E.O. 175, s. 2022)
A corporation that complies with the 60-40
Filipino to foreign equity requirement can be 100% Filipino Owned
considered a Filipino corporation if there is no
doubt as to who has the “beneficial ownership” Zero Percent (0%) Foreign Equity
and “control” of the corporation. In this case, a (Co-Fi-A-M-Ma-N-Co-Mi-Se-US$2.5M)
further investigation as to the nationality of the
personalities with the beneficial ownership and 1. Cooperatives; (Art. 26, Ch. III, R.A. No. 6938)
control of the corporate shareholders in both 2. Manufacture of Firecrackers and other
the investing and investee corporations is pyrotechnic devices; (Sec. 5, R.A. No. 7183)
necessary. “Doubt” refers to various indicia that 3. Manufacture, repair, stockpiling and/or
the “beneficial ownership” and “control” of the distribution of biological, chemical, and
corporation do not in fact reside in Filipino radiological weapons and Anti-personnel
shareholders but in foreign stakeholders. Even mines; (Various treaties to which the
if at first glance the petitioners comply with the Philippines is a signatory and conventions
60-40 Filipino to foreign equity ratio, doubt supported by the Philippines)

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Corporation Law
4. Mass media, except recording; 70% Filipino Owned

5. Utilization of Marine resources; (Sec. 2, Art. XII,
1987 Constitution) Up to Twenty Percent (30%) Foreign Equity
6. Manufacture, repair, stockpiling and/or (Ad-Pawn)
distribution of Nuclear weapons; (Sec. 8, Art. II,
1987 Constitution) 1. Advertising; (Sec. 11(2), Art. XVI, 1987
7. Cockpits; (Sec. 5, P.D. 449) Constitution) and
8. Small-scale Mining; (Sec. 3, R.A. No. 7076) 2. Corporations engaged in Pawnshop business.
9. Private Security agencies; (Sec. 4, R.A. No. 5487) (Sec. 8, P.D. 114)
and
10. Retail trade enterprises with paid-up capital of 60% Filipino Owned
less than US$2.5 M. (Sec. 5, R.A. No. 8762)
Up to Twenty Percent (40%) Foreign Equity
80% Filipino Owned (Go-L-E-A-R-N-C-U-P-I-D-Co)
Up to Twenty Percent (20%) Foreign Equity (P-R-C) 1. Contracts for the supply of materials, goods, and
commodities to GOCC, agency or municipal
1. Private Radio Communications network (R.A. corporation; (Sec. 1, R.A. No. 5183)
No. 3846) 2. Ownership of private Lands; (Sec. 7, Art. XII,
1987 Constitution; Sec. 22, Ch. 5, C.A. 141; Sec. 4,
75% Filipino Owned R.A. No. 9182)
3. Ownership/establishment and administration
Up to Twenty Percent (25%) Foreign Equity of Educational institutions; (Sec. 4, Art. XIV,
(Lo-R-D-F) 1987 Constitution)
4. Adjustment Companies; (Sec. 323, P.D. 613)
1. Contracts for the construction and repair of 5. Culture, production, milling, processing, trading
Locally-funded public works (Sec. 1, C.A. 541, excepting retailing, of rice and corn and
L.O.I. 630) except: acquiring, by barter, purchase or otherwise,
a. infrastructure/development projects Rice and corn and the by-products thereof; (Sec.
covered in R.A. No. 7718; and 5, P.D. 194)
b. projects which are foreign funded or 6. Exploration, development and utilization of
assisted and required to undergo Natural resources; (Sec. 2, Art. XII, 1987
international competitive bidding; (Sec. Constitution)
2(a), R.A. No. 7718) 7. Ownership of Condominium units where the
common areas in the condominium project are
2. Private Recruitment, whether for local or co-owned by the owners of the separate units or
overseas employment; (Art. 27, P.D. 442) owned by a corporation; (Sec. 5, R.A. No. 4726)
3. Contracts for the construction of Defense- 8. Operation and management of public Utilities;
related structures; (Sec. 1, C.A. 541) and (Sec. 11, Art. XII, Constitution; Sec. 16, C.A. 146)
4. Under the Flag Law, in the purchase of articles 9. Project Proponent and Facility Operator of a
for the Government, preference shall be given BOT project requiring a public utilities
to materials and supplies produced, made, or franchise; (Sec. 11, Art. XII, Constitution; Sec. 2a,
manufactured in the Philippines, and to R.A. No. 7718)
domestic entities. “Domestic entity” means any 10. Manufacture, repair, storage and/ or
citizen of the Philippines or commercial distribution of products/ Ingredients requiring
company at least 75% of the capital of which is PNP clearance; (R.A. No. 7042 as amended by
owned by citizens of the Philippines. (Sec. 2, C.A. R.A. No. 8179)
138) 11. Operation of Deep-Sea commercial fishing
vessel; (Sec. 27, R.A. No. 8550) and

Commercial Law
12. Corporations engaged in Coastwise shipping. Teves, G.R. No. 176579, 28 June 2011; Sec. 19, Art. II,
(Sec. 806, P.D. 1464) 1987 Constitution)
40% Filipino Owned Q: Following the decision of the Court in the case
of Gamboa v. Teves, the SEC issued a
Up to Twenty Percent (60%) Foreign Equity Memorandum Circular (SEC-MC No. 8), which
[F-I-(SEC)] are guidelines on compliance with the Filipino-
foreign ownership requirement prescribed in
1. Financing companies regulated by the SEC (Sec. the Constitution and/or existing laws by
6, R.A. No. 5980, as amended by R.A. No. 8556) corporations engaged in nationalized and partly
2. Investment houses regulated by the SEC (Sec. 5, nationalized activities. The dispositive portion
P.D. 129, as amended by R.A. No. 8366) of the Gamboa Decision stated that the term
‘capital’ referred only to shares of stock entitled
Q: Bell Philippines, Inc. (BellPhil.) is a public to vote in the election of directors, while there
utility company, duly incorporated and were certain statements made in the body of the
registered with the SEC. Its authorized capital Resolution to the effect that the 60-40 Filipino-
stock consists of voting common shares and foreign ownership requirement applies to each
non-voting preferred shares, with equal par class of shares, whether voting or non-voting.
values of P100.00/share. Currently, the issued Hence, Roy filed a case alleging that SEC-MC No.
and outstanding capital stock of BellPhil 8 is not compliant with the Gamboa Decision and
consists only of common shares shared between Resolution as it did not apply the 60 to 40
Bayani Cruz, a Filipino with 60% of the issued Filipino-foreign ownership requirement
common shares, and Bernard Fleet, a Canadian, separately to each class of share. Is Roy correct?
with 40%.
A: NO. While there is a passage in the body of the
To secure additional working fund, BellPhil Gamboa Resolution that might have appeared
issued preferred shares to Bernard Fleet contrary to the fallo of the Gamboa Decision, the
equivalent to the currently outstanding definiteness and clarity of the fallo of the Gamboa
common shares. A suit was filed questioning the Decision must control over the obiter dictum in the
corporation action on the ground that the Gamboa Resolution.
foreign equity holdings in the company would
now exceed 40% foreign equity limit allowed The Gamboa Decision already held, in no uncertain
under the Constitution for public utilities. Rule terms, that what the Constitution requires is "full
on the legality of Bernard Fleet’s current and legal beneficial ownership of 60 percent of the
holdings. (2013 BAR) outstanding capital stock, coupled with 60 percent
of the voting rights must rest in the hands of Filipino
A: The holdings of Bernard Fleet equivalent to the nationals." And, precisely that is what SEC-MC No. 8
outstanding common shares is illegal. His holdings provides, viz.: “For purposes of determining
of preferred shares could not exceed 40%. Since the compliance with the constitutional or statutory
constitutional requirement of 60% Filipino ownership, the required percentage of Filipino
ownership of the capital of public utilities applies ownership shall be applied to BOTH (a) the total
not only to voting control but also to beneficial number of outstanding shares of stock entitled to
ownership of the corporation, it should also apply to vote in the election of directors; AND (b) the total
the preferred shares. Preferred shares are also number of outstanding shares of stock, whether or
entitled to vote in certain corporate matters. The not entitled to vote." (Roy v. Herbosa, G.R. No.
state shall develop a self-reliant and independent 207246, 18 Apr. 2017, J. Caguioa)
national economy effectively controlled by Filipinos
The effective control here should be mirrored
across the board on all kinds of shares. (Gamboa v.

2022 GOLDEN NOTES
Corporation Law
2. DOCTRINE OF SEPARATE JURIDICAL entered into a Joint Venture Agreement with

PERSONALITY SBMA, Biwater and DMCI. Pursuant to this
agreement, Subic Water – a new corporate entity
The doctrine of corporate juridical personality – was incorporated, with the following equity
states that a corporation is a juridical entity with participation from its shareholders: SBMA 20%;
legal personality separate and distinct from those OCWD 10%; Biwater 30%; and DMCI 40%.
acting for and, in its behalf, and, in general, from the
people comprising it. (Francisco v. Mallen Jr., G.R. No. Subic Water was granted the franchise to
173169, 22 Sept. 2010) operate and to carry on the business of
providing water and sewerage services in the
Q: An employee of Price Richardson Corporation Subic Bay Free Port Zone, as well as in Olongapo
executed a sworn affidavit at the NBI’s Interpol City. Hence, Subic Water took over OCWD’s
Division, alleging that Price Richardson was water operations in Olongapo City. To finally
"engaged in boiler room operations, wherein settle their money claims against each other,
the company sells non-existent stocks to Olongapo City and OCWD entered into a
investors using high pressure sales tactics." The compromise agreement.
SEC filed before the DOJ its complaint against,
among with its incorporators and directors, To enforce the compromise agreement,
Price Richardson, for violation of Art. 315(1)(b) Olongapo City filed a motion for the issuance of
of the Revised Penal Code (RPC) and Secs. a writ of execution with the RTC. OCWD’s former
26.3 and 28 of the Securities Regulation Code counsel filed a manifestation alleging that
(SRC). Velarde-Albert was its Director for OCWD had already been dissolved and that
Operations and Resnick was its Associated Subic Water is now the former OCWD. Because
Person. Can Velarde-Albert and Resnick be of this assertion, Subic Water also filed a
indicted for violations of the SRC and the RCC? manifestation informing the RTC that as borne
out by the articles of incorporation and general
A: NO. Velarde-Albert and Resnick cannot be information sheet of Subic Water, OCWD is not
indicted for violations of the SRC and the RPC. Subic Water. The manifestation also indicated
Petitioner failed to allege the specific acts of that OCWD was only a ten percent (10%)
respondents Velarde-Albert and Resnick that could shareholder of Subic Water; and that its 10%
be interpreted as participation in the alleged share was already in the process of being
violations. There was also no showing, based on the transferred to Olongapo City pursuant to a Deed
complaints, that they were deemed responsible for of Assignment.
Price Richardson's violations. To be held criminally
liable for the acts of a corporation, there must be a Can Subic Water be made liable under the writ
showing that its officers, directors, and of execution issued by RTC in favor of Olongapo
shareholders actively participated in or had the City?
power to prevent the wrongful act. A corporation’s
personality is separate and distinct from its officers, A: NO. OCWD and Subic Water are two separate and
directors, and shareholders. (SEC v. Price Richardson different entities. Subic Water clearly demonstrated
Corp, G.R. No. 197032, 26 July 2017) that it was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of
Q: Olongapo City filed a complaint for sum of Subic Water. As a mere shareholder, OCWD’s
money and damages against Olongapo City juridical personality cannot be equated nor
Water District (OCWD). It alleged that OCWD confused with that of Subic Water. It is basic in
failed to pay its electricity bills to Olongapo City Corporation Law that a corporation is a juridical
and remit its payment under the contract to pay, entity vested with a legal personality separate and
pursuant to OCWD’s acquisition of Olongapo distinct from those acting for and, in its behalf, and,
City’s water system. In the interim, OCWD in general, from the people comprising it. Under this

Commercial Law
corporate reality, Subic Water cannot be held liable It should be noted in this regard that while Nuccio
for OCWD’s corporate obligations in the same was the signatory of the loan and the money was
manner that OCWD cannot be held liable for the delivered to him, the proceeds of the loan were
obligations incurred by Subic Water as a separate unquestionably intended for NSI’s proposed
entity. (Olongapo City v. Subic Water and Sewerage business plan. That the business did not materialize
Co., Inc., G.R. No. 171626, 06 Aug. 2014) is not also sufficient proof to justify a piercing, in the
absence of proof that the business plan was a
Q: Puyat granted a loan to NS International, Inc. fraudulent scheme geared to secure funds from the
(NSI). The loan was made pursuant to the respondent for the petitioners’ undisclosed goals.
Memorandum of Agreement and Promissory NSI’s liability should not attach to Nuccio. (Saverio v.
Note between Puyat and NSI, represented by Puyat, G.R. No. 186433, 27 Nov. 2013)
Nuccio. It was agreed that Puyat would extend a
credit line with a limit of P500,000.00 to NSI, to Q: Richard owns 90% of the shares of the capital
be paid within thirty (30) days from the time of stock of GOM Co. On one occasion, GOM
the signing of the document. The loan carried an represented by Richard as President and
interest rate of 17% per annum, or at an General Manager executed a contract to sell a
adjusted rate of 25% per annum if payment is subdivision lot in favor of Tomas. For failure of
beyond the stipulated period. NSI and Nuccio GOM to develop a subdivision, Tomas filed an
received a total amount of P300,000.00 and action for rescission and damages against GOM
certain machinery intended for their business. and Richard. Will the action prosper? Explain
The proposed business, however, failed to (1996 BAR)
materialize.
A: The action will prosper against GOM Corporation
When the petitioners defaulted in the payment but not against Richard. Richard has a separate and
of the loan, Puyat filed a collection suit alleging distinct personality from GOM. His mere ownership
mainly that the NSI and Nuccio still owe him the of 90% of the shares of the capital stock of GOM does
value of the machinery. The RTC ordered them, not make him one and the same as the corporation.
jointly and severally, to pay the balance. The CA Mere ownership by a single stockholder, or by
also affirmed the RTC ruling that they are one another corporation, of all or nearly all of the capital
and the same. Did the CA commit a reversible stock of a corporation is not itself a sufficient ground
error in affirming the RTC’s decision holding for disregarding the separate corporate personality.
them jointly and severally liable for the amount (Secosa v. Heirs of Erwin Suarez Francisco, G.R. No.
claimed? 160039, 29 June 2004)
A: YES. Piercing the veil of corporate fiction is not Q: A contract of sale was entered into between
justified. The NSI and Nuccio are not one and the petitioner DHLFMC and respondent ASIAMED
same. The records of the case do not show that whereby the former agreed to purchase
Nuccio had control or domination over NSI’s machines from the latter for a consideration of
finances. The mere fact that it was Nuccio who, on P31 million to be paid no later than (2) days
behalf of the corporation, signed the MOA is not from the date of delivery. Despite receiving the
sufficient to prove that he exercised control over the machines, with invoices signed by Anthony and
corporation’s finances. Neither the absence of a Alejandro, DHLFMC did not pay the whole
board resolution authorizing him to contract the consideration which led ASIAMED to file a
loan nor NSI’s failure to object thereto supports this complaint for sum of money with a writ of
conclusion. These may be indicators that, among preliminary attachment against the DHLFMC
others, may point to the proof required to justify the and Anthony demanding the payment of the
piercing the veil of corporate fiction, but by balance of the contract. The RTC found DHLFMC
themselves, they do not rise to the level of proof and Anthony jointly and severally liable. On
required to support the desired conclusion. appeal, the CA ruled that the DHLFMC and

2022 GOLDEN NOTES
Corporation Law
Anthony were estopped from raising the letter demanding the reimbursement of
separate juridical personality of DHLFMC in P420,000, but Tan refused.
view of their denial of the allegation that
DHLFMC "[was] an entity representing itself to Union Bank then debited the available balance
be a corporation duly organized and existing," in Tan’s account as a set-off, and thereafter
stating that they "never represented that instituted a Complaint for Sum of Money for the
[petitioner] DHLFMC [was] a corporate entity recovery of the remaining balance. Tan argues
duly organized and existing. Hence, he should be that Union Bank should not be allowed to
held solidarily liable. Are the petitioners recover the amount erroneously deposited in
estopped from invoking the separate juridical his account because of Union Bank’s own gross
personality of DHLFMC? negligence. On an appeal before the CA, Tan
named Yon Mitori as co-appellant. In appealing
A: YES. Petitioners do not dispute that they to the Supreme Court, Yon Mitori was named as
specifically denied the allegation regarding sole petitioner in the Petition.
petitioner DHLFMC's corporate circumstances, the
truth being that the petitioners never represented a. Is Yon Mitori a real party in interest?
that petitioner DHLFMC is a corporate entity duly b. Is Tan obligated to return the value of the
organized and existing under and by virtue of the BPI Check?
laws of the Republic of the Philippines. Petitioners
merely insist that petitioner Anthony was not A:
shown to have acted in bad faith, and thus, cannot a. NO. Yon Mitori has no separate juridical
be held solidarily liable with petitioner personality. A single proprietorship is not
DHLFMC. However, petitioners do not point to considered a separate juridical person under
anything on record to counter their own specific the Civil Code. The Petition should have been
denial that would establish DHLFMC's existence as filed in Tan's name, the latter being the real
a corporation with separate juridical personality. party in interest who possesses the legal
(Dee Hwa Liong Foundation v. ASIAMED, G.R. No. standing to file this Petition. Nevertheless, the
205638, 23 Aug. 2017) Court permits the substitution of Tan as
petitioner. Sec. 4, Rule 10 of the Rules of Court
Q: Rodriguez Tan, doing business under the provides that “a defect in the designation of the
name and style of Yon Mitori, is a depositor parties and other clearly clerical or
maintaining a Current Account with Union Bank. typographical errors may be summarily
In said account, Tan deposited P420,000 corrected by the court at any stage of the
through BPI Check drawn against the account of action, at its initiative or on motion, provided
Angli Lumber & Hardware, Inc, which is one of no prejudice is caused thereby to the adverse
Tan’s clients. The BPI Check was entered in party.”
Tan’s bank records. Tan withdrew from said
account the amount of P480,000.00. Later that b. YES. Tan is bound to return the proceeds of the
day, however, the BPI Check was returned to dishonored BPI Check based on the principle of
Union Bank as the account against which it was unjust enrichment. Art. 22 of the Civil Code
drawn had been closed. Union Bank discovered states that “every person who through an act of
that Tan’s account had been mistakenly credited performance by another, or any other means,
so their branch manager immediately called Tan acquires or comes into possession of
to recover the funds mistakenly released but something at the expense of the latter without
Tan refused. During Union Bank’s investigation, just or legal ground, shall return the same to
it was discovered that Tan previously deposited him.” For the principle to apply, the following
five BPI checks drawn by Angli Lumber against requisites must concur: (i) a person is unjustly
the same BPI account, and these checks were all benefited; and (ii) such benefit is derived at the
previously dishonored. Union Bank sent Tan a expense of or with damages to another.

Commercial Law
Here, it was unequivocally established that Tan may be made on the president, managing
withdrew and utilized the proceeds of the BPI partner, general manager, corporate secretary,
Check fully knowing that he was not entitled treasurer, or in-house counsel of the
thereto. To note, Tan had deposited five other corporation wherever they may be found, or in
checks drawn against the same account. He their absence or unavailability, on their
was fully aware that Angli Lumber's account secretaries.
with BPI had been closed. So he could not have
expected that the BPI Check in question would If such service cannot be made upon any of the
be honored. (Yon Mitori International foregoing persons, it shall be made upon the
Industries v. Union Bank of the Philippines, G.R. person who customarily receives the
No. 225538, 14 Oct. 2020, J. Caguioa) correspondence for the defendant at its
principal office.
Significance of the Doctrine of Separate Juridical
Personality In case the domestic juridical entity is under
receivership or liquidation, service of summons
1. Liability for acts or contracts – As a general shall be made on the receiver or liquidator, as
rule, the obligation of the corporation is not the the case may be.
liability of the stockholders, directors, or
officers. (1992, 1996, 2010 BAR) Should there be a refusal on the part of the
persons above-mentioned to receive summons
A corporation may not, generally, be made to despite at least three (3) attempts on two (2)
answer for acts or liabilities of its stockholders separate dates, service may be made
or those of the legal entities to which it may be electronically, if allowed by the court, as
connected, and vice versa. (Cease v. CA, G.R. No. provided under Section 6 of Rule 14. (Sec. 12,
L-33172, 18 Oct. 1979) Rule 14, Rules of Court)
2. Right to bring actions – may bring civil and 5. Changes in individual membership –
criminal actions in its own name in the same corporation remains unchanged and unaffected
manner as natural persons. (Art. 46, NCC) in its identity by changes in its individual
membership or ownership of its stocks.
NOTE: Rights belonging to the corporation
cannot be invoked by the stockholders (or Stockholders are NOT the Owners of Corporate
directors and officers) even if the latter own Properties and Assets
substantial majority of the shares in that
corporation; and rights of the stockholders, A corporation is a juridical person distinct from the
directors and officers cannot be invoked by the members composing it. Properties in the name of
corporation. (Stonehill v. Diokno, G.R. No. L- the corporation are owned by it as an entity
19550, 19 June 1967) separate and distinct from its members. While
shares of stocks constitute personal property, they
3. Right to acquire and possess property – do not represent property of the corporation. The
property conveyed to or acquired by the corporation has properties of its own. A share of
corporation is in law the property of the stock only represents an aliquot part of the
corporation itself as a distinct legal entity and corporation’s property, or the right to share in its
not that of the stockholders or members. proceeds but its holder is not the owner of any.
(Silverio v. Filipino Business Consultants, Inc., G.R. No.
4. Acquisition of jurisdiction – When the 143312, 12 Aug. 2005)
defendant is a corporation, partnership or
association organized under the laws of the At the very least, the interest of stockholders is
Philippines with a juridical personality, service purely inchoate, or in sheer expectancy of a right in

2022 GOLDEN NOTES
Corporation Law
the management of the corporation and to share in equitable rights over the subject properties?
the profits thereof and in the properties and assets
thereof on dissolution, after payment of the A: NO. Aznar, et al., have no right to ask for the
corporate debts and obligations. The interest of the quieting of title of the properties at issue because
stockholders over the properties are merely they have no legal and/or equitable rights over the
inchoate. (Saw v. CA, G.R. No. 90580, 08 Apr. 1991; properties that are derived from the previous
1996, 2000 BAR) registered owner which is RISCO.
Moreover, under the trust fund doctrine, the capital Aznar, et al., who are stockholders of RISCO, cannot
stock, property, and other assets of a corporation claim ownership over the properties at issue in this
are regarded as equity in trust for the payment of case on the strength of the Minutes which, at most,
corporate creditors which are preferred over the is merely evidence of a loan agreement between
stockholders in the distribution of corporate assets. them and the company. There is no indication or
The distribution of corporate assets and property even a suggestion that the ownership of said
cannot be made to depend on the whims and properties were transferred to them which would
caprices of the stockholders, officers, or directors of require no less that the said properties be registered
the corporation unless the indispensable conditions under their names. At the very least, their interest is
and procedures for the protection of corporate purely inchoate, or in sheer expectancy of a right in
creditors are followed. (Yamamoto v. Nishino the management of the corporation and to share in
Leather Industries, Inc., G.R. No. 150283, 16 Apr. the profits thereof and in the properties and assets
2008) thereof on dissolution, after payment of the
corporate debts and obligations.
Q: RISCO ceased operation due to business
reverses. Due to Aznar et. al’s desire to While a share of stock represents a proportionate or
rehabilitate RISCO, they contributed a total aliquot interest in the property of the corporation, it
amount of P212,720.00 which was used in the does not vest the owner thereof with any legal right
purchase of three (3) parcels of land located in or title to any of the property, his interest in the
various areas in the Cebu Province. Pursuant to corporate property being equitable or beneficial in
the Minutes of the Special Meeting of the Board nature. Shareholders are in no legal sense the
of Directors of RISCO, the contributed amounts owners of corporate property, which is owned by
constitute liens and encumbrances on the the corporation as a distinct legal person. (PNB v.
aforementioned properties as annotated in the Aznar, et al, G.R. No. 171805, 30 May 2011)
titles of the said parcels of land. Thereafter,
various subsequent annotations were made on NOTE: Where stockholders granted a loan to the
the same titles in favor of PNB. As a result, a corporation to finance the acquisition of property
Certificate of Sale was issued in favor of PNB, which was eventually mortgaged to a bank to secure
being the lone and highest bidder of the three a corporate loan, the right of the stockholders is
(3) parcels of land and was also issued Transfer subordinate to the mortgagee. The stockholder has
Certificate of Title over the said parcels of land. the right to be paid the loan but not to the property
of the corporation. (Divina, 2021 citing PNB v. Aznar,
Aznar, et. al filed a complaint seeking the supra)
quieting of their supposed title to the subject
properties. They alleged that the subsequent Q: National Galleon Shipping Corporation
annotations on the titles are subject to the prior (Galleon) took out several loans from different
annotation of their liens and encumbrances. On sources such as foreign financial institutions, its
the other hand, PNB assert that, as mere shareholders and other entities. DBP
stockholders of RISCO, they do not have any guaranteed Galleon's foreign loans. Galleon and
legal or equitable right over the properties of its stockholders, Sta. Ines, Cuenca Investment,
the corporation. Do Aznar et. al. have the legal or Universal Holdings, Cuenca, and Tinio, executed

Commercial Law
a Deed of Undertaking and obligated themselves members, having "powers, attributes and
to guarantee DBP's potential liabilities. Galleon properties expressly authorized by law or incident
undertook to secure a first mortgage on its new to its existence.”
and second-hand vessels. Despite the loans,
Galleon’s financial condition did not improve. Novation is a mode of extinguishing an obligation by
President Marcos issued a Letter of Instruction "changing its object or principal conditions,
ordering NDC to acquire 100% of the substituting the person of the debtor or subrogating
shareholdings of Galleon Shipping Corporation a third person in the rights of the creditor." While
from its present owners. novation, "which consists in substituting a new
debtor in the place of the original one may be made
Galleon's stockholders, represented by Cuenca, even without the knowledge or against the will of
and NDC, through its then Chairman of the Board the latter, it must be with the consent of the
of Directors, Ongpin, entered into a creditor.”
Memorandum of Agreement where NDC and
Galleon undertook to prepare and sign a share Aside from Ongpin being the concurrent head of
purchase agreement covering 100% of Galleon's DBP and NDC at the time the Memorandum of
equity. DBP paid off Galleon's debts to its foreign Agreement was executed, there was no proof
bank creditor. NDC took over Galleon's presented that Ongpin was duly authorized by DBP
operations "even prior to the signing of a share to give consent to the substitution by NDC as a co-
purchase agreement." However, despite NDC's guarantor of Galleon's debts. Ongpin is not DBP,
takeover, the share purchase agreement was therefore, it is wrong to assume that DBP impliedly
never formally executed. President Marcos gave its consent to the substitution simply by virtue
issued another letter to DBP and NDC directing of the personality of its Governor. (DBP v. Sta. Ines
that they take steps, including foreclosure of Melale Forest Products Corp., G.R. No. 193068, 01 Feb.
Galleon vessels and other assets. 2017)
Sta. Ines, Cuenca, Tinio, Cuenca Investment and Stockholders are NOT Real Parties in Interest to
Universal Holdings, major stockholders of Claim Damages and Recover Compensation
Galleon, filed a Complaint with Application for
Injunction. They claimed that DBP can no longer The stockholders were clearly not vested with any
go after them for any deficiency judgment since direct interest in the personal properties coming
NDC had been subrogated in their place as under the levy on attachment by virtue alone of
borrowers, hence the Deed of Undertaking they their being stockholders of the corporation. Their
executed had been extinguished and novated. stockholdings represented only their proportionate
Did the Memorandum of Agreement novate the or aliquot interest in the properties of the
Deed of Undertaking executed between DBP and corporation but did not vest in them any legal right
respondents? or title to any specific properties of the corporation.
Without doubt, the corporation remained the owner
A: NO. The Court of Appeals erred when it ruled that as a distinct legal person. Given the separate and
DBP was privy to the Memorandum of Agreement distinct legal personality of the corporation, the
since Ongpin was concurrently Governor of DBP and stockholders lacked the legal personality to claim
chairman of NDC Board of Directors at the time the the damages sustained from the levy of the former’s
Memorandum of Agreement was signed. properties. (Stronghold Insurance Company, Inc. v.
Cuenca, G.R. No. 173297, 06 Mar. 2013)
The general rule is that, "in the absence of an
authority from the board of directors, no person, not Q: Ronald Sham, doing business under the name
even the officers of the corporation, can validly bind of SHAMRON Machineries (Shamron), sold to
the corporation." A corporation is a juridical person, Turtle Mercantile (Turtle) a diesel farm tractor.
separate and distinct from its stockholders and In payment, Turtle’s President and Manager

2022 GOLDEN NOTES
Corporation Law
Dick Seldon issued a check for P50,000 in favor Respondents refused to obey Capt. Cura, who
of Shamron. A week later, Turtle sold the tractor then told them that they were dismissed. Is
to Briccio Industries (Briccio) for P60,000. Arcega solidarily liable for the obligations of
Briccio discovered that the engine of the tractor Symex to respondents?
was reconditioned so it refused to pay Turtle. As
a result, Dick Seldon ordered the “Stop A: NO, there was no showing that Arcega, as
Payment” of the check issued to Shamron. President of Symex, willingly and knowingly voted
Shamron sued Turtle and Dick Seldon. Shamron or assented to the unlawful acts of the company. A
obtained a favorable judgment holding co- corporation is a juridical entity with a legal
defendants Turtle and Dick Seldon jointly and personality separate and distinct from those acting
severally liable. Comment on the decision of the for and in its behalf and, in general, from the people
trial court. Discuss fully. (1995 BAR) comprising it. Thus, as a general rule, an officer may
not be held liable for the corporation's labor
A: I disagree with the trial court’s ruling. Dick obligations unless he acted with evident malice
Seldon should not be held solidarily liable with and/or bad faith in dismissing an employee. Sec. 31
Turtle in his capacity as President and Manager of of the Corporation Code (now Sec. 30 of the RCC) is
Turtle. Turtle has a separate juridical personality the governing law on personal liability of officers for
from its officers. (Consolidated Bank and Trust Corp. the debts of the corporation. To hold a director or
v. CA, G.R. No. 114286, 19 Apr. 2001) officer personally liable for corporate obligations,
two requisites must concur: (1) it must be alleged in
Non-Applicability of Doctrine of Separate the complaint that the director or officer assented to
Juridical Personality in Examination of Officers patently unlawful acts of the corporation or that the
to Ascertain Properties, Income which can be officer was guilty of gross negligence or bad faith;
Subjected to Execution and (2) there must be proof that the officer acted in
bad faith.
The doctrine of separate juridical personality does
not apply if the judgment creditor wanted the Respondents failed to specifically allege either in
officers to be examined not for the purpose of their complaint or position paper that Arcega, as an
passing unto them the liability of the judgment officer of Symex, willfully and knowingly assented
obligor but to ascertain the properties and income to the acts of Capt. Cura, or that Arcega had been
of the latter which can be subjected for execution in guilty of gross negligence or bad faith in directing
order to satisfy the final judgment and nothing else. the affairs of the corporation. In fact, there was no
(Linden Suites, Inc. v. Meridien Far East Properties, evidence at all to show Arcega's participation in the
Inc., G.R. No. 211969, 04 Oct. 2021) illegal dismissal of respondents. Clearly, the twin
requisites of allegation and proof of bad faith,
Officers NOT liable for Dismissal of Employee necessary to hold Arcega personally liable for the
Except in Cases of Evident Malice and/or Bad monetary awards to the respondents, are lacking.
Faith (Symex Security Services, Inc. v. Rivera, Jr., G.R. No.
202613, 08 Nov. 2017, J. Caguioa)
Q: Respondents had been employed as security
guards by petitioner Symex. They were not given Entitlement of Corporations to Constitutional
a rest day, and were not paid their overtime pay, Rights
five-day service incentive leave pay, and 13th
month pay. Thus, respondents filed a complaint Corporations are entitled to the following rights
against Symex and its President and Chairman of under the Constitution:
the Board, Arcega. Capt. Cura, the operations
manager of Symex, told respondents that they 1. Right to Due Process (Sec. 1, Art. III, 1987
would not be given a duty assignment unless Constitution);
they withdrew the complaint they filed.

Commercial Law
2. Right against Unreasonable Searches and Liability of a Corporation in Cases of Crimes

Seizures. (Sec. 2, ibid.)
GR: If the crime is committed by a corporation or
NOTE: Corporations are not entitled to the right other juridical entity, the directors, officers,
against self-incrimination, being a mere creature of employees, or other officers thereof responsible
law. It is presumed to be incorporated for the for the offense shall be charged and penalized for
benefit of the public. It received certain special the crime, precisely because of the nature of the
privileges and franchises and holds them subject to crime and the penalty therefor. A corporation
the laws of the state and the limitations of its cannot be arrested and imprisoned; hence, cannot
charter. Its powers are limited by law. It can make be penalized for a crime punishable by
no contract not authorized by its charter. Its rights imprisonment. (Ching v. Secretary of Justice, G.R. No.
to act as a corporation are only preserved to it so 164317, 06 Feb. 2006)
long as it obeys the laws of its creation. There is a
reserve right in the legislature to investigate its XPN: However, a corporation may be charged and
contracts and find out whether it has exceeded its prosecuted for a crime if the imposable penalty is
powers. It would be a strange anomaly to hold that fine. Even if the statute prescribes both fine and
a state, having chartered a corporation to make use imprisonment as penalty, a corporation may be
of certain franchises, could not, in the exercise of prosecuted and, if found guilty, may be fined. (Ibid.)
sovereignty, inquire how these franchises had been
employed, and whether they had been abused, and RECOVERY OF DAMAGES
demand the production of the corporate books and
papers for that purpose. (Bataan Shipyard & Recovery of Moral Damages
Engineering Co. v. PCGG, G.R. No. 75885, 27 May
1987) GR: A corporation is not entitled to moral damages
because, being an artificial person and having
LIABILITY FOR TORTS AND CRIMES existence only in legal contemplation, it has no
feelings, no emotions, no senses. It cannot,
A Corporation may be held Liable for Torts therefore, experience physical suffering and mental
anguish, which can be experienced only by one
A corporation is liable whenever a tortious act is having a nervous system. (ABS-CBN Broadcasting
committed by an officer or agent under express Corp. v. CA, G.R. No. 128690, 21 Jan. 1999)
direction or authority from the stockholders or
members acting as a body, or, generally, from the XPNs:
directors as the governing body. (PNB v. CA, G.R. No. 1. A corporation may recover moral damages
L-27155, 18 May 1978) under item 7 of Art. 2219, of the NCC because
said provision expressly authorizes the
Reason for Liability in Cases of Torts recovery of moral damages in cases of libel,
slander, or any other form of defamation.
A corporation is civilly liable in the same manner as
natural persons for torts, because generally NOTE: Art. 2219(7) does not qualify whether
speaking, the rules governing the liability of a the injured party is a natural or juridical person.
principal or master for a tort committed by an agent Therefore, a corporation, as a juridical person,
or servant are the same, whether the servant or can validly complain for libel or any other form
agent is a natural person or a corporation and of defamation and claim for moral damages.
whether the servant or agent be a natural or (Filipinas Broadcasting Network, Inc. v. AMEC-
artificial person . (Ibid.) BCCM, G.R. No. 141994, 17 Jan. 2005)
2. When the corporation has a reputation that is

debased, resulting in its humiliation in the

2022 GOLDEN NOTES
Corporation Law
business realm. But in such a case, it is damages. (Filipinas Broadcasting Network, Inc., v.
imperative for the claimant to present proof to AMEC-BCCM, supra)
justify the award. It is essential to prove the
existence of the factual basis of the damage and Q: Meralco and T.E.A.M. Electronics Corporation
its causal relation to petitioner’s acts. (MERALCO (TEC) were parties to two separate contracts for
v. T.E.A.M. Electronics Corp., et. al., G.R. No. the sale of electric energy. Meralco undertook to
131723, 13 Dec. 2007) supply TEC’s building known as DCIM with
electric power. One day, Meralco conducted a
NOTE: While the court may allow the grant of moral surprise inspection of the electric meters
damages to corporations, it is not automatically installed at the DCIM building. Two meters
granted; there must still be proof of the existence of were found to be allegedly tampered with and
the factual basis of the damage and its causal did not register the actual power consumption
relation to the defendant’s acts. This is so because in the building. Meralco informed TEC of the
moral damages, though incapable of pecuniary results of the inspection and demanded from the
estimation, are in the category of an award designed latter the payment of its unregistered
to compensate the claimant for actual injury consumption. TEC failed to pay the same.
suffered and not to impose a penalty on the
wrongdoer. (Crystal v. BPI, G.R. No. 172428, 28 Nov. For failure to pay, Meralco disconnected the
2008) electricity supply to the DCIM building. TEC
demanded from Meralco the reconnection of
Q: "Exposé" is a radio documentary program electrical service, claiming that it had nothing to
hosted by Rima and Alegre. It is aired every do with the alleged tampering, but the latter
morning over DZRC-AM which is owned by FBNI. refused to heed the demand. The Energy
One morning, Rima and Alegre exposed various Regulatory Board (ERB) immediately ordered
alleged complaints from students, teachers and the reconnection of the service, but Meralco did
parents against AMEC and its administrators not immediately comply. TEC filed a complaint
and called it the dumping ground for misfits. for damages against Meralco before the RTC.
Claiming that the broadcasts were defamatory, The RTC ruled in favor of TEC, and it awarded,
AMEC and Ago, as Dean of AMEC’s College of among others, moral damages. Is TEC entitled to
Medicine, filed a complaint for damages against moral damages?
FBNI, Rima and Alegre. As a defense, FBNI claims
that AMEC is not entitled to moral damages A: NO. TEC is not entitled to moral damages. TEC’s
because it is a corporation. Is AMEC is entitled to claim was premised allegedly on the damage to its
moral damages? goodwill and reputation. As a rule, a corporation is
not entitled to moral damages because, not being a
A: YES. AMEC is entitled to moral damages. A natural person, it cannot experience physical
juridical person is generally not entitled to moral suffering or sentiments like wounded feelings,
damages because, unlike a natural person, it cannot serious anxiety, mental anguish and moral
experience physical suffering or such sentiments as shock. The only exception to this rule is when the
wounded feelings, serious anxiety, mental anguish, corporation has a reputation that is debased,
or moral shock. Nevertheless, AMEC’s claim for resulting in its humiliation in the business realm.
moral damages falls under item 7 of Art. 2219 of the But in such a case, it is imperative for the claimant
NCC. This provision expressly authorizes the to present proof to justify the award. It is essential
recovery of moral damages in cases of libel, slander, to prove the existence of the factual basis of the
or any other form of defamation. Art. 2219(7) does damage and its causal relation to Meralco’s acts. In
not qualify whether the plaintiff is a natural or the present case, the records are bereft of any
juridical person. Therefore, a juridical person such evidence that the name or reputation of TEC/TPC
as a corporation can validly complain for libel or any has been debased as a result of Meralco’s acts.
other form of defamation and claim for moral (MERALCO v. T.E.A.M. Electronics Corp. et al., supra)

Commercial Law
3. DOCTRINE OF PIERCING THE Grounds for Application of Doctrine of Piercing

CORPORATE VEIL the Corporate Veil
The doctrine of piercing the corporate veil is the It applies upon the following circumstances:
doctrine that allows the State to disregard, for (F-A-C-O)
certain justifiable reasons, the notion that a
corporation has a personality separate and distinct 1. If the fiction is used to perpetrate fraud (Fraud
from the persons composing it. Test);
Where it appears that business enterprises are 2. If the complete control of one corporate entity
owned, conducted, and controlled by the same to another which perpetuated the wrong is the
parties, law and equity will disregard the legal proximate cause of the injury (Control Test);
fiction that these corporations are distinct entities
and shall treat them as one. This is in order to 3. If a certain corporation is only an adjunct or an
protect the rights of third persons. (Vicmar extension of the personality of the corporation
Development Corporation v. Elarcosa, et al., G.R. No. (Alter Ego or Instrumentality Test); or
202215, 09 Dec. 2015)
4. If the fiction is pierced to make the stockholders
Absent any allegation or proof of fraud or other liable for the obligation of the corporation
public policy considerations, the existence of (Objective Test).
interlocking directors, officers and stockholders is
not enough justification to pierce the veil of Q: Rosario Lorezo received, upon inquiry, a
corporate fiction as in the instant case. (Hacienda letter from the Social Security System (SSS),
Luisita Incorporated v. Presidential Agrarian Reform informing her that she cannot avail of their
Council, G.R. No. 171101, 22 Nov. 2011) retirement benefits since per their record she
has only paid 16 months. Aggrieved, Lorezo
Effect of Piercing the Corporate Veil then filed her Amended Petition before the
Social Security Commission (SSC), alleging that
1. The corporation will be treated merely as an she was employed as laborer in Cataywa
association of persons, undertaking a business managed by Jose Marie Villanueva in 1970 but
and the liability will attach directly to the was reported to the SSS only in 1978. She alleged
officers and stockholders. that SSS contributions were deducted from her
wages from 1970 to 1995, but not all were
2. Where there are two (2) corporations, they will remitted to the SSS which, subsequently, caused
be merged into one, the one being merely the rejection of her claim. She also impleaded
regarded as the instrumentality, agency, Talisay Farms, Inc. by virtue of its Investment
conduit, or adjunct of the other. Agreement with Mancy and Sons Enterprises.
She also prayed that the veil of corporate fiction
NOTE: Notwithstanding that the corporate veil has be pierced since she alleged that Mancy and Sons
been pierced, the corporation continues for other Enterprises and Manuel and Jose Marie
legitimate objectives, the corporate character is not Villanueva are one and the same. Should Mancy
necessarily abrogated. (Reynoso IV v. CA, G.R. Nos. and Sons Enterprises’ veil of corporate fiction be
116124-25, 22 Nov. 2000) pierced?
A: NO. It was not alleged nor proven that Mancy and

Sons Enterprises, Inc. functions only for the benefit
of Manuel Villanueva, thus, one cannot be an alter
ego of the other. The piercing doctrine when applied
to alter ego cases applies where the stock of a

2022 GOLDEN NOTES
Corporation Law
corporation is owned by one person whereby the family corporation was intended merely as a case of
corporation functions only for the benefit of such “estate tax planning.”
individual owner. In such case, the corporation and
the individual should be deemed one and the same. Accordingly, this separate personality of the
corporation may be disregarded, or the veil of
There is no need to pierce the corporate veil since corporate fiction pierced, in cases where it is used
Lorezo failed to substantiate her claim that Mancy as a cloak or cover for fraud or illegality, or to work
and Sons Enterprises, Inc. and Manuel and Jose an injustice, or where necessary to achieve equity or
Marie Villanueva are one and the same. She based when necessary for the protection of creditors.
her claim on the SSS form wherein Manuel Corporations are composed of natural persons and
Villanueva appeared as employer. However, this the legal fiction of a separate corporate personality
does not prove, in any way, that the corporation is is not a shield for the commission of injustice and
used to defeat public convenience, justify wrong, inequity. Likewise, this is true when the corporation
protect fraud, or defend crime, or when it is made as is merely an adjunct, business conduit or alter ego
a shield to confuse the legitimate issues, warranting of another corporation. In such case, the fiction of
that its separate and distinct personality be set separate and distinct corporation entities should be
aside. (Hacienda Cataywa/Manuel Villanueva, et al. disregarded. (Tan Boon Bee v. Jarencio, G.R. No. L-
v. Rosario Lorezo, G.R. No. 179640, 18 Mar. 2015) 41337, 30 June 1988)
Q: Mr. Pablo, a rich merchant in his early forties, Q: Romeo Morales was able to obtain a favorable
was a defendant in a lawful suit which could judgment for a sum of money against Kukan, Inc.
subject him to substantial damages. A year With the judgment attaining finality, the sheriff
before the court rendered judgment, Pablo levied on execution various personal properties
sought his lawyer’s advice on how to plan his found at what was supposed to be Kukan’s office.
estate to avoid taxes. He suggested that he Kukan International Corporation (KIC) filed a
should form a corporation with himself, his wife, third-party complaint, alleging that it was the
and his children (all students and still owner of the levied properties. Morales prayed
unemployed) as stockholders and then transfer that the principle of piercing the veil of
all his assets and liabilities to this corporation. corporate fiction be applied in order to satisfy
Mr. Pablo followed the recommendation of his the judgment debt of Kukan. The RTC granted
lawyer. the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
One year later, the court rendered judgment affirmed the RTC. Did the RTC properly apply the
against Pablo and the plaintiff sought to enforce doctrine?
this judgment. The sheriff, however, could not
locate any property in the name of Pablo and A: NO. The principle of piercing the veil of
therefore returned the writ of execution corporate fiction, and the resulting treatment of
unsatisfied. What remedy, if any, is available to two related corporations as one and the same
the plaintiff? (1994 BAR) juridical person with respect to a given transaction,
is basically applied only to determine established
A: The plaintiff can avail himself of the doctrine of liability; it is not available to confer on the court a
piercing the veil of corporate fiction which can be jurisdiction it has not acquired over a party not
invoked when a corporation is formed or used in impleaded in a case. Elsewise put, a corporation not
avoiding a just obligation. impleaded in a suit cannot be subject to the courts
process by piercing the veil of its corporate fiction.
The factual settings indicate the existence of a lawful In that situation, the court has not acquired
suit that could subject Pablo to a substantial amount jurisdiction over the corporation and, hence, any
of damages. It would thus be difficult for Pablo to proceedings taken against that corporation and its
convincingly assert that the incorporation of the property would infringe on its right to due process.

Commercial Law
Two-fold Implication: it because it was its owner, it had not been made
a party to the case, and it was a corporation
1. The court must first acquire jurisdiction over entirely different from TTAI. Is Gold Line’s
the corporation or corporations involved contention, correct?
before its or their separate personalities are
disregarded; and A: NO. Whenever necessary for the interest of the
public or for the protection of enforcement of their
2. The doctrine of piercing the veil of corporate rights, the notion of legal entity should not and is not
entity can only be raised during a full-blown to be used to defeat public convenience, justify
trial over a cause of action duly commenced wrong, protect fraud or defend crime. There is
involving parties duly brought under the sufficient factual basis to find that Goldline and TTAI
authority of the court by way of service of were one and the same entity, specifically: (a)
summons or what passes as such service. documents submitted showing that Cheng, who
(Kukan International Corp v. Reyes, G.R. No. claimed to be the operator of TTAI, is also the
182729, 29 Sept. 2010) President/Manager and an incorporator of Gold Line;
and (b) Travel and Tours Advisers, Inc. had been
NOTE: The Supreme Court, however, ruled known in Sorsogon as Goldline.
differently in Gold Line Tours v. Lacsa (G.R. No.
159108, 18 June 2012). It held that if the RTC had The RTC was correct in finding that the two
sufficient factual basis to conclude that the two companies are actually one and the same, hence the
corporations are one and the same entity as when levy for the bus in question was proper. The RTC thus
they have the same president and controlling rightly ruled that Goldline might not be shielded from
shareholder and it is generally known in the place liability under the final judgment through the use of
where they do business that they are one, the third- the doctrine of separate corporate identity. Truly,
party claim filed by the other corporation was this fiction of law could not be employed to defeat the
properly set aside and the levy on its property held ends of justice. (Gold Line Tours, Inc. v. Heirs of Maria
valid even though the latter was not made a party Concepcion Lacsa, G.R. No. 159108, 18 June 2012)
to the case. The judgment may be enforced against
the other corporation to prevent multiplicity of Q: Eric Livesey filed a complaint for illegal
suits and save the parties unnecessary expenses dismissal with money claims against CBB
and delays. (Divina, 2021) Philippines Strategic Property Services, Inc.
(CBB) and Paul Dwyer, its president. Livesey and
Q: Ma. Concepcion Lacsa was riding a Goldline CBB, through Keith Elliot, entered into a
passenger bus owned and operated by Travel & compromise agreement. Unless and until the
Tours Advisers, Inc. (TTAI) when the bus collided agreement is fully satisfied, CBB shall not sell,
with a passenger jeepney, causing her instant alienate, or otherwise dispose of all or
death. The Heirs of Concepcion instituted a suit in substantially all of its assets or business;
the RTC for damages due to breach of contract, suspend its business operations; substantially
with the complaint set against “Travel & Tours change the nature of its business; and declare
Advisers, Inc. (Goldline)” and the bus driver. The bankruptcy or insolvency.
RTC ruled in favor of the Heirs, holding TTAI
liable to pay the heirs damages and expenses. A CBB failed to pay the rest of the amount as the
writ of execution was served upon TTAI and company ceased operations. Livesey moved for
Cheng, operator of the Goldline bus. Cheng failed the issuance of an alias writ of execution,
to settle the judgment; thus a tourist bus was alleging that CBB and Elliot have organized
levied. another corporation, “Binswanger Philippines,
Inc.” He claimed that there was evidence
Gold Line Tours Inc. filed a third-party claim, showing that CBB and Binswanger Philippines,
claiming that the levied tourist bus be returned to Inc. are one and the same corporation, pointing

2022 GOLDEN NOTES
Corporation Law
out that CBB stands for Chesterton Blumenauer Circumstances which did NOT Result to the
Binswanger. Is the doctrine of piercing the veil Piercing of the Corporate Veil
of corporate fiction applicable?
The mere fact that: (Fi-Co-S)
A: YES. Shortly after Elliot forged the compromise
agreement with Livesey, CBB ceased operations. 1. A corporation owns Fifty (50%) of the capital
There was an indubitable link between CBB’s stock of another corporation, or the majority
closure and Binswanger’s incorporation. CBB ownership of the stocks of a corporation is not
ceased to exist only in name; it re–emerged - to per se a cause for piercing the veil.
avoid payment by CBB of the last two installments
of its monetary obligation to Livesey, as well as its 2. Two corporations have Common directors or
other financial liabilities. A reasonable mind would same or single stockholder who has all or nearly
arrive at the conclusion that Binswanger is CBB’s all of the capital stock of both corporations is
alter ego or that CBB and Binswanger are one and not in itself sufficient ground to disregard
the same corporation. There are also indications of separate corporate entities.
badges of fraud in Binswanger’s incorporation. It
was a business strategy to evade CBB’s financial 3. There is a Substantial identity of the
liabilities, including its outstanding obligation to incorporators of the two (2) corporations does
Livesey. (Livesey v. Binswanger Philippines, G.R. No. not necessarily imply fraud and does not
177493, 19 Mar. 2014) warrant piercing the corporate veil.
Tax Avoidance Does Not Justify Piercing Q: Land Bank of the Philippines (LBP) extended
Corporate Veil a series of credit accommodations to ECO using
the trust funds of PVTA. The proceeds of the
There is one case where it was held that the credit accommodations were received on behalf
corporation is a business conduit of the of ECO by Emmanuel Oñate. Upon maturity of the
stockholders when the latter transferred their loans, ECO failed to pay the same. ECO then
properties to a corporation in exchange for its submitted a Plan of Payment to LBP, however,
shares of stock. The Supreme Court said that what the latter rejected the same. LBP filed a
the transferors did was to invest their properties complaint for collection of sum of money against
and change the nature of their ownership from ECO and Oñate. LBP contends that the
unincorporated to incorporated form by personalities of Oñate and of ECO should be
organizing a corporation to take control of their treated as one holding Oñate liable for the loans
properties and at the same time save on estate tax. incurred by ECO from Land Bank. Is Oñate
There was no sale of property that would violate jointly and severally liable with ECO for the
the right of first refusal of the lessee over the said loans incurred from LBP?
properties. Even through the corporation is a
conduit of the shareholders, its corporate veil was A: NO. Oñate should not be held jointly and severally
not pierced. Tax avoidance, being valid and liable with ECO. A corporation, upon coming into
legitimate, does not justify piercing the veil of existence, is invested by law with a personality
corporate fiction. (Divina, 2020, citing Delphers separate and distinct from those persons composing
Traders Corp. v. Intermediate Appellate Court, G.R. it as well as from any other legal entity to which it
No. 69259, 26 Jan. 1988) may be related. By this attribute, a stockholder may
not, generally, be made to answer for acts or
liabilities of the said corporation, and vice versa.
The mere fact that Oñate owned the majority of the

shares of ECO is not a ground to conclude that Oñate
and ECO are one and the same. Mere ownership by

Commercial Law
a single stockholder of all or nearly all of the capital autonomy and the parent corporation, though
stock of a corporation is not by itself sufficient acting through the subsidiary in form and
reason for disregarding the fiction of separate appearance, “is operating the business directly for
corporate personalities. Neither is the fact that the itself.”
name “ECO” represents the first three letters of
Oñate’s name sufficient reason to pierce the 2. Fraud Test
veil. Even if it did, it does not mean that the said
corporation is merely a dummy of Oñate. A This test requires that the parent corporation’s
corporation may assume any name provided it is conduct in using the subsidiary corporation be
lawful. There is nothing illegal in a corporation unjust, fraudulent, or wrongful. It examines the
acquiring the name or as in this case, the initials of relationship of the plaintiff to the corporation. It
one of its shareholders. (Land Bank of the Philippines recognizes that piercing is appropriate only if the
v. CA, et al., G.R. No. 127181, 04 Sept. 2001) parent corporation uses the subsidiary in a way that
harms the plaintiff creditor. As such, it requires a
Three-pronged Test to Determine the showing of “an element of injustice or fundamental
Application of the Alter Ego or Instrumentality unfairness.”
Theory (C-F-H)
3. Harm Test
1. Control, not mere majority or complete stock
control, but complete domination, not only of This test requires the plaintiff to show that the
finances but of policy and business practice in defendant’s control, exerted in a fraudulent, illegal,
respect to the transaction attacked so that the or otherwise unfair manner toward it, caused the
corporate entity as to this transaction had at the harm suffered. A causal connection between the
time no separate mind, will or existence of its fraudulent conduct committed through the
own (Instrumentality or Control test); instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
2. Such control must have been used by the should be established. The plaintiff must prove that,
defendant to commit fraud or wrong, to unless the corporate veil is pierced, it would have
perpetuate the violation of a statutory or other been treated unjustly by the defendant’s exercise of
positive legal duty, or dishonest and unjust act control and improper use of the corporate form and,
in contravention of plaintiff’s legal right (Fraud thereby, suffer damages.
test); and
NOTE: Piercing the corporate veil based on the alter
3. The aforesaid control and breach of duty must ego theory requires the concurrence of the three
have proximately caused the injury or unjust elements – (1) control, (2) fraud or fundamental
loss complained of. (Harm test) unfairness, and (3) harm or damage. The absence of
any of these elements prevents piercing the
1. Instrumentality or Control Test corporate veil. (DBP v. Hydro Resources Contractors
Corp., G.R. Nos. 167603, 167561, & 167530, 13 Mar.
This test requires that the subsidiary be completely 2013)
under the control and domination of the parent. It
examines the parent corporation’s relationship with Piercing the Veil of Corporate Fiction On The
the subsidiary. It inquires whether a subsidiary Basis Of Equity
corporation is so organized and controlled and its
affairs are so conducted as to make it a mere Equity cases applying the piercing doctrine are what
instrumentality or agent of the parent corporation are termed the "dumping ground," where no fraud
such that its separate existence as a distinct or alter ego circumstances can be culled by the
corporate entity will be ignored. It seeks to establish Court to warrant piercing.
whether the subsidiary corporation has no

2022 GOLDEN NOTES
Corporation Law
Specifically, the equity test can be applied when: Piercing the Corporate Veil May Apply to Natural
Persons
1. The corporate personality would be
inconsistent with the business purpose of the When the Corporation is the Alter Ego of a
legal fiction; Natural Person – the piercing of the corporate veil
may apply to corporations as well as natural
2. The piercing the corporate fiction is necessary persons involved with corporations. The "corporate
to achieve justice or equity for those who deal mask may be lifted and the corporate veil may be
in good faith with the corporation; or pierced when a corporation is just but the alter ego
of a person or of another corporation."
3. The use of the separate juridical personality is
used to confuse legitimate issues. Reverse Piercing of the Corporate Veil – from
American parlance of what is called reverse piercing
Indications that a Subsidiary Corporation is a or reverse corporate piercing or piercing the
Mere Instrumentality of its Parent Corporation corporate veil "in reverse." As held in the U.S. Case,
C.F. Trust, Inc., v. First Flight Limited Partnership, "in
1. The parent corporation owns all or most of the a traditional veil-piercing action, a court disregards
capital stock of the subsidiary; the existence of the corporate entity so a claimant
2. The parent and subsidiary corporations have can reach the assets of a corporate insider. In a
common directors or officers; reverse piercing action, however, the plaintiff seeks
3. The parent corporation finances the subsidiary; to reach the assets of a corporation to satisfy claims
4. The parent corporation subscribes to all the against a corporate insider. Reverse-piercing flows
capital stock of the subsidiary or otherwise in the opposite direction (of traditional corporate
causes its incorporation; veil-piercing) and makes the corporation liable for
5. The subsidiary has grossly inadequate capital; the debt of the shareholders." (IAM/E v. Litton and
6. The parent corporation pays the salaries and Company Inc., G.R. No. 191525, 13 Dec. 2017)
other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business Two (2) Types of Reverse Piercing
except with the parent corporation or no assets
except those conveyed to or by the parent 1. Outsider reverse piercing occurs when a party
corporation; with a claim against an individual or
8. In the papers of the parent corporation or in the corporation attempts to be repaid with assets of
statements of its officers, the subsidiary is a corporation owned or substantially controlled
described as a department or division of the by the defendant.
parent corporation, or its business or financial
responsibility is referred to as the parent 2. Insider reverse piercing, the controlling
corporation’s own; members will attempt to ignore the corporate
9. The parent corporation uses the property of the fiction in order to take advantage of a benefit
subsidiary as its own; available to the corporation, such as an interest
10. The directors or executives of the subsidiary do in a lawsuit or protection of personal assets.
not act independently in the interest of the (IAM/E v. Litton and Company Inc., supra)
subsidiary but take their orders from the parent
corporation; Q: Plaintiffs filed a collection action against X
11. The formal legal requirements of the subsidiary Corporation. Upon execution of the court's
are not observed. (PNB v. Ritratto Group, G.R. decision, X Corporation was found to be without
No. 142616, 13 July 2001) assets. Thereafter, the plaintiffs filed an action
against its present and past stockholder, Y
Corporation, which owned substantially all of
the stocks of X corporation. The two

Commercial Law
corporations have the same board of directors b. Nonstock – All other corporations not
and Y Corporation financed the operations of X classified as stock corporation are
corporation. May Y Corporation be held liable nonstock corporations (Sec. 3, RCC). It is
for the debts of X Corporation? Why? (2001 one where no part of its income is
BAR) distributable as dividends to its members,
trustees, or officers (Sec. 86, RCC). These
A: YES. Y Corporation may be held liable for the corporations may be formed or organized
debts of X Corporation. The doctrine of piercing the for charitable, religious, educational,
veil of corporation fiction applies to this case. The professional, cultural, fraternal, literary,
two corporations have the same board of directors, scientific, social, civic service, or similar
Y Corporation owned substantially all of the stocks purposes. (Sec. 87, RCC)
of X Corporation, and Y Corporation controls the
finances of X Corporation. These facts justify the 2. As to Place of Incorporation:
conclusion that the latter is merely an extension of
the personality of the former, and that the former a. Domestic – incorporated and organized
controls the policies of the latter. An overall under the laws of the Philippines.
appraisal of the circumstances presented by the
facts of the case, yields to the conclusion that the X b. Foreign – formed, organized, or existing
Corporation is merely an adjunct, business conduit under any laws other than those of the
or alter ego, of Y Corporation and that the fiction of Philippines and whose laws allow Filipino
corporate entities, separate and distinct from each, citizens and corporations to do business in
should be disregarded. (CIR v. Norton & Harrison its own country or state. (Sec. 140, RCC)
Company, G.R. No. L‐17618, 31 Aug. 1964)
3. As to their Legal Status:
NOTE: There is no hard and fast rule when to apply
the doctrines of separate legal entity and piercing a. De jure – one that has fulfilled all the
the veil of corporate fiction. Each case must be requirements mandated by law and can
judged based on its own particular circumstances. successfully resist a suit by the State to
The undeniable yardstick though is that lacking any challenge its existence. De jure means “a
harm or injury to another, or in the absence of matter of law” that validates the
abuse of the legal fiction of the corporation, the corporation as a legal entity.
doctrine of separate legal entity stands. (Divina,
2020) b. De facto – one organized with colorable
compliance with the requirements of a
CLASSES OF CORPORATIONS valid law. Its existence cannot be inquired
collaterally. Such inquiry may be inquired
The following are the classes of corporations: only by a direct attack by the State through
a quo warranto proceeding. (Sec. 19, RCC)
1. As to Existence of Shares of Stock:
c. By Estoppel – exists when two or more
a. Stock – one which has: persons assume to act as a corporation
i. Capital stock divided into shares; and knowing it to be without authority to do
ii. Are authorized to distribute to the so. They are liable as general partners for
holders of such shares dividends or all debts, liabilities, and damages incurred
allotments of the surplus profits on or arising as a result thereof: Provided,
the basis of the shares held. (Sec. 3, however, that when any such ostensible
RCC) corporation is sued on any transaction
entered by it as a corporation or on any
tort committed by it as such, it shall not be

2022 GOLDEN NOTES
Corporation Law
allowed to use as a defense its lack of 6. Other Classifications:

corporate personality. (Sec. 20, RCC)
a. Closed Corporation ‐ one whose AOI
d. By Prescription – one which has exercised provides that all of the corporation’s
corporate powers for an indefinite period issued stock of all classes, exclusive of
without interference on the part of the treasury shares, shall be held of record by
sovereign power, e.g., Roman Catholic not more than a specified number of
Church. (Divina, 2020) persons, not exceeding twenty (20);
subject to specified restrictions on
4. As to their Relationship of Management and transfers; and it shall not list in any stock
Control: exchange or make any public offering of its
stocks of any class.
a. Holding Corporation – a corporation that
holds stocks in other companies for A corporation is “going private” when it is
purposes of control rather than for mere adopting the features of a closed
investment. corporation. (Divina, 2020)
b. Subsidiary Corporation – a company that b. Special Corporations – include

is owned or controlled by another educational corporations and religious
company, called the parent company. corporations. (Secs. 105-107, RCC)
Religious corporations include
c. Affiliates – two companies are affiliates corporation sole and religious societies.
when one company owns less than the (Secs. 108, 114, RCC)
majority of the voting stock of the other.
c. One-Person Corporation – a corporation
d. Parent Company – a corporation that wherein all of the stocks are held directly
owns enough voting stock in another or indirectly by one person. It is not
company to control management and necessarily illegal for as long as it follows
operation by influencing or electing its and observes the law throughout its
board of directors. Companies that existence and conducts its business affairs
operate under this management are lawfully, otherwise, the doctrine of
deemed subsidiaries of the parent piercing the veil may be applied in such a
company. (Divina, 2020) case. (Divina, 2020; Sec. 116, RCC)
5. As to whether they are for Public

(government) or Private Purpose or
Function: (2001, 2004 BAR)
a. Public – formed or organized for the

government of a portion of the State (like
cities and municipalities) for the purpose
of serving the general good and welfare.
(Aquino, 2014)
b. Private – one formed for some private

purpose, benefit, or end. It may either be a
stock or non-stock. (Ibid.)

Commercial Law
entering into a subscription agreement,

B. DE FACTO CORPORATIONS VERSUS adopting by-laws, and electing directors.
CORPORATIONS BY ESTOPPEL
De Facto Corporation vs. De Jure Corporation
DE FACTO DE JURE
DE FACTO CORPORATION
One which actually
One created in strict or
exists for all practical
A de facto corporation is one that is organized with substantial conformity
purposes as a
colorable compliance with the requirements of with the mandatory
corporation, but which
incorporation under the law and allowed to exist statutory
has no legal right to
and exercise the powers of a corporation until its requirements for
corporate existence as
corporate existence is assailed by the State in a quo- incorporation.
against the State.
warranto proceeding. (Divina, 2021)
There is a colorable There is substantial
compliance with the compliance with the
Requisites of a De Facto Corporation (L-A-P)
requirements of the requirements of the
law creating the law creating the
1. Organized under a valid Law;
corporation. corporation.
As such, if the law under which it is Its right to exist as a
incorporated is declared unconstitutional, corporation cannot be
there is neither de jure nor de facto existence. successfully attacked
Can be attacked
For instance, if Congress enacts a law to create or questioned by any
directly but not
a private corporation, such corporation cannot party even in direct
collaterally.
be considered de facto because the law creating proceeding for that
it is unconstitutional. Congress can enact a law purpose by the State.
to create a corporation only if it is owned and (De Leon, 2010)
controlled by the government. (Divina, 2021) Stockholders enjoy exemption from personal
liability for corporate obligations.
2. Colorable Compliance – Bona fide Attempt in
good faith to form a corporation according to The Existence of a De Facto Corporation Cannot
the requirements of the law; and be Collaterally Attacked
The execution of the articles of incorporation The due incorporation of a de facto corporation shall
and adoption of bylaws, per se, are not enough not be inquired into collaterally in any private suit
to warrant de facto existence. There is no bona to which such corporation may be a party. Such
fide attempt to incorporate until the SEC at the inquiry may be made by the Solicitor General in a
very least issues the certificate of incorporation quo warranto proceeding. (Sec. 19, RCC)
(Divina, 2021). The filing of articles of
incorporation and the issuance of the certificate Liabilities of Officers and Directors and/or
of incorporation are essential for the existence Trustees of a De Facto Corporation
of a de facto corporation. (Missionary Sisters of
Our Lady of Fatima v. Alzona, G.R. No. 224307, 06 The liabilities and penalties attending to officers
Aug. 2018) and directors/ trustees of a de jure corporation shall
be the same as those of a de facto corporation. This
3. Actual Use – Use of corporate Powers. includes the liability under the criminal law.
The corporation must have performed the acts Q: University Publishing Company (UPC),
which are peculiar to a corporation like through its president, entered into a contract
with Albert to publish the commentaries on the

2022 GOLDEN NOTES
Corporation Law
Revised Penal Code. UPC published the be liable as general partners for all debts,
commentaries, but it did not remit the amount liabilities and damages incurred or arising as a
due to Albert. This prompted Albert to file a result;
collection suit. The RTC ruled against UPC. When
the Sheriff was about to implement the writ of 2. When any such ostensible corporation is sued
execution against the company, he discovered on any transaction entered by it as a
that UPC is not a registered corporation. corporation or on any tort committed by it as
Consequently, the president of UPC was such, it shall not be allowed to use as a defense
substituted in the writ of execution. The its lack of corporate personality; and
president invoked the separate legal
personality of the corporation as his defense. 3. One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
a. Is UPC a de facto corporation? thereof on the ground that there was in fact no
b. Can the defense that UPC is a corporation by corporation. (Sec. 20, RCC)
estoppel be invoked by the president?
c. Who is liable for the debts of the NOTE: Where there is no third person involved and
corporation? the conflict arises only among those assuming the
form of a corporation who know that the
A: corporation has not been registered, there is NO
a. NO. UPC cannot be considered a de facto corporation by estoppel. (Lozano v. Santos, G.R. No.
corporation because it was not registered with 125221, 19 June 1997)
the SEC.
De Facto Corporation vs. Corporation by
b. NO. One who has induced another to act upon Estoppel
his willful misrepresentation that a corporation
was duly organized and existing under the law DE FACTO CORPORATION BY
cannot thereafter set up against his victim the CORPORATION ESTOPPEL
principle of corporation by estoppel. There is existence in There is no existence in
law. law.
c. The president who negotiated with Albert is The State reserves the
liable. A person acting or purporting to act on right to question its Quo warranto
behalf of a corporation which has no valid existence through a proceeding is NOT
existence assumes such privileges and quo warranto applicable.
obligations and becomes personally liable for proceeding.
contracts entered into or for other acts Stockholders in a de Stockholders are liable
performed as such agent. (Albert v. University facto corporation are as general partners for
Publishing Co., G.R. No. L-19118, 30 Jan. 1965) liable as a de jure all debts, liabilities, and
corporation. damages incurred.
CORPORATION BY ESTOPPEL
Q: On behalf of Ocean Quest Fishing Corporation
A corporation by estoppel is one that exists when
(Ocean Quest), Antonio Chua and Peter Yao
two or more persons assume to act as a corporation
entered into a contract for the purchase of
knowing it to be without authority to do so. (Divina,
fishing nets of various sizes from the Philippine
2021; Sec. 20, RCC)
Fishing Gear Industries, Inc. (PFGI) They
claimed that they were engaged in a business
Rules Governing a Corporation by Estoppel
venture with Lim Tong Lim, who however was
not a signatory to the agreement. The buyers
1. All persons who assume to act as a corporation
failed to pay for the fishing nets and the floats;
knowing it to be without authority to do so shall
hence, PFGI filed a collection suit against Chua,

Commercial Law
Yao, and Lim Tong Lim. The suit was brought corporation. (Pioneer Insurance v. CA, G.R. No. 84197,
against the three in their capacities as general 28 July 1989)
partners, on the allegation that Ocean Quest was
a nonexistent corporation. However, a passive subscriber who obtained benefit
from a contract entered into by others with whom
The trial court ruled in favor of PFGI that Chua, he previously had an existing relationship is
Yao and Lim are liable as general partners. Lim deemed to be part of said association and is covered
contends that the Doctrine of Corporation by by the scope of the doctrine of corporation by
Estoppel applies only to Yao and Chua. Lim estoppel. (Lim Tong Lim v. PH Fishing Gear
insists that only those who dealt in the name of Industries, supra in Divina, 2021)
the ostensible corporation should be held
liable. Since his name does not appear on any of Q: Francisco Co, Jr. sued Abante Tonite, a daily
the contracts and since he never directly tabloid of general circulation, and its publisher
transacted with the Ocean Quest, he cannot be and staff – claiming damages because of an
held liable. Is Lim jointly liable with Chua and allegedly libelous article they published in an
Yao? issue. Macasaet, et al. moved, among others, to
drop Abante Tonite as a defendant by virtue of
A: YES. Lim should be held liable jointly with Chua its being neither a natural nor a juridical person
and Yao. Unquestionably, Lim benefited from the that could be impleaded as a party in a civil
use of the nets found inside F/B Lourdes, the boat action.
which has earlier been proven to be an asset of the
partnership. Lim, Chua, and Yao decided to form a The RTC denied the motion, holding that
corporation. Although it was never legally formed assuming “Abante Tonite” is not registered with
for unknown reasons, this fact alone does not the SEC, it is deemed a Corporation by Estoppel
preclude the liabilities of the three as contracting considering that it possesses attributes of a
parties in representation of it. Clearly, under the juridical person, otherwise it cannot be held
law on estoppel, those acting on behalf of a liable for damages and injuries it may inflict to
corporation and those benefited by it, knowing it to other persons. The CA affirmed the RTC ruling.
be without valid existence, are held liable as general Was the CA correct in upholding the inclusion of
partners. Technically, it is true that Lim did not Abante Tonite as a party defendant despite its
directly act on behalf of the corporation. However, lack of juridical personality?
having reaped the benefits of the contract entered
into by persons with whom he previously had an A: YES. The petitioners’ contention that Abante
existing relationship, he is deemed to be part of said Tonite could not be sued as a defendant due to its
association and is covered by the scope of the not being either a natural or a juridical person
Doctrine of Corporation by Estoppel. (Lim Tong Lim cannot be sustained. In rejecting the contention, the
v. Philippine Fishing Gear Industries, Inc., G.R. No. CA categorized Abante Tonite as a corporation by
136448, 03 Nov. 1999) estoppel as the result of its having represented itself
to the reading public as a corporation despite its not
Q: Are all those who subscribed for the stock of being incorporated. The non-incorporation of
a proposed corporation which was never legally Abante Tonite with the SEC was of no consequence,
formed liable as general partners? for, otherwise, whoever of the public who would
suffer any damage from the publication of articles in
A: The doctrine of corporation by estoppel does not the pages of its tabloids would be left without
apply against a person who takes no part except to recourse. The SC cannot disagree with the CA,
subscribe for stock in the proposed corporation considering that the editorial box of the daily tabloid
which was never legally formed, and hence, cannot disclosed that although Monica Publishing
be liable as a partner of those who engaged in Corporation had published the tabloid on a daily
business under the name of the pretended basis, nothing in the box indicated that Monica

2022 GOLDEN NOTES
Corporation Law
Publishing Corporation had owned Abante Tonite.

(Macasaet, et al. v. Co, G.R. No. 156759, 05 June 2013) C. CORPORATE POWERS
Q: Who cannot invoke the doctrine of

corporation by estoppel?
Kinds of Corporate Powers
A: The doctrine can only be invoked by the

1. Express Powers – granted by law, the
aggrieved party who relied on the representations
Corporation Code, and its Articles of
by others that they are legally formed as a
Incorporation or Charter, and administrative
corporation. It cannot be invoked by the one who
regulations;
benefitted from the transaction.
2. Inherent/Incidental Powers – not expressly

In another case though, it was held that the doctrine
stated but are deemed to be within the capacity
of corporation by estoppel is founded on principles
of corporate entities; and
of equity and is designed to prevent injustice and
unfairness. It applies when a non-existent
3. Implied/Necessary Powers – exists as a
corporation enters into contracts or dealings with
necessary consequence of the exercise of the
third persons. In which case, the person who has
express powers of the corporation or the
contracted or otherwise dealt with the non-existent
pursuit of its purposes as provided for in the
corporation is estopped to deny the latter’s legal
Charter.
existence in any action leading out of or involving
such contract or dealing. (Divina, 2021 citing
1. HOW POWERS ARE EXERCISED
Missionary Sisters of Our Lady of Fatima v. Alzona,
supra)
Q: Eliodoro Cruz was the former president of
Application of Doctrine of Corporation by Filport. During the general stockholders’
Estoppel in Reverse meeting, he wrote a letter to the corporation’s
Board of Directors questioning the board’s
While the doctrine is generally applied to protect creation of certain positions and their
the sanctity of dealings with the public, nothing corresponding monthly remuneration. Because
prevents its application in the reverse, in fact the his letter was not heeded favorably, Cruz,
very wording of the law which sets forth the purportedly in representation of Filport and its
doctrine of corporation by estoppel permits such stockholders, filed with SEC a petition which he
interpretation. Such that a person who has assumed describes as a derivative suit against the
an obligation in favor of a non-existent corporation, incumbent members of Filport’s BOD, for
having transacted with the latter as if it was duly alleged acts of mismanagement detrimental to
incorporated, is prevented from denying the the interest of the corporation and its
existence of the latter to avoid the enforcement of shareholders at large.
the contract.
Did Filport’s BOD act within its powers in
Jurisprudence dictates that the doctrine of creating the executive committee and the
corporation by estoppel applies for as long as there positions of AVPs for Corporate Planning,
is no fraud and when the existence of the association Operations, Finance and Administration, and
is attacked for causes attendant at the time the those of the Special Assistants to the President
contract or dealing sought to be enforced was and the Board Chairman, each with
entered into, and not thereafter. (Missionary Sisters corresponding remuneration?
of Our Lady of Fatima v. Alzona, G.R. No. 224307, 06
Aug. 2018) A: YES. The governing body of a corporation is its
board of directors. Sec. 22 of the RCC provides that

Commercial Law
unless otherwise provided in this Code, the Board of The general powers of a corporation are the
directors or Trustees shall exercise the corporate following: (Su-Per-C-A-B-S-P-E-D-R-O)
powers, conduct all business, and control all
properties of the corporation. Thus, with the 1. To Sue and be sued;
exception only of some powers expressly granted by 2. To have Perpetual existence unless the
law to stockholders (or members, in case of non- certificate of incorporation provides otherwise;
stock corporations), the board of directors (or 3. To adopt and use of Corporate seal;
trustees, in case of non-stock corporations) has the 4. To amend its Articles of Incorporation;
sole authority to determine policies, enter into 5. To adopt its By-laws;
contracts, and conduct the ordinary business of the 6. For stock corporations: issue and Sell stocks to
corporation within the scope of its charter, i.e., its subscribers and treasury stocks; for non-stock
AOI, by-laws and relevant provisions of law. Verily, corporations: admit members;
the authority of the board of directors is restricted 7. To Purchase, receive, take, or grant, hold,
to the management of the regular business affairs of convey, sell, lease, pledge, mortgage and deal
the corporation, unless more extensive power is with real and personal property, securities and
expressly conferred. bonds subject to the Constitution and existing
laws;
In the present case, the board’s creation of the 8. To Enter into merger or consolidation, (To
subject positions was in accordance with the regular enter into a partnership, joint venture, merger,
business operations of Filport as it is authorized to consolidation, or any other commercial
do so by the corporation’s by-laws, pursuant to the agreement with natural and juridical persons);
Corporation Code. (Filipinas Port Services, Inc., v. Go, 9. To make reasonable Donations, including those
et al., G.R. No. 161886, 16 Mar. 2007) for public welfare, or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Three (3) Levels of Control in the Corporate Provided, That no foreign corporation shall give
Hierarchy donations in aid of:
1. The board of directors – responsible for a. Any political party;

corporate policies and the general b. Candidate; or
management of the business affairs of the c. Partisan political activity.
corporation;
NOTE: It shall be unlawful for any foreigner,
2. The officers of the corporation – execution of whether judicial or natural person, to aid any
the policies laid down by the board, but in candidate or political party, directly or
practice often have wide latitude in indirectly, or take part in or influence in any
determining the course of business operations; manner any election, or to contribute or make
any expenditure in connection with any
3. The stockholders – have the residual power election campaign or partisan political activity.
over fundamental corporate changes, like (Sec. 81, Omnibus Election Code)
amendments of the AOI. (Citibank, N.A. v. Chua,
G.R. No. 102300, 17 Mar. 1993) 10. To establish pension, Retirement, and other
plans for the benefit of its directors, trustees,
GENERAL POWERS officers, and employees – basis of which is the
Labor Code; and
Theory of General Capacity 11. To exercise Other powers essential or
necessary to carry out its purpose or purposes
Under the Theory of General Capacity, a corporation as stated in the articles of incorporation. (Sec.
holds such powers which are not prohibited or 35, RCC)
withheld from it by general laws. (Divina, 2021)

2022 GOLDEN NOTES
Corporation Law
Limitation on Corporation’s Exercise of Acts of When Board Resolution is Required for the
Property of Ownership Signing of the Verification and Certification
Against Forum Shopping
The power of the corporation to exercise acts of
ownership over its assets and properties is limited GR: The verification and certification against forum
by the following: shopping must be signed on behalf of the
corporation pursuant to a valid board resolution.
1. The transaction of corporate property is
reasonably and necessarily required by the XPN: The following officers may sign even in the
lawful business of the corporation; and absence of a board resolution:
2. The transaction is done within the limits 1. Chairperson of the Board of Directors;
prescribed by law or Constitution. (Sec. 35(g), 2. President;
RCC) 3. General Manager;
4. Personnel Officer; or
Commencement of the Power to Sue and be Sued 5. Employment Specialist in labor cases.
The power to sue and be sued commences upon These officers are in the position to verify the
issuance by SEC of the Certificate of Incorporation. truthfulness and correctness of the allegations in
the petition. (Mid Pasig Land and Development
The Power of the Corporation to Sue and be Sued Corporation v. Tablante, G.R. No. 162924, 04 Feb.
is Exercised by the Board of Directors 2010)
The power of the corporation to sue and be sued is The chairperson and president of a corporation may
exercised by the board of directors. The physical sign the verification and certification without need
acts of the corporation, like the signing of of board resolution. Moreover, lack of authority of a
documents, can be performed only by natural corporate officer to undertake an action on behalf of
persons duly authorized for the purpose by the corporation may be cured by ratification
corporate by-laws or by a specific act of the board. through the subsequent issuance of a board
Absent the said board resolution, a petition may not resolution. (Jorgenetics Swine Improvement Corp. v.
be given due course. (Esguerra, et al. vs Holcim Thick & Thin Agri-Products, Inc., G.R. Nos. 201044 &
Philippines, Inc., G.R. No. 182571, 02 Sept. 2013) 222691, 5 May 2021)
If the real party in interest is a corporate body, an Q: Steamship insures its members-shipowners
officer of the corporation can sign the verification against "third party risks and liabilities" for
against forum shopping so long as he has been duly claims arising from (a) death or injury to
authorized by a resolution of its board of directors. passengers; (b) loss or damage to cargoes; and
The court did not commit grave abuse of discretion (c) loss or damage from collisions. Sulpicio
in dismissing the petition for lack of authority of the insured its fleet of inter-island vessels with
officer who signed the certification of forum Steamship. One of these vessels, the M/V
shopping in representation of the corporation. (San Princess of the World, was gutted by fire
Miguel Bukid Homeowners Association, Inc. v. City of resulting in total loss of its cargoes. Sulpicio
Mandaluyong, et al., G.R. No. 153653, 02, Oct. 2009; claimed indemnity from Steamship. Steamship
Republic v. Coalbrine International Philippines, et al., denied the claim and subsequently rescinded
G.R. No. 161838, 07 Apr. 2010) the insurance coverage.
Sulpicio filed a Complaint with the RTC against

Steamship. The RTC denied Steamship’s motion
to dismiss. Hence, Steamship assailed the trial

Commercial Law
court’s orders and filed a Petition for Certiorari petition and certify on non-forum shopping
with the Court of Appeals. Steamship's Petition's considering that "it has handled the case for
Verification and Certification against forum Steamship since its inception." (Steamship Mutual
shopping was signed by its counsel. Did the Underwriting Association v. Sulpicio Lines, G.R. No.
Verification and Certification against Forum 196072, 20 Sept. 2017)
Shopping signed by Steamship's counsel
substantially comply with the requirements of An Unregistered Corporation has No Right to Sue
the Rules of Court? or be Sued for Want of Corporate Personality
A: YES. In case the petitioner is a private “Lideco Corporation” had no personality to

corporation, the verification and certification may intervene since it had not been duly registered as a
be signed, for and on behalf of the corporation, by a corporation. If petitioner “Laureano Investment &
specifically authorized person, including its Development Corporation” legally and truly wanted
retained counsel, who has personal knowledge of to intervene, it should have used its corporate name
the facts required to be established by the as the law requires and not another name which it
documents. had not registered. (Laureano Investment &
Development Corp. v. CA, G.R. No. 100468, 06 May
In this case, Steamship's Petition's Verification and 1997)
Certification against forum shopping was signed by
its counsel. A Power of Attorney was appended to Limitations of the Corporation in Dealing with
the Petition, which purportedly authorized "Atty. Property
Charles Jay D. Dela Cruz or any of the partners of Del
Rosario & Del Rosario to sign the verification or 1. It must be in the furtherance of the purpose for
certification" against forum shopping of petitions which the corporation was organized;
and appeals in appellate courts necessary in
representing and defending Steamship. It was 2. Constitutional limitations – Private
notarized, in accordance with the law of Bermuda corporations or associations may not hold such
and authenticated by the Philippine consulate in alienable lands of the public domain except by
London, United Kingdom. However, a closer look lease; (Sec. 3, Article XII, 1987 Constitution)
into the Power of Attorney reveals that the
signatory of the document was not identified. This With regard to private land, 60% of the
was pointed out by Sulpicio in its Comment. corporation must be owned by the Filipinos,
same with the acquisition of a condominium
Nonetheless, in Steamship’s reply, it attached two unit.
Secretary's Certificates signed by Davis containing
excerpts of board resolutions showing Davis' NOTE: No law disqualifies a person from purchasing
authority to execute the Power of Attorney on its shares in a landholding corporation even if the latter
behalf, and Davis' reappointment as Corporate will exceed the allowed foreign equity, what the law
Secretary, respectively. The Court holds that there is disqualifies is the corporation from owning land. (JG
substantial compliance with the rules on Summit Holdings, Inc. v. CA, G.R. No. 124293, 31 Jan.
verification and certification against forum 2005)
shopping. Steamship's subsequent submission of
the Secretary's Certificates showing Davis' 3. Special law – subject to the provisions of the
authority to execute the Power of Attorney in favor Bulk Sales Law and law against monopoly,
of Del Rosario & Del Rosario cured the defect in the illegal combination, or restraint of trade.
verification and certification appended to the
petition. Under the circumstances of this case,
Steamship's counsel would be in the best position to
determine the truthfulness of the allegations in the

2022 GOLDEN NOTES
Corporation Law
Requisites for a Valid Donation (P-A-I-R) 9. Enter into management contract with another
corporation;(Sec. 43, RCC) and
1. The donation must be Reasonable; 10. Amend Articles of Incorporation. (Sec. 15, RCC)
2. It must be for valid Purposes including public 11. Elect, Appoint, and Remove Directors and
welfare, hospital, charitable, cultural, scientific, Corporate Officers. (Secs. 23, 24, and 27, RCC)
civic, or similar purposes; 12. Create Executive Committees and Special
3. The donation must bear a reasonable relation to Committees. (Sec 34, RCC)
the corporation’s Interest and must not be so 13. Adopt and Amend Bylaws. (Secs. 45 and 46, RCC)
remote and fanciful; and 14. Enter into merger and consolidation. (Sec. 75,
4. For foreign corporations, it must not be an Aid RCC)
in any: 15. Apply for voluntary dissolution. (Secs. 134 and
a. Political party; 135, RCC)
b. Candidate; or
c. Partisan political activity. (Divina, 2020) Power to Extend or Shorten Corporate Term
Implied Powers of a Corporation

Procedural Requirements in Extending or
Shortening Corporate Term
A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
1. Majority vote of the Board of Directors or Board
but has the power to do what is reasonably
of Trustees;
necessary or proper to promote the interest or
welfare of the corporation. (NAPOCOR v. Vera, G.R.
2. Ratification by shareholders representing at
No. 83558, 27 Feb. 1989)
least 2/3 of the outstanding capital stock (OCS),
or by at least 2/3 of the members in case of non-
SPECIFIC POWERS
stock corporation;
Theory of Specific Capacity

3. Written notice of the proposed action and of the
time and place of the meeting shall be
Under the Theory of Specific Capacity, a corporation
addressed to each stockholder or member at his
cannot exercise powers except those expressly or
place of residence as shown on the books of the
impliedly given to it. (Divina, 2021)
corporation and deposited to the addressee in
the post office with postage prepaid, or served
The specific powers of a corporation are the
personally or when allowed in the bylaws or
following:
done with the consent of the stockholder, sent
electronically in accordance with the rules and
1. Power to extend or shorten corporate term;
regulations of the Commission on the use of
(Sec. 36, RCC)
electronic data messages;
2. Increase or decrease capital stock; (Sec. 37, RCC)
3. Incur, create, or increase bonded indebtedness;
4. Copy of the amended AOI shall be submitted to
(Sec. 37, RCC)
the SEC for its approval; (Sec. 36, RCC)
4. Deny pre-emptive right; (Sec. 38, RCC)
5. Sell, dispose, lease, encumber all or
5. In case of banks, banking, and quasi-banking
substantially all of corporate assets; (Sec. 39,
institutions, preneed, insurance and trust
RCC)
companies, NSSLAS, pawnshops, and other
6. Purchase or acquire own shares; (Sec. 40, RCC)
financial intermediaries, a favorable
7. Invest corporate funds in another corporation
recommendation of appropriate government
or business or for other purpose other than
agency; (Sec. 16, RCC)
primary purpose; (Sec. 41, RCC)
8. Declare dividends; (Sec. 42, RCC)

Commercial Law
6. The extension must be done during the lifetime Power to Increase or Decrease Capital Stock or
of the corporation not earlier than 3 years prior Incur, Create, Increase Bonded Indebtedness
to the expiry date unless there is justifiable
reason for an earlier extension (Sec. 11, RCC)
Procedural Requirements in Increasing or
Decreasing Capital Stock
Q: What is the effect of the failure of the
corporation to extend its corporate term?
1. Approved by majority vote of the Board of
Directors;
A: In the case of PNB v. CFI of Rizal, Pasig (G.R. No.
63201, 27 May 1992), the Supreme Court ruled that
2. Approved by stockholders representing at least
upon the expiration of the period fixed in the AOI, in
2/3 of the OCS;
the absence of compliance with the legal requisites
for the extension of the period, the corporation
3. Written notice of the time and place of the
ceases to exist and is dissolved ipso facto.
stockholder’s meeting and the purpose of the
said meeting must be sent to the stockholders
The automatic dissolution of the corporation is
at their places of residence as shown in the
no longer applicable under the RCC given the
books of the corporation and served on the
option available to the corporation to revive the
stockholders personally or through electronic
corporate term (Sec. 11, RCC). Since the period of
means recognized in the corporation’s bylaws
revival is not indicated in the RCC, the option may
and/or the Commission’s rules as a valid mode
be exercised within a reasonable period, but prior to
for service of notices;
the dissolution and liquidation of the corporation.
What is a reasonable period is for the SEC to
4. A certificate in duplicate must be signed by a
determine. (Divina, 2021)
majority vote of the directors of the corporation
and countersigned by the chairperson and the
Remedy of the Stockholder Not in Favor of
secretary of the stockholders’ meeting, setting
Extending or Shortening the Corporate Term
forth:
The stockholder not in favor of extension of the

a. That the requirements of Sec. 37 of the RCC
corporate term may exercise his appraisal right,
have been complied with;
that is, he may get out of the corporation and
b. The amount of increase or decrease of the
demand for the payment of the fair value of his
capital stock;
shares subject to the conditions specified in Sec. 80
c. In case of an increase of the capital stock,
of the RCC. (Ibid.)
the amount of capital stock or number of
shares of no par stock actually subscribed,
A stockholder may also exercise appraisal right in
the names, nationalities and residences of
case of shortening of the corporate term. While Sec.
the persons subscribing, the amount of
36 of the RCC refers to the remedy of appraisal right
capital stock or number of no par stock
only in case of extension of corporate term, Sec. 80
subscribed by each, and the amount paid by
of the RCC also provides for the same remedy in case
each on his subscription in cash or
a stockholder votes against the shortening of
property, or the amount of capital stock or
corporate term. (Ibid.)
number of shares of no par stock allotted to
each stockholder if such increase is for the
purpose of making effective stock dividend
authorized;
d. Any bonded indebtedness to be incurred,
created, or increased;
e. The amount of stock represented at the
meeting; and

2022 GOLDEN NOTES
Corporation Law
f. The vote authorizing the increase or Limitation on Power to Decrease Authorized

diminution of the capital stock, or the Capital Stock
incurring, creating, or increasing of any
bonded indebtedness. (Sec. 37, RCC) No decrease in the capital stock shall be approved
by the Commission if its effect shall prejudice the
Prior to the approval of the SEC of the increase in the rights of corporate creditors. (Sec. 37, RCC)
authorized capital stock, such payments cannot yet
be deemed part of the corporation’s paid-up capital, Q: If the subscribed capital stock is P60,000,000
technically speaking, because its capital stock has divided into 60,000,000 shares with par value of
not yet been legally increased. Such payments Php 1.00 per share and the paid-up capital stock
constitute deposits on future subscriptions, money is Php 50,000,000 divided into 50,000,000
which the corporation will hold in trust for the shares with par value of P 1.00 per share, can the
subscribers until it files a petition to increase its corporation reduce the capital stock to Php
capitalization and a certificate of filing of increase of 50,000,000?
capital stock is approved and issued by the SEC.
(Central Textile Mills, Inc. v. NWPC, et al., G.R. No. A: NO, the capital stock of the corporation may be
104102, 07 Aug. 1996) decreased only if it will not result in prejudice to
corporate creditors. In this case, the reduction of the
Additional Requirement with Respect to capital stock to 50,000,000 will mean the release or
Increase of Capital Stock – Treasurer’s Affidavit condonation of the 10,000,000 unpaid subscription,
(25%-25% Rule) thereby causing prejudice to the creditors as
subscriptions to the capital stock are funds held in
The application to be filed with the SEC shall be trust for their benefit under the trust fund doctrine.
accompanied by the sworn statement of the (Divina, 2021)
treasurer of the corporation, showing that at least
25% of the increase in the capital stock was The Board of Directors may Issue Additional
subscribed and that at least 25% of the said amount Shares of Stock Without Stockholder Approval
has been paid either in actual cash to the
corporation or that property, the valuation of which A stock corporation is expressly granted the power
is equal to 25% of the subscription. (Sec. 37, RCC) to issue or sell stocks. The power to issue stocks is
lodged with the Board of Directors and no
Ways of Effecting the Increase or Decrease of the stockholders’ meeting is required to consider it
Capital Stock because additional issuance of stock (unlike
increase in capital stock) does not need approval of
By increasing or decreasing the: the stockholders. What is only required is the board
1. Number of shares and retaining the par value; resolution approving the additional issuance of the
2. Par value of existing shares and retaining the shares. The corporation shall also file the necessary
number of shares; or application with the SEC to exempt these from the
3. Number of shares as well as the par value. registration requirements under the SRC. (Majority
Stockholders of Ruby Industrial Corp. v. Miguel Lim
NOTE: The following will result to decrease in and Minority Stockholders of Ruby Industrial Corp.,
capital stock, provided the shares are cancelled or G.R. Nos. 165887 & 165929, 06 June 2011)
retired thereafter:
Q: The stockholders of People Power, Inc. (PPI)
1. Redemption of redeemable shares; (Sec. 8, RCC) approved two resolutions in a special
2. Purchase of own shares; (Sec. 40, RCC) stockholders' meeting:
3. Cancelling shares which have not yet been
issued. 1. Resolution increasing the authorized capital
stock of PPI; and

Commercial Law
2. Resolution authorizing the Board of Registration of the Bonds Issued by the

Directors to issue, for cash payment, the new Corporation
shares from the proposed capital stock
increase in favor of outside investors who Bonds issued by a corporation shall be registered
are non‐stockholders. with the SEC which shall have the authority to
determine the sufficiency of the terms thereof. (Sec.
The foregoing resolutions were approved by 37, RCC)
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter Power to Deny Pre-emptive Right
was Jimmy Morato who owned 1% of the stock.
Pre-emptive Right
a. Are the resolutions binding on the
corporation and its stockholders including
All stockholders shall enjoy the pre-emptive right to
Jimmy Morato, the dissenting stockholder?
subscribe to all issues or disposition of shares of any
b. What remedies, if any, are available to
class in proportion to their present shareholdings,
Morato? (1998 BAR)
unless such right is denied by the articles of
incorporation or an amendment thereto. (Sec. 38,
A:
RCC)
a. The resolutions are not binding on the
corporation and its stockholders including
This means that except in the cases provided by law,
Jimmy Morato. While these resolutions were
shares of stock of the corporation should first be
approved by the stockholders, there is no
offered to the stockholders prior to any offer to non-
showing that directors' approval, which is
stockholders. (2019 BAR)
required by law, exists.
Purpose of Pre-emptive Right

b. Jimmy Morato can petition the Securities and
Exchange Commission to declare the two (2)
The purpose of pre-emptive right is to enable the
resolutions, as well as any and all actions taken
shareholder to retain his proportionate control in
by the Board of Directors thereunder, null and
the corporation and to retain his equity in the
void.
surplus.
Bonded Indebtedness
NOTE: Pre-emptive right shall not extend to shares
issues in compliance with laws requiring stock
It is a borrowing by the corporation which is long
offerings or minimum stock ownership by the
term in nature involving a large number of lenders
public; or to shares issued in good faith with the
and secured by the encumbrance on corporate
approval of the stockholders representing two-
assets. Since bonds are securities, they should also
thirds (2/3) of the OCS, in exchange for property
be registered with the SEC. (Divina, 2020)
needed for corporate purposes or in payment of a
previously contracted debt; (Sec. 38, RCC)
NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
Pre-emptive Right is Available on the Re-
same with the power to increase or decrease capital
issuance of Treasury Shares
stock, except that this power may also be exercised
by a non-stock corporation.
Since Sec. 38 of the RCC uses the phrase “all issues
or disposition of shares of any class”, pre-emptive
right extends not only to the issuance of new shares
resulting from an increase in capital stock but also
to the issuance of previously subscribed shares
which form part of the existing authorized capital

2022 GOLDEN NOTES
Corporation Law
stock, as well as to the disposition of treasury appraisal right as such action restricts his rights as
shares. (Divina, 2020) a stockholder. (Sec. 80(a), RCC)
Pre-emptive Right may be Waived (2019 BAR) Non-Existence of Pre-Emptive Right does NOT
Bar Challenge to Validity of Issuance of
1. The pre-emptive right may be waived by the Additional Shares if done in Breach of Trust
stockholder. However, the waiver should be given
individually by the stockholder concerned or by Even if pre-emptive right does not exist either
another by way of Special Power of Attorney. Being because the issue comes within the exceptions in
a personal right, the waiver cannot be waived by the Sec. 38, RCC or because it is denied in the AOI, an
corporation itself through a stockholders’ issue of shares may still be objectionable if the
resolution. (SEC Opinion, 12 Dec. 1994) directors acted in breach of trust and their primary
2. purpose is to perpetuate or shift control of the
3. A stockholder cannot be forced to waive the right corporation or to “freeze out” the minority interest.
even if the majority of the stockholders opt to waive The issuance of unissued shares out of the original
it. (SEC Opinion No. 08-08, 31 Mar. 2008) authorized capital stock pursuant to a rehabilitation
plan the propriety or validity of which was on
NOTE: If the board resolution approving the question by the minority stockholders and
issuance of shares prescribes a certain number of subsequently disapproved by the Supreme Court
days to exercise pre-emptive right and the amounts to unlawful dilution of the minority
stockholder fails to exercise such right within the shareholdings. (Majority Stockholders of Ruby
fixed period, the stockholder is deemed to have Industrial Corp. v. Miguel Lim and Minority
impliedly waived his right. (Divina, 2020) Stockholders of Ruby Industrial Corp., supra; Divina,
2014)
Q: X Corporation has already issued the 1000
originally authorized shares of the corporation Pre-emptive Right vs. Right of First Refusal
so that its Board of Directors and stockholders
wish to increase X's authorized capital stock. RIGHT OF FIRST
PRE-EMPTIVE RIGHT
After complying with the requirements of the REFUSAL
law on increase of capital stock, X issued an Description
additional 1000 shares of the same value.
Assume that stockholder A presently holds 200 Right to subscribe to all
out of the 1000 original shares. Would A have a issuance or
Right to purchase
pre‐emptive right to 200 of the new issue of dispositions of shares
shares of a
1000 shares? Why? of the corporation even
stockholder.
to the subsequent sale
A: YES. A would have a pre‐emptive right to 200 of of treasury stocks.
the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation. To What does it Pertain
According to the RCC, each stockholder has the pre‐
Pertains to Pertains to the sale of
emptive right to all issues of shares made by the
unsubscribed portion the stocks already
corporation in proportion to the number of shares
of the authorized owned by another
he holds on record in the corporation.
capital stock. stockholder.
NOTE: A stockholder whose pre-emptive right is Against Whom is it Exercised

violated may maintain an action to compel the
corporation to give him that right. If the denial is by Right exercised against Right exercised against
amendment to the AOI, he may exercise his the corporation. a co-stockholder.

Commercial Law
Effect of the Absence of Express into any transaction authorized by this section. (Sec.
Provision in the AOI 39, RCC)
May be exercised even Can only be exercised Substantially All of Corporate Assets
when there is no when so provided in
express provision in the AOI, by-laws and A sale or other disposition shall be considered shall
the AOI or amendment printed in the stock be deemed to cover substantially all the corporate
thereto. certificate. property and assets if in the process thereof, the
corporation would be rendered:
Treasury Shares
1. Incapable of continuing the business; or
It includes treasury Does not include
2. Incapable of accomplishing the purpose for
shares. treasury shares.
which it was incorporated. (Sec. 39, RCC)
Power to Sell or Dispose Corporate Assets Instances When Approval of Stockholders or

Members is NOT Required
Procedural Requirements for Sale, Lease,

1. If sale is necessary in the usual and regular
Exchange, Mortgage, Pledge, and any Other
course of business; or
Disposition (Sa-L-E-M-P-O) of All or
2. If the proceeds of the sale or other disposition
Substantially All of Corporate Assets
of such property and assets are to be
appropriated for the conduct of the remaining
1. Majority vote of the BOD or BOT;
business.
2. Approval by stockholders representing at least

Abandonment of the Plan for SaLEMPO Even
2/3 of the OCS, or by at least 2/3 of the
After Approval of the Stockholders or Members
members in case of nonstock corporation; and
The BOD, in its discretion, may abandon the plan for
3. Written notice of the proposed action and of the
SaLEMPO even after such authorization or approval
time and place of the meeting addressed to each
by the stockholders, subject to the rights of third
stockholder or member at his place of residence
parties under any contract relating thereto, without
as shown on the books of the corporation and
further action or approval by the stockholders or
deposited to the addressee in the post office
members. (Sec. 39, RCC)
with postage prepaid, served personally, or
when allowed by the bylaws or done with the
Nell Doctrine (2017 BAR)
consent of the stockholder, sent electronically:
Provided, That any dissenting stockholder may
GR: Where one corporation sells or otherwise
exercise the right of appraisal under the
transfers all of its assets to another corporation, the
conditions provided in this Code. (Sec. 39, RCC)
latter is not liable for the debts and liabilities of the
transferor.
NOTE: The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations
XPNs: The transferee of corporate assets or
and monopolies, including R.A. No. 10667,
property is liable for the debts of the transferor in
otherwise known as the “Philippine Competition
case of:
Act.”
1. Express assumption of liability - where the
Further, in case of non-stock corporations, where
purchaser expressly or impliedly agrees to
there are no members with voting rights, the vote of
assume such debts;
at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter

2022 GOLDEN NOTES
Corporation Law
2. Transaction amounts to a consolidation or accomplishing the purpose for which it was

merger of the corporations - The surviving or incorporated.
the consolidated corporation shall possess all
the rights, privileges, immunities and franchises b. YES. The law does not prohibit sale of all or
of each constituent corporation; and all real or substantially all of corporate assets to
personal property, all receivables due on competitor-company provided said sale is
whatever account, including subscriptions to subject to laws against illegal combination,
shares and other choses in action, and every monopoly, or restraint of trade and Bulk Sales
other interest of, belonging to, or due to each Law. The facts did not state that the
constituent corporation, shall be deemed competitor-company lies within the
transferred to and vested in such surviving or restrictions provided for by law. For the
consolidated corporation without further act or transaction to be valid, it needs a majority vote
deed; (Sec. 79 (d), RCC) of its board of directors and approval of the
stockholders representing at least 2/3 of
3. Business Enterprise Transfer – where the outstanding capital stock. Further, the
purchasing corporation is merely a provisions of the Bulk Sales Law must be
continuation of the selling corporation; and complied with:
4. Entered Fraudulently - Where the transaction a. The seller must provide the buyer with a
is entered into fraudulently in order to escape verified list containing the name of the
liability for such debts. (Nell v. Pacific Farms, creditors, their addresses, amounts owing
G.R. No. L-20850, 29 Nov. 1965) to each of them, and the respective
maturity dates;
Q: Divine Corporation, engaged in the b. A full detailed inventory of the properties
manufacture of garments for export, was able to or assets to be sold, including their cost or
obtain loans from individuals and financing acquisition price; and
institutions. However, due to the drop in the c. The list of inventory must be filed with the
demand for garments in the international DTI.
market, Divine Corporation could not meet its Where an asset constitutes the only property of the
obligations. It decided to sell all its equipment corporation, its sale to a 3rd party is a sale or
such as sewing machines, permapress machines, disposition of all the corporate property and assets
high-speed sewers, cutting tables, ironing of the corporation falling squarely within the
tables, etc., as well as its supplies and materials contemplation of Sec. 39 of the RCC. Hence, for the
to Top Grade Fashion Corporation, its sale to be valid, the majority vote of the legitimate
competitor. Board of Trustees, concurred in by the vote of at
least 2/3 of the bona fide members of the
a. How would you classify the transaction? corporation should have been obtained. (Islamic
Directorate of the Philippines, et al., v. CA, G.R. No.
b. Can Divine Corporation sell aforesaid items 117897, 14 May 1997)
to its competitor, Top Grade Fashion
Corporation? What are the requirements to Power to Acquire Own Shares
validly sell the items? Explain. (2005 BAR)
Q: May a corporation acquire its own shares of

A:
stock?
a. The transaction is deemed classified as a sale of
all or substantially all of the corporate assets
A: Ordinarily, a stock corporation has no power to
because the corporation would be rendered
acquire its own shares as it is illogical for the
incapable of continuing the business or
corporation to be its own stockholder. Moreover,
the funds of the corporation should be devoted to

Commercial Law
attain the purposes of incorporation. However, the 1. Not appropriated by its BOD for corporate
RCC allows the corporation to acquire or purchase expansion projects or programs;
its own shares in certain instances. (Divina, 2020) 2. Not covered by a restriction for dividend
declaration under a loan agreement; and
Instances When a Corporation May Acquire its 3. Not required to be retained under special
Own Shares (1991, 1992, 2005 BAR) circumstances obtaining in the corporation
such as when there is a need for a special
1. To eliminate fractional shares arising out of reserve for probable circumstances. (SEC
stock dividends; (Sec. 40, RCC) Circular No. 11, Series of 2008)
2. To collect or compromise an indebtedness to
the corporation, arising out of unpaid Guidelines for Acquisition of Own Shares
subscription, in a delinquency sale and to
purchase delinquent shares sold during said 1. The capital of the corporation must not be
sale; (Ibid.) impaired. There shall be URE’s to purchase the
3. To pay dissenting or withdrawing stockholders; shares.
(Ibid.) 2. Legitimate or proper corporate objective is
4. To acquire treasury shares; (Sec. 9, RCC) advanced.
5. To acquire redeemable shares; (Sec. 8, RCC) 3. Condition of the corporate affairs warrants it.
6. To effect a decrease of capital stock; (Sec. 37, 4. Transaction is designed and carried out in good
RCC) and faith.
7. In close corporations, when there is a deadlock 5. Interest of creditors is not impaired, that is, the
in the management of the business, the SEC may same is not violative of the trust fund doctrine.
order the purchase at their fair value of the (Sec. 41, SEC Opinions, 12 Oct. 1992, 11 Sept.
shares of any stockholder by a corporation (Sec. 1985, and 11 Apr. 1994)
103 par. 1(d), RCC)
Trust Fund Doctrine
Rule in Acquisition of Own Shares
The requirement of unrestricted retained earnings
GR: The corporation may only acquire its own to cover the share is based on the trust fund doctrine
stocks if there are unrestricted retained earnings which means that the capital stock, property, and
(URE). other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The
XPNs: (R-D-L-D) reason is that the creditors of a corporation are
preferred over the stockholders in the distribution
1. Redemption of redeemable shares; of corporate assets. (Boman Environmental
2. Donation of shares to the corporation; Development Corp v. CA, G.R. No. 77860, 22 Nov.
3. Levy/garnishment of shares to satisfy the 1988)
judgment in favor of the corporation;
4. Conveyance of shares to the corporation in See also discussion on Trust Fund Doctrine – page
payment of a Debt. (Divina, 2020) 145.
Unrestricted Retained Earnings (URE)
Unrestricted Retained Earnings represent the

amount of accumulated profits and gains realized
out of the normal and continuous operations of the
company after deducting therefrom distributions of
stockholders and transfers to capital stock or other
accounts, and which are:

2022 GOLDEN NOTES
Corporation Law
Power to Invest Corporate Funds in A:

Another Corporation or Business a. Since a powerplant project and a concrete road
project are neither primary purposes nor
reasonably necessary for the accomplishment
Statutory Requirements for Investing In
thereof, majority votes of the board of directors
Another Corporation, Business, or Purpose
plus the ratification of the stockholders
Other Than Primary Purpose (1995, 1996 BAR)
representing 2/3 of the outstanding capital
stock are needed.
1. Approval by the majority vote of the BOD or
BOT;
On the other hand, quarry operations for
limestone are reasonably necessary or
2. Ratification by stockholders representing at
incidental to attain the primary purpose of the
least 2/3 of the OCS or by at least 2/3 of the
corporation, i.e. the manufacture of cement.
members in case of non-stock corporations;
Hence, only the majority approval of the board
of directors is needed. The ratification by the
3. Ratification must be made at a meeting duly
stockholders is no longer necessary.
called for the purpose; and
b. Notice of the proposed investment and the time

4. Notice of the proposed investment and the time
and place of the meeting shall be addressed to
and place of the meeting shall be addressed to
each stockholder or member at the place of
each stockholder or member at the place of
residence as shown in the books of the
residence as shown in the books of the
the post office with postage prepaid, served
the post office with postage prepaid, served
personally, or sent electronically in accordance
personally, or sent electronically in accordance
with the rules and regulations of the
with the rules and regulations of the
Commission on the use of electronic data
Commission on the use of electronic data
message, when allowed by the bylaws or done
message, when allowed by the bylaws or done
with the consent of the stockholders. (Sec. 41,
with the consent of the stockholders. (Sec. 41,
RCC)
RCC)
In the case of pawnshops organized as corporations

NOTE: Any dissenting stockholder shall have
and partnerships, they may be allowed to engage in
appraisal right as provided in the RCC. Ratification
ancillary activity of directly purchasing or selling
of stockholders is not needed where the investment
goods or articles. The Pawnshop Regulation Act
by the corporation is reasonably necessary to
contains no prohibition to engage in ancillary
accomplish its primary purpose as stated in the AOI.
activities. Hence, by implication, their scope may be
extended to other unrelated business unless clearly
Q: Stikki Cement Co. was organized primarily for
prohibited by the said Act.
cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest
The only requirement is that the person or entity
in: a) a powerplant project; b) a concrete road
engaged at the same time in other business not
project; and c) quarry operations for limestone
directly related or not incidental to pawnshop
in the manufacture of cement.
business, shall keep such business distinct and
separate from his pawnshop operations. (SEC
a. What corporate approvals or votes are
Opinion, 28 Mar. 1985)
needed for the proposed investments?
Explain.
b. Describe the procedure in securing these
approvals. (1992 BAR)

Commercial Law
Power to Declare Dividends Form of Dividends
1. Cash
Dividends
2. Stock
3. Property
Dividends are corporate profits allocated, lawfully
declared, and ordered by the directors to be paid
Cash Dividends vs. Stock Dividends
proportionately to the stockholders in the form of
cash, property, or stocks. (Divina, 2020)
CASH DIVIDENDS STOCK DIVIDENDS
As to Where it Forms Part
Q: Are profits the same as dividends?
Part of general fund. Part of capital.
A: Profits are the sources of dividends. Profits are
As to Cash Outlay
dividends only when they have been set aside for
distribution to stockholders under the conditions Results in cash
No cash outlay.
specified by law. outlay.
As to Levy by Corporate Creditors
Profits belong to the corporation while dividends
once declared, belong to the stockholder. (Divina, Once issued, can be levied
2020; 2005 BAR) Not subject to levy by creditors of the
by corporate corporate stockholder
Q: Under what circumstances may a corporation creditors. because they are part of
declare dividends? (2005 BAR) corporate asset.
A: A corporation may declare dividends when there As to how Approvals Needed

are unrestricted retained earnings, a resolution of Declared only by the Declared by the board
the Board of Directors, and in case of stock board of directors at with the concurrence of
dividends, the declaration must likewise be its discretion. the stockholders
approved by the stockholders representing at least (majority of the representing at least 2/3
two-thirds (2/3) of the outstanding capital stock. quorum only, not of the outstanding capital
majority of all the stock at a regular/special
Q: During the annual stockholders meeting, board) meeting.
Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be As to Effect on Corporate Capital
capitalized, and stock dividends be distributed
Does not increase Corporate capital is
to the stockholders, arguing that as owners of
the corporate capital increased.
the company, the stockholders, by a majority
vote, can do anything. As chairman of the As to whether Declaration creates Debt
meeting, how would you rule on the motion to Its declaration
declare stock dividends? (1991, 2001 BAR) creates a debt from
No debt is created by its
the corporation to
declaration.
A: As the chairman of the meeting, I would rule each of its
against the motion considering that a declaration of stockholders.
stock dividends should initially be taken by the BOD As to Taxability
and thereafter to be concurred in by the vote of the If received by
stockholders representing 2/3 of the outstanding individual: subject to Not subject to tax
capital stock (RCC, Sec. 42). The stockholders cannot tax; Whether received by
compel the corporation to declare dividends as the If received by individual or a
determination thereof rests with the sound corporation: not corporation.
discretion of the board (business judgment rule). subject to tax.

2022 GOLDEN NOTES
Corporation Law
As to Revocation Q: Can the board be compelled to declare

dividends every year?
Can be revoked despite
Cannot be revoked
announcement but before
after announcement. A: NO. Declaration of dividends is discretionary
issuance.
upon the board. Dividends are payable only when
As to Application on Unpaid Balance there are profits earned by the corporation and as a
general rule, even if there are existing profits, the
Can be withheld until
Applied to the Board of Directors has the discretion to determine
payment of unpaid
unpaid balance if whether or not dividends are declared. (Republic
balance if delinquent
delinquent shares. Planters Bank v. Agana, G.R. No. 51765, 03 Mar. 1997)
shares.
Prohibition Imposed by Law on UREs of a Stock
NOTE: Declaration of cash dividends may not be Corporation
revoked since, upon declaration, a creditor-debtor
relationship is established between the stockholder GR: Stock corporations are prohibited from
and the corporation. Hence, the debtor-corporation retaining surplus profits in excess of one hundred
is bound to make good its obligation to the creditor- (100%) percent of their paid-in capital stock.
stockholder to pay the cash dividends. Stock
dividends may be revoked even after declaration XPNs: (2001 BAR)
but prior to the actual issuance of shares because
what consummates stock dividend is not the 1. When justified by definite corporate
declaration but the share issuance. expansion projects or programs approved by
the board of directors;
Q: From what funds are cash and stock dividends
sourced? Explain why. (2005 BAR) 2. When the corporation is prohibited under any
loan agreement with any financial institution
A: Dividends either cash or stock dividend must be or creditor, whether local or foreign, from
declared out of unrestricted retained earnings declaring dividends without its/his consent,
because of the Trust Fund Doctrine. The Trust Fund and such consent has not yet been secured; or
Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the 3. When it can be clearly shown that such
creditors have the right to look for the satisfaction retention is necessary under special
of their claims. (Ong v. Tiu, G.R. No. 144476, 18 Apr. circumstances obtaining in the corporation,
2003) Thus, dividends must never impair the such as when there is need for special reserve
subscribed capital stock. for probable contingencies. (Sec. 42, RCC)
STOCK SPLIT STOCK DIVIDENDS Q: For the past three years of its commercial
A mere increase in the Capitalization of operation, X, an oil company, has been earning
number of shares earnings or profits, tremendously in excess of 100% of the
which evidence together with a corporation’s paid-in capital. All of the
ownership without distribution of the stockholders have been claiming that they must
altering the amount of added shares which share in the profits of the corporation by way of
the capital, surplus, or evidence the assets dividends, but the Board of Directors failed to
segregated earnings. transferred to capital. lift its finger. Is Corporation X guilty of violating
a law? If in the affirmative, state the basis. (2001
BAR)
A: YES. Corporation X is guilty of violating Sec. 42 of

the RCC. This provision prohibits stock corporations

Commercial Law
from retaining surplus profits in excess of 100% of A: NO. Only stockholders are entitled to payment of
their paid-in capital, except on certain situations stock dividends. (Nielson & Co., Inc. v. Lepanto
provided under the RCC. Consolidated Mining Co., G.R. No. L-217601, 17 Dec.
1966)
Wrongful or Illegal Declaration of Dividends
Distinction between Distribution in Liquidation
The Board of Directors is liable in case of wrongful and Ordinary Dividend
or illegal declaration of dividends. The stockholders
should return the dividends to the corporation If the distribution is in the nature of a recurring
based on the principle of solutio indebiti. return on stock, it is an ordinary dividend. However,
if the corporation is really winding up its business
Persons Entitled to Receive Dividends or recapitalizing and narrowing its activities, the
distribution may properly be treated as incomplete
Dividends are payable to the stockholders of record or partial liquidation and as payment by the
as of the date of the declaration of dividends or corporation to the stockholder for his stock or as
holders of record on a certain future date, as the return of the capital invested by him. (Wise & Co.,
case may be, unless the parties have agreed Inc. v. Meer, G.R. No. 48231, 30 June 1947)
otherwise. (Cojuangco and Prime Holdings, Inc., v.
Sandiganbayan G.R. No. 183278, 24 Apr. 2009) Power to Enter into Management Contract
Transfers of Shares Unrecorded in the Books of

Management Contract
the Corporation
A Management Contract is any contract whereby a

Transfer of shares which is not recorded in the
corporation undertakes to manage or operate all or
books of the corporation is valid only as between
substantially all of the business of another
the parties, hence, the transferor has the right to
corporation, whether such contracts are called
dividends as against the corporation without notice
service contracts, operating agreements or
of transfer, but it serves as trustee of the real owner
otherwise. (Sec. 43, RCC)
of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to
NOTE: Sec. 43 refers only to a management contract
receive the dividends. (Ibid.)
with another corporation. Hence, it does not apply
to management contracts entered into by a
Receipt of Dividends in Case of Mortgaged or
corporation with natural persons.
Pledged Shares
Requirements for Validity of Management

GR: The mortgagor or the pledgor has the right to
Contract
receive the dividends.
1. The contract must be approved by at least

XPN: When the mortgagor or pledgor defaults and
majority of the BOD or BOT of both managing
the mortgagee or pledgee acquires the pledged
and managed corporation;
stocks and the transfer is recorded in the books of
the corporation, the mortgagee or pledgee is
2. The contract must be approved by the
entitled to receive the dividends.
stockholders owning at least the majority of the
OCS, or members in case of a non-stock
Q: May stock dividends be issued to a person
corporation, of both the managing and the
who is not a stockholder in payment of services
managed corporation, at a meeting duly called
rendered?
for the purpose;

2022 GOLDEN NOTES
Corporation Law
3. The contract must be approved by the would suggest that the managing corporation
stockholders of the managed corporation should instead be given a net profit participation
owning at least 2/3 of the OCS entitled to vote and, if it later so desires, to then convert the amount
or 2/3 of the members when: that may be due thereby to equity or shares of stock
at no less than the par value thereof.
a. Stockholders representing the same
interest in both of the managing and the a. ULTRA VIRES DOCTRINE
managed corporation own or control more
than 1/3 of the total outstanding capital No corporation shall possess or exercise any
stock entitled to vote of the managing corporate powers except those conferred by this
corporation (Interlocking Stockholders); Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of
b. Majority of the members of the BOD of the the powers so conferred. (Sec. 44, RCC)
managing corporation also constitute a
majority of the BOD of the managed Ultra Vires Act
corporation. (Interlocking Directors)
An ultra vires act is one committed outside the
4. No management contract shall be entered into object for which a corporation is created as defined
for a period longer than five (5) years for any by the law of its organization and therefore beyond
one (1) term except for service contracts or the power conferred upon it by law. (Atrium
operating agreements which relate to the Management Corporation v. CA, G.R. No. 109491, 28
exploration, development, exploitation or Feb. 2001)
utilization of natural resources may be entered
into for such periods as may be provided by the Unlike illegal acts which contemplate the doing of an
pertinent laws or regulations. (Sec. 43, RCC) act that is contrary to law, morals, or public policy
or public duty, and are void, ultra vires acts are not
Q: ABC Management Inc. presented to the DEF illegal and void ab initio but are not merely within
Mining Co, the draft of its proposed Management the scope of the articles of incorporation. They are
Contract. As an incentive, ABC included in the merely voidable and may become binding and
terms of compensation that ABC would be enforceable when ratified by the stockholders.
entitled to 10% of any stock dividend which DEF (Maria Clara Pirovana, et al. v. the De La Rama
may declare during the lifetime of the Steamship Co., G.R. No. L-5377, 29 Dec. 1954)
Management Contract. Would you approve of
such provision? If not, what would you suggest Types of Ultra Vires Acts
as an alternative? (1991 BAR)
1. Acts done beyond the powers of the corporation
A: NO. I would not approve of a proposed
as provided in the law or its articles of
stipulation in the management contract that the incorporation;
managing corporation, as an additional 2. Acts entered into on behalf of the corporation
compensation to it, should be entitled to 10% of any by persons who have no corporate authority or
stock dividend that may be declared. Stockholders exceeded the scope of their authority; and
are the only ones entitled to receive stock dividends. 3. Acts or contracts which are per se illegal as
(Nielson & Co., Inc. v. Lepanto Consolidated Mining, being contrary to law. (Divina, 2020)
G.R. No. L-21601, 17 Dec. 1966)
Q: When is there an ultra vires act on the part of
I would add that the unsubscribed capital stock of a (a) the corporation; (b) the board of directors;
corporation may only be issued for cash or property and (c) the corporate officers? (2009 BAR)
or for services already rendered constituting a
demandable debt. (Sec. 61, RCC) As an alternative, I

Commercial Law
A: Ratification
a. The Corporation – Under Sec. 45 (now Sec. 44,
Can be ratified. Cannot be ratified.
RCC) of the Corporation Code, no corporation
shall possess or exercise any corporate power Binding Effect
except those conferred by the Code or by its AOI
Can bind the parties if
and except such as are necessary or incidental Cannot bind the
wholly or partly
to the exercise of the powers so conferred. parties.
executed.
When a corporation does an act or engages in
an activity which is outside of its express,
implied, or incidental powers set out in its AOI, Acts that Do Not Comply With Formalities vs.
the act is deemed to be ultra vires. Unauthorized Acts
b. The Board of Directors – When the Board ACTS THAT DO NOT

UNAUTHORIZED
engages in an activity or enters into a contract COMPLY WITH
ACTS
without the ratificatory vote of the stockholders FORMALITIES
in those instances where the Corporation Code The act may be within
so requires such ratificatory vote, such as when If certain procedures the powers of the
the corporation is made to invest in another or formalities are corporation but not
corporation or engage in a business which is not prescribed in the AOI within the powers of
in pursuit of its primary purpose, the board or bylaws and the same the particular officer.
resolution not ratified by stockholders owning are not complied with, The latter is sometimes
or representing at least two-thirds (2/3) of the the resulting act is not referred to as ultra
outstanding capital stock would make the an ultra vires act of the vires act of the officer.
transaction void, as being ultra vires. corporation. The law on agency
applies.
c. The Corporate Officers – When a corporate
officer enters into a contract on behalf of the Q: The board of directors of Lopez Realty, Inc.
corporation without having been so expressly passed a resolution providing gratuity pay for
or impliedly authorized by the Board of its employees in a special meeting called for the
Directors, even when the act or contract falls purpose. At the time, however, Asuncion (a
within the corporation’s express, implied or member of the board), was still out of the
incidental power, then the unauthorized act of country. Asuncion assailed the validity of the
the corporate officer is deemed to be ultra vires. said board resolution contending that the same
was ultra vires on the ground that she was not
Ultra Vires Acts by Reason of Lack of Authority duly notified of the special meeting in which it
vs. Ultra Vires Acts by Reason of Illegality (Illegal was passed. Is the disputed board resolution
Acts) ultra vires as urged by Asuncion?
ULTRA VIRES ACT ILLEGAL ACTS A: NO. The assailed resolution covers a subject
Lawfulness which concerns the benefit and welfare of the
Unlawful; against company’s employees. To stress, providing gratuity
Not necessarily unlawful, pay for its employees is one of the express powers
law, morals, public
but outside the powers of of the corporation under the Corporation Code,
policy, and public
the corporation. hence, Asuncion cannot invoke the doctrine of ultra
order.
Enforceability vires to avoid any liability arising from the issuance
Merely voidable and may of the subject resolution. (Lopez Realty, Inc. v.
be enforced by Void; cannot be Fontecha, G.R. No. 76801, 11 Aug. 1995)
performance, ratification, validated.
or estoppel.

2022 GOLDEN NOTES
Corporation Law
Q: Sea Lion International Port Terminal Instances When the Acts of Officers Bind the
Services, Inc. filed a complaint for prohibition Corporation (P-R-A-D-A)
and mandamus against National Power
Corporation (NPC) and Philippine Ports 1. If it is Provided in the By-laws;
Authority (PPA), wherein Sea Lion alleged that 2. When the act was Ratified;
NPC had acted in bad faith and with grave abuse 3. If Authorized by the board; or
of discretion in not renewing its contract for 4. Under the Doctrine of Apparent Authority
stevedoring services for coal-handling
operations at NPC's plant, and in taking over its Doctrine of Apparent Authority (2015 BAR)
stevedoring services. NPC seeks to annul the
order of the RTC in issuing a writ of preliminary If a corporation knowingly permits one of its
injunction which enjoined NPC from further officers or any other agent to act within the scope of
undertaking stevedoring and arrastre services an apparent authority, it holds him out to the
in its pier and directing it either to enter into a public possessing the power to do those acts; and
contract for stevedoring and arrastre services thus, the corporation will, as against anyone who
or to conduct a public bidding therefor. Does has in good faith dealt with it through such agent, be
NPC have the power to undertake stevedoring estopped from denying the agent’s authority.
and arrastre services in its pier?
Its existence may be ascertained through:
A: YES. NPC has the power to undertake stevedoring
and arrastre services. To carry out the national 1. The general manner in which the corporation
policy of total electrification of the country, the NPC holds out an officer or agent as having the
was created and empowered not only to construct, power to act, or in other words, the apparent
operate and maintain power plants, reservoirs, authority to act in general, with which it clothes
transmission lines, and other works, but also to him; or
exercise such powers and do such things as may be
reasonably necessary to carry out the business and 2. The acquiescence in his acts of a particular
purposes for which it was organized, or which, from nature, with actual or constructive notice
time to time, may be declared by the Board to be thereof, within or beyond the scope of his
necessary, useful, incidental or auxiliary to ordinary powers.
accomplish said purpose. If that act is one which is
lawful in itself and not otherwise prohibited and is It requires presentation of evidence of similar act(s)
done for the purpose of serving corporate ends, and executed either in its favor or in favor of other
reasonably contributes to the promotion of those parties. It is not the quantity of similar acts which
ends in a substantial and not in a remote and fanciful establishes apparent authority but the vesting of a
sense, it may be fairly considered within the corporate officer with the power to bind the
corporation's charter powers. The rule is that a corporation. (Advance Paper Corp. v. Arma Traders
corporation is not restricted to the exercise of Corp., GR No. 176897, 11 Dec. 2013)
powers expressly conferred upon it by its charter
but has the power to do what is reasonably Apparent Authority is Determined by Acts of
necessary or proper to promote the interest or Principal, Not by Acts of Agent
welfare of the corporation. The stevedoring services
which involve the unloading of the coal shipments The Doctrine of Apparent Authority is determined
into the NPC pier for its eventual conveyance to the by the acts of the principal and not by the acts of the
power plant are incidental and indispensable to the agent." As applied to corporations, the doctrine of
operation of the plant. (NPC v. Vera, et al., G.R. No. apparent authority provides that “a corporation is
83558, 27 Feb. 1989) estopped from denying the officer's authority if it
knowingly permits such officer to act within the
scope of an apparent authority, and it holds him out

Commercial Law
to the public as possessing the power to do those imposes liability not as a result of contractual
acts.” (Agro Food and Processing Corp. v. Vitarich relationship but rather because of the actions of the
Corp., G.R. No. 217454, 11 Jan. 2021, J. Caguioa) principal or an employer in somehow misleading
the public that the relationship or authority exists.
When Corporation is Estopped to Deny (Megan Sugar Corporation v. RTC Iloilo Br. 68, G.R.
Ratification of Acts Entered by Officers or Agents No. 170352, 01 June 2011)
Generally, when the corporation has knowledge Q: May the board of directors of a rural banking
that its officers or agents exceed their power, it must corporation be compelled to confirm a deed of
promptly disaffirm the contract or act, and allow the absolute sale of real property owned by the
other party or third person to act in the belief that it corporation whose deed of sale was executed by
was authorized or has been ratified. Otherwise, if it the bank manager without prior authority of the
acquiesces, with knowledge of the facts, or if it fails board of directors of the rural banking
to disaffirm, ratification will be implied. (Premiere corporation?
Development Bank v. CA, G.R. No. 159352, 14 Apr.
2004) A: YES. A bank is liable to innocent third persons
where representation is made in the course of its
So settled is the precept that ratification can be normal business by an agent like the bank manager,
made by the corporate board either expressly or even though such agent is abusing her
impliedly. Implied ratification may take various authority. Clearly, persons dealing with her could
forms - like silence or acquiescence; by acts showing not be blamed for believing that she was authorized
approval or adoption of the contract; or by to transact business for and on behalf of the bank.
acceptance and retention of benefits flowing The bank is estopped from questioning the
therefrom. (MWSS v. CA, G.R. No. 126000, 07 Oct. authority of the bank manager to enter into the
1998) contract of sale. If a corporation knowingly permits
one of its officers or any other agent to act within the
Where the practice of the corporation has been to scope of an apparent authority, it holds the agent
allow its general manager to negotiate and execute out to the public as possessing the power to do those
contracts in its copra trading activities for and on acts; thus, the corporation will, as against anyone
behalf of the corporation without board approval, who has in good faith dealt with it through such
the board itself, by its acts through acquiescence, agent, be estopped from denying the agent’s
practically laid aside the by-law requirement of authority. Unquestionably, the bank has authorized
prior approval. Settled is the rule that where similar its manager to enter into the Deed of Sale.
acts have been approved by the directors as a Accordingly, it has a clear legal duty to issue the
matter of general practice, custom, and policy, the board resolution sought by. Having authorized her
general manager may bind the company without to sell the property, it behooves the bank to confirm
formal authorization from the board of directors. the Deed of Sale so that the buyers may enjoy its full
(Board of Liquidators v. Heirs of Kalaw, et al., G.R. No. use. (Rural Bank of Milaor v. Ocfemia, et al., G.R. No.
L-18805, 14 Aug. 1967) 137686, 08 Feb. 2000)
A corporation cannot deny the authority of a lawyer Q: Associated Bank (the Bank) purchased in a
when they clothed him with apparent authority to foreclosure sale the real properties of Sps. Vaca
act in their behalf such as when he entered his mortgaged in its favor. The Sps. Vaca, however,
appearance accompanied by the corporation’s prayed for the nullification of the mortgage and
general manager and the corporation never foreclosure sale. In the meantime, the Bank
questioned his acts and even took time and effort to advertised for sale the subject properties, and
forward all the court’s documents to him. The the Sps. Pronstroller offered to buy the same.
lawyer may not have been armed with a board The offer was made through Atty. Soluta, the
resolution, but the doctrine of apparent authority Bank’s Vice-President, Corporate Secretary, and

2022 GOLDEN NOTES
Corporation Law
a member of its BOD. The Bank accepted the Sps. Banate, however, carried over the mortgage lien
Pronstroller’s offer. in PCRB’s favor. PCRB refused to release the
property from the lien.
Sps. Pronstroller and Atty. Soluta executed two
Letters-Agreement wherein the balance of the Did the purported agreement between Banate
purchase price will be paid upon receipt of a and Mondigo novate the mortgage contract over
final order from the Supreme Court in the Vaca the subject properties in a manner binding upon
case and the delivery of the property to the Sps. PCRB?
Pronstroller free from occupants.
A: NO. The Court would be unduly stretching the
The Bank was later on reorganized, and Atty. doctrine of apparent authority if the Court would
Soluta was relieved from his duties. The Bank, consider the power to undo or nullify solemn
through its Assistant Vice-President, Atty. agreements validly entered into as within the
Dayday, informed Sps. Pronstroller that their doctrine’s ambit. Although a branch manager,
request for extension was disapproved and, in within his field and as to third persons, is the
view of their breach of the contract, the Bank general agent and is in general charge of the
was rescinding the same and forfeiting their corporation, with apparent authority
deposit. Is Associated Bank bound by the Letter- commensurate with the ordinary business
Agreement signed by Atty. Soluta under the entrusted him and the usual course and conduct
doctrine of apparent authority? thereof, yet the power to modify or nullify corporate
contracts remains generally in the board of
A: YES. The authority of a corporate officer or agent directors.
in dealing with third persons may be actual or
apparent. Accordingly, the authority to act for and Being a mere branch manager alone is insufficient
to bind a corporation may be presumed from acts of to support the conclusion that Mondigo has been
recognition in other instances, wherein the power clothed with “apparent authority” to verbally alter
was exercised without any objection from its board terms of written contracts, especially when viewed
or shareholders. Undoubtedly, Associated Bank against the telling circumstances of this case: the
had previously allowed Atty. Soluta to enter into the unequivocal provision in the mortgage contract;
first agreement without a board resolution PCRB’s vigorous denial that any agreement to
expressly authorizing him; thus, it had clothed him release the mortgage was ever entered into by it;
with apparent authority to modify the same via the and, the fact that the purported agreement was not
second letter-agreement. It is not the quantity of even reduced into writing considering its legal
similar acts which establishes apparent authority, effects on the parties’ interests. To put it simply, the
but the vesting of a corporate officer with the power burden of proving the authority of Mondigo to alter
to bind the corporation. (Associated Bank v. Spouses or novate the mortgage contract has not been
Pronstroller, G.R. No. 148444, 14 July 2008) established. (Banate, et al., v. Philippine Countryside
Rural Bank, Inc., et al., G.R. No. 163825, 13 July 2010)
Q: Sps. Magsalang obtained a loan from
Philippine Countryside Rural Bank (PCRB), Q: PPI, a fertilizer manufacturer, entered into an
secured by a real estate mortgage over their arrangement with Janet Layson for the delivery
property, including the house constructed of fertilizers to her, payable from the proceeds
thereon owned by the Sps. Cortel. Sps. of the loan that UCPB extended to her. Layson
Magsalang and Sps. Cortel asked permission executed a document called “pagares,” written
from PCRB to sell the subject properties. on the dorsal side of a UCPB promissory note.
Mondigo, Branch Manager of PCRB, verbally The pagares stated that Layson had an approved
agreed to their request but first required full loan with UCPB-Iloilo Branch. The second
payment of the loan. The subject properties portion of the pagares, signed by that branch’s
were later sold to Banate. The title issued to manager Gregory Grey, stated that the

Commercial Law
assignment has been duly accepted and 2. If the contract is executory on both sides – it
payment duly guaranteed within 60 days from will not be enforced at the suit of either party,
PPI’s Invoice. But contrary to her undertakings, because their enforcement is not required by
Layson withdrew with branch manager Grey’s any equitable principles and will be contrary to
connivance, the loan that UCPB granted her. public policy.
On the strength of the three documents, PPI 3. If the contract is executed on one side, and
delivered quantities of fertilizers to Layson. executory on the other – courts in some
When PPI presented the documents of the jurisdictions, although not in all, will enforce in
financed transactions to UCPB for collection, the favor of the party who has executed the same on
bank denied the claim on the ground that it his part against the other party who has
neither authorized the transactions nor the received and retained the benefits on the
execution of the documents which were not part ground that equitable principles and
of its usual banking transactions. UCPB claimed outweighing considerations of public policy
that branch manager Grey exceeded his require that the latter should not be permitted,
authority in guaranteeing payment of Layson’s while retaining the benefits of the contract, to
purchases on credit. It contended that the escape liability on the ground that it was ultra
pagares were illegal and void since banking laws vires.
prohibit bank officers from guaranteeing loans
of bank clients. Is UCPB bound by Grey’s 4. Contracts, whether wholly executory or
undertaking on its behalf to deliver to PPI the executed on one side, apparently authorized,
proceeds of the bank’s loan in payment for the but in fact, ultra vires because they are made
fertilizers Layson bought? for a purpose not within the scope of the
business of the corporation, the ultra vires
A: NO. UCPB is not bound. A corporation like UCPB purpose being unknown to the other party –
is liable to innocent third persons where it enforceable against the corporation. (Divina,
knowingly permits its officer, or any other agent, to 2020)
perform acts within the scope of his general or
apparent authority, holding him out to the public as Remedies in Case of Ultra Vires Acts
possessing power to do those acts. But, here, it is
plain from the guarantee Grey executed that he was If the act is yet to be done, the remedy is one of
acting for himself, not in representation of UCPB. injunction to enjoin the performance or continued
The latter cannot be bound by Grey’s above performance of the ultra vires act.
undertaking since he appears to have made it in his
personal capacity. He signed it under his own name, If the act has already been performed, a stockholder
not in UCPB’s name or as its branch manager. may file a derivative suit on behalf of the
Indeed, the wordings of the undertaking do not at all corporation to set aside the ultra vires act. (Divina,
make any allusion to UCPB. (UCPB v. Planters 2020)
Products, Inc., et al., G.R. No. 179015, 13 June 2012)
Q: X Corp., whose business purpose is to
Consequences of Ultra Vires Acts manufacture and sell vehicles, invested its funds
in Y Corp., an investment firm, through a
These are the effects for the specific acts: resolution of its Board of Directors. The
investment grew tremendously on account of Y
1. If the contract is executed on both sides – the Corp.'s excellent business judgment. But a
courts will not set aside or interfere to deprive minority stockholder in X Corp. assails the
either party of what has been acquired under investment as ultra vires. Is he right and, if so,
them. what is the status of the investment? (2011 BAR)

2022 GOLDEN NOTES
Corporation Law
A: YES. It is an ultra vires act of its Board of Directors estoppels, or on equitable especially if no creditors
but voidable only, subject to stockholders’ are prejudiced thereby and no rights of the state or
ratification. the public are involved. (Fletcher, p.585; Republic v.
Acoje Mining Co., Inc., G.R. No. L-18062, 28 Feb. 1963)
Q: Which of the following corporate acts is valid,
void, or voidable? b. TRUST FUND DOCTRINE
a. XL Foods Corporation, which is engaged in The trust fund doctrine provides that subscriptions
the fast-food business, entered into a to the capital stock of a corporation constitute a
contract with its President, Jose Cruz, fund to which the creditors have a right to look for
whereby the latter would supply the the satisfaction of their claims. (Ong v. Tiu, G.R. Nos.
corporation with its meat and poultry 144476 and 144629, 08 Apr 2003)
requirements.
In a sense, they have to be unimpaired for the
A: Voidable – A contract of the corporation with protection of creditors. These cover the entire
one or more of its directors or trustees or officers is consideration received for the issuance of no par
voidable, at the option of such corporation (Sec. 31, value shares or the aggregate amount for the par
RCC). Such contract can be ratified by the vote of the value shares issued by the corporation. (Divina,
stockholders representing at least two-thirds of the 2020)
outstanding capital stock in a meeting called for the
purpose: Provided, that full disclosure of the Trust fund doctrine is not limited to the
adverse interest of the directors or trustees stockholders’ subscriptions. The scope of the
involved is made at such meeting: Provided, doctrine when the corporation is insolvent
however, That the contract is fair and reasonable encompasses not only the capital stock, but also
under the circumstances. other property and assets generally regarded in
equity as a trust fund for the payment of corporate
b. The Board of Directors of XL Foods debts. All assets and property belonging to the
Corporation declared and paid cash corporation held in trust for the benefit of creditors
dividends without approval of the that were distributed or in the possession of the
stockholders. stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in
A: Valid – Approval of the stockholders is not satisfaction of its claim. (Halley v. Printwell, Inc., G.R.
required in declaring cash dividends. No. 157549, 30 May 2011; 2015, 2019 BAR)
c. XL Foods Corporation guaranteed the loan Effects of the Trust Fund Doctrine
of its sister company XL Meat Products, Inc.
(2002 BAR) 1. Dividends must never impair the subscribed
capital stock; (NTC v. CA, G.R. No. 127937, 28 July
A: Voidable – This is an ultra vires act on part of XL 1999)
Foods Corporation and is not one of the powers
provided for in Sec. 35 of the RCC. It can be ratified 2. Subscription commitments cannot be condoned
provided it is not illegal per se but merely beyond or remitted; (Ibid.)
the powers of the corporation by the approval of the
majority of the board and vote of the stockholders 3. GR: The corporation cannot buy its own shares
representing at least two thirds of the outstanding using the subscribed capital as the
capital stock. Where the contract or act is not illegal consideration therefor. (Ibid.)
per se but merely beyond the power of the
corporation, the same is merely voidable and may XPNs:
be enforced by performance, ratification, or a. Redeemable shares may be acquired even

Commercial Law
without surplus profit for as long as it will Nishino Leather Industries, Inc., G.R. No. 150283, 16
not result to the insolvency of the April 2008)
Corporation; (Republic Planters Bank v.
Hon. Agana, G.R. No. 51765, 03 March When Creditor is Allowed to Maintain an Action
1997) Upon Unpaid Subscriptions
b. In a close corporation, a stockholder may A corporate creditor cannot immediately invoke the
demand the payment of the fair value of trust fund doctrine to proceed against unpaid
shares regardless of existence of retained subscriptions of stockholders of the debtor
earnings for as long as it will not result to corporation except in these two (2) instances when
the insolvency of the corporation; (Sec. the creditor is allowed to maintain an action upon
104, RCC) any unpaid subscriptions based on the trust fund
doctrine:
c. In case of a close corporation, if the
directors or stockholders are so divided 1. Where the debtor corporation released the
on the management of the corporation’s subscriber to its capital stock from the
business and affairs that the votes obligation of paying for their shares, in whole
required for a corporate action cannot be or in part, without a valuable consideration, or
obtained, with the consequence that the fraudulently, to the prejudice of creditors; and
business and affairs of the corporation can
no longer be conducted to the advantage 2. Where the debtor corporation is insolvent or
of the stockholders generally, the SEC, has been dissolved without providing for the
upon written petition by any stockholder, payment of its creditors. (Enano-Bote v.
may require the purchase at their fair Alvarez, G.R. No. 223572, 10 Nov. 2020, J.
value of shares of any stockholder, either Caguioa)
by the corporation regardless of the
availability of unrestricted retained
earnings in its books, or by the other
stockholders. (Sec. 103(d), RCC)
4. Rescission of a subscription agreement is not

allowed since it will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation. (Ong v. Tiu, G.R.
No. 144476, 08 April 2003)
When negotiations ensued in the light of a planned

takeover of a company and the counsel of the buyer
advised the stockholder through a letter that he may
take the machineries he brought to the corporation
out with him for his own use and sale, the previous
stockholder cannot recover said machineries and
equipment because these properties remained part
of the capital property of the corporation. Under the
trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors
which are preferred over the stockholders in the
distribution of corporate assets. (Yamamoto v.

2022 GOLDEN NOTES
Corporation Law
of number, will have to delegate the power to

D. BOARD OF DIRECTORS AND TRUSTEES manage the corporation to the board. (Divina, 2020)
XPNs to Doctrine of Centralized Management
Unless otherwise provided in the RCC, the board of

The doctrine is not applicable to the following
directors or trustees shall exercise the corporate
instances:
powers, conduct all business, and control all
properties of the corporation. (Sec. 22, RCC)
1. In case of delegation to the Executive
Committee duly authorized in the by-laws; (Sec.
Stated otherwise, corporate acts must be approved
34, RCC)
by the board of directors, otherwise, such acts are
2. Authorization pursuant to a contracted
generally not binding on the corporation. They do
manager which may be an individual, a
not create rights nor impose obligations upon the
partnership, or another corporation; and
corporation. Thus, if a corporation will enter into
3. In case of close corporations, the stockholders
contracts, initiate legal action or perform any of the
may manage the business of the corporation
corporate acts under the RCC, the same must be
instead of a board of directors, if the articles of
supported by a resolution that the board has duly
incorporation so provide. (Sec. 96, RCC)
adopted authorizing such acts and designating the
person who will carry them out on behalf of the
Rationale: The concentration in the board of the
corporation. (Divina, 2020)
powers of control of corporate business and of
appointment of corporate officers and managers is
The general rule is that a corporation, through its
necessary for efficiency in any large organization.
Board of Directors, should act in a manner and
Stockholders are too numerous, scattered, and
within the formalities, if any, prescribed by its
unfamiliar with the business of a corporation to
charter or by the general law. Directors must act as
conduct its business directly. And so the plan of
a body in a meeting called for the pursuant to the
corporate organization is for the stockholders to
law or the corporation’s by laws, otherwise, any
choose the directors who shall control and
action taken therein may be questioned by any
supervise the conduct of corporate business.
objecting director or shareholder; but an action of
(Filipinas Port Services, Inc. v. Go, G.R. No. 161886, 16
the Board of Directors during a meeting, which was
Mar. 2007)
illegal for lack of notice, may be ratified expressly,
by the action of directors in a subsequent legal
Stockholders or members periodically elect the
meeting, or impliedly, by the corporation’s
board of directors or trustees, who are charged with
subsequent course of conduct. (Lopez Realty, Inc., v.
the management of the corporation. The board, in
Fontecha, et al., GR No. 76801, 11 August 1995)
turn, periodically elects officers to carry out
management functions on a day-to-day basis. As
1. BASIC PRINCIPLES
owners though, the stockholders or members have
residual powers over fundamental and major
a. DOCTRINE OF CENTRALIZED MANAGEMENT corporate changes. While stockholders and
members (in some instances) are entitled to receive
The doctrine means that corporate powers are profits, the management and direction of the
vested in a body, called board of directors for a stock corporation are lodged with their representatives
corporation and board of trustees for a nonstock and agents -- the board of directors or trustees. In
corporation. Except in those instances where other words, the acts of management pertain to the
stockholders’ or members’ approval is required for board; and those of ownership, to the stockholders
certain acts under the RCC or the corporation’s or members. In the latter case, the board cannot act
bylaws, it is the board which exercises corporate alone, but must seek approval of the stockholders or
powers. The stockholders or members, regardless

Commercial Law
members. (Tan v. Sycip, G.R. No. 153468, 17 Aug. 4. To pay compensation to directors, as the power
2006) is lodged with the stockholders; (Ibid.)
5. To support a request for a new stock and
b. BUSINESS JUDGMENT RULE transfer book on the pretext that the original is
lost (when in fact it is not) and declare entries
in the supposed lost stock and transfer book as
Questions of policy or management are left solely to
the honest decision of officers and directors of a invalid. (Ibid., citing Provident International
Resources v. Venus, G.R. No. 167041, 17 June
corporation and the courts are without authority to
2008)
substitute their judgment for the judgment of the
board of directors. The board is the business
manager of the corporation and so long as it acts in Interference of Third Parties, Including the SEC,
good faith, its orders are not reviewable by the in the Decrease of Capital Stock Without
courts or the SEC. (Montelibano v. Bacolod-Murcia Reasonable Ground Violates Business Judgment
Milling Co., G.R. No. L-15092, 18 May 1962; Phil. Stock Rule
Exchange, Inc. v. CA, G.R. No. 125469, 27 Oct. 1997)
Similarly, under the same business judgment rule, The SEC only has the ministerial duty to approve
stockholders cannot interfere with the board in the decrease of a corporation’s authorized
conducting the business affairs of the corporation. capital stock. After a corporation faithfully
They cannot, for instance, revoke resolutions of the complies with the requirements laid down in Sec. 38
board or repudiate their acts on account of mere (now Sec. 37, RCC), the SEC has nothing more to do
disagreement. If the stockholders are not satisfied other than approve the same. Pursuant to Sec. 38
with the way the board exercises its powers or (now Sec. 37, RCC), the scope of the SEC's
manages the corporation, their remedies consist of determination of the legality of the decrease in
replacing the board members upon expiration of authorized capital stock is confined only to the
their term or vote for their removal under Sec. 27 of determination of whether the corporation
the RCC or file a derivative suit on behalf of the submitted the requisite authentic documents to
corporation to set aside the board’s wrongful acts support the diminution. Simply, the SEC's function
but not to supplant the board’s business judgment here is purely administrative in nature.
for their own.
For third persons or parties outside the corporation
To repeat, save for the authority granted to them by like the SEC to interfere to the decrease of the capital
law and the bylaws, stockholders cannot exercise stock without reasonable ground is a violation of the
corporate powers and have no management rights. "business judgment rule." (Metroplex Berhad v.
In the absence of gross negligence or bad faith, the Sinophil Corp., G.R. No. 208281, 28 June 2021)
board may not even be held liable for mistakes or
errors in directing the affairs of the corporation. Consequences of Business Judgment Rule
(Divina, 2020)
1. Resolutions and transactions entered into by
XPNs: The doctrine cannot be invoked: the Board within the powers of the corporation
cannot be reversed by the courts not even on
1. When the act is unconscionable and oppressive the behest of the stockholders;
as to amount to wanton destruction to the 2. Directors and officers acting within such
rights of the minority; (Ong v Tiu, ibid.) business judgment cannot be held personally
2. When there is bad faith or gross negligence by liable for such acts;
the directors; (Republic Communications Inc. v. 3. If the cause of the losses is merely error in
CA, G.R. No. 135074, 29 Jan. 1999) business judgment, not amounting to bad faith
3. To declare dividends when there is no surplus or negligence, directors and/or officers are not
profit or to declare dividends out of reliable; (Filipinas Port Services v. Go, G.R. No.
appraisal surplus; (Divina, 2020) 161886, March 16, 2007)

2022 GOLDEN NOTES
Corporation Law
4. The Board of Directors has the power to create rejected PALI’s application. The SEC reversed
positions not provided for in the corporation's the ruling of the PSE. Is the SEC correct?
by-laws since the board is the corporation’s
governing body, clearly upholding the power of A: NO. In applying the business judgment rule, the
its board to exercise its prerogatives in SEC and the courts are barred from intruding into
managing the business affairs of the business judgments of corporations, when the same
corporation; (Ibid.) are made in good faith. The said rule precludes the
5. Directors and officers who purport to act for the reversal of the decision of the PSE to deny PALI's
corporation, keep within the lawful scope of listing application, absent a showing of bad faith on
their authority and act in good faith, do not the part of the PSE.
become liable, whether civilly or otherwise, for
the consequences of their acts, which are Under the listing rules of the PSE, to which PALI had
properly attributed to the corporation alone; previously agreed to comply, the PSE retains the
(Benguet Electric Cooperative, Inc. v. NLRC, G.R. discretion to accept or reject applications for listing.
No. 89070, 18 May 1992) and (PSE v. CA, G.R. No. 125469, 27 Oct. 1997)
6. The power to elect corporate officers was a
discretionary power that the law exclusively 2. TENURE AND QUALIFICATIONS OF
vested in the Board of Directors and could not DIRECTORS OR TRUSTEES
be delegated to subordinate officers or agents.
(Matling Industrial and Commercial Term of Office
Corporation, et al. v. Coros, G.R. No. 157802, 13
Oct. 2010) Directors shall be elected for a term of one (1) year
from among the holders of stocks registered in the
Requirements for Application of Business corporation’s books, while trustees shall be elected
Judgment Rule for a term not exceeding three (3) years from among
the members of the corporation. (Sec. 22, RCC)
1. Presence of a business decision including
decisions on policy management and If no election is held, the directors and officers will
administration; continue to occupy position even after the lapse of
2. The decision must be intra vires and must one (1) year under a hold-over capacity until their
comply with the procedural and substantive successors are elected and qualified.
requirements of law;
3. Good faith; Term, Tenure, and Holdover Period
4. Due care in making the decision; and
5. The director must not have personal interest or Term – time during which the officer may claim to
nor self-dealing or otherwise on breach of the hold the office as a matter of right, and fixes the
duty of loyalty. (Villanueva, 2018) interval after which the several incumbents shall
succeed one another. The term of office is not
Q: PALI sought to offer its shares to the public in affected by the holdover. It is fixed by statute and
order to raise funds for development of does not change simply because the office may have
properties and pay its loans with several banks. become vacant, nor because the incumbent holds
To facilitate the trading of its shares, PALI office beyond his term when a successor has not
applied for a listing in the Philippine Stock been elected.
Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the Tenure – represents the term during which the
Heirs of Marcos, requesting PSE to defer PALI’s incumbent actually holds office. The tenure may be
registration, contending that certain properties shorter (or, in case of holdover, longer) than the
of PALI are owned by Marcos. Consequently, PSE term for reasons within or beyond the power of the
incumbent.

Commercial Law
Holdover Period – the time from the lapse of one Disqualifications

year from a member’s election to the Board and
until his successor’s election and qualification. It is On disqualification, the RCC expanded and qualified
not part of the director’s original term of office, nor the grounds such that a person shall be disqualified
is it a new term; the holdover period, however, from being a director, trustee or officer of any
constitutes part of his tenure. (Valle Verde Country corporation if, within five (5) years prior to the
Club v. Africa, G.R. No. 151969, 04 Sept. 2009) election or appointment as such, the person was:
Common Qualifications of Directors and Trustee a. Convicted by final judgment:

i. Of an offense punishable by imprisonment
The directors and trustees must have all the for a period exceeding six (6) years;
qualifications provided under Sec. 22, in relation to ii. For violating the RCC; and
Secs. 10, 13, and 91, of the RCC as well as those iii. For violating R.A. No. 8799, otherwise
provided under the bylaws, and none of the known as “The Securities Regulation Code”;
disqualifications under Sec. 26 of the RCC and the
bylaws. (Divina, 2020) b. Found administratively liable for any offense
involving fraudulent acts; and
Below are the qualifications for directors or trustees
under the RCC: c. By a foreign court or equivalent foreign
regulatory authority for acts, violations, or
1. The director or trustee must be of legal age. misconduct similar to those enumerated in
(Sec. 10, RCC) paragraphs (a) and (b) above.
2. The director must own at least one (1) share of The foregoing is without prejudice to qualifications
stock of the corporation and the trustee must be or other disqualifications, which the SEC, the
a member of the corporation, (Sec. 22, RCC), primary regulatory agency, or the Philippine
except with respect to independent trustees of Competition Commission may impose in its
nonstock corporations vested with public promotion of good corporate governance or as a
interest. (Sec. 91, RCC) sanction in its administrative proceedings. (Sec. 26,
RCC)
NOTE: A provision in the bylaws which allots a
permanent seat in the board to a non-member Director Must Be Stockholder
of the association is contrary to law. Similarly,
the fact that said permanent seat was held for A person who does not own a stock at the time of his
fifteen (15) years cannot give rise to a vested election or appointment does not disqualify him as
right and estoppel cannot forestall a challenge director if he becomes a shareholder before
against an act that is contrary to law. (Grace assuming the duties of his office. (SEC Opinions, 09
Christian High School v. CA, et al., G.R. No. Nov. 1987 & 05 Apr. 1990)
108905, 23 Oct. 1997),
Q: Is it necessary that the director be the owner
3. Trustees of educational institutions organized of the share of the corporation in his own right
as nonstock corporations or religious societies to qualify as such director?
shall not be less than five (5) nor more than
fifteen (15). However, with respect to A: In order to be eligible as a director, what is
educational institutions, the number of trustees material is the legal title to, not beneficial ownership
shall only be in multiples of five (5). (Secs. 106 of, the stock as appearing on the books of the
and 114, RCC) corporation (Lee v. CA, G.R. No. 93695, 04 Feb. 1992)
Similarly, when a director loses his legal title over

2022 GOLDEN NOTES
Corporation Law
all his shares, he automatically forfeits his director stands in fiduciary relation to the corporation and
position. (Divina, 2020) its stockholders. The disqualification of a
competitor from being elected to the board of
Additional Qualifications Provided by the directors is a reasonable exercise of corporate
Revised Code of Corporate Governance (RCCG) authority. Sound principles of corporate
management counsel against sharing sensitive
A director should have the following: (C-P-M-P) information with a director whose fiduciary duty to
loyalty may well require that he discloses this
1. College education or equivalent academic information to a competitive rival. When a person
degree; buys stock in a corporation, he does so with the
2. Practical understanding of the business of the knowledge that its affairs are dominated by a
corporation; majority of the stockholders. (Gokongwei v. SEC, et
3. Membership in good standing in relevant al., G.R. No. L-45911, 11 Apr. 1979)
industry, business, or professional
organizations; and Disqualification of Foreigners
4. Previous business experience. (Art. 3[D], RCCG)
While foreigners are disqualified from being
Q: John Gokongwei Jr., as stockholder of San elected/ appointed as corporate officers in wholly
Miguel Corporation, filed with SEC a petition for or partially nationalized business activities, they are
declaration of nullity of amended by-laws allowed representation in the BOD or governing
against the majority of the members of the body of said entities in proportion to their
Board of Directors and San Miguel Corporation. shareholding. (Sec. 2-A, Anti-Dummy Law; Sec. 11,
Gokongwei claimed that prior to the questioned Art. XII, 1987 Constitution, Art. XII, Sec. 11)
amendment, he had all the qualifications to be a
director of the corporation, being a substantial Q: Are directors or trustees required to be
stockholder thereof, Gokongwei had acquired residents of the Philippines?
rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the A: The requirement of the OCC which provides that
election of directors, and that in amending the “[a] majority of the directors or trustees of all
by-laws, Soriano, et. al. purposely provided for corporations organized under this Code must be
Gokongwei's disqualification and deprived him residents of the Philippines” was removed under
of his vested right as aforementioned, hence the the RCC. As such, it is possible that a majority or
amended by-laws are null and void. even all directors or trustees may be non-residents.
(Divina, 2020)
Is a provision on the by-laws disqualifying a
person for a position in the board of directors on Q: Are directors or trustees required to be
the ground that he is engaged in a business Filipino citizens?
which competes with that of the Corporation
valid? A: Similar to the OCC, the RCC does not require
Filipino citizenship for the directors or trustees of a
A: YES. A corporation is authorized to prescribe the corporation. However, if the corporation is engaged
qualifications of its directors. A provision in the by- in nationalized activities, citizenship becomes a
laws of the corporation that no person shall qualify qualification. Foreigners cannot be appointed to the
or be eligible for nomination for elections to the board of corporations engaged in wholly-
board of directors if he is engaged in any business nationalized activities. For partly nationalized
which compete with that of the Corporation is valid; activities, foreigners can be elected to the board of
provided, however, that before such nominee is directors in proportion to their foreign equity, as
disqualified, he should be given due process to show allowed by law. (Divina, 2020)
that he is covered by the disqualification. A director

Commercial Law
Q: A Korean national joined a corporation and Requirement of Independent Directors

was elected to the Board of Directors. To
complement its furniture manufacturing The board of the following corporations vested with
business, the corporation also engaged in the public interest shall have independent directors
logging business. With the additional logging constituting at least twenty percent (20%) of the
activity, can the Korean national still be a board: (Co-B-O)
member of the Board of Directors? Explain
(2005 BAR) 1. Corporations covered by Sec. 17.2 of R.A. No.
8799, otherwise known as “The Securities
A: YES. The Korean national can still be a member of Regulation Code,” such as (Re-Li-Ass):
the Board of Directors as long as sixty percent
(60%) of the Board of Directors are Filipinos and a. Corporations whose securities are
there is at least 20% foreign ownership justifying Registered with the Commission;
one (1) board seat for a foreigner. Corporations that b. Corporations Listed with an exchange;
are sixty percent (60%) owned by Filipinos can c. Public Companies; meaning, Corporations
engage in the business of exploration, development, with:
and utilization of natural resources (Sec. 2, Art. XII, i. Assets of at least P50 million;
1987 Constitution). The election of aliens as ii. Having 200 or more shareholders;
members of the Board of Directors engaging in iii. Each shareholder holding at least 100
partially nationalized activities is allowed in shares of a class of its equity shares.
proportion to their allowable participation or share
in the capital of such entities (Sec. 2-A, Anti-Dummy 2. Banks, quasi-banks, Preneed, Insurance and
Law). There is also nothing in the facts that shows trust companies, Nonstock savings and loan
that more than forty percent (40%) of the Board of associations, Pawnshops, corporations
Directors are foreigners. Engaged in money service business and other
Financial intermediaries; (B-P-I-N-P-E-F) and
Independent Directors
3. Other corporations engaged in business vested
An independent director is a person who apart from with public interest similar to the above, as may
shareholdings and fees received from the be determined by the Commission, after taking
corporation, is independent of management and into account relevant factors which are
free from any business or other relationship which germane to the objective and purpose of
could or could reasonably be perceived to requiring the election of independent director,
materially interfere with the exercise of such as the extent of minority ownership, type
independent judgment in carrying out the of financial products or securities issued or
responsibilities as a director. (Sec. 22, RCC) offered to investors, public interest involved in
the nature of business operations, and other
Independent directors must be elected by the analogous factors.
shareholders present or entitled to vote in absentia
during the election of directors. Independent Q: Two years since it began to operate, a
directors shall be subject to rules and regulations corporation has amassed assets valued at over
governing their qualifications, disqualifications, Php 60,000,000.00. It also has 250 shareholders,
voting requirements, duration of term and term each holding at least 150 shares. Under the
limit, the maximum number of board memberships, Revised Corporation Code, is the corporation
and other requirements that the SEC will prescribe required to have an independent director?
to strengthen their independence and align with Explain briefly. (2020-21 BAR)
international best practices. (Sec. 22, RCC)
A: Under Sec. 23 of the RCC, corporations vested
with public interest are required to have

2022 GOLDEN NOTES
Corporation Law
independent directors in their Boards. Corporations exercised in corporations vested with public
vested with public interest include public interest notwithstanding the absence of a
companies as described under the Securities provision in the bylaws of such corporations
Regulation Code.
2. The election must be by ballot, if requested by
A public company is any corporation with class of any voting stockholder or member;
equity shares listed for trading on an exchange OR
with assets in excess of Php 50,000,000.00 and has 3. Stockholders entitled to vote shall have the
200 or more stockholders, at least 200 of which hold right to vote the number of shares of stock
at least 100 shares each. (Sec. 23, RCC) standing in their own names in the stock books
of the corporation at the time fixed in the
Based on the facts provided, the corporation has bylaws or where the bylaws are silent, at the
assets of more than P50 million with 250 time of the election;
shareholders, each one holding more than 100
shares each. Thus, being a public company, the 4. The said stockholder may: (a) vote such number
corporation is required to have independent of shares for as many persons as there are
directors. directors to be elected; (b) cumulate said shares
and give one (1) candidate as many votes as the
Q: May the composition of the board of directors number of directors to be elected multiplied by
of the National Power Corporation be validly the number of the shares owned; or (c)
reduced to three? (2008 BAR) distribute them on the same principle among as
many candidates as may be seen fit: Provided,
A: YES. NPC is a government owned and controlled That the total number of votes cast by him must
corporation created by a special charter. Its charter not exceed the number of shares owned by him
allows composition of its board of directors to be as shown in the books of the corporation
reduced. Since NPC is not governed by the multiplied by the whole number of directors to
Corporation Code, the standard number of directors be elected;
is not required.
5. No delinquent stock shall vote or be voted for;
3. ELECTION AND REMOVAL OF and
DIRECTORS OR TRUSTEES
6. Except when the exclusive right is reserved for
ELECTION OF DIRECTORS OR TRUSTEES holders of founders’ shares under Section 7 of
this Code, each stockholder or member shall
Requirements and Limitations for the Election have the right to nominate any director or
of Directors or Trustees trustee who possesses all of the qualifications
and none of the disqualifications set forth in this
1. Presence of stockholders representing a Code. (Sec. 24, RCC)
majority of the outstanding capital stock of the
corporation or majority of the members, either Reportorial Requirement
in person or by proxy;
Within thirty (30) days after the election of
NOTE: Sec. 23 of the RCC also provides for directors, trustees and officers of the corporation,
voting through remote communication or in the secretary, or any other officer of the corporation,
absentia. When so authorized in the bylaws or by shall submit to the Commission the names,
a majority of the board of directors, nationality, shareholdings, and residence addresses
of the directors, trustees and officers elected. (Sec.
The right to vote through such modes (remote 25, RCC)
communication or in absentia) may be

Commercial Law
Jurisdiction Over Election Contests since he would have been elected as a director
had it not been for E’s nomination and election,
As amended by R.A. 8799 (SRC), the jurisdiction of then he (F) should now be considered a director
the SEC under Sec. 5 P.D. No. 902‐A (SEC as he had acquired all the shares of E. Decide
Reorganization Act) is now transferred to courts of with reasons. (1984 BAR)
general jurisdiction (RTC). Thus, RTC now has
jurisdiction over election contests. A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the
Q: In case where there are two (2) sets of transfer of all his shares to F in the books of the
persons claiming to be the Board of Directors, corporation. Every director must own at least one
which one is controlling? share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
A: It is the Board of Directors as reported to the SEC on the books of the corporation. Any director who
through the filing of a general information sheet. ceases to be the owner of at least one share of the
capital stock of the corporation of which he is a
By the express mandate of the Corporation Code director shall thereby cease to be a director. F’s
(Sec. 26) (now Sec. 25, RCC), all corporations duly claims are without merit since he was not duly
organized pursuant thereto are required to submit elected as a director at the stockholders’ meeting.
within the period therein stated (30 days) to the SEC Only the candidates receiving the highest number of
the names, nationalities and residences of the votes shall be declared elected.
directors, trustees and officers elected. Evidently,
the objective sought to be achieved by Sec. 26 is to Methods of Voting
give the public information, under sanction of oath
of responsible officers, of the nature of business, 1. Straight voting – every stockholder may vote
financial condition and operational status of the such number of shares for as many persons as
company together with information on its key there are directors to be elected.
officers or managers so that those dealing with it
and those who intend to do business with it may 2. Cumulative voting for one candidate – a
know or have the means of knowing facts stockholder is allowed to concentrate his votes
concerning the corporation’s financial resources and give one candidate, as many votes as the
and business responsibility. (Premium Marble number of directors to be elected multiplied by
Resources, Inc. v. CA, G.R. No. 96551, 04 Nov. 1996) the number of his shares shall equal.
Q: At the annual meeting of ABC Corporation for 3. Cumulative voting by distribution – a

the election of five directors as provided for in stockholder may cumulate his shares by
its articles of incorporation, A, B, C, D, E, F and G multiplying the number of his shares by the
were nominated. A, B, C, D and E received the number of directors to be elected and distribute
highest number of votes and were proclaimed the same among as many candidates as he shall
elected. F received ten votes less than E. see fit. (Sec. 23, RCC)
Subsequently, E sold all his shares to F. In the EXAMPLE: A owns 100 shares of stock in ABC Corp.
next Board of Directors’ meeting following the There are ten (10) directors to be elected. A has in
transfer of the shares in the books of the his power to cast 1,000 votes.
corporation, both E and F appeared. E claimed
that notwithstanding the sale of his shares to F, 1. Straight voting: A may give 100 votes for each
he remained a director since the Corporation candidate.
Code provides that directors “shall hold office
for 1 year and until their successors are elected 2. Cumulative voting for one candidate: A may
and qualified.” On the other hand, F claimed that give 1,000 votes to one preferred candidate.

2022 GOLDEN NOTES
Corporation Law
3. Cumulative voting by distribution: A may The Commission shall have the power to issue
give 500 votes each to two candidates. orders as may be appropriate, including orders:
Cumulative Voting in Stock vs. Non-stock 1. Directing the issuance of a notice stating the
time and place of election;
Members of nonstock corporations may cast as 2. The designated presiding officer; and
many votes as there are trustees to be elected but 3. The record date or dates for the determination
may not cast more than one (1) vote for one (1) of stockholders or members entitled to vote.
candidate, unless otherwise provided in the AOI or (Sec. 25, RCC)
in the bylaws
NOTE: Notwithstanding any provision of the AOI or
Cumulative voting is mandatory in stock bylaws to the contrary, the shares of stock or
corporations to protect the rights of minority membership represented at such meeting and
stockholders. Through cumulative voting, the entitled to vote shall constitute a quorum for
minority stockholders are given an opportunity to purposes of conducting an election under this
cumulate their shares to improve the chance of section.
getting a seat in the board of directors. (Divina,
2020) Quorum
Non-Holding of Elections Quorum Required in a Stock or Non-stock

corporation
Report
Unless otherwise provided in this Code or in the
1. Within thirty (30) days from the date of the bylaws, a quorum shall consist of the stockholders
scheduled election. The report shall specify representing a majority of the outstanding capital
a new date for the election, which shall not stock or a majority of the members in the case of
be later than sixty (60) days from the nonstock corporations. (Sec. 51, RCC)
scheduled date. (Sec. 25, RCC)
For stock corporations, the quorum is based on
2. Should a director, trustee or officer die, the number of outstanding voting stocks while for
resign or in any manner cease to hold office, non-stock corporations, only those who are actual,
the secretary, or the director, trustee or living members with voting rights shall be counted in
officer of the corporation, shall, within determining the existence of a quorum. To be clear,
seven (7) days from knowledge thereof, the basis in determining the presence of quorum in
report in writing such fact to the non-stock corporations is the numerical equivalent
Commission. of all members who are entitled to vote, unless some
other basis is provided by the By-Laws of the
Summary Order of Commission corporation. The qualification "with voting rights"
simply recognizes the power of a non-stock
If: corporation to limit or deny the right to vote of any
1. No new date has been designated, or of its members. (Mary Lim v. Moldex Land, Inc., G.R.
2. The rescheduled election is likewise not held – No. 206038, 25 Jan. 2017)
The Commission, may, upon the application of the AOI as Basis in Determining Quorum
stockholder, member, director, or trustee, and after
verification of the unjustified non-holding of the When the stock and transfer book is inaccurate and
election, summarily order that an election be held. deficient, it cannot be the sole basis of determining
the shareholdings for purposes of quorum. The AOI

Commercial Law
may be used as basis in determining the 1. There must be a previous notice of the meeting
shareholdings. to stockholders or members, and the
procedures prescribed by the RCC and bylaws
To base the computation of quorum solely on the must be followed.
obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the 2. The notice of the meeting must specify the
issued and outstanding shares as indicated in the intention to propose the removal of a director.
articles of incorporation would work injustice to the
owners and/or successors in interest of the said NOTE: The RCC does not require that the name
shares. This case is one instance where resort to of the director proposed to be removed be
documents other than the stock and transfer books specified. Thus, it is enough to include in the
is necessary. The stock and transfer book of PMMSI agenda that there is such an intention to remove
cannot be used as the sole basis for determining the a director.
quorum as it does not reflect the totality of shares
which have been subscribed, more so when the 3. The removal must be approved by stockholders
articles of incorporation show a significantly larger representing at least two-thirds (2/3) of the
amount of shares issued and outstanding as OCS or by at least two-thirds (2/3) of the
compared to that listed in the stock and transfer members entitled to vote for non-stock
book. (Lanuza, et al. v. CA, et al., G.R. No. 131394, 28 corporation.
Mar. 2005)
4. The removal may be with or without just cause.
REMOVAL OF DIRECTORS AND TRUSTEES
Provided, That removal without cause may not
Power to Remove be used to deprive minority stockholders or
members of the right of representation to which
The power to remove belongs to the stockholders they may be entitled under Sec. 23 of the RCC.
representing at least 2/3 of the OCS of a stock
corporation, or if a non-stock corporation, by a vote 5. The vacancy brought about by the removal of
of at least 2/3 of the members entitled to vote. (Sec. the director may be filled at the same
27, RCC) stockholders’ meeting where the removal was
effected as long as this fact is similarly stated in
GR: Removal may be with or without cause. the agenda and notice of the said meeting, or in
a separate meeting called for that purpose. (Sec.
XPN: If the director was elected by the minority, 28, RCC)
there must be cause for removal because the
minority may not be deprived of the right to NOTE: Only a majority of the outstanding capital
representation to which they may be entitled under stock of the corporation must be present to have a
Sec. 23 of the Code. (Sec. 27, RCC) quorum on the election to be held to fill the
aforesaid vacancy. (Divina, 2020)
NOTE: The right of representation referred to is the
right to cumulative voting for one candidate under The SEC may order the removal, after due notice and
Sec. 23 of the Code. hearing, of a director who has been elected despite
his disqualification, or whose disqualification arose
Requisites for Removal of Directors or Trustees or is discovered subsequent to an election. (Sec. 28,
RCC)
The removal of a director or trustee by the
stockholders or members is subject to the following
requisites:

2022 GOLDEN NOTES
Corporation Law
Remedy if there is Refusal to Call a Meeting to Amotion is the premature ousting of a director or
Remove Director officer from his post in the corporation.
If there is: FILLING OF VACANCIES

1. No secretary; or
2. If the secretary, despite demand, fails or Ways of Filling up Vacancies
refuses to call the special meeting or to give
notice thereof 1. Vacancies to be filled up by stockholders or
members: (E-R-O-R-I)
The stockholder or member signing the demand a. Expiration of term;
may call for the meeting by directly addressing the b. Removal;
stockholders or members c. Grounds Other than removal or expiration
of term, where the remaining directors do
Power of the SEC not constitute a quorum for the purpose of
filling the vacancy;
The Commission shall, motu proprio or upon d. If the vacancy may be filled by the
verified complaint, and after due notice and hearing, remaining directors or trustees but the
order the removal of a director or trustee elected board Refers the matter to stockholders or
despite the disqualification, or whose members; or
disqualification arose or is discovered e. Increase in the number of directors.
subsequent to an election. The removal of a
disqualified director shall be without prejudice to 2. Vacancies filled up by members of the board:
other sanctions that the Commission may impose on Any vacancy occurring in the board of directors
the board of directors or trustees who, with or trustees other than by removal or by
knowledge of the disqualification, failed to remove expiration of term may be filled by the vote of at
such director or trustee. (Sec. 27, RCC) least a majority of the remaining directors or
trustees, if still constituting a quorum. (Sec. 28,
Q: Henry is a board director in XYZ Corporation. RCC)
For being a fiscalizer in the Board, the majority
of the directors want him removed and his NOTE: The phrase “may be filled” in Sec. 28, RCC
shares be sold at auction, so he can no longer indicates that the filling of vacancies in the board by
participate even in the stockholder’s meetings. the remaining directors constituting a quorum is
Henry approaches you for advice on whether he merely permissive. Corporations may choose how
can be removed as board of director and vacancies in their boards may be filled up, either by
stockholder without cause. What is your advice? the remaining directors or trustees constituting a
Explain “amotion” and the procedure in quorum or by the stockholders or members, unless
removing a director. (2016 BAR) a specific mode if provided in the bylaws.
A: Henry cannot be removed by his fellow directors. Term of Replacement Director

The power to remove belongs to the stockholders.
He can only be removed by the stockholders owning A director elected to fill a vacancy shall serve the
at least 2/3 of the outstanding capital stock in a unexpired term of the predecessor in office. (Sec. 28,
meeting called for that purpose. The removal may RCC)
be with or without cause except that in this case, the
removal must be with cause because it is intended
to deprive the minority of the right of
representation.

Commercial Law
Vacancy Caused by Resignation of Director in When Vacancy Should be Filled

Hold-Over Position
WHEN VACANCY SHOULD BE FILLED
Q: Who should fill the vacancy due to the Term
Removal Other cases
resignation of a holdover director? Expiration
May be on the
A: In the case of Valle Verde Country Club, Inc., et al. same day the
vs. Africa (G.R. No. 151969, 04 Sept. 2009), the No later than meeting Forty-five
Supreme Court ruled the resignation as a holdover the day of such authorizing the (45) days
director will not change the nature of the cause of expiration at a removal; from the
the vacancy which is due to the expiration of meeting called provided this time the
director's term. The term of a hold-over director has for the fact is stated in vacancy
expired. The holdover period is not part of his term. purpose. (Sec. the agenda and arose. (Sec.
So, the cause of the vacancy is not resignation but 28, RCC) notice of said 28, RCC)
the expiration of term. As such, the vacancy must be meeting. (Sec.
filled by the stockholders in a regular or special 28, RCC)
meeting called for the purpose pursuant to Sec. 29
of OCC (now Sec. 28, RCC). (Divina, 2020) 4. DUTIES, RESPONSIBILITIES, AND
LIABILITIES FOR UNLAWFUL ACTS
Emergency Board (Sec. 28, RCC)
DUTIES AND RESPONSIBILITIES
EMERGENCY BOARD
When to call for an Emergency Board Fiduciary Nature of Obligation
When the vacancy prevents the remaining
directors from constituting a quorum and The directors’ character is that of a fiduciary insofar
emergency action is required to prevent grave, as the corporation and the stockholders as a body
substantial, and irreparable loss or damage to the are concerned. As agents entrusted with the
corporation. management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary
Who may fill the vacancy
relation, and in this sense the relation is one of trust.
It may be temporarily filled from among the
officers of the corporation. The ordinary trust relationship of directors of a
Voting requirement corporation and stockholders springs from the fact
that directors have the control and guidance of
He will be elected by a UNANIMOUS vote of the
corporate affairs and property and hence of the
remaining directors or trustees.
property interests of the stockholders. Equity
Limitations and Cessation recognizes that stockholders are the proprietors of
It shall be limited to the emergency action the corporate interests and are ultimately the only
necessary and term shall cease within: beneficiaries thereof. (Gokongwei v. SEC, et al., G.R.
(a) Reasonable time from the termination of the No. L-45911, 11 Apr. 1979)
emergency action; or
(b) Upon election of the replacement director or Majority Rule Doctrine
trustee,
whichever comes earlier. The majority rule states that a director has a
Reportorial Requirement fiduciary duty with respect to the corporation as an
The corporation must notify the SEC within three entity, and not to the stockholders as individuals.
(3) days from the creation of the emergency Consequently, he is subject to the duty to disclose all
board, stating therein the reason for its creation. material facts only to the corporation and not to the
stockholders. (American T. Co. v. California etc. Ins.

2022 GOLDEN NOTES
Corporation Law
Co., 15 Cal. 2d 42, 1940) Sec. 30 vs. Sec. 33, RCC
Three-Fold Duties of Directors

LIABILITY OF
DIRECTORS, DISLOYALTY OF A
In this jurisdiction, the members of the board of
TRUSTEES OR DIRECTOR
directors have a three-fold duty:
OFFICERS SEC. 33
SEC. 30
1. Duty of Obedience – shall direct the affairs of
the corporation only in accordance with the Applicable to directors, Applicable to directors
purposes for which it was organized; (Basis: Sec. trustees, and officers. only.
24, RCC)
Covers stock and non- Covers only stock
stock corporations. corporations.
2. Duty of Diligence – shall not willfully and
knowingly vote for or assent to patently Transaction cannot be Transaction may be
unlawful acts of the corporation or act in bad ratified. ratified.
faith or with gross negligence in directing the
affairs of the corporation; (Basis: Sec. 30, RCC)
LIABILITIES
and
Liability For Official Acts

3. Duty of Loyalty – shall not acquire any personal
or pecuniary interest in conflict with their duty
GR: The officers of a corporation are not personally
as such directors or trustees. (Basis: Secs. 30 and
liable for their official acts.
33, RCC) (Strategic Alliance Development
Corporation v. Radstock Securities Ltd., G.R. No.
XPNs: The officers may be held liable if it is shown
178158, 04 Dec. 2009)
that they exceeded their authority.
Disloyalty of Directors
In the following instances, the directors/ trustees
may be held personally liable for damages:
GR: Where a director, by virtue of such office,
acquires a business opportunity which should
1. When they willfully and knowingly vote for or
belong to the corporation, thereby obtaining profits
assent to patently unlawful acts of the
to the prejudice of such corporation, the director
corporation;
must account for and refund to the latter all such
profits.
2. When they are guilty of gross negligence or bad
faith in directing the affairs of the corporation;
XPN: Unless the act has been ratified by a vote of the
stockholders owning or representing at least two-
NOTE: Bad faith or negligence is a question of
thirds (2/3) of the OCS. (Sec. 33, RCC)
fact. Bad faith does not simply mean bad
judgment or negligence. It imparts a dishonest
NOTE: This provision shall be applicable,
purpose or some moral obliquity and conscious
notwithstanding the fact that the director risked
doing of wrong. It means breach of a known
one's own funds in the venture. (Ibid.)
duty through some motive or interest or ill-will;
it partakes of the nature of fraud. (Ford Phils.,
Inc., et al. v. CA, G.R. No. 99039, 03 Feb. 1997)
3. When they acquire any personal or pecuniary

interest in conflict with their duty as such
directors or trustees; (Sec. 30, RCC)

Commercial Law
4. When they consent to the issuance of watered failed to prove the existence of circumstances
stocks or who, having knowledge thereof, does that render Shangri-La and the other directors
not forthwith file with the corporate secretary solidarily liable. It ruled that Shangri-La’s Board
his written objection thereto; (Sec, 64, RCC) of Directors is not liable for the contractual
obligations of Shangri-La to BF Corporation.
5. When they are made, by a specific provision of
law, to personally answer for their corporate Are Shangri-La’s directors liable for the
action; (Sec. 144, CC; Sec.13, P.D. 115; Uichico v. contractual obligations of Shangri-La to BF
NLRC, G.R. No. 121434, 02 June 1997) Corporation?
6. When they agree to hold themselves personally A: NO. Indeed, as petitioners point out, their
and solidarily liable with the corporation; personalities as directors of Shangri-La are separate
(Tramat Mercantile, Inc. vs. CA, G.R. No. 111008, and distinct from Shangri-La. A corporation is an
07 Nov. 1994) or artificial entity created by fiction of law. This means
that while it is not a person, naturally, the law gives
7. When the corporate fiction is used to defeat it a distinct personality and treats it as such. A
public convenience, justify wrong, protect corporation, in the legal sense, is an individual with
fraud, or defend crime. (Carag v. NLRC, GR No. a personality that is distinct and separate from
147590, 02 Apr. 2007) other persons including its stockholders, officers,
directors, representatives, and other juridical
NOTE: When the officers of the corporation entities. (Lanuza, Jr. v. BF Corporation, G.R. No.
exceeded their authority, their actions are not 174938, 01 Oct. 2014)
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them. Participation in Arbitration
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535, 18 Aug. 2006) As a general rule, a corporation’s representative
who did not personally bind himself or herself to an
Q: BF Corporation, in a collection complaint filed arbitration agreement cannot be forced to
against Shangri-La and its Board of Directors, participate in arbitration proceedings made
alleged that Shangri-La induced BF Corporation pursuant to an agreement entered into by the
to continue with the construction of the corporation. He or she is generally not considered a
buildings using its own funds and credit despite party to that agreement. However, there are
Shangri-La’s default. It claims that Shangri-La instances when the distinction between
misrepresented that it had funds to pay for its personalities of directors, officers, and
obligations with BF Corporation. The latter representatives, and of the corporation, are
eventually completed the construction of the disregarded. We call this piercing the veil of
buildings. Shangri-La took possession of the corporate fiction. Hence, when the directors, as in
same while still owing BF Corporation an this case, are impleaded in a case against a
outstanding balance. corporation, alleging malice or bad faith on their
part in directing the affairs of the corporation,
Shangri-La’s BoD based their defense on the complainants are effectively alleging that the
separate personality given to juridical persons directors and the corporation are not acting as
vis-à-vis their directors, officers, stockholders, separate entities. They are alleging that the acts or
and agents. Since they did not sign the omissions by the corporation that violated their
arbitration agreement in any capacity, they rights are also the directors' acts or omissions. They
cannot be forced to submit to the jurisdiction of are alleging that contracts executed by the
the Arbitration Tribunal in accordance with the corporation are contracts executed by the directors.
arbitration agreement. The Arbitral Tribunal Complainants effectively pray that the corporate
rendered a decision, finding that BF Corporation

2022 GOLDEN NOTES
Corporation Law
veil be pierced because the cause of action between into a service contract with Robinsons Land
the corporation and the directors is the same. Corporation. Halfway through the service
contract, Skillex asked the respondents-
In that case, complainants have no choice but to employees Seva, et al. to execute individual
institute only one proceeding against the parties. contracts which stipulated that their respective
Under the Rules of Court, filing of multiple suits for employments shall end at the last day of the
a single cause of action is prohibited. Institution of year. Skillex and Robinsons no longer extended
more than one suit for the same cause of action their contract of janitorial services.
constitutes splitting the cause of action, which is a Consequently, Skillex dismissed Seva, et al. as
ground for the dismissal of the others (Lanuza, Jr. v. they were project employees whose duration of
BF Corporation, supra) employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed
NOTE: However, in ruling that petitioners may be a complaint for illegal dismissal with the NLRC.
compelled to submit to the arbitration proceedings, Should Rana and Burgos be held solidarily liable
the Supreme Court is not overturning Heirs of with the corporation for respondents-
Augusto Salas Jr. v. Laperal Realty Corporation, et al. employees’ monetary claims against the
(G.R. No. 135362, 13 Dec. 1999) wherein the court corporation?
affirmed the basic arbitration principle that only
parties to an arbitration agreement may be A: NO. Seva, et al. failed to show the existence of the
compelled to submit to arbitration. first requisite. They did not specifically allege in
their complaint that Rana and Burgos willfully and
Requisites for Holding Directors or Officers knowingly assented to petitioner’s patently
Personally Liable: unlawful act of forcing the respondents to sign the
dubious employment contracts in exchange for their
Before a director or officer of a corporation can be salaries. The respondents also failed to prove that
held personally liable for corporate obligations, the Rana and Burgos had been guilty of gross negligence
following requisites must concur: or bad faith in directing the affairs of the
corporation.
1. The complainant must allege in the complaint
that the director or officer assented to patently To hold an officer personally liable for the debts of
unlawful acts of the corporation, or that the the corporation, and thus pierce the veil of
officer was guilty of gross negligence or bad corporate fiction, it is necessary to clearly and
faith; and convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed.
2. The complainant must clearly and convincingly (FVR Skills and Services Exponents, Inc. [SKILLEX], et.
prove such unlawful acts, negligence, or bad Al. v. Seva, et al., G.R. No. 200857, 22 Oct. 2014)
faith. (Heirs of Fe Tan Uy v. International
Exchange Bank, G.R. No. 166282, G.R. No. 166283, Q: LMN Corporation hired X as Assistant Stage
13 Feb. 2013) Manager under a four-month contract on board
a vessel. While on board, X started to feel back
NOTE: The fact that the corporation ceased pains after he moved several boxes. As the pain
operations the day after the promulgation of the SC persisted, X was sent to an orthopedic doctor
resolution finding the corporation liable does not where he was initially assessed to have lumbar
prove bad faith on the part of the incorporator of the disc disorder. The company-designated
corporation. (Polymer Rubber Corp. v. Ang physician issued a medical report declaring X
Salamuding, G.R. No. 185160, 24 July 2013) partially and permanently disabled with Grade
8 Impediment. Unsatisfied, X consulted another
Q: Rana and Burgos are the President and doctor who declared him as permanently and
General Manager of SKILLEX. The latter entered totally disabled. Thereafter, X informed LMN

Commercial Law
Corporation of the findings of his doctor and Labor Arbiter that he was dismissed by Genesis
requested that his case be referred to a third on account of a discrepancy in the amount he
doctor. However, since LMN Corporation declared on bus ticket receipts. Genesis gave
ignored his request, X filed a complaint for him a Memorandum to explain within twenty-
payment of total and permanent disability four (24) hours why he should not be sanctioned
benefits. LMN Corporation contended that only for reporting and remitting the amount of
those with Grade 1 disability assessment are P198.00 instead of the admittedly correct
entitled to full disability compensation, thus X amount of P394 worth of bus ticket receipts.
was not entitled to the benefits under POEA Rivera responded that it was an honest mistake,
Standard employment contract. which he was unable to correct “because the bus
encountered mechanical problems.” Despite
Can a corporate officer who entered a contract Rivera’s explanations, his employment was
on behalf of a corporation be held solidarily terminated through a written notice. Rivera
liable with the corporation? filed a complaint for illegal dismissal against
Genesis and Riza Moises, the General Manager
A: YES. Generally, corporate directors, trustees, or and President of Genesis. Should Riza Moises be
officers who entered into contracts on behalf of the solidarily liable with Genesis?
corporation cannot be personally held liable for the
liabilities of the latter. However, their personal A: NO. As a rule, corporate directors and officers are
liability may validly attach when they are not liable for the illegal termination of a
specifically made by a particular provision of law. corporation’s employees. It is only when they acted
in bad faith or with malice that they became
Here, RA 8042 expressly provides for joint and solidarily liable with the corporation. Rivera, in this
solidary liability of corporate directors and officers case, has not produced proof to show that Moises
with the recruitment/placement agency for all acted in bad faith or with malice as regards the
money claims or damages that may be awarded to termination of his employment. Thus, she did not
OFWs. incur any personal liability. (Rivera v. Genesis
Transport Service, Inc., G.R. No. 215568, 03 Aug.
Thus, the owner of LMN Corporation, is solidarily 2015)
liable with the latter for X’s partial and permanent
disability benefits. (United Philippines Lines, Inc. v. Q: Jacob and Fernandez are STI officers, the
Alkuino, Jr., G.R. No. 245960, 14 July 2021) former being the President and CEO and the
latter as the Senior VP. Ico was hired as Faculty
Liability of Director for Termination of Member by STI College Makati, Inc., a wholly-
Employees owned subsidiary of STI. Ico was subsequently
promoted as Dean of STI College-Parañaque
Without any evidence of bad faith or malice, and, thereafter, as COO of STI-Makati. However,
directors may not be held personally liable. Only after the merger between STI and STI College
when the termination is done with malice or in bad Makati (Inc.), Ico received a memorandum
faith on the part of the director may the director be cancelling her COO assignment, citing the
held solidarily liable with the corporation. management’s decision to undertake an
(Equitable Banking Corporation vs. NLRC, G.R. No. "organizational restructuring" in line with the
02467, 13 June 1997; Rolando DS Torres v. Rural merger, and further ordering Ico to turn over
Bank of San Juan, Inc., et al., G.R. No. 184520, 13 Mar. her work to one Victoria Luz, who shall function
2013) as STI-Makati’s School Administrator.
Q: Rivera was employed by Genesis Transport Based on a report, it was recommended that an
Service, Inc. (Genesis) as a bus conductor. He investigation committee be formed to
acknowledged in his Position Paper before the investigate Ico for grave abuse of authority,

2022 GOLDEN NOTES
Corporation Law
falsification, gross dishonesty, maligning and difference between the value received at the
causing intrigues, and other charges. The LA issuance of the stock and the par or issued value of
found Ico to have been illegally, constructively the same. (Sec. 64, RCC)
and in bad faith, dismissed by STI, Jacob and
Fernandez. On appeal, the NLRC reversed the NOTE: The prohibition to issue “watered stock”
ruling of the LA. CA affirmed the ruling of the refers only to the original issue of stocks (primary
NLRC. Is Jacob, as the President and CEO of STI, issuance) but not to a subsequent transfer of such
solidarily liable with STI? stocks by the corporation (secondary market or
transaction).
A: NO. The Court fails to discern any bad faith or
negligence on the part of respondent Jacob. The See also discussion on Watered Stocks – page 210.
principal character that figures prominently in this
case is Fernandez; he alone relentlessly caused Liability for Attempting to Acquire Adverse
petitioner’s hardships and suffering. He alone is Interest on Confidential Matters
guilty of persecuting petitioner. His superior, Jacob,
may have been, for the most part, clueless of what When a director, trustee, or officer attempts to
Fernandez was doing to petitioner. A corporation, acquire or acquires, in violation of his duty, any
as a juridical entity, may act only through its interest adverse to the corporation in respect of any
directors, officers, and employees. Obligations matter which has been reposed in him in
incurred as a result of the directors’ and officers’ confidence, as to which equity imposes a disability
acts as corporate agents, are not their personal upon him to deal in his own behalf, he shall be liable
liability but the direct responsibility of the as a trustee for the corporation and must account
corporation they represent. As a rule, they are only for the profits which otherwise would have accrued
solidarily liable with the corporation for the illegal to the corporation. (Sec. 30, RCC)
termination of services of employees if they acted
with malice or bad faith. (Girly Ico v. STI, Inc., et al., NOTE: Private or secret profits obtained must be
G.R. No. 185100, 09 July 2014) accounted for, even though the transaction on
which they are made is advantageous or is not
Liability of Directors for Issuance of Watered harmful to the corporation, or even though the
Stocks director/ trustee or officer acted without intent to
injure the corporation.
Watered Stock –is a stock issued in exchange for
cash, property, share, stock dividends, or services NOTE: The members of the board of directors who
lesser than its par value or issued value (no par approved the payment of the cash dividends despite
value) or for a consideration other than cash, valued the insolvency of the corporation and the
in excess of its fair value. (Sec. 64, RCC) stockholders who received the payment should
make good the losses. (Steinberg v. Velasco, G.R. No.
A director or trustee who: L-30460, 12 March 1929)
1. Consents to the issuance of stocks for a
consideration less than its par or issued value; Q: International Air Transport Association
2. Consents to the issuance of stocks for a (IATA) and Morning Star entered a Passenger
consideration other than cash, valued in excess Sales Agency Agreement such that the latter
of its fair value; or must report all air transport ticket sales to the
3. Having knowledge of the insufficient former and account all payments received
consideration, does not file a written objection through the centralized system called Billing
with corporate secretary and Settlement Plan. IATA obtained a Credit
Insurance policy from Pioneer to assure itself of
Shall be liable to the corporation or its creditors, payments by accredited travel agents for tickets
solidarily with the stockholder concerned for the

Commercial Law
sales and monies due to the airline companies circumstance would amount to fraud, warranting
under the Billing and Settlement Plan. personal and solidary liability of its corporate
officers.
The policy was made known to Morning Star,
through its President, Benny Wong, who was Piercing the corporate veil in order to hold
among those that declared itself liable to corporate officers personally liable for the
indemnify Pioneer for any and all claims under corporation’s debts requires that "the bad faith or
the policy. Morning Star had an accrued billing wrongdoing of the director must be established
of P49,021,641.80 and US$325,865.35 for the clearly, and convincingly as bad faith is never
period from Dec. 16, 2002 to Dec. 31, 2002. It presumed. (Pioneer Insurance v. Morning Star Travel
failed to remit these amounts through the and Tours, G.R. No. 198436, 08 July 2015)
Billing and Settlement Plan.
Disloyalty
IATA demanded from Pioneer the sums of
P109,728,051.00 and US$457,834.14 GR: The director must account for and refund to the
representing Morning Star’s overdue account as office all such profits, which such director, by virtue
of April 30, 2003. Pioneer investigated, of such office;
ascertained, and validated the claims, then paid
IATA the amounts of P100,479,171.59 and 1. Acquires a business opportunity which should
US$457.834.14. Consequently, Pioneer belong to the corporation;
demanded these amounts from Morning Star 2. Thereby obtaining profits to the prejudice of
through a letter. IATA executed a Release of such corporation. (Sec. 33, RCC)
Claim and Subrogation Receipt in favor of
Pioneer. XPN: Unless the act has been ratified by a vote of the
stockholders owning or representing at least two-
Pioneer filed a Complaint for Collection of Sum thirds (2/3) of the OCS. (Ibid.)
of Money and Damages against Morning Star and
its shareholders and directors. Should the NOTE: This rule shall be applicable,
shareholders and directors of Morning Star be notwithstanding the fact that the director risked
jointly and severally liable with Morning Star? one’s own funds in the venture. (Ibid.)
A: NO. Under Sec. 31 of the Corporation Code (now Doctrine of Corporate Opportunity
Sec. 30, RCC), Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful Where a director, by virtue of his office, acquires for
acts of the corporation or who are guilty of gross himself a business opportunity which should belong
negligence or bad faith in directing the affairs of the to the corporation, thereby obtaining profits to the
corporation or acquire any personal or pecuniary prejudice of such corporation, is guilty of disloyalty
interest in conflict with their duty as such directors and should, therefore, account to the latter for all
or trustees shall be liable jointly and severally for all such profits by refunding the same, notwithstanding
damages resulting therefrom suffered by the that he risked his funds in the venture. (Sec. 33, RCC)
corporation, its stockholders or members and other
persons. A director shall refund to the corporation all the
profits he realizes on a business opportunity which:
The mere fact that Morning Star has been incurring
huge losses and that it has no assets at the time it 1. The corporation is financially able to
contracted large financial obligations to IATA, undertake;
cannot be considered that its officers, Estelita Co 2. From its nature, is in line with corporation’s
Wong, Benny H. Wong, Arsenio Chua, Sonny Chua business and is of practical advantage to it; and
and Wong Yan Tak, acted in bad faith or such

2022 GOLDEN NOTES
Corporation Law
3. The corporation has an interest or a reasonable the responsible officer is criminally liable, therefore.
expectancy. (Ibid.) The reason is that a corporation can act through its
officers and agents and where the business itself
Q: Malyn, Schiera and Jaz are the directors of involves a violation of law all who participate in it
Patio Investments, a close corporation formed are liable. While the corporation may be fined for
to run the Patio Cafe, an al fresco coffee shop in such criminal offense if the law so provides, only the
Makati City. In 2000, Patio Cafe began responsible corporate officer can be imprisoned.
experiencing financial reverses, consequently, (People v. Tan Boon Kong, G.R. No. L-35262, 15 Mar.
some of the checks it issued to its beverage 1930)
distributors and employees bounced.
However, a director or officer can be held liable for
In October 2003, Schiera informed Malyn that a criminal offense only when there is a specific
she found a location for a second cafe in Taguig provision of law making a particular officer liable
City. Malyn objected because of the dire financial because being a corporate officer by itself is not
condition of the corporation. enough to hold him criminally liable.
Sometime in April 2004, Malyn learned about Liability of Officers Under Trust Receipts Law
Fort Patio Cafe located in Taguig City and that its
development was undertaken by a new The Trust Receipts Law (P.D. 115) recognizes the
corporation known as Fort Patio, Inc., where impossibility of imposing the penalty of
both Schiera and Jaz are directors. Malyn also imprisonment on a corporation. Hence, if the
found that Schiera and Jaz, on behalf of Patio entrustee is a corporation, the law makes the
Investments, had obtained a loan of P500,000, officers or employees or other persons responsible
from PBCom Bank, for the purpose of opening for the offense liable to suffer the penalty of
Fort Patio Cafe. This loan was secured by the imprisonment. (Ong v. CA, G.R. No. 119858, 29 Apr.
assets of Patio Investments and personally 2003)
guaranteed by Schiera and Jaz.
Though the entrustee is a corporation, nevertheless,
Malyn then filed a corporate derivative action the law specifically makes the officers, employees or
before the RTC of Makati City against Schiera other persons responsible for the offense, without
and Jaz, alleging that the two directors had prejudice to the civil liabilities of such corporation
breached their fiduciary duties by and or board of directors, officers, or other officials
misappropriating money and assets of Patio or employees responsible for the offense. The
Investments in the operation of Fort Patio Cafe. rationale is that such officers or employees are
vested with the authority and responsibility to
Did Schiera and Jaz violate the principle of devise means necessary to ensure compliance with
corporate opportunity? Explain. (2005 BAR) the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in
A: YES. Schiera and Jaz violated the Doctrine of the violations of the law. (Ching v. the Secretary of
Corporate Opportunity because they used Patio Justice, et al., G.R. No. 164317, 06 Feb. 2006)
Investments to obtain a loan, mortgaged its assets
and used the proceeds of the loan to acquire a coffee A trust receipt transaction imposes upon the
shop through a corporation they formed. entrustee the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not
Responsibility for Crimes sold, to return the same to the entruster. There are
two obligations in a trust receipt transaction: the
Where a law requires a corporation to do a first, refers to money received under the obligation
particular act, failure of which on the part of the involving the duty to turn it over to the owner of the
responsible officer to do so constitutes an offense, merchandise sold, while the second refers to

Commercial Law
merchandise received under the obligation to relief may be granted in appropriate instances.
"return" it to the owner. A violation of any of these (Strong v. Repide, supra)
undertakings constitutes estafa defined under Art.
315 (1) (b) of the RPC, as provided by Sec. 13 of P.D. Inside Information
115.
Any material non-public information about the
Although these pieces of evidence show that Choa issuer of the securities (corporation) or the security
signed the Trust Receipt Agreements, they do not obtained by being an insider, which includes:
show that he signed them in his personal capacity. (I-D-Re-Go-L)
Without any evidence that respondent personally
bound himself to the debts of the company he 1. The Issuer;
represented, this Court cannot hold him civilly liable 2. A Director or officer (or any person performing
under the Trust Receipt Agreements. (BDO Unibank, similar functions) of, or a person controlling the
Inc. v. Choa, G.R. No. 237553, 10 July 2019) issuer;
3. A person whose Relationship or former
Special Fact Doctrine relationship to the issuer gives or gave him
access to material information about the issuer
The special fact doctrine is an exception to the or the security that is not generally available to
majority rule doctrine. It states that where special the public;
circumstances or facts are present which make it 4. A Government employee, director, or officer of
inequitable for the director to withhold information an exchange, clearing agency and/or self-
from the stockholder, the duty to disclose arises, regulatory organization who has access to
and concealment is fraud. material information about an issuer or a
security that is not generally available to the
See also discussion on Majority Rule Doctrine – page public; or
158. 5. A person who Learns such information by a
communication from any forgoing insiders (Sec.
Application of Special Fact Doctrine 3.8, SRC)
In foreign U.S. jurisprudence, the special fact Dealings of Directors, Trustees or Officers with
doctrine was applied in the following cases: the Corporation
1. Where a director actively participates in the A contract of the corporation with one or more of its
negotiations for a transfer of the corporate directors, trustees, officers, or their spouses and
property. (Strong v. Repide, 213 U.S. 419, 29 S.Ct. relatives within the fourth civil degree of
521, 53 L.Ed. 853) consanguinity or affinity is voidable, at the option of
the corporation unless all the following conditions
2. Where a director undertakes to speak or are present:
becomes active in inducing the sale, he must
speak fully, frankly, and honestly, and conceal 1. In case of a director or trustee:
nothing to the disadvantage of the selling a. That the presence of such director or
stockholder. (Poole v. Camden, 79 W. Va. 310) trustee in the board meeting in which the
contract was approved was not necessary
3. Where a director personally seeks a to constitute a quorum for such meeting;
stockholder for the purpose of buying his b. That the vote of such director or trustee
shares without making disclosure of material was not necessary for the approval of the
facts within his peculiar knowledge and not contract;
within reach of the stockholders, the c. That the contract is fair and reasonable
transaction will be closely scrutinized, and under the circumstances;

2022 GOLDEN NOTES
Corporation Law
NOTE: In case of corporations vested with A: “A” should account for and refund to the
public interest, material contracts are corporation all the profits which he realized from
approved by at least 2/3 of the entire the transaction. He grabbed the business
membership of the board, with at least a opportunity from the corporation (Sec. 33, RCC).
majority of the independent directors voting
to approve the material contract; and Contracts between Corporations with
Interlocking Directors
2. In case of officer: That in the case of an officer,
the contract with the officer has been A contract between two or more corporations
previously authorized by the board of directors. having interlocking directors shall not be
(Sec. 31, par. 1, RCC) invalidated on that ground alone. Provided that:
NOTE: Sec. 31 does not require that the corporation 1. Contract is not fraudulent;
suffers injury or damage as a result of the contract. 2. Contract is fair and reasonable under the
circumstances; and
Ratification of Contract With Director, or 3. If the interest of the interlocking director in one
Trustee corporation or corporations is substantial and
the interest in the other corporation or
A contract of the corporation with one or more of its corporations is merely nominal, he shall be
directors or trustees may be ratified by the vote of subject to the provisions of Sec. 32 insofar as the
the stockholders representing at least 2/3 of the latter corporation or corporations are
OCS or 2/3 of the members in a meeting called for concerned. (Sec. 32, RCC);
the purpose where any of the first three (3)
conditions is absent. NOTE: Stockholdings exceeding 20% of the
outstanding capital stock shall be considered
Provided: There is full disclosure of the adverse substantial for purposes of interlocking
interest of the directors or trustees involved is made directors.
at the stockholders’ meeting called for the purpose;
and the contract is fair and reasonable under the When a mortgagee bank foreclosed the mortgage on
circumstances. (Sec. 31, par. 2, RCC) the real and personal property of the debtor and
thereafter assigned the properties to a corporation
Q: Suppose that the by-laws of X Corporation, a it formed to manage the foreclosed assets, the
mining firm, provides that "The directors shall unpaid seller of the debtor cannot complain that the
be relieved from all liability for any contract assignment is invalid simply because the mortgagee
entered into by the corporation with any firm in and the assignee have interlocking directors. There
which the directors may be interested." Thus, is no bad faith on the part of DBP by its creation of
director A acquired claims which overlapped Nonoc Mining, Maricalum and Island Cement as the
with X's claims and were necessary for the creation of these three corporations was necessary
development and operation of X's mining to manage and operate the assets acquired in the
properties. Is the by-law provision valid? Why? foreclosure sale lest they deteriorate from non-use
(2001 BAR) and lose their value. (DBP v. CA, G.R. No. 126200, 16
Aug. 2001)
A: NO. It is in violation of Sec. 31 of the RCC.
EXECUTIVE COMMITTEE
Q: What happens if director “A” is able to
consummate his mining claims over and above Executive Committee
that of the corporation’s claims? (2001 BAR)
An executive committee is a body created by the by-
laws and composed of not less than three (3)

Commercial Law
members of the board which, subject to the Committee to manage the affairs of the
statutory limitations, has all the authority of the corporation in between board meetings. The
board to the extent provided in the board resolution Board of Directors appointed the following
or by-laws. The committee may act by a majority members of the Executive Committee: the
vote of all of its members. (Sec. 34, RCC) President, Sarah L; the Vice-President, Jane L;
and a third member from the board, Juan Riles.
A Foreigner is Allowed to be a Member of the in December 1, 2013, the Executive Committee,
Executive Committee with Sarah L and Jane L present, met and
decided on the following matters:
A foreigner can be allowed representation in the
executive committee since he can be allowed in the 1. Purchase of a delivery van for use in the
BOD. An Executive Committee is a governing body corporation’s retail business;
which functions as the board itself. Thus, 2. Declaration and approval of the 13th month
membership therein shall be governed by the same bonus;
law/ rules applicable to the BOD as provided in Sec. 3. Purchase of an office condominium unit at
35. (SEC Opinion, June 3, 1998) the Fort; and
4. Declaration of P10.00 per share cash
Limitations on the Powers of the Executive dividend.
Committee
Are the actions of the Executive Committee
The executive committee cannot act on the valid? (2014 BAR)
following:
A: NO. All the actions taken by the Executive
1. Matters needing stockholder approval; Committee in the problem are not valid. The
2. Filling up of board vacancies; Executive Committee was not properly created and,
3. Amendment, repeal, or adoption of by-laws; therefore, its acts are invalid. Sec. 35 of the
4. Amendment or repeal of any resolution of the Corporation Code requires that at least three
Board which by its express terms is not members of an Executive Committee be directors of
amendable or repealable; and the corporation. In the problem, only Member Sarah
5. Cash dividend declaration (Sec. 34, RCC) L (who is a director as she is the president) and
Member Juan Riles (who is clearly identified in the
Creation of Special Committees problem as a director) are directors of Soei
Corporation. Member Jane L is not identified as a
The Board of directors may create special director. As the Executive Committee in the problem
committees of temporary or permanent nature and was not properly created, it could not act at all as the
determine the members’ term, composition, minimum quorum would be three. As stated earlier,
powers, and responsibilities. (Sec. 34, RCC) the Executive Committee lacks one qualified
member.
Decisions of the Executive Committee are NOT
Subject to Appeal to the Board If the Executive Committee were properly
organized and a quorum was present, all the actions
Decisions of the executive committee are not subject taken by the Executive Committee in the problem,
to appeal to the board. However, if the resolution of except the declaration of P10.00 per share cash
the Executive Committee is invalid, i.e. not one of the dividend, would have been valid. The distribution of
powers conferred to it, it may be ratified by the cash dividends to the shareholders may not be
board. (SEC Opinion, 29 July 1995) delegated by the Board of Directors to the Executive
Committee pursuant to Sec. 34 of the RCC
Q: Pursuant to its By-Laws, Soei Corporation’s
Board of Directors created an Executive

2022 GOLDEN NOTES
Corporation Law
MEETINGS OF DIRECTORS OR TRUSTEES be held estopped to set up the failure to observe

formalities. (Divina, 2020)
REGULAR SPECIAL
When Attendance, Voting by Proxy at Board Meetings
At any time upon call
Monthly, unless the Directors or trustees cannot attend or vote by proxy
of the President or as
bylaws provide at board meetings. (Sec. 52, par. 5, RCC)
may be provided in
otherwise.
the bylaws.
The members of the BOD are required to exercise
Notice Requirement their judgment and discretion in running the affairs
1. It must state the date, time and place of the of the corporation and they cannot be substituted by
meeting; others. (SEC Opinion, 27 May 1970)
2. It must be sent to every director or trustee
a. Within the period provided in the by- Who Presides Meeting
laws.
b. at least two (2) days prior to the The chairman or, in his absence, the president shall
scheduled meeting, unless a longer preside at all meetings of the directors or trustees
period is provided in the bylaws as well as of the stockholders or members, unless
the bylaws provide otherwise (Sec. 53, RCC).
NOTE: A director or trustee may waive this
requirement, either expressly or impliedly. (Sec. Q: Under the articles of incorporation of Manila
52, RCC) Industrial Corp., its principal place of business
shall be in Pasig, Metro Manila. The principal
Attendance in Meetings
corporate offices are at Ortigas Center, Pasig,
Directors or trustees who cannot physically Metro Manila, while factory processing leather
attend or vote at board meetings can participate products is in Manila. The corporation holds its
and vote through remote communication such as annual stockholders’ meeting at the Manila
videoconferencing, teleconferencing, or other Hotel in Manila and its BOD meeting at a hotel in
alternative modes of communication that allow Makati, Metro Manila. The by-laws are silent as
them reasonable opportunities to participate. to the place of meeting of the stockholders and
directors.
Directors or trustees cannot attend or vote by
proxy at board meetings. a. Who shall preside at the meeting of the
directors?
Venue
b. Can Ting, a stockholder, who did not attend
May be held anywhere in or outside of the the stockholders’ annual meeting in Manila,
Philippines, unless the bylaws provide otherwise. question the validity of the corporate
resolutions passed at such meeting?
Consequence of Lack of Notice, Absence c. Can the same stockholder question the
validity of the resolutions adopted by the
A meeting held in the absence of some of the BOD at the meeting held in Makati? (1993
directors and without any notice given to them is BAR)
illegal, and the action at such meeting although by a
majority of the directors, is invalid unless: A:
a. Sec. 53 of the RCC provides that it is the
1. Subsequently ratified or waived, expressly or chairman or, in his absence, the president who
impliedly, by the absent directors; or shall preside at all meetings, unless the bylaws
2. Rights have been acquired by innocent third provide otherwise.
persons, as against whom the corporation must

Commercial Law
b. NO. Sec. 50 of the RCC provides that the Three (3) out of five (5) directors of the board of
stockholders’ or members’ meetings, whether directors present in a special meeting do not
regular or special, shall be held in the principal constitute a quorum to validly transact business
office of the corporation as set forth in the AOI, when its by-laws require at least four members to
or, if not practicable, in the city or municipality constitute a quorum. Under Sec. 25 of the CC (now
where the principal office of the corporation is Sec. 52, RCC), the articles of incorporation or by-
located. Provided, That any city or municipality laws may fix a greater number than the majority of
in Metro Manila, Metro Cebu, Metro Davao, and the number of directors to constitute a quorum. Any
other Metropolitan areas shall, for purposes of number less than the number provided in the
this section, be considered a city or municipality articles or by-laws cannot constitute a quorum; any
Since the principal office or business of MIC is act therein would not bind the corporation; all that
Pasig, Metro Manila, the holding of the annual the attending directors could do is to adjourn (Pena
stockholders’ meeting in Manila, which is v. CA, G.R. No. 91478, 07 Feb. 1991)
within Metro Manila, is proper.
Effect of Abstention
c. NO. Ting cannot question the validity of
corporate resolutions passed in the BOD No inference can be drawn in a vote of abstention.
meeting because Sec. 52 of the RCC does not When a director or trustee abstains, it cannot be
require that the meeting must be held within said that he intended to acquiesce in the action
the city or municipality where the principal taken by those who voted affirmatively. Neither, for
office of the corporation is located. The that matter, can such inference be drawn from the
meetings of directors or trustees may be held abstention that he was abstaining because he was
anywhere in or outside of the Philippines unless not then ready to make a decision. (Lopez v. Ercita,
the bylaws provide otherwise. G.R. No. L-32991, 29 June 1972)
Quorum in Board Meetings When Director is Required to Abstain
GR: Majority of the number of directors or trustees Whenever a director believes he/she has a conflict
as stated in the articles of incorporation. of interest, the director should abstain from voting
on the issue and make sure his/her abstention is
XPN: If AOI or the by-laws provide for a greater noted in the minutes. (Robert's Rules, 10th ed.)
number. (Sec. 52, RCC)
The other reason a director might abstain is that
NOTE: The quorum is the same even if there is he/she believes there was insufficient information
vacancy in the board. for making a decision. Otherwise, directors should
cast votes on all issues put before them. Failure to
Rule as to Vote Needed for a Decision do so could be deemed a breach of their fiduciary
duties.
GR: Every decision of at least a majority of the
directors or trustees present at a meeting at which Example: To avoid insider trading, insiders are
there is quorum shall be valid as a corporate act. obligated to abstain from trading the shares of his
corporation. This duty to abstain is based on two
XPNs: factors:
1. The election of officers which shall require the
vote of a majority of all the members of the 1. The existence of a relationship giving access,
board; or directly or indirectly, to information intended
2. Unless greater majority is required under the to be available only for a corporate purpose and
RCC, AOI, or by-laws. not for the personal benefit of anyone; and

2022 GOLDEN NOTES
Corporation Law
2. The inherent unfairness involved when a party

takes advantage of such information knowing it E. STOCKHOLDERS AND MEMBERS
is unavailable to those with whom he is dealing.
(SEC v. Interport Resources Corporation, G.R. No.
135808, 06 Oct. 2008)
A person becomes a shareholder the moment he:
1. Enters into a subscription contract with an

existing corporation (he is a stockholder upon
acceptance of the corporation of his offer to
subscribe whether the consideration is fully
paid or not);
2. Purchase treasury shares from the corporation;
or
3. Acquires shares from existing shareholders by
sale or any other contract or acquires shares by
operation of law like succession. (Sundiang Sr. &
Aquino, 2009)
1. RIGHTS AND OBLIGATIONS OF A

STOCKHOLDER AND MEMBER
Rights of a Stockholder and Member
1. Management Rights
a. To attend and vote in person or by proxy
at a stockholders’ meetings; (Sec. 49, 57,
RCC)
b. To elect and remove directors; (Sec. 23, 27,
RCC)
c. To approve certain corporate; (Sec. 57,
RCC)
d. To adopt and amend or repeal the by-laws
of adopt new by-laws; (Sec. 45, 47, RCC)
e. To compel the calling of the meetings; (Sec.
49, RCC)
f. To enter into a voting trust agreement;
(Sec. 58, RCC) and
g. To have the corporation voluntarily
dissolved. (Sec. 117, 118, RCC)
2. Proprietary Rights
a. To transfer stock in the corporate book;
(Sec. 62, RCC)
b. To receive dividends when declared; (Sec.
42, RCC)
c. To the issuance of certificate of stock or
other evidence of stock ownership; (Sec.
63, RCC)

Commercial Law
d. To participate in the distribution of While a stockholder has no personal liability for the
corporate assets upon dissolution; (Sec. debts of the corporation beyond the amount of his
117, 118, RCC) and capital investment, he is personally liable for the
e. To pre-emption in the issue of shares. (Sec. above obligations. In addition, he may become
38, RCC) personally liable for damages or otherwise for any
wrongful disposition of corporate assets, breaches
3. Remedial Rights of fiduciary duties, fraud, gross negligence,
a. To inspect corporate books; (Sec. 73, RCC) unauthorized acts, violations of law, or improper
b. To recover stock unlawfully sold for use of the corporate form.
delinquent payment of subscription; (Sec.
68, RCC)
c. To be furnished with most recent financial
statements or reports of the corporation’s
operation; (Sec. 73, 74, RCC)
d. To bring suits (derivative suit, individual
suit, and representative suit); and
e. To demand payment in the exercise of
appraisal right. (Sec. 40, 81, RCC)
a. DOCTRINE OF EQUALITY OF SHARES
Under the doctrine of equality of shares, all stocks

issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such
differences. (CIR v. CA, G.R. No. 108576, 20 Jan. 1999)
In considering the proposed dividend distribution

system, the entitlement of certain kind of stocks to
preferences and benefits must be clearly and
expressly stated in the articles of incorporation of
BFDC. (SEC Opinion No. 10-20)
Obligations of a Stockholder
The following are the obligations of the stockholder:
1. Liability to the corporation for unpaid

subscription; (Sec. 65-69, RCC)
2. Liability to the corporation for interest on
unpaid subscription if so required by the
subscription contract; (Sec. 65, RCC)
3. Liability to the creditors of the corporation for
unpaid subscription; (Sec. 59, RCC)
4. Liability for watered stock; (Sec. 64, RCC)
5. Liability for dividends unlawfully paid; (Sec. 42,
RCC) and
6. Liability for failure to create corporation.
(Sundiang Sr. & Aquino, 2014; Sec. 10, RCC)

2022 GOLDEN NOTES
Corporation Law
STOCKHOLDERS’/MEMBERS’ MEETINGS
DATE AND PLACE REQUIRED WRITTEN NOTICE
Regular Meeting
The notice of meetings shall be in writing, and the time and

place thereof stated therein.
1. Annually on date fixed in the by-laws; or
2. If not so fixed, on any date after April 15 NOTE: The written notice of regular meetings may be sent
of every year as determined by the board through electronic mail or such other manner as the
of directors or trustees. (Sec. 49, RCC) commission shall allow under its guidelines. (Sec. 49, RCC)
Venue: The notice shall be sent to the stockholder or member:

1. At least twenty-one (21) days prior to the meeting;
Stock Corporations: In the principal office of 2. Unless a different period is required in the bylaws, law,
the corporation as set forth in the articles of or regulation (Sec. 49, RCC)
incorporation, or, if not practicable, in the city
or municipality where the principal office of Notice may be waived, expressly or impliedly, by any
the corporation is located. (Sec. 50, RCC) stockholder or member.
NOTE: Any city or municipality in Metro Each notice of meeting shall further be accompanied by the
Manila, Metro Cebu, Metro Davao, and other following:
Metropolitan areas shall, for purposes of this
section, be considered a city or municipality. 1. Agenda for the meeting;
(Ibid.) 2. Proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
Non-stock Corporations: Any place even 3. When attendance, participation, and voting are allowed by
outside the place where the principal office of remote communication or in absentia, the requirements
the corporation is located, as long as within and procedures to be followed when a stockholder or
Philippine territory and proper notice is sent member elects either option; and
to all members. (Sec. 92, RCC) 4. When the meeting is for the election of directors or
trustees, the requirements and procedure for nomination
and election. (Sec. 50, RCC)
Special Meeting
1. Any time deemed necessary; or
2. As provided in the by-laws.
The notice of meetings shall be in writing, and the time and
Venue: in the principal office of the place thereof stated therein.
corporation as set forth in the AOI, or, if not
practicable, in the city or municipality where The notice shall be sent to the stockholder or member:
the principal office of the corporation is 1. At least one (1) week prior to the meeting;
located. (Sec. 50, RCC) In the city or 2. Unless a different period is provided in the bylaws, law
municipality where the principal office is or regulation.
located, and if practicable in the principal
office of the corporation: Provided, that Metro Notice may be waived, expressly or impliedly, by any
Manila shall be considered a city or stockholder or member.
municipality.

Commercial Law
NOTE: Any city or municipality in Metro

Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.
(Sec. 50, Ibid.)
Requirements for a Valid Meeting a. There is prima facie evidence showing

that the said shares are ill-gotten and thus
1. It must be held in the proper place; belong to the State; and
2. It must be held at the stated date and at the b. There is an imminent danger of
appointed time or at a reasonable time dissipation, thus necessitating the
thereafter; continued sequestration of the shares and
3. It must be called by the proper person. authority to vote thereupon by the PCGG
while the main issue is pending before
Rules Applicable to Certain Shares the Sandiganbayan. (Trans Middle East
[Phils.] v. Sandiganbayan, G.R. No. 172556,
1. Delinquent shares – shall not be entitled to 09 June 2006)
vote. (Sec. 23, RCC)
However, the two-tiered test contemplates a
2. Treasury shares – have no voting rights while situation where the registered stockholders
they remain in the treasury. (Sec. 56, RCC) were in control and had been dissipating
company assets and the PCGG wanted to vote
3. Fractional shares – shall not be entitled to the sequestered shares to save the company.
vote. This was not the situation in ETPI in 1997. It
was the PCGG elected board that remained in
4. Escrow shares – shall not be entitled to vote control during that year and it apparently had
before the fulfillment of the condition imposed done well in the preceding years guarding
thereon. company assets. (Africa v. Sandiganbayan, G.R.
No. 172222, 174493 & 184636, 11 Nov. 2013)
5. Unpaid shares – if not delinquent, are entitled
to all the rights of a stockholder including the XPN to the XPN: The two-tiered test does not
right to vote. apply in cases involving funds of public
character (public character exception). In such
6. Sequestered shares cases, the government is granted the authority
to vote said shares, namely:
GR: The registered owner of the shares of a
corporation, even if they are sequestered by the a. Where the government shares are taken
government through the PCGG, exercises the over by private persons or entities who or
right and the privilege of voting on them. which registered them in their own
names; and
As a mere conservator, the PCGG cannot, as a b. Where the capitalization of shares that
rule, exercise acts of dominion by voting these were acquired with public funds somehow
shares. landed in private hands. (Republic v.
Sandiganbayan, G.R. No. 107789, 30 Apr.
XPN: Two-tiered test: The registered owner of 2003)
sequestered shares may only be deprived of
these voting rights, and the PCGG authorized to 7. Secured Creditors and Administrators – In
exercise the same, only if it is able to establish case a stockholder grants security interest in his
that: or her shares in stock corporations, the

2022 GOLDEN NOTES
Corporation Law
stockholder-grantor shall have the right to A: NO. The agenda for the meeting, which includes
attend and vote at meetings of stockholders, the elections of the new board of directors and
unless the secured creditor is expressly given ratification of acts of the incumbent board of
by the stockholder-grantor such right in writing directors and management, was the standard order
which is recorded in the appropriate corporate of business in a regular annual meeting of
books. stockholders of a corporation. Thus, the March 15,
2002 annual stockholders' meeting was a regular
Executor, administrators, receivers, and other meeting. Hence, the requirement to state the object
legal representatives may attend and vote in and purpose in case of a special meeting as provided
behalf of the stockholder or members without for in Art. VIII (5) of the PSI’s by-laws does not apply
need of any written proxy (Sec. 54, RCC). In to the Notice for the March 15, 2002 annual
Gochan v. Young, G.R. No. 131889, 12 Mar. 2001, stockholders' meeting.
it was held that heirs are not prohibited from
representing the deceased in a suit, especially Regarding the time for serving notice of the meeting
when no administrator has yet been appointed. to all the stockholders, Sec. 50 of B.P. No. 68 reads in
part:
8. Shares jointly owned – consent of all the co-
owners is necessary, unless there is a written Sec. 50 [now Sec. 49, RCC]. Regular and Special
proxy signed by all the co-owners authorizing Meetings of Stockholders or Members. – Regular
one (1) or some of them or any other person to meetings of stockholders or members shall be
vote such share or shares. If shares are owned held annually on a date fixed in the by-laws, or
in an “and/or” capacity by the holders thereof, if not so fixed, on any date in April of every year
any one of the joint owners can vote or appoint as determined by the board of directors or
a proxy thereof. (Sec. 55, RCC) trustees: Provided, that written notice of regular
meetings shall be sent to all stockholders or
Q: On March 15, 2002, a general stockholders' members of record at least two (2) weeks prior
meeting was held wherein Lao, Ong, Henry Sy, Sy to the meeting, unless a different period is
Tian Tin, Sy Tian Tin, Jr. and Paul Chua were required by the by-laws.
elected as members of the board of directors,
with Chua Lian as chairman of the board. Under PSI's by-laws, notice of every regular or
special meeting must be mailed or personally
Yao Bio Lim and King filed a Petition against the delivered to each stockholder not less than five (5)
newly elected board of directors. They sought, days prior to the date set for the meeting.
among others, to annul: (1) "the elections held In this case, the PSI's by-laws providing only for a
on March 15, 2002 and all corporate acts of the five (5)-day prior notice must prevail over the two
supposedly new board of directors and officers (2)-week notice under the Corporation Code. By its
of PSI. The CA affirmed the RTC Decision holding express terms, the Corporation Code allows "the
that there were valid grounds to nullify the shortening (or lengthening) of the period within
March 15, 2002 stockholders' meeting. First, the which to send the notice to call a special (or regular)
Notice of meeting did not state the purpose of meeting." Thus, the mailing of the Notice to
the stockholders' meeting as required by Art. respondents on March 5, 2002 calling for the annual
VIII (5) of PSI's by-laws. Additionally, it was not stockholders' meeting to be held on March 15, 2002
sent to the stockholders at least two (2) weeks is not irregular, since it complies with what was
prior to the meeting as required under Sec. 50 of stated in PSI's by-laws. (Lao v. Lim, G.R. No. 201306,
the Corporation Code. 09 Aug. 2017)
Is the 2002 Meeting a special meeting, and thus NOTE: Sec. 49 of the RCC provides that written
require the purpose to be specified? Does it need notice of regular meetings shall be sent at least
to follow the 2-week notice requirement? twenty-one (21) days prior to the meeting, unless a

Commercial Law
different period is required in the bylaws, law, or Quorum

regulation.
GR: Quorum shall consist of the stockholders
Who Calls the Meeting representing at least majority of the outstanding
capital stock or a majority of the actual and living
The “call” for a meeting is exercised by the person members with voting rights, in the case of non-stock
who has the power to call the meeting. The corporation. (Tan v. Sycip, G.R. No. 153468, 17 Aug.
following persons may exercise the power to “call” 2006).
for a meeting:
XPN: A different quorum may be provided for in the
1. The person or persons designated in the by- by-laws.
laws to have the authority to call stockholders’/
members’ meeting; Minutes of the Meeting
2. In the absence of such provision in the by-laws, The minutes are a brief statement not only of what
the director/trustee or officer entrusted with transpired at a meeting, usually of stockholders/
the management of the corporation unless members or directors/trustees, but also at a
otherwise provided by law; meeting of an executive committee.
A stockholder/member may make the call on The minutes are usually kept in a book especially
order of the SEC whenever for any cause, there designed for that purpose, but they may also be kept
is no person authorized to call a meeting (Sec. in the form of memoranda or in any other manner in
49, RCC) or the officers authorized fail or refuse which they can be identified as minutes of a
to call a meeting; and meeting. (People v. Dumlao, GR 168918, 02 March
2009)
NOTE: SEC may compel the officers of any
corporation registered by it to call meetings of Probative Value of Meetings
stockholders/members thereof under its
supervision. (Sec. 6 [f], P.D. No. 902-A) The minutes of board meetings should be signed by
the corporate secretary. Without such signature,
3. Corporate Secretary on order of the president, neither probative value nor credibility could be
or upon written demand of the stockholders accorded such minutes. (Union of Supervisors [RB]-
representing or holding at least a majority of NATU v. Sec. of Labor, G.R. No. L- 39889, 12 Nov.
the outstanding capital stock, or a majority of 1981)
the members entitled to vote for a special
meeting intended for the removal of directors Minutes of meetings without the signature of the
or trustees, provided: corporate secretary have no probative value, and
therefore cannot be demanded for inspection or
a. There must be a previous notice; examination. (Villanueva, 2018)
b. There must be a quorum. (Sec. 27, RCC)
2. PARTICIPATION IN MANAGEMENT
NOTE: If there is no secretary, or if the secretary,
despite demand, fails or refuses to call the special Under the RCC, stockholders or members
meeting or to give notice thereof, the stockholder or periodically elect the board of directors or trustees,
member of the corporation signing the demand may who are charged with the management of the
call for the meeting by directly addressing the corporation. The board, in turn, periodically elects
stockholders or members (Sec. 27, RCC) officers to carry out management functions on a
day-to-day basis. As owners, though, the

2022 GOLDEN NOTES
Corporation Law
stockholders or members have residual powers 2. Enables those who do not wish to attend a
over fundamental and major corporate changes. stockholders’/ members’ meeting to protect
their interest by exercising their right to vote
While stockholders and members (in some through a representative; and
instances) are entitled to receive profits, the 3. One of the devices in securing voting control or
management and direction of the corporation are management control in the corporation. (Ibid.)
lodged with their representatives and agents -- the
board of directors or trustees. In other words, acts Who May Be a Proxy
of management pertain to the board; and those of
ownership, to the stockholders or members. In the Any person whom the stockholder or member sees
latter case, the board cannot act alone, but must fit to represent him.
seek approval of the stockholders or members. (Tan
v. Sycip, G.R. No. 153468, 17 Aug. 2006) NOTE: By-laws restricting the stockholder’s or
member’s right in this respect are void.
a. PROXY
Further, same person may act as proxy for one or
Stockholders and members may vote in person or several stockholders or members.
by proxy in all meetings of stockholders or
members. (Sec. 57, RCC) Duration of Proxy
However, the right of members to vote by proxy 1. Specific proxy – authority granted to the proxy
may be denied under the AOI or by-laws of a non- holder to vote only for a particular meeting on a
stock corporation. (Sec. 88, RCC) specific date.
The term “proxy” designates the formal written 2. Continuing proxy – authority granted a proxy
authority given by the owner or holder of the stock, to appear and vote for and on behalf of a
who has a right to vote it, or by a member, as shareholder for a continuing period which
principal, to another person, as agent, to exercise should not be more than five (5) years at any
the voting rights of the former. one time. By-laws may provide for a shorter
duration of a continuing proxy.
It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or Extent of Authority
member to vote for him at a stockholders’ or
members’ meeting. 1. General Proxy – A general discretionary power
to attend and vote at an annual meeting, with all
NOTE: A proxy is a special form of agency. A proxy the powers the undersigned would possess if
holder is an agent and as such a fiduciary. personally present, to vote for directors and all
ordinary matters that may properly come
Since a proxy acts for another, he may act as such before a regular meeting.
although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote NOTE: A holder of a general proxy has no
because his stock has been declared delinquent may authority to vote for a fundamental change in
vote the stocks of his principal which are not the corporate charter or other unusual
delinquent. transactions such as merger or consolidation.
Purposes of Proxies 2. Limited Proxy – Restrict the authority to vote

to specified matters only and may direct the
1. Assures the presence of a quorum in meetings manner in which the vote shall be cast. (Ibid.)
of stockholders of large corporations;

Commercial Law
Requirements of a Valid Proxy denied to members in the AOI or the by-laws as

long as the denial is not discriminatory.
1. Proxies shall be in writing and shall be signed
by the stockholder or member concerned. Oral 5. In considering other matters:
proxies are NOT valid; a. Pledge or mortgage of shares; (Sec. 54,
2. The proxy shall be filed within a reasonable RCC)
time before the scheduled meeting with the b. In all other matters as may be provided in
corporate secretary; the by-laws; and
3. Unless otherwise provided (continuing in c. In all meetings of stockholders or
nature) in the proxy, it shall be valid only for the members. (Sec. 57, RCC)
meeting for which it is intended. The authority
may be general or limited; and Power to Appoint a Proxy is a Purely Personal
4. No proxy shall be valid and effective for a period Right
longer than 5 years at any one time. (Sec. 57,
RCC) The right to vote is inseparable from the right of
ownership of stock. The appointment of proxy is,
Instances when the Right to Vote by Proxy may therefore, purely personal and to be valid, a proxy to
be Exercised vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
1. Election of the BOD/BOT; (Sec. 23, RCC) same at the time it is voted. (SEC Opinion, 03 Dec.
1993, citing 5 Fletcher, Sec. 2053)
NOTE: When proxies are solicited in relation to
the election of corporate directors, the resulting Unless the stockholder or member who executed a
controversy, even if it ostensibly raised the proxy gives his consent in writing, a designated
violation of the SEC rules on proxy solicitation, proxy may not further re-designate another under
should be properly seen as an election the same proxy. An alternate proxy can only act as
controversy within the original and exclusive proxy in case of non-attendance of the other
jurisdiction of the trial courts by virtue of Sec. designated proxy. (De Leon, supra)
5.2 of the SRC in relation to Sec. 5(c) of P.D. No.
902-A. From the language of Sec. 5(c) of P.D. No. Revocation of Proxy
902-A, it is indubitable that controversies as to
the qualification of voting shares, or the validity A proxy may be revoked in writing, orally or by
of votes cast in favor of a candidate for election conduct.
to the board of directors are properly
cognizable and adjudicable by the regular GR: One who has given a proxy the right to vote may
courts exercising original and exclusive revoke the same at any time.
jurisdiction over election cases. (GSIS v. CA, G.R.
No. 183905, 06 Apr. 2009) XPN: If said proxy is coupled with interest, even if it
may appear by its terms to be revocable. (De Leon,
2. Voting in case of joint ownership of stock; (Sec. supra)
55, RCC)
3. Voting by trustee under Voting Trust Last proxy given revokes all previous proxies. (SEC
Agreements; (Sec. 58, RCC) and Opinion, 14 Oct. 1991)
4. Voting by members in nonstock corporations.
(Sec. 88, RCC) SEC may Pass Upon Validity of Issuance and Use
of Proxies
NOTE: In nonstock corporations the right to
vote by proxy, or even the right to vote may be PD 902-A empowers the SEC, among others, “to pass
upon the validity of the issuance and use of proxies

2022 GOLDEN NOTES
Corporation Law
and voting trust agreements for absent other specific rights) over such shares; and in
stockholders or members.” (P.D. No. 902-A, Sec. 5[d]) return, trust certificates are given to the
stockholder/s, which are transferable like stock
Procedural Matters Relating to Proxies certificates, subject, to the trust agreement.
1. “Proxy Solicitation” involves the securing and Principal Purpose: To acquire control of the
submission of proxies, while “Proxy Validation” corporation.
concerns the validation of such secured and
submitted proxies; Other Purposes
2. The SEC’s power to pass upon the validity of 1. To make possible a unified control of the affairs
proxies in relation to election controversies has of the corporation and a consistent policy by
effectively been withdrawn, tied as it is to its binding stockholders to vote as a unit;
abrogated jurisdictional powers and has been 2. To assure continuity of policy and management
transferred to the RTC Special Commercial especially of a new corporation desirous of
Courts pursuant to the terms of Sec. 5.2 of the attracting investors;
Securities Regulation Code; 3. To enable the owners of the majority of the
stock of the corporation to control the
3. However, although an intra-corporate corporation;
controversy may animate a disgruntled 4. To vest and retain the management of the
shareholder to complain to the SEC a corporation in the persons originally promoting
corporation’s violations of SEC rules and it;
regulations, that motive alone should not be 5. To prevent a rival concern from acquiring
sufficient to deprive the SEC of its investigatory control of the corporation;
and regulatory powers, especially so since such 6. To carry out a proposed sale of the
powers are exercisable on a motu proprio basis. corporation’s assets and to facilitate its
dissolution;
The fact that the jurisdiction of the regular courts 7. To enable two holding companies to operate
under Sec. 5(c) is confined to the voting on election jointly a corporation controlled by them;
of officers, and not on all matters which may be 8. To effect a plan for reorganization of a
voted upon by stockholders, elucidates that the corporation in financial difficulty or in
power of the SEC to regulate proxies remains bankruptcy proceedings;
extant and could very well be exercised when 9. To aid a financially embarrassed corporation to
stockholders vote on matters other than the obtain a loan and protect its creditors.
election of directors. (GSIS v. CA, G.R. No. 183905, 16
Apr. 2009) Procedural Requirements and Limitations on
VTAs
NOTE: It must be noted however that directors or
trustees cannot vote by proxy at board meetings. 1. The agreement must be in writing and
(Sec. 52, RCC) notarized and specify the terms and conditions
thereof;
b. VOTING TRUST
2. A certified copy of such agreement shall be filed
with the corporation and with the SEC,
Voting Trust Agreement
otherwise, it is ineffective and unenforceable;
A voting trust agreement (VTA) is an agreement
3. The certificate/s of stock covered by the VTA
whereby one or more stockholders transfer their
shall be cancelled;
shares of stocks to a trustee, who thereby acquires
for a period of time the voting rights (and/or any

Commercial Law
4. A new certificate shall be issued in the name of the right to receive dividends. (Lee v. CA, G.R. No.
the trustee/s stating that they are issued 93695, 04 Feb. 1992)
pursuant to the VTA;
NOTE: The voting trust agreement filed with the
5. The transfer shall be noted in the books of the corporation shall be subject to examination by any
corporation, that it is made pursuant to said stockholder in the same manner as any other
VTA; corporate book or record. Both the transferor and
the trustee may exercise the right of inspection of all
6. The trustee/s shall execute and deliver to the corporate books and records. (Sec. 58, RCC)
transferors voting trust certificates, which shall
be transferable in the same manner and with Trustor has the right to terminate a voting trust
the same effect as certificates of stock; agreement when the trustee has committed a
breach of trust. (Everett v. Asia Banking Corp., G.R.
7. GR: No VTA shall be entered into for a period No. L-25241, 03 Nov. 1926)
exceeding 5 years at any one time (i.e., for every
voting trust);
XPN: In case of a voting trust specifically

requiring a longer period as a condition in a
loan agreement, the period may exceed 5 years
but shall automatically expire upon full
payment of the loan; and
8. No VTA shall be entered into for the purpose of

circumventing the laws against anti-
competitive agreements, abuse of dominant
position, anti-competitive mergers and
acquisitions, violation of nationality and capital
requirements, or for the perpetuation of fraud.
(Sec. 58, RCC)
NOTE: Unless expressly renewed, all rights granted

in a voting trust agreement shall automatically
expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the trustors.
(Sec. 58, RCC)
Effects of Voting Trust Agreement With Respect

to Trustee
It is the trustee of the shares who acquires legal title

to the shares under the voting trust agreement and
thus entitled to the right to vote and the right to be
elected in the board of directors while the trustor-
stockholder has the beneficial title which includes

2022 GOLDEN NOTES
Corporation Law
Voting Trust Agreement vs. Proxy
VOTING TRUST PROXY

Revocability
If validly executed, VTA is intended to be
A proxy, unless coupled with interest, is revocable at any
irrevocable for a definite and limited period of
time.
time.
Legal Title
Trustee acquires legal title to the shares of the
Proxy has no legal title to the shares of the principal.
transferring stockholder.
Rights Included
Right to vote as well as other rights may be given

except the right to receive dividends. The trustee
Only the right to vote is given.
may vote in person or by proxy unless the
agreement provides otherwise.
Notarization Requirement
The agreement must be notarized. Proxy need not be notarized.
Limitations to Act
Trustee is not limited to act at any particular

Proxy can only base on authority given.
meeting.
Cancellation of Stock Certificate
The stock certificate shall be cancelled and a new

one in the name of the trustee shall be issued No cancellation of the certificate shall be made.
stating that they are issued pursuant to a VTA.
Extent of Right
A trustee can vote and exercise all the rights of the

A proxy can only vote in the absence of the stockholder.
stockholder even when the latter is present.
Term or Duration
An agreement must not exceed 5 years at any one A proxy is usually of shorter duration although under
time except when the same is made a condition of Sec. 58 it can be for a longer period not to exceed 5 years
a loan. at any one time.
Governing Law
Governed by the law on trust. Governed by the law on agency.
Right to Inspect
A proxy does not have a right of inspection of corporate
A trustee has the right to inspect corporate books.
books.

Commercial Law
Pooling Agreement The three-year period having expired, the

company demanded the turn-over and transfer
Pooling or voting agreements are agreements by of all its assets and properties, including the
which two or more stockholders agree that their management and operation of the company,
shares shall be voted as a unit. They are usually claiming that under the Voting Trust Agreement,
concerned with the election of directors to gain the bank was constituted as trustee of the
control of the management. The parties remain the management and operations of the Company. Is
legal owners of their stocks with the right to vote the company correct? (1992 BAR)
them. (De Leon, supra)
A: NO. The company’s demand does not tally with
NOTE: This does not involve a transfer of stocks but the concept of VTA because such agreement merely
is merely a private agreement. (Sec. 99, RCC) conveys to the trustee the right to vote the shares of
the grantor. The consequence of the foreclosure of
Example: Shareholders A, B, C, D, and E hold 50% of the mortgaged properties would not be in
the outstanding capital stock, entered into a pooling consonance with the VTA and its effects.
agreement to vote for F as a member of the board of
directors. c. CASES WHEN STOCKHOLDERS’ ACTION
IS REQUIRED
Validity of Pooling Agreements
Under Sec. 6 of the Corporation Code, each share of
Pooling agreements are valid as long as they do not stock is entitled to vote, unless otherwise provided
limit the discretion of the BOD in the management in the AOI or declared delinquent under Sec. 67 of
of corporate affairs or work any fraud against the Corporation Code (now Sec. 66, RCC). (Tan v.
stockholders not party to the contract. Sycip, G.R. No. 153468, 17 Aug. 2006)
The validity and legality of such pooling agreements Right to Vote

depend upon the objects sought to be attained and
the acts which are done under them, and the other The stockholders can exercise their right to vote
circumstances. There is some authority for holding through the election, replacement and removal of
pooling agreements to be invalid if the Board of Directors or Trustees and on other
consideration for entering into the same gives a corporate acts which require stockholders’
private benefit to the stockholder. approval.
Pooling Agreement vs. Voting Trust Agreement Nature of Right to Vote
In a Pooling Agreement, the stockholders One of the rights of a stockholder is the right to
themselves exercise their right to vote. On the other participate in the control and management of the
hand, the trustees are the ones who exercise the corporation that is exercised through his vote. The
right to vote under the Voting Trust Agreement. right to vote is a right inherent in and incidental to
the ownership of corporate stock, and such is a
Q: A distressed corporation executed a VTA for a property right. The stockholder cannot be deprived
period of three years over 60% of its of the right to vote his stock nor may the right be
outstanding paid-up shares in favor of a bank to essentially impaired, either by the legislature or by
which it was indebted, naming the Bank as the corporation, without his consent, through
trustee. The Company mortgaged all its amending the charter, or the by-laws (Castillo v.
properties to the Bank. The Bank foreclosed the Balinghasay, G.R. No. 150976, 18 Oct. 2004)
mortgaged properties, and as the highest
bidder, acquired said properties and assets of
the Company.

2022 GOLDEN NOTES
Corporation Law
Conditions for Issuance of Non-Voting Shares b. Shares subject of a settlement of estate

proceeding or under receivership:
Non-voting shares may be issued provided the Executors, administrators, receivers, and other
following conditions under Sec. 6 of the RCC are legal representatives duly appointed by the
complied with: court may attend and vote in behalf of the
stockholders or members without need of any
1. No share may be deprived of voting rights written proxy. (Sec. 54, RCC)
except those classified and issued as
“preferred” or “redeemable” shares, unless c. Shares under joint ownership: The consent of
otherwise provided in this Code; and all the co-owners shall be necessary in voting
2. There shall always be a class or series of shares shares of stock owned jointly by two (2) or
with complete voting rights; and more persons, unless there is a written proxy,
3. Holders of nonvoting shares shall nevertheless signed by all the co-owners, authorizing one (1)
be entitled to vote on certain matters provided or some of them or any other person to vote
in the RCC. such share or shares: Provided, That when the
shares are owned in an "and/or" capacity by the
Instances when Non-Voting Shares shall holders thereof, any one of the joint owners can
nevertheless be Entitled to Vote vote said shares or appoint a proxy therefor.
(Sec. 55, RCC)
The non-voting shares may still vote in the following
matters: (A-A-S-I-I-M-I-D) d. Treasury shares: Treasury shares shall have
no voting right as long as such shares remain in
1. Amendment of the articles of incorporation; the treasury. (Sec. 56, RCC)
2. Adoption and amendment of By-laws;
3. Sale, lease, exchange, mortgage, pledge or other i. BY A MAJORITY VOTE
disposition of all or substantially all of the
corporate property; Refer to the Vote Requirement table on page 184.
4. Incurring, creating or increasing bonded
indebtedness; ii. BY A TWO-THIRDS VOTE
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with Refer to the Vote Requirement table on page 184.
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with the
corporation code; and
8. Dissolution of the corporation (Sec. 6, RCC)
Right to vote in the following cases:
a. Shares under security interest: In case a

stockholder grants security interest in his or
her shares in stock corporations, the
stockholder-grantor shall have the right to
attend and vote at meetings of stockholders,
unless the secured creditor is expressly given
by the stockholder-grantor such right in writing
which is recorded in the appropriate corporate
books. (Sec. 54, RCC)

Commercial Law
Corporate Powers Exercised Jointly by the BOD and Stockholders (I4-P-A2-G-E2-S-M-A-V)
VOTE REQUIREMENT
BOARD OF DIRECTORS STOCKHOLDERS
Amendments, Repeal, or Adoption of New By-laws
GR: Majority vote of the outstanding capital stock.

Majority vote of the BOD.
XPN: If delegated by the stockholders to the board.
Entering into Management Contract
GR: Vote of the majority of the outstanding shares of

stock or members of both the managing and the
managed corporation.
XPN: The vote required for the managed corporation

is not merely majority but 2/3 of the outstanding
capital stock in cases where:
Majority of the quorum of the BOD. 1. A stockholder or stockholders representing the

same interest of both the managing and the
managed corporations own or control more than
one-third (1/3) of the total OCS entitled to vote of
the managing corporation; or
2. Majority of the members of the board of directors
of the managing corporation also constitute a
majority of the members of the board of directors
of the managed corporation.
Issuance of Stock Dividends
Majority of the quorum of the BOD. Vote representing 2/3 of the OCS.
Amendment to Articles of Incorporation

Majority vote of the BOD. Vote representing 2/3 of the OCS.
Grant of Compensation to Directors

Approval of the Board. Majority vote of the OCS.
Extending or Shortening the Corporate Term

Increase or Decrease of Capital Stock

Incur, Create, or Increase Bonded Indebtedness
Deny Pre-emptive Right

2022 GOLDEN NOTES
Corporation Law
Investment of Corporate Funds in Another Corporation or Business or

for Any Other Purpose other than the Primary Purpose

The Sale or Other Disposition of All or Substantially All of the Corporate Assets
Majority vote of the board. Vote representing 2/3 of the OCS.
Merger or Consolidation
Majority vote of the BOD Vote representing 2/3 of the OCS.
Voluntary Dissolution
To Adopt a Plan of Distribution of Assets of a Non-stock Corporation
Majority vote of the Trustees. 2/3 of the members having voting rights.
Corporate Powers Exercised Solely by the To revoke the power delegated to the BOD to
Stockholders amend or repeal the by-laws
or adopt new by laws
CORPORATE POWERS
Majority of the OCS or of the members.
Election of directors or trustees; Filling up of
vacancies by the stockholders due to the To call a special meeting to
expiration of term, removal from office or remove directors or trustees
increase in the number of board seats
Majority of the OCS or of the members entitled to
Candidates receiving the highest number of votes vote.
from the outstanding capital stock or members
entitled to vote. (plurality, NOT majority) Removal of directors
To elect officers of the corporation Vote representing 2/3 of the OCS or of members
entitled to vote.
Plurality vote of the BOD listed in the AOI, not
merely those present constituting a quorum. Delegation of the power to amend by-laws
to the board of directors
Fixing the issued price of no-par value shares
Vote representing 2/3 of the OCS.
Majority of the quorum of the BOD if authorized
by the AOI or in the absence of such authority, by Ratification of corporate contract
a majority of the outstanding capital stock. with a director
Declaration of cash and other dividends other Vote representing 2/3 of the OCS.
than stock dividends
Majority of the quorum of the board. To delegate to the BOD the power to amend or
repeal the by-laws or adopt new by laws
To adopt by-laws
Majority of the OCS or of the members. 2/3 of the OCS or of the members.

Commercial Law
iii. BY CUMULATIVE VOTING and not on the amount paid for the shares. (SEC
Opinion, 10 Oct. 1992 and 16 July 1996)
Cumulative Voting
GR: Stock corporations are prohibited from
In stock corporations, stockholders entitled to vote retaining surplus profits in excess of 100% of their
shall have the right to vote the number of shares of paid-in capital stock.
stock standing in their own names in the stock
books of the corporation at the time fixed in the XPNs:
bylaws or where the bylaws are silent, at the time of 1. When justified by definite corporate
the election. expansion projects or programs approved by
the board of directors;
The said stockholder may:
a. Vote such number of shares for as many 2. When the corporation is prohibited under any
persons as there are directors to be elected; loan agreement with any financial institution
or creditor, whether local or foreign, from
b. Cumulate said shares and give one (1) declaring dividends without its/his consent,
candidate as many votes as the number of and such consent has not yet been secured; or
directors to be elected multiplied by the
number of the shares owned; or 3. When it can be clearly shown that such
retention is necessary under special
c. Distribute them on the same principle among circumstances obtaining in the corporation,
as many candidates as may be seen fit. such as when there is need for special reserve
for probable contingencies. (Sec. 42, RCC)
GR: Members of nonstock corporations may cast as
many votes as there are trustees to be elected but Entitlement to Receive Dividends
may not cast more than one (1) vote for one (1)
candidate. GR: Those stockholders at the time of declaration
are entitled to dividends. (Sundiang Sr. & Aquino,
XPN: Cumulative voting is allowed in the AOI or in 2009, citing SEC Opinion, 15 July 1994)
the bylaws.
NOTE: Dividends declared before the transfer of
3. PROPRIETARY RIGHTS shares belongs to the transferor and those declared
after the transfer, belong to the transferee. (Ibid.)
The following are the proprietary rights of the
stockholders: XPN: In case a record date is provided for.
1. Right to Dividends; A record date is the date fixed in the resolution

2. Right of Appraisal; declaring dividends, when the dividend shall be
3. Right to Inspect; payable to those who are stockholders of record on
4. Pre-emptive Right; and a specified future date or as of the date of the
5. Right of First Refusal. meeting declaring said dividend. (De Leon, supra)
Right of Holders of Non-Delinquent, But Not

a. RIGHT TO DIVIDENDS
Fully Paid Shares
It is the right of the stockholder to demand payment

Holders of shares not fully paid which are not
of dividends after the board’s declaration.
delinquent shall have all the rights of a stockholder.
Stockholders are entitled to dividends pro rata
based on the total number of shares that they own

2022 GOLDEN NOTES
Corporation Law
GR: Prior to the declaration of a dividend, a 4. The price of the Fair Market Value of the shares
stockholder cannot maintain an action at law to on the day before the date of voting;
recover his share of the accumulated profits
because such stockholder has no individual interest NOTE: In case of disagreement, the value will be
in the profits of a corporation until a dividend has determined by appraisal of 3 disinterested
been declared. persons. (Sec. 81, RCC)
XPN: An action at law may be maintained where it 5. The corporation has sufficient Unrestricted
is alleged that sufficient net profits have been retained earnings to pay. The trust fund
earned to obligate the corporation to pay, however, doctrine backstops the requirement of
there must be a prior application with the directors unrestricted retained earnings to fund the
for the relief sought. If it appears that the directors payment of the shares of stocks of the
have wantonly violated their duty, and such withdrawing stockholders (Turner vs. Lorenzo
application would be inefficacious, such application G.R. No. 157479, 24 Nov. 2010)
need not be made.
Instances of Exercise of Appraisal Right
No dividends can be declared out of capital, except
when liquidating dividends distributed at Any stockholder of a corporation shall have the right
dissolution. (Sec. 139, RCC) to dissent and demand payment of the fair value of
his shares in the following instances:
Applying Dividends to Delinquent Shares
1. In case any amendment to the AOI has the effect
Cash of changing or restricting the rights of any
stockholder or class of shares, or of authorizing
Cash dividends due on delinquent stock shall first
preferences in any respect superior to those of
be applied to the unpaid balance on the
outstanding shares of any class, or of extending
subscription plus cost and expenses.
or shortening the term of corporate existence;
Stock
Stock dividends are withheld from the delinquent 2. In case of sale, lease, exchange, transfer,
stockholder until his unpaid subscription is fully mortgage, pledge or other disposition of all or
paid. substantially all of the corporate property and
assets as provided in the Code;
b. RIGHT OF APPRAISAL
3. In case of merger or consolidation; and
The right of a stockholder to dissent and demand
payment of the fair value of the shares in the certain 4. In case of investment of corporate funds for any
instances provided in the RCC. (Sec. 80, RCC) purpose other than the primary purpose of the
corporation; (Sec. 80, RCC)
Requisites: (G-W-A-F-U)
NOTE: Any stockholder of a close corporation may,
1. Any of the Grounds for appraisal must be for any reason, compel said corporation to purchase
present; his shares at their fair value, which shall not be less
2. A Written demand on the corporation must be than their par or issued value, when the corporation
made within 30 days after the date when the has sufficient assets in its books to cover its debts
vote was taken; and liabilities exclusive of capital stock. (Sec. 104,
3. The dissenting stockholders Attend the meeting RCC)
of the stockholders and voted against the
proposed action; Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the

Commercial Law
shares; may the stockholder invoke his Disagreement As to Valuation of Shares

appraisal rights and demand payment for his
shareholdings? (1999 BAR) If within a period of 60 days from the date the
corporate action was approved by the stockholders,
A: NO. The stockholder may not invoke his appraisal the withdrawing stockholder and the corporation
right because disagreement with the issuance of cannot agree on the fair value of the shares, it shall
new shares and its pricing do not fall under any of be determined and appraised by three (3)
the instances where the appraisal right is available. disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
Effects of Exercise the third by the two thus chosen.
1. Once the dissenting stockholder demands The findings of the majority of the appraisers shall
payment of the fair value of his shares: be final, and their award shall be paid by the
corporation within 30 days after such award is
a. All rights accruing to such shares including made. (Sec. 81, RCC)
voting and dividend rights shall be
suspended; and Cost of Appraisal
b. He shall be entitled to receive payment of The costs and expenses of appraisal shall be borne
the fair value of his shares as agreed upon as follows:
between him and the corporation or as
determined by the appraisers chosen by 1. By the corporation –
him; a. Where the price which the corporation
offered to pay the dissenting stockholder
c. GR: He is not allowed to withdraw his is lower than the fair value as determined
demand for payment of his shares by the appraisers named by them;
b. Where an action is filed by the dissenting
XPN: Unless the corporation consents stockholder to recover such fair value and
thereto. the refusal of the stockholder to receive
payment is found by the court to be
2. If the dissenting stockholder was not paid the justified.
value of his shares within 30 days after the
award, his voting and dividend rights shall be 2. By the dissenting stockholder –
immediately restored until payment of his a. Where the price offered by the
shares (Sec. 82, RCC); corporation is approximately the same as
the fair value ascertained by the
NOTE: Even if his rights as stockholder are appraisers;
suspended after his demand in writing is made, b. Where the same action is filed by the
he cannot be considered as an ordinary creditor dissenting stockholder and his refusal to
of the corporation (SEC Opinion, 11 Jan 1982); accept payment is found by the court to be
unjustified. (Divina, 2020)
3. Upon payment of the stockholder’s shares, all
his rights as stockholders are terminated, not Q: In case of disagreement between the
merely suspended (Sec. 81, RCC); and corporation and a withdrawing stockholder
who exercises his appraisal right regarding the
4. If before the stockholder is paid, the proposed fair value of his shares, a three-member group
corporate action is abandoned, his rights and shall by majority vote resolve the issue with
status as a stockholder shall thereupon be finality. May the wife of the withdrawing
permanently restored. (Sec. 83, RCC)

2022 GOLDEN NOTES
Corporation Law
stockholder be named to the three member inspection of the corporate records. (Terelay v. Yulo,
group? (2011 BAR) G.R. No. 160924, 05 Aug. 2015)
A: NO. The wife of the withdrawing shareholder is Valid Purposes for Inspection
not a disinterested person.
1. Ascertainment of financial condition of
Q: When does the right to payment cease? corporation or propriety of dividends
2. Value of the shares of stock for sale or
A: The right of the dissenting stockholder to be paid investment.
the fair value of his shares shall cease, his status as 3. Existence of mismanagement.
a stockholder shall thereupon be restored, and all 4. Obtainment of list of stockholders to solicit
dividend distributions which would have accrued proxies or influence voting.
on his shares shall be paid to him if: 5. Obtainment of information in aid of litigation
with the corporation or its officers regarding
1. Demand for payment is withdrawn with the corporate transactions.
consent of the corporation;
2. The proposed corporate action is abandoned by Books and Records Required to be Kept
the corporation;
3. The proposed corporate action is rescinded by The following are the books and records required to
the corporation; be kept by private corporations:
4. The proposed corporate action is disapproved
by the SEC where such approval is necessary; or 1. The AOI and bylaws of the corporation and all
5. The SEC determines that the dissenting their amendments;
stockholder is not entitled to the appraisal right. 2. The current ownership structure and voting
(Sec. 83, RCC) rights of the corporation, including lists of
stockholders or members, group structures,
NOTE: A dissenting stockholder who demands intra-group relations, ownership data, and
payment of his shares is no longer allowed to beneficial ownership;
withdraw from his decision unless the corporation 3. The names and addresses of all the members of
consents thereto. the board of directors or trustees and the
executive officers;
c. RIGHT TO INSPECT 4. A record of all business transaction;
5. A record of the resolutions of the board of
directors or trustees and of the stockholders or
The stockholder’s right of inspection of the
members;
corporation’s book and records is based upon his
6. Copies of the latest reportorial requirements
ownership of shares in the corporation and the
submitted to the Commission;
necessity for self-protection. (Puno v. Puno
7. The minutes of all meetings of stockholders or
Enterprises, Inc., G.R. No, 177066, 11 Sept. 2009)
members, or of the board of directors or
trustees;
The stockholder's right of inspection of the
8. Corporate records; and
corporation's books and records is based upon their
9. Stock and transfer book, in case of stock
ownership of the assets and property of the
corporations. (Sec. 73, RCC)
corporation. It is, therefore, an incident of
ownership of the corporate property. (Republic v.
NOTE: The duty to keep these books is imperative
Sandiganbayan, G.R. No. 88809, 10 July 1991)
and mandatory. The stockholder can likewise
inspect the financial statements of the corporation.
The mere fact that the shareholding of a stockholder
(Sec. 73, RCC).
is merely .001 per cent of the issued shares of stock
does not justify the denial of the request of

Commercial Law
Place Where Books and Records Shall be Kept NOTE: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
GR: All the above books and records must be kept at wholly-owned by the corporation.
the principal office of the corporation.
Extent of Right
XPN: The stock and transfer book may be kept in the
principal office of the corporation or in the office of The right to inspect extends to the books and
its stock transfer agent, if one has been appointed by records of the wholly-owned subsidiary of the
the corporation. (Sec. 73, RCC) corporation. It would be more in accord with equity,
good faith and fair dealing to construe the statutory
Requirements for the Exercise of the Right of right of the stockholder to inspect the books and
Inspection records of the corporation as extending to books
and records of its wholly-owned subsidiary which
1. The right must be exercised during reasonable are in the corporation’s possession and control.
hours on business days; (Gokongwei v. SEC, et al., G.R. No. L-45911, 11 Apr.
2. The person demanding the right has not 1979)
improperly used any information obtained
through any previous examination of the books Persons Entitled to Right
and records of the corporation;
3. The demand is made in writing and good faith The following are entitled to inspect the corporate
or for legitimate purpose germane to his books:
interest as a stockholder. (Sec. 73, RCC)
1. Any director, trustee, or stockholder or member
Good purposes may be: of the corporation at reasonable hours on
a. To investigate acts of management; business day (Sec. 73, RCC);
b. To investigate financial conditions; fix
value of shares; 2. Voting trust certificate holder – The term
c. Mailing list for proxies; or “stockholder”, as used in Sec. 73, RCC means not
d. Information for litigation. only a stockholder of record; it includes a voting
trust certificate holder who has become merely
4. It should follow the formalities that may be an equitable owner of the shares transferred
required in the by-laws; (Sec. 58, RCC);
5. The right does not extend to trade secrets; and
6. The inspecting or reproducing party shall 3. Stockholder of a sequestered company
remain bound by confidentiality rules under (Republic v. Sandiganbayan, supra); and
prevailing laws, such as the rules on trade
secrets or processes under R.A. No. 8293, 4. Beneficial owner of shares – pledgee, judgment
otherwise known as the “Intellectual Property debtor, buyer from record owner. This is
Code of the Philippines”, as amended, R.A. No. provided that his interest is clearly established
10173, otherwise known as the “Data Privacy by evidence.
Act of 2012”, R.A. No. 8799, otherwise known as
“The Securities Regulation Code”, and the Rules Q: The deceased Carlos Puno, was an
of Court. incorporator of Puno Enterprises, Inc. (Puno,
7. It is subject to limitations under special laws, Inc). Joselito Musni Puno, claiming to be an heir
e.g. Secrecy of Bank Deposits and FCDA or the of Carlos Puno, initiated a complaint for specific
Foreign Currency Deposits Act. performance against Puno, Inc. Joselito averred
that he is the son of the deceased with the
latter’s common-law wife, Amelia Puno. As
surviving heir, he claimed entitlement to the

2022 GOLDEN NOTES
Corporation Law
rights and privileges of his late father as such corporation. (Yujuico v. Quiambao, G.R. No.
stockholder of Puno, Inc. The complaint thus 180416, 02 June 2014)
prayed that Joselito be allowed to inspect its
corporate book, and be given an accounting and Remedies for Enforcement
all the profits pertaining to the shares of Puno.
1. Action for mandamus or damages; and
May an heir of a stockholder automatically 2. Civil and criminal liability.
exercise the rights (inspection, accounting,
dividends) pertaining to the deceased? Q: PASARC filed an Amended Petition for
Injunction and Damages with prayer for
A: NO. The stockholder’s right of inspection of the Preliminary Injunction and/or Temporary
corporation’s books and records is based upon his Restraining Order seeking to restrain
ownership of shares in the corporation and the respondents, who are stockholders of the
necessity for self-protection. After all, a shareholder corporation, from demanding inspection of its
has the right to be intelligently informed about confidential and inexistent records. The RTC
corporate affairs. Such right rests upon the issued an Order granting PASAR's prayer for a
stockholder’s underlying ownership of the writ of preliminary injunction. On appeal, the CA
corporation’s assets and property. Similarly, only held that there was no basis to issue an
stockholders of record are entitled to receive injunctive writ. Will injunction lie to prevent the
dividends declared by the corporation, a right respondents from invoking their right to
inherent in the ownership of the shares. inspect?
Upon the death of a shareholder, the heirs do not A: NO. An action for injunction filed by a corporation
automatically become stockholders of the generally does not lie to prevent the enforcement by
corporation and acquire the rights and privileges of a stockholder of his or her right to inspection. This
the deceased as shareholder of the corporation. The is the case since the Corporation Code provides that
stocks must be distributed first to the heirs in estate a stockholder has the right to inspect the records of
proceedings, and the transfer of the stocks must be all business transactions of the corporation and the
recorded in the books of the corporation. During minutes of any meeting at reasonable hours on
such interim period, the heirs stand as the equitable business days. However, this right is not absolute
owners of the stocks, the executor or administrator and may be refused when the information is not
duly appointed by the court being vested with the sought in good faith or is used to the detriment of
legal title to the stock. (Puno v. Puno Enterprises, Inc., the corporation. But the "impropriety of purpose
G.R. No. 177066, 11 Sept. 2009) such as will defeat enforcement must be set up the
corporation defensively if the Court is to take
Q: Who are the persons who may be held liable cognizance of it as a qualification.
under Sec. 73, RCC?
In other words, corporations may raise their
A: It is clear that a criminal action based on the objections to the right of inspection through
violation of the second or fourth paragraphs of Sec. affirmative defense in an ordinary civil action for
74 (now Sec. 73) can only be maintained against specific performance or damages, or through a
corporate officers or such other persons that are comment (if one is required) in a petition for
acting on behalf of the corporation. Violations of the mandamus. In this case, the petitioner did not raise
second and fourth paragraphs of Sec. 74 (now Sec. such limitations as a matter of defense. (PASARC v.
73) contemplates a situation wherein a corporation, Lim, G.R. No. 172948, 05 Oct. 2016)
acting thru one of its officers or agents, denies the
right of any of its stockholders to inspect the
records, minutes and the stock and transfer book of

Commercial Law
Liability for Violation of Right The Corporation Code has granted to all
stockholders the right to inspect the corporate
The unjustified failure or refusal by the corporation, books and records, and in so doing has not required
or by those responsible for keeping and maintaining any specific amount of interest for the exercise of
corporate records, to comply with Secs. 45, 73, 92, the to inspect. (Terelay Investment and Development
128, 177 and other pertinent rules and provisions of Corp. v. Yulo, G.R. No. 160924, 05 Aug. 2015)
this Code on inspection and reproduction of records
shall be punished with a fine ranging from Ten Defenses that can be set up against inspecting party:
thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00), at the discretion of 1. Improper use of the information obtained in the
the court, taking into consideration the seriousness past;
of the violation and its implications. When the 2. Not acting in good faith or legitimate purpose;
violation of this provision is injurious or and
detrimental to the public, the penalty is a fine 3. Is a competitor, director, officer, controlling
ranging from Twenty thousand pesos (P20,000.00) stockholder or otherwise represents the
to Four hundred thousand pesos (P400,000.00). interests of a competitor. (Sec. 73, RCC)
(Sec. 161, RCC)
d. PREEMPTIVE RIGHT
Requisites for Existence of Probable Cause to
File a Criminal Case of Violation of a It is the right of shareholders to subscribe to all
Stockholder’s Right to Inspect Corporate Books issues or disposition of shares of any class in
proportion to their respective shareholdings, unless
1. A director, trustee, stockholder or member has such right is denied by the AOI or an amendment
made a prior demand in writing for a copy or thereto, and subject to certain exceptions. (Sec. 38,
excerpts from the corporation’s records or RCC)
minutes;
NOTE: The preemptive right of stockholders in
2. Any officer or agent of the concerned close corporations shall extend to all stock to be
corporation shall refuse to allow the said issued, including reissuance of treasury shares,
director, etc., to examine and copy said whether for money, property or personal services,
excerpts; or in payment of corporate debts, unless the AOI
provide otherwise. (Sec.101, RCC)
3. If such refusal is made pursuant to a resolution
or order of the BOD’s the liability for such action Purpose of Preemptive Right
shall be imposed upon the directors or trustees
who voted such refusal; and To enable the shareholder to retain his
proportionate control in the corporation (non-
4. Where the officer or agent of the corporation dilution) and to retain his equity in the surplus.
sets up the defense that the person demanding
to examine and copy excerpts from the records Exercise of Preemptive Right
and minutes has improperly used any
information secured through any prior Preemptive right must be exercised in accordance
examination of the same or was not acting in with the AOI or the By-Laws. When the AOI and the
good faith or for a legitimate purpose in making By-Laws are silent, the Board may fix a reasonable
his demand, the contrary must be shown or time within which the stockholders may exercise
proved. (Ang-Abaya v. Ang, G.R. No. 178511, 04 the right.
Dec. 2008)

2022 GOLDEN NOTES
Corporation Law
Stock transactions covered includes: may also be provided for in specified statutory
provisions, such as that provided for in Sec. 98 (now
1. The issuance of shares pursuant to an increase Sec. 97) of the Code on close corporations. Unlike
in the authorized capital stock; preemptive right which pertains to stockholders by
2. Opening for subscription the unissued portion common law and does not require any statutory
of existing authorized capital stock; and enabling provision, the right of first refusal, if not
3. Re-issuance of treasury shares. provided for by law or by the AOI, does not exist at
all. (SEC-OGC Opinion No. 19-51, 11 Oct. 2019, citing
Transferability of Preemptive Right Villanueva 2001)
Preemptive right is transferable unless there is an See also discussion on Pre-emptive Right vs. Right of
express restriction in the AOI. First Refusal – page 131.
Waiver of Preemptive Right by the Stockholder 4. REMEDIAL RIGHTS
The stockholder may waive his pre-emptive right Actions Available to Stockholders or Members
either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right 1. Derivative suit – one brought by one or more
within the applicable period after being notified and stockholders or members in the name and on
given an opportunity to avail of such right. behalf of the corporation to redress wrongs
committed against it or to protect or vindicate
The stockholder must be given a reasonable time corporate rights, whenever the officials of the
within which to exercise their preemptive rights. corporation refuse to sue or are the ones to be
Upon the expiration of said period, any stockholder sued or hold control of the corporation.
who has not exercised such right is deemed to have
waived it. (Majority Stockholders of Ruby Industrial 2. Individual suit – an action brought by a
Corp. v. Lim, G.R. Nos. 165887 & 165929, 06 June stockholder against the corporation for direct
2011) violation of his contractual rights as such
individual stockholder, such as the right to vote
Denial of Preemptive Right and be voted for, the right to share in the
declared dividends, the right to inspect
There is preemptive right, unless such right is corporate books and records, and others.
denied by the AOI or an amendment thereto.
3. Representative suit – one brought by a person
e. RIGHT OF FIRST REFUSAL on his own behalf and on behalf of all similarly
situated.
A right granting the existing stockholders or the
corporation the option to purchase the shares of the Where a stockholder or member is denied the right
transferring stockholder with such reasonable of inspection, his suit would be individual because
terms, conditions or period stated. If, upon the the wrong is done to him personally and not to the
expiration of said period, the existing stockholders other stockholders or the corporation. Where the
or the corporation fails to exercise the option to wrong is done to a group of stockholders, as where
purchase, the transferring stockholder may sell preferred stockholders' rights are violated, a class
their shares to any third person. (Sec. 97, RCC) or representative suit will be proper for the
protection of all stockholders belonging to the same
Right of First Refusal is a right that arises only by group. But where the acts complained of constitute
virtue of contractual stipulations, in which case the a wrong to the corporation itself, the cause of action
right is construed strictly against the right of belongs to the corporation and not to the individual
persons to dispose of or deal with their property. It

Commercial Law
stockholder or member. (Legaspi Towers 300, Inc. v. controversy must not only be rooted in the
Muer, G.R. No. 170783, 18 June 2012) existence of an intra-corporate relationship but
must as well pertain to the enforcement of the
5. INTRA-CORPORATE DISPUTES parties’ correlative rights and obligations under the
(INDIVIDUAL vs. REPRESENTATIVE vs. Corporation Code and the internal and intra-
DERIVATIVE SUITS) corporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental
To determine whether a case involves an intra- to the controversy or if there will still be conflict
corporate controversy, and is to be heard and even if the relationship does not exist, then no intra-
decided by the branches of the RTC specifically corporate controversy exists. (Ibid.)
designated by the court to try and decide such cases,
two (2) elements must concur: Q: Santos, claiming to be a stockholder and co-
owner of Belo’s share in Belo Medical Group, Inc.
1. The status or relationship of the parties since such were acquired when they are
(Relationship Test); and cohabitating as husband and wife, demanded for
inspection of the corporation’s book. However,
2. The nature of the question that is the subject of Belo claims that it is her who paid for the shares
their controversy (Nature of the Controversy and that there’s conflict of interest with respect
Test). (Reyes v. Zenith Insurance Co., G.R. No. to the demand of Santos for inspection since the
165744, 11 Aug. 2008) latter owned 90% of The Obagi Skin Health Inc.
Relationship Test Belo Medical Group filed a complaint for

interpleader claiming the complaint was filed to
Initially, the main consideration in determining protect its interest and to compel Belo and
whether a dispute constitutes an intra-corporate Santos to litigate their conflicting claims of
controversy was limited to a consideration of the ownership. Belo argued that the proceedings
intra-corporate relationship existing between or should not have been classified as intra-
among the parties. The types of relationships, as corporate because it ceased to be that and
declared in the case of Union Glass & Container Corp. becomes a full-blown civil law question of
v. SEC (G.R. No. L-64013, 28 Nov. 1983), were as competing rights of ownership.
follows:
Santos filed for the dismissal of the case claiming
1. Between the corporation, partnership, or that there’s no cause of action and it is merely an
association and the public; afterthought for BMG to escape criminal liability
2. Between the corporation, partnership, or for not allowing him to inspect the records. The
association and its stockholders, partners, RTC dismissed the case. Is the dispute intra-
members, or officers; corporate?
3. Between the corporation, partnership, or
association and the State as far as its franchise, A. YES. The conflict is clearly intra-corporate.
permit or license to operate is concerned; and Applying the relationship test, both Belo and Santos
4. Among the stockholders, partners, or associates are named shareholders in Belo Medical Group's
themselves. (Ibid.) Articles of Incorporation and General Information
Sheet for 2007. The conflict is clearly intra-
Nature of the Controversy Test corporate as it involves two (2) shareholders
although the ownership of stocks of one stockholder
Under the nature of the controversy test, is questioned. Applying the nature of the
the incidents of that relationship must also be controversy test, this is still an intra-corporate
considered for the purpose of ascertaining whether dispute. The Complaint for interpleader seeks a
the controversy itself is intra-corporate. The determination of the true owner of the shares of

2022 GOLDEN NOTES
Corporation Law
stock registered in Santos' name. Ultimately, Villareal and Filart's right to a refund of the value of
however, the goal is to stop Santos from inspecting their shares was based on SBGCCI and UIGDC's
corporate books. This goal is so apparent that, even alleged failure to abide by their representations in
if Santos is declared the true owner of the shares of their prospectus. Specifically, Villareal and Filart
stock upon completion of the interpleader case, Belo alleged in their letter-complaint that the world-class
Medical Group still seeks his disqualification from golf course that was promised to them when they
inspecting the corporate books based on bad faith. purchased shares did not materialize. This is an
Therefore, the controversy shifts from a mere intra-corporate matter that is under the designated
question of ownership over movable property to the Regional Trial Court's jurisdiction. It involves the
exercise of a registered stockholder's proprietary determination of a shareholder's rights under the
right to inspect corporate books. (Belo Medical Corporation Code or other intra-corporate rules
Group v. Santos, G.R. No. 185894, 30 Aug. 2017) when the corporation or association fails to fulfill its
obligations. (SEC v. Subic Bay Golf and Country Club,
Q: Subic Bay Golf and Country Club, Inc. (SBGCCI) G.R. No. 179047, 11 Mar. 2015)
and Universal International Group
Development Corporation (UIGDC) entered into Q: Arevalo set up Broadcom with Cosare, his
a Development Agreement. UIGDC agreed to former employee, as an incorporator. Cosare
"finance, construct and develop the golf course, was later promoted to the position of Assistant
for and in consideration of the payment by Vice-President for Sales and Head of the
SBGCCI of its 1,530 (SBGCCI) shares of stock." Technical Coordination. Abiog was appointed as
Upon SBGCCI's application, SBGCCI was issued a Broadcom’s VP for Sales and thus, became
Certificate of Permit to Offer Securities for Sale Cosare’s immediate superior. Later, Cosare sent
to the Public of its 1,530 no par value a confidential memo to Arevalo to inform him of
proprietary shares. SBGCCI would use the the anomalies which were allegedly being
proceeds of the sale of securities to pay UIGDC committed by Abiog against the company.
for the development of the golf course. Subsequently, Cosare was totally barred from
entering the company premises.
In the letter addressed to the Director of SEC's
Corporation Finance Department, complainants Cosare attempted to furnish the company with a
Regina Filart and Margarita Villareal informed memo by which he addressed and denied the
the SEC that they had been asking UIGDC for the accusations cited in Arevalo’s memo. Soon after,
refund of their payment for their SBGCCI shares Cosare filed a labor complaint, claiming that he
because they failed to deliver the promised was constructively dismissed from employment
amenities. Should the issue of refund be litigated by Broadcom and Arevalo. CA ruled that the case
in the RTC? is an intra-corporate controversy and is under
the RTC’s jurisdiction. Is the CA correct?
A: YES. Jurisdiction over intra-corporate disputes
and all other cases enumerated in Sec. 5 of P.D. No. A: NO. The Court has determined that contrary to
902-A had already been transferred to designated the ruling of the CA, it is the LA, and not the regular
Regional Trial Courts. Hence, actions pertaining to courts, which has the original jurisdiction over the
intra-corporate disputes should be filed directly subject controversy. An intra-corporate
before designated Regional Trial Courts. Intra- controversy, which falls within the jurisdiction of
corporate disputes brought before other courts or regular courts, has been regarded in its broad sense
tribunals are dismissible for lack of jurisdiction. to pertain to disputes that involve any of the
This case also involves corporate rights and following relationships:
obligations. The nature of the action — whether it
involves corporate rights and obligations — is a. between the corporation, partnership or
determined by the allegations and reliefs in the association and the public;
complaint.

Commercial Law
b. between the corporation, partnership or case involves an intra-corporate dispute, the motion
association and the state in so far as its to dismiss is undeniably a prohibited pleading.
franchise, permit or license to operate is Moreover, the Court finds no justification for the
concerned; dismissal of the case based on the mere issuance of
c. between the corporation, partnership or a board resolution by the incumbent members of
association and its stockholders, partners, the Board of Trustees of petitioner corporation
members or officers; and recommending its dismissal, especially considering
d. among the stockholders, partners or associates, the various issues raised by the parties before the
themselves. court a quo. Hence, the RTC should not have
entertained, let alone have granted the subject
Settled jurisprudence, however, qualifies that when motion to dismiss. (Aldersgate College v. Gauuan,
the dispute involves a charge of illegal dismissal, the G.R. No. 192951, 14 Nov. 2012)
action may fall under the jurisdiction of the LA’s
upon whose jurisdiction, as a rule, falls termination Q: Jaka Investments bought 3 lots in Urdaneta
disputes and claims for damages arising from Village from Urdaneta Village Association,
employer-employee relations as provided in Art. subject to uniform restrictions annotated on the
217 of the Labor Code. Consistent with this transfer certificates of title covering the lots. On
jurisprudence, the mere fact that Cosare was a March 15, 2007, the Association's Board of
stockholder and an officer of Broadcom at the time Governors held a meeting, where it approved
the subject controversy developed failed to the extension of the Association's corporate life
necessarily make the case an intra-corporate after its expiration on Aug. 13, 2008 and the
dispute. term of the Deed Restrictions from June 1, 2008,
both for another 25 years. The extensions were
In Matling Industrial and Commercial Corporation v. approved by the members of the Association.
Coros, the Court distinguished between a “regular Jaka Investments filed before the RTC a Petition
employee” and a “corporate officer” for purposes of for the cancellation of restrictions annotated in
establishing the true nature of a dispute or the Transfer Certificate of Titles of the lots
complaint for illegal dismissal and determining bought.
which body has jurisdiction over it. Succinctly, it
was explained that “[t]he determination of whether The Association opposed the petition and
the dismissed officer was a regular employee or claimed that it was an intra-corporate dispute
corporate officer unravels the conundrum” of on the validity of the uniform restrictions' term
whether a complaint for illegal dismissal is extension. It argued that the HLURB, not the
cognizable by the LA or by the RTC. “In case of the trial court, had exclusive and original
regular employee, the LA has jurisdiction; jurisdiction over the case. Is the contention of
otherwise, the RTC exercises the legal authority to the Association correct?
adjudicate.
A: YES. Pursuant to E.O. No. 535, the HIGC assumed
Applying the foregoing to the present case, the LA the regulatory and adjudicative functions of the SEC
had the original jurisdiction over the complaint for over homeowners' associations. Moreover, by
illegal dismissal because Cosare, although an officer virtue of this amendatory law, the HIGC also
of Broadcom for being its AVP for Sales, was not a assumed the SEC's original and exclusive
“corporate officer” as the term is defined by law. jurisdiction under Sec. 5 of P.D. No. 902-A to hear
(Cosare v. Broadcom Asia, Inc., et al., G.R. No. 201298, and decide cases involving controversies arising out
05 Feb. 2014) of intra-corporate or partnership relations, between
and among stockholders, members, or associates;
Under Sec. 8, Rule 1 of the Interim Rules of between any and/or all of them and the corporation,
Procedure for Intra-Corporate Controversies, a partnership or association of which they are
motion to dismiss is a prohibited pleading. As this stockholders, members or associates, respectively;

2022 GOLDEN NOTES
Corporation Law
and between such corporation, partnership or REPRESENTATIVE SUIT

association and the state insofar as it concerns their
individual franchise or right to exist as such entity.
Where the wrong is done to a group of stockholders,
Later on, the above-mentioned powers and
as where preferred stockholders' rights are
responsibilities, which had been vested in the HIGC
violated, a class or representative suit will be proper
with respect to homeowners' associations, were
for the protection of all stockholders belonging to
transferred to the HLURB pursuant to R.A. No. 8763,
the same group. (Legaspi Towers 300, Inc. v. Muer,
entitled "Home Guaranty Corporation Act of 2000."
supra)
(JAKA Investments Corporation v. Urdaneta Village
Association Inc., G.R. Nos. 204187 and 206606, 01
NOTE: Right of pre-emption is personal to each
Apr. 2019)
stockholder. While a stockholder may maintain a
suit to compel the issuance of his proportionate
NOTE: HLURB is now the Human Settlements
share of stock, it has been ruled, nevertheless, that
Adjudication Commission pursuant to Republic Act
he may not maintain a representative action on
No. (RA) 11201 or the Department of Human
behalf of other stockholders who are similarly
Settlements and Urban Development Act.
situated.
Award of Damages in Intra-Corporate Disputes

Remedies of Direct Action (Individual or
Representative Suit) and Derivative Suit are
As can be gleaned from the title of A.M. No. 01-2-04-
Mutually Exclusive
SC, the amendment of Sec. 4, Rule 1 of the Interim
Rules of Procedure Governing Intra-Corporate
A derivative suit, on one hand, and individual and
Controversies was crafted precisely to clarify the
class suits, on the other, are mutually exclusive. The
previous rule that decisions on intra-corporate
two actions are mutually exclusive: i.e., the right of
disputes are immediately executory, by specifically
action and recovery belongs to either the
providing for an exception. Thus, the prevailing rule
shareholders (direct action) or the corporation
now categorically provides that awards for moral
(derivative action). (Cua v. Tan, G.R. No. 182008, 04
damages, exemplary damages, and attorney’s fees in
Dec. 2009)
intra-corporate controversies are not immediately
executory. (Heirs of Santiago Divinagracia, v. Ruiz,
G.R. No. 172508, 12 Jan. 2011) DERIVATIVE SUIT
INDIVIDUAL SUIT Where the acts complained of constitute a wrong to

the corporation itself, the cause of action belongs to
the corporation and not to the individual
Where a stockholder or member is denied the right
stockholder or member. (Legaspi, supra)
of inspection, his suit would be individual because
the wrong is done to him personally and not to the
A stockholder's right to institute a derivative suit is
other stockholders or the corporation. (Legaspi
not based on any express provision of the
Towers 300, Inc. v. Muer, G.R. No. 170783, 18 June
Corporation Code, or even the Securities Regulation
2012)
Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for
NOTE: Authorization from the board of directors of
damages suffered by the corporation and its
the CMH in the case at bar was not necessary
stockholders for violation of their fiduciary duties.
inasmuch as private respondent was not acting on
Hence, a stockholder may sue for mismanagement,
behalf of the corporation but in his own personal
waste or dissipation of corporate assets because of
capacity; and precisely he was suing the corporation
a special injury to him for which he is otherwise
itself (CMH) to preserve his successional rights.
without redress.
(CMH Agricultural Corp. v. CA, G.R. No. 112625, 07
March 2002)

Commercial Law
In effect, the suit is an action for specific must be "in the name of [the] corporation or
performance of an obligation owed by the association." (Divina, 2020, citing Reyes v. Hon. RTC
corporation to the stockholders to assist its rights of of Makati, Br. 142, G.R. No. 165744, 11 Aug. 2008)
action when the corporation has been put in default
by the wrongful refusal of the directors or NOTE: This requirement has already been settled in
management to make suitable measures for its jurisprudence. Thus, in Western Institute of
protection. The basis of a stockholder's suit is Technology, Inc., et al v. Solas, et al, the Supreme
always one in equity. However, it cannot prosper Court said that "among the basic requirements for a
without first complying with the legal requisites for derivative suit to prosper is that the minority
its institution. (Yu v. Yukayguan, G.R. No. 177549, 18 shareholder who is suing for and on behalf of the
June 2009) corporation must allege in his complaint before the
proper forum that he is suing on a derivative cause
A derivative suit is an exception to the general rule of action on behalf of the corporation and all other
that the corporation’s power to sue is exercised only shareholders similarly situated who wish to join
by the board of directors or trustees. (Divina, 2020) him. (Villamor v. Umale, G.R. No. 172843, 24 Sept.
2014)
Requisites for Derivative Suit
NOTE: Corporate cause of action: the cause of action
A stockholder or member may bring an action in the must devolve upon the corporation itself; the
name of a corporation or association, as the case wrongdoing or harm having been caused to the
may be, provided, that: corporation and not to the particular stockholder
bringing the suit. (Reyes v. Hon. RTC of Makati Br.
1. He was a stockholder or member at the time the 142, supra)
acts or transactions subject of the action
occurred and at the time the action was filed. Representative Suit vs. Derivative Suit
NOTE: If the cause of action is continuing in DIRECT ACTION DERIVATIVE SUIT

nature, the only requisite is that the party is a Initiated by the
Initiated by the
stockholder at the time the action was filed stockholder under his
stockholder on behalf
(Dean Divina’s Lecture, 29 Apr. 2015) own name or on behalf
of the corporation.
of other stockholders.
2. He exerted all reasonable efforts, and alleges Seeks to recover for the
the same with particularity in the complaint, to benefit of the
exhaust all remedies available under the AOI, corporation and its
by-laws, laws or rules governing the whole body of
Seeks vindication for
corporation or partnership to obtain the relief shareholders when
injury to his or her
he desires; injury is caused to the
interest as a
corporation that may
shareholder.
3. No appraisal rights are available for the act or not otherwise be
acts complained of; and redressed because of
failure of the
4. The suit is not a nuisance or harassment suit. corporation to act.
(Rule 8, Sec. 1, Interim Rules of Procedure for Deals with individual
Intra-Corporate Controversies (“Interim Rules”) Deals with corporate
stockholders or a class
rights. (Ibid.)
of stockholder’s rights .
The fifth requisite for filing derivative suits, while
not included in the enumeration, is implied in the
first paragraph of Rule 8, Sec. 1 of the Interim Rules:
The action brought by the stockholder or member

2022 GOLDEN NOTES
Corporation Law
Q: Royal Links Golf Club obtained a loan from a Q: Ranier Madrid, a shareholder, wrote the
bank which is secured by a mortgage on a titled Board of Directors of FHGCCI two demand
lot where holes 1, 2, 3 and 4 are located. The letters because of the delay in construction and
bank informed the Board of Directors (Board) asked them to initiate legal actions against
that if the arrearages are not paid within thirty FEGDI and FEDI. The Board of Directors,
(30) days, it will extra-judicially foreclose the however, failed and/or refused to act on the
mortgage. The Board decided to offer to the demand letters. Madrid, in a derivative capacity
members 200 proprietary membership shares, on behalf of petitioner FHGCCI, filed with the
which are treasury shares, at the price of RTC a Complaint for Specific Performance with
P175,000.00 per share even when the current Damages.
market value is P200,000.00.
FEGDI argued that there is no cause of action and
In behalf and for the benefit of the corporation, it is not a proper derivative suit as Madrid on
Peter, a stockholder, filed a derivative suit behalf of FHGCCI failed to exhaust all remedies
against the members of the Board for breach of available under the AOI and by-laws and failed
trust for selling the shares at P25,000.00, lower to implead its Board of Directors as
than its market value, and asked for the indispensable parties. Is there compliance with
nullification of the sales and the removal of the requirements of derivative suit?
board members. Peter claims the Club incurred
a loss of P5 million. The Board presented the A: NO. Madrid, as a shareholder of FHGCCI, failed to
defense that in its honest belief any delay in the allege with particularity in the Complaint, and even
payment of the arrearages will be prejudicial to in the Amended Complaint, that he exerted all
the Club as the mortgage on its assets will be reasonable efforts to exhaust all remedies available
foreclosed and the sale at a lower price is the under the articles of incorporation, by-laws, or rules
best solution to the problem. Decide the suit and governing the corporation; that no appraisal rights
explain. (2016 BAR) are available for the acts or acts complained of; and
that the suit is not a nuisance or a harassment suit.
A: The derivative suit will not prosper. There is no Although the Complaint alleged that demand letters
indication in the Complaint that they had exerted all were sent to the Board of Directors of petitioner
reasonable efforts to exhaust all remedies available FHGCCI and that these were unheeded, these
under the AOI, by-laws, and laws or rules governing allegations will not suffice. (Forest Hills Golf and
the corporation to obtain the relief they desire. The Country Club, Inc. v. Fil- Estate Properties, Inc. G.R.
Complaint contained no allegation whatsoever of No. 206649, 20 July 2016)
any effort to avail of intra-corporate remedies.
Indeed, even if petitioners thought it was futile to Q: MC Home Depot occupied a prime property
exhaust intra-corporate remedies, they should have (Rockland area) in Pasig. The property was part
stated the same in the Complaint and specified the of the area owned by Mid-Pasig Development
reasons for such opinion. a derivative suit cannot Corporation (Mid-Pasig). PPC obtained an
prosper without first complying with the legal option to lease portions of Mid-Pasig's property,
requisites for its institution. (Ching v. Subic Bay Golf including the Rockland area. PPC's board of
and Country Club, G.R. No. 174353, 10 Sept. 2014) directors issued a resolution waiving all its
rights, interests, and participation in the option
NOTE: Although the shareholdings of petitioners to lease contract in favor of the law firm of Atty.
are indeed only two out of the 409 alleged Alfredo Villamor, Jr. (Villamor). PPC,
outstanding shares or 0.24%, the Court has held that represented by Villamor, entered into a
it is enough that a member or a minority of memorandum of agreement (MOA) with MC
stockholders file a derivative suit for and in behalf Home Depot. Under the MOA, MC Home Depot
of a corporation. (Villamor v. Umale, supra) would continue to occupy the area as PPC's

Commercial Law
sublessee for four (4) years, renewable for Respondent Balmores did not bring the action for
another four (4) years. the benefit of the corporation. Instead, he was
alleging that the acts of PPC's directors, specifically
In compliance with the terms of the MOA, MC the waiver of rights in favor of Villamor's law firm
Home Depot issued 20 post-dated checks and their failure to take back the MC Home Depot
representing rental payments for one year and checks from Villamor, were detrimental to his
the goodwill money. The checks were given to individual interest as a stockholder. In filing an
Villamor who did not turn these or the action, therefore, his intention was to vindicate his
equivalent amount over to PPC, upon individual interest and not PPC's or a group of
encashment. stockholders. (Villamor v. Umale, G.R. No. 172843, 24
Sept. 2014)
Hernando Balmores, a stockholder and director
of PPC, filed with the RTC an intra-corporate Derivative Suit is a Remedy of Last Resort
controversy complaint. Balmores prayed that a
receiver be appointed from his list of nominees. As a general rule, corporate litigation must be
He also prayed for petitioners' prohibition from commenced by the corporation itself, with the
selling, encumbering, transferring or disposing imprimatur of the board of directors, which,
in any manner any of PPC's properties, including pursuant to the law, wields the power to sue.
the MC Home Depot checks and/or their Therefore, since the derivative suit is a remedy of
proceeds. He further prayed for the accounting last resort, it must be shown that the board, to the
and remittance to PPC of the MC Home Depot detriment of the corporation and without a valid
checks or their proceeds and for the annulment business consideration, refuses to remedy a
of the board's resolution waiving PPC's rights in corporate wrong. A derivative suit may only be
favor of Villamor's law firm. Is Balmores' action instituted after such an omission. Simply put,
a derivative suit? derivative suits take a back seat to board-
sanctioned litigation whenever the corporation is
A: NO. A derivative suit is an action filed by willing and able to sue in its own name. (Ago Realty
stockholders to enforce a corporate action. It is an & Development Corp. v. Ago, G.R. Nos. 210906 &
exception to the general rule that the corporation's 211203, 16 Oct. 2019)
power to sue is exercised only by the board of
directors or trustees. Individual stockholders may Stockholder is NOT Real Party-in-Interest
be allowed to sue on behalf of the corporation
whenever the directors or officers of the The corporation is the real party-in-interest while
corporation refuse to sue to vindicate the rights of the suing stockholder, on behalf of the corporation,
the corporation or are the ones to be sued and are in is only a nominal party. (Hi-Yield Realty v. CA, G.R.
control of the corporation. It is allowed when the No. 168863, 23 June 2009)
directors or officers are guilty of breach of trust, and
not of mere error of judgment. Time When Person Must Be Stockholder to
Institute Derivative Suit
In derivative suits, the real party in interest is the
corporation, and the suing stockholder is a mere He must be a stockholder at the time the cause of
nominal party. Moreover, it is important that the action accrued. If the cause of action is general and
corporation be made a party to the case. While it is continuing, said person must be a stockholder at the
true that the basis for allowing stockholders to file time of filing of the suit and at the time the cause of
derivative suits on behalf of corporations is based action accrued.
on equity, the legal requisites for its filing must
necessarily be complied with for its institution. The implicit argument - that a stockholder, to be
considered as qualified to bring a derivative suit,
must hold a substantial or significant block of stock

2022 GOLDEN NOTES
Corporation Law
- finds no support whatever in the law. The bona fide bringing the action in behalf of the corporation.
ownership by a stockholder of stock in his own right (SMC v. Khan, G.R. No. 85339, 11 Aug. 1989)
suffices to invest him with standing to bring a
derivative action for the benefit of the corporation. c. NO. Watered shares are those sold by the
The number of his shares is immaterial since he is corporation for less than the par/book value. In
not suing in his own behalf, or for the protection or the instant case, it will depend upon the value of
vindication of his own particular right, or the services rendered in relation to the total par
redress of a wrong committed against him, value of the shares.
individually, but in behalf and for the benefit of the
corporation. (San Miguel Corporation v. Khan, G.R. Allegation of Tort can Co-Exist With Derivative
No. 85339, 11 Aug. 1989) Suit in Same Petition
Q: A became a stockholder of Prime Real Personal injury suffered by a stockholder cannot

Estate Corporation (PREC) on July 10, 1991, disqualify him from filing a derivative suit on behalf
when he was given one share by another of the corporation. It merely gives rise to an
stockholder to qualify him as a director. A was additional cause of action for damages against the
not re-elected director in the July 1, 1992 annual erring directors. (Gochan v. Young, G.R. No. 131889,
meeting but he continued to be a registered 12 Mar. 2001)
shareholder of PREC.
Jurisdiction
When he was still a director, A discovered that
on Jan 5, 1991, PREC issued free of charge A derivative suit is an intra-corporate controversy
10,000 shares to X, a lawyer who assisted in a hence under the jurisdiction of the RTC acting as a
court case involving PREC. special commercial court.
a. Can A now bring an action in the name of the Q: AA, a minority stockholder, filed a suit against
corporation to question the issuance of the BB, CC, DD, and EE, the holders of majority
shares to X without receiving any payment? shares of MOP Corporation, for alleged
misappropriation of corporate funds. The
b. Can X question the right of A to sue him in complaint averred, inter alia, that MOP
behalf of the corporation on the ground that Corporation is the corporation in whose behalf
A has only one share in his name? and for whose benefit the derivative suit is
brought. In their capacity as members of the
c. Can the shares issued to X be considered as Board of Directors, the majority stockholders
watered stock? (1993 BAR) adopted a resolution authorizing MOP
Corporation to withdraw the suit. Pursuant to
A: said resolution, the corporate counsel filed a
a. As a general rule, A cannot bring a derivative Motion to Dismiss in the name of the MOP
suit in the name of the corporation concerning Corporation. Should the motion be granted or
an act that took place before he became a denied? Reason briefly.
stockholder. However, if the act complained of
is a continuing one, A may do so. A: The motion to dismiss should be denied. A
derivative suit has been the principal defense of the
b. NO. In a derivative suit, the action is instituted/ minority shareholder against abuses by the
brought in the name of a corporation and reliefs majority. It is a remedy designed by equity for those
are prayed for therein for the corporation, by a situations where the management, through fraud,
minority stockholder. The law does not neglect of duty, or other cause, declines to take the
qualify the term “minority” in terms of the proper and necessary steps to assert the
number of shares owned by a stockholder corporation’s rights.

Commercial Law
Indeed, to grant to MOP the right of withdrawing or Rodrigo, in filing the complaint, is enforcing his
dismissing the suit, at the instance of majority rights as a co-heir and not as a stockholder of Zenith.
stockholders and directors who themselves are the The injury he seeks to remedy is one suffered by an
persons alleged to have committed breaches of trust heir (for the impairment of his successional rights)
against the interest of the corporation, would be to and not by the corporation nor by Rodrigo as a
emasculate the right of minority stockholders to shareholder on record. (Oscar Reyes v. RTC of
seek redress for the corporation. To consider the Makati, Br. 142, supra)
Notice of Dismissal filed by MOP as quashing the
complaint filed by AA in favor of the corporation Q: Pursuant to the by-laws of Legaspi Towers
would be to defeat the very nature and function of a 300, Inc. (Legaspi), petitioners Lilia Marquinez
derivative suit and render the right to institute the Palanca, et al., the incumbent Board of Directors,
action illusory. (Commart (Phils.) Inc. v. SEC, G.R. No. fixed the annual meeting of the members of the
85318, 03 June 1991) condominium corporation and the election of
the new Board of Directors. Out of a total
Q: Oscar and Rodrigo Reyes are two of the four number of 5,723 members who were entitled to
children of the spouses Pedro and Anastacia vote, 1,358 were supposed to vote through their
Reyes. Pedro, Anastacia, Oscar, and Rodrigo respective proxies and their votes were critical
each owned shares of stock of Zenith Insurance in determining the existence of a quorum.
Corporation (Zenith), a domestic corporation
established by their family. Pedro and Anastacia The Committee on Elections of Legaspi,
died. Thus, Pedro’s estate was judicially however, found most of the proxy votes, at its
partitioned among his heirs, however, no face value, irregular, thus, questionable; and for
similar settlement and partition appear to have lack of time to authenticate the same, Palanca, et
been made with Anastacia’s estate, which al., adjourned the meeting for lack of quorum.
included her shareholdings in Zenith. Despite Palanca et al.'s insistence that no
quorum was obtained during the annual
Zenith and Rodrigo filed a complaint with the meeting, Muer, et al., pushed through with the
SEC against Oscar. The complaint stated that it is scheduled election and were elected as the new
a derivative suit initiated and filed by the Board of Directors and officers of Legaspi.
complainant Rodrigo to obtain an accounting of Subsequently, they submitted a General
the funds and assets of Zenith which are now or Information Sheet to the SEC with the new set of
formerly in the control, custody, and/or officers. Palanca, et al., filed a complaint for the
possession of Oscar and to determine the shares declaration of nullity of elections against Muer,
of stock of deceased spouses Pedro and et al., in a form of a derivative suit. Is the
Anastacia Reyes that were arbitrarily and derivative suit proper?
fraudulently appropriated by Oscar. Oscar
denied the charge. Furthermore, Oscar claimed A: NO. Petitioners’ complaint seek to nullify the said
that the suit is not a bona fide derivative suit election, and to protect and enforce their individual
because the requisites therefor have not been right to vote. Petitioners seek the nullification of the
complied with. Is the complaint filed by Rodrigo election of the Board of Directors, composed of
a derivative suit? herein respondents, who pushed through with the
election even if petitioners had adjourned the
A: NO. First, Rodrigo, in so far as the shares of meeting allegedly due to lack of quorum.
Anastacia is concerned, is not a shareholder; he only Petitioners are the injured party, whose rights to
stands as a transferee-heir whose rights to the share vote and to be voted upon were directly affected by
are inchoate and unrecorded. In addition, the claims the election of the new set of board of directors. The
tell the Court unequivocally that the present party-in-interest are the petitioners as
controversy arose from the parties' relationship as stockholders, who wield such right to vote. The
heirs of Anastacia and not as shareholders of Zenith. cause of action devolves on petitioners, not the

2022 GOLDEN NOTES
Corporation Law
condominium corporation, which did not have the

right to vote. Hence, the complaint for nullification F. CAPITAL STRUCTURE
of the election is a direct action by petitioners, who
were the members of the Board of Directors of the
corporation before the election, against
Number and the Qualifications of Incorporators
respondents, who are the newly-elected Board of
in a Stock Corporation
Directors. Under the circumstances, the derivative
suit filed by petitioners in behalf of the
1. The RCC provides that any person, partnership,
condominium corporation in the Second Amended
association, or corporation, singly or jointly
Complaint is improper. (Legaspi Towers 300, Inc., et
with others.
al., v. Muer, et al., supra)
NOTE: The word “singly” pertains to a One

Person Corporation, which may only be
incorporated by a natural person, trust, or
estate.
2. Incorporators must not be more than 15.
3. A natural person incorporator must be of legal

age
4. Each must own or subscribe to at least one (1)

share of the capital stock. (Sec. 10, RCC)
Q: Must all incorporators and directors be

residents of the Philippines? (2006 BAR)
A: NO. The RCC has removed the residency

requirement. Thus, incorporators and directors do
not need to be residents of the Philippines
Incorporator vs. Corporator
INCORPORATOR CORPORATOR
Who are they
Those who compose a corporation, whether as

stockholders or as members.
Those stockholders or members mentioned in the
AOI as originally forming and composing the A stockholder may or may not be a subscriber.
corporation and who are signatories thereof. Subscribers are persons who have agreed to take and
pay for original, unissued shares of a corporation
formed or to be formed.
Signatory of the AOI
A signatory of the AOI. May or may not be signatory of the AOI.

Commercial Law
Effect upon the Sale of his Shares
Ceases to be a corporator by sale of his shares in case

of stock corporation.
Does not cease to be an incorporator upon sale of his
shares.
In case of non-stock corporation, the corporator
ceases to be a member.
Number of Incorporators/Corporators
GR: No limit.
XPN: Close corporations – not more than a specified

Not more than 15. number of persons, not exceeding 20. (Sec. 95, RCC)
NOTE: There must only be one stockholder in a One

Person Corporation.
Filipino Citizenship
GR: Filipino citizenship is not a requirement.
XPN: When engaged in a business which is wholly or partly-nationalized. In the case of partly-nationalized,
the requisite percentage of Filipino stockholdings /membership must be attained, and the Board of Directors
/ Trustees must be to the same extent.
Capital Stock Requirements Q: In order to comply with the 60% capital

requirement for ownership by Filipinos of
GR: Stock corporations shall not be required to have certain corporations, what does the term capital
a minimum capital stock. (Sec. 12, RCC) refer to?
XPN: As otherwise specifically provided by special A. The term “capital” refers to shares with voting
law. rights, and with full beneficial ownership, which
must be owned and held by citizens of the
1. SHARES OF STOCK Philippines. (Gamboa v. Teves, G.R. No. 176579, 28
June 2011)
Share of stock is one of the units in which the capital
stock is divided. It represents the interest or right Rationale: The right to vote in the election of
which the owner has: directors, coupled with full beneficial ownership of
stocks, translates to effective control of a
1. In the management of the corporation in which corporation.
he takes part through his right to vote (if voting
rights are permitted for that class of stock by Legal Title Without Beneficial Title Insufficient
the AOI); to Comply With Ownership Requirement
2. In a portion of the corporate earnings, if and
when, segregated in the form of dividends; and Mere legal title is insufficient to meet the 60%
3. Upon its dissolution and winding up, in the Filipino-owned “capital” required in the
property and assets of the corporation Constitution. Full beneficial ownership of 60% of
remaining after the payment of corporate debts the outstanding capital stock, coupled with 60%
and liabilities to creditors. (De Leon, 2010, citing of the voting rights, is required. The legal and
11 Fletcher, 1971) beneficial ownership of 60% of the outstanding

2022 GOLDEN NOTES
Corporation Law
capital stock must rest in the hands of Filipino (a) total number of outstanding shares of stock
nationals in accordance with the constitutional entitled to vote in the election of directors; AND
mandate. Otherwise, the corporation is “considered
as non-Philippine nationals. Full beneficial (b) the total number of outstanding shares of stock,
ownership of the stocks, coupled with appropriate whether or not entitled to vote in the election of
voting rights, is essential.” directors (Roy III v. Herbosa, G.R. No. 207246, 22
Nov. 2016)
NOTE: Since the constitutional requirement of at
least 60% Filipino ownership applies not only to a. NATURE OF SHARES OF STOCK
voting control of the corporation but also to the
beneficial ownership of the corporation, it is Shares of stock are units of capital stock. Once
therefore imperative that such requirement apply issued, they are considered personal property of the
uniformly and across the board to all classes of stockholder owning it. While shares of stock
shares, regardless of nomenclature and category, constitute personal property, they do not represent
comprising the capital of a corporation. the property of the corporation. The corporation
has property of its own. A share of stock only
Under the RCC, capital stock consists of all classes of typifies an aliquot part of the corporation's
shares issued to stockholders, that is, common property, or the right to share in its proceeds to that
shares as well as preferred shares, which may have extent when distributed according to law and
different rights, privileges or restrictions as stated equity.
in the articles of incorporation. The RCC allows
denial of the right to vote to preferred and As personal property, shares of stock may be
redeemable shares, but disallows denial of the right transferred, either through sale, donation or
to vote in specific corporate matters. Thus, common succession, or encumbered or otherwise be subject
shares have the right to vote in the election of to a security interest. (Divina, 2020)
directors, while preferred shares may be denied
such right. Nonetheless, preferred shares, even if Does Not Constitute Indebtedness
denied the right to vote in the election of directors,
are entitled to vote on certain corporate matters. They are in the nature of choses in action but are not
in a strict sense. They do not constitute an
Since a specific class of shares may have rights and indebtedness of the corporation to the shareholder
privileges or restrictions different from the rest of and are therefore, not credits as to make the
the shares in a corporation, the 60-40 ownership stockholder a creditor of the corporation. (De Leon,
requirement in favor of Filipino citizens in Sec. 11, 2010)
Art. XII of the Constitution must apply not only to
shares with voting rights but also to shares without BOD May Issue Additional Shares
voting rights. (This is because when only preferred
shares without voting rights are issued, the A stock corporation is expressly granted the power
requirement of full beneficial ownership will be to issue or sell stocks. The power to issue shares of
used as the standard). Preferred shares denied the stock in a corporation is lodged in the board of
right to vote in the election of directors are anyway directors and no stockholders’ meeting is required
still entitled to vote on the eight specific corporate to consider it because additional issuances of shares
matters under Sec. 6. (Heirs of Gamboa v. Teves, G.R. of stock do not need approval of the stockholders.
No. 176579, 09 Oct. 2012)
The only requirement is the board resolution
The Court upheld SEC-MC No. 8, s. 2013, which approving the additional issuance of shares. The
requires percentage of Filipino ownership shall be corporation shall also file the necessary application
applied to BOTH:
with the SEC to exempt these from the registration
requirements under the Revised Securities Act (now

Commercial Law
the Securities Regulation Code). (Majority Amount of Consideration

Stockholders of Ruby Industrial Corp. v. Lim, G.R. No.
165887, 06 June 2011) Shares of stock shall not be issued for a
consideration less than the par or issued price
b. CONSIDERATION FOR SHARES OF STOCK thereof, except treasury shares so long as the price
is reasonable.
Valid Considerations in a Subscription
Agreement Persons Required to Pay in Full
1. Actual cash paid to the corporation; 1. Non‐resident foreign subscribers upon

2. Property, tangible, or intangible (i.e. patents or incorporation must pay in full their
copyrights), provided: subscriptions unless their unpaid subscriptions
are guaranteed by a surety bond or by an
a. The property is actually received by the assumption by a resident stockholder through
corporation an affidavit of liability.
b. The property is necessary or convenient
for its use and lawful purposes 2. In case of no‐par value shares, they are deemed
c. It must be subject to a fair valuation equal fully paid and non‐assessable. (Sec. 6, RCC)
to the par or issued value of the stock
issued NOTE: The issued price of no-par value shares may
be fixed in the AOI or by the BOD pursuant to
NOTE: The valuation thereof shall initially be authority conferred upon it by the AOI or the by-
determined by the stockholders or directors laws, or in the absence thereof, by the stockholders
and subject to the approval of the SEC. representing at least a majority of the outstanding
capital stock at a meeting duly called for the
3. Labor performed for or services actually purpose. (Sec. 61, RCC)
rendered to the corporation.
4. Previously incurred indebtedness of the Doctrine of Individuality or Indivisibility of
corporation. Subscription
5. Amounts transferred from unrestricted
retained earnings to stated capital (in case of Shares of stock so issued are personal property and
declaration of stock dividends). may be transferred by delivery of the certificate or
6. Outstanding shares exchanged for stocks in the certificates indorsed by the owner or his attorney-
event of reclassification or conversion. in-fact or any other person legally authorized to
7. Shares of stock in another corporation; and/or make the transfer. No transfer, however, shall be
8. Other generally accepted form of consideration valid, except as between the parties, until the
(Sec. 61, RCC) transfer is recorded in the books of the corporation
showing the names of the parties to the transaction,
NOTE: Promissory notes or future services are not the date of the transfer, the number of the certificate
valid considerations. or certificates and the number of shares transferred.
(Sec. 62, RCC)
In view of nos. 1 and 2 of Sec. 61, payment of shares
of stock must be actually received by the No certificate of stock shall be issued to a subscriber
corporation. Hence, receivables cannot be treated as until the full amount of the subscription together
cash actually received. They may, however, be with interest and expenses (in case of delinquent
considered as property payment subject to shares), if any is due, has been paid. (Sec. 63, RCC)
verification by SEC and the condition that it be held
in escrow until actual payment of the amount. The doctrine of indivisibility of subscription
contract implicitly set forth under Sec. 64 (now Sec.

2022 GOLDEN NOTES
Corporation Law
63) of the Code, that is, as subscription is one, entire Here, the records show that the purported
and indivisible contract. It cannot be divided into transaction between Tee Ling Kiat and Dewey Dee
portions so that the stockholder shall not be entitled has never been recorded in VIP's corporate books.
to a certificate of stock until he has remitted the full Thus, the transfer, not having been recorded in the
payment of his subscription together with the corporate books in accordance with law, is not valid
interest and expenses if any is due. or binding as to the corporation or as to third
persons. (Tee Ling Kiat v. Ayala Corporation, G.R. No.
The purpose of the prohibition is to prevent the 192530, 07 Mar. 2018, J. Caguioa)
partial disposition of a subscription which is not
fully paid, because if it is permitted, and the Time When Balance of the Subscription Should
subscriber subsequently becomes delinquent, in the Be Paid
payment of his subscription, the corporation may
not be able to sell as many as his subscribed shares 1. On the date specified in the subscription
as would be necessary to cover the total amount due contract, without need of demand or call;
from his, which is authorized under Sec. 68 (now, 2. If no date of payment has been specified, on the
Sec. 67). (SEC OGC Opinion No. 16-05 dated March 31, date specified in the call made by the BOD; (Sec.
2016, citing previous SEC opinions) 66, RCC)
3. If no date of payment has been specified in the
Q: Ayala Corporation instituted a complaint for call made, within 30 days from the date of call;
sum of money with an application for a writ of and
attachment against the Spouses Dee. The RTC 4. When insolvency supervenes upon a
rendered a decision adverse to the Spouses Dee, corporation and the court assumes jurisdiction
thus, a writ of execution was issued by the RTC. to wind it up, all unpaid subscriptions become
Subsequently, a Notice of Levy on Execution was payable on demand, and are at once
issued addressed to the RD of Antipolo to levy on recoverable, without necessity of any prior call.
the properties registered in the name of Vonnel
Industrial Park, Inc. (VIP). Accrual of Interest
Dewey Dee was an incorporator of VIP. Tee Ling Unpaid balance will accrue interest if so required by
Kiat filed a Third-Party Claim alleging that even the subscription contract and at the rate of interest
though Dewey Dee was an incorporator of VIP, fixed in the subscription contract. If no rate of
Dewey Dee was no longer a stockholder of VIP interest is fixed in the subscription contract, such
by virtue of a sale of shares made by Dewey Dee rate shall be deemed to be the legal rate. (Sec. 65,
in favor of Tee Ling Kiat as evidenced by a RCC)
cancelled check issued by Dewey Dee in favor of
Tee Ling Kiat. The RTC and the CA ruled against The above interest is different from the interest
Tee Ling Kiat holding that Tee Ling Kiat was not contemplated by Sec. 66, the unpaid balance
able to prove the alleged sale of shares. Is Tee involved in which, will only accrue interest, by way
Ling Kiat a stockholder of VIP? of penalty, from the date specified in the contract of
subscription or from the date stated in the call made
A: NO. Sec. 63 (now Sec. 62, RCC) of the Corporation by the board.
Code of the Philippines provides that: "No transfer,
x x x shall be valid, except as between the parties, Effect of Failure to Pay
until the transfer is recorded in the books of the
corporation showing the names of the parties to the Failure to pay on such date (specified in the
transaction, the date of the transfer, the number of subscription contract or specified in the call) shall
the certificate or certificates and the number of render the entire balance due and payable and shall
shares transferred." make the stockholder liable for interest at the legal
rate on such balance, unless a different interest rate

Commercial Law
is provided in the subscription contract. (Sec. 66, Unpaid claim

RCC)
The term "unpaid claim" under Sec. 63 (now Sec. 62,
Remedies to Enforce Payment RCC) refers to "any unpaid claim arising from
unpaid subscription, and not to any indebtedness
1. Extra-judicial sale at public auction (Sec. 66, which a subscriber or stockholder may owe the
RCC); and corporation arising from any other transaction." In
2. Judicial action (Sec. 69, RCC) the case at bar, the subscription for the share in
question has been fully paid as evidenced by the
Call for Payment issuance of Membership Certificate No. 1219. What
Calapatia owed the corporation were merely the
A call is made in a form of board resolution that monthly dues. Hence, the aforequoted provision
unpaid subscriptions to the capital stock are due does not apply. (China Bank v. CA, G.R. No. 117604,
and payable and the same or such percentage 26 Mar. 1997)
thereof shall be collected, together with all accrued
interest, on a specified date and that if no payment The term "unpaid claim" only refers to "any unpaid
is made within 30 days from said date, all stocks claim arising from unpaid subscription. It does not
covered by said subscription shall thereupon include any indebtedness which a subscriber or
become delinquent and shall be subject to public stockholder may owe the corporation arising from
auction sale. any other transaction. It does not, for instance,
include monthly dues imposed by the corporation
Stocks become delinquent when the unpaid for the use of its facilities. (China Bank, supra.)
subscription and accrued interests thereon are not
paid within 30 days from their due date as specified Call Not Always Necessary to Effect Payment of
in the subscription contract or in the call by the Unpaid Subscription
board of directors.
The due date for the payment of the balance is either
There is no need of a formal declaration of the Board the stipulated date or in the absence of such
for an unpaid subscription to become delinquent in stipulation, the call or demand by the Board of
the event of failure to pay the unpaid subscription Directors.
within the prescribed 30 day period from the date
specified in the subscription contract or the date Demand is not necessary to put the subscriber in
stated in the call. Henceforth, the subscription default if the due date of payment is specified in the
becomes automatically delinquent upon the lapse of contract of subscription based on Article 1169 of the
the 30 day period in the call, with the stockholder Civil Code that demand is not necessary to put the
failing to pay. (SEC OGC Opinion No. 16-05 dated debtor in default when the law so declares. (Divina,
March 31, 2016 citing previous SEC opinions) 2020)
A call made upon some of the subscribers is void or When Shares become Delinquent
which requires some to pay a higher rate than the
others, pursuant to the rule that calls must operate If no payment is made within thirty (30) days from
uniformly upon all stockholders. A call cannot be of the date specified in the subscription contract or on
such character as to permit the directors to practice the date stated in the call made by the board, all
favoritism or act oppressively. In like manner, if a stocks covered by the subscription shall thereupon
call cannot be made discriminatorily, so should the become delinquent and shall be subject to sale,
removal of the delinquency status. (ibid) unless the board of directors orders otherwise. (Sec.
66, RCC)

2022 GOLDEN NOTES
Corporation Law
Effect of Delinquency Procedure for Sale of Delinquent Stocks
1. Render the entire balance due and payable and 1. Resolution – the board shall issue a resolution
shall make the stockholder liable for interest at ordering the sale of delinquent stock.
the legal rate on such balance, unless a different
interest rate is provided in the subscription 2. Notice – notice of said sale, with a copy of the
contract (Sec. 66, RCC) resolution, shall be sent to every delinquent
stockholder either personally or by registered
2. Disenfranchises the shares from any right that mail or through other means provided in the
inheres to a stockholder, except the right to bylaws.
dividends (Sec. 70, RCC)
3. Publication – the notice shall be published once
NOTE: Any cash dividends due on delinquent stock a week for two consecutive weeks in a
shall first be applied to the unpaid balance on the newspaper of general circulation in the
subscription plus costs and expenses, while stock province or city where the principal office of the
dividends shall be withheld from the delinquent corporation is located
stockholders until their unpaid subscription is fully
paid. (Sec. 42, RCC) 4. Sale – the delinquent stock shall be sold at a
public auction to be held not less than 30 days
Q: Ace Cruz subscribed to 100,000 shares of nor more than 60 days from the date the stocks
stock of JP Development Corporation, which has become delinquent to such bidder who shall
a par value of P 1 per share. He paid P25,000.00 offer to pay the full amount of the balance on the
and promised to pay the balance before subscription together with accrued interest,
December 31, 2008. JP Development costs of advertisement and expenses of sale, for
Corporation declared cash dividends on October the smallest number of shares or fraction of a
15, 2008 payable on December 1, 2008. share.
a. For how many shares is Ace Cruz entitled to 5. Transfer – the stock so purchased shall be
be paid cash dividends? Explain. transferred to such purchaser in the books of
b. On December 1, 2008, can Ace Cruz compel the corporation and a certificate for such stock
JP Development Corporation to issue to him shall be issued in his favor.
the stock certificate corresponding to the
P25,000 paid by him? (2008 BAR) 6. Remaining Shares – the remaining shares, if
any, shall be credited in favor of the delinquent
A: stockholder who shall likewise be entitled to
a. Ace is entitled cash dividends pertaining to the the issuance of a certificate of stock covering the
entire 100,000 shares. A contract of same. (Sec. 67, RCC).
subscription is an indivisible contract. Even if
only partial payment for the subscription was NOTE: Should there be no bidder at the public
made, the whole subscription remain eligible to auction who offers to pay the full amount of the
cash dividend. balance on the subscription together with
accrued interest, costs of advertisement, and
b. NO. No certificate of stock shall be issued to a expenses of sale, for the smallest number of
subscriber until the full amount of subscription shares or fraction of a share, the corporation
together with interest and expenses (in case of may, subject to the provisions of this Code, bid
delinquent shares), if any is due, has been paid. for the same, and the total amount due shall be
(Sec 63, RCC) Clearly, since Ace Cruz did not pay credited as fully paid in the books of the
the full subscription yet, he cannot compel the corporation.
corporation to issue the certificate of stock.

Commercial Law
Discontinuance or Cancellation of Delinquency Reason Behind Prohibition from Issuance of

Sale Watered Stock
Delinquency sale may be discontinued or cancelled The issuance of Watered Stocks violates the Trust
if the delinquent stockholder pays the unpaid Fund Doctrine.
balance plus interest, costs, and expenses on or
before the date specified for the sale of the It is an established doctrine that subscriptions to the
delinquent stocks or when the BOD orders capital stock of a corporation constitute a fund to
otherwise. (Sec. 67, RCC) which creditors have a right to look for satisfaction
of their claims, and that the assignee in insolvency
NOTE: A call cannot be of such character as to can maintain an action upon any unpaid stock
permit the directors to practice favoritism or act subscription in order to realize assets for the
oppressively. In like manner, if a call cannot be payment of its debts (Halley v. Printwell, G.R. No.
made discriminatorily, so should the removal of the 157549, 30 May 2011)
delinquency status. (SEC Opinion, supra)
Treasury Shares NOT Covered
When Sale may be Questioned
Trust fund doctrine is not violated in case treasury
An action to recover delinquent stock sold can be shares are reacquired and subsequently re-issued
sustained upon the ground of irregularity or defect for a lesser consideration by the corporation since
in the notice of sale, or in the sale itself of the this does not involve original issuance or primary
delinquent stock, PROVIDED: issuance of shares. The only limitation for the
reissuance of treasury shares is that their price must
1. Party seeking to maintain such action first pays be reasonable.
or tenders to the party holding the stock the
sum for which the same was sold, with interest Treasury shares are not original issuances. They are
from the date of sale at the legal rate. shares of stocks which have been issued and fully
2. The complaint is filed within six (6) months paid for, but subsequently reacquired by the issuing
from the date of sale. (Sec. 68, RCC) corporation by purchase, redemption, donation, or
through some other lawful means. (Sec. 9, RCC)
c. WATERED STOCKS Since they do not lose their status as issued shares,
they cannot be treated as new issues when disposed
A watered stock is a stock issued in exchange for of or reissued.
cash, property, share, stock dividends, or services
lesser than its par value or issued value (no par Issuance of Watered Stocks Not Ratifiable
value) or for a consideration other than cash, valued
in excess of its fair value. (Sec. 64, RCC) It is not merely ultra vires but is illegal per se as it is
a violation of Sec. 61, RCC.
Watered Stocks include stocks:
Liability of Directors for Watered Stocks
1. Issued without consideration ;
2. Issued for a consideration other than cash, the Any director or officer of a corporation shall be
fair valuation of which is less than its par or solidarily liable with stockholder concerned to the
issued value; corporation and its creditors for difference between
3. Issued as stock dividend when there are no the value received at the time of the issuance of the
sufficient retained earnings to justify it; and stock and the par or issued value of the same, if:
4. Issued as fully paid when the corporation has
received a lesser sum of money than its par or 1. He consents to the issuance of stocks for
issued value. consideration less than its par or issued value;

2022 GOLDEN NOTES
Corporation Law
2. He consents to the issuance of stocks for a Who may Classify Shares

consideration in any form other than cash,
valued in excess of its fair value; or 1. Incorporators – the classes and number of
3. Who, having knowledge thereof, does not shares which a corporation shall issue are first
forthwith express his objection in writing and determined by the incorporators as stated in
file the same with the corporate secretary. (Sec. the AOI filed with the SEC.
64, RCC)
2. Board of directors and stockholders – after
NOTE: The solidary liability of the directors the corporation comes into existence,
emanates from the fiduciary character of the classification of shares may be altered by the
position of director or corporate officer. board of directors and the stockholders by
amending the AOI pursuant to Sec. 15, RCC.
d. SITUS OF SHARES OF STOCK
1. PAR VALUE SHARES
GR: The situs of shares of stock is the country where
the corporation is domiciled. (Wells Fargo Bank v. Shares with a value fixed in the AOI and the
CIR, G.R. No. L-46720, 28 June 1940) certificates of stock. The par value fixes the
minimum issue price of the shares.
The residence of the corporation is the place
where the principal office of the corporation is 2. NO PAR VALUE SHARES
located as stated in its AOI even though the
corporation has closed its office therein and These are shares having no stated par value in the
relocated to another place. (Hyatt Elevators and AOI.
Escalators Corp. v. Goldstar Elevator Phils., Inc., G.R.
No. 161026, 24 Oct. 2005) Shares of capital stock issued without par value
shall be deemed fully paid and nonassessable and
NOTE: For purposes of the estate tax, the gross the holder of such shares shall not be liable to the
estate of a resident decedent, whether citizen or corporation or to its creditors in respect thereto
alien, or a citizen decedent, whether resident or (Sec. 6, RCC)
nonresident, includes his intangible personal
property wherever situated. Limitations on No Par Value Shares
1. The issued price of no-par value shares may be

e. CLASSES OF SHARES OF STOCK
fixed in the AOI or by the board of directors
pursuant to authority conferred by the AOI or
Kinds or Classifications of Shares the bylaws, or if not so fixed, by the
stockholders representing at least a majority of
1. Par value shares; the outstanding capital stock at a meeting duly
2. No par value shares; called for the purpose provided that the issued
3. Common shares; price of no-par value shares shall not be less
4. Preferred shares; than P5.00. (Sec. 6 in relation to Sec. 61, RCC)
5. Redeemable shares;
6. Treasury shares; 2. The entire consideration received by the
7. Founder’s share; corporation for its no-par value shares shall be
8. Voting shares; treated as capital and shall not be available for
9. Non-voting shares; distribution as dividends. (Sec. 6, RCC) Banks,
10. Convertible shares; trust, insurance, and pre-need companies,
public utilities, building and loan associations,
and other corporations authorized to obtain or

Commercial Law
access funds from the public, whether publicly b. Non-participating preferred shares – not
listed or not, shall not be permitted to issue no- entitled to participate with the common
par value shares of stock. (ibid.) shares in excess distribution.
NOTE: Preferred shares of stock may be issued 3. As to Cumulation –

only with a stated par value.
a. Cumulative preferred shares – if a
3. COMMON SHARES dividend is omitted in any year, it must be
made up in a later year before any dividend
Common shares are the basic class of stock may be paid on the common shares in the
ordinarily and usually issued without privileges or later year.
advantages except that they cannot be denied the
right to vote. Owners are entitled to a pro-rata share b. Non-cumulative preferred shares – there
in the profits of the corporation and in its assets is no need to make up for undeclared
upon dissolution and liquidation, and in the dividends.
management of its affairs. (Divina, 2020)
Holders of Preferred Shares are Not Creditors of
4. PREFERRED SHARES the Corporation
Preferred shares are par-value shares given Preferences granted to preferred stockholders do
preference in the distribution of dividends and in not give them a lien upon the property of the
the distribution of corporate assets in case of corporation nor make them creditors of the
liquidation, or such other preferences. The board of corporation, the right of the former being always
directors, where authorized in the AOI, may fix the subordinate to the latter. Dividends are thus
terms and conditions of preferred shares of stock or payable only when there are profits earned by the
any series thereof: Provided, further, That such corporation and as a general rule, even if there are
terms and conditions shall be effective upon filing of existing profits, the board of directors has the
a certificate thereof with the SEC. . (Sec. 6, RCC) discretion to determine whether or not dividends
are to be declared. Shareholders, both common and
Kinds of Preferred Shares preferred, are considered risk takers who invest
capital in the business and who can look only to
1. As to Preference – what is left after corporate debts and liabilities are
fully paid. (Republic Planters Bank v. Agana, Sr., G.R.
a. Preferred shares as to assets – gives the No. 51765, 03 Mar. 1997)
holder preference in the distribution of the
assets of the corporation in case of Common vs. Preferred shares
liquidation.
COMMON SHARES PREFERRED SHARES
b. Preferred shares as to dividends – Definition
entitled to receive dividends on said share
to the extent agreed upon before any Stock which entitles
dividends at all are paid to the holders of Stock which entitles the holder to some
common stock. the owner to an equal preference, either in
pro rata division of the dividends, or in
2. As to Participation – profits. distribution of assets,
or both.
a. Participating preferred shares – entitled Value
to participate with the common shares in Depends if it is a par or
excess distribution. Par value.
no-par value share.

2022 GOLDEN NOTES
Corporation Law
Voting Rights 2. The Terms and conditions affecting said shares

must be stated both in the AOI and in the
May be deprived of
certificates of stock.
Usually vested with the voting rights except in
exclusive right to vote. the instances provided
3. Redeemable shares may be deprived of Voting
by law. (Sec. 6, RCC)
rights in the AOI, unless otherwise provided in
Preference upon liquidation the Code. (Sec. 6, RCC)
No advantage, priority,
Has preference over
or preference over any 4. Redemption may not be made where the
dividends/profits/
other stockholder in corporation is Insolvent or if such redemption
distribution of assets.
the same class. will cause insolvency or inability of the
corporation to meet its debts as they mature.
(Republic Planters Bank v. Agana, Sr., G.R. No.
5. REDEEMABLE SHARES
51765, 03 Mar. 1997)
These are shares which may be purchased by the

Q: Planters Bank issued preferred redeemable
corporation from the holders of such shares upon
shares with a feature that entitles them to be
the expiration of a fixed period, regardless of the
preferred in the payment of dividends.
existence of unrestricted retained earnings in the
Subsequently, the bank experienced liquidity
books of the corporation, and upon such other terms
problems. The Central Bank ruled that the bank
and conditions stated in the AOI and the certificate
has a reserve deficiency. Despite the condition,
of stock representing the shares, subject to rules
one of the stockholders holding the preferred
and regulations issued by the Commission. (Sec. 8,
shares filed an action against the corporation to
RCC)
redeem his shares and pay the dividends due.
Will the suit prosper?
Kinds of Redeemable Shares
A: NO. While redeemable shares may be redeemed

1. Mandatory – the issuing corporation must
regardless of the existence of unrestricted retained
redeem the shares after the expiration of a
earnings, this is subject to the condition that the
stated period or when demanded by the holder;
corporation has, after such redemption, assets in its
provided that the corporation has sufficient
books to cover debts and liabilities inclusive of
assets to pay for the shares or the redemption
capital stock. Redemption, therefore, may not be
will not bring about the insolvency of the
made where the corporation is insolvent or if such
corporation.
redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
2. Optional – the issuing corporation may or may
not redeem the shares after a stated period.
Reissuance of Redeemed Shares
If the terms of the preferred shares are silent, the

In the case of redeemable shares reacquired, the
redemption is at the option of the corporation.
same shall be considered retired and no longer
(Divina, 2020)
issuable, unless otherwise provided in the Articles
of Incorporation. (SEC-OGC Opinion 19-20 dated 17
Limitations on Redeemable Shares (A-T-V-I)
May 2019, citing 1982 SEC Rules Governing
Redeemable and Treasury Shares)
1. The issuance of redeemable shares must be
expressly provided in the Articles of
incorporation.

Commercial Law
6. TREASURY SHARES cover the shares to be purchased or acquired. In

addition, in cases where the reason for reacquiring
Shares that have been earlier issued and fully paid the shares is because of the unpaid subscription,
for, but have been reacquired by the corporation the Corporation Code is likewise explicit that the
through purchase, donation, redemption or through corporation must purchase the same during a
some other lawful means. (Sec. 9, RCC) delinquency sale. (Salido, Jr. v. Aramaywan Metals
Development Corp., G.R. No. 233857, 18 Mar. 2021, J.
NOTE: Treasury shares do not revert to the Caguioa)
unissued shares of the corporation but are regarded
as property acquired by the corporation which may Treasury Shares Distributed via Dividends
be reissued or sold by the corporation at a price to
be fixed by the Board of Directors. (SEC-OGC Opinion They can be distributed only as property dividends.
19-20 dated 17 May 2019, citing 1982 SEC Rules They cannot be declared as stock or cash dividends
Governing Redeemable and Treasury Shares) because they are not considered part of earned or
surplus profits. The distribution of cash or stock
Legitimate Purpose to Acquire Own Share dividends out of treasury shares would be
converting the corporation into both a debtor and
1. To collect or compromise unpaid indebtedness creditor for the same amount at the same time or
to the corporation arising out of unpaid requiring it to take money or stock from one of its
subscription, in a delinquency sale, and to pockets and putting it in another, which is absurd.
purchase delinquent shares sold during said Treasury shares may be declared as property
sale; dividend to be issued out of the retained earnings
2. To eliminate fractional shares arising out of previously used to support their acquisition
stock dividends; provided that the amount of the said retained
3. To pay dissenting or withdrawing stockholders earnings has not been subsequently impaired by
entitled to payment for their shares under the losses. (SEC Opinion, 17 July 1984)
provisions of this Code;
4. Redemption of Redeemable Shares; and NOTE: Although a treasury share, not having been
5. Purchase of Shares when ordered by the SEC retired by the corporation re-acquiring it, may be
due to a deadlock in a Close corporation. re-issued or sold again, such share, as long as it is
held by the corporation as a treasury share,
Limitations on Treasury Shares participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor
1. It may be re-issued or sold again as long as it is in the meetings of the corporation as voting stock,
for a reasonable price fixed by the BOD; for otherwise equal distribution of voting powers
2. Cannot participate in dividends; among stockholders will be effectively lost and the
3. It has no voting right as long as such remains in directors will be able to perpetuate their control of
the Treasury, hence cannot participate in the corporation, though it still represents a paid-for
meetings as voting stocks; and interest in the property of the corporation(CIR v.
4. The amount of unrestricted retained earnings Manning, G.R. No. L-28398, 06 Aug. 1975)
(URE) equivalent to the cost of treasury shares
being held shall be restricted from being
declared and issued as dividends.
Apart from reacquiring the shares through some

lawful means, the Corporation Code is also explicit
that while a corporation has the power to purchase
or acquire its own shares, the corporation must
have unrestricted retained earnings in its books to

2022 GOLDEN NOTES
Corporation Law
Treasury Shares vs. Redeemable Shares 8. VOTING SHARES
TREASURY SHARES REDEEMABLE SHARES Shares with a right to vote on all corporate acts.
Description Usually refers to common shares, although the
corporation may also grant voting rights to
Shares so acquired by
preferred shares under its AOI.
the corporation Issued by the
through purchase, corporation when
9. NON-VOTING SHARES
donation, redemption, expressly so provided in
or any other lawful the AOI.
Shares without the right to vote. The law only
means.
authorizes the denial of voting rights in the case of
Manner of Acquisition redeemable shares and preferred shares, provided
that there shall always be a class or series of shares
Redeemable shares may
which have complete voting rights (common
Can only be acquired be acquired even
shares). (Sec. 6, RCC)
in the presence of without URE for as long
unrestricted retained as it will not result in the
Instances when Holders of Non-voting Shares
earnings (URE). insolvency of the
are Still Entitled to Vote
corporation.
Applicability of the Trust Fund Doctrine These redeemable and preferred shares, when such
voting rights are denied, shall nevertheless be
Must comply with the Is an exception to the
entitled to vote on the following fundamental
trust fund doctrine. trust fund doctrine.
matters: (A-A-S-I-I-M-I-D)
Effect of Redemption
1. Amendment of articles of incorporation;
While redeemable, they
Are not redeemable; 2. Adoption and amendment of By-laws;
are not re-issued, unless
they may be re-issued. 3. Sale, Lease, Exchange, Mortgage, Pledge or
otherwise provided.
Other disposition (Sa-Le-M-P-O) of all or
substantially all of the corporate property;
7. FOUNDERS' SHARES 4. Incurring, creating, or increasing bonded
Indebtedness;
Shares classified as such in the AOI, and which may 5. Increase or decrease of capital stock;
be given certain rights and preferences not enjoyed 6. Merger or consolidation of the corporation with
by the owner of other stocks. (Sec. 7, RCC) another corporation or other corporations;
7. Investment of corporate funds in another
NOTE: Where the exclusive right to vote and be corporation or business in accordance with this
voted for in the election of directors is granted, it Code; and
must be for a limited period not to exceed five (5) 8. Dissolution of the corporation. (Sec. 6, RCC)
years from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its NOTE: Except as provided in the foregoing eight (8)
exercise will violate Commonwealth Act No. 108, instances, the vote required under the RCC to
otherwise known as the “Anti-Dummy Law”; R.A. approve a particular corporate act shall be deemed
No. 7042, otherwise known as the “Foreign to refer only to stocks with voting rights (Sec. 6, RCC)
Investments Act of 1991”; and other pertinent laws.
(Sec. 7, RCC) 10. CONVERTIBLE SHARES
A share that is changeable by the stockholder from

one class to another at a certain price and within a
certain period. (Divina, 2020)

Commercial Law
Other Kinds of Shares: a. NATURE OF THE CERTIFICATE
1. Fractional Share – A fractional share is a share The certificate of stock itself once issued is a
of equity that is less than one full share. continuing affirmation or representation that the
stock described therein is valid and genuine and is
2. Shares in Escrow – A stock deposited with a at least prima facie evidence that it was legally
third person to be delivered to a stockholder or issued in the absence of evidence to the contrary.
his assign, after complying with certain However, this presumption may be rebutted.
conditions, usually the full payment of (Bitong v. CA, G.R. No. 123553, 13 July 1998)
subscription or purchase price. (Divina, 2020)
Transfer of Partially Paid Shares
NOTE: The classification of shares, their
corresponding rights, privileges, or restrictions, and The subscriber, as the owner of the shares, may
their stated par value, if any, must be indicated in assign his right to the contract of subscription in
the AOI. A corporation may further classify its favor of the assignee. Partially paid shares are not
shares for the purpose of ensuring compliance with covered yet by a stock certificate, and as such, there
constitutional or legal requirements. (Sec. 6, RCC) is no certificate which can be endorsed and
delivered to the transferee as required by Sec. 62,
2. CERTIFICATE OF STOCK RCC.
A certificate of stock is the paper representative or The corporation may, however, refuse the transfer
tangible evidence of the stock itself and of the of shares based on Sec. 62, RCC, which provides that
various interests therein. The certificate is not stock the corporation may refuse the transfer if it holds
in the corporation but is merely evidence of the unpaid claim over the shares. The term “unpaid
holder’s interest and status in the corporation, his claim” means unpaid subscription.
ownership of the share represented thereby, but is
not in law the equivalent of such ownership. It Consent Required in the Sale of Unpaid Shares
expresses the contract between the corporation and
the stockholder, but it is not essential to the 1. If the subscription is fully paid, the
existence of a share in stock or the creation of the stockholder may sell or dispose of his shares
relation of shareholder to the corporation. (Tan v. without having to secure the consent of the
SEC, G.R. No. 95696, 03 March 1992) corporation. In fact, the corporation cannot
require its consent for the transfer of the shares.
Shares of Stock vs. Certificates of Stock It will be contrary to law and public policy. To
be valid, the restriction on transfer cannot be
CERTIFICATE OF more onerous than the option granted to a
SHARE OF STOCK
STOCK stockholder to purchase the shares of a
Evidence of the transferring stockholder on reasonable terms
holder’s ownership of and conditions, or simply, the right of first
Unit of interest in a the stock and of his refusal. Requiring the consent of the
corporation. right as a shareholder corporation is certainly more onerous than the
and of his extent right of first refusal.
specified therein.
It is an incorporeal or It is concrete and 2. If the subscription is not fully paid, the
intangible property. tangible. consent of the corporation is necessary
It may be recognized before the subscriber may assign his right to
It may be issued only if
by the corporation the contract of subscription. Assignment of
the subscription is fully
even if the subscription shares with unpaid subscription basically
paid.
is not fully paid. amounts to novation as there will be a change of

2022 GOLDEN NOTES
Corporation Law
debtor from the subscriber to the assignee. The c. NEGOTIABILITY; REQUISITES FOR VALID
obligation to pay the balance of the subscription TRANSFER OF STOCKS
will be assumed by the assignee. To be valid,
novation requires consent of the creditor, Stock Certificate is NOT Negotiable
which in this case is the corporation. (Divina,
2020) Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be
Alienation Despite Absence of Certificate of transferred by delivery, it is well-settled that the
Stock instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
A stockholder may alienate his shares even if there defenses as the registered owner or creditor may
is no certificate of stock issued by the corporation. have under the law, except insofar as such rights or
The absence of a certificate of stock does not defenses are subject to the limitations imposed by
preclude the stockholder from alienating or the principles governing estoppel. (Republic v.
transferring his shares of stock. Sandiganbayan, G.R. No. 107789 & 147214, 30 Apr.
2003)
Transfers Involving Fully Paid Subscriptions
Certificates of stock may be issued only to registered
In case of a fully paid subscription, without the owners of stock. The issuance of “bearer” stock
corporation having issued a certificate of stock, the certificates is not allowed under the law. (SEC
transfer may be effected by the subscriber or Opinion No. 05-02, 31 Jan. 2005)
stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and Requirements for Valid Transfer of Stocks
submitting said contract or deed to the corporate
secretary for recording. The following are the requirements for valid
transfer of stocks:
In case of subscription not fully paid, the
corporation may record such transfer, provided that 1. If represented by a certificate, the following
the transfer is approved by the board of directors must be strictly complied with:
and the transferee executes a verified assumption of
obligation to pay the unpaid balance of the a. Delivery of the certificate or certificates;
subscription. b. Indorsed by the owner, his attorney-in-fact,
or any other person legally authorized to
b. UNCERTIFICATED SHARES make the transfer;
c. No transfer, however, shall be valid, except
The SEC may require corporations whose securities as between the parties, until the transfer is
are traded in trading markets, and which can recorded in the books of the corporation
reasonably demonstrate their ability to do so, to showing the names of the parties to the
issue their securities or shares of stock in transaction, the date of the transfer, the
uncertificated or in scripless form in accordance number of the certificate or certificates, and
with the rules imposed by SEC. (Sec. 62, RCC) the number of shares transferred. (Sec. 62,
RCC)
2. If NOT represented by a certificate (such as

when the certificate has not yet been issued or
where for some reason is not in the possession
of the stockholder):
a. By means of deed of assignment; and

Commercial Law
b. Such is duly recorded in the books of the did not happen in this case. (Africa v.
corporation. (Divina, 2020) Sandiganbayan, G.R. Nos. 17222, 11 Nov. 2013)
Effect of Non-Payment of Documentary Stamp Q: Nemesio Garcia filed an action for injunction
Tax against spouses Jose and Sally Atinon and
Nicolas Jomouad, ex-officio sheriff. Said action
No sale, exchange, transfer, or similar transaction stemmed from an earlier case for collection of
intended to convey ownership of, or title to any sum of money, filed by the spouses Atinon
share of stock shall be registered in the books of the against Jaime Dico. In that case, the trial court
corporation unless the receipts of payment of the rendered judgment ordering Dico to pay the
tax herein imposed is filed with and recorded by the spouses Atinon. After said judgment became
stock transfer agent or secretary of the corporation. final and executory, the sheriff proceeded with
(Sec. 11, Revenue Regulations No. 6-2008) its execution. In the course thereof, the
Proprietary Ownership Certificate (POC) in the
Ministerial Duty of Corporate Secretary to Cebu Country Club, which was in the name of
Register Transfer of Stocks Dico, was levied on and scheduled for public
auction.
In transferring stock, the secretary of a corporation
acts in purely ministerial capacity and does not try Claiming ownership over the subject certificate,
to decide the question of ownership. If a corporation Garcia filed the action for injunction to enjoin
refuses to make such transfer without good cause, it the spouses Antinon from proceeding with the
may, in fact, even be compelled to do so by auction. Garcia contends that the subject stock
mandamus. (Teng v. SEC, G.R. No. 184332, 17 Feb., of certificate, albeit in the name of Dico, cannot
2016) be levied upon the execution to satisfy his
judgment debt because even prior to the
Remedies When Corporation Refuses to Record institution of the case for collection of sum of
Transfer money against him, the spouses Atinon had
knowledge that Dico already conveyed back the
If the corporation wrongfully refuses to issue a ownership of the subject certificate to Garcia
certificate of stock, the assignee or transferee of and that Dico executed a deed of transfer
shares of stock may: covering the subject certificate in favor of
Garcia.
1. File a suit for specific performance of an express
or implied contract; Is a bona fide transfer of the shares of a
2. File for an alternative relief by way of damages corporation, not registered or noted in the
where specific performance cannot be granted; books of the corporation, valid as against a
and subsequent lawful attachment of said shares,
3. File a petition for mandamus to compel regardless of whether the attaching creditor had
issuance of a certificate. (SEC-OGC Opinion No. actual notice of said transfer or not?
21-06, Mar. 23, 2006, cited in Divina, 2020)
A: NO. A transfer of shares not registered in the
The fact that the corporate secretary asked for leave books of the corporation is not valid as against
to register the transfer five years after the sale did subsequent attachment of the shares. All transfers
not make the transfer irregular. This Court held in of shares not so entered in the books of the
Lee E. Won v. Wack Wack Golf & Country Club, Inc., corporation are invalid as to attaching or execution
that since the law does not prescribe a period for creditors of the assignors, as well as to the
such kind of registration, the action to enforce the corporation and to subsequent purchasers in good
right to have it done does not begin to toll until a faith, and, indeed, as to all persons interested,
demand for it had been made and was refused. This except the parties to such transfers. Hence, the

2022 GOLDEN NOTES
Corporation Law
transfer of the subject certificate made by Dico to the owner or his attorney-in-fact or other person
Garcia was not valid as to the spouses Atinon, the legally authorized to make the transfer.
judgment creditors, as the same still stood in the
name of Dico, the judgment debtor, at the time of the In this case, Vertex fully paid the purchase price by
levy on execution. (Nemesio Garcia v. Nicolas Feb. 11, 1999 but the stock certificate was only
Jomouad, et al., G.R. No. 133969, 26 Jan. 2000) delivered on Jan. 23, 2002 after Vertex filed an
action for rescission against FEGDI.
Q: Fil-Estate Golf and Development, Inc. (FEGDI)
is a stock corporation whose primary business Under these facts, considered in relation to the
is the development of golf courses. Fil-Estate governing law, FEGDI clearly failed to deliver the
Land, Inc. (FELI) is also a stock corporation, but stock certificates, representing the shares of stock
is engaged in real estate development. FEGDI purchased by Vertex, within a reasonable time from
was the developer of the Forest Hills Golf and the point the shares should have been delivered.
Country Club (Forest Hills) and, in consideration This was a substantial breach of their contract that
for its financing support and construction entitles Vertex the right to rescind the sale under
efforts, was issued several shares of stock of Art. 1191 of the Civil Code. It is not entirely correct
Forest Hills. to say that a sale had already been consummated as
Vertex already enjoyed the rights a shareholder can
FEGDI sold on installment, to RS Asuncion exercise. The enjoyment of these rights cannot
Construction Corporation (RSACC) one common suffice where the law, by its express terms, requires
share of Forest Hills. Prior to the full payment of a specific form to transfer ownership.
the purchase price, RSACC sold the share to
Vertex Sales and Trading, Inc. (Vertex). RSACC Mutual restitution is required in cases involving
advised FEGDI of the sale to Vertex and FEGDI, in rescission under Art. 1191 of the Civil Code; such
turn, instructed Forest Hills to recognize Vertex restitution is necessary to bring back the parties to
as a shareholder. For this reason, Vertex their original situation prior to the inception of the
enjoyed membership privileges in Forest Hills. contract. Accordingly, the amount paid to FEGDI by
reason of the sale should be returned to Vertex. (Fil-
Despite Vertex’s full payment on Feb. 11, 1999, Estate Golf and Development, Inc. and Fil-Estate
the share remained in the name of FEGDI. As the Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No.
demands to issue a certificate in its name went 202079, 10 June 2013)
unheeded, Vertex filed a Complaint for
Rescission with Damages and Attachment Q: May Forest Hills appeal the CA decision which
against FEGDI, FELI and Forest Hills. It averred ordered the recission of the sale?
that the petitioners defaulted in their obligation
as sellers when they failed and refused to issue A: NO. It was not a party to the sale even though the
the stock certificate covering the subject share subject of the sale was its share of stock. The
despite repeated demands. Only thereafter that corporation whose shares of stock are the subject
the stock certificates were delivered (on Jan. 23, of a transfer transaction (through sale, assignment,
2002). donation, or any other mode of conveyance) need
not be a party to the transaction, as may be inferred
Is the delay in the issuance of the stock from the terms of Sec. 63 (now Sec. 62, RCC) of the
certificate a substantial breach of the sale which Corporation Code. However, to bind the
entitles Vertex to the rescission thereof? corporation as well as third parties, it is necessary
that the transfer is recorded in the books of the
A: YES. Sec. 63 (now Sec 62, RCC) provides, among corporation. In the present case, the parties to the
others, that shares of stock may be transferred by sale of the share were FEGDI as the seller and
delivery of the certificate or certificates indorsed by Vertex as the buyer (after it succeeded RSACC). As
party to the sale, FEGDI is the one who may appeal

Commercial Law
the ruling rescinding the sale. 4. Such other entries as the by-laws may
prescribe. (Sec. 73, RCC)
The remedy of appeal is available to a party who
has "a present interest in the subject matter of the Entries
litigation and is aggrieved or prejudiced by the
judgment. A party, in turn, is deemed aggrieved or It is the corporate secretary’s duty and obligation to
prejudiced when his interest, recognized by law in register valid transfers of stocks and if said
the subject matter of the lawsuit, is injuriously corporate officer refuses to comply, the transferor-
affected by the judgment, order or decree." The stockholder may rightfully bring suit to compel
rescission of the sale does not in any way prejudice performance. In other words, there are remedies
Forest Hills in such a manner that its interest in the within the law that petitioners could have availed of,
subject matter – the share of stock – is injuriously instead of taking the law in their own hands, as the
affected. (Forest Hills Golf & Country Club v. Vertex cliche goes. (Torres, Jr. v. CA, G.R. No. 120138, 05 Sept.
Sales and Trading, Inc., G.R. No. 202205, 06 March 1997)
2013)
Probative Value of Stock and Transfer Book
d. ISSUANCE
Similarly, books and records of a corporation which
Issuance of Certificate of Stock include even the stock and transfer book are
generally admissible in evidence in favor of or
No certificate of stock shall be issued to a subscriber against the corporation and its members to prove
until the full amount of the subscription together the corporate acts, its financial status and other
with interest and expenses (in case of delinquent matters including one’s status as a stockholder.
shares), if any is due, has been paid. (Sec. 63, RCC) They are ordinarily the best evidence of corporate
acts and proceedings.
Requisites for Issuance of Stock Certificates for
Fully-paid Shares However, the books and records of a corporation
are not conclusive even against the corporation but
1. Signed by the president or vice president are prima facie evidence only. Parol evidence may
2. Countersigned by the secretary or assistant be admitted to supply omissions in the records,
secretary; and explain ambiguities, or show what transpired where
3. Sealed with the seal of the corporation no records were kept, or in some cases where such
4. Issued in accordance with the bylaws. (Sec. 62, records were contradicted. The effect of entries in
RCC) the books of the corporation which purport to be
regular records of the proceedings of its board of
Stock and Transfer Book directors or stockholders can be destroyed by
testimony of a more conclusive character than mere
Stock corporations must also keep a stock and suspicion that there was an irregularity in the
transfer book, which shall contain: manner in which the books were kept.
1. A record of all stocks in the names of the The foregoing considerations are founded on the
stockholders alphabetically arranged; basic principle that stock issued without authority
2. The installments paid and unpaid on all stocks and in violation of law is void and confers no rights
for which subscription has been made, and the on the person to whom it is issued and subjects him
date of payment of any installment; to no liabilities. Where there is an inherent lack of
3. A statement of every alienation, sale or transfer power in the corporation to issue the stock, neither
of stock made, the date thereof, by and to whom the corporation nor the person to whom the stock is
made; and issued is estopped to question its validity since an
estoppel cannot operate to create stock which

2022 GOLDEN NOTES
Corporation Law
under the law cannot have existence. (Bitong v. CA, 3. After the expiration of one (1) year from the
G.R. No. 123553, 13 July 1998) date of the last publication, if no contest has
been presented to said corporation regarding
e. LOST OR DESTROYED CERTIFICATES said certificate of stock or if no action is pending
in court regarding the ownership of the
certificate of stock which has been lost, stolen
Procedure for Issuance of New Stock Certificate
in Lieu of Lost, Stolen or Destroyed Certificate or destroyed, the corporation shall cancel in its
books the certificate of stock which has been
lost, stolen or destroyed and issue in lieu
1. The registered owner of a certificate of stock in
a corporation or his legal representative shall thereof new certificate of stock.
file with the corporation an affidavit in
triplicate setting forth: NOTE: if a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of stock
a. If possible, the circumstances as to how the
certificate was lost, stolen or destroyed; which has been lost, stolen, or destroyed, the
b. The number of shares represented by such issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision by
certificate;
c. The serial number of the certificate and the the court regarding the ownership of said certificate
of stock which has been lost, stolen, or destroyed.
name of the corporation which issued the
same.
A new certificate may be issued even before the
expiration of the one (1) year period provided the
He shall also submit such other information and
registered owner files a bond or other security as
evidence which he may deem necessary.
may be required, effective for a period of one (1)
year, for such amount and in such form and with
2. After verifying the affidavit and other
such sureties as may be satisfactory to the board of
information and evidence with the books of the
corporation, the latter shall publish a notice in a directors. (Sec. 72, RCC)
newspaper of general circulation published in
the place where the corporation has its Liability of Corporation for Issuance of New
principal office, once a week for three (3) Certificates in Lieu of Lost, Stolen or Destroyed
consecutive weeks at the expense of the Ones
registered owner of the Certificate of Stock.
GR: No action may be brought against any
Contents of notice: corporation which has issued a certificate of stock in
a. Name of the corporation; lieu of those lost, stolen, or destroyed pursuant to
b. Name of the registered owner; the procedure under Sec. 72, RCC.
c. Serial number of the certificate of stock;
and XPN: In case of fraud, bad faith, or negligence on the
d. Number of shares represented by the part of the corporation and its officers. (Ibid.)
certificate of stock.
e. A statement that after the expiration of Q: A stockholder claimed that his stock
one (1) year from the date of the last certificate was lost. After going through with the
publication, if no contest has been procedure for the issuance of lost certificate,
presented to the corporation regarding and no contest was presented within one (1)
the certificate of stock, the right to make year from the last publication, the corporation
such contest shall be barred and the issued a new certificate of stock in lieu of the
corporation shall cancel the lost, supposed lost certificate. The stockholder
destroyed or stolen certificate of stock in immediately sold his shares and endorsed the
its books replacement certificate to a buyer. It turned out

Commercial Law
that the original certificate was not lost but sold conflicting claims of Jose and Pedro. The BOD of
and endorsed to another person. X Co. invited you to enlighten them on these
questions; viz:
a. May the corporation be made liable by the
aggrieved party? a. If a suit were to be initiated in order to
b. Who will have a better right over the shares, resolve the controversy between Pedro and
the endorsee of the original certificate or the Jose, should the matter be submitted to the
endorsee of the replacement certificate? SEC or to the regular courts?
b. Between Jose and Pedro, whom should the
A: corporation so recognize as the rightful
a. NO. The corporation cannot be made liable, stockholder? How would you respond to the
unless there is fraud, bad faith or negligence. above queries? (1997 BAR)
Under Sec. 72 of the RCC, except in cases of
fraud, bad faith, or negligence on the part of the A:
corporation and its officers, no action may be a. The jurisdiction of the matter belongs to the
brought against any corporation which has regular courts. Under Sec. 5.2 of the SRC as
issued certificates of stock in lieu of those lost, amended, the jurisdiction for intra-corporate
stolen, or destroyed pursuant to the procedure controversies was transferred from the SEC to
prescribed therein. the regular courts.
b. The endorsee of the replacement certificate has
a better right to the shares. After the expiration b. The corporation should recognize both Pedro
of one (1) year from the date of the last and Jose as rightful stockholders if there is no
publication, and no contest has been presented over-issuance of shares resulting from the two
to corporation regarding said certificate, the transactions without prejudice to the right of
right to make such contest is consequently the corporation to claim against Juan for the
barred and said corporation is deemed to have value of the shares sold to Jose.
already canceled in its books the certificate
which have been lost, stolen, or destroyed and 3. DISPOSITION AND ENCUMBRANCE
issued in lieu thereof a new certificate. OF SHARES
Q: Juan was a stockholder of X Co. He owned a

a. SALE OF SHARES
total of 500 shares evidenced by Certificate of
Stock No. 1001. He sold the shares to Pedro.
Registration of Transfer in Case of Sale
After getting paid, Juan indorsed and delivered
said Certificate of Stock No. 1001 to Pedro. The
No transfer shall be valid, except as between the
following day, Juan went to the office of the
parties, until the transfer is recorded in the books of
corporation and claimed that his Certificate of
the corporation showing the names of the parties to
Stock No. 1001 was lost and that, despite diligent
the transaction, the date of the transfer, the number
efforts, the certificate could not be located. The
of the certificate or certificates, and the number of
formalities prescribed by law for the
shares transferred.
replacement of the lost certificate were
complied with.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
Eventually X Co. issued in substitution of the lost
books of the corporation. (Sec. 62, RCC)
certificate, Certificate of Stock No. 2002. Juan
forthwith transferred for valuable
consideration the new certificate to Jose who
knew nothing of the previous sale to Pedro. In
time, the corporation was confronted with the

2022 GOLDEN NOTES
Corporation Law
b. ALLOWABLE RESTRICTIONS ON THE SALE OF c. REQUISITES OF A VALID TRANSFER

SHARES
See discussion under: c. NEGOTIABILITY;
Right of Corporation to Regulate Transfers of REQUISITES FOR VALID TRANSFER OF STOCKS –
Stock page 217.
Corporation can provide regulations to the d. INVOLUNTARY DEALINGS

sale/transfer of the shares of stockholders, but the
authority granted to a corporation to regulate the
It refers to such writ, order or process issued by a
transfer of its stock does not empower it to restrict
court of record affecting shares of stocks which by
the right of a stockholder to transfer his shares, but
law should be registered to be effective, and also to
merely authorizes the adoption of regulations as to
such instruments which are not the willful acts of
the formalities and procedure to be followed in
the registered owner, and which may have been
effecting transfer. (Thomson v. CA, G.R. No. 116631,
executed even without his knowledge or against his
28 Oct. 1998)
consent.
Requisites for Validity of Restriction

Examples of Involuntary Dealings
The corporation may impose restrictions on the

1. Attachment;
transfer of shares but subject to the following
2. Sale on execution of judgment or sales for taxes;
requisites:
3. Adverse claims; or
4. Foreclosure of mortgage of stocks.
1. Restrictions on the right to transfer shares must
appear in the AOI, in the bylaws, as well as in the
Involuntary Dealings Must be Registered
certificate of stock; otherwise, the same shall
not be binding on any purchaser in good faith.
It is the act of registration which creates a
constructive notice to the whole world of such
2. Restrictions shall not be more onerous than
instrument or court writ or process and is the
granting the existing stockholders or the
operative act that conveys ownership. (Aquino,
corporation the option to purchase the shares
2007)
of the transferring stockholder with such
reasonable terms, conditions or period stated.
3. Upon the expiration of the said period, the

existing stockholders or the corporation fails to
exercise the option to purchase, the
transferring stockholder may sell their shares
to any third person. (Sec. 97, RCC)
While these restrictions appear in the chapter on

close corporations, there is no reason not to apply
the same to open or regular corporation. (Divina,
2020)

Commercial Law
the parties, and the questions involved pertain to

G. DISSOLUTION AND LIQUIDATION their rights and obligations under the Corporation
Code and matters relating to the regulation of the
corporation. The Court further holds that the nature
of the case as an intra-corporate dispute was not
Dissolution
affected by the subsequent dissolution of the
corporation. Sec. 145 (now Sec. 184 of the RCC)
It is the extinguishment or cancellation of the
preserves a corporate actor’s cause of action and
corporate franchise and the termination of its
remedy against another corporate actor. In so doing,
corporate existence for business purposes. (Divina,
the said section also preserves the nature of the
2020)
controversy between the parties as an intra-
corporate dispute.
Effects of Dissolution of Corporation
The dissolution of the corporation simply prohibits

1. Corporation ceases as a body corporate to
it from continuing its business. However, despite
continue the business for which it was
such dissolution, the parties involved in the
established.
litigation are still corporate actors. The dissolution
does not automatically convert the parties into total
2. The Corporation continues as a body corporate
strangers or change their intra-corporate
for 3 years only for the purpose of prosecuting
relationships. Neither does it change or terminate
and defending suits by or against it and
existing causes of action, which arose because of the
enabling it to settle and close its affairs, dispose
corporate ties between the parties. Thus, a cause of
of, and convey its property, and distribute its
action involving an intra-corporate controversy
assets (winding up or liquidation). (Sec. 139,
remains and must be filed as an intra-corporate
RCC)
dispute despite the subsequent dissolution of the
corporation. (Aguirre v. FQB+7 Inc., G.R. No. 170770,
Q: Vitaliano Aguirre, II, one of the original
09 Jan. 2013)
subscribers of FQB+7, filed a complaint for
intra-corporate dispute against Nathaniel, et al.
Q: Alabang Development Corporation (ADC),
upon learning that they have filed, as corporate
developer of Alabang Hills Village, filed with the
officers of FQB+7, a GIS which showed a different
RTC a complaint for injunction against Alabang
set of Directors and Subscribers from that of the
Hills Village Association, Inc. (AHVAI) and its
AOI. In response, Nathaniel, et al. filed a petition
president, Rafael Tinio, alleging that AHVAI
for certiorari with the CA for the annulment of
started the construction of a multi-purpose hall
the proceedings in the RTC claiming that the SEC
and a swimming pool on one of the parcels of
had already revoked FQB+7’s certificate of
land still owned by ADC, without the latter’s
registration almost a year before Aguirre filed
consent and approval.
his complaint with the RTC.
AHVAI claimed that ADC had no legal capacity to

The CA dismissed the complaint because the
sue since its existence as a registered corporate
corporation has lost its juridical personality. As
entity was revoked by the SEC on 26 May 2003.
such the trial court does not have jurisdiction to
Does the ADC have the capacity to file the
entertain an intra-corporate dispute when the
complaint?
corporation is already dissolved. Is the case an
intra-corporate dispute and is thus under the
A: NO. In the instant case, there is no dispute that
jurisdiction of the RTC?
ADC's corporate registration was revoked on 26
May 2003. Based on Sec. 122 (no Sec. 139, RCC), it
A: YES. The Court finds and so holds that the case is
had three years, or until May 26. 2006, to prosecute
essentially an intra-corporate dispute. It obviously
or defend any suit by or against it. The subject
arose from the intra-corporate relations between

2022 GOLDEN NOTES
Corporation Law
complaint, however, was filed only on Oct. 19, 2006, corporation:

more than three years after such revocation.
i. Was created for the purpose of
In the present case, ADC filed its complaint not only committing, concealing or aiding the
after its corporate existence was terminated but commission of securities violations,
also beyond the three-year period allowed by [now] smuggling, tax evasion, money
Sec. 139 of the RCC. Thus, it is clear that at the time laundering, or graft and corrupt
of the filing of the subject complaint ADC lacks the practices;
capacity to sue as a corporation. To allow ADC to ii. Committed or aided in the
initiate the subject complaint and pursue it until commission of securities violations,
final judgment, on the ground that such complaint smuggling, tax evasion, money
was filed for the sole purpose of liquidating its laundering, or graft and corrupt
assets, would be to circumvent the provisions of Sec. practices, and its stockholders knew
139 of the RCC. (Alabang Development Corp. v. of the same; and
Alabang Hills Village Association and Rafael Tinio, iii. Repeatedly and knowingly tolerated
G.R. No. 187456, 02 June 2014) the commission of graft and corrupt
practices or other fraudulent or illegal
1. MODES OF DISSOLUTION acts by its directors, trustees, officers,
or employees. (Sec. 138, RCC)
a. VOLUNTARY AND INVOLUNTARY
DISSOLUTION VOLUNTARY DISSOLUTION
Dissolution Where No Creditors are Affected

The following are the modes of dissolution of the
corporation:
1. Dissolution is approved by majority vote of the
board of directors or trustees;
1. Voluntary –
a. By a verified request for dissolution filed
2. A meeting of the Stockholders/Members must
with the SEC where no creditors are
be held upon the call of the directors or
affected; (Sec. 134, RCC)
trustees:
b. By a petition for dissolution filed with t
SEC where creditors are affected; (Sec.
Notice of meeting must be given at least twenty
135, RCC)
(20) days prior to the said meeting. to each
c. By amending the AOI to shorten the
stockholder or member either by registered
corporate term; (Sec. 136, RCC)
mail or by personal delivery or by any means
d. Merger or consolidation
authorized under its bylaws whether or not
e. Affidavit of dissolution by a corporation
entitled to vote at the meeting, in the manner
sole
provided in Sec. 50 of the RCC.
2. Involuntary –
a. Notice shall state that the purpose of the
a. Non-use of corporate charter as provided
meeting is to vote on the dissolution of the
under Sec. 21, RCC;
corporation.
b. Continuous inoperation of a corporation
as provided under Sec. 21, RCC;
b. Notice of the time, place, and object of the
c. Upon receipt of a lawful court order
meeting shall be published once prior to the
dissolving the corporation;
date of the meeting in a newspaper
d. Upon finding by final judgment that the
published in the place where the principal
corporation procured its incorporation
office of said corporation is located, or if no
through fraud;
newspaper is published in such place, in a
e. Upon finding by final judgment that the

Commercial Law
newspaper of general circulation in the the SEC shall approve the request and issue the
Philippines. certificate of dissolution.
3. A resolution must be adopted approving the NOTE: The dissolution shall take effect only upon
dissolution by the affirmative vote of the the issuance by the SEC of a certificate of
stockholders owning at least majority of the dissolution. (Sec. 134, RCC)
outstanding capital stock or majority of the
members in the meeting called for the said Dissolution Where Creditors are Affected
purpose. (A-PSIVECSO–CPUPOO-J)
4. A verified request for dissolution shall be filed 1. Approval of the stockholders representing at
with the SEC, stating: least 2/3 of the OCS or by at least two-thirds
(2/3) of the members at a meeting of its
a. The reason for the dissolution stockholders or members called for that
b. The form, manner, and time when the purpose;
notices were given;
c. Names of the stockholders and directors 2. Filing of Petition for dissolution with SEC. The
or members and trustees who approved petition must be: (SiVeCS)
the dissolution;
d. The date, place, and time of the meeting in a. Signed by a majority of its board of
which the vote was made; and directors or trustees;
e. The details of publication. b. Verified by its president or secretary or one
of its directors or trustees;
5. The Corporation shall submit the following to c. Set forth all Claims and demands against it;
the SEC: d. State that dissolution was resolved upon by
the affirmative vote of the Stockholders
a. A copy of the resolution authorizing the representing at least two-thirds (2/3) of
dissolution, certified by the majority of the the OCS or at least two-thirds (2/3) of the
BOD/BOT, and countersigned by the members at a meeting of its stockholders or
secretary of the corporation; members called for that purpose ;
e. State: (a) the reason for the dissolution; (b)
b. Proof of publication; and the form, manner, and time when the
notices were given; and (c) the date, place,
c. Favorable recommendation from the and time of the meeting in which the vote
appropriate regulatory agency, when was made
necessary.
The corporation shall submit to the SEC the
No application for dissolution of banks, following: (1) a copy of the resolution
banking, and quasi-banking institutions, authorizing the dissolution, certified by a
preneed, insurance and trust companies, majority of the board of directors or trustees
NSSLAs, pawnshops, and other financial and countersigned by the secretary of the
intermediaries shall be approved by the corporation; and (2) a list of all its creditors.
SEC unless accompanied by a favorable
recommendation of the appropriate 3. If the petition is sufficient in form and
government agency. substance, the SEC shall, by an Order reciting
the purpose of the petition, fix a deadline for
6. Within fifteen (15) days from receipt of the filing objections to the petition which date shall
verified request for dissolution, and in the not be less than thirty (30) days nor more than
absence of any withdrawal within said period, sixty (60) days after the entry of the order;

2022 GOLDEN NOTES
Corporation Law
4. Before such date, Copy of the order shall be: changes made, and a copy thereof duly certified
under oath by the corporate secretary and a
a. Published at least once a week for three (3) majority of the directors or trustees, with a
consecutive weeks in a newspaper of statement that the amendments have been duly
general circulation published in the approved by the required vote of the
municipality or city where the principal stockholders or members, shall be submitted to
office of the corporation is situated, or if the SEC;
there be no such newspaper, then in a
newspaper of general circulation in the 3. The amendments shall take effect upon their
Philippines, and Approval by the SEC Commission or from the
date of filing with the said Commission if not
b. Posted for three (3) consecutive weeks in acted upon within six (6) months from the date
three (3) public places in such municipality of filing for a cause not attributable to the
or city; corporation.
5. After expiration of the time to file objections NOTE: In the case of expiration of corporate term,
and upon prior 5-day notice to hear the dissolution shall automatically take effect on the day
objections, the SEC shall proceed to hear the following the last day of the corporate term stated
petition and try any issue made by the in the AOI, without the need for the issuance by the
Objections file; and SEC of a certificate of dissolution.
6. If no objection is sufficient and the material INVOLUNTARY DISSOLUTION

allegations of the petition are true, it shall
render Judgment dissolving the corporation Involuntary Dissolution
and directing such disposition of its assets as
justice requires and may appoint a receiver to A corporation may be dissolved by the SEC motu
collect such assets and pay the debts of the proprio or upon filing of a verified complaint by any
corporation. interested party, on the grounds provided under
Sec. 138 of the RCC.
NOTE: Dissolution takes effect upon the issuance of
a certificate of dissolution by the SEC. (Sec. 135, RCC) Non-Use of Charter or Continuous Inoperation
Procedure for Dissolution by Shortening To “formally organize” as used in reference to

Corporate Term (A-S-A-F) corporations means:
1. Amending the AOI pursuant to Sec. 15: 1. Election of officers,

2. Providing for the subscription and payment of
a. Approved by majority vote of the board of the capital stock;
directors or by vote or written assent of 3. Adoption of by-laws; and
majority of the trustees 4. Such other steps as are necessary to endow the
b. Vote or written assent of the stockholders legal entity with the capacity to transact the
representing at least two-thirds (2/3) of legitimate business for which it was created.
the OCS or of the members; (Benguet Consolidated Mining Co. v. Pineda, G.R.
No. L-7231, 28 Mar. 1956)
2. The original and amended articles together
shall contain all provisions required by law to Effects of Non-Use or Continuous Inoperation
be set out in the AOI. Amendments to the
articles pertaining to the shortened term shall If a corporation does not formally organize and
be indicated by underscoring the change or commence its business within five (5) years from

Commercial Law
the date of its incorporation, its certificate of other fraudulent or illegal acts by its directors,
incorporation shall be deemed revoked as of the day trustees, officers, or employees.
following the end of the five-year period.
NOTE: The SEC shall give reasonable notice to, and
If a corporation has commenced its business but coordinate with, the appropriate regulatory agency
subsequently becomes inoperative for a period of at prior to the involuntary dissolution of companies
least five (5) consecutive years, the Commission under their special regulatory jurisdiction. (Sec. 138,
may, after due notice and hearing, place the RCC)
corporation under delinquent status.
DISSOLUTION OF CORPORATION SOLE
A delinquent corporation shall have a period of two
(2) years to resume operations and comply with all Procedure for Dissolution of Corporation Sole
requirements that the Commission shall prescribe.
Upon compliance by the corporation, the In case of a corporation sole, by submitting to the
Commission shall issue an order lifting the SEC for approval, a verified declaration of
delinquent status. Failure to comply with the dissolution which will set forth the following:
requirements and resume operations within the
period given by the Commission shall cause the 1. The name of the corporation;
revocation of the corporation’s certificate of 2. The reason for dissolution and winding up;
incorporation. (Sec. 21, RCC) 3. The authorization for the dissolution of the
corporation by the particular religious
Forfeiture in Favor of the National Government denomination, sect or church; and
4. The names and addresses of the persons who
If the corporation is ordered dissolved by final are to supervise the winding up of the affairs of
judgment pursuant to the following grounds, , its the corporation.
assets, after payment of its liabilities, shall, upon
petition of the SEC with the appropriate court, be Upon approval of such declaration of dissolution by
forfeited in favor of the national government. Such the Securities and Exchange Commission, the
forfeiture shall be without prejudice to the rights of corporation shall cease to carry on its operations
innocent stockholders and employees for services except for the purpose of winding up its affairs. (Sec.
rendered, and to the application of other penalty or 113, RCC)
sanction under the RCC or other laws:
DISSOLUTION BY MERGER OR CONSOLIDATION
Upon finding by final judgment that the corporation:
Dissolution by Merger or Consolidation
(1) Was created for the purpose of committing,
concealing or aiding the commission of Upon issuance by the SEC of a Certificate of Merger
securities violations, smuggling, tax evasion, or Consolidation, the corporate existence of the
money laundering, or graft and corrupt absorbed corporation and the constituent
practices; corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
(2) Committed or aided in the commission of thereafter be conducted. (Sec. 79, RCC)
securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt
practices, and its stockholders knew; and
(3) Repeatedly and knowingly tolerated the

commission of graft and corrupt practices or

2022 GOLDEN NOTES
Corporation Law
2. METHODS OF LIQUIDATION Right to Appeal Not Extinguished
Liquidation Although the cancellation of a corporation's

certificate of registration puts an end to its juridical
Liquidation is the process of settling the affairs of personality, Sec. 122 of the Corporation Code (now
the corporation after its dissolution. This consists Sec. 139, RCC), however provides that a corporation
of: (1) collection of all that is due the corporation, whose corporate existence is terminated in any
(2) the settlement and adjustment of claims against manner continues to be a body corporate for three
it, and (3) the payment of its debts and (4) the (3) years after its dissolution for purposes of
distribution of the remaining assets, if any among prosecuting and defending suits by and against it
the stockholders thereof in accordance with their and to enable it to settle and close its affairs.
contracts, or if there be no special contract, on the Moreover, the rights of a corporation, which is
basis of their respective interests. The manner of dissolved pending litigation, are accorded
liquidation or winding up may be provided for in the protection by law pursuant to Sec. 145 of the
corporate bylaws and this would prevail unless it is Corporation Code (now Sec. 184, RCC) (Paramount
inconsistent with law. (Divina, 2020) Insurance Corp. v. A.C. Ordonez Corp., G.R. No.
175109, 06 Aug. 2008)
Methods of Liquidation
Liquidation NOT Necessary in Dissolution by
1. By the corporation itself; (Sec. 139, RCC) Merger or Consolidation
2. By the trustee appointed by the corporation;
(Sec. 139, RCC) In case of merger or consolidation, the surviving or
3. By the Receiver appointed by SEC; (Sec. 135, the consolidated corporation shall thereupon and
RCC) thereafter possess all the rights, privileges,
4. By liquidation after three years. (Sec. 25, FRIA) immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
Approval of the SEC is NOT Required for all receivables due on whatever account, including
Liquidation and Distribution subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to,
The liquidation and distribution of the assets of a or due to each constituent corporation, shall be
dissolved corporation is a matter of internal deemed transferred to and vested in such surviving
concern of the corporation and falls within the or consolidated corporation without further act or
power of the directors and stockholders or duly deed.
appointed liquidation trustee. (SEC Opinion, July 23,
1996) The separate existence of the constituent
corporations shall cease, except that of the surviving
Suits Brought Against Corporation Within the or the consolidated corporation. (Sec. 79, RCC)
Three-Year Period But Remain Pending
Distribution of Assets Prior to Dissolution
Pending actions against the corporation are not
extinguished. They may still be prosecuted against GR: No corporation shall distribute any of its assets
the corporation even beyond said period. or property except upon lawful dissolution and after
payment of all its debts and liabilities. (Sec. 139,
The creditors of the corporation who were not paid RCC)
within the 3-year period may follow the property of
the corporation that may have passed to its XPNs:
stockholders unless barred by prescription or 1. Decrease of capital stock; (Sec. 37, RCC)
laches or disposition of said property in favor of a 2. Redemption of redeemable shares; (Sec. 8,
purchaser in good faith. RCC)

Commercial Law
3. Acquisition of own shares, provided that the NOTE: A corporation’s board of directors is not
corporation has unrestricted retained rendered functus officio by its dissolution. Since Sec.
earnings; (Sec. 41, RCC) 122 (now Sec. 139, RCC) allows a corporation to
4. Declaration of dividends out of the continue its existence for a limited purpose,
unrestricted retained earnings; (Sec. 42, RCC) necessarily there must be a board that will continue
5. Purchase of shares of any stockholder upon acting for and on behalf of the dissolved corporation
order of the SEC in case of deadlocks in a close for that purpose. In fact, Sec. 122 (now Sec. 139,
corporation; (Sec. 103, RCC) and RCC) authorizes the dissolved corporation’s board
6. Withdrawal of a stockholder in a close of directors to conduct its liquidation within three
corporation. (Sec. 104, RCC) years from its dissolution. Jurisprudence has even
recognized the board’s authority to act as trustee for
Order of Distribution of Assets in Case of persons in interest beyond the said three-year
Liquidation period. Thus, the determination of which group is
the bona fide or rightful board of the dissolved
The assets of the corporation shall be used to pay off corporation will still provide practical relief to the
the claims of various creditors based on the law on parties involved. (Aguirre v. FQB+7 Inc., G.R. No.
concurrence and preference of credit. The residual 170770, 09 Jan. 2013)
assets shall then be distributed to the holders of the
preferred shares of stock, if any, then to the holders Liquidation by Conveyance to a Trustee Within a
of common shares based on their agreement, if any, Three-Year Period
otherwise, in proportion to their respective
shareholdings in the corporation. At any time during the three-year period for
liquidation, said corporation is authorized and
NOTE: SEC approval is not required in the approval empowered to convey all of its property to trustees
of the distribution or liquidation of the assets of the for the benefit of its stockholders, members,
dissolved corporation. This falls within the creditors and other persons in interest.
authority of the directors and stockholders or the
duly appointed trustee or receiver. From and after any such conveyance by the
corporation of its property in trust for the benefit of
Any asset distributable to the creditor or its stockholders, members, creditors and others in
stockholder or member who is unknown or cannot interest, all interest which the corporation had in
be found shall be escheated in favor of the national the property terminates, the legal interest vests in
government. (Divina, 2020) the trustees, and the beneficial interest in the
stockholders, members, creditors, or other persons
Liquidation by the Corporation Itself in interest. (Sec. 139(2), RCC)
Every corporation whose charter expires pursuant Meaning of Trustee

to its AOI, is annulled by forfeiture, or whose
corporate existence is terminated in any other The word “trustee” as used in the law must be
manner, shall nevertheless remain as a body understood in its general concept which could
corporate for three (3) years after the effective date include the counsel to whom the prosecution of the
of dissolution, for the purpose of prosecuting and suit filed by the corporation was entrusted. The
defending suits by or against it and enabling it to purpose in the transfer of the assets of the
settle and close its affairs, dispose of and convey its corporation to a trustee upon its dissolution is more
property, and distribute its assets, but not for the for the protection of its creditors and stockholders.
purpose of continuing the business for which it The appointment of said counsel can be considered
was established. The period of liquidation is three a substantial compliance. (Gelano v. CA, G.R. No. L-
(3) years. (Sec. 139, RCC) 39050, 24 Feb. 1981)

2022 GOLDEN NOTES
Corporation Law
Suits Brought By Corporation Within the Three- as a corporation. One of these rights, to be sure,
Year Period But Remain Pending After Period includes the UCC’s right to seek from the court the
execution of a valid and final judgment in Civil Case
A corporation may, during the three-year term, No. 9165 – through its trustee/liquidator
appoint a trustee or a receiver who may act beyond Encarnacion Gonzales Wong – for the benefit of its
that period. The termination of the life of a juridical stockholders, creditors and any other person who
entity does not by itself cause the extinction or may have legal claims against it. To hold otherwise
diminution of the rights and liabilities of such entity would be to allow petitioners to unjustly enrich
nor those of its owners and creditors. If the three- themselves at the expense of UCC. (Knecht v. United
year extended life has expired without a trustee or Cigarette Corp., G.R. No. 139370, 04 July 2002)
receiver. having been expressly designated by the
corporation within that period, the board of Q: The corporation, once dissolved, thereafter
directors (or trustees) itself, following the rationale continues to be a body corporate for three years
of the Supreme Court's decision in Gelano vs. CA may for purposes of prosecuting and defending suits
be permitted to so continue as "trustees" by legal by and against it and of enabling it to settle and
implication to complete the corporate liquidation. close its affairs, culminating in the final
Still in the absence of a board of directors or disposition and distribution of its remaining
trustees, those having any pecuniary interest in the assets. If the 3-year extended life expires
assets, including not only the shareholders but without a trustee or receiver being designated
likewise the creditors of the corporation, acting for by the corporation within that period and by
and in its behalf, might make proper that time (expiry of the 3-year extended term),
representations with the Securities and Exchange the corporate liquidation is not yet over, how, if
commission, which has primary and sufficiently at all, can a final settlement of the corporate
broad jurisdiction in matters of this nature, for affairs be made? (1997 BAR)
working out a final settlement of the corporate
concerns. (Clemente v. CA, G.R. No. 82407, 27 March A: The liquidation can continue with the winding up.
1995) The members of the BOD can continue with the
winding of the corporate affairs until final
Suits Brought By Corporation Beyond Three- liquidation. They can act as trustees or receivers for
Year Period Not Barred this purpose.
The trustee (of a dissolved corporation) may Where no receiver or trustee has been designated
commence a suit which can proceed to final after dissolution:
judgment even beyond the three-year period (of
liquidation) x x x, no reason can be conceived 1. The board of directors or trustees itself may be
why a suit already commenced by the permitted to so continue as “trustees” by legal
corporation itself during its existence, not by a implication;
mere trustee who, by fiction, merely continues the 2. In the absence of the BoD or BoT, those having
legal personality of the dissolved corporation, a pecuniary interest in the corporate assets,
should not be accorded similar treatment – to stockholders, or creditors, may make a proper
proceed to final judgment and execution representations with SEC for working out a final
thereof. settlement of the corporate concerns; (Clemente
v. CA, G.R. No. 82407, 27 Mar. 1995)
Indeed, the rights of a corporation (dissolved 3. The only surviving stockholder or director;
pending litigation) are accorded protection by law. (SEC Opinion No. 10-96, 29 Jan. 2010) or
This is clear from Sec. 145 of the Corporation Code 4. The counsel who prosecuted and defended the
(now Sec. 184, RCC). The dissolution of UCC itself, or interest of the corporation. (Reburiano v. CA,
the expiration of its three-year liquidation period, G.R. No. 102965, 21 Jan. 1999)
should not be a bar to the enforcement of its rights

Commercial Law
Liquidation by a Management Committee or corporation now pertains to the appropriate

Rehabilitation Receiver regional trial courts. This is the correct procedure
because the liquidation of a corporation requires
In the case of a dissolution order where creditors the settlement of claims for and against the
are affected, the SEC may appoint a receiver to take corporation, which clearly falls under the
charge of the liquidation of the corporation. (Sec. jurisdiction of the regular courts. The trial court is
135, RCC) in the best position to convene all the creditors of
the corporation, ascertain their claims, and
Appointment of Receiver for Going Corporation determine their preferences.
The appointment of a receiver for a going It should be noted that the power of the SEC to
corporation is a last resort remedy and should not appoint a receiver existed even under the OCC and
be employed when another remedy is retained under the RCC despite the ruling in BPI v.
available. Relief by receivership is an extraordinary Eduardo Hong. It is submitted that the receiver may
remedy and is never exercised if there is an carry out the liquidation of the corporation if the
adequate remedy at law or if the harm can be creditors and the corporation are able to agree
prevented by an injunction or a restraining among themselves on how the creditors’ claims
order. Bad judgment by directors, or even shall be satisfied. Otherwise, the RTC should carry
unauthorized use and misapplication of the out the liquidation process. (Divina, 2020)
company’s funds, will not justify the appointment of
a receiver for the corporation if appropriate relief Prohibition Against Condonation
can otherwise be had. (Rev. Ao-As v. CA, G.R. No.
128464, 20 June 2006) The corporation, through its president cannot
condone penalties and charges after it had been
Under Sec. 135 of the RCC, the SEC shall proceed to placed under receivership. The appointment of a
hear the petition (filed by a corporation where receiver operates to suspend the authority of a
creditors are affected) and try any issue raised in corporation and of its directors and officers over its
the objections filed; and if no such objection is property and effects, such authority being reposed
sufficient, and the material allegations of the in the receiver. (Yam v. CA, G.R. No. 104726, 11 Feb.
petition are true, it shall render judgment dissolving 1999)
the corporation and directing such disposition of its
assets as justice requires and may appoint a receiver Q: ASB Realty, being the owner of the property
to collect such assets and pay the debts of the by virtue of a Deed of Assignment, entered a
corporation. Contract of Lease with Leonardo Umale. Upon
expiration of the contract, Umale continued
The receiver represents the SEC, as well as the occupying the premises. ASB Realty served
stockholders and creditors. The receiver is not Umale a Notice of Termination of Lease and
bound by the three-year liquidation period. Demand to Vacate. Umale failed to comply with
the demand of vacating the premises and paying
The appointment of a receiver operates to suspend his arrears. Thus, ASB Realty filed an unlawful
the authority of a corporation and its directors and detainer case againt Umale.
officers over its property and effects, such authority
being reposed in the receiver. Thus, a corporate Umale admitted occupying the property but
officer had no authority to condone a debt. challenged the personality of ASB Realty to sue
and recover the property. He claimed that ASB
In BPI v. Eduardo Hong (G.R. No. 161771, 15 Feb. Realty being placed under receivership, it is the
2012), the Supreme Court held, however, that while rehabilitation receiver that has the power to
the SEC has jurisdiction to order the dissolution of a take possession, control, and custody of the
corporation, jurisdiction over the liquidation of the assets under the Interim Rules of Procedure on

2022 GOLDEN NOTES
Corporation Law
Corporate Rehabilitation. Can ASB Realty, a

corporation under rehabilitation, sue in its own H. OTHER CORPORATIONS
name and recover property unlawfully
withheld?
1. CLOSE CORPORATION
A: YES. Being placed under corporate rehabilitation
and having a receiver appointed to carry out the
rehabilitation plan do not ipso facto deprive a Characteristics of a Close Corporation
corporation and its corporate officers of the power
to recover its unlawfully detained property. The principal characteristics of close corporations
Rehabilitation is for effecting a feasible and viable are the following:
rehabilitation by preserving a floundering business
as a going concern. This concept of preserving the 1. The business of the corporation may be
corporation’s business as a going concern while it is managed by the stockholders of the corporation
undergoing rehabilitation is called debtor-in- rather than by a board of directors.
possession or debtor-in-place wherein the debtor
corporation remains in control of its business and 2. If the corporation is classified as a close
properties, subject only to the monitoring of the corporation, a board resolution authorizing the
appointed rehabilitation receiver. The receiver sale or mortgage of the corporate property is
does not take over the control and management of not necessary to bind the corporation for the
the debtor corporation being tasked only to monitor action of its president.
the successful implementation of the rehabilitation
plan. (Umale v. ASB Realty Corporation, G.R. No. 3. Quorum may be greater than a mere majority.
181126, 15 June 2011)
4. Transfers of stocks to others which would
increase the number of stockholders to more
than the maximum are invalid.
5. Corporate actions may be binding even without

a formal board meeting, if the director had
knowledge or ratified the informal action of the
others, unless after having knowledge thereof,
the director promptly files his written objection
with the secretary of the corporation.
6. Pre-emptive right extends to all stocks issued,

including re-issuance of treasury shares,
whether for money or for property or personal
services, or in payment of corporate debts,
unless the AOI provide otherwise.
7. Deadlocks in the board may be settled by the

SEC, on written petition by any stockholder.
8. A stockholder may withdraw for any reason and

avail himself of his right of appraisal when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock. (Divina, 2020)

Commercial Law
Validity of Restrictions on Transfer of Shares 3. If a stock certificate of a close corporation

conspicuously shows a restriction on transfer of
Restrictions on the right to transfer shares must: the corporation’s stock and the transferee
acquires the stock in violation of such
1. Appear in: restriction, the transferee is conclusively
a. The articles of incorporation; presumed to have notice of the fact that the
b. In the by-laws; and stock was acquired in violation of the
c. In the certificate of stock; restriction.
NOTE: Otherwise, the same shall not be binding 4. Whenever a person to whom stock of a close
on any purchaser in good faith. corporation has been issued or transferred has,
or is conclusively presumed under this section
2. Said restrictions shall not be more onerous than to have notice of: (1) the person’s ineligibility to
granting the existing stockholders or the be a stockholder of the corporation, or (2) that
corporation the option to purchase the shares the transfer of stock would cause the stock of
of the transferring stockholder with such the corporation to be held by more than the
reasonable terms, conditions or period stated. If number of persons permitted under its AOI; or
upon the expiration of said period, the existing (3) that the transfer violates a restriction on
stockholders or the corporation fails to exercise transfer of stock, and the corporation may, at its
the option to purchase, the transferring option, refuse to register the transfer in the
stockholder may sell their shares to any third name of the transferee.
person. (Sec. 97, RCC)
NOTE: The provisions under par. 4 shall not be
NOTE: The above describes a Right of First Refusal. applicable if the transfer of stock, though contrary
to par. 1-3, has been consented to by all the
Effects of Issuance or Transfer of Stock in Breach stockholders of the close corporation, or if the close
of Qualifying Conditions corporation has amended its AOI.
1. If a stock of a close corporation is issued or NOTE: “Transfer” is not limited to a transfer for
transferred to any person who is not eligible value.
thereof under any provision of the AOI, and if
the certificate for such stock conspicuously The provisions of Sec. 98 shall not impair any right
shows the qualifications of the persons entitled which the transferee may have to either rescind the
to be holders of record thereof, such person is transfer or recover the stock under any express or
conclusively presumed to have notice of the fact implied warranty. (Sec. 98, RCC)
of the ineligibility to be a stockholder.
Effects When Board Meeting is Unnecessary or
2. If the AOI of a close corporation states the Improperly Held
number of persons, not exceeding twenty (20),
who are entitled to be stockholders of record, Unless the by-laws provide otherwise, any action
and if the certificate for such stock taken by the directors of a close corporation without
conspicuously states such number, and the a meeting called properly and with due notice shall
issuance or transfer of stock to any person nevertheless be deemed valid if:
would cause the stock to be held by more than
such number of persons, the person to whom 1. Before or after such action is taken, written
such stock is issued or transferred is consent thereto is signed by all the directors;
conclusively presumed to have notice of this 2. All the stockholders have actual or implied
fact. knowledge of the action and make no prompt
objection in writing;

2022 GOLDEN NOTES
Corporation Law
3. The directors are accustomed to take informal the power to arbitrate the dispute. (Sec. 103, RCC)
action with the express or implied acquiescence
of all the stockholders; or Appropriate Orders of the SEC in case of
4. All the directors have express or implied Deadlocks
knowledge of the action in question and none of
them makes a prompt objection in writing. (Sec. In the exercise of its power to arbitrate in case of
100, RCC) deadlock, the SEC shall have authority to make
appropriate orders, such as:
NOTE: An action within the corporate powers taken
at a meeting held without proper call or notice, is 1. Cancelling or altering any provision contained
deemed ratified by a director who failed to attend, in the AOI, bylaws, or any stockholder’s
unless after having knowledge thereof, the director agreement;
promptly files his written objection with the 2. Cancelling, altering, or enjoining a resolution
secretary of the corporation. (Ibid.) or act of the corporation or its board of
directors, stockholders, or officers;
Pre-Emptive Right in Close Corporations 3. Directing or prohibiting any act of the
corporation or its board of directors,
The preemptive right of stockholders in close stockholders, officers, or other persons party
corporations shall extend to all stock to be issued, to the action;
including reissuance of treasury shares, whether for 4. Requiring the purchase at their fair value of
money, property, or personal services, or in shares of any stockholder, either by the
payment of corporate debts, unless the AOI provide corporation regardless of the availability of
otherwise. (Sec. 101, RCC) unrestricted retained earnings in its books, or
by the other stockholders;
Amendment of AOI 5. Appointing a provisional director;
6. Dissolving the corporation; or
Any amendment to the AOI which seeks to delete or 7. Granting such other relief as the circumstances
remove any provision required by this Title or to may warrant. (Ibid.)
reduce a quorum or voting requirement stated in
said AOI shall require the affirmative vote of at least Provisional Director
two-thirds (2/3) of the OCS, whether with or
without voting rights, or of such greater proportion A provisional director shall be an impartial person
of shares as may be specifically provided in the AOI who is neither a stockholder nor a creditor of the
for amending, deleting or removing any of the corporation or any of its subsidiaries or affiliates,
aforesaid provisions, at a meeting duly called for the and whose further qualifications, if any, may be
purpose. (Sec. 102, RCC) determined by the Commission. (Ibid.)
Power to Arbitrate in case of a Deadlock A provisional director is not a receiver of the

corporation and does not have the title and powers
Notwithstanding any contrary provision in the close of a custodian or receiver. (Ibid.)
corporation’s AOI, bylaws, or stockholders’
agreement, if the directors or stockholders are so A provisional director shall have all the rights and
divided on the management of the corporation’s powers of a duly elected director, including the right
business and affairs that the votes required for a to be notified of and to vote at meetings of directors
corporate action cannot be obtained, with the until removed by order of the Commission or by all
consequence that the business and affairs of the the stockholders. (Ibid.)
corporation can no longer be conducted to the
advantage of the stockholders generally, the SEC,
upon written petition by any stockholder, shall have

Commercial Law
Compensation of Provisional Director transferable, unless the AOI or the bylaws

otherwise provide. (Sec. 89, RCC)
The compensation of the provisional director shall
be determined by agreement between such director 5. The right of the members of any class or classes
and the corporation, subject to approval of the to vote may be limited, broadened, or denied to
Commission, which may fix the compensation the extent specified in the AOI or the bylaws.
absent an agreement or in the event of Unless so limited, broadened, or denied, each
disagreement between the provisional director and member, regardless of class, shall be entitled to
the corporation. (Ibid.) one; (Sec. 88, RCC)
2. NON-STOCK CORPORATION 6. The provisions of specific provisions of the RCC

to the contrary notwithstanding, nonstock, or
Non-Stock Corporation special corporations may, through their AOI or
their bylaws, designate their governing boards
One where no part of its income is distributable as by any name other than as board of trustees;
dividends to its members, trustees, or officers. Any (Sec. 174, RCC)
profit which it may obtain as an incident to its
operations shall whenever necessary or proper, be 7. The bylaws may provide that the members of a
used in furtherance of the purpose or purposes for nonstock corporation may hold their regular or
which it was organized. (Sec. 86, RCC) special meetings at any place even outside the
place where the principal office of the
Nonstock corporations may be formed or organized corporation is located: Provided, That proper
for charitable, religious, educational, professional, notice is sent to all members indicating the date,
cultural, fraternal, literary, scientific, social, civic time and place of the meeting: Provided,
service, or similar purposes, like trade, industry, further, That the place of meeting shall be
agricultural and like chambers, or any combination within Philippine territory; (Sec. 92, RCC)
thereof, subject to the special provisions of Title XI
of the RCC governing particular classes of nonstock Q: Adventist University of the Philippines (AUP)
corporations. (Sec. 87, RCC) is a non-stock, non-profit educational
institution. Petonillo Barayuga was appointed
Characteristics of Non-Stock Corporation by the AUP’s Board of Trustees as its President
in 2001. AUP subsequently amended its By-Laws
1. It does not have capital stock divided into to state that members of the Board of Trustees
shares; were to serve a term of office of only two years;
and the officers, who included the President,
2. No part of its income during its existence is were to be elected from among the members of
distributable as dividends to its members, the Board of Trustees during their
trustees, or officers; organizational meeting, which was held during
the election of the Board of Trustees every two
3. Any profit which it obtains incidental to its years.
operations shall, whenever necessary or
proper, be used for the furtherance of the In 2003, the Board voted to remove Barayuga as
purpose or purposes for which it was president. This prompted Barayuga to file a
organized, subject to the provisions of Title XII petition for injunction with damages against
of the RCC; (Sec. 86, RCC) AUP, contending among others, that the Board
relieved him of the presidency without valid
4. Membership in a nonstock corporation and all grounds despite his five-year term. The RTC
rights arising therefrom are personal and non- ruled in favor of Barayuga. The CA, on the other
hand, ruled in favor of AUP.

2022 GOLDEN NOTES
Corporation Law
Can an officer-elect of a non-stock educational

corporation occupying a hold-over capacity be
removed without cause upon the appointment
of his or her successor?
A: YES. For institutions organized as stock

corporations, the number and term of directors
shall be governed by the provisions on stock
corporations.
The second paragraph of Sec. 108 (now Sec. 106,

RCC), although setting the term of the members of
the Board of Trustees at five years, contains a
proviso expressly subjecting the duration to what is
otherwise provided in the AOI or by-laws of the
educational corporation. That contrary provision
controls on the term of office.
In AUP's case, its amended By-Laws provided the

term of the members of the Board of Trustees, and
the period within which to elect the officers. In light
of foregoing, the members of the Board of Trustees
were to serve a term of office of only two years; and
the officers, who included the President, were to be
elected from among the members of the Board of
Trustees during their organizational meeting, which
was held during the election of the Board of
Trustees every two years. Naturally, the officers,
including the President, were to exercise the powers
vested by Section 2 of the amended By-Laws for a
term of only two years, not five years.
Ineluctably, the petitioner, could serve for only two

years. By the time of his removal for cause as
President, he was already occupying the office in a
hold-over capacity, and could be removed at any
time, without cause, upon the election or
appointment of his successor. His insistence on
holding on to the office was untenable, therefore,
and with more reason when one considers that his
removal was due to the loss of confidence on the
part of the Board of Trustees. (Barayuga v. Adventist
University of the Philippines, G.R. No. 168008, 17 Aug.
2011)

Commercial Law
Stock Corporation vs. Non-stock Corporation
STOCK CORPORATION NON-STOCK CORPORATION

Existence of Capital Stock
No capital stock.
Has capital stock divided into shares. (Sec. 3, RCC)

Non-stock corporations only have contributions or
donations.
Purpose
Organized for profit. Not organized for profit.
Distribution of Profit
Profits are not distributed to members. Any profit

Profits are distributed to the stockholders through earned by the non-stock corporation is used for the
dividends. (Sec. 3, RCC) furtherance of the purpose or purposes for which it
was organized. (Sec. 86, RCC)
Number of Directors or Trustees
May or may not be more than fifteen (15) (Sec. 91,

RCC)
One (1) in the case of OPC, two to fifteen (2-15) in the XPNs:
case of Ordinary Stock Corporations. (Sec. 121, 13,
RCC) Non-stock educational institutions – not be less than
five (5) nor more than fifteen (15): Provided, That the
XPN: Banks (in case of merger or consolidation) number of trustees shall be in multiples of five (5).
which can have a maximum of 21 directors. (Sec. 106, RCC)
Religious Societies – not less than five (5) nor more

than fifteen (15) (Sec. 114, RCC)
Term of Office of the Board of Directors / Trustees
Term of one year until their successors are elected Shall hold office for not more than three (3) years
and qualified, subject to the provisions of AOI and By- until their successors are elected and qualified. (Sec.
laws. (Sec. 22, RCC) 22 and 91, RCC)
Election of Officers
Unless otherwise provided in the AOI or the bylaws,

Officers are elected by the BOD . the members may directly elect officers of a nonstock
corporation. (Sec. 91, RCC)

2022 GOLDEN NOTES
Corporation Law
Place of Meeting
The bylaws may provide that the members of a

Stockholders’ or members’ meetings, whether nonstock corporation may hold their regular or
regular or special, shall be held in the principal office special meetings at any place even outside the place
of the corporation as set forth in the AOI, or, if not where the principal office of the corporation is
practicable, in the city or municipality where the located: Provided, That proper notice is sent to all
principal office of the corporation is located. (Sec. 50, members indicating the date, time and place of the
RCC) meeting: Provided, further, That the place of meeting
shall be within Philippine territory. (Sec. 92, RCC)
Right to Vote
Unless otherwise provided in the AOI or in the bylaws,

members of nonstock corporations may cast as many
votes as there are trustees to be elected but may not
Stockholders can resort to cumulative voting. (Sec. 23, cast more than one (1) vote for one (1) candidate.
RCC) (Sec. 23, RCC)
Only preferred and redeemable shares can be denied The right of the members of any class or classes to
the right to vote, but will still be entitled to vote in the vote may be limited, broadened, or denied to the
8 instances provided in in Sec. 6. extent specified in the AOI or the bylaws. Unless so
limited, broadened, or denied, each member,
regardless of class, shall be entitled to one (1) vote.
(Sec. 88, RCC)
Transferability of Shares/ Membership
Shares of stock so issued are personal property and

may be transferred by delivery of the certificate or
certificates indorsed by the owner, his attorney in-
fact, or any other person legally authorized to make
the transfer. No transfer, however, shall be valid,
Membership in a nonstock corporation and all rights
except as between the parties, until the transfer is
arising therefrom are personal and non-transferable,
recorded in the books of the corporation showing the
unless the AOI or the bylaws otherwise provide. (Sec.
names of the parties to the transaction, the date of the
89, RCC)
transfer, the number of the certificate or certificates,
and the number of shares transferred. No shares of
stock against which the corporation holds any unpaid
claim shall be transferable in the books of the
corporation. (Sec. 62, RCC)

Commercial Law
Right to Expel Members
Membership shall be terminated in the manner and

for the causes provided in the AOI or the bylaws.
Stockholders may be expelled only for grounds Termination of membership shall extinguish all rights
provided by law. of a member in the corporation or in its property,
unless otherwise provided in the AOI or the bylaws.
(Sec. 90, RCC)
Distribution of Assets in case of Dissolution
The assets of a nonstock corporation undergoing the

process of dissolution for reasons other than those set
forth in Sec. 139 of the RCC, shall be applied and
distributed as follows: (a) All liabilities and
obligations of the corporation shall be paid, satisfied
and discharged, or adequate provision shall be made
therefor; (b) Assets held by the corporation upon a
condition requiring return, transfer or conveyance,
and which condition occurs by reason of the
dissolution, shall be returned, transferred or
conveyed in accordance with such requirements; (c)
Assets of stock corporation shall be distributed in the Assets received and held by the corporation subject
following order: to limitations permitting their use only for charitable,
religious, benevolent, educational or similar
1. Payment of claims of creditors who are not purposes, but not held upon a condition requiring
stockholders (based on preference of credit); return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to one
2. Payment of claims of stockholders as creditors; (1) or more corporations, societies or organizations
engaged in activities in the Philippines substantially
3. Residual balance is distributed proportionately similar to those of the dissolving corporation
to preferred shares, if any, then to common according to a plan of distribution adopted pursuant
stock. to the Chapter II, Title XI of the RCC,; (d) Assets other
than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the
provisions of the AOI or the bylaws, to the extent that
the AOI or the bylaws determine the distributive
rights of members, or any class or classes of members,
or provide for distribution; and (e) In any other case,
assets may be distributed to such persons, societies,
organizations or corporations, whether or not
organized for profit, as may be specified in a plan of
distribution adopted pursuant to Chapter II, Title XI
of the RCC. (Sec. 93, RCC)

2022 GOLDEN NOTES
Corporation Law
Termination of Membership Political Purpose Not Allowed
1. Membership shall be terminated in the manner Political purpose is not included on the purposes for
and for the causes provided in the AOI or the which a non-stock corporation may be established.
bylaws. Termination of membership shall SEC may reject the AOI if the purpose of the
extinguish all rights of a member in the corporation is to engage in election campaign or
corporation or in its property, unless otherwise partisan political activity. (SEC Opinion, 10 Apr.
provided in the AOI or the bylaws. (Sec. 90, RCC) 1985)
Example: Membership in a golf club where the Rule on Offsetting Unused Contributions Against
purchase of the share is a sine qua non. (Valley Balance of Receivables
Golf & Country Club Inc. v. Caram, G.R. No.
158805, 16 Apr. 2009) The unused contributions of members cannot be
offset against the balance of receivables because
2. Non-payment of dues may be a ground for this would amount to distribution of the capital of
termination or suspension of membership. The the corporation. Members of non-stock
AOI or the by-laws of a non-stock corporation corporations are not entitled to distribution of
may provide that unpaid dues shall constitute a capital. They are only entitled to distribution of
lien on the member’s share. (Calatagan Golf capital upon dissolution when it is provided for in
Club, Inc. v. Clemente, Jr., G.R. No. 165443, 16 Apr. the AOI or by-laws. (SEC Opinion, Nov. 27, 1985)
2009);
3. FOREIGN CORPORATIONS
NOTE: The procedure in Sec. 68 of the
Corporation Code (now Sec. 67, RCC) does not A foreign corporation is:
apply if the membership shares are sold under
the provisions that provide for the constitution 1. One formed, organized or existing under any
of lien, as said section refers to delinquency sale laws other than those of the Philippines; and
arising from unpaid subscription. 2. Whose laws allow Filipino citizens and
corporations to do business in its own country
For the termination of membership to be valid, or State. (Sec. 140, RCC)
there should be reasonable notice to the
member concerned and he must be given a fair NOTE: The second requirement refers to Principle
opportunity to be heard in his defense; of Reciprocity
3. Membership in and all rights arising from a Jurisdiction over Foreign Corporation
non-stock corporation are personal and non-
transferable, unless the AOI or the by-laws of IF THE FOREIGN IF THE FOREIGN
the corporation provide otherwise. Deceased CORPORATION IS CORPORATION IS
members who are dropped from the THE PLAINTIFF THE DEFENDANT
membership roster in the manner and for the 1. Voluntary 1. GR: Voluntary
cause provided for in the by-laws are not to be appearance before appearance of the
counted in determining the requisite vote in the local courts by corporation by
corporate matters or the requisite quorum for the filing of an interposing a
the annual member’s meeting. (Tan v. Sycip, G.R. action by a licensed defense.
No. 153468, 17 Aug. 2006) corporation.
XPN: A special
2. If the foreign appearance to file a
corporation is a co- motion to dismiss
plaintiff with a based on lack of

Commercial Law
domestic jurisdiction. RCC and a certificate of authority from the

corporation and appropriate government agency. (Sec. 140, RCC)
latter later filed a 2. Service of summons
suit here in the to a foreign a. WHAT CONSTITUTES “DOING BUSINESS”
Philippines. corporation which
has transacted Q: When is a foreign corporation deemed to be
business in the “doing business in the Philippines?” (1998, 2016
Philippines whether BAR)
licensed or
registered. A: Under the Foreign Investment Act of 1991 (R.A.
No. 7402),the phrase “doing business” shall include
3. Service of summons soliciting orders, service contracts, opening offices,
to its resident agent whether called “liaison” offices or branches;
in an isolated appointing representatives or distributors
transaction. domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods
Bases of Jurisdiction totaling one hundred eighty (180) days or more;
participating in the management, supervision or
The following are the two bases of authority control of any domestic business, firm, entity or
(jurisdiction) over foreign corporations: corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings
1. A corporation may give actual consent to or arrangements, and contemplate to that extent the
judicial jurisdiction manifested normally by performance of acts or works, or the exercise of
compliance with the State’s foreign corporation some of the functions normally incident to, and in
qualification requirements (licensing progressive prosecution of, commercial gain or of
requirements and other requisites to lawfully the purpose and object of the business organization
transact business in the Philippines); and
Provided, however, That the phrase “doing business”
2. A corporation, even though not qualified (not shall not be deemed to include mere investment as
licensed), by engaging in sufficient activity a shareholder by a foreign entity in domestic
(doing business) within the State, established corporations duly registered to do business, and/or
judicial jurisdiction over the foreign the exercise of rights as such investor; nor having a
corporation. (Foreign Corporations: The nominee director or officer to represent its interests
Interrelation of Jurisdiction and Qualification, in such corporation; nor appointing a
Indiana Law Journal, Art. 4, Vol. 33, Issue 3, representative or distributor domiciled in the
retrieved on 29 Apr. 2013) Philippines which transacts business in its own
name and for its own account.
Consent
Q: When is a foreign corporation deemed doing
Through compliance with the Philippines’ legal business in the Philippines?
requirements to lawfully engage in business within
the country’s territory, the foreign corporation A: The term “doing business” is not specifically
gives its actual consent to be subjected to the defined by the OCC and the RCC. There are certain
jurisdiction of the Philippines. (Ibid.) activities, however, which are deemed as doing
business under R.A. No. 7042, otherwise known as
Foreign Corporations shall have the right to transact the Foreign Investments Act of 1991 (“FIA”). Under
business in the Philippines after obtaining a the FIA, doing business shall include:
license for that purpose in accordance with the

2022 GOLDEN NOTES
Corporation Law
a. Soliciting orders; constitute “minimum contacts” for jurisdictional

b. Service contracts; purposes.
c. Opening offices, whether called “liaison” offices
or branches; The Sliding Scale Test is based on the premise that
d. Appointing representatives or distributors “the likelihood that ‘personal jurisdiction’ can be
domiciled in the Philippines or who in any constitutionally exercised is directly proportionate
calendar year stay in the country for a period or to the nature and quantity of commercial activity
periods totaling 180 days or more; that an entity conducts over the internet.”
e. Participating in the management, supervision
or control of any domestic business, firm, entity, At one end of the scale are “passive” websites, which
or corporation in the Philippines; and alone generally do not generate sufficient contacts
f. Any other act or acts that imply a continuity of with a foreign state to establish personal
commercial dealings or arrangements and jurisdiction since they are only used to post
contemplate to that extent the performance of information therein.
acts or works, or the exercise of some of the
functions normally incident to, and in At the other end of the scale are “active” websites,
progressive prosecution of, commercial gain or which generate sufficient business over the internet
of the purpose and object of the business to establish personal jurisdiction.
organization.
“Interactive” websites fall in the center of the scale
Twin Characterization Test since they are hybrid sites that contain elements of
both passive and active websites, and courts
Under this test, a foreign corporation is considered determine whether to exercise personal jurisdiction
to be “doing business” in the Philippines when: over the interactive website owner on a case-by-
case basis. (Divina, 2020)
a. The foreign corporation is maintaining or
continuing in the Philippines the body or Q: What is the legal test for determining if an
substance of the business or enterprise for unlicensed foreign corporation is doing
which it was organized or whether it has business in the Philippines? (2002 BAR)
substantially retired from it and turned it over
to another. A: The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply
b. The foreign corporation is engaged in activities a continuity of commercial dealings or
which necessarily imply “continuity of arrangements and contemplate to that extent the
commercial dealings and arrangements, and performance of acts or works, or the exercise of
contemplates, to that extent, the performance of some of the functions normally incident to, and in
acts or works or the exercise of some of the progressive prosecution of, commercial gain or of
functions normally incident to, and in the purpose and object of the business corporation.
progressive prosecution of, the purpose and
object of its organization.” (Divina, 2020, citing Q: Steelcase is a foreign corporation existing
Mentholatum Co. Inc. v. Mangaliman, G.R. No. L- under the laws of Michigan, USA, and engaged in
47701, 27 June 1941) the manufacture of office furniture with dealers
worldwide. DISI is a corporation existing under
Sliding Scale Test Philippine Laws and engaged in the furniture
business, including the distribution of furniture.
Currently, most courts in the United States apply a
Sliding Scale Test tailored to internet activities to Steelcase and DISI orally entered into a
determine the level or types of activities that will dealership agreement whereby Steelcase
granted DISI the right to market, sell, distribute,

Commercial Law
install, and service its products to end-user companies, acting in its own name and for its own
customers within the Philippines. The business account. (Steel Case v. Design International
relationship continued smoothly until it was Selections, Inc., G.R. No. 171995, 18 Apr. 2012)
terminated after the agreement was breached
with neither party admitting any fault. Steelcase b. NECESSITY OF A LICENSE TO DO BUSINESS
filed a complaint for sum of money against DISI
alleging, among others, that DISI had an unpaid It was never the intent of the legislature to bar court
account of US$600,000.00. access to a foreign corporation or entity which
happens to obtain an isolated order for business in
DISI alleged that the complaint failed to state a the Philippines. Neither, did it intend to shield
cause of action and to contain the required debtors from their legitimate liabilities or
allegations on Steelcase’s capacity to sue in obligations. But it cannot allow foreign corporations
the Philippines despite the fact that Steelcase or entities which conduct regular business any
was doing business in the Philippines without access to courts without the fulfillment by such
the required license to do so. Consequently, it corporations of the necessary requisites to be
posited that the complaint should be dismissed subjected to our government’s regulation and
because of Steelcase’s lack of legal capacity to
authority. By securing a license, the foreign entity
sue in Philippine courts. Is Steelcase doing would be giving assurance that it will abide by the
business in the Philippines without the required decisions of our courts, even if adverse to it. By
license?
securing a license, which is a legal requirement to
lawfully engage in business in the Philippines, the
A: NO. The appointment of a distributor in foreign entity would be giving assurance that it will
the Philippines is not sufficient to constitute “doing
abide by the decisions of our courts, even if adverse
business” unless it is under the full control of the to it. (Eriks PTE, Ltd. v. CA, GR 118843, 06 Feb. 1997)
foreign corporation. If the distributor is an
independent entity which buys and distributes
Corporation Engaged in Exporting Goods to the
products, other than those of the foreign Philippines NOT Required to Obtain License
corporation, for its own name and its own account,
the latter cannot be considered to be doing business To be doing or "transacting business in the
in the Philippines. It should be kept in mind that the Philippines" for purposes of Sec. 133 of the
determination of whether a foreign corporation is
Corporation Code (now, Sec. 150, RCC), the foreign
doing business in the Philippines must be judged in corporation must actually transact business in the
light of the attendant circumstances. Philippines, that is, perform specific business
transactions within the Philippine territory on a
It is undisputed that DISI was founded in 1979 and continuing basis in its own name and for its own
is independently owned and managed by the account. Actual transaction of business within the
spouses Leandro and Josephine Bantug. In addition
Philippine territory is an essential requisite for the
to Steelcase products, DISI also distributed products Philippines to acquire jurisdiction over a foreign
of other companies including carpet tiles, corporation and thus require the foreign
relocatable walls, and theater settings. The
corporation to secure a Philippine business license.
dealership agreement between Steelcase and DISI If a foreign corporation does not transact such kind
had been described by the owner himself as a buy- of business in the Philippines, even if it exports its
and-sell arrangement. This clearly belies DISI’s
products to the Philippines, the Philippines has no
assertion that it was a mere conduit through which jurisdiction to require such foreign corporation to
Steelcase conducted its business in the
secure a Philippine business license. (B. Van Zuiden
country. From the preceding facts, the only
Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R.
reasonable conclusion that can be reached is that
No. 147905, 28 May 2007)
DISI was an independent contractor, distributing
various products of Steelcase and of other

2022 GOLDEN NOTES
Corporation Law
Q: Cargill is a corporation organized and existing specific commercial act within the territory of the
under the laws of the State of Delaware, United importing country. Without jurisdiction over the
States of America. Cargill and Northern foreign exporter, the importing country cannot
Mindanao Corporation (NMC) executed a compel the foreign exporter to secure a license to do
contract whereby NMC agreed to sell to Cargill business in the importing country.
molasses provided that Cargill would open a
Letter of Credit with the BPI. The amended In this case, the contract between Cargill and NMC
contract required NMC to put up a performance involved the purchase of molasses by petitioner
bond which represents the value of 10,500 from NMC. It was NMC, the domestic corporation,
metric tons of molasses. The performance bond which derived income from the transaction and not
was intended to guarantee NMC’s performance Cargill. To constitute "doing business," the activity
to deliver the molasses during the prescribed undertaken in the Philippines should involve profit-
shipment periods according to the terms of the making. Besides, under Sec. 3(d) of RA 7042,
amended contract. "soliciting purchases" has been deleted from the
enumeration of acts or activities which constitute
In compliance with the terms of the third "doing business."
amendment of the contract, respondent Intra
Strata Assurance Corporation (Intra Strata) Other factors which support the finding that
issued a performance bond to petitioner is not doing business in the Philippines
guarantee NMC’s delivery of the 10,500 tons of are: (1) Cargill does not have an office in the
molasses, and a surety bond. NMC was only able Philippines; (2) Cargill imports products from the
to deliver 219.551 metric tons of molasses out of Philippines through its non-exclusive local broker,
the agreed 10,500 metric tons. Thus, Cargill sent whose authority to act on behalf of petitioner is
demand letters to NMC claiming payment under limited to soliciting purchases of products from
the performance and surety bonds. When NMC suppliers engaged in the sugar trade in the
refused to pay, Cargill filed a complaint for sum Philippines; and (3) the local broker is an
of money against NMC and Intra Strata. Does independent contractor and not an agent of
Cargill, an unlicensed foreign corporation, have petitioner.
legal capacity to sue before Philippine courts?
In the present case, Cargill is a foreign company
A: YES. It has the capacity to sue. In this case, Cargill merely importing molasses from a Philippine
and NMC amended their contract three times to give exporter. A foreign company that merely imports
a chance to NMC to deliver to Cargill the molasses, goods from a Philippine exporter, without opening
considering that NMC already received the an office or appointing an agent in the Philippines, is
minimum price of the contract. There is no showing not doing business in the Philippines. (Cargill,
that the transactions between Cargill and NMC Inc., vs. Intra Strata Assurance Corp., G.R. No. 168266,
signify the intent of Cargill to establish a continuous 15 Mar. 2010)
business or extend its operations in the Philippines.
An exporter in one country may export its products c. REQUISITES FOR ISSUANCE OF LICENSE
to many foreign importing countries without
performing in the importing countries specific The foreign corporation must submit to SEC the
commercial acts that would constitute doing following:
business in the importing countries. The mere act of
exporting from one’s own country, without doing 1. Copy of its AOI and by-laws, certified in
any specific commercial act within the territory of accordance with law and their translation to an
the importing country, cannot be deemed as doing official language of the Philippines, if necessary
business in the importing country. The importing (Sec. 142, RCC);
country does not require jurisdiction over the
foreign exporter who has not yet performed any

Commercial Law
2. The application, which shall be under oath, and, the translator shall be attached thereto;
unless already stated in its AOI, shall specifically
set forth the following: (a) The date and term of 4. Statement under oath by the President or other
incorporation; (b) The address, including the person authorized by the Corporation showing
street number, of the principal office of the to the satisfaction of the SEC and other
corporation in the country or State of governmental agency in the proper cases that
incorporation; (c) The name and address of its the:
resident agent authorized to accept summons
and process in all legal proceedings and all a. Applicant is solvent and in sound financial
notices affecting the corporation, pending the condition
establishment of a local office; (d) The place in b. The assets and liabilities of the corporation
the Philippines where the corporation intends as of the date not exceeding one (1) year
to operate; (e) The specific purpose or purposes immediately prior to the filing of the
which the corporation intends to pursue in the application;
transaction of its business in the Philippines:
Provided, That said purpose or purposes are 5. A written power of attorney designating a
those specifically stated in the certificate of person who must be a resident of the
authority issued by the appropriate Philippines, on whom summons, and other legal
government agency; (f) The names and processes may be served in all actions or other
addresses of the present directors and officers legal proceedings against such corporation, and
of the corporation; (g) A statement of its consenting that service upon such resident
authorized capital stock and the aggregate agent shall be admitted and held as valid as if
number of shares which the corporation has served upon the duly authorized officers of the
authority to issue, itemized by class, par value foreign corporation at its home office (Sec. 145,
of shares, shares without par value, and series, RCC); and
if any; (h) A statement of its outstanding capital
stock and the aggregate number of shares 6. An agreement or stipulation, executed by the
which the corporation has issued, itemized by proper authorities of said corporation, in form
class, par value of shares, shares without par and substance as follows: “The (name of foreign
value, and series, if any; (i) A statement of the corporation) hereby stipulates and agrees, in
amount actually paid in; and (j) Such additional consideration of being granted a license to
information as may be necessary or appropriate transact business in the Philippines, that if the
in order to enable the Commission to determine corporation shall cease to transact business in
whether such corporation is entitled to a license the Philippines, or shall be without any resident
to transact business in the Philippines, and to agent in the Philippines on whom any summons
determine and assess the fees payable. (Ibid.); or other legal processes may be served, then
service of any summons or other legal process
3. Attached to the application for a license shall be may be made upon the Commission in any
a duly executed certificate under oath by the action or proceeding arising out of any business
authorized official or officials of the jurisdiction or transaction which occurred in the
of its incorporation, attesting to the fact that: Philippines and such service shall have the
same force and effect as if made upon the duly
a. The laws of the country or state of the authorized officers of the corporation at its
applicant allow Filipino citizens and home office.”
corporations to do business therein.
b. The applicant is an existing corporation in NOTE: Foreign banking, financial and insurance
good standing. corporations shall, in addition to the above
c. If such certificate is in a foreign language, a requirements, comply with the provisions of
translation thereof in English under oath of existing laws applicable to them. In the case of all

2022 GOLDEN NOTES
Corporation Law
other foreign corporations, no application for (10%) of their actual market value at the time they
license to transact business in the Philippines shall were deposited. The SEC may, at its discretion,
be accepted by the Commission without previous release part of the additional deposit if the gross
authority from the appropriate government agency, income of the licensee has decreased, or if the actual
whenever required by law. (Sec. 142, RCC) market value of the total deposit has increased, by
more than ten percent (10%) of their actual market
Effectivity of License value at the time they were deposited. The SEC may,
from time to time, allow the licensee to make
Upon issuance of the license, such foreign substitute deposits for those already on deposit as
corporation may commence to transact business in long as the licensee is solvent. Such licensee shall be
the Philippines and continue to do so for as long as entitled to collect the interest or dividends on such
it retains its authority to act as a corporation under deposits. In the event the licensee ceases to do
the laws of the country or State of its incorporation, business in the Philippines, its deposits shall be
unless such license is sooner surrendered, revoked, returned, upon the licensee’s application and upon
suspended, or annulled in accordance with this proof to the satisfaction of the Commission that the
Code or other special laws. (Sec. 143, RCC) licensee has no liability to Philippine residents,
including the Government of the Republic of the
NOTE: Within sixty (60) days after the issuance of Philippines. For purposes of computing the
the license to transact business in the Philippines, securities deposit, the composition of gross income
the licensee, except foreign banking or insurance and allowable deductions therefrom shall be in
corporations, shall deposit with the SEC for the accordance with the rules of the SEC. Deposit
benefit of present and future creditors of the securities for the benefit of present and future
licensee in the Philippines, securities satisfactory to creditors, within 60 days after the issuance of
the SEC, consisting of bonds or other evidence of license. (Ibid.)
indebtedness of the Government of the Philippines,
its political subdivisions and instrumentalities, or of Since the SEC will grant a license only when the
GOCCs and entities, shares of stock or debt foreign corporation has complied with all the
securities that are registered under R.A. No. 8799, requirements of law, it follows that when it decides
otherwise known as “The Securities Regulation to issue such a license, it is satisfied that the
Code”, shares of stock in domestic corporations applicant's by-laws, among the other documents,
listed in the stock exchange, shares of stock in meet the legal requirements. This, in effect, is an
domestic insurance companies and banks, any approval of the foreign corporation’s by-laws. It
financial instrument determined suitable by the may not have been made in express terms, still it is
SEC, or any combination thereof with an actual clearly an approval. Therefore, petitioner bank's by-
market value of at least Five hundred thousand laws, though originating from a foreign jurisdiction,
pesos (P500,000.00) or such other amount that may are valid and effective in the Philippines. (Citibank
be set by the Commission: vs. Chua, G.R. No. 102300, 17 Mar. 1993)
Provided, however, That within six (6) months after d. RESIDENT AGENT
each fiscal year of the licensee, the SEC shall require
the licensee to deposit additional securities or A resident agent may be either an individual
financial instruments equivalent in actual market residing in the Philippines or a domestic
value to two percent (2%) of the amount by which corporation lawfully transacting business in the
the licensee’s gross income for that fiscal year Philippines:
exceeds Ten million pesos (P10,000,000.00). The
SEC shall also require the deposit of additional 1. An individual resident agent must be of
securities or financial instruments if the actual good moral character and of sound
market value of the deposited securities or financial financial standing;
instruments has decreased by at least ten percent

Commercial Law
2. In case of a domestic corporation who will 2. Accompanied by a duly authenticated written

act as a resident agent, it must likewise be power of attorney designating the substitute or
of sound financial standing and must show the new resident agent.
proof that it is in good standing as certified
by the Commission. (Sec 144, RCC) NOTE: The appointment of a resident agent of a
foreign corporation is revocable at any time at the
Purpose of Appointing Resident Agent instance of the corporation. (SEC Opinion, 4 Sept.
1990)
The appointment of a resident agent is required for
the purpose of accepting and receiving, on behalf of Duty of Resident Agent in Case of Change of
the foreign corporation: Address
1. Notice affecting the corporation pending the It shall be his or its duty to immediately notify in
establishment of its local office; and writing the SEC of the new address. (Sec. 145, RCC)
2. Summons and other legal processes in all
proceedings for or against the corporation. Instances When Service of Summons Or Other
Legal Processes are Made Upon the SEC Instead
Effect of Service of Summons and Notices to the of a Resident Agent
Resident Agent
1. If a foreign corporation, previously granted a
Service upon such resident agent shall be admitted license, ceases to transact business in the
and held as valid as if served upon the duly Philippines.
authorized officers of the foreign corporation at its
home office. (Sec. 145, RCC) 2. A foreign corporation shall be without any
resident agent in the Philippines on whom any
Resident Agent Cannot Sign the Certificate of summons or other legal processes may be
Non-Forum Shopping served. (Sec. 145, RCC)
While a resident agent may be aware of actions filed Effect of Service Made Upon SEC
against his principal (a foreign corporation doing
business in the Philippines), such resident may not Such service made upon the SEC shall have the same
be aware of actions initiated by its principal, force and effect as if made upon the duly authorized
whether in the Philippines against a domestic officers of the corporation at its home office. (Sec.
corporation or private individual, or in the country 145, RCC)
where such corporation was organized and
registered, against a Philippine registered Whenever such service shall be made upon the SEC,
corporation or a Filipino citizen. (Expert Travel & the SEC must, within 10 days thereafter, transmit by
Tours Inc. vs. CA, G.R. No. 152392, 26 May 2005) mail a copy of such summons or other legal process
to the corporation at its home or principal office.
Requirements for Replacement of Resident The sending of such copy by the SEC shall be a
Agent necessary part of and shall complete such service.
All expenses incurred by the Commission for such
SEC requires the submission of: service shall be paid in advance by the party at
whose instance the service is made. (Ibid.)
1. A duly authenticated copy of board resolution
or a certification from the authorized officer of
the company formally revoking his
appointment as a resident agent of the
corporation; and

2022 GOLDEN NOTES
Corporation Law
e. PERSONALITY TO SUE AND SUABILITY The obtainment of a license prescribed by the

Corporation Code is not a condition precedent to the
Personality to Sue maintenance of any kind of action in Philippine
courts by a foreign corporation. However, no
No foreign corporation transacting business in the foreign corporation shall be permitted to transact
Philippines without a license, or its successors or business in the Philippines, as this phrase is
assigns, shall be permitted to maintain or intervene understood under the Corporation Code, unless it
in any action, suit or proceeding in any court or shall have the license required by law, and until it
administrative agency of the Philippines; but such complies with the law in transacting business here,
corporation may be sued or proceeded against it shall not be permitted to maintain any suit in local
before Philippine courts or administrative tribunals courts. As thus interpreted, any foreign corporation
on any valid cause of action recognized under not doing business in the Philippines may maintain
Philippine laws. (Sec. 150, RCC) an action in our courts upon any cause of action,
provided that the subject matter and the defendant
XPN: Under the rule on estoppel, a party is estopped are within the jurisdiction of the court. It is not the
to challenge the personality of a foreign corporation absence of the prescribed license but "doing
to sue, even if it has no license, after having business" in the Philippines without such license
acknowledged the same by entering to a contract which debars the foreign corporation from access to
with it. our courts. In other words, although a foreign
corporation is without license to transact business
One who has dealt with a corporation of foreign in the Philippines, it does not follow that it has no
origin as a corporate entity is estopped to deny its capacity to bring an action. Such license is not
corporate existence. (Steel Case v. Design necessary if it is not engaged in business in the
International Selections, Inc., G.R. No. 171995, 18 Apr. Philippines. (Columbia Pictures v. CA, G.R. No.
2012) 110318, 28 Aug. 1996)
Q: Is a foreign corporation which not licensed to Without doubt, the Corporation Code is the general
do business in the Philippines absolutely law providing for the formation, organization, and
incapacitated from filing a suit in local courts? regulation of private corporations. On the other
hand, RA 6657 is the special law on agrarian reform.
A: NO. Only when that foreign corporation is As between a general and special law, the latter shall
“transacting” or “doing business” in the country will prevail — generalia specialibus non derogant.
a license be necessary before it can institute suits. It
may, however, bring suits on isolated business Following the same principle, the Alternative
transactions, which is not prohibited under Dispute Resolution Act of 2004 shall apply in this
Philippine law. case as the Act, as its title – An Act to Institutionalize
the Use of an Alternative Dispute Resolution System
Thus, a foreign insurance company may sue in in the Philippines and to Establish the Office for
Philippine courts upon the marine insurance Alternative Dispute Resolution, and for Other
policies issued by it abroad to cover international- Purposes – would suggest, is a law especially
bound cargoes shipped by a Philippine carrier, even enacted “to actively promote party autonomy in the
if it has no license to do business in this country. It resolution of disputes or the freedom of the party to
is the act of engaging in business without the make their own arrangements to resolve their
prescribed license and not the lack of license per se disputes.” It specifically provides exclusive grounds
which bars a foreign corporation from access to our available to the party opposing an application for
courts. (Aboitiz Shipping Corp. v. Insurance Co. of NA, recognition and enforcement of the arbitral award.
G.R. No. 168402, 6 Aug. 2008)
Now, does a foreign corporation not licensed to do
business in the Philippines have legal capacity to sue

Commercial Law
under the provisions of the Alternative Dispute it desires to sue in Philippine courts under the
Resolution Act of 2004? We answer in the "isolated transaction rule" because without such
affirmative. Indeed, it is in the best interest of disclosure, the court may choose to deny it the right
justice that in the enforcement of a foreign arbitral to sue.
award, we deny availment by the losing party of
the rule that bars foreign corporations not licensed The right and capacity to sue, being, to a great
to do business in the Philippines from maintaining extent, matters of pleading and procedure, depend
a suit in our courts. upon the sufficiency of the allegations in the
complaint. Thus, as to a foreign corporation, the
When a party enters into a contract containing a qualifying circumstance that if it is doing business in
foreign arbitration clause and, as in this case, in the Philippines, it is duly licensed or if it is not, it is
fact submits itself to arbitration, it becomes bound suing upon a singular and isolated transaction, is an
by the contract, by the arbitration and by the result essential part of the element of the plaintiffs
of arbitration, conceding thereby the capacity of capacity to sue and must be affirmatively pleaded.
the other party to enter into the contract,
participate in the arbitration and cause the In either case, compliance with the requirement of
implementation of the result. A foreign corporation, license, or the fact that the suing corporation is
although not licensed to do business in the exempt therefrom, as the case may be, cannot be
Philippines, may seek recognition and enforcement inferred from the mere fact that the party suing is a
of the foreign arbitral award in accordance with the foreign corporation. The qualifying circumstance
provisions of the Alternative Dispute Resolution Act being an essential part of the plaintiff’s capacity to
of 2004. (Tuna Processing Inc., v. Philippine Kingford sue must be affirmatively pleaded. Hence, the
Inc., G.R. No. 185582, 29 Feb. 2012) ultimate fact that a foreign corporation is not
doing business in the Philippines must first be
Foreign Corporation Not Doing Business in the disclosed for it to be allowed to sue in Philippine
Philippines Must Disclose Such Fact to Sue in courts under the isolated transaction rule.
Philippine Courts Failing in his requirement, the complaint filed by
plaintiff with the trial court, it must be said, fails to
A foreign corporation that is not doing business in show its legal capacity to sue. (Llorente v. Star City
the Philippines must disclose such fact if it desires Pty. Ltd., G.R. No. 212050, 15 Jan. 2020, J. Caguioa)
to sue in Philippine courts under the "isolated
transaction rule" because without such disclosure, Suability of Foreign Corporations
the court may choose to deny it the right to sue.
A foreign corporation lawfully doing business in the
While the law (presently the RCC or its predecessor, Philippines shall be bound by all laws, rules, and
the Corporation Code) grants to foreign regulations applicable to domestic corporations of
corporations with Philippine license the right to sue the same class, except those which provide for the
in the Philippines, the Court, however, in a long line creation, formation, organization or dissolution of
of cases under the regime of the Corporation Code corporations or those which fix the relations,
has held that a foreign corporation not engaged in liabilities, responsibilities, or duties of stockholders,
business in the Philippines may not be denied the members, or officers of corporations to each other
right to file an action in the Philippine courts for an or to the corporation.(Sec. 146, RCC)
isolated transaction. The issue on whether a foreign
corporation which does not have license to engage A Foreign Corporation Doing Business in the
in business in the Philippines can seek redress in Philippines Without License may be Sued in the
Philippine courts depends on whether it is doing Country
business or it merely entered into an isolated
transaction. A foreign corporation that is not doing At this juncture it must be emphasized that a foreign
business in the Philippines must disclose such fact if corporation doing business in the Philippines with

2022 GOLDEN NOTES
Corporation Law
or without license is subject to process and and Sons, G.R. No. 147724, 08 June 2004)
jurisdiction of the local courts. If such corporation is
properly licensed, well and good. But it shall not be Q: Star City PTY Limited (SCPL) is an Australian
allowed, under any circumstances, to invoke its lack corporation which operates the Star City Casino
of license to impugn the jurisdiction of our courts. in Sydney, New South Wales, Australia. Claiming
(Marubeni Nedeland BV v. Tensuan, G.R. No. 61950, that it is not doing business in the Philippines
28 Sept. 1990) and is suing for an isolated transaction, it filed a
complaint for collection of sum of money with
Isolated Transaction prayer for preliminary attachment against
Quintin Artacho Llorente (Llorente), who was a
The execution of the policy is a single act, an isolated patron of its Star City casino and Equitable PCI
transaction. This Court has not construed the term Bank (EPCIB).
“isolated transaction” to literally mean “one” or a
mere single act. In Eriks Pte. Ltd. vs. CA, this Court Llorente is one of the numerous patrons of its
held that: casino in Sydney, Australia. As such, he
maintained therein a Patron Account. Llorente
. . . What is determinative of "doing business" is not negotiated two EPCIB drafts in order to play in
really the number or the quantity of the the Premium Programme of the casino. SCPL
transactions, but more importantly, the intention of deposited the subject drafts, but it received an
an entity to continue the body of its business in the advice of Bank of New York about the "Stop
country. The number and quantity are merely Payment Order" prompting it to make several
evidence of such intention. The phrase "isolated demands upon Llorente to make good his
transaction" has a definite and fixed meaning, i.e. a obligation. However, the latter refused to pay. It
transaction or series of transactions set apart from likewise asked EPCIB for a settlement which the
the common business of a foreign enterprise in the latter denied on the ground that it was Llorente
sense that there is no intention to engage in a who requested the Stop Payment Order and no
progressive pursuit of the purpose and object of the notice of dishonor was given. Does SCPL have the
business organization. Whether a foreign legal personality to sue?
corporation is "doing business" does not necessarily
depend upon the frequency of its transactions, but A: YES. In the case at bar, SCPL alleged in its
more upon the nature and character of the complaint that "it is a foreign corporation which
transactions. operates its business at the Star City Casino in
Sydney, New South Wales, Australia; that it is not
In the case of Gonzales v. Raquiza, et al., three doing business in the Philippines; and that it is suing
contracts, hence three transactions were challenged upon a singular and isolated transaction". (Llorente
as void on the ground that the three American v. Star City PTY Ltd., supra, J. Caguioa)
corporations which are parties to the contracts are
not licensed to do business in the Philippines. This Q: May a foreign corporation not engaged in
Court held that “one single or isolated business business in the Philippines and a national of a
transaction does not constitute doing business country which is a party to any convention,
within the meaning of the law. Transactions which treaty, or agreement relating to intellectual
are occasional, incidental, and casual — not of a property rights or the repression of unfair
character to indicate a purpose to engage in competition, to which the Philippines is also a
business — do not constitute the doing or engaging party or extend reciprocal rights sue in
in business as contemplated by law. Where the trademark or service mark enforcement action?
three transactions indicate no intent by the foreign
corporation to engage in a continuity of A: YES. The foreign corporation mentioned above
transactions, they do not constitute doing business may sue in trademark or service mark enforcement
in the Philippines.” (Lorenzo Shipping Corp., v. Chubb action. This is in accordance with Section 160, in

Commercial Law
relation to Section 3 of R.A. No. 8393, The The exception to this rule is the doctrine of estoppel.
Intellectual Property Code. (Sehwani Inc. v. In-n-Out Global is estopped from challenging Surecomp's
Burger, G.R. No. 171053, 15 Oct. 2007) capacity to sue.
Q: Surecomp, a foreign corporation duly A foreign corporation doing business in the

organized and existing under the laws of the Philippines without license may sue in Philippine
Netherlands, entered into a software license courts a Filipino citizen or a Philippine entity that
agreement with ABC, a domestic corporation, for had contracted with and benefited from it. A party is
the use of its IMEX Software System (System) in estopped from challenging the personality of a
the bank’s computer system for a period of corporation after having acknowledged the same by
twenty (20) years. ABC merged with Global entering into a contract with it. The principle is
Business Holdings, Inc. (Global), with Global as applied to prevent a person contracting with a
the surviving corporation. foreign corporation from later taking advantage of
its noncompliance with the statutes, chiefly in cases
When Global took over the operations of ABC, it where such person has received the benefits of the
found the System unworkable for its operations contract. (Global Business Holdings, Inc., v. Surecomp
and informed Surecomp of its decision to Software, B.V., G.R. No. 173463, 13 Oct. 2010)
discontinue the agreement and to stop further
payments thereon. Consequently, for failure of Grounds for Revocation of License
Global to pay its obligations under the
agreement despite demands, Surecomp filed a Without prejudice to other grounds provided by
complaint for breach of contract with damages special laws, the license of a foreign corporation to
before the RTC. transact business in the Philippines may be revoked
or suspended by the SEC upon any of the following
In its complaint, Surecomp alleged that it is a grounds:
foreign corporation not doing business in
the Philippines and is suing on an isolated 1. Failure to file its annual report or pay any fees
transaction. Pursuant to the agreement, it as required by the Code;
installed the System in ABC’s computers for a 2. Failure to appoint and maintain a resident
consideration of US$298,000.00 as license fee. agent in the Philippines;
Global filed a motion to dismiss on the ground 3. Failure, after change of its resident agent or of
that Surecomp had no capacity to sue because it his address, to submit to the Securities and
was doing business in the Philippines without a Exchange Commission a statement of such
license. Is Global estopped from questioning change;
Surecomp’s capacity to sue? 4. Failure to submit to the SEC an authenticated
copy of any amendment to its AOI or by-laws or
A: YES, Global is estopped. A corporation has a legal of any articles of merger or consolidation within
status only within the state or territory in which it the time prescribed by the Corporation Code;
was organized. For this reason, a corporation 5. A misrepresentation of any material matter in
organized in another country has no personality to any application, report, affidavit or other
file suits in the Philippines. In order to subject a document submitted by such corporation
foreign corporation doing business in the country to pursuant to this Title;
the jurisdiction of our courts, it must acquire a 6. Failure to pay any and all taxes, imposts,
license from the Securities and Exchange assessments, or penalties, if any, lawfully due to
Commission and appoint an agent for service of the Philippine Government or any of its
process. Without such license, it cannot institute a agencies or political subdivisions;
suit in the Philippines. 7. Transacting business in the Philippines outside
of the purpose or purposes for which such
corporation is authorized under its license;

2022 GOLDEN NOTES
Corporation Law
8. Transacting business in the Philippines as agent natural person who is licensed to exercise a
of or acting for and on behalf of any foreign profession may not organize as a One Person
corporation or entity not duly licensed to do Corporation for the purpose of exercising such
business in the Philippines; or profession except as otherwise provided under
9. Any other ground as would render it unfit to special laws. (Ibid.)
transact business in the Philippines. (Sec. 151,
RCC) Q: A single parent started a plant-based/vegan
meal delivery service during the COVID-19
Upon the revocation of the license to transact pandemic using only the resources available in
business in the Philippines, a certificate of the kitchen and in a nearby market. After just six
revocation shall be issued by the SEC. A copy thereof months, the single parent needed to expand by
shall be furnished to the appropriate government hiring cooks, kitchen staff, and finance and
agency in the proper cases. The SEC shall also mail administrative personnel. A bank told the single
to the corporation at its registered office in the parent that it was ready to fund the small
Philippines a notice of such revocation accompanied business but the parent needed to be registered
by a copy of the certificate of revocation. (Sec. 152, with the proper government regulatory
RCC) agencies.
Withdrawal of License Friends advised the single parent that

registering as a single proprietorship would
Subject to existing laws and regulations, a foreign make their personal assets vulnerable in case
corporation licensed to transact business in the the business takes a downturn. The single
Philippines may be allowed to withdraw from the parent now comes to you for legal advice,
Philippines by filing a petition for withdrawal of wanting to have the limited liability of a
license. No certificate of withdrawal shall be issued corporation but is unwilling to take in partners
by the Commission unless all the following in the business that would stiffly their culinary
requirements are met: creativity.
1. All claims which have accrued in the Philippines Under the Revised Corporation Code, is it legally
have been paid, compromised, or settled; possible for the single parent to register as a
2. All taxes, imposts, assessments, and penalties, if corporation with only the single parent as
any, lawfully due to the Philippine Government stockholder? Explain briefly. (2020-21 BAR)
or any of its agencies or political subdivisions
have been paid; and A: The Revised Corporation Code eliminated the
3. The petition for withdrawal of license has been minimum number of incorporators for corporations
published once a week for three (3) consecutive (Sec. 10, RCC). It also allows natural persons, trust
weeks in a newspaper of general circulation in and estate to organize a corporation with a single
the Philippines. (Sec. 152, RCC) stockholder (Sec. 116, RCC). The law makes no
distinction as to the civil status of natural persons
4. ONE-PERSON CORPORATIONS who can organize a one person corporation. Thus, a
single parent may register as a corporation with
A corporation with a single stockholder: Provided, only himself/herself as stockholder.
that only a natural person, trust, or an estate may
form a One Person Corporation. (Sec. 116, RCC) Minimum Capital Stock NOT Required
Banks and quasi-banks, pre-need, trust, insurance, A One Person Corporation shall not be required to
public and publicly listed companies, and non- have a minimum authorized capital stock except as
chartered GOCCs may not incorporate as One otherwise provided by special law. (Sec. 117, RCC)
Person Corporations: Provided, further, That a

Commercial Law
Contents of the AOI The single stockholder may not be appointed as

corporate secretary. A single stockholder who is
A One Person Corporation shall file AOI in likewise the self-appointed treasurer of the
accordance with the requirements under Sec. 14 of corporation shall give a bond to the Commission in
the RCC. It shall likewise substantially contain the such a sum as may be required. The bond shall be
following: renewed every two (2) years or as often as may be
required.
1. If the single stockholder is a trust or an estate,
the name, nationality, and residence of the Provided, That, the said stockholder/treasurer shall
trustee, administrator, executor, guardian, undertake in writing to faithfully administer the
conservator, custodian, or other person One Person Corporation’s funds to be received as
exercising fiduciary duties together with the treasurer, and to disburse and invest the same
proof of such authority to act on behalf of the according to the AOI as approved by the
trust or estate; and Commission. (Ibid.)
2. Name, nationality, residence of the nominee Special Functions of the Corporate Secretary
and alternate nominee, and the extent,
coverage, and limitation of the authority. (Sec. In addition to the functions designated by the One
118, RCC) Person Corporation, the corporate secretary shall:
By-Laws 1. Be responsible for maintaining the minutes

book and/or records of the corporation;
The One Person Corporation is not required to
submit and file corporate bylaws. (Sec. 119, RCC) 2. Notify the nominee or alternate nominee of the
death or incapacity of the single stockholder,
Display of Corporate Name which notice shall be given no later than five (5)
days from such occurrence;
A One Person Corporation shall indicate the letters
“OPC” either below or at the end of its corporate 3. Notify the Commission of the death of the single
name. (Sec. 120, RCC) stockholder within five (5) days from such
occurrence and stating in such notice the
Single Stockholder as Director, President names, residence addresses, and contact details
of all known legal heirs; and
The single stockholder shall be the sole director and
president of the One Person Corporation. (Sec. 121, 4. Call the nominee or alternate nominee and the
RCC) known legal heirs to a meeting and advise the
legal heirs with regard to, among others, the
Treasurer, Corporate Secretary, and Other election of a new director, amendment of the
Officers AOI, and other ancillary and/or consequential
matters. (Sec. 123, RCC)
Within fifteen (15) days from the issuance of its
certificate of incorporation, the One Person Nominee and Alternate Nominee
Corporation shall appoint a treasurer, corporate
secretary, and other officers as it may deem The single stockholder shall designate a nominee
necessary, and notify the Commission thereof and an alternate nominee who shall, in the event of
within five (5) days from appointment. (Sec. 122, the single stockholder’s death or incapacity, take the
RCC) place of the single stockholder as director and shall
manage the corporation’s affairs.

2022 GOLDEN NOTES
Corporation Law
The AOI shall state the names, residence addresses Minutes Book
and contact details of the nominee and alternate
nominee, as well as the extent and limitations of A One Person Corporation shall maintain a minutes
their authority in managing the affairs of the One book which shall contain all actions, decisions, and
Person Corporation. resolutions taken by the One Person Corporation.
(Sec. 127, RCC)
The written consent of the nominee and alternate
nominee shall be attached to the application for Records in Lieu of Meetings
incorporation. Such consent may be withdrawn in
writing any time before the death or incapacity of When action is needed on any matter, it shall be
the single stockholder. (Sec. 124, RCC) sufficient to prepare a written resolution, signed
and dated by the single stockholder, and recorded in
Term of Nominee and Alternate Nominee the minutes book of the One Person Corporation.
The date of recording in the minutes book shall be
1. When the incapacity of the single stockholder deemed to be the date of the meeting for all
is temporary – the nominee shall sit as director purposes under this Code. (Sec. 128, RCC)
and manage the affairs of the One Person
Corporation until the stockholder, by self- Reportorial Requirements
determination, regains the capacity to assume
such duties. The One Person Corporation shall submit the
following within such period as the Commission
2. In case of death or permanent incapacity of may prescribe:
the single stockholder – the nominee shall sit
as director and manage the affairs of the One 1. Annual financial statements audited by an
Person Corporation until the legal heirs of the independent certified public accountant:
single stockholder have been lawfully Provided, That if the total assets or total
determined, and the heirs have designated one liabilities of the corporation are less than Six
of them or have agreed that the estate shall be Hundred Thousand Pesos (P600,000.00), the
the single stockholder of the One Person financial statements shall be certified under
Corporation. oath by the corporation’s treasurer and
president.
The alternate nominee shall sit as director and 2. A report containing explanations or comments
manage the One Person Corporation in case of the by the president on every qualification,
nominee’s inability, incapacity, death, or refusal to reservation, or adverse remark or disclaimer
discharge the functions as director and manager of made by the auditor in the latter’s report;
the corporation, and only for the same term and 3. A disclosure of all self-dealings and related
under the same conditions applicable to the party transactions entered into between One
nominee. (Sec. 125, RCC) Person Corporation and the single stockholder;
and
Change of Nominee or Alternate Nominee 4. Other reports as the Commission may require.
(Sec. 129, RCC)
The single stockholder may, at any time, change its
nominee and alternate nominee by submitting to For purposes of this provision, the fiscal year of a
the Commission the names of the new nominees and One Person Corporation shall be that set forth in its
their corresponding written consent. For this AOI or, in the absence thereof, the calendar year.
purpose, the AOI need not be amended. (Sec. 126,
RCC) The Commission may place the corporation under
delinquent status should the corporation fail to
submit the reportorial requirements three (3)

Commercial Law
times, consecutively or intermittently, within a the conversion into an ordinary stock corporation.
period of five (5) years. (Ibid.) If all requirements have been complied with, the
Commission shall issue an amended certificate of
Liability of Single Shareholder incorporation reflecting the conversion. (Sec. 132,
RCC)
A sole shareholder claiming limited liability has the
burden of affirmatively showing that the In case of death of the single stockholder, the
corporation was adequately financed. nominee or alternate nominee shall transfer the
shares to the duly designated legal heir or estate
Where the single stockholder cannot prove that the within seven (7) days from receipt of either an
property of the One Person Corporation is affidavit of heirship or self-adjudication executed by
independent of the stockholder’s personal property, a sole heir, or any other legal document declaring
the stockholder shall be jointly and severally liable the legal heirs of the single stockholder and notify
for the debts and other liabilities of the One Person the Commission of the transfer. Within sixty (60)
Corporation. days from the transfer of the shares, the legal heirs
shall notify the Commission of their decision to
The principle of piercing the corporate veil applies either wind up and dissolve the One Person
with equal force to One Person Corporations as with Corporation or convert it into an ordinary stock
other corporations. (Sec. 130, RCC) corporation. (Ibid.)
Conversion from an Ordinary Corporation to a The ordinary stock corporation converted from a
One Person Corporation One Person Corporation shall succeed the latter and
be legally responsible for all the latter’s outstanding
When a single stockholder acquires all the stocks of liabilities as of the date of conversion. (Ibid.)
an ordinary stock corporation, the latter may apply
for conversion into a One Person Corporation,
subject to the submission of such documents as the
Commission may require. If the application for
conversion is approved, the Commission shall issue
a certificate of filing of amended AOI reflecting the
conversion.
The One Person Corporation converted from an

ordinary stock corporation shall succeed the latter
and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.
(Sec. 131, RCC)
Conversion from a One Person Corporation to an

Ordinary Stock Corporation
A One Person Corporation may be converted into an

ordinary stock corporation after due notice to the
Commission of such fact and of the circumstances
leading to the conversion, and after compliance with
all other requirements for stock corporations under
this Code and applicable rules. Such notice shall be
filed with the Commission within sixty (60) days
from the occurrence of the circumstances leading to

2022 GOLDEN NOTES
Corporation Law
Merger vs. De Facto Merger

I. MERGERS AND CONSOLIDATIONS
DE FACTO MERGER
MERGER
(2016 BAR)
Merger is a re-
1. CONCEPT
organization of two or
more corporations that
Common Forms of Corporate Combinations Can be pursued by
results in their
one corporation
consolidating into a
1. Sale of Assets – One corporation sells all or acquiring all or
single corporation, which
substantially all of its assets to another. Such substantially all of
is one of the constituent
sale, usually, though not necessarily made in the the properties of
corporations, one
course of the dissolution of the vendor another corporation
disappearing or
corporation. in exchange of
dissolving and the other
shares of stock of the
surviving. To put it
2. Lease of Assets – A corporation, without being acquiring
another way, merger is
dissolved, leases its property to another corporation. The
the absorption of one or
corporation for which the lessor merely acquiring
more corporations by
receives rental paid by the lessee. This is similar corporation would
another existing
to the sale of assets, except that under a lease, end up with the
corporation, which
nothing passes, except the right to use the business enterprise
retains its identity and
property leased. of the target
takes over the rights,
corporation;
privileges, franchises,
3. Sale of Stock – The purpose of a holding whereas, the target
properties, claims,
corporation is to acquire a sufficient amount of corporation would
liabilities and obligations
the stock of another corporation for the end up with
of the absorbed
purpose of acquiring control. The acquiring basically its only
corporation(s). The
corporation is called the parent/ holding remaining assets
absorbing corporation
company. The corporation whose stocks were being the shares of
continues its existence
acquired is the subsidiary. stock of the
while the life or lives of
acquiring
the other corporation(s)
4. Merger – Two (2) or more corporations may corporation.
is or are terminated.
merge into a single corporation which shall be (Ibid.)
(Bank of Commerce v.
one of the constituent corporations (Sec. 75, Radio Philippines
RCC)
Network, Inc., et al., G.R.
No. 195615, 21 Apr. 2014)
5. Consolidation – Two (2) or more corporations
may consolidate into a new single corporation
Asset Sale vs. Stock Sale
which shall be the consolidated corporation.
ASSET SALE STOCK SALE
The individual or
The corporate entity corporate
sells all or substantially shareholders sell a
all of its assets to controlling block of
another entity. stock to new or
existing shareholders.
The seller in good faith Notwithstanding the
is authorized to stock sale, the
dismiss the affected corporation continues

Commercial Law
employees but is liable to be the employer of Was there a transfer of business such that
for the payment of its people and Samson, being an innocent transferee, has no
separation pay under continues to be liable obligation to retain the employment of Gaspar,
the law. The buyer in for the payment of et al.?
good faith, on the other their just claims.
hand, is not obliged to Furthermore, the A: NO. There was no transfer of the business
absorb the employees corporation or its new establishment to speak of, but merely a change in
affected by the sale, nor majority shareholders the new majority shareholders of the corporation.
is it liable for the are not entitled to
payment of their lawfully dismiss There are two types of corporate acquisitions: asset
claims. The most that it corporate employees sales and stock sales. In contrast with asset sales,
may do, for reasons of absent a just or in which the assets of the selling corporation are
public policy and social authorized cause. transferred to another entity, the transaction in
justice, is to give (Ibid.) stock sales takes place at the shareholder level.
preference to the Because the corporation possesses a personality
qualified separated separate and distinct from that of its shareholders,
personnel of the selling a shift in the composition of its shareholders will not
firm. (SME Bank, Inc., et affect its existence and continuity. Thus,
al., v. Gaspar, et al., G.R. notwithstanding the stock sale, the corporation
Nos. 184517 & 186641, continues to be the employer of its people and
8 Oct. 2013) continues to be liable for the payment of their just
claims. Furthermore, the corporation or its new
Q: One of the stipulations in the sale of SME Bank majority shareholders are not entitled to lawfully
to Abelardo Samson was that Agustin and De dismiss corporate employees absent a just or
Guzman, the majority stockholders, and authorized cause.
corporate directors of SME, shall
terminate/retire its employees. At the behest of In the case at bar, the Letter Agreements show that
Samson’s wife, SME’s general manager urged its their main object is the acquisition by the Samson
employees, respondents Gaspar, et al., to tender Group of 86.365% of the shares of stock of SME
their resignations on the promise that they will Bank. Hence, this case involves a stock sale,
be rehired. The majority shares of SME were whereby the transferee acquires the controlling
then sold to the Sps. Samson, and SME did not shares of stock of the corporation. Thus, following
rehire De Guzman, et al. the rule in stock sales, respondent employees may
not be dismissed except for just or authorized
Gaspar, et al. filed a complaint for illegal causes under the Labor Code.
dismissal against SME, Samson, Agustin and De
Guzman. The LA ruled that the labor buyer of an The transfer only involved a change in the equity
enterprise is not bound to absorb its employees, composition of the corporation. To reiterate, the
unless there is an express stipulation to the employees are not transferred to a new employer,
contrary. The NLRC found that there was only a but remain with the original corporate employer,
mere transfer of shares – and therefore, a mere notwithstanding an equity shift in its majority
change of management – from Agustin and De shareholders. This being so, the employment status
Guzman to the Samson Group. As the change of of the employees should not have been affected by
management was not a valid ground to the stock sale. A change in the equity composition of
terminate respondent bank employees, the the corporate shareholders should not result in the
NLRC ruled that they had indeed been illegally automatic termination of the employment of the
dismissed. corporation’s employees. Neither should it give the
new majority shareholders the right to legally

2022 GOLDEN NOTES
Corporation Law
dismiss the corporation’s employees, absent a just deleting the phrase that the P & A agreement
or authorized cause. was a farce or a mere tool to effectuate a merger
or consolidation between TRB and BOC. The CA
It is thus erroneous on the part of the corporation to limited the execution to TRB’s properties found
consider the employees as terminated from their in BOC’s possession.
employment when the sole reason for so doing is a
change of management by reason of the stock sale. The RTC issued an alias writ of execution against
The conformity of the employees to the BOC, and BOC sought reconsideration of the
corporation’s act of considering them as terminated same considering that the CA declared that no
and their subsequent acceptance of separation pay merger existed between BOC and TRB. The RTC
does not remove the taint of illegal dismissal. denied BOC’s motion.
Acceptance of separation pay does not bar the
employees from subsequently contesting the a. Was there a merger between BOC and TRB?
legality of their dismissal, nor does it estop them b. Should BOC be considered as RPN, et al.’s
from challenging the legality of their separation judgment debtor?
from the service. (SME Bank, Inc., et al., v. Gaspar, et
al., supra) A:
a. NO. What happened is that TRB sold, and BOC
Q: Petitioner Bank of Commerce (BOC) and purchased identified recorded assets of TRB in
Traders Royal Bank (TRB) executed a Purchase consideration of BOC’s assumption of identified
and Assumption agreement, where the former recorded liabilities of TRB including booked
acquired the latter’s specified assets and contingent accounts. There is no law that
liabilities, excluding liabilities arising from prohibits this kind of transaction especially
judicial actions which were covered by a BSP- when it is done openly and with appropriate
mandated escrow fund of P50 million. Shortly government approval. In a strict sense, no
after, the Supreme Court, in TRB v. RPN, ordered merger or consolidation took place as the
TRB to pay respondents Radio Philippines records do not show any plan or articles of
Network, Intercontinental Broadcasting merger or consolidation.
Corporation, and Banahaw Broadcasting
Corporation (RPN, et al.) actual damages with No de facto merger took place in the present
legal interest. RPN, et al. filed a motion for case simply because the TRB owners did not get
execution against TRB before the RTC. But an equivalent value in BOC shares of stock in
rather than pursue a levy in execution of the exchange for the bank’s assets and liabilities.
corresponding amounts on escrow, RPN, et al. BOC and TRB agreed with BSP’s approval to
filed a Supplemental Motion for Execution exclude from the sale the TRB’s contingent
where they described TRB as “now BOC” based judicial liabilities, including those owing to RPN,
on the assumption that TRB had been merged et al.
into BOC.
The Bureau of Internal Revenue (BIR) treated
BOC opposed RPN, et al.’s motion and denied the transaction between the two banks purely
that there was a merger between itself and TRB. as a sale of specified assets and liabilities when
The RTC granted the writ of execution to cover it rendered its opinion on the tax consequences
all assets of TRB, including those subject of the P of the transaction given that there is a
& A agreement. The RTC held that the P & A difference in tax treatment between a sale and
agreement was a mere tool to effectuate merger. a merger or consolidation.
BOC appealed to the CA, which affirmed with b. NO. First, BOC agreed to assume those liabilities
modification the RTC decision, by declaring that of TRB that are specified in their P & A
no merger existed between BOC and TRB and Agreement. That agreement specifically

Commercial Law
excluded TRB’s contingent liabilities that the Merger vs. Consolidation

latter might have arising from pending
litigations in court, including the claims of RPN, MERGER CONSOLIDATION
et al. Definition
One where a
Second, as already pointed out above, the sale
corporation absorbs One where a new
did not amount to merger or de facto merger of
another corporation corporation is created
Bancommerce and TRB since the elements
and remains in and consolidating
required of both were not present.
existence while others corporations are
are dissolved. (Sec. 75, extinguished. (Ibid.)
Third, the evidence in this case fails to show that
RCC)
BOC was a mere continuation of TRB. TRB
retained its separate and distinct identity after Consequent Dissolution of a
the purchase. Although it subsequently changed Corporation or Corporations
its name to Traders Royal Holding’s, Inc. such
change did not result in its dissolution. All of the constituent All consolidated
corporations involved corporations are
Fourth, to protect contingent claims, the BSP are dissolved except dissolved without
directed BOC and TRB to put up P50 million in one. exception.
escrow with another bank. It was the BSP, not Consequent Creation of a New Corporation
BOC that fixed the amount of the escrow.
Consequently, it cannot be said that the latter No new corporation is A new corporation
bank acted in bad faith with respect to the created. emerges.
excluded liabilities. They did not enter into the
P & A Agreement to enable TRB to escape from Acquisition of Assets, Liabilities,
its liability to creditors with pending court Capital Stock
cases. The surviving All assets, liabilities,
corporation acquires and capital stock of all
Since there had been no merger, BOC cannot be all the assets, consolidated
considered as TRB’s successor-in-interest and liabilities, and capital corporations are
against which the Court’s Decision in TRB v. RPN stock of all constituent transferred to the new
may be enforced. BOC did not hold the former corporations. corporation.
TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latter’s
Q: Where one corporation sells or otherwise
liabilities to RPN, et al. BOC bought and
transfers all of its assets to another corporation,
acquired those assets and thus, became their
is the latter liable for the debts and liabilities of
absolute owner.
the transferor?
The enforcement, therefore, of the decision in

A: GR: NO.
the main case should not include the assets and
properties that BOC acquired from TRB. These
XPNs:
have ceased to be assets and properties of TRB
1. Where the purchaser expressly or impliedly
under the terms of the BSP-approved P & A
agrees to assume such debts;
Agreement between them. They are not TRB
2. Where the transaction amounts to a
assets and properties in the possession of BOC.
consolidation or merger of the corporations;
(Bank of Commerce v. Radio Philippines
3. Where the purchasing corporation is merely a
Network, Inc., et al., supra)
continuation of the selling corporation; and
4. Where the transaction is entered into
fraudulently to escape liability for such debts.

2022 GOLDEN NOTES
Corporation Law
(Nell Co. vs. Pacific Farms, Inc., G.R. No. L-20850, corporation and does not depend on any deceit
29 Nov. 1965) committed by the transferee corporation, then
fraud is certainly not an element of the business
NOTE: The Nell Doctrine states the general rule enterprise doctrine. Indeed, the transferee
that the transfer of all the assets of a corporation to corporation may inherit the liabilities of the
another shall not render the latter liable to the transferor despite the lack of fraud due to the
liabilities of the transferor. If any of the above-cited continuity of the latter’s business. (Y-I Leisure
exceptions are present, then the transferee Philippines, Inc. v. Yu, G.R. No. 207161, 08 Sept. 2015)
corporation shall assume the liabilities of the
transferor. (2017 BAR) Q: E Co. sold its assets to M Inc. after complying
with the requirements of the Bulk Sales Law.
See also discussion on the Nell Doctrine – page 132. Subsequently, one of the creditors of E Co. tried
to collect the amount due it but found out that E
Business-Enterprise Transfer Co. has no more assets left. The creditors sued M
Inc. on the theory that M Inc. is a mere alter ego
The transferee corporation’s interest goes beyond of E Co. Will the suit prosper? (1996 BAR)
the assets of the transferor’s assets and its desires
to acquire the latter’s business enterprise, including A: NO. The suit will not prosper. The sale by E Co. of
its goodwill. its assets to M Inc. did not result in the transfer of
liabilities of the latter to, nor in the assumption
Sec. 40 (now Sec. 39, RCC) suitably reflects the therefore by, the former. The facts given do not
business-enterprise transfer under the exception of indicate that such transfer or assumption took place
the Nell Doctrine because the purchasing or or was stipulated upon by the parties in their
transferee corporation necessarily continued the agreement. Furthermore, the sale by E Co. of its
business of the selling or transferor corporation. assets is a sale of its property. It does not involve the
Given that the transferee corporation acquired not sale of the shares of stock of the corporation
only the assets but also the business of the belonging to its stockholders. There is therefore no
transferor corporation, then the liabilities of the merger or consolidation that took place. E Co.
latter are inevitably assigned to the former. Sec. 39 continues to exist and remains liable to the creditor.
refers to the sale, lease, exchange or disposition of
all or substantially all of the corporation's assets, Contents of a Plan of Merger or Consolidation
including its goodwill. The sale under this provision
does not contemplate an ordinary sale of all The BOD/BOT of each corporation party to the
corporate assets; the transfer must be of such merger or consolidation shall approve a plan of
degree that the transferor corporation is rendered merger or consolidation which set forth the
incapable of continuing its business or its corporate following:
purpose.
1. The names of the corporations proposing to
The purpose of the business-enterprise transfer is merge or consolidate, hereinafter referred to as
to protect the creditors of the business by allowing the constituent corporations;
them a remedy against the new owner of the assets 2. The terms of the merger or consolidation and
and business enterprise. Otherwise, creditors the mode of carrying the same into effect;
would be left “holding the bag,” because they may 3. A statement of the changes, if any, in the AOI of
not be able to recover from the transferor who has the surviving corporation in case of a merger;
“disappeared with the loot,” or against the and, with respect to the consolidated
transferee who can claim that he is a purchaser in corporation in case of consolidation, all the
good faith and for value. Based on the foregoing, as statements required to be set forth in the AOI
the exception of the Nell doctrine relates to the for corporations organized under the RCC; and
protection of the creditors of the transferor

Commercial Law
4. Such other provisions with respect to the this Code: Provided, that if after the approval by the
proposed merger or consolidation as are stockholders of such plan, the BOD should decide to
deemed necessary or desirable. (Sec. 75, RCC) abandon the plan, the appraisal right shall be
extinguished. (Sec. 76, RCC)
Approval of the Plan of Merger or Consolidation
Articles of Merger or Consolidation
The plan of merger or consolidation must be
approved by: After the approval by the stockholders or members
as required by Sec. 76, articles of merger or articles
1. Majority vote of each of the BOD/ BOT of the of consolidation shall be executed by each of the
constituent corporations; and constituent corporations, to be signed by the
2. Submitted for approval by the stockholders or president or vice president and certified by the
members of each of such corporations at secretary or assistant secretary of each corporation
separate corporate meetings duly called for the setting forth:
purpose.
3. Notice of such meetings shall be given to all a. The plan of the merger or the plan of
stockholders or members of the respective consolidation;
corporations in the same manner as giving b. As to stock corporations, the number of shares
notice of regular or special meetings under outstanding, or in the case of nonstock
Section 49 of the RCC The notice shall state the corporations, the number of members;
purpose of the meeting and include a copy or a c. As to each corporation, the number of shares or
summary of the plan of merger or members voting for or against such plan,
consolidation. respectively;
4. The affirmative vote of the stockholders d. The carrying amounts and fair values of the
representing at least 2/3 of the OCS of each assets and liabilities of the respective
corporation in the case of stock corporations or companies as of the agreed cut-off date;
at least 2/3 of the members in the case of non- e. The method to be used in the merger or
stock corporations, shall be necessary for the consolidation of accounts of the companies;
approval of such plan. (Sec. 76, RCC) f. The provisional or pro-forma values, as merged
or consolidated, using the accounting method;
Amendment of a Plan of Merger or Consolidation and
g. Such other information as may be prescribed by
Any amendment may be made, provided such the Commission. (Sec. 77, RCC)
amendment is approved by majority vote of the
respective BOD/BOT of all the constituent The articles of merger or of consolidation, signed
corporations and ratified by the affirmative vote of and certified as required by the RCC, shall be
stockholders representing at least 2/3 of the OCS or submitted to the SEC for its approval. (Sec. 78, RCC)
2/3 of the members of each of the constituent
corporations. (Sec. 76, RCC) NOTE: In the case of merger or consolidation of
banks or banking institutions, loan associations,
NOTE: Such plan, together with any amendment, trust companies, insurance companies, public
shall be considered as the agreement of merger or utilities, educational institutions, and other special
consolidation. corporations governed by special laws, the
favorable recommendation of the appropriate
Appraisal Right is Available to a Dissenting government agency shall first be obtained (Ibid.)
Stockholder to a Plan of Merger or Consolidation
Any dissenting stockholder in stock corporations

may exercise his appraisal right in accordance with

2022 GOLDEN NOTES
Corporation Law
When Hearing is Set A: NO. The merger was not valid. Merger does not
become effective upon the mere agreement of the
If, upon investigation, the SEC has reason to believe constituent corporations. Since a merger or
that the proposed merger or consolidation is consolidation involves fundamental changes in the
contrary to or inconsistent with the provisions of corporation, as well as in the rights of stockholders
the RCC or existing laws, it shall set a hearing to give and creditors, there must be an express provision of
the corporations concerned the opportunity to be law authorizing them.
heard. Written notice of the date, time, and place of
hearing shall be given to each constituent The merger shall only be effective upon the issuance
corporation at least two (2) weeks before said of a certificate of merger by the SEC, subject to its
hearing. The SEC shall thereafter proceed as prior determination that the merger is not
provided in the RCC. (Ibid.) inconsistent with the Corporation Code or existing
laws.
Effectivity
In this case, it is undisputed that the articles of
If the SEC is satisfied that the merger or merger between FISLAI and DSLAI were not
consolidation of the corporations concerned is registered with the SEC due to incomplete
consistent with the provisions of the RCC and documentation. Consequently, the SEC did not issue
existing laws, it shall issue a certificate approving the required certificate of merger. Even if it is true
the articles and plan of merger or of consolidation, that the Monetary Board of the Central Bank of
at which time the merger or consolidation shall be the Philippines recognized such merger, the fact
effective. (Ibid.) remains that no certificate was issued by the SEC.
Such merger is still incomplete without
Q: FISLAI and DSLAI entered into a merger, with the certification.
DSLAI as the surviving corporation. The articles
of merger were not registered with the SEC due The issuance of the certificate of merger is crucial
to incomplete documentation. DSLAI changed its because not only does it bear out SEC’s approval but
corporate name to MSLAI. The business of it also marks the moment when the consequences of
MSLAI, however, failed. Prior to the closure of a merger take place. By operation of law, upon the
MSLAI, Remedios Uy filed an action for effectivity of the merger, the absorbed corporation
collection of sum of money against FISLAI. The ceases to exist but its rights and properties, as well
RTC ruled in favor of Uy and hence, six (6) as liabilities, shall be taken and deemed transferred
parcels of land owned by FISLAI were sold to to and vested in the surviving corporation.
Willkom, the highest bidder. (Mindanao Savings and Loan Association, Inc., et al.,
v. Willkom, et al., G.R. No. 178618, 11 Oct. 2010)
MSLAI filed a complaint for annulment of
sheriff’s sale. Willkom, et al., averred that MSLAI 2. EFFECTS AND LIMITATIONS
had no cause of action against them or the right
to recover the subject properties because MSLAI 1. The constituent corporations shall become a
is a separate and distinct entity from FISLAI. single corporation which:
They further contended that the “unofficial
merger” between FISLAI and DSLAI (now MSLAI) a. In case of merger, shall be the surviving
did not take effect considering that the merging corporation designated in the plan of
companies did not comply with the formalities merger.
and procedure for merger or consolidation as b. In case of consolidation, shall be the
prescribed by the Corporation Code of consolidated corporation designated in the
the Philippines. Was the merger between FISLAI plan of consolidation;
and DSLAI (now MSLAI) valid and effective?

Commercial Law
2. The separate existence of the constituent Garnishment Upon the Surviving Corporation
corporations shall cease, except that of the for the Liabilities of the Absorbed Corporation
surviving or the consolidated corporation;
Citytrust was dissolved, no winding up of its affairs
3. The surviving or the consolidated corporation or liquidation of assets, privileges, powers, and
shall possess all the rights, privileges, liabilities took place. As the surviving corporation,
immunities, and powers and shall be subject to BPI simply continued the combined businesses of
all the duties and liabilities of a corporation the two banks and absorbed all the rights,
organized under the RCC; privileges, assets, liabilities, and obligations of City
Trust, including the latter’s obligation over the
4. The surviving or the consolidated corporation garnished deposits of the defendants.
shall thereupon and thereafter possess:
Through the service of the writ of garnishment, the
a. All the rights, privileges, immunities, and garnishee becomes a “virtual party” to, or a “forced
franchises of each of the constituent intervenor” in the case and the trial court thereby
corporations; acquires jurisdiction to bind him to compliance with
b. All property, real or personal, and all all orders and processes of the trial court with a
receivables due on whatever account, view to the complete satisfaction of the judgment of
including subscriptions to shares and other the court.
choses in action,
c. Every other interest of, belonging to, or due Citytrust, therefore, upon service of the notice of
to each constituent corporation, shall be garnishment and its acknowledgment that it was in
deemed transferred to and vested in such possession of defendants’ deposit accounts became
surviving or consolidated corporation a “virtual party” to or “forced intervenor” in the civil
without further act or deed; and case. As such, it became bound by the orders and
processes issued by the trial court despite not
5. The surviving or consolidated corporation having been properly impleaded therein.
shall: Consequently, by virtue of its merger with BPI, the
latter, as the surviving corporation, effectively
a. Be responsible and liable for all the became the garnishee, thus the “virtual party” to the
liabilities and obligations of each of the civil case. (BPI v. Lee, G.R. No. 190144, 01 Aug. 2012)
constituent corporations in the same
manner as if such surviving or consolidated Transfer of Employees
corporation had itself incurred such
liabilities or obligations; Taking a second look on this point, we have come to
b. Any pending claim, action or proceeding agree with Justice Brion's view that it is more in
brought by or against any of such keeping with the dictates of social justice and the
constituent corporations may be State policy of according full protection to labor to
prosecuted by or against the surviving or deem employment contracts as automatically
consolidated corporation; assumed by the surviving corporation in a merger,
c. The rights of creditors or liens upon the even in the absence of an express stipulation in the
property of any of such constituent articles of merger or the merger plan. In his
corporations shall not be impaired by such dissenting opinion, Justice Brion reasoned that:
merger or consolidation. (Sec. 79, RCC)
To my mind, due consideration of Sec. 80 of the
Corporation Code (now Sec. 79, RCC), the
constitutionally declared policies on work, labor
and employment, and the specific FEBTC-BPI
situation -- i.e., a merger with complete "body and

2022 GOLDEN NOTES
Corporation Law
soul" transfer of all that FEBTC embodied and absorbed employees for a lawful or authorized
possessed and where both participating banks were cause or the right of such an employee to resign,
willing (albeit by deed, not by their written retire or otherwise sever his employment, whether
agreement) to provide for the affected human before or after the merger, subject to existing
resources by recognizing continuity of employment contractual obligations. In this manner, Justice
-- should point this Court to a declaration that in a Brion's theory of automatic assumption may be
complete merger situation where there is total reconciled with the majority's concerns with the
takeover by one corporation over another and there successor employer's prerogative to choose its
is silence in the merger agreement on what the fate employees and the prohibition against involuntary
of the human resource complement shall be, the servitude. (BPI v. BPI Employees Union – Davao
latter should not be left in legal limbo and should be Chapter, G.R. No. 164301, 19 Oct. 2011)
properly provided for, by compelling the surviving
entity to absorb these employees. This is what Sec. Q: Associated Banking Corporation and Citizens
80 of the Corporation Code (now, Sec. 79, RCC) Bank and Trust Company (CBTC) merged to
commands, as the surviving corporation has the form just one banking corporation known as
legal obligation to assume all the obligations and Associated Citizens Bank, the surviving
liabilities of the merged constituent corporation. bank. The Associated Citizens Bank changed its
corporate name to Associated Bank by virtue of
Not to be forgotten is that the affected employees the Amended Articles of Incorporation.
managed, operated, and worked on the transferred
assets and properties as their means of livelihood; Lorenzo Sarmiento executed in favor of CBTC a
they constituted a basic component of their promissory note. Upon maturity and despite
corporation during its existence. In a merger and repeated demands Sarmiento failed to pay the
consolidation situation, they cannot be treated amount due. Associated Bank filed a collection
without consideration of the applicable suit against Sarmiento. Sarmiento contends that
constitutional declarations and directives, or, Associated Bank is not the proper party in
worse, be simply disregarded. If they are so treated, interest because the promissory note was
it is up to this Court to read and interpret the law so executed in favor of Associated Citizens Bank.
that they are treated in accordance with the legal
requirements of mergers and consolidation, read in The trial court ordered Sarmiento to pay. The
light of the social justice, economic and social CA, however, held that the Associated Bank had
provisions of our Constitution. Hence, there is a no cause of action against Lorenzo Sarmiento Jr.,
need for the surviving corporation to take since the said bank was not privy to the
responsibility for the affected employees and to promissory note executed by Sarmiento in favor
absorb them into its workforce where no of Citizens Bank and Trust Company
appropriate provision for the merged corporation's (CBTC). The court ruled that the earlier merger
human resources component is made in the Merger between the two banks could not have vested
Plan. Associated Bank with any interest arising from
the promissory note executed in favor of
By upholding the automatic assumption of the non- CBTC after such merger.
surviving corporation's existing employment
contracts by the surviving corporation in a merger, May Associated Bank, the surviving corporation,
the Court strengthens judicial protection of the right enforce the promissory note made by Sarmiento
to security of tenure of employees affected by a in favor of CBTC, the absorbed company, after
merger and avoids confusion regarding the status of the merger agreement had been signed?
their various benefits which were among the chief
objections of our dissenting colleagues. However, A: YES. Associated Bank may enforce the
nothing in this Resolution shall impair the right of promissory note. Ordinarily, in the merger of two or
an employer to terminate the employment of the more existing corporations, one of the combining

Commercial Law
corporations survives and continues the combined

business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the
surviving corporation. Although there is a
dissolution of the absorbed corporations, there is no
winding up of their affairs or liquidation of their
assets, because the surviving corporation
automatically acquires all their rights, privileges,
and powers, as well as their liabilities. All contracts
of the absorbed corporations, regardless of the date
of execution shall pertain to the surviving
corporation. (Associated Bank v. CA, G.R. No. 123793,
29 June 1998)

2022 GOLDEN NOTES
Intellectual Property Code
Intellectual Property Rights

IV. INTELLECTUAL PROPERTY CODE
(R.A. NO. 8293; EXCLUDING IMPLEMENTING The term “intellectual property rights” consists of:
RULES AND REGULATIONS)
a. Copyright and Related Rights;
b. Trademarks and Service Marks;
c. Geographic Indications;
Rationale behind the Intellectual Property
d. Industrial Designs;
Code
e. Patents;
f. Layout-Designs (Topographies) of Integrated
The Intellectual Property Code (IPC) gives life to
Circuits; and
Sec. 13, Art. XIV of the 1987 Constitution which
g. Protection of Undisclosed Information. (Sec.
mandates that the State shall protect and secure
4.1., IPC)
the exclusive rights of scientists, inventors, artists
and other gifted citizens to their intellectual
Intellectual Property as Property
property and creations, particularly when
beneficial to the people, for such period as may be
Ownership is acquired by occupation and by
provided by law.
intellectual creation.
The State recognizes that an effective intellectual

Ownership and other real rights over property are
and industrial property system is vital to the
acquired and transmitted by law, by donation, by
development of domestic and creative activity,
testate and intestate succession, and in
facilitates transfer of technology, attracts foreign
consequence of certain contracts, by tradition.
investments and ensures market access for our
products. It shall protect and secure the exclusive
They may also be acquired by means of
rights of scientists, inventors, artists and other
prescription. (Art. 712, New Civil Code (NCC))
gifted citizens to their intellectual property and
creations, particularly when beneficial to the
Ownership may be exercised over things or rights.
people, for such periods as provided in R.A. No.
(Art. 427, NCC)
8293, as amended, or the IPC. (Sec. 2, IPC)
Basic Principles
Intellectual Property
National Treatment – A Member country shall

Intellectual Property shall include the rights
accord to the nationals of other Member countries
relating to:
treatment no less favorable than it accords to its
own national with regard to the protection of
1. Literary, artistic, and scientific works;
intellectual property. (Art. 3, The Agreement on
2. Performances of performing artists,
Trade-Related Aspects of Intellectual Property
phonograms, and broadcasts;
Rights [TRIPS Agreement])
3. Scientific discoveries;
4. Industrial designs;
Most Favored Nation – With regard to the
5. Trademarks, service marks, and commercial
protection of intellectual property, any advantage,
names and designations;
favor, privilege, or immunity granted by a Member
6. Protection against unfair competition; and
to the nationals of any other country shall be
7. All other rights resulting from intellectual
accorded immediately and unconditionally to the
activity in the industrial, scientific, literary or
nationals of all other Members. (Art. 4, TRIPS
artistic fields. (Art. 2 (viii), World Intellectual
Agreement)
Property Organization)

Commercial Law
Technology Transfer Arrangements economy and fosters healthy competition in trade.

(Air Philippines Corp. v. Pennswell, Inc., G.R. No.
Contracts or agreements involving the transfer of 172835, 13 Dec. 2007)
systematic knowledge for the manufacture of a
product, the application of the process, or INTELLECTUAL PROPERTY RIGHTS
rendering of a service including management Copyright and Related Rights
contracts; and the transfer, assignment or
Exists over original and derivative intellectual
licensing of all forms of intellectual property
creations in the literary and artistic domain
rights, including licensing of computer software
protected from the moment of their creation.
except computer software developed for mass
(Sec. 172.1, IPC)
market. (Sec. 4.2, IPC)
Trademarks and Service Marks
Nature of Technology Transfer Arrangement Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of
Technology transfer is a licensing contract. It is a an enterprise and shall include a stamped or
contract between an intellectual property right marked container of goods. (Sec. 121.1, IPC)
owner, as the licensor, and a second party, as the
licensee who was granted the authority to Geographic Indications
commercially exploit the same intellectual Indications which identify a good as originating
property right under specified terms and in the territory of a Member of the Agreement,
conditions. (Salao, 2019) or a region or locality in that territory, where a
given quality, reputation or other characteristic
Undisclosed Information of the good is essentially attributable to its
geographical origin. (Art. 22, TRIPS Agreement)
1. Secret in the sense that it is not, as a body or in
precise configuration and assembly of Industrial Designs
components, generally known among, or
Any composition of lines or colors or any three-
readily accessible to persons within the circles
dimensional form, whether or not associated
that normally deal with the kind of
with lines or colors, provided that such
information in question;
composition or form gives a special appearance
2. Has commercial value because it is a secret; or
to and can serve as pattern for an industrial
3. Has been subjected to reasonable steps under
product or handicraft. It must be new or
the circumstances, by the person lawfully in
ornamental. (Secs. 112 & 113, IPC)
control of the information, to keep it a secret.
(Art. 39, TRIPS Agreement) Patents
Any technical solution of a problem in any field
Nature of Undisclosed Information or Trade
of human activity which is new, involves an
Secret
inventive step and is industrially applicable. It
may be, or may relate to, a product, or process,
Those trade secrets are of a privileged nature. The
or an improvement of any of the foregoing. (Sec.
protection of industrial property encourages
21, IPC)
investments in new ideas and inventions and
stimulates creative efforts for the satisfaction of Layout Designs
human needs. It speeds up transfer of technology Synonymous with ‘Topography' and means the
and industrialization, and thereby bring about three-dimensional disposition, however
social and economic progress. expressed, of the elements, at least one of which
is an active element, and of some or all of the
Verily, the protection of industrial secrets is interconnections of an integrated circuit, or
inextricably linked to the advancement of our such a three-dimensional disposition prepared

2022 GOLDEN NOTES
for an integrated circuit intended for Trade Secrets

manufacture. (Sec. 112(3), IPC) A plan or process, tool, mechanism or
Protection of Undisclosed Information compound known only to its owner and those of
Protection of information lawfully held from his employees to whom it is necessary to
being disclosed to, acquired by, or used by confide it. The definition also extends to: (a) a
others without their consent in a manner secret formula or process not patented, but
contrary to honest commercial practices so long known only to certain individuals using it in
as such information: (a) is secret in the sense compounding some article of trade having a
that it is not, as a body or in the precise commercial value; or (b) any formula, pattern,
configuration and assembly of its components, device, or compilation of information that: (1) is
generally known among or readily accessible to used in one's business; and (2) gives the
persons within the circles that normally deal employer an opportunity to obtain an
with the kind of information in question; (b) has advantage over competitors who do not possess
commercial value because it is secret; and (c) the information. (Air Philippines Corporation v.
has been subject to reasonable steps under the Pennswell, Inc., G.R. No. 172835, 13 Dec. 2007)
circumstances, by the person lawfully in control
of the information, to keep it secret. (Art. 39,
TRIPS Agreement)
Differences between Copyrights, Trademarks, and Patents (2015 BAR)
PATENT TRADEMARK COPYRIGHT

Definition
Any technical solution of a
problem in any field of human Any visible sign capable of
Exists over original and derivative
activity which is new, involves an distinguishing the goods
intellectual creations in the
inventive step and is industrially (trademark) or services (service
literary and artistic domain
applicable shall be patentable. It mark) of an enterprise and shall
protected from the moment of
may be, or may relate to, a product, include a stamped or marked
their creation. (Sec. 172.1, IPC)
or process, or an improvement of container of goods. (Sec. 121.1, IPC)
any of the foregoing. (Sec. 21, IPC)
Term of Protection
1. For literary and artistic works,

and derivative works, it shall
be protected during the life of
It shall remain in force for ten (10) the author and for 50 years
years. (Sec. 145, IPC) after his death; (Sec. 213.1,
IPC)
Twenty (20) years from filing date It may be renewed for periods of
of application. (Sec. 54, IPC) ten (10) years at its expiration 2. In joint authorship, during the
upon payment of prescribed fee life of the last surviving author
and upon filing of a request. (Sec. and for 50 years after his
146, IPC) death; (Sec. 213.2, IPC)
3. In anonymous or pseudonym
works, 50 years from the date
on which the work was first

Commercial Law
published. In case the author’s

identity is revealed, during his
lifetime and 50 years after his
death; (Sec. 213.3, IPC)
4. In works of applied art, 25

years from the date of making;
(Sec. 213.4, IPC) and
5. In case of photographic works,

50 years from publication of
the work, and if unpublished,
50 years from the making.
(Sec. 213.5, IPC)
6. In case of audiovisual work, 50

years from the date of
publications, and if
unpublished, from the date of
making. (Sec. 213.6, IPC)
NOTE: The term of protection

subsequent to the death of the
author shall run from the date of
his death or of publication, but
such terms shall always be deemed
to begin on the first day of January
of the year following. (Sec. 214,
IPC)
Limitations to the Use of Right
A person may NOT: 1. Recitation or performance of a
1. In general
work, once it has been lawfully
1. Use a name if the word is made accessible to the public, if
a. GR: If put on the market in the
generic; (Lyceum of the done privately and free of
Philippines by the owner of
Philippines v. CA, G.R. No. 101897, charge or for a charitable or
the product, or with his
05 Mar. 1993) religious institution or society;
express consent.
(Sec. 184, IPC)
2. Use any name indicating a
XPN: Drugs and medicines -
geographical location; (Ang Si 2. The making of quotations from
introduced in the Philippines
Heng v. Wellington Department a published work if they are
or anywhere else in the world
Store, G.R. No. L-4531, 10 Jan. compatible with fair use and
by the patent owner, or by any
1953) only to the extent justified for
party authorized to use the
the purpose; (Ibid.)
invention. (Sec. 72.1, as
3. Use any name or designation
amended by R.A. No. 9502)
contrary to public order or 3. Communication to the public
morals; by mass media of articles on
b. Where the act is done
current political, social,
privately and on a non-
4. Use a name if it is liable to economic, scientific or
commercial scale or for a non-
deceive trade circles or the religious topic, lectures,

2022 GOLDEN NOTES
commercial purpose; (Sec. public as to the nature of the addresses and other works of
72.2, IPC) enterprise identified by that the same nature; (Ibid.)
name; (Sec. 165.1, IPC)
c. Exclusively for experimental 4. As part of reports of current
use of the invention for 5. Subsequently use a trade name events (e.g. music played or
scientific purposes or likely to mislead the public as a tunes on the occasion of a
educational purposes third party; (Sec. 165.2(b), IPC). sporting event and such tunes
(experimental use provision); were picked up during a new
(Sec. 72.3, IPC) 6. Copy or simulate the name of coverage of the event); (Ibid.)
any domestic product (for
d. Bolar Provision - In the case of imported products); 5. For teaching purposes,
drugs and medicines, where provided that the source and
the act includes testing, using, 7. Copy or simulate a mark the name of the author, if
making or selling the registered in accordance with appearing in the work, are
invention including any data the provisions of IPC (for mentioned; (Ibid.)
related thereto, solely for imported products); and
6. Recording made in educational
purposes reasonably related
institutions of a work included
to the development and 8. Use mark or trade name
in a broadcast for the use of
submission of information and calculated to induce the public to
such educational institutions,
issuance of approvals by believe that the article is
provided that such recording
government regulatory manufactured in the Philippines,
must be deleted within a
agencies required under any or that it is manufactured in any
reasonable period after they
law of the Philippines or of foreign country or locality other
were first broadcast; (Ibid.)
another country that regulates than the country or locality
the manufacture, where it is in fact manufactured.
7. The making of ephemeral
construction, use or sale of
recordings by a broadcasting
any product; (Sec. 72.4, IPC) NOTE: Items 4, 5 and 6 only apply
organization by means of its
to imported products and those
own facilities and for use in its
e. Where the act consists of the imported articles shall not be
own broadcast; (Ibid.)
preparation for individual admitted to entry at any
cases, in a pharmacy or by a customhouse of the Philippines. 8. The use made of a work by or
medical professional, of a (Sec. 166, IPC) under the direction or control
medicine in accordance with a of the government, by the
medical prescription; (Sec. National Library or by
72.5, IPC) and educational, scientific or
professional institutions
f. Where the invention is used in where such use is in the public
any ship, vessel, aircraft, or interest and is compatible with
land vehicle of any other fair use; (Ibid.)
country entering the territory
of the Philippines temporarily 9. The public performance of a
or accidentally. (Sec. 72.6, IPC) work, in a place where no
admission fee is charged;
2. Prior user – Person other than (Ibid.)
the applicant, who in good faith,
started using the invention in the 10. Public display of the original
Philippines, or undertaken serious or a copy of the work not
preparations to use the same, made by means of a film,
before the filing date or priority slide, television image or

Commercial Law
date of the application, shall have otherwise on screen or by

the right to continue the use means of any other device or
thereof, but this right shall only be process (e.g. Public display
transferred or assigned further using posters mounted on
with his enterprise or business. walls and display
(Sec. 73, IPC) boards;(Ibid.) and
3. Use by Government – A 11. Any use made of a work for

government agency or third the purpose of any Judicial
person authorized by the proceedings or for the giving
government may exploit invention of professional advice by a
even without agreement of a legal practitioner; (Ibid.) and
patent owner where:
12. The reproduction or
a. Public interest, as determined distribution of published
by the appropriate agency of articles or materials in a
the government, so requires; specialised format
or exclusively for the use of the
b. A judicial or administrative blind, visually- and reading-
body has determined that the impaired perons. Provided
manner of exploitation by that such copies and
owner of patent is anti- distribution shall be made on
competitive. (Sec. 74, IPC) a non-profit basis, and shall
indicate the copyright owner
4. Reverse reciprocity of foreign and the date of the original
law – Any condition, restriction, publication. (Ibid.)
limitation, diminution,
requirement, penalty or any
similar burden imposed by the law
of a foreign country on a Philippine
national seeking protection of
intellectual property rights in that
country, shall reciprocally be
enforceable upon nationals of said
country, within Philippine
jurisdiction. (Sec. 231, IPC)
Prescriptive Period for Filing an Action for Damages due to Infringement
No damages can be recovered for
acts of infringement committed Four (4) years from the time the Four (4) years from the time the
more than 4 years before the cause of action arose. (Sec. 226, cause of action arose. (Sec. 226,
institution of the action for IPC) IPC)
infringement. (Sec. 79, IPC)
Tests or Elements which will Establish the Presence of Infringement
1. Literal Infringement Test – A person infringes a right
1. That it is duly registered in the
Resort must be had, in the first protected under this Act when one:
Intellectual Property Office;
instance, to words of the claim. If
the accused matter clearly falls a. Directly commits an
2. The validity of the mark;
within the claim, infringement is infringement;
committed.

2022 GOLDEN NOTES
3. The plaintiff’s ownership of b. Benefits from the infringing

Minor modifications are the mark; activity of another person who
sufficient to put the item beyond commits an infringement if the
literal infringement. (Godines v. 4. The use of the mark or its person benefiting has been
CA, G.R. No. L-97343, 13 Sept. colorable imitation by the given notice of the infringing
1993) alleged infringer results in activity and has the right and
“likelihood of confusion”; ability to control the activities
2. Doctrine of Equivalents – There (McDonald’s Corp v. L.C. Big of the other person; and
is infringement where a device Mak Burger, Inc., G.R. No.
appropriates a prior invention 143993, 18 Aug. 2004) and c. With knowledge of infringing
by incorporating its innovative activity, induces, causes or
concept and, although with 5. Used without the consent of materially contributes to the
some modification and change, the owner. (Prosource infringing conduct of another
performs substantially the same International Inc. v. Horphag (Sec. 216, IPC, as amended by
function in substantially the Research Management SA, G.R. R.A. No. 10372)
same way to achieve No. 180073, 25 Nov. 2009)
substantially the same result.
(Godines v. CA, G.R. No. L-97343,
13 Sept. 1993)
Remedies Against Infringement
1. Injunction;
2. Damages, including legal costs

and other expenses, as he may
have incurred due to the
infringement as well as the
1. Civil – i.e. preliminary
profits the infringer may have
injunction with damages;
made due to such
1. Civil action; (Sec. 76.3, IPC) infringement;
2. Criminal – remedies available
2. Criminal action;
shall also include the seizure,
3. Administrative remedy; 3. Impounding during the
forfeiture and destruction of
4. Disposal or destruction of pendency of the action sales
the infringing goods and of any
infringing material; (Sec. 76.5, invoices and other documents
materials and implements the
IPC) or evidencing sales;
predominant use of which has
5. Provisional measures. (Sec.
been in the commission of the
76.2, IPC) 4. Destruction without any
offense; or
compensation of all infringing
copies; and
3. Administrative
5. Moral and exemplary damages

(Sec. 216.1, IPC); or
6. Seizure and impounding of

any article, which may serve
as evidence in the court
proceedings. (Sec. 216.2, IPC)

Commercial Law
How Acquired
The rights in a mark shall be
acquired through registration
made validly in accordance with
Patent is acquired through Copyright is acquired from the
the provisions of this law. (Sec.
registration with the IPO. moment of creation.
122, IPC; Zuneca v. Natrapharm,
G.R. No. 211850, 08 Sept. 2020, J.
Caguioa)

2022 GOLDEN NOTES
3. Industrial Design – any composition of lines

A. PATENTS or colors or any three-dimensional form,
whether or not associated with lines or colors,
provided that such composition or form gives
a special appearance to and can serve as
General Principles
pattern for an industrial product or handicraft
and must be new or ornamental. (Secs. 112 and
The right granted to an inventor by a State, or by
113, IPC)
a regional office acting for several States, which
allows the inventor to exclude anyone else from
Generally, an industrial design is the
commercially exploiting his invention for a
ornamental or aesthetic aspect of a useful
limited period. (Understanding Industrial
article. (Amador, 2007)
Property, WIPO, p.5)
An industrial design is not considered new if it

The primary purpose of the patent system is not
differs from prior designs only in minor
the reward of the individual but the
respects that can be mistaken as such prior
advancement of the arts and sciences. The
designs by an ordinary observe. (World
function of a patent is to add to the sum of useful
Intellectual Property Organization, 2004)
knowledge and one of the purposes of the patent
system is to encourage dissemination of
Term or Duration of a Patentable Invention
information concerning discoveries and
(Sec. 54, IPC)
inventions. (Manzano v. Court of Appeals, G.R. No.
113388, 05 Sept. 1997)
It shall be twenty (20) years from the filing date of
the application.
Three-fold Purpose of Patent Law:
Right to a Patent (Sec. 28, IPC)

1. To foster and reward invention;
2. To promote disclosures of inventions to
The right to a patent belongs to the inventor, his
stimulate further innovation and to permit
heirs, or assigns. When two (2) or more persons
the public to practice the invention once the
have jointly made an invention, the right to a
patent expires; and
patent shall belong to them jointly.
3. To ensure that ideas in the public domain

Assignment of Patent Rights
remain there for the free use of the public.
(Pearl & Dean Inc. v. Shoemart, Inc., G.R. No.
Inventions and any right, title, or interest in and to
148222, 15 Aug. 2003)
patents and inventions covered thereby, may be
assigned or transmitted by inheritance or bequest
Coverage of Patents
or may be the subject of a license contract. (Sec.
103.2, IPC)
1. Invention – any technical solution of a
problem in any field of human activity
The assignment must be: (W-A-C)
which is new, involves an inventive step and
is industrially applicable. It may be, or may
1. In Writing;
relate to, a product or process, or an
2. Acknowledged before a notary public or other
improvement of any of the foregoing. (Sec.
officer authorized to administer oath or
21, IPC)
perform notarial acts; and
3. Certified under the hand and official seal of the
2. Utility Model – an invention qualifies for
notary or such other officer. (Sec. 105, IPC)
registration as a utility model if it is new and
industrially applicable. (Sec. 109, IPC)

Commercial Law
1. PATENTABLE VS. NON-PATENTABLE clear and satisfactory proof which overcomes

INVENTIONS every reasonable doubt. (Manzano v. CA, G.R. No.
113388, 05 Sept. 1997)
PATENTABLE INVENTIONS
Prior Art (Sec. 24, IPC)
Any technical solution of a problem in any field
of human activity which is: (N-I-I) 1. Everything which has been made available to
the public anywhere in the world, before the
1. New; filing date or the priority date of the
2. Involves an Inventive step; and application claiming the invention; and
3. Is Industrially applicable.
2. The whole contents of an earlier published
NOTE: It may be, or may relate to, a product or Philippine application or application with
process or an improvement of any of the earlier priority date of a different inventor.
foregoing. (Sec. 21, IPC)
Public Disclosure
Improvement
The ultimate goal of a patent system is to bring
An enhancement or modification of any of the new designs and technologies into the public
foregoing subject to patentability criteria. through disclosure; hence ideas, once disclosed to
the public without protection of a valid patent, are
For example, an improvement in the tile-making subject to appropriation without significant
process is indeed inventive and goes beyond the restraint. (Pearl & Dean v. Shoemart Inc., G.R. No.
exercise of mechanical skill. The applicant has 148222, 15 Aug. 2003)
introduced a new kind of tile for a new purpose.
He has improved the old method of making tiles The application shall disclose the invention in a
and pre-cast articles which were not satisfactory manner sufficiently clear and complete for it to be
because of an intolerable number of breakages, carried out by a person skilled in the art. Where the
especially if deep engravings are made on the application concerns a microbiological process or
tile. He has overcome the problem of producing the product thereof and involves the use of a
decorative tiles with deep engraving, but with micro-organism which cannot be sufficiently
sufficient durability. (Aguas v. De Leon, G.R. No. disclosed in the application in such a way as to
L-32160, 30 Jan. 1982) enable the invention to be carried out by a person
skilled in the art, and such material is not available
Three Elements for Patentability to the public, the application shall be
supplemented by a deposit of such material with
1. Novelty; an international depository institution. (Sec. 35.1,
2. Inventive Step; and IPC)
3. Industrially Applicable.
Doctrine of Prejudicial Disclosure
NOVELTY
The right to patent arises from application date. If
the inventor voluntarily discloses his creation,
An invention shall not be considered new if it such as by offering it for sale, the world is free to
forms part of a prior art. (Sec. 23, IPC) copy and use it with impunity. Ideas, once
disclosed to the public without the protection of a
NOTE: The burden of proving want of novelty of valid patent, are subject to appropriation without
an invention is on the person who avers it and significant restraint. (Pearl & Dean, Inc. v.
the burden is a heavy one which is met only by Shoemart, Inc., G.R. No. 148222, 15 Aug. 2003)

2022 GOLDEN NOTES
GR: When a work has already been made b. The mere discovery of any new property
available to the public, it shall be non-patentable or new use for a known substance; or
for absence of novelty. c. The mere use of a known process unless
such known process results in a new
XPN: Doctrine of Non-Prejudicial Disclosure product that employs at least one new
reactant. (Sec. 26.2, IPC, as amended by R.A.
The disclosure of information contained in the No. 9502)
application during the twelve (12) months
preceding the filing date or the priority date of Test of Non-Obviousness
the application shall not prejudice the applicant
on the ground of lack of novelty if such A patent may not be obtained though the invention
disclosure was made by: is not identically disclosed or described, if the
differences between the subject matter sought to
a. The inventor; be patented and the prior art are such that the
b. A patent officer and the information was subject matter as a whole would have been
contained (a) in another publication filed by obvious at the time the invention was made to a
the inventor and should not have been person having ordinary skill in the art to which
disclosed by the office, or (b) in an said subject matter pertains. Patentability shall not
application filed, without the knowledge or be negatived by the manner in which the invention
consent of the inventor, by a third party who was made. (Graham v. John Deere Co., 383 U.S. 1, 21
obtained the information directly or Feb. 1966)
indirectly from the inventor; or
c. A third party who obtained the information Person Skilled in the Art
directly or indirectly from the inventor.
A person skilled in the art is a person with ordinary
(Sec. 25, IPC)
skills in a certain art or field, who is aware of what
is a common general knowledge in the field at the
If the disclosure was made by the designer in the
time of the application. He is presumed to have
case of industrial design, the period is six (6)
knowledge of all references that are sufficiently
months. In other words, the application must be
related to one another and to the pertinent art and
filed within six (6) months after disclosure for it
to have knowledge of all arts reasonably pertinent
to be non-prejudicial.
to the particular problems with which the inventor
was involved. He is presumed also to have had at
INVENTIVE STEP his disposal the normal means and capacity for
routine work and experimentation. (Rule 207,
GR: An invention involves an inventive step if, Revised IRR for R.A. No. 8293)
having regard to prior art, it is not obvious to a
person skilled in the art at the time of the filing The use of the qualifying phrase “ordinary skill”
date or priority date of the application claiming excludes the “best” expert available. This means
the invention. (Sec. 26, IPC) that the criteria is only limited to a person with an
average level of skill in the concerned field. (WIPO,
XPN: In the case of drugs and medicine, there is Intellectual Property Handbook, 2004 edition, p.
no inventive step if the invention results from 20.)
the mere discovery of:
INDUSTRIAL APPLICABILITY
a. A new form or new property of a known
substance which does not result in the An invention that can be produced and used in any
enhancement of the known efficacy of industry meets the industrial application
that substance; or requirement of patent registrability. This means

Commercial Law
an invention is not merely theoretical, but also protection provided in the law for a utility model
has a practical purpose. If the invention is a is generally much shorter than the maximum term
product, it should be able to produce a product of protection provided in the law for an invention
and if the invention is a process, it should be able for which a patent for invention is available. (WIPO
to lay out a process. (WIPO, IP Handbook 2nd Handbook, Chapter 2, “Fields of Intellectual
Edition, Chapter 2: “Fields of Intellectual Property Property Protection”, WIPO Publication No. 489, 2nd
Protection” Publication No. 489 (E)) Edition)
Utility Model Requisites for an Invention to be considered as

a Utility Model
A name given to inventions in the mechanical
field. It must be new and industrially applicable. A model
of implement or tools of any industrial product
Utility models differ from inventions for which even if not possessed of the quality of invention but
patents for invention are available mainly in two which is of practical utility. (Sec. 109.1, IPC)
respects. First, the technological progress
required is smaller than the technological Term of a Utility Model
progress (“inventive step”) required in the case
of an invention for which a patent for invention Seven (7) years from date of filing of the
is available. Second, the maximum term of application. (Sec. 109.3, IPC)
Invention vs. Utility Model vs. Industrial Design
INVENTION UTILITY MODEL INDUSTRIAL DESIGN

Elements
-New
-New
-Inventive Step -New or Ornamental
-Industrial Applicability
-Industrial Applicability
Term of Protection
Five (5) years from the date of filing
Twenty (20) years from the date of Seven (7) years from the date of
with 2 five-year term renewals
filing with payment of annuities. filing without renewal. (Sec. 109.3,
upon payment of fees. (Sec. 118.2,
No renewal. (Sec. 54, IPC) IPC)
IPC)
Grounds for Cancellation
1. Invention is not new or 1. The invention does not qualify
patentable; for registration as a utility
2. Patent does not disclose the model; 1. The subject matter of the
invention in a manner 2. The description and the claims industrial design is not
sufficiently clear and complete do not comply with the registrable;
for it to be carried out by any prescribed requirements; 2. The subject matter is not new;
person skilled in the art; 3. Any drawing which is or
3. The patent is contrary to necessary for the 3. The subject matter of the
public order or morality (Sec. understanding of the industrial design extends
61.1, IPC); invention has not been beyond the content of the
4. The patent is found invalid in furnished; or application as originally filed.
an action for infringement 4. The owner of the utility model (Sec. 120, IPC)
(Sec. 82, IPC); or registration is not the inventor
5. The patent includes matters or his successor in title. (Sec.
outside the scope of the 109.4, IPC)

2022 GOLDEN NOTES
disclosure contained in the

application. (Sec. 1, Rule 3,
Regulations on Inter Partes
Proceeding)
NON-PATENTABLE INVENTIONS 7. Discoveries, scientific theories and

mathematical methods. (Sec. 22, IPC as
An invention may not be patentable because it amended by R.A. 9502)
does not comply with the elements of
patentability, or it falls under non-patentable Q: Dr. Nobel discovered a new method of
inventions enumerated under Sec. 23 of the IPC. treating Alzheimer’s involving a special
(Salao, 2018) method of diagnosing the disease, treating it
with a new medicine that has been discovered
The Following are Non-Patentable Inventions: after long experimentation and field testing,
(Tr-A-P-S-A-D2) and novel mental isometric exercises. He
comes to you for advice on how he can have his
1. Methods for Treatment of the human or discoveries protected. Can he legally protect
animal body by surgery or therapy and his new method of diagnosis, the new medicine,
diagnostic methods practiced on the human or and the new method of treatment? If no, why?
animal body. This provision shall not apply to If yes, how? (2010 BAR)
products and composition for use in any of
these methods; A: Dr. Nobel can be protected by a patent for the
new medicine as it falls within the scope of Sec. 21
2. Aesthetic creations; of the Intellectual Property Code. (R.A. No. 8293, as
amended). However, no protection can be legally
3. Plant varieties or animal breeds or essentially extended to him for the method of diagnosis and
biological process for the production of plants method of treatment which are expressly non-
or animals. This provision shall not apply to patentable. (Sec. 22, IPC)
micro-organisms and non-biological and
microbiological processes; Patentability of Computer Programs
4. Schemes, rules and methods of performing GR: Computer programs are not patentable but are
mental acts, playing games or doing business, copyrightable.
and programs for computers;
XPN: They can be patentable if they are part of a
5. Anything which is contrary to public order or process. (e.g., business process with a step
morality; involving the use of a computer program)
6. In the case of Drugs and medicines, mere Q: Supposing Albert Einstein were alive today
discovery of a new form or new property of a and he filed with the Intellectual Property
known substance which does not result in the Office (IPO) an application for patent for his
enhancement of the efficacy of that substance theory of relativity expressed in the formula
or the new use for a known substance, or the E=mc2. The IPO disapproved Einstein’s
mere use of a known process unless such application on the ground that his theory of
known process results in a new product that relativity is not patentable. Is the IPO’s action
employs at least one new reactant; and correct? (2006 BAR)

Commercial Law
A: YES. The IPO is correct because under the interconnections of an integrated circuit, or
Intellectual Property Code, discoveries, scientific such a three-dimensional disposition
theories, and mathematical methods are classified prepared for an integrated circuit intended for
to be as “non-patentable inventions”. Einstein’s manufacture. (Sec. 112 (3), IPC)
theory of relativity falls within the category of
being a non-patentable “scientific theory”. Registration is valid for 10 years without
renewal counted from date of commencement
Q: X invented a bogus coin detector which can of protection. (Sec. 118.5, IPC)
be used exclusively on self-operating gambling
devices otherwise known as one-armed 2. OWNERSHIP OF A PATENT
bandits. Can X apply for a patent?
Persons Entitled to a Patent
A: NO. The law provides that any invention that is
contrary to public order or morality may not be 1. Inventor, his heirs, or assigns; (Sec. 28, IPC)
extended patent protection. The bogus coin
detector appears to be a device used to cheat in 2. Joint invention – jointly by the inventors; (Sec.
gambling. Therefore, it may not be patented. 28, IPC)
Q: Can an article of commerce serve as 3. Two or more persons invented separately and
trademark and at the same time enjoy patent independently of each other – to the person
and copyright protection? Explain and give an who filed an application; (Sec. 29, IPC)
example. (2010 BAR)
4. Two or more applications are filed – the
A: A stamped or marked container of goods can be applicant who has the earliest filing date or,
registered as trademark (Sec. 113, IPC). An original the earliest priority date. [First-to-file Rule]
ornamental design or model for articles of (Sec. 29, IPC)
manufacturer can be copyrighted (Sec. 172.1, IPC).
An ornamental design cannot be patented, because First-to-File Rule (Sec. 29, IPC)
aesthetic creations cannot be patented (Sec. 22,
IPC). However, it can be registered as an industrial 1. If two (2) or more persons have made the
design (Sec. 113.1, 172.1, IPC). Thus, a container of invention separately and independently of
goods which has an original ornamental design can each other, the right to the patent shall belong
be registered as trademark, can be copyrighted, to the person who filed an application for such
and can be registered as an industrial design. invention; or
2. Where two or more applications are filed for
Other Kinds of Intellectual Property Rights the same invention, to the applicant which has
the earliest filing date.
1. Integrated Circuit – A product, in its final
form, or an intermediate form, in which the Inventions Pursuant to a Commission (Sec.
elements, at least one of which is an active 30.1, IPC)
element and some or all of the
interconnections are integrally formed in and The person who commissions the work shall own
or on a piece of material, and in which is the patent, unless otherwise provided in the
intended to perform an electronic function. contract.
2. Layout Design/Topography – The three-

dimensional disposition, however expressed,
of the elements, at least one of which is an
active element, and of some or all of the

2022 GOLDEN NOTES
Inventions Pursuant to Employment (Sec. 30.2, 2. Classification, search and first publication;
IPC) and
3. Examination as to substance or substantive
In case the employee made the invention in the examination.
course of his employment contract, the patent shall
belong to: Steps in the Registration of a Patent
(F-A-Fo-Cla-P-S-G-P-I)
1. The employee, if the inventive activity is not a
part of his regular duties even if the employee The procedure for the grant of patent may be
uses the time, facilities, and materials of the summarized as follows:
employer;
1. Filing of the application;
2. The employer, if the inventive activity is the 2. Accordance of the filing date;
result of the performance of his regularly 3. Formality examination;
assigned duties, unless there is an agreement, 4. Classification and Search;
express or implied, to the contrary. 5. Publication of application;
6. Substantive examination;
Priority Date 7. Grant of Patent;
8. Publication upon grant;
An application for patent filed by any person who 9. Issuance of certificate. (Salao, 2019)
has previously applied for the same invention in
another country which by treaty, convention, or Manner of Making Disclosure (Sec. 35, IPC)
law affords similar privileges to Filipino citizens,
shall be considered as filed as of the date of filing The application shall disclose the invention in a
the foreign application. (Sec. 31, IPC) manner sufficiently clear and complete for it to be
carried out by a person skilled in the art.
Filing date is accorded only when all the
requirements provided under Section 40 are Claims (Sec. 36.1)
present. Priority Date comes into play when there
is an application for patent for the same invention The application for patent shall contain one (1) or
that was filed in another country. (Salao, 2012) more claims which shall define the matter for
which protection is sought. Each claim shall be
Conditions in Availing of Priority Date clear and concise and shall be supported by the
description.
1. The local application expressly claims
priority; Abstract (Sec. 37, IPC)
2. It is filed within 12 months from the date the
earliest foreign application was filed; and A concise summary of the disclosure of the
3. A certified copy of the foreign application invention as contained in the description, claims,
together with an English translation is filed and merely serves as technical information.
within 6 months from the date of filing in the
Philippines. (Sec. 31, IPC) The purpose of requiring a definite and accurate
description of the process is to apprise the public
Three (3) Main Areas of Activity in the Grant of of what the patentee claims as his invention, to
Invention Patent inform the Courts as to what they are called upon
to construe, and to convey to competing
1. Examination as to form or formality manufacturers and dealers information of exactly
examination; what they are bound to avoid. (Boothe v. Director
of Patents, G.R. No. L-24919, 28 Jan. 1980)

Commercial Law
Unity of Invention application in such a manner as to enable one

skilled in the art to use the same for a legally
The application shall relate to one invention only adequate utility. (Boothe v. Director of Patents, G.R.
or to a group of inventions forming a single general No. L-24919, 28 Jan. 1980)
inventive concept. (Sec. 38.1, IPC)
Rights Conferred by a Patent Application After
If several independent inventions which do not Publication (Sec. 46, IPC)
form a single general inventive concept are
claimed in one application, the application must be The applicant shall have all the rights of a patentee
restricted to a single invention. (Sec. 38.2, IPC) against any person who, without his authorization,
exercised any of the rights conferred under Section
Divisional Applications 71 in relation to the invention claimed in the
published patent application, as if a patent had
Divisional applications come into play when two or been granted for that invention, provided that the
more inventions are claimed in a single application said person had:
but are of such a nature that a single patent may
not be issued for them. The applicant is thus 1. Actual knowledge that the invention that he
required to “divide”, that is, to limit the claims to was using was the subject matter of a
whichever invention he may elect, whereas those published application; or
inventions not elected may be made the subject of 2. Received written notice that the invention was
separate applications which are called “divisional the subject matter of a published application
applications.” (Smith-Kline Beckman Corp. v. CA, being identified in the said notice by its serial
G.R. No. 126627, 14 Aug. 2003) number.
Q: Leonard and Marvin applied for Letters The action may not be filed until after the grant of
Patent claiming the right of priority granted to a patent on the published application and within
foreign applicants. Receipt of petitioners’ four (4) years from the commission of the acts
application was acknowledged by respondent complained of.
Director on March 6, 1954. Their Application
for Letters Patent in the US for the same Effectivity of a Patent (Sec. 50.3, IPC)
invention indicated that the application in the
US was filed on March 16, 1953. They were A patent shall take effect on the date of the
advised that the "specification" they had publication of the grant of the patent in the IPO
submitted was "incomplete" and that Gazette.
responsive action should be filed with them
four months from date of mailing, which was 3. GROUNDS FOR CANCELLATION OF A
August 5, 1959. On July 3, 1962, petitioners PATENT
submitted two complete copies of the
Specification. The Director of Patents held that Grounds for Cancellation (Sec. 61, IPC)
petitioners' application may not be treated as
filed. Is the director correct? Any interested party may petition to cancel any
patent or any claim or parts of a claim any of the
A: YES. It is imperative that the application be following grounds:
complete in order that it may be accepted. It is
essential to the validity of Letters Patent that the 1. Invention is not new or patentable;
specifications be full, definite, and specific. To be 2. Patent does not disclose the invention in a
entitled to the filing date of the patent application, manner sufficiently clear and complete for it to
an invention disclosed in a previously filed be carried out by any person skilled in the art;
application must be described within the instant

2022 GOLDEN NOTES
3. The patent is contrary to public order or by final court order or decision to be the true and
morality; (Sec. 61.1, IPC) actual inventor, the court shall order for his
4. The patent is found invalid in an action for substitution as patentee, or at the option of the
infringement; (Sec. 82, IPC) or true inventor, cancel the patent, and award actual
5. The patent includes matters outside the scope damages in his favor if warranted by the
of the disclosure contained in the application. circumstances. (Sec. 68, IPC)
(Sec. 1, Rule 3, Regulations on Inter Partes
Proceeding) In the two circumstances aforementioned, the
court shall furnish the Office a copy of the order or
NOTE: If the ground for cancellation relates to decision which shall be published in the IPO
some of the claims or parts of the claim only, Gazette within three (3) months from the date
cancellation may be effected to such extent only. such order or decision became final and executor
(Sec. 61.2, IPC) and shall be recorded in the register of the Office.
(Sec. 69, IPC)
Grounds for Cancellation of Layout-Design of
Integrated Circuits Time to File Action in Court (Sec. 70, IPC)
1. The layout-design is not protectable; The actions indicated in Sections 67 and 68 shall
2. The right holder is not entitled to protection; be filed within one (1) year from the date of
or publication made in accordance with Sections 44
3. The application for registration of the layout- and 51, respectively.
design, was not filed within two (2) years from
its first commercial exploitation anywhere in Q: Cezar works in a car manufacturing
the world. company owned by Joab. Cezar is quite
innovative and loves to tinker with things. With
NOTE: Where the grounds for cancellation are the materials and parts of the car, he was able
established with respect only to a part of the to invent a gas-saving device that will enable
layout-design, only the corresponding part of the cars to consume less gas. Francis, a co-worker,
registration shall be cancelled. (Sec. 120.3, IPC as saw how Cezar created the device and likewise,
amended by Sec. 1, R.A. No. 9150) came up with a similar gadget, also using scrap
materials and spare parts of the company.
Remedies of Persons with a Right to a Patent Thereafter, Francis filed an application for
(Sec. 67.1, IPC) registration of his device with the Bureau of
Patents. Eighteen months later, Cezar filed his
If a person other than the applicant is declared by application for the registration of his device
final court order or decision as having the right to with the Bureau of Patents.
a patent, he may within 3 months after such
decision has become final: a. Is the gas-saving device patentable?
Explain.
1. Prosecute the application as his own; b. Assuming that it is patentable, who is
2. File a new patent application; entitled to the patent? What, if any, is the
3. Request the application to be refused; or remedy of the losing party? (2005 BAR)
4. Seek cancellation of the patent.
A:
Remedies of the True and Actual Inventor a. YES. For the gas saving device to be patentable
(1993, 2005 BAR) invention it must be new; must involve an
inventive step; and must be industrially
If a person, who was deprived of the patent applicable. In the given case, it shows that the
without his consent or through fraud is declared gas saving device is new and with the

Commercial Law
innovativeness of Cezar using certain b. Was Therapharma even rightfully allowed

materials of the car, it provides a useful to intervene on appeal?
application to save on the consumption of gas. c. Will E.I. Dupont Nemours’ prior application
in the U.S. remove the invention from being
b. Cezar is entitled to the patent because he is part of the public domain in the
the true and actual inventor. While it is true Philippines?
that Francis was the first to file the application
for registration of patent, the same will not A:
work in his favor because he was in bad faith. a. YES, the CA was correct in denying the revival of
However, considering that under the IPC, it the patent application. Section 113 of the 1962
adopts the first to file rule, Cezar will have to Revised Rules of Practices, which provides for a 4-
take action against Francis within one (1) year month period within which an application may be
from the date of publication. If he is declared revived from the date of abandonment, has since
by final court order or decision as having the been superseded Rule 930 of the Rules and
right to a patent, he may within 3 months after Regulations on Inventions, and Rule 929 of the
such decision has become final: a) prosecute Revised Implementing Rules and Regulations for
the application as his own application in place Patents, Utility Models and Industrial Design. The
of the applicant; b) file a new patent period of four (4) months from the date of
application in respect of the same invention; c) abandonment, however, remains unchanged.
request the application to be refused; or d) Section 133.4 of the Intellectual Property Code
seek cancellation of the patent, if one has even provides for a shorter period of three (3)
already been issued. months within which to file for revival. Under
Section 113, E.I. Dupont Nemours had until
Q: E.I. Dupont Nemours is an American January 1989 to file for a revival of the patent
corporation organized under the laws of the application. Its Petition for Revival, however, was
State of Delaware. It is the assignee of several filed on May 2002, 13 years after the date of
inventors who were all citizens of the United abandonment. The petition should thus be denied
States of America (U.S.). In 1987, it filed a since these regulations only provide a four (4)
patent application before the Bureau for month period within which to file for the revival of
losartan, an invention related to the treatment the application. The rules do not provide any
of hypertension and congestive heart failure. exception that could extend this four (4)-month
The application was handled by Atty. Nicanor period to 13 years.
Mapili. In 2000, E.I. Dupont Nemours’ counsel
requested for an office action to be issued on b. YES, Therapharma was rightfully allowed to
the said patent application. The application, intervene on appeal. The Intellectual Property
however, was already deemed abandoned for Code (IPC) is the applicable law with regard to the
E.I. Dupont Nemours’ failure to respond to an revival of E.I. Dupont Nemours' patent application.
Office Action mailed on 1988. Arguing that Atty. Section 7 (7.1)(a) of the Intellectual Property Code
Mapili failed to inform them about it, a Petition states that the decisions of the Director General in
for Revival of the patent application was filed the exercise of his appellate jurisdiction in respect
in 2002. When the case reached the Court of of the decisions of the Director of Patents, and the
Appeals (CA), Therapharma intervened. It Director of Trademarks shall be appealable to the
argued that a decision granting the Court of Appeals in accordance with the Rules of
application’s revival directly affects its vested Court. Furthermore, Rule 19 of the Rules of Court
rights. It was able to prove its case, and so the provides that a court has the discretion to
CA denied the Petition for Revival. determine whether to give due course to an
intervention. If an administrative agency's
a. Was the CA correct in denying the revival of procedural rules expressly prohibit an
the patent application? intervention by third parties, the prohibition is

2022 GOLDEN NOTES
limited only to the proceedings before the product obtained directly or indirectly from
administrative agency. Once the matter is brought such process. (Sec. 71, IPC)
before the Court of Appeals in a petition for review,
any prior prohibition on intervention does not 3. Right to assign the patent, to transfer by
apply since the only question to be determined is succession, and to conclude licensing
whether the intervenor has established a right to contracts. (Sec. 71.2, IPC)
intervene under the Rules of Court.
NOTE: The rights conferred by a patent
c. NO, a prior application in the U.S. did not remove application take effect after publication in the IPO
the invention from the Philippines’ public domain. Gazette. (Sec. 46, IPC)
A right of priority has no bearing in a case for
revival of an abandoned patent application. A Limitations of Patent Rights (Sec. 72, IPC as
patent applicant with the right of priority is given amended by R.A. No. 9502)
preference in the grant of a patent when there are
two or more applicants for the same invention. The owner of a patent has no right to prevent third
Since both the United States and the Philippines parties from making, using, offering for sale,
are signatories to the Paris Convention for the selling, or importing a patented product in the
Protection of Industrial Property, an applicant who following circumstances:
has filed a patent application in the United States
may have a right of priority over the same a. Using a patented product after it has been put
invention in a patent application in the Philippines. on the market in the Philippines by the owner
However, this right of priority does not of the product, or with his express consent.
immediately entitle a patent applicant the grant of
a patent. A right of priority is not equivalent to a In case of drugs or medicines, the said
patent. Otherwise, a patent holder of any member- limitation applies after a drug or medicine has
state of the Paris Convention need not apply for been introduced in the Philippines or
patents in other countries where it wishes to anywhere else in the world by the patent
exercise its patent. It was, therefore, inaccurate for owner, or by any party authorized to use the
E.I. Dupont Nemours to argue that its prior patent invention. This allows parallel importation
application in the United States removed the for drugs and medicines.
invention from the public domain in the
Philippines. This argument is only relevant if The right to import the drugs and medicines
respondent Therapharma, Inc. had a conflicting shall be available to any government agency or
patent application with the Intellectual Property any private third party; (Sec. 72.1, IPC)
Office, but in a case for revival of an abandoned
patent application. (E.I. Dupont De Nemours and Co. b. Where the act is done privately and on a non-
v. Director Francisco, G.R. No. 174379, 31 Aug. 2016) commercial scale or for a non-commercial
purpose: Provided that it does not
Rights Conferred by a Patent significantly prejudice the economic interest
of the owner of the patent.; (Sec. 72.2, IPC)
1. In case of a Product – Right to restrain,
prohibit and prevent any unauthorized c. Exclusively for experimental use of the
person or entity from making, using, offering invention for scientific purposes or
for sale, selling, or importing the product. educational purposes; (Sec. 72.3, IPC)
2. In case of Process – Right to restrain prohibit d. In the case of drugs and medicines, where the
and prevent any unauthorized person or act includes testing, using, making, or selling
entity from manufacturing, dealing in, using, the invention including any data related
offering for sale, selling, or importing any thereto, solely for purposes reasonably

Commercial Law
related to the development and submission of without giving up entirely his enterprise. (Salao,
information and issuance of approvals by 2019)
government regulatory agencies required
under any law of the Philippines or of another Prior use in good faith is generally considered as a
country that regulates the manufacture, defense against patent infringement. This defense
construction, use or sale of any product. permits a person to continue their use of an
invention even if that invention is subsequently
The data submitted by the original patent patented by another. (Gepty, 2019)
holder may be protected from unfair
commercial use provided in Article 39.3 of the Q: X invented a device which, through the use
TRIPS Agreement; (Sec. 72.4, IPC) of noise, can recharge a cellphone battery. He
applied for and was granted a patent on his
e. Where the act consists of the preparation for device, effective within the Philippines. As it
individual cases, in a pharmacy or by a medical turns out, a year before the grant of X's patent,
professional, of a medicine in accordance with Y, also an inventor, invented a similar device
a medical prescription; and (Sec. 72.5, IPC) which he used in his cellphone business in
Manila. But X files an injunctive suit against Y
f. Where the invention is used in any ship, vessel, to stop him from using the device on the
aircraft, or land vehicle of any other country ground of patent infringement. Will the suit
entering the territory of the Philippines prosper? (2011 BAR)
temporarily or accidentally. Provided, that
such invention is used exclusively for the A: NO, since Y is a prior user in good faith.
needs of the ship, vessel, aircraft, or land
vehicle and not used for the manufacturing of Use by the Government
anything to be sold within the Philippines.
(Sec. 72.6, IPC) A Government agency or third person authorized
by the Government may exploit the invention even
Prior User without agreement of the patent owner where:
(PI-JA-Na-No-D)
Any prior user, who, in good faith was using the
invention or has undertaken serious preparations a. The Public Interest, in particular, national
to use the invention in his enterprise or business, security, nutrition, health, or the development
before the filing date or priority date of the of other sectors, as determined by the
application in which a patent is granted, shall have appropriate agency of the government, so
the right to continue the use thereof as envisaged requires;
in such preparations within the territory where
the patent produces its effects. (Sec. 73.1, IPC) b. A Judicial or Administrative body has
determined that the manner of exploitation,
To protect the patent owner, however, the prior by the owner of the patent or his licensee, is
user may only transfer or assign the right if it is anti- competitive;
transferred or assigned together with his
enterprise or business, or with that part of his c. In the case of drugs and medicines, there is a
enterprise or business in which is the use or National emergency or other circumstance of
preparation for use have been made. (Sec. 73.2, extreme urgency requiring the use of the
IPC) invention;
In other words, the prior user cannot assign the d. In the case of drugs and medicines, there is a
right to use the patented product or process public Non-commercial use of the patent by
the patentee, without satisfactory reason; or

2022 GOLDEN NOTES
e. In the case of drugs and medicines, the of drugs and medicines shall be subject to the
Demand for the patented article in the determination of the President of the
Philippines is not being met to an adequate Philippines for the purpose of determining the
extent and on reasonable terms, as need for such use or other exploitation, which
determined by the Secretary of the shall be immediately executory. (Sec. 74.2, IPC,
Department of Health. (Sec. 74, IPC as amended as amended by R.A. No. 9502)
by R.A. No. 9502)
Reverse Reciprocity of Foreign Law
Unless otherwise provided herein, the use by the
Government, or third person authorized by the Any condition, restriction, limitation, diminution,
Government shall be subject, where applicable, to requirement, penalty, or any similar burden
the following provisions: imposed by the law of a foreign country on a
Philippine national seeking protection of
1. In situations of national emergency or other intellectual property rights in that country, shall
circumstances of extreme urgency, the right reciprocally be enforceable upon nationals of said
holder shall be notified as soon as reasonably country, within Philippine jurisdiction. (Sec. 231,
practicable; IPC)
2. In the case of public non-commercial use of the Doctrine of Exhaustion

patent by the patentee, without satisfactory
reason, the right holder shall be informed Also known as the doctrine of first sale, it provides
promptly; that the patent holder has control of the first sale
of his invention. He has the opportunity to receive
Provided, that, the Government or third the full consideration for his invention from his
person authorized by the Government, sale. Hence, he exhausts his rights in the future
without making a patent search, knows or has control of his invention.
demonstrable ground to know that a valid
patent is or will be used by or for the It espouses that the patentee who has already sold
Government. his invention and has received all the royalty and
consideration for the same will be deemed to have
3. If the demand for the patented article in the released the invention from his monopoly. The
Philippines is not being met to an adequate invention thus becomes open to the use of the
extent and on reasonable terms as determined purchaser without further restriction. (Adams v.
by the Secretary of Health, the right holder Burke, 84 U.S. 17, 1873)
shall be informed promptly;
GR: Patent rights are exhausted by first sale in the
4. The scope and duration of such use shall be Philippines (Domestic exhaustion).
limited to the purpose for which it was
authorized; XPN: On drugs and medicines: first sale in any
jurisdiction exhausts the rights of the owner
5. Such use shall be non-exclusive; thereof (International exhaustion). (R.A. No. 9502)
6. The right holder shall be paid adequate 4. PATENT INFRINGEMENT

remuneration in the circumstances of each
case, taking into account the economic value of Civil Infringement
the authorization; and
GR: The making, using, offering for sale, selling, or
7. The existence of national emergency or other importing a patented product or a product
circumstances of extreme urgency, in the case obtained directly or indirectly from a patented

Commercial Law
process, or the use of a patented process without infringer knowingly induced infringement and
the authorization of the patentee constitutes possessed of specific intent to encourage another’s
patent infringement. (Sec. 76.1, IPC) infringement. (Amador, 2007)
XPNs: In patent infringement, one who induced someone

to make, use, offer for sale, sell, or import a
a. Using a patented product which has been put patented product or a product obtained directly or
on the market in the Philippines by the owner indirectly from a patented process, or facilitated
of the product, or with his express consent, the use of a patented process without the
insofar as such use is performed after that authorization of the patentee will also be held
product has been so put on the said market. liable for patent infringement. (Gepty, 2019)
(Sec. 72.1, IPC, as amended by R.A. No. 9502)
Criminal Infringement
b. In the case of drugs and medicines, where the
act includes testing, using, making or selling If infringement is repeated by the infringer or by
the invention including any data related anyone in connivance with him after finality of the
thereto, solely for purposes reasonably judgment of the court against the infringer, the
related to the development and submission of offenders shall, without prejudice to the institution
information and issuance of approvals by of a civil action for damages, be criminally liable.
government regulatory agencies required (Sec. 84, IPC)
under any law of the Philippines or of another
country that regulates the manufacture, Two Tests in Determining Patent Infringement
construction, use or sale of any product; (Ibid.)
1. Literal Infringement
c. Compulsory licensing; (Sec. 76.1, IPC, as
amended by R.A. No. 9502) The extent of protection conferred by the patent
shall be determined by the claims, which are to be
d. Use of Invention by Government; (Ibid.) and interpreted in the light of description and
drawings. (Sec. 75, IPC)
e. Procedures on Issuance of a Special
Compulsory License under the TRIPS There is infringement of patent under this test if
Agreement for patented drugs and medicines. one makes, uses or sells an item that contains all
(Ibid.) elements of the patent claim. The test is satisfied
in either of the following:
Contributory Infringement
a. Exactness rule: the item being sold, made,
Anyone who actively induces the infringement of a or used conforms exactly to the patent
patent or provides the infringer with a component claim of another; or
of a patented product or of a product produced
because of a patented process knowing it to be b. Additional rule: One makes, uses, or sells
especially adopted for infringing the patented an item that has all the elements of the
invention and not suitable for substantial non- patent claim of another plus other
infringing use shall be liable as a contributory elements. (Aquino, 2019)
infringer and shall be jointly and severally liable
with the infringer. (Sec. 76.6, IPC) In using literal infringement, resort must be had, in
the first instance, to the words of the claim. If
To succeed on a claim of inducement, patentee accused matter clearly falls within the claim,
must show, first, that there has been direct infringement is made out and that is the end of it.
infringement, and second, that the alleged To determine whether the particular item falls

2022 GOLDEN NOTES
within the literal meaning of the patent claims, the before him, could substitute in the place of the
Court must juxtapose the claims of the patent and mechanism described without the exercise of the
the accused product within the overall context of inventive faculty. (Gsell v. Yap-Jue, G.R. No. L-4720,
the claims and specifications, to determine 19 Jan. 1909, citing Burden v. Corning)
whether there is exactly identity of all material
elements. (Godines v. CA, G.R. No. 97343, 13 Sept. Steps in Determining the Presence of
1993) Infringement:
A patent may be infringed where the essential or 1. Determine if there is literal infringement. If
substantial features of the patented invention are there is, defendant is liable; and
taken or appropriated, or the device, machine or 2. If there is no literal infringement, then the
other subject matter to infringe is substantially doctrine of equivalents should be applied.
identical with the patented invention. In order to (Funa, 2017)
infringe a patent, a machine or device must
perform the same function, or accomplish the Process Patent Infringement
same result by identical or substantially identical
means and the principle or mode of operation If the subject matter of a patent is a process for
must be substantially the same. (Del Rosario v. obtaining a product, any identical product shall be
Court of Appeals, G.R. No. 115106, 15 Mar. 1996) presumed to have been obtained through the use
of the patented process if the product is new or
2. Doctrine of Equivalents (2015 BAR) there is substantial likelihood that the identical
product was made by the process and the owner of
Account shall be taken of elements which are the patent has been unable despite reasonable
equivalent to the elements expressed in the claims, efforts, to determine the process actually used.
so that a claim shall be considered to cover not (Sec. 78, IPC)
only all the elements expressed therein, but also
equivalents. (Sec. 75, IPC) To establish an infringement, it is not essential to
show that the defendant adopted the device or
According to the doctrine of equivalents, an process in every particular; Proof of an adoption of
infringement also occurs when a device the substance of the thing will be sufficient
appropriates a prior invention by incorporating its (Godines v. CA, G.R. No. L-97343, 13 Sept. 1993)
innovative concept and, despite some modification
and change, performs substantially the same Q: Does the use of a patented process by a third
function in substantially the same way to achieve person constitute an infringement when the
substantially the same result. (Godines v. CA, G.R. alleged infringer has substituted, in lieu of
No. 97343, 13 Sept. 1993) some unessential part of the patented process,
a well-known mechanical equivalent?
The doctrine of equivalents thus requires
satisfaction of the function-means-and-result test, A: YES. Under the doctrine of mechanical
the patentee having the burden to show that all equivalents, the patentee is protected from
three components of such equivalency test are colorable invasions of his patent under the guise of
met. (Smithkline Beckman Corporation v. CA, G.R. substitution of some part of his invention by some
No. 126627, 14 Aug. 2003) well-known mechanical equivalent. It is an
infringement of the patent if the substitute
Meaning of “Equivalent Device” performs the same function and was well known at
the date of the patent as a proper substitute for the
An equivalent device is such as a mechanic of omitted ingredient. (Gsell v. Yap-Jue, G.R. No. L-
ordinary skill in construction of similar machinery, 4720, 19 Jan. 1909)
having the forms, specifications, and machine

Commercial Law
Doctrine of File Wrapper Estoppel or d. The court may, according to the

Prosecution History Estoppel circumstances of the case, award damages
in a sum above the amount found as actual
Prosecution history estoppel applies when an damages sustained: Provided, That the
applicant during a patent prosecution narrows a award does not exceed three (3) times the
claim to avoid the prior art, or otherwise to amount of such actual damages. (Sec. 76.4,
address specific concern that arguably would have IPC)
rendered the claimed subject matter unpatentable.
In these instances, estoppel bars the applicant If the infringement is a continuing activity, the
from later invoking the doctrine of equivalents. aggrieved patent holder retains his cause of action
(Funa, 2012) for damages and injunction but may not claim
damages beyond 4 years counted back from the
The doctrine precludes a patentee from obtaining institution of the action. (Amador, 2007)
under the doctrine of equivalents coverage of
subject matter that has been relinquished during A civil action for infringement of a patent may be
the process of its patent application. (Pharmacia & filed despite the pendency of a petition in the IPO
Upjohn Co. v. Mylan Pharm., Inc., 170 F. 3d1373, fir cancellation of the patent. (Luchan v. Honrado,
1376, 31 Mar. 1998) CA-G.R. No. 04706-SP, 06 July 1976)
Remedies of a Patent Owner 2. Criminal action for infringement – If the

infringement is repeated by the infringer or
1. Civil action for infringement – The owner by anyone in connivance with him after
may bring a civil action with the appropriate finality of the judgment of the court against the
Regional Trial Court to recover from infringer infringer, the infringer offender shall be
the damages sustained by the former, plus criminally liable and upon conviction, shall
attorney’s fees and other litigation expenses, suffer imprisonment of not less than six (6)
and to secure an injunction for the protection months but not more than three (3) years
of his rights. (Sec 76.2, IPC) and/or a fine not less than P100,000.00 but
not more than P300,000.00. (Sec. 84, IPC)
Limitations:
Limitation: The criminal action prescribes
a. No damages can be recovered for acts of three (3) years from the commission of the
infringement committed more than four crime. (Ibid.)
(4) years before the filing of the action for
infringement. (Sec. 79, IPC) NOTE: Infringement entails only civil liability in
the first instance, but it becomes a criminal offense
b. Damages cannot be recovered for acts of when it is repeated by the infringer after finality of
infringement committed before the the judgment of the court against the infringer.
infringer had known or had reasonable (Amador, 2007)
grounds to know of the patent. (Sec. 80,
IPC) 3. Administrative remedy – Where the number
of damages claimed is not less than
c. If the damages are inadequate or cannot P200,000.00, the patentee may choose to file
be reasonably ascertained with an administrative action against the infringer
reasonable certainty, the court may award with the Bureau of Legal Affairs (BLA). The
by way of damages a sum equivalent to BLA can issue injunctions and order direct
reasonable royalty. (Sec 76.3, IPC) infringer to pay patentee damages. However,
unlike regular courts, the BLA may not issue

2022 GOLDEN NOTES
search and seizure warrants or warrants of for infringement because the right to maintain
arrest. (Sec. 10.2(a), IPC) an infringement suit depends on the existence
of the patent. (Ibid.)
4. Disposal or Destruction of Infringing
material – The court may, in its discretion, GR: A licensee may NOT maintain a suit for
order that the infringing goods, materials and infringement. Only the patentees, his heirs,
implements predominantly used in the assignee, grantee, or personal representatives
infringement be disposed of outside the may bring an action for infringement.
channels of commerce of destroyed, without
compensation. (Sec.76.5, IPC) XPN: If the licensing agreement provides that
the licensee may bring an action for
5. Provisional measures - Any patentee, or infringement or if he was authorized to do so
anyone possessing any right, title, or interest by the patentee through a special power of
in and to the patented invention, whose rights attorney.
have been infringed, may bring a civil action
before a court of competent jurisdiction, to 2. Any foreign national or juridical entity who
recover from the infringer such damages meets the requirements of Sec. 3 and not
sustained thereby, plus attorney’s fees and engaged in business in the Philippines, to
other expenses of litigation, and to secure an which a patent has been granted or assigned,
injunction for the protection of his rights. (Sec. whether or not it is licensed to do business in
76.2, IPC) the Philippines. (Sec. 77, IPC)
Exclusive right to monopolize the subject A patent holder cannot enforce his rights if he has
matter of the patent exists only within the committed inequitable conduct in the prosecution
term of the patent. Upon the expiration of the of his patent application. (Amador, 2007)
term, there is no more basis for the issuance of
a restraining order or injunction. (Phil. Defenses in Action for Infringement
Pharmawealth, Inc. v. Pfizer Inc., G.R. No.
167715, 17 Nov. 2010) 1. Invalidity of the patent; (Sec. 81, IPC);
2. Any of the grounds for cancellation of patents:
Jurisdiction a. That what is claimed as the invention is
not new or patentable;
An action for infringement of patent falls within b. That the patent does not disclose the
the jurisdiction of the regular courts rather than invention in a manner sufficiently clear
the Intellectual Property Office. (Amancor, Inc. v. and complete for it to be carried out by
Salas, CA-G.R. No. 06049-SP, 10 Oct. 1985) any person skilled in the art; or
c. That the patent is contrary to public order
Persons who can File an Action for or morality; (Sec. 61, IPC) and
Infringement 3. Prescription. (Sec. 84, IPC)
1. The patentee or his successors-in-interest Burden of Proof

may file an action for infringement. (Creser
Precision Systems, Inc. v. CA, G.R. No. 118708, 02 The burden of proof to substantiate a charge of
Feb. 1998) infringement is with the plaintiff. But where the
plaintiff introduces the patent in evidence, and the
A person or entity who has not been granted same is in due form, there is created a prima facie
letters patent over an invention and has not presumption of its correctness and validity. The
acquired any light or title thereto either as decision of the Director of Patent in granting the
assignee or as licensee, has no cause of action patent is presumed to be correct. The burden of

Commercial Law
evidence then shifts to the defendant to overcome

by competent evidence this legal presumption. B. TRADEMARKS
(Maguan v. CA, G.R. No. L-45101, 28 Nov. 1986)
Effect of Invalid Patent

1. MARKS vs. COLLECTIVE MARKS vs. TRADE
NAMES
In an action for infringement, if the court shall find
the patent or any claim to be invalid, it shall cancel
the same, and the Director of Legal Affairs upon Mark
receipt of the final judgement of cancellation by the
court, shall record that fact in the registrar of the Any visible sign capable of distinguishing the
Office and shall publish a notice to that effect in the goods (trademark) or services (service mark) of an
IPO Gazette. (Sec. 82, IPC) enterprise and shall include a stamped or marked
container of goods. (Sec. 121.1, IPC)
Trademark
It is any distinctive word, name, symbol, emblem,

sign or device or any combination thereof, adopted
and used by a manufacturer or merchant on his
goods to identify and distinguish them from those
manufactured, sold or dealt by others. (Dermaline,
Inc. v. Myra Pharmaceuticals, Inc., G.R. No. 190065,
26 Aug. 2010)
Purpose of Trademark
1. To indicate origin or ownership of the articles

to which they are attached;
2. To guarantee that those articles come up to a
certain standard of quality; and
3. To advertise the articles they symbolized.
(Mirpuri v. CA, G.R. No. 114508, 19 Nov. 1999)
Functions of Trademark
1. Economic Function - serve as essential means

of distinguishing the products of one
manufacturer or dealers from those of others;
2. Source-Indicating Function - indicate the

source or origin of the goods on which it is
used. Its immediate object is to distinguish the
goods of one manufacturer from those of his
competitors through the association of goods
thus marked with a particular producer;

2022 GOLDEN NOTES
3. Guarantee Function - guarantee that the yet have the right to register such ownership here
product to which it is affixed comes up to a due to the owner’s failure to use the same in the
certain standard of quality; Philippines for 2 months prior to registration.
4. Advertisement Function – the more widely In any case, the present law on trademarks,
advertised the product is, the more readily Republic Act No. 8293, otherwise known as the
may courts concede that it has become Intellectual Property Code of the Philippines, as
distinctive of its proprietor’s goods. (Amador, amended, has already dispensed with the
2017) requirement of prior actual use at the time of
registration. Thus, there is more reason to allow
Marks which may be Registered the registration of the subject mark under the
name of Cointreau as its true and lawful owner.
Any word, name, symbol, emblem, device, figure, (Ibid.)
sign, phrase, or any combination thereof except
those enumerated under Section 123 of the IPC. Collective Mark
Obligations Under the Paris Convention Any visible sign designated as such in the
application for registration and capable of
In view of the obligations under the Paris distinguishing the origin or any other common
Convention, the Philippines is obligated to assure characteristic, including the quality of goods or
nationals of the signatory-countries that they are services of different enterprises which use the sign
afforded an effective protection against violation under the control of the registered owner of the
of their intellectual property rights in the collective mark. (Sec. 121.2, IPC)
Philippines in the same way that their own
countries are obligated to accord similar A "collective mark" or “collective trade-name" is a
protection to Philippine nationals. "Thus, under mark or tradename used by the members of a
Philippine law, a trade name of a national of a State cooperative, an association or other collective
that is a party to the Paris Convention, whether or group or organization. (Sec. 40, RA. No. 166)
not the trade name forms part of a trademark, is
protected "without the obligation of filing or Contents of an Application for Registration of a
registration. Thus, the applicant for registration of Collective Mark
trademark is not the lawful owner thereof and is
not entitled to registration if the trademark has 1. The application shall designate the mark as a
been in prior use by a national of a country which collective mark;
is a signatory to the Paris Convention. (Divina, 2. Accompanied by a copy of the agreement, if
2021; Ecole De Cuisine Manille, Inc. v. Renaud any, governing the use of the collective mark.
Cointreau & Cie and Le Condron Bleu Int’l B.V., G.R. (Sec. 167.2, IPC)
No. 185830, 05 June 2013)
Grounds for the Cancellation of Collective
Under Section 2 of R.A. No. 166, in order to register Marks
a trademark, one must be the owner thereof and
must have actually used the mark in commerce in The Court shall cancel the registration of a
the Philippines for 2 months prior to the collective mark if the person requesting the
application for registration. Under the same law, it cancellation proves that:
is clear that actual use in commerce is also the test
of ownership, but the provision went further by 1. Only the registered owner uses the mark;
saying that the mark must not have been so 2. He uses or permits its use in contravention of
appropriated by another. Thus, one may be an the agreements referred to in Subsection
owner of a mark due to its actual use but may not 166.2; and

Commercial Law
3. He uses or permits its use in a manner liable to Limitations on Use of Trade Name or Business
deceive trade circles or the public as to the Name
origin or any other common characteristics of
the goods or services concerned. (Sec. 167.3, A person may NOT:
IPC)
1. Use a name if the word is generic; (Lyceum of
The registration of a collective mark, or an the Philippines v. CA, G.R. No. 101897, 5 Mar.
application therefore shall not be the subject of a 1993)
license contract.
2. Use any name indicating geographical
Transliteration vs. Translation of Mark locations; (Ang Si Heng v. Wellington
Department Store, Inc., G.R. No. L-4531, 10 Jan.
TRANSLATION OF 1953)
TRANSLITERATION
MARK
Definition 3. Use any name or designation contrary to
An act, process, or public order or morals;
instances of An act, process, or
representing or instance of 4. Use a name if it is liable to deceive trade circles
spelling of words, translating as or the public as to the nature of the enterprise
letters, or characters of rendering from one identified by that name; (Sec. 165.1, IPC)
one language in the language or
letters and characters representational 5. Subsequently use a trade name likely to
of another language or system into another. mislead the public as a third party; (Sec.
alphabet. 165.2(b), IPC)
Trade Name 6. Copy or simulate the name of any domestic

product (for imported products);
Name or designation identifying or distinguishing
an enterprise. (Sec. 121.3, IPC) 7. Copy or simulate a mark registered in
accordance with the provisions of IPC (for
Any individual name or surname, firm name, imported products); and
device nor word used by manufacturers,
industrialists, merchants, and others to identify 8. Use mark or trade name calculated to induce
their businesses, vocations, or occupants. the public to believe that the article is
(Converse Rubber Corp. vs. Universal Rubber manufactured in the Philippines, or that it is
Products, G.R. No. L-27425, L-30505, 28 Apr. 1980) manufactured in any foreign country or
locality other than the country or locality
A trade name need not be registered with the IPO where it is in fact manufactured.
before an infringement suit may be filed by its
owner against the owner of an infringing NOTE: Items 4, 5 and 6 only apply to imported
trademark. All that is required is that the trade products and those imported articles shall not be
name is previously used in trade or commerce in admitted to entry at any customhouse of the
the Philippines. (Coffee Partners v. San Francisco Philippines. (Sec. 166, IPC)
Coffee and Roastery, Inc., G.R. No. 169504, 03 Mar.
2010) Change in the ownership of a trade name is made
with the transfer of the enterprise or part thereof
identified by that name. (Sec. 165.4, IPC)

2022 GOLDEN NOTES
Trademark vs. Trade name trademark application based on the fact that it
is the registered owner of the KOLIN mark and
TRADEMARK TRADE NAME the registration of KPII’s kolin mark will cause
Function confusion among consumers. KPII asserted
Identifies or Identifies or that KECI’s ownership over the mark is limited
distinguishes the distinguishes the only in connection with the goods specified in
goods or services business or enterprise KECI’s certificate of registration and those
Requirement of Registration related thereto. KPII insisted that the
Registration is Registration is not “Television sets and DVD players” are not
required required related to the goods covered by KECI’s
registered mark. Should KPII’s trademark
2. ACQUISITION OF OWNERSHIP application be granted?
A: NO. KECI was already declared owner of the

The right to register a trademark should be based
KOLIN mark under the Trademark Law. Section
on ownership. When the applicant is not the owner
236 of the Intellectual Property Code states that
of the trademark being applied for, he has no right
nothing in the IP Code – which includes
to apply for the registration of the same. Under the
registrations made pursuant thereto – shall
Trademark Law, only the owner of the trademark,
adversely affect the rights of the enforcement of
trade name or service mark used to distinguish his
marks acquired in good faith prior to the effective
goods, business or service from the goods,
date of said law. Furthermore, Section 122 of the
business or service of others is entitled to register
same code provides that the rights in a mark shall
the same. An exclusive distributor does not acquire
be acquired through registration made validly in
any proprietary interest in the principal's
accordance with the provisions of the IP Code.
trademark and cannot register it in his own name
unless it has been validly assigned to him.
By granting KPII’s trademark application, KPII
(Superior Commercial Enterprises, Inc. v. Kunnan
would acquire exclusive rights over the stylized
Enterprises, G.R. No. 169974, 20 Apr. 2010)
version of KOLIN (“kolin”) for a range of
good/services falling within the normal potential
Trademark is acquired solely through registration.
expansion of its business. This will effectively
For marks that are first used and/or registered
amount to a curtailment of KECI’s right to freely
after the effectivity of the IP Code, ownership is no
use and enforce the KOLIN word mark, or any
longer dependent on the fact of prior use in light of
stylized version thereof, for its own range of
the adoption of the first-to-file rule and the rule
goods/services, especially against KPII, regardless
that ownership is acquired through registration.
of the existence of actual confusion. Based on
(Zuneca Pharmaceutical v. Natrapharm, Inc., G.R.
Section 122 vis-à-vis Section 236 of the Intellectual
No. 211850, 08 Sept. 2020, J. Caguioa)
Property Code, KPII’s trademark application for
kolin cannot be given due course. (Kolin
Rights Over a Trademark Conferred by
Electronics Co, Inc. v. Kolin Philippines
Registration
International, Inc, G.R. No. 228165, 9 Feb. 2021, J.
Caguioa)
The rights in a mark shall be acquired through
registration made validly in accordance with the
Prior Use of Mark as a Requirement
provisions of the IP Code. (Sec. 122, IPC) The filing
date of application is the operative act to acquire
Actual prior use in commerce in the Philippines
trademark rights.
has been abolished as a condition for the
registration of trademark.
Q: KPII filed a trademark application for kolin
mark under class 9 covering “Television sets
and DVD players.” KECI opposed KPII’s

Commercial Law
Q: S Development Corporation sued Shangrila by the registration of a mark or trade name".

Corporation for using the “S” logo and the trade (Shangri-la International Hotel Management, LTD.,
name “Shangrila.” The former claims that it et.al v. Developers Group of Companies, Inc. G.R. No.
was the first to register the logo and the trade 159938, 31 March 2006)
name in the Philippines and that it had been
using the same in its restaurant business. Q: Natrapharm Corp. is selling citicoline under
the trademark ZYNAPSE that is used for
Shangrila Corporation counters that it is an treating stroke and registered it with the IPO.
affiliate of an international organization which In 2007, It filed a complaint against Zuneca for
has been using such logo and trade name injunction and trademark infringement.
“Shangrila” for over 20 years. Zuneca is selling a drug called carbamezipine
under the brand name ZYNAPS that is used to
However, Shangrila Corporation registered the control seizure disorders. Natrapharm claimed
trade name and logo in the Philippines only that the term ZYNAPSE was registered in IPO
after the suit was filed. upon researching that there is no product
using the same. On the other hand, Zuneca
a. Which of the two corporations has a better alleged that it has been using the term ZYNAPS
right to use the logo and the trade name? since 2004 and already secured a certificate of
Explain. product listing from BFAD. Also, it claimed that
b. How does the international affiliation of it was impossible for Natrapharm not to have
Shangrila Corporation affect the outcome known the existence of ZYNAPS before
of the dispute? Explain. (2005 BAR) registration of ZYNAPSE since Natrapharm
promoted its products in the same publication
A: where ZYNAPS was advertised. RTC ruled in
a. S Corporation. Sec. 122 of the Intellectual favor of Natrapharm stating that it is the first
Property Code provides that the rights in a filer in good faith thus, it may prevent others. Is
trademark are acquired through valid the court correct?
registration. Actual prior use in commerce in
the Philippines has been abolished as a A: YES. Under the IP Code, ownership of a mark is
condition for the registration of a trademark. acquired through registration. Subparagraph (d)
(Record of the Senate, Vol. II, No. 29, 8 Oct. 1996; of the provision of the Trademark Law was
Journal of the House of Representatives, No. 35. amended in the IP Code to, among others, remove
12 Nov. 1996, 34) the phrase ''previously used in the Philippines by
another and not abandoned." Under the
b. Shangrila’s international affiliation shall result Trademark Law, as amended, the first user of the
in a decision favorable to it. The Paris mark had the right to file a cancellation case
Convention mandates that protection should be against an identical or confusingly mark registered
afforded to internationally known marks as in good faith by another person. However, with
signatory to the Paris Convention, without regard the omission in the IP Code provision of the
as to whether the foreign corporation is registered, phrase "previously used in the Philippines by
licensed, or doing business in the Philippines. another and not abandoned," said right of the
Shangrila’s separate personalities from their first user is no longer available. In effect, based
mother corporation cannot be an obstacle in the on the language of the provisions of the IP Code,
enforcement of their rights as part of the Kuok even if the mark was previously used and not
Group of Companies and as official repository, abandoned by another person, a good faith
manager and operator of the subject mark and applicant may still register the same and thus
logo. Besides, R.A. No. 166 did not require the party become the owner thereof, and the prior user
seeking relief to be the owner of the mark but "any cannot ask for the cancellation of the latter's
person who believes that he is or will be damaged registration. If the lawmakers had wanted to retain

2022 GOLDEN NOTES
the regime of acquiring ownership through use, a. CONCEPT OF ACTUAL USE

this phrase should have been retained in order to
avoid conflicts in ownership. The removal of such The actual use of the mark representing the goods
a right unequivocally shows the intent of the or services introduced and transacted in
lawmakers to abandon the regime of ownership commerce over a period of time creates that
under the Trademark Law, as amended. (Zuneca goodwill which the law seeks to protect.
Pharmaceutical v. Natrapharm Inc, G.R. No. 211850,
8 Sept. 2020, J. Caguioa) The use of a registered mark representing the
owner's goods or services by means of an
Rights Conferred to the Owner of a Registered interactive website may constitute proof of actual
Mark use that is sufficient to maintain the registration of
the same (W Land Holdings, Inc., v. Starwood Hotels
The owner of a registered mark shall have the and Resorts Worldwide, Inc., G.R. No. 222366, 04
exclusive right to: Dec. 2017)
1. Use the mark for one’s own goods or services; It must be emphasized, however, that the mere
and exhibition of goods or services over the internet,
2. Prevent third parties from using, without his without more, is not enough to constitute actual
consent, signs or containers which are use. To reiterate, the "use" contemplated by law is
identical or similar to the registered genuine use – that is, a bona fide kind of use
trademark where such use would result in a tending towards a commercial transaction in the
likelihood of confusion. ordinary course of trade. Since the internet creates
a borderless marketplace, it must be shown that
In case of the use of an identical sign for identical the owner has actually transacted, or at the very
goods or services, a likelihood of confusion shall least, intentionally targeted customers of a
be presumed. (Secs. 147 and 147.1, IPC) particular jurisdiction in order to be considered as
having used the trademark in the ordinary course
Trademark owner enjoys protection in product of his trade in that country. A showing of an actual
and market areas that are the normal potential commercial link to the country is therefore
expansion of his business. (Dermaline Inc. vs. Myra imperative. (W Land Holdings, Inc., v. Starwood
Pharmaceuticals, Inc., GR No. 190065, August 16, Hotels and Resorts Worldwide, Inc., supra.)
2010)
Proof of Actual Use
Doctrine of Secondary Meaning
The following shall be accepted as proof of actual
"Secondary meaning" means that a word or phrase use of the mark:
originally incapable of exclusive appropriation
with reference to an article in the market (because 1. Labels of the mark as these are used;
it is geographically or otherwise descriptive) 2. Downloaded pages from the website of the
might nevertheless have been used for so long and applicant or registrant clearly showing that
so exclusively by one producer with reference to the goods are being sold or the services are
his article that, in the trade and to that branch of being rendered in the Philippines;
the purchasing public, the word or phrase has 3. Photographs (including digital photographs
come to mean that the article was his property. printed on ordinary paper) of goods bearing
(Pearl & Dean, Inc. v. Shoemart, Inc., G.R. No. the marks as these are actually used or of the
148222, 15 Aug. 2003) stamped or marked container of goods and of
the establishment/s where the services are
being rendered;

Commercial Law
4. Brochures or advertising materials showing NOTE: Lack of funds shall not excuse non-use of
the actual use of the mark on the goods being a mark. (Sec. 152.1, IPC)
sold or services being rendered in the
Philippines; 2. A use which does not alter its distinctive
5. For online sale, receipts of sale of the goods or character though the use is different from the
services rendered or other similar evidence of form in which it is registered; (Sec. 152.2, IPC)
use, showing that the goods are placed on the 3. Use of mark in connection with one or more of
market, or the services are available in the the goods/services belonging to the class in
Philippines or that the transaction took place which the mark is registered; (Sec. 152.3, IPC)
in the Philippines; 4. Use of a mark by a company related to the
6. Copies of contracts for services showing the applicant/registrant; (Sec. 152.4, IPC)
use of the mark. Computer printouts of the 5. Use of a mark by a person controlled by the
drawing or reproduction of marks will not be registrant. (Sec. 152.4, IPC)
accepted as evidence of use. (Rule 205(c),
Trademark Regulations, as amended by Office Duration or Effectivity of Trademark
Order No. 056-13; W Land Holdings, Inc., v. Registration
Starwood Hotels and Resorts Worldwide, Inc.,
supra.) The trademark registration remains in force for
ten (10) years, subject to indefinite renewals of ten
Admission of non-compliance with the (10) years each.
requirement of filing a Declaration of Actual Use is
tantamount to a judicial admission of The registrant is required to file a declaration of
abandonment of trademark. (Mattel, Inc. v. actual use and evidence to that effect, or show valid
Francisco, G.R. No. 166886, 30 July 2008) reasons based on the existence of obstacles to such
use, within one (1) year from the fifth anniversary
NOTE: Failure to file a Declaration of Actual Use of the date of the registration of the mark.
(DAU) within the required period results in the Otherwise, the mark shall be removed from the
automatic cancellation of registration of a Register by the IPO. (Secs. 145 and 146, IPC)
trademark. In turn, such failure is tantamount to
the abandonment or withdrawal of any right or Application for Registration of a Mark by a
interest the registrant has over his trademark. Foreign National
(Birkenstock Orthopaedie GMBH and Co. KG v.
Philippine Shoe Expo Marketing Corporation, G.R. An application for registration of a mark filed in
No. 194307, 20 Nov. 2013) the Philippines by a foreign national of a country
with whom the Philippines extends reciprocity
Periods for the Submission of Declaration of rights, and who previously duly filed an
Actual Use and Proof of Use: application for registration of the same mark in
one of those countries, shall be considered as filed
1. Three (3) years from the filing date of the as of the day the application was first filed in the
application; and foreign country. (Sec. 131.1, IPC)
2. One (1) year from the 5th anniversary of
the date of registration of the mark. However, the owner of a well-known mark in the
Philippines that is identical with, or confusingly
Instances when Non-Use of a Mark is Excused similar to, or constitutes a translation of a mark,
although not registered, may oppose the
1. If caused by circumstances arising application of a mark of foreign origin, or petition
independently of the will of the owner; (Sec. the cancellation of its registration or sue for unfair
152.1, IPC) competition. (Sec. 131.3, IPC)

2022 GOLDEN NOTES
Q: Birkenstock, applied for various trademark Q: E.Y. Industrial is a domestic corporation

registrations before the IPO. However, engaged in the production, distribution and
registration proceedings of the subject sale of air compressors and other industrial
applications were suspended in view of an tools and equipment. Shen Dar is a Taiwan-
existing registration of the mark based foreign corporation engaged in the
"BIRKENSTOCK AND DEVICE" in the name of manufacture of air compressors. Both
STIIC, predecessor-in-interest of PSEMC. companies claimed to have the right to register
Birkenstock filed a cancellation case on the the trademark "VESPA" for air compressors.
ground that it is the lawful and rightful owner
of the Birkenstock marks. However, On June 9, 1997, Shen Dar filed Trademark
STIIC/PSEMC’s registration expired, thereby Application with the IPO for the mark "VESPA,
resulting in the cancellation of such mark. Chinese Characters and Device" for use on air
Accordingly, the cancellation case was compressors and welding machines. On July
dismissed for being moot and academic. 28, 1999, EYIS filed Trademark Application
also for the mark "VESPA," for use on air
The aforesaid cancellation paved the way for compressors.
the publication of the subject applications in
the IPO e-Gazette. In response, respondent On June 21, 2004, Shen Dar filed a Petition for
filed three (3) separate Inter Partes Cases. The Cancellation of EYIS’ COR. Shen Dar primarily
BLA-IPO sustained STIIC/PSEMC’s opposition. argued that the issuance of the COR in favor of
IPO Director General reversed and set aside EYIS violated Section 123.1 paragraphs (d), (e)
the ruling of the BLA. The CA reversed and set and (f) of Republic Act No. (RA) 8293,
aside the ruling of the IPO Director General and otherwise known as the Intellectual Property
reinstated that of the BLA. Did Birkenstock Code (IP Code), having first filed an application
acquire ownership over the said marks by for the mark.
mere application or registration?
Who is the true owner of the mark?
A: NO. It is not the application or registration of a
trademark that vests ownership thereof, but it is A: E.Y. Industrial is the true owner of the mark.
the ownership of a trademark that confers the Under the Intellectual Property Code, the
right to register the same. A trademark is an registration of a mark is prevented with the filing
industrial property over which its owner is of an earlier application for registration. This must
entitled to property rights which cannot be not, however, be interpreted to mean that
appropriated by unscrupulous entities that, in one ownership should be based upon an earlier filing
way or another, happen to register such trademark date. Notably, the Court has ruled that the prior
ahead of its true and lawful owner. The and continuous use of a mark may even overcome
presumption of ownership accorded to a the presumptive ownership of the registrant and
registrant must then necessarily yield to superior be held as the owner of the mark. Registration,
evidence of actual and real ownership of a without more, does not confer upon the registrant
trademark. (Divina, 2014; Birkenstock Orthopaedie an absolute right to the registered mark. The
GMBH and Co. KG v. Philippine Shoe Expo Marketing certificate of registration is merely a prima facie
Corporation G.R. No. 194307, 20 Nov. 2013) proof that the registrant is the owner of the
registered mark or trade name. Evidence of prior
NOTE: The rights in a mark shall be acquired and continuous use of the mark or trade name by
through registration made validly in accordance another can overcome the presumptive ownership
with the provisions of the IP Code. (Sec. 122, IPC; of the registrant and may very well entitle the
Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No. former to be declared owner in an appropriate
211850, 08 Sept. 2020, J. Caguioa) case.

Commercial Law
E.Y. Industrial’s prior adoption and continuous use of the enterprise identified by that name. (Sec.
of the mark "VESPA" on air compressors is 165.1, IPC)
bolstered by numerous documentary evidence.
The use by E.Y. Industrial in the concept of owner In particular, any subsequent use of the trade
is shown by commercial documents, sales invoices name by a third party, whether as a trade name or
unambiguously describing the goods as "VESPA" a mark or collective mark, or any such use of a
air compressors. E.Y. Industrial have sold the air similar trade name or mark, likely to mislead the
compressors bearing the "VESPA" to various public, shall be deemed unlawful. (Sec. 165.2(b),
locations in the Philippines, as far as Mindanao and IPC)
the Visayas since the early 1990s.
Ownership of a xxx trade name may be acquired
As such, E.Y. Industrial must be considered as the not necessarily by registration but by adoption and
prior and continuous user of the mark "VESPA" use in trade or commerce. As between actual use of
and its true owner and is entitled to the a mark without registration, and registration of the
registration of the mark in its name. (E.Y. Industrial mark without actual use thereof, the former
Sales v. Shen Dar Electricity and Machinery Co., Ltd., prevails over the latter. For a rule widely accepted
G.R. No. 184850, 20 Oct. 2010) and firmly entrenched is that actual use in
commerce or business is a prerequisite to the
Q: Is there an infringement of trademark when acquisition of the right of ownership. (Shangri- La
two similar goods use the same words, ‘PALE International Hotel Management, Ltd. v. Developers
PILSEN’? Group of Companies, Inc., G.R. No. 159938, 31 Mar.
2006)
A: NONE, because “pale pilsen” are generic words
descriptive of the color (pale) and of a type of beer The two concepts of corporate name or business
(pilsen), which is a light bohemian beer with name and trademark or service mark are not
strong hops flavor that originated in the City of mutually exclusive. It is common, indeed likely,
Pilsen in Czechoslovakia. Pilsen is a primarily that the name of a corporation or business is also a
geographically descriptive word, hence, non- trade name, trademark, or service mark. (Shangri-
registrable and not appropriable by any beer La International Hotel Management, Ltd. v.
manufacturer. (Asia Brewery, Inc. v. CA, G.R. No. Developers Group of Companies, Inc., supra)
103543, 5 July 1993)
A trade name of a national of a State that is a party
Who May File Opposition to Trademark to the Paris Convention, whether or not the trade
Registration; Grounds name forms part of a trademark, is protected
“without the obligation of prior filing or
Any person who believes that he would be registration.” (Fredco Manufacturing Corporation
damaged by the registration of a mark may, upon v. President and Fellows of Harvard College
payment of the required fee and within thirty (30) (Harvard University), G.R. No. 185917, 01 June
days after the publication referred to in Subsection 2011)
133.2, file with the Office an opposition to the
application. (Sec. 134, IPC) A trade name need not be registered with the IPO
before an infringement suit may be filed by its
Acquisition of Trade Names owner against the owner of an infringing
trademark. All that is required is that the trade
A name or designation may not be used as a trade name is previously used in trade or commerce in
name if by its nature or the use to which such name the Philippines. A corporation has the exclusive
or designation may be put, it is contrary to public right to use its name. The right proceeds from the
order or morals and if, in particular, it is liable to theory that it is a fraud on the corporation which
deceive trade circles or the public as to the nature has acquired a right to that name and perhaps

2022 GOLDEN NOTES
carried on its business thereunder, that another b. Closely related goods or services; or
should attempt to use the same name, or the same c. If it nearly resembles such a mark as to
name with a slight variation in such a way as to be likely to deceive or cause confusion;
induce persons to deal with it in the belief that they
are dealing with the corporation which has given a 5. Is identical with an internationally well-
reputation to the name. (Coffee Partners, Inc. v. San known mark, Whether or not it is registered
Francisco Coffee & Roastery, Inc., G.R. No. 169504, here, used for identical or similar goods or
03 Mar. 2010) services Provided, that in determining
whether a mark is well-known, account shall
b. EFFECT OF REGISTRATION be taken of;
The rights in a mark shall be acquired through 6. Is identical with an internationally well-
registration made validly in accordance with the known mark which is Registered in the
provisions of the IPC. (Sec. 122, IPC) Philippines with respect to non-similar goods
or services. Provided, that the interests of the
Certificate of Registration owner of the registered mark are likely to be
damaged by such use;
A certificate of registration of a mark shall be
prima facie evidence of the validity of the 7. Is likely to Mislead the public as to the nature,
registration, the registrant's ownership of the quality, characteristics or geographical origin
mark, and of the registrant's exclusive right to use of the goods or services;
the same in connection with the goods or services
8. Consists exclusively of signs that are Generic
and those that are related thereto specified in the
for the goods or services that they seek to
certificate. (Sec. 138, IPC)
identify;
Non-Registrable Marks (Im-F-L-E-W-Re-Mi-G-
9. Consists exclusively of signs or of indications
Cu-De-S-Co-Con)
that have become Customary or usual to
designate the goods or services in everyday
1. Consists of Immoral, deceptive, or scandalous
language or in bona fide and established trade
matter or falsely suggest a connection with
practice.
persons, institutions, beliefs, or national
symbols; 10. Consists exclusively of signs or indications
that may serve in trade to Designate the kind,
2. Consists of the Flag or coat of arms or other quality, quantity, intended purpose, value,
insignia of the Philippines or any of its geographical origin, time or production of the
political subdivisions, or of any foreign goods or rendering of the services, or other
nation; characteristics of the goods or services;
3. Consists of a name, portrait or signature 11. Consists of Shapes that may be necessitated
identifying a particular Living individual by technical factors or by the nature of the
except by his written consent, or the name, goods themselves or factors that affect their
signature, or portrait of a deceased President intrinsic value;
of the Philippines, during the life of his widow
except by written consent of the widow; 12. Consists of Color alone, unless defined by a
given form; or
4. Identical with a registered mark belonging to
a different proprietor or a mark with an 13. Is Contrary to public order or morality (Sec.
Earlier filing or priority date, in respect of: 123, IPC)
a. The same goods or services;

Commercial Law
Q: Laberge, Inc., manufactures and markets A: YES. Petitioner’s argument that “San Francisco”
after-shave lotion, shaving cream, and is just a proper name referring to the famous city
deodorants using the trademark “PRUT”, in California and that “coffee” is simply a generic
which is registered with the Intellectual term, is untenable. Respondent has acquired an
Property Office. Laberge does not manufacture exclusive right to the use of the trade name “SAN
briefs and underwear and these items are not FRANCISCO COFFEE & ROASTERY, INC.” since the
specified in the certificate of registration. JG registration of the business name with the DTI in
who manufactures briefs and underwear, 1995. Thus, respondent’s use of its trade name
wants to know whether, under our laws, he can from then on must be free from any infringement
use and register the trademark “PRUTE” for his by similarity. Of course, this does not mean that
merchandise. Can JG register the trademark? respondent has exclusive use of the geographic
word “San Francisco” or the generic word “coffee.”
A: YES. The trademark registered in the name of Geographic or generic words are not, per se,
Laberge, Inc. covers only after-shave lotion, subject to exclusive appropriation. It is only the
shaving cream, deodorant, talcum powder and combination of the words “SAN FRANCISCO
toilet soap. It does not cover briefs and underwear. COFFEE,” which is respondent’s trade name in its
The limit of the trademark is stated in the coffee business, that is protected against
certificate issued to Laberge Inc. It does not infringement on matters related to the coffee
include briefs and underwear which are different business to avoid confusing or deceiving the
products protected by Laberge’s trademark. JG can public. (Divina, 2014; Coffee Partners, Inc. v. San
register the trademark “PRUTE” to cover its briefs Francisco Coffee and Roastery, Inc., G.R. No. 169504,
and underwear. (Faberge Inc. v. IAC, G.R. No. 71189, 03 Mar. 2010)
04 Nov. 1992)
NOTE: It is hornbook doctrine that emphasis
Q: CPI was registered with the SEC in January should be on the similarity of the products
2001. It has a franchise agreement with Coffee involved and not on the arbitrary classification or
Partners Ltd. (CPL) for a non-exclusive right to general description of their properties or
operate coffee shops in the Philippines using characteristics. The mere fact that one person has
trademarks designed by CPL such as SAN adopted and used a trademark on his goods would
FRANCISCO COFFEE. not, without more, prevent the adoption and use of
the same trademark by others on unrelated
SFCRI was registered with the SEC in May 1995. articles of a different kind. (Taiwan Kolin
It registered the business name SAN Corporation, Ltd. v. Kolin Electronics Co., Inc., G.R.
FRANCISCO COFFEE & ROASTERY, INC. with the No. 209843, 25 Mar. 2015)
DTI in June 1995.
In Taiwan Kolin Corporation, while both competing
In June 2001, SFCRI discovered that CPI was marks refer to the word “KOLIN” written in upper
about to open a coffee shop under the name case letters and in bold font, the Court noted that
SAN FRANCISCO COFFEE in Libis, Quezon City. one is italicized and colored black while the other
SFCRI sent a letter to CPI demanding that the is white in pantone red color background.
latter stop using the name SAN FRANCISCO According to the Court, the differing features
COFFEE. Does CPI ‘s use of the trademark SAN between the two, though they may appear
FRANCISCO COFFEE constitutes infringement minimal, are sufficient to distinguish one brand
of SFCRI ‘s trade name SAN FRANCISCO COFFEE from the other.
& ROASTERY, INC., even if the trade name is not
registered with the Intellectual Property Office Q: Natrapharm is a domestic corporation
(IPO)? engaged in the business of manufacturing,
marketing, and distribution of pharmaceutical
products for human relief. One of the products

2022 GOLDEN NOTES
being manufactured and sold by Natrapharm is a trademark is a creation of use and belongs to one
citicoline under the trademark "ZYNAPSE", who first used it in trade or commerce. (Zuneca
which is indicated for the treatment of Pharmaceutical v. Natrapharm, Inc., G.R. No.
cerebrovascular disease or stroke. The 211850, 08 Sept. 2020, J. Caguioa)
trademark "ZYNAPSE" was registered with the
Intellectual Property Office of the Philippines Similarity between Marks
(IPO) on September 24, 2007 and is covered by
Certificate of Trademark Registration No. 4- The likelihood of confusion is a relative concept; to
2007-005596. Natrapharm filed with the RTC be determined only according to the particular and
a Complaint against Zuneca for Injunction, sometimes peculiar circumstances of each case. In
Trademark Infringement, Damages and trademark cases, even more than in any other
Destruction with Prayer for TRO and/or litigation, precedent must be studied in light of the
Preliminary Injunction, alleging that Zuneca's facts of the particular case. The wisdom of the
"ZYNAPS" is confusingly similar to its likelihood of confusion test lies in its recognition
registered trademark "ZYNAPSE" and the that each trademark infringement case presents its
resulting likelihood of confusion is dangerous own unique set of facts. (Societe Des Produits
because the marks cover medical drugs Nestle, S.A. and Nestle Philippines, Inc. v. CA and CFC
intended for different types of illnesses. Corporation, G.R. No. 112012, 04 Apr. 2001)
Zuneca, contends that, as the first user, it had
already owned the "ZYNAPS" mark prior to Two (2) Types of Confusion
Natrapharm's registration. Does Natrapharm
have the right to prevent Zuneca from 1. Confusion of goods (product confusion) –
using/registering the trademark "ZYNAPS" or where the ordinarily prudent purchaser
marks similar or identical thereto? would be induced to purchase one product in
the belief that he was purchasing the other;
A: YES. Section 122 of the IP Code provides that the and
rights in a mark shall be acquired by means of its
valid registration with the IPO. A certificate of 2. Confusion of business (source or origin
registration of a mark, once issued, constitutes confusion) – where, although the goods of the
prima facie evidence of the validity of the parties are different, the product, the mark of
registration, of the registrant's ownership of the which registration is applied for by one party,
mark, and of the registrant's exclusive right to use is such as might reasonably be assumed to
the same in connection with the goods or services originate with the registrant of an earlier
and those that are related thereto specified in the product, and the public would then be
certificate. Nevertheless, the first-to-file rule deceived either into that belief or into the
prioritizes the first filer of the trademark belief that there is some connection between
application and operates to prevent any the two parties, though inexistent. (Mang
subsequent applicants from registering marks Inasal Philippines, Inc. v. IFP Manufacturing
described under Section 123.1(d) of the IP Code. In Corporation, G.R. No. 221717, 19 June 2017)
other words, the prima facie presumption brought
about by the registration of a mark may be Q: Kolin Philippine International (KPII), an
challenged and overcome, in an appropriate affiliate of TKC, filed Trademark Application
action, by proof of the nullity of the registration or No. 4-2006-010021 for the mark under Class 9
of non-use of the mark, except when excused. covering “television and DVD players. Kolin
Moreover, the presumption may likewise be Electronics Co., Inc (KECI) filed an opposition
defeated by evidence of prior use by another against KPII’s trademark Application for the
person, i.e., it will controvert a claim of legal reason that it is the registered owner of the
appropriation or of ownership based on mark and that the registration of KPII will
registration by a subsequent user. This is because cause confusion among customers. KPII

Commercial Law
argued that the promulgation of KECI Holistic Test, Abandoned

ownership cannot apply to KPII case because
it was not a party to the said case and the Q: Petitioner Levi Strauss & Co. is a foreign
ownership case is not res judicata to the KPII corporation and owner of the word mark
case. The IPO – BLA rejected KPII claim "LEVI'S". It filed before the IPO a petition for
because it will cause confusion to the products cancellation of the trademark “LIVE’S” on the
offered by KECI and KPII. Whether or not Kolin ground that it is confusingly similar with
Philippines International Inc., should be petitioner's "LEVI'S" mark. Both marks cover
allowed to register its mark? the same goods under Class 25 of the Nice
Classification. Respondent Guevarra alleged
A: NO. To summarize the above discussion: (1) that its mark is not confusingly similar with
there is resemblance between KECI's and KPII's petitioner's "LEVI'S" mark, claiming that the
marks; (2) the goods covered by KECI's are probability of confusion arising from the
related to the goods covered by KPII's ; (3) there alleged similarity of the marks is negligible
is evidence of actual confusion between the two due to the attention given by the purchasers to
marks; (4) the goods covered by KPII's fall within the goods they are purchasing; and that there
the normal potential expansion of business of are sufficient differences in the price, hand
KECI; (5) sophistication of buyers is not enough to tags, and other markings of the products.
eliminate confusion; (6) KPII's adoption of KECI's Should the Petition for Cancellation be
coined and fanciful mark would greatly contribute granted?
to likelihood of confusion; and (7) KPII applied for
in bad faith. Thus, KPII's application for should be A: YES. The Holistic Test in determining
denied because it would cause likelihood of trademark resemblance has been abandoned. The
confusion and KECI's rights would be damaged. Dominancy Test must be used in determining the
existence of confusing similarity between the
Further, KECI was already declared as the owner "LEVI'S" and “LIVE’S” marks. This test relies not
of the mark under Trademark Law. The existence only on the visual but also on the aural and
of likelihood of confusion is already considered as connotative comparisons and overall impressions
damage that would be sufficient to sustain the between the two trademarks. The dominant
opposition and rejection of KPII's trademark feature of petitioner's "LEVI'S" marks is the word
application. The Court is likewise cognizant that, "LEVI'S" composed of five (5) letters, namely "L",
by granting this registration, KPII would acquire "E", "V", "I", and "S" with an apostrophe
exclusive rights over the stylized version of separating the fourth and fifth letters. Notably, for
KOLIN for a range of goods/services, 172 i.e., petitioner's stylized marks, the letter "E" is in
covered goods, related goods/services, lowercase format with the rest in uppercase
goods/services falling within the normal format. On the other hand, the dominant feature
potential expansion of KPII's business. Owing to of respondents' “LIVE’S” stylized mark is the word
the peculiar circumstances of this case, this will "LIVE'S" also composed of the same five (5)
effectively amount to a curtailment of KECI's right letters; and its only difference with petitioner's
to freely use and enforce the KOLIN word mark, marks is that the positioning of the letters "E" and
or any stylized version thereof, for its own range "I" are interchanged. Furthermore, respondents'
of goods/services, especially against KPII, mark also depicts the letter "E" in lowercase
regardless of the existence of actual confusion. format with the rest in uppercase format.
(Kolin Electronics v. Kolin Philippines, G.R. No.
228165, 09 Feb. 2021, J. Caguioa) From the foregoing, it is thus readily apparent
that although petitioner's and respondents'
NOTE: The use of the Holistic Test in determining marks are neither spelled identically nor
the resemblance of marks has been abandoned. pronounced in the same way, nor possess the
(Ibid.) same meaning, they both begin with the same

2022 GOLDEN NOTES
letter and are in the possessive form as denoted same on the entirely unrelated goods or services,
by the apostrophe before the letter "S" at the end, subject to the following requisites, to wit:
with only the second and fourth letters re-
arranged. Simply put, respondents' “LIVE’S” mark 1. The mark is well-known internationally and in
is but a mere anagram of petitioner's "LEVI'S" the Philippines;
marks. It would not be farfetched to imagine that 2. The use of the well-known mark on the
a buyer, when confronted with such striking entirely unrelated goods or services would
similarity would be led to confuse one over the result to the likelihood of confusion of origin
other. Thus, by simply applying the Dominancy or business or some business connection or
Test, it can already be concluded that there is a relationship between the registrant and the
likelihood of confusion between petitioner's user of the mark; and
"LEVI'S" marks and respondents' “LIVE’S” mark. 3. The interests of the owner of the well-known
(Levi Strauss & Co. v. Sevilla, G.R. No. 219744, 01 mark are likely to be damaged. (246
Mar. 2021) Corporation, doing business under the name
and style of Rolex Music Lounge v. Hon.
3. WELL-KNOWN MARKS Reynaldo B. Daway, in his capacity as Presiding
Judge of RTC Br. 90, Quezon City, G.R. No.
Well-known Marks 157216, 20 Nov. 2003)
A well-known mark is a mark which is considered Internationally Well-known Mark

by the competent authority of the Philippines to be
well-known internationally and in the Philippines, 1. Considered by the competent authority of the
whether or not it is registered here, as being Philippines to be “well-known” internationally
already the mark of a person other than the and in the Philippines as the mark of a person
applicant for registration. (Divina, 2021; Sec. other than the applicant or registrant;
123.1(e), IPC) 2. Need not be used or registered in the
Philippines; and
Test to Determine Confusing Well-Known 3. Need not be known by the public at large but
Marks only by relevant sector of the public. (Sec.
123(e), IPC)
This is used in determining whether an
international mark is well-known for the rule on Rules regarding Internationally Well-Known
non-registrable marks under Sec. 123(e) to Marks
operate. (Gepty, 2018)
A mark cannot be registered if it is identical with,
The scope of protection initially afforded by the or confusingly similar to, or constitutes a
Paris Convention has been expanded via a translation of a mark which is considered by the
nonbinding recommendation that a well-known competent authority of the Philippines to be well-
mark should be protected in a country even if the known internationally and in the Philippines,
mark is neither registered nor used in that country. whether or not it is registered here, as being
(Sehwani, Incorporated v. In-N-Out Burger, Inc., G. already the mark of a person other than the
R. No. 171053, 15 Oct. 2007) applicant for registration and used for identical or
similar goods or services. Provided. that in
A junior user of a well-known mark on goods or determining whether a mark is well-known,
services which are not similar to the goods or account shall be taken of the knowledge of the
services, and are therefore unrelated, to those relevant sector of the public, rather than of the
specified in the certificate of registration of the public at large, including knowledge in the
well-known mark is precluded from using the Philippines which has been obtained as a result of
the promotion of the mark.

Commercial Law
A mark cannot be registered if it is identical with, claiming that his mark is a well-known mark.
or confusingly similar to, or constitutes a
translation of a mark considered well-known in Provided, further, that the mark is well-known both
accordance with the preceding paragraph, which is internationally and in the Philippines. (Sec. 3, Rule
registered in the Philippines with respect to goods 18, A.M. No. 10-3-10-SC, as amended, 06 Oct. 2020)
or services which are NOT similar to those with
respect to which registration is applied for: NOTE: Account shall be taken of the knowledge of
Provided, That use of the mark in relation to those the relevant sector of the public, rather than of the
goods or services would indicate a connection public at large, including knowledge in the
between those goods or services, and the owner of Philippines which has been obtained as a result of
the registered mark: Provided further, That the the promotion of the mark. The following criteria
interests of the owner of the registered mark are or any combination thereof may be taken into
likely to be damaged by such use. (Sec. 123, IPC) account in determining whether a mark is well-
known.
Factors to be Considered in Determining Well-
Known Marks In Fredco Manufacturing Corp. vs. President and
Fellows of Harvard College, (G.R. No. 185917, 01
1. Duration, extent, and geographical area of any June 2011) Fredco Manufacturing Corp. (Fredco)
use of the mark; in particular, the duration, filed before the IPO a Petition for Cancellation of
extent and geographical area of any promotion Registration issued to Harvard University for the
of the mark, including advertising or publicity mark “Harvard Veritas Shield Symbol”. Fredco
and the presentation, at fairs or exhibitions, of claims that as early as 1982 the mark was already
the goods and/or services to which the mark used in the Philippines by its predecessor-in-
applies; interest. Harvard University, on the other hand,
2. Market share, in the Philippines and in other claimed that the name and mark “Harvard” was
countries, of the goods and/or services to adopted in 1639 as the name of Harvard College of
which the mark applies; Cambridge, Massachusetts, USA. The mark had
3. Degree of the inherent or acquired distinction been used in commerce since 1872 and was
of the mark; registered in more than 50 countries.
4. Quality image or reputation acquired by the
mark; The Supreme Court ruled that "Harvard" is the
5. Extent to which the mark has been registered trade name of the world-famous Harvard
in the world; University, and it is also a trademark of Harvard
6. Exclusivity of registration attained by the University. Under Article 8 of the Paris Convention,
mark in the world; as well as Section 37 of R.A. No. 166, Harvard
7. Extent to which the mark has been used in the University is entitled to protection in the
world; Philippines of its trade name "Harvard" even
8. Exclusivity of use attained by the mark in the without registration of such trade name in the
world; Philippines. This means that no educational entity
9. Commercial value attributed to the mark in in the Philippines can use the trade name
the world; "Harvard" without the consent of Harvard
10. Record of successful protection of the rights in University. Likewise, no entity in the Philippines
the mark; can claim, expressly or impliedly through the use
11. Outcome of litigations dealing with the issue of of the name and mark "Harvard," that its products
whether the mark is a well-known mark; and or services are authorized, approved, or licensed
12. Presence or absence of identical or similar by, or sourced from, Harvard University without
marks validly registered for or used on the latter's consent.
identical or similar goods or services and
owned by persons other than the person

2022 GOLDEN NOTES
To be protected under the two directives of the prejudice to availing himself of other remedies
Ministry of Trade, an internationally well-known provided for under the law. (Ibid.)
mark need not be registered or used in the
Philippines. All that is required is that the mark is 4. RIGHTS CONFERRED BY REGISTRATION
well-known internationally and in the Philippines
for identical or similar goods, whether or not the Rights Conferred to the Owner of a Registered
mark is registered or used in the Philippines. Mark
Section 123.1(e) of R.A. No. 8293 now categorically
states that "a mark which is considered by the The owner of a registered mark shall have the
competent authority of the Philippines to be well- exclusive right to:
known internationally and in the Philippines,
whether or not it is registered here," cannot be 1. Use the mark for one’s own goods or services;
registered by another in the Philippines. Section 2. Prevent third parties from using, without his
123.1(e) does not require that the well-known consent, signs or containers which are
mark be used in commerce in the Philippines but identical or similar to the registered
only that it be well-known in the Philippines. trademark where such use would result in a
likelihood of confusion.
Division of Application
In case of the use of an identical sign for identical
Any application referring to several goods or goods or services, a likelihood of confusion shall
services, hereafter referred to as the "initial be presumed. (Secs. 147 and 147.1, IPC)
application," may be divided by the applicant into
two (2) or more applications, hereafter referred to Trademark owners enjoy protection in product
as the "divisional applications," by distributing and market areas that are the normal potential
among the latter the goods or services referred to expansion of his business. (Dermaline Inc. vs. Myra
in the initial application. The divisional Pharmaceuticals, Inc.., GR No. 190065, 16 Aug.
applications shall preserve the filing date of the 2010)
initial application or the benefit of the right of
priority. (Sec. 129, IPC) Limitations
Priority Right Except in cases of importation of drugs and

medicines allowed under Section 72.1 of the IP
An application for registration of a mark filed in Code and of off- patent drugs and medicines, the
the Philippines by a person referred to in Section 3 owner of a registered mark shall have the exclusive
of the IPC, and who previously duly filed an right to prevent all third parties not having the
application for registration of the same mark in owner’s consent from using in the course of trade
one of those countries, shall be considered as filed identical or similar signs or containers for goods or
as of the day the application was first filed in the services which are identical or similar to those in
foreign country. No registration of a mark shall be respect of which the trademark is registered
granted until such mark has been registered in the where such use would result in a likelihood of
country of origin of the applicant. (Sec. 131, IPC) confusion. In case of the use of an identical sign for
identical goods or services, a likelihood of
The owner of a mark seeking priority right is not confusion shall be presumed.
entitled to sue for acts committed prior to the date
on which his mark was registered in the There shall be no infringement of trademarks or
Philippines: except in the case of an owner of a trade names of imported or sold patented drugs
well-known mark where he can oppose its and medicines allowed under Section 72.1 of the IP
registration or petition the cancellation of its Code, as well as imported or sold off-patent drugs
registration or sue for unfair competition, without and medicines; Provided, That said drugs and

Commercial Law
medicines bear the registered marks that have not from the fifth anniversary of the date of the
been tampered, unlawfully modified, or infringed registration of the mark. Otherwise, the mark shall
upon, under Section 155 of the IP Code. (Sec. 147, be removed from the Register by the Office. (Sec.
IPC, as amended by R.A. No. 9502) 145, IPC)
When the Rights Terminate Effect of Failure to file Declaration of Actual Use
The rights conferred by trademark registration The applicant or the registrant shall file a
end upon cancellation of the certificate of declaration of actual use (DAU) of the mark with
registration by the IPO in the cases allowed by law. evidence to that effect, as prescribed by the
(Divina, 2021) Regulations within three (3) years from the filing
date of the application. Otherwise, the application
Certificate of Registration Prima Facie shall be refused, or the mark shall be removed
Evidence of Validity from the Register by the Director. (Sec. 124.2, IPC)
A certificate of registration of a mark shall be A fifth anniversary use is also required. This is
prima facie evidence of the validity of the done by filing a declaration of actual use and
registration, the registrant’s ownership of the evidence to that effect within one year from the
mark, and of the registrant’s exclusive right to use fifth anniversary of the registration. The form and
the same in connection with the goods or services evidence of use required are similar to the third
and those that are related thereto specified in the year DAU. Failure to submit the fifth anniversary
certificate. (Sec. 138, IPC) use and evidence to that effect shall merit the
cancellation of the mark. (Sec. 145, IPC)
Issuance and Publication of Certificate of
Registration Renewal of Registration
The certificate of registration shall be issued when A certificate of registration may be renewed for
the period for filing the opposition has expired, or periods of ten (10) years at its expiration. Each
when the Director of Legal Affairs shall have request for renewal of registration must be made
denied the opposition, and upon payment of the within 6 months before the expiration of the
required fee. (Sec. 136, IPC) registration or within 6 months after such
expiration on payment of the additional fee
The registered mark shall be published, in the form prescribed. (Sec. 146, IPC)
and within the period fixed by the Regulations.
Marks registered at the Office may be inspected 5. CANCELLATION OF REGISTRATION
free of charge and any person may obtain copies
thereof at his own expense. This provision shall A trademark registration may be cancelled by any
also be applicable to transactions recorded in person who believes that he will be damaged by
respect of any registered mark. (Sec. 138, IPC) the registration of the mark:
Duration of a Certificate of Trademark 1. Within five (5) years from the date of the
Registration registration of the mark; or
A certificate of registration shall remain in force 2. At any time;

for ten (10) years, provided that the registrant a. If the registered mark becomes the generic
shall file a declaration of actual use and evidence name for the goods or services, or a portion
to that effect or shall show valid reasons based on thereof, for which it is registered;
the existence of obstacles to such use, as b. If the mark has been abandoned;
prescribed by the Regulations, within one (1) year

2022 GOLDEN NOTES
c. If its registration was obtained A:

fraudulently or contrary to the provisions
of the IPC; a. NO. Since YYY is not the owner of the trademark,
d. If the registered mark is being used by, or it has no right to apply for registration.
with the permission of, the registrant so as Registration of trademark, by itself, is not a mode
to misrepresent the source of the goods or of acquiring ownership. It is the ownership of a
services on or in connection with which the trademark that confers the right to register the
mark is used; or same. (Birkenstock Orthopedia GMBH and Co. v.
e. Non-use of the mark within the Philippines, Philippines Shoe Expo Marketing Corp., G.R. No.
without legitimate reason, for an 194307, 20 Nov. 2013)
uninterrupted period of 3 years. (Sec. 151,
IPC) b. NO. Registration merely creates a prima facie
presumption of validity of the registration of the
NOTE: If in a petition for cancellation of a registrant’s ownership of the trademark and the
trademark, it was established that the petitioner exclusive right to the use thereof. The presumption
was not its owner, prior registration can be of ownership accorded to a registrant is rebuttable
cancelled without need of filing a separate petition. and must yield to evidence to the contrary.
(E.Y. Industrial Sales, Inc. v. Shen Dar Electricity and (Zuneca Pharmaceutical v. Natrapharm, Inc., G.R.
Machinery Co. Ltd., G.R. No. 184850, 20 Oct. 2010) No. 211850, 08 Sept. 2020, J. Caguioa)
Q: ABC Appliances Corporation (ABC) is a Q: Alice Corp had been using the trademark
domestic corporation engaged in the “Mr. Gulaman” for gulaman powder jelly mix. It
production and sale of televisions and other registered the same on 2006, but it found out
appliances. YYY Engineers, a Taiwanese that there was a pending registration for the
company, is the manufacturer of televisions same trademark filed on 2005 by Q Corp. Alice
and other appliances from whom ABC actually Corp. opposed Q’s registration on the ground
purchases appliances. From 2000, when ABC that it had been using the logo since 2000 and
started doing business with YYY, it has been the logo it had been using was a registered
using the mark "TTubes" in the Philippines for copyright from the artist that it had
the television units that were bought from YYY. commissioned to create such logo. The artist
In 2015, YYY filed a trademark application for then assigned such copyrighted logo to its
"TTubes." Later, ABC also filed its application. favor. Despite such opposition, the Certificate
Both claim the right over the trademark of Registration was issued in favor of Q Corp.
"TTubes" for television products. YYY relies on Alice Corp then decides to file a petition for
the principle of "first to file" while ABC involves cancellation of the certificate of registration.
the "doctrine of prior use. This was granted by the BLA-IPO on the ground
of that was substantial evidence to prove Alice
a. Does the fact that YYY filed its application Corp’s prior use of mark due to its actual use in
ahead of ABC mean that YYY has the prior right commerce since 1996 and that the competing
over the trademark? Explain briefly. logos are identical and the same in all aspects.
Is the BLA-IPO correct in cancelling the
b. Does the prior registration also mean a Certificate of Registration issued in favor of Q
conclusive assumption that YYY Engineers is in Corp?
fact the owner of the trademark “TTubes?”
Briefly explain your answer. (2016 BAR) A: YES. Pursuant to the case of Zuneca v.
Natrapharm, trademark can be acquired only
through registration and not through prior use.
However, when a certificate of registration is
already issued in favor of a person, it is only

Commercial Law
considered as prima facie evidence of the mistake or to deceive purchasers or others as to

ownership of such trademark. The same can be the source or origin of such goods or services, or
rebutted. While registration vests ownership over Identity of such business; or reproduce,
a mark, bad faith may still be a ground for the counterfeit, copy or colorably imitate any such
cancellation of trademark registrations. In mark or tradename and apply such reproduction,
cancelling petitioner's certificate of registration, counterfeit, copy or colorable limitation to labels,
the BLA-IPO concluded that petitioner copied signs, prints, packages, wrappers, receptacles or
respondent's mark. It compared the two and found advertisements intended to be used upon or in
that petitioner's mark is identical with connection with such goods, business or services."
respondent's. It noted that the word "Mr. (Esso Standard Eastern, Inc. v. CA, G.R. No. L-29971,
Gulaman" in both of their marks are "exactly the 31 Aug. 1982)
same in all aspects" This conclusion was bolstered
by its finding that in petitioner's Declaration of A crucial issue in any trademark infringement case
Actual Use, she submitted photographs of a is the likelihood of confusion, mistake, or deceit as
packaging showing respondent's "Mr. Gulaman" to the identity, source or origin of the goods or
and its logo design. (Medina v. Global Quest identity of the business as a consequence of using
Ventures, G.R. No. 213815, 08 Feb. 2021) a certain mark. Likelihood of confusion is
admittedly a relative term, to be determined
Use of Indications by Third Parties for rigidly according to the particular (and some-
Purposes Other than those for which the Mark times peculiar) circumstances of each case. Thus,
is Used in trademark cases, more than in other kinds of
litigation, precedents must be studied in the light
Registration of the mark shall not confer on the of each particular case. (Mighty Corporation v. E. J.
registered owner the right to preclude third Gallo Winery, G.R. No. 154342, 14 July 2004)
parties from using bona fide their names,
addresses, pseudonyms, geographical name, or Less Stringent Standard of Likelihood of
exact indications concerning the kind, quality, Confusion
quantity, destination, value, place of origin, or time
of production or of supply, of their goods or Failure to present proof of actual confusion does
services: Provided, That such use is confined to the not negate their claim of trademark infringement.
purposes of mere identification or information and Trademark infringement requires the less
cannot mislead the public as to the source of the stringent standard of “likelihood of confusion”
goods or services. (Sec. 148, IPC) only. While proof of actual confusion is the best
evidence of infringement, its absence is
NOTE: The IPC deems unlawful any subsequent inconsequential. (McDonalds Corporation v. L. C.
use of the trade name by a third party, whether as Big Mak Burger, Inc., G.R. No. 143993, 18 Aug. 2004)
a trade name or mark or collective mark, or any
such use of a similar trade name or mark, likely to Elements of Trademark Infringement (Re-Re-
mislead the public. (Sec. 165.2(b), IPC) Use-Co-Co)
6. TRADEMARK INFRINGEMENT 1. The trademark being infringed is Registered

in the Intellectual Property Office;
Infringement is the use without consent of the
trademark owner of any "reproduction, 2. The trademark is Reproduced, counterfeited,
counterfeit, copy or colorable limitation of any copied, or colorably imitated by the infringer;
registered mark or tradename in connection with
the sale, offering for sale, or advertising of any 3. The infringing mark is Used in connection
goods, business or services on or in connection with the sale, offering for sale, or advertising
with which such use is likely to cause confusion or of any goods, business, or services; or the

2022 GOLDEN NOTES
infringing mark is applied to labels, signs, visually similar, but are phonetically and aurally
prints, packages, wrappers, receptacles or similar as well. To top it all off, both marks are used
advertisements intended to be used upon or in in selling lechon products. Verily, there exists a
connection with such goods, business or high likelihood that the consumers may conclude
services; an association or relation between the products.
Likewise, the uncanny resemblance between the
4. The use or application of the infringing mark marks may even lead purchasers to believe that
is likely to cause Confusion or mistake or to Emzee and Elarfoods are the same entity. In fine,
deceive purchasers or others as to the goods Emzee's use of marks similar to those of the
or services themselves or as to the source or Elarfoods' constitutes a violation of the latter's
origin of such goods or services or the identity intellectual property rights. (Emzee Foods, Inc. v.
of such business; and Elarfoods, Inc., G.R. No. 220558, 17 Feb. 2021)
5. The use or application of the infringing mark Counterfeit Goods vs. Colorable Imitation
is without the Consent of the trademark
owner or the assignee thereof. (Divina, 2021; COUNTERFEIT COLORABLE
Diaz v. People, G.R. No. 180677, 18 Feb. 2013) GOODS IMITATION
Definition
Q: ELARS Lechon was established and Any goods, including Such a close or
marketed in 1970 by spouses Lontoc. In 1989, packaging, bearing ingenious imitation as
the spouses Lontoc incorporated their food without authorization to be calculated to
business. Elarfoods was granted a Certificate of a trademark which is deceive ordinary
Registration by the Securities and Exchange identical to the purchasers, or such
Commission. Since then, the spouses Lontoc trademark validly resemblance of the
actively managed and used Elarfoods as its registered in respect infringing mark to the
business name and marketed its roasted pig of such goods, or original as to deceive
products as “ELARS LECHON ON A BAMBOO which cannot be an ordinary purchaser
TRAY,” popularly known by the public as distinguished in its giving such attention
“Elar’s Lechon.” However, without Elarfoods’ essential aspects from as a purchaser usually
knowledge and permission, Emzee sold and such a trademark, and gives, and to cause
distributed roasted pigs using the marks which thereby him to purchase the
“ELARZ LECHON” “ELAR LECHON” “PIG DEVICE” infringes the rights of one supposing it to be
and “ON A BAMBOO TRAY” making it appear the owner of the the other. (Emerald v.
that Emzee was a branch or franchisee of trademark in question CA, G.R. No. 100098, 29
Elarfoods. Emzee’s officers and incorporators under the law of the Dec. 1995)
were former Elarfoods employees. Is Emzee country of
guilty of trademark infringement and unfair importation. (Art. 51,
competition? footnote 14(a), TRIPS
Agreement)
A: YES. Applying the dominancy test to the case at
bar, it is very obvious that the Emzee's marks Unauthorized Use of Container Bearing a
"ELARZ LECHON” and "ELAR LECHON” bear an Registered Trademark
indubitable likeness with Elarfoods' "ELARS
LECHON." As can easily be seen, both marks use The mere unauthorized use of a container bearing
the essential and dominant word "ELAR". The only a registered trademark in connection with the sale,
difference between the Emzee's mark from that of distribution or advertising of goods or services
Elarfoods' are the last letters Z and S, respectively. which is likely to cause confusion, mistake or
However, the letters Z and S sound similar when deception among the buyers or consumers can be
pronounced. Thus, both marks are not only considered as trademark infringement. (Republic

Commercial Law
Gas Corporation v. Petron Corporation, G.R. No. services in connection with which the mark or
194062, 17 June 2013) trade name was issued.
Remedies of the Owner of the Trademark In cases where actual intent to mislead the public
Against Infringers or to defraud the complainant is shown, in the
discretion of the court, the damages may be
1. Civil – filed with the Regional Trial Courts. The doubled. (Sec, 156.3, IPC)
owner of the registered mark may ask the
court to issue a preliminary injunction to Jurisdiction Over Violations of Intellectual
quickly prevent infringer from causing Property Rights
damage to his business. Furthermore, the
court will require infringer to pay damages to It is properly lodged with the Regional Trial Court
the owner of the mark provided defendant is even if the penalty therefore is imprisonment of
shown to have had notice of the registration of less than six years, or from 2 to 5 years and a fine
the mark (which is presumed if a letter R ranging from P50,000 to P200,000.
within a circle is appended) and stop him
permanently from using the mark. R.A. No. 8293 and R.A. No. 166 are special laws
conferring jurisdiction over violations of
2. Criminal – the owner of the trademark may intellectual property rights to the Regional Trial
ask the court to issue a search warrant and in Court. They should therefore prevail over R.A. No.
appropriate cases, remedies available shall 7691, which is a general law. (Samson v. Daway,
also include the seizure, forfeiture, and G.R. No. 160054-55, 21 July 2004)
destruction of the infringing goods and of any
materials and implements the predominant Q: K-9 Corporation, a foreign corporation
use of which has been in the commission of the alleging itself to be the registered owner of
offense. trademark “K-9” and logo “K”, filed an Inter
Partes case with the Intellectual Property
3. Administrative – same as in patent Office against Kanin Corporation for the
infringement cases. If the amount of damages cancellation of the latter’s mark “K-9” and logo
claimed is not less than P200,000.00, the “K.” During the pendency of the case before the
registrant may choose to seek redress against IPO, Kanin Corporation brought suit against K-
the infringer by filing an administrative action 9 Corporation before the RTC for infringement
against the infringer with the Bureau of Legal and damages. Could the action before the RTC
Affairs. prosper? Why? (2003 BAR)
Ascertainment of the Amount of Damages in a A: YES. The action before the RTC can prosper.
Civil Action for Infringement According to Section 151.2 of the IPO, the filing of
a suit to enforce the registered mark with the
The owner of a trademark which has been proper court or agency shall exclude any other
infringed is entitled to actual damages: court or agency from assuming jurisdiction over a
subsequently filed petition to cancel the same
1. The reasonable profit which the complaining mark. On the other hand, the earlier filing of
party would have made, had the defendant not petition to cancel the mark with the Bureau of
infringed his said rights; or Legal Affairs shall not constitute a prejudicial
2. The profit which the defendant actually made question that must be resolved before an action to
out of infringement; or enforce the rights to same registered mark may be
3. The court may award as damages a reasonable decided. The issues raised before the different the
percentage based upon the amount of gross IPO and the RTC are different. The issue raised
sales of the defendant or the value of the before the IPO is whether or not the cancellation of

2022 GOLDEN NOTES
the subsequent trademark is proper because of the inflicted on them by an improperly obtained or
prior ownership of the disputed mark by K-9. enforced search warrant. (Divina, 2014; Del
While the issue raised before the RTC pertains to Rosario, et al. v. Donato, Jr. et al., G.R. No. 180595, 04
infringement. Furthermore, an action for Mar. 2010)
infringement or unfair competition, as well as the
remedy of injunction and relief for damages, is Limitations on the Actions for Infringement
explicitly and unquestionably within the
competence and jurisdiction of ordinary courts. 1. Right of prior user – a registered mark shall
(Shangri-la International Hotel Management, Ltd., be without effect against any person who, in
v. Makati Shangri-la Hotel and Resort Inc., G.R. No. good faith, before filing or priority date, was
111580, 21 June 2001) using the mark for purposes of his business;
(Sec. 159.1, IPC)
Venue in Filing Actions for Infringement 2. Relief against publisher – injunction is
limited to the future printing against an
A.M. 02-1-06-SC (The Rule on Search and Seizure in innocent infringer who is engaged solely in the
Civil Actions for Infringement of Intellectual business of printing the mark; (Sec. 159.2, IPC)
Property Rights) governs the issuance of a writ of and
search and seizure in a civil action for infringement 3. Relief against newspaper – injunction
filed by an intellectual property right owner against the presentation of advertising matter
against the supposed infringer of his trademark or in future issues of the newspaper, magazine or
name. Under this rule, the claim for damages in electronic communications in case the
should be filed with the same court that issued the infringement complained of is contained in or
writ of search and seizure. is part of paid advertisement in such materials.
(Sec. 159.3, IPC)
However, Philip Morris, the manufacturer of
Marlboro cigarettes did not go by this route. Philip Requirement of Notice
Morris did not file a civil action for infringement of
its trademark against the Del Rosarios before the The owner of the registered mark shall not be
RTC of Angeles City. Instead, Philip Morris sought entitled to recover profits or damages unless the
assistance from the NBI for the apprehension and acts have been committed with knowledge that
criminal prosecution of those reportedly such imitation is likely to cause confusion, or to
appropriating its trademark and selling fake cause mistake, or to deceive.
Marlboro cigarettes. In turn, the NBI instituted a
police action that included applying for a search Knowledge is presumed in the following instances:
and seizure warrant under Sections 3, 4, 5 and 6 of
Rule 126 of the Rules of Criminal Procedure (not 1. The registrant gives notice that his mark is
under the provisions of A.M. 02-1-06-SC) against registered by displaying with the mark the
the Del Rosarios upon the belief that they were words “Registered Mark” or the letter R within
storing and selling fake Marlboro cigarettes in a circle; or
violation of the penal provisions of the intellectual 2. The defendant had otherwise actual notice of
property law. the registration. (Sec. 158, IPC)
The proceeding under Rule 126, a limited criminal 7. UNFAIR COMPETITION

one, does not provide for the filing of
counterclaims for damages against those who may Employing deception or any other means contrary
have improperly sought the issuance of the search to good faith by which a person passes off his
warrant. Consequently, the Del Rosarios had the goods or business or services for those of one who
right to seek damages, if the circumstances has already established goodwill thereto. (Sec.
warranted, by separate civil action for the wrong 168.2, IPC)

Commercial Law
It is the passing off (or palming off) or attempting their products or services due to its similarity in
to pass off upon the public of the goods or business appearance or packaging.
of one person as the goods or business of another
with the end and probable effect of deceiving the Unfair competition violates property rights
public. Passing off (or palming off) takes place
where the defendant, by imitative devices on the A person who has identified in the mind of the
general appearance of the goods, misleads public the goods he manufactures or deals in, his
prospective purchasers into buying his business or services from those of others, whether
merchandise under the impression that they are or not a registered mark is employed, has a property
buying that of his competitors. Thus, the defendant right in the goodwill of the said goods, business or
gives his goods the general appearance of the services so identified, which will be protected in
goods of his competitor with the intention of the same manner as other property rights. (Sec.
deceiving the public that the goods are those of his 168.1, IPC)
competitor. (Republic Gas Corporation v. Petron
Corporation, G. R. No. 194062, 17 June 2013) Persons Guilty of Unfair Competition
Infringement of Trademark vs. Unfair 1. Any person, who is selling his goods and gives
Competition (2015 BAR) them the general appearance of goods of
another manufacturer or dealer, either as to
INFRINGEMENT OF UNFAIR the goods themselves or in the wrapping of the
TRADEMARK COMPETITION packages in which they are contained, or the
Definition devices or words thereon, or in any other
The passing off of feature of their appearance, which would be
Unauthorized use of a likely to influence purchasers to believe that
one’s goods as those of
trademark.
another. the goods offered are those of a manufacturer
Requirement of Fraudulent Intent or dealer, other than the actual manufacturer
Fraudulent intent is Fraudulent intent is or dealer, or who otherwise clothes the goods
unnecessary. essential. with such appearance as shall deceive the
Requirement of Prior Registration public and defraud another of his legitimate
GR: Prior registration trade, or any subsequent vendor of such goods
of the trademark is a or any agent of any vendor engaged in selling
Registration is not such goods with a like purpose;
prerequisite to the
necessary. (Del Monte
action.
Corp. v. CA, G.R. No. 2. Any person who by any artifice, or device, or
78325, 23 Jan. 1990) who employs any other means calculated to
XPN: Well-known
marks induce the false belief that such person is
offering the services of another who has
NOTE: There can be unfair competition and identified such services in the mind of the
infringement at the same time. public;
Q: In what way is an infringement of a 3. Any person who shall make any false
trademark similar to that which pertains to statement in the course of trade or who shall
unfair competition? (2003 BAR) commit any other act contrary to good faith of
a nature calculated to discredit the goods,
A: The similarity lies in both their ability to disrupt business or services of another. (Sec. 168.3,
fair competition amongst business enterprises and IPC)
other businesses. They can also create confusion,
mistake, and deception as to the minds of the Trademark infringement is more limited, but it
consumers with regard to the source or identity of recognizes a more exclusive right derived from the

2022 GOLDEN NOTES
trademark adoption and registration by the person and defraud may be inferred from the similarity of
whose goods or business is first associated with it. the appearance of the goods as offered for sale to
Hence, even if one fails to establish his exclusive the public. (McDonalds Corporation v. L. C. Big Mak
property right to a trademark, he may still obtain Burger, Inc., G.R. No. 143993, 18 Aug. 2004)
relief on the ground of his competitor’s unfairness
or fraud. Conduct constitutes unfair competition if The Element of Passing-off
the effect is to pass off on the public the goods of
one man as the goods of another. (Mighty In order to prove a case of unfair competition, it is
Corporation v. E. & J. Gallo Winery, G.R. No. 154342, sufficient to show that such deception will be the
14 July 2004) natural and probable effect of defendant’s acts.
(Superior Enterprises, Inc. v. Kunnan Enterprises
An action for unfair competition is based on the Ltd., supra.)
proposition that no dealer in merchandise should
be allowed to dress his goods in simulation of the Q: The NBI found that SG Inc. is engaged in the
goods of another dealer, so that purchasers reproduction and distribution of counterfeit
desiring to buy the goods of the latter would be "playstation games" and thus applied with the
induced to buy the goods of the former. The most Manila RTC warrants to search respondent's
usual devices employed in committing this crime premises in Cavite. RTC granted such warrants
are the simulation of labels and the reproduction and thus, the NBI served the search warrants
of form, color and general appearance of the on the subject premises. SG Inc. questioned the
package used by the pioneer manufacturer or validity of the warrants due to wrong venue
dealer. (Caterpillar, Inc. v. Samson, G.R. No. 164605, since the RTC of Manila had no jurisdiction to
27 Oct. 2006) issue a search warrant enforceable in Cavite. Is
the contention of SG Inc., correct?
Jurisprudence also formulated the following “true
test” of unfair competition: whether the acts of the A: NO. Unfair competition is a transitory or
defendant have the intent of deceiving or are continuing offense under Sec. 168 of the IPC. As
calculated to deceive the ordinary buyer making such, petitioner may apply for a search warrant in
his purchases under the ordinary conditions of the any court where any element of the alleged offense
particular trade to which the controversy relates. was committed, including any of the courts within
One of the essential requisites in an action to Metro Manila and may be validly enforced in
restrain unfair competition is proof of fraud; the Cavite. (Sony Computer Entertainment Inc. v.
intent to deceive, actual or probable must be Supergreen Inc. G.R. No. 161823, 22 Mar. 2007)
shown before the right to recover can exist.
(Superior Enterprises, Inc. v. Kunnan Enterprises NOTE: Section 2, Rule 10 of the Rules of Procedure
Ltd., G.R. No. 169974, 20 Apr. 2010) on IP Cases (A.M. No. 10-3-10 SC, as amended
October 6, 2020) provides that Special Commercial
Essential Elements of an Action for Unfair Courts in Quezon City, Manila, Makati, Pasig,
Competition Baguio City, Iloilo City, Cebu City, Cagayan de Oro
City, and Davao City shall have authority to act on
1. Confusing similarity in the general appearance applications for the issuance of search warrants
of the goods; and involving violations of the Intellectual Property
2. Intent to deceive the public and defraud a Code, which search warrants shall be enforceable
competitor. nationwide. Within their respective territorial
jurisdictions, the Special Commercial Courts in the
The confusing similarity may or may not result judicial regions where the violation of intellectual
from similarity in the marks but may result from property rights occurred shall have concurrent
other external factors in the packaging or jurisdiction to issue search warrants.
presentation of the goods. The intent to deceive

Commercial Law
The "true test" of unfair competition has thus been with its house mark “CDO” and FIESTA bears
"whether the acts of the defendant have the intent house mark “PUREFOODS” rendering
of deceiving or are calculated to deceive the confusion impossible. Further, Foodsphere
ordinary buyer making his purchases under the claimed that San Miguel does not have the
ordinary conditions of the particular trade to monopoly to the term FIESTA since there are
which the controversy relates." It is therefore other products in the supermarket using the
essential to prove the existence of fraud, or the same term. Was there unfair competition?
intent to deceive, actual or probable, determined
through a judicious scrutiny of the factual A: YES. The Court has held that unfair competition
circumstances attendant to a particular case. consists of the passing off (or palming off) or
(Shang Properties Realty Corporation (formerly The attempting to pass off upon the public of the goods
Shang Grand Tower Corporation) and Shang or business of one person as the goods or business
Properties, Inc. (formerly EDSA Properties Holdings, of another with the end and probable effect of
Inc.) v. St. Francis Development Corporation, G.R. deceiving the public. Passing off (or palming off)
No. 190706, 21 July 2014) takes place where the defendant, by imitative
devices on the general appearance of the goods,
A distinction should be made between suits for misleads prospective purchasers into buying his
trademark infringement and unfair competition: merchandise under the impression that they are
(a) the former is the unauthorized use of a buying that of his competitors. In other words, the
trademark, whereas the latter is the passing off of defendant gives his goods the general appearance
one’s goods as those of another; (b) fraudulent of the goods of his competitor with the intention of
intent is unnecessary in the former, while it is deceiving the public that the goods are those of his
essential in the latter; and (c) in the former, prior competitor. The "true test," therefore, of unfair
registration of the trademark is a pre-requisite to competition has thus been "whether the acts of the
the action, while it is not necessary in the latter. defendant have the intent of deceiving or are
(Roberto Co v. Keng Huan Jerry Yeung and Emma calculated to deceive the ordinary buyer making
Yeung, G.R. No. 212705, 10 Sept. 2014) his purchases under the ordinary conditions of the
particular trade to which the controversy relates."
Q: San Miguel started selling its FIESTA ham in
1980. In 2006, it filed for trademark Thus, the essential elements of an action for unfair
infringement and unfair competition against competition are: (1) confusing similarity in the
Foodsphere for selling its PISTA ham. San general appearance of the goods; and (2) intent to
Miguel alleged that there is confusing deceive the public and defraud a competitor. The
similarity in the general appearance of the confusing similarity may or may not result from
goods and that Foodsphere intended to deceive similarity in the marks but may result from other
the public. According to San Miguel, both external factors in the packaging or presentation of
products have a picture of a partly sliced ham the goods. The intent to deceive and defraud may
served on a plate of fruits and both FIESTA and be inferred from the similarity of the appearance
PISTA were printed in white bold stylized font. of the goods as offered for sale to the public. Actual
Further, the packaging for both consists of box- fraudulent intent need not be shown. (San Miguel
typed paper bags made of cardboard materials Pure Foods Company, Inc. v. Foodsphere, G.R. No.
with cut-out holes on the middle top portion 217781, 20 June 2018)
for use as handles and predominantly red in
color with a background design of Christmas Applicability of Rules on the Issuance of the
balls, stars, snowflakes, and ornate scrolls. On Search and Seizure Order in Civil Actions for
the other hand, Foodsphere claimed that the Infringement
marks were not confusingly similar and
visually and aurally distinct from each other. The Rules on the Issuance of the Search and
This is because PISTA is always in conjunction Seizure in Civil Actions for Infringement of

2022 GOLDEN NOTES
Intellectual Property Rights are not applicable in in one of its warehouses. MS filed a suit for
this case as the search warrants were not applied unfair competition against BA before the
based thereon, but in anticipation of criminal Regional Trial Court (RTC). Finding a
actions for violation of intellectual property rights connection between the dwindling sales of MS
under RA 8293. It was established that respondent and the increased sales of BA, the RTC ruled
had asked the NBI for assistance to conduct that BA resorted to acts of unfair competition
investigation and search warrant implementation to the detriment of MS. Is the RTC correct?
for possible apprehension of several drugstore Explain. (2016 BAR)
owners selling imitation or counterfeit TOP GEL
T.G. & DEVICE OF A LEAF papaya whitening soap. A: NO. The RTC is not correct. Hoarding, or the act
What is applicable is Rule 126 of the Rules of of accumulating empty bottles to impede
Criminal Procedure. A core requisite before a circulation of the bottled product, does not amount
warrant shall validly issue is the existence of to unfair competition. BA did not fraudulently
probable cause. The pendency of a similar action “pass off” its product as that of MS Lite. There was
for infringement of trademark and unfair no representation or misrepresentation on the
competition against the very person who applied part of BA that would confuse or tend to confuse its
for search warrant does not bar the issuance of the goods with those of MS Lite. (Coca Cola Bottlers
warrant if it is based on probable cause. (Divina, Philippines v. Gomez, G.R. No. 154491, 14 Nov. 2008)
2014; Century Chinese Medicine Co., et.al. v. People
of the Philippines and Ling Na Lau, G.R. No. 188526, Actions, and Damages and Injunction for
11 Nov. 2013) Infringement
Ordinary Purchaser The owner of a registered mark may recover

damages from any person who infringes his rights,
An ordinary purchaser is one accustomed to buy, and the measure of the damages suffered shall be
and therefore to some extent familiar with, the either the reasonable profit which the complaining
goods in question. The test of fraudulent party would have made, had the defendant not
simulation is not found in the deception, or the infringed his rights, or the profit which the
possibility of deception, of the person who knows defendant actually made out of the infringement,
nothing about the design which has been or in the event such measure of damages cannot
counterfeited, and who must be indifferent be readily ascertained with reasonable certainty,
between that and the other. The simulation, in then the court may award as damages a reasonable
order to be objectionable, must be such as appears percentage based upon the amount of gross sales
likely to mislead the ordinary intelligent buyer of the defendant or the value of the services in
who has a need to supply and is familiar with the connection with which the mark or trade name
article that he seeks to purchase. (Emerald was used in the infringement of the rights of the
Garment Manufacturing Corporation v. Court of complaining party.
Appeals, G.R. No. 100098, 29 Dec. 1995)
Q: MS Brewery Corporation (MS) is a

manufacturer and distributor of the popular
beer "MS Lite." It faces stiff competition from
BA Brewery Corporation (BA) whose sales of
its own beer product, "BA Lighter," has soared
to new heights. Meanwhile, sales of the "MS
Lite" decreased considerably. The distribution
and marketing personnel of MS later
discovered that BA has stored thousands of
empty bottles of "MS Lite" manufactured by MS

Commercial Law
(Pearl & Dean Inc. v. Shoemart, Inc., G.R. No. 148222,

C. COPYRIGHT 15 Aug. 2003; Joaquin, Jr. v. Drilon, G.R. No. 108946,
28 Jan. 1999; Ching v. Salinas, G.R. No. 161295, 29
June 2005)
A right over literary and artistic works which are

Functional components of useful articles, no matter
original intellectual creations in the literary and
how artistically designed, have generally been
artistic domain protected from the moment of
denied copyright protection unless they are
creation. (Sec. 171.1, IPC)
separable from the useful article A useful article
may be copyrightable only if and only to the extent
Duration of the Author’s Copyright
that such design incorporates pictorial, graphic, and
sculptural features that can be identified separately
Copyright shall last during the lifetime of the author
from and are capable of existing independently of
and 50 years after his death.
the utilitarian aspects of the article. (Ching v. Salinas,
G.R. No. 161295, 29 June 2005)
Copyright protection is not absolute. (ABS-CBN
Corporation v. Gozon, G.R. No. 195956, 11 Mar. 2015)
Elements of Originality
There is no absolute protection unlike the
protection in tangible properties where one can do
1. Independently created by the author; and
anything so long as you will not violate the rights of
2. Possesses some minimal degree of creativity
others. In the case of copyright, there is a limitation
on the term of protection.
Time when Copyright Vests
Basic Principles
Principle of Automatic Protection – Works are
protected from the moment of their creation,
Elements of copyrightability
irrespective of their mode or form of expression, as
well as of their content, quality, and purpose (Sec.
1. Originality – Must have been created by the
172.2, IPC).
author’s own skill, labor, and judgment without
directly copying or evasively imitating the work
P.D. 49, as amended, does not require registration
of another. (Ching Kian Chuan v. CA, G.R. No.
and deposit for a creator to be able to file an action
130360, 15 Aug. 2001)
for infringement of his rights. These conditions are
merely pre-requisites to an action for damages. So,
NOTE: Minimal degree of creativity suffices.
as long as the proscribed acts are shown to exist, an
action for infringement may be initiated. (Columbia
2. Expression – Must be embodied in a medium
Pictures, Inc. v. CA, G.R. No. 110318, 28 Aug. 1996)
sufficiently permanent or stable to permit it to
be perceived, reproduced or communicated for
The certificates of registration and deposit issued by
a period more than a transitory duration.
the National Library and the Supreme Court Library
serve merely as a notice of recording and
Copyright, in the strict sense of the term, is purely a
registration of the work but do not confer any right
statutory right. Being a mere statutory grant, the
or title upon the registered copyright owner or
rights are limited to what the statute confers. It may
automatically put his work under the protective
be obtained and enjoyed only with respect to the
mantle of the copyright law. It is not a conclusive
subjects and by the persons, and on terms and
proof of copyright ownership. As it is, non-
conditions specified in the statute. Accordingly, it
registration and deposit of the work within the
can only cover the works falling within the statutory
prescribed period only makes the copyright owner
enumeration or description. Only the expression of
liable to pay a fine. (Manly Sportswear
an idea is protected by copyright, not the idea itself.

2022 GOLDEN NOTES
Manufacturing Inc. v. Dadodette Enterprises and/or Derivative Works

Hermes Sports Center, G.R. No. 165306, 20 Sept. 2005)
1. Dramatizations, translations, adaptations,
Copyright as Distinct from Material Object abridgements, arrangements, and other
alterations of literary or artistic works;
GR: The copyright is distinct from the property in 2. Collections of literary, scholarly, or artistic
the material object subject to it. Consequently, the works and compilations of data and other
transfer or assignment of the copyright shall not materials which are original by reason of the
itself constitute a transfer of the material object. Nor selection or coordination or arrangement of
shall a transfer or assignment of the sole copy or of their contents. (Sec. 173, IPC)
one or several copies of the work imply transfer or
assignment of the copyright. NOTE: Derivative works shall be protected as new
works, provided that such new work shall not affect
XPN: Work of Architecture - Copyright in a work of the force of any subsisting copyright upon the
architecture shall include the right to control the original works employed or any part thereof or be
erection of any building which reproduces the construed to imply any right to such use of the
whole or a substantial part of the work either in its original works, or to secure or extend copyright in
original form or in any form recognizably derived such original works. (Sec. 173.2, IPC)
from the original: Provided, That the copyright in
any such work shall not include the right to control Q: P&D was granted a copyright on the technical
the reconstruction or rehabilitation in the same drawings of light boxes as "advertising display
style as the original of a building to which that units". SMI, however, manufactured similar or
copyright relates. (Sec. 186, IPC) identical to the light box illustrated in the
technical drawings copyrighted by P&D for
1. COPYRIGHTABLE WORKS leasing out to different advertisers. Was this an
infringement of P&D’s copyright over the
Original Works Include in Particular the technical drawings?
Following (Literary and Artistic Works):
(Bo-L2-D-M-Wa-P-G-A-S-P-A-P-C-O) A: NO. P&D’s copyright protection extended only to
the technical drawings and not to the light box itself.
1. Books, pamphlets, articles, and other writings The light box was not a literary or artistic piece
2. Lectures, sermons, addresses, dissertations which could be copyrighted under the copyright
prepared for oral delivery, whether or not law. If SMI reprinted P&D’s technical drawings for
reduced in writing or other material form sale to the public without license from P&D, then no
3. Letters doubt they would have been guilty of copyright
4. Dramatic, choreographic works infringement. Only the expression of an idea is
5. Musical compositions protected by copyright, not the idea itself. If what
6. Works of Art P&D sought was exclusivity over the light boxes, it
7. Periodicals and Newspapers should have instead procured a patent over the light
8. Works relative to Geography, topography, boxes itself. (Pearl and Dean Inc. v. Shoemart Inc., GR
architecture, or science No. 148222, 15 Aug. 2003)
9. Works of Applied art
10. Works of a Scientific or technical character Q: Juan Xavier wrote and published a story
11. Photographic works similar to an unpublished copyrighted story of
12. Audiovisual works and cinematographic works Manoling Santiago. It was, however,
13. Pictorial illustrations and advertisements conclusively proven that Juan Xavier was not
14. Computer programs; and aware that the story of Manoling Santiago was
15. Other literary, scholarly, scientific, and artistic protected by copyright. Manoling Santiago sued
works. (Sec. 172.1, IPC)

Commercial Law
Juan Xavier for infringement of copyright. Is rules and regulations, and speeches, lectures,
Juan Xavier liable? (1998 BAR) sermons, addresses, and dissertations,
pronounced, read, or rendered in courts of
A: YES. Juan Xavier is liable for infringement of justice, before administration agencies, in
copyright. It is not necessary that Juan Xavier is deliberative assemblies and in meetings of
aware that the story of Manoling Santiago was public character. (Sec. 176, IPC)
protected by copyright. The work of Manoling
Santiago is protected from the time of its creation. 7. TV programs, format of TV programs; (Joaquin
v. Drilon, G.R. No. 108946, 28 Jan. 1999)
There will still be originality sufficient to warrant 8. Systems of bookkeeping; and
copyright protection if “the author, through his skill 9. Statutes.
and effort, has contributed a distinguishable
variation from the older works.” In such a case, of Q: X, an amateur astronomer, stumbled upon
course, only those parts which are new are what appeared to be a massive volcanic
protected by the new copyright. Hence, in such a eruption in Jupiter while peering at the planet
case, there is no case of infringement. Juan Xavier is through his telescope. The following week, X,
no less an “author” because others have preceded without notes, presented a lecture on his
him. (Habana v. Robles, G.R. No. 131522, 19 July findings before the Association of Astronomers
1999) of the Philippines. To his dismay, he later read
an article in a science journal written by Y, a
2. NON-COPYRIGHTABLE WORKS professional astronomer, repeating exactly
what X discovered without any attribution to
Non-copyrightable Works (I-N-O-P-De-G-TV-S2) him. Has Y infringed on X's copyright, if any?
(2011 BAR)
1. Idea, procedure, system, method or operation,
concept, principle, discovery, or mere data as A: NO, because no protection extends to any
such; discovery, even if expressed, explained, illustrated,
2. News of the day and other items of press or embodied in a work.
information;
3. Any Official text of a legislative, administrative, Q: Rural is a certified public utility providing
or legal nature, as well as any official translation telephone service to several communities in
thereof; Manila. It obtains data for the directory from
4. Pleadings; subscribers, who must provide their names and
5. Decisions of courts and tribunals – this refers to addresses to obtain telephone service. Feist
original decisions and not to annotated Publications, Inc., is a publishing company that
decisions such as the SCRA or SCAD as these specializes in area-wide telephone directories
already fall under the classification of covering a much larger geographic range than
derivative works, hence copyrightable; directories such as Rural's. Feist extracted the
6. Any work of the Government of the Philippines; listings it needed from Rurals’s directory
without its consent. Are directories
GR: Conditions imposed prior the approval of copyrightable?
the government agency or office wherein the
work is created shall be necessary for A: NO. Directories are not copyrightable and
exploitation of such work for profit. Such therefore the use of them does not constitute
agency or office, may, among other things, infringement. The IPC mandates originality as a
impose as condition the payment of royalties. prerequisite for copyright protection. This
requirement necessitates independent creation
XPN: No prior approval or conditions shall be plus a modicum of creativity. Since facts do not owe
required for the use of any purpose of statutes, their origin to an act of authorship, they are not

2022 GOLDEN NOTES
original, and thus are not copyrightable. A Records Management Seminar. She filed a leave
compilation is not copyrightable per se, but is of absence to attend the seminar. During the
copyrightable only if its facts have been "selected, said seminar, NAP’s handouts were presented
coordinated, or arranged in such a way that the and disseminated. The Executive Director
resulting work as a whole constitutes an original learned about Domingo’s activity and issued a
work of authorship." Nonetheless, a compilation show cause memorandum relative to the
that is copyrightable receives only limited conduct of the unapproved seminar and
protection, for the copyright does not extend to facts unauthorized use and dissemination of the NAP
contained in the compilation. (Feist Publications, Inc. handouts. Rule on Domingo’s liability for the
v. Rural Telephone Service Co., 499 U.S. 340, 27 Mar. dissemination of NAP’s handouts during the
1991) seminar.
Q: ABS-CBN conducted a live audio-video A: Domingo is not liable. She did not violate any
coverage of and broadcasted the arrival of rule of conduct when the NAP's materials were
Angelo dela Cruz at the Ninoy Aquino disseminated during the seminar. There is no
International Airport (NAIA) and the finding of fact that Domingo was the operating and
subsequent press conference. ABS-CBN allowed controlling mind of the dissemination. Further,
Reuters Television Service (Reuters) to air the under Section 176.1 of the Intellectual Property
footages it had taken earlier under a special Code, the Government holds no copyright to its
embargo agreement. It received a live video feed materials. However, prior approval of the
of the coverage of Angelo dela Cruz’s arrival government agency or office wherein the work is
from Reuters. GMA-7 immediately carried the created shall be necessary for exploitation of such
live news feed in its program "Flash Report," work for profit. Such agency or office may, among
together with its live broadcast. ABS-CBN filed other things, impose as a condition the payment of
the Complaint for copyright infringement. Are royalties. No prior approval or conditions shall be
news footages considered copyrightable under required for the use for any purpose of statutes,
the law? rules and regulations, and speeches, lectures,
sermons, addresses, and dissertations, pronounced,
A: YES. The arrival of Angelo dela Cruz is not read, or rendered in courts of justice, before
copyrightable because that is the newsworthy administrative agencies, in deliberative assemblies
event. However, any footage created from the event and in meetings of public character.
itself, in this case the arrival of Angelo dela Cruz, are
intellectual creations which are copyrightable. The Under the law, the NAP materials were free to be
Intellectual Property Code does not state that disseminated to the City of Bacoor stakeholders.
expression of the news of the day, particularly when Presenting the NAP materials to the City of Bacoor
it underwent a creative process, is not entitled to is not an exploitation of the NAP materials for profit,
protection. News coverage in television involves but for the noble and laudable cause of improving
framing shots, using images, graphics, and sound the basic records management of this local
effects. It involves creative process and originality. government unit. There is no finding that Domingo
Television news footage is an expression of the personally materially benefitted from her
news. Thus, being an expression, it is considered attendance at the seminar and the dissemination of
copyrightable under the law. (ABS-CBN Corp. v. the NAP materials. (Estrella Domingo v. Civil Service
Gozon, G.R. No. 195956, 15 Mar. 2015) Commission and Victorino Manalo, G.R. No. 236050,
17 June 2020)
Q: Estrella Domingo is the Chief Archivist of the
Archives Preservation Division of the National An Object of Utility is Not Copyrightable
Archives of the Philippines (NAP). She
personally received an invitation to serve as a A copyrightable work refers to literary and artistic
resource speaker for the City of Bacoor's Basic works defined as original intellectual creations in

Commercial Law
the literary and artistic domain. A hatch door, by its a. To require that the authorship of the works
nature is an object of utility. It is defined as a small be attributed to him (attribution right);
door, small gate or an opening that resembles a b. To make any alterations of his work prior
window equipped with an escape for use in case of to, or to withhold it from publication;
fire or emergency. It is thus by nature, functional c. To preserve integrity of work, object to any
and utilitarian serving as egress access during distortion, mutilation or other modification
emergency. It is not primarily an artistic creation which would be prejudicial to his honor or
but rather an object of utility designed to have reputation; and
aesthetic appeal. It is intrinsically a useful article, d. To restrain the use of his name with respect
which, as a whole, is not eligible for copyright. to any work not of his own creation or in a
distorted version of his work. (Sec. 193, IPC)
The only instance when a useful article may be the
subject of copyright protection is when it 3. Droit de suite or “art proceeds right” is the
incorporates a design element that is physically or artist’s resale right, which requires that a
conceptually separable from the underlying percentage of the resale price of an artistic work
product. This means that the utilitarian article can is paid to the author. The right is exercisable
function without the design element. In such an even after the author’s death, provided the
instance, the design element is eligible for copyright work is still in copyright. (David Bainbridge,
protection. (Sison Olano, et al. v. Lim Eng Co, G.R. No. Intellectual Property, 3rd Ed., p. 220 1996, also
195835, 14 Mar. 2016) cited in Copyright Law of the Philippines by D.
Funa)
3. RIGHTS CONFERRED BY COPYRIGHT
In every sale or lease of an original work of
Rights of Copyright Owners (1995 BAR) painting or sculpture or of the original
manuscript of a writer or composer,
1. Economic rights – The right to carry out, subsequent to the first disposition thereof by
authorize or prevent the following acts: the author, the author or his heirs shall have an
(Re-Ca- F-Re-P2-O) inalienable right to participate in the gross
proceeds of the sale or lease to the extent of five
a. Reproduction of the work or substantial percent (5%). (Sec. 200, IPC)
portion thereof;
b. Carry-out derivative work (dramatization, Rights Which are Not Covered Under a Droit de
translation, adaptation, abridgement, suite
arrangement, or other transformation of
the work) ; 1. Prints
c. First distribution of the original and each 2. Etchings
copy of the work by sale or other forms of 3. Engravings
transfer of ownership; 4. Works of applied art
d. Rental right; 5. Similar works wherein the author primarily
e. Public display; derives gain from the proceeds of
f. Public performance; reproductions. (Sec. 201, IPC)
g. Other communications to the public.
Q: ABC is the owner of certain musical
NOTE: Assignment of rights must be in writing compositions among which are the songs
to be valid. entitled: "Dahil Sa Iyo", "Sapagkat Ikaw Ay Akin,"
"Sapagkat Kami Ay Tao Lamang" and "The
2. Moral rights – For reasons of professionalism Nearness Of You.” Soda Fountain Restaurant
and propriety, the author has the right: hired a combo with professional singers to play
and sing musical compositions to entertain and

2022 GOLDEN NOTES
amuse customers. They performed the above- continues to enjoy the above-mentioned moral
mentioned compositions without any license or rights. (Amador, 2007)
permission from ABC to play or sing the same.
Accordingly, ABC demanded from Soda Fountain Term of Moral Rights
payment of the necessary license fee for the
playing and singing of aforesaid compositions, The rights of an author shall last during the lifetime
but the demand was ignored. ABC filed an of the author and for fifty (50) years after his death
infringement case against Soda Fountain. Does while the rights under sections 193.2, 193.3 and
the playing and singing of musical compositions 193.4 shall be coterminous with the economic
inside an establishment constitute public rights, the moral rights shall not be assignable or
performance for profit? subject to license. The person or persons to be
charged with the posthumous enforcement of these
A: YES. The patrons of the Soda Fountain pay only rights shall be named in a written instrument which
for the food and drinks and apparently not for shall be filed with the National Library. In default of
listening to the music, but the music provided is for such person or persons, such enforcement shall
the purpose of entertaining and amusing the devolve upon either the author’s heirs, and in
customers in order to make the establishment more default of the heirs, the Director of the National
attractive and desirable. For the playing and singing Library. (Sec. 198, IPC)
the musical compositions involved, the combo was
paid as independent contractors by Soda Fountain. Exceptions to Moral Rights
It is therefore obvious that the expenses entailed 1. Absent any special contract at the time creator
thereby are added to the overhead of the restaurant licenses/permits another to use his work, the
which are either eventually charged in the price of following are deemed not to contravene
the food and drinks or to the overall total of creator’s moral rights, provided they are done
additional income produced by the bigger volume of in accordance with reasonable customary
business which the entertainment was programmed standards or requisites of the medium:
to attract. Consequently, it is beyond question that
the playing and singing of the combo in Soda a. Editing
Fountain Restaurant constituted performance for b. Arranging
profit. (FILSCAP v. Tan, G.R., No. L-36402, 16 Mar. c. Adaptation
1987) d. Dramatization
e. Mechanical and electric reproduction
Performance of a Contract
2. Complete destruction of work unconditionally
An author cannot be compelled to perform his transferred by creators. (Sec. 197, IPC)
contract to create a work or for the publication of
his work already in existence. However, he may be Waiver of Moral Rights
held liable for damages for breach of such contract.
(Sec. 195, IPC) GR: Moral rights can be waived in writing, expressly
so stating such waiver.
MORAL RIGHTS
XPN: Even in writing, no such waiver shall be valid
Nature of Moral Rights where its effects is to permit another to:
1. Use the name of the author, title of his work, or
These are personal rights independent from the his reputation with respect to any
economic rights. Being a personal right, it can only version/adaptation of his work, which because
be given to a natural person. Hence, even if he has of alterations, substantially tend to injure
licensed or assigned his economic rights, he

Commercial Law
literary/artistic reputation of another author; Loss of Performer’s Rights

or
2. Use the name of the author in a work that he did Once the performer has authorized the
not create. (Sec. 195, IPC) broadcasting or fixation of his performance, his
performer’s rights provided for in Section 203 shall
NEIGHBORING RIGHTS have no further application.
1. Performer’s Rights Fair use and limitations to copyrights shall apply

2. Producers of Sound Recordings mutatis mutandis to performers. (Sec. 205, IPC)
3. Broadcasting Organizations
Moral Rights of Performers
1. PERFORMER’S RIGHTS
The performer, shall, as regards his live aural
performances or performances fixed in sound
Performers shall enjoy the following exclusive
recordings, have the right to claim to be identified
rights:
as the performer of his performances, except where
the omission is dictated by the manner of the use of
1. As regards their performances, the right of
the performance, and to object to any distortion,
authorizing the:
mutilation or other modification of his
a. Broadcasting and other communication to
performances that would be prejudicial to his
the public of their performance; and
reputation. (Sec. 204, IPC)
b. Fixation of their unfixed performance.
Additional Remuneration for Subsequent

2. Right of authorizing the direct or indirect
Communications or Broadcasts
reproduction of their performances fixed in
sound recordings or audiovisual works or
The performer shall be entitled to an additional
fixations in any manner or form;
remuneration equivalent to at least five percent
(5%) of the original compensation he received for
3. Right of authorizing the first public distribution
the first communication or broadcast in every
of the original and copies of their performance
communication to the public or broadcast of a
fixed in sound recordings or audiovisual works
performance subsequent to the first communication
or fixations through sale or rental of other
or broadcast, unless otherwise provided in the
forms of transfer of ownership;
contract. (Sec. 206, IPC)
4. Right of authorizing the commercial rental to

the public of the original and copies of their 2. PRODUCERS OF SOUND RECORDINGS
performances fixed in sound recordings or
audiovisual works or fixations, even after Producers of sound recordings shall have exclusive
distribution of them by, or pursuant to the right to authorize the:
authorization by the performer; and
1. Direct or indirect reproduction of their sound
5. Right of authorizing the making available to the recordings, in any manner or form; the placing
public of their performances fixed in sound of these reproductions in the market and the
recordings or audiovisual works or fixations, by right of rental or lending;
wire or wireless means, in such a way that
members of the public may access them from a 2. First public distribution of the original and
place and time individually chosen by them. copies of their sound recordings through sale or
(Sec. 203, IPC, as amended by R.A. No. 10372) rental or other forms of transferring ownership;

2022 GOLDEN NOTES
3. Commercial rental to the public of the original Must Carry Rule

and copies of their sound recordings, even after
distribution by them by or pursuant to It is limitation on copyright which obligates
authorization by the producer; and operators to carry the signals of local channels
within their respective systems. This is to give the
4. Making available to the public of their sound people wider access to more sources of news,
recordings in such a way that members of the information, education, sports event and
public may access the sound recording from a entertainment programs other than those provided
place and at a time individually chosen or for by mass media and afforded television programs
selected by them, as well as other to attain a well-informed, well-versed and culturally
transmissions of a sound recording with like refined citizenry and enhance their socio-economic
effect. (Sec. 208, IPC, as amended by R.A. No. growth. (ABS-CBN Broadcasting Corp. v. Philippine
10372) Multimedia System, G.R. No. 175769-70, 19 Jan. 2009)
3. BROADCASTING ORGANIZATION’S RIGHTS This rule mandates that the local television (TV)
broadcast signals of an authorized TV broadcast
station, such as the GMA Network, Inc., should be
Broadcasting organizations shall enjoy the exclusive
carried in full by the cable antenna television
right to carry out, authorize or prevent any of the
(CATV) operator, without alteration or deletion. In
following acts:
this case, the Central CATV, Inc. was found not to
have violated the must-carry rule when it solicited
1. Rebroadcasting of their broadcasts;
and showed advertisements in its cable television
2. Recording in any manner, including the making
(CATV) system. Such solicitation and showing of
of films or the use of video tape, of their
advertisements did not constitute an infringement
broadcasts for the purpose of communication to
of the “television and broadcast markets” under
the public of television broadcasts of the same;
Section 2 of E.O. No. 205. (GMA Network, Inc. v.
and
Central CATV, Inc., G.R No. 176694, 18 July 2014)
3. Use of such records for fresh transmissions or
for fresh recording. (Sec. 211, IPC)
NOTE: The provisions of IPC shall also apply to
works, performers, producers of sound recordings
Broadcasting
and broadcasting organizations that are to be
protected by virtue of and in accordance with any
It is the transmission by wireless means for the
international convention or other international
public reception of sounds or of images or of
agreement to which the Philippines is a party. (Sec.
representations thereof; such transmission by
221.2 and 224.2, IPC)
satellite is also broadcasting where the means for
decrypting are provided to the public by the
Applicability of Rights
broadcasting organization or with its consent. (ABS-
CBN Broadcasting Corp. v. Philippine Multimedia
The provisions of Chapter VIII shall apply mutatis
System, Inc., G.R. Nos. 175769-70, 19 Jan. 2009)
mutandis to the rights of performers, producers of
sound recordings and broadcasting organizations,
Rebroadcasting
as an exception to infringement and allowing the
following:
It is the simultaneous broadcasting by one
broadcasting organization of the broadcast of
1. Exclusive use of a natural person for own
another broadcasting organization. While the Rome
personal purposes;
Convention gives broadcasting organizations the
2. Short excerpts for reporting current events;
right to authorize or prohibit the rebroadcasting of
3. Sole use for the purpose of teaching or for
its broadcast, however, this protection does not
scientific research;
extend to cable retransmission. (Ibid.)

Commercial Law
4. Fair use of the broadcast. (Sec. 212, IPC, as iii. Which has not been fixed in sound
amended by R.A. No. 10372) recording but are carried by
broadcast qualifying for protection
Term of Protection under the IPC. (Sec. 222, IPC)
1. For performances not incorporated in 3. Of sound recordings

recordings, fifty (50) years from the end of the a. Sound recordings the producers of which
year in which the performance took place are nationals of the Philippines
2. For sound or image and sound recordings and b. Sound recordings that were first published
for performances incorporated therein, fifty in the Philippines. (Sec. 223, IPC)
(50) years from the end of the year in which the
recording took place 4. For broadcasts
3. In case of broadcasts, the term shall be twenty a. Broadcasts of broadcasting organizations
(20) years from the date the broadcast took the headquarters of which are situated in
place. The extended term shall be applied only the Philippines; and
to old works with subsisting protection under b. Broadcasts transmitted from transmitters
the prior law. (Sec. 215, IPC) situated in the Philippines. (Sec. 224, IPC)
Persons To Whom the Rights are Granted 4. OWNERSHIP OF A COPYRIGHT

(Copyrightable Works Applicable)
Presumption of Authorship
1. For works
a. Works of authors who are nationals of, or The natural person whose name is indicated on a
have their habitual residence in, the work in the usual manner as the author shall, in the
Philippines; absence of proof to the contrary, presumed to be the
b. Audio-visual works the producer of which author of the work. This is applicable even if the
has his headquarters or habitual residence name is a pseudonym, where the pseudonym leaves
in the Philippines; no doubt as to identity of the author. (Sec. 219.1, IPC)
c. Works of architecture erected in the
Philippines or other artistic works The person or body corporate, whose name appears
incorporated in a building or other on the audio-visual work in the usual manner shall,
structure located in the Philippines; in the absence of proof to the contrary, be presumed
d. Works first published in the Philippines; to be the maker of said work. (Sec. 219.2, IPC)
and
e. Works first published in another country Rules on Ownership of Copyright
but also published in the Philippines within
thirty days, irrespective of the nationality OWNER OF COPYRIGHT
or residence of the authors. (Sec. 221, IPC) Original literary and artistic works
Author of the work. (Sec. 178.1, IPC)
2. For performers
Joint authorship
a. Performers who are nationals of the
Co-authors – in case of works of joint authorship;
Philippines;
in the absence of agreement, their rights shall be
b. Performers who are not nationals of the
governed by the rules on co-ownership.
Philippines but whose performances:
i. Take place in the Philippines;
NOTE: If work of joint authorship consists of
ii. Are incorporated in sound
parts that can be used separately, then the author
recordings that are protected under
of each part shall be the original owner of the
IPC; or

2022 GOLDEN NOTES
copyright in the part that he has created. (Sec.

178.2, IPC) Letters and other private communications in
Audiovisual work writing are owned by the person to whom they
GR: Producer, the author of the scenario, the are addressed and delivered, but they cannot be
composer of the music, the film director, and the published or disseminated without the consent of
author of the work so adapted. the writer or his heirs. However, the court may
authorize their publication or dissemination if
XPN: Unless otherwise provided in an the public good or the interest of justice so
agreement, the producers shall exercise the requires. (Art. 723, NCC)
copyright to an extent required for the exhibition
of the work in any manner, except for the right to Collective work vs. Joint work
collect performing license fees for the
performance of musical compositions, with or COLLECTIVE WORK JOINT WORK
without words, which are incorporated into the Integration of Elements
work. (Sec. 178.5, IPC) Elements remain Separate elements
Anonymous and pseudonymous works unintegrated and merge into a unified
The publishers shall be deemed to represent the disparate. whole.
authors of articles and other writings published Intention of the Authors
without the names of the authors or under Work created by two or
pseudonyms, unless the contrary appears, or the more persons at the
Work prepared by two
pseudonyms or adopted name leaves no doubt as initiative and under the
or more authors with
to the author's identity, or if the author of the direction of another
the intention that
anonymous works discloses his identity. (Sec. with the understanding
their contributions be
179, IPC) that it will be disclosed
merged into
Commissioned work by the latter under his
inseparable or
The person who commissioned the work shall own name and that of
independent parts of
own the work but the copyright thereto shall the contributions of
the unitary whole.
remain with the creator, unless there is a written natural persons will not
stipulation to the contrary. (Sec. 178.4, IPC) be identified
Collective works Right of the Authors
When an author contributes to a collective work, Each author shall enjoy Joint authors shall be
his right to have his contribution attributed to copyright to his own co-owners. Co-
him is deemed waived unless he expressly contribution ownership shall apply.
reserves it. (Sec. 196, IPC) Persons to whom the Work will be Attributed
In the course of employment The work will be
The employee, if not a part of his regular duties attributed to the person
Joint authors shall be
even if the employee uses the time, facilities and under whose initiative
both entitled to the
materials of the employer. and direction it was
acknowledgment as
created unless the
authors of the work.
The employer, if the work is the result of the contributor expressly
performance of his regularly-assigned duties, reserves his right.
unless there is an agreement, express or implied,
to the contrary. (Sec. 178.3, IPC) Q: T, an associate attorney in XYZ Law Office,
Letters wrote a newspaper publisher a letter disputing
In respect of letters, the copyright shall belong to a columnist’s claim about an incident in the
the writer subject to the provisions of Article 723 attorney’s family. T used the law firm’s
of the Civil Code. (Sec. 178.6, IPC) letterhead and its computer in preparing the
letter. T also requested the firm’s messenger to

Commercial Law
deliver the letter to the publisher. Who owns the National Library did not confer copyright upon him.
copyright to the letter? (2011 BAR) The registration is merely for the purpose of
completing the records of the National Library.
A: T, since he is the original creator of the contents
of the letter. Q: BR and CT are noted artists whose paintings
are highly prized by collectors. Dr. DL
Q: Solid Investment House commissioned Mon commissioned them to paint a mural at the main
Blanco and his son Steve, both noted artists, to lobby of his new hospital for children. Both
paint a mural for the Main Lobby of the new agreed to collaborate on the project for a total
building of Solid for a contract price of P2M. fee of 2 million pesos to be equally divided
between them. It was also agreed that Dr. DL had
a. Who owns the mural? Explain. to provide all the materials for the painting and
b. Who owns the copyright of the mural? pay for the wages of technicians and laborers
Explain. (1995 BAR) needed for the work on the project.
A: Assume that the project is completed and both

a. The mural is owned by Solid. It commissioned BR and CT are fully paid the amount of P2M as
the work and paid Mon and Steve Blanco P2M artists' fee by DL. Under the law on intellectual
for the mural. property, who will own the mural? Who will own
b. Even though Solid owns the mural, the the copyright in the mural? Why? Explain. (2004
copyright of the mural is jointly owned by Mon BAR)
and Steve, unless there is a written stipulation
to the contrary. (Sec. 178.4, IPC) A: DL owns the mural, while both BR and CT jointly
own the copyright thereto. This is so because the
Q: Rudy is a fine arts student in a university. He mural was commissioned by DL and a consideration
stays in a boarding house with Bernie as his was paid to BR and CT in exchange thereof.
roommate. During his free time, Rudy would According to Section 178.4 of the IPC, when the
paint and leave his finished works lying around work is commissioned by a person other than an
the boarding house. One day, Rudy saw one of employer of the author, the owner of the work shall
his works—an abstract painting entitled Manila be the one who commissioned the work, but the
Traffic Jam—on display at the university copyright of the work shall be owned by the person
cafeteria. The cafeteria operator said he who is responsible for its creation, unless there is a
purchased the painting from Bernie who written stipulation to the contrary.
represented himself as its painter and owner.
Q: Eloise, an accomplished writer, was hired by
Rudy and the cafeteria operator immediately Petong to write a bimonthly newspaper column
confronted Bernie. While admitting that he did for Diario de Manila, a newly established
not do the painting, Bernie claimed ownership newspaper of which Petong was the Editor-in-
of its copyright since he had already registered chief. Eloise was to be paid P1,000.00 for each
it in his name with the National Library as column that was published. In the course of two
provided in the Intellectual Property Code. months, Eloise submitted three columns which,
after some slight editing, were printed in the
Who owns the copyright to the painting? newspaper. However, Diario de Manila proved
Explain. (2013 BAR) unprofitable and closed only after two months.
Due to the minimal amounts involved, Eloise
A: Rudy owns the copyright to the painting because chose not to pursue any claim for payment from
he was one who actually created it. His rights the newspaper, which was owned by New Media
existed from the moment of its creation. The Enterprises.
registration of the painting by Bernie with the

2022 GOLDEN NOTES
Three years later, Eloise was planning to publish 5. LIMITATIONS ON COPYRIGHT

an anthology of her works and wanted to include
the three columns that appeared in the Diario de General Limitations on Copyright
Manila in her anthology. She asks for your legal
advice: The following acts shall not constitute infringement
of copyright:
a. Does Eloise have to secure authorization
from New Media Enterprises to be able to 1. Recitation or performance of a work, once it has
publish Diario de Manila columns in her own been lawfully made accessible to the public, if
anthology. Explain fully. done privately and free of charge or if made
strictly for a charitable or religious institution
b. Assume that New Media Enterprises plans to or society;
publish Eloise’s columns in its own
anthology entitled, “The best of Diario de 2. Making of quotations from a published work if
Manila.” Eloise wants to prevent the they are compatible with fair use and only to the
publication of her columns in that anthology extent justified for the purpose, including
since she was never paid by the newspaper. quotations from newspaper articles and
Name one irrefutable legal argument Eloise periodicals in the form of press summaries:
could cite to enjoin New Media Enterprises Provided, That the source and the name of the
from including her columns in its anthology. author, if appearing on the work, are
(2008 BAR) mentioned;
A: 3. Communication to the public by mass media of

a. NO. In the case of a work commissioned by a articles on current political, social, economic,
person other than an employer of the author scientific, or religious topic, lectures, addresses
and who pays for it and the work is made in and other works of the same nature, which are
pursuance of the commission, the person who delivered in public if such use is for information
so commissioned the work shall have purposes and has not been expressly reserved:
ownership of work, but the copyright thereto Provided, That the source is clearly indicated;
shall remain with the creator, unless there is a
written statement to the contrary. Thus, though 4. Reproduction and communication to the public
Diario de Manila commissioned the work, it of literary, scientific, or artistic works as Part of
cannot be considered as its owner because it did reports of current events (e.g. music played or
not pay Eloise. Ownership and copyright still tunes on the occasion of a sporting event and
belong to Eloise. Authorization is no longer such tunes were picked up during a new
needed to publish Diario de Manila in her coverage of the event) by means of
anthology because Eloise has moral and photography, cinematography or broadcasting
economic rights over her works. to the extent necessary for the purpose;
b. The fact that Eloise was not paid, ownership 5. Inclusion of a work in a publication, broadcast,
over her work, published in the newspaper, did or other communication to the public, sound
not vest upon the latter. She retains full moral recording or film, if such inclusion is made by
and economic rights over it. way of illustration for teaching purposes and is
compatible with fair use: Provided, That the
source and of the name of the author, if
appearing in the work, are mentioned;
6. Recording made in educational institutions of a

work included in a broadcast for the use of such

Commercial Law
educational institutions, provided that such Other Limitations on Copyright

recording must be deleted within a reasonable
period after they were first broadcast; 1. Copyright in a work of architecture shall
include the right to control the erection of any
7. Making of ephemeral recordings by a building which reproduces the whole or a
broadcasting organization by means of its own substantial part of the work either in its original
facilities and for use in its own broadcast; form or in any form recognizably derived from
the original, provided, that the copyright in any
8. Use made of a work by or under the direction or such work shall not include the right to control
control of the government, by the National the reconstruction or rehabilitation in the same
Library or by educational, scientific, or style as the original of a building to which that
professional institutions where such use is in copyright relates. (Sec. 186, IPC)
the public interest and is compatible with fair
use; 2. The private reproduction of a published work in
a single copy, where the reproduction is made
9. Public performance or the communication to by a natural person exclusively for research
the public of a work, in a place where no and private study, shall be permitted, without
admission fee is charged in respect of such the authorization of the owner of copyright in
public performance or communication, by a the work but shall not extend to the
club or institution for charitable or educational reproduction of:
purpose only, whose aim is not profit making,
subject to such other limitations as may be a. A work of architecture in the form of
provided in the Regulations; building or other construction;
b. An entire book, or a substantial part
10. Public display of the original or a copy of the thereof, or of a musical work in graphic
work not made by means of a film, slide, form by reprographic means;
television image or otherwise on screen or by c. A compilation of data and other materials;
means of any other device or process (e.g. d. A computer program except as provided in
Public display using posters mounted on walls Section 189; and
and display boards), Provided, That either the e. Any work in cases where reproduction
work has been published, or, that original or the would unreasonably conflict with a normal
copy displayed has been sold, given away or exploitation of the work or would
otherwise transferred to another person by the otherwise unreasonably prejudice the
author or his successor in title; legitimate interests of the author. (Sec. 187,
IPC)
11. Any use made of a work for the purpose of any
judicial proceedings or for the giving of 3. The reproduction in one back-up copy or
professional advice by a legal practitioner; adaptation of a computer program shall be
permitted, without the authorization of the
12. Reproduction or distribution of published author of, or other owner of copyright in, a
articles or materials in a specialized format computer program, by the lawful owner of that
exclusively for the use of the blind, visually- and computer program, provided, the copy or
reading-impaired persons: Provided, that such adaptation is necessary for:
copies and distribution shall be made on a
nonprofit basis and shall indicate the copyright a. The use of the computer program in
owner and the date of the original publication. conjunction with a computer for the
(Sec. 184, IPC, as amended by R.A. No. 10372) purpose, and to the extent, for which the
computer program has been obtained; and

2022 GOLDEN NOTES
b. Archival purposes, and, for the replacement Published Anonymous or Pseudonymous

of the lawfully owned copy of the computer Works
program in the event that the lawfully Fifty (50) years from the date on which the work
obtained copy of the computer program is was first lawfully published
lost, destroyed, or rendered unusable. (Sec.
187, IPC) If the author's identity is revealed or is no longer
in doubt before the 50-year period, the
Q: In a written legal opinion for a client on the provisions on original and derivative works, as
difference between apprenticeship and well as works of joint authorship, shall apply.
learnership, Liza quoted without permission a Unpublished Anonymous or Pseudonymous
labor law expert’s comment appearing in his Works
book entitled “Annotations on the Labor Code.” Fifty (50) years counted from the making of the
Can the labor law expert hold Liza liable for work
infringement of copyright for quoting a portion Work of Applied Art
of his book without his permission? Twenty-five (25) years from the time of the
making.
A: NO. Liza cannot be held liable for infringement of Photographic works
copyright. Any use made of a work for the purpose Fifty (50) years from publication of the work and,
of judicial proceedings or for giving of professional if unpublished, fifty (50) years from the making
advice by a legal proceedings or for giving of Audio-visual works
professional advice by a legal practitioner shall not
Fifty (50) years from date of publication and, if
constitute infringement of copyright. (Sec. 184(k),
unpublished, from the date of making
IPC)
The term of protection subsequent to the death of
Q: May a person have photocopies of some pages
the author shall run from the date of his death or of
of the book of Professor Rosario made without
publication, but such terms shall always be deemed
violating the copyright law?
to begin on the first day of January of the year
following the event which gave rise to them. (Sec.
A: YES. The private reproduction of a published
214, IPC)
work in a single copy, where the reproduction is
made by a natural person exclusively for research
6. DOCTRINE OF FAIR USE
and private study, shall be permitted, without the
authorization of the owner of copyright in the work.
This rule contemplates that reproduction of the The fair use of a copyrighted work for criticism,
book shall not extend to an entire book or a comment, news reporting, teaching including
substantial part thereof. (Secs. 187.1 to 187.2[b], IPC) limited number of copies for classroom use,
scholarship, research, and similar purposes is not an
infringement of copyright. (Sec. 185, IPC)
Term of protection of copyright
“Fair use” permits a secondary use that “serves the

TERM OF PROTECTION
copyright objective of stimulating productive
Original and Derivative Works, as well as
thought and public instruction without excessively
Posthumous works
diminishing the incentives for creativity.”
During the life of the author and for fifty (50)
years after his death
Decompilation may be Considered Fair Use
Works of joint authorship
Economic rights shall be protected during the life
Decompilation, which is the reproduction of the
of the last surviving author and for fifty (50)
code and translation of the forms of the computer
years after his death
program to achieve the inter-operability of an
independently created computer program with

Commercial Law
other programs, may also constitute fair use under A: NO. In determining whether the use made of a
the criteria established Sec. 185, to the extent that work in any particular case is fair use, the factors to
such decompilation is done for the purpose of be considered shall include:
obtaining the information necessary to achieve such
interoperability. (Sec. 185, IPC) a. The purpose and character of the use,
including whether such use is of a
Factors to be considered in determining fair use commercial nature or is for non-profit
(P-A-N-E) educational purposes;
b. The nature of the copyrighted work;
1. Purpose and character of the use, including c. The amount and substantiality of the
whether such use is of a commercial nature or portion used in relation to the copyrighted
is for non-profit educational purpose; work as a whole; and
2. Amount and substantiality of the portion used d. The effect of the use upon the potential
in relation to the copyrighted work as a whole; market for or value of the copyrighted
3. Nature of the copyrighted work; and work. (Sec. 185.1, IPC)
4. Effect of the use upon the potential market for
or value of the copyrighted work. Based on these factors, the invocation of the
doctrine of fair use is not proper. The reproduction
NOTE: The fact that a work is unpublished shall not of the copies is commercial in nature, where the
by itself bar a finding of fair use if such finding is entire book is reproduced thereby violating the
made upon consideration of all the above factors economic right of the author and the offer to the
(Sec. 182.2, IPC). If you copy to the extent that you public of copies of the book has an injurious effect
reduce the marketability of the book, it is no longer upon the potential market or value of the
fair use. copyrighted work.
Q: KLM Printers, Inc. operated a small outlet Published Works

located at the ground floor of a university
building in Quezon City. It possessed soft copies Works which, with the consent of the authors, are
of certain textbooks on file and would print made available to the public by wire or wireless
“book-alikes” of these textbooks (or in other means in such a way that members of the public may
words, reproduced the entire textbooks) upon access these works from a place and time
order and for a fee. It would even display individually chosen by them: provided, that
samples of such “book-alikes” in its stall for sale availability of such copies has been such, as to
to the public. satisfy the reasonable requirement of the public,
having regard to the nature of the work. (Sec. 171.7,
Upon learning of KLM Printers, Inc.’s activities, IPC)
the authors of the textbooks filed a suit against
it for copyright infringement. In its defense, KLM Reprographic Reproduction by Libraries
Printers, Inc. invoked the doctrine of fair use,
contending that the “book-alikes” are being Any library or archive whose activities are not for
used for educational purposes by those who profit may, without the authorization of the author
avail of them. or copyright owner, make a limited number of
copies of the work, as may be necessary for such
Is KLM Printers, Inc.’s invocation of the doctrine institutions to fulfill their mandate, by reprographic
of fair use proper in this case? Explain. (2019 reproduction:
BAR) a. Where the work by reason of its fragile
character or rarity cannot be lent to user in its
original form;

2022 GOLDEN NOTES
b. Where the works are isolated articles contained Transfer or Assignment of Copyright
in composite works or brief portions of other
published works and the reproduction is The copyright may be assigned or licensed in whole
necessary to supply them, when this is or in part. Within the scope of the assignment or
considered expedient, to persons requesting license, the assignee or licensee is entitled to all the
their loan for purposes of research or study rights and remedies which the assignor or licensor
instead of lending the volumes or booklets had with respect to the copyright. (Sec. 180.1, IPC)
which contain them; and
c. Where the making of such limited copies is in Requisites for a Transfer of Copyright to Take
order to preserve and, if necessary, in the event Effect
that it is lost, destroyed or rendered unusable,
replace a copy, or to replace, in the permanent 1. If inter vivos, there must be a written indication
collection of another similar library or archive, of such intention; and
a copy which has been lost, destroyed or 2. Filed in National Library upon payment of
rendered unusable and copies are not available prescribed fees. (Sec. 182, IPC)
with the publisher.
The filing of the assignment or license of
But it shall not be permissible to produce a volume copyright is NOT a mandatory requirement.
of a work published in several volumes or to
produce missing tomes or pages of magazines or Section 182 uses the permissive word “may” in
similar works, unless the volume, tome or part is out reference to the filing of the deed of assignment or
of stock. (Sec. 188, IPC, as amended by R.A. No. 10372) transfer of copyright, this filing should not be
understood as mandatory for validity and
Public Performance vs. Communication to the enforceability. The filing is entirely optional for the
Public of a Performance parties and may be useful only for evidentiary and
notification purposes. (Amador, 2007)
COMMUNICATION TO
PUBLIC
THE PUBLIC OF A Limitation regarding submission of a literary,
PERFORMANCE
PERFORMANCE photographic, or artistic work to a newspaper,
Definition magazine or periodical for publication
Performance at a
The transmission to the
place or at places Unless a greater right is expressly granted, such
public, by any medium,
where persons submission shall constitute only a license to make a
otherwise than by
outside the normal single publication.
broadcasting, of sounds
circle of a family and
of a performance or the
that family’s closest If two or more persons jointly own a copyright or
representations of
social acquaintances any part thereof, neither of the owners shall be
sounds fixed in a sound
are or can be entitled to grant licenses without the prior written
recording.
present. consent of the other owner or owners. (Sec. 180.3,
Mode of Access IPC)
The communication can
It is performed at a be accessed through Q: In a written legal opinion for a client on the
specific time and wired or wireless means difference between apprenticeship and
place. (e.g. The at a time and place learnership, Liza quoted without permission a
Pacquiao-Clottey convenient to the viewer labor law expert's comment appearing in his
Match in Dallas (e.g. The Pacquiao- book entitled "Annotations on the Labor Code."
Texas Stadium) Clottey Match watched Can the labor law expert hold Liza liable for
via YouTube) infringement of copyright for quoting a portion
of his book without his permission? (2006 BAR)

Commercial Law
A: NO. One of the limitations on copyright is the infringing activity and has the right and ability
making of quotations from a published work if they to control the activities of the other person;
are compatible with fair use, provided that the 3. With knowledge of infringing activity, induces,
source and the name of the author, if appearing on causes, or materially contributes to the
the work, are mentioned. The legal opinion made by infringing conduct of another. (Sec. 216, IPC, as
Liza is consistent with fair use since the quoted part amended by R.A. No. 10372)
is merely used to explain a concept of law for the
benefit of the client and not to defeat the rights of Q: Diana and Piolo are famous personalities in
the author over his copyright. (Sec. 184.1(b), IPC) showbusiness who kept their love affair secret.
They use a special instant messaging service
7. COPYRIGHT INFRINGEMENT which allows them to see one another’s typing
on their own screen as each letter key is pressed.
It is the doing by any person, without the consent of When Greg, the controller of the service facility,
the owner of the copyright, of anything the sole right found out their identities, he kept a copy of all
to do which is conferred by statute on the owner of the messages Diana and Piolo sent each other
the copyright. The act of lifting from another’s book and published them. Is Greg liable for copyright
substantial portions of discussions and examples infringement? Reason briefly. (2007 BAR)
and the failure to acknowledge the same is an
infringement of copyright. (Habana v. Robles, G.R. A: YES. The messages which Diana and Pablo sent
No. 131522, 19 July 1999) each other fall under the category of letters as
provided in Sec. 172.1.d which provides that literary
Copying alone is not what is prohibited. The copying and artistic works, hereinafter referred to as
must produce an “injurious effect”. A copy of a “works,” are original intellectual creations in the
piracy is an infringement of the original, and it is no literary and artistic domain protected from the
defense that the pirate, in such cases, did not know moment of their creation and shall include in
whether or not he was infringing any copyright; he particular, among others, letters. Infringement of
at least knew that what he was copying was not his, such consist in the doing by any person, without the
and he copied at his peril. (Ibid.) consent of the owner of the copyright, of anything
the sole right to do which is conferred by statute on
The gravamen of copyright infringement is not the owner of the copyright. Reproduction and first
merely the unauthorized "manufacturing" of public distribution of the work are economic rights
intellectual works but rather the unauthorized of the authors of the work. Such cannot be done by
performance of any of the rights exclusively granted the person not the author of the work. In this
to the copyright owner. Hence, any person who instance, Greg is not the owner of the messages. He
performs any of such acts under without obtaining merely copied it without the consent of the authors
the copyright owner’s prior consent renders himself thereof and subsequently published the same in
civilly and criminally liable for copyright violation of the latter’s economic rights.
infringement. (NBI-Microsoft Corp. v. Hwang, G.R. No.
147043, 21 June 2005) Q: The Victoria Hotel chain reproduces
videotapes, distributes the copies thereof to its
Infringement hotels and makes them available to hotel guests
for viewing in the hotel guest rooms. It charges a
A person infringes a right protected under this Act separate nominal fee for the use of the videotape
when one: player.
a. Can the Victoria Hotel be enjoined for
1. Directly commits an infringement; infringing copyrights and held liable for
2. Benefits from the infringing activity of another damages?
person who commits an infringement if the
person benefiting has been given notice of the

2022 GOLDEN NOTES
b. Would it make any difference if Victoria publisher of the books in the Philippines, sued
Hotel does not charge any fee for the use of KK for copyright infringement. Decide. (2014
the videotape? (1994 BAR) BAR)
A: A: KK did not commit copyright infringement.

a. YES. Victoria Hotel may be held liable for Under the “first sale” doctrine, the owner of a
infringing copyrights of the said videotapes particular copy or phonorecord lawfully made is
because the reproduction and distribution entitled, without the authority of the copyright
thereof are not merely for private viewing. owner, to sell or otherwise dispose of the
Instead, it was used as a means to gain extra possession of that copy or phonorecord. Hence,
profit by making it as an extra amenity for its there is no infringement by KK since the said
hotel services. However, if such performances doctrine permitted importation and resale without
contained in the videotapes became available to the publisher’s further permission.
the public even prior to its registration, then
there is no copyright infringement because the Substantial Reproduction
videotapes are already considered as public
property. It is not necessarily required that the entire
copyrighted work, or even a large portion of it, be
b. NO. Notwithstanding the non-charging of fee copied. If so much is taken that the value of the
for the use of the videotapes, Victoria Hotel still original work is substantially diminished, there is an
uses the videotapes for business purposes, infringement of copyright and to an injurious extent,
serving as an attraction to prospective and the work is appropriated. It is no defense that the
current guests, unless the performances in the pirate did not know whether or not he was
videotapes had been long before available to infringing any copyright; he at least knew that what
the public prior to registration; hence, it is he was copying was not his, and he copied at his
already public property. (Filipino Society of peril. In cases of infringement, copying alone is not
Composers, Authors, Publishers, Inc. v. Benjamin what is prohibited. The copying must produce an
Tan, G.R. No. L-36402, 16 Mar. 1987) “injurious effect”. (Habana v. Robles, G.R. No. 131522,
19 July 1999)
Q: In an action for damages on account of an
infringement of a copyright, the defendant (the Copying is demonstrated by:
alleged pirate) raised the defense that he was
unaware that what he had copied was a 1. Direct evidence; or
copyright material. Would this defense be valid? 2. Circumstantial evidence of access and
(1997 BAR) substantial inquiry or the most common test.
(Amador, 2007).
A: NO. In copyright infringement, intent is
irrelevant. A person may consciously or Q: May a person have photocopies of some pages
unconsciously copy or infringe a copyrighted of the book of Professor Rosario made without
material and still be held liable for such act. violating the copyright law? (1998 BAR)
Q: KK is from Bangkok, Thailand. She studies A: YES, a person may photocopy some of pages of
medicine in the Pontifical University of Santo Professor Rosario’s book for as long as it is not for
Tomas (UST). She learned that the same foreign public use or distribution, and it does not copy the
books prescribed in UST are 40-50% cheaper in substantial text or “heart” of the book. It is
Bangkok. So she ordered 50 copies of each book considered as fair use of the copyrighted work.
for herself and her classmates and sold the
books at 20% less than the price in the
Philippines. XX, the exclusive licensed

Commercial Law
Plagiarism as it is not
acknowledged.
Plagiarism means the theft of another person’s Manner of Copying
language, thoughts, or ideas. To plagiarize is to take The copying must be The copying need not
(ideas, writings, etc.) from (another) and pass them substantial. be substantial.
off as one’s own. The passing off of the work of Expression
another as one’s own is thus an indispensable Plagiarism may exist
element of plagiarism. The copying must refer
even if none of the
to an expression of an
same words are used
Plagiarism presupposes intent and a deliberate, idea.
to express an idea.
conscious effort to steal another’s work and pass it
off as one’s own. (In the matter of the charges of Remedies in case of copyright infringement
plagiarism against Associate Justice Mariano C. Del (I2-D2-M-S)
Castillo, A.M. No. 10-7-17-SC, 12 Oct. 2010)
1. Injunction;
Copyright Infringement vs. Plagiarism 2. Impounding during the pendency of the action
sales invoices and other documents evidencing
COPYRIGHT sales;
PLAGIARISM
INFRINGEMENT 3. Damages, including legal costs and other
Definition expenses, as he may have incurred due to the
The unauthorized use infringement as well as the profits the infringer
of copyrighted material may have made due to such infringement;
in a manner that 4. Destruction without any compensation all
violates one of the The use of another’s infringing copies;
copyright owner’s information, language, 5. Moral and Exemplary damages (Sec. 216.1, IPC);
exclusive rights, such or writing, when done or
as the right to without proper 6. Seizure and impounding of any article, which
reproduce or perform acknowledgment of may serve as evidence in the court proceedings.
the copyrighted work, the original source (Sec. 216.2, IPC)
or to make derivative
works that build upon The copyright owner may elect, at any time before
it final judgment is rendered, to recover instead of
Coverage actual damages and profits, an award of statutory
Copyright infringement damages for all infringements involved in an action
is a very broad term in a sum equivalent to the filing fee of the
that describes a variety infringement action but not less than Fifty thousand
of acts, such as the pesos (P50,000.00). (Sec. 216.1, IPC, as amended by
Plagiarism is specific
duplication of a work, R.A. No. 10372)
as it refers only to
rewriting a piece,
using someone else’s
performing a written Factors to be considered by the court in
work without proper
work or doing anything awarding statutory damages
acknowledgment.
that is normally
considered to be the 1. Nature and purpose of the infringing act;
exclusive right of the 2. Flagrancy of the infringement;
copyright holder. 3. Whether the defendant acted in bad faith;
Public Document 4. Need for deterrence;
There is no copyright 5. Any loss that the plaintiff has suffered or is
Public documents can
infringement on public likely to suffer by reason of the infringement;
be plagiarized so long
documents and

2022 GOLDEN NOTES
6. Any benefit shown to have accrued to the performance. (Sec. 171.13, IPC, as amended by R.A.
defendant by reason of the infringement. (Sec. No. 10372)
216.1, IPC, as amended by R.A. No. 10372)
Criminal Penalties in Case of Copyright
Double damages Infringement
The amount of damages to be awarded shall be 1. Imprisonment of one (1) year to three (3) years
doubled against any person who: plus a fine ranging from Fifty thousand pesos
(P50,000) to One hundred fifty thousand pesos
1. Circumvents effective technological measures; (P150,000) for the first offense.
or 2. Imprisonment of three (3) years and one (1)
2. Having reasonable grounds to know that it will day to six (6) years plus a fine ranging from One
induce, enable, facilitate or conceal the hundred fifty thousand pesos to Five hundred
infringement, remove or alter any electronic thousand (P500,000) for the second offense.
rights management information from a copy of 3. Imprisonment of six (6) years and one day to
a work, sound recording, or fixation of a nine (9) years plus a fine ranging from Five
performance, or distribute, import for hundred thousand pesos (P500,000) to
distribution, broadcast, or communicate to the P1,500,000 for the third offense.
public works or copies of works without 4. In all cases, subsidiary imprisonment in cases of
authority, knowing that electronic rights insolvency. (Sec. 217, IPC)
management information has been removed or
altered without authority. (Sec. 216.1, IPC, as Determination of Penalty
amended by R.A. No. 10372)
The court shall consider the value of the infringing
Technological Measure materials that the defendant has produced or
manufactured and the damage that the copyright
It is any technology, device, or component that, in owner has suffered by reason of the infringement:
the normal course of its operation, restricts acts in Provided, that the respective maximum penalty
respect of a work, performance or sound recording, stated in Section 217.1. (a), (b) and (c) herein for the
which are not authorized by the authors, first, second, third and subsequent offense, shall be
performers or producers of sound recordings imposed when the infringement is committed by:
concerned or permitted by law. (Sec. 171.12, IPC, as 1. Circumvention of effective technological
amended by R.A. No. 10372) measures;
2. Removal or alteration of any electronic rights
Rights Management Information management information from a copy of a
work, sound recording, or fixation of a
It is information which identifies the work, sound performance, by a person, knowingly and
recording or performance; the author of the work, without authority; or
producer of the sound recording or performer of the 3. Distribution, importation for distribution,
performance; the owner of any right in the work, broadcast, or communication to the public of
sound recording or performance; or information works or copies of works, by a person without
about the terms and conditions of the use of the authority, knowing that electronic rights
work, sound recording or performance; and any management information has been removed or
number or code that represent such information, altered without authority. (Sec. 217.2, IPC, as
when any of these items is attached to a copy of the amended by R.A. No. 10372)
work, sound recording or fixation of performance or
appears in conjunction with the communication to
the public of a work, sound recording or

Commercial Law
Affidavit Evidence the power and ability to control the person

committing the infringement. (Ibid.)
It is an affidavit made before the notary public in
actions for infringement, reciting the facts required Liability of mall owners for the infringement
to be stated under Sec. 216.1 of the IPC. activities of their tenants
As a prima facie proof, the affidavit shifts the burden Mall owners are not automatically penalized for the
of proof to the defendant, to prove the ownership of infringing acts of their tenants. When a mall owner
the copyrighted work. or lessor finds out about an infringement activity, he
or she must give notice to the tenant, then he or she
Q: Due to the amendment of the IP Code under will be afforded time to act upon this knowledge.
R.A. No. 10372 APPROVED ON FEBRUARY 28, The law requires that one must have both proven
2013, deleting the provision entitling knowledge of the infringement, and the ability to
importation in the Philippines of up to three (3) control the activities of the infringing person, to be
copies of copyrighted works in a personal held liable. The mall owner must also have
baggage, can one still be allowed to import benefitted from the infringement. (Ibid.)
books, DVDs, and CDs from abroad?
Other beneficial provisions brought by R.A. No.
A: YES. In fact, the amendments to the Intellectual 10372
Property Code have removed the original limitation
of three copies when bringing legitimately acquired 1. Grant of enforcement powers to IPOPHL
copies of copyrighted material into the country. (Sec. 2)
Only the importation of pirated or infringed
material is illegal. As long as they were legally The law grants visitorial powers to IPOPHL and
purchased, you can bring as many copies you want, allows it to undertake enforcement functions with
subject to Customs regulations. (FAQs on the the support of concerned agencies such as PNP, NBI,
amendments to the Intellectual Property Code of the BOC, OMB and LGUs. IPOPHL itself will not be
Philippines, officialgazette.gov.ph, 8 Mar 2013) conducting raids or seizures but will be
coordinating with the said agencies. However, as IP
Reproduction of copyrighted material for rights remain to be private rights, there must be a
personal purposes is not punishable by R. A. No. complaint from the IP right owner. So, if an author
10372 sees pirated copies of his book in a certain store, he
may notify IPOPHL. IPOPHL can now initiate
Infringement in this context refers to the economic together with any of the said agencies to address the
rights of the copyright owner. Transferring music problem.
from a lawfully acquired CD into a computer, then
downloading it to a portable device for personal use, 2. Establishment of the Bureau of Copyright
is not infringement. But if, multiple copies of the CD and other related rights (Secs. 1 and 3)
were reproduced for sale, then infringement occurs.
(Ibid.) At present there is no entity performing the more
substantial function of policy formulation,
Possession of a music file procured through an rulemaking, adjudication, research and education,
infringing activity is a violation of the law which is envisioned to be handled by the Bureau of
Copyright. Although a Copyright Division exists in
The possession of a music file procured through an the National Library, the function of such office is
infringing activity is a violation of the law only if it merely to accept deposits of copyrighted works. The
can be proven that the person benefitting from the Copyright Bureau is dedicated to serving the needs
music file has knowledge of the infringement, and of the copyright-based industries and stakeholders
could give more focus and rally more resources and

2022 GOLDEN NOTES
support for the creative industry, which is very works for use by visually impaired persons. Before
important for protection of works by Filipinos both this amendment, hundreds of thousands of blind
here and abroad. Filipinos could not buy Braille works at cheap prices
because copyright protection operates. Now with
3. Accreditation of collective management this amendment, blind and visually impaired
organizations or CMOs (Sec. 10) Filipinos can have easier access to copyrighted
works in Braille.
CMOs are organizations that enforce the copyright
of the copyright holders. Through this mandate, 6. Formulation of IP Policies within universities
IPOPHL will be able to monitor and promote good and colleges (Sec. 27)
corporate governance among CMOs, benefitting not
only the rights holders themselves but also the users This will ensure that the rights of the academic
of copyrighted works. Members of the Philippine community (professors, researchers, students) over
Retailers Association (PRA), mall owners, their literary, scholarly, and artistic works are
restaurants, and other heavy users of music in their clearly delineated and respected. With an IP Policy
establishments will greatly benefit from this in existence, these sectors within the academe will
provision, as they are ensured that only legitimate have a clear delineation of their respective rights
collecting agencies can collect royalties from them and benefits, thus, avoiding disputes and costly
on behalf of copyright owners. litigation within their ranks which would be
detrimental to education, research, and
4. Clarification of the concept of copyright development.
infringement, including secondary liability
(Secs. 22 and 23)
The provisions on copyright infringement have

been refined to include contributory infringement
(secondary liability), circumvention of
technological measures and rights management
information as aggravating circumstances, and the
option to collect statutory damages instead of actual
damages. However, under Sec. 22 of the
amendments, to be secondarily liable, a landlord or
mall must: (1) benefit from the infringing activity;
(2) must have been given notice of the infringing
activity and a grace period to act on the same; and
(3) has the right and ability to control the activities
of the person who is doing the infringement. The
complainant has the burden of proof to provide
evidence that all 3 elements are present. If a
landlord or mall owner is not aware of the
infringement, he cannot be liable for infringement,
even if he benefits from it (from rental payments) or
has control over the premises.
5. Fair use for the blind, visually- and reading-

impaired (Sec. 11)
This provision would give a special fair use

exemption for the non-commercial reproduction of

Anti-Money Laundering Act
3. (i) Securities dealers, brokers, salesmen,

V. THE ANTI-MONEY LAUNDERING ACT OF 2001 investment houses and other similar persons
(RA. NO. 9160, AS AMENDED) managing securities or rendering services as
investment agent, advisor, or consultant;
(ii) Mutual funds, close-end investment
companies, common trust funds, and other
Policy of the Law (Sec. 2, R.A. No. 9160, as
similar persons;
amended)
(iii) Other entities administering or otherwise
dealing in currency, commodities or financial
1. To protect and preserve the integrity and
derivatives based thereon, valuable objects,
confidentiality of bank accounts and to ensure
cash substitutes and other similar monetary
that the Philippines shall not be used as a
instruments or property supervised or
money laundering site for the proceeds of any
regulated by the Securities and Exchange
unlawful activity;
Commission (SEC);
2. To pursue the State’s foreign policy to extend
cooperation in transnational investigation and
4. Jewelry dealers in precious Metals, who, as a
prosecutions of persons involved in money
business, trade in precious metals, for
laundering activities wherever committed as
transactions in excess of One million pesos
well as the implementation of targeted financial
(P1,000,000.00);
sanctions related to the financing of the
proliferation of weapons of mass destruction,
5. Jewelry dealers in precious Stones, who, as a
terrorism, and financing of terrorism, pursuant
business, trade in precious stones, for
to the resolutions of the United Nations Security
transactions in excess of One million pesos
Council. (as amended by Sec. 1, R.A. No. 11521)
(P1,000,000.00);
6. Company service providers which, as a

A. COVERED INSTITUTIONS AND THEIR business, provide any of the following services
OBLIGATIONS to third parties:
(i) Acting as a formation agent of juridical

Sec. 3(a), R.A. No. 9160, as amended persons;
(ii) Acting as (or arranging for another
NOTE: Covered “Institutions” was changed to person to act as) a director or corporate
Covered “Persons” under R.A. No. 10365. secretary of a company, a partner of a
partnership, or a similar position in
Covered persons, natural or juridical, refer to: relation to other juridical persons;
(M-I-S-S-M-S-B-C-C-R-O-P) (iii) Providing a registered office, business
address or accommodation,
1. Banks, non-banks, quasi-banks, trust entities, correspondence or administrative
foreign exchange dealers, pawnshops, money address for a company, a partnership or
changers, remittance and transfer companies any other legal person or arrangement;
and other similar entities, and all other persons and
and their subsidiaries and affiliates supervised (iv) Acting as (or arranging for another
or regulated by the Bangko Sentral ng Pilipinas person to act as) a nominee shareholder
(BSP); for another person; and
2. Insurance companies, pre-need companies, and 7. Persons, including lawyers, accountants, and
all other persons supervised or regulated by the other professionals, who provide any of the
Insurance Commission (IC); following services (Sec. 1, Rule 4, 2018

2022 GOLDEN NOTES
Commercial Law
Implementing Rules and Regulations of R.A. No. 2. Authorized to practice in the Philippines; and
9160, as amended): 3. Continue to be subject to the provisions of their
respective codes of conduct and/or
(i) Managing of client money, securities, or professional responsibility or any of its
other assets; amendments. (Sec. 3[a][7], R.A. 9160, as
(ii) Management of bank, savings, or amended
securities accounts;
(iii) Organization of contributions for the For purposes of covered persons under Sec. 3(a)(8),
creation, operation, or management of the following terms are hereby defined as follows:
companies; and
(iv) Creation, operation or management of 1. Casino refers to a business authorized by the
juridical persons or arrangements, and appropriate government agency to engage in
buying and selling business entities. gaming operations;
8. Casinos, including internet and ship-based 2. Internet-based casinos shall refer to casinos in
casinos, with respect to their casino cash which persons participate by the use of remote
transactions related to the gaming operations; communication facilities such as, but not
(Sec. 3[a][8], R.A. 9160, as amended by R.A. No. limited to, internet, telephone, television, radio
10927) or any other kind of electronic or other
technology for facilitating communication; and
9. Real estate developers and brokers; (as
amended by Sec. 2, R.A. No. 11521) 3. Ship-based casino shall refer to casinos, the
operation of which is undertaken on board a
10. Offshore gaming operators, as well as their vessel, ship, boat, or any other water-based
service providers, supervised, accredited, or craft wholly or partly intended for gambling;
regulated by the Philippine Amusement and
Gaming Operation or any government agency. 4. Casino cash transaction refers to transactions
(as amended by Sec. 2, R.A. No. 11521) involving the receipt of cash by a casino paid by
or on behalf of a customer, or transactions
Q: Are lawyers and accountants considered as involving the payout of cash by a casino to a
covered persons? customer or to any person in his/her behalf;
and
GR: Yes, lawyers and accountants are
considered as Covered Persons under the definition 5. Gaming operations refer to the activities of the
under the AMLA except if they act as an casino offering games of chance and any
“Independent Legal/Accounting Professional”. variations thereof approved by the appropriate
government authorities. (as amended by Sec. 3,
NOTE: “Independent Legal/Accounting R.A. No. 10927)
Professional” refers to lawyers/accountants
working in a private firm or as a sole practitioner Obligations of Covered Persons (Sec. 9, R.A. No.
who, by way of business or occupation, provides 9610, as amended)
purely legal or accounting services to their clients.
([tt], Sec. 1, Rule 2, 2018 Implementing Rules and a. Customer Identification - Covered persons
Regulations of R.A. No. 9160, as amended): shall:
a. Establish and record the true identity
Requisites for Exclusion: of its clients based on official
documents;
1. They must be acting as independent legal b. Maintain a system of verifying the true
professionals; identity of their clients; and

c. In case of corporate clients, require a

system of verifying their legal existence B. COVERED AND SUSPICIOUS TRANSACTIONS
and organizational structure, as well as
the authority and identification of all
persons purporting to act on their
Covered Transactions (Sec. 3(b), R.A. 9160, as
behalf.
amended)
b. Record Keeping - All records of all transactions

A transaction in cash or other equivalent monetary
of covered persons shall be maintained and
instrument involving a total amount in excess of
safely stored for five (5) years from the date of
five hundred thousand pesos (P500,000.00) within
transactions.
one (1) banking day.
XPN: If a case has been filed in court involving

For casinos, a single casino cash transaction
the account, records must be retained and safely
involving an amount in excess of five million pesos
kept beyond the five (5)-year period, until it is
(P5,000,000.00) or its equivalent in any other
officially confirmed by the AMLC Secretariat
currency.
that the case has been resolved, decided or
terminated with finality. (Sec. 3, Rule 20, 2018
For real estate developers and brokers, a single cash
Implementing Rules and Regulations of R.A. No.
transaction involving an amount in excess of seven
9160, as amended):
million five hundred thousand pesos
(P7,500,000.00) or its equivalent in any other
NOTE: With respect to closed accounts, the
currency. (as amended by Sec. 2, R.A. No. 11521)
records shall be preserved and safely stored for
at least five (5) years from the dates when they
Suspicious Transactions (Sec. 3(b-1), R.A. No.
were closed.
9160, as amended)
c. Reporting of Covered and Suspicious

Transactions with covered persons, regardless of
Transactions.
the amounts involved, where any of the following
circumstances exist: (D-A-R-I-A-N-S)
GR: Covered persons shall report to the AMLC
all covered transactions and suspicious
1. There is No underlying legal or trade obligation,
transactions within five (5) working days from
purpose, or economic justification;
occurrence thereof.
2. The client is not properly Identified;
3. The Amount involved is not commensurate with
XPN: The AMLC prescribes a different period
the business or financial capacity of the client;
not exceeding fifteen (15) working days.
4. Taking into account all known circumstances, it
may be perceived that the client's transaction is
NOTE: Should a transaction be determined to
Structured in order to avoid being the subject of
be both a covered transaction and a suspicious
reporting requirements under the Act;
transaction, the covered person shall be
5. Any circumstances relating to the transaction
required to report the same as a suspicious
which is observed to Deviate from the profile of
transaction. (Sec. 9, R.A. No. 9160, as amended
the client and/or the client's past transactions
by Sec. 7, R.A. No. 10365)
with the covered person;
6. The transaction is in any way Related to an
unlawful activity or offense under this Act that
is about to be, is being or has been committed;
or

2022 GOLDEN NOTES
Commercial Law
7. Any transaction that is similar or Analogous to Department of Justice or the Office of the
any of the foregoing. (as amended by Sec. 2, R.A. Ombudsman for anti-money laundering offenses.
No. 11521) The criminal prosecution of such offenses would be
unduly hampered if it were to be prohibited from
Q: Lionair, Inc. sold helicopters as brand new disclosing such information. For the AMLC to refuse
when in fact they were already used. Lionair’s disclosing the information required of it would be to
president alleged that Lionair imported the go against its own functions under the law. (Republic
helicopters from the United States and sold of the Philippines v. Sandiganbayan, G.R. Nos.
them to Arroyo, who, in turn, deposited partial 232724-27, 15 Feb. 2021)
payment to Lionair’s account with the Union
Bank. The Office of the Special Prosecutor (OSP)
presented the Manager of the Union Bank
Branch where the account was maintained to
verify the source of deposits. The manager
suggested that the Bangko Sentral ng Pilipinas
or the AMLC may have reports on the
transaction. Thus, the Sandiganbayan, upon the
OSP’s request, issued a subpoena duces tecum
and ad testificandum directing the Secretariat of
the AMLC, to testify and to produce Lionair’s
bank records. The AMLC moved to quash the
subpoena, arguing that whatever information it
has on Lionair’s bank account is confidential
under R.A. No. 9160. AMLC argues that the
prohibition under R.A. No. 9160 extends to it. It
claims that as a covered institution, it cannot be
forced to disclose such prohibited information.
Is the AMLC’s argument tenable?
A: NO. According to the wording of R.A. No. 9160,

the AMLC “is not one of the covered institutions
prohibited from disclosing information on covered
and suspicious transactions,” and that the rationale
for the prohibition does not extend to the AMLC.
Unlike covered institutions, the AMLC is mandated
to investigate and file a case against violators based
on the information it obtains. Furthermore, the
prohibition and confidentiality cannot apply to the
AMLC; otherwise, it would contravene its direct
mandate under Sec. 7 of R.A. No. 9160.
AMLC is not merely a repository of reports and

information on covered and suspicious
transactions. It is created precisely to investigate
and institute charges against the offenders. Sec. 7
clearly states that it is tasked to institute civil
forfeiture proceedings and other remedial
proceedings, and to file complaints with the

2. Communicating, directly or indirectly, in any

C. SAFE HARBOR PROVISION manner or by any means, to any person or
entity, the media, the fact that a covered or
suspicious transaction has been reported or is
about to be reported, the contents of the report,
No administrative, criminal, or civil proceedings
or any other information in relation thereto;
shall lie against any person for having made a
and
covered transaction report (CTR) or a suspicious
transaction report (STR) in the regular performance
3. Publishing or airing in any manner or form by
of his duties and in good faith, whether or not such
the mass media, electronic mail, or other similar
reporting results in any criminal prosecution under
devices.
the AMLA or any other Philippine law. (Sec. 6, Rule
22, 2018 Implementing Rules and Regulations of R.A.
In case of violation of these prohibitions, the
No. 9160, as amended)
concerned officer and employee of the covered
person and media shall be held criminally liable. (as
When reporting covered or suspicious transactions
amended by Sec. 9, R.A. No. 10365)
to the Anti-Money Laundering Council (AMLC),
covered persons and their officers and employees
shall not be deemed to have violated: (G-O-L-F)
1. The Law on Secrecy of Bank Deposits or R.A. No.

1405, as amended;
2. Foreign Currency Deposit Act of the Philippines
or R.A. No. 6426, as amended;
3. General Banking Law of 2000 or R.A. No. 8791;
and
4. Other similar laws. (Sec. 9(c), R.A. No. 9160, as
amended by Sec. 6, R.A. No. 9194)
Prohibited Communications
When reporting covered or suspicious transactions

to the AMLC, covered persons and their employees
or officers are prohibited from:
1. Communicating, directly or indirectly, in any

manner or by any means, to any person, the fact
that a covered or suspicious transaction report
was made, the contents thereof, or any other
information in relation thereto;
NOTE: If the reporting is done by any person in

the regular performance of his duties in good
faith, no administrative, criminal, or civil
proceedings shall lie against said person,
whether or not such reporting results in any
criminal prosecution under this Act of any other
law (Safe Harbor Provision).

2022 GOLDEN NOTES
Commercial Law
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16

D. WHEN IS MONEY LAUNDERING COMMITTED of Republic Act No. 9165, otherwise known as
(INCLUDING PREDICATE CRIMES) 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
Money Laundering; How committed (Sec. 4, R.A.
known as the Anti-Graft and Corrupt Practices
No. 9160, as amended by Sec. 4, R.A. No. 10365)
Act;
4. Plunder under Republic Act No. 7080, as
Money laundering is committed by any person
amended;
who, knowing that any monetary instrument or
5. Robbery and extortion under Articles 294, 295,
property represents, involves, or relates to the
296, 299, 300, 301 and 302 of the Revised Penal
proceeds of any unlawful activity: (C-A-P-C-A-T)
Code, as amended;
6. Jueteng and Masiao punished as illegal gambling
a) Transacts said monetary instrument or
under Presidential Decree No. 1602;
property;
7. Piracy on the high seas under the Revised Penal
b) Converts, transfers, disposes of, moves,
Code, as amended and Presidential Decree No.
acquires, possesses, or uses said monetary
532;
instrument or property;
8. Qualified theft under Article 310 of the Revised
c) Conceals or disguises the true nature, source,
Penal Code, as amended;
location, disposition, movement, or ownership
9. Swindling under Article 315 and Other Forms of
of or rights with respect to said monetary
Swindling under Article 316 of the Revised
instrument or property;
Penal Code, as amended;
d) Attempts or conspires to commit money
10. Smuggling under Republic Act Nos. 455 and
laundering offenses referred to in paragraphs
1937;
(a), (b) or (c);
11. Violations of Republic Act No. 8792, otherwise
e) Aids, abets, assists in or counsels the
known as the Electronic Commerce Act of 2000;
commission of the money laundering offenses
12. Hijacking and other violations under Republic
referred to in paragraphs (a), (b) or (c) above;
Act No. 6235; destructive arson and murder, as
and
defined under the Revised Penal Code, as
f) Performs or fails to perform any act as a result
amended;
of which he facilitates the offense of money
13. Terrorism and conspiracy to commit terrorism
laundering referred to in paragraphs (a), (b) or
as defined and penalized under Sections 3 and 4
(c) above.
of Republic Act No. 9372; (as amended by Sec. 2,
R.A. No. 10365)
Money laundering is also committed by any covered
14. Financing of terrorism under Section 4 and
person who, knowing that a covered or suspicious
offenses punishable under Sections 5, 6, 7 and 8
transaction is required under this Act to be reported
of Republic Act No. 10168, otherwise known as
to the AMLC, fails to do so.
the Terrorism Financing Prevention and
Suppression Act of 2012; (Ibid.)
Unlawful Activities or Predicated Crimes (Sec.
15. Bribery under Articles 210, 211 and 211-A of
3(i), R.A. 9160, as amended)
the Revised Penal Code, as amended, and
Corruption of Public Officers under Article 212
Unlawful activity refers to any act or omission or
of the Revised Penal Code, as amended; (Ibid.)
series or combination thereof involving or having
16. Frauds and Illegal Exactions and Transactions
direct relation to the following:
under Articles 213, 214, 215 and 216 of the
Revised Penal Code, as amended; (Ibid.)
1. Kidnapping for ransom under Article 267 of Act
No. 3815, otherwise known as the Revised Penal
Code, as amended;

17. Malversation of Public Funds and Property 31. Violation of Section 4 of Republic Act No. 9775,
under Articles 217 and 222 of the Revised Penal otherwise known as the Anti-Child
Code, as amended; (Ibid.) Pornography Act of 2009; (Ibid.)
18. Forgeries and Counterfeiting under Articles 32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and
163, 166, 167, 168, 169 and 176 of the Revised (e), 11, 12 and 14 of Republic Act No. 7610,
Penal Code, as amended; (Ibid.) otherwise known as the Special Protection of
19. Violations of Sections 4 to 6 of Republic Act No. Children Against Abuse, Exploitation and
9208, otherwise known as the Anti-Trafficking Discrimination; (Ibid.)
in Persons Act of 2003; (Ibid.) 33. Fraudulent practices and other violations under
20. Violations of Sections 78 to 79 of Chapter IV, of Republic Act No. 8799, otherwise known as the
Presidential Decree No. 705, otherwise known Securities Regulation Code of 2000; (as
as the Revised Forestry Code of the Philippines, amended by Sec. 2, R.A. No. 11521)
as amended; (Ibid.) 34. Violation of Section 19 (a)(3) of Republic Act No.
21. Violations of Sections 86 to 106 of Chapter VI, of 10697, otherwise known as the ‘Strategic Trade
Republic Act No. 8550, otherwise known as the Management Act’, in relation to the proliferation
Philippine Fisheries Code of 1998; (Ibid.) of weapons of mass destruction and its
22. Violations of Sections 101 to 107, and 110 of financing pursuant to United Nations Security
Republic Act No. 7942, otherwise known as the Council Resolution Numbers 1718 of 2006 and
Philippine Mining Act of 1995; (Ibid.) 2231 of 2015; (Ibid.)
23. Violations of Section 27(c), (e), (f), (g) and (i), of 35. Violations of Section 254 of Chapter II, Title X of
Republic Act No. 9147, otherwise known as the the National Internal Revenue Code of 1997, as
Wildlife Resources Conservation and Protection amended, where the deficiency basic tax due in
Act; (Ibid.) the final assessment is in excess of Twenty-five
24. Violation of Section 7(b) of Republic Act No. million pesos (P25,000,000.00) per taxable
9072, otherwise known as the National Caves year, for each tax type covered and there has
and Cave Resources Management Protection been finding of probable cause by the
Act; (Ibid.) competent authority: Provided, further, that
25. Violation of Republic Act No. 6539, otherwise there must be a finding of fraud, willful
known as the Anti-Carnapping Act of 2002, as misrepresentation or malicious intent on the
amended; (Ibid.) part of the taxpayer: Provided, finally, that in no
26. Violations of Sections 1, 3 and 5 of Presidential case shall the AMLC institute forfeiture
Decree No. 1866, as amended, otherwise known proceedings to recover monetary instruments,
as the decree Codifying the Laws on property or proceeds representing, involving or
Illegal/Unlawful Possession, Manufacture, relating to a tax crime, if the same has already
Dealing In, Acquisition or Disposition of been recovered or collected by the Bureau of
Firearms, Ammunition or Explosives; (Ibid.) Internal Revenue (BIR) in a separate
27. Violation of Presidential Decree No. 1612, proceeding; and (Ibid.)
otherwise known as the Anti-Fencing Law; 36. Felonies or offenses of a similar nature that are
(Ibid.) punishable under the penal laws of other
28. Violation of Section 6 of Republic Act No. 8042, countries. (Ibid.)
otherwise known as the Migrant Workers and
Overseas Filipinos Act of 1995, as amended by
Republic Act No. 10022; (Ibid.)
29. Violation of Republic Act No. 8293, otherwise
known as the Intellectual Property Code of the
Philippines; (Ibid.)
30. Violation of Section 4 of Republic Act No. 9995,
otherwise known as the Anti-Photo and Video
Voyeurism Act of 2009; (Ibid.)

2022 GOLDEN NOTES
Commercial Law
Limitations on Examination
E. AUTHORITY TO INQUIRE INTO BANK
DEPOSITS The authority to inquire into or examine the main
account and the related accounts shall comply with
the requirements of Sec. 2 and 3, Art. III of the 1987
Constitution. (as amended by Sec. 2, R.A. No. 10167)
Authority to Inquire into bank deposits (Sec. 11,
R.A. No. 9160, as amended)
Similarities of a Freeze Order under Sec. 10 and
a Bank Inquiry Order under Sec. 11
The AMLC may inquire into or examine any
particular deposit or investment, including related
The freeze order under Sec. 10 and the bank inquiry
accounts, with any banking institution or non-bank
order under Sec. 11 are similar in that they are
financial institution provided:
extraordinary provisional reliefs which the AMLC
may avail of to effectively combat and prosecute
1. It is upon order of any competent court;
money laundering offenses. (Republic v. Eugenio,
G.R. No. 174629, 15 Feb. 2008)
NOTE: Competent court under Sec. 11 of R.A.
9160, as amended, refers to the Court of
Cases where no court order shall be required in
Appeals (A.M. No. 21-03-05-CA)
order for the AMLC to inquire into deposit,
investment, or related accounts
2. Based on an ex parte application; and
3. In cases of violations of this Act, when it has
No need of court order in cases of activities
been established that there is probable cause
involving (KD-HAM-STF):
that the deposits or investments, including
related accounts involved, are related to an
1. Kidnapping,
unlawful activity as defined in Section 3(i) or a
2. Violation of Dangerous Drugs Act,
money laundering offense under Section 4.
3. Hijacking,
4. Arson,
NOTE: The inquiry conducted by the AMLC is
5. Murder
not violative of The Law on Secrecy of Bank
6. Felonies or offenses of a nature Similar to those
Deposits or R.A. No. 1405, as amended; Foreign
mentioned in Section (i)(1), (2), and (12), which
Currency Deposit Act or R.A. No. 6426, as
are punishable under the penal laws of other
amended; General Banking Law or R.A. No.
countries;
8791; and other similar laws. (As amended by
7. Terrorism and conspiracy to commit terrorism
Sec. 2, R.A. No. 10167)
(as amended by Sec. 2, R.A. No. 10167)
8. Financing of terrorism (Sec. 11, R.A. No. 10168)
The Court of Appeals shall act on the application to
inquire into or examine any deposit or investment
NOTE: In the above mentioned circumstances, the
with any banking institution or non-bank financial
AMLC shall issue an ex parte order authorizing its
institution within twenty-four (24) hours from
Secretariat to inquire into or examine any particular
filing of the application. (Ibid.)
deposit or investment account, including related
accounts, with any banking institution or non-bank
Related Accounts
financial institution and their subsidiaries and
affiliates when it has been established that probable
Refers to accounts, the funds, and sources of which
cause exists that the deposits or investments
originated from and/or are materially linked to the
involved, including related accounts, are in any way
monetary instrument(s) or property(ies) subject of
related to any of the above-mentioned activities.
the freeze order(s). (as amended by Sec. 2, R.A. No.
(Sec. 2, Rule 11, 2018 Implementing Rules and
10167)
Regulations of R.A. No. 9160, as amended):

Q: The Office of the Ombudsman requested the With the consistency of the assailed provision of
AMLC to conduct a financial investigation of the R.A. No. 9160 with the Constitution, the Estrada’s
bank accounts of Senator Estrada and other argument that the Inquiry Report was the fruit of a
individuals allegedly involved in the corruption poisonous tree and, therefore, inadmissible in
over Priority Development Assistance Fund evidence remains unsubstantiated. (Jinggoy Estrada
(PDAF). v. Sandiganbayan, et al., G.R. No. 217682, July 17,
2018)
Meanwhile, the AMLC, determining that
Estrada's accounts were probably related to the Q: From his first term in 2007, Congressman
charge of plunder and the violation of R.A. No. Abner has been endorsing his pork barrel
3019 charged against him and others, allocations to Twin Rivers in exchange for a
authorized its secretariat to file in the Court of commission of 40% of the face value of the
Appeals (CA) an ex parte application for bank allocation. Twin Rivers is a non-governmental
inquiry pursuant to R.A. No. 9160, as amended. organization whose supporting papers, after
audit, were found by the Commission on Audit to
The results of the AMLC's bank inquiry into be fictitious. Other than to prepare and submit
Estrada's accounts were contained in the so- falsified papers to support the encashment of
called Inquiry Report on the Bank Transactions the pork barrel checks, Twin Rivers does not
Related to the Alleged Involvement of Senator appear to have done anything on the endorsed
Estrada in the PDAF Scam (Inquiry Report). On projects and Congressman Abner likewise does
December 19, 2014, the AMLC furnished the not appear to have bothered to monitor the
Office of the Ombudsman a copy of the Inquiry progress of the projects he endorsed. The
Report. During Estrada's bail hearings in the congressman converted most of the
Sandiganbayan, the Prosecution presented the commissions he generated into US dollars and
AMLC financial investigator, who testified on the deposited these in a foreign currency account
Inquiry Report. with Banco de Plata (BDP). Based on amply
supported tips given by a congressman from
Estrada filed the motion to suppress the another political party, the Anti-Money
presentation of Inquiry Report contending that Laundering Council sent BDP an order:
the bank inquiry violates the constitutionally
mandated right to due process and right to (1) to confirm Cong. Abner's deposits with the
privacy, and that such Report is a fruit of bank and to provide details of these deposits;
poisonous tree. Is the contention of Sen. Estrada and
correct?
(2) to hold all withdrawals and other
A: The AMLC, in investigating probable money transactions involving the congressman's bank
laundering activities, does not exercise quasi- accounts.
judicial powers, but merely acts as an investigatory
body with the sole power of investigation similar to As counsel for BDP, would you advise the bank
the functions of the National Bureau of Investigation to comply with the order? (2013 BAR)
(NBI). Hence, the ex parte application for the bank
inquiry order cannot be said to violate any person's A: NO. I shall advise Banco de Plata not to comply
constitutional right to procedural due process. Also, with the order of the AMLC. It cannot inquire into
the source of the right to privacy respecting bank the deposits of Congressman Abner, regardless of
deposits is statutory, not constitutional; hence, the currency, without a bank inquiry order from a
Congress may validly carve out exceptions to the competent court, because crimes involved are not
rule on the secrecy of bank deposits, as illustrated in kidnapping for ransom, violations of the
Section 11 of R.A. No. 9160. Comprehensive Dangerous Drugs Act, hijacking and
other violations of R.A. No. 6235, destructive arson,

2022 GOLDEN NOTES
Commercial Law
murder, and terrorism and conspiracy to commit AMLC charged him with violation of the Anti-
terrorism. Money Laundering Law. Upon request of the
AMLC, the bank disclosed to it Rudy's bank
The AMLC cannot order Banco de Plata to hold all deposits amounting to P100 Million.
withdrawals and other transactions involving the Subsequently, he was charged in court for
accounts of Congressman Abner. It is the Court of violation of the Anti-Money Laundering Law.
Appeals which has the power to issue a freeze order
over the accounts upon petition of the Anti-Money a. Can Rudy move to dismiss the case on the
Laundering Council. (Republic v. Cabrini Green Ross, ground that he has no criminal record?
G.R. No. 154522, 05 May 2006)
b. To raise funds for his defense, Rudy sold the
Q: Prosperous Bank is a domestic bank with houses and lots to a friend. Can Luansing
head office in Makati. It handles the banking Realty, Inc. be compelled to transfer to the
requirements of thousands of clients. The AMLC buyer ownership of the houses and lots?
initiated a discreet investigation of the financial
transactions of Lorenzo, a suspected drug c. In disclosing Rudy's bank accounts to the
trafficker based in Naga City. The intelligence AMLC, did the bank violate any law?
group of the AMLC, in coordination with the
counterpart group from the PDEA and the NBI, d. Supposing the titles of the houses and lots
gathered ample evidence establishing Lorenzo's are in possession of the Luansing Realty Inc.,
unlawful drug activities. The AMLC had probable is it under obligation to deliver the titles to
cause that his deposits and investments in Rudy? (2006 BAR)
various banks, including Prosperous Bank, were
related to money laundering. Accordingly, the A:
AMLC now transmits to Prosperous Bank a a. NO. The contention of Rudy is not tenable
formal demand to allow its agents to examine because under AMLA, "money laundering “is
the banking transactions of Lorenzo, but committed when the proceeds of an "unlawful
Prosperous Bank refuses the demand. Is activity," like jueteng operations, are made to
Prosperous Bank's refusal justified? Explain appear as having originated from legitimate
your answer. (2017 BAR) sources. Money laundering is separate from the
unlawful activity of being a jueteng operator
A: NO. While, as a general rule, the AMLC may and requires no previous conviction for the
inquire into bank deposits only upon order of any unlawful activity. (Sec. 3, R.A. No. 9160, as
competent court, there is no need for such court amended)
order in cases of kidnapping, hijacking, violation of
the Dangerous Drugs Act, arson, and murder. Given b. YES. Rudy is still the owner of the house and lot
that there is probable cause that Lorenzo is engaged in question and as such he may dispose the
in unlawful activities as a drug trafficker, the AMLC same as he pleases. Absent any freeze order
is authorized to inquire into his bank deposits with filed by the OSG on behalf of the AMLC, Rudy
Prosperous Bank. may dispose said properties and compel
Luansing Realty to transfer to the buyer
Q: Rudy is jobless but is reputed to be a jueteng ownership of the properties sold.
operator. He has never been charged or
convicted of any crime. He maintains several c. YES. Under the Anti-money Laundering Law, as
bank accounts and has purchased 5 houses and amended, the AMLC may inquire into bank
lots for his children from the Luansing Realty I accounts upon order of any competent court
Inc. Since he does not have any visible job, the based in an ex parte application when it has
company reported his purchases to the Anti- been established that said accounts are related
Money Laundering Council (AMLC). Thereafter, to an unlawful activity. In the case at hand, the

AMLC merely requested the disclosure of said

accounts without court order. The bank F. FREEZING AND FORFEITURE
therefore violated the secrecy of bank account
of Rudy when it allowed the AMLC to look into
said accounts without court order. (Sec. 11, R.A.
Freezing of Monetary Instrument or Property
No. 9160 as amended by Sec. 2, R.A. No. 10167)
(Sec. 10, R.A. No. 9160, as amended)
d. YES. The properties are validly sold in favor of

Purpose of a Freeze Order
Rudy and as such Luansing Realty is under the
obligation to deliver the titles to the buyer. This
To give the government the necessary time to
is without prejudice to the application of freeze
prepare its case and to file the appropriate charges
order by the OSG on behalf of the AMLC.
without having to worry about the possible
dissipation of the assets that are in any way related
to the suspected illegal activity. (Ligot v. Republic,
G.R. No. 176944, 06 Mar. 2013)
Objective of a Freeze Order
The primary objective of a freeze order is to

temporarily preserve monetary instruments or
property that are in any way related to an unlawful
activity or money laundering, by preventing the
owner from utilizing them during the duration of
the freeze order. (Ligot v. Republic, supra)
When may a Freeze Order be issued (Sec. 10(a))
The Court of Appeals may issue a freeze order which

shall be effective immediately, for a period of twenty
(20) days:
a. Upon a verified ex parte petition by the AMLC;

and
b. After determination that probable cause exists
that any monetary instrument or property is in
any way related to an unlawful activity as
defined in Sec. 3(i).
NOTE: No court shall issue a temporary restraining

order or a writ of injunction against any freeze
order, except the Supreme Court. (as amended by
Sec. 4, R.A. No. 10927)
A freeze order is not dependent on a separate

criminal charge, much less does it depend on a
conviction. Based on Sec. 10 of R.A. No. 9160, as
amended, there are only two requisites for the
issuance of a freeze order: (1) the application ex-
parte by the AMLC, and (2) the determination of

2022 GOLDEN NOTES
Commercial Law
probable cause by the CA. Probable cause refers to property in any way deemed related to unlawful
the sufficiency of the relation between an unlawful activities as defined in Section 3(i) of the AMLA. The
activity and the property or monetary instrument owner of such monetary instruments or property
which is the focal point of Sec. 10 of R.A. No. 9160, would thus be inhibited from utilizing the same for
as amended. (Edgardo Yambao v. Republic of the the duration of the freeze order.
Philippines, G.R. No. 171054, 26 Jan. 2021)
On the other hand, a bank inquiry order under
Summary Hearing Section 11 does not necessitate any form of physical
seizure of property of the account holder. What the
Within the twenty (20)-day period, the Court of bank inquiry order authorizes is the examination of
Appeals shall conduct a summary hearing, with the particular deposits or investments in banking
notice to the parties, to determine whether or not to institutions or non-bank financial institutions. The
modify or lift the freeze order or extend its monetary instruments or property deposited with
effectivity. (As amended by Sec. 4, R.A. No. 10927) such banks or financial institutions are not seized in
a physical sense, but are examined on particular
Period of the Freeze Order details such as the account holder’s record of
deposits and transactions. (Republic v. Eugenio, G.R.
The total period of the freeze order issued by the No. 174629, 15 Feb. 2008)
Court of Appeals shall not exceed six (6) months. (As
amended by Sec. 4, R.A. No. 10927) NOTE: The Eugenio ruling with regard to the
distinction of a Freeze Order and Bank Inquiry
NOTE: This is without prejudice to an asset Order is no longer applicable since the amendment
preservation order that the Regional Trial Court in R.A. No. 10167 as it explicitly states that the
having jurisdiction over the appropriate anti-money proceedings in application for bank inquiry is ex
laundering case or civil forfeiture case may issue on parte.
the same account depending upon the
circumstances of the case, where the Court of Q: Bangladesh Bank Governor Rahman sought
Appeals will remand the case and its records: the assistance of BSP Governor Tetangco
Provided, That if there is no case filed against a regarding the loss of millions of US dollars from
person whose account has been frozen within the Bangladesh Bank’s Account with the New York
period determined by the Court of Appeals, not Fed. Governor Rahman requested to conduct an
exceeding six (6) months, the freeze order shall be inquiry and asked for help to recover their
seemed ipso facto lifted: Provided, further, That this money since some fraudulent payment
new rule shall not apply to pending cases in the transactions were made to the New York Fed in
courts. In any case, the court should act on the Favor of RCBC involving US$81,000,000.00.
petition to freeze within twenty-four (24) hours
from filing of the petition. (As amended by Sec. 4, R.A. Upon investigation it was found that four
No. 10927) accounts with the RCBC were the beneficiaries of
the fraudulent transfer. The withdrawals from
NOTE: If the application is filed a day before a no the four RCBC bank accounts were eventually
working day, the computation of the twenty-four transferred to the account of a certain William
(24)-hour period shall exclude the nonworking Go. The amount was credited to PhilRem Service
days. (As amended by Sec. 4, R.A. No. 10927) Corporation’s account upon Go’s instructions.
Later on, PhilRem was instructed to deliver the
Freeze Order under Section 10 vs. Bank Inquiry amount to Bloomberry Resorts and Hotels, Inc.’s
Order under Sec. 11 BDO Account.
A freeze order under Section 10 on the one hand is The AMLC found probable cause that BRHI’s
aimed at preserving monetary instruments or BDO account was related to unlawful activity of

hacking, and it issued a resolution authorizing resolve this motion before the expiration of the
the AMLC Secretariat to file an ex parte petition freeze order. No court shall issue a temporary
of a freeze order against the subject account, restraining order or a writ of injunction against any
through the Office of the Solicitor General. freeze order, except the Supreme Court. Clearly, a
Afterwards, the CA issued the freeze order Freeze Order may not be issued indefinitely, lest the
effective for 30 days. same be characterized as a violation of the person's
right to due process and to be presumed innocent of
For its part, BRHI claims that it is the casino a charge. (Republic of the Philippines v. Bloomberry
operator of Solaire and it is not a covered Resort and Hotels, Inc., G.R. No. 224112, 02 Sept.
institution under the Anti-Money Laundering 2020)
Act of 2001 at the time the incident happened. It
claims that at the time the remittance, there was Q: The CA, upon the finding of probable cause
no reason for it to suspect that the amount could and through a Resolution dated 5 July 2005,
be related to any unlawful activity as the same issued a Freeze Order against the subject
was received and deposited in the account of monetary instruments of petitioners Ligot and
BRHI in the regular course of business. BRHI Yambao. Thereafter, petitioner filed a Motion to
filed an Urgent Motion to Lift Freeze Order while Lift Freeze Order against the monetary
the AMLC filed an Urgent Motion for Additional instruments and properties of Edgardo Yambao.
Period of Freeze Order. It further argued that On 20 Sept. 2005, the CA issued a Resolution
the petition is moot because the freeze order wherein the motion to lift the freeze order was
cannot be issued or extended for a period longer denied and that the urgent motion for the
than six months. Has the Freeze Order become extension of effectivity of freeze order was
moot and academic? granted. Meanwhile, A.M. No. 05-11-04-SC or the
Rule of Procedure in Cases of Civil Forfeiture,
A: YES. Sec. 10 of R.A. No. 9160, as amended, Asset Preservation, and Freezing of Monetary
provides that upon a verified ex parte petition by the Instrument, Property, or Proceeds
AMLC and after determination that probable cause Representing, Involving, or Relating to an
exists that any monetary instrument or property is Unlawful Activity or Money Laundering Offense
in any way related to an unlawful activity as defined under R.A. No. 9160, as amended, took effect on
in Sec. 3(i) hereof, the Court of Appeals may issue a 15 Dec. 2005. Asserting the applicability of the
freeze order which shall be effective immediately, said Rule, petitioner filed an Urgent Motion for
and which shall not exceed six (6) months Summary Hearing to Limit the Effectivity of
depending upon the circumstances of the case: Freeze Order and/or to Declare the Expiration
Provided, that if there is no case filed against a of the Freeze Order. On 4 Jan. 2006, the CA
person whose account has been frozen within the issued the challenged Resolution, denying all
period determined by the court, the freeze order pending motions, including those of petitioner’s.
shall be deemed ipso facto lifted: Provided, further,
That this new rule shall not apply to pending cases Is the petitioner entitled to due process as
in the courts. guaranteed by the Constitution and the New
Rules?
In any case, the court should act on the petition to
freeze within twenty-four (24) hours from filing of A: YES. The Court, in Ligot’s case, clarified that a
the petition. If the application is filed a day before a freeze order cannot be issued for an indefinite
nonworking day, the computation of the twenty- period. In fact, the continued extension of the freeze
four (24)-hour period shall exclude the nonworking order beyond the six-month period violated Ligot’s
days. right to due process.
A person whose account has been frozen may file a The silence of the law, however, does not in any way
motion to lift the freeze order and the court must affect the Court’s own power under the Constitution

2022 GOLDEN NOTES
Commercial Law
to ‘promulgate rules concerning the protection and due process; (2) right to procedural due process
enforcement of constitutional rights and procedure or (3) right to privacy.
in all courts.’ Pursuant to this power, the Court
issued A.M. No. 05-11-04 SC, limiting the effectivity A: 1. NO. Sec. 11 of the AMLA providing for ex-parte
of an extended freeze order to six months – to application and inquiry by the AMLC into certain
otherwise leave the grant of extension to the sole bank deposits and investments does not violate
discretion of the CA, which may extend a freeze substantive due process, there being no physical
order indefinitely or to an unreasonable amount of seizure of property involved at that stage.
time – carries serious implications on an
individual’s substantive right to due process. A bank inquiry order under Sec. 11 does not
(Edgardo Yambao v. Republic of the Philippines as necessitate any form of physical seizure of property
represented by the Anti-Money Laundering Council, of the account holder. What the bank inquiry order
G.R. No. 171054, 26 Jan. 2021) authorizes is the examination of the particular
deposits or investments in banking institutions or
Limitation of Freeze Order non-bank financial institutions. The monetary
instruments or property deposited with such
The freeze order or asset preservation order issued banks or financial institutions are not seized in
under this Act shall be limited only to the amount of a physical sense but are examined on particular
cash or monetary instrument or value of property details such as the account holder's record of
that the court finds there is probable cause to be deposits and transactions.
considered as proceeds of a predicate offense, and
the freeze order or asset preservation order shall 2. NO. The AMLC functions solely as an investigative
not apply to amounts in the same account in excess body in the instances mentioned in Rule 5.b.26.
of the amount or value of the proceeds of the Thereafter, the next step is for the AMLC to file a
predicate offense. (As amended by Sec. 4, R.A. No. Complaint with either the DOJ or the Ombudsman
10927) pursuant to Rule 6b. Even in the case of Estrada v.
Office of the Ombudsman, where the conflict arose at
Q: SPCMB was most concerned with the article the preliminary investigation stage by the
published in the Manila Times on 25 February Ombudsman, we ruled that the Ombudsman's
2015 which read: “The Anti-Money Laundering denial of Senator Estrada's Request to be furnished
Council asked the Court of Appeals to allow the copies of the counter-affidavits of his co-
Council to peek into the bank accounts of the respondents did not violate Estrada's constitutional
Beenays, their corporations, and a law office right to due process where the sole issue is the
where a family member was once a partner. Also existence of probable cause for the purpose of
the bank accounts of the law office linked to the determining whether an information should be filed
family, the SPCMB, where the Vice President's and does not prevent Estrada from requesting a
daughter Abigail was a former partner. copy of the counter-affidavits of his co-respondents
during the pre-trial or even during trial.
By 8 Mar 2015, the Manila Times published
another article reporting that the appellate Plainly, the AMLC's investigation of money
court had issued a Resolution granting the ex- laundering offenses and its determination of
parte application of the AMLC to examine the possible money laundering offenses, specifically
bank accounts of SPCMB. SPCMB undertook this its inquiry into certain bank accounts allowed
petition for certiorari and prohibition on the by court order, does not transform it into an
following grounds that the Anti-Money investigative body exercising quasi-judicial
Laundering Act is unconstitutional insofar as it powers. Hence, Sec. 11 of the AMLA, authorizing a
allows the examination of a bank account bank inquiry court order, cannot be said to violate
without any notice to the affected party; Does it SPCMB's constitutional right to due process.
violate the following: (1) right to substantive

3. NO. We now come to a determination of whether FORFEITURE PROVISIONS

Sec. 11 is violative of the constitutional right to (Sec. 12, R.A. No. 9160, as amended)
privacy enshrined in Sec. 2, Art. III of the
Constitution. We thus subjected Sec. 11 of the AMLA Definition of Civil Forfeiture
to heightened scrutiny and found nothing arbitrary
in the allowance and authorization to AMLC to “Civil Forfeiture” (CF) refers to the non-conviction-
undertake an inquiry into certain bank accounts or based proceedings aimed at forfeiting, in favor of
deposits. It provides safeguards before a bank the government, monetary instruments or
inquiry order is issued, ensuring adherence to the properties related to an unlawful activity or money
general state policy of preserving the absolutely laundering offense defined herein. ([r], Sec. 1, Rule 2,
confidential nature of Philippine bank accounts: 2018 Implementing Rules and Regulations of R.A. No.
9160, as amended)
a. The AMLC is required to establish probable
cause as basis for its ex-parte application for Prior criminal charge or conviction for the
bank inquiry order; unlawful activity is NOT a requirement for Civil
b. The CA, independent of the AMLC's Forfeiture proceedings
demonstration of probable cause, itself
makes a finding of probable cause that the No prior criminal charge, pendency of a case, or
deposits or investments are related to an conviction for an unlawful activity or money
unlawful activity under Sec. 3(i) or a money laundering offense is necessary for the
laundering offense under Sec. 4 of the AMLA; commencement or the resolution of a petition for
c. A bank inquiry court order ex-parte for civil forfeiture. ([a], Sec. 1, Rule 12, 2018
related accounts is preceded by a bank Implementing Rules and Regulations of R.A. No. 9160,
inquiry court order ex-parte for the as amended).
principal account which court order ex-parte
for related accounts is separately based on Section 28 of A.M. No. 05-11-04-SC (Rules of
probable cause that such related account is Procedure in Cases of Civil Forfeiture) provides that
materially linked to the principal account an action for civil forfeiture “shall proceed
inquired into; and independently of the criminal prosecution.”
d. The authority to inquire into or examine the
main or principal account and the related How to initiate Civil Forfeiture (Sec. 12(a))
accounts shall comply with the requirements
of Secs. 2 and 3, Art. III, of the Constitution. Upon determination by the AMLC that probable
cause exists that any monetary instrument or
The foregoing demonstrates that the inquiry and property is in any way related to an unlawful
examination into the bank account are not activity or a money laundering offense, the AMLC
undertaken whimsically and solely based on the shall file with the appropriate court through the
investigative discretion of the AMLC. In particular, Office of the Solicitor General, a verified ex-parte
the requirement of demonstration by the AMLC, and petition for forfeiture, and the Rules of Court on
determination by the CA, of probable cause Civil Forfeiture shall apply. (As amended by Sec. 9,
emphasizes the limits of such governmental action. R.A. No. 10365)
(Subido v. CA, G.R. No. 216914, 06 Dec. 2016)

2022 GOLDEN NOTES
Commercial Law
Forfeiture of Assets of Equivalent Value Payment in Lieu of Forfeiture (Sec. 12(c))
The forfeiture shall include those other monetary Where the court order for civil or criminal forfeiture
instrument or property having an equivalent value of the monetary instrument or property subject of a
to that of the monetary instrument or property money laundering offense cannot be enforced, the
found to be related in any way to an unlawful court may accordingly order the convicted offender
activity or a money laundering offense when: to pay an amount equal to the value of said
(D-O-C-C-S) monetary instrument or property. (As amended by
Sec. 9, R.A. No. 10365)
1. with due Diligence, the former cannot be
located; or Instances when the order of forfeiture cannot be
2. it has been Substantially altered, destroyed, enforced (Sec. 12(c))
diminished in value, or otherwise rendered
worthless by any act or omission; or 1. When any particular monetary instrument or
3. it has been Concealed, removed, converted, or property cannot, with due diligence, be located;
otherwise transferred; or 2. When it has been substantially altered,
4. it is located Outside the Philippines or has been destroyed, diminished in value, or otherwise
placed or brought outside the jurisdiction of the rendered worthless by any act or omission,
court; or directly or indirectly, attributable to the
5. it has been Commingled with other monetary offender;
instrument or property belonging to either the 3. When it has been concealed, removed,
offender himself or a third person or entity, converted;
thereby rendering the same difficult to identify 4. When it is otherwise transferred to prevent the
or be segregated for purposes of forfeiture. same from being found or to avoid forfeiture
(Ibid.) thereof;
5. When it is located outside the Philippines or has
Claim on Forfeited Assets (Sec. 12(b)) been placed or brought outside the jurisdiction
of the court;
Where the court has issued an order of forfeiture of 6. When it has been commingled with other
the monetary instrument or property in a criminal monetary instruments or property belonging to
prosecution for any money laundering offense either the offender himself or a third person or
defined under Sec. 4, the offender or any other entity, thereby rendering the same difficult to
person claiming an interest therein may apply, by identify or be segregated for purposes of
verified petition, for a declaration that the same forfeiture.
legitimately belongs to him and for segregation or
exclusion of the monetary instrument or property NOTE: No court shall issue a temporary restraining
corresponding thereto. order (TRO) or a writ of injunction against any
provisional asset preservation order or asset
The verified petition shall be filed with the court preservation, except the Court of Appeals or the
which rendered the judgment of forfeiture, within Supreme Court. (Sec. 12(d) R.A. 9160, as amended by
fifteen (15) days from the date of the finality of the Sec. 6, R.A. No. 11521)
order of forfeiture, in default of which the said order
shall become final and executor. This provision shall Venue and Jurisdiction
apply in both civil and criminal forfeiture. (As
amended by Sec. 9, R.A. No. 10365) The venue of civil forfeiture cases is any RTC of the
judicial region where the money instrument,
property or proceeds representing, involving, or
relating to an unlawful activity or to a money
laundering offense is located. It is the preliminary

seizure of the property which brings it within the property. The asset forfeiture following a conviction
reach of judicial process. (Republic v. Glasgow Credit will apply only to those properties not covered in a
and Collection Services, Inc., G.R. No. 170281, 18 Jan. parallel civil forfeiture case, and vice versa. (Sec. 27,
2008) Rules on Criminal Forfeiture)
NOTE: In its Resolution dated 9 November 2021, the

Supreme Court issued A.M. 03-03-03-SC designated
Special Commercial Courts to hear and decide AMLC
cases, including petitions for civil forfeiture and
criminal forfeitures.
Criminal Forfeiture
The Rule on Criminal Forfeiture refers to the Rule on

Asset Preservation, Seizure, and Forfeiture in
Criminal Cases under Republic Act No. 9160 as
Amended refers to A.M. 21-13-13-SC, which took
effect on 31 May 2021.
Applicability of the Rules on Criminal Forfeiture
The Rule on Criminal Forfeiture applies to all

criminal actions involving either an:
(a) unlawful activity under Section 3(i), AMLA; or

(b) money laundering under Section 4, AMLA.
The Remedy of Asset Forfeiture under the Rules

on Criminal Forfeiture
Under the Rule, the prosecution may pursue the

remedy of asset forfeiture by an allegation in the
criminal information that it will proceed against the
subject of the crime or offense, proceeds or fruits of
the crime of offense, or any property used as the
means of committing a crime or offense.
In this regard, the prosecution may amend a

criminal information, with leave of court, if during
trial, other property not subject of the original
information is shown to be the subject of, the
proceeds or fruits of, or the means used of
committing the crime or offense charged.
Parallel Forfeiture
Pursuit of asset forfeiture under the Rules on

Criminal Forfeiture shall proceed independently of
proceedings for civil forfeiture against the same

2022 GOLDEN NOTES
Electronic Commerce Act
2. Promote the universal use of electronic

VI. ELECTRONIC COMMERCE ACT OF 2000 transaction in the government and general
(R.A. NO. 8792) public.
Sphere of Application (Sec. 4)
Policy of the Law (Sec. 2)

This Act shall apply to any kind of data message and
electronic document used in the context of
The law is a recognition by the State of:
commercial and non-commercial activities to
include domestic and international dealings,
1. The vital role of information and
transactions, arrangements, agreements, contracts
communications technology (ICT) in nation-
and exchanges and storage of information.
building;
2. The need to create an information-friendly
environment which supports and ensures the
availability, diversity and affordability of ICT A. LEGAL RECOGNITION OF ELECTRONIC DATA
products and services; MESSAGES, DOCUMENTS, AND SIGNATURES
3. The primary responsibility of the private sector
in contributing investments and services in
telecommunications and information Legal Recognition of Electronic Data Messages
technology; (Sec. 6)
4. The need to develop, with appropriate training
programs and institutional policy changes, Information shall not be denied legal effect, validity,
human resources for the information or enforceability solely on the grounds that it is in
technology age, a labor force skilled in the use the data message purporting to give rise to such
of ICT and a population capable of operating legal effect, or that it is merely referred to in that
and utilizing electronic appliances and electronic data message.
computers;
5. Its obligation to facilitate the transfer and Electronic Data Messages
promotion of technology and to ensure network
security, connectivity, and neutrality of This refers to information generated, sent, received,
technology for the national benefit; and or stored by electronic, optical, or similar means.
6. The need to marshal, organize and deploy (Sec. 5(c), R.A. No. 8792)
national information infrastructures,
comprising in both telecommunications Legal Recognition of Electronic Documents (Sec.
network and strategic information services, 7)
including their interconnection to the global
information networks. Electronic documents shall have the legal effect,
validity, or enforceability as any other document or
Objectives of the Law (Sec. 3) legal writing.
The Act aims to: Electronic Document

1. Facilitate domestic and international dealings,
transactions, arrangements agreements, This refers to information or the representation of
contracts and exchanges and storage of information, data, figures, symbols, or other mode of
information through the utilization of written expression, described or however
electronic, optical, and similar medium, mode, represented, by which a right is established, or an
instrumentality and technology to recognize obligation extinguished, or by which a fact may be
the authenticity and reliability of electronic proved and affirmed, which is received, recorded,
documents related to such activities; and

Commercial Law
transmitted, stored, processed, retrieved, or Electronic Signature

produced electronically. (Sec. 5(f), R.A. No. 8792)
This refers to any distinctive mark, characteristic
This includes digitally signed documents and any and/or sound in electronic form, representing the
print-out or output, readable by sight or other identity of a person, and attached to or logically
means, which accurately reflects the electronic data associated with the electronic data message or
message or electronic document. (Sec. 1(h), Rule 2, electronic document or any methodology or
A.M. No. 01-7-01-SC or the Rules on Electronic procedures employed or adopted by a person and
Evidence) executed or adopted by such person with the
intention of authenticating or approving an
NOTE: Under the Rules on Electronic Evidence, the electronic data message or electronic document.
term “electronic document” may be used (Sec. 5(e), R.A. No. 8792)
interchangeably with “electronic data message”.
Divina, 2021; Sec. 1(h), Rules on Electronic Evidence) NOTE: For the purposes of the Rules on Electronic
Evidence, an electronic signature includes digital
Legal Recognition of Electronic Signatures (Sec. signature. (Sec. 1(j), Rule 2, Rules on Electronic
8) Evidence)
An electronic signature on the electronic document Digital Signature

shall be equivalent to the signature of a person on a
written document if that signature is proved by This refers to an electronic signature consisting of a
showing that a prescribed procedure, not alterable transformation of an electronic document or an
by the parties interested in the electronic document, electronic data message using an asymmetric or
existed under which: public cryptosystem, such that a person has the
initial untransformed electronic document and the
a. A method is used to identify the party sought to signer’s public key can accurately determine the
be bound and to indicate said party’s access to following:
the electronic document necessary for his i. Whether the transformation was created using
consent or approval through the electronic the private key that corresponds to the
signature; signer’s public key; and
ii. Whether the initial electronic document had
b. Said method is reliable and appropriate for the been altered after the transformation was
purpose for which the electronic document was made. (Sec. 1(j), Rule 2, A.M. No. 01-7-01-SC)
generated or communicated, in the light of all
circumstances, including any relevant
agreement; B. PRESUMPTION RELATING TO ELECTRONIC
SIGNATURES
c. It is necessary for the party sought to be bound,
in or order to proceed further with the
transaction, to have executed or provided the
In any proceedings involving an electronic
electronic signature; and
signature, it shall be presumed that:
d. The other party is authorized and enabled to

a) The electronic signature is the signature of
verify the electronic signature and to make the
the person to whom it correlates; and
decision to proceed with the transaction
authenticated by the same.
b) The electronic signature was affixed by that
person with the intention of signing or
approving the electronic document unless
the person relying on the electronically

2022 GOLDEN NOTES
Electronic Commerce Act
signed electronic document knows or has NOTE: Under the Rules on Electronic Evidence, an
notice of defects in or unreliability of the electronic document is admissible in evidence if it
signature or reliance on the electronic complies with the rules on admissibility prescribed
signature is not reasonable under the by the Rules of Court and related laws and is
circumstances. (Sec. 9, R.A. No. 8792) authenticated in the manner prescribed by these
Rules. (Sec. 2, Rule 3, Rules on Electronic Evidence)
NOTE: Under the Rules on Electronic Evidence,
upon the authentication of an electronic signature, Evidential Weight of Electronic Data Message or
the disputable presumptions are: Electronic Document (Sec. 12)
a) The electronic signature is that of the In assessing the evidential weight of an electronic
person to whom it correlates; data message or electronic document, the reliability
of the manner in which it was generated, stored or
b) The electronic signature was affixed by that communicated, the reliability of the manner in
person with the intention of authenticating which its originator was identified, and other
or approving the electronic document to relevant factors shall be given due regard.
which it is related or to indicate such
person's consent to the transaction NOTE: Under the Rules on Electronic Evidence, the
embodied therein; and following are the factors for assessing evidentiary
weight:
c) The methods or processes utilized to affix
or verify the electronic signature operated a) The reliability of the manner or method in
without error or fault. (Sec. 3, Rule 6, Rules which it was generated, stored, or
on Electronic Evidence) communicated, including but not limited to
input and output procedures, controls,
tests and checks for accuracy and reliability
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF of the electronic data message or
ELECTRONIC DATA MESSAGE OR ELECTRONIC document, in the light of all the
DOCUMENT circumstances as well as any relevant
agreement;
b) The reliability of the manner in which its

Admissibility in Evidence of Electronic Data
originator was identified;
Message or Electronic Document (Sec. 12)
c) The integrity of the information and

In any legal proceedings, nothing in the application
communication system in which it is
of the rules on evidence shall deny the admissibility
recorded or stored, including but not
of an electronic data message or electronic
limited to the hardware and computer
document in evidence:
programs or software used as well as
a) On the sole ground that it is in electronic
programming errors;
form; or
b) On the ground that it is not in the standard
d) The familiarity of the witness or the person
written form, and the electronic data
who made the entry with the
message or electronic document meeting
communication and information system;
and complying with the requirements
under Secs. 6 or 7 of the Act shall be the best
e) The nature and quality of the information
evidence of the agreement and transaction
which went into the communication and
contained therein.
information system upon which the

Commercial Law
electronic data message or electronic and Industry with other appropriate government
document was based; or agencies, the parties to any electronic transaction
shall be free to determine the type of level of
f) Other factors which the court may consider electronic data message and electronic document
as affecting the accuracy or integrity of the security needed, and to select and use or implement
electronic document or electronic data appropriate technological methods that will suit
message. (Sec. 1, Rule 7, A.M. No. 01-7-01- their needs. (Sec. 24, R.A. No. 8792)
SC)
Formation of Validity of Electronic Contracts D. OBLIGATION OF CONFIDENTIALITY

(Sec. 16)
GR: An offer, the acceptance of an offer and such

Except for the purposes authorized under this Act,
other elements required under existing laws for the
any person who obtained access to any electronic
formation of contracts may be expressed in,
key, electronic data message or electronic
demonstrated and proved by means of electronic
document, book, register, correspondence,
data messages or electronic documents. (Sec. 16(1),
information, or other material pursuant to any
R.A. No. 8792)
powers conferred under this Act, shall not convey to
or share the same with any other person. (Sec. 32,
NOTE: No contract shall be denied validity or
R.A. No. 8792)
enforceability on the sole ground that it is in the
form of an electronic data message or electronic
document, or that any or all of the elements
required under existing laws for the formation of
contracts is expressed, demonstrated and proved by
means of electronic data messages or electronic
documents. (Ibid.)
XPN: When the parties otherwise agree.
Electronic transactions made through

networking among banks
Electronic transactions made through networking

among banks, or linkages thereof with other entities
or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or
the debit of one account and the corresponding
credit to another. (Sec. 16(2), R.A. No. 8792)
NOTE: The obligation of one bank, entity, or person

similarly situated to another arising therefrom shall
be considered absolute and shall not be subjected to
the process of preference of credits. (Ibid.)
Choice of security methods
Subject to applicable laws and/or rules and

guidelines promulgated by the Department of Trade

2022 GOLDEN NOTES
Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
a. A sole proprietorship duly registered with

VII. FINANCIAL REHABILITATION, INSOLVENCY, the Department of Trade and Industry
LIQUIDATION and SUSPENSION OF PAYMENTS (DTI);
b. A partnership duly registered with the
(R.A. No. 10142, FR Rules [A.M. No. 12-12-11- Securities and Exchange Commission
SC], and FLSP Rules [A.M. No. 15-04-06-SC]) (SEC);
c. A corporation duly organized and existing
under Philippine laws; or
d. An individual debtor who has become
Policy of the Law (Sec. 2, Financial Rehabilitation
insolvent. (Sec. 4(k), Ibid.)
and Insolvency Act (FRIA))
Excluded from the Term Debtor (Sec. 5, FRIA)

1. To encourage debtors, both juridical and
natural persons, and their creditors to
1. Bank – refers to any duly licensed bank or
collectively and realistically resolve and adjust
quasi-bank that is potentially or actually subject
competing claims and property rights;
to conservatorship, receivership, or liquidation
2. To ensure a timely, fair, transparent, effective,
proceedings under the New Central Bank Act
and efficient rehabilitation or liquidation of
(R.A. No. 7653) or succeeding legislation;
debtors;
3. To ensure or maintain certainty and
2. Insurance Company - refers to those
predictability in commercial affairs, preserve
companies that are potentially or actually
and maximize the value of the assets of these
subject to insolvency proceedings under the
debtors, recognize creditor rights and respect
Insurance Code (P.D. 1460) or succeeding
priority of claims, and ensure equitable
legislation;
treatment of creditors who are similarly
situated;
3. Pre-need Company - refers to any corporation
4. When rehabilitation is not feasible, to facilitate
authorized/licensed to sell or offer to sell pre-
a speedy and orderly liquidation of these
need plans; and
debtor's assets and the settlement of their
obligations.
4. National and Local Government Agencies or
Units
Nature of the Proceedings (Sec. 3, FRIA)
NOTE: Government financial institutions other than

1. In rem - Jurisdiction over all persons affected
banks and government-owned-or-controlled
by the proceedings shall be considered as
corporations are covered by this Act unless their
acquired upon publication of the notice of the
specific charter provides otherwise. (Sec. 5, FRIA)
commencement of the proceedings in any
newspaper of general circulation in the
Philippines;
2. Summary and non-adversarial.
Covered Persons
1. Individual debtor – a natural person who is a

resident and citizen of the Philippines that has
become insolvent; (Sec. 4(o), FRIA)
2. Debtor – unless specifically excluded by a
provision of this Act, refers to:

Commercial Law
2. INSOLVENT
A. BASIC CONCEPTS
Insolvent shall refer to the financial condition of a
debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course of
1. REHABILITATION
business or has liabilities that are greater than its or
his assets. (Sec. 4(p), FRIA)
Rehabilitation shall refer to the restoration of the
debtor to a condition of successful operation and
Insolvency shall refer to the financial incapacity of
solvency, if it is shown that its continuance of
the debtors to pay their liabilities as they fall due in
operation is economically feasible and its creditors
the ordinary course of business or whenever their
can recover by way of the present value of payments
liabilities are greater than their assets. (Sec. 5(k),
projected in the plan, more if the debtor continues
Rule 1, A.M. No. 12-12-11-SC)
as a going concern than if it is immediately
liquidated. (Sec. 4(g), FRIA)
NOTE: As used in the Financial Rehabilitation and
Insolvency Act or FRIA, the term “insolvent” covers
Corporate rehabilitation is a remedy for
both bankruptcy and illiquidity. (De Leon, 2021)
corporations, partnerships, and associations who
foresee the impossibility of meeting their debts
3. LIQUIDATION
when they respectively fall due. (De Leon, 2021; Viva
Shipping Lines, Inc. v. Keppel Philippines Mining, Inc.,
G.R. No. 177382, 17 Feb. 2016) Liquidation shall refer to the proceedings on
Liquidation of Insolvent Juridical Debtor (Chapter
A corporation under rehabilitation continues with V), Voluntary Liquidation (Chapter VI[B]),
its corporate life and activities to achieve solvency, Involuntary Liquidation (Chapter VI[C]), and
or a position where the corporation is able to pay its Provisions Common to Liquidation in Insolvency of
obligations as they fall due in the ordinary course of Individual and Juridical Debtors (Chapter VII). (Sec.
business. (Viva Shipping Lines, Inc. v. Keppel 5[l], Rule 1, A.M. No.15-04-06-SC)
Philippines Mining, Inc., supra)
Liquidation vs. Rehabilitation
Types of Rehabilitation Proceedings
Liquidation is diametrically opposed to
1. Court-supervised - which may be voluntary or rehabilitation. Both cannot be undertaken at the
involuntary; (Secs. 12 & 13, FRIA) same time. In rehabilitation, corporations have to
2. Pre-negotiated; (Sec. 76, FRIA) and maintain their assets to continue business
3. Out-of-Court or informal. (Sec. 83, FRIA) operations. In liquidation, on the other hand,
corporations preserve their assets in order to sell
Purpose of Rehabilitation them. Without these assets, business operations are
effectively discontinued. The proceeds of the sale
Rehabilitation proceedings have a two-pronged are distributed equitably among creditors, and
purpose, namely: surplus is divided, or losses are re-allocated. (De
Leon, 2021; Viva Shipping Lines, Inc. v. Keppel
(a) to efficiently and equitably distribute the Philippines Mining, Inc., G.R. No. 177382, 17 Feb.
remaining assets of the insolvent debtor to its 2016)
creditors; and
(b) to provide the debtor with a fresh start. (De Leon, Types of Liquidation
2021; Asiatrust Development Bank v. First Aikka
Development, Inc. and Univac Development, Inc., G.R. 1. Voluntary – when the petition is filed by the
No. 179558, 1 June 2011) debtor;

2022 GOLDEN NOTES
2. Involuntary – when the petition is filed by the

creditor. (De Leon, 2021)
4. SUSPENSION OF PAYMENTS
This is a petition filed by an individual debtor who

possesses sufficient property to cover all his debts
but foresees the impossibility of meeting them
when they respectively fall due. (Sec. 94, FRIA)
A petition for suspension of payment is a remedy

available to an individual debtor who seeks to
suspend the payments outside of the necessary or
legitimate expenses of his business while the
proceedings are pending.
This petition is always voluntary since it is filed by

the debtor. Creditors cannot file a petition for
suspension of payment against the debtor. (De Leon,
2021)

Commercial Law
TYPES OF REHABILITATION PROCEEDINGS
COURT-SUPERVISED PRE-NEGOTIATED
Who may initiate
1. Voluntary proceedings
Initiated by the debtor when approved by:
a. The owner (sole proprietorship);
b. A majority of the partners (partnership);
c. 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 (stock
corporation); or
d. The vote of at least two-thirds (2/3) of the An insolvent debtor, by itself or jointly with any of its
members, in a stockholder's or member's creditors. (Sec. 76, FRIA)
meeting duly called for the purpose in case of
a (non-stock corporation). (Sec. 12, FRIA)
2. Involuntary proceedings
Any creditor or group of creditors with a claim of, or
the aggregate of whose claims is, at least One million
pesos (Php1,000,000.00) or at least twenty-five
percent (25%) of the subscribed capital stock or
partners' contributions, whichever is higher. (Sec. 13,
FRIA)
How initiated
By filing a verified petition for rehabilitation with the
court and on the grounds specifically provided.
Grounds: A group of debtors may jointly file a petition

for rehabilitation under this Act when: By filing a verified petition with the court for the
a. One or more of its members foresee the approval of a pre-negotiated Rehabilitation Plan
impossibility of meeting debts when they which has been endorsed or approved by creditors
respectively fall due, and the financial distress holding at least two-thirds (2/3) of the total
would likely adversely affect the financial liabilities of the debtor, including:
condition and/or operations of the other
members of the group; and/or 1. Secured creditors holding more than fifty
b. The participation of the other members of the percent (50%) of the total secured claims of the
group is essential under the terms and debtor; and
conditions of the proposed Rehabilitation Plan. 2. Unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of
NOTE: The petition shall be verified to establish the the debtor. (Sec. 76, FRIA)
insolvency of the debtor and the viability of its
rehabilitation. (Sec. 12, FRIA)

2022 GOLDEN NOTES
By filing a verified petition for rehabilitation with the
court if:
a. There is no genuine issue of fact or 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, FRIA)
NOTE: The petition shall be verified to establish the

substantial likelihood that the debtor may be
rehabilitated. (Sec. 14, FRIA)
Contents of petition
Petition shall include as a minimum:
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;
The petition shall include, as a minimum:
d. The grounds upon which the petition is based;
a. A schedule of the debtor's debts and liabilities;
e. Other information that may be required under this
b. An inventory of the debtor's assets;
Act depending on the form of relief requested;
c. The pre-negotiated Rehabilitation Plan,
f. Schedule of the debtor's debts and liabilities
including the names of at least three (3) qualified
including a list of creditors with their addresses,
nominees for rehabilitation receiver; and
amounts of claims and collaterals, or securities, if
d. A summary of disputed claims against the debtor
any;
and a report on the provisioning of funds to
g. An inventory of all its assets including receivables
account for appropriate payments should any
and claims against third parties;
such claims be ruled valid, or their amounts be
h. A Rehabilitation Plan;
adjusted. (Sec. 76, FRIA)
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. (Sec. 12, FRIA)

Commercial Law
Shall 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, FRIA)

2022 GOLDEN NOTES
How initiated
B. MODES OF REHABILITATION
By filing a verified
petition for
By filing a verified
rehabilitation with the
1. COURT-SUPERVISED REHABILITATION petition for
court and on the
rehabilitation with the
grounds specifically
court.
a. VOLUNTARY VS. INVOLUNTARY provided. (Sec. 12,
FRIA)
NOTE: The petition shall
If an insolvent debtor initiates rehabilitation
be verified to establish
proceedings, the proceedings are voluntary. (Sec. NOTE: The petition
the substantial
12, FRIA) shall be verified to
likelihood that the
establish the
debtor may be
On the other hand, if a creditor or group of creditors insolvency of the
rehabilitated. (Sec. 14,
initiates rehabilitation proceedings, the debtor and the viability
FRIA)
proceedings are involuntary. (De Leon, 2021) of its rehabilitation.
(Sec. 12, FRIA)
VOLUNTARY INVOLUNTARY
Who may file Grounds
Initiated by the debtor
when approved by: a. There is no genuine
a. The owner (sole a. One or more of its issue of fact or law
proprietorship); members foresee on the claim/s of the
b. A majority of the the impossibility of petitioner/s, and
partners meeting debts that the due and
(partnership); when they demandable
c. A majority vote of the respectively fall payments thereon
Any creditor or group of due, and the have not been made
board of directors or
creditors with a claim of, financial distress for at least sixty (60)
trustees and
or the aggregate of would likely days; or
authorized by the
whose claims is, at least adversely affect b. the debtor has failed
vote of the
One million pesos the financial generally to meet its
stockholders
(Php1,000,000.00) or at condition and/or liabilities as they fall
representing at least
least twenty-five operations of the due; or
two-thirds (2/3) of
percent (25%) of the other members of c. at least one creditor,
the outstanding
subscribed capital stock the group; and/or other than the
capital stock (stock
or partners' b. The participation petitioner/s, has
corporation); or
contributions, of the other initiated foreclosure
d. The vote of at least
whichever is higher. members of the proceedings?"
two-thirds (2/3) of
(Sec. 13, FRIA) group is essential against the debtor
the members, in a
stockholder's or under the terms that will prevent the
member's meeting and conditions of debtor from paying
duly called for the the proposed its debts as they
purpose in case of a Rehabilitation become due or will
(non-stock Plan. (Sec. 12, FRIA) render it insolvent.
corporation). (Sec. 12, (Sec. 5, Rule 2, A.M.
FRIA) No. 12-12-11-SC)

Commercial Law
Contents of the petition pursuant to this Act

a. Identification of and the rules of
the debtor, its procedure as may
principal activities be promulgated by
and its addresses; the Supreme Court.
b. Statement of the (Sec. 12, FRIA)
fact of and the
cause of the Venue
a. Identification of the
debtor's insolvency
debtor, its principal
or inability to pay The petition for rehabilitation shall be filed in the
activities and its
its obligations as Regional Trial Court which has jurisdiction over the
address;
they become due; principal office of the debtor alleged to be insolvent
b. The circumstances
c. The specific relief as specified in its articles of incorporation or
sufficient to support
sought pursuant to partnership or in its registration papers with the
a petition to initiate
this Act; Department of Trade and Industry (DTI) in cases of
involuntary
d. The grounds upon sole proprietorship, as the case may be. Where the
rehabilitation
which the petition principal office of the corporation, partnership or
proceedings under
is based; association as registered in the Securities and
Sect. 13 of this Act;
e. Other information Exchange Commission (SEC) is in Metro Manila, the
c. The specific relief
that may be action must be filed in the Regional Trial Court of the
sought under this
required under this city or municipality where the head office is located.
Act;
Act depending on
d. A Rehabilitation
the form of relief A petition for voluntary or involuntary
Plan;
requested; rehabilitation involving a group of debtors shall be
e. The names of at least
f. Schedule of the filed in the Regional Trial Court which has
three (3) nominees
debtor's debts and jurisdiction over the principal-office of, any of the
to the position of
liabilities including debtors alleged to be insolvent, as specified in its
rehabilitation
a list of creditors articles of incorporation or partnership, or
receiver;
with their registration papers with the DTI in cases of sole
f. Other information
addresses, proprietorship, as the case may be. (Sec. 6, Rule 1,
that may be
amounts of claims A.M. No. 12-12-11-SC)
required under this
and collaterals, or
Act depending on
securities, if any; b. COMMENCEMENT ORDER (INCLUDING STAY
the form of relief
g. An inventory of all ORDER)
requested; and
its assets including
Other documents
receivables and Commencement Order
required to be filed with
claims against third
the petition pursuant to
parties; If the court finds the petition for rehabilitation to be
this Act and the rules of
h. A Rehabilitation sufficient in form and substance, it shall, within five
procedure as may be
Plan; (5) working days from the filing of the petition, issue
promulgated by the
i. The names of at a Commencement Order. (Sec. 15, FRIA)
Supreme Court. (Sec. 14,
least three (3)
FRIA)
nominees to the If, within the same period, the court finds the
position of petition deficient in form or substance, the court
rehabilitation may, in its discretion, give the petitioner/s a
receiver; and reasonable period of time (i.e., not more than 5
j. Other documents working days) within which to amend or
required to be filed supplement the petition, or to submit such
with the petition documents as may be necessary or proper to put the

2022 GOLDEN NOTES
petition in proper order. In such case, the five (5) claims with the court at least five (5) days
working days provided above for the issuance of the before the initial hearing;
Commencement Order shall be reckoned from the 10. Direct the Bureau of Internal Revenue (BIR) to
date of the filing of the amended or supplemental file and serve on the debtor its comment on or
petition or the submission of such documents. (De opposition to the petition or its claim/s against
Leon, 2021; Sec. 15, FRIA; Sec. 7, Rule 2, A.M. No. 12- the debtor under such procedures as the
12-11-SC) Supreme Court may hereafter provide;
11. Prohibit the debtor's suppliers of goods or
The rehabilitation proceedings shall commence services from withholding the supply of goods
upon the issuance of the Commencement Order and services in the ordinary course of business
which shall: for as long as the debtor makes payments for
the services or goods supplied after the
1. Identify the debtor, its principal business or issuance of the Commencement Order;
activity/ies and its principal place of business; 12. Authorize the payment of administrative
2. Summarize the ground/s for initiating the expenses as they become due;
proceedings; 13. Set the case for initial hearing, which shall not
3. State the relief sought under this Act and any be more than forty (40) days from the date of
requirement or procedure particular to the filing of the petition for the purpose of
relief sought; determining whether there is substantial
4. State the legal effects of the Commencement likelihood for the debtor to be rehabilitated;
Order, including those mentioned in Section 17 14. Make available copies of the petition and
hereof; rehabilitation plan for examination and copying
5. Declare that the debtor is under rehabilitation; by any interested party;
6. Direct the publication of the Commencement 15. Indicate the location or locations at which
Order in a newspaper of general circulation in documents regarding the debtor and the
the Philippines once a week for at least two (2) proceedings under this Act may be reviewed
consecutive weeks, with the first publication to and copied;
be made within seven (7) days from the time of 16. State that any creditor or debtor, who is not the
its issuance; petitioner, may submit the name or nominate
7. If the petitioner is the debtor, direct the service any other qualified person to the position of
by personal delivery of a copy of the petition on rehabilitation receiver at least five (5) days
each creditor holding at least ten percent (10%) before the initial hearing;
of the total liabilities of the debtor as 17. Include a Stay or Suspension Order which
determined from the schedule attached to the shall:
petition within five (5) days; if the petitioner/s 1. suspend all actions or proceedings, in
is/are creditor/s, direct the service by personal court or otherwise, for the
delivery of a copy of the petition on the debtor enforcement of claims against the
within five (5) days; debtor;
8. Appoint a rehabilitation receiver who may or 2. Suspend all actions to enforce any
may not be from among the nominees of the judgment, attachment or other
petitioner/s, and who shall exercise such provisional remedies against the
powers and duties defined in this Act as well as debtor;
the procedural rules that the Supreme Court 3. Prohibit the debtor from selling,
will promulgate; encumbering, transferring or disposing
9. Summarize the requirements and deadlines for in any manner any of its properties
creditors to establish their claims against the except in the ordinary course of
debtor and direct all creditors to file their business; and

Commercial Law
4. Prohibit the debtor from making any be sold or disposed of by the debtor, if such sale
payment of its liabilities outstanding as or disposal is necessary for the operation of the
of the commencement date except as debtor's business, and the debtor has made
may be provided herein. (Sec. 16, FRIA) arrangements to provide a substitute lien or
ownership right that provides an equal level of
Effects of the Commencement Order (2017 BAR) security for the counter-party's claim or right.
(Sec. 50, FRIA)
1. It vests the rehabilitation receiver with all the
powers and functions provided for in the Act, NOTE: Sale or disposal of property under
such as the right to review and obtain all section 50 shall not give rise to any criminal
records to which the debtor's management and liability under applicable laws. (Sec. 50, FRIA)
directors have access, including bank accounts
of whatever nature of the debtor, subject to the 3. It serves as the legal basis for rendering null and
approval by the court of the performance bond void any set-off after the commencement date
filed by the rehabilitation receiver; (Sec. 17, of any debt owed to the debtor by any of the
FRIA) debtor's creditors;
2. It prohibits, or otherwise serves as the legal 4. It serves as the legal basis for rendering null and
basis for rendering null and void the results of void the perfection of any lien against the
any extrajudicial activity or process to seize debtor's property after the commencement
property, sell encumbered property, or date;
otherwise attempt to collect on or enforce a
claim against the debtor after the NOTE: The court may rescind or declare as null
commencement date. (Sec. 17, FRIA) and void any sale, payment, transfer or
conveyance of the debtor's unencumbered
XPN: The court may authorize the sale, transfer, property or any encumbering thereof by the
conveyance or disposal of encumbered debtor or its agents or representatives after the
property of the debtor, or property of others commencement date which are not in the
held by the debtor where there is a security ordinary course of the business of the debtor:
interest pertaining to third parties under a Provided, however, That the unencumbered
financial, credit or other similar transactions if, property may be sold, encumbered or
upon application of the rehabilitation receiver otherwise disposed of upon order of the court
and with the consent of the affected owners of after notice and hearing:
the property, or secured creditor/s in the case
of encumbered property of the debtor and, after a. If such are in the interest of
notice and hearing, the court determines that: administering the debtor and
facilitating the preparation and
a. Such sale, transfer, conveyance, or implementation of a Rehabilitation
disposal is necessary for the continued Plan;
operation of the debtor's business; and b. In order to provide a substitute lien,
b. The debtor has made arrangements to mortgage or pledge of property under
provide a substitute lien or ownership the Act;
right that provides an equal level of c. For payments made to meet
security for the counter-party's claim administrative expenses as they arise;
or right. d. For payments to victims of quasi delicts
upon a showing that the claim is valid
Provided, That properties held by the debtor and the debtor has insurance to
where the debtor has authority to sell such as reimburse the debtor for the payments
trust receipt or consignment arrangements may made;

2022 GOLDEN NOTES
e. For payments made to repurchase The Court of Appeals, however, denied the
property of the debtor that is auctioned motion and explained that the appeal would not
off in a judicial or extrajudicial sale affect the rehabilitation case since the two
under this Act; or proceedings involved different parties, issues
f. For payments made to reclaim and reliefs. Kaizen Builders argued that the CA
property of the debtor held pursuant to acted with grave abuse of discretion in denying
a possessory lien. (Sec. 52, FRIA) the motion for consolidation and prayed that the
proceedings before the CA be suspended within
5. It consolidates the resolution of all legal the duration of the rehabilitation case. Is Kaizen
proceedings by and against the debtor to the builders correct in its assertion that
court: Provided, however, that the court may proceedings before the CA be suspended within
allow the continuation of cases in other courts the duration of the rehabilitation case?
where the debtor had initiated the suit. (Sec. 17,
FRIA) A: YES. Sections 16 and 17 of R.A. No. 10142
authorizes the rehabilitation court to issue a
NOTE: Attempts to seek legal or other recourse Commencement Order that includes a Stay Order,
against the debtor outside these proceedings shall which have the effects of suspending all actions for
be sufficient to support a finding of indirect the enforcement of claims against the debtor and
contempt of court. consolidating the resolution of all legal proceedings
by and against it.
The effects of the Commencement Order and the
Stay or Suspension Order on the suspension of The indiscriminate suspension of actions for claims
rights to foreclose or otherwise pursue legal is intended to expedite the rehabilitation of the
remedies shall apply to government financial distressed corporation. It enables the management
institutions, notwithstanding provisions in their committee or the rehabilitation receiver to
charters or other laws to the contrary. (Sec. 20, effectively exercise its/his powers free from any
FRIA) judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor
company. To allow such other actions to continue
Q: Kaizen Builders entered into an investment
would only add to the burden of the management
agreement with Ophelia Ursais for
committee or rehabilitation receiver, whose time,
P2,200,000.00. However, it was later rescinded,
effort, and resources would be wasted in defending
and it was stipulated that Kaizen Builders will
claims against the corporation.
pay the amount of P380,000.00 on installment
basis while the remaining P1,500,000.00 shall
bear an interest of 1.5% or P22,500.00 per The Commencement Order ipso jure suspended the
month. Despite repeated demands, Kaizen proceedings in the CA at whatever stage it may be,
Builders stopped remitting the monthly interest considering that the appeal emanated from a money
and refused to deliver the P380,000.00. This claim against a distressed corporation which is
prompted Ophelia to file a complaint for sum of deemed stayed pending the rehabilitation case.
money against Kaizen Builders. Later on, during Moreover, the appeal before the CA is not one of the
the pendency of the trial in the Court of Appeals, instances where a suspension order is inapplicable.
Kaizen Builders filed before the special The CA should have abstained from resolving the
commercial court a petition for corporate appeal. Taken together, the CA clearly defied the
rehabilitation to which the rehabilitation court effects of a Commencement Order and disregarded
issued a Commencement Order which the state policy to encourage debtors and their
consolidated all legal proceedings by and creditors to collectively and realistically resolve and
against Kaizen Builders and suspended all adjust competing claims and property rights.
actions for the enforcement of claims against it.

Commercial Law
(Kaizen Builders, Inc. vs. Court of Appeals, G.R. No. Pagsisihan, designated as the "Area 3 Manager,"
226894, 03 Sept. 2020) which provides terms and conditions for the
lease of an area of the Sunshine Plaza Mall for
Q: SPRDC and SPFC are engaged in the the operation of a "Satellite Office."
construction, development, maintenance, and
lease of commercial buildings. Among their Believing its realty tax delinquencies had
projects, SPFC holds a long-term lease over the already been offset by accrued rentals from the
Food Terminal, Inc. (FTI) Complex in Taguig arrangements, the SPGC sent a Letter to the OIC
City, upon which it erected its Sunshine Plaza of the CGT City Treasurer, invoking the MOA's
Mall. The 1997 Asian Financial Crisis inflicted stipulations on such offset. The OIC of the CGT
financial setbacks on SPRDC and SPFC, City Treasurer responded claiming that the
prompting them to file a joint Petition for offset features apply to unpaid realty taxes as of
Rehabilitation. The City Government of Taguig December 31, 2006, but not those incurred
(CGT) is among the creditors claiming unpaid beyond such date; that SPGC's claim for unpaid
realty taxes due on the operation of the rentals is at best based on the BTS, but
Sunshine Plaza Mall. The RTC-Makati issued a disavowed the authority of Ana Esperanza
Resolution approving SPRDC and SPFC's Revised Pagsisihan to execute such BTS, and that the
Rehabilitation Plan, noting as a strategic same does not mention any offsetting scheme;
offsetting scheme that the plan envisioned to ultimately, requiring SPGC to pay its realty tax
source its funds to pay those financial delinquencies. SPGC was constrained to pay the
obligations from lease rentals of available units realty tax delinquencies under protest. Thus,
at the two malls, one of which is the Sunshine SPFC was motivated to file the Urgent Motion for
Plaza Mall. Pursuant to the Order and the Collection, praying that the CGT be directed to
Revised Rehabilitation Plan, the CGT and SPFC pay its unpaid rentals, CUSA fees, and utilities
executed a MOA instituting an offsetting scheme, over the areas it leased in the Sunshine Plaza
whereby SPFC agreed to lease out unoccupied Mall. The CGT submitted its Comment and
units of the Sunshine Plaza Mall to the CGT and Opposition arguing, among others, that the RTC-
apply accruing rentals to the realty tax credit Makati had no jurisdiction to act on said motion.
due to the CGT "until the credit is fully The RTC-Makati issued an Order granting the
consumed." Urgent Motion for Collection.
The CGT leased portions of the Sunshine Plaza Does the RTC-Makati, acting as a rehabilitation
Mall to operate the Pamantasan ng Lungsod ng court, have the jurisdiction to issue the order
Taguig (PLT) and its canteen. Besides PLT and granting the motion of SPGC for collection
its canteen, the CGT leased additional areas of against CGT?
the Sunshine Plaza Mall in order to establish and
operate a government satellite office. Pursuant A: YES. A Rehabilitation Court is empowered to
to Executive Order No. 032, Series of 2005 (EO issue orders necessary to carry out the
32), the CGT institutionalized the One-Stop Local Rehabilitation of the Insolvent Debtor.
Government Centers (OSLGC) to carry out its
Simplified Revenue and Tax Generation and Presently, the governing statute on rehabilitation is
Collection Program. However, unlike the MOA, Republic Act No. 10142, or the Financial
which served as basis for the lease of areas Rehabilitation and Insolvency Act of 2010 (FRIA),
where the PLT and its canteen operate, no and the procedural rules embodied in A.M. No. 12-
similar definitive agreement whereby the CGT 12-11-SC, or the Financial Rehabilitation Rules of
agreed to lease additional portions of the Procedure (2013). That the RTC-Makati could very
Sunshine Plaza Mall in order to operate the Area well act on the Urgent Motion for Collection, and
III OSLGC. Still, there exists a Booking Term grant the motion in the Order, is well-entrenched in
Sheet (BTS), signed by an Ana Esperanza A. jurisprudence. As the Court held in Bureau of

2022 GOLDEN NOTES
Internal Revenue v. Lepanto Ceramics, Inc., the Waiver of taxes and fees due to the National
"inherent purpose of rehabilitation is to find ways Government and to Local Government Units
and means to minimize the expenses of the
distressed corporation during the rehabilitation Upon issuance of the Commencement Order by the
period by providing the best possible framework for court, and until the approval of the Rehabilitation
the corporation to gradually regain or achieve a Plan or dismissal of the petition, whichever is
sustainable operating form." Further, the Court earlier, the imposition of all taxes and fees, including
emphasized in Allied Banking Corporation v. penalties, interests and charges thereof, due to the
Equitable PCI Bank, Inc., that "once jurisdiction is national government or to LGUs shall be considered
acquired, the court can subject all those affected to waived, in furtherance of the objectives of
orders consistent with the rehabilitation of the rehabilitation. (Sec. 19, FRIA)
insolvent debtor, including the reversal of any
transfer, payment, or sale made after the filing of the Effectivity or duration of the Commencement
petition." Order
True, as pointed out by the CGT, none of the Unless lifted by the court, the Commencement Order
foregoing documents explicitly declare that shall be effective for the duration of the
occupancy for the OSLGC Area 3 Satellite Office was rehabilitation proceedings for as long as there is a
for the purpose of offsetting SPGC's unpaid realty substantial likelihood that the debtor will be
taxes. Yet, the fact remains that such arrangement successfully rehabilitated. (Sec. 21, FRIA)
was entered into during the course of rehabilitation
proceedings, no less under the auspices of the Minimum requirements to determine whether
controlling Revised Rehabilitation Plan, which was there is substantial likelihood for the debtor to
"envisioned to source its funds to pay those financial be successfully rehabilitated
obligations from lease rentals of available units" in
SPGC's malls. 1. The proposed Rehabilitation Plan submitted
complies with the minimum contents
Hence, the foregoing transactions are but specific prescribed by the Act;
elements of the overarching Revised Rehabilitation 2. There is sufficient monitoring by the
Plan, implementation of which the RTC-Makati had rehabilitation receiver of the debtor's business
jurisdiction over. Consistently, the Urgent Motion for the protection of creditors;
for Collection sought an incidental relief towards 3. The debtor has met with its creditors to the
the successful rehabilitation of the SPGC. After all, a extent reasonably possible in attempts to reach
motion is a "necessary incident" designed "to bring a consensus on the proposed Rehabilitation
a material but incidental matter arising in the Plan;
progress of the case" as "it relates to some question 4. The rehabilitation receiver submits a report,
that is collateral to the main object of the action and based on preliminary evaluation, stating that
is connected with and dependent upon the principal the underlying assumptions and the financial
remedy." Thus, the RTC-Makati possessed the goals stated in the petitioner's Rehabilitation
jurisdiction to act on the Urgent Motion for Plan are realistic, feasible and reasonable; or, if
Collection and grant the same in the Order. (City not, there is, in any case, a substantial likelihood
Government of Taguig v. Shoppers Paradise Realty, for the debtor to be successfully rehabilitated
G.R. No. 246179, 14 July 2021) because, among others:
a. There are sufficient assets with which to

rehabilitate the debtor;
b. There is sufficient cash flow to maintain
the operations of the debtor;

Commercial Law
c. The debtor's owner/s, partners, 2. Claims against directors and officers of the
stockholders, directors and officers have debtor arising from acts done in the discharge
been acting in good faith and with due of their functions falling within the scope of
diligence; their authority: Provided, That, this inclusion
d. The petition is not a sham filing intended does not prohibit the creditors or third parties
only to delay the enforcement of the rights from filing cases against the directors and
of the creditor/s or of any group of officers acting in their personal capacities. (Sec.
creditors; and 4(c), FRIA)
e. The debtor would likely be able to pursue
a viable Rehabilitation Plan; No Diminution of Secured Creditor’s Right
5. The petition, the Rehabilitation Plan and the GR: The issuance of the Commencement Order and
attachments thereto do not contain any the Suspension or Stay Order, and any other
materially false or misleading statement; provision of the Act, shall not be deemed in any way
6. If the petitioner is the debtor, that the debtor to diminish or impair the security or lien of a
has met with its creditor/s representing at least secured creditor, or the value of his lien or security.
three-fourths (3/4) of its total obligations to the
extent reasonably possible and made a good XPN: The secured creditor’s right to enforce said
faith effort to reach a consensus on the security or lien may be suspended during the term
proposed Rehabilitation Plan; if the of the Stay Order.
petitioner/s is/are a creditor or group of
creditors, that the petitioner/s has/have met The court, upon motion or recommendation of the
with the debtor and made a good faith effort to rehabilitation receiver, may allow a secured
reach a consensus on the proposed creditor to enforce his security or lien, or foreclose
Rehabilitation Plan; and upon property of the debtor securing his/its claim,
7. The debtor has not committed acts of if the said property is not necessary for the
misrepresentation or in fraud of its creditor/s rehabilitation of the debtor.
or a group of creditors. (Sec. 21, FRIA)
The secured creditor and/or the other lien holders
Effect of Creditor’s Failure to File Notice of Claim shall be admitted to the rehabilitation proceedings
only for the balance of his claim, if any. (Sec. 60,
A creditor whose claim is not listed in the schedule FRIA)
of debts and liabilities and who fails to file a notice
of claim in accordance with the Commencement STAY OR SUSPENSION ORDER
Order but subsequently files a belated claim shall
not be entitled to participate in the rehabilitation When the Stay or Suspension Order shall not
proceedings but shall be entitled to receive apply (Sec. 18, FRIA)
distributions arising therefrom. (Sec. 23, FRIA)
1. To cases already pending appeal in the Supreme
NOTE: Claim shall refer to all claims or demands of Court as of commencement date: Provided, That
whatever nature or character against the debtor or any final and executory judgment arising from
its property, whether for money or otherwise, such appeal shall be referred to the court for
liquidated or unliquidated, fixed or contingent, appropriate action;
matured or unmatured, disputed or undisputed,
including, but not limited to: 2. Subject to the discretion of the court, to cases
pending or filed at a specialized court or quasi-
1. All claims of the government, whether national judicial agency which, upon determination by
or local, including taxes, tariffs and customs the court, is capable of resolving the claim more
duties; and quickly, fairly and efficiently than the court:

2022 GOLDEN NOTES
Provided, That any final and executory Q: PVB entered into a Note Facility Agreement
judgment of such court or agency shall be with debtor PhilPhos Corporation in the
referred to the court and shall be treated as a aggregate amount of P5 billion. To secure
non-disputed claim; payment, TIDCORP, with express conformity of
PhilPhos Corporation, executed a Guarantee
3. To the enforcement of claims against sureties Agreement whereby it guaranteed payment of
and other persons solidarily liable with the the outstanding notes without the benefit of
debtor, and third party or accommodation excussion. Devastated by a typhoon, PhilPhos
mortgagors as well as issuers of letters of credit, filed a Petition for Voluntary Rehabilitation
unless the property subject of the third party or before the RTC. The RTC, acting as
accommodation mortgage is necessary for the Rehabilitation Court, issued a Commencement
rehabilitation of the debtor as determined by Order, which included a Stay Order. Thereafter,
the court upon recommendation by the PVB filed a complaint for specific performance
rehabilitation receiver; against TIDCORP to claim under the Guarantee
Agreement. TIDCORP argued that the RTC
4. To any form of action of customers or clients of cannot validly try the case because of the
a securities market participant to recover or Rehabilitation Court’s Stay Order, which
otherwise claim moneys and securities enjoined the enforcement of all claims, actions
entrusted to the latter in the ordinary course of and proceedings against PhilPhos. Is the
the latter's business as well as any action of argument of TIDCORP tenable?
such securities market participant or the
appropriate regulatory agency or self- A: NO. The Stay Order of the Rehabilitation court did
regulatory organization to pay or settle such not divest the RTC’s jurisdiction to hear and decide
claims or liabilities; PVB’s Complaint. Section 18 (c) of the FRIA
explicitly states that a stay order shall not apply "to
5. To the actions of a licensed broker or dealer to the enforcement of claims against sureties and other
sell pledged securities of a debtor pursuant to a persons solidarily liable with the debtor, and third
securities pledge or margin agreement for the party or accommodation mortgagors as well as
settlement of securities transactions in issuers of letters of credit,
accordance with the provisions of the Securities
Regulation Code and its implementing rules and It must be noted that the Stay Order relied upon by
regulations; petitioner TIDCORP merely ordered the staying and
suspension of enforcement of all claims and
6. To the clearing and settlement of financial proceedings against the petitioner PhilPhos and not
transactions through the facilities of a clearing against all the other persons or entities solidarily
agency or similar entities duly authorized, liable with the debtor. (Trade and Investment
registered and/or recognized by the Development Corporation of the Philippines v.
appropriate regulatory agency like the Bangko Philippine Veterans Bank, G.R. No. 233850, 01 July
Sentral ng Pilipinas (BSP) and the SEC as well as 2019, J. Caguioa)
any form of actions of such agencies or entities
to reimburse themselves for any transactions c. REHABILITATION RECEIVER AND
settled for the debtor; and MANAGEMENT COMMITTEE
7. To any criminal action against the individual Rehabilitation Receiver

debtor or owner, partner, director or officer of
a debtor shall not be affected by any proceeding Rehabilitation receiver shall refer to the person or
commenced under this Act. persons, natural or juridical, appointed as such by
the court pursuant to this Act and which shall be

Commercial Law
entrusted with such powers and duties as set forth faithful and proper discharge of his powers,
herein. (Sec. 4(hh), FRIA) duties and responsibilities. (Sec. 34, FRIA)
6. Make an appropriate disclosure of conflict of
If the rehabilitation receiver is a juridical entity, it interest either to the court or to the creditors in
must designate a natural person/s who possess/es case of out-of-court rehabilitation proceedings.
all the qualifications and none of the (Sec. 40, FRIA)
disqualifications as its representative, it being
understood that the juridical entity and the Powers, Duties, and Responsibilities of a
representative/s are solidarily liable for all Rehabilitation Receiver
obligations and responsibilities of the rehabilitation
receiver. (Sec. 28, FRIA) 1. To verify the accuracy of the factual allegations
in the petition and its annexes;
Minimum Qualifications of a Rehabilitation 2. To verify and correct, if necessary, the
Receiver inventory of all of the assets of the debtor, and
their valuation;
1. A citizen of the Philippines or a resident of the 3. To verify and correct, if necessary, the schedule
Philippines in the six (6) months immediately of debts and liabilities of the debtor;
preceding his nomination; 4. To evaluate the validity, genuineness, and true
2. Of good moral character and with amount of all the claims against the debtor;
acknowledged integrity, impartiality and 5. To take possession, custody, and control, and to
independence; preserve the value of all the property of the
3. Has the requisite knowledge of insolvency and debtor;
other relevant commercial laws, rules and 6. To sue and recover, with the approval of the
procedures, as well as the relevant training court, all amounts owed to, and all properties
and/or experience that may be necessary to pertaining to the debtor;
enable him to properly discharge the duties and 7. To have access to all information necessary,
obligations of a rehabilitation receiver; and proper, or relevant to the operations and
4. Has no conflict of interest: Provided, that such business of the debtor and for its rehabilitation;
conflict of interest may be waived, expressly or 8. To sue and recover, with the approval of the
impliedly, by a party who may be prejudiced court, all property or money of the debtor paid,
thereby. (Sec. 29, FRIA) transferred, or disbursed in fraud of the debtor
or its creditors, or which constitute undue
Principal Duties of a Rehabilitation Receiver preference of creditor/s;
9. To monitor the operations and the business of
The rehabilitation receiver shall be deemed an the debtor to ensure that no payments or
officer of the court with the following principal transfers of property are made other than in the
duties: ordinary course of business;
10. With the court's approval, to engage the
1. Preserving and maximizing the value of the services of or to employ persons or entities to
assets of the debtor during the rehabilitation assist him in the discharge of his functions;
proceedings; 11. To determine the manner by which the debtor
2. Determining the viability of the rehabilitation of may be best rehabilitated, to review, revise
the debtor; and/or recommend action on the Rehabilitation
3. Preparing and recommending a Rehabilitation Plan and submit the same or a new one to the
Plan to the court; and court for approval;
4. Implementing the approved Rehabilitation 12. To implement the Rehabilitation Plan as
Plan. (Sec. 31, FRIA) approved by the court, if so, provided under the
5. Take an oath and file a bond, in such amount to Rehabilitation Plan;
be fixed by the court, conditioned upon the

2022 GOLDEN NOTES
13. To assume and exercise the powers of MANAGEMENT COMMITTEE

management of the debtor, if directed by the
court pursuant to Section 36 hereof; Role of the Management Committee
14. To exercise such other powers as may, from
time to time, be conferred upon him by the When appointed, the management committee shall
court; and take the place of the management and the governing
15. To submit a status report on the rehabilitation body of the debtor and assume their rights and
proceedings every quarter or as may be responsibilities. (Sec. 37, FRIA)
required by the court motu proprio, or upon
motion of any creditor, or as may be provided, NOTE: Members of the management committee are
in the Rehabilitation Plan. (Sec. 31, FRIA) considered also as officers of the court.
NOTE: Unless appointed by the court under Sec. 36 How the Management Committee is Appointed
(Management Committee), the rehabilitation
receiver shall not take over the management and Upon motion of any interested party, the court may
control of the debtor but may recommend the appoint and direct the rehabilitation receiver to
appointment of a management committee over the assume the powers of management of the debtor, or
debtor in the cases provided by this Act. appoint a management committee that will
undertake the management of the debtor, upon
Removal of the Rehabilitation Receiver clear and convincing evidence of any of the
following circumstances:
The rehabilitation receiver may be removed at any
time by the court, either motu proprio or upon 1. Actual or imminent danger of dissipation, loss,
motion by any creditor/s holding more than fifty wastage or destruction of the debtor's assets or
percent (50%) of the total obligations of the debtor, other properties;
on such grounds as the rules of procedure may 2. Paralyzation of the business operations of the
provide which shall include, but are not limited to, debtor; or
the following: 3. Gross mismanagement of the debtor, or fraud or
other wrongful conduct on the part of, or gross
1. Incompetence, gross negligence, failure to or willful violation of this Act by, existing
perform or failure to exercise the proper degree management of the debtor or the owner,
of care in the performance of his duties and partner, director, officer, or representative/s in
powers; management of the debtor. (Sec. 36, FRIA)
2. Lack of a particular or specialized competency
required by the specific case; Qualifications of Members of the Management
3. Illegal acts or conduct in the performance of his Committee
duties and powers;
4. Lack of qualification or presence of any The qualifications and disqualifications of the
disqualification; members of the management committee shall be set
5. Conflict of interest that arises after his forth in the procedural rules, taking into
appointment; and consideration the nature of the business of the
6. Manifest lack of independence that is debtor and the need to protect the interest of all
detrimental to the general body of the stakeholders concerned. (Sec. 38, FRIA)
stakeholders. (Sec. 32, FRIA)

Commercial Law
COMMON PROVISIONS 6. He has any other direct or indirect material

interest in the debtor or any of the creditors.
Employment of Professionals (Sec. 40, FRIA)
Upon approval of the court, and after notice and NOTE: Any party to the proceeding adversely
hearing, the rehabilitation receiver or the affected by the appointment of any person with a
management committee may employ specialized conflict of interest to any of the positions
professionals and other experts to assist each in the enumerated above may however waive his right to
performance of their duties. Such professionals and object to such appointment and, if the waiver is
other experts shall be considered either employees unreasonably withheld, the court may disregard the
or independent contractors of the rehabilitation conflict of interest, taking into account the general
receiver or the management committee, as the case interest of the stakeholders.
may be. (Sec. 39, FRIA)
Immunity
Conflict of Interest
The rehabilitation receiver and all persons
No person may be appointed as a rehabilitation employed by him, and the members of the
receiver, member of a management committee, or management committee and all persons employed
be employed by the rehabilitation receiver or the by it, shall not be subject to any action, claim or
management committee if he has a conflict of demand in connection with any act done or omitted
interest. to be done by them in good faith in connection with
the exercise of their powers and functions under
An individual shall be deemed to have a conflict of this Act or other actions duly approved by the court.
interest if he is so situated as to be materially (Sec. 41, FRIA)
influenced in the exercise of his judgment for or
against any party to the proceedings. Without d. DETERMINATION OF CLAIMS
limiting the generality of the foregoing, an
individual shall be deemed to have a conflict of Registry of Claims
interest if:
Within 20 days from his assumption into office, the
1. He is a creditor, owner, partner or stockholder rehabilitation receiver shall establish a preliminary
of the debtor; registry of claims. The rehabilitation receiver shall
2. He is engaged in a line of business which make the registry available for public inspection
competes with that of the debtor; and provide publication notice to the debtor,
3. He is, or was, within five (5) years from the creditors, and stakeholders on where and when
filing of the petition, a director, officer, owner, they may inspect it. All claims included in the
partner or employee of the debtor or any of the registry of claims must be duly supported by
creditors, or the auditor or accountant of the sufficient evidence. (Sec. 44, FRIA)
debtor;
4. He is, or was, within two (2) years from the Opposition or Challenge of Claims
filing of the petition, an underwriter of the
outstanding securities of the debtor; Within 30 days from the expiration of the period
5. He is related by consanguinity or affinity within stated in the immediately preceding section, the
the fourth civil degree to any individual debtor, creditors, stakeholders and other interested
creditor, owner/s of a sole proprietorship- parties may submit a challenge to claim/s to the
debtor, partners of a partnership-debtor or to court, serving a certified copy on the rehabilitation
any stockholder, director, officer, employee or receiver and the creditor holding the challenged
underwriter of a corporation-debtor; or claim/s.

2022 GOLDEN NOTES
Upon the expiration of the 30-day period, the or quasi-reorganization, dacion en pago, debt-
rehabilitation receiver shall submit to the court the equity conversion and sale of the business (or
registry of claims which shall include undisputed parts of it) as a going concern, or setting-up of a
claims that have not been subject to challenge. new business entity or other similar
(Sec. 45, FRIA) arrangements as may be necessary to restore
the financial well-being and viability of the
Appeal insolvent debtor;
7. Specify the treatment of each class or subclass
Any decision of the rehabilitation receiver described in subsections (d) and (e);
regarding a claim may be appealed to the court. (Sec. 8. Provide for equal treatment of all claims within
46, FRIA) the same class or subclass, unless a particular
creditor voluntarily agrees to less favorable
e. REHABILITATION PLAN treatment;
9. Ensure that the payments made under the plan
It refers to a plan by which the financial well-being follow the priority established under the
and viability of an insolvent debtor can be restored provisions of the civil code on concurrence and
using various means including, but not limited to, preference of credits and other applicable laws;
debt forgiveness, debt rescheduling, reorganization 10. Maintain the security interest of secured
or quasi-reorganization, dacion en pago, debt-equity creditors and preserve the liquidation value of
conversion and sale of the business (or parts of it) the security unless such has been waived or
as a going concern or setting-up of new business modified voluntarily;
entity as prescribed in Sec. 62 hereof, or other 11. Disclose all payments to creditors for pre-
similar arrangements as may be approved by the commencement debts made during the
court or creditors. (Sec. 4(ii), FRIA.) proceedings and the justifications thereof;
12. Describe the disputed claims and the
Contents of a Rehabilitation Plan (Sec. 62, FRIA) provisioning of funds to account for
appropriate payments should the claim be
1. Specify the underlying assumptions, the ruled valid, or its amount adjusted;
financial goals and the procedures proposed to 13. Identify the debtor's role in the implementation
accomplish such goals; of the plan;
2. Compare the amounts expected to be received 14. State any rehabilitation covenants of the debtor,
by the creditors under the rehabilitation plan the breach of which shall be considered a
with those that they will receive if liquidation material breach of the plan;
ensues within the next one hundred twenty 15. Identify those responsible for the future
(120) days; management of the debtor and the supervision
3. Contain information sufficient to give the and implementation of the plan, their affiliation
various classes of creditors a reasonable basis with the debtor and their remuneration;
for determining whether supporting the plan is 16. Address the treatment of claims arising after
in their financial interest when compared to the the confirmation of the rehabilitation plan;
immediate liquidation of the debtor, including 17. Require the debtor and its counterparties to
any reduction of principal interest and adhere to the terms of all contracts that the
penalties payable to the creditors; debtor has chosen to confirm;
4. Establish classes of voting creditors; 18. Arrange for the payment of all outstanding
5. Establish subclasses of voting creditors if prior administrative expenses as a condition to the
approval has been granted by the court; plan's approval unless such condition has been
6. Indicate how the insolvent debtor will be waived in writing by the creditors concerned;
rehabilitated including, but not limited to, debt 19. Arrange for the payment of all outstanding
forgiveness, debt rescheduling, reorganization, taxes and assessments, or an adjusted amount

Commercial Law
pursuant to a compromise settlement with the unreasonable. (Bank of the Philippine Islands v.
BIR or other applicable tax authorities; Sarabia Manor Hotel Corporation, G.R. No. 175844,
20. Include a certified copy of a certificate of tax 29 July 2013)
clearance or evidence of a compromise
settlement with the BIR; Confirmation of Rehabilitation
21. Include a valid and binding resolution of a
meeting of the debtor's stockholders to increase If no objections are filed within the relevant period
the shares by the required amount in cases or, if objections are filed, the court finds them
where the plan contemplates an additional lacking in merit, or determines that the basis for the
issuance of shares by the debtor; objection has been cured, or determines that the
22. State the compensation and status, if any, of the debtor has complied with an order to cure the
rehabilitation receiver after the approval of the objection, the court shall issue an order confirming
plan; and the Rehabilitation Plan.
23. Contain provisions for conciliation and/or
mediation as a prerequisite to court assistance The court may confirm the Rehabilitation Plan
or intervention in the event of any notwithstanding unresolved disputes over claims if
disagreement in the interpretation or the Rehabilitation Plan has made adequate
implementation of the rehabilitation plan. provisions for paying such claims.
f. CREDITOR APPROVAL AND CONFIRMATION For the avoidance of doubt, the provisions of other
laws to the contrary notwithstanding, the court
Creditor Approval of the Rehabilitation Plan shall have the power to approve or implement the
Rehabilitation Plan despite the lack of approval, or
The rehabilitation receiver shall notify the creditors objection from the owners, partners or stockholders
and stakeholders that the Plan is ready for their of the insolvent debtor: Provided that, the terms
examination. Within 20 days from the said thereof are necessary to restore the financial well-
notification, the rehabilitation receiver shall being and viability of the insolvent debtor. (Sec. 68,
convene the creditors, either as a whole or per class, FRIA)
for purposes of voting on the approval of the Plan.
The Plan shall be deemed rejected unless approved Effects of Confirmation of the Rehabilitation
by all classes of creditors whose rights are adversely Plan
modified or affected by the Plan.
1. The Rehabilitation Plan and its provisions shall
The Plan is deemed to have been approved by a class be binding upon the debtor and all persons who
of creditors if members of the said class holding may be affected by it, including the creditors,
more than fifty percent (50%) of the total claims of whether or not such persons have participated
the said class vote in favor of the Plan. The votes of in the proceedings or opposed the
the creditors shall be based solely on the amount of Rehabilitation Plan or whether or not their
their respective claims based on the registry of claims have been scheduled;
claims submitted by the rehabilitation receiver. 2. The debtor shall comply with the provisions of
(Sec. 64, FRIA) the Rehabilitation Plan and shall take all actions
necessary to carry out the Plan;
Cram Down Effect 3. Payments shall be made to the creditors in
accordance with the provisions of the
A Rehabilitation Plan may be approved by the court Rehabilitation Plan;
even over the oppositions of the creditors holding a 4. Contracts and other arrangements between the
majority of the corporation’s total liabilities if there debtor and its creditors shall be interpreted as
is a showing that rehabilitation is feasible, and the continuing to apply to the extent that they do
opposition of the creditors is manifestly

2022 GOLDEN NOTES
not conflict with the provisions of the 2. PRE-NEGOTIATED REHABILITATION

Rehabilitation Plan;
5. Any compromises on amounts or rescheduling
a. HOW INITIATED
of timing of payments by the debtor shall be
binding on creditors regardless of whether or
An insolvent debtor, by itself or jointly with any of
not the Plan is successfully implemented; and
its creditors, may file a verified petition with the
6. Claims arising after approval of the Plan that are
court for the approval of a pre-negotiated
otherwise not treated by the Plan are not
Rehabilitation Plan which has been endorsed or
subject to any Suspension Order. (Sec. 69, FRIA)
approved by creditors holding at least two-thirds
(2/3) of the total liabilities of the debtor, including
NOTE: These effects shall also be applicable to an
secured creditors holding more than fifty percent
approved a Pre-negotiated Rehabilitation Plan. (Sec.
(50%) of the total secured claims of the debtor and
82, Ibid)
unsecured creditors holding more than fifty percent
(50%) of the total unsecured claims of the debtor.
g. FAILURE OF REHABILITATION
(Sec. 76, FRIA)
The rehabilitation proceedings under Chapter II

Contents of the Petition for the Approval of a
(Court-Supervised Rehabilitation) shall, upon
Pre-Negotiated Rehabilitation Plan
motion by any stakeholder of the rehabilitation
receiver, be terminated by order of the court either
The petition shall include as a minimum:
declaring a successful implementation of the
1. A schedule of the debtor's debts and liabilities;
Rehabilitation Plan or a failure of rehabilitation.
2. An inventory of the debtor's assets;
(Sec. 74, FRIA)
3. The pre-negotiated Rehabilitation Plan,
including the names of at least 3 qualified
There is failure of rehabilitation in the following
nominees for rehabilitation receiver; and
cases:
4. A summary of disputed claims against the
debtor and a report on the provisioning of funds
1. Dismissal of the petition by the court;
to account for appropriate payments should
2. The debtor fails to submit a Rehabilitation Plan;
any such claims be ruled valid, or their amounts
3. Under the Rehabilitation Plan submitted by the
adjusted. (Sec. 76, FRIA)
debtor, there is no substantial likelihood that
the debtor can be rehabilitated within a
b. PERIOD AND EFFECT OF APPROVAL
reasonable period;
4. The Rehabilitation Plan or its amendment is
Period for Approval of Rehabilitation Plan
approved by the court but in the
implementation thereof, the debtor fails to
The court shall have a maximum period of 120 days
perform its obligations thereunder or there is a
from the date of the filing of the petition to approve
failure to realize the objectives, targets or goals
the Rehabilitation Plan. If the court fails to act within
set forth therein, including the timelines and
the said period, the Rehabilitation Plan shall be
conditions for the settlement of the obligations
deemed approved. (Sec. 81, FRIA)
due to the creditors and other claimants;
5. The commission of fraud in securing the
Effect of Approval
approval of the Rehabilitation Plan or its
amendment; and
Approval of the pre-negotiated Rehabilitation Plan
6. Other analogous circumstances as may be
shall have the same legal effect as confirmation of a
defined by the rules of procedure. (Sec. 74,
Plan. (Sec. 82, FRIA)
FRIA)

Commercial Law
3. OUT-OF-COURT OR INFORMAL Requisites

RESTRUCTURING AGREEMENT OR
REHABILITATION PLAN 1. Such agreement is approved by creditors
representing more than fifty percent (50%) of
the total liabilities of the debtor;
a. MINIMUM REQUIREMENTS
2. Notice thereof is published in a newspaper of
general circulation in the Philippines once a
For an out-of-court or informal
week for two (2) consecutive weeks; and
restructuring/workout agreement or Rehabilitation
3. The standstill period does not exceed one
Plan to qualify, it must meet the following minimum
hundred twenty (120) days from the date of
requirements:
effectivity. (Sec. 85, FRIA)
1. The debtor must agree to the out-of-court or

The notice must invite creditors to participate in the
informal restructuring/workout agreement or
negotiation for out-of-court rehabilitation or
Rehabilitation Plan;
restructuring agreement and notify them that said
agreement will be binding on all creditors if the
2. It must be approved by creditors representing
required majority votes prescribed in Sec. 84 of the
at least sixty-seven percent (67%) of the
Act are met. (Sec. 85, FRIA)
secured obligations of the debtor;
Effect of court actions or other proceedings

3. It must be approved by creditors representing
at least seventy-five percent (75%) of the
Any court action or other proceedings arising from,
unsecured obligations of the debtor; and
or relating to, the out-of-court or informal
restructuring/workout agreement or Rehabilitation
4. It must be approved by creditors holding at
Plan shall not stay its implementation, unless the
least eighty-five percent (85%) of the total
relevant party is able to secure a temporary
liabilities, secured and unsecured, of the
restraining order or injunctive relief from the Court
debtor. (Sec. 84, FRIA)
of Appeals. (Sec. 88, FRIA)
b. STANDSTILL PERIOD
c. CRAM DOWN EFFECT
Standstill period shall refer to the period agreed
Cram Down Effect
upon by the debtor and its creditors to enable them
to negotiate and enter into an out-of-court or
A Rehabilitation Plan may be approved by the court
informal restructuring/workout agreement or
even over the oppositions of the creditors holding a
rehabilitation plan. (Sec. 5(q), Rule 1, A.M. No. 12-12-
majority of the corporation’s total liabilities if there
11-SC)
is a showing that rehabilitation is feasible, and the
opposition of the creditors is manifestly
The standstill agreement may include provisions
unreasonable. Also known as the “cram-down”
identical with or similar to the legal effects of a
clause, this provision, which is currently
commencement order. (Ibid.)
incorporated in the FRIA, is necessary to curb the
majority creditors’ natural tendency to dictate their
Against whom a Standstill Period is Effective and
own terms and conditions to the rehabilitation,
Enforceable
absent due regard to the greater long-term benefit
of all stakeholders.
A standstill period shall be effective and enforceable
not only against the contracting parties but also
Otherwise stated, it forces the creditors to accept
against the other creditors. (Sec. 85, FRIA)
the terms and conditions of the Rehabilitation Plan,
preferring long-term viability over immediate but

2022 GOLDEN NOTES
incomplete recovery. (Bank of the Philippine Islands from the date of the last publication of the notice
v. Sarabia Manor Hotel Corporation, G.R. No. 175844, thereof. (Sec. 86, FRIA)
29 July 2013)
The court has the power to “cram-down” the

Rehabilitation Plan, i.e., the power to approve or
implement the Rehabilitation Plan despite the lack
of approval, or objection from the owners, partners,
stockholders, or creditors of the insolvent debtor,
provided that the terms thereof are necessary to
restore the financial well-being and viability of the
insolvent debtor. (De Leon, 2021; Secs. 64 and 68,
FRIA)
Thus, notwithstanding the rejection of the

Rehabilitation Plan by the creditors, the court may
confirm the Rehabilitation Plan if all of the following
circumstances are present:
1. The Rehabilitation Plan complies with the

requirements specified in this Act;
2. The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
3. The shareholders, owners or partners of the
juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan;
and
4. 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.
(De Leon, 2021; Sec. 64, FRIA)
A restructuring/workout agreement or
Rehabilitation Plan that is approved pursuant to an
informal workout framework (out of court or
informal restructuring agreements) shall have the
same legal effect as confirmation of a Plan under
Section 69 of FRIA. 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

Commercial Law
C. LIQUIDATION
1. VOLUNTARY LIQUIDATION VS.

INVOLUNTARY LIQUIDATION VS.
CONVERSION
Kinds of Debtors:
1. Juridical debtors; and

2. Individual debtors.
Liquidation of Insolvent Juridical Debtors
VOLUNTARY LIQUIDATION INVOLUNTARY LIQUIDATION CONVERSION

Who may initiate
Rehabilitation proceedings may be
converted into liquidation proceedings
and may be initiated by: (De Leon,
2021)
a. By the court upon a finding that

(1) the debtor is insolvent; and that
(2) there is no substantial
likelihood for the debtor to be
By 3 or more creditors the successfully rehabilitated. (Sec.
aggregate of whose claims is at 25(c), FRIA)
least either Php1,000,000.00 or at b. By the court if there is an
least 25% of the subscribed objection to the Rehabilitation Plan
capital stock or partner's and the court determines that the
An insolvent debtor may apply
contributions of the debtor, debtor acted in bad faith, or that it
for liquidation by filing a
whichever is higher, may apply for is not feasible to cure the defect.
petition for liquidation with
and seek the liquidation of an (Sec. 67, FRIA)
the court. (Sec. 90, FRIA)
insolvent debtor by filing a c. Upon motion or motu proprio if
petition for liquidation of the the court does not confirm the
debtor with the court. (Sec. 91, Rehabilitation Plan within 1 year
FRIA) from the date of filing of the
petition. (Sec. 72, FRIA)
d. Upon a breach of, or upon a failure
of the Rehabilitation Plan the
court, upon motion by an
affected party may (1) issue an
order directing that the breach be
cured within a specified period of
time, falling which the proceedings
may be converted to a liquidation;
or (2) Issue an order converting

2022 GOLDEN NOTES
the proceedings to a liquidation;

(Sec. 74, FRIA)
e. By the court if the termination of
proceedings is due to failure of
rehabilitation or dismissal of the
petition for reasons other than
technical grounds, the proceedings
shall be immediately converted;
(Sec. 75, FRIA)
f. By the court upon determination
that the debtor or creditors
supporting the pre-negotiated
Rehabilitation Plan acted in bad
faith, or that the objection is non-
curable. (Sec. 80, FRIA)
g. At any time during the pendency of
court-supervised or pre-
negotiated rehabilitation
proceedings, the debtor may
initiate liquidation proceedings.
(Sec. 90, FRIA; Sec. 2, Rule 2, A.M.
No. 15-04-06-SC)
h. At any time during the pendency of
or after a rehabilitation court-
supervised or pre-negotiated
rehabilitation proceedings, 3 or
more creditors whose claims is at
least either Php1,000,000.00 or at
least 25% of the subscribed capital
or partner's contributions of the
debtor, whichever is higher. (Sec.
91, FRIA)
i. By the court in cases authorized
by law, or upon the
recommendation of the
rehabilitation receiver or
management committee that the
rehabilitation of the debtor is no
longer feasible. (Sec. 92, FRIA; Sec.
9., Rule 2, A.M. No. 15-04-06-SC)
Contents of the petition
The petition shall be verified, The petition shall show that:
shall establish the insolvency
of the debtor and shall contain, a. There is no genuine issue of
whether as an attachment or fact or law on the claim/s of
as part of the body of the the petitioner/s, and that the
petition: due and demandable
payments thereon have not

Commercial Law
a. A schedule of the debtor's been made for at least 180

debts and liabilities days or that the debtor has
including a list of creditors failed generally to meet its
with their addresses, liabilities as they fall due; and
amounts of claims and b. There is no substantial
collaterals, or securities, if likelihood that the debtor
any; may be rehabilitated. (Sec. 91,
b. An inventory of all its FRIA)
assets including
receivables and claims
against third parties; and
c. The names of at least 3
nominees to the position
of liquidator. (Sec. 90,
FRIA)
Liquidation of Insolvent Individual Debtors
VOLUNTARY LIQUIDATION INVOLUNTARY LIQUIDATION

Who may file
An individual debtor whose properties are not
Any creditor or group of creditors. (Sec. 105, FRIA)
sufficient to cover his liabilities. (Sec. 103, FRIA)
Minimum Amount of Aggregate Debt
The debt must exceed P500,000. (Sec. 103, FRIA) The debt must be at least P500,000. (Sec. 105, FRIA)
How and where to initiate

By filing a verified petition with the court of the By filing a verified petition for liquidation with the
province or city in which he has resided for 6 months court of the province or city in which the individual
prior to the filing of such petition. (Sec. 103, FRIA) debtor resides. (Sec. 105, FRIA)
Contents of the petition
The following shall be considered acts of insolvency,
and 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;
He shall attach to his petition a schedule of debts and
b. That being absent from the Republic of the
liabilities and an inventory of assets. (Sec. 103, FRIA)
Philippines, with intent to defraud his creditors,
he remains absent;
NOTE: The filing of such petition shall be an act of
c. That he conceals himself to avoid the service of
insolvency. Acts of insolvency need not be alleged.
legal process for the purpose of hindering or
(Sec. 103, FRIA)
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

2022 GOLDEN NOTES
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 creditor 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 capacity;
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,
FRIA)
Effect of Absence of Debtor
Applies even in the case of absent debtor under Sec.

The debtor is not absent as he files the petition.
108 of the FRIA.
Posting of Bond
The petitioning creditor/s shall post a bond in such
sum as the court shall direct, conditioned that if the
petition for liquidation is dismissed by the court, or
Posting of bond by creditors not required. withdrawn by the petitioner, or if the debtor shall not
be declared an insolvent, the petitioners will pay to
the debtor all costs, expenses, damages occasioned by
the proceedings, and attorney's fees. (Sec. 105, FRIA)

Commercial Law
Issuance of Liquidation Order

Issued after trial.
Upon filing of such creditors’ petition, court shall

issue a show-cause order against the individual
debtor, at a time and place to be fixed therein why he
Issued without trial.
should not be adjudged an insolvent.
If the court finds petition sufficient in form and

Upon good cause shown, the court may issue an order
substance, it shall, within 5 working days, issue a
forbidding the individual debtor from making
liquidation order. (Villanueva, 2018; Sec. 104, FRIA)
payments of any of his debts, and transferring any
property belonging to him. If the individual debtor
shall default or if, after trial, the issues are found in
favor of petitioning creditors, the court shall issue
the liquidation order. (Villanueva, 2018)

2022 GOLDEN NOTES
2. PROCEDURE 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
The liquidation process refers to the proceeding
forty-five (45) days from the date of the last
where claims are filed, and the assets of the
publication.
insolvent debtor are disposed of and the proceeds
are divided among the creditors.
Effects of the Liquidation Order (Sec. 113, FRIA)
a. LIQUIDATION ORDER; EFFECTS

Upon issuance of the Liquidation Order:
Liquidation Order
a. The juridical debtor shall be deemed dissolved
and its corporate or juridical existence
If, after considering the comments filed, the court
terminated;
determines that the petition is meritorious, it will
b. Legal title to and control of all the assets of the
issue the Liquidation Order. (De Leon, 2021; Sec. 91,
debtor, except those that may be exempt from
FRIA; Sec. 8, Rule 2, A.M. No. 15-04-06-SC)
execution, shall be deemed vested in the
liquidator or, pending his election or
The Court may also issue the Liquidation order if the
appointment, with the court;
debtor on whom summons is properly served fails
c. All contracts of the debtor shall be deemed
to file a comment on or opposition to the petition
terminated and/or breached, unless the
within the period given by the court. (Sec. 18, Rule 3,
liquidator, within ninety (90) days from the
A.M. No. 15-04-06-SC)
date of his assumption of office, declares
otherwise and the contracting party agrees;
Contents of a Liquidation Order (Sec. 112, FRIA)
d. No separate action for the collection of an
unsecured claim shall be allowed. Such actions
The liquidation order shall:
already pending will be transferred to the
Liquidator for him to accept and settle or
a. Declare the debtor insolvent;
contest. If the liquidator contests or disputes
b. Order the liquidation of the debtor and, in the
the claim, the court shall allow, hear, and
case of a juridical debtor, declare it as dissolved;
resolve such contest except when the case is
c. Order the sheriff to take possession and control
already on appeal. In such a case, the suit may
of all the property of the debtor, except those
proceed to judgment, and any final and executor
that may be exempt from execution;
judgment therein for a claim against the debtor
d. Order the publication of the petition or motion
shall be filed and allowed in court; and
in a newspaper of general circulation once a
e. No foreclosure proceeding shall be allowed for
week for two (2) consecutive weeks;
a period of one hundred eighty (180) days.
e. Direct payments of any claims and conveyance
of any property due the debtor to the liquidator;
Secured Creditor and Secured Claim
f. Prohibit payments by the debtor and the
transfer of any property by the debtor;
Secured creditor refers to a creditor with a secured
g. Direct all creditors to file their claims with the
claim. (Sec. 4(kk), FRIA)
liquidator within the period set by the rules of
procedure;
Secured claim shall refer to a claim that is secured
h. Authorize the payment of administrative
by a lien. (Sec. 4(jj), FRIA)
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

Commercial Law
Rights of Secured Creditors (Sec. 114, FRIA) discharge of his powers, duties and responsibilities.
(Sec. 117, FRIA)
The Liquidation Order shall not affect the right of a
secured creditor to enforce his lien in accordance The powers, duties, and responsibilities of the
with the applicable contract or law. liquidator shall include, but not be limited to:
A secured creditor may: 1. To sue and recover all the assets, debts and
1. Waive his rights under the security or lien, claims, belonging or due to the debtor;
prove his claim in the liquidation proceedings 2. To take possession of all the property of the
and share in the distribution of the assets of the debtor except property exempt by law from
debtor; or execution;
2. Maintain his rights under his security or lien. 3. To sell, with the approval of the court, any
property of the debtor which has come into his
If the secured creditor maintains his rights under possession or control;
the security or lien: 4. To redeem all mortgages and pledges, and to
satisfy any judgment which may be an
1. The value of the property may be fixed in a encumbrance on any property sold by him;
manner agreed upon by the creditor and the 5. To settle all accounts between the debtor and his
liquidator. When the value of the property is creditors, subject to the approval of the court;
less than the claim it secures, the liquidator may 6. To recover any property or its value,
convey the property to the secured creditor and fraudulently conveyed by the debtor;
the latter will be admitted in the liquidation 7. To recommend to the court the creation of a
proceedings as a creditor for the balance; if its creditors' committee which will assist him in the
value exceeds the claim secured, the liquidator discharge of his functions, and which shall have
may convey the property to the creditor and powers as the court deems just, reasonable and
waive the debtor's right of redemption upon necessary; and
receiving the excess from the creditor; 8. Upon approval of the court, to engage such
2. The liquidator may sell the property and satisfy professionals as may be necessary and
the secured creditor's entire claim from the reasonable to assist him in the discharge of his
proceeds of the sale; or duties.
3. The secured creditor may enforce the lien or
foreclose on the property pursuant to In addition to the rights and duties of a
applicable laws. rehabilitation receiver, the liquidator shall have the
right and duty to take all reasonable steps to
Powers, Duties and Responsibilities of the manage and dispose of the debtor's assets with a
Liquidator view towards maximizing the proceedings
therefrom, to pay creditors and stockholders, and to
The liquidator shall be deemed an officer of the terminate the debtor's legal existence.
court with the principal duty of preserving and
maximizing the value and recovering the assets of A liquidator shall be subject to removal pursuant to
the debtor, with the end of liquidating them and procedures for removing a rehabilitation receiver.
discharging to the extent possible all the claims (Sec. 119, FRIA)
against the debtor. (Sec. 119, FRIA)
3. DETERMINATION OF CLAIMS
Prior to entering upon his powers, duties and
responsibilities, the liquidator shall take an oath
Registry of Claims
and file a bond, in such amount to be fixed by the
court, conditioned upon the proper and faithful
Within twenty (20) days from his assumption into
office, the liquidator shall prepare a preliminary

2022 GOLDEN NOTES
registry of claims of secured and unsecured grounds of fraud, accident, mistake or inexcusable
creditors. neglect. (Sec. 125, FRIA)
Secured creditors who have waived their security or Liquidation Plan

lien or have fixed the value of the property subject
of their security or lien by agreement with the Within three (3) months from his assumption into
liquidator and is admitted as a creditor for the office, the Liquidator shall submit a Liquidation Plan
balance, shall be considered as unsecured creditors. to the court. The Liquidation Plan shall, as a
minimum, enumerate all the assets of the debtor, all
The liquidator shall make the registry available for the claims against the debtor and a schedule of
public inspection and provide publication notice to liquidation of the assets and payment of the claims.
creditors, individual debtors, owner/s of the sole (Sec. 129, FRIA)
proprietorship-debtor, the partners of the
partnership-debtor and shareholders or members Sales of Assets in Liquidation
of the corporation-debtor, on where and when they
may inspect it. All claims must be duly proven The liquidator may sell the unencumbered assets of
before being paid. (Sec. 123, FRIA) the debtor and convert the same into money. The
sale shall be made at public auction.
Right of Set-off
However, a private sale may be allowed with the
If the debtor and a creditor are mutually debtor and approval of the court if:
creditor of each other, one debt shall be set off
against the other, and only the balance, if any, shall 1. The goods to be sold are of a perishable nature,
be allowed in the liquidation proceedings. (Sec. 124, or are liable to quickly deteriorate in value, or
FRIA) are disproportionately expensive to keep or
maintain; or
Opposition or Challenge to Claims 2. The private sale is for the best interest of the
debtor and his creditors. With the approval of
Within thirty (30) days from the expiration of the the court, unencumbered property of the
period for filing of applications for recognition of debtor may also be conveyed to a creditor in
claims, creditors, individual debtors, owner/s of the satisfaction of his claim or part thereof.
sole proprietorship-debtor, partners of the
partnership-debtor and shareholders or members With court’s approval, unencumbered property of
of the corporation-debtor and other interested Debtor may also be conveyed to a creditor in
parties may submit a challenge to a claim or claims satisfaction of his claim or part thereof. (Sec. 131,
to the court, serving a certified copy on the FRIA)
liquidator and the creditor holding the challenged
claim. (Sec. 125, FRIA) Concurrence and Preference of Credits
Finality of the Claims The Liquidation Plan and its implementation shall
ensure that the concurrence and preference of
Upon the expiration of the thirty (30)-day period, credits as enumerated in the Civil Code of the
the rehabilitation receiver shall submit to the court Philippines and other relevant laws shall be
the registry of claims containing the undisputed observed, unless a preferred creditor voluntarily
claims that have not been subject to challenge. Such waives his preferred right. For purposes of this
claims shall become final upon the filing of the chapter, credits for services rendered by employees
register and may be subsequently set aside only on or laborers to the debtor shall enjoy first preference
under Article 2244 of the Civil Code, unless the

Commercial Law
claims constitute legal liens under Articles 2241 and a. Calling a meeting of all the creditors named in
2242 thereof. (Sec. 133, FRIA) the schedule of debts and liabilities at such time
not less than 15 days nor more than 40 days
The rules on preference and concurrence of credits from the date of such Order and designating the
are of no consequence where the value of the date, time and place of the meeting;
property or the value of all the assets is sufficient to b. Directing such creditors to prepare and present
pay in full all the creditors. Hence, the rules become written evidence of their claims before the
material only when insolvency proceedings - when scheduled creditors' meeting;
the assets are insufficient for then some creditors of c. Directing the publication of the said order in a
necessity will not be paid or some creditors will not newspaper of general circulation published in
obtain the full satisfaction of their claims. the province or city in which the petition is filed
(Philippine Savings Bank v. Hon. Gregorio Lantin, G.R. once a week for two (2) consecutive weeks,
No. L-33929, 2 Sept. 1983) with the first publication to be made within
seven (7) days from the time of the issuance of
the Order;
D. SUSPENSION OF PAYMENTS; SUSPENSION OF d. Directing the clerk of court to cause the sending
PAYMENT ORDER of a copy of the Order by registered mail,
postage prepaid, to all creditors named in the
schedule of debts and liabilities;
e. Forbidding the individual debtor from selling,
Suspension of Payments (Sec. 96, FRIA)
transferring, encumbering, or disposing in any
manner of his property, except those used in the
Upon motion filed by the individual debtor, the
ordinary operations of commerce or of industry
court may issue an order suspending any pending
in which the petitioning individual debtor is
execution against the individual debtor: Provided
engaged so long as the proceedings relative to
that properties held as security by secured creditors
the suspension of payments are pending;
shall not be the subject of such suspension order.
f. Prohibiting the individual debtor from making
any payment outside of the necessary or
The suspension order shall lapse when three (3)
legitimate expenses of his business or industry,
months shall have passed without the proposed
so long as the proceedings relative to the
agreement being accepted by the creditors or as
suspension of payments are pending; and
soon as such agreement is denied.
g. Appointing a commissioner to preside over the
creditors' meeting.
No creditor shall sue or institute proceedings to
collect his claim from the debtor from the time of the
Not Covered by the Suspension of Payment
filing of the petition for suspension of payments and
Order
for as long as proceedings remain pending except:
1. Those creditors having claims for personal

1. Those creditors having claims for personal
labor, maintenance, expense of last illness, and
labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor
funeral of the wife or children of the debtor
incurred in the 60 days immediately prior to
incurred in the sixty (60) days immediately
filing of the petition; and
prior to the filing of the petition; and
2. Secured creditors. (Sec. 96, FRIA)
2. Secured creditors.
Failure of Individual Debtor to perform the

Suspension of Payment Order (Sec. 95, FRIA)
agreement (Sec. 102, FRIA)
If the court finds the petition sufficient in form and

If the individual debtor fails, wholly or in part, to
substance, it shall, within five (5) working days from
perform the agreement decided upon at the meeting
the filing of the petition, issue an Order:

2022 GOLDEN NOTES
of the creditors, all the rights which the creditors opposition is manifestly unreasonable. (Bank of the
had against the individual debtor before the Philippine Islands v. Sarabia Manor Hotel
agreement shall revest in them. In such case the Corporation, G.R. No. 175844, 29 July 2013)
individual debtor may be made subject to the
insolvency proceedings in the manner established Involuntary Liquidation of Individual Debtor vs.
by the FRIA. Involuntary Liquidation of Juridical Debtor
Q: SARABIA filed a petition for corporate INDIVIDUAL DEBTOR JURIDICAL DEBTOR

rehabilitation with prayer for the issuance of a As to Number of Creditors
stay order before the RTC as it foresaw the
At least three (3) There can be one or
impossibility to meet its maturing obligations to
creditors required. more creditors.
its creditors when they fall due. It was later on
approved by the lower courts. BPI mainly argues As to Minimum Amount of Debt
that the approved rehabilitation plan did not The debt or aggregate
give due regard to its interests as a secured of debts must be at
creditor in view of the imposition of a fixed least one million pesos
The debts must be at
interest rate of 6.75% p.a. and the extended loan (P1,000,000) or
least Five Hundred
repayment period. Is BPI correct? equivalent to 25% of
Thousand Pesos
the subscribed capital
(P500,000)
A: NO. BPI is not correct. Although undefined in the or partner’s
Interim Rules, it may be said that the opposition of a contribution,
distressed corporation’s majority creditor is whichever is higher.
manifestly unreasonable if it counter-proposes As to Continuation of Business
unrealistic payment terms and conditions which
The business
would, more likely than not, impede rather than aid The individual can
organization will be
its rehabilitation. The unreasonableness becomes continue business.
dissolved.
further manifest if the rehabilitation plan, in fact,
provides for adequate safeguards to fulfill the As to Proof of Acts of Insolvency
majority creditor’s claims, and yet the latter persists
There must be an act An act of insolvency is
on speculative or unfounded assumptions that his
of insolvency. not required.
credit would remain unfulfilled.
It must be pointed out that oppositions which push Q: On July 18, 2010, R.A. No. 10142, or FRIA,
for high interest rates are generally frowned upon lapsed into law. It took effect on August 31, 2010,
in rehabilitation proceedings given that the but its implementing rule was only promulgated
inherent purpose of a rehabilitation is to find ways on August 27, 2013. FRIA expressly repealed the
and means to minimize the expenses of the Insolvency Law of 1909 and impliedly repealed
distressed corporation during the rehabilitation laws, orders, and rules that were inconsistent
period. It is the objective of a rehabilitation with its provisions. On September 9, 2010, after
proceeding to provide the best possible framework FRIA had taken effect, Interco, et al. filed a
for the corporation to gradually regain or achieve a Petition for Suspension of Payments and
sustainable operating form. Hence, if a creditor, Rehabilitation before the rehabilitation court.
whose interests remain well-preserved under the On the day of the initial hearing, the
existing rehabilitation plan, still declines to accept rehabilitation court declared that the
interests pegged at reasonable rates during the proceedings shall be governed by the 2008
period of rehabilitation, and, in turn, proposes rates Rules on Corporate Rehabilitation.
which are largely counter-productive to the
rehabilitation, then it may be said that the creditor’s

Commercial Law
Interco, et al. argue that the Court of Appeals

erred in ruling that FRIA is applicable since the
rehabilitation court's decision to apply the 2008
Rules on Corporate Rehabilitation has become
the law of the case. They likewise maintain that
while their Petition for Suspension of Payments
and Rehabilitation was filed after FRIA had
taken effect, the law is inapplicable since its
provisions are not self-executory. Is Interco, et
al.’s contention tenable?
A: NO. The absence of an implementing rule alone

cannot render a law inoperative. Every law is
presumed valid, until and unless judicially declared
invalid.
Interco, et al. misread Section 146 of FRIA in

insisting that the law's provisions do not apply to
their case. Section 146 provides:
“SECTION 146. Application to Pending Insolvency,

Suspension of Payments and Rehabilitation Cases. -
This Act shall govern all petitions filed after it has
taken effect. All further proceedings in insolvency,
suspension of payments and rehabilitation cases
then pending, except to the extent that in the
opinion of the court their application would not be
feasible or would work injustice, in which event the
procedures set forth in prior laws and regulations
shall apply.”
As the CA correctly found, the discretion given to

rehabilitation courts in applying the 2008 Rules on
Corporate Rehabilitation instead of FRIA pertains
only to petitions for rehabilitation filed before and
are pending at the time FRIA took effect. In cases
involving petitions for rehabilitation filed after
FRIA's effectivity, the rehabilitation court has no
option and is mandated to apply the provisions of
FRIA. (Banco De Oro Unibank, Inc. v. International
Copra Export Corp., Interco Manufacturing Corp., Icec
Land Corp., And Kimee Realty Corp., G.R. Nos. 218485-
86 and 218493-97, 28 Apr. 2021)

2022 GOLDEN NOTES

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FACULTY OF CIVIL LAW (1734)

2022 GOLDEN NOTES

Address: Academics Committee

Tel. No: (02) 8731-4027

Released in the Philippines, 2022.

ACADEMIC YEAR 2021-2022

SARAH ANGELA D. EVA CHAIRPERSON

ATTY. AL CONRAD B. ESPALDON

ACADEMICS COMMITTEE 2022

COMMERCIAL LAW COMMITTEE 2022

PAULINE ABEGAIL P. FRIVALDO ASST. HEAD,

ANGELYNN C. SALAZAR ASST. HEAD,

ATTY. MARIAN JOANNE K. CO-PUA

FACULTY OF CIVIL LAW

ATTY. ARTHUR B. CAPILI

ATTY. ELGIN MICHAEL C. PEREZ

JUDGE PHILIP A. AGUINALDO

LENY G. GADIANA, R.G.C.

OUR DEEPEST APPRECIATION TO OUR

Dean Nilo T. Divina Atty. Marian Joanne K. Co-Pua

Dean Amado L. Dimayuga Atty. Allan B. Gepty

Dean Eduardo Juan F. Abella Atty. Jacinto D. Jimenez

Justice Japar B. Dimaampao Atty. Albert R. Palacios

Justice Gabriel T. Robeniol Atty. Mercy Jane B. Paras-Leynes

Judge Maria Ella Cecilia D. Escalante Atty. Teofilo R. Ragadio

Judge Edith Cynthia A. Wee Atty. Amado E. Tayag

Atty. Emma Ruby Aguilar-Aprado Atty. Janna Mae B. Tecson

Atty. Fe T. Becina-Macalino Atty. Maria Zarah R. Villanueva-

THE RISK OF USE OF THIS BAR

A. BASIC CONCEPTS ......................................................................................................................................................................................1

II. TRANSPORTATION LAW .................................................................................................................................................... 50

A. COMMON CARRIER ............................................................................................................................................................................... 50

III. CORPORATION LAW .......................................................................................................................................................... 91

A. GENERAL PRINCIPLES ........................................................................................................................................................................ 91

IV. INTELLECTUAL PROPERTY CODE ............................................................................................................................... 267

A. PATENTS ................................................................................................................................................................................................ 275

V. THE ANTI-MONEY LAUNDERING ACT OF 2001 ........................................................................................................ 340

A. COVERED INSTITUTIONS AND THEIR OBLIGATIONS ....................................................................................................... 340

VI. ELECTRONIC COMMERCE ACT OF 2000 .................................................................................................................... 357

A. BASIC CONCEPTS ................................................................................................................................................................................362

I of the Insurance Code.

The term “doing an insurance business” or

3. Doing any kind of business, including a

1 UNIVERSITY OF SANTO TOMAS

UNIVERSITY OF SANTO TOMAS 2

5. Risk of loss – The insured is subject to a risk of a. For motor vehicles;

2. Voluntary It is subject to conditions the principal one of which

GR: The insurer promises to make good only the

3 UNIVERSITY OF SANTO TOMAS

1. WHAT MAY BE INSURED Anything having an appreciable pecuniary value,

UNIVERSITY OF SANTO TOMAS 4

5 UNIVERSITY OF SANTO TOMAS

As to When must Insurable Interest Exist 4. A transfer of

UNIVERSITY OF SANTO TOMAS 6

beneficiary, the schedule of values attached to the policy.

GR: The insured shall have the right to change the

7 UNIVERSITY OF SANTO TOMAS

UNIVERSITY OF SANTO TOMAS 8

insurance Persons Prohibited from being Designated as