Commercial Law Reviewer

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

CODE OF COMMERCE

Commerce It is the exchange of goods, productions, or property of any kind. It is intercourse by way of trade traffic between different peoples or states and the citizens or inhabitants thereof, including not only the purchase, sale, and exchange of commodities, but also the instrumentalities and agencies by which it is promoted and the means and appliances by which it is carried on, and transportation of persons as well as goods. (Black’s Law Dictionary) It is that branch of human activity, the purpose of which is to bring products to the consumer by means of exchanges or operations which tend to supply and extend to him, habitually, with intent to gain, at the proper time and place and in good quality and quantity. (1 Blanco 36) Commercial law It is a phrase used to designate the whole body of substantive jurisprudence applicable to the rights, intercourse, and relations of persons engaged in commerce, trade, or mercantile pursuits. (Black’s Law Dictionary)

It is that branch of private law which regulates the juridical relations arising from commercial acts. It includes trade (business traffic within the limitations of the state) and commerce (intercourse with foreign states). Law Merchant (Lex Mercatoria) It is an old international law of merchants and mariners growing out of their customary practices; a law practiced and enforced by businessmen and ship owners in their own courts without professional judges or lawyers. (Mellinkoff’s Dictionary of American Legal Usage) Acts of commerce / Commercial Transactions The Code of Commerce does not attempt anywhere to define what commercial transactions are. It only specifies two general classes: (1) Those contained in the Code of Commerce and (2) All others of analoguous character. An act need not be performed by a merchant in order that it may be considered an act of commerce. They are governed by: (1) Code of Commerce, (2) by commercial usages observed in each place, in the absence of (1), and (3) by the rules of civil law, in the absence of (1) & (2). Sources of Commercial laws 1. Principal – a. Statute law b. Agreements c. Customs d. Court decisions 2. Auxiliary – a. Natural law

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CODE OF COMMERCE b. c. d.

Scientific law Foreign statutory law and judicial decisions Opinions of authorities

Characteristics of Commercial Law 1. Uniform – act or contract is governed by the same set of rules 2. Universal / International – exists in every civilized society 3. Equitable – involve the exchange of values or consideration 4. Customary – embody rules that are followed from time to time or are invoked in everyday transactions 5. Progressive – accumulates new ideas and keeps abreast with contemporary development Constitutional Provisions on Commerce and Trade 1. Sec. 1, A. XII and Secs. 19 & 20, A. II - Economic nationalism as constitutional Policy on national economy and commerce 2. Secs. 9 & 10, A. II - Equitable distribution of wealth 3. Secs. 10 & 12, A. XII - Filipino First policy and nationalization 4. Sec. 1, A. VIII - Power of judicial review in key economic and commercial matters Portions of the Code of Commerce still in force 1. Merchants, Books of Merchants and General Provisions on Contracts (Arts. 1-63) 2. Joint Account Associations (Arts. 239-243) 3. Commercial Barter (Art. 346) 4. Transfers of Non-negotiable Credits (Arts. 347348) 5. Commercial Contracts of Overland Transportations (Arts. 349-379) 6. Letters of Credit (Arts. 567-572) 7. Maritime Commerce (Arts. 573-869) 8. Charter Party 9. Respondentia 10. Averages 11. Bottomry 12. Bill of Lading 13. Aval 14. Crossed Checks 15. Arrival Under Stress 16. Collision Provisions in the Code of Commerce which have been repealed by the New Civil Code 1. Sales 2. Partnership 3. Agency 4. Loan 5. Deposit and 6. Guaranty Special Commercial Laws: 1. Corporation Code 2. Negotiable Instruments Law

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS 3. 4. 5. 6. 7. 8. 9. 10.

Insurance Code Public Service Law General Banking Law Securities Regulation Code Insolvency Law Retail Trade Nationalization Law Chattel Mortgage Law Warehouse Receipts Law CIVIL LAW

Foreigners and companies created abroad may engage in commerce in the Philippines subject to (1) the laws of their country with respect to capacity to contract and to the (2) provisions of the Code of Commerce as regards the creation of their establishment in foreign territory, mercantile operations and the jurisdiction of the courts of the Philippines (3) Corporation Code and other laws - There is a need to obtain license from the SEC - However, the Board of Investment may impose requirements other that those set by the Corporation Code (172 S 490)

CODE OF COMMERCE

Acceptance made by letter/telegram does NOT bind the offeror EXCEPT from the time it came to his knowledge; contract is presumed to have been entered into in the place where the offer was made (Theory of Cognition)

Contracts are perfected from the moment an answer is made accepting the offer (Theory of Manifestation)

If the obligation does not fix a period, action filed with the court for the fixing of the period

Obligation without a fixed period demandable: a) 10 days after perfection, if it gives rise to an ordinary action b) on the next day, if it involves immediate action

Default depends on the actuations of the obligee or creditor; no liability if no demand EXCEPT if time is of the essence in the contract

Every debtor in default without need of demand (mora ex re)

A. MERCHANTS AND COMMERCIAL TRANSATIONS (Code of Commerce Articles 1-63)

b) Investing in the Philippines Under the Foreign Investments Act of 1991, foreigners are allowed to invest up to 100% of the capital needs of the firm However, they are still prohibited from investing in industries covered by the negative list which includes: a. Those provided in the Constitution and other Philippine laws b. Defense related industries c. Those with health and moral implications d. Those with needing capital of not more than $500,000 e. Industries in areas already adequately covered 2.

Filipino Merchants a) Individual i. Legal capacity to engage in commerce ii. Habitual engagement therein iii. Completed the age of 18 (as amended by R.A.

Merchants 1. Those who having capacity to engage in commerce, habitually devote themselves thereto. 2. Commercial or Industrial associations organized in accordance with the Code of Commerce. Classes of Merchants 1. Foreign Merchants 2. Filipino Merchants 3. Commercial and Industrial companies created in accordance with the Code of Commerce and by special laws Essential Requisites to be considered a Merchant 1. Legal capacity 2. Habitually engaged in commerce 

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CODE OF COMMERCE

The legal presumption of habitually engaging in commerce shall exist from the time the person who intends to engage therein gives announcement, by means of circulars, newspapers, handbills, poster exhibited to the public, or by other means whatsoever of an establishment, the purpose of which is to conduct commercial transaction

Essential Requisites of a Merchant (accdg. to class) 1. Foreign Merchants a) Engaging in Commerce

6809)

Free disposition of his property b) Association i. Commercial or industrial company ii. Created in accordance with existing legislation iii. Legal capacity to engage in commerce iv. Habitual engagement therein iv.

Persons disqualified to be merchants 1. ABSOLUTELY disqualified  

Incapacity extends throughout the Philippines Effect of act: null and void

i. ii. iii. 2. 

Persons serving penalty of civil interdiction Insolvents Those absolutely disqualified by special laws RELATIVELY disqualified Incapacity extends only to the territory where the officer s exercising his functions Effect of act: violator subjected to disciplinary action / punishment



i. ii. iii. iv.

judicial and prosecuting officials in active service (Rule 5.02, Code of Judicial Conduct) administrative, economic and military chiefs government collection agents and custodian of funds stock and commercial brokers

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS v. vi. vii.

viii. ix.

those who by special laws cannot trade in specified territories Members of the Congress (Sec.14, A.VI) President, Vice-President, members of the Cabinet and their deputies/assistants (Sec.13, A.VII) Members of Constitutional Commission (Sec.2, A.IX) Ombudsman and (f)(g)(h) with respect to any loan, guaranty or other form of financial accommodation for any business purpose by any government-owned or controlled bank (Sec. 16, A.XI)

Commercial Registries It is a book where entries are made of merchants and of documents affecting their commercial transactions; or an office established for the purpose of copying and recording verbatim certain classes of documents of commercial value. Rules on Commercial Registries A. Individual Merchants  Optional  Registration at the Bureau of Domestic Trade (Metro Manila) or Register of Deeds (provinces)  No registration = no request of inscription of any document in mercantile registry; no availment of effects of registration B. Juridical Persons  Compulsory for corporations and partnerships with capital of P3,000 or more, or contributions of real estate  Registration at the SEC  No registration = no creation of corporation; no effect on the existence of a partnership’s juridical personality C. Shipowners  Compulsory for Philippine vessels with gross tonnage of more than 3 tons  Issuance of Certificate of Philippine Registry – compulsory if more than 15 tons gross; optional if 15 tons gross or less Books of Merchant A. Code of Commerce 1. Book of inventories and balances containing a statement of assets, liabilities and capital 2. Journal containing day-to-day operations 3. Ledger containing the accounts classified as to objects or persons, transferred from the journal 4. Book for letters or telegrams sent out 5. Other books required by special laws B. Special Laws 1. Book of minutes in case of juridical persons, containing the resolutions passed 2. Stock and Transfer Book if the juridical person is a corporation C. National Internal Revenue Code 1. Bookkeeping records authorized by the Finance Department if merchant, natural or

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CODE OF COMMERCE

2.

3.

juridical, has gross quarterly sales, earnings, receipts or output NOT exceeding P5,000 Journal or ledger if the gross quarterly sales, earning, receipts or output exceed P5,000 bur are below P25,000 Books must be audited and examined by an independent certified public accountant if the amount exceeds P25,000

Probative Value of Merchant’s Books 1. Evidence against the merchants themselves 2. Conflict between books of two merchants: those kept properly shall prevail 3. If one merchant keeps books and the other does not (and cannot explain their absence), the books of the former shall be admitted against the latter; 4. If both keep their books properly but the entries conflict, the court shall accept other proofs Commercial Contract It is an agreement between two or more merchants or non-merchants binding themselves to give to do something in commercial transactions Contract of Correspondence It is a contract entered into by correspondence like letters, telegrams, by messengers, etc. but not including those made by phone or through agents . When is a mercantile contract by correspondence perfected? Under the Code of Commerce, it is perfected from the moment the offeree accepts the offer, EVEN BEFORE KNOWLEDGE of said acceptance by the offeror. This rule is applicable to all commercial contracts except in deposit, guaranty, sale, loan, agency, and partnership where the Civil Code rule as to the perfection is applicable Rules to be observed with respect to commercial contracts 1. Governing law Commercial contracts shall be governed by the Code of Commerce; in default of such provisions, by the commercial usages observed in each place; and in the absence of both, by the general rules of civil law. 2. Formalities and exceptions Commercial contracts shall be valid and create an obligation and cause of action in suits, whatever may be the form or in whatever language they may be executed, the class to which they correspond, and the amount involved, PROVIDED their existence is proves by some means established by the civil law EXCEPT a. Contracts which must be in form necessary for their validity as provided by the Code of Commerce or special law, or b. Contracts executed abroad which require instruments, forms or formalities for their

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS validity, although Philippine law does not so require 3.

4.

5.

6.

7.

Unlawful Agreements These cannot serve as the basis of any obligation or cause of action even they involve commercial transactions Contracts through correspondence Contracts through entered into through correspondence shall be perfected from the time an answer is made accepting the proposition or the conditions by which the latter may be modified. Availment of indemnification clause The aggrieved party may take legal steps to demand (1) fulfillment of the contract or (2) the indemnity as provided in the contract. Standard Compliance It shall be executed and complied with in good faith according to the terms in which they are drafted, without evading the honesty, proper and usual meaning of written and spoken words with arbitrary interpretations, nor limiting the effects which are naturally derived from the manner in which the contracting parties may have explained their wishes and contracted their obligations Commencement date of effects of default – a. In contracts in which a day is fixed for their compliance by will of the parties or by law, on the day following the one they fall due b. In contracts in which no such day is fixed, (1)from the day on which the creditor legally makes demand upon the debtor or (2) notifies him of the protest of losses and damages made against him before a justice, notary or other public official authorized to admit the same

Joint Account Partnership or Joint Partnership It is a business arrangement whereby two or more persons interested themselves in the business of another making contribution thereto and participating in the results of the business. A joint account is a transaction of merchants where other merchants agree to contribute the amount of capital agreed upon, and participating in the favorable and unfavorable results thereof in the proportion they may determine. (UP law center)

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CODE OF COMMERCE

Common name Common fund Juridical personality Capacity to sue and be sued Liability of rd partners to 3 persons Liquidation

Joint account/ joint adventure None – it is in the name of the ostensible partner None

Commercial Partnership

None

Yes

Only in the name of the ostensible partner Only the ostensible partner Made by the ostensible partner

Transaction involved

Often limited to one transaction

Management

By the ostensible partner alone

Yes Yes

It may under the partnership name All general partners May be entrusted to a partner/s Continuing business of various transactions All partners participate unless there is a managing partner

Case x-ref (Heirs of Tan Eng Kee vs. CA 341S740)

B. LETTERS OF CREDIT (Code of Commerce Articles 567-572)

Letter of Credit It is a letter issued by one merchant to another for the purpose of attending to a commercial transaction (A. 567, Code of Commerce)

It is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in credit Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. (Prudential Bank vs. IAC GR no 74886 December 8, 1992)

Features 1. It may be formed without any formality and may be privately contracted orally or in writing 2. Only one ostensible member; others are silent 3. Only the ostensible partner can sue and be sued 4. No common name 5. No common fund

It is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS evidencing or attesting to the shipment of the goods to the buyer. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform to what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank. (Bank of America vs. CA GR no. 105395 December 10, 1993)

Stages 1. Contract of sale between the buyer and seller 2. Application for LC by the buyer with the bank 3. Issuance of LC by the bank 4. Shipping of goods by the seller 5. Execution of draft and tender of documents by the seller 6. Redemption of draft (payment) and obtaining of documents by the issuing bank 7. Reimbursement to the bank and obtaining of documents by the buyer Nature of letters of credit 1. It is an accessory contract. 2. It is NOT a negotiable instrument because it does NOT have all the requisites of negotiability. 

What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. (Ibid)

Essential conditions of a letter of credit 1. That it be issued in favor of a definite person and not to order 2. That it be limited to a fixed and specified amount or to one or more undeterminable amounts but within the maximum limits of which has to be stated exactly. 3. Duration a. 6 mos. if used in the Philippines or b. 1 year if used abroad, Unless the parties provide for a different period. 

It becomes VOID in fact and in law when it is not used within the period agreed upon or within the duration aforementioned as provided by law.

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CODE OF COMMERCE Parties to a letter of credit 1. Buyer/importer/applicant a. procures the letter of credit and b. obliges himself to reimburse the issuing bank upon receipt of the documents of title. 2. Issuing/opening bank a. issues the letter of credit and b. undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement. 3. Seller/exporter/beneficiary a. in compliance with the contract of sale ships the goods to the buyer and b. delivers the documents of title and draft to the issuing bank to recover payment 4. Advising/notifying bank  Correspondent bank of the opening bank through which it advises the beneficiary of the letter of credit  NOT liable for a breach of the LC; bound only to check the apparent authenticity of the LC 5. Confirming bank  Bank which confirms the LC issued upon the request of the beneficiary  Liable for a breach of the LC 6. Paying bank  Bank on which the drafts are to be drawn, which may be the opening bank or another bank NOT in the city of the beneficiary 7. Negotiating bank  Bank in the city of the beneficiary which buys or discounts the drafts contemplated by the LC, if such draft is to be drawn on the opening bank or on another designated bank NOT in the city of the beneficiary How the parties’ respective relationships are governed: 1. Bank and Importer/applicant  by the terms of the application and agreement for the issuance of letters of credit 2. Bank and Exporter/beneficiary  by the terms of the letter of credit issued by the bank 3. Applicant and Beneficiary  by the contract of sale Independent contracts in a letter of credit 1. Contract of sale between the buyer and the seller 2. Contract of the buyer with the issuing bank 3. LC proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein (with a pour atrui stipulation in favor of the seller) Independence principle The bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. (Bank of America supra)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS In the operation of a letter of credit, the involved banks deal only with documents and NOT on goods described in those documents. (Ibid, BPI vs. De Reny GR no. l-

Types of letters of credit

24821 October 16, 1970)

obligates the issuing bank to honor drafts drawn in compliance with the credit and can neither be cancelled nor modified without the consent of all parties, including the beneficiary

Rule of Strict Compliance Documents tendered by the seller/beneficiary must strictly conform to the terms of the LC. They must include all the documents required by the letter of credit. (Feati Bank vs. CA, April 30,1991).

A correspondent bank which departs from what has been stipulated under the letter of credit acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank the money thus paid to the beneficiary. (Ibid.) Fraud Exception Principle The untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as FRAUD sufficient to support an injunction against payment. The remedy of injunction is availing when the following are present: 1. Clear proof of fraud 2. Fraudulent abuse of the independent purpose of the LC (not fraud under the main agreement) 3. Irreparable injury might follow if injunction is not granted; or the recovery of damages would be seriously damaged. (Transfield Phil. Inc. vs. Luzon Hydro Corp., November 22, 2004)

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CODE OF COMMERCE

IRREVOCABLE

CONFIRMED issued by one bank can be confirmed by another, in which case both banks are obligated to honor drafts drawn in compliance with the credit

REVOLVING valid for several transactions over a given period of time

CUMULATIVE a revolving letter of credit in which case the undrawn amount amounts is carried over to future periods

REVOCABLE can be cancelled or amended at any time before payment; it is intended to serve as a means of arranging payment but not as a guarantee of payment

UNCONFIRMED obligation is only of the issuing bank

NON-REVOLVING valid for one transaction only

NON-CUMULATIVE a revolving letter of credit in which case any amount not used by the beneficiary during the specified period may not be drawn against a later period

BACK TO BACK LETTER OF CREDIT credit with identical documentary requirements and covering the same merchandise as another LC, except for a difference in the price of the merchandise as shown by the invoice and the draft; the second letter can be negotiated only after the first is negotiated

STANDBY LETTER OF CREDIT  a bank-issued option on a loan under the terms of which, the beneficiary has the right to “take down the loan” if the account party (party requesting for the issuance of SLC) fails to meets its commitment, in which case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer, account party  while SLCs are a security arrangement as they secure obligation of the borrowers to the lender, they are not converted thereby into contracts of guaranty. That would make them ulra vires acts, (as the banks are not allowed under sec 745 of the General Banking Act to enter into a contract of guaranty or suretyship except in certain instances) rather than a letter of credit which is within the powers of a bank. SLCs are primary obligations and not accessory contracts (Insular Bank of Asia and America vs. IAC November 17, 1988)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

BULK SALES LAW (Act No. 3952) Purpose of the law 1. To prevent the defrauding of creditors by the secret sale or disposal or mortgage in bulk of all or substantially all of a merchant’s stock of goods in bulk until the creditor of the seller shall have been paid in full 2. An exercise of the police power of the State (Liwanag vs. Mengraj, June 20, 1941)

Nature It is penal in nature and in derogation of the right to alienate property without restriction. Its provisions must be strictly construed against the State and liberally in favor of the accused. Sale and transfer in bulk It is any sale, transfer, mortgage or assignment, regardless of intent, whether done in good or bad faith, of: a. a stock of goods, wares, materials, provisions or merchandise OTHER THAN in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor or assignor or b. all or substantially all of the business or trade theretofore conducted by the above mentioned persons c. all or substantially all of the fixtures and equipment theretofore conducted by the business the vendor, mortgagor, transferor or assignor Goods contemplated: 1. STOCK  that which are kept for sale (common use of this term when applied to goods in a mercantile house) 2. MERCHANDISE  those that are usually bought and sold in trade by merchants  something sold everyday and is constantly going out of the store and being replaced by other goods 3. FIXTURES  such articles of merchandise usually possessed and annexed to the premises occupied by merchants to enable them beer to store, handle and display their wares although removable without material injury to the premises at or before the end of tenancy 

LANDS and BUILDINGS are NOT goods/ merchandise/ fixtures; these are NOT covered by the Bulk Sales Law.

COMMERCIAL LAW

7

BULK SALES LAW

Formal Requirements 1. Sworn written statement of the names and addresses of all creditors of the seller and respective amounts of debts to be furnished the buyer/mortgagee and submitted to the Bureau of Domestic Trade (DTI) before receiving the purchase price 2. Pro-rata application of the proceeds to the bona fide claim of creditors as shown in the verified statement ***Non-compliance with (1) and (2) is with criminal consequence. 3. Detailed inventory of stock to be sold or mortgaged 4. Notice to the creditors at least 10 days before the sale or transfer 5. Registration of the documents in Bureau of Domestic Trade (DTI) ***Non-compliance with (3,)(4) and (5) is with criminal consequence. Effect of failure to comply with the general scheme of the Bulk Sales Law The sale shall be NULL and VOID; it can be nullified by the creditors of the seller. The buyer merely becomes a trustee of such goods in behalf of the creditors, without prejudice to the right of the buyer to be reimbursed for the amount it paid and to any action he may have against the seller. If the buyer already has disposed of the goods, the buyer shall be made liable for the value of those disposed by him forming part of the bulk. Exempt from application of the Bulk Sales Law 1. When there is written waiver of the provision of the Bulk Sales Law from his creditors as shown by verified statements (Sec.2)  Effect of waiver: The buyer, mortgagee can be protected from future claims of creditors of the seller, transferor, or assignor 2. Sale or mortgage made in the ordinary course of business 3. Sale made by executors, administrators, receivers, assignees in insolvency, or public officers, acting under judicial process (Sec. 8) 4. Sale by assignee in insolvency or those beyond the reach of creditors 5. Sale or properties exempt from attachment or execution (Sec. 13, Rule 39, Rules of Court) Parties: 1. SELLER / MORTGAGOR a. Right  To recover the property sold/mortgaged b. Duties i. To return to the buyer/mortgagee the price delivered ii. To deliver to such vendee, mortgagee, or agent a written statement, sworn to substantially,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS 

the names and addresses of all creditors to whom said vendor or mortgagor may be indebted,  together with the amount of indebtedness due or owing , or to become due or owing to said creditors. iii. To make a full detailed inventory thereof and to preserve the same showing the quantity at least ten days before the sale, transfer of the goods iv. To notify every creditor whose name and addresses is set forth in the verified statement of the vendor at least ten days before transferring possession thereof of the price, terms condition of the sale, transfer, mortgage, or assignment. v. The sworn statement containing the names and addresses of all the creditors shall be registered in the Bureau of Commerce. vi. To apply the purchase or mortgage money to the pro rata payment of the bona fide of the creditors of the vendor or mortgagor c. Liabiliy  Criminal liability d. Remedies available to avoid liability i. Comply with the specified formalities ii. Obtain a written waiver from ALL the creditors 2.

3.

BUYER / MORTGAGEE a. Rights  Recover the price delivered PLUS damages  Right in the property as against the seller/mortgagor’s creditors b. Duty  To hold the property in trust for the seller or mortgagor c. Liabilities i. Personal liability for value of the property in trust if disposed ii. Possible criminal liability CREDITORS of seller/mortgagor a. Who are creditors?  All of the seller’s creditors at the time of the sale/mortgage  Creditors whose claims came into existence subsequent to the sale are entitled to the benefits of the statute; they need NOT be judgment creditors and their claim need NOT be due b. Rights i. To be justly paid in full ii. To file an action against the seller/mortgagor under the Bulk Sales Law iii. To collect on the credit against the debtor and to attach on the property

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BULK SALES LAW fraudulently sold/ mortgaged (Pp. vs Mapoy, 73 P 678)

c.

Remedies available i. Action against the goods to subject them to payment of a debt (execution, attachment, garnishment or proceeding in equity) ii. Ordinary action to obtain money judgment against the purchaser by the creditors in violation of the Bulk Sales Law if the purchaser has disposed of the property held in trust

Offenses punishable under the Bulk Sales Law 1. Failure to deliver to the vendee, mortgagee or to his agent or representative the sworn statement provided for 2. To transfer title to the same without consideration or for a nominal consideration only 3. Failure to apply the purchase or mortgage money of the said property to the pro rata payment of the bona fide claim or claims of the creditors 4. Incomplete, false or untrue sworn written statement; EFFECTS: a. Without knowledge of buyer  Buyer will be protected if the statement is fair upon its face  Remedy of creditor is to criminally prosecute the seller and NOT against the goods b. With knowledge or imputed knowledge of buyer  Buyer accepts at his own risk  Sale is valid between seller and vendor  Void as against the creditors c. With names of certain creditors without omitting notice  Sale is void as to such creditors d. With respect to an innocent purchaser for value from the original purchaser  Buyer is protected; creditor cannot pursue property Effects of violation(s) 1. Contract is a. Valid between the seller and buyer b. Valid between persons other than the creditors c. Void as to affected creditors of the seller/mortgagor 2. Purchaser acts as a trustee or receiver for the benefit of the creditors of the seller 3. Criminal liability, if expressly provided Penalty 1. imprisonment of not less the six months, nor more than five years, or 2. fine in a sum not exceeding five thousand pesos, or 3. both, in the discretion of the court

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

WAREHOUSE RECEIPTS LAW (Act no. 2137) Purposes 1. To regulate the status, rights and liabilities of the parties in a warehousing contract 2. To protect those who, in good faith and for value, acquire negotiable warehouse receipts by negotiation 3. To render the title o, and right of possession of, property stored in warehouses more easily convertible 4. To facilitate the use of warehouse receipts Applicability  To ALL warehouses, public/private, bonded or not  Articles 1507-1520 of the Civil Code apply in all other cases where receipts are NOT issued by a warehouseman. Definition of terms: 1. Warehouseman  person lawfully engaged in the business of storing goods for profit  only a warehouseman may issue warehouse receipts; those not issued by a warehouseman are NOT warehouse receipts. (Sec. 1)  but a duly authorized officer or agent of a warehouseman may validly issue a warehouse receipt (National Bank vs. Producer’s Warehouse Association, January 9, 1922)

2.

3.

4.

5.

Warehouse  the building or place where goods are deposited and stored for profit Warehouse receipts  written acknowledgement by a warehouseman that he has received and holds certain goods therein described in store for the person to whom it is issued; a written contract between the owner of the goods and the warehouseman to pay the compensation for that service Non-negotiable receipts  receipt in which it is stated that the goods received will be delivered to the depositor, or to any other specified person Negotiable receipts  receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt

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WAREHOUSE RECEIPTS LAW

Functions of warehouse receipts 1. They are simple CONTRACTS evidencing the underlying contract of deposit/carriage. 2. They are EVIDENCE of receipt of goods. 3. Under A.1636 of the New Civil Code, they are DOCUMENTS OF TITLE to goods. Contents 1. Location of the warehouse where goods are stored 2. Date of issue of the receipt  3. Consecutive number of the receipts 4. Statements whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his order 5. Rate of storage charges 6. Description of the goods or of the packages containing them  The mere fact that the goods deposited are incorrectly described does not make ineffective the receipt, when the identity of the goods is fully established by evidence. Its indorsement and delivery shall constitute a sufficient transfer of the title of the goods. (American Foreign Banking Corporation vs. Herridge, December 20, 1924)

7. 8. 9.  

Signature of the warehouseman which may be made by his authorized agent Warehouseman’s ownership of or interest in the goods Statement of advances made and liabilities incurred These are required for the protection of the depositor and those succeeding to his rights. If the warehouseman omits any of the required information and injury is caused thereby to a person: (a) the warehouseman shall be liable to the said person for ALL damages caused by such omission (b) the validity and negotiability of the receipt are NOT affected (c) the contract is converted to ordinary deposit (Gonzales vs. Go Fiong & Luzon Surety Co., August 30, 1958)

Inclusion of other terms  General Rule: The warehouseman may insert any other terms and conditions.  Exceptions: 1. Those contrary to the provisions of the Warehouse Receipts Law 2. Those contrary to law, morals, good customs, public order or public policy 3. Those exempting the warehouseman from liability for misdelivery or for not giving statutory notice in case of sale of the goods 4. Those exempting the warehouseman from liability for negligence 5. Those which may impair the obligation of the warehouseman to exercise that degree of care in the safekeeping of goods entrusted to him

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS Degree of care required of a warehouseman in the safekeeping of goods entrusted to him The warehouseman is required to exercise that degree of care which a reasonably careful man would exercise in regard to similar goods of his own. Form Generally, the warehouse receipt is not required to be in any particular form. However it should contain the above cited contents. Negotiability of warehouse receipts 1. Warehouse receipts are NOT negotiable instruments under the Negotiable Instruments Law. 2. The warehouse receipt is negotiable under this Act; in the passage of the warehouse receipts through the channels of commerce, the law regards the property which they describe as following them and gives to their regular transfer by endorsement the effect of manual delivery of the things specified in them. 3. No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision, if inserted, shall be void. Negotiable Instruments The subject is money The instrument itself is the object of value Intermediate parties become secondarily liable

Deliberate alteration makes it null and void

If originally a bearer instrument, it will remain as such Holder in due course may obtain a better title

Warehouse Receipt The subject is merchandise The goods are the object of value Intermediate parties are NOT liable for the warehouseman’s failure to deliver the goods. Valid if altered BUT enforceable only in accordance with its original tenor Converted to an order instrument IF specially indorsed HDC obtains only the title which the party negotiating had over the goods

Kinds of receipts a warehouseman may issue 1. NON-NEGOTIABLE  one which provides that the goods will be delivered to the depositor or to any other specified person  should be stamped on its face “non-negotiable”; otherwise, a holder believing it to be negotiable may treat it as such (Sec. 7)  acquired through transfer and assignment, NOT through negotiation; vests the transferee with the ff. rights: a. right of title to the goods, as against the transferor b. right to notify the warehouseman of the transfer and acquire the direct obligation of the warehouseman to hold the goods for him

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WAREHOUSE RECEIPTS LAW 

2.

goods represented can be subject to attachment or levy by execution (Sec.42)

NEGOTIABLE  one which that the goods will be delivered to the bearer or to the order of any person named in the receipt  failure to mark it as “negotiable” does NOT render it non-negotiable for as long as it contains words of negotiability (Sec. 5)  acquired through negotiation; vests the holder with the ff. rights: a. right of title to the goods of: i. the person negotiating the receipt ii. the person to whose order the goods were to be delivered b. right to have the warehouseman directly obligated to hold possession of the goods for him, as if the warehouseman directly contracted with him  goods represented cannot be subject to attachment or levy by execution UNLESS in proper circumstances (Sec.49)  when more than one is issued for the same goods, the word “duplicate” should be placed upon the face of every receipt, except on the first one issued; otherwise, the warehouseman shall be liable to a holder for value even after delivery is made to the holder of the original receipt (Sec.6)

Advantages of a negotiable receipt from a nonnegotiable receipt 1. It protects a purchaser for value and in good faith 2. The goods covered by the receipt cannot be garnished or levied upon under execution unless it is surrendered, impounded or its negotiation enjoined; 3. In case of negotiation, the holder acquires the direct obligation of the warehouseman to hold possession of the goods for him without notice to such warehouseman. 4. The goods it covers are not subject to seller lien or stoppage in transit NEGOTIATION (Negotiable warehouse receipts) A. HOW NEGOTIATED 1. DELIVERY, when the goods are deliverable to a) the bearer, or b) a specified person or order, and the latter or a subsequent indorsee indorses it in blank or to bearer 2. INDORSEMENT + DELIVERY  If the receipt is indorsed to a specified person, it becomes an order receipt and negotiation can only be effected by the indorsement of such person in blank, to bearer or to another specified person  Delivery alone is not sufficient  Effects of delivery without indorsement: a) Transferee acquires title against transferor

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

3.

b) Transferee can compel the transferor to complete the negotiation by indorsement c) Warehouseman has no direct obligation PLEDGE  Negotiation of a receipt may also be by way of pledge; as to the legal title to the property covered by a warehouse receipt, a pledge is on the same footing as a vendee EXCEPT that the former is under obligation of surrendering his title over the goods upon payment of the debt secured. (BPI vs. Herridge, December 20, 1924)  BUT the pledgee or mortgagee does NOT automatically become the owner of the goods, but merely retains the right to keep them and sell them (with consent of the owner) so as to satisfy the obligation from the proceeds (PNB vs. Sayo, July 9, 1998) 

If the property is lost without the fault or negligence of the pledgee or mortgagee, it is regarded as lost on account of the real owner, mortgagor or pledgor

B. WHO MAY NEGOTIATE 1. Owner 2. Any person to whom the possession or custody of the receipt has been entrusted by the owner IF a) by the terms of the receipt, the goods are deliverable to the order of the person to whom the possession/custody of the receipt has been entrusted, or b) the receipt is in such form that it may be negotiated by delivery 3. Even a thief or fraud can negotiate the receipt if it is in such a form that he need not forge any signature (bearer instrument). C. EFFECTS 1. Negotiation produces the effect of delivery: the transferee becomes the owner of the goods. 2. Negotiation carries with it BOTH title to and possession of the property. D. RIGHTS 1. Person to whom a negotiable receipt has been negotiated: (Sec41) a. The title of the person negotiating the receipt over the goods covered by the receipt; b. The title of the person (depositor or owner) to whose order by the terms of the receipt the goods were to be delivered over such goods; and c. The direct obligation of the warehouseman to hold possession of the goods for him, as if the warehouseman directly contracted with him. 2. Transferee of a negotiable receipt delivered WITHOUT endorsement: (Sec43) a. The right to the goods as against the transferor; and b. The right to compel the transferor to indorse the receipt  The negotiation shall take effect as of the time when the endorsement is actually made.

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WAREHOUSE RECEIPTS LAW 

The endorsement of a receipt shall not make the endorser liable for any failure on the part of the warehouseman or previous endorsers of the receipt to fulfill their respective obligations. (Sec45)

E. WARRANTIES OF THE PERSON NEGOTIATING/ TRANSFERRING 1. That the receipt is genuine 2. That he has legal right to negotiate/transfer it 3. That he has NO knowledge of defects that may impair the validity or worth of the receipt 4. That he has a right to transfer title to the goods and that the goods are merchantable or fit for a particular purpose whenever such warranties would have been implied, if the contract of the parties had been to transfer without a receipt of the goods represented thereby 



F.

The indorser does NOT warrant the warehouseman’s complicity with the latter’s duties. A holder for security who in good faith accepts payment of a debt does NOT warrant: a. The genuineness of the receipt b. The quality or quantity of the goods described therein

WARRANTIES IN DUPLICATE RECEIPTS Sec 15 provides that if the term “duplicate’ is indicated in the receipts it warrants the ff: a. That the duplicate is an accurate copy of the original receipt; and b. Such original receipt is uncancelled at the date of the issue of the duplicate

G. EFFECT OF VENDOR’S LIEN Where a negotiable receipt has been issued for the goods: a. No seller’s lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated whether it be prior or subsequent to the notification to the warehouseman who issued such receipt; b. The warehouseman shall NOT be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation. TRANSFER (Non-negotiable warehouse receipts) A. HOW TRANSFERRED/ASSIGNED  Delivery to the transferee accompanied by a deed of assignment, donation or other form of transfer B. TO WHOM DELIVERED 1. Depositor 2. Any other specified person C. NON-NEGOTIABLE MARK  A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it as “nonnegotiable” or “not negotiable”

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS 

Failure to do so, the holder of the receipt believing it to be negotiable may, AT HIS OPTION, treat it as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable

3.

D. RIGHTS OF THE TRANSFEREE (Sec42) 1. The title to the goods as against the transferor; 2. The right to notify the warehouseman of the transfer thereof; and 3. The right, thereafter, to acquire the obligation of the warehouseman to hold the goods for him.  The right of the transferee is not absolute as it is subject to the terms of any agreement with the transferor. He merely steps into the shoes of the transferor. Rights of a warehouseman 1. To be paid 2. To exercise his lien on the goods deposited in case of non-payment 3. To refuse delivery in proper legal circumstances 4. Obligations of a warehouseman A. To issue a warehouse receipt in the required form for goods received, and mark them accordingly (i.e. nonnegotiable, duplicate) B. To exercise reasonable diligence towards such goods C. To insure the goods in the following circumstances: 1. Where the law provides; 2. Where it was an inducement for the depositor to enter into the contract; 3. Where it is an established practice 4. Where the warehouse receipt contains a representation to that effect D. To give up the proper notice in case of sale of the goods, as provided E. To NOT commingle the goods deposited UNLESS they are fungible and of the same kind and grade (coownership applies) F. To deliver the goods to the person lawfully entitled 1. A warehouseman is bound to deliver the goods UPON A DEMAND made either by: a. The person lawfully entitled to the possession of the goods or his agent (e.g. buyer in an auction sale, donee of the goods) b. A person who is entitled to delivery by the terms of the non-negotiable receipt or who has written authority from the person so entitled either indorsed or written upon another paper c. A person in possession of a negotiable receipt 2. Such demand must accompanied by: a. an offer to satisfy the warehouseman’s lien b. an offer to surrender the receipt, if negotiable with such endorsements as would be necessary for negotiation of the receipts c. a readiness and willingness to sign, when the goods are delivered, an acknowledgment that the goods had been delivered

12

WAREHOUSE RECEIPTS LAW Ownership is NOT a defense for the refusal to deliver goods  When the warehouseman has rendered it beyond his power to deliver the goods, demand may be dispensed with. (A.1169,NCC)  Refusal or failure to deliver: the burden shall be upon the warehouseman to establish the existence of a lawful excuse for the refusal.  Neither can the warehouseman, as a depositary for hire, set up an adverse title in another as an excuse for his failure to deliver the property to his bailor on demand. (Sec.19)  DOCTRINE OF ESTOPPEL: The warehouseman cannot refuse to deliver the goods on the ground that he has acquired title or right to the possession of the same unless such title or right is derived: a. Directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent thereto; b. From the warehouseman’s lien. (Sec.16) The warehouseman may legally refuse to deliver goods in the following circumstances: a. When the holder of the receipt does NOT satisfy the conditions prescribed in Section 8 of the Act b. When the warehouseman has legal title in himself on the goods, such title or right being derived directly or indirectly from the transfer made by the depositor at the time or subsequent to the deposit for storage, or from the warehouseman’s lien (Sec.16) c. If the warehouseman had been requested by a person lawfully entitled to a right of property or possession in the goods NOT to make delivery to any person (Sec.10) d. If he had information that the delivery to be made was to one NOT lawfully entitled to the possession of the goods (Sec.10) e. Where the goods have already been lawfully sold to third persons to satisfy the warehouseman’s lien; or disposed of because of their perishable or hazardous nature (Sec.36) f. In case of adverse claimants (Secs.17 and 18) g. In the valid exercise of the warehouseman’s lien (Sec.31) h. Delivery to a claimant with a better right i. Attachment/levy of the goods by a creditor where the document is surrendered/ impounded or its negotiation enjoined (Sec.25)

j.

Where the document of title is attached by a creditor (Sec.26) k. Failure was not due to any fault of the warehouseman (Sec.26) G. To take up and cancel the warehouse receipt when the goods are delivered

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Liabilities of a warehouseman A. Liability for misdelivery or conversion 1. A warehouseman would be liable for misdelivery or conversion if he delivers the goods to one who is not in fact lawfully entitled to the possession of the goods  Conversion is an unauthorized assumption and exercise of the right of ownership over goods belonging to another through the alteration of their condition or exclusion of the owner’s right. 2. He would also be liable for misdelivery even if he delivers to a person holding a non-negotiable receipt or a negotiable receipt if prior to such delivery he had either: a. Been requested, by or on behalf of the person lawfully entitled to a right or property or possession in the goods, not to make such delivery; or b. Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods 3. Steps a warehouseman may take to protect him from misdelivery: a. He could ascertain the validity of the adverse claim or to bring legal proceedings to compel claimants to interplead (sec 17) b. He may require the claimants to interplead (sec 18)

B. Liability for alteration of receipts 1. If the alteration is IMMATERIAL, that is, the tenor of the receipt is not changed, whether fraudulent or not, authorized or not, the warehouseman is liable on the altered receipt according to its original tenor 2. If the alteration is MATERIAL, that is the tenor of the receipt is changed, but authorized, the warehouseman is liable according to the terms of the receipt as altered. 3. If the alteration is MATERIAL BUT INNOCENTLY MADE THOUGH UNAUTHORIZED, the warehouseman is liable on the altered receipt according to its original tenor; and 4. If the alteration is MATERIAL AND FRAUDULENTLY MADE, the warehouseman is liable according to the original tenor of the receipt to a purchaser of the receipt for value without notice and even to the alterer and subsequent purchases with notice. C. Liability for lost or destroyed receipts If the receipt is claimed to have been lost or destroyed, it is essential that the court shall pass upon the question and make sure that the receipt is really lost or destroyed before the goods are delivered or a new receipt is issued; a competent court may order the delivery of the goods only: 1. Upon proof of the loss or destruction of the receipt; and 2. Upon the giving of a bond with sufficient sureties to be approved by the court

COMMERCIAL LAW

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WAREHOUSE RECEIPTS LAW

D. Liability as to duplicate 1. Failure to place the word “duplicate” in a duplicate receipt will make the warehouseman liable for all the damages to anyone who purchased such receipt believing it to be an original, even if the purchase be after the delivery of the goods by the warehouseman to the holder of the original receipt. (Sec 6) 2. He shall be guilty of a crime punishable by fine or imprisonment, or both, if he issues a duplicate or additional negotiable receipt for goods knowing that a former negotiable receipt for the same goods or any part of then is outstanding or and uncancelled, without plainly placing upon the face of the receipt the word duplicate, EXCEPT in the case of a lost or destroyed receipt after proceedings. E. Liability to rightful claimants 1. INTERPLEADER – this is a remedy given to the warehouseman in case there is more than one person who claims title or possession of the goods either as a defense to an action brought against him for nondelivery or as an original suit; this would require the different claimants to litigate among themselves. 2. Sec.18 provides that if someone other than the depositor or person claiming has a claim to the title or possession of the goods, the warehouseman shall be excused from liability for refusing to deliver the goods until he has a reasonable time to ascertain the validity of the adverse claim or bring legal proceedings to compel claimants to interplead. F. Liability for non-existence or misdescription of goods  GR: The warehouseman is under obligation to deliver the identical property stored with him and if he fails to do so, he is liable directly to the owner or holder of a receipt for damages.  EXC: If the description consists merely of marks or labels upon the goods or upon the packages containing them, the warehouseman is not liable even if the goods are not of the kind as indicated in the marks or labels. G. Liability for loss due to lack of care  GR: The warehouseman is required to exercise ordinary or reasonable care in the custody of goods, that is, the care a reasonably careful owner would exercise over similar goods of his own. This is the “diligence of a good father of a family”  EXC: In the absence of any agreement to the contrary, the warehouseman is not liable for any loss or injury to the goods which could not have been avoided by the exercise of such care. H. Liability to depositors of commingled goods  PURPOSE: to permit at all times the identification and redelivery of the goods deposited  GR: A warehouseman shall keep the goods so far separate from goods of other depositors, and from other goods of the same depositor for which a separate receipt has been issued.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 

I. 



J.





EXC: 1. If authorized by agreement or by custom, or 2. If the goods are fungible goods with other goods of the same kind and grade. a. The various depositors of the mingled goods shall own the entire mass in common and each depositor shall be entitled to such portion as the amount deposited by him bears to the whole. b. The warehouseman shall be severally liable to each depositor for the care and redelivery of his share of such mass to the same extent and under the same circumstances as if the goods had been kept separate. Liability for failure to mark a receipt intended to be non-negotiable as “non-negotiable” The holder of the receipt believing it to be negotiable may, at his option, treat it as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable. The “holder” referred herein cannot be the original holder because, as the depositor, he is presumed to know whether he is getting a negotiable or a non0negotiable receipt. Failure to take up and cancel a negotiable receipt when goods are delivered, OR failure to take up and cancel a negotiable receipt or to place upon it a statement of what goods have been delivered, when the goods are partly delivered GR: The warehouseman shall be liable for failure to deliver the goods to any one who purchases for value in good faith such receipt whether the purchaser acquired title to the receipt before or after delivery of the goods by the warehouseman. He shall also be guilty in such case of crime punishable by fine or imprisonment. Exceptions: 1. Where the goods have been lawfully sold to satisfy a warehouseman’s lien; or 2. Where the goods have been lawfully sold or disposed of because of their perishable or hazardous nature.

K. Liability for issuing receipts for goods not received by him or are not under his actual control at the time of issuance of the receipt L. Liability for issuing receipts for the warehouseman’s goods which do not state that fact  A warehouseman shall be guilty of a crime punishable by fine or imprisonment, or by both, if he issues a negotiable receipt for the same goods deposited with or held by him of which he knows he is the owner, solely or jointly or in common with others, if he fails to state such ownership in the receipt

COMMERCIAL LAW

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WAREHOUSE RECEIPTS LAW M. Liability for delivery of goods without obtaining negotiable receipt or knowing that a negotiable receipt is outstanding and uncancelled  Exceptions: 1. Where the goods have been lawfully sold to satisfy a warehouseman’s lien or 2. The goods have been lawfully sold or disposed of because of their perishable or hazardous nature or 3. In case of lost or destroyed receipt after proceedings Attachment or levy of goods deposited A. Negotiable receipt  The warehouseman has the direct obligation to hold possession of the goods for the original owner or for the person to whom the negotiable receipt of title has been duly negotiated.(Sec 41)  GR: While in possession of such, the goods CANNOT be attached or levied upon under an execution unless: 1. The document be first surrendered; or 2. The negotiation is enjoined; 3. The document is impounded by the court.  EXCEPTIONS: 1. If the person depositing is not the owner of the goods or one who has no right to convey title to the goods binding upon the owner; 2. Actions for recovery or manual delivery of goods by the real owner; 3. Cases where the attachment is made before the issuance of the negotiable receipt of title  A creditor whose debtor is the owner of a negotiable receipt CAN attach the negotiable receipt in the debtor’s possession and NOT the goods covered by such receipt. (Sec.26) This provision expressly gives the court full power to aid by injunction and otherwise a creditor seeking to get a negotiable receipt covering such goods.  The prohibition is for the protection of the warehouseman since he could be made liable to a subsequent purchaser for value in good faith. B. Non-negotiable receipt  The goods can be attached, provided it is done prior to the notification of the warehouseman of the transfer (Sec.42)  Absent such notice, both the warehouseman and the sheriff have a right to assume that the goods are still owned by the person whose name appears in the receipt. The warehouseman’s lien A. Extent  The warehouseman has a lien on goods deposited or on the proceeds thereof in his hands for: 1. All lawful charges for storage and preservation of the goods 2. All lawful claims for money advanced, interest, insurance, transportation, labor, weighing, cooperating and other charges or expenses in relation to the goods

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 3.



All reasonable charges and expenses for notice and advertisements of sale, and 4. Sale of goods where default has been made in satisfying the warehousing lien. The warehouseman’s lien over the goods deposited with him is his security for the payment of the charge, money advanced and other expenses.

B. Against what enforced  The warehouseman’s lien can be enforced against: 1. The goods of the depositor who is liable to the warehouseman as debtor whenever such goods are deposited; and 2. The goods of other persons stored by the depositor who is liable to the warehouseman as debtor with authority to make a valid pledge.  Purpose of the law: to give the warehouseman a lien for charges against goods of persons who are primarily liable for the charge incurred, and who by their agreement create the relation of debtor and creditor.

b.

C. Remedies for enforcement 1. Refusing to deliver the goods until the lien is satisfied; 2. Causing the extrajudicial sale of the property and applying the proceeds to the value of the lien; and 3. Filing a civil action for the unpaid charges or by way of counterclaim in an action to recover the property from him.  Whether a warehouseman has or has not lien upon the goods, he is entitled to all remedies allowed by law to a creditor against his debtor, for the collection from the depositor of all the charges and advances which the depositor has expressly or impliedly contracted with the warehouseman to pay. (Sec 32)

c.

D. Loss  The lien may be lost by: 1. Surrendering possession of goods  a warehouseman loses his lien upon the goods by voluntary surrendering the possession without requiring payment of the lien, it will be presumed that the lien has been waived or abandoned where the warehouseman permits a depositor to remove the goods BUT NOT where the property is taken without warehouseman’s consent or by force 2. Wrongfully refusing to deliver goods when demand is made with which he is bound to comply under provisions of Sec.8

e.

E. Satisfaction by sale 1. PROCEDURE: (Sec.33) a. The warehouseman shall give a WRITTEN NOTICE to the person on whose account the goods were held or to any person who has a claim or interest in the goods. The notice shall be given either by delivery in person or by registered mail to the last known place of

15

WAREHOUSE RECEIPTS LAW

d.

f.

g.

2. 



business or abode. The notice shall contain the following: i. An itemized statement of the warehouseman’s claim, the sum due and the date(s) when it became due. ii. A brief description of the goods against which the lien exists. iii. A demand that the amount of the claim shall be paid on or before a day mentioned (not less than 10 days from the delivery of the notice if personally delivered or from the time when the notice should reach its destination if the notice is sent by mail) iv. A statement that unless the claim is paid within the time specified, the goods will be advertised for sale and sold by auction at a specified time and place. In accordance with the terms of the notice, a sale of the goods by auction may be had to satisfy any valid claim of the warehouseman for which he has a lien over the goods. After the time for payment ahs elapsed, an advertisement of the sale, describing the goods to be sold and stating the name of the owner or person on whose account the goods has been held and the time and place of the sale. The ad shall be published once a week for two consecutive weeks in a newspaper published in the place where the sale shall be held. It can be in the place where the lien was acquired or if such place is manifestly unsuitable, at the nearest suitable place.  If there is no newspaper published in such place, the advertisement shall be posted at least 10 days before such sale in not less than six (6) conspicuous places therein. The sale shall be held not less than 15 days from the time of the first publication. From the proceeds of the sale the warehouseman shall satisfy his lien including the reasonable charges of notice, advertisement and sale. The balance, if any, shall be held by the warehouseman, and delivered on demand to the person to whom he would have been bound to deliver the goods.

EFFECT The warehouseman shall not thereafter be liable for failure to deliver the goods to the depositor or owner of the goods even if such receipt be negotiable. In cases of perishable and hazardous goods, the warehouseman may give notice to the owner, or to the person in whose name the goods are stored, to satisfy the lien upon such goods and to remove them from the warehouse. Failure to do so may entitle the warehouseman to sell the goods at public or private sale without advertisements. In case he was unable to sell, he may dispose of them in any lawful manner, and shall incur no liability by reason thereof.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 

Perishable and hazardous goods are goods which by keeping will deteriorate greatly in value, or by odor, leakage, inflammability or explosive nature and will make warehouseman liable in case it will injure other property.

COMMERCIAL LAW

16

WAREHOUSE RECEIPTS LAW he afterwards negotiates for value without disclosing his want of title or existence of the lien or mortgage.  LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding P2,000.00, or by both.

Effect of subsequent negotiation by seller of a receipt  There is a duty upon the purchaser, mortgagee, or pledgee of goods for which a negotiable receipt has been issued, to require the negotiation of the receipt to him; otherwise, his failure will have the same effect as an express authorization on his part to the seller, mortgagor or pledgor in possession of such receipt to make any subsequent negotiation. Criminal Offenses: Who are liable 1. Warehouseman, or any officer, agent or servant of the warehouseman, who issues or aids in issuing a receipt knowing that the goods have not actually been received or are not under his actual control at the time of issuing of such receipt  LIABILITY: Imprisonment not exceeding 5 yrs or by a fine not exceeding P10, 000.00, or by both. 2.

Warehouseman, or any officer, agent or servant of warehouseman, who fraudulently issues or aids in fraudulently issuing a receipt for goods knowing that it contains any false statements  LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding P2,000.00, or by both.

3.

Warehouseman, or any officer, agent or servant of warehouseman, who issues or aids in issuing a duplicate or additional negotiable receipt for goods knowing that a former negotiable receipt for the same goods is outstanding and uncancelled, without plainly placing “duplicate” (except in case of loss or destroyed receipts)  LIABILITY: Imprisonment not exceeding 5 yrs, or by a fine not exceeding P10,000.00, or by both.

4.

If there are goods deposited or held by the warehouseman as an owner, either solely or jointly with others: that warehouseman, or any officer, agent or his servant, knowing such ownership who, issues or aids in issuing a negotiable receipt not stating such ownership.  LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding P2,000.00, or by both.

5.

Warehouseman, or any officer, agent or servant of warehouseman, who delivers goods out of the possession of such warehouseman, knowing that a negotiable receipt is outstanding and uncancelled, without obtaining the possession of such receipt at or before the time of delivery  LIABILITY: Imprisonment not exceeding 1 yr, or a fine not exceeding P2,000.00, or by both.

6.

Any person who deposits goods to which he has no title, or upon which there is a lien or mortgage, and who takes, for such goods a negotiable receipt which

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

17

GENERAL BONDED WAREHOUSE ACT

GENERAL BONDED WAREHOUSE ACT (ACT NO 3893 as amended by RA 247)

2.

Purposes of the law 1. To protect depositors by giving then recourse in case of the insolvency of the warehouseman against the bond filed by him  To achieve this purpose, any person who wants to engage in the business of receiving commodities for storage is required by the Act to first secure a license therefore from the Department of Trade and Industry. 2. To regulate the business of receiving commodities for storage 3. To encourage the establishment of more warehouse

3.

GENERAL BONDED WAREHOUSE ACT

WAREHOUSE RECEIPTS LAW

Regulates and supervises warehouses which put up a bond

Prescribes the mutual duties and rights of a warehouseman who issues warehouse receipts, and his depositor; covers all warehouses, whether bonded or not

A warehouseman is a person engaged in the business of receiving commodity for storage.

A warehouseman is a person lawfully engaged in the business of storing goods for profit

Applicability 1. Warehouseman engaged in the business of receiving commodity for storage, 2. Including contracts or transactions wherein: a. The warehouseman is obligated to return the very same commodity delivered to him or to pay its value b. The commodity delivered is to be milled for the owner thereof c. The commodity delivered is commingled with the commodity belonging to other persons, and the warehouseman is obligated to return commodity of the same kind or to pay its value Commodities which may be stored in a bonded warehouse  Generally, these commodities could be any raw, processed, manufactured or finished product or byproduct, goods, article, or merchandise, either domestic or of foreign production or origin, which may be traded or dealt in openly and legally.  Prohibited substances, the possession of which is prohibited by law, may NOT be validly received for storage in a bonded warehouse. Bond required to be put by the warehouseman 1. The bond may either be cash or property bond or bond issued by a duly authorized bonding company

The amount of the bond must not be less than 33 1/3% of the market value of the maximum quantity of the commodity to be received by the warehouseman. It shall be conditioned as to respond for the market value of the commodity actually delivered and received at any time by the warehouseman in case the latter is unable to return the commodity or to pay its value.

Duties of a bonded warehouseman 1. To secure a license from the Bureau of Domestic Trade (DTI); 2. To give the necessary bond; 3. To insure the commodity received for storage against fire; 4. To receive for storage any commodity: a. of the kind customarily stored by him in the warehouse, b. so far as his license or the capacity of the warehouse will permit, c. without making any discrimination between persons desiring to avail themselves of warehouse facilities  A fine for double the market value of the commodity so received is imposed in case of excess of the authorized quantity. (Sec.12) 5. To keep complete record of all commodities received by him, of the receipts issued therefore, of the withdrawals, of the liquidation, and of all receipts returned to and canceled by him; 6. To observe the rules and regulations of the Bureau of Domestic Trade (DTI) Right of a person injured by the breach by the warehouseman of any of his obligation under the act:  He may sue on the bond put up by the warehouseman to recover the damages he may have sustained on account of such breach.  In case the bond given is not sufficient to cover the full market value of the commodity stored, he may sue on any property or assets of the warehouseman not exempt by law from attachment and execution. Offenses penalized under the act A. Civil - Breach of obligations secured by the bond B. Criminal 1. Engaging in the business of receiving commodities for storage without the proper license 2. Receiving a quantity of commodity greater that that specified in the license of the warehouseman 3. Conniving or entering into a combination with an unlicensed warehouseman for the purpose of avoiding compliance with the requirement of obtaining a license before engaging in the business of receiving commodities for storage

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS

TRUST RECEIPTS LAW

TRUST RECEIPTS LAW (PD 115) Purposes 1. To encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade 2. To regulate trust receipts transactions in order to assure the protection of the rights and the enforcement of the obligations of the parties involved therein 3. To declare the misuse or misappropriation of goods or the proceeds realized from the sale of goods released under trust receipts as an offense punishable under A.315 of the Revised Penal Code 4. To punish the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether or not the latter is the owner Other purposes 1. In the case of goods or documents a. To sell the goods or procure their sale; b. To manufacture or process the goods with the purpose of ultimate sale (here the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt) or c. To load, unload, ship or transship or otherwise deal with them in a manner preliminarily or necessary to their sale 2. In the case of instruments a. To sell or procure their sale or exchange; or b. To deliver them to a principal; or c. To effect the consummation of some transaction involving delivery to a depository or register; or d. To effect their presentation, collection or renewal Constitutionality/Validity  The Court has consistently declared that it does NOT violate the constitutional proscription against imprisonment for non-payment of debts.  The Trust Receipts Law is a declaration by the legislative authority that, as a matter of public policy, the failure of a person to turn over the proceeds of the sale of goods covered by a trust receipt or to return said goods if not sold is a public nuisance to be abated by the imposition of penal sanctions. (Tiomico vs. CA, March 4, 1999)



It does NOT seek to enforce payment of a loan. The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible.

18

Trust Receipt It is a written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provision of the decree. Trust Receipt Transaction It is any transaction by and between an entruster and entrustee, whereby the entruster, who owns or holds absolute title over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a trust receipt. Parties to a trust receipt transaction: 1. ENTRUSTEE - Borrower/buyer/importer - person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor-in-interest of such person for the purpose(s) specified in the trust receipt agreement - owner of the goods purchased 2. ENTRUSTER - Lender/financier - person holding title over the goods, documents, or instruments subject of a trust receipt transaction and any successor-in-interest of such person - mere holder of security interest and NOT the owner of the goods  Security Interest – a property interest in goods, documents or instruments to secure performance of some obligation of the entrustee or of some third person  Seller of the goods is a party to the contract of sale with the buyer/importer, NOT a party to the trust receipt transaction Form and contents of the trust receipt A trust receipt need not be in any particular form, BUT every such receipt must substantially contain the following: 1. A description of the goods, documents or instruments subject of the trust receipt; 2. The total invoice value of the goods and the amount of the draft to be paid by the entrustee; 3. An undertaking or a commitment of the entrustee to: a. Hold in trust for the entrustee the goods, documents or instruments therein described; b. Dispose of them in the manner provided for in the trust receipt; and c. Turn over the proceeds of the sale to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or return the same in the event of non-sale within a specified period.  The trust receipt may contain other terms and conditions agreed upon by the parties provided that such shall not be contrary to the provisions of this

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

TRUST RECEIPTS LAW

law, any existing laws, public policy or morals, public order or good customs. Denominated currency of the trust receipt The trust receipt may be in: 1. Philippine currency or 2. Any foreign currency acceptable and eligible as part of international reserves of the Philippines. In case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the date the proceeds of the sale are turned over to the entruster. Rights of the parties A. Entrustee (Borrower/Buyer/Importer) 1. To receive the surplus from the public sale 2. To have possession of the goods as a condition for his liability under this law B. Entruster (Lender/Financier) 1. The entruster shall be entitled to the following: a. Proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee b. Return of the goods, documents or instruments in case of non-sale and c. Enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this decree. 2. May cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt; or 3. On or after default, give notice to the entrustee of the intention to sell, and may, not less than 5 days after serving or sending of such notice, sell the goods at a public or private sale, and the entruster may, at a public sale, become a purchaser. 4. The entruster’s security interest in goods, documents or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. 5. The entruster holding a security interest shall NOT, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction, be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. 

Right of purchaser in good faith Any purchaser of goods, documents or instruments, who buys such for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster’s security interest.

19

Obligations of the parties A. Entrustee (Borrower/Buyer/Importer) 1. Hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; 2. Receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt; 3. Insure the goods for their total value against loss from fire, theft, pilferage or other casualties; 4. Keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of entruster; 5. Return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and 6. Observe all other terms and conditions of the trust receipt not contrary to the provisions of this decree. B. Entruster (Lender/Financier) 1. Give possession of the goods to the entrustee; and 2. Give at least 5 days notice to the entrustee of the intention to sell the goods at an intended public sale Liabilities of the parties A. Entrustee (Borrower/Buyer/Importer) 1. CIVIL: a. Liability for loss  Loss pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall NOT extinguish his obligation to the entruster for the value thereof. b. Liability for damages under A.33 of the NCC; because it is malum prohibitum, there is no need of proof of intent to defraud 2. CRIMINAL: Estafa  If there is failure on the part of the entrustee to turn over the proceeds of the sale or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt.  If a corporation, partnership, association or other juridical entities commit the violation; the penalty shall be imposed upon the directors, officers, employees or other officials responsible for the offense. 

The breach of obligation under a trust receipt agreement is separate and distinct from any criminal liability for misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts, punishable under Sec.13 of the Trust Receipts Law in relation to A.315(1)(b) of the RPC. Being based on an obligation ex contractu and not ex

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

TRUST RECEIPTS LAW

20

delicto, the civil action may proceed independently of the criminal proceedings instituted against petitioners regardless of the result of the latter. (Sarmiento, Jr. vs CA, December 27, 2002)

B. Entruster (Lender/Financier)  NO liability under any sale or contract to sell made by the entrustee Public sale of the goods by the entruster 1. Notice of the sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee’s last known address. 2. The proceeds of such sale, whether public or private, shall be applied to the following: a. Payment of the expenses thereof; b. Payment of the expenses of re-taking, keeping and storing of goods, documents or instruments; c. Satisfaction of the entrustee’s indebtedness to the entruster. 3. Excess/Deficiency a. Excess (surplus) – entrustee is entitled to it b. Deficiency – entruster is entitled to it (entrustee to pay balance to entruster)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS NEGOTIABLE INSTRUMENTS LAW Act No. 2031 Negotiable Instrument A negotiable instrument is a written contract for the payment of money which complies with the requirements of Sec. 1 of the Negotiable Instruments Law, which, by its form and on its face is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course the right to hold the instrument free from defenses available to prior parties. Functions 1. To supplement the currency of the government; 2. To substitute for money and 3. To increase the purchasing medium.  A negotiable instrument is NOT legal tender. Principal Features and Characteristics 1.

2.

COMMERCIAL LAW

Negotiability - A bill, note or check may pass from hand to hand so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses Accumulation of secondary contracts - When negotiable instruments are transferred through negotiation, secondary contracts are accumulated because the indorsers become secondarily liable not only to their immediate transferees, but also to any holder

Non-negotiable documents and instruments: These are some documents very similar to, but not, negotiable instruments, because they lack one, some, or all the requirements of a negotiable instrument under Section 1 of the Negotiable Instruments Law. Examples: 1. Treasury Warrants 2. Money Orders 3. Warehouse Receipts 4. Bills of Lading 5. Trust Receipts

Classes of Instrument 1. Promissory Note - It is an unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money, to order or to bearer. (Sec. 184) 2. Bill of Exchange - It is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (sec 126) 3. Check It is a bill of exchange drawn on a bank payable on demand. (Sec. 185) - It is a written order addressed to a bank or person carrying on the business of banking, by a party having money in their hands, requesting them to pay on presentment, to a person named therein or to bearer or order, a named sum of money. (Moran v. CA, 230 SCRA 799).

PROMISSORY NOTE

BILL OF EXCHANGE

It contains an unconditional promise

It contains an unconditional order

There are two (2) original parties, viz; maker and payee

There are three (3) original parties, viz; drawer, drawee and payee

The original issuer (maker) is primarily liable

The original issuer (drawer) is secondarily liable

Only one presentment (for payment) is needed

At least two (2) presentments (for acceptance and for payment) are generally needed.

BILL OF EXCHANGE

Basis

Requisites Transfer Rights acquired

Warranty Law that governs

NEGOTIABLE INSTRUMENT Contains all the requisites of Sec. 1 of the NIL. By negotiation A holder in due course can have rights better than his transferor A prior party may warrant payment Negotiable Instruments Law

21

NEGOTIABLE INSTRUMENTS LAW

NON-NEGOTIABLE INSTRUMENT Does not have any, some or all of the requisites mentioned in the N.I.L. By assignment A transferee acquires rights no better than his transferor A prior party does not warrant payment but merely the legality of his title New Civil Code

Not necessarily drawn on a deposit. The drawee need not be a bank. Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the payee to pay.

CHECK It is necessary that a check is drawn on a bank deposit. The drawee is always a bank. Death of the drawer of a check, with the knowledge of the bank revokes the authority of the banker to pay.

May be presented for payment within a reasonable time after its last negotiation because it may be further negotiated.

Must be presented for payment within a reasonable time after its issue.

May be payable on demand or at a fixed or determinable future time

Always payable demand.

on

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

22

NEGOTIABLE INSTRUMENTS LAW

Other forms of negotiable instruments: 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer (CALTEX v. CA, 212 SCRA 471) 2. Trade Acceptance; 3. Bonds, which are in the nature of a promissory notes; 4. Drafts which are bills of exchange drawn by one bank upon another;  All of these comply with Sec. 1 NIL.  Letters of Credit are NOT negotiable.

5.

Legal tender It is that kind of money which the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount. A negotiable instrument is NOT legal tender.

The conditional nature of the promise or order is not affected by: a. An indication of a particular fund from which the maker or acceptor reimburses himself after paying the holder; b. A statement of the transaction which gives rise to the instrument. (Sec. 3) c. A provision which gives the holder an election to require something to be done in lieu of payment of money. (Sec 5 par d)

FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS Requisites of Negotiability in General (Sec. 1) An instrument to be negotiable must conform to the following requirements: 1. It must be in writing and signed by the maker or drawer; 2. It must contain an unconditional promise or order to pay a sum certain in money; 3. It must be payable on demand or at a fixed or determinable future time; 4. It must be payable to order or to bearer; 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. Requisites of a Negotiable Promissory Note: 1. It must be in writing and signed by the maker; (Relate with Sec. 191) 2. It must contain an unconditional promise or order to pay a sum certain in money; 3. It must be payable on demand, or at fixed or determinable future time; and 4. It must be payable to order or to bearer. Requisites of a Negotiable Bill of Exchange: 1. It must be in writing and signed by the drawer; 2. It must contain an unconditional order to pay a sum certain in money; 3. It must be payable on demand or at a fixed or determinable future time; 4. It must be payable to order or to bearer; and 5. The drawee must be named or otherwise indicated therein with reasonable certainty. The validity and negotiable character of a negotiable instrument are NOT affected by the fact that: 1. It is not dated; 2. It does not specify the place where it is drawn or where it is payable; 3. It bears a seal; 4. It designates a particular kind of current money in which payment is to be made ; and

It does not specify the value given, or that any value had been given therefore.

Unconditional promise or order Where the promise or order is made to depend on a contingent event, it is conditional, and makes the instrument non-negotiable. An instrument which contains an order or promise to do any act in addition to the payment of money is NOT negotiable.

FUND FOR REIMBURSEMENT Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated.

PARTICULAR FUND FOR PAYMENT There is only one act- the drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient.

Particular fund indicated is not the direct source of payment but only the source of reimbursement.

Particular fund indicated is the direct source of payment.

Indication in the instrument does not affect the unconditional character or unconditionality of the promise or order

Indication in the instrument makes the promise or order conditional.

Certainty of sum - The sum is certain if the amount is fixed. - The certainty is NOT affected although it is to be paid: 1. with interests; 2. by stated installments; 3. by stated installments with acceleration clause; 4. with exchange (fixed or current rate); 5. with cost of collection or attorney’s fees. (Sec. 2) 

The presence of an escalation clause or a deescalation clause or both in the instrument does NOT affect the negotiable character of the instrument.

Escalation Clause It is an agreement pertaining to a loan or forbearance of money, goods or credits which stipulates that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS De-escalation Clause It is an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be reduced in the event that the applicable maximum rate of interest is decreased by law or by the Monetary Board. Acceleration Clause It is a provision that upon default in payment of any installment or of interest, the whole shall become due. Insecurity Clause It is a provision in the contract which allows the holder to accelerate payment if he deems himself insecure. The instrument is rendered non-negotiable because the holder’s whim and caprice prevail without the fault and control of the maker. Extension Clause It is a clause in the face of the instrument that extend the maturity dates: a. At the option of the holder; or b. At the option of the maker or acceptor; or c. Automatically upon or after a specified act or event. Payable in money  General Rule: If some other act besides payment of money is promised or ordered, the instrument becomes nonnegotiable.  Exceptions: 1. Authorizes the sale of collateral securities on default; 2. Authorizes confession of judgment on default; 3. Waives the benefit of law intended to protect the debtor/obligor; 4. Allows the holder the option to require something to be done in lieu of money. Payable on demand An instrument is payable on demand: 1. When it is so expressed to be payable on demand, or at sight, or on presentation; or 2. In which no time for payment is expressed. Payable on a determinable future time Future time is determinable in the following cases: a. At a fixed period after date or sight; b. On or before a specified fixed or determinable future time; c. On or at a fixed period after the occurrence of a specified event, certain to happen, although the exact date of happening is not certain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (Sec 4)

COMMERCIAL LAW

23

NEGOTIABLE INSTRUMENTS LAW Payable to order - The instrument is payable to order where drawn payable to the order of a specified person, or when drawn payable to a specified person or to his order. - The payee must be named or otherwise indicated therein with reasonable certainty. - It may be drawn payable to the order of: a) A payee who is not maker, drawer, or drawee; or b) The drawer or maker; or c) The drawee; or d) Two or more payees jointly; or e) One or some of several payees; or f) The holder of an office for the time being. Payable to bearer - The instrument is payable to bearer: a) When it is expressed to be so payable; b) When payable to a person named therein or bearer; c) When payable to the order of a fictitious or nonexisting person, and such fact was known to the drawer or maker; d) When the name of the payee does not purport to be the name of any person; or e) When the only OR last indorsement is an indorsement in blank. - An original bearer instrument remains to be a bearer instrument even if indorsed specially and thus can be further negotiated by mere delivery. When the payee is vaguely designated, the loss will be borne by the party who caused it – the drawer. (Equitable Bank v. IAC, 161 SCRA 518).

Rules as to dates a. Where the instrument is dated, such date is deemed prima facie to be the true date of the making (of the PN) or drawing (of the Bill of Exchange). (Sec. 11) b. Where an acceptance of a bill is dated, such date is deemed prima faice to be the true date of acceptance thereof. (Sec. 11) c. Where any indorsement of a note or bill is dated, such date is deemed prima facie to be the true date of the indorsement. (Sec. 11) d. Where an instrument expressed to be payable at a fixed period after date is issued undated, any holder may insert therein the true date of issue and the instrument shall be payable accordingly. (Sec. 13) e. Where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of acceptance and the instrument shall be payable accordingly. (Sec. 13)  The insertion of a wrong date in d. and e. above does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. f. Antedating or postdating an instrument does not affect the validity or negotiability thereof unless done for an illegal or fraudulent purpose.  The person to whom an ante-dated or postdated instrument is delivered acquires title thereto as of the date of delivery. (Sec. 12)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS

g.

h.

i.

Where the instrument provides for the payment of interest, the interest runs from the date specified in the instrument as the starting point for the running of the interest. If the instrument does not specify the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof. When a promissory note is payable on demand, the date of its issuance is important in relation to when it should be presented for payment. Sec. 71 provides: “where a promissory note is payable on demand, presentment for payment must be made within a reasonable time after its issue. When a bill of exchange is payable on demand, the date of its last negotiation is important in relation to when it should be presented for payment. Sec. 71 provides: In the case of a bill of exchange which is payable on demand, presentment for payment will be sufficient if made within a reasonable time after the last negation thereof.

Rules on interpretation of instruments 1. Discrepancy between the amount in figures and that in words  The words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount. 2. Instrument NOT dated  considered dated on the date of issue 3. Conflict between written and printed provisions  written provisions prevail 4. Interest provided for, BUT no starting date was specified  starting date is the date of the instrument, in the absence of said date, from date of issue 5. Instrument is ambiguous  if the instrument is ambiguous such that there is doubt whether it is a bill or note, the holder may treat it either as a note or a bill at his option. 6. Signature on instrument does not indicate capacity in which made  Where it cannot be determined in what capacity a person affixed his signature to a negotiable instrument, he is deemed to have signed as an indorser. As indorser, his liability under the instrument is secondary, meaning that if the party primarily liable cannot pay, the indorser can be made to pay by the holder of the instrument. 7. Where promissory note worded “Promise to Pay” is signed by two (2) or more makers, they are jointly and severally liable  Under Section 17 (g) of the NIL and Article 1216 of the Civil Code, where the promissory note was executed jointly and severally by two or more persons, the payee of the promissory note had the right to hold any one of the two (2) signers of the promissory note responsible for the payment of the whole amount of the note. (Philippine National Bank v. Conception Milling Co., 5 SCRA 745).

24

NEGOTIABLE INSTRUMENTS LAW

INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT 1. 2. 3. 4. 5. 6. 7. 8. 9.

Issue Negotiation Presentment for acceptance, in certain kinds of bills of exchange Acceptance Dishonor by non-acceptance Presentment for payment Dishonor by non-payment Notice of dishonor Discharge ISSUE

Issue The first delivery of the instrument, complete in form, to a person who takes it as a holder. (Sec. 191) Delivery It is transfer of possession, actual or constructive, from one person to another for the purpose of giving effect thereto. (Sec. 191) Kinds of Instruments which are issued: 1. complete instrument 2. incomplete instrument Incomplete Instrument, how completed:  It must be filled up strictly in accordance with the authority given and within a reasonable time. (Sec 14)  Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.(Sec 13)  If after completion, an incomplete instrument is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. (Sec 14)  Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. (Sec 15) Value It is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. (Sec 25)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 

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NEGOTIABLE INSTRUMENTS LAW

Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. (Sec 24)

2.

Holder for value Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time.

3.

An accommodation party to a negotiable instrument, in spite of the lack of consideration between him and the accommodated party, is liable to any other holder NOT to the accommodated party. (Travel-On, Inc. v. CA, et al, 210 SCRA 351).

( Sec 26)

When lien on instrument constitutes holder for value Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. (Sec 27) Effect of want of consideration Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial absence or consideration is a defense pro tanto, whether the absence or failure is an ascertained and liquidated amount or otherwise. (Sec. 28) Accommodation A. Definition Accommodation is a legal arrangement under which a person called the accommodation party lends his name and credit to another called the accommodated party, without consideration. B. Effect A person to whom the instrument thus executed is subsequently negotiated, has a right of recourse against the accommodation party inspite of the former’s knowledge that no consideration passed between the accommodation and accommodated parties. C. Requisites 1. The accommodation party must sign as maker, drawer, acceptor or indorser; 2. No value is received by the accommodation party from the accommodated party; and 3. The purpose is to lend the name. (Crisologo-Jose v. CA, 177 SCRA 594).

D. Accommodation Party Is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to another person.  A corporation cannot act as an accommodation party. Such is an ultra vires act. (Crisologo-Jose v CA, 117SCRA594) E. Liability of the Accommodation Party 1. The accommodation party is liable on the instrument to a holder for value notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party. It is NOT a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. He is liable to a holder for value by virtue of his being an accommodation party.

4.

An accommodation party’s liability as a solidary party is unconditional party is unconditional and is not affected by an extension of payment granted by the creditor to the debtor. HOWEVER, where the holder allowed payments by the drawer direct to the contractor without availing of the deed of assignment in its favor, said holder is a bad faith holder, NOT a holder in due course against whom an extension to pay granted by the drawer is a defense by the accommodation party. (Prudencio v. CA, 143 SCRA 6). The liability of an accommodation party does not extend to corporate accommodation because the act of the corporate officers is ultra vires. However, these officers are personally liable. (Crisologo-Jose v. CA, 177 SCRA 594).

5.

A promissory note, with an accommodation comaker, used to settle an estafa case, has an illegality of cause, and does not make the accommodation co-maker liable. (United General Industries v. Paler, 112 SCRA 404)

6.

A promissory note with an accommodation maker, utilized to settle an estafa case, has an illegal consideration, and does not make the comaker liable. (United general Industries v. Paler, 112 SCRA 404)

F. Rights of an accommodation party 1. Against the Accommodated Party - the accommodation party, if obliged to pay to a holder of value, can seek reimbursement from the accommodated party. 2. Against the Co-accommodation Party - where a solidary accommodation maker paid to the bank the balance due on a promissory note, he may seek contribution from the other solidary accommodation maker, in the absence of a contrary agreement between them. This right springs from an implied promise between the accommodation makers to share equally the burdens resulting from their execution of the note. They are joint guarantors of the principal debtor. (Sadaya v. Sevilla) G. A solidary accommodation maker may: a. demand from the principal debtor reimbursement of the amount which he paid on the promissory note and b. demand contribution from his coaccommodation maker, without first directing his action against the principal debtor, PROVIDED that: b.1. he made the payment by virtue of a judicial demand, or b.2. the principal debtor is insolvent.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS NEGOTIATION Negotiation An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. (Sec 30) Negotiation of the whole instrument As a rule the whole instrument must be indorsed – EXCEPT when it was partially paid, in which case, the remainder can be indorsed. Rights Transferred by Negotiation - Negotiation constitutes the transferee a holder of the instrument. A holder is entitled to collect the instrument from the party primarily liable, and if dishonored, from the secondary parties. He can sue in court on the instrument. If the holder is a holder in due course, he takes the instrument free from the defects of title of prior parties, free from personal defenses of prior parties among themselves, and he can enforce the instrument for the full amount thereof against all parties liable thereon. Classes of Negotiation 1. By Mere Delivery of the Instrument - Negotiation of negotiable instrument may be effected by the delivery alone of the instrument to the transferee in those negotiable instruments which are: a. originally payable to bearer, or b. originally payable to order instruments where the last indorsement is an indorsement in blank or where the only indorsement is an indorsement in blank. 2. By Indorsements Followed by Delivery - A negotiable instrument payable to the order of a specified person, or to him or his order, may be negotiated by the payee by indorsement followed by delivery of the instrument to the indorsee. Subsequent negotiation must be made in this manner if the holder who indorses acquired the instrument under a special indorsement. - The payee of the negotiable instrument acquires no interest with respect thereto until its delivery to him. (Development Bank of Rizal v. Sima Wei)

INDORSEMENT Indorsement It is the legal transaction effected by the writing of one’s own name at the: 3. back of the instrument or 4. upon a paper (allonge) attached thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper

26

NEGOTIABLE INSTRUMENTS LAW

-

transferred but likewise enters into an implied guaranty that the instrument will be duly paid. (sec 31) General Rule: Indorsement must be of the entire instrument. Exception: Where instrument has been paid in part, it may be indorsed as to the residue. (Sec 32)

Kinds: 1. Special Indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. (Sec 34) 2. Indorsement in blank - specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. (Sec 34) 3. Restrictive Indorsement - an indorsement is restrictive when it a. Prohibits the further negotiation of the instrument; or b. Constitutes the indorsee the agent of the indorser; or c. Vests the title in the indorsee in trust for or to the use of some other persons.  But the mere absence of words implying power to negotiate does not make an indorsement restrictive. (Sec 36)  Effect of restrictive indorsement; rights of restrictive indorsee - A restrictive indorsement confers upon the indorsee the right: a. to receive payment of the instrument; b. to bring any action thereon that the indorser could bring; c. to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement.(Sec 37) 4. Qualified indorsement - constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.(Sec 38) 5. Conditional Indorsement Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. (Sec 39)

6.

Unconditional or absolute indorsement

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 7.

8.

Irregular indorsement - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: a. If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. b. If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. c. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. (Sec 64) Joint Indorsement - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. (Sec 41)

Indorsement of instrument payable to bearer Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.(Sec 40) Effect of instrument drawn or indorsed to a person as cashier Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. (Sec 42) Indorsement where name is misspelled, and so forth Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. (Sec 43) Indorsement in representative capacity Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. (Sec 44)



Every negotiation is deemed prima facie to have been effected before the instrument was overdue.



Every indorsement is presumed prima facie to have been made at the place where the instrument is dated.

 The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.  An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Effect of Indorsement on Instrument Negotiable by DELIVERY Where an instrument negotiable by delivery is indorsed by the holder, he becomes liable as an indorser. Effect of Lack of Indorsement on an Instrument Negotiable by INDORSEMENT Followed by Delivery Where a holder of an instrument payable to order transfers it for value without indorsing it, the transferee is vested with the title, and acquires the right to have the indorsement of the transferor. For the purpose of determining whether the transferee is a holder in due course or not, the negotiation takes effect on the date the indorsement was actually made. Striking out of indorsements The holder may STRIKE OUT indorsements NOT NECESSARY TO HIS TITLE. The indorser whose indorsement is struck out and all indorsers subsequent to him are relieved from liability on the instrument.  Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiate the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.

Requisites in indorsements made by an agent: 1. The agent must be authorized. 2. He must disclose his principal. 3. He must sign for and in behalf of his principal. Signature per Procuration - A signature per procuration is one made by an agent with a limited authority to sign, and the principal is bound only if the agent acts within the limits of the authority. - It is made by adding “per procuration”, “per proc”, “p.p.” under the agents signature.

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NEGOTIABLE INSTRUMENTS LAW

PRESENTMENT FOR PAYMENT In Promissory Notes Purpose Not necessary to make the maker liable, but is necessary to make the secondary parties liable. Requisites For a valid presentment for payment of a promissory note, the following are necessary: a. made within a reasonable time after issue; b. by the holder or his agent;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS c. d. e. 

to the party primarily liable under it; at a reasonable hour on a business day; and at the proper place as defined by the NIL.

The holder must exhibit the instrument to the debtor and should deliver it to said debtor if the latter pays.

When NOT required Presentment is NOT required: 1. when after due diligence presentment cannot be made; 2. when presentment is waived, and 3. when the indorser is an accommodated party. When Instrument Considered Dishonored The instrument is considered dishonored: 1. when after due presentment for payment, payment is refused, and 2. when presentment being excused, the instrument is overdue and unpaid.

PRESENTMENT FOR ACCEPTANCE Presentment for Acceptance It is the production of a bill of exchange to the drawee for his acceptance or payment. General rule: Presentment for acceptance is NOT necessary to render any party to the bill liable. Exceptions: 1. Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or 2. Where the bill is expressly stipulates that it shall be presented for acceptance; or 3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. 

In those instances found in Section 143 – it is NECESSARY, in order to charge persons secondarily liable: a. to make presentment for acceptance or b. to negotiate the bill within a reasonable time. (Sec. 144)

Purpose - To get acceptance of the drawee for the purpose of making him liable primarily as an acceptor. - It is also a pre-requisite to the accrual of secondary liability against the drawer and the indorser. When necessary It is necessary in the following cases: a. to fix the maturity date; b. where the bill expressly stipulated presentment; c. where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

28

NEGOTIABLE INSTRUMENTS LAW Requisites Presentment for acceptance must be 1. made within a reasonable time, 2. by the holder, or his agent, 3. to the drawee or his agent 4. at a reasonable hour on a business day, 5. before the bill is overdue. When excused 1. where the drawee is dead, hides or is a fictitious or incapacitated person; 2. when after due diligence presentment cannot be made; 3. when acceptance is refused on another ground although presentment is irregular. When Instrument Dishonored By Non-Acceptance The instrument is considered dishonored by nonacceptance: 1. where such acceptance is refused or cannot be obtained, and 2. where acceptance being excused, the bill is not accepted. PRESENTMENT How made Presentment MUST be made by or on behalf of the holder: Requisites: 1. It must be presented at a reasonable hour; 2. It must be presented on a business day; and 3. It must be presented before the bill is overdue. To WHOM presented 1. To the DRAWEE or some person authorized to ACCEPT or REFUSE ACCEPTANCE on his BEHALF; and 2. Where a bill is addressed to two or more drawees who are not partners; presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; 3. Where the drawee is dead presentment may be made to his personal representative; 4. Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee. When made: 1. A bill may be presented for acceptance on ANY DAY on which negotiable instruments may be presented for payment. 2. When saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o’clock noon on that day. 

The only difference between Section 72 and 85 is that under Section 146 there is no distinction between the instruments payable at a fixed or

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS determinable future time and instruments payable on demand.

-



Where the holder of a bill drawn payable elsewhere other than the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence to present the bill for acceptance before presenting it for payment on that day it falls due – the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does NOT discharge the drawers and indorsers.

ACCEPTANCE

-

2. -

Acceptance It is the signification by the drawee of his assent to the order of the drawer. Requisites The acceptance must be 1. in writing; 2. signed by the drawee; 3. must NOT express that the drawee will perform his promise by means other than money payment; and 4. it must be communicated or delivered to the holder. How made The acceptance may be on the bill, or on a separate paper (allonge), and may even be in writing before the bill is drawn. Express acceptance - The drawee, if he wants to accept, must do so expressly within twenty-four (24) hours from presentment to him, or within the period allowed him by the holder. b. Implied or constructive acceptance - If he destroys the bill, or refuses to return the bill accepted or not accepted within said period of twenty-four hours, or other period allowed him by the holder, he is deemed to have accepted the bill.

-

-

a.





 

A sight draft (usually accompanying a letter of credit in importations) is payable on demand and needs no acceptance by the drawee. (Prudential Bank v. IAC) It is usually done by writing across the face of the bill the word “ACCEPTED” or words of similar import, e.g. “HONORED”, “I WILL PAY THE BILL”, “SEEN” followed by the signature of the drawee. The drawee must sign because without his signature he would not be bound – See Section 18, NIL. Acceptance by telegram has been held sufficient.

Classes of Acceptance A. General and Qualified 1. GENERAL

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NEGOTIABLE INSTRUMENTS LAW assents without qualification to the order of the drawer. An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. (Sec.140) The holder of the bill has the right to require general acceptance – thus he may refuse to take qualified acceptance and if he does not obtain an unqualified acceptance – he may treat the bill as dishonored by non-acceptance – accordingly the holder must give notice of dishonor. QUALIFIED varies the effect of the bill as drawn kinds: a. Conditional – one which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; b. Partial – an acceptance to pay part only of the amount for which the bill is drawn; c. Local – an acceptance to pay only at a particular place; d. Qualified as to time e. The acceptance of some or more drawees but NOT of ALL. Effect of taking qualified acceptance: Where a qualified acceptance is taken – the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take qualified acceptance or subsequently assents thereto. When the drawer or indorser receives notice of qualified acceptance – he must – within a reasonable time – express his dissent to the holder or he will be deemed to have assented thereto.

B. Express and Constructive 1. EXPRESS - written on the instrument by the drawee 2. CONSTRUCTIVE - NOT in writing, a. Where the drawee to whom the bill is delivered for acceptance, destroys it; or b. Where the drawee refuses, within 24 hours after such delivery or within such time as is given him, to return the bill accepted or not accepted. 



If the holder should demand its return before twenty-four hours, the drawee would be required to comply on pain of being held as an acceptor; but return within twenty-four hours unaccepted would not be a dishonor. In all the foregoing, the drawee will be deemed to have accepted the bill even if there is no actual written acceptance by him.

Effect of acceptance: - Upon acceptance, the drawee becomes liable on the bill. The bill becomes in effect a note, the acceptor

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS standing in the place of the maker, and the drawer, in the place of the first indorser. -

-

But should the drawee refuse to accept, the payee or the holder has no recourse against him but only against the drawer and indorsers, if any. The payment of a check does NOT include or imply its acceptance in the sense that this word is used in Section 62, NIL.

Where acceptance may be written: Acceptance may be made 1. 2.

on the bill itself, or on a separate paper; and if on a separate paper a. it may be acceptance as to an existing bill; or b. it may be acceptance as to a future or non-existing bill.

If the bill is non-existent, the acceptance on a separate paper must comply with following requirements: 1. That the contemplated drawee shall describe the bill to be drawn and promise to accept it. 2. That the bill shall be drawn within a reasonable time after such promise is written; and 3. That the holder shall take the bill upon the credit of the promise. The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance if given, dates as of the day of presentation. NOTE: The time allowed begins from the time of delivery and not after demand for a return of the bill and the time for returning the bill to the holder does not begin to run from the demand for its return but from the date of its delivery. Drawee bank is NOT entitled to 24 hours to decide whether to pay or not. But, if the check is presented for certification, this ruling will not apply, as certification is equivalent to acceptance. Instances when a bill may be accepted: 1. Before the bill has been signed by the drawer; 2. Even when the bill is otherwise incomplete; 3. Even when the bill is overdue; 4. Even after it has been dishonored by nonacceptance or by non-payment. Instances when presentment for acceptance is excused and a bill may be treated as dishonored by nonacceptance: 1. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill; 2. Where, after the exercise of reasonable diligence, presentment cannot be made;

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NEGOTIABLE INSTRUMENTS LAW 3.

Where, although presentment has been irregular, acceptance has been refused on some other ground.

When a bill is dishonored by non-acceptance 1. When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or 2. When presentment for acceptance is excused and the bill is not accepted. Duty of the holder where bill is not accepted Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. How bill is treated as dishonored by non-acceptance 1. by giving NOTICE OF DISHONOR; or 2. by making a PROTEST when required Right of holder where bill is NOT accepted: An immediate right of recourse against the drawer and indorsers accrues to the holder and NO PRESENTMENT for payment is necessary. *The immediacy is subject to the giving of notice of dishonor to the drawer and the indorsers.

ACCEPTANCE FOR HONOR Definition - Acceptance of a bill made by a stranger to it before maturity, where the drawee of the bill refused to accept it, and the bill has been protested for nonacceptance or where the bill has been protested for better security Purpose - to save the credit of the parties to the instrument or some party to it, as the drawer, drawee, or indorser, or somebody else 

Where a bill is accepted for honor, consideration is presumed, and the presumption is that acceptor has funds/money of the party for whose honor he accepts.

Requisites 1. The bill must have been previously protested (a) for non-acceptance or b) for better security; 2. The acceptor for honor must be a person not a party already liable thereon, that is, a stranger to the bill; 3. The bill is not overdue at the time of the acceptance for honor; 4. The acceptor for honor must be a stranger to the bill; and 5. The holder must give his consent.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS How made (Formal Requisites of Acceptance for Honor) 1. It must be in writing; 2. It must indicate that it is an acceptance for honor; 3. It must be signed by the acceptor for honor; 4. It must contain an express/implied promise to pay in money; and 5. The accepted bill for honor must be delivered to the holder. NOTE: It is necessary that the acceptor for honor MUST APPEAR before a notary public and declare that he accepts the protested bill in honor of the drawer or indorser, as the case may be, and that he will pay it at the appointed time. 

Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer.

Instances where a person’s signature appears on a negotiable instrument and yet he is not liable thereon 1. in case of an undelivered and incomplete instrument the person whose signature is placed thereon before delivery (Sec. 15); 2. in case of a signature by an authorized agent (Sec. 19); 3. in case of indorsement by a minor or incapacitated person (sec. 22); 4. in case of forgery, the person whose name appears on the instrument but forged is not liable thereon. A. Parties PRIMARILY Liable 1. MAKER a. Engages to pay according to the tenor of the instrument b. Admits the existence of the payee and his capacity to indorse. 

Liability of the acceptor for honor - Secondary, NOT primary or absolute. - The acceptor for honor is liable to the holder and all parties to the bill subsequent to the party for whose honor he had accepted. Acceptor for honor agrees to pay if 1. presentment for payment has been made; 2. the drawee does not pay; 3. the bill is protested for non-payment; and 4. notice of dishonor is given to him. Maturity of a bill payable after sight which has been accepted for honor - Maturity is calculated from the date of noting for the non-acceptance and NOT from the date of the acceptance for honor. Bills which must be protested for non-payment before it will be presented for payment 1. Where a dishonored bill has been accepted for honor supra protest; or 2. Where a dishonored bill contains a referee in case of need. *Reason: In order to fix the liability of the indorsers.

LIABILITIES OF PARTIES General rule Only persons whose signature appear on the negotiable instrument are liable thereon. (Sec. 18) Exceptions 1. where a person uses an assumed name or trade name (Sec. 18); 2. the principal is liable if an authorized agent signs in his behalf (Sec. 19); 3. in case of forgery, the forger is liable even if his signature does not appear on the instrument; 4. a person who negotiates by mere delivery

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NEGOTIABLE INSTRUMENTS LAW

The liability of two or more co-makers using the words “I promise to pay” is solidary while the liability of two or more co-makers using the words “We promise to pay” is joint and therefore liable for their proportionate share.

2. ACCEPTOR / DRAWEE WHO ACCEPTS THE INSTRUMENT a. Engages to pay according to the tenor of his acceptance. b. Admits the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument. c. Admits the existence of the payee and his capacity to indorse. 

The acceptor is precluded from asserting the following defenses: 1. That the drawer is fictitious or non-existent; or 2. That the drawer’s signature is a forgery; or 3. That he has no funds in his hands belonging to the drawer with which to pay the bill; or 4. That the drawer has overdrawn his account; or 5. That the drawer has no capacity to contract or has no authority to draw the bill

B. Parties Secondarily Liable 1. THE DRAWER a. Admits the existence of the payee and his capacity to endorse. b. Engages that the instrument will be accepted or paid by the party primarily liable. c. Engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid. 2. THE GENERAL INDORSER - A person placing his signature upon an instrument other than as maker, drawer, or acceptor, is deemed to be indorser unless he

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS clearly indicates by appropriate words his intention to be bound in some other capacity. [Sec 63] a.

b. c.

Warrants i. the genuineness of the instrument and in all respects what it purports to be, ii. his good title to it, iii. the capacity to contract of all prior parties, and iv. the instrument is valid and subsisting. Engages that the instrument will be paid by the party primarily liable. Engages that if the instrument is dishonored, and proper proceedings are taken, he will pay to the other party entitled to be paid.



The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements.



Aside from the warranties as an indorser, the collecting bank is made liable because it is privy to the depositor who negotiated the check because it knows him, his address and history for being a client thereof. Thus, it is in a better position to detect forgery or irregularity in the indorsement. (Associated bank v. CA, 252 SCRA 620). aka “Doctrine of Comparative Negligence”

3.

THE IRREGULAR INDORSER - An irregular indorser is one who not otherwise a party to an instrument, affixes his signature in blank on an instrument before delivery. - Liability: a. Instrument payable to order of third person - irregular indorser liable to payee and to subsequent parties b. Instrument payable to order of maker or drawer - liable to all parties subsequent to the maker or drawer; c. Irregular indorser signs for accommodation of payee - liable to all parties subsequent to the payee.  -

-

Liability of GUARANTOR: “I hereby guarantee payment of this instrument” is written at the back of the instrument NOT discharged from liability merely because of the lack of due presentment or due notice of dishonor

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NEGOTIABLE INSTRUMENTS LAW -

 -

liable only subsidiarily after the assets of the principal debtor have been exhausted Indorses for identification only; he is a guarantor not an indorser Liability of SURETY primarily and absolutely liable with the debtor without benefit of exhaustion of the properties of the latter and also without the necessity of presentment or notice of dishonor

C. Parties With Limited Liability 1. THE QUALIFIED INDORSER - Warranties: a. That the instrument is genuine and in all respect what it purports to be; b. That he has a good title to it; c. That all prior parties had capacity to contract; d. That he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument; it may be made by adding to the indorser’s signature the words “without recourse”, “sans recourse” or any other word of similar import. - “Recourse” means resort to a person who is secondarily liable after the default of the person who is primarily liable; by indorsing the note “with recourse”, does not make the indorser a qualified indorser but a general indorser who is secondarily liable 2. PERSON NEGOTIATING BY DELIVERY - Warranties: a. That the instrument is genuine and in all respect what it purports to be; b. That he has a good title to it; c. That all prior parties had capacity to contract; d. That he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless. - Warranties extended to immediate transferee only. When Secondary Liability Attaches Acts needed before secondary liability attaches a. Presentment for payment in notes and presentment for acceptance and/or payment in bills of exchange; b. Dishonor by non-payment in notes and dishonor by non-acceptance and/or non-payment in bills of exchange; c. Notice of dishonor to secondary parties. Order in which the indorsers are liable - They are liable in the ORDER in which their indorsements appear in the instrument; the latter ones have a right of recourse against the prior ones

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS RIGHTS OF A HOLDER Holder - a payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof - the holder of a negotiable instrument may sue thereunder in his own name, and payment to him in due course discharges the instrument 

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NEGOTIABLE INSTRUMENTS LAW Rights of a holder in due course: a) Like any other holder, a holder in due course may enforce the instrument and sue thereon in his own name. b) He also holds the instrument free any defect of title of prior parties, free from personal defenses of prior parties among themselves, and he may enforce payment of the instrument for the full amount thereof, against all parties liable thereon. *N.B. The fact that the postdated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. The only grounds are those outlined in Section 119 of the NIL. (State Investment House, Inc.

If a promissory note is non-negotiable, subsequent holders can never be holders in due course, but are mere assignees against whom defenses may be raised by prior parties. (Consolidated Plywood v. IFC Leasing, 149 SCRA 448).

v. CA, 217 SCRA 32)

Classes of holders 1. HOLDER IN DUE COURSE - one who takes the instrument “in good faith and for value [Section 52 (c)] - in order that one may be a holder in due course, it is necessary that at the time the instrument was negotiated to him he had no notice of any xxx defect in the title of the person negotiating it [Section 52 (d)]

-

every holder is deemed prima facie to be a holder in due course (Section 59; Vicente R. de Ocampo & Co. v. Gatchalian, 3 SCRA 596)  However, when

it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. (Bataan Cigar and Cigarette

2. HOLDER NOT IN DUE COURSE - A holder not in due course is one who became a holder of an instrument without any, some, or all of the requisites under Section 52 of the NIL Where a holder’s title is defective or suspicious, it cannot be stated that the payee acquired the check without the knowledge of said defect in the holder’s title and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. (Vicente R. Ocampo v. Gatchalian, 3 SCRA 596) -

Factory, Inc. v. CA, 230 SCRA 647).

-

What constitutes a holder in due course: A holder in due course is a holder who has taken the instrument under the following conditions: 1. That it is complete and regular upon its face; 2. That he became the holder of it before it was overdue and without notice that it had been previously dishonored if such was the fact; 3. That he took it for value and in good faith; 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. 

To constitute notice of defect in the title of the person negotiating the same, the person to whom it is negotiated must have actual knowledge of such facts that his action in taking the instrument amount to bad faith. (Constructive knowledge).

Rights of holder not in due course a) A holder not in due course can enforce the instrument and sue under it in his own name. Prior parties, however, even through remote, can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in said instrument. b) That a holder is not a holder in due course does not mean that he cannot recover under the instrument. c) A holder not in due course who derives title through a holder in due course and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.

* HOLDER FOR VALUE - one who has all the requisites for a holder in due course EXCEPT notice of want of consideration he is not necessarily a holder in due course, hence, prior parties may avail of defenses against said holder (Prudencio v. CA, 143 SCRA 7) 

In a sale on installment, financed by a financing company, the latter is not a holder in due course, and the defense of failure of consideration may be invoked against it, if the goods bought are defective and cannot be used by the buyer for the purpose for which he bought it. (Consolidated Plywood v. IFC Leasing, 149 SCRA 448).

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 

A person who became a holder of a cashier’s check indorsed by the person who stole it, is not a holder in due course, and the issuing bank may refuse to pay the same. (Mesina v. IAC, 145 SCRA 497)



Where the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it to prove that it actually acquired said check in good faith.



Where a note is acquired by the contract of merger or sale between two banks, and the note is subject to a Holdout Agreement, the holder of that note is NOT a holder in due course. (BPI v. CA, 232 SCRA 305)



The indorsee of a crossed check is a holder NOT in due course, and is subject to the defenses as if the instrument is non-negotiable.



The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. (Bataan Cigar and Cigarette Factory, Inc. v. CA, 230 SCRA 647)

Situational Rights of a Holder: 1. Right to insert true date of issue (Sec. 13); 2. Right to insert true date of acceptance (sec. 13); 3. Right to complete an incomplete instrument (Sec. 14); 4. Right to treat an ambiguous instrument as either a bill or a note (Sec. 17, {e}); 5. Right to sign in a trade name or assumed name (Sec. 18); 6. right to strike out any indorsement not necessary to his title (Sec. 48) 7. Right to convert a blank indorsement into a special one (Sec. 35); 8. Right to discharge instrument by intentional cancellation thereof (Sec. 119); 9. Right to discharge a person secondarily liable by intentional cancellation of his signature (Sec. 120 {b}); 10. Right to release the principal debtor and consequently discharge persons secondarily liable (Sec. 120{e}); 11. Right to extend the time of payment (Sec. 120 {f}); 12. Right to renounce his rights against any party to the instrument (Sec. 122); 13. Right to enforce payment of materially altered instrument according to its original tenor (Sec. 124); 14. Right to resort to the referee in case of need (Sec. 131);  Referee in case of need is the person whose name was inserted by the drawer of the bill and any indorser to whom the holder may resort in case of need – that is in case the bill is dishonored by non-acceptance or by non-payment. 15. Right of the holder of a bill presenting the same for acceptance to require that the acceptance be written of the face of the bill (Sec. 133);

COMMERCIAL LAW

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NEGOTIABLE INSTRUMENTS LAW 16. Right of a holder of a bill to allow a period for the drawee to accept other than 24 hours (Sec. 136 in rel. to Sec. 137) 17. Right of a holder of a bill dishonored but subsequently accepted to have the bill accepted as of the date of presentment (Sec. 138); 18. Right of holder of a bill to refuse to take a qualified acceptance and to treat the bill as dishonored by non-acceptance if he does not obtain an unqualified acceptance (Sec. 142); 19. Right of a holder of a bill required to be presented for acceptance either to present it for acceptance or negotiate it within a reasonable time (Sec. 144) 20. Right of a holder of a bill dishonored by nonacceptance to have immediate recourse against the drawer and indorsers (Sec. 151); 21. Right of holders to whom different parts of a bill in set are negotiated (Sec. 179); 22. Right of a holder of a bill to allow acceptance of the same for honor

PRESENTMENT FOR PAYMENT Purpose - The purpose of presentment for payment of an accepted bill is to collect from the acceptor; and if refused, to collect from the secondary parties. - Other purposes of presentment for payment are: 1. to receive payment for the negotiable instrument; 2. to afford the person under the obligation of paying the instrument an opportunity to ascertain the genuineness of the paper, the amount thereon, and the authority of the one making the presentment; and 3. to permit the surrender of the paper on payment of the amount due it. When excused Presentment for payment is excused; a) when after due diligence, it cannot be made; b) when the drawee is a fictitious person; and c) where there is a waiver of presentment. When should be made a) where the instrument is not payable on demand, presentment must be made on the day it falls due. b) where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. (Sec. 71) What constitutes sufficient presentment It must be made: 1. by the holder, or by some person authorized to receive the payment in his behalf; 2. at a reasonable hour on a business day; 3. at a proper place as defined in the NIL;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 4.



to the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made (Sec. 72)

Proper place for presentment a) Where a place of payment is specified in the instrument and it is there presented; b) Where no place is specified, but the address of the person to make payment is given in the instrument and it is there presented; c) Where no place for payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; and d) In any other case, if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence (sec. 73)  The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. (Sec. 74) Presentment where instrument is payable to a bank - Presentment for payment must be made during banking hours, unless the parson to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient. (Sec. 75)

Presentment to persons liable as partners - Presentment for payment may be made to any one of them, even though there be a dissolution of the firm Presentment to joint debtors who are not partners - Presentment must be made to all of the debtors When presentment for payment is not required in order to charge the drawer - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. When presentment for payment is not required to charge the indorser - Presentment for payment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. When an instrument is dishonored by non-payment 1. It is duly presented for payment and payment is refused or cannot be obtained; or 2. Presentment is excused and the instrument is overdue and unpaid. (Sec. 83)

When an instrument is dishonored by nonpayment, an immediate right of recourse (subject to the giving of notice of dishonor) to all parties secondarily liable thereon accrues to the holder. (Sec. 84)

Time of maturity - Every negotiable instrument is payable at the time fixed therein without grace - RULES: 1. When the day of maturity falls upon Sunday, or a holiday, the instrument is payable on the next succeeding business day. 2. Instrument falling due or become payable on Saturday are to be presented for payment on the next succeeding business day, except that instruments payable on demand may, at the option of the holder, be presented for payment before 12 o’clock noon on Saturday when that entire day is not a holiday (Sec. 85) - COMPUTATION OF TIME:  Where the instrument is payable at a fixed period after date, after sight, or after the happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment (Sec. 86) 

Presentment where the principal debtor is dead - Presentment for payment must be made to the deceased’s personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found

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NEGOTIABLE INSTRUMENTS LAW

Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon (Sec. 87)

Payment in Due Course - Payment made at or after the maturity of the instrument to the holder thereof in good faith and without notice that his title is defective - Requisites of payment in due course 1. Made at or after maturity. 2. Made to the holder. 3. In good faith and without notice that the holder’s title is defective. (Sec. 88) - Good faith refers to the paying maker or acceptor and not to the holder. Presentment for payment to acceptor for honor, how made 1. It must be presented in the place where the protest for non-payment was made – it must be presented NOT LATER than the day following its maturity; 2.

If it is to be presented in some other place other than the place where it was protested, then it must be forwarded within the time specified in Section 104. (Sec. 168)

Delay, when excused - Delay in making presentment is excused when the delay was caused by events which are beyond the control of the holder and not imputable to default, misconduct or negligence.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 

When the cause of delay ceases to operate, the bill must be noted/ protested with reasonable diligence.



When a bill is dishonored by the acceptor for honor – it must be protested for non-payment by him.

DISHONOR 1. In promissory notes - In a promissory note, dishonor by non-payment takes place when a. it is duly presented for payment and payment is refused or cannot be obtained; or b. if presentment is excused, the instrument is overdue and unpaid. 2. In bills of exchange - In bills of exchange, there is dishonor by nonacceptance a. where the bill is presented for acceptance and is returned dishonored, or b. within twenty four hours from presentment or any other period as the holder may allow, is not returned accepted or unaccepted - There is dishonor by non-payment a. if the bill, after it has been accepted is not paid when presented for payment, or b. presentment being excused, is not paid on the date of maturity.

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NEGOTIABLE INSTRUMENTS LAW Who may give notice of dishonor 1. The holder; 2. Someone acting on behalf of the holder; 3. Any party to the instrument a) who might be compelled to pay it to the holder, and b) who upon taking it up, would have a right to reimbursement from the party to whom the notice is given; 4. Someone acting on behalf of such party 

Notice of dishonor may be given by an agent either in his own name or in the name of any party entitled to give notice, whether that party be his principal or not (Sec. 91)



Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom notice is given.



Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party whom notice is given

NOTICE OF DISHONOR

When agent may give notice - When the instrument has been dishonored in the hands of an agent, a) he may either himself give notice to the parties liable thereon, or b) he may give notice to his principal.

Definition - Notice of dishonor is bringing, either verbally or in writing, to the knowledge of the drawer or the indorser of an instrument, the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted, or has not been paid, and that the party notified is expected to pay it.

When notice is sufficient - A written notice need NOT be signed, and an insufficient written notice may be supplemented and validated by verbal communication. - A misdescription of the instrument NOT vitiate the notice UNLESS the party to whom the notice is given is in fact misled thereby.

To whom given - To the drawer and to each indorser  any drawer or indorser to whom such notice is not given is discharged - Notice of dishonor is not necessary to hold parties primarily liable

Form of notice 1. It may be in writing or merely oral 2. It may be given in any terms which sufficiently identify the instrument and indicate that it has been dishonored by non-acceptance or non-payment; 3. It must be delivered personally or through mail

Purpose - To inform the party notified that the paper has been dishonored and that he is looked to for payment and the purpose of requiring it is to enable him to protect his rights against others who are antecedent to him on the instrument and to afford him an opportunity to discharge it before suit is filed to enforce payment thereon, with consequent costs

To whom may be given - either a) to the party himself, or b) to his agent in that behalf

Effect of failure to give notice of dishonor - Any drawer or indorser to whom such notice of dishonor is not given is discharged from liability

Notice where party is dead - When a party is dead, and his death is known to the party giving notice, the notice must be given a) To a personal representative if there be one, and if with reasonable diligence he can be found. b) If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Notice to partners - Where the parties to be notified are partners, notice to any partner is notice to the firm even though there has been a dissolution Notice to persons jointly liable - Notice to joint parties who are not partners must be given to each of them, UNLESS one of them has authority to receive such notice for the others Notice to a bankrupt party - Where a party has been adjudged bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to the trustee or assignee Time within which notice must be given - General Rule:  Notice must be given as soon as the instrument is dishonored and unless delay is excused as herein provided must be given within the time fixed by the Act -

Other Rules: 1. Where parties reside in the same place a)

If given at the place of business of the person to receive notice, it must be given before the close of business hours on the following day; b) If given at his residence, it must be given before the usual hours of rest of the day following; c) If sent by mail, it must be deposited in the post-office in time to reach him in usual course of the day following 2.

Where parties reside in different places a) if sent by mail, it must be deposited in the post office, in time to go by mail the following day of dishonor, or if there be no mail at a convenient hour on that day, by the next mail thereafter; b) if given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision.

When sender is deemed to have given due notice - Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding the miscarriage of mails 

Notice is deemed to have been deposited in the post office when deposited in any branch post office or in any letter box under the control of the post office department.

COMMERCIAL LAW

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NEGOTIABLE INSTRUMENTS LAW Time of Notice to subsequent party - Where a party receives notice of dishonor, he has after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Where notice must be sent 1. Where a party has added an address to his signature, notice of dishonor must be sent to that address. 2. If no address was given, notice must be sent as follows a) Either to the post office nearest to his place of residence ot to the post office where he is accustomed to receive his letters; or b) If he lives in one place, and he has a place of business in another, notice may be sent to either place; or c) If he is sojourning in another place, notice may be sent to the place where he is sojourning. Waiver of notice - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice and the waiver may be express or implied. Who are affected by waiver of notice 1. Where the waiver is embodied in the instrument itself, it is binding upon all parties; but 2. Where it is written above the signature of an indorser, it binds himself only. Effect of waiver of protest - a waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed waiver not only of a formal protest but also of 1. presentment, and 2. notice of dishonor. When notice is dispensed with - When after the exercise of due diligence, notice cannot be given to or does not reach the parties sought to be charged. Delay in giving notice, when excused - When the delay is caused by circumstances beyond the control of the holder, AND not imputable to his default, misconduct or negligence When notice of dishonor is not required to be given to the drawer 1. Where the drawer and the drawee are the same person; 2. When the drawee is a fictitious person or a person not having capacity to contract; 3. When the drawer is the person to whom the instrument is presented for payment; 4. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; 5. Where the drawer has countermanded payment

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS When notice of dishonor is not required to be given to an indorser 1. Where the drawee is a fictitious person or a person not having the capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; 2. Where the indorser is the person to whom the instrument is presented for payment; 3. Where the instrument was made or accepted for his accommodation. Notice of non-payment where acceptance is refused - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by nonpayment is not necessary, UNLESS in the meantime the instrument has been accepted Effect of omission to give notice of dishonor by nonacceptance - Does not prejudice the rights of a holder in due course subsequent to the omission.

PROTEST Definition - It is a formal statement in writing made by a notary public or other competent person under his seal of office at the request of the holder of a bill or note, in which it is declared that the same was on a certain day presented for payment (or acceptance as the case may be), and such payment (or acceptance) was refused, whereupon the notary protests against all parties to such instrument and declares that they will be held responsible for all loss or damage arising from its dishonor. - It means all the steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser. Necessity - Protest is required only for foreign bills, but NOT for inland bills or notes. - However, they may also be protested if desired. - Omission of protest, where protest is required, will discharge the drawer and the indorsers. Purpose - Protest is required: 1. for uniformity in international transactions because most countries require it and 2. in order to furnish authentic and satisfactory evidence of the dishonor to the drawer who, from his residence abroad, may experience difficulty in verifying the matter and may be forced to rely on the representation of the holder. Instances when protest is required: 1. Where the foreign bill is dishonored by nonacceptance;

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NEGOTIABLE INSTRUMENTS LAW 2. 3.

4.

Where the foreign bill is dishonored by non-payment, it not having been dishonored by non-acceptance; Where the bill has been accepted for honor, it must be protested for non-payment to the acceptor for honor; or Where the bill contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the referee in case of need.

Protest, how made: - The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify: 1. The time and place of presentment; 2. The fact that presentment was made and the manner thereof; 3. The cause or reason for protesting the bill; 4. The demand made and the answer given, it any, or the fact that the drawee or acceptor could not be found. Protest may be made by a. A notary public; Or b. By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses. Protest, when made 1. Protest must be made on the day of its dishonor unless delay is excused. 2. When a bill has been duly noted – the protest may be subsequently extended as of the date of the noting. - Duly noted means that a notary public jots down a note on the bill or on paper attached thereto, or in his registry book, consisting of his initials or signature and those matters required to be stated in section 153. Protest, where made: - GR: The protest must be made at the place where the instrument is dishonored. - EXC: When the bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by non-acceptance  It must be protested for non-payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. -

A bill which has been protested for non-acceptance may be subsequently protested for non-payment.

Protest for better security - DEFINITION  A bill protested before maturity - REQUISITES  A protest for better security must be made: a. After acceptance; b. But before the date of maturity; and c. When the acceptor has been adjudged bankrupt and insolvent or has made an assignment for the benefit of creditors.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

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NEGOTIABLE INSTRUMENTS LAW

Protest is dispensed with by any circumstances which would dispense with notice of dishonor.

honor – the payor supra protest – may even be a party to the instrument.

Protest may be made on a copy or written particulars thereof when: 1. A bill is lost or destroyed ; or 2. A bill is wrongfully detained from the person entitled to hold it

Procedure 1. The payer or his agent goes to a notary public and declares his intention to pay the bill and for whose honor he pays. 2. The notary then records the declaration in the protest or in a separate paper attached to it. 3. The payor then notifies the person for whose honor he pays within reasonable time.

-

DISCHARGE Definition - A release of all the parties liable from obligations arising thereunder. - It renders the instrument without force and effect and, consequently, it can no longer be negotiated. How a negotiable instrument is discharged 1. By payment in due course by or on behalf of the principal debtor; 2. By payment by accommodated party, where the instrument is made or accepted for his accomodation; 3. By the intentional cancellation thereof by the holder; 4. By any other act which will discharge a simple contract for the payment of money;  The law on Obligations and Contracts applies (Art 1231, NCC): a) Loss of the thing due b) Condonation or remission c) Confusion or merger d) Compensation e) Novation f) Annulment g) Rescission h) Fulfillment of resolutory condition i) Prescription 5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right. (Sec. 119) 6. By renunciation of the holder’s rights against the principal debtor under the terms of Sec. 122.

PAYMENT FOR HONOR Requisites 1. The bill has been dishonored by non-payment; 2. The bill has been protested for non-payment; 3. ANY PERSON, even a party thereto may pay supra protest. 4. The payment must be attested by notarial act of honor which may be appended to the protest, or form an extension to it; and 5. The notarial act of honor must be based on the declaration made by the payer for honor or his agent declaring his intention to pay the bill for honor and for whose honor he pays. -

As distinguished from acceptance for honor – the acceptor for honor must be a stranger. In payment for

Purpose - Instead of simple negotiation to the person desiring to pay, payment for honor may be availed of when the holder does not want to indorse the bill and thereby incur the liabilities of an indorser or of one negotiating by mere delivery. Preference of parties offering to pay for honor - The person whose payment will discharge most parties to the bill is to be given the preference. Effects on subsequent parties where bill is paid for honor 1. All parties subsequent to the party for whose honor it is paid are discharged. 2. The payer for honor is subrogated for and succeeds to both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. Effect if the holder refuses to receive payment supra protest - He loses his right of recourse against any party who would have been discharged by such payment. Rights of payer for honor: 1. He acquires the rights of the holder under Section 175; and 2. He has also the right to receive both the bill and the protest.

DEFENSES OF PRIOR PARTIES AGAINST THE HOLDER Classes of Defenses 1. Real or Absolute Defenses - Defenses which attach to the instrument irrespective of the parties and are predicated on the principle that the right sought to be enforced has never existed or has ceased to exist. - Available against ALL HOLDERS, whether in due course or not. - Real defenses: (WAD FIMMU WIFE) a) Want of delivery of an incomplete instrument; b) Alteration; c) Duress amounting to forgery; d) Fraud in factum or fraud in esse contractus; e) Insanity where the insane person has a guardian appointed by the court;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS f) Minority; g) Marriage in case of a wife; h) Ultra vires acts of a corporation; where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances; i) Want of authority of agent, real or apparent; j) Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute; k) Forgery; l) Execution of instrument between public enemies

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NEGOTIABLE INSTRUMENTS LAW

2.

b. Consideration c. Consent Lack of regularity in issue by absence of a. The material particulars of the questioned instrument, or in their correctness; b. Delivery of instrument made with the knowledge and/or conformity of the maker or the drawer and with intention of making the transferee a holder of the instrument.

Effects of defenses 2. Personal or Equitable Defenses - a personal or equitable defense is one growing out of an agreement or conduct of a particular person in regard to an instrument which renders it inequitable for him although owner of it, to enforce it against the defendant. - The defense is available against all holders NOT in due course EXCEPT those who derive their rights from holders in due course and who are not parties to any fraud or illegality affecting the instrument. 2 4 24 2 - Personal defenses: (W A F I N MU) a) Want of delivery of complete instrument; b) Want of authority of agent where he has apparent authority. c) Absence or failure of consideration, partial or total; d) Acquisition of the instrument by force, duress or fear; e) Acquisition of the instrument by unlawful means; f) Acquisition of the instrument for an illegal consideration; g) Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered; h) Fraud in inducement; i) Insertion of wrong date in an instrument, where it is payable at a fixed period after date and it is issued undated or where it is payable at a fixed period after sight and the acceptance is undated; j) Intoxication; k) Insanity where there is no notice of insanity on the part of the one contracting with the insane person; l) Illegality of contract where the form or consideration is illegal; m) Negotiation in breach of faith; n) Negotiation under circumstances that amount to fraud; o) Mistake; p) Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued. Abnormal and similarly deficient negotiable instrument A. Causes for Abnormality and Deficiency 1. Lack of Essential Requisites to a contract, which are: a. Lawful subject matter

A. Incomplete but delivered NI (Sec 14) 1. Holder has prima facie authority to complete the instrument; 2. Completion must be done strictly within a reasonable time and according to the authority given; 3. Holder in due course of the instrument previously completed in breach of instructions can enforce the same as if regularly completed. B. Incomplete and undelivered NI (Sec 15) - If completed and delivered without authority, not a valid contract against a person who has signed before delivery even in the hands of HIDC but subsequent holders are liable. C. Complete but Undelivered Instrument (Sec 16) - Between immediate parties and a remote party not a holder in due course, delivery to be effectual must be made by or under the authority of the maker, drawer, acceptor or indorser, as the case may be; a. If the instrument is in the hands of a holder in due course, all prior deliveries are conclusively presumed valid; b. If the instrument is out of the hands of the person who signed it, a valid and intentional delivery is disputably presumed. D. Absence or Failure of Consideration 1. Absence of consideration is the lack or want of consideration 2. Failure of consideration is failure of agreed consideration to materialize. 3. Both absence and failure of consideration are defenses personal to the prejudiced party, and available against any person not a holder in due course. 4. Partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. E. Forgery 1. Definition - Forgery is the counterfeit making or fraudulent alteration of any writing. - It may consist of:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS a)

Signing of another’s name with intent to defraud. (Sec. 23) b) Alteration of an instrument in the name, amount, description of payee, etc. with intent to defraud. (Sec. 124; N.B. the name for this defense is fraudulent alteration) 2. Governing rules a) GR: The signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party to it, is acquired through or under such signature. b) EXC: The party against whom it is sought to enforce such right is precluded from setting up the defense of forgery or want of authority. (Sec. 23) i. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors. ii. Those who, by their acts, silence, or negligence are estopped from setting up the defense of forgery. 3. Forgery in checks: a) Forgery in Signature of the DRAWER on a Check - the drawer is NOT liable and his drawee bank cannot charge the drawer’s account for said check because a bank is supposed to know the signatures of its customers, and bears the damage in case it pays under a forged signature of its drawer-customer. - the drawee bank is considered as paying out of its own funds and cannot charge the drawer’s account. (PNB v. CA, 25 SCRA 693)  Doctrine of Comparative Negligence – the party whose negligence is the proximate cause of loss bears the loss. - the risk of loss must perforce fall on the drawee bank. However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from asserting the forgery. If at the same time the drawee bank was also negligent to the point of contributing to the loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent bank. (Associated Bank v. CA, 252 SCRA 620). b) Forgery in the Signature of INDORSERS - As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two (2) types of cases: i. where forgery was accomplished by a person not associated with the drawerfor example a mail robbery; and ii. where the indorsement was forged by an agent of the drawer. (Gempesaw v. CA,

41

NEGOTIABLE INSTRUMENTS LAW 

As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer’s account for the amount of said check. An EXCEPTION to this rule where the drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check.

F. Material Alteration - Any alteration which changes the: 1. date, 2. sum payable, 3. time or place of payment, 4. number or relation of the parties, 5. medium or currency of payment, 6. adds a place of payment where none is specified, 7. which alters the effect of the instrument in any respect. - Effect: 1. Alteration by a party  Material alteration avoids the instrument EXCEPT as against the party who made, authorized or assented to the alteration, and subsequent indorsers  Where the altered instrument, however, is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. 2. Alteration by a stranger (spoliation) - same effect with that alteration made a party. (Sec. 124)

BILLS OF EXCHANGE Definition it is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126) Types 1. DRAFT - a common term for all bills of exchange and they are used synonymously.  In bank drafts, DRAWER and DRAWEE are liable to purchaser of draft for not complying with his instructions. 2. TRADE ACCEPTANCE - a bill of exchange payable to order and at a certain maturity, drawn by a seller against the purchaser of goods as drawee, for a fixed sum of money, showing on its face the acceptance of the purchaser of the goods and that it has arisen out of a purchase of goods by the acceptor.

218 SCRA 682).

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 3. -

BANKER’S ACCEPTANCE a draft or a bill of exchange of which the acceptor is a bank or banker engaged generally in the business of granting banker’s acceptance credit. It is similar to a trade acceptance, the fundamental difference being that the banker’s acceptance is drawn against a bank instead of the buyer. 4. TRUST RECEIPT - the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of PD 115 (Trust Receipt Law, which took effect on January 21, 1973). No further formality of execution or authentication shall be necessary to the validity of the trust receipt.  It is the ENTRUSTEE NOT the ENTRUSTER who is the real owner of the goods covered by the trust receipt.  The liability of the entrustee to the entruster is EX CONTRACTU not ex delicto. 5. TREASURY WARRANTS - a treasury warrant bearing on its face the words “payable from the appropriation for food administration” is actually an order for payment out of a particular fund and is NOT unconditional, and does not fulfill one of the essential requirements of a negotiable instrument. (Abubakar v. Auditor General) 6. MONEY ORDER - a species of draft drawn by the post-office upon another for an amount of money deposited at the first post office by the person purchasing the money order and payable at the second office to a payee named in the order. - Money order is NOT negotiable. 7. CLEAN AND DOCUMENTARY BILLS OF EXCHANGE a) Clean bill of exchange - is one to which are not attached documents of title to be delivered to the person against whom the bill is drawn when he either accepts or pays the bill. b) Documentary bill of exchange - is one to which are attached documents of title to be delivered and surrendered to the drawee when he accepts or pays the bill. 8. D/A AND D/P BILLS OF EXCHANGE a) Documents Against Payment Bill or D/P Bill - is a sight or time bill to which are attached documents to be delivered and surrendered to the drawee when he has paid the corresponding bill. b) Documents Against Acceptance Bill or D/A Bill - is a time bill to which are attached documents to be delivered and surrendered to the drawee when he accepts the bill. 9. TIME OR USANCE BILLS - are bills which are payable at a fixed future time or at a determinable future time. 10. SIGHT BILLS - are bills which are payable upon presentation or at sight or on demand.

COMMERCIAL LAW

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NEGOTIABLE INSTRUMENTS LAW 11. INLAND BILL OF EXCHANGE - is a bill which is or on its face purports to be BOTH drawn and payable within the Philippine Islands. 12. FOREIGN BILL OF EXCHANGE - is a bill which is, or on its face purports to be, drawn or payable outside the Philippine Islands. a. to be drawn in the Philippines but payable outside thereof; or b. to be payable in the Philippines but drawn outside thereof. Importance of the distinction: 1. The distinction is important because foreign bills are required to be protested. Failure to protest foreign bills will discharge persons secondarily liable thereon. 2. The distinction is also important for the determination of the law applicable. When a bill may be treated as promissory note 1. Where the drawer and the drawee are the same person such as, in a draft drawn by an agent on his principal by authority of the principal. 2. Where the drawee is a fictitious person. 3. Where the drawee has no capacity to contract. Referee in case of need - is the person whose name was inserted by the drawer of the bill and any indorser to whom the holder may resort in case of need – that is in case the bill is dishonored by non-acceptance or by non-payment. - It is the option of the holder to resort to the referee in case of need or not as he may see fit.

BILLS IN SET Definition - One composed of various parts, each part being numbered and containing a reference to the other parts, all of which parts constitute but one bill. Purpose - To increase the probability of the bill reaching its destination. Right of holders where different parts are negotiated - Where two or more parts are negotiated to different holders in due course – the holder whose title first accrues – as between such holders – is the true owner of the bill. Liability of holder who indorses two or more parts of a set to different persons a) He is liable on every such part; and b) Every indorser subsequent to him is liable on the part he has himself indorsed – as if such parts were separate bills. Acceptance of bills in set - The acceptance may be written on any part and it must be written on ONE PART only.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS Effect if the drawee accepts more than one part - If the drawee accepts more than one part and such accepted parts are negotiated to different holders in due course, he is liable on every part as if it were a separate bill. Payment by acceptor of bills drawn in sets - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course – he is liable to the holder thereof. Effect of discharging one of a set: - Where one part of a bill drawn in a set is discharged by payment or otherwise – the whole bill is discharged – except as otherwise provided.

PROMISSORY NOTES AND CHECKS Promissory Note - An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or bearer. 

Where a note is drawn to the maker’s own order, it is NOT complete until indorsed by him.

Special types of promissory notes 1. CERTIFICATE OF DEPOSIT - is a written acknowledgment by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer, or to some other person or order. - It is NOT ipso facto negotiable – it must first comply with the requirements provided under Section 1, NIL. 2. BONDS - A promise, under seal, to pay money. - The bond certifies that the issuing company is indebted to the bondholder for the amount specified on the face of the bond, and contains an agreement of the company to pay the sum at a specified time in the future, and meanwhile to pay a specified interest on the principal amount at regular intervals, generally six months apart. They are negotiable if all the requisites in Section 1, NIL are complied with. - Classes of bonds: a) Mortgage bonds; b) Equipment Bonds; c) Collateral trust bonds; d) Guaranteed bonds; e) Debentures; and f) Income bonds; g) Convertible bonds; h) Redeemable Bonds; i) Registered Bonds; and

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NEGOTIABLE INSTRUMENTS LAW j)

Coupon Bonds  Those to which are attached a sheet of dated, numbered and similarly printed coupons which the bondholder may cut off when due or thereafter.  Such coupons may be served and deposited in a bank, negotiated before the maturity of the interest they represent, and transferred just like any commercial paper.  They are negotiable if all the requisites in Section 1, NIL are complied with. 3. BANK NOTES - Are promissory notes of the issuing bank payable to bearer on demand and intended to circulate as money. They are regarded as cash and pass from hand to hand without any evidence of title in the holder than that which arises form possession. However, they are not money. 4. DUE BILLS - Is an instrument whereby one person acknowledges his indebtedness to another. 5. MORTGAGE NOTE 6. TITLE RETAINING NOTE 7. COLLATERAL NOTE 8. JUDGMENT NOTE Check - A bill of exchange drawn on a bank payable on demand. 

Acceptance is NOT required for checks for the same are PAYABLE ON DEMAND.



A check is a bill of exchange payable on demand – is intended for immediate use and NOT to circulate as a promissory note.

Special types of checks 1. CASHIER’S CHECK - It is a check drawn by the cashier of a bank in the name of the bank against the bank itself payable to a third person or order. 2. MANAGER’S CHECK - Drawn by the manager of a bank in the name of the bank against the bank itself payable to a third person. - It is similar to the cashier’s check as to effect and use. 3. MEMORANDUM CHECK - a check on which is written the word “memorandum”, “memo”, and “mem”, signifying that the drawer engages to pay the bona fide holder absolutely and not upon a condition to pay upon presentment and nonpayment. 4. CERTIFIED CHECK - a check on which the drawee bank has written an agreement whereby it undertakes to pay the check at any future time when presented for payment, such as, by stamping on the check the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

5.

6.

word “certified” and underneath it is written the signature of the cashier. TRAVELER’S CHECK - one in which the holder’s signature must appear twice, one to be affixed by him at the time it is issued and the second or counter-signature to be affixed by him in the presence of the payee before it is paid, otherwise, it is incomplete. CROSSED CHECK - How is crossing of check done:  it is usually done by drawing two parallel lines transversally on the face of the check. A check may be crossed (1) specially or (2) generally. - Crossing specially  a check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn transversally on the face of the check. - Crossing generally  a check is crossed generally when only the words “and company” are written between the parallel lines, or when nothing is written at all between the parallel lines. - Under crossed checks, the payee has the duty to ascertain the holder’s title to checks. - The holder should not present for encashment a crossed check but deposit the same for collection. - Where other than payee of crossed checks presented it for payment, there is no proper presentment and drawer is not liable thereon. - Advantages of crossing check:  it is a good precaution when it is to be forwarded by mail or when it is entrusted to an agent and the drawer wants to be sure that it will be paid to the rightful owner.

Check – when it should be presented for payment - A check MUST be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186) - Must be presented within six (6) months – otherwise it will become stale. - a check under BP 22 must be presented for payment to the bank within 90 days from date so that the holder will enjoy the benefit of the prima facie presumption that the maker, drawer, or issuer knows at the time of issue that he does not have sufficient funds in or credit with the drawee bank for payment of such check.

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-

-

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DEFINITION OF TERMS 1.

2. 3.

5.

6. Certification of check

is an agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment.  A bank is NOT obliged to the depositor to certify checks. The certification of a check is equivalent to an acceptance. Form of certification:  No particular form is required – but it must be in writing.  The letters “O.K.”, with the initials of the cashier of a bank do not constitute a sufficient certification under modern banking practice. Effect of Certification: 1. It is equivalent to acceptance and is the operative act that makes the drawee bank liable; 2. It operates as an assignment of the funds of the drawer in the hands of the drawee bank; 3. If obtained by the holder, it discharges persons secondarily liable thereon; 4. The payee or holder, for all intents and purposes, becomes the depositor of the drawee bank, with rights and duties of one in such a situation; and 5. The drawee may not issue a stop payment order on the certified check. Effect where the holder of check procures it to be certified: a) Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. b) Indorsers subsequent to the certification are not discharged.

When check operates as an assignment - A check of itself does not operate as assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check.

4. Effect if the check was allowed to become stale - The drawer is discharged but only to the extent of the loss caused by the delay. - Hence, if no loss or injury is shown, the drawer is not discharged.

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NEGOTIABLE INSTRUMENTS LAW

ACCEPTANCE - an acceptance completed by delivery or notification. ACTION - includes counterclaim and set-off. BANK - includes any person or association of persons carrying on the business of banking, whether incorporated or not. BEARER - the person in possession of a bill or note which is payable to bearer. BILL - bill of exchange; and “NOTE” means negotiable promissory note. DELIVERY - transfer of possession, actual or constructive, from one person to another.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 7.

8. 9. 10.

11.

12. 13.

COMMERCIAL LAW

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NEGOTIABLE INSTRUMENTS LAW

HOLDER - the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof. INDORSEMENT - an indorsement completed by delivery. INSTRUMENT - negotiable instrument. ISSUE - first delivery of the instrument, complete in form, to a person who takes it as a holder. PERSON - includes a body of persons, whether incorporated or not; VALUE - valuable consideration. WRITTEN - includes printed manner; and “WRITING” includes print

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

CORPORATION CODE of the Philippines (BP Blg. 68, effective May 01, 1980) I. II. III. IV. V. VI. VII. VIII. IX. X. XI.

XII. XIII.

XIV. XV. XVI.

General Provisions Incorporation and Organization of Private Corporations Board of Directors/Trustees/Officers Powers of Corporation By-Laws Meetings Stocks and Stockholders Corporate Books and Records Merger and Consolidation Appraisal Right Non-Stock Corporations a. Members b. Trustees and Officers c. Distribution of Assets in Non-Stock Corporations Close Corporations Special Corporations a. Educational Corporations b. Religious Corporations Dissolution Foreign Corporations Miscellaneous Provisions

----------------------------------------------------------------------I. GENERAL PROVISIONS A. CORPORATION DEFINED Corporation -It is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec. 2). Attributes of a Corporation (CAPS) 1. Created by operation of law 2. Artificial being 3. Powers, attributes and properties expressly authorized by law or incident to its existence 4. Right to Succession a.

Created by operation of law. No Private Corporation could validly exist unless there is a law that creates it. Consent of the state is needed. If not made by operation of law, it becomes a corporation by estoppel. b. Artificial being. It is not a natural person. It is not liable for the acts of its stockholders or members. c. Powers, attributes and properties. Acquire real/personal properties. Powers: (a) Those expressly authorized by law. 1. Secs. 36-44 Corporation Code; 2. Articles of Incorporation/By laws; (b) Those incidental to its existence; 1. Those implied from its express powers;

COMMERCIAL LAW

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CORPORATION LAWS 2. Those fairly related or incidental to its existence, direct or immediate to the furtherance of the corporation’s business. Requirements so that a private corporation could hold real properties in the Philippines: 1. 60% shareholdings should at least belong to Filipinos. It is the extent of shareholdings and not the number of persons. 40% shareholdings for aliens; 2. Place of incorporation should be in the Philippines. If incorporated outside the Philippines even if 60% of the shareholdings is Filipino owned, it is a foreign corporation.  If incorporated in the Philippines but less 60% stock is Filipino owned it is a Philippine (domestic) corporation, but it could not acquire real properties in the Philippines.  Acquired properties belong to the corporation, not to the stockholders/members, because of its separate and distinct personality. d. Right to succession. The corporation is not affected by anything that happens to its stockholders (insolvency, death, incapacity, etc). It continues to exist for the term stated in its articles of incorporation except when earlier dissolved. Right of Stockholders in Corporate Property a. There is no real interest in the corporate property. It is a mere expectancy inchoate in nature; b. It ripens into real right only upon dissolution of the corporation on the assumption that all debts are already paid; Suit - A corporation cannot represent its stockholders in a suit. - Gen. Rule: A corporation is not entitled to a claim for moral damages.  Reason: Being an artificial person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Mental suffering can be experienced only by one having a nervous system. - Exception: If the good reputation of a corporation is debased or besmirched resulting in social humiliation, this may be a ground for recovery of moral damages and attorney’s fees. Doctrine of separate personality - A corporation has a juridical personality separate and distinct from that of its stockholders or members. - Used for purposes of convenience and to subserve the ends of justice - Consequences: 1. Ownership of property, capacity to sue and be sued in its own right (Art. 46, NCC);

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS 2. 3. 4.

Entitlement to constitutional rights; eg. Due process, equal protection; Liability for crimes or torts; Cannot always claim equal rights with natural persons; i.e. entitlement to moral damages.

Piercing the veil of corporate fiction - This doctrine allows the State to disregard the fiction of juridical personality of the corporation where the entity is formed or used for non-legitimate purposes. - Grounds: 1. Where corporate fiction is used to defeat public convenience;  Corporate Fiction is a personality separate from the stockholders/members.  Public Convenience: Instead of dealing with all the individual stockholders, it is for public convenience to deal with the corporation alone. 2. Where corporate fiction is used to justify a wrong, to protect fraud, or to defend a crime; 3. Where the corporation serves as a mere alter ego of another person; 4. Where the corporation serves merely as an instrument of another corporation. 5. Where the corporation is controlled by aliens, in violation of the law as where it was organized under Philippine laws but most of its stockholders are Germans (normally a Filipino corporation), the Supreme Court went beyond the corporate fiction during the war and considered it as an enemy corporation. Alter Ego or Instrumentality Rule Requisites: 1. There must be control, not merely majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (control) 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right (breach of duty) ; and 3. Such control and breach of duty must proximately cause the injury to the plaintiff. 

In piercing the veil, the stockholders become liable instead of the corporation.



Do not immediately pierce the veil just because a ground exists. Determine first the facts and circumstance.  Steps: A. Determine first the following Items: 1. Common Ownership 2. Identity of directors;

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CORPORATION LAWS 3. 4.

Manner of keeping records; Manner of conducting business.

B. Is there a misuse of corporate fiction? The mere control by a single person of the majority shares is not a ground to pierce the veil [Sunio vs. NLRC, 127 SCRA 390 (1984)] Evidence of fraud must be proven clearly and convincingly [Del Rosario vs. NLRC, 182 SCRA 777 (1990)]

Purpose of Piercing the Veil 1. To seek satisfaction of an obligation directed against the stockholders; 2. Direct always the action against the stockholders: If directed against the corporation, you cannot anymore pierce the veil. A suit cannot be brought against the corporation to satisfy the obligation of its stockholders. {Umali case [182 SCRA 529 (1990)]} Net Effect of Piercing the Veil a) Only One Corporation: Liability attaches to its stockholders; b) Two or more Corporations: The court treats them as only one.

B. CLASSES OF CORPORATIONS 1. As to existence of shares of stock a. Stock Corporation – a corporation (1) which has capital stock divided into shares and (2) is authorized to distribute to the shareholders dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3) b. Non-Stock Corporation – a corporation which does not issue stock and distribute dividends to its members. 2. As to number of persons composing the corporation a. Corporation Aggregate – a corporation consisting of more than one member or corporator. b. Corporation Sole – a religious corporation which consists of one member or corporator only and his successors, such as a bishop. (Sec. 110) 3. As to legal status a. De Jure Corporation – organized in accordance with the requirements of law; existing both in fact and in law. b. De Facto Corporation – organized with a colorable compliance with the requirements of a valid law; existing in fact but not in law. Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec. 20)  Why quo warranto? 1. It is the State’s right and authority which are invaded and usurped;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 2.

3.

It would produce endless confusion and hardship and probably destroy the corporation if the legality of its existence could be questioned in every suit; The rule is in the interest of the public and is essential to the validity of business transactions with corporations.

 How can there be a de facto status? 1. Defect in the acknowledgement; 2. Incomplete requirements; 3. Residency requirement is overlooked; but it was still issued a certificate of incorporation.  Requisites of a de facto corporation: 1. Existence of a valid law under which it may be incorporated; 2. A bona fide attempt in good faith to incorporate under such law; 3. Actual use or exercise in good faith of corporate powers; and 4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of good faith. 

A de jure corporation can successfully resist a suit by the State brought to challenge its existence; a de facto cannot sustain its right to exist.

c.

Corporation by Estoppel - a group of persons that assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It is precluded to deny its existence in an action under said transaction. It is neither a de jure nor de facto corporation. (Sec. 21)  Doctrinal Basis: It is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons.

d.

Corporation by Prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law is given the status of a corporation, e.g. Roman Catholic Church.

4. As to relationship of management and control a. Parent/Holding Corporation – one which controls another as a subsidiary by the power, either directly or indirectly, to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment.

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CORPORATION LAWS b. Subsidiary Corporation i. Majority-owned Subsidiary – its capital stock (51% to 94%) is owned by another corporation. ii. Wholly-Owned Subsidiary – its capital stock (95% to 100%) is owned by another corporation. c. Affiliates – companies subject to the common control of the Holding Corporation. d. Parent and Subsidiary Corporation – separate entities with power to contract with each other. The BOD of the Parent Company determines its representatives to attend and vote in the stockholders’ meeting of its subsidiary. The stockholders of the Parent company demand representation in the Board meetings of its subsidiary. 5. As to place of incorporation a. Domestic Corporation – a corporation formed, organized, or existing under Philippine laws. b. Foreign Corporation – a corporation formed, organized or existing under any laws other than those of the Philippines. (Sec. 123) 6. As to Functions a. Public Corporation – one formed or organized for the government of a portion of the State for the general good and welfare. b. Private Corporation – those formed for private purpose, usually for profit-making.  Private corporation includes: 1. Government –owned or controlled corporation – one created or organized by the government or of which the government is the majority stockholder; it is not for the government of a portion of the State, e.g. GSIS, SSS, PNRC 2. Quasi-Public Corporation (a.k.a. “public utility” or “public service corporation”)– a private corporation which have accepted from the State the grant of franchise or contract involving the performance of public duties but which are organized for profit. – e.g. electric, water, telephone and transportation companies.  Officers and employees of GOCCs with original Charter (created by special law) = under Civil Service  Those incorporated under the Corporation Code, governed by the Labor Code. (Const., Art IX- B, Sec. 2 [1])

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS Tests to determine the nationality of corporations 1. INCORPORATION TEST – determined by the state of incorporation, regardless of the nationality of the stockholders. 2. DOMICILE TEST – determined by the State where it is domiciled. 3. CONTROL TEST or WAR-TIME TEST – determined by the nationality of the controlling stockholders or members. It is applied in times of war. Domicile – the domicile of a corporation is the place fixed by law creating or recognizing it, in the absence thereof, it shall be understood to be the place where its legal representation is established or where it exercises its principal functions (Art. 51, New Civil Code) Corporation as a Philippine national (under RA 7042, Foreign Investment Act of 1991) 1. A corporation organized under the law of the Philippines of which at least 60% of the outstanding capital stock entitled to vote is owned by Filipino citizens; 2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding capital stock entitled to vote is wholly owned by Filipinos; and 3. Where a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60 % of the members of the Board of Directors of both corporations must be Filipino citizens (Double 60% Rule)  The law applies the Control Test both with respect to the ownership of shares entitled to vote and the membership in the BOD. Grandfather rule - The method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the constitution and other nationalization laws, is computed, where there are corporate shareholders. - Shares belonging to corporations or partnerships at least 60 % of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. - But if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Nationalized corporations: 1. 100% Filipino owned: a. Mass media (radio, TV, and printed) b. Rural Banks – 100% of its capital stock c. Rice and corn industry d. Security, watchman, and detective agency 2. 70% Filipino owned

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CORPORATION LAWS a. Advertising Industry b. Banks other than rural banks and new banks established by consolidation of branches or agencies of foreign banks in the Philippines c. Private development Banks d. Savings and Loan associations 3. 60% Filipino owned a. Financing companies - 60 % of its capital stock b. Fishing and business activity relating to fishing Industry – 60% of its capital stock c. Exploration, Development, and Utilization of Natural Resources d. Owners of lands e. Operation of Public Utility f. Educational institutions other than those established by religious groups g. Any business reserved by Congress 4. Majority Owned by Filipinos a. Investment House Advantages of a corporation over an unregistered association 1. Enjoys perpetual succession under corporate name and in an artificial form; 2. Can take and grant property; 3. Can contract obligations; 4. Can sue and be sued in its corporate name as a juridical person; 5. Capacity to receive and enjoy common grants and privileges and immunities; 6. No personal liability beyond value of their shares.

C. CLASSIFICATION OF SHARES 1.

Common Shares – the basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever.

2.

Preferred Shares – those issued wit par value, and preferences either with respect to (a) payment of dividends (b) distribution of assets after dissolution, or (c) such other preferences as may be stated in the Articles of Incorporation which are not violative of the Corporation Code. – Kinds of Preferred Shares: a) Preferred share as to assets b) Preferred share as to Dividends - Cumulative Preferred Share – a share which entitles the holder thereof not only to the payment of current dividends but also to dividends in arrears. If the stipulated dividend is not paid in a given year, it shall be added to the dividend which shall be due the following year and the accumulated dividends must be paid to the shareholder before any

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

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dividend may be paid to common stockholders. Non-Cumulative Preferred Share – It is a share which entitles the holder thereof to the payment of current dividends only in preference to common stockholders. Participating Preferred share – A share which gives the holder thereof not only the right to receive the stipulated dividends but also to participate with the holders of common shares in the remaining profits pro rata after the common shares have been paid the amount of the stipulated dividend at the same preferred rate. Non-Participating Preferred Share – It is a share which entitles the holder thereof to receive the stipulated preferred dividends and no more. The balance, if any, is given entirely to the common stocks. Cumulative –Participating Preferred Share – The holder is entitled not only to dividends in arrears but also, after receiving his preferred share of dividends, to participation with the holders of common stocks in the remaining profits.

3.

Deferred Shares – Those shares in which the payment of dividends upon them is expressly postponed until the preferred and common shares are paid.

4.

Redeemable Shares – those which permit the issuing corporation to redeem or purchase its own shares.  Limitations: a. Redeemable shares may be issued only when expressly provided for in the Articles of Incorporation; b. The terms and conditions affecting such shares must be stated both in the articles of Incorporation and in the certificates of stock representing such shares; c. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless otherwise provided in the Corporation Code.  Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock.  Redemption may not be made where the corporation is: a. insolvent; or b. if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature.

5.

Treasury Shares – Shares which have been lawfully issued by the corporation and fully paid for and later reacquired it

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CORPORATION LAWS either by purchase, redemption, donation, forfeiture or other lawful means.  If purchased from stockholders: The transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause impairment of the capital.  If acquired by donation from the stockholders: The act would amount to surrender of their stock without getting back their investments that are, instead voluntary given to the corporation.  Treasury shares need not be sold at par or issued value but may be sold at the best price obtainable, provided it is reasonable. When treasury shares are sold below their par or issued value, there can be no watering of stock because such watering contemplates an original issuance of shares. 6.

Founder’s Shares – shares issued to organizers and promoters of a corporation in consideration of some supposed right or property. Shares classified as such in the AI which may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, it needs the approval of the SEC, and cannot exceed 5 years from the date of approval.

7.

Par Value Shares – Shares with a value fixed in the certificates of stock and in the Articles of Incorporation.

8.

No Par Value Shares – Shares having no par value but have issued value stated in the certificate or AI.  Limitations: a. No par value shares cannot have an issued price less than P5.00; b. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c. They cannot be issued as preferred stocks; d. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan associations; e. The AI must state the fact that it issued no par value shares as well as the number of shares; f. Once issued, they are deemed fully paid and non-assessable. (Sec. 6)

9.

Voting Shares – shares with a right to vote.

10. Non-Voting Shares – shares without right to vote.  The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided there shall always

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

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

be a class or series of shares which have complete voting rights. These redeemable or preferred shares, when such voting rights are denied, are still entitled to vote on the following: a. Amendment of Articles of Incorporation; b. Adoption and amendment of by-laws; c. Sale or disposition of all or substantially all of corporate property; d. Incurring, creating or increasing bonded indebtedness; e. Increase or decrease of capital stock; f. Merger or consolidation or corporations; g. Investments of corporate funds in another corporation; h. Dissolution of corporation. (Sec. 6)

11. Watered Stock – a stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services.  “Water” in stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks. 12. Escrow stock – deposited with a third person to be delivered to a stockholder or his assign after complying with certain conditions, usually payment of subscription price. 13. Convertible Shares – shares that are changeable by the stockholder from one class to another at certain price and within a certain period.  Convertibility of Shares a. Preferred to Common – in the absence of an express provision in the AI as to that convertibility, preferred shares cannot be converted to common. b. No Par Value to Par Value – allowed by SEC provided there would be no change in the stockholders’ percentage interest in the total assets of the corporation.

issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities (Sec. 6). ----------------------------------------------------------------------II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS A. Theories on the Formation of a Corporation 1. Concession Theory – espouses that a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the SEC. 2. Theory of corporate enterprise or economic unit – espouses that the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. B. Steps in the Creation of a Corporation (Sec. 10) 1. Promotion - is a number of business operations peculiar to the business world by which the company is brought into existence. - Procuring necessary legislation; - Getting incorporations together; - Procuring necessary subscribers to the articles of incorporation.  This can, however, be dispensed with if the persons promoting have sufficient capital or funds; hence, there is no need to attract prospective investors to come in. 2.

Incorporation Proper (Sec. 10): - Drafting and execution of the Articles of Incorporation - Filing with the SEC of the Articles of Incorporation accompanied by an affidavit showing that at least 25% of the entire authorized shares has been subscribed and at least 25% of the entire subscription has been paid in cash. - If governed by a special law, a favorable recommendation of the appropriate government agency is needed in filing the Articles of Incorporation. - Payment of filing and publication fees. - Issuance of Certificate of Incorporation by the SEC (within a period of two years).

3.

Formal Organization and Commencement of Business Operations (Sec.22): - Election of Board of Directors/Trustees, its corporate officers (President, Vice President, Secretary, Treasurer) within 2 years from date of incorporation. - If it fails, then: a. corporate powers cease; b. corporation can be deemed dissolved.

14. Street Certificate – a stock certificate endorsed by the registered holder in blank and the transferee can command its transfer to his name from the issuing corporation. 15. Over-issued/Spurious Stock – stock issued in excess of the authorized capital stock. Its issuance is null and void. 16. Fractional Share – a share with a value less than one full share. Doctrine of equality of shares - Where the Articles of Incorporation do not provide for any distinction of the shares of stock, all shares

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Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

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2009 BAR OPERATIONS -

If it commenced transaction of business but subsequently becomes inoperative for a period of at least 5 years, the same shall be a ground for the suspension of its corporate franchise (Certificate of Incorporation).



Promoter – a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. Incorporators – They are those mentioned in the article of Incorporation as originally forming and composing the corporation, having signed the AI and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute. Stockholders/Shareholders – owners of shares in a corporation which has a capital stock. Members – corporators of a corporation which has no capital stock. Corporators – those whose comprise the corporation whether as stockholders or members.









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C. Franchises of a Corporation 1. Primary Franchise - Right or privilege granted by the State to individuals to exist and act as a corporation after its incorporation. It is inalienable. It is a part of the corporation and cannot be sold or assigned; otherwise, a corporation would be created without the consent of the legislature. 2. Secondary Franchise - The special right or privilege conferred upon an existing corporation to the business for which it was created. May ordinarily be conveyed/mortgaged under the general power granted to a corporation to dispose of its property, except such franchises charged with a public use (e.g., to operate a messenger and express delivery service, to use the streets of a city to lay pipes or tracks). Primary Franchise vs. Secondary Franchise Primary Franchise

Secondary Franchise

1. refers to the franchise of being or existing as a corporation 2. vested in the individuals who compose the corporation 3. It cannot be sold or transferred because it is inseparable from the corporation itself.

1. refers to the exercise of rights. Example: eminent domain 2. deemed vested in the corporation 3. It may be sold or transferred, subject to sale on execution or levy

D. Number & Qualifications of Incorporators 1. Not less than 5 but not more than 15 incorporators who must be natural persons - Reason: Artificial persons, without brain or body and existing only on paper through legislative command, cannot create other artificial persons. - Exception: Rural Banks Act of 1992 (Sec. 4, RA No. 7353). Duly established cooperatives and corporations primarily organized to hold equities in rural banks and/or subscribe shares of stocks of a rural bank can be incorporators of rural banks. - Exception to the number requirement: a corporation sole which is incorporated by only one person, e.g., bishop, priest, rabbi - A corporation may become a stock holder in another corporation by subscribing or purchasing the latter’s stocks for the power of one corporation to own a stock in another corporation is entirely different from its power to create or itself become one of the incorporators of another corporation. - A cooperative cannot be a corporation because a corporation must be formed under the Corporation Code, but it has a separate legal existence from its members. 2.

Incorporators must have the capacity to enter into a valid contract. - Reason: an act of forming a corporation is contractual in nature. - It must be acknowledged before a notary public (its articles of incorporation). - It is also to secure the State and all concerned individuals against the possibility of any fictitious name being subscribed to the articles and to furnish proof of the genuineness of the signatures.

3.

Majority of the incorporators must be residents of the Philippines. - A corporation composed of entirely aliens may be incorporated as long as a majority of the incorporators are residents of the Philippines, except in cases of nationalized corporations. - Reasons for Residence Requirement: a. Because they transact business in the Philippines. b. So that they could be easily notified (as when there are special or regular meetings).

4. Citizenship Requirement - It is a necessary qualification for incorporators in corporations in which a certain percentage of the capital stock is required to be owned by Filipino Citizens. This rule applies to directors and trustees. - Reason: Certain nationalized activities are exclusively reserved to Filipino Citizens like quasi-public corporations.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 5.

Each of the incorporators of a Stock Corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. - Reason: The presumption is that where an incorporator has a pecuniary interest in the corporation, he will be concerned with the management of its affairs.

E. Corporate term (limitations [sec. 11]) 1. Shall not exceed 50 years at any given time. 2. Extension may be made by amendment of the Articles of Incorporation. - When: a. Within the period of 5 years before the expiry date. b. Earlier than 5 years could be made if there is a justifiable reason as determined by the SEC. - Procedure for Extension (Sec. 37) a. Amendment of the Articles of Incorporation to be approved by a majority vote of the Board of Directors/Trustees (board resolution) and ratified at a meeting of stockholders representing at least 2/3 of the capital stock (or 2/3 of the members). b. Written notice of the proposed action, time, place of the meeting must be addressed to each stockholder as shown in the corporate books; c. Delivery of the notice to the stockholder by depositing the same to the addressee in the post office with postage prepaid, or served personally d. Amendments (with appropriate markings) will be submitted to the SEC attached to the original copy. e. Amendment is effected before the corporate term of existence, for after dissolution by expiration of the corporate term, no more corporate life to extend: 



Doctrine of Relation: Where the delay in effecting the amendment is due to the neglect of the officer with whom the application is required to be filed or to a wrongful refusal on his part to receive it, the same will be treated as having been filed before the expiry date. But the occurrence of a fortuitous event or force majeure may justify the doctrine. The doctrine does not apply if the delay is attributable to the corporation. Appraisal Right of Dissenting Stockholder: He can demand payment for the full value of his share if he does not wish to join.

F. Corporate Structure of a Stock Corporation  Definition of Terms: 1. CAPITAL – The value of the actual property or estate of the corporation whether in money or property. Its net worth or stockholder’s equity is its assets less liabilities. 2. CAPITAL STOCK – The amount fixed in the articles of incorporation, to be subscribed and paid in or agreed to

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CORPORATION LAWS be paid in by the stockholders of a corporation, in money, property, services, or other means at the organization of the corporation or afterwards and upon which it is to conduct its business, such contribution being made either through directly through stock subscription or indirect through the declaration of stock dividends. 3. AUTHORIZED CAPITAL STOCK – The capita stock divided into shares with par values. Par value stocks are required in the case of corporations issuing preferred shares, as well as in the case of banks, trust companies, insurance companies, building and loan associations, and public utilities. It is the total amount in the charter which may be raised by the corporation for its operations. 4. SUBSCRIBED CAPITAL STOCK – The total amount of the capital stock subscribed whether fully paid or not. 5. PAID-UP CAPITAL STOCK – The amount paid by the stockholders on subscriptions from unissued shares of the corporation. 6. OUTSTANDING CAPITAL STOCK – The total amount of the capital stock issued to subscribers except treasury shares. 7. UNISSUED CAPITAL STOCK – That portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends. 8. LEGAL CAPITAL – The amount equal to the aggregate par value and/or issued value of the outstanding capital stock. (1) Minimum Capital Stock a. General Rule: No minimum capital stock is required for stock corporations incorporated under the Corporation Code as long as the paidup capital is not less than P5,000.00 Exception: Filipino percentage ownership requirement regarding corporate capital in nationalized corporations. (2) Minimum Subscription and Paid-Up Capital for Incorporation a. Minimum Subscribed Capital – At least 25% of the authorized capital stock as stated in the Articles of Incorporation must be subscribed at the time of incorporation; Computation of the 25% subscription requirement: 1. Where capital stock consists of par value shares: The minimum subscription should be 25% of the amount of the authorized capital stock or 25% of the aggregate value of all the shares of stock the corporation is authorized to issue. In par value stock corporations, the percentage subscription requirement shall always be based on the amount of the authorized capital stock irrespective of the class, number, and par value of the shares. 2. Where the capital stock consist of no par value shares: The 25% requirement shall be computed on the basis of the entire number of authorized shares. Corporations whose shares have no par value have no authorized capital stock

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

3.

b.

-

-

the issued price of no par value shares need to be fixed in the articles of incorporation. Where the capital stock is divided into par value shares and no par value shares: The requirement as to par value shares is as indicated above and for the no par value shares, the 25% is based on the number of the said no par value shares.

Minimum Paid-Up Capital – At least 25% of the total subscription must be paid upon subscription but must not be less than P5, 000.00. Reason: To give assurance to the investing public dealing with the new corporation that it is financially and actually able to operate and undertake to do business as they arise from the start of its operations. Exception: when special laws require higher minimum capitalization such as: 1. Insurance Corporations – P5 million 2. Pawnshop established as a corporation – P100,000.00 3. Financial Intermediary applying for authority to perform quasi-banking functions – P50 million

Ways of increasing capital stock: 1. By increasing the number of shares and retaining the par value; 2. By retaining the number of shares and increasing the par value; 3. By increasing the number of shares and increasing the par value; 4. By reinvesting retained earnings to the capital and issuing stock dividends. Tools available to the stockholders to replenish capital 1. Additional subscription to shares of stock of the corporation by the stockholders or by investors; 2. Advances by the stockholders to the corporation; 3. Payment of unpaid subscription by the stockholders.

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CORPORATION LAWS Contents: - Generally 1. Name of the corporation; 2. Specific purpose for which the corp. is being incorporated; 3. Location of principal office which must be within the Philippines; 4. Corporate term; 5. Incorporators’ names, nationalities and residences; 6. Number of Directors or trustees, which shall not be less than 5 nor more than 15; 7. Names, nationalities and residences of persons acting as directors/trustees until the first regular directors/trustees are duly elected and qualified; - If stock corp: 1. Amount of its authorized capital stock in lawful money of the Philippines; 2. Number of shares into which it is divided; 3. If par value shares, the par value of each, names, nationalities and residences of the original subscriber, the amount subscribed and paid; 4. If some or all of the shares are without par value. - If non-stock corp: 1. The amount of its capital; 2. Names, nationalities, and residences of the contributors; and 3. The amount contributed by each. 4. The articles of incorporation must state the amount of its capital or money contributed or donated by specified persons. 5. Sworn statement of the treasurer elected by the subscribers showing a. A copy of the articles filed which is returned with the certificate of incorporation issued by the SEC under its official seal becomes its corporate charter. b. Corporation created by special law has no articles of incorporation. It draws its life not from a general law, but from a direct act of Congress. c. If that corporation is regulated by a government agency, submit also a favorable recommendation of that agency.

G. Articles of incorporation (AI) Articles of Incorporation - The document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the Corporation Code. Significance - Its issuance signals the birth of the corporation’s juridical personality. Language Used - Any of the official languages duly signed and acknowledged by all of the incorporators.

Corporate name - Necessity of putting the corporate name: 1. The corporation acquires juridical personality under the name stated in the articles of Incorporation; 2. The corporation has the power to succession thru that name; 3. It identifies and distinguishes it from other corporations; 4. By its name it is authorized to transact business; 5. Corporate/trade name is a property right, a right in which it may assert and protect against the whole world. - Guidelines for Corporate Name (Sec. 18) 1. Not identical or deceptively or confusingly similar to that of another existing corporation or to any other name already protected by law.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 2. 3.

4.

Not patiently deceptive or contrary to existing law; The name of the corporation must end with word “Incorporated” or “Inc.” unless it includes the word “corporation”. Prohibited Use of Certain Words: a. Emblem, official seal, and the name of the United Nations both in its full or abbreviated form for commercial purposes (RA No. 226); b. Unlawful to use the word “Bonded”, in part or in whole as business name of those maintaining any warehouse not licensed under the General Bonded Warehouse Act (Act No. 3893). c. Using the word “bank”, “banking”, banker”, “building and loan association”, “trust corporation”, “trust company”, or words of similar import, when not conducting the business of commercial banking corporation, trust corporation, savings and mortgage bank, or building and loan association; d. Using the words “Rural Bank”, when not authorized under the Rural Banks Act (RA No. 7353); e. Using the term “savings and loan association” when not organized under the Savings and Loan Association Act (RA No. 3779), or the term “development bank” unless organized under the Private Development Banks Act (RA No. 4093); f. Using the word “National” as portion of their name or title, except the Philippines National Bank (PD 694), due to its connotation of being a government agency or a government-owned or controlled corporation; g. “UN”, “Olympic”, and Bureau in full or abbreviated form or business purposes; h. “Financing Company”, “Finance Investment Company”, unless organized as a financing company (RA No. 5980); i. “Engineer”, or “Architect” unless used by persons properly registered and licensed as civil engineers or architects (RA Nos. 544, 545); j. “Geodetic Engineers” is prohibited except when majority of the members of the partnership or corporation are properly registered and licensed as geodetic engineers (RA No. 4374); k. subsidiary corporation of a foreign firm may carry the name of the principal company with the word “Phil.” Or “Philippines” affixed to the firm name, with the written consent of the mother company. l. The name of an internationally known foreign corporation or one similar to it may not be used by a domestic corporation without the prior consent of the former;

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CORPORATION LAWS m. If the full name of a person forms part of the corporate name, the consent of such person or his heir must be obtained; and n. The word “State”, “National”, “Maharlika” and the “Barangay” cannot be used as part of the corporate name since these are reserved for the exclusive use of the government. Doctrine of secondary meaning - A word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically, or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article, that in that trade or to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. Ex. “Ang Tibay,” merely descriptive, but its products are already associated with it. - Test of infringement: Whether the similarity is such as to mislead a person using ordinary care and discrimination. The right to the exclusive use of a corporate name with freedom from infringement is determined by priority of adoption.  Remedy in case of infringement: Injunction. Corporate purpose: - It must be specified with sufficient clarity to define with certainty the scope of its business. If more than one purposes, state the primary and the secondary purpose. - The law allows a corporation to have secondary purposes because the primary purpose may not turn out to be profitable, and in such case, all it has to do is to invest its funds in any such purposes instead of organizing a new corporation.  Reasons: a. A person who intends to invest his money in the business corporation will know where and in what kind of business or activity his money will be invested; b. The directors and officers of the corporation will know within what scope of business are they authorized to act; and c. A third person who has dealings with the corporation will know by perusal of the articles whether the transaction or dealing he has with the corporation is within the authority of the corporation or not. Principal place - The articles of incorporation must state the principal place where the principal office of the corporation is to be established or located, in which place, must be within the Philippines. The place to be designated is the city or municipality where the principal office is to be located. - Purpose of the requirement for definite place: For effective regulation and supervision of the corporation.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS AMENDMENTS OF THE ARTICLES OF INCORPORATION (PROCEDURE): (Sec. 16) 1. Board of Directors convene to a meeting and make a proposal for amendments to be converted into a board resolution; 2. The resolution stating such amendments must be approved by a majority vote of the Board of Directors/Trustees; 3. The approved resolution must be submitted to the stockholders for ratification; 4. The required vote for ratification is the approval of stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members (for non-stock); a meeting to that effect may not be necessary since they can just submit their written assent representing at least 2/3 of the outstanding capital stock. Note: Written assent is not allowed in (a) extending or shortening the corporate term (Sec. 37); (b) decreasing or increasing the capital stock and (c) in close corporations (Sec. 103), a meeting of the stockholders is always necessary. 5. The articles, as amended, must be indicated by underscoring the change or changes made, a copy thereof must be certified under oath by the corporate secretary and the fact that it has been duly approved by the required vote of the stockholders/members. 6. Submission to the SEC; and 7. It takes effect upon approval by the SEC or from the date of filing if not acted upon within 6 months if the delay is not attributable to the corporation.  This rule does NOT apply if the amendment is intended to dissolve the corporation. You have to wait for the approval of the SEC. There can be no presumption that when 6 months have already lapsed, it is deemed approved. The reason being that dissolution must be made at the consent of the State. Non-amendable Facts in the Articles of Incorporation Those matters referring to facts existing as of the date of the incorporations such as: 1. Names of incorporators; 2. Names of original subscribers to the capital stock and their subscribed and paid-up capital; 3. Treasurer elected by the original subscribers; 4. Members who contributed to the initial capital of a non-stock corporation; 5. Date and place of execution of the AI; 6. Witnesses to the signing and acknowledgment of the AI. Grounds for the Disapproval of the Articles of Incorporation 1. Not substantially in compliance with the form prescribed by the Code; 2. Purpose/purposes are patently unconstitutional, illegal, immoral or contrary to government rules and regulations; 3. Treasurer’s affidavit concerning the amount of capital stock subscribed and/or paid is false;

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Required percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. Ex. Monetary Board of the Central Bank for banking institutions. However, if the corporation is involved in a public utility the SEC may give such corporation a reasonable time to modify the objectionable portion.

Grounds for Suspension/Revocation of Certificate 1. Fraud in procuring the certificate of incorporation (ex. Paid-up capital); 2. Serious misrepresentation causing great damage and prejudice to the public; 3. Refusal to comply with a lawful order of the SEC; 4. Continuous inoperation for a period of at least 5 years; 5. Failure to file by-laws within the required period; and 6. Failure to file required reports in appropriate forms as determined by the SEC within the prescribed period. ARTICLES OF INCORPORATION vs. BY-LAWS ARTICLES OF INCORPORATION 1. It constitutes the charter or fundamental law of the corporation; a contract between: a. the corporation and the stockholders/members; b. between and among the stockholders/ members; and c. the corporation and the State 2. It is executed before incorporation

3. It is a condition precedent in the acquisition of corporate existence

4. It is amended by a majority vote of the BOD/BOT, and stockholders representing at least 2/3 of the outstanding capital, or 2/3 of the members in case of non-stock corporations 5. The power to amend/repeal the AI cannot be delegated by the stockholders/ members to the BOD/BOT

BY-LAWS 1. It is merely for the internal government of the corporation but has the force and effect of a contract between: a. the corporation and the stockholders /members; and b. between and among the stockholders/ members 2. It may be executed after incorporation; it may be filed simultaneously with the AI

3. It is a condition subsequent; its absence merely furnishes a ground for the revocation of the franchise. 4. It may be amended by a majority vote of the BOD/BOT, and majority vote of the outstanding capital stock, or a majority of members in case of nonstock corporations 5. The power to amend/repeal the by-laws or adopt new by-laws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members incase of non-stock corporations.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Rules on conversion (SEC Opinion) 1. Stock to non-stock corporation - May be made by mere amendment of the articles of Incorporation. 2. Non-stock to stock corporation - The corporation must first be dissolved; mere amendment of the AI would not suffice because the conversion would change the corporate nature from non-profit to monetary gain. 

The conversion without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the asset of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become stockholders of the corporation.

Formal organization and commencement of the transaction of the business (sec. 22) - These are conditions subsequent which may be satisfied by substantial compliance in order that a corporation may legally continue as such. - Acts of Constituting Formal Organization 1. Adoption of by-laws and filing of the same with the SEC; 2. Election of the Board of Directors and officers by the board pursuant to the by-laws; 3. Establishment of principal office; 4. Subscription and payment of the capital stock, etc… Effects of Subsequent Continuous Inoperation 1. If the corporation does not formally organize and commence transaction within a period of 2 years, corporate powers cease and corporation is deemed dissolved; 2. If it commenced transaction but subsequently becomes continuously inoperative for a period of 5 years, it serves as a ground for the suspension or revocation of its corporate franchise (certificate of incorporation).

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CORPORATION LAWS III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS Subject structure: components of a corporation 1. Promoter 2. Incorporators 3. Corporators a. Stockholders b. Members 4. Governing Body (absolute control and direction) a. Board of Directors b. Board of Trustees 5. Managing and Administrative Body a. Executive committee b. Contracted Mangers 6. Corporate Officers A. Qualifications of Directors/Trustees 1. Every director (including incorporating director) must own at least one share of the capital stock, and if ceases to own at least one share in his own name, he automatically ceases to be a director (Sec 23). For non-stock corporation, only members of the corporation can be elected to seat in the Board of Trustees.  Person in whose name it has been issued is the one to be elected  Q. When is it necessary that he is the owner? A: At the time of assumption of office  Note: Both husband and wife own share – either can be elected at any given time. 2. A majority of the directors/trustees must be residents of the Philippines 3. He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code committed within 5 years from the date of his election (Sec. 27). 4. Only natural persons can be elected directors/trustees. 5. Other qualifications as may be prescribed in the bylaws of the corporation (e.g. must not be engaged in business in competition with the corporation) (Gokongwei case, 89 SCRA 336)



The rule that a corporation must formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation (the exercise of its secondary franchise) does not apply to: 1. Special Corporations, because the law creating them provides for the commencement of their juridical personality; 2. Corporation Sole, the person incorporating is not required to wait for the certificate of incorporation. Mere filing of the Articles of Incorporation makes it incorporated already.

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B. BOD/BOT as repository of corporate powers - Gen. Rule:  The corporate powers of the corporation, all business conducted and all property of such corporation controlled and held by the BOD/BOT (Sec. 23) - Exceptions: 1. In case of an Executive Committee duly authorized in the by-laws; 2. In case of a contracted manager which may be an individual, a partnership, or another corporation. (Note: In case the contracted manager is another corporation – special rule: Sec. 44 applies) 3. In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the Articles of Incorporation provide.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS C. Nature of Powers of the Board 1. They are original and undelegated  Theory of Original Power: the powers of the board are original and undelegated. The stockholders or members do not confer, nor can they revoke, those powers. 2. They are derivative only in the sense of being received from the State in the act of incorporation 3. They are directly conferred by statute; 4. Can bind the corporation only by action taken at a board meeting.  Reasons: a. A meeting is necessary in order that any action may be deliberately adopted, after opportunity for discussion and an interchange of views, and b. As agents of the corporation managing its affairs, directors/trustees have no power to act other than as a board. Business judgment rule The BOD/BOT is the body entrusted with the general control and management of the business of the corporation having plenary power and authority to transact the ordinary business of the corporation within the scope of its charter power. The SEC, court, and stockholders cannot overrule a pure business judgment. Three-Fold Duties of Directors 1. Duty of Obedience - To direct the affairs of the corporation only in accordance with the purposes for which it was organized 2. Duty of Diligence 3. Duty of Loyalty Obligation and liabilities of the board of directors, trustees and officers (sec. 31) 1. Liability for Damages (director/trustee) - Solidary liability a. Willfully and knowingly votes or assents to patently unlawful acts of the corporation, b. Gross negligence or bad faith in directing the affairs of the corporation; c. Acquiring any personal or pecuniary interest in conflict with his duty as such director or trustee. d. Agreeing or stipulating in a contract to hold himself liable with the corporation e. Consenting to the issuance of a watered stocks, or, having knowledge thereof, failing to file objections with the corporate secretary (Sec.65) (Personal Liability) f. By virtue of specific provision of law. 2.

Liability for Bad Faith or Gross Negligence (BOD/trustees/officers) - Personal Liability a. Any wrongful disposition of corporate assets and for any loss or injury to the corporation arising from their gross negligence or unauthorized acts of violation of their duties;

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CORPORATION LAWS b.

3.

Termination of employees which are done with malice or in bad faith.

Liability for secret profit (BOD/ Trustees/officers) a. Profits which otherwise would have accrued to the corporation; b. Profits derived from ultra vires transaction.

Remedies in case of mismanagement: 1. Derivative suit or complaint 2. Injunction, if the act has not yet been done 3. Receivership 4. Dissolution if the abuse amounts to a ground for quo warranto but the Solicitor general refuses to act Special fact doctrine Director takes advantage of an information by virtues of his office to the disadvantage of the corporation. Inherent power of amotion It is the power to remove directors, trustees or officers prior to the expiration of their term D. Election of directors or trustees (sec. 24) a. Stock Corporation - directors elected among the holders of stocks b. Non-stock corporation - trustees elected from among the members of the corp. Requirements 1. Presence of majority stockholders/members in person or by proxy (written/authorized) 2. By balloting if requested by any voting stockholders/members, otherwise by viva voice Methods of Voting 1. Straight Voting - Every stockholder may vote such number of shares for as many persons as there are directors to be elected. - Illustration: X owns 100 shares in ABC Corporation. If there are 5 directors to be chosen, X is entitled to 500 votes obtained by multiplying 100 by 5. He may give to the 5 candidates he wants to be elected 100 votes each. Under this method, the votes are distributed equally among the 5 candidates without preference. 2.

Cumulative Voting a. Cumulative Voting for one candidate - A stockholder gives to one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. - In the above example, X gives 500 votes to one candidate. b. Cumulative Voting by Distribution - A stockholder cumulates his shares by multiplying also the number of his shares by

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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-

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the number of directors to be elected and distribute the same among as many candidates as he shall see fit. Also in the illustration above, with 100 shares, X is entitled to 500 votes if there are 5 directors to be elected. X may distribute his votes to candidates D= 100; E=100; F=100; G = 150; H = 250. Any combination is allowed provided the total of votes cast by him does not exceed 500 votes. Rationale: To enable minority stockholders to have adequate representation in the board.

Non stock corporation - As many votes as there are trustees to be elected but can give only 1 vote per trustee - If shares are delinquent-can’t vote - Q. Can a holder of preferred shares vote? A. No, not allowed to vote in the election of BOD - Q. Can one vote by zones: A. No, implied from Sec. 24-election requires the majority of the capital stock or majority of the members entitled to vote. - TERM: shall hold office for 1 year until their successors are elected and qualified. Hold-over principle Upon failure of a quorum at any meeting of the stockholders or members called for an election, the directorate naturally holds over and continuous to function until another directorate is chosen and qualified. The failure to elect does not terminate the terms of incumbent officers nor dissolve the corporation. 

Corporate Elections - only means by which stockholders can control the composition and the action of the Board.

Number a. Stock Corporation – not less than 5 but not more than 15 (Sec. 14[6]) b. Non-Stock Corporation – not less than 5 (or 3?) but may be more than 15 with the term of office of 1/3 of their number expiring every year (Sec. 92 [1]) c. Close Corporation – no board (no limit) or can have if pass a resolution d. Corporation Sole =1 Corporate officers (Sec. 25) Those whose offices are created by the Corporation Code or the corporation’s by-laws. They do not enjoy security of tenure, and their incumbency is within the business judgment discretion of the BOD/BOT. Their removal is considered an intra-corporate controversy and beyond the reach of labor tribunals. Immediately after their election, the directors must formally organize by the election of: 1. President – must be a director

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CORPORATION LAWS 2.

3.

4.

Treasurer – may or may not be a director; as a matter of sound corporate practice, must be a resident of the Philippines Secretary – must be a resident and citizen of the Phils.; need not be a director unless required by the by-laws Other officers provided for in the by-laws



Two or more position maybe held concurrently by the same person  President and Treasurer at the same time but NOT President and Secretary.



Officers are elected by the Board in a valid meeting.

Quorum - Such number of the membership of a collective body as is competent to transact its business or do any other corp. act. - Gen. Rule: Simple majority can act on any matter. - Exception: in the election of corporate officers which shall require the vote of a majority of all the members of the Board (all of them are present) Requisites for a valid board meeting 1. Meeting of the directors or trustees duly assembled as a board; 2. Presence of the required quorum; 3. Decision of the majority of quorum or, in other cases, a majority of the entire board; and 4. Meeting at the place, time and manner provided in the by-laws. No proxy in a board meeting - directors or trustees cannot validly act by proxy on account of a. their responsibility to the corporation and b. their being voted into office presumably because of their personal qualifications. 

For spouses who own the same share jointly, only one of them can be elected on the board.

Valid corporate acts - Gen. Rule: All corporate acts to be valid must be from a board meeting. - Exceptions: (Board meeting not required for validity) 1. Directors are the only stockholders 2. When a corporate act is undertaken by a person already authorized by the Board 3. If the necessity of a Board meeting is waived. 4. Act done or authorized by the BOD without a valid board meeting is ratified unanimously by the stockholders. 5. Management contract 6. Executive Committee acts within the power delegated to it. Report of election of BOD/BOT and Officers (Sec. 26) - Secretary or other officer of the corporation to submit with SEC the names, nationalities, and

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS

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residences of the directors, trustees and officers elected within 30 days after the election. Director/trustee/officer – dies, resigns or in any manner ceases to hold office – his heir, the secretary or any other officer of corporation or the director, trustee or officer himself, to immediately report such fact to the SEC. (as the case may be)

Removal of directors or trustees (Sec. 28) 1. Hold a meeting – regular or special Regular meeting – as provided in the by-laws/AI 2. Prior notice to stockholders of the intention to remove a director -by the SEC upon orders of the President or majority of members 3. Notice must contain the particular purpose-removal specified 4. Vote – stockholders representing 2/3 of outstanding capital stock, or in non-stock corporations, by 2/3 of the members entitled to vote 

A special meeting called for the removal of a director/trustee must be called 1. By the SECRETARY on order of the President, or 2. On the written demand of stockholders holding or representing at least a MAJORITY of the outstanding capital stock (or on the written demand of at least MAJORITY members entitled to vote)  If the Secretary fails or refuses to call a special meeting upon such demand or refuses to give the notice, or if there is no Secretary, the call for the meeting may be addressed directly to the stockholders or members by ANY stockholder or member signing the demand.





The vacancy resulting from the removal may be filled: a. by election at the same meeting without further notice, or b. at any regular or special meeting called for the purpose, after giving notice Removal may be with or without cause; BUT minority director can only be removed with cause.

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CORPORATION LAWS 3.

If the vacancy is created because of increase in the number of directors/trustees at any time of the year.

Compensation of directors (Sec. 30) - Gen. Rule: “BOD/BOT are not entitled to compensation except for reasonable per diems. - Exceptions (that they can receive compensation): 1. If provided for in the by-laws; or 2. By a vote of stockholders representing at least a majority of the outstanding capital stock. - Limitation (in case they are compensated): The yearly compensation of directors shall in no case exceed 10% of the NET income before income tax of the corporation during the preceding year.  But a corporate officer who is not a director may be compensated as an employee of the corporation.  A corporate officer who is also a director may likewise be compensated, in addition to his per diems, the amount to be fixed by a board resolution in the absence of provision to the contrary in the by laws and subject to the limitation. Liability of directors/trustees (Sec. 31) - Nature of Directors/Trustee’s Position  They are agents of the corporation; they also occupy a fiduciary relation to the corporation. Instances when directors/trustees maybe held liable for damages 1. He willfully and knowingly votes or assents to patent unlawful acts of the corporation 2. He is guilty of gross negligence or bad faith in directing the affairs of the corporation-refuse to make a decision/withholds the vote required. 3. He acquires any personal or pecuniary interest in conflict with his duty as such director/trustee. (investment in another corporation competing directly with the corporation.) 

The erring board members shall be held jointly and severally liable for all the damages resulting therefrom suffered by the corporation, its SH/members or other persons.

a

Vacancies in the office of director/trustee (Sec. 29) - Vacancy other than removal by the SH/member (Death, Resignation, Abandonment, Disqualification, or Expiration of term) is filled by at least majority of the remaining directors/trustees, if still constituting a quorum. Vacancies to be filled by a vote of stockholders or members: 1. In case of removal of a director or trustee; 2. If the remaining directors or trustees do not constitute a quorum and therefore could not fill the vacancies created by death, resignation, disqualification, abandonment or expiration of the term of a director or trustee;

Liability of a director/trustee, or officer as a trustee for the corporation 1. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation 2. In respect to any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf.  he must account for the profits which otherwise would have accrued to the corporation. 

The effects under Sec. 31 and 34 applies even if he uses his own money; if violated, no ratification SEC 31: Violated is a specific trust reposed upon a director SEC 34: Violated is general trust reposed on all directors

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS    

Applies also if no specific instructions given (no decision made by Board) Doctrine of Corporate opportunity will not apply if the director acted in good faith Acquisition is not vested to any activity of the corporation If corporation is unable to acquire opportunity – no prohibition imposed upon him

Special rules on contracts directors/trustees or officers: 1. -

-

-

2. -

-

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CORPORATION LAWS

entered

into

3. -

by

Contracts of Self-Dealing Directors (Sec. 32) Contracts which are entered into by the corporation with one or more of its own directors/trustees, or officers are voidable, UNLESS: a) The presence of such director/trustee in the board meeting approving the contract was not necessary to constitute a quorum for such meeting; b) The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract; c) The contract is fair and reasonable under the circumstances; d) In case of an officer, there was previous authorization by the BOD/BOT. If any of the first 2 conditions is absent, in the case of a contract with a director/trustee, the contract may be ratified by the vote of the stockholders representing at least 2/3 of the OCS or of 2/3 of the members in a meeting called for the purpose, PROVIDED: a) That full disclosure of the adverse interest of the dir/trustee involved is made at such meeting. b) That the contract is fair and reasonable under the circumstances Although not all the said conditions are present, the corporation may elect NOT to attack or question the validity of the contract, without prejudice, however , to the liability of the director/trustee for damages under Sec. 31. Contracts of Interlocking Directors (Sec. 33) Contracts entered into between corporations with interlocking directors (interest of said directors is substantial – exceeding 20% of the outstanding capital stock) are VALID provided that: a) The contract is not fraudulent; and b) The contract is fair and reasonable under the circumstances. If interest in both corporation are nominal (less than 20% of OCS), the contract is valid If both substantial, the contract is valid If one is nominal and the other is substantial , the contract is valid if all the conditions set in Sec 32 are present with respect to the corporation in which he has nominal interest

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Doctrine of Corporate Opportunity (Sec. 34) Disloyalty of a Director Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity which: a) The corporation is financially able to undertake; b) from its nature, is in line with the corporation’s business and is of practical advantage to it; and c) the corporation has an interest or a reasonable expectancy. The rule shall apply notwithstanding the fact that the director risked his own funds in the venture. When doctrine is NOT applicable: a. If the director acted in good faith b. Acquisition is not related to any activity of the corporation c. If the corporation is unable to acquire the opportunity d. If no prohibition is imposed upon him e. If the prohibition imposed upon him is related but there is ratification

Rationale of applying sec. 32 - As if the corporation is dealing with its own directors Section 35: Executive Committee - Body given corporate powers which is composed of not less than 3 as provided for in the by-laws to assume - Provided for in the by-laws - Not less than 3 members of the board to be appointed by the board. - Gen. Rule: An act by majority vote, all other matters delegated by the by-laws or on a majority vote of the board. - Exceptions: 1. approval of any action for which shareholders approval is also required 2. the filling of vacancies in the board 3. the amendment or repeal of by-laws in the adoption of new by laws 4. the amendment or repeal of any resolution of the board or by its express terms is not so amendable or repealable 5. a distribution of cash dividends to the shareholders. Purpose of creating executive committee - To assure prompt and speedy action and solution to important matters with the need for a board meeting especially where such meeting cannot readily be held

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Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS IV. POWERS OF CORPORATION -

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EXPRESS POWERS - granted by law, Corporation Code, and its Articles of Incorporation INHERENT/INCIDENTAL POWERS - not expressly stated but are deemed to be within the capacity of corporate entities. IMPLIED/NECESSARY POWERS - exist as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Articles of Incorporation.

Theory of general capacity A corporation is said to hold such powers as are not prohibited or withheld from it by general law (everything is allowed except when prohibited) General Powers and Capacity (Sec 36) Express powers: 1. To sue and be sued 2. Of succession 3. To adopt and use of corporate seal 4. To amend its Articles of Incorporation 5. To adopt its by-laws 6. For stock corporation – to issue and sell stocks to subscribers and treasury stock, for non-stock corporations – to admit members; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds; 8. To enter into merger or consolidation; 9. To make reasonable donations to a. public welfare b. hospital c. charitable d. cultural e. scientific f. civic g. similar purposes Provided NO donation is given to any: a. Political party b. Candidates c. Partisan political activity 10. To establish pension, retirement, and other plans for the benefit of directors, trustees, officers and employees 11. To exercise other powers essential or necessary to carry out its purposes. Two sources of express powers of a corporation: 1. Those enumerated in Sec. 36 2. Purpose clause of the AI Theory of special capacity - A corporation cannot exercise powers except those expressly or impliedly given (everything is prohibited except when allowed)

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CORPORATION LAWS Special powers (Secs. 37 – 44) 1. To extend or shorten corporate term Requirements: a. Amendment of articles of incorporation b. Approval of the amendment by majority vote of the BOD/BOT c. Written notice of the proposed action and of the time and place of the meeting to each stockholder or member. d. Ratification in the meeting by stockholders representing at least 2/3 of OCS or at least 2/3 of members 2. To increase or decrease capital stock; 3. To incur, create or increase bonded indebtedness 4. To deny pre-emptive right 5. To sell, dispose, lease, encumber all or substantially all of corporate assets; 6. To purchase or acquire own shares provided: a. there is an unrestricted retained earnings b. it is for a legitimate purpose 7. To invest corporate funds in another corporation or business for other purpose other than primary purpose; 8. To declare dividends out of unrestricted earnings 9. Enter into management contract with another corporation (not with an individual or a partnership – within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than 5 years for any one term. (Sec. 37) 

Right of appraisal is available in case of extension (Sec. 37) and also available in shortening the corporate term (Sec. 81[1]).

Sec. 38 – Power to increase or decrease capital stock; incur, create or increase bonded indebtedness - Requires: 1. Proposed action approved by a majority vote of the BOD 2. Written notice of the proposed action and of the time and place of the stockholder’s meeting to be addressed to each stockholder 3. Approved by stockholders representing 2/3 of OCS 4. A certificate in duplicate of said corporate act shall be signed by majority of the BOD and and countersigned by the Chairman and the Secretary of the stockholders’ meeting 5. A certificate of increase must be accompanied by the Treasurer’s affidavit showing that at least 25% of such increased capital stock has been subscribed and that at least 25% of the amount subscribed has been paid.   

Corporate act to take effect from and after the approval of the SEC. No decrease in capital stock shall be approved by SEC if it will prejudice corporate creditors Bonds issued by the corporation shall be registered with the SEC which is given the power to determine the sufficiency of the terms of such bonds

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 

 

Where a corporation increase capital stock. SH are entitled to a pre-emptive right to subscribe to a sufficient number of shares in order to maintain their previous relative voting power. The corporation must give the SH a reasonable period which to exercise such right. Right of appraisal NOT available in this Sec. 38. Non-stock corporation may incur or create bonded indebtedness, or increase the same with the approval of: 1. majority vote of the BOT and 2. at least 2/3 vote of the members in a meeting duly called for the purpose.

Power to deny pre-emptive right (Sec. 39) - All SH of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares on any class, in proportion to their respective shareholdings. Pre-emptive right shall not extend to: 1. Shares to be issued in compliance with laws requiring stock offering or minimum stock ownership by the public; 2. Shares issued in good faith with the approval of the SH representing 2/3 of the OCS, in exchange for property needed for corporate purposes 3. Shares issued in payment of a previously contracted debt. 4. In case the right is denied in the AI.

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stocks which are personal property. Restrictions on transfer of shares can be provided only in the law or the charter of the corporation, and would be invalid if provided for in the by-laws. Pre-emptive right is not available in case of shares issued to obtain loans or to obtain the services of technical men.

Sale or other disposition of assets (Sec. 40) - Requisites: 1. The sale or other disposition must be approved by a majority vote of the BOD/BOT; 2. The action of the board must be authorized by the vote of stockholders representing at least 2/3 of OCS including holders of non-voting shares or 2/3 of the members; and 3. The authorization must be done at a stockholders’ or members’ meeting duly called for the purpose after written notice.  





Appraisal right can be exercised Despite approval by the SH or members, it is not mandatory for the board to continue with the disposition. Substantially all – where the sale or other disposition would render the corporation incapable of continuing the business or accomplishing the purpose for which it as incorporated. This section covers not only sale but also lease, exchange, mortgage or pledge. But disposition of properties in the course of business does not need approval by or authority of SH members.

*Pre-emptive right includes re-issuance of treasury shares. Pre-emptive right or right of pre-emption - The stockholder’s right to subscribe to all issues or disposition of shares of any class in proportion to his stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. - Pre-emptive right granted in favor of the corporation only is null and void, because it unduly inhibits the SH’s right to dispose of their shares in the manner they desire. However, if in the subscription agreement, the SH waives his pre-emptive right, this is valid because this has been individually and freely bargained for. Waiver of a right is valid and is not prohibited. What is prohibited is the blanket restriction in the by-laws. - A contract entered into between the two majority SH of the corporation providing for suspension of the right to dispose shareholding during the limited period provided for in the agreement and imposes a penalty if any of the parties should dispose of their shareholdings within the limited period, is a valid agreement and not violative of the policy against restraint of trade since it is reasonable in purpose (to ensure the stability of the corporation during the critical period of development) and is reasonable in period. - By-laws of a corporation cannot be the source of limit to restrict the right of the SH to transfer shares of

Stock Certificate - Written acknowledgement by the corporation of the stockholder’s interest in the corporation. - It is personal property and be mortgaged or pledged. Power to acquire own shares (Sec. 41) - When may a corporation reacquire its own stocks? 1. To eliminate fractional shares arising out of stock dividends 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing SH entitled to payment for their shares under the provisions of this Code. - Other instances when the corporation may acquire its own shares: 1. Reacquisition of treasury shares (Sec. 9); 2. Purchase of redeemable shares by the corporation regardless of the existence of unrestricted retained earnings (URE) in its books (Sec. 8); 3. To effect a decrease in the capital stock of the corporation (Sec. 38); 4. In a close corporation, where there is deadlock respecting the management of its business, the SEC may order the purchase at their fair value of shares of any stockholder by the corporation

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS regardless of the availability of URE in its books (Sec. 104, par. 1[4]). Trust fund doctrine - The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription. - The capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. - Hence, dividends are declared only if there is an unrestricted retained earnings, and that no distribution of corporate property except upon dissolution and after payment of all its debts and liabilities.

Power to declare dividends (Sec. 43) - The BOD of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all SH on the basis of outstanding stock held by them: a) Provided, that any cash dividends due on delinquent stock shall first be applied to the unpaid balance, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: b) Provided further, that no stock dividend shall be issued without the approval of SH representing not less than 2/3 of the OCS at a regular or special meeting duly called for the purpose. -

Stock corporations are prohibited from retaining surplus profit in excess of 100% of their paid-in capital stock, EXCEPT: 1. When justified by definite corporate expansion program or programs approved by the BOD 2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured. 3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.

-

It is mandatory to declare dividends: a) Cash dividends – declared by the BOD only b) Stock dividends – BOD, approved by 2/3 OCS

Application of the Trust Fund Doctrine: 1. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 2. Where the corporation has transferred its property in fraud of its creditors; 3. Where the corporation had released the subscribers to the capital stock from their subscriptions; and 4. Where the corporation is insolvent. Coverage of the Trust Fund Doctrine: 1. If the corporation is solvent, the TFD extends to the capital stock represented by the corporation’s legal capital. 2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation and to all of its property and assets. Exceptions to the Trust Fund Doctrine: 1. Redemption of redeemable shares (Sec. 8) 2. In close corporation, when there is a deadlock and the SEC orders the payment of the appraised value of the stockholder’s share (Sec. 104). Power to invest corporate funds in another corporation or business for any other purpose (Sec. 42) - Requires majority vote of BOD, ratified by 2/3 OCS/members, to invest for purposes other than primary purpose. But where the investment (even in another corporation) is reasonably necessary to accomplish the primary purpose, a board resolution is sufficient. - Example: A sugar company invests in another company engaged in the manufacture of sacks for sugar, this was done pursuant to its primary purpose so a Board resolution will do. - BUT where the purchase of another corporation’s shares is done solely for investment and not to accomplish the purpose of its incorporation, the 2/3 vote of SH is required.

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Dividends That part of the profits or unrestricted returned earnings of a corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time, in the form of cash, property or stocks. Kinds of Dividends: 1. Cash Dividend – payable in cash. 2. Property Dividend – distributed to stockholders in the form of property, real or personal, such as warehouse receipts, or shares of stock of another corporation. 3. Stock dividend – payable in unissued or increased or additional shares of the corporation. 4. Optional Dividend – gives the stockholder an option to receive cash or stock dividend. 5. Composite Dividend – partly in cash and partly in stocks. Here, there is no option involved. 6. Preferred or Preferential Dividend – payable, by virtue of contract, to one class of stockholders in priority to that to be paid to another class.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 7.

Cumulative Dividend – contracted to be paid at a certain rate at stated times and, if net earnings at any dividend period are insufficient to pay the contract dividend, it is to be made out of subsequent net earnings. 8. Scrip Dividend – one in the form of a writing or certificate issued to a stockholder entitling him to the payment of money, stock or other benefit at some future time inasmuch as the corporation at the time such dividends are declared has profits not in cash or has no sufficient cash, or has the cash but wishes to reserve it for some corporate purposes. It is in the form of a promissory note or a promise to pay and may be issued to bear interest. 9. Bond Dividend – A dividend distributed in bonds of the corporation to the stockholders. The bondholder becomes a creditor of the corporation to the extent of the amount of the bond. 10. Liquidating Dividends – These are actually distributions of assets of the corporation upon dissolution or winding of the same. They are not paid on account of earnings or profits, but as a return of capital invested. -

The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is prohibited from entitling thereto to anyone else. Sources of Dividends: - Gen. Rule: Dividends can only be declared and paid out of actual and bona fid unrestricted retained earnings. - Special Rules: 1. Where a corporation sold its real property, which is not being used for business, at a gain, the income derived therefrom may be availed of for dividend distribution. 2. Increase in the value of a fixed asset as a result of its revaluation is NOT retained earning. However, increase in the value of fixed assets as a result of revaluation (“revaluation surplus”) may be declared as cash or stock dividends provided that the company: a) has sufficient income from operations from which the depreciation on the appraisal increase was charged; b) has no deficit at the time the depreciation on the appraisal increase was charged to operations; and c) such depreciation on appraisal increase previously charged to operations has not been impaired by losses. 3. Dividends can be declared out of the amount received in excess of the par value of shares (“paid-in surplus”) when: a) They are declared only as stock dividends and not cash; b) No creditors are prejudiced; and c) There is no impairment of capital. -

Note that unlike par value shares, when no par shares are sold at a premium, the entire

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CORPORATION LAWS

4. 5.

6.

7.

8.

-

consideration paid is considered capital, hence the same cannot be declared as dividends. Reduction surplus can be a source of dividends. Rule on paid-in surplus is applicable. Money cannot be borrowed for the payment of dividends because an indebtedness is not a retained earning o f the corporation. Corporate earnings which have not yet been received even though they consist in money which is due, cannot be included in the profits out of which dividends may be paid. Profits realized from sale of Treasury Shares are part of capital and cannot be declared as cash or stock dividend as purchase and sale of such shares are regarded as contractions and expansions of paid-in capital. No dividends can be declared out of capital except only in two instances: a) liquidating dividends; and b) dividends from investments in wasting asset corporation. Retained earnings = Assets – liabilities and legal capital

Wasting assets doctrine A wasting assets corporation, such as a mining or timbercutting company, the capital of which is necessarily exhausted in the carrying on of its operations, may rightfully declare and pay dividends out of net income without making up for the loss of its capital which is thus being constantly diminished. A mining company, for example, is not formed for the purpose of permanently using the property in which its capital is invested, but for the purpose of investing in property which, in the nature of things, will be gradually consumed in making profits, and in estimating the profits of such company for the purpose of determining whether it may lawfully declare a dividend, no deduction is to be made for depreciation in the value of its mine by reason of its use and consumption in taking out the ore or other minerals. Dividends may be lawfully declared out of the net proceeds of its operations after deducting expenses and debts and a reasonable fund for contingencies. Power to enter into management contract (Sec. 44) - Requires: 1. Resolution of the BOD/Trustees, and 2. Majority vote of the OCS/members Except: (2/3 vote shall be necessary if:) a) The SH represents the interest of both corporations owns 1/3 of the OCS of the managing corporation. b) Majority of the members of he board of the managing corporation compose also majority of the members of the board of the managed corporation. -

Management contract is a device for tax avoidance, resulting in splitting of income. But when the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS conditions set herein are complied with, then there is no legal basis to pierce the veil of corporate entity. Ultra vires acts of corporations (Sec. 45 ) - No corporation under this Code shall possess or exercise any corporate power except those conferred by this Code or by its AOI and except such as are necessary or incidental to the exercise of the powers so conferred. Ultra vires act - “beyond powers” An act which although not prohibited by law, the corporation cannot perform because it is not within its express, incidental or implied powers. It is not necessarily illegal although an illegal act is always ultra vires. - An ultra vires act may be that of: 1. The corporation; 2. The Board of Directors; and 3. The corporate officers.

Ratification of ultra vires acts 1. If act or contract is illegal per se, it is null and void and cannot be ratified. 2. If act or contract is bot illegal per se but merely beyond the power of a corporation, the same is merely VOIDABLE Requirements for the ratification of an ultra vires act: 1. The act must be consummated, not executory 2. The creditors are not prejudiced, or all of the creditors have given their consent 3. The rights of the public or the State are not involved 4. All the SH must give their consent -

Corporations cannot validly enter into a partnership because in a partnership, all the other partners can bind the partnership and the other partners, which would be violative of the principle in Corporation Law that only the BOD can bind the corporation.



Case: - X company agreed to post a bond for a postmaster in case of malversation for the opening of a post office within X Company’s compound to facilitate mail of the employees living therein, after conferring with the Postmaster General. The postmaster malversed public funds, so the Postmaster General sued on the bond posed by X Co. but X Co. raised the defense of ultra vires act, that it was not authorized to file a bond for a public officer such as the postmaster and, therefore, such act did not bind the corporation. - Held: The filing of the surety bond is ultra vires, but not illegal per se, and which was ratified by the acceptance by X company of the benefits attendant to the opening of a post office in its compound, is binding on the corporation.



Case: - Y cannot pay her loan from the GSIS with her house as mortgage so she proposed a scheme to the GSIS Board by which she can liquidate her claim. It was rejected by the Board, but the secretary erroneously sent a message to Y that the proposal was accepted. Subsequently, Y received a summons for foreclosure. Y sued GSIS for damages. - Held: The corporate secretary is the custodian of corporate records and if she certifies that a certain action had been taken by the board, such certification is binding upon the corporation although the same may have been erroneously made. The reason for this is that the corporate secretary is clothed with apparent authority.

Types of Ultra Vires Cases 1. Acts done beyond the powers of the corporation as provided in the law or its AI; 2. Acts or contracts entered into in behalf of a corporation by persons who have nor corporate authority (This is technically ultra vires acts of officers and not of the corporation); 3. Acts and contracts which are per se illegal as being contrary to law. Test whether a corporation may perform an act: Consider the logical and necessary relation between the act questioned and the corporate purpose expressed by law or in the charter. If the act is lawful in itself and not prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense (Montelibano Doctrine) Effects of Ultra Vires Act on: 1. Wholly executed contract - shall not be interfered with as between the parties or persons whose rights are derived therefrom, but the State can always question said contract or act. 2. Wholly executory contracts - cannot be enforced, even at the suit of either party (void and unenforceable) nor can damages be recovered for its breach. 3. Part executed and part executory - principle of “no unjust enrichment at the expense of another” shall apply, and recovery can be had by one or whose part it was executed. 4. Executory contracts apparently authorized but ultra vires - the principle of estoppel shall apply and the title of a corporation to property cannot be questioned on the ground that it was acquired through an ultra vires contract of transfer.

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Derivative suit - the principal defense of the minority SH against the abuses of the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS declines to take the proper and necessary step to assert the corporation’s rights. Requisites for the proper filing of a derivative suit: 1. The party bringing suit should be a SH as of the time of the act or transaction complained of 2. He has exhausted intra-corporate remedies (i.e., has made a demand on the BOD for the appropriate relief but the latter has failed or refused to heed his plead.) 3. The cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not the particular SH bringing the suit. ------------------------------------------------------------------V. BY-LAWS By – laws These are rules of action adopted by a corporation for its internal government and for the government of its stockholders or members and those having the direction, management and control of its affairs in their relation to the corporation and as among themselves. Binding Effect of by-laws: 1. As to members and corporation They have the force of contract between the members themselves. They are binding only upon the corporation and on its members and those having direction, management and control of its affairs. 2. As to third persons Third persons are not bound to know the by-laws which are merely provisions for the government of a corporation and notice to them will not be presumed. -Why? By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned. When by-laws are adopted It may be before or after incorporation. Generally every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its Certificate of Incorporation by the SEC adopt a code of by-laws for its government not inconsistent with this Code. - However, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the SEC, together with the Articles of Incorporation. -

-

When by-laws are effective In all cases, by-laws shall be effective only upon the issuance by the SEC of a certification that the by-laws are not inconsistent with this Code.

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CORPORATION LAWS How by-laws are adopted a) Affirmative vote of majority of the OCS/members b) Signed by stockholders/members voting for them and shall be kept in the principal office of the corporation, subject to inspection of the stockholders or members during office hours c) Duly certified to by a majority of the directors or trustees and countersigned by the secretary of the corporation. d) Filed with the SEC, which shall be attached to the original articles of incorporation. Special Corporations - SEC not to accept for filing the by- laws of any special corporation governed by special laws unless accompanied by a certificate of the appropriate government agency to the effect that such are in accordance with law. Validity of By-Laws 1. They must not be contrary to law and not inconsistent with the Corporation Code;  Not contrary to law – although allowed in the bylaws, a BOD must always be a natural person. He cannot be a representative of a juridical person (Grace Nat. High vs. CA 281 SCRA 133).

2. 3. 4. 5. 6.

Must not be contrary to morals and public policy; Must not impair obligations of contracts; Must be general and uniform in their operation and not directed against particular individuals; Must be consistent with the charter or articles of incorporation; Must be reasonable (capable of compliance).

Amendments to by-laws (Sec. 48) - By a vote of the majority of the BOD/BOT and the owners of at least a majority of the OCS/members, at a regular or special meeting DULY called for the purpose. May the voting right of the SH be delegated? - Yes. The owners of 2/3 of the OCS or members may delegate to the BOD or trustees the power to amend or repeal any by-laws PROVIDED, the power delegated is deemed revoked whenever the stockholders owning or representing a majority of the OCS or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. -

The power to revoke may happen at any time even if not among the agenda in a regular or special meeting. Notice that the rule did not specifically provide that the regular or special meeting must be duly called for the purpose.

Effectivity of amended by-laws - The amended or new by-laws shall only be effective upon the issuance by the SEC of a Certification that the same are not inconsistent with the Code. ---------------------------------------------------------------------

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS VI. MEETINGS MEETING

Regular

Special

NOTICE

Regular

Special

-

SH/MEMBERS

3. BOD

Held annually on a date fixed in the bylaws; if not so fixed, on any date in April of every year as determined by the Board

Held monthly or as provided in the by laws.

Held at any time deemed necessary or as provided in the by- laws.

Held at anytime upon the call of the President or as provided in the by- laws.

SH/MEMBERS 2 weeks prior to the meeting unless a different period is required by the bylaws.

1 week written notice, unless otherwise provided in the by-laws.

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CORPORATION LAWS

4.

BOD 1 day notice prior to the scheduled meeting unless otherwise provided in the by-laws. 1 day notice prior to the scheduled meeting unless otherwise provided in the by-laws. (the same as in regular meeting)

Notice of any meeting, either SH/Member’s or BOD’s meeting, may be waived, expressly or impliedly by the SH/Member or BOD/trustee.

Who presides at meetings - The President - Exceptions: a) When the by -laws provide otherwise; b) the petitioning stockholder/member – When there is no person authorized to call a meeting, a SH/member may petition the SEC upon showing of good cause therefor. SEC to issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by the Corporation Code or the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the SH/members present have chosen one of their number as presiding officer (Sec. 50(4)). Proper Person to Call the Meeting 1. Person designated in the by-laws – normally it is the Corporate Secretary 2. In the absence of the secretary, a director/trustee or by an officer with interest in the management of the corporation unless there is a prohibition in the by-laws.

A SH or member on order of the SEC whenever for any cause, no person authorized to call a meeting. Special meeting for the removal of director/trustee may be called by the Secretary or by the SH/member as provided by Sec. 28.

Place and Time of Meetings/Quorum

PLACE

QUORUM

SH/MEMBER (Regular or special) city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation (Sec. 51) Majority of the OCS or members in case of non-stock unless otherwise provided for in the Corporation Code or in the by-laws.

BOD/BOT May be held anywhere in or outside of the Philippines, unless the bylaws provide otherwise (Sec. 53) Majority of members the Board directors trustees.

all of of or

Requisites of Notice of Meeting 1. Issued by one who has authority to issue it; 2. Must be in writing; 3. Must state the time, date and place of the meeting, unless otherwise provided in the by-laws; 4. Must state the business to be transacted thereat; 5. Must be sent at a certain time before the scheduled meeting as fixed by law, unless a different period is required by the by-laws. 6. The notice must comply with any other requirements prescribed by the law or by the by-laws of the Corporation. May the BOD change or postpone the date of meetings fixed in the by-law? - Yes, but not the annual meeting. - Exception: Annual meetings may be postponed if there are justifiable reasons for its postponement as when the annual meetings cannot be held in the date fixed by the by -laws for some valid or justifiable reasons. However, no postponement is allowed if the effect is to prolong the term of the directors. -

Meetings held in the absence of some of the directors and without any notice to them is illegal and the action at such meeting is invalid, unless subsequently ratified or waived.

Requisites for a valid meeting of Stockholders or members: 1. It must be held at the proper place; 2. It must be held on stated date and at the appointed time or at a reasonable time thereafter; 3. It must be called by the proper person; 4. There must be a previous notice of meeting; 5. There must be a quorum.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS  When a meeting is not required 1. Amendment of the AI (sec. 16) 2. Sec. 101 – action by the directors of a close corporation without a meeting but ratified 3. When there is agreement. Right to vote - An inherent right of the stockholders or members in the management of the corporation. May a stockholder be compensated for his time in coming to the corporation to vote? - No, because voting is a right hence one is not paid for exercising such right. Who are entitled to vote - The SH/Members (record date). - Except the ff. 1. Delinquent 2. Treasury shares 3. Non -voting shares, except under those 8 2 3 instances enumerated under sec. 6 “A MI DS” 

The following persons are not stockholders or members but may vote. 1. Pledgor or mortgagor under sec. 55 - A pledgor or mortgagor of shares remain entitled to vote on shares given as security unless an express written authority to vote is given to pledgee or mortgagee this authority being required by law to be registered in corporate books at the instance of the pledgor or mortgagor. 2. Executors, administrators, receivers, and the other legal representatives duly appointed by the court (sec. 55) - Legal representatives (like executors, receivers, etc.) vote by legal mandate (without need of proxy) on shares subject to their administration.

2 Ways of Voting By the Stockholder or member 1. In person 2. By proxy Proxy - Is the formal authority given by the holder of the stock, who has a right to vote it, or by a member, to another person to exercise the voting rights of the former. Requisites/limitations of a valid Proxy 1. It shall be in writing and signed by the SH or member; 2. It must be filed before the scheduled meeting with the corporate secretary; 3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended or valid only for the specified meeting; 4. A continuing proxy may be for a period not exceeding five (5) years at any one time, otherwise it shall not be a valid and effective after such period.

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CORPORATION LAWS Directors or trustees cannot attend or vote by proxy at Board meetings. (Sec. 25, last paragraph)

Kinds of Proxy 1. General Proxy - Confers a general discretionary power of attorney to attend and vote at an annual meeting with all the powers the undersigned would possess if personally present, to vote for directors and all ordinary matters that may properly come before a regular meeting. 2. Limited Proxy - The power has a limited. Rules on Proxy 1. 1 proxy is given to 2 or more persons: - Gen. Rule:  All must agree upon the vote.  If they cannot agree, rule of the majority applies. - Exception:  if the proxies discriminate  This means that the proxies determined the manner on how they should vote. - The stockholder’s instruction, if any, prevails. 2. When several proxies are submitted: a. Where proxies are dated  Latest proxy revokes the earlier proxy. b. Where proxies are undated  If proxy is mailed to the corporation – the one having the latest time of day of postmark  If submitted in person – one presented latest.  Dated proxies prevail over undated proxies Right to appoint a proxy - The right to appoint a proxy cannot be denied in a stock corporation but maybe denied in a non-stock corporation. - Reason for the distinction:  In a stock corporation, the stockholder has an investment that he is protecting; the same is not true in a non-stock corporation. Revocation of proxies - Gen. Rule:  Revocation takes place at any time. - Exception:  When the proxy is coupled with an interest (Proxy has parted with value or incurred liability at the SH’s request, looking to the exercise or the proxy as the means of reimbursement or indemnity. E.g. Where D borrows money from C and D pledges his certificates of stock to C for the debt, giving C a written continuing proxy to attend and vote the shares at meetings of stockholders until the debt is paid. It is clear that D cannot revoke the proxy unless he first pays C.)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS How to revoke a proxy agreement - In any manner either expressly or impliedly, hence notice is not actually required as when it was orally revoked 1. Formal notice/expressly; 2. Orally/impliedly; 3. By conduct, as when during the meeting the SH appears, in this case the proxy is deemed revoked; 4. Issuance of a subsequent proxy; OR 5. Sale of shares of stockholder. VOTING TRUST AGREEMENT (VTA) - It is an agreement in writing whereby one or more stockholders of a stock corporation transfer his or their shares to any person or persons or to a corporation having authority to act as a trustee for the purpose of vesting or conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any one time. Rationale of VTA a) Such an agreement makes possible a unified control of the affairs of the corporation and consistent policy by binding the SH to vote as a unit. b) It also makes it possible for a majority group of shareholders to dispose of the beneficial interest in a large proportion of their shares and still retains control of the corporation through the voting trustee. Limitations of a VTA 1. It shall be good for a period not exceeding five (5) years at any one time BUT if required by a loan agreement, the period may go beyond five (5) years but the trust shall automatically cease upon full payment of the loan; 2. It must be in writing and duly notarized; 3. It shall not be entered to circumvent laws against monopolies and illegal combinations in restraint of trade nor shall it be used for purposes of fraud; 4. A certified copy of such agreement shall be filed with the corporation and with the SEC, otherwise said agreement is ineffective and unenforceable; 5. It shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided that both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provision of the code; 6. Unless expressly renewed, all rights granted in a VTA 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 trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. How VTA works 1. Certificate of stock covered by the VTA shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement.

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CORPORATION LAWS

2.

 NOTE: In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said VTA.  EFFECT: The trustor becomes the beneficial owner. A stockholder of a stock corporation parts with the voting power only but retains the beneficial ownership of the stock. A voting trustee therefore is only a share owner vested with apparent legal title for the sole purpose of voting upon stocks that he does not own.  HOWEVER, the transferring stockholder, although he has ceased to be the stockholder of record, retains the right of inspection of corporate books, which he can exercise concurrently with the voting trustee. Trustee(s) shall execute and deliver to the transferor a voting trust certificates (VTC), which shall be transferable in the same manner and with the same effect as certificates of stock.  EXPLANATION: In return for the certificates of stock, the voting trustee executes and delivers to the stockholders voting trust certificates to show that the latter are in reality the owners of the shares held by the voting trustee. The owners are thus enabled to claim the dividends when they are collected by the trustee and to recover their stocks at the expiration of the trust.

Effects of the executing and delivering VTA to the Stockholder (transferor) 1. To show that the SH is in reality the owner of the shares held by the voting trustee 2. To enable him to claim the right to the dividend when they are collected by the trustee. 3. To inspect corporate books 4. To recover his shares of stock at the expiration of the trust. Rights of voting trustee(s) 1. The trustee(s) shall possess the right to vote and other rights pertaining to the shares so transferred and registered in his or their names subject to the terms and conditions of and for the period specified in the agreement. 2. When he votes, he may vote in person or by proxy unless the agreement provides otherwise. 3. They may exercise, like the transferor, the rights of inspection of all corporate booked and records. 4. He is the legal title holder or owner of the shares so transferred under the agreement. Hence he can be voted. If so then he is also qualified to be a director (Sec. 23) Cancellation of the VTA - 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 stocks shall be reissued in the name of the transferors.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS VOTING TRUST vs. PROXY VOTING TRUST 1. Trustee acquires legal title to the shares of the transferring stockholder 2. Generally, the agreement is irrevocable for a definite and limited period of time. 3. Trustee can act in all meetings during the lifetime of the VTA.

6. There is transfer of share

PROXY 1. Proxy has no legal title to the shares of the principal 2. Generally revocable except when coupled with interest. 3. Proxy can only act at a specified meeting unless otherwise provided (continuing) 4. Proxy can only vote if in the absence of the owner of the stock. Reason: Presence of SH in a meeting is an implied revocation of the proxy. 5. A proxy is usually shorter in duration although it cannot exceed 5 years at any one time (Sec. 58) 6. No transfer of share

7. Filed with the SEC otherwise it is ineffective and unenforceable.

7. Filed only with the Corporate secretary. Filing with the SEC not needed.

8. The agreement must be notarized 9. The voting right is divorced from the ownership of stocks

8. The proxy need not be notarized 9. The right to vote is inherent and inseparable from the right to stock ownership. 10. The proxy holder votes as agent

4. Trustee can vote and exercise all the rights of the transferring stockholder even when the latter is present. 5. A VTA must not exceed 5 years at any one time except when the same is made a condition of a loan.

10. The trustee votes as owner rather than as mere agent 

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The maximum duration of both cannot exceed five (5) years at any one time.

---------------------------------------------------------------------VII. STOCKS AND STOCKHOLDERS Ways by which a person becomes a Stockholder 1. By Subscription 2. By Purchase/transfer Subscription contract - It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. - Subscription pertains only to unissued stocks. Kinds of Subscription 1. Pre-incorporation subscription contract (Sec. 61) - One entered into before incorporation. It constitutes a binding contract among the subscribers. (Sec. 61) This is mandatory. (Sec. 13) [25%/25% requirement]

-

-

-

-

2.

Gen. Rule:  A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription.  Rationale of the GR: To ensure that the corporation shall have the capital to undertake the business of which it is established. Exceptions: a. When all of the other subscribers consent to the revocation; or b. The incorporation of the corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription. Notice that the 6 months period as provided in the Gen. Rule applies only if no stipulation is made in the subscription contract. The 6 months may also be shortened if so stipulated in the subscription contract. When is the Pre-incorporation Subscription Contract absolutely irrevocable?  After the submission of the AI to the SEC.  In Ong Yong vs. CA (02/01/02), the SC allowed the rescission of a pre-incorporation subscription contract on the ground of substantial breach of obligations as provided in Art. 1191 of the NCC.  The SC recognized the nature of a preincorporation subscription contract as a reciprocal obligation by the original subscribers with the corporation intended to be formed as a beneficiary of pour autri stipulation in such agreement. Post-incorporation subscription contract - One entered into after the incorporation for the acquisition of unissued stock.

Stock option - Is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period granted. It is a contract to buy or purchase whereas in SUBSCRIPTION, the contract is already executed. Purchase or transfer - Buying issued shares from a stockholder or from the corporation itself. - Pertains to issued shares in contradistinction with subscription. Sources of Corporate Capital 1. Funds furnished by shareholders 2. Borrowings 3. Profits and stock dividends

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Warrant A type of security which entitles the holder the right to subscribe to the unissued capital stock of a corporation OR to purchase issued shares in the future, evidenced by a Warrant Certificate, whether detachable or not, which may be soled or offered for sale to the public. Shares of stock - Interest or right which the owner has in the management of the corporation, and its surplus, profits, and, on dissolution, in all of its assets remaining after the payment of its debt. Consideration for stocks (sec. 62) - Rule:  Stocks shall not be issued for a consideration less than the par or issued price thereof.  If less than its par or issued price – watered stock - Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash; 2. Property, tangible or intangible, a. actually received by the corporation b. and necessary or convenient for its use and lawful purposes c. at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for, or services actually rendered to, the corporation; 4. Previously incurred indebtedness by the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; (increase of capital by declared stock dividends) 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion, e.g. common shares of stock. 

Promissory notes or future services cannot be made as payment for shares of stock.

May postdated checks be accepted as payment? - No. As a rule the corporation must actually receive the cash or property. Who determines the valuation if the consideration is other than cash? - Where the consideration is other than cash or consists of intangible property such as patents or copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the SEC. - Hence, there must be a valuation fixed by the Board, approved by the SEC before the property is accepted as consideration. If accepted as consideration and no valuation, the stock is considered as watered. (sec. 65) What about no par value shares, how are their issued price determined? - The issued price of no-par value shares may be:

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c.

fixed in the Articles of Incorporation; or by the BOD pursuant to authority conferred upon it by the AI or the bylaws or in the absence thereof, by the stockholders representing at least a majority of the OCS at a meeting duly called for the purpose

Bonds - The same consideration as provided for in this section (Sec. 62) insofar as they may be applicable, may be used for the issuance of bonds by the corporation. When one is supposed to pay? - At the date fixed in the subscription contract or, if no date is fixed, upon CALL (demand to pay) by the board. What happens if there was failure to pay on the date fixed or upon call? - Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate of interest as provided in the by-laws, computed from such date until full payment. - Within 30 days after the call or after the date fixed in the by-laws, there was still failure to pay, the shares shall become delinquent shares. Purpose of a call - To fix the date of payment Requisites of a valid call 1. It must be made by the board through a resolution 2. It must operate uniformly either to all or a particular class or species of share. Is a call absolutely necessary? - No, call is not necessary in the following instances: a. If corporation is already insolvent; b. Subscriber is insolvent; c. If there is a date fixed in the subscription contract. What one is supposed to pay a. Amount of unpaid subscription b. The interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in, the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. 

Now that one has paid, he is now entitled to shares of stocks and the corresponding certificate of stocks.

Stock certificate - This is a written instrument signed by the proper officer (president or the vice president) of a corporation stating or acknowledging that the person named thereon is the owner of a designated number of shares of its stock.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 

Stockholder has the right to a certificate of stock  Upon full payment of the amount of the subscription together with the interest and expenses (in case of delinquent shares) if any.

Formal requisites of a certificate of stock 1. Signed by the President or VP. 2. Countersigned by the Secretary or asst. secretary. 3. Issued in accordance with the by-laws. 4. It contains the corporate seal. 

Where the stock certificate reflects a greater volume of shares than the actual number of shares issued or to be issued, the following rules may be considered: 1. To the extent that there was an over-issue, the excess issuance (over the authorized capital stock or stated capital) shall be void as being ultra vires. 2. If there is no over-issue, but no payment has been made to cover the par or stated value of the excess shares, the latter would constitute “watered” stocks. 3. If there is no over-issue and watering of stocks, the corporation may be bound to honor the certificate (if duly signed and released by its authorized officers) in the hands of a holder in good faith, reserving a right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party.

How partial payments are treated - Partial payment must be applied on the number of shares covered by it BUT in the case of Baltazar (14 SCRA 522); “Partial payment must be pro-rated among all the shares” - Eg. If A subscribed 500 shares at 100 peso per share and he paid only 25,000 pesos. He is deemed to have paid only 50 pesos of the 100 peso per share subscription price. This doctrine was however decided under the old laws but there may still be corporations existing that are governed by the old law. 

Once the stocks are issued in the name of the stockholder, the shares of stocks so issued become his personal property.  Effect: It being his personal property, he may transfer the same if he wants to (remember that transfer or purchase is one of the modes by which one becomes a stockholder)

Requisite of a valid transfer - It should be recorded in the books of the corporation. - Exception: Sole Corporation Who should do the recording? - The corporate secretary. Other than him the recording is ineffective. - However, another person may do it provided it is done under his supervision. (278 SCRA 792)

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CORPORATION LAWS When may the corporate secretary refuse the recording? - Corporate secretary may refuse or the corporation may oppose recording or transfer when the corporation holds an unpaid claim against the shares of stocks. (sec. 63) - In the Chinabank case (270 SCRA 503) the shares of stock against which the corporation holds an unpaid claim is defined as a delinquency. Is it not that under section 64 stock certificate shall be issued only when they are fully paid? - Yes, but the unpaid claims as hereto referred arises from instances where by honest mistake the corporation issued a stock certificate to a subscriber unknowingly that he has not yet fully paid his subscription. How transfer is made - Transfer is made by endorsement and delivery of the certificate. Reasons for Requiring Registration of Stock transfer 1. To enable the corporation to know at all times who are its stockholders because mutual rights and obligations exist between the corporation and its stockholders. 2. To afford the corporation an opportunity to object or refuse to the transfer in case it has a claim against the stock sought to be transferred, or for any valid reason. 3. To avoid fictitious or fraudulent transfers. Can a subscription be transferred? - Yes, but with consent of the corporation. This is in effect a novation. Effects of Unregistered Transfer 1. Valid only between transferor and transferee 2. Invalid as against the corporation until notice is given. 3. Invalid as against the corporate creditors. - Under the doctrine of Piercing the Veil of Corporate Entity. Remember that the purpose of the same is to make the stockholders liable. 4. Invalid as against creditors of transferor 5. Transferor continues the right to vote and be voted until he is challenged. 6. Transferor continues to enjoy the right to receive the dividends until there is recording. Subscriber vs. Stockholder a) A subscriber is one who has not yet fully paid his subscription, whereas a stockholder is one who has paid his subscription. b) Holders of subscribed shares not fully paid which are not delinquent (CF) shall have all the rights of a stockholder (Sec. 72) 

In the case of First Phil. Holding, 253 SCRA, a stock certificate is not necessary to establish the relationship of a Stockholder with the corporation. The evidence is now the receipt of payment.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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CORPORATION LAWS

If the stocks are fully paid but the certificate of stocks is not yet issued is one already considered a stockholder? - Yes, because if section 72 considers one to be a stockholder even if he has not yet fully paid then with more reason that a person who has fully paid his subscription be considered a stockholder.

Who are primarily liable? - The holder of the watered stock shall be liable to the corporation and its creditors for the difference between the fair values received at the time of issuance of the stock and the par or issued value of the same.

Rights of stockholders 1. Managerial Rights a. Voting rights; and b. Right to remove directors 2. Appraisal Rights 3. Proprietary Rights a. Right to dividends; b. Right to issuance of certificate of stock for fully paid shares; c. Proportionate participation in the distribution of assets in liquidation; d. Right to transfer of stocks in corporate books; e. Pre-emptive right; f. Right to recover stocks unlawfully sold for delinquent payment of subscription; g. Right to be furnished of the most recent financial statement/ financial report. 4. Inspection Right – right to inspect books and records 5. Remedial rights a. Individual suit – a suit instituted by a shareholder for his own behalf against the corporation; b. Representative suit – a suit filed by a shareholder in his behalf and in behalf of other stockholders similarly situated and with a common cause against the corporation; and c. Derivative suit – a suit filed in behalf of the corporation by its stockholders (not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it, against any person, director, officer and/or controlling shareholders of the corporation.

Instances when not only the SH is liable 1. When a director or officer of a corporation consented to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or 2. Who having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary (This is the remedy of a director or officer if he wants to avoid liability arising from the issuance of a watered stock of which he has knowledge.)

What is the presumption if one is issued his certificate of stock? - The presumption is that he has fully paid his subscription.

DELINQUENT SHARES

Watered stocks - These are stocks issued not in exchange for its equivalent. - Includes: 1. Stock issued without consideration 2. Issued as fully paid when the corporation has received a less sum of money than its par or issued value 3. Other than cash but valuation less than the par or issued value 4. Issued as stock dividend when there are no sufficient retained earnings or surplus (as if not paid the full amount of subscription)

 Extent of liability in these instances - The director or officer shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. - Section 64 does not apply. - Section 65 does not also distinguish whether the issuance of a watered stock is deliberate or not. Coverage of watered stocks - Only originally issued shares may be watered. Hence, it arises only in a transaction between the corporation and a subscriber. - Any subsequent appreciation in value of the shares will not cure the defect.  Reason: The liability for watered stocks arises from the time the stocks are issued.

Effects of Declaration of Delinquency (Sec. 71) 1. Delinquent stocks cannot be voted for 2. Cannot vote in any election 3. No representation at any stockholder’s meeting 4. Not entitled to any of the right of the stockholder except the right to receive dividends but subject to the rules under sec. 43. Procedure for delinquency sale: (Sec 68) 1. There must be a board resolution ordering the sale stating the amount due on each subscription plus all accrued interest and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks became delinquent. 2. Notice of sale, with a copy of the resolution given to the delinquent SH personally or by registered mail. This must also be published once a week for 2

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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3.





consecutive weeks in the province or city where the principal office of the corporation is located. Auction sale whereby the stocks are sold to the highest bidder. - HIGHEST BIDDER  He is the person offering at the sale to pay the full amount of the balance on the subscription together with the accrued interest if any, cost of advertising and expenses of the sale, for the smallest number of shares or fraction of a share (Why smallest number of share – to give possibility for the subscriber to have something left for him).  Illustration: At public auction sale, M offers to pay P800 for 1,000 shares, L, P800 for 900 shares and T, P800 for 800 shares. T is the highest bidder and the remaining 200 shares shall go to X, the original subscriber. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.

When auction may be cancelled 1. If the delinquent SH pays to the corporation, on or before the date specified for the sale, the balance due on his subscription plus accrued interest, cost of advertisement plus expenses of the sale. 2. If the Board otherwise orders. What happens if there are no bidders? - The corporation may purchase the delinquent stocks. The purchase must be made out of its net earnings in view of the trust fund doctrine (Sec. 41[2]). - Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears (Art. 1326,NCC) When may the auction sale be questioned? - When there is irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock. - Remedy: Recovery of the stocks Requisites before one may file an action to recover a. The party seeking to maintain such action must first pay or tender to the party holding the stocks the sum for which the same was sold with interest from the date of sale at the legal rate. b. The action must be filed within 6 months from the date of sale. Can the corporation dispense with the auction sale as a remedy? - Yes, by first filing a judicial action to collect the amount due in any unpaid subscription with accrued interest, costs and expenses. Call is still necessary.

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CORPORATION LAWS Rights of Unpaid Shares (Sec. 72) Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.

Lost, stolen or destroyed certificate of stock (sec. 73) Procedure: 1. The registered owner of the certificate or his legal representative shall file with the corporation an affidavit in triplicate, setting forth if possible, the circumstances as to: a) how the certificates were lost, stolen or destroyed, b) the number of shares represented by each certificate, c) the name of the corporation which issued the same, and d) Such other information and evidence which he may deem necessary. 2. The corporation shall publish a notice in a newspaper of general circulation once a week for 3 consecutive weeks at the expense of the registered owner. When a corporation may issue a new certificate of stock - After the expiration of 1 year from the date of last publication. - If no contest has been presented to said corp. after the expiration of 1 year – the right to make the contest shall be barred. - If contest has been presented to the corp. or an action is pending in court regarding the ownership, the issuance of a new certificate shall be suspended until final determination by the court regarding the ownership of the lost, stolen or destroyed certificate.  

Gen. Rule: No action may be brought against any corp. for the issuance of a new certificate Exceptions: in case of fraud, bad faith or negligence on the part of the corp. and officers.

May the requirement of publication be dispensed with? - Yes, if bond or surety is filed by shareholder running for a period of 1 year, in which case a new certificate may be issued even before the expiration of 1 year -----------------------------------------------------------------VIII. CORPORATE BOOKS AND RECORDS Books and Records to be Kept by the Corporation (Sec. 74): 1. A record of all business transactions; 2. Minutes of all meetings – contents - set forth in details the time and place of meeting whether regular or special - those present and absent - every act ordered at the meeting - upon demand, time when director/shareholder/members entered or left, yes or no vote or protest

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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 

Stock and transfer books, in case of stock corporation - records of all stocks and names of shareholder - installments paid and unpaid in all stock for which subscription has been made - Kept in principal office of the corp. or office of the stock or transfer agent Non-stock corp. do not have stock and transfer books. Sole corp. may not have all these books

Inspection rights of a stockholder Limitations: a. The right must be exercised during reasonable hours on business days; b. The person demanding the right has not improperly used any information obtained through any previous examination of the books and records of the corporation; and c. The demand is made in good faith or for a legitimate purpose. 



OFFICER/AGENT of corp. who refuses to allow examination and copying of excerpts – liable for damages and guilty of violation of the Corporation Code; if acting based on a board resolution or order of directors, liability attaches to the directors who voted for the refusal. Mandamus – available remedy of the stockholder or member if wrongfully refused to exercise the right.

Stocks and transfer agent - One engaged principally in the business of registering transfer of stocks in behalf of a stock corp. - Allowed to operate in the Philippines if he secures a license from the SEC and pays a fee which shall be renewed annually. 

Stock corp is not precluded from making transfer of its own stocks

A Corp. – B Corp.: X shareholder of A Corp.; A Corp. is a shareholder of B Corp - Gen Rule: No right of inspection by X to the books of B Corp. - Except: If it is wholly – owned subsidiary - Conditions: (89 SCRA 336) 1. If owned entirely by the corp. of which he is a shareholder 2. Both corporations use the same office 3. Both corporations have identical directors Rights to financial statements (Sec. 75) When is a corp. mandated to furnish its recent financial statement? - Within 10 days from receipt of a written request of any shareholder or member What are included in the written statement 1. Balance sheet as of the end of the last taxable year

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

Profit or loss statement for said taxable year showing in reasonable details its assets and liabilities and result of its operation

OBLIGATION OF THE BOARD - Financial report of the operations of the corp. for the preceding year, which shall include financial statement, duly signed and certified by an independent CPA

 PAID- UP CAPITAL OF CORP. - Less than 50T, financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. -------------------------------------------------------------------IX. MERGER AND CONSOLIDATION Merger - A union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business. Consolidation - The union of two or more existing corporations to form a new corporation called the consolidated corporation. Reasons: 1. expansion, 2. profitability, 3. effective loss management, 4. lesser cost Procedure (Sec. 76-79) 1. Board of each constituent corp. execute a plan of merger or consolidation – contents of plan a. Names of the corporations proposing to merge/consolidate b. The terms of the merger or consolidation and the mode of carrying the same into effect c. A statement in the changes of AI of the surviving corp. in case of merger and with respect to the consolidated corp., in case of consolidation, all the statements required to be set forth in the AI d. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable 2. Approval by majority of each of the board of the constituent corporations 3. Submitted for approval to shareholders/members of each of such corporations at separate meetings - notice given at least 2 weeks prior to the date of the meeting / include a summary of the plan - Q: May the right of Appraisal be taken away? A: Yes when the board decided to abandon the plan after approval by the shareholder of such plan - Amendment to the plan of merger or consolidation

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS a)

4.

5.

6.

approval of majority vote of the boards of all constituent corps. b) ratified by the shareholder representing 2/3 of the OCS Execution of articles of merger or consolidation by each of the constituent corp. - signed by the President or VP and certified by the Secretary or Asst. Secretary by each corp. setting forth: a) the plan of merger or consolidation b) as to stock corp., the number of shares outstanding, in case of non-stock the number of members c) as to each corp. the number of shares or members voting for or against such plan Approval by the SEC (in quadruplicate) - if banks or banking institutions, building and loan associations, trust co., insurance co,. public utilities, educational institutions and other special corps. governed by special laws, FAVORABLE recommendation of the appropriate government agency be obtained first. Issuance of the certificate of merger / consolidation - upon such time merger or consolidation shall be effective

 If SEC has reason to believe that the proposed merger or consolidation is contrary law: - set a hearing for the corp. to be heard - notice be given at least 2 weeks prior to the hearing Effects of Merger or Consolidation (Sec. 80) 1. The constituent corporations shall become a single corporation which, in case of merger shall be the surviving corporation, and in case of consolidation, shall be the consolidated corporation; 2. Separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation; 3. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subjected to all the duties and liabilities of a corporation; 4. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchise of each of the constituent corporations; 5. All property, real or personal, and all receivables due to, and all other interest of, each constituent corporation shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed – (transfer is automatic); 6. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each of the constituent corporations. 7. Any claim, action or proceeding pending by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation;

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The rights of creditors or lien upon the property of any of each of the constituent corporations shall NOT be impaired by such merger or consolidation

SALE - Gen. Rule: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintaining their separate corporate entities, one will not answer for the debts of the other. - Exceptions as to non-assumption of liabilities: 1. If there is an express assumption of liabilities; 2. If there is a consolidation or merger; 3. If the purchase was in fraud of creditors; and 4. If the purchaser is merely a continuation of the seller. MERGER/CONSOLIDATION vs. SALE OF ASSETS Merger/Consolidation 1. Sale of assets is not always involved 2. There is automatic assumption by the surviving/ consolidated corp of the liabilities of the constituent corp. 3.There is a continuance of the enterprise and of the shareholders thereon though in an altered form 4.The title to the assets of the corp. is by operation of law transferred to the new corp. 5. Constituent corps. automatically dissolved

are

Sale of Assets 1. Sale of assets is always involved 2. The purchasing corp is not generally liable for the duties and liabilities of the selling corp 3. The selling corp. ordinarily contemplates a liquidation of the enterprise 4.Transfer of title is by virtue of contract 5. The selling corp is not dissolved by the mere transfer of its property

----------------------------------------------------------------------IX. APPRAISAL RIGHT Appraisal right (Sec. 81) - right of shareholder to demand payment of the fair value of his shares after dissenting from a proposed corporate action involving a fundamental change in the corporation in the cases provided by law. Instances when the appraisal right may be exercised 1. In case of any amendment to the AI which has the effect of changing or restricting the rights of any shareholder or class of shares, or authorizing preferences in any respect superior to those of outstanding shares of any class; 2. Amendment which has the effect of extending or shortening the term of corporate existence;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 3.

4. 5.

6.

In case of sale, lease, exchange, transfer, mortgage, pledge, or other disposition of all or substantially all of corporate property and assets; In case of merger or consolidation; Investment of corporate funds to another corporation or business for any purpose other than its primary purpose; Shareholder of any close corporation may compel the corporation to allow him to exercise the right when the corporation has sufficient assets in the books to cover its debts and liabilities exclusive of capital stock. (Sec. 85)

How to exercise appraisal right (Sec. 82) 1. By voting against the proposed action 2. By making a written demand within 30 days after the vote was taken. 3. By surrendering the Certificate of Stock within 10 days from demand  for notation only – that such is dissenting share, once noted, return to shareholder  importance of surrender Sec. 86: so that shareholder rights will not be terminated 4. All rights accruing to the shares from demand for payment until either abandonment of the corporate action involved or the purchase of said shares by the corp. shall be suspended (30 days)  including voting and dividend rights EXCEPT the right to receive the payment of fair value.  Note: Failure to make a written demand within 30 days shall be deemed a waiver of appraisal right  If the withdrawing shareholder and corp. cannot agree on the fair value of the shares within 60 days – appraised by 3 disinterested persons (1 by shareholder, 1 by corp, 1 chosen by the 2) findings of the majority of the appraisers shall be final and the award be paid by the corp within 30 days after award is made. 5. Corp. pays the shareholder the fair market value of the share  fair value as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action 6. Upon payment, shareholder shall transfer his shares to the corp.  effect if dissenting shareholder Is not paid the value of his shares within 30 days after the award  His voting and dividend rights shall immediately be received (back as shareholder) Extinguishment of right of payment - Gen Rule: No demand of payment of the FV of shares may be withdrawn - Exceptions: 1. Such shareholder withdraws his demand for payment and the corporation consents thereto; 2. Proposed corporate action is abandoned or rescinded by the corporation; 3. The proposed corporate action is disapproved by SEC, where its approval is necessary;

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CORPORATION LAWS 4.

The SEC determines that such shareholder is not entitled to appraisal right.

Effects when right of payment has ceased 1. Restored as shareholder 2. All dividends which would have accrued in his shares shall be paid to him Who bears the cost of appraisal (Sec. 85) 1. the corporation a. Where the price offered by the stockholder is approximately the same as the FV ascertained by the appraisers; or b. In case of an action to recover such FV is filed by the dissenting shareholder and his refusal to accept payment is found by the court to be justified. 2. the Stockholder a. Where the price offered by the corporation is approximately the same as the FV ascertained by the appraisers; or b. In case of an action to recover such FV is filed by the dissenting shareholder and his refusal to accept payment is found by the court to be unjustified. Effects of Transfer of Shares/COS 1. The rights of transferor as dissenting shareholder shall cease and transferee shall have all the rights of a regular shareholder. 2. All dividends which or would have accrued to such shares shall be paid to transferee. - purchasing the dissenting shares is an indication on the part of the transferee to become a shareholder which is in contrast to the right of appraisal. ---------------------------------------------------------------------XI. NON-STOCK CORPORATIONS Non-stock corporation (Sec. 87) - one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution - Any profit obtained as an incident to its operations shall be used for the furtherance of the purpose(s) for which it was organized. - Purposes (Sec. 88): charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agricultural and like chambers or combination thereof.  NSCs are governed by the same rules established for stock corporations, whenever pertinent, subject, however, to a number of special features.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS STOCK CORPORATION vs. NON-STOCK CORPORATION SC 1. Has capital stock divided into shares and with authority to distribute to its stockholders 2. Stockholders may transfer their shares

3. Cumulative voting is available in the election of directors 4. Directors cannot exceed 15 in number 5. The term of a director is 1 year 6. Stockholders may vote by proxy

7. Officers are elected by the Board of Directors

8. Stockholders and directors must act in a meeting, except where a mere written assent is sufficient or a formal meeting unnecessary 9. Stockholders meeting to be held at the place where the principal office is located

NSC 1. Does not have shares and may not distribute profits to its members 2. Members cannot transfer their membership unless allowed by the AI or by-laws 3. cumulative voting not available unless otherwise provided in the AI or bylaws 4. Trustees may exceed 15 in number 5. The term of a trustee is 3 years; 1/3 of the Board shall be elected annually 6. Members may be deprived of the right to vote by proxy in the AI or by-laws 7. Officers may be directly elected by the members unless otherwise provided in the AI or by-laws 8. Members may be allowed by the by-laws to vote by mail or other similar means.

COMMERCIAL LAW

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CORPORATION LAWS Distribution of assets (Sec. 93) - Dissolution – execute a plan of distribution of assets - Procedure: 1. Adoption of a resolution recommending a plan of distribution by or majority vote of the BOT. 2. Submission for voting at a regular or special meeting. 3. Written notice to each member entitled to vote, set forth the proposed plan or summary thereof; date, time and place of meeting. 4. Adoption of the plan upon approval of at least 2/3 of the members having voting rights present or by proxy. Conversion of NSC to SC - Dissolution of NSC before organizing a stock corporation. Conversion of SC to NSC - Mere amendment of AI Rules on distribution (Sec. 94) 1. All liabilities shall be paid or satisfied for adequate provisions. 2. Assets held subject to return upon dissolution shall be delivered back to their respective transferors; 3. Assets held for charitable, religious, etc, without a condition for their return on dissolution shall be conveyed to one or more organizations engaged in similar activities as the dissolved corporation; 4. Other assets shall be distributed to members as provided for in the AI or by-laws; 5. In any other case, assets may be distributed as provided in the plan of distribution. -----------------------------------------------------------------------

9. Members meeting in or out of the place where the principal office is located.

Right to vote (Sec. 89) - Gen Rule: Each member regardless of class, shall be entitled to 1 vote - Except: If limited, broadened or denied by the AI or by-laws - Power of Courts: Courts have no power to strip a member of his membership therein without cause. Who can be trustees? - Any member of the NSC - Vacancy – filled by election only for unexpired term Place of meetings (Sec. 93:) - Members’ meeting  In or out of the place where the principal office of the corporation is located, so long as it is within the Philippines - Notice  sent to all members indicating the date, time and place of meeting.

XII. CLOSE CORPORATIONS Close corporation (Sec. 96) - A special kind of stock corporation: 1. whose Articles of Incorporation provide that: a) all shares except treasury shares are held on record by persons not exceeding 20; b) issued stock s are subject to one or more restrictions, with a right of preemption in favor of the stockholders or the corporation; and c) the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; AND 2. whose 2/3 of the voting stocks or voting rights is NOT owned or controlled by another corporation which is not a close corporation. What kind of restrictions can the corporation put? - Any restriction provided it does not violate Sec. 98: 1. Restrictions on the right to transfer shares must appear in the AI or By-Laws and in the Certificate of Stock, otherwise not binding upon a purchaser in good faith.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 2.

3.



Restrictions shall not be more onerous than granting the existing shareholder or the corporation the option to purchase the shares of the transferring shareholder with such reasonable terms, conditions or period stated thereon. e.g. a) FMV of shares = 100 if sold less 10% ( can’t because it is more burdensome) b) Transferring without prior consent of the board If corp. fails to exercise the option – Shareholder may now transfer to third person who wishes to buy. Close Corp. may not list in a stock exchange or make any public offering of its shares. - Corp. must be listed in the Phil Stock Exchange (reason: shares may be held by anybody who is unknown/not denied)

Public Offering – offering one’s share for the unknown public

Can a corp. be part of a close corp.? - Yes, provided it does not own or control 2/3 of OCS of a close corporation or control 2/3 of stocks having voting rights. Right of First Refusal - The shareholder who wants to sell his shares must first offer it either to the corporation or to the other existing shareholders. If the corporation or existing shareholders fail to exercise the option to purchase within the period stated (1 month) the transferring shareholder may sell his shares to any third person. - Gen Rule: Any corporation may be incorporated as a close corporation - Exceptions: 1. mining companies; 2. oil companies; 3. stock exchanges; 4. banks; 5. insurance companies; 6. public utilities; 7. education institutions; 8. other corporations declared to be vested with public interest Characteristics of close corporations: 1. Stockholders may act as directors without need of election and therefore are liable as directors; 2. Stockholder who are involved in the management of the corporation are liable in the same manner as directors are; 3. Quorum may be greater than mere majority; 4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum, are invalid; 5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified the informal action of the others;

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CORPORATION LAWS 6. 7. 8.

Preemptive right extends to all stock issues; Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and A stockholder may withdraw and avail of his right of appraisal.

Articles of Incorporation (Sec. 97): - Aside from the general matters of Art. 14, the AI of a close corporation may provide: 1. For a a) classification of shares or rights b) prescribe qualification for owning/holding shares c) restrictions on their transfer 2. For a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stocks; 3. For a greater quorum or voting requirements in meetings of stockholders or directors 4. That the business of the corporation shall be managed by the stockholders rather than the BOD so long as this provision continues in effect: a) No meeting of stockholders need be called to elect directors; b) Unless the context clearly requires otherwise, the stockholders shall be deemed to be directors for all intents c) The stockholders and the corporation shall be subject to all liabilities of directors. 5. That all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders instead of the BOD. Terms of directors - 1 year Issuance or Transfer of Stock of a Close Corporation in Breach of Qualifying Conditions (Sec. 99): 1. A person holding stocks - if the qualification for ownership is conspicuously stated in the certificate of stock, the person holding such certificate is conclusively presumed to have knowledge of such qualification. - Effect: Corp at its option may refuse the transfer in its favor 2. If the AI states the number of persons not in excess of 20 to be entitled to be holders on record of its stock and the certificate conspicuously states such numbers, the person to whom such stock is issued in excess of the nos. required is conclusively presumed to have knowledge of the fact. - Effect: Corp. may refuse to record the transfer to its books 3. If a stock certificate conspicuously shows a restriction on transfer of stocks, transferee is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. - If transfer actually violates the restriction – without prejudice to the right of transferee to proceed against transferor

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 3. Effect of Violation of the Presumption - Gen. Rule:  The corporation may at its option, refuse to register the transfer of the stock in the name of the transferee - Except: 1. if the transfer of the stock has been consented to by all shareholders of the close corporation; or 2. if the corporation has amended its AI. 

Transfer – not limited to a transfer for value



Note: It is better to dissolve the corp. and incorporate again if it wants to convert it into another kind



Amendment that may terminate the status of a close corporation  2 kinds: 1. To delete/remove any of the provisions under the title; 2. To reduce the quorum or voting requirement - reduction of what is required by law to ordinary shareholder 2/3 to effect amendment - include all shareholder with or without voting rights

4.

5.

No provision in any written agreement signed by stockholders, relating to any phase of the corporate affairs, shall be invalidated between the parties on the ground that its effect is to make them partners among themselves.  must be consistent with the AI Shareholders’ agreement restricting or interfering with the discretion and powers of the BOD – it will not be invalidated but the stockholders who are parties thereto shall be liable for managerial acts imposed by the Corporation Code on directors Stockholders who actively engage in the management or operation of the business and affairs of the corporation shall be held to strict fiduciary duties to each other and among themselves  Corporate torts – shareholders are personally liable UNLESS the corporation has obtained reasonably adequate liability insurance

When Board Meeting Is Unnecessary Or Improperly Held (Sec. 101) -

Rights of transferee not impaired by the provisions of this section 1. Right to rescind the transaction; or 2. Right to recover under any applicable warranty, express or implied. Rules on Agreements By Stockholders (Sec. 100) 1. Agreements by and among shareholders before the formation and organization of a close corporation signed by all stockholders: - survive the incorporation of such corporation and - valid and binding, if not inconsistent with the AI, irrespective if embodied in AI or not, except those required by the Corporation Code to be embodied in the AI.  Prior to incorp. – Shareholder can enter into any agreement as long as it is legal.  After incorp. – agreement continues to subsist/ valid and binding 2. Shareholders’ agreement, in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted: a) as therein provided; b) as they may agree; or c) as determined in accordance with a procedure agreed upon by them  How shares will be voted? - Agree at the time of voting how to vote - Procedure to determine how they will vote - Voting trust / voting by proxy – as equivalent in ordinary situation

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CORPORATION LAWS

 

Gen Rule: Any action by the director without a meeting shall be valid if the following conditions are present: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. Exception: If by- laws provide otherwise Ordinary corp. without / improper meeting – question of impropriety If a directors’ meeting is held without a proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend UNLESS he promptly files his written objection with the Secretary of the corporation after having knowledge thereof.

Preemptive Right In Close Corporation (Sec. 102) - Extend to all kinds of stock, including reissuance of treasury shares, unless the AI provide otherwise (ordinary corp. – extend only to new issuances) Deadlocks (Sec. 104) - If the directors or stockholders are so divided respecting the management of the corporation’s business and affairs that the votes required for any corporate action cannot be obtained with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally. The SEC, with the power to arbitrate, upon written petition of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

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CORPORATION LAWS

any shareholder shall have authority to make such orders as it deems appropriate, including an order: 1. Canceling or altering any provision contained in AI or By-Laws or any stockholders’ agreement; 2. Canceling, altering, or enjoining any resolution, or other act of the corporation or its BOD, officers or stockholders; 3. Directing or prohibiting any act of the corporation or its BOD, stockholders, officers or other persons party to the action; 4. Requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by other stockholders; 5. Appointing a provisional director; 6. Dissolving the corporation; OR 7. Granting such other relief as the circumstances may warrant. Provisional director (Sec. 104) - An impartial person who is neither a stockholder nor a creditor of the corporation, and whose further qualifications, if any, may be determined by the SEC. - He is NOT a receiver of the corporation and does not have the title and powers of a custodian or receiver. - He shall have all the rights and powers of a duly elected director, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the SEC or by all the stockholders. Remedies in case of deadlocks 1. Written petition with SEC for it to arbitrate 2. Withdrawal – Shareholder may for any reason compel the corporation to purchase his shares at the FMV provided the close corp. has sufficient assets in its books to cover its debts and liabilities exclusive of capital stocks (Sec 105) 3. Written petition with SEC to compel dissolution on grounds of the acts of the directors, officers or those in control of the corporation is : a) Illegal, b) fraudulent, c) dishonest, d) oppressive or unfairly prejudicial to the corporation or any stockholder, or e) whenever corporate assets are being misappropriated or wasted. ORDINARY STOCK CORPORATION VS. CLOSE CORPORATION ORDINARY STOCK CORPORATION 1. Its AI need only contain the general matters enumerated in Sec. 14 of the Corporation Code

COMMERCIAL LAW

CLOSE CORPORATION 1. Aside from the general matters in Sec. 14, its AI must contain the special matters prescribed by Sec. 97. Failure to do so precludes a de jure close corporation status

2. Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights 3. Its AI cannot classify its directors 4. Business of the corporation is managed by the BOD

5. The corporate officers and employees are elected by a majority vote of all the directors 6. The pre-emptive right is subject to the exceptions found in Sec. 39 7. The appraisal right may be exercised by a stockholder only in the case provided in Secs. 81 and 42 of the Corporation Code 8. Except as regards redeemable shares, the purchase of the corporation of its own stock must always be made from the unrestricted retained earnings

9. Arbitration of intracorporate deadlock by the SEC is not a remedy in case the directors or stockholders are so divided respecting management of the corporation

2. The 2/3 of its voting stock or voting rights must not be owned or controlled by another corporation which is not a close corporation 3. Its AI may classify its directors 4. Business of the corporation may be managed by the stockholders if the AI so provide, but they are liable as directors 5. Its AI may provide that any or all of the corporate officers or employees may be elected or appointed by the stockholders 6. The pre-emptive right is subject to no exceptions unless denied in the AI 7. The appraisal right may be exercised and compelled against the corporation by a stockholder for any reason 8. In case of an arbitration of an intra-corporate deadlock by the SEC, the corporation may be ordered to purchase its own shares from the stockholders regardless of the availability of unrestricted retained earnings 9. Arbitration of intracorporate deadlock by the SEC is an available remedy in case the directors or stockholders are so divided respecting the management of the corporation

----------------------------------------------------------------------XIII. SPECIAL CORPORATIONS 1. EDUCATIONAL CORPORATION (Sec. 106) - A stock or non-stock corporation organized to provide facilities for teaching or instructions - must obtain favorable recommendation from DECS for the approval of its AI and By-Laws by SEC. [DepEd = Elementary and High School; CHED = Tertiary] - it is primarily governed by special laws and, suppletorily, by the provisions of the Corporation Code - Board of Trustees (NSEC) – not less than 5 members and not more than 15 – the term of office is 5 years

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS 

 Procedure i. File with the SEC the resolution duly certified by the Board and countersigned by the Secretary ii. Issuance by the SEC of a certificate of dissolution – dissolution takes effect

It is different from an ordinary non-stock corporation organized for educational purposes.

2.RELIGIOUS CORPORATION (Sec. 109) - A corporation composed entirely of spiritual persons which is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property - It is different from an ordinary non-stock corporation organized for religious purposes, like the Knights of Columbus, Opus Dei etc. - Kinds: a. Corporation Sole - incorporated by one person and consist of one member or corporator only and his successors, such as a bishop a) can sell, acquire, encumber property b) to dissolve, file a declaration to that effect b. Religious Society - a non-stock corporation governed by a board but with religious purposes. It is incorporated by an aggregate of persons, e.g. religious order, diocese, synod, sect, etc. - Articles of incorporation - submit to SEC with affidavit of affirmations

b.

If there are creditors affected, by judgment of the SEC after hearing of the petition for voluntary dissolution. (Sec. 119)  Procedure: 1. Petition filed with SEC 2. If petition is sufficient in form and substance, the SEC, by an order reciting the purpose of the petition, shall fix a date on or before which objections thereto may be filed, but which shall not be less than 30 days nor more than 60 days after the entry of the order; 3. Publication of the SEC order at least once a week in 3 consecutive weeks in a newspaper of general circulation, and a similar copy shall be posted for 3 consecutive weeks in 3 public places, in the municipality or city where the principal office of the corporation is situated; 4. Five days after the expiration of the date set for filing objections, the SEC shall hear the petition and try any issue made by objections filed; 5. Dissolution takes effect upon judgment by SEC ordering distribution of assets of corp.

c.

by amending the AI to shorten the corporate term (Sec. 120)  Procedure: 1. Amendment of the AI approved by the Board and ratified by stockholders owning at least 2/3 of OCS or 2/3 of the members 2. Submit the amended AI to the SEC  The Rule that when the SEC does not take action in 6 months from the date of filing for a cause not attributable to the corporation the amendment is deemed effective, is not applicable in this case.  Submit also an affidavit of publication setting forth that the corporation has amended its articles to shorten the term to effect dissolution upon arrival of date stated 3. Dissolution takes effect upon approval of the amendment or expiration of the shortened term.

----------------------------------------------------------------------XIV. DISSOLUTION Dissolution - refers to the extinguishment of its franchise to be a corp. and the termination of its corporate existence - Corp ceases its operation altogether, BUT it continues to exist for 3 years for purposes of winding up of its affairs - Steps: 1. Termination 2. Winding up 3. Liquidation Kinds of dissolution 1. Voluntary dissolution 2. Involuntary dissolution Voluntary dissolution - by the act of the corporation a. If there are no creditors who are prejudiced, dissolution may be effected: i. by the majority vote of BOD/BOT, and ii. by a resolution duly adopted by the affirmative vote of the stockholders owning at least 2/3 of the OCS or of at least 2/3 members at a meeting duly called for the purpose after notice of the meeting was published in a newspaper of general circulation.

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CORPORATION LAWS

If there are creditors what is the proper way of dissolving? - Any of the 3 ways so long as creditors are not prejudiced. - In case of corporation sole, dissolution is effected by submitting to the SEC a verified declaration of dissolution for approval.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS Involuntary dissolution - Brought about by filing of a verified complaint with SEC and after proper notice and hearing on the grounds provided for by existing laws, rules and regulations. - Grounds: 1. Violation of the corporation code 2. When there is a deadlock in a close corp. 3. When a close corp. is mismanaged 4. When the certificate of registration is suspended or revoked in ff. instances: a) when there is fraud in processing its certificate of registration b) when there is serious misrepresentation as to what the corp. can do or is doing to the great prejudice of or damage to the general public c) refusal to comply or defiance of any lawful order of the commission restraining the commission of an act which would amount to a grave violation of its franchise d) continuous inoperation for 5 years e) failure to file BL within the required period f) failure to file reports in appropriate form within the presented period

4.

5.

The dissolution does not by itself imply the extinction of rights demandable against the corporation Ceases to have any personality whatsoever after the expiration of the 3-year winding period and as a general rule it can no longer sue or be sued as such

LIQUIDATION - The winding up of the affairs of the corporation by reducing its assets in money, settling with creditors and debtors, and apportioning the amount of profit and loss. Methods of Liquidation 1. Liquidation by the corporation itself - converts assets with cash, settle with creditors, apportion profit and loss 2. Liquidation by a duly appointed trustee - transfer assets in the name of the trustee, has responsibility to liquidate the corporation. 3. Liquidation by a management committee or rehabilitation receiver appointed by the SEC. 

Kinds of Involuntary Dissolution 1. Expiration of the corporate term – corp. continues to operate for a period of 3 years for purposes of winding up its affairs 2. Legislative enactment – except: it must not impair any right or remedy 3. Failure to organize and commence transaction within 2 years from incorporation (However, the SEC has opined that the dissolution in this case is not automatic. The corporation continues to exist as such, notwithstanding its non-operational status until the SEC orders its dissolution after notice and hearing) 4. Dissolution by judicial decree – forfeiture of its privilege or franchise as non user 5. Quo warranto suit against a de facto corporation 6. Minority stockholder’s suit for dissolution on justifiable grounds 7. SEC dissolution, upon complaint and after notice and hearing, on the following grounds: a) The corporation was illegally organized; b) Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least 5 years; c) Serious dissension in the corporation; or d) Commission by the corporation of illegal or ultra vires acts or violations of the Corporation Code. Effects of dissolution 1. Legal title to corporate assets is vested in the shareholder, who become co-owners thereof 2. The corporation ceases as a body politic or to continue the business for which it was established 3. Can no longer be revived (but may reincorporated by filing a new AI and BL)

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The 3-year period of liquidation does not apply to Methods 2 and 3 as long as the trustee or receiver is appointed within the said period.

If corp. cannot wind up its affairs within 3 years a. It is best to appoint a trustee or receiver because he can act as such even beyond 3 years, (the corp. can only act for 3 years) b. If the property liquidation is transmitted to a trustee or a receiver, the corporation ceases, legal interest vests in the trustee and beneficial interest in the stockholders, members, or creditors. 



The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors alike (Sec. 145). Where, in the case of a corporation, the 3-year extended life has expired without a trustee or receiver having been expressly designated within the said period, those who have been charged to wind up its affairs or, in their absence, the BOD/BOT should be permitted to continue as “trustees” by legal implication to complete the corporate liquidation.

How to Distribute Assets In the following order: 1. Creditors 2. Shareholders/members who are likewise creditors 3. Shareholders in proportion to their shareholding preference

-

Amount shareholder is entitled to Fair Market Value of the shares of stock. If there is a loss – below FMV. If there are profits – in proportion to their shareholdings

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 

Upon winding up of the corporate affairs, any asset distributable to any creditor of shareholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such asset is located.



General Rule:  Dissolution – authority given to the corporation to distribute assets to shareholders or members Except: (even if no dissolution, the corp. can distribute assets)  Exceptions to the Trust Fund Doctrine 1. Decrease of capital stock (Sec. 38) 2. When corp. is redeemed by redeemable shares 3. When corporation is purchasing treasury shares (Sec. 42) 4. When the corporation is acquiring its own shares, converting it into treasury shares (Sec. 42) 5. When declared as dividends (Sec 43) 6. When there is withdrawal from a close corp (Sec 105)



----------------------------------------------------------------------XV. FOREIGN CORPORATION Foreign corporation - One formed, organized or existing under any laws other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or State. (Sec. 123) - This definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes. It does not say that it is required that the laws under which foreign corporations are formed give Philippine national reciprocal rights. - A foreign corporation shall have the right to transact business in the Phil. after obtaining a license to transact business in this country and a certificate of authority from the appropriate government agency concerned. (Sec. 123) - Test: Incorporation Test (Place of incorporation), regardless of the nationality of the shareholders - During wartime, the control test will apply, that is, a domestic corp. controlled by enemy aliens shall be deemed a foreign corporation with a nationality identical with that of its controlling shareholder - becomes a Philippine resident the moment it is granted a license to transact business in the Philippines. Corporate residence is where its business is transacted Objectives of regulation of foreign corporation 1. To place them in equal footing with domestic corporation; 2. To subject them to inspection so that their condition may be known; 3. To protect the residents of the State doing business with them by subjecting them to the courts of the State.

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CORPORATION LAWS FOREIGN INVESTMENT ACT OF 1991 (RA 7092) - A foreign corporation may now acquire and own 100% Filipino corporation. - Except when limited by Constitution (owning land) 

Problem: Corporation A with Shareholder = 31% Filipino and 69% owned by Corporation B ( 47% Fil and 53% Alien), engaged in partially nationalized industry Q: Is the 60% requirement met? A: Yes, requirement met

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Because a FC cannot extend its jurisdiction beyond its limits, it exist only in contemplation of law and by the consent of such state or country

APPLICATION FOR A LICENSE (Sec. 125) Procedure for the Issuance of License I. Submit application with SEC which shall be under oath and specifically set forth the following unless stated in its AI: 1. The date and term of incorporation; 2. The address including the street number of the principal office of the corporation in the country or state of incorporation; 3. Name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purposes of the corporation which it intends to pursue in the transactions of its business in the Philippines. Provided that said purpose are those specifically stated in the certificate of authority issued by the appropriate government agency; 6. The names and addresses of the present directors and officers of the corporation; 7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue; 8. A statement of its OCS and the aggregate number of shares which the corp. has issued; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary in order to enable the SEC to determine whether such corp. is entitled to a license to transact business in the Philippines and to determine and assess the fees payable. II. Submit Articles of Incorporation and By-laws, duly certified and their translation to an official language in the Phil. III. Submit and attach a certificate under oath by an authorized official of the jurisdiction of its incorporation attesting to the fact that the laws of the country or state

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS of the applicant allow Filipino citizens and corporation to do business therein and the applicant is an existing corp. of good standing with a translation of the certificate in English under oath of the translator if it is in foreign language IV. A statement under oath of the President or any authorized officer of the corp. showing to the satisfaction of the SEC and other government agency in proper cases that the applicant is solvent and in sound financial condition and setting forth its assets and liabilities for the previous year V. Other requirement provided by law – a certificate of Authority from the appropriate government agency whenever required by law VI. Power (written) of Attorney designating a resident agent on whom summons and other legal processes against the corp. may be served and a written agreement and stipulation consenting that such services may be made upon the SEC, if anytime, it shall cease to transact business in the Phils. or shall be without resident agent (Rule XIV, Sec 13). Resident agent - An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated by a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. (Secs. 127 -128) 

When a corporation has designated a person to receive service of summons pursuant to the Corporation Code, that designation is exclusive and service of summons on any other person is inefficacious.

Service of summons to a corp. with license (In the ff. order) 1. Resident agent – exclusive 2. SEC ( If no resident agent and the corp ceases to transact business –SEC transmit within 10 days from receipt a copy of such summons to the corp. at its home or principal office (act of mailing within 10 days complete the service – expenses born by the party on whose instance the service is made) 3. Officers or agent in the Philippines. 

Note: the above order of examination is to be followed only if a foreign corp. is transacting business in the Phils. with a license (Wang Labora vs. Mendoza)

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If without license – service be made upon any agent of the corp. If domestic corp. –Rules of Court will apply

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Conditions imposed subsequent to the issuance of license: 1. The FC shall transact business and for the purpose/s for which it is authorized under its license; 2. Within 60 days after the issuance of its license, it shall deposit with SEC satisfactorily securities in the actual market value of at least P100k consists of: a. bonds or other evidence of indebtedness of the government of the Phils, its political subdivisions and instrumentalities or of government owned or controlled corporation; b. shares of stock in “Registered Enterprises” (registered under Omnibus Investment Code) c. Shares of stock in domestic corporation registered in the stock exchange d. Shares of stock in domestic insurance co. and banks e. Any combination of these kinds of securities EXCEPT foreign banking or insurance corp. 3. Within 6 months after the end of each fiscal year of the license a. additional deposit of securities equivalent in actual market value of 2% of the amount by which the license’s gross income for that fiscal year exceeds 5M – if less than 5M no additional b. If the market value of the deposit decreased by at least 10% of such value at the time they were deposited , the deposit shall be increased; if the deposit increased by 10% - allowed to withdraw Can you exchange the deposits with another one? Yes, substitution can be allowed provided the corp. is solvent. c. If there are dividends/interest due on the deposited securities, the license shall be entitled to collect d. Deposits be returned when the license ceases to do business in the Phils. provided it is able to show the absence of any liability to Phil residents including the Government of the Pgils. 4. It must comply with the provisions of existing laws, rules and regulations otherwise its license may be revoked, suspended or annulled by SEC Effect of issuance of license: - FC may now commence to transact its business in the Philippines for as long the corporation continues to exist as a corporation under the laws of its State of incorporation EXCEPT when the license is surrendered, revoked, suspended, or annulled.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS TESTS OF DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES: A. JURSIPRUDENTIAL TESTS: 1. Twin Characterization Test a) Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over to another (Substance Test); and b) Whether there is continuity of commercial dealings and arrangements, contemplating to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of the purpose and object of its organization (Continuity Test). 2. Contract Test - Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines. B. STATUTORY TESTS 1. Foreign Investment Act of 1991 (RA 7042) Acts constituting “doing business”: a) Soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; b) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling to 180 days or more; c) Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the Philippines; d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purposes of the business organization. 2. Implementing Rules of RA 7042 - Acts NOT constituting “doing business”: a) Mere investment as a shareholder in a domestic corporation and/or the exercise of the rights of such investor; b) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; c) Publication of a general advertisement through any print or broadcast media; d) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; e) Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export; f) Collecting information in the Philippines; and

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CORPORATION LAWS g) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis. Law Applicable (Sec 129) - Gen. Rule:  Any FC lawfully doing business in the Phils. shall be bound by all laws, rules and regulations applicable to domestic corporation. - Except: (Governed by the state of Incorp.) 1. Matters relative to formation, creation, organization or dissolution of corporation 2. The relations, liabilities, responsibilities or duties of shareholders, members or officers of corp. to each other or to the corp. (Citibank vs. Chilia) - By laws of a FC can be given application without approval by the SEC since the SEC grants a license only when the FC has complied with all the requirements of law, it follows that when it decides to issue such license, it is deemed to have approved its foreign enacted by laws Amendments to articles of incorporation or by-laws of foreign corporations (Sec. 130) - Note: The law that governs the amendment of AI of the FC is the law of State of its incorporation - Limitation in the amendments of AI/BL of FC: it shall not of itself enlarge or alter the purpose/s for which such corporation is authorized to transact business in the Philippines. Amended license (Sec 131) Q: When is it required? A: 1. The FC changes its corporate name 2. The FC desires to pursue in the Phils. other or additional purposes  How – by submitting an application thereof to the SEC favorably endorsed by the appropriate government agency in the proper cases  Merger/Consolidation involving a FC licensed in the Phils. - FC merged/consolidated with a domestic corp – laws of the Phils will be followed as to requirements or merger or consolidation - If FC with another FC – such FC licensed to do business in the Phil. within 60 days after such merger/consolidation becomes effective, file with the SEC and in appropriate cases, with the proper government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official of the State under the laws of which such merger or consolidation was effected. - If FC with another FC – if the one absorbed is the corp. licensed to do business in the Phils. – it shall file a petition for the withdrawal of its license.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS REVOCATION OF LICENSE (Sec. 135) Grounds 1. Failure to file annual report or pay any fees required by this Code. 2. Failure to appoint and maintain a resident agent in the Philippines; 3. Failure after change of its resident agent or of his address to submit to the SEC a statement of such change; 4. Failure to submit to the SEC an authenticated copy of any amendments to its AIC or BL or any articles of merger or consolidation; 5. A misrepresentation of any material matter in any application, report, affidavit or other documents submitted by such corporation pursuant to this title; 6. Failure to pay any and all taxes imposed, penalties and assessments, if any, lawfully due to the Philippine government or any of its agencies or political subdivisions; 7. Transacting business in the Philippines outside of the purpose/s for which such corp. is authorized under its license; 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corp. or entity not duly licensed to do business in the Philippines; 9. Any other ground as would render it unfit to transact business in the Philippines. What happens when there is revocation of license? - The SEC will issue a certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. SEC shall mail to the corp. at its registered office in the Phils. a notice of such revocation accompanied by a copy of the certificate of revocation EFFECTS OF LACK OF LICENSE A. On suits 1. Foreign corporation doing business in the Philippines: a) may not sue in any action in any court or administrative agency of the Philippines; and b) may be sued on any valid cause of action recognized in the Philippines (under the doctrine of quasiestoppel by acceptance of benefits). (Sec. 133) 2. Foreign corporation NOT doing business in the Philippines: a) Generally, it may not sue and be sued in any court or administrative agency of the Philippines; b) However, it may sue and be sued on isolated transactions, as well as for those which are casual or incidental thereto. Doctrine of Isolated Transactions -Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. - However, it is not the lack of the prescribed license to do business in the Philippines but the doing of business without license which bars a foreign corporation from

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CORPORATION LAWS access to Philippine courts. An unlicensed foreign corporation is not ipso facto barred from bringing an action. The legal prohibition is confined to cases relating to its business activity in the country. Instances when a foreign corporation may sue in the Philippines whether or not licensed to do business thereat: 1. To seek redress for isolated business transaction; 2. To protect its corporate name, reputation or goodwill; 3. To enforce a right not arising out of a business transaction in the Philippines; 4. When the parties have contractually stipulated that the Philippines is the venue of actions; and 5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation. B. On contracts - The contracts contemplated are those that satisfy the “contract test” or those that make a foreign corporation as one “doing business in the Philippines.” General Rule: The contracts are unenforceable. They are enforceable only upon securing a license. Exception: However, the contracts are null and void if they are contrary to law, morals, good customs, public policy and public order. WITHDRAWAL OF FOREIGN CORPORATIONS (Sec. 136) - How to effect surrender/ withdrawal: by filing a petition for withdrawal of license Essential Requirements for Withdrawal 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments and penalties, if any, lawfully due the Phil. government or any of its agencies or political subdivisions have been paid; 3. The petition for withdrawal of license has been published once a week for 3 consecutive weeks in a newspaper of general circulation in the Phil. Formal Requirements to Legally Effect the Withdrawal of Foreign Corporation’s License The following must be submitted to the SEC: 1. The letter – petition of the Resident Agent requesting the withdrawal of the license to do business 2. Filing fee of P10.00 3. A copy of the resolution of the BOD authorizing the closing of the Phil. branch and empowering the RA to effectuate the withdrawal thereof, duly authenticated in accordance with law to be submitted in triplicate 4. Latest balance sheet and sworn statement that no creditors will be prejudiced by the withdrawal also to be submitted in triplicate

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 5.

6.

Proof of publication of the Notice of withdrawal once a week for 3 consecutive weeks in a newspaper of general circulation in the Phil. The license issued by the commission to the corp. which shall be surrendered

2 Things to Consider to Determine Whether a FOREIGN CORPORATION has Access to Phil Courts 1. Does it have license 2. Is it transacting business in the Phil. - How to determine – no hard and fast rule but there are guidelines provided a. If the FC is continuing the business for which it was created in the Phil. then it is transacting business (Menthrelatura case) b. If acts of the corp. indicates a purpose by the corp. to engage in some parts of its regular business, then doing business (Microwe____ case) c. When a single act is not merely incidental or casual but such but of such character as to distinctly indicate its intention to perform other business in the Phils (Way lab) d. The volume of the business does not matter, it is the performance of acts for which the corp. was created that determines whether it was transacting business (Granger) e. The continuity of conduct of which an intention can be inferred of establishing a business in the Phils (JAL) 4 Exceptions when FC Without license can sue I. Isolated business transaction – single transaction - solicited by domestic corp., entity or person - Note: If FC who solicits the transaction then it is already transacting business in the Phils. Rationale for the exceptions: not the intention of law to favor domestic corp. 3 Requisites (to file an action based on this) 1. FC must disclose that it is not doing business in the Phils. And it is suing under the isolated business transaction – disclose in complaint 2. Suing entity must be a FC 3. Name its duly authorized representative or RA – for purposes of action, it must appoint a resident agent to whom notice upon the FC must be served for the purpose of pre trial II. To protect corporate name, reputation and goodwill ( Puma vs. IAC) - Rule NOW, foreign trademarks/ trade names 1. owner of the same is domiciled in the country of which it is a member of the treaty agreement on trademarks 2. widely known in the Phils.

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Country of the FC allows or gives Filipino Corp/citizen reciprocal rights

III. To enforce a right not arising out of Business Transaction - Bulakhidas and Universal Shopping – transaction between 2 foreign entities IV. Intends to hold person/entity for actionable acts or omission - Rule on equity allows Filipino to sue FC - Lack of license is not an excuse for its non-suability (FBA)  RULES 1. Burden of proof that it is FC transacting business without a license suing under the 4 exceptions is on the FC 2. The defendant must specifically deny the allegation of FC capacity to sue 3. Proof of doing business is not necessary to confer jurisdiction on th FC (Maruber’s case and Signetics vs, CA) ----------------------------------------------------------------------XVI. MISCELLANEOUS PROVISIONS Sec 137 - OCS – all shares of stock issued to subscribers or shareholders of a stock corp. whether or nor fully paid or partially as long as there is a bonding subscription agreement, except treasury shares. - All OCS are issued because not outstanding if not issued but not all issued shares of stocks are outstanding (e.g. treasury shares issued but not OCS)

OCS

Subscribed

Not all OCS are considered subscribed

All subscribed capital stocks are considered outstanding

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Reason: Because it is possible that shares of stock are fully paid. If fully paid, no longer considered as subscribed.

Sec. 138 - Q: Is it possible for a corp. to have its affairs managed by Board of Governors? A: Yes, but only limited to non-stock and special corp. who may designate another name for its BOT Sec 142 - Gen Rule: Examination results of the operation, books and records of any corp are strictly confidential - Except: When a law requires disclosure

2 Requirements BEFORE ( no longer applied) 1. Trade name/trademark registered in the Phils. Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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 When may a receiver be appointed for a corporation? -Whenever necessary in order to preserve the rights of party litigants and/or protect the interest of the investing public and creditor.  If the corp. is regulated by another government agency, a receiver can still be appointed but a request coming from an appropriate government agency if necessary  When can there be a management committee? Two instances: 1. When there is imminent danger of dissipation, loss or wastage or destruction of assets or other properties; 2. When there is paralyzation of business operation which may be prejudicial to the interest of minority shareholders, any of the party litigants or the general public.

Securities and Exchange Commission Reorganization Decree

Revised Securities Act PD 902-A SEC - agency entrusted with the enforcement of all laws affecting corps., partnership and association - Composition:  5 Commissioners – 1 chair (7 years)  4 Associate Com o 2 (3 years) o 2 (5 years) Quorum - The presence of 3 Comm is sufficient to constitute quorum. In the absence of the chairman – presiding officer will the most Senior Officer  Q: Can the SEC form a committee to hear a dispute? A: Yes, because in the exercise of its authority, it shall have the power to unlist the aid and support of and to deputize any and all enforcement agencies of the gov’t, civil or military as well as any private institution, corp., form, association or person  If there is dispute = heard by SEC/SEC division – within 30 days – appealable with the commission en banc – within 20 days – to the CA on Petition for Review (BP 129 does not apply)  Can the RTC issue an injunction directed to the SEC? No, because they are of co-equal rank. Original and exclusive jurisdiction of the regional trial courts (Sec. 5 of PD 902-A in relation to Sec. 5.2 of RA 8799): 1. Fraudulent devices and schemes employed by directors detrimental to the public interest and to other firms; 2. Intra-corporate controversies and with the state in relation to their franchise and right to exist as such;  4 Kinds of Relationship that will constitute an intra-corporate relationship (Union Cola vs. SEC): a. between the corp. and the public; b. between the corp. and shareholders, members and officers; c. between the corp. and the state in so far as its permits, franchise, or license to operate is concerned – right to exist d. between and among shareholders 3. Controversies in election or appointment of directors, trustees, officers and managers 4. Petitions declaring corp. in a state of suspension of payments  2 Situations that will allow the filing of petition for suspension of payments: a. Corp. has sufficient assets to cover liabilities but foresees the impossibility, when they fall due – simple suspension b. No asset or insufficient asset but under the management of a rehabilitation receiver or management committee

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Gen. Rule: Petition is necessary before SEC can appoint management committee Except: If in SEC’s opinion there is imminent danger of dissipation, loss or wastage or destruction of assets, or other properties or paralyzation of business corp.

Powers of rehabilitation committee or rehabilitation receiver (Sec. 6[d]): 1. To take custody of, and control over, all existing assets and properties of such entities under management; 2. To evaluate the existing assets and liabilities, earnings and operations of such corporations, partnerships or other associations; 3. To determine the best way to salvage and protect the interest of the investors and creditors; 4. To study, review and evaluate the feasibility of continuing operation and restructure and rehabilitate such entities if determined to be feasible by the RTC; 5. To report and be responsible to the RTC until dissolved; and 6. May overrule or revoke the actions of the previous management and board of directors of the entity under management, notwithstanding any provision of law, articles of incorporation or by-laws to the contrary. Rehabilitation receiver/ management committee - Not subject to any action, claim or demand for or in connection with any act done or omitted to be done by it in good faith in the exercise of its function.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

SECURITIES REGULATION CODE RA 8799

Definition of Terms: 1. SECURITIES – these are shares, participation or interests in a corporation or in a commercial enterprise or profit making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: (i) shares of stock, bonds, debentures, notes, evidences, of indebtedness, asst-backed securities; (ii) investments contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; (iii) fractional undivided interests in oil, gas or other mineral rights; (iv) derivates like options or warrants; (v) certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; (vi) proprietary or nonproprietary membership certificates in corporation; and (vii) Other instruments as may in be future be determined by the Commission. (Sec. 3.1) 2. ISSUER – it is the originator, maker, obligor, or creator of the security. Securities statures have been enacted principally to protect the investing public from unscrupulous issuers. (Sec. 3.2) 3. BROKER – any person engaged in the business of buying and selling securities for the account of others. (Sec. 3.3) 4. DEALER – any person who buys and sells securities for his own account in then ordinary course of business. Compare with a broker. (Sec. 3.4) 5. CLEARING AGENCY – any person who acts as intermediary in making deliveries upon payment to effect settlement in securities transactions. Just like an exchange, it is the desire of the SEC that a clearing agency could develop into a self-regulatory organization. (Sec. 3.6) 6. EXCHANGE – an organized market place or facility that brings together buyers and sellers and executes trades of securities and/ or commodities. Unlike the usual over-thecounter market, an exchange has a physical facility. (Sec. 3.7) 7. INSIDER – an insider may be: (i) The issuer; (ii) A director or office (or a person performing similar functions) of, or a person controlling the issuer; (iii) a person whose relationship or former relationship to the issuer gives or gave him

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CORPORATION LAWS access to material information about the issuer or the security that is not generally available to the public; (iv) a government employee, or director, or office of an exchange, clearing agency and/ or self-regulatory organization who has access to a material information about an issuer or a security that is not generally available to the public; or (v) A person who learn such information by a communication from any of the foregoing insiders. (Sec. 3.8) One is not prohibited form being an insider. It is not a crime. It is a status. An insider starts to get into trouble when he acts upon the material nonpublic information he has and busy or sells shares or, under Section 27.3, communicates such information to another knowing or having reason to believe that such person will likely buy or sell a security. 8. PRE-NEED PLANS – these are contracts which provide for the information of future services or the payment of future monetary considerations at the time of actual need, for which plan holders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interments and other plans which the commission may from time to time approve. (Sec. 3.9) 9. PROMOTER – a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration thereof. (Sec. 3.10) 10. PROSPECTUS – it is the document made by or on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed with the SEC. it is a selling document that contains most of the information set out in the registration statement. If a potential investor wants information about a new issue, his broker will hand him a prospectus of the issue, not the registration statement of the particular security. (Sec. 3.11) 11. REGISTRATION STATEMENT – it is the application for the registration of securities required or be filed with the SEC. the protection of the investing public starts with an examination and review by the SEC of an issuer’s registration statement. (Sec. 3.12) 12. UNCERTIFICATED SECURITY – it is a security evidenced by electronic or similar records. The increased difficulty in the issuance and cancellation of shares after every transaction in the exchange, brought about by increase in the volume of transactions, has led to the development and adoption of the concept of uncertificated securities. (Sec. 3.13) 13. UNDERWRITER – a person who guarantees on a firm commitment and/ or declared beat efforts basis the distribution and sale of securities of any kind by another

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS company. The firm underwriter takes to buy the unsold portion of the issue it handles and gets paid a higher- fee for its effort than the best efforts underwriter who does no make the same commitment. (Sec. 3.14)

REGISTRATION OF SECURITIES - Gen rule: A registration statement duly filed and approved by the Sec is necessary before securities may be sold and offered for sale or distribution within the Philippines. Prior to any sale, information on the securities, in such form and substance prescribed by the SEC, shall be made available to each prospective purchaser. (Sec. 8) - Exceptions: 1. Exempt securities; and 2. Exempt transactions. EXEMPT SECURITIES (Sec. 9) 1. Any security issued or guaranteed by the government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as instrumentality of said government; 2. Any security issued or guaranteed by the government of any country of which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity; provided, that the commission may require compliance with the form and content of disclosures the Commission may prescribed; 3. Certificates issued by the receiver or by the trustee in bankruptcy duly approved by the proper adjudicatory body; 4. Any security or its derivates the sale or transfer of which, by law, is under the supervision and regulation of the office of the Insurance Commission, Housing and Land Used Regulatory Board, or the Bureau of Internal Revenue; 5. Any security issued by the bank except its own shares of stock. EXEMPT TRANSACTIONS (Sec. 10) 1. Judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy; 2. Sale of pledged or foreclosed property to liquidate debts; 3. Sale on isolated transactions by owner or by his representative for the owner’s account; 4. Distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus; 5. Sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock ( e.g. the additional issuance of shares by a

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CORPORATION LAWS corporation out of its authorized but unissued capital stock); 6. Issuance of bonds or notes secured by mortgage upon real state or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale; 7. Issuance and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion (Provided, that the security so surrendered has been registered under the SRC or was, when sold, exempt from the provisions of the SRC, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under the SRC. Upon such conversion, the par value of the security surrendered in such and delivered in such exchanged and sold); 8. Broker’s transactions, executed upon consumer’s orders, on any registered exchange or other trading market; 9. Pre-incorporation subscriptions and subscription to an increase in its authorized capital stock under the Corporation Code; 10. Exchange of securities by the issuer with its existing security holders exclusively; 11. Sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12 month period; 12. Sale of securities to any number of the following qualified buyers: (i) bank (ii) registered investment house; (iii) insurance company; (iv) pension fund or retirement plan maintained by the government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the BankoSentral to engage in trust functions; (v) investment company; or (vi) such other person as the commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, or amount of assets under management. Initial procedure for the registration of securities (Sec. 12) - All securities required to be registered under section 8.1 of the SRC shall be registered through the filing by the issuer in the main office of the SEC of the sworn registration statement with respect to such securities. Unlike the Revised Securities Act, the SRC does not specify in great detail the information which must be provided and the documents which must be submitted by the applicant issuer, leaving such matters, including the form of the application, for the SEC to prescribe.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Who are required to sign the registration statement? (Sec. 12.4) - The registration statement shall be signed by the issuer’s principal executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary or person’s performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. What action may the SEC take on a registration statement? (Sec. 12.6) - Within 45 days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14 of the SRC. The SEC shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto is on its face complete and that the requirements have been complied with. The SEC may impose such terms and conditions as may be necessary or appropriate for the protection of the investors. Note that the SEC does not “”approve” the registration statement (although Secs. 8.1 and 8.2 refer to the registration statement being “approved” by the SEC) but simply declares it “effective.” The non-use of he word “approve” is more probably designed to avoid any suggestion that the SEC is endorsing the particular issue. Grounds for Rejecting a Registration Statement (Sec. 13.1) - The SEC may reject a registration statement and refuse registration of the security thereunder, or revoke the affectivity of a registration statement and the registration of the security thereunder, after due notice and hearing, by issuing an order to such effect, setting forth its findings in respect thereto, if it finds that: (a) the issuer(i) has been judicially declared insolvent; (ii) has violated any of the provisions of this code; the rules promulgated pursuant thereto, or any order of the commission of which the issuer has notice in connection with the offering for which the registration statement has been filed; (iii) has been or is engaged or is about to engage in fraudulent transactions; (iv) has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) has failed to comply with any requirement that the commission may impose as a condition for the registration of the security for which the registration has been filed.

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CORPORATION LAWS (b) the registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or, (c) the issuer, any officer, director or controlling person of the issuer, or person performing similar functions, or any underwriter has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the commission or other competent judicial or administrative body for violations of securities, commodities, and other related laws. TENDER OFFER - A tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company (Sec. 19). It has also been described as “an imprecise term widely used in securities law, generally referring to a quick, enticing proposal to the shareholders of a corporation that they tender their shares for purchase by the offeror at a specified price. Tender offer is an upside-down term; I make the offer, you make the tender. It is usually, not always, part of an attempt by the offeror to buy enough stock to control the corporation, i.e., a takeover (also spelled takeover and take over). Accordingly, tender offer is sometimes called takeover offer or takeover bid.” (Mellinkoff’s Dictionary of American Legal Usage, p. 64) - Tender offers are regulated to prevent he stockholders of the target company from being misled by the offeror or the target’s management. Thus, a principal requirement of the SEC rules on tender offer is the disclosure by the offeror of certain information about the offer, with a copy of such information being given or sent to the stockholders (Rule 19.1, par. 7). Circumstances where tender offer is mandatory (Sec. 19.1 (a); SRC Rule 19.1, par. 2) - Except when relief from the mandatory tender offer requirement is granted under SRC Rule 19.1, paragraph 3, a person is required under the following circumstances to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire: (a) where the person intends to acquire 15% or more of the equity shares of a public company pursuant to an agreement made between or among the person or one or more sellers; (b) where the person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months; and, (c) where the person intends to acquire shares that would result in the ownership of more

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS than 50% of the equity shares of a public company. When would a person be presumed to be making a voluntary tender offer? (SRC Rule 19.1, par. 4) - A person may make a voluntary tender offer. He will be presumed to be doing so when some or all of the following factors are present: (a) there is active and widespread solicitation of public shareholders fort he shares of a public company; (b) the solicitation is made for a substantial percentage of the issuer’s stock; (c) the offer to purchase is made at a premium over the prevailing market price, at firm rather than negotiable terms; (d) the offer is contingent on the tender of a fixed number of shares; and (e) the offer is only open for a limited period of time. 

The terms “solicit” and “solicitation” means (a) any request for a proxy whether or not accompanied by or included in a form of proxy; (b) any request to execute or not to execute, or to revoke a, a proxy; or (c) the furnishing of a form of proxy or other communication to security holders under circumstance reasonably calculated to result in the procurement, withholding or revocation of a proxy. 

The approach of the SEC Rules on proxy solicitation follows the traditional three-way approach which (i) calls for a brief description of the matters to be considered, together with the action proposed to be taken by the holder of the proxy (SRC Rule 20, pars. 3 and 4); (ii) requires the registrant (i.e. the insurer of the securities in respect of which proxies are to be solicited), as a condition of its own solicitation, to mail to record owners the proxy material of any stockholder upon his or her request at his or her expense (SRC Rule 2o, par. 6); and (iii) adopts a general fraud rule prohibiting the making of any materially false or misleading statements (SRC Rule 20, par. 7).



No solicitation of proxy shall be made unless each person solicited is furnished, concurrently or earlier, with a written proxy statement containing the information required by the SEC (SRC Rule 20, par. 3). The form of proxy, shall be made unless each person solicited or given to stockholders at least 15 business days prior to the meeting date (SRC Rule 20, par. 4.f).

The foregoing list of factors reflects the so-called weight-factor Wellman Vs. Dickinson Test enunciated in an American Case of the same name (475F. Supp. 783, 823-824 [S>D>N>Y>, 1979] involving the coordinated private solicitations of 30 institutions and 9 individuals, with a premium price offered and no individualized negotiations (Fundamentals of Securities Regulation by Louis Loss and Joel Seligman, rd Little Brown and Company, 3 edition, 1995).

What is a proxy and why is its solicitation regulated? (Sec. 20; SRC Rule 20) - A proxy is a formal authorization from a stockholder that empowers someone to vote in his or her behalf; the term also refers to the person who is sop authorized to vote on behalf of a stockholder - The SRC regulates the issuance and solicitation of proxies. Indeed, it expressly requires that proxies must be issued and proxy solicitation must be made in accordance with SEC rules (Sec. 20.1). thus, proxies must be in writing, signed by the stockholder or his duly authorized representative and filed with the corporate secretary before the scheduled meeting (Sec. 20.2); unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended; no proxy shall be valid and effective for a period longer than 5 years at one time (Sec. 20.3); and a broker or dealer can not give a proxy in respect of any security it carries fort he account of a customer without the express written authorization of such customer(Sec. 20.4). - The issuance and solicitation of proxies are regulated to minimize, if not avoid, the abuse and misuse of the proxy device that may lead to the self-perpetuation and irresponsibility of management. Management has innate advantages in the solicitation of proxies; it has the stockholder’s list; it benefits from the usual inertia of stockholders; and it has access to corporate funds for the normally substantial costs of solicitation.

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RECOVERY OF PROFITS When could the profits made by a stockholder, director or officer in a purchase and sale, or a sale and purchase, of any equity security be recovered? (Sec. 23.2) - For the purpose of preventing the unfair use of information which may have been obtained by a beneficial owner of equity securities, director or officer, or officer of the issuer by reason of his relationship top the issuer, any profit realized by him from any purchase and sale, o any sale and purchase, of any equity security of such issuer with in any period of less than 6 months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not purchasing the security sold for a period exceeding 6 months. A suit to recover such profit may be instituted before the regional trial court by the issuer, or by the owner of any security of the issuer in the name and I behalf of the issuer if the issuer shall fail or refuse to bring such suit within 60 days after

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS request or shall be brought more than 2 years after the date such profit was realized. MANIPULATION OF SECURITY PRICES What are the various ways by which security prices may be manipulated? (Sec. 24; SRC Rule 24.1(b)-1, par. 5) - The following are some examples of the ways by which security prices may be manipulated: (a) Painting the tape- engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security; (b) Marking the close- buying and selling securities at the close of the market in an effort to alter the closing price of the security; (c) Improper matched orders- engaging in the transaction where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties; (d) Hype and dump- engaging in buying activity at increasingly higher prices and then selling securities in the market at higher prices; (e) Wash sales- engaging in transactions in which there is no genuine change in actual ownership of a security; (f) Squeezing the float- taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices ; (g) Boiler room sales- the use of high-pressure sales tactics to promote purchases and sales of securities; (h) Daisy chain- a series of purchases and sales of the same at successively higher (or lower) prices, by the same group of people with the purpose of manipulating prices and drawing unsuspecting investors into the market, leaving them defrauded of their money or securities.

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CORPORATION LAWS Could an insider be liable even if he does not trade? (Sec. 27. 3) Yes. It shall be unlawful for any insider to communicate material nonpublic information about the issuer or security to any person who, by virtue of the communication, becomes an insider as defined in Section 3.8 of the SRC, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such information. Is there a presumption of insider trading? (Sec. 27.1) Yes. A purchase or sale of a security of the issuer made by an insider or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time fort he market to absorb such information; provided, however, that this presumption shall be rebutted upon a showing by the purchaser or seller that he was no aware of the material nonpublic information at the time of the purchase or sale. MATERIAL NONPUBLIC INFORMATION (Sec. 27. 2) Material nonpublic information is information that 1. has not being generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information, or 2. would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.

REGISTRATION OF MARKET PROFESSIONALS AND ENTITIES

THE INSIDER Prohibited acts of an insider: (Secs. 3.8 and 27) - While to be an insider in not prohibited, it shall, however, be unlawful for an insider to sell or buy a security of the issuer while in possession of material nonpublic information with respect to the issuer or the security unless(a) the insider is able to prove that the information was not gained from such relationship, or (b) if the other party selling to or buying from the insider (or his agent) is identified, the insider is able to prove (i) the he disclosed the nonpublic information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the nonpublic information. 

The duty of the insider when trading is to disclose the material nonpublic information to the other party.

Who are the market professionals and entities required to register with SEC? (a) Brokers, dealers, salesman and associated person (Sec. 28.1) – no person shall engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the SEC. (b) Exchanges (Secs. 3.7 and 33.2) – the applicant fort he registration must be organized as a stock corporation and engaged solely in the business of operating an exchange. No person may beneficially own or control, directly or indirectly, more than 5% of the voting rights of the exchange. Industry and business group are similarly limited to not more than 29% of the voting rights of the exchange. Brokers shall constitute no more than 49% of the Board of Directors of the exchange, while the remaining 51% shall be composed of three independent

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS directors and person who represent the interests of issuers, investors and other market participants who are not associated with any broker or dealer or member of the exchange for period of 2 years prior to his appointment. (c) Other securities trading markets – the SEC is authorized to determine the number, size and location of stock exchanges, other trading markets and commodity exchanges, and other similar organizations in the light of national or regional requirements for such activities with the view to promote, enhance, protect, conserve or rationalize investment (Sec. 36.3). The Sec is also authorized to register and license innovative and other trading markets or exchanges covering the issuance of innovative securities, securities of small, medium, growth and venture enterprises, and technology-based ventures. (d) Self-regulatory organizations (Sec. 39) – a selfregulatory organization is any securities exchange, clearing or depository agency or other securities-related organization or association which is organized and has the capacity to be able to carry out he purposes of the SRC and to comply with, and to enforce compliance by its members, with the provisions of the SRC, the rules and regulations thereunder, and the rules of the association (Sec. 39.3[a]). Those entities which the SEC may register as self=regulatory organizations include associations of brokers and dealers, transfer agents, custodians, fiscal and paying agents, computer services, news disseminating services, proxy solicitors, statistical agencies, security rating agencies, and securities information processors. (e) Clearing agencies (Secs. 3.6 and 42) 

In Nicolas vs. CA, G.R. 122857, March 27, 1998 The Supreme Court ruled that the suit of Nicolas must fail because the traded securities fort he account of others without securing the necessary license therefore from the SEC. the failure to obtain such a license is a violation of Section 19 of the Revised Securities Act which provides that no brokers shall sell any securities unless he is registered with the SEC. stock market trading, a technical and highly specialized institution in the Philippines, must be entrusted to individuals with proven integrity, competence and knowledge and who has due regard fort he requirements of the law. INDEPENDENT DIRECTOR - An independent director is a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere in the exercise of independent judgment in carrying out the responsibilities of a director (Sec. 38). - More expansively, SRC rule 38.1 defines an independent director as a person who, apart from his fees and shareholdings, is independent of management and free from any business or other

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CORPORATION LAWS relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director in the corporation. For example, a person may not qualify as an independent director under SRC rule 38.1 if – (a) he is a substantial shareholder (i.e. a beneficial owner, directly or indirectly, of more than 10% of any class of equity security) of the corporation or of its related companies (i.e., its holding company, its subsidiary, or subsidiary of its holding company) or any of its substantial shareholders; or (b) he is a relative (i.e., the spouse, parent, child, brother and sister of such person, and the spouse of such child, brother or sister) of any director, officer or substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders; or (c) he has been employed in any executive capacity by the public company, any of its related companies or by any of its substantial shareholders within the last 5 years; or (d) he is retained as professional adviser by the public company, any of its related companies or by any of its substantial shareholders, either personally or through his firm. Who are required to have independent directors? (Sec. 38) Apart from exchange, any corporation with a class of equity securities listed for trading in an exchange, or with assets in excess of P50 million and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities or which has sold a class of equity securities to the public pursuant to an effective registration statement in compliance with Section 12 of the SRC, shall have at least 2 independent directors or such independent directors shall constitute at least 20% of the members of such board, whichever is the lesser. PROHIBITED TRANSACTIONS OF BROKERS AND DEALERS (Sec. 30.1) - No broker or dealer shall deal in or otherwise buy or sell, for its own account or for the account of customers, securities listed on an exchange issued by any corporation where any stockholder, director, associated person or salesman, or authorized clerk of said broker or dealer and all the relatives of the foregoing within the fourth civil degree of consanguinity or affinity, is at the time holding office in said issuer corporation as a director, president, vice president, manager, treasurer, comptroller, secretary or any office of trust and responsibility, or is controlling person oft eh issuer. SUITABILITY RULE (SRC Rule 30.2-4) - The suitability rule states that, in recommending to a customer the purchase, sale or exchange of any security, a broker, dealer or an associated person or salesman of a broker or dealer shall have reasonable

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS grounds for believing that the recommendation is suitable for such customer upon the basis of the facts disclosed by such customer as to his security holdings and as to his financial situation and needs. SUSPENSION OF TRADINGS Can the SEC suspend trading in a security or all trading on any securities exchange? (Sec. 36.1) Yes. The SEC is authorize, if in its opinion such action is necessary or appropriate for the protection of investors and the public interest so requires, summarily to suspend trading in any listed security on any exchange or other trading market for a period not exceeding 30 days or, with the approval of the President of the Philippines, summarily to suspend all trading on any securities exchange or other trading market for a period of more than 30 but not exceeding 90 days; provided, however, that the SEC, promptly following the issuance of the order of suspension, shall notify the affected issuer of the reasons for such suspension and provides such issuer with an opportunity for hearing to determine whether the suspension should be lifted.

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CORPORATION LAWS (d) in the case of f\violation of Section 34 (re segregation and limitation of functions of members, brokers, dealers), a fine of no more than 3 times the profit gained or loss avoided as a result of the purchase, sale or communication proscribed by such section; and (e) other penalties within the power of the SEC to impose. SETTLEMENT OFFER (Sec. 55) A settlement offer is a written proposal made to the SEC by a party being investigated or charged, during an investigation or proceeding under the SRC, in order that such investigation or proceeding against the said party could be terminated or dismissed. Upon receipt of such offer of settlement, the SEC may consider the offer based on timing, the nature of the investigation or proceeding, and the public interest. The SEC may only agree to settlement offer based on its findings that such settlement is in the public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such decision may be made with out a determination of guilt on the part of the person making the offer.

MARGIN TRADING (Secs. 48, et seq.) Margin trading refers to the purchase of securities by an investor using the credit of the broker to pay for part of the said securities. It is regulated for the purpose of the excessive use of credit or carrying of securities. The “margin” is the amount of money or securities that an investor must deposit with a broker to secure a loan with from the broker. When a broker makes a demand on the investor to deposit money or securities with a broker when the purchase is made or when the investor’s equity in a margin account declines below a minimum standard set by the exchange or broker, the broker is said to have made a margin call.

FALSE REGISTRATION STATEMENT Who may sue on account of a false registration statement? (Sec. 56.1) Any person (i) acquiring a security, the registration statement of which or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make such statement not misleading, (ii) who suffers damage, and (iii) who did not know of such untrue statement or omission at the time of such acquisition, may sue and recover damages.

VIOLATONS OF THE SRC, PENALTIES AND SANCTIONS What administrative sanctions may the SEC impose? (Sec. 4) If there is violation of the SRC, the SCR rules or the orders of the SEC, the SEC shall, in its discretion and after due notice and hearing, impose any or all the following sanctions as may be appropriate in light of the facts and circumstances: (a) suspension, or revocation of any registration for the offering of securities; (b) a fine of no less than P10,000 nor more than P1,000,000 plus not more than P2,000 for each day of continuing violation; (c) in the case of violations of Sections 19.2(the making of untrue statement, etc. in connection with a tender offer), 20 (proxy solicitations), 24 (manipulation of security prices, etc.), 26 (fraudulent transactions) and 27 (insider trading), disqualification from being an officer, member of the board of directors, or person performing similar functions, of an issuer required to file reports under Section 17 of the SRC or any other act, rule or regulation administered by the SEC;

Who may be sued on account of a false registration statement? ( Sec. 56.1) (a) the issuer and every person who signed the registration statement; (b) every person who was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted; (c) every person who is named in the registration statement as being or about to become a director of, or person performing similar functions, or a partner in, the issuer and whose written consent thereto is filed with the registration statement. (d) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus; (e) Every person who, with his written consent, which shall be filed with the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement, report or evaluation, which

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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purports to have been prepared or certified, by him; (f) Every selling shareholder who contributed to and certified as to the accuracy of the portion of the registration statement, with respect to that portion of the registration statement which purports to have been contributed by him; and (g) Every underwriter with respect to such security. What is the prescriptive period for the enforcement of actions under Sections 56 (re civil liabilities on account of false registration statement) and 57 (Re civil liabilities arising in connection with prospectus, communications and reports)? Sec. 62) No action shall be maintained to enforce any liability created under Sections 56 or 57 of the SRC unless brought within 2 years after the discovery of the untrue statement or the omission, or, if the action is to enforce a liability created under Section 57.1(a) (re offering to sell or selling an unregistered security), unless brought within 2 years after the violation upon which it is based. In no event shall any such action be brought to enforce liability crated under Section 56 or 57.1(a) more than 5 years after the security was bona fide offered to the public, or under Section 57.1 (b) ( re offering to sell or selling a security by means of a prospectus, etc. containing an untrue statement, etc.) more than 5 years after the sale. What are the damages that may be awarded in suits to recover damages under Sections 56-60? (Sec. 63) (a) actual damages; (b) treble damages, i.e., damages in an amount not exceeding triple the amount of the transaction; (c) exemplary damages in cases of bad faith, fraud, malevolence or wantonness in the violation of the SRC or the SRC rules; (d) Attorney’s fees not exceeding 30% of the award. May compliance with any provision of the SRC be waived and would such waiver be valid? (Sec. 71.1) Any condition, stipulation, or provision binding any person to waive compliance with any provision of the SRC or of any rule or regulation thereunder, or of any rule of an Exchange required thereby, as well as the waiver itself, shall be void.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

RULES OF PROCEDURE ON CORPORATE REHABILITATION A.M. No. 00-8-10-SC RESOLUTION Acting on the recommendation of the Subcommittee on Special Rules for Special Commercial Courts, submitting for the consideration and approval of the Court the Resolved to APPROVED the same. The Rule shall take effect on January 16, 2009 following its publication in two (2) newspapers of general circulation.

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CORPORATION LAWS "Asset" is anything of value that can be in the form of money, such as cash at the bank or amounts owed; fixed assets such as property or equipment; or intangibles including intellectual property, the book value of which is shown in the last three audited financial statement immediately preceding the filing of the petition, In case the debtor is less than three years in operation, it is sufficient that the book value is based on the audited financial statement\s for the years or year immediately preceding the filing of petition, as the case may be. "Board of Directors" shall include the executive committee or the management of partnership or association "Claim" shall include all claims or demands of whatever nature or charter against a debtor or its property, whether for money or otherwise

December 2, 2008 RULES OF PROCEDURE ON CORPORATE REHABILITATION (2008) RULE 1 COVERAGE Section 1. Scope - These Rules shall apply to petitions for rehabilitation of corporations, partnerships and associations pursuant to Presidential Decree No. 902-A, as amended. Section 2. Applicability to Rehabilitation Cases Transferred from the Securities and Exchange Commission. - Cases for rehabilitation transferred from Securities Exchange Commission to the Regional Trial Court pursuant to Republic Act No. 8799, otherwise known as The Securities Regulation Code, shall likewise be governed by these Rules. RULE 2 DEFINITION OF TERMS AND CONSTRUCTION

"Control" is the power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exit when the parent owns, directly or indirectly though subsidiaries, more than one half (?) of the voting power of the voting power of an enterprise unless, unless, in exception circumstances, it can clearly be demonstrated that such own ship does not constitute control. Control also exits even when the parent own one-half (1/2) or less of the voting power of an enterprise when there is power: (A) Over more than one-half (?) of agreement with investors; (B) To direct or govern the financial and operating policies of the enterprise under a statute or agreement; (C) To appoint or remove the majority of the member of the board of directors or equivalent governing body; or (D) To cast the majority votes at meeting of the board of directors or equivalent governing body. "Creditor" shall mean any holder of a claim

Section 1. Definition of Terms. - For purpose of these Rules: "Administrative Expenses" shall refer to (a) reasonable and necessary expenses that are incurred in connection with the filing of the petition; (b) expenses incurred in the ordinary course of business after the issuance of the stay order, excluding interest payable to the creditors for loans and credit accommodations existing at the time of the issuance of the stay order, and (c) other expenses that are authorized under this Rules. "Affidavit of General Financial Condition" shall refer to a verified statement on the general financial condition of the debtor requiredin Section 2, Rule 4 of these Rules. "Affiliate" is a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation, which thereby becomes its parent corporation.

"Court" shall refer to the proper Regional Trial Court designated to hear and decide the cases contemplated contemplated under these Rules. "Days" shall refer to calendar days unless otherwise provided in these Rules. "Debtor" shall mean any corporation, partnership or association or a group of companies, whether supervised or regulated by the Securities and Exchange Commission or other government agencies, on whose behalf a petition for rehabilitation has been filed under these rules. "Foreign court" means a judicial or other authority competent to control or supervise a foreign proceeding. "Foreign proceeding" means a collective judicial or administrative proceeding in a foreign State, interim proceeding, pursuant to a law re solvency in which proceeding the assets and affairs of the debtor are subject

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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to control or supervision by a foreign count, for the purpose of rehabilitation or re-organization

or general circulation in the Philippines in the manner prescribed by these rules.

"Foreign Representative" means person or entity, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or rehabilitation of the debtor or act as a representative of the foreign proceeding. "Group of companies" refers to, and can cover only, corporation that are financially refers to, and can cover only, corporations that are financially rated to one another as parent corporation, subsidiaries and affiliates. When the petition covers a group of companies, all reference under these Rules to "debtor" shall include and apply include and apply to the group of companies.

The proceedings shall also be summary and nonadversarial in nature. The following pleading are prohibited: (a) Motion to dismiss; (b) Motion for a bill of particulars: (c) Petition for relief; (d) Motion for extension; (e) Motion for postponement (f) Third-party complaint; (g) Intervention; (h) Motion to hear affirmative defenses; and (I) Any pleading or motion which is similar to or of like effect as any of the foregoing.

"Liabilities" shall refer to monetary claims against the debtor, including stockholders advances that have been recoded in the debtor's audited financial statements as advances for subscription. "Parent" is a corporation directly or indirectly though one or more intermediaries. "Rehabilitation" shall mean the restoration of the debtor to a position of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan more if the corporation continues as a going concern than if it immediately liquidated. "Secured claim" shall refer to any claim whose payment or fulfillment is secured by contract or by law, including any claim or credit enumerated under Articles 2241 and 2242 of the civil Code and Article 110, as amended, of the Labor code of the Philippines. "Subsidiary" means a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled directly or indirectly though one or more intermediaries by another corporation "Unsecured claim" shall mean any claim other than a secured claim. Section 2. Construction - These Rules shall be liberally construed to carry out the objectives of Section 5(d), 6(d) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the parties in obtaining a jut, expeditious and inexpensive determination of case. Where applicable, the Rules of Court shall apply supplementary to proceedings under these Rules. RULES 3 GENERAL PROVISONS Section 1. Nature of Proceeding - Any proceeding initiated under these Rules shall be considered in rem. Jurisdiction over all persons affected by the proceeding shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper

Any pleading, motion, opposition, defense or claim filed by any interested party shall be supported by verified statements that the affiant has read same and that the factual allegations therein are true and correct of his personal knowledge or based on authentic records, and correct of his personal knowledge or based on authentic records, and shall contain as annexes such documents as may be deemed by the party court may be decide matters on the basis of affidavits and other documentary evidence. Where necessary, the court shall conduct clarificatory hearings before resolving any matter submitted to it for resolution. Section 2. Venue. - Petitions for rehabilitation pursuant to these Rules shall be filed in the regional trial court which has jurisdiction over the principal office of the debtor as specified in its articles of incorporation or partnership. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the regional trial court of the city or municipality where the head office is located. A joint petition by a group of companies shall be filed in the Regional Trial Court which has jurisdiction over the principal office of the parent company, as specified in its Articles of Incorporation. Section 3. Service of Pleadings and Documents. - When so authorized by the court, any pleading and/or document required by these Rules may be filed with the court and/or served upon the other parties by facsimile transmission (fax) or electronic mail (e-mail). In such cases, the date of transmission shall be deemed to be the dtae of service. Where the pleading or document is voluminous, the court may, upon motion, waive the requirement of service; provided that a copy thereof together with all its attachments is duly filed with the court and is made available for examination and reproduction by any party, and provided, further, that a notice of such filing and availability is duly served on the parties. Section 4. Trade Secrets and Other Confidential Information. - Upon motion, the court may issue an order to protect trade secrets or other confidential research,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS development or commercial information belonging to the debtor. Section 5. Executory Nature of Orders. - Any order issued by the court under these Rules is immediately executory. A petition to review the order shall not stay the execution of the order unless restrained or enjoined by the appellate court. Unless otherwise provided in these Rules, the review of any order or decision of the court or an appeal therefrom shall be in accordance with the Rules of Court; provided, however, that the reliefs ordered by the trial or appellate courts shall take into account the need for resolution of proceedings in a just, equitable and speedy manner. Section 6. Nullification of Illegal Transfers and Preferences. - Upon motion the court may nullify any transfer of property or any other conveyance, sale, payment or agreement made in violation of its stay order or in violation of these Rules. Section 7. Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall; not later than five (5) working days from the filing of the petition, issue an order: (a) appointing a rehabilitation receiver and fixing his bond; (b) staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor; provided, that the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor's obligations; provided, further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (d) prohibiting the debtor from making any payment of its liabilities except as provided in items (e), (f) and (g) of this Section or when ordered by the court pursuant to Section 10 of Rule 3; (e) prohibiting the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (f) directing the payment in full of all administrative expenses incurred after the issuance of the stay order; (g) directing the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior court approval;

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CORPORATION LAWS (h) fixing the dates of the initial hearing on the petition not earlier than forty-five (45) days but not later than sixty (60) days from the filing thereof; (i) directing the petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; (j) directing the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the creditors named in the petition and the appropriate regulatory agencies such as, but not limited to, the Securities and Exchange Commission, the Bangko Sentral ng Pilipinas, the Insurance Commission, the National Telecommunications Commission, the Housing and Land Use Regulatory Board and the Energy Regulatory Commission; (k) directing the petitioner that foreign creditors with no known addresses in the Philippines be individually given a copy of the stay order at their foreign addresses; (l) directing all creditors and all interested parties (including the regulatory agencies concerned) to file and serve on the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than fifteen (15) days before the date of the first initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings; and, (m) directing the creditors and interested parties to secure from the court copies of the petition and its annexes within such time as to enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition. The issuance of a stay order does not affect the right to commence actions or proceedings insofar as it is necessary to preserve a claim against the debtor. Section 8. Service of Stay Order on Rehabilitation Receiver. - The petitioner shall immediately serve a copy of the stay order on the rehabilitation receiver appointed by the court, who shall manifest his acceptance or nonacceptance of his appointment not later than ten (10) days from receipt of the order. Section 9. Period of Stay Order. - The stay order shall be effective from the date of its issuance until the approval of the rehabilitation plan or the dismissal of the petition. Section 10. Relief from, Modification, or Termination of Stay Order. (a) The court may, upon motion, terminate, modify, or set conditions for the continuance of the stay order, or relieve a claim from the coverage thereof upon showing that (1) any of the allegations in the petition, or any of the contents of any attachment, or the verification thereof has ceased to be true; (2) a creditor does not have adequate protection over property securing its claims; (3) the debtor's secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary for the rehabilitation of the debtor; or (4) the property covered by the stay order is not essential or necessary to the rehabilitation and the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

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creditor's failure to enforce its claim will cause more damage to the creditor than to the debtor.

(6) He has any other direct or indirect material interest in the debtor or any creditor.

(b) For purposes of this Section, the creditor lacks adequate protection if it can be shown that: (1) The debtor fails or refuses to honor a pre-existing agreement with the to keep the property insured; (2) The debtor fails or refuses to take commercially reasonable steps to maintain the property; or (3) The property has depreciated to an extent that the creditor is undersecured

Section 12. Powers and Functions of Rehabilitation Receiver. - The rehabilitation receiver shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings. For this purpose, the rehabilitation receiver shall have the powers, duties and functions of a receiver under Presidential Decree No. 902-A, as amended, and the Rules of Court.

(c) Upon showing the creditor's lack of adequate protection, the court shall order the rehabilitation receiver to (1) make arrangements to provide for the insurance or maintenance of the property, or (2) to make payments or otherwise provide additional or replacement security such as that the obligation is fully secured. If such arrangements are not feasible, the court shall modify the stay order to allow the secured creditor lacking adequate protection to enforce its claim against the debtor; provided, however, that the court may deny the creditor the remedies in this paragraph if such remedies would prevent the continuation of the debtor as a going concern or otherwise prevent the approval and implementation of a rehabilitation plan.

The rehabilitation receiver shall be considered as an officer of the court. He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor's property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated, as well as implement the rehabilitation plan after its approval. Accordingly, he shall have the following powers and functions:

Section 11. Qualifications of Rehabilitation Receiver. (a) In the appointment of the rehabilitation receiver, the following qualifications shall be taken into consideration by the court: (1) Expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor; (2) Knowledge in management, finance and rehabilitation of distressed companies; (3) General familiarity with the rights of creditors in suspension of payments or rehabilitation and general understanding of the duties and obligations of a rehabilitation receiver; (4) Good moral character, independence and integrity; (5) Lack of conflict of interest as defined in this Section; and (6) Willingness and ability to file a bond in such amount as may be determined by the court. (b) Without limiting the generality of the following, a rehabilitation receiver may be deemed to have a conflict of interest if: (1) He is creditor or stockholder of the debtor; (2) He is engaged in a line of business which competes with the debtor; (3) He is, or was within two (2) years from the filing of the petition, a director, officer, or employee or the auditor or accountant of the debtor; (4) He is or was within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor; (5) He is related by consanguinity or affinity within the fourth civil degree to any creditor, stockholder, director, officer, employee, or underwriter of the debtor; or

(a) To verify the accuracy of the petition, including its annexes such as the Schedule of Debts and Liabilities and the Inventory of Assets submitted in support to the petition; (b) To accept and incorporate, when justified, amendments to the Schedule of Debts and Liabilities; (c) To recommend to the court the disallowance of claims and rejection of amendments t the Schedule of Debts and Liabilities that lack sufficient proof and justification; (d) To submit to the court and make available for review by the creditors, a revised Schedule of Debts and Liabilities; (e) To investigate the acts, conduct, properties, liabilities and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof; and, any other matter relevant to the proceeding or to the formulation of a rehabilitation plan; (f) To examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate; (g) To make available to the creditors documents and notices necessary for them to follow and participate in the proceedings; (h) To report to the court any fact ascertained by him pertaining to the causes of the debtor's problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement and irregularities committed by the stockholders, directors, management,, or any other person against the debtor; (i) To employ such person or persons such as lawyers, accountants, appraisers and staff are necessary in performing his functions and duties as rehabilitation receiver; (j) To monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor's business; (k) To evaluate the existing assets and liabilities, earnings and operations of the debtor;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS (l) To determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders and the general public; (m) To study the rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the proceedings, together with any comments made thereon; (n) To prohibit and report to the court any encumbrance, transfer or disposition of the debtor's property outside of the ordinary course of business or what is allowed by the court; (o) To prohibit and report to the court any payments outside of the ordinary course of business; (p) To have unlimited access to the debtor's employees, premises, books, records and financial documents during business hours; (q) To inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the debtor or other persons; (r) To gain entry into any property for the purpose of inspecting, measuring, surveying or photographing it or any designated relevant object or operation thereon; (s) To take possession, control and custody of the debtor's assets; (t) To notify counterparties and the court as to contracts that the debtor has decided to continue to perform the breach; (u) To be notified of and to attend all meetings of the board of directors and stockholder of the debtor; (v) To recommend any modification of an approved rehabilitation plan as he may deem appropriate; (w) To bring to the attention of the court any material change affecting the debtor's ability to meet the obligations under the rehabilitation plan; (x) To recommend the appointment of a management committee in the cases provided for under Presidential Decree No. 902-A, as amended; (y) To recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public; (z) To apply to the court for any order or directive that he may deem necessary or desirable to aid him in the exercise of his powers and performance of his duties and functions; and (aa) To exercise such other powers as may from time to time be conferred upon him by the court. Section 13. Oath and Bond. - Before entering upon his powers, duties and functions, the rehabilitation receiver must be sworn in to perform them faithfully, and must post a bond executed in favor of the debtor in such sum as the court may direct, to guarantee that he will faithfully discharge his duties and obey the orders of the court. If necessary, he shall also declare under oath that he will perform the duties of a trustee of the assets of the debtor, will act honestly and in good faith, and deal with the assets of the debtor on a commercially reasonable manner.

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Section 14. Fees and Expenses. - The rehabilitation receiver and the persons hired by him shall be entitled to reasonable professional fees and reimbursement of expenses which shall be considered as administrative expenses. Section 15. Immunity from Suit. - The rehabilitation receiver shall not be subject to any action, claim or demand in connection with any act done or omitted by him in good faith in the exercise of his functions and powers herein conferred. Section 16. Reports. - The rehabilitation receiver shall file a written report every three (3) months to the court or as often as the court may require on the general condition of the debtor. The report shall include, at the minimum, interim financial statements of the debtor. Section 17. Dismissal of Rehabilitation Receiver. - A rehabilitation receiver may, upon motion, be dismissed by the court on the following grounds: (a) if he fails, without just cause, to perform any of his powers and functions under these Rules; or (b) on any of the grounds for removing a trustee under the general principles of trusts. Section 18. Rehabilitation Plan. - The rehabilitation plan shall include: (a) the desired business targets or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall include the manner of its implementation, giving due regard to the interests of secured creditors such as, but not limited, to the non-impairment of their security liens or interests; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale exchange or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the present value of payments it would receive under the plan is more than that which it would receive if the assets of the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition; and, (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. Section 19. Repayment Period. - If the rehabilitation plan extends the period for the debtor to pay its contractual obligations, the new period should not extend beyond fifteen (15) years from the expiration of the stipulated term existing at the time of filing of the petition. Section 20. Effects of Rehabilitation Plan. - The approval of the rehabilitation plan by the court shall result in the following:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS (a) The plan and its provisions shall be binding upon the debtor and all persons who may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled; (b) The debtor shall comply with the provisions of the plan and shall take all actions necessary to carry out the plan; (c) Payments shall be made to the creditors in accordance with the provisions of the plan; (d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the plan; and (e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the plan is successfully implemented. Section 21. Revocation of Rehabilitation Plan on Grounds of Fraud. - Upon motion, within ninety (90) days from the approval of the rehabilitation plan, and after notice and hearing, the court may revoke the approval thereof on the ground that the same was secured through fraud. Section 22. Alteration or Modification of Rehabilitation Plan. - An approved rehabilitation plan may, upon motion, be altered or modified if, in the judgement of the court, such alteration or modification is necessary to achieve the desired targets or goals set forth therein. Section 23. Termination of Proceedings. - The court shall, upon motion or upon recommendation of the rehabilitation receiver, terminate the proceeding in any of the following cases: (a) Dismissal of the petition; (b) Failure of the debtor to submit the rehabilitation plan; (c) Disapproval of the rehabilitation plan by the court; (d) Failure to achieve the desired targets or goals as set forth in the rehabilitation plan; (e) Failure of the debtor to perform its obligations under the plan; (f) Determination that the rehabilitation plan may no longer be implemented in accordance with its terms, conditions, restrictions or assumptions; or (g) Successful implementation of the rehabilitation plan. Section 24. Discharge of Rehabilitation Receiver. - Upon termination of the rehabilitation proceedings, the rehabilitation receiver shall submit his final report and accounting with such period of time as the court will allow him. Upon approval of his report and accounting, the court shall order his discharge. RULE 4 DEBTOR-INITIATED REHABILITATION Section 1. Who May Petition. - Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, may petition the proper regional trial court for rehabilitation.

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A group of companies may jointly file a petition for rehabilitation under these Rules when one or more of its constituent corporations foresee the impossibility of meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/or operations of the other member companies of the group is essential under the terms and conditions of the proposed rehabilitation plan. Section 2. Contents of Petition. (a) The petition filed by the debtor must be verified and must set forth with sufficient particularity all the following material facts: (1) the name and business of the debtor; (2) the nature of the business of the debtor; (3) the history of the debtor; (4) the cause of its inability to pay its debts; (5) all the pending actions or proceedings known to the debtor and the courts or tribunals where they are pending; (6) threats or demands to enforce claims or liens against the debtor; and (7) the manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees and stockholders. (b) The petition shall be accompanied by the following documents: (1) An audited financial statement of the debtor at the end of its last fiscal year; (2) Interim financial statements as of the end of the month prior to the filing of the petition; (3) A Schedule of Debts and Liabilities which lists all the creditors of the debtor, indicating the name and last address of record of each creditor; the amount of each claim as to principal, interest, or penalties due as of the date of filing; the nature of the claim; and any pledge, lien, mortgage judgement or other security given for the payment thereof; (4) An Inventory of Assets which must list with reasonable specificity all the assets of the debtor, stating the nature of each asset, the location and condition thereof, the book value or market value of the asset, and attaching the corresponding certificate of title thereof in case of real property, or the evidence of title or ownership in case of movable property, the encumbrances, liens or claims thereon, if any, and the identities and addresses of the lienholders and claimants. The Inventory shall include a Schedule of Accounts Receivable which must indicate the amount of each, the persons from who due, the date of maturity and the degree of collectibility categorizing them as highly collectible to remotely collectible; (5) A rehabilitation plan which conforms with the minimal requirements set out in Section 18 of Rule 3; (6) A Schedule of Payments and Disposition of Assets which the debtor may have effected within three (3) months immediately preceding the filing of the petition; (7) A Schedule of Cash Flow of the debtor for three (3) months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding three (3) months;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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(8) A Statement of Possible Claims by or against the debtor which must contain a brief statement of the facts which might give rise to the claim and an estimate of the probable amount thereof; (9) An Affidavit of General Financial Condition which shall contain answers to the questions or matters prescribed in Annex "A" hereof; (10) At least three (3) nominees for the position of rehabilitation receiver as well as their qualifications and addresses, including but not limited to their telephone numbers, fax numbers and e-mail address; and (11) A certificate attesting under oath that (i) the filing of the petition has been duly authorized; and (ii) the directors and stockholders of the debtor have irrevocably approved and/or consented to, in accordance with existing laws, all actions or matters necessary and desirable to rehabilitate the debtor including, but not limited to, amendments to the articles of incorporation and by-laws or articles of partnership; increase or decrease in the authorized capital stock; issuance of bonded indebtedness; alienation, transfer, or encumbrance of assets of the debtor; and modification of shareholders' rights.

officers, directors and stockholders have not, directly or indirectly, concealed, fraudulently sold or otherwise fraudulently disposed of, any part of petitioner's real or personal property, estate, effects or rights of action, and petitioner, its officers, directors and stockholders have not in any way compounded with any of its creditors in order to give preference to such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to whom petitioner is indebted. Petitioner, its officers, directors, and stockholders have been acting in good faith and with due diligence. Section 4. Opposition to or Comment on Petition. - Every creditor of the debtor or any interested party shall file his verified opposition to or comment on the petition not later than fifteen (15) days before the date of the initial hearing fixed in the stay order. After such time, no creditor or interested party shall be allowed to file any comment thereon or opposition thereto without leave of court. If the Schedule of Debts and Liabilities omits a claim or liability, the creditor concerned shall attach to its comment or opposition a verified statement of the obligations allegedly due it.

(c) Five (5) copies of the petition shall be filed with the court.

Section 5. Initial Hearing. (a) On or before the initial hearing set in the order mentioned in Section 7 of Rule 3, the petitioner shall file a publisher's affidavit showing that the publication requirements and a petitioner's affidavit showing that the notification requirement for foreign creditors had been complied with, as required in the stay order.

Section 3. Verification by Debtor. - The petition filed by the debtor must be verified by an affidavit of a responsible officer of the debtor and shall be in a form substantially as follows: "I, ___________________, (position) of (name of petitioner), do solemnly swear that the petitioner has been duly authorized to file the petition and that the stockholders and board of directors (or governing body) have approved and/or consented to, accordance with law, all actions or matters necessary or desirable to rehabilitate the debtor. The petition is being filed to protect the interests of the debtor, the stockholders, the inventors and the creditors of the debtor, which warrant the appointment of a rehabilitation receiver. There is no petition for insolvency filed with any other body, court of tribunal affecting the petitioner. The Inventory of Assets and the Schedule of Debts and Liabilities contains a full, correct and true description of all debts and liabilities and of all goods, effects, estate and property of whatever kind of class belonging to petitioner. The Inventory also contains a full, correct and true statement of all debts owing or due to petitioner, or to any person or persons in trust for petitioner and of all securities and contracts whereby any money may hereafter become due or payable to petitioner or by or through which any benefit or advantage may accrue to petitioner. The petition contains a concise statement of the facts giving rise, or which might give rise, to any cause of action in favor of petitioner. Petitioner has no land, money, stock, expectancy, or property of any kind, except those set forth in the Inventory of Assets. Petitioner has, in no instance, created or acknowledged a debt for a greater sum than the true and correct amount. Petitioner, its

(b) Before proceeding with the initial hearing, the court shall determine whether the jurisdictional requirements set forth above had been complied with. After finding that such requirements are met, the court shall ensure that the parties consider in detail all of the following: (1) Amendments to the rehabilitation plan proposed by the debtor; (2) Simplification of the issues; (3) The possibility of obtaining stipulations and admission of facts and documents, including resort to request for admission under Rule 26 of the Rule of Court; (4) The possibility of amicably agreeing on any issue brought up in the comments on, or opposition to, the petition; (5) Referral of any accounting, financial and other technical issues to an expert; (6) The possibility of submitting the petition for decision on the basis of the comments, opposition, affidavit and other documents on record; (7) The possibility of a new rehabilitation plan voluntarily agreed upon by the debtor and its creditors; and (8) Such other matters as may aid in the speedy and summary disposition of the case. Section 6. Additional Hearings. - The court may hold additional hearings as part of the initial hearing contemplated in these Rules but the initial hearing must

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS be concluded not later than ninety (90) days from the initial date of the initial hearing fixed in the stay order. Section 7. Order After Initial Hearing. (a) Within twenty (20) days after the last hearing, the court shall issue an order which shall: (1) Give due course to the petition and immediately refer the petition and its annexes to the rehabilitation receiver who shall evaluate the rehabilitation plan and submit his recommendations to the court not later than ninety (90) days from the date of the last initial hearing, if the court is satisfied that there is merit to the petition, otherwise the court shall immediately dismiss the petition; and (2) Recite in detail the matters taken up in the initial hearing and the action taken thereon, including a substitute rehabilitation plan contemplated in Sections 5 (b)(7) and (8) of this Rule; (b) If the debtor and creditors agree on a new rehabilitation plan pursuant to Section 5 (b)(7) of this Rule, the order shall so state the fact and require the rehabilitation receiver to supply the details of the plan and submit it for the approval of the court not later than sixty (6) days from the date of the last initial hearing. The court shall approve the new rehabilitation plan not later than ninety (90) days from the date of the last initial hearing upon concurrence of the following: (1) Approval or endorsement of creditors holding at least two-thirds (2/3) of the total liabilities of the debtor including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor; (2) The rehabilitation plan complies with the requirements specified in Section 18 of Rule 3; (3) The rehabilitation plan would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a six (6) month period from the date of filing of the petition; and (4) The rehabilitation receiver has recommended approval of the plan. The approval by the court of the new rehabilitation plan shall have the same effect as approval of a rehabilitation plan under Section 20 of Rule 3. Section 8. Creditors' Meetings. - If no new rehabilitation plan is agreed upon by the debtor and the creditors, the rehabilitation receiver, at any time before he submits his evaluation on the debtor-proposed rehabilitation plan to the court as prescribed in Section 7(a)(1) of this Rule, shall, either alone or with the debtor, meet with the creditors or any interested party t discuss the plan with a view to clarifying or resolving any matter connected therewith.

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CORPORATION LAWS Section 9. Comments on or Opposition to Rehabilitation Plan. - Any creditor or interested party of record may file comments on or opposition to the proposed rehabilitation plan, with a copy given to the rehabilitation receiver, not later than sixty (60) days from the date of the last initial hearing. The court shall conduct summary and non-adversarial proceedings to receive evidence, if necessary, in hearing the comments on and opposition to the plan. Section 10. Modification of Proposed Rehabilitation Plan. The debtor may modify its rehabilitation plan in the light of the comments of the rehabilitation receiver and creditors or any interested party and submit a revised or substitute rehabilitation plan for the final approval of the court. Such rehabilitation plan must be submitted to the court not later than ten (10) moths from the date of filing of the petition. Section 11. Approval of Rehabilitation Plan. - The court may approve a rehabilitation plan even over the opposition of creditors of the debtor if, in its judgement, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable if the following are present: (a)

The rehabilitation plan complies with the requirements specified in Section 18 of Rule 3; (b) The rehabilitation plan would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a six (6)month period from the date of filing of the petition; and (c) The rehabilitation receiver has recommended approval of the plan. In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors are not impaired. The court shall also issue the necessary orders or processes for its immediate and successful implementation. it may impose such terms, conditions, or restrictions as the effective implementation and monitoring thereof may reasonably require, or for the protection and preservation of the interests of the creditors should the plan fall. Section 12. Period to Decide Petition. - The court shall decide the petition within one (1) year from the date of filing of the petition, unless the court, for good cause shown, is able to secure an extension of the period from the Supreme Court. RULE 5 CREDITOR-INITIATED REHABILITATION Section 1. Who May Petition. - Any creditor or creditors holding at least twenty percent (20%) of the debtor's total liabilities may file a petition with the proper regional trial court for rehabilitation of a debtor that cannot meet its debts as they respectively fall due.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

Section 2. Requirements for Creditor-Initiated Petitions. Where the petition is filed by a creditor or creditors under this Rule, it is sufficient that the petition is accompanied by a rehabilitation plan and a list of at least three (3) nominees to the position of rehabilitation receiver and verified by a sworn statement that the affiant has read the petition and that its contents are true and correct of his personal knowledge or based on authentic records and that the petition is being filed to protect the interests of the debtor, the stockholders, the investors and the creditors of the debtor. Section 3. Applicability of Provisions Relating to DebtorInitiated Rehabilitation. - The provisions of Sections 5 to 12 of Rule 4 shall apply to rehabilitation under this Rule. RULE 6 PRE-NEGOTIATED REHABILITATION Section 1. Pre-negotiated Rehabilitation Plan. - A debtor that foresees the impossibility of meeting its debts as they fall due may, by itself or jointly with any of its creditors, file a verified petition for the approval of a prenegotiated rehabilitation plan. The petition shall comply with Section 2 of Rule 4 and be supported by an affidavit showing the written approval or endorsement of creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. Section 2. Issuance of Order. - If the court finds the petition sufficient in form and substance, it shall, not later than five (5) working days from the filing of the petition, issue an order which shall: (a) Identify the debtor, its principal business or activity/ies and its principal place of business; (b) Direct the publication of the order in a newspaper of general circulation once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance; (c) Direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least five percent (5%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, within three (3) days; (d) Direct the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the relevant regulatory agency; (e) State that copies of the petition and the rehabilitation plan are available for examination and copying by any interested party; (f) Direct creditors and other parties interested (including the Securities and Exchange Commission and the relevant regulatory agencies such as, but not limited to, the Bangko Sentral ng Pilipinas, the Insurance Commission, the National Telecommunications

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CORPORATION LAWS Commission, the Housing and Land Use Regulatory Board and the Energy Regulatory Commission) in opposing the petition or rehabilitation plan to file their verified objections thereto or comments thereon within a period of not later than twenty (20) days from the second publication of the order, with a warning that failure to do so will bar them from participating in the proceedings; (g) Appoint the rehabilitation receiver named in the plan, unless the court finds that he is not qualified under these Rules in which case it may appoint a qualified rehabilitation receiver of its choice; (h) Stay enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor; provided, that the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor's obligations; provided further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to be benefit of excussion as such guarantor; (i) Prohibit the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (j) Prohibit the debtor from making any payment of its liabilities outstanding as of the date of filing of the petition; (k) Prohibit the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (l) Direct the payment in full of all administrative expenses incurred after the issuance of the stay order; and (m) Direct the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior court approval. Section 3. Approval of Plan. - Within ten (10) days from the date of the second publication of the order referred to in Section 2 of this Rule, the court shall approve the rehabilitation plan unless a creditor or other interested party submits a verified objection to it in accordance with the next succeeding section. Section 4. Objection to Petition or Rehabilitation Plan. Any creditor or other interested party may submit to the court a verified objection to the petition or the rehabilitation plan. The objection shall be limited to the following: (a) The petition or the rehabilitation plan or their attachments contain material omissions or are materially false or misleading; (b) The terms of rehabilitation are unattainable; or

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS (c) The approval or endorsement of creditors required under Section 1 of this Rule has not been obtained Copies of any objection to the petition or the rehabilitation plan shall be served on the petitioning debtor and/or creditors. Section 5. Hearing on Objections. - The court shall set the case for hearing not earlier than ten (10) days and no longer than twenty (20) days from the date of the second publication of the order mentioned in Section 2 of this Rule on the objections is in accordance with the immediately preceding section, it shall direct the petitioner to cure the defect within a period fifteen (15) days from receipt of the order. Section 6. Period for Approval of Rehabilitation Plan. - The court shall decide the petition not later than one hundred twenty (120) days from the date of the filing of the petition. If the court fails to do so within said period, the rehabilitation plan shall be deemed approved. Section 7. Effects of Approval of Rehabilitation Plan. Approval of the rehabilitation plan under this Rule shall have the same legal effect as approval of a rehabilitation plan under Section 20 of Rule 3. Section 8. Revocation of Approved Rehabilitation Plan. Not later than thirty (30) days from the approval of a rehabilitation plan under this Rule, the plan may, upon motion and after notice and hearing, be revoked on the ground that the approval was secured by fraud or that the petitioner has failed to cure the defect ordered by the court pursuant to Section 5 of this Rule. Section 9. Effect of Rule on Pending Petitions. - Any pending petition for rehabilitation that has not undergone the initial hearing prescribed under the Interim Rules of Procedure for Corporate Rehabilitation at the time of the effectivity of these Rules may be converted into a rehabilitation proceeding under this Rule. RULE 7 RECOGNITION OF FOREIGN PROCEEDINGS Section 1. Scope of Application. - This Rule applies where (a) assistance is sought in a Philippine court by a foreign court or a foreign representative in connection with a foreign proceeding; (b) assistance is sought in a foreign State in connection with a domestic proceeding governed by these Rules; or (c) a foreign proceeding and a domestic proceeding are concurrently taking place. The sole fact that a petition is filed pursuant to this Rule does not subject the foreign representative or the foreign assets and affairs of the debtor to the jurisdiction of the local courts for any purpose other than the petition. Section 2. Non-Recognition of Foreign Proceeding. Nothing in this Rule prevents the court from refusing to take an action governed by this Rule if (a) the action would be manifestly contrary to the public policy of the

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CORPORATION LAWS Philippines; and (b) if the court finds that the country of which the petitioner is a national does not grant recognition to a Philippine rehabilitation proceeding in a manner substantially in accordance with this Rule. Section 3. Petition for Recognition of Foreign Proceeding. A foreign representative may apply with the Regional Trial Court where the debtor resides for recognition of the foreign proceeding in which the foreign representative has been appointed. A petition for recognition shall be accompanied by: (a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or (b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or (c) In the absence of evidence referred to in subparagraph (a) and (b), any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative. Section 4. Recognition of Foreign Proceeding. - A foreign proceeding shall be recognized if: (a) The proceeding is a foreign proceeding as defined herein; (b) The person or body applying for recognition is a foreign representative as defined herein; and (c) The petition meets the requirements of Section 3 of this Rule; Section 5. Period to Recognize Foreign Proceeding. - A petition for recognition of a foreign proceeding shall be decided within thirty (30) days from the filing thereof. Section 6. Notification to Court. - From the time of filing the petition for recognition f the foreign proceeding, the foreign representative shall inform the court promptly of: (a) Any substantial change in the status of the foreign proceeding or the status of the foreign representative's appointment; and (b) Any other foreign proceeding regarding the same debtor that becomes known to the foreign representative. Section 7. Provisional Relief that May be Granted upon Application for Recognition of Foreign Proceeding. - From the time of filing a petition for recognition until the same is decided upon, the court may, upon motion of the foreign representative where relief is urgently needed to protect the assets of the debtor or the interests of the creditors, grant relief of a provisional nature, including: (a) Staying execution against the debtor's assets; (b) Entrusting the administration or realization of all or part of the debtor's assets located in the Philippines to the foreign representative or another person designated by the court in order to protect and preserve the value of assets that, by their nature or because of other circumstances, are perishable, susceptible to devaluation or otherwise in jeopardy;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS (c) Any relief mentioned in Section 9(a)(1), (2) and (7) of this Rule. Section 8. Effects of Recognition of Foreign Proceeding. Upon recognition of a foreign proceeding: (a) Commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed; provided, that such stay does not affect the right to commence individual actions or proceedings to the extent necessary to preserve a claim against the debtor. (b) Execution against the debtor's assets is stayed; and (c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended. Section 9. Relief That May be Granted After Recognition of Foreign Proceeding. (a) Upon recognition of a foreign proceeding, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, upon motion of the foreign representative, grant any appropriate relief including: (1) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities to the extent they have not been stayed under Section 8(a) of this Rule; (2) Staying execution against the debtor's assets to the extent it has not been stayed under Section 8(b) of this Rule; (3) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under Section 8(c) of this Rule; (4) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities; (5) Entrusting the administration or realization of all or part of the debtor's assets located in the Philippines to the foreign representative or another person designated by the court; (6) Extending the relief granted under Section 7 of this Rule; (7) Granting any additional relief that may be available to the rehabilitation receiver under these laws. (b) Upon recognition of a foreign proceeding, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor's assets located in the Philippines to the foreign representative or another person designated by the court; provided that the court is satisfied that the interests of local creditors are adequately protected. Section 10. Protection of Creditors and Other Interested Persons. (a) In granting or denying relief under this Rule or in modifying or terminating the relief under paragraph (c) of this Section, the court must be satisfied that the interests of the creditors and other interested

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CORPORATION LAWS persons, including the debtor, are adequately protected. (b) The court may subject the relief granted under Section 7 or Section 9. Of this Rule to conditions it considers appropriate. (c) The court may, upon motion of the foreign representative or a person affected by the relief granted under Section 7 or Section 9 of this Rule, or on its own motion, modify or terminate such relief. Section 11. Actions to Avoid Acts Detrimental to Creditors. - Upon recognition of a foreign proceeding, the foreign representative acquires the standing to initiate actions to avoid or otherwise render ineffective acts detrimental to creditors that are available under these Rules. Section 12. Intervention by Foreign Representative in Philippine Proceedings. - Upon recognition of a foreign proceeding, the foreign representative may intervene in any action or proceeding in the Philippines in which the debtor is a party. Section 13. Cooperation and Direct Communication with Foreign Courts and Foreign Representatives. - In matters covered by this Rule, the court shall cooperate to the maximum extent possible with foreign courts or foreign representatives. The court is entitled to communicate directly with, or request information or assistance directly from, foreign courts or foreign representatives. Section 14. Forms of Cooperation. - Cooperation may be implemented by any appropriate means, including but not limited to the following: (a) Appointment of a person or body to act at the discretion of the court; (b) Communication of information by any means considered appropriate by the court; (c) Coordination of the administration and supervision of the debtor's assets and affairs; (d) Approval or implementation by courts of agreements concerning the coordination of proceedings; (e) Coordination of concurrent proceedings regarding the same debtor; (f) Suspension of proceedings against the debtor; (g) Limiting the relief of assets that should be administered in a foreign proceeding pending in a jurisdiction other than the place where the debtor has its principal place of business (foreign non-main proceeding) or information required in that proceeding; and (h) Implementation of rehabilitation or re-organization plan for the debtor. Nothing in this Rule limits the power of the court to provide additional assistance to the foreign representative under other applicable laws. Section 15. Commencement of Local Proceeding after Recognition of Foreign Proceeding. - After the recognition of a foreign proceeding, a local proceeding under these Rules may be commenced only if the debtor is doing business in the Philippines, the effects of the proceedings

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS shall be restricted to the assets of the debtor located in the country and, to the extent necessary to implement cooperation and coordination under Sections 13 and 14 of this Rule, to the other assets of the debtor that, under local laws, must be administered in that proceeding. Section 16. Local and Foreign Proceedings. - Where a foreign proceeding and a local proceeding are taking place concurrently regarding the same debtor, the court shall seek cooperation and coordination under Section 13 and 14 of this Rule. Any relief granted to the foreign proceeding must be made consistent with the relief granted in the local proceeding. RULE 8 PROCEDURAL REMEDIES Section 1. Motion for Reconsideration. - A party may file a motion for reconsideration of any order issued by the court prior to the approval of the rehabilitation plan. No relief can be extended to the party aggrieved by the court's order on the motion through a special civil action for certiorari under Rule 65 of the rules of Court. Such order can only be elevated to the Court of Appeals as an assigned error in the petition for review of the decision or order approving or disapproving the rehabilitation plan. An order issued after the approval of the rehabilitation plan can de reviewed only through a special civil action for certiorari under Rule 65 of the Rules of Court. Section 2. Review of Decision or Order on Rehabilitation Plan. - an order approving or disapproving a rehabilitation plan can only be reviewed through a petition for review to the Court of Appeals under Rule 43 of the Rules of Court within fifteen (15) days from notice of the decision or order. RULE 9 FINAL PROVISIONS Section 1. Severability. - If any provision or section of these Rules is held invalid, the other provisions or sections shall not be affected thereby. Section 2. Transitory Provision. - Unless the court orders otherwise to prevent manifest injustice, any pending petition for rehabilitation that has not undergone the initial hearing prescribed under the Interim Rules of Procedure for Corporate Rehabilitation at the time of the effectivity of these Rules shall be governed by these rules. Section 3. Effectivity. - These Rules shall take affect on 16 January 2009 following its publication in two (2) newspapers of general circulation in the Philippines. ANNEX "A" AFFIDAVIT OF GENERAL FINANCIAL CONDITION (1) Are you an officer of the debtor referred to in these proceedings? (2) What is your full name and what position do you hold in the debtor?

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CORPORATION LAWS (3) What is the full name of the debtor and what is the address of its head office? (4) When was it formed or incorporated? (5) When did the debtor commence business? (6) What is the nature of its business? What is the market share of the debtor in the industry in which it is engaged? (7) Who are the parties, members, or stockholders? How many employees? (8) What is the capital of the debtor? (9) What is the capital contribution and what is the amount of the capital, paid and unpaid, of each of the partners or shareholders? (10) Do any of these people hold the shares in trust for others? (11) Who are the directors and officers of the debtors? (12) Has the debtor any subsidiary corporation? If so, give particulars? (13) Has the debtor properly maintained its books and are they updated? (14) Were the books audited annually? (15) If so, what is the name of the auditor and when was the last audited statement drawn up? (16) Have all proper returns been made to the various government agencies requiring same? (17) When did the debtor first become aware of its problems? (18) Has the debtor within the twelve months preceding the filing of the petition: (a) made any payments, returned any goods or delivered any property to any of its creditors, except in the normal course of business? (b) executed any mortgage, pledge, or security over any of its properties in favor of any creditor? (c) transferred or disposed of any of its properties in payment of any debt? (d) sold, disposed of, or removed any of its property except in the ordinary course of business? (e) sold any merchandise at less than fair market value or purchased merchandise or services at more than fair market value? (f) made or been a party to any settlement of property in favor of any person? If, so, give particulars. (19) Has the debtor recorded all sales or dispositions of assets? (20) What were the sales for the last three years and what percentage of the sales represented the profit or markup? (21) What were the profits or losses for the debtor for the last three years? (22) What are the causes of the problems of the debtor? Please provide particulars? (23) When did you first notice these problems and what actions did the debtor take to rectify them? (24) How much do you estimate is needed to rehabilitate the debtor? (25) Has any person expressed interest in investing new money into the debtor? (26) Are there any pending and threatened legal actions against the debtor? If so, please provide particulars.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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(27) Has the debtor discussed any restructuring or repayment plan with any of the creditors? Please provide status and details. (28) Has any creditor expressed interest in restructuring the debts of the debtor? If so, please give particulars. (29) Have employees' wages and salaries been kept current? If not, how much are in arrears and what time period do the arrears represent? (30) Have obligation to the government and its agencies been kept current? If not, how much are in arrears and what time period do the arrears represent?

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION (2000) (Effective December 15, 2000) Rule 1 Rule 2 Rule 3 Rule 4 Rule 5 Annex “A” Appendix “A”

Coverage Definition Of Terms And Construction General Provisions Rehabilitation Final Provisions Affidavit of General Financial Condition A.M. No. 00-11-03-SC Rule 1 COVERAGE

“Debtor” shall mean any corporation, partnership, or association, whether supervised or regulated by the Securities and Exchange Commission or other government agencies, on whose behalf a petition for rehabilitation has been filed under these Rules. “Stockholder” shall include a member of a non-stock corporation or association, or a partner in a partnership. SEC. 2. Construction.— These Rules shall be liberally construed to carry out the objectives of sections 5(d), 6(c) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the parties in obtaining a just, expeditious, and inexpensive determination of cases. Where applicable, the Rules of Court shall apply suppletorily to proceedings under these Rules.

SECTION 1. Scope — These Rules shall apply to petitions for rehabilitation filed by corporations, partnerships, and associations pursuant to Presidential Decree No. 902-A, as amended. SEC. 2. Applicability to Rehabilitation Cases Transferred from the Securities and Exchange Commission.— Cases for rehabilitation transferred from the Securities and Exchange Commission to the Regional Trial Courts pursuant to Republic Act No. 8799, otherwise known as The Securities Regulation Code, shall likewise be governed by these Rules. Rule 2 DEFINITION OF TERMS AND CONSTRUCTION SECTION 1. Definition of Terms.— For purposes of these Rules: “Administrative Expenses” shall refer to those expenses incurred in the ordinary course of business of the debtor after the issuance of the stay order, excluding interest payable to creditors. “Affidavit of General Financial Condition” shall refer to a verified statement on the general financial condition of the debtor required in section 2, Rule 4 of these Rules. “Board of Directors” shall include the executive committee or the management of a partnership or association. “Claim” shall include all claims or demands of whatever nature or character against a debtor or its property, whether for money or otherwise.

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Rule 3 GENERAL PROVISIONS SECTION 1. Nature of Proceedings.— Any proceeding initiated under these Rules shall be considered in rem. Jurisdiction over all those affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines in the manner prescribed by these Rules. The proceedings shall also be summary and nonadversarial in nature. The following pleadings are prohibited: a. b. c. d. e. f. g. h. i. j.

Motion to dismiss; Motion for a bill of particulars; Motion for new trial or for reconsideration; Petition for relief; Motion for extension; Memorandum; Motion for postponement; Reply or Rejoinder; Third party complaint; and Intervention.

Any pleading, motion, opposition, defense, or claim filed by any interested party shall be supported by verified statements that the affiant has read the same and that the factual allegations therein are true and correct of his personal knowledge or based on authentic records and shall contain as annexes such documents as may be deemed by the party submitting the same as supportive of the allegations in the affidavits. The court may decide matters on the basis of affidavits and other documentary evidence. Where necessary, the court shall conduct clarificatory hearings before resolving any matter submitted to it for resolution.

“Creditor” shall mean any holder of a Claim. “Court” shall refer to the proper Regional Trial Court designated to hear and decide the cases contemplated under these Rules.

SEC. 2. Venue.— Petitions for rehabilitation pursuant to these Rules shall be filed in the Regional Trial Court having jurisdiction over the territory where the debtor’s principal office is located.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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SEC. 3. Service of Pleadings and Documents.— When so authorized by the court, any pleading and/or document required by these Rules may be filed with the court and/or served upon the other parties by facsimile transmission (fax) or electronic mail (e-mail). In such cases, the date of transmission shall be deemed to be the date of service. In case of a voluminous pleading or document, the court may, motu proprio or upon motion, waive the requirement of service, provided, a copy thereof together with all its attachments is duly filed with the court and is made available for examination and reproduction by any party, and provided, further, that a notice of such filing and availability is duly served on the parties.

d.

SEC. 4. Trade Secrets and Other Confidential Information.— On motion or on its own initiative, the court may issue an order to protect trade secrets or other confidential research, development, or commercial information belonging to the debtor. SEC. 5. Executory Nature of Orders.— Any order issued by the court under these Rules is immediately executory. A petition for review or an appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court. The review of any order or decision of the court or an appeal therefrom shall be in accordance with the Rules of Court; Provided, however, that the reliefs ordered by the trial or appellate courts shall take into account the need for resolution of proceedings in a just, equitable, and speedy manner.

e.

f.

g. Rule 4 REHABILITATION SECTION 1. Who May Petition.— Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, or any creditor or creditors holding at least twenty-five percent (25%) of the debtor’s total liabilities, may petition the proper Regional Trial Court to have the debtor placed under rehabilitation. SEC. 2. Contents of the Petition.— The petition filed by the debtor must be verified and must set forth with sufficient particularity all the following material facts: (a) the name and business of the debtor; (b) the nature of the business of the debtor; (c) the history of the debtor; (d) the cause of its inability to pay its debts; (e) all the pending actions or proceedings known to the debtor and the courts or tribunals where they are pending; (f) threats or demands to enforce claims or liens against the debtor; and (g) the manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees, and stockholders. The petition shall be accompanied by the following documents: a. b. c.

An audited financial statement of the debtor at the end of its last fiscal year; Interim financial statements as of the end of the month prior to the filing of the petition; Schedule of Debts and Liabilities which lists all

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h.

i.

j.

k.

the creditors of the debtor indicating the name and address of each creditor, the amount of each claim as to principal, interest, or penalties due as of the date of filing, the nature of the claim, and any pledge, lien, mortgage judgment, or other security given for the payment thereof; An Inventory of Assets which must list with reasonable specificity all the assets of the debtor, stating the nature of each asset, the location and condition thereof, the book value or market value of the asset, and attaching the corresponding certificate of title therefor in case of real property, or the evidence of title or ownership in case of movable property, the encumbrances, liens or claims thereon, if any, and the identities and addresses of the lienholders and claimants. The Inventory shall include a Schedule of Accounts Receivable which must indicate the amount of each, the persons from whom due, the date of maturity, and the degree of collectibility categorizing them as highly collectible to remotely collectible; A rehabilitation plan which conforms to the minimal requirements set out in section 5, Rule 4 of these Rules; A Schedule of Payments and disposition of assets which the debtor may have effected within three (3) months immediately preceding the filing of the petition; A Schedule of the Cash Flow of the debtor for three (3) months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding three (3) months; A Statement of Possible Claims by or against the debtor which must contain a brief statement of the facts which might give rise to the claim and an estimate of the probable amount thereof; An Affidavit of General Financial Condition which shall contain answers to the questions or matters prescribed in Annex “A” hereof; At least three (3) nominees for the position of Rehabilitation Receiver as well as their qualifications and addresses, including but not limited to their telephone numbers, fax number and e-mail address; and A Certificate attesting, under oath, that (a) the filing of the petition has been duly authorized; and (b) the directors and stockholders have irrevocably approved and/or consented to, in accordance with existing laws, all actions or matters necessary and desirable to rehabilitate the debtor including, but not limited to, amendments to the articles of incorporation and by-laws or articles of partnership; increase or decrease in the authorized capital stock; issuance of bonded indebtedness; alienation, transfer, or encumbrance of assets of the debtor; and

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS modification of shareholders’ rights. Five (5) copies of its petition shall be filed with the court. SEC. 3. Verification by Debtor.— The petition filed by the debtor must be verified by an affidavit of a responsible officer of the debtor and shall be in a form substantially as follows: “I, _____________________, (position) of (name of petitioner), do solemnly swear that the petitioner has been duly authorized to file the petition and that the stockholders and board of directors (or governing body) have approved and/or consented to, in accordance with law, all actions or matters necessary or desirable to rehabilitate the debtor. There is no petition for insolvency filed with any other body, court, or tribunal affecting the petitioner. The Inventory of Assets and the Schedule of Debts and Liabilities contains a full, correct, and true description of all debts and liabilities and of all goods, effects, estate, and property of whatever kind or class belonging to petitioner. The Inventory also contains a full, correct, and true statement of all debts owing or due to petitioner, or to any person or persons in trust for petitioner and of all securities and contracts whereby any money may hereafter become due or payable to petitioner or by or through which any benefit or advantage may accrue to petitioner. The petition contains a concise statement of the facts giving rise, or which might give rise, to any cause of action in favor of petitioner. Petitioner has no land, money, stock, expectancy, or property of any kind, except those set forth in the Inventory of Assets. Petitioner has, in no instance, created or acknowledged a debt for a greater sum than the true and correct amount. Petitioner, its officers, directors, and stockholders have not, directly or indirectly, concealed, fraudulently sold, or otherwise fraudulently disposed of, any part of petitioner’s real or personal property, estate, effects, or rights of action, and petitioner, its officers, directors, and stockholders have not in any way compounded with any of its creditors in order to give preference to such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to whom petitioner is indebted. Petitioner, its officers, directors, and stockholders have been acting in good faith and with due diligence.” SEC. 4. Creditor-initiated Petitions.— Where the petition is filed by a creditor or creditors, it is sufficient that the petition is accompanied by a rehabilitation plan and a list of nominees to the position of Rehabilitation Receiver

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CORPORATION LAWS and verified by a sworn statement that the affiant has read the petition and that its contents are true and correct of his personal knowledge or based on authentic records obtained from the debtor. SEC. 5. Rehabilitation Plan.— The rehabilitation plan shall include (a) the desired business targets or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall include the manner of its implementation, giving due regard to the interests of secured creditors; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of the controlling interest; (e) a liquidation analysis that estimates the proportion of the claims that the creditors and shareholders would receive if the debtor’s properties were liquidated; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. SEC. 6. Stay Order.— If the court finds the petition to be sufficient in form and substance, it shall, not later than five (5) days from the filing of the petition, issue an Order (a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (d) prohibiting the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition; (e) prohibiting the debtor’s suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (f) directing the payment in full of all administrative expenses incurred after the issuance of the stay order; (g) fixing the initial hearing on the petition not earlier than forty five (45) days but not later than sixty (60) days from the filing thereof; (h) directing the petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; (i) directing all creditors and all interested parties (including the Securities and Exchange Commission) to file and serve on the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than ten (10) days before the date of the initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings; and (j) directing the creditors and interested parties to secure from the court copies of the petition and its annexes within such time as to enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS SEC. 7. Service of Stay Order on Rehabilitation Receiver.— The petitioner shall immediately serve a copy of the stay order on the Rehabilitation Receiver appointed by the court, who shall manifest his acceptance or nonacceptance of his appointment not later than ten (10) days from receipt of the order. SEC. 8. Voidability of Illegal Transfers and Preferences.— Upon motion or motu proprio, the court may declare void any transfer of property or any other conveyance, sale, payment, or agreement made in violation of its stay order or in violation of these Rules. SEC. 9. Initial Hearing.— On or before the initial hearing, the petitioner shall file the publisher’s affidavit showing that the publication requirements specified above had been complied with. If the court is satisfied that said jurisdictional requirement had been complied with, it shall summarily hear the parties on any matter relating to the petition as well as any comment and/or opposition filed in connection therewith. The court may hold additional clarificatory hearings where there is need to further clarify matters but in no event shall such additional hearings be held beyond one hundred eighty (180) days from the date of the initial hearing. If, after the initial hearing, the court is satisfied that there is merit in the petition, it shall give due course to the petition and immediately refer the petition and its annexes to the Rehabilitation Receiver who shall evaluate the rehabilitation plan and submit his recommendations to the court not later than one hundred twenty (120) days from the date of the initial hearing. SEC. 10. Opposition to or Comment on the Petition.— Every creditor of the debtor or any interested party shall file his verified opposition to or comment on the petition not later than ten (10) days before the date of the initial hearing. After such time, no creditor or interested party shall be allowed to file any comment or opposition thereto without leave of court. If the Schedule of Debts and Liabilities omits a claim or liability, the creditor concerned shall attach a verified statement of the obligations allegedly due it to its comment or opposition. The court shall likewise require the Securities and Exchange Commission to comment on the petition. The Commission shall coordinate with the government agency concerned in appropriate cases for purposes of filing its comment. SEC. 11. Period of the Stay Order.— The stay order shall be effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. The petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of one hundred eighty (180) days from the date of the initial hearing. The court may grant an extension beyond this period only if it appears by convincing and compelling evidence that the debtor may successfully be rehabilitated. In no instance, however, shall the period for approving or disapproving a rehabilitation plan exceed

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CORPORATION LAWS eighteen (18) months from the date of filing of the petition. SEC. 12. Relief from, Modification, or Termination of Stay Order.— The court may, on motion or motu proprio, terminate, modify, or set conditions for the continuance of the stay order, or relieve a claim from the coverage thereof upon showing that (a) any of the allegations in the petition, or any of the contents of any attachment, or the verification thereof has ceased to be true; (b) a creditor does not have adequate protection over property securing its claim; or (c) the debtor’s secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary for the rehabilitation of the debtor. For purposes of this section, the creditor shall lack adequate protection if it can be shown that: a.

b.

c.

the debtor fails or refuses to honor a preexisting agreement with the creditor to keep the property insured; the debtor fails or refuses to take commercially reasonable steps to maintain the property; or the property has depreciated to an extent that the creditor is undersecured.

Upon showing of a lack of adequate protection, the court shall order the rehabilitation receiver to (a) make arrangements to provide for the insurance or maintenance of the property, or (b) to make payments or otherwise provide additional or replacement security such that the obligation is fully secured. If such arrangements are not feasible, the court shall modify the stay order to allow the secured creditor lacking adequate protection to enforce its claim against the debtor; Provided, however, that the court may deny the creditor the remedies in this paragraph if such remedies would prevent the continuation of the debtor as a going concern or otherwise prevent the approval and implementation of a rehabilitation plan. SEC. 13. Qualifications of the Rehabilitation Receiver.— In the appointment of the Rehabilitation Receiver, the following qualifications shall be taken into consideration by the court: a.

b. c.

d. e. f.

Expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor; Knowledge in management, finance, and rehabilitation of distressed companies; General familiarity with the rights of creditors in suspension of payments or rehabilitation and general understanding of the duties and obligations of a Rehabilitation Receiver; Good moral character, independence, and integrity; Lack of a conflict of interest as defined in these Rules; and Willingness and ability to file a bond in such amount as may be determined by the court.

Without limiting the generality of the following, a

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Rehabilitation Receiver may be deemed to have a conflict of interest if: a. b. c.

d.

e.

f.

He is a creditor or stockholder of the debtor; He is engaged in a line of business which competes with the debtor; He is, or was within two (2) years from the filing of the petition, a director, officer, or employee of the debtor or any of its present creditors, or the auditor or accountant of the debtor; He is, or was within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor; He is related by consanguinity or affinity within the fourth civil degree to any creditor, stockholder, director, officer, employee, or underwriter of the debtor; or He has any other direct or indirect material interest in the debtor or any creditor.

SEC. 14. Powers and Functions of the Rehabilitation Receiver.—The Rehabilitation Receiver shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings, and for this purpose shall have the powers, duties and functions of a receiver under Presidential Decree No. 902-A, as amended, and the Rules of Court. The Rehabilitation Receiver shall be considered as an officer of the court. He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor’s property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated, as well as implement the rehabilitation plan after its approval. Accordingly, he shall have the following powers and functions: a)

b)

c)

d)

e)

f)

To verify the accuracy of the petition, including its annexes such as the Schedule of Debts and Liabilities and the Inventory of Assets submitted in support of the petition; To accept and incorporate, when justified, amendments to the Schedule of Debts and Liabilities; To recommend to the court the disallowance of claims and rejection of amendments to the Schedule of Debts and Liabilities that lack sufficient proof and justification; To submit to the court and make available for review by the creditors, a revised Schedule of Debts and Liabilities; To investigate the acts, conduct, properties, liabilities, and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof; and, any other matter relevant to the proceeding or to the formulation of a rehabilitation plan; To examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate;

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h)

i)

j)

k) l)

m)

n)

o)

p)

q)

r)

s) t)

u)

v)

w)

To make available to the creditors documents and notices necessary for them to follow and participate in the proceedings; To report to the court any fact ascertained by him pertaining to the causes of the debtor’s problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement, and irregularities committed by the stockholders, directors, management, or any other person against the debtor; To employ such person or persons such as lawyers, accountants, appraisers, and staff as are necessary in performing his functions and duties as Rehabilitation Receiver; To monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor’s business; To evaluate the existing assets and liabilities, earnings and operations of the debtor; To determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders, and the general public; To study the rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the proceedings, together with any comments made thereon; To prohibit and report to the court any encumbrance, transfer, or disposition of the debtor’s property outside of the ordinary course of business or what is allowed by the court; To prohibit and report to the court any payments outside of the ordinary course of business; To have unlimited access to the debtor’s employees, premises, books, records, and financial documents during business hours; To inspect, copy, photocopy, or photograph any document, paper, book, account, or letter, whether in the possession of the debtor or other persons; To gain entry into any property for the purpose of inspecting, measuring, surveying, or photographing it or any designated relevant object or operation thereon; To take possession, control, and custody of the debtor’s assets; To notify counterparties and the court as to contracts that the debtor has decided to continue to perform or breach; To be notified of, and to attend all meetings of the board of directors and stockholders of the debtor; To recommend any modification of an approved rehabilitation plan as he may deem appropriate; To bring to the attention of the court any material change affecting the debtor’s ability to meet the obligations under the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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x)

y)

z)

aa)

rehabilitation plan; To recommend the appointment of a management committee in the cases provided for under Presidential Decree No. 902-A, as amended; To recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors, or the general public; To apply to the court for any order or directive that he may deem necessary or desirable to aid him in the exercise of his powers and performance of his duties and functions; and To exercise such other powers as may from time to time be conferred upon him by the court.

SEC. 15. Oath and Bond.— Before entering upon his powers, duties, and functions, the Rehabilitation Receiver must be sworn to perform them faithfully, and must post a bond executed in favor of the debtor in such sum as the court may direct, to guarantee that he will faithfully discharge his duties and obey the orders of the court. If necessary, he shall also declare under oath that he will perform the duties of a trustee of the assets of the debtor, will act honestly and in good faith, and deal with the assets of the debtor in a commercially reasonable manner. SEC. 16. Fees and Expenses.— The Rehabilitation Receiver and the persons hired by him shall be entitled to reasonable professional fees and reimbursement of expenses which shall be considered as administrative expenses. SEC. 17. Immunity from Suit.— The Rehabilitation Receiver shall not be subject to any action, claim, or demand in connection with any act done or omitted by him in good faith in the exercise of his functions and powers herein conferred. SEC. 18. Reports.— The Rehabilitation Receiver shall report every three months to the court or as often as the court may require on the general condition of the debtor. SEC. 19. Dismissal of Rehabilitation Receiver.— A Rehabilitation Receiver may be dismissed by the court, upon motion or motu proprio, on account of conflict of interest, or on any of the grounds for removing a trustee under the general principles of trusts. SEC. 20. Comments on or Opposition to the Rehabilitation Plan.— Any creditor or interested party of record may file comments on or opposition to the proposed rehabilitation plan, with a copy given to the Rehabilitation Receiver, not later than one hundred twenty (120) days from the date of the initial hearing. The court shall conduct summary and non-adversarial proceedings to receive evidence, if necessary, in hearing

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CORPORATION LAWS the comments and opposition to the plan. SEC. 21. Creditors’ Meetings.— At any time before he submits his evaluation on the rehabilitation plan to the court as prescribed in section 9, Rule 4 of this Rule, the Rehabilitation Receiver may, either alone or with the debtor, meet with the creditors or any interested party to discuss the plan with a view to clarifying or resolving any matter connected therewith. SEC. 22. Modification of the Proposed Rehabilitation Plan.— The debtor may modify its rehabilitation plan in the light of the comments of the Rehabilitation Receiver and creditors or any interested party and submit a revised or substitute rehabilitation plan for the final approval of the court. Such rehabilitation plan must be submitted to the court not later than one (1) year from the date of the initial hearing. SEC. 23. Approval of the Rehabilitation Plan.— The court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. In determining whether or not the opposition of the creditors is manifestly unreasonable, the court shall consider the following: a.

b.

c.

That the plan would likely provide the objecting class of creditors with compensation greater than that which they would have received if the assets of the debtor were sold by a liquidator within a three-month period; That the shareholders or owners of the debtor lose at least their controlling interest as a result of the plan; and The Rehabilitation Receiver has recommended approval of the plan.

In approving the rehabilitation plan, the court shall issue the necessary orders or processes for its immediate and successful implementation. It may impose such terms, conditions, or restrictions as the effective implementation and monitoring thereof may reasonably require, or for the protection and preservation of the interests of the creditors should the plan fail. SEC. 24. Effects of the Rehabilitation Plan.— The approval of the rehabilitation plan by the court shall result in the following: a.

b.

c.

The plan and its provisions shall be binding upon the debtor and all persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled; The debtor shall comply with the provisions of the plan and shall take all actions necessary to carry out the plan; Payments shall be made to the creditors in

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

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2009 BAR OPERATIONS

d.

e.

accordance with the provisions of the plan; Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the plan; and Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the plan is successfully implemented.

SEC. 25. Revocation of the Rehabilitation Plan on Grounds of Fraud.— On motion or motu proprio, within ninety (90) days from the approval of the rehabilitation plan, and after notice and hearing, the court may revoke the approval thereof on the ground that the same was secured through fraud. SEC. 26. Alteration or Modification of the Rehabilitation Plan.— An approved rehabilitation plan may, on motion, be altered or modified if, in the judgment of the court, such alteration or modification is necessary to achieve the desired targets or goals set forth therein. SEC. 27. Termination of Proceedings.— In case of the failure of the debtor to submit the rehabilitation plan, or the disapproval thereof by the court, or the failure of the rehabilitation of the debtor because of failure to achieve the desired targets or goals as set forth therein, or the failure of the said debtor to perform its obligations under the said plan, or a determination that the rehabilitation plan may no longer be implemented in accordance with its terms, conditions, restrictions, or assumptions, the court shall upon motion, motu proprio, or upon the recommendation of the Rehabilitation Receiver, terminate the proceedings. The proceedings shall also terminate upon the successful implementation of the rehabilitation plan. SEC. 28. Discharge of the Rehabilitation Receiver.— Upon termination of the rehabilitation proceedings, the Rehabilitation Receiver shall submit his final report and accounting within such period of time as the court will allow him. Upon approval of his report and accounting, the court shall order his discharge. Rule 5

ANNEX “A” AFFIDAVIT OF GENERAL FINANCIAL CONDITION

1)

Are you an officer of the debtor referred to in these proceedings?

2)

What is your full name and what position do you hold in the debtor?

3)

What is the full name of the debtor and what is the address of its head office?

4)

When was it formed or incorporated?

5)

When did the debtor commence business?

6)

What is the nature of its business? What is the market share of the debtor in the industry in which it is engaged?

7)

Who are the partners, members, or stockholders? How many employees?

8)

What is the capital of the debtor?

9)

What is the capital contribution and what is the amount of the capital, paid and unpaid, of each of the partners or shareholders?

10)

Do any of these people hold the shares in trust for others?

11)

Who are the directors and officers of the debtor?

12)

Has the debtor any subsidiary corporation? If so, give particulars.

13)

Has the debtor properly maintained its books and are they updated?

14)

Were the books audited annually?

15)

If so, what is the name of the auditor and when was the last audited statement drawn up?

16)

Have all proper returns been made to the various government agencies requiring the same?

17)

When did the debtor first become aware of its problems?

18)

Has the debtor within the twelve months preceding the filing of the petition: a)

made any payments, returned any goods or delivered any property to any of its creditors, except in the normal course of business?

b)

executed any mortgage, pledge, or security over any of its properties in favor of any creditor? transferred or disposed of any of its properties in payment of any debt? sold, disposed of, or removed any of its property except in the ordinary course of business? sold any merchandise at less than fair market value or purchased merchandise or services at more than fair market value? made or been a party to any settlement of

FINAL PROVISIONS SECTION 1. Severability.— If any provision or section of these Rules is held invalid, the other provisions or sections shall not be affected thereby.

c) SEC. 2. Effectivity.— These Rules shall take effect on December 15, 2000 following its publication in two (2) newspapers of general circulation in the Philippines.

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d)

e)

f)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS property in favor of any person? If so, give particulars. 19)

Has the debtor recorded all sales or dispositions of assets?

20)

What were the sales for the last three years and what percentage of the sales represented the profit or mark-up?

21)

What were the profits or losses for the debtor for the last three years?

22)

What are the causes of the problems of the debtor? Please provide particulars.

23)

When did you first notice these problems and what actions did the debtor take to rectify them?

24)

How much do you estimate is needed to rehabilitate the debtor?

25)

Has any person expressed interest in investing new money into the debtor?

26)

Are there any pending and threatened legal actions against the debtor? If so, please provide particulars.

27)

Has the debtor discussed any restructuring or repayment plan with any of the creditors? Please provide status and details.

28)

29)

30)

Has any creditor expressed interest in restructuring the debts of the debtor? If so, please give particulars. Have employees’ wages and salaries been kept current? If not, how much are in arrears and what time period do the arrears represent? Have obligations to the government and its agencies been kept current? If not, how much are in arrears and what time period do the arrears represent?

119

CORPORATION LAWS A.M. NO. 00-11-03-SC RESOLUTION DESIGNATING CERTAIN BRANCHES OF REGIONAL TRIAL COURTS TO TRY AND DECIDE CASES FORMERLY COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION To implement the provisions of Sec. 5.2 of Republic Act No. 8799 (The Securities Regulation Code), and in the interest of a speedy and efficient administration of justice and subject to the guidelines hereinafter set forth, the following branches of the Regional Trial Courts (RTC) are hereby designated to try and decide Securities and Exchange Commission (SEC) cases enumerated in Sec. 5 of P.D. No. 902-A (Reorganization of the Securities and Exchange Commission), arising within their respective territorial jurisdictions with respect to the National Capital Judicial Region and within the respective provinces in the First to the Twelfth Judicial Regions: NATIONAL CAPITAL JUDICIAL REGION Manila (1) Br. 46, Judge Artemio S. Tipon Quezon City (2) Br. 90, Judge Reynaldo B. Daway (3) Br. 93, Judge Apolinario D. Bruselas, Jr. Makati City (4) Br. 138, Judge Sixto C. Marella (5) Br. 139, Judge Florentino A. Tuazon, Jr. Pasig City (6) Br. 158, Judge Jose R. Hernandez Kalookan City (7) Br. 123, Judge Edmundo T. Acu–a Las Pi–as City (8) Br. 253, Judge Jose F. Caoibes, Jr. Mandaluyong City (9) Br. 214, Judge Edwin D. Sorongon Marikina City (10) Br. 273, Judge Olga P. Enriquez Muntinlupa City (11) Br. 256, Judge Alberto L. Lerma Para–aque City (12) Br. 258, Judge Raul E. De Leon Pasay City (13) Br. 231, Judge Cesar Z. Ylagan Valenzuela City (14) Br. 75, Judge Jaime F. Bautista FIRST JUDICIAL REGION Abra (Bangued) (15) Br. 1, Judge Charito B. Gonzales Benguet (Baguio City) (16) Br. 59, Judge Abraham B. Borreta Ilocos Norte (Laoag City) (17) Br. 15, Judge Benjamin D. Turgano La Union (San Fernando City)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS (18) Br. 29, Judge Robert T. Cawed

COMMERCIAL LAW SEVENTH JUDICIAL REGION

Pangasinan (Urdaneta City) (19) Br. 48, Judge Alicia G. Decano

Cebu (Cebu City) (43) Br. 11, Judge Isaias P. Dicdican

SECOND JUDICIAL REGION

Negros Oriental (Dumaguete City) (44) Br. 40, Judge Godofredo S. Sison

Isabela (Ilagan) (20) Br. 16, Judge Isaac R. De Alban Nueva Vizcaya (Bayombong) (21) Br. 29, Judge Gil L. Valdez

Bohol (Tagbilaran City) (45) Br. 48, Judge Fernando G. Fuentes, III EIGHT JUDICIAL REGION

Quirino (Cabarroguis) (22) Br. 31, Judge Moises M. Pardo

Leyte (Tacloban City) (46) Br. 8, Judge Salvador Y. Apurillo

THIRD JUDICIAL REGION

Southern Leyte (Maasin) (47) Br. 24, Judge Bethany G. Kapili

Bataan (Balanga) (23) Br. 2, Judge Manuel M. Tan Bulacan (Malolos) (24) Br. 7, Judge Danilo A. Manalastas

Northern Samar (Catarman) (48) Br. 19, Judge Cesar R. Cinco NINTH JUDICIAL REGION

Nueva Ecija (Cabanatuan City) (25) Br. 28, Judge Tomas B. Talavera

Zamboanga del Norte (Dipolog City) (49) Br. 6, Judge Primitivo S. Abarquez, Jr.

Pampanga (San Fernando) (26) Br. 42, Judge Pedro M. Sunga, Jr.

Zamboanga del Sur (Zamboanga City) (50) Br. 12, Judge Hakim S. Abdulwahid

Zambales (Olongapo City) (27) Br. 72, Judge Eliodoro G. Ubiadas

Agusan del Norte (Butuan City) (51) Br. 33, Judge Victor A. Tomaneng

Tarlac (Tarlac City) (28) Br. 63, Judge Arsenio P. Adriano

TENTH JUDICIAL REGION

FOURTH JUDICIAL REGION

Misamis Oriental (Cagayan de Oro City) (52) Br. 40, Judge Epifanio T. Nacaya, Jr.

Laguna (Calamba) (29) Br. 92, Judge Antonio S. Pozas

Misamis Occidental (Oroquieta City) (53) Br. 14, Judge Henry B. Damasing

Rizal (Binangonan) (30) Br. 70, Judge Augusto T. Gutierrez

Surigao del Norte (Surigao City) (54) Br. 30, Judge Floripinas C. Buyser

Cavite (Imus) (31) Br. 21, Judge Norbeto J. Quisumbing, Jr.

ELEVENTH JUDICIAL REGION

Batangas (Batangas City) (32) Br. 2, Judge Mario V. Lopez Quezon (Lucena City) (33) Br. 57, Judge Rafael R. Lagos Mindoro Oriental (Calapan City) (34) Br. 39, Judge Manuel D. Luna, Jr.

Davao del Norte (Panabo) (55) Br. 34, Judge Gregorio A. Palabrica Davao del Sur (Davao City) (56) Br. 10, Judge Augusto V. Breva South Cotabato (General Santos City) (57) Br. 23, Judge Jose S. Majaducon

FIFTH JUDICIAL REGION

Surigao del Sur (Tandag) (58) Br. 27, Judge Ermelindo G. Andal

Camarines Sur (Naga City) (35) Br. 23, Judge Pablo M. Paqueco, Jr.

TWELFTH JUDICIAL REGION

Albay (Legaspi City) (36) Br. 4, Judge Gregorio A. Consulta Sorsogon (Sorsogon) (37) Br. 52, Judge Honesto A. Villamor SIXTH JUDICIAL REGION Negros Occidental (Bacolod City) (38) Br. 53, Judge Pepito B. Gellada Iloilo City (39) Br. 39, Judge Jose G. Abdallah Aklan (Kalibo) (40) Br. 8, Judge Eustaquio G. Terencio Capiz (Roxas City) (41) Br. 19, Judge Sergio L. Pesta–o Antique (San Jose) (42) Br. 10, Judge Sylvia G. Jurao

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Lanao de Norte (Iligan City) (59) Br. 5, Judge Maximino M. Libre Lanao del Sur (Marawi City) (60) Br. 8, Judge Santos B. Adiong The following guidelines shall be observed: 1. In multiple sala courts where one (1) or more branches of the RTC are herein designated as special courts, there will be no unloading of cases already pending in the branches designated. They shall continue to try and decide the said cases in addition to the SEC cases. In the meantime, in view of the temporary imbalance of caseload as a result of the transfer of SEC cases, the Executive Judge concerned shall exclude them in the raffle of newly filed cases in their station until their workload equals to that of the other branches, in which event they shall be included in the raffle of other civil and

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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criminal cases. 2. The trial and disposition of SEC cases shall be in accordance with the procedure to be promulgated by the Supreme Court. 3. In case of temporary incapacity, absence, disability or inhibition of the judge of the designated special court in multiple sala courts where one (1) or more branches of the RTC have been designated, the pairing system for multiple sala stations subject of Circular No. 7 dated 23 September 1974, as amended, shall apply. 4. The branches herein designated shall continue to perform the functions of special courts even after they shall have become vacant due to retirement, death, incapacity, dismissal, resignation, transfer, detail or promotion of the incumbent judges herein named. Their successors, whether permanent or temporary, shall act as Presiding Judges of these special courts unless the Court directs otherwise. 5. In provinces (for the First to the Twelfth Judicial Regions) where there are no designated special courts, the Executive Judge of the station where new SEC cases will be filed shall consult the Supreme Court thru the Office of the Office Administrator. 6. This Resolution shall take effect on the fifteenth day of December, 2000 and shall be published in a newspaper of general circulation not later than the 28th day of November 2000. Promulgated this 21st day of November 2000. Davide, C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Quisumbing, Pardo, Buena, Gonzaga-Reyes, Ynares-Santiago, and De Leon, JJ.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION (Effective December 15, 2000) Steps: 1. Filing of a verified petition with the appropriate RTC by: a) corporate debtor who foresees the impossibility of meeting its debts when they respectively fall due, or b) creditors holding at least 25% of the debtor’s total liabilities; 2. The following shall be annexed to the petition: a) audited financial statement at the end of its last fiscal year; b) interim financial statement; c) schedule of debts and liabilities; d) inventory of assets; e) rehabilitation plan; f) schedule of payments and disposition of assets effected within 3 months preceding the filing of the petition; g) schedule of cash flow for the last 3 months; h) statement of possible claims; i) affidavit of general financial condition; j) at least 3 nominations for rehabilitation receiver; k) certificate under oath that directors and stockholders have irrevocably approved/consented to all actions/matters necessary under the rehabilitation plan. 3. The court shall issue the stay order not later than 5 days from the filing of the petition, which among others, shall: 4. Publication of the stay order in a newspaper of a general circulation once a week for 2 consecutive weeks; 5. Referral of rehabilitation plan to rehabilitation receiver; 6. Meetings between corporate debtor with creditors and discussions on the rehabilitation plan; 7. Submission of final rehabilitation plan to the RTC for approval; 8. The petition shall be dismissed (which results into the automatic lifting of the stay order unless RTC ordered otherwise) if no rehabilitation plan is approved after 180 days from initial hearing; 9. Approval or disapproval of the rehabilitation plan by the RTC. What is the scope of the rules? (Rule 1, Sec. 2) The rules apply to petitions for rehabilitation filed by corporations, partnerships and associations pursuant to PD 902-A, as amended. How should the rules be construed? (Rule 2, Sec. 2) The rules are to be liberally construed in order to carry out the objectives of Sections 5(d) and 6(c) and (d) of PD 902-A, and to assist the parties in obtaining a just, expeditious and inexpensive determination of cases.

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CORPORATION LAWS What is the nature of the proceedings under the rules? (Rule 3) The proceedings under the rules shall be in rem. Jurisdiction over all those affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in a newspaper of a general circulation in the Philippines. The proceedings shall also be summary and nonadversarial in nature. For example(a) motions to dismiss, for bills of particulars, for new trail or for reconsideration, among others, are prohibited (Rule 3,Sec. 1); (b) the court may decide matters on the basis of affidavits and other documentary evidence ( Rule 3, Sec. 1); (c) pleadings and documents may be filed with the court or served on the other parties, when so authorized by the court, by facsimile transmission (fax) or electronic mail (email) (Rule 3, Sec. 3); (d) incase of voluminous pleading or document, the court may, motu proprio or upon motion, waive the requirement of service, provided that a copy thereof, together with all its attachments, is duly filed with the court and made available for examination and reproduction by any party, and provided, further that a notice of such filing and availability is duly served on the parties (Rule 3, Sec. 5); and (e) any order issued by the court under the rules is immediately executory, and a petition for review or appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court (Rule 3, Sec. 5). Who may petition for rehabilitation? (Rule 4, Sec. 1) (a) any debtor who foresees the impossibility of meeting its debts when they respectively fall due; or (b) any creditor or creditors holding at least 25% of the debtor’s total liabilities. Where should a petition for rehabilitation be filed? (Rule 3 Sec. 2) Petitions for rehabilitation shall be filed in the appropriate Regional Trial Court having jurisdiction over the territory where the debtor’s principal office is located. Are the Rules of Court applicable to the proceedings? (Rule 2, Sec. 2) Yes, the Rules of Court, where appropriate, shall apply suppletorily to proceedings under the rules. What are the contents of the petition filed by the debtor? (Rule 4, Sec. 2) (a) name and business of the debtor; (b) nature of debtor’s business; (c) history of the debtor; (d) cause of the debtor’s inability to pay its debts; (e) all the pending actions or proceedings known to the debtor and the courts or tribunals where they are pending; (f) threats or demands to enforce claims or liens against the debtor;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS (g) the manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees and stockholders.

(c)

(d) What should be attached to the petition filed by the debtor?(Rule 4, Sec.4) (a) audited financial statements as of the end of the debtor’s last fiscal year; (b) interim financial statements as of the end of the month prior to the filing of the petition; (c) schedule of debts and liabilities; (d) inventory of assets; (e) rehabilitation plan; (f) schedule of the debtor’s cash flow; (g) affidavit of general financial condition; (h) names of at least three nominees for the position of rehabilitation receiver, including their qualifications and contact information; (i) certificate under oath attesting to the fact that (i) the filing has been duly authorized, and (ii) the directors and stockholders have irrevocably approved and/or consented to all actions or matters necessary and desirable to rehabilitate the debtor including, but not limited to, amendments to the articles of incorporation and by-laws (or articles of partnership); increase or decrease in the authorized capital stock; issuance of bonded indebtedness; alienation, transfer or encumbrance of assets of the debtor, and modification of shareholder’s rights. What are the attachments to the petition filed by creditor(s)? (Rule 4 Sec. 4) (a) rehabilitation plan; (b) list of nominees to the position of rehabilitation receiver; Under what circumstance could the petition be dismissed? (Rule 4, Sec. 11) The petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of initial hearing. The court may grant an extension beyond this period if it appears by convincing and compelling evidence that the debtor may be rehabilitated. In no instance, however, shall the period for approving or disapproving a rehabilitation plan exceed 18 months from the date of filing of the petition. What are the contents of the order that the court shall issue if it finds the petition for rehabilitation to be sufficient in form and substance? (Rule 4, Sec. 6 and 11) If the court finds the petition to be sufficient in form and substance, it shall, not later than 5 days from the filing of the petition issue an order which shall, among others: (a) appoint a rehabilitation receiver and fix his bond; (b) stay enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor;

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(e)

(f)

(g)

(h)

prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; prohibit the debtor from making any payment of its outstanding liabilities as of the date of filing of the petition; prohibit the debtor’s suppliers of goods or services from withholding supply of goods or services in the ordinary course or business for as long as the debtor makes payments from the services and goods supplied after the issuance of the stay order; fix the initial hearing on the petition not earlier than 45 days but not later than 60 days from the filing thereof; direct the petitioner to publish the order in a newspaper of general circulation in the Philippines once a week for two consecutive weeks; direct all creditors and interested parties (including the SEC) to file and serve on the debtor a verified comment or opposition to the petition, with supporting affidavits and documents, not later than 10 days before the date of the initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings.

For how long the stay holder to be effective?(Rule 4, Sec. 11) The stay order shall be effective from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings. Could the stay order be modified or terminated? Could conditions be set for its continuance? Could a claim be relieved from the coverage of the order?(Rule 4, Sec 12) Yes, to all the questions. The court may, on motion or motu proprio, terminate, modify, or set conditions for the continuance of the stay order, or relieve a claim from the coverage thereof, upon showing that(a) any of the allegations of the petition, or any of the contents of any attachment, or the verification thereof, has ceased to be true; (b) a creditor does not have adequate protection over property securing its claim; or (c) the debtor’s secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary for the rehabilitation of the debtor. What is the concept of adequate protection over property?(Rule 4, Sec 12) A creditor does not have adequate protection over property securing its claim if it can be shown that(a) the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured; (b) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or (c) the property has depreciated to the extent that the creditor is undersecured. What are the contents of the rehabilitation plan? (Rule 4, Sec 5)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS (a) the desired business targets or goal, and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, e.g. conversion of debts into equity, restructuring the debts, dacion en pago, sale of assets or controlling interest; (e) liquidation analysis, i.e. an estimate of the proportion of the claims that the creditors and stockholders would receive if the debtor’s properties were liquidated; (f) other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.

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CORPORATION LAWS He does not take over the management and control of the debtor but simply oversees and monitors closely the operations of the debtor during the pendency of the proceedings. This reflects the concept of debtor-inplace. For this purpose, he has been granted the powers, duties and functions of a receiver under PD 1402-A, as amended, and the Rules of Court.

What is the power of the court to cram down a rehabilitation plan?(Rule 4, Sec. 23) The power of the court to cram down a rehabilitation plan refers to its authority to approve a rehabilitation plan even over the opposition of the creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. In determining whether or not the opposition of the creditor is manifestly unreasonable, the court shall consider the following: (a) the plan would likely provide the objecting class of the creditors with compensation greater than that which they would have received if the assets of the debtor were sold by the liquidator within a threemonth period; (b) that the shareholders or owners of the debtor lost at least their controlling interest as a result of the plan; and (c) that the rehabilitation receiver has recommended approval of the plan. What is the effect of the approval of the court of the rehabilitation plan on the debtor and creditors?(Rule 4, Sec. 24) The approval of the rehabilitation plan by the court shall result, among other effects, in the said plan and its provisions being binding upon the debtor and all the persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled. What is the primary task of the rehabilitation receiver? Does he take over the management and control of the debtor? (Rule 4, Sec 14) The rehabilitation receiver implements the rehabilitation plan after its approval by the court. His primary task is to study the best way to rehabilitate the debtor and to ensure that the value of the debtor’s property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

Proposed Interim Rules Of Procedure Governing Intra-Corporate Controversies Under R.A. No. 8799 A.M. No. 01-2-04-SC (Effective April 1, 2001) RULE I GENERAL PROVISIONS SECTION 1. (a) Cases covered. - These Rules shall govern the procedure to be observed in civil cases involving the following: (1) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or association; (2) Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members, or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; (3) Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; (4) Derivative suits; and (5) Inspection of corporate books. (b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the following: (1) The extent of the shareholding or interest of the initiating stockholder or member; (2) Subject matter of the suit; (3) Legal and factual basis of the complaint; (4) Availability of appraisal rights for the act or acts complained of; and (5) Prejudice or damage to the corporation, partnership, or association in relation to the relief sought. In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss the case. SEC. 2. Suppletory application of the Rules of Court. The Rules of Court, in so far as they may be applicable and are not inconsistent with these Rules, are hereby adopted to form an integral part of these Rules. SEC. 3. Construction. - These Rules shall be liberally construed in order to promote their objective of securing a just, summary, speedy and inexpensive determination of every action or proceeding.

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CORPORATION LAWS SEC. 4. Executory nature of decisions and orders. - All decisions and orders issued under these Rules shall immediately be executory. No appeal or petition taken therefrom shall stay the enforcement or implementation of the decision or order, unless restrained by an appellate court. Interlocutory orders shall not be subject to appeal. SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership, or association concerned. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the city or municipality where the head office is located. SEC. 6. Service of pleadings. - When so authorized by the court, any pleading and/or document required by these Rules may be filed with the court and/or served upon the other parties by facsimile transmission (fax) or electronic mail (e-mail). In such cases, the date of transmission shall be deemed to be prima facie the date of service. SEC. 7. Signing of pleadings, motions and other papers. - Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record in the attorney’s individual name, whose address shall be stated. A party who is not represented by an attorney shall sign the pleading, motion, or other paper and state his address. The signature of an attorney or party constitutes a certification by the signer that he has read the pleading, motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry, it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing jurisprudence; and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. If a pleading, motion, or other paper is not signed, it shall be stricken off the record unless it is promptly signed by the pleader or movant, after he is notified of the omission. SEC. 8. Prohibited pleadings. - The following pleadings are prohibited: (1) Motion to dismiss; (2) Motion for a bill of particulars; (3) Motion for new trial, or for reconsideration of judgment or order, or for re-opening of trial; (4) Motion for extension of time to file pleadings, affidavits or any other paper, except those filed due to clearly compelling reasons. Such motion must be verified and under oath; and (5) Motion for postponement and other motions of similar intent, except those filed due to clearly compelling reasons. Such motion must be verified and under oath. SEC. 9. Assignment of cases. - All cases filed under

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS these Rules shall be tried by judges designated by the Supreme Court to hear and decide cases transferred from the Securities and Exchange Commission to the Regional Trial Courts and filed directly with said courts pursuant to Republic Act No. 8799, otherwise known as the Securities and Regulation Code. RULE 2 COMMENCEMENT OF ACTION AND PLEADINGS SECTION 1. Commencement of action. - An action under these Rules is commenced by the filing of a verified complaint with the proper Regional Trial Court. SEC. 2. Pleadings allowed. - The only pleadings allowed to be filed under these Rules are the complaint, answer, compulsory counterclaims or cross-claims pleaded in the answer, and the answer to the counterclaims or cross-claims. SEC. 3. Verification. - The complaint and the answer shall be verified by an affidavit stating that the affiant has read the pleading and the allegations therein are true and correct based on his own personal knowledge or on authentic records. SEC. 4. Complaint. - The complaint shall state or contain: (1) the names, addresses, and other relevant personal or juridical circumstances of the parties; (2) all facts material and relevant to the plaintiff’s cause or causes of action, which shall be supported by affidavits of the plaintiff or his witnesses and copies of documentary and other evidence supportive of such cause or causes of action; (3) the law, rule, or regulation relied upon, violated, or sought to be enforced; (4) a certification that (a) the plaintiff has not theretofore commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency, and, to the best of his knowledge, no such other action or claim is pending therein; (b) if there is such other action or claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed or is pending, he shall report that fact within five (5) days therefrom to the court; and (5) the relief sought. SEC. 5. Summons. - The summons and the complaint shall be served together not later than five (5) days from the date of filing of the complaint. (a) Service upon domestic private juridical entities. - If the defendant is a domestic corporation, service shall be deemed adequate if made upon any of the statutory or corporate officers as fixed by the by-laws or their respective secretaries. If the defendant is a partnership, service shall be deemed adequate if made upon any of the managing or general partners or upon their respective

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CORPORATION LAWS secretaries. If the defendant is an association, service shall be deemed adequate if made upon any of its officers or their respective secretaries. (b) Service upon foreign private juridical entity. When the defendant is a foreign private juridical entity which is transacting or has transacted business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines. SEC. 6. Answer. - The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within fifteen (15) days from service of summons. In the answer, the defendant shall: (1) Specify each material allegation of fact the truth of which he admits; (2) Specify each material allegation of fact the truth of which he does not admit. Where the defendant desires to deny only a part of an averment, he shall specify so much of it as true and material and shall deny only the remainder; (3) Specify each material allegation of fact as to which truth he has no knowledge or information sufficient to form a belief, and this shall have the effect of a denial; (4) State the defenses, including grounds for a motion to dismiss under the Rules of Court; (5) State the law, rule, or regulation relied upon; (6) Address each of the causes of action stated in the complaint; (7) State the facts upon which he relies for his defense, including affidavits of witnesses and copies of documentary and other evidence supportive of such cause or causes of action; (8) State any compulsory counterclaim/s and crossclaim/s; and (9) State the relief sought. The answer to counterclaims or cross-claims shall be filed within ten (10) days from service of the answer in which they are pleaded. SEC. 7. Effect of failure to answer. - If the defendant fails to answer within the period above provided, he shall be considered in default. Upon motion or motu proprio, the court shall render judgment either dismissing the complaint or granting the relief prayed for as the records may warrant. In no case shall the court award a relief beyond or different from that prayed for. SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence. Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading; Provided, however, that affidavits,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases: (1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor; (2) If the failure to submit the evidence is for meritorious and compelling reasons; and (3) Newly discovered evidence. In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence.

RULE 3 MODES OF DISCOVERY SECTION 1. In general. - A party can only avail of any of the modes of discovery not later than fifteen (15) days from the joinder of issues. SEC. 2. Objections. - Any mode of discovery such as interrogatories, request for admission, production or inspection of documents or things, may be objected to within ten (10) days from receipt of the discovery device and only on the ground that the matter requested is patently incompetent, immaterial, irrelevant or privileged in nature. The court shall rule on the objections not later than fifteen (15) days from the filing thereof. SEC. 3. Compliance. - Compliance with any mode of discovery shall be made within ten (10) days from receipt of the discovery device, or if there are objections, from receipt of the ruling of the court. SEC. 4. Sanctions. - The sanctions prescribed in the Rules of Court for failure to avail of, or refusal to comply with, the modes of discovery shall apply. In addition, the court may, upon motion, declare a party non-suited or as in default, as the case may be, if the refusal to comply with a mode of discovery is patently unjustified.

RULE 4 PRE-TRIAL SECTION 1. Pre-trial conference; mandatory nature. Within five (5) days after the period for availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue and serve an order immediately setting the case for pretrial conference and directing the parties to submit their respective pre-trial briefs. The parties shall file with the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the date set for the pre-trial.

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CORPORATION LAWS The parties shall set forth in their pre-trial briefs, among other matters, the following: (1) Brief statement of the nature of the case, which shall summarize the theory or theories of the party in clear and concise language; (2) Allegations expressly admitted by either or both parties; (3) Allegations deemed admitted by either or both parties; (4) Documents not specifically denied under oath by either or both parties; (5) Amendments to the pleadings; (6) Statement of the issues, which shall separately summarize the factual and legal issues involved in the case; (7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting their positions on each of the issues; (8) All other pieces of evidence, whether documentary or otherwise and their respective purposes; (9) Specific proposals for an amicable settlement; (10) Possibility of referral to mediation or other alternative modes of dispute resolution; (11) Proposed schedule of hearings; and (12) Such other matters as may aid in the just and speedy disposition of the case. SEC. 2. Nature and purpose of pre-trial conference. During the pre-trial conference, the court shall, with its active participation, ensure that the parties consider in detail all of the following: (1) The possibility of an amicable settlement; (2) Referral of the dispute to mediation or other forms of dispute resolution; (3) Facts that need not be proven, either because they are matters of judicial notice or expressly or deemed admitted; (4) Amendments to the pleadings; (5) The possibility of obtaining stipulations and admissions of facts and documents; (6) Objections to the admissibility of testimonial, documentary and other evidence; (7) Objections to the form or substance of any affidavit, or part thereof; (8) Simplification of the issues; (9) The possibility of submitting the case for decision on the basis of position papers, affidavits, documentary and real evidence; (10) A complete schedule of hearing dates; and (11) Such other matters as may aid in the speedy and summary disposition of the case. SEC. 3. Termination. - The preliminary conference shall be terminated not later than ten (10) days after its commencement, whether or not the parties have agreed to settle amicably. SEC. 4. Judgment before pre-trial. - If, after submission of the pre-trial briefs, the court determines

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a nonextendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda. SEC. 5. Pre-trial order; judgment after pre-trial. - The proceedings in the pre-trial shall be recorded. Within ten (10) days after the termination of the pre-trial, the court shall issue an order which shall recite in detail the matters taken up in the conference, the actions taken thereon, the amendments allowed in the pleadings, and the agreements or admissions made by the parties as to any of the matters considered. The court shall rule on all objections to or comments on the admissibility of any documentary or other evidence, including any affidavit or any part thereof. Should the action proceed to trial, the order shall explicitly define and limit the issues to be tried and shall strictly follow the form set forth in Annex “A” of these Rules. The contents of the order shall control the subsequent course of the action, unless modified before trial to prevent manifest injustice. After the pre-trial, the court may render judgment, either full or partial, as the evidence presented during the pre-trial may warrant. RULE 5 TRIAL SECTION 1. Witnesses. - If the court deems necessary to hold hearings to determine specific factual matters before rendering judgment, it shall, in the pre-trial order, set the case for trial on the dates agreed upon by the parties. Only persons whose affidavits were submitted may be presented as witnesses, except in cases specified in section 8, Rule 2 of these Rules. The affidavits of the witnesses shall serve as their direct testimonies, subject to cross-examination in accordance with existing rules on evidence. SEC. 2. Trial schedule. - Unless judgment is rendered pursuant to Rule 4 of these Rules, the initial hearing shall be held not later than thirty (30) days from the date of the pre-trial order. The hearings shall be completed not later than sixty (60) days from the date of the initial hearing, thirty (30) days of which shall be allotted to the plaintiffs and thirty (30) days to the defendants in the manner prescribed in the pre-trial order. The failure of a party to present a witness on a scheduled hearing date shall be deemed a waiver of such hearing date. However, a party may present such witness or witnesses within his remaining allotted hearing dates. SEC. 3. Written offer of evidence. - Evidence not otherwise admitted by the parties or ruled upon by the court during the pre-trial conference shall be offered in

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CORPORATION LAWS writing not later than five (5) days from the completion of the presentation of evidence of the party concerned. The opposing party shall have five (5) days from receipt of the offer to file his comments or objections. The court shall make its ruling on the offer within five (5) days from the expiration of the period to file comments or objections. SEC. 4. Memoranda. - Immediately after ruling on the last offer of evidence, the court shall order the parties to simultaneously file, within thirty (30) days from receipt of the order, their respective memoranda. The memoranda shall contain the following: (1) A “Statement of the Case,” which is a clear and concise statement of the nature of the action and a summary of the proceedings; (2) A “Statement of the Facts,” which is a clear and concise statement in narrative form of the established facts, with reference to the testimonial, documentary or other evidence in support thereof; (3) A “Statement of the Issues,” which is a clear and concise statement of the issues presented to the court for resolution; (4) The “Arguments,” which is a clear and concise presentation of the argument in support of each issue; and (5) The “Relief,” which is a specification of the order or judgment which the party seeks to obtain. No reply memorandum shall be allowed. SEC. 5. Decision after trial. - The court shall render a decision not later than (90) days from the lapse of the period to file the memoranda, with or without said pleading having been filed. RULE 6 ELECTION CONTESTS SECTION 1. Cases covered. - The provisions of this rule shall apply to election contests in stock and nonstock corporations. SEC. 2. Definition. - An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles of incorporation or by-laws so provide. SEC. 3. Complaint. - In addition to the requirements in section 4, Rule 2 of these Rules, the complaint in an election contest must state the following: (1) The case was filed within fifteen (15) days from the date of the election if the by-laws of the corporation do not provide for a procedure for resolution of the controversy, or within fifteen (15) days from the resolution of the controversy by the corporation as provided in its by-laws; and (2) The plaintiff has exhausted all intra-corporate

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS remedies in election cases as provided for in the by-laws of the corporation. SEC. 4. Duty of the court upon the filing of the complaint. - Within two (2) days from the filing of the complaint, the court, upon a consideration of the allegations thereof, may dismiss the complaint outright if it is not sufficient in form and substance, or, if it is sufficient, order the issuance of summons which shall be served, together with a copy of the complaint, on the defendant within two (2) days from its issuance. SEC. 5. Answer. - The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within ten (10) days from service of summons and the complaint. The answer shall contain the matters required in section 6, Rule 2 of these Rules. SEC. 6. Affidavits, documentary and other evidence. The parties shall attach to the complaint and answer the affidavits of witnesses, documentary and other evidence in support thereof, if any. SEC. 7. Effect of failure to answer. - If the defendant fails to file an answer within the period above provided, the court shall, within ten (10) days from the lapse of said period, motu proprio or on motion, render judgment as may be warranted by the allegations of the complaint, as well as the affidavits, documentary and other evidence on record. In no case shall the court award a relief beyond or different from that prayed for. SEC. 8. Trial. - If the court deems it necessary to hold a hearing to clarify specific factual matters before rendering judgment, it shall, within ten (10) days from the filing of the last pleading, issue an order setting the case for hearing for the purpose. The order shall, in clear and concise terms, specify the factual matters the court desires to be clarified and the witnesses, whose affidavits have been submitted, who will give the necessary clarification. The hearing shall be set on a date not later than ten (10) days from the date of the order, and shall be completed not later than fifteen (15) days from the date of the first hearing. The affidavit of a witness who fails to appear for clarificatory questions of the court shall be ordered stricken off the record. SEC. 9. Decision. - The Court shall render a decision within fifteen (15) days from receipt of the last pleading, or from the date of the last hearing as the case may be. The decision shall be based on the pleadings, affidavits, documentary and other evidence attached thereto and the answers of the witnesses to the clarificatory questions of the court given during the hearings. RULE 7 INSPECTION OF CORPORATE BOOKS AND RECORDS SECTION 1. Cases covered. - The provisions of this Rule shall apply to disputes exclusively involving the rights of stockholders or members to inspect the books

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CORPORATION LAWS and records and/or to be furnished with the financial statements of a corporation, under sections 74 and 75 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines. SEC. 2. Complaint. – In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the following: (1) The case is for the enforcement of plaintiff’s right of inspection of corporate orders or records and/or to be furnished with financial statements under sections 74 and 75 of the Corporation Code of the Philippines; (2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff upon defendant; (3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any; and (4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof. SEC. 3. Duty of the court upon the filing of the complaint. - Within two (2) days from the filing of the complaint, the court, upon a consideration of the allegations thereof, may dismiss the complaint outright if it is not sufficient in form and substance, or, if it is sufficient, order the issuance of summons which shall be served, together with a copy of the complaint, on the defendant within two (2) days from its issuance. SEC. 4. Answer. – The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within ten (10) days from service of summons and the complaint. In addition to the requirements in section 6, Rule 2 of these Rules, the answer must state the following: (1) The grounds for the refusal of defendant to grant the demands of the plaintiff, stating the law and jurisprudence in support thereof; (2) The conditions or limitations on the exercise of the right to inspect which should be imposed by the court; and (3) The cost of inspection, including manpower and photocopying expenses, if the right to inspect is granted. SEC. 5. Affidavits, documentary and other evidence. – The parties shall attach to the complaint and answer the affidavits of witnesses, documentary and other evidence in support thereof, if any. SEC. 6. Effect of failure to answer. – If the defendant fails to file an answer within the period above provided, the court, within ten (10) days from the lapse of the said period, motu proprio or upon motion, shall render judgment as warranted by the allegations of the complaint, as well as the affidavits, documentary and other evidence on record. In no case shall the court award a relief beyond or different from that prayed for.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

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2009 BAR OPERATIONS SEC. 7. Decision. – The court shall render a decision based on the pleadings, affidavits and documentary and other evidence attached thereto within fifteen (15) days from receipt of the last pleading. A decision ordering defendants to allow the inspection of books and records and/or to furnish copies thereof shall also order the plaintiff to deposit the estimated cost of the manpower necessary to produce the books and records and the cost of copying, and state, in clear and categorical terms, the limitations and conditions to the exercise of the right allowed or enforced. RULE 8 DERIVATIVE SUITS SECTION 1. Derivative action. - A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit. In case of nuisance or harassment suit, the court shall forthwith dismiss the case. SEC. 2. Discontinuance. - A derivative action shall not be discontinued, compromised or settled without approval of the court. During the pendency of the action, any sale of shares of the complaining stockholder shall be approved by the court. If the court determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interests it determines will be so affected. RULE 9 MANAGEMENT COMMITTEE SECTION 1. Creation of a management committee. As an incident to any of the cases filed under these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the appointment of a management committee for the corporation, partnership or association, when there is imminent danger of: (1) Dissipation, loss, wastage or destruction of assets or other properties; and (2) Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, parties-litigants or the general

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CORPORATION LAWS public. SEC. 2. Receiver. - In the event the court finds the application to be sufficient in form and substance, the court shall issue an order: (a) appointing a receiver of known probity, integrity and competence and without any conflict of interest as hereunder defined to immediately take over the corporation, partnership or association, specifying such powers as it may deem appropriate under the circumstances, including any of the powers specified in section 5 of this Rule; (b) fixing the bond of the receiver; (c) directing the receiver to make a report as to the affairs of the entity under receivership and on other relevant matters within sixty (60) days from the time he assumes office; (d) prohibiting the incumbent management of the company, partnership or association from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (e) directing the payment in full of all administrative expenses incurred after the issuance of the order. SEC. 3. Receiver and management committee as officers of the court. - The receiver and the members of the management committee in the exercise of their powers and performance of their duties are considered officers of the court and shall be under its control and supervision. SEC. 4. Composition of the management committee. After due notice and hearing, the court may appoint a management committee composed of three (3) members chosen by the court. In the appointment of the members of the management committee, the following qualifications shall be taken into consideration by the court: (1) Expertise and acumen to manage and operate a business similar in size and complexity as that of the corporation, association or partnership sought to be put under management committee; (2) Knowledge in management and finance; (3) Good moral character, independence and integrity; (4) A lack of a conflict of interest as defined in these Rules; and (5) Willingness and ability to file a bond in such amount as may be determined by the court. Without limiting the generality of the following, a member of a management committee may be deemed to have a conflict of interest if: (1) He is engaged in a line of business which competes with the corporation, association or partnership sought to be placed under management; (2) He is a director, officer or stockholder charged with mismanagement, dissipation or wastage of the properties of the entity under management; or (3) He is related by consanguinity or affinity within the fourth civil degree to any director, officer or stockholder charged with mismanagement, dissipation or wastage of the properties of the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS entity under management. SEC. 5. Powers and functions of the management committee. - Upon assumption to office of the management committee, the receiver shall immediately render a report and turn over the management and control of the entity under his receivership to the management committee. The management committee shall have the power to take custody of and control all assets and properties owned or possessed by the entity under management. It shall take the place of the management and board of directors of the entity under management, assume their rights and responsibilities, and preserve the entity’s assets and properties in its possession. Without limiting the generality of the foregoing, the management committee shall exercise the following powers and functions: (1) To investigate the acts, conduct, properties, liabilities, and financial condition of the corporation, association or partnership under management; (2) To examine under oath the directors and officers of the entity and any other witnesses that it may deem appropriate; (3) To report to the court any fact ascertained by it pertaining to the causes of the problems, fraud, misconduct, mismanagement and irregularities committed by the stockholders, directors, management or any other person; (4) To employ such person or persons such as lawyers, accountants, auditors, appraisers and staff as are necessary in performing its functions and duties as management committee; (5) To report to the court any material adverse change in the business of the corporation, association or partnership under management; (6) To evaluate the existing assets and liabilities, earnings and operations of the corporation, association or partnership under management; (7) To determine and recommend to the court the best way to salvage and protect the interest of the creditors, stockholders and the general public, including the rehabilitation of the corporation, association or partnership under management; (8) To prohibit and report to the court any encumbrance, transfer, or disposition of the debtor’s property outside of the ordinary course of business or what is allowed by the court; (9) To prohibit and report to the court any payments made outside of the ordinary course of business; (10) To have unlimited access to the employees, premises, books, records and financial documents during business hours; (11) To inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the corporation, association or partnership or other persons; (12) To gain entry into any property for the purposes of inspecting, measuring, surveying, or

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CORPORATION LAWS photographing it or any designated relevant object or operation thereon; (13) To bring to the attention of the court any material change affecting the entity’s ability to meet its obligations; (14) To revoke resolutions passed by the Executive Committee or Board of Directors/Trustees or any governing body of the entity under management and pass resolution in substitution of the same to enable it to more effectively exercise its powers and functions; (15) To modify, nullify or revoke transactions coming to its knowledge which it deems detrimental or prejudicial to the interest of the entity under management; (16) To recommend the termination of the proceedings and the dissolution of the entity if it determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public; (17) To apply to the court for any order or directive that it may deem necessary or desirable to aid it in the exercise of its powers and performance of its duties and functions; and (18) To exercise such other powers as may, from time to time, be conferred upon it by the court. SEC. 6. Action by management committee. - A majority of its members shall be necessary for the management committee to act or make a decision. The chairman of the management committee shall be chosen by the members from among themselves. The committee may delegate its management functions as may be necessary to operate the business of the entity under management and preserve its assets. SEC. 7. Transactions deemed to be in bad faith. - All transactions made by the previous management and directors shall be deemed fraudulent and are rescissible if made within thirty (30) days prior to the appointment of the receiver or management committee or during their incumbency as receiver or management committee. SEC. 8. Fees and expenses. - The receiver or the management committee and the persons hired by it shall be entitled to reasonable professional fees and reimbursement of expenses which shall be considered as administrative expenses. SEC. 9. Immunity from suit. - The receiver and members of the management committee and the persons employed by them shall not be subject to any action, claim or demand in connection with any act done or omitted by them in good faith in the exercise of their functions and powers. All official acts and transactions of the receiver or management committee duly approved or ratified by the court shall render them immune from any suit in connection with such act or transaction. SEC. 10. Reports. - Within a period of sixty (60) days from the appointment of its members, the management committee shall make a report to the court on the state of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS the corporation, partnership or association under management. Thereafter, the management committee shall report every three (3) months to the court or as often as the court may require on the general condition of the entity under management.

presiding judge may, upon a verified complaint filed with the Office of the Court Administrator, be subject to disciplinary action under any of the following cases: (1) Failure to observe the special summary procedures prescribed in these Rules; or (2) Failure to issue a pre-trial order in the form prescribed in these Rules.

SEC. 11. Removal and replacement of a member of the management committee. - A member of the management committee is deemed removed upon appointment by the court of his replacement chosen in accordance with section 4 of this Rule. SEC. 12. Discharge of the management committee. The management committee shall be discharged and dissolved under the following circumstances: (1) Whenever the court, on motion or motu proprio, has determined that the necessity for the management committee no longer exists; (2) By agreement of the parties; and (3) Upon termination of the proceedings. Upon its discharge and dissolution, the management committee shall submit its final report and render an accounting of its management within such reasonable time as the court may allow.

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RULE 12 FINAL PROVISIONS SECTION 1. Severability. - If any provision or section of these Rules is held invalid, the remaining provisions or sections shall not be affected thereby. SEC. 2. Effectivity. - These Rules shall take effect on 1 April 2001 following its publication in two (2) newspapers of general circulation in the Philippines.

Annex “A” Republic of the Philippines _______ Judicial Region Regional Trial Court Branch ___

RULE 10 PROVISIONAL REMEDIES SECTION 1. Provisional remedies. - A party may apply for any of the provisional remedies provided in the Rules of Court as may be available for the purposes. However, no temporary restraining order or status quo order shall be issued save in exceptional cases and only after hearing the parties and the posting of a bond.

NAME(s) OF PLAINTIFF/S, Plaintiff/s, - versus -

NAME(s) OF DEFENDANT/S, Defendant/s. x———————————x PRE-TRIAL ORDER

RULE 11 SANCTIONS SECTION 1. Sanctions on the parties or counsel. - In any of the following cases, the court may, upon motion or motu proprio, impose appropriate sanctions: (1) In case the court determines in the course of the proceeding that the action is a nuisance or harassment suit; (2) In case a pleading, motion or other paper is filed in violation of section 7, Rule 1 of these Rules; (3) In case a party omits or violates the certification required under section 4, Rule 2 of these Rules; (4) In case of unwarranted denials in the answer to the complaint; (5) In case of willful concealment or non-disclosure of material facts or evidence; The sanctions may include an order to pay the other party or parties the amount of the reasonable expenses incurred because of the act complained of, including reasonable attorney’s fees.

Case No. __________

I.

Summary of the Case

II.

Preliminary Matters A. Amendments allowed in the pleadings B. Rulings on all objections to or comments on admissibility of any documentary or other evidence C. Other matters taken up in conference not covered by the subsequent items and actions taken thereon.

III. Statement of the Facts A. Admitted B. Disputed 1. Version of the Plaintiff 2. Version of the Defendant IV. Issues to be Resolved A. Factual B. Legal V. Applicable Laws

SEC. 2. Disciplinary sanctions on the judge. - The Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS VI. Evidence for the Parties All evidence to be adduced and presented by both parties shall be limited to those identified below. All documentary evidence have already been pre-marked and copies thereof, after comparison with the original, have been given the other party or such party has been given an opportunity to examine the same in cases when generating copies proves impractical. The testimonies of the witnesses have all been reduced to affidavit form in accordance with these Rules and copies thereof given to the other party. No other evidence shall be allowed other than those indicated below except in accordance with section 8, Rule 2 of the Interim Rules of Procedure for Intra-Corporate Controversies.

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shall

be

similarly

VII. Hearing Dates (These hearing dates, which should be scheduled not later than thirty (30) days from the completion at the pretrial, shall be strictly followed and all postponements by either party shall be deducted from such party’s allotted time to present evidence.) A.

Schedule of Plaintiff’s Presentation of Evidence

B.

Schedule of Defendant’s Presentation of Evidence

A.

Evidence of the Plaintiff Documentary Evidence a) Document No. 1 (Exh. ___ ) (1) Name/Type (2) Pre-Marking Number (3) Summary (4) Purpose b) Document No. 2 (Exh. ___ ) (1) Name/Type (2) Pre-Marking Number (3) Summary (4) Purpose (Additional documentary evidence shall be similarly presented) 2. Testimonial Evidence a) Name of First Witness (1) Purpose of the testimony (2) Estimated length of testimony b) Name of Second Witness (1) Purpose of the testimony (2) Estimated length of testimony (Additional witnesses shall be similarly presented) 3. Other Evidence B. Evidence of the Defendant 1. Documentary Evidence a) Document No. 1 (Exh. ___ ) (1) Name/Type (2) Pre-Marking Number (3) Summary (4) Purpose b) Document No. 2 (Exh. ___ ) (1) Name/Type (2) Pre-Marking Number (3) Summary (4) Purpose (Additional documentary evidence shall be similarly presented) 2. Testimonial Evidence a) Name of First Witness (1) Purpose of the testimony (2) Estimated length of testimony b) Name of Second Witness (1) Purpose of the testimony (2) Estimated length of testimony 1.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied b. The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the Monetary Board c. Overseeing to ascertain that laws and regulations are complied with d. Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall be immediately addressed e. Inquiring into the solvency and liquidity of the institution; or f. Enforcing prompt corrective action.

THE GENERAL BANKING LAW OF 2000 REPUBLIC ACT NO. 8791

Banks - entities engaged in the lending of funds obtained in the form of deposits an investment company that performs such functions is NOT a bank; but one which loans out the money of its customers, collects the interests and charges a commission to both lender and borrower is engaged in banking (Banas v. Asia Pacific Finance Corp., Oct. 18, 2000; Republic vs. SCAC, G.R. No. L-20583)

Classification of Banks a. Commercial banks; b. Universal banks c. Thrift banks, composed of: (i) Savings and mortgage banks; (ii) Stock savings and loan associations; and (iii) Private development banks b) Rural banks c) Islamic banks d) Cooperative banks e) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.

2.

POWERS OF THE BANGKO SENTRAL 1.

Supervisory Powers. The operations and activities of banks shall be subject to supervision of the Bangko Sentral. It shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. Quasi-banks shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations Deposit substitutes is defined as an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. Supervision shall include the following: a. The issuance of rules of, conduct or the establishment standards of operation for uniform application to all institutions or functions covered,

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The Monetary Board may prescribe ratios, ceilings, limitations, or other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall, to the extent feasible, conform to internationally accepted standards, including of the Bank for International Settlements (BIS). The Monetary Board may exempt particular categories of transactions from the abovementioned regulations, but not limited to: 1. Exceptional cases or 2. To enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue in business, with safety to its creditors, depositors and the general public.

3.

Authorize person or entity to engage in banking operations or quasi-banking functions No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking function and shall continue to do so unless such authority is sooner 1. Surrendered,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 2.

3. 4.

Annulled by the Bangko Sentral in accordance with this Act or other special laws. Revoked, Suspended

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BANKING LAWS b. c. d.

its operating plan internal controls its projected financial condition and capital base.

Issuance of Stocks Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws.

Par value stocks only Treasury Stocks - No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary Board:

4.

The department head and the examiners of the appropriate supervising and examining department are authorized to administer oaths to any such person, employee, officer, or director of any such entity and to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act.

5.

The Bangko Sentral shall, when examining a bank, have the authority to examine an enterprise which is wholly or majority-owned or controlled by the bank. 6. Phase Out of Bangko Sentral Powers Over Building and Loan Associations. Within a period of three (3) years from the effectivity of this Act, the Bangko Sentral shall phase out and transfer its supervising and regulatory powers over building and loan associations to the Home Insurance and Guaranty Corporation which shall assume the same. Conditions in the organization of bank or quasi-bank 1. That the entity is a stock corporation; 2. That its funds are obtained from the public, which shall mean twenty (20) or more persons; and 3. That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied Other Considerations 1. Capability in terms of their financial resources and technical expertise and integrity. 2. The bank licensing process shall incorporate a. an assessment of the bank’s ownership structure, directors and senior management,

Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. Foreign Stockholdings Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. {Control Test applies}  Matters which must be fully disclosed in all transactions by corporations or related groups of persons with the bank {Scope of RELATED INTEREST} 1. Stockholdings of Family Groups of Related Interests Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests. 2. Corporate Stockholdings. Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests  The Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Evidence to be submitted for the issuance of the certificate of authority a) That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS b) That the public interest and economic conditions, both general and local, justify the authorization; and c) That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest.  The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral. Board of Directors At least five (5), and a maximum of fifteen (15) members of the board or directors of a bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21) Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank.

The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, 1. teleconferencing and 2. video-conferencing. Fit and Proper Rule. The Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit. Ratio: To maintain the quality of bank management and afford better protection to depositors and the public in general After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position. In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his 1. Experience. 2. Competence 3. Integrity 4. Training 5. Education

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BANKING LAWS

Prohibition on Public Officials Except as otherwise provided in the Rural Banks Act, no appointive or elective public official whether fulltime or part-time shall at the same time serve as officer of any private bank, save in cases where 1. Such service is incident to financial assistance provided by the government or a government owned or controlled corporation to the bank or 2. Unless otherwise provided under existing laws.

Bank Branches Universal or commercial banks may open branches or other offices within or outside the Philippines upon prior approval of the Bangko Sentral. {all other banks shall be governed by pertinent laws.} A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and/or sale of the financial products of its allied undertaking or of its investment house units. A bank authorized to establish branches or other offices shall be responsible for all business conducted in such branches and offices to the same extent and in the same manner as though such business had all been conducted in the head office. A bank and its branches and offices shall be treated as one unit. Strikes and Lockouts - Any strike or lockout involving banks, - if unsettled after seven (7) calendar days - shall be reported by the Bangko Sentral to the Secretary of Labor who: 1. May assume jurisdiction over the dispute or 2. Decide it or 3. Certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same. Ratio: The banking industry is indispensable to the national interest

declared

as

Operations Of Universal Banks and Commercial Banks Powers of a Universal Bank 1. General powers incident to corporations 2. Powers necessary to carry on the business banking such as a. accepting drafts and issuing letters of credit; b. discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; c. accepting or creating demand deposits;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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3.

Note: A bank other than a universal or commercial bank cannot accept or create demand deposits except upon prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. (sec 22) d. receiving other types of deposits and deposit substitutes; e. buying and selling foreign exchange and gold or silver bullion; f. acquiring marketable bonds and other debt securities; and g. extending credit,. powers of an investment house as provided in existing laws and the power to invest in nonallied enterprises as provided in this Act.

Investments in Financial Allied Enterprises

one hundred percent (100%) of the equity in o a thrift bank, o a rural bank or o a financial allied enterprise b. A publicly-listed universal may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank

Equity Investments in NonFinancial Allied Enterprises.

May own up to one hundred percent (100%) of the equity in a nonfinancial allied enterprise. To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. - The equity investment of a universal bank, or - of its wholly or majority-owned subsidiaries,

Operations Of Commercial Banks Powers of a Commercial Bank. - same as (1) and (2) of Universal banks

Universal Banks

Equity Investments

Conditions to equity investment

Commercial Banks

A universal bank A commercial bank may invest in the may invest only in equities of allied** the equities of and non-allied allied** enterprises enterprises **Allied enterprises may either be financial or non-financial. a. The total a. The total investment in investment in equities of allied equities of allied and non-allied enterprises shall enterprises shall not exceed not exceed fifty thirty-five percent (50%) of percent (35%) of the net worth of the net worth of the bank; and the bank; and b. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth** of the bank.

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b. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of tile net worth of the bank.

Equity Investments in QuasiBanks.

c. Subject to prior approval of the Monetary Board

c. Subject to prior approval of the Monetary Board **“net worth” shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral Equity a. May own up to a. May own up to

Equity Investments in NonAllied Enterprises

one hundred percent (100%) of the equity of o a thrift bank or o a rural bank b. Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise {??? A publicly-listed commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank (sec 25)} May own up to one hundred percent (100%) of the equity in a nonfinancial allied enterprise

-do-

-None-

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS - in a single nonallied enterprise - shall not exceed thirty-five percent (35%) of the total equity in that enterprise - nor shall it exceed thirtyfive percent (35%) of the voting stock in that enterprise.

PROVISIONS APPLICABLE TO ALL BANKS, QUASIBANKS, AND TRUST ENTITIES Other Banking Services In addition to the operations specifically authorized in this Act, a bank may perform the following services: 1. 2.

3.

4.

5.

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

The bank shall perform the services permitted under Subsections 1.,.2, 3. and.4. as depositary OR as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities. In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a 1. bank holiday, OR 2. In any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. Acceptance of Demand Deposits. A bank other than a universal or commercial bank cannot accept or create demand deposits except upon prior approval of, and subject to such conditions

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BANKING LAWS and rules as may be prescribed by the Monetary Board. Risk-Based Capital The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. the ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, MB may prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: - Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible conform to internationally accepted standards, including those of the Bank for International Settlements (BIS), relating to risk-based capital requirements: - Provided further, That it may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year: - Provided, finally, That such ratio shall be applied uniformly to banks of the same category.

In case a bank does not comply with the prescribed minimum ratio: 1. The Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met 2. The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Before the effectivity of rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force. Limit on Loans, Credit Accommodations and Guarantees Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single borrower limit is the total credit commitment of the bank to the borrower. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank Provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (b) in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. NOTE: Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual

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BANKING LAWS under certain circumstances, including but not limited to, any of the following situations: (a) the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or (c) the subsidiaries though separate entities operate merely as departments or divisions of a single entity. Other credit accommodations and guarantees shall exclude: (a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government; (b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest; (c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines; (d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and (e) other loans or credit accommodations which the Monetary Board may from time to time, specify as non-risk items. NOTE: Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. Certain types of contingent accounts of borrowers may be included among those subject to these prescribed limits as may be determined by the Monetary Board. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests (DOSRI) - No director or officer of any bank - shall, directly or indirectly, for himself or as the representative or agent of others, a. borrow from such bank b. nor shall he become a guarantor, endorser or surety for loans from such bank to others, c. or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral. NOTE: Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. Effect of violation to the provision 1. Office may be declared vacant and 2. The director or officer shall be subject to the penal provisions of the New Central Bank Act. The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its DOSRI, as well as investments of such bank in enterprises owned or controlled by said DOSRI However, the outstanding loans, credit accommodations and guarantees which a bank may extend to each of its DOSRI, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit. NOTE: The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders.

140

BANKING LAWS Loans And Other Credit Accommodations on Security of Chattels and Intangible Properties Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, an such loans and other credit accommodation may be made to the title-holder of the chattels and intangible properties or his assignees. Grant and Purpose of Loans and Other Credit Accommodations A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices. The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to (1) terminate the loan or other credit accommodation and (2) demand immediate repayment of the obligation. Requirement for Grant of Loans or 0ther Credit Accommodations Debtor should be capable of fulfilling his commitments to the bank Toward this end, a bank may demand a. b. c.

Loans and Other Credit Accommodations Against Real Estate

A statement of their assets and liabilities and of their income and expenditures and other information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue.

Effect of false or incorrect detail, Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees.

a.

b.

The bank may terminate any loan or other credit accommodation granted on the basis of said statements and Shall have the right to demand immediate repayment or liquidation of the obligation.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Unsecured Loans or Other Credit Accommodations. The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.

-

-

Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations

of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying 1.

The Monetary Board, may prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. Amortization on Loans and Other Credit Accommodations The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed. 1. In case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic amortization payments, but such payments must be made at least annually: Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted. 2. In case of loans and other credit accommodations to micro finance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks. Prepayment of Loans and Other Credit Accommodations A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower.

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2.

-

the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom.

However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law.

NOTE: Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Renewal or Extension of Loans and Other Credit Accommodations The Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations. Provisions for Losses and Write-Offs Bad Debts - All debts due to any bank on which interest is past due and unpaid for such period as may be determined by the Monetary Board, unless the same are welt-secured and in the process of collection

Foreclosure of Real Estate Mortgage In the event of foreclosure, whether judicially or extrajudicially,

The Monetary Board may fix, by regulation or by order in a specific case, the amount of reserves for bad debts or doubtful accounts or other contingencies. Writing off of loans, other credit accommodations, advances and other

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS assets shall be subject to regulations issued by the Monetary Board.

approval of a loan or other credit accommodation from said bank; d. Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or e. Outsource inherent banking functions.

Ceiling on Investments in Certain Assets. -

-

-

Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank’s total investment in real estate, unless otherwise provided by the Monetary Board. (sec 51)

3.

4.

Any real property acquired or held under the circumstances enumerated in the above paragraph (sec 52) shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding section (sec 51) 5.

2.

A bank shall not directly engage in insurance business as the insurer No director, officer, employee, or agent of any bank shall a. Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person; b. Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; c. Accept gifts, fees, or commissions or any other form of remuneration in connection with the

No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same. The making of false reports or misrepresentation or suppression of material facts by personnel of the Bangko Sentral ng Pilipinas shall be subject to the administrative and criminal sanctions provided under the New Central Bank Act.

Prohibited Transactions 1.

No borrower of a bank shall a. Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; b. Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; c. Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or d. Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

NOTE: Notwithstanding the limitations above-mentioned (sec 51), a bank may acquire, hold or convey real property under the following circumstances: 1. Such as shall be mortgaged to it in good faith by way of security for debts; 2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. (sec 52)

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6.

Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or non regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposit Prohibition on Dividend Declaration. – No bank or quasi-bank shall declare dividends, if at the time of declaration: a. b.

c.

d.

Its clearing account with the Bangko Sentral is overdrawn; or It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days, or It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or It has committed a major violation as may be determined by the Bangko Sentral.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Conducting Business in an Unsafe or Unsound Manner In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances: 1.

2.

3.

4.

The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution; The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general; The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby.

Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. Independent Auditor The Monetary Board may require a bank, quasi-bank or trust entity to engage the services of an independent auditor to be chosen by the bank, quasi-bank or trust entity concerned from a list of certified public accountants acceptable to the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be a. on a continuing basis where the auditor shall act as resident examiner, or b. on the basis of special engagements; but in any case, the independent auditor shall be responsible to the bank’s, quasibank’s or trust entity’s board of directors. A copy of the report shall be furnished to the Monetary Board. The Monetary Board may also direct the board of directors of a bank, quasi-bank, trusty entity and/or the individual members thereof; to conduct, either personally or by a committee created by the board, an annual

143

BANKING LAWS balance sheet audit of the bank, quasi-bank or trust entity to review the internal audit and control system of the bank, quasi-bank or trust entity and to submit a report of such audit. Financial Statements Every bank, quasi-bank or trust entity shall submit to the appropriate supervising and examining department of the Bangko Sentral financial statements in such form and frequency as may be prescribed by the Bangko Sentral. Such statements, which shall be as of a specific date designated by the Bangko Sentral, shall show thee actual financial condition of the institution submitting the statement, and of its branches, offices, subsidiaries and affiliates, including the results of its operations, and shall contain such information as may be required in Bangko Sentral regulations. Publication of Financial Statements in such terms understandable to the layman and in such frequency as may be prescribed Bangko Sentral, in English or Filipino, at least once every quarter in a newspaper of general circulation in the city or province where the principal office, in the case of a domestic institution or the principal branch or office in the case of a foreign bank, is located, but if no newspaper is published in the same province, then in a newspaper published in Metro Manila or in the nearest city or province. The Bangko Sentral may by regulation prescribe the newspaper where the statements prescribed herein shall be published. The Monetary Board may allow the posting of the financial statements of a bank, quasi-bank or trust entity in public places it may determine, lieu of the publication required in the preceding paragraph, when warranted by the circumstances. Additionally, banks shall make available to the public in such form and manner as the Bangko Sentral may prescribe the complete set of its audited financial statements as well as such other relevant information including those on enterprises majority-owned or controlled by the bank, that will inform the public of the true financial condition of a bank as of any given time. In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary Board, by a vote of at least five (5) of its members, in special cases and upon application of the bank, quasi-bank or trust entity, may allow such bank, quasi-bank or trust entity to defer for a stated period of time the publication of the statement of financial condition required herein.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Publication of Capital Stock A bank, quasi-bank or trust entity incorporated under the laws of the Philippines shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid up. No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head office, or of the bank in its entirety without indicating at the same time and with equal prominence the amount of the capital, if any, definitely assigned to such branch, such fact shall be stated in, and shall form part of the publication. Settlement of Disputes The provisions of any law to the contrary notwithstanding, the Bangko Sentral shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks, quasi-banks or trust entities arising out of and involving a. b.

relations between and among their directors, officers or stockholders, as well as disputes between any or all of them and the bank, quasi-bank or trust entity of which they are directors, officers or stockholders.

If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General.

PLACEMENT UNDER CONSERVATORSHIP Provided, That this Section shall also apply to conservatorship proceedings of quasi-banks. Appointment of Conservator {The conservator should be competent and knowledgeable in bank operations and management} Grounds: a.

a.

b. c.

b.

shall advertise or hold itself out as being engaged in the business of such bank, quasi-bank, trust entity, or association, or use in connection with its business title, the word or words “bank,” “banking,” “banker,” “quasi-bank,” “quasi-banking,” “quasi-banker,” “savings and loan association,” “trust corporation,” “trust company” or words of similar import or transact in any manner the business of any such bank, corporation or association.

Penalty for Violation of this Act Unless otherwise herein provided, the violation of any of the provisions of this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer.

to take charge of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank.

The Monetary Board shall terminate the conservatorship a. b.

a.

a bank or a quasi-bank is in a (1) state of continuing inability or (2) unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors,

Responsibility of the conservator:

Unauthorized Advertisement or Business Representation No person, association, or corporation unless duly authorized to engage in the business of a bank, quasibank, trust entity, or savings and loan association as defined in this Act, or other banking laws,

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c.

After the expiration of one (1) year {The conservatorship shall not exceed one (1) year} When it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary or On the basis of the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to its depositors or creditors

CESSATION OF BANKING BUSINESS Voluntary Liquidation In case of voluntary liquidation of any bank organized under the laws of the Philippines, or of any branch or office in the Philippines of a foreign bank, written notice of such liquidation shall be sent to the Monetary Board before such liquidation is undertaken, and the Monetary Board shall have the right to intervene and take such steps as may be necessary to protect the interests of creditors.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS Receivership and Involuntary Liquidation The grounds and procedures for placing a bank under receivership or liquidation, as well as the powers and duties of the receiver or liquidator appointed for the bank shall be governed by the provisions of Sections 30, 31, 32, and 33 of the New Central Bank Act: Provided, That the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond, executed in favor of the Bangko Sentral, in an amount to be fixed by the court. This Section shall also apply to the extent possible to the receivership and liquidation proceedings of quasi-banks. Grounds for receivership - is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (a) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or (b) cannot continue in business without involving probable losses to its depositors or creditors; or (c) has willfully violated a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver.

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BANKING LAWS (2) Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. (3) convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code (4) institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. The actions of the Monetary Board taken shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. Distribution of Assets

Liquidation If the receiver determines that the institution cannot be rehabilitated or permitted to resume business the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall: (1) file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation

In case of liquidation of a bank or quasi-bank, (1) after payment of the cost of proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall (2) pay the debts of such institution, under order of the court, in accordance with the rules on concurrence and preference of credit as provided in the Civil Code. Disposition of Revenues and Earnings. All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasi-bank within the purview of this Act shall be used to pay the costs, fees and expenses mentioned in the preceding section, salaries of such personnel whose employment is rendered necessary in the discharge of the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS liquidation together with other additional expenses caused thereby. The balance of revenues and earnings, after the payment of all said expenses, shall form part of the assets available for payment to creditors. Penalty for Transactions After a Bank Becomes Insolvent Any director or officer of any bank declared insolvent or placed under receivership by the Monetary Board who 1. 2. 3.

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refuses to turn over the bank’s records and assets to the designated receivers, or who tampers with banks records, or who appropriates for himself for another party or destroys or causes the misappropriation and destruction of the bank’s assets, or who receives or permits or causes to be received in said bank any deposit, collection of loans and/or receivables, or who pays out or permits or causes to be transferred any securities or property of said bank

shall be subject to the penal provisions of the New Central Bank Act. LAWS GOVERNING OTHER TYPES OF BANKS The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern.

FOREIGN BANKS Transacting Business in the Philippines The entry of foreign banks in the Philippines through the establishment of branches shall be governed by the provisions of the Foreign Banks Liberalization Act. The conduct of offshore banking business in the Philippines shall be governed by the provisions of the Presidential Decree No. 1034, otherwise known as the “Offshore Banking System Decree.” Acquisition of Voting Stock in a Domestic Bank Within seven (7) years from the effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines.

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Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof. HOWEVER: In the exercise of the authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. NOTE: Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines. Local Branches of Foreign Banks In the case of a foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be held to refer to such units. Head Office Guarantee In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch. Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance with the existing laws. Summons and Legal Process Summons and legal process served upon the 1. Philippine agent or designated to accept 2. Head of any foreign bank service thereof shall give jurisdiction to the courts over such bank, and service of notices on such agent or head shall be as binding upon the bank which he represents as if made upon the bank itself. Should the authority 1. be revoked, or 2. should such agent or head become mentally incompetent or 3. otherwise unable to accept service while exercising such authority, it shall be the duty of the bank (1) to name and designate promptly another agent or head upon whom service of summons and processes in legal proceedings against the bank and of notices affecting

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS the bank may be made, and (2) to file with the SEC a duly authenticated nomination of such agent. In the absence of the agent or head or should there be no person authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments and such service shall be as effective as if made upon the bank or its duly authorized agent or head. The said deputy Governor shall register and transmit by mail to the president or the secretary of the bank at its head or principal office a copy, duly certified by him, of the summons, process, or notice. The sending of such copy of the summons, process, or notice shall be a necessary part of the services and shall complete the service. The registry receipt of mailing shall be prima facie evidence of the transmission of the summons, process or notice. All costs necessarily incurred by the said Deputy Governor for the making and mailing and sending of a copy of the summons, process, or notice shall be paid in advance by the party at whose instance the service is made. Laws Applicable In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the (1) creation, (2) formation, (3) organization or (4) dissolution of corporations or (5)for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation. Revocation of License of a Foreign Bank The Monetary Board may revoke the license to transact business in the Philippines of, any foreign bank, 1. If it finds that the foreign bank is insolvent, or 2. In imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. After the revocation of its license, it shall be unlawful for any such foreign banks to transact business in the Philippines unless its license is renewed or reissued. After the revocation of such license, the Bangko Sentral shall take the necessary action to protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable.

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BANKING LAWS TRUST OPERATIONS Authority to Engage in Trust Business Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behalf of others. For purposes of this Act, such a corporation shall be referred to as a trust entity. The SEC shall not register the articles of incorporation and by-laws or any amendment thereto, of any trust entity, unless accompanied by a certificate of authority issued by the Bangko Sentral. Minimum Capitalization. – A trust entity, before it can engage in trust or other fiduciary business, shall comply with the minimum paid-in capital requirement which will be determined by the Monetary Board. Conduct of Trust Business A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims. Prohibited transactions No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign, or lend money or property to, or purchase debt instruments of, 1. any of the departments, directors, officers, stockholders, or employees of the trust entity, 2. relatives within the first degree of consanguinity or affinity, or 3. the related interests, of such directors, officers and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the other party involved in the transaction is fully disclosed to the trustor of beneficiary of the trust prior to the transaction.

Powers of a Trust Entity A trust entity, in addition to the general powers incident to corporations, shall have the power to: 1. Act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any trust consistent with law; 2. Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other incompetent person, 3. Act under the appointment of any court as receiver and depositary of any moneys paid into court by parties to any legal proceedings and of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

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property of any kind which may be brought under the jurisdiction of the court; Act as the executor of any will when it is named the executor thereof; Act as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased person when there is no will; Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; and Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board.

For the Faithful Performance of Trust Duties 1. Before transacting trust business, every trust entity shall deposit with the Bangko Sentral, as security for the faithful performance of its trust duties, cash or securities approved by the Monetary Board in an amount equal to or not less than Five hundred thousand pesos (P500,000.00) or such higher amount as may fixed by the Monetary Board: Provided, however, That the Monetary Board shall require every trust entity to increase the amount of its cash or securities on deposit with the Bangko Sentral Should the capital and surplus fall below said amount, A trust entity so long as it shall continue to be solvent and comply with laws or regulations shall have the right to collect the interest earned on such securities deposited with the Bangko Sentral and, from time to time, with the approval of the Bangko Sentral, to exchange the securities for others. If the trust entity fails to comply with any law or regulation, the Bangko Sentral shall retain such interest on the securities deposited with it for the benefit of rightful claimants. All claims rising out of the trust business of a trust entity shall have priority over all other claims as regards the cash or securities deposited as above provided. 2. Before an executor, administrator, guardian, trustee, receiver or depositary appointed by the court enters upon the execution of his duties, he shall, upon order of the court, file a bond in such sum as the court may direct. NOTE: No bond or other security shall be required by the court from a trust entry for the faithful performance of its duties as court-appointed trustee, executor, administrator, guardian, receiver, or depositary. However, the court may, upon proper application with it showing special cause therefore, require the trust entity to post a bond or other security for the

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BANKING LAWS protection of funds or property confided to such entity. Separation of Trust Business from General Business The trust business shall be kept separate and distinct from the general business including all other funds, properties, and assets of such trust entity. The accounts of all such funds, properties, or securities shall likewise be kept separate and distinct from the accounts of the general business of the trust entity. Investment Limitations of a Trust Entity Unless otherwise directed by the instrument creating the trust, the lending and investment of funds and other assets acquired by a trust entity as executor, administrator, guardian, trustee, receiver or depositary of the estate of any minor or other incompetent person shall be limited to loans or investments as may be prescribed by law, the Monetary Board or any court of competent jurisdiction. Exemption of Trust Assets from Claims No assets held by a trust entity in its capacity as trustee shall be subject to any claims other than those of the parties interested in the specific trusts. Establishment of Branches of a Trust Entity The ordinary business of a trust entity shall be transacted at the place of business specified in its articles of incorporation. With prior approval of the Monetary Board, establish branches in the Philippines and the said entity shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office. For the purpose of this Act, the trust entity and its branches shall be treated as one unit.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS THE NEW CENTRAL BANK ACT RA 7653

Establishment and organization of Bangko Sentral ng Pilipinas - The central Bank shall be the central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. - It is a government-owned-and-controlled corporation but it was created as an autonomous body corporate governed by the provisions of its charter (RA 265). It enjoys fiscal and administrative autonomy.( Sec1; Chapter I ) Corporate powers (Sec 5; Chapter I) 1. authorized to adopt, alter and use a corporate seal 2. lease or own real and personal property 3. sell or dispose of the corporate properties 4. to sue or be sued 5. to do and perform any and all things that may be necessary or proper to carry out the purposes of this Act 6. may acquire and hold assets and incur liabilities in connection with its operations 7. may compromise, condone or release in whole or in part, any claim of or settled liability to the Bangko Sentral 

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It has a capital of its own; P50B to be fully subscribed by the Government, P10B of which shall be fully paid by the Government upon the effectivity of the Act and the balance to be paid within a period of 2 years from the effectivity of the Act. It has a capital of its own and operates under a budget prepared by its own Monetary Board and appropriates money for its own operations and other expenditures independently of the national budget. It does not depend on the national government for the financing of its operations; it is the national government that occasionally resorts to it for needed budgetary accommodations.

RESPONSIBILITIES AND PRIMARY OBJECTIVES (Sec 3; Chapter I) Responsibilities: 1. Provide policy directions in the areas of money, banking and credit 2. Shall have supervision over the operations of banks; and 3. Exercise such regulatory powers as provided in this Act and other pertinent laws over the operation of banks and pertinent laws over the operations of finance companies and non-bank financial institution performing quasi-banking functions.

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Primary objectives: 1. Maintain price stability conducive to a balanced and sustainable growth of the economy 2. Promote and maintain monetary stability and the convertibility of the peso (it includes power to regulate no-dollar imports; owing to the influence and effect that the same may and do have upon the stability of our peso and its international value) THE MONETARY BOARD - shall exercise all the powers and functions of the Central Bank The exercise of authority (sec15; Chapter II) The monetary board shall: 1. issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested upon the Monetary Board and Bangko Sentral; 2. direct the management, operations and administrations of Bangko Sentral, reorganize its personnel, and issue such rules and regulations as it may deem necessary or convenient; 3. Establish a human resource management system which shall govern the selection, hiring. Appointment, transfer, promotion or dismissal of all personnel. AIM OF SYSTEM: establish professionalism and excellence at all levels of Bangko Sentral in accordance with sound principles of management. 4. Adopt an annual budget for and authorize expenditures by the Bangko Sentral as are in the interest of effective administration and operations of the bank in accordance with applicable laws and regulations; and 5. Indemnify its members and other officials of Bangko Sentral, including personnel of departments performing supervision and examination functions against all costs and expenses reasonably incurred by such persons. ( civil or criminal action, suit or proceeding which he may be a party by reason of performance of his functions or duties ) Composition of the monetary board - 7 members appointed by the President of the Philippines for a term of 6 years - The seven members are: a. Governor of Bangko Sentral – shall be the Chairman of the Monetary Board; his appointment is subject to the confirmation by Commission of Appointments b. Members of the Cabinet – designated by the President of the Philippines c. 5 members who shall come from the private sector, all shall serve full-term - 3 shall have a term of 6 years - 2 shall have a term of 3 years ***No member of the Monetary Board may be reappointed more than once.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS THE GOVERNOR OF BANGKO SENTRAL The powers and duties of the Governor: 1. As a chief executive officer of Bangko Sentral; his powers and duties are: a) prepare the agenda for the meetings of the Monetary Board and submit for the consideration of the board the policies and measures necessary to carry out the purpose of the Act; b) execute and administer the policies and measures approved by the Monetary Board; c) direct and supervise the operations and internal administration of the Bangko Sentral; d) appoint and fix the remuneration and other emoluments of personnel below the rank of a department head in accordance with the position and compensation plans approved by the board, as well as to impose disciplinary measures upon personnel of Bangko Sentral e) render opinions, decisions or rulings, which shall be final and executory until reversed or modified by the board, on matters regarding application or enforcement of laws pertaining to institutions supervised by the Bangko Sentral and laws pertaining to quasi-banks; and f) exercise such other powers as may be vested in him by the Monetary Board. 2.

As a principal representative of the Monetary Board and the Bangko Sentral; he is empowered to: a) represent the Monetary Board and Bangko Sentral in all dealings with other offices, agencies and instrumentalities of the Government and all other persons or entities, public or private, whether domestic, foreign or international; b) sign contracts entered into by the Bangko Sentral, notes and securities issued by the Bangko Sentral, all reports, balance sheets, profit and loss statements, correspondence and other documents of the Bangko Sentral

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the signature of the Governor may be in facsimile whenever appropriate a) represent the Bangko Sentral, either personally or through counsel as may be authorized by the Monetary Board in any legal proceedings, action or specialized legal studies; and b) delegate his power to represent the Bangko Sentral to other officers upon his own responsibility

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The Governor also has emergency powers where time is insufficient to call a meeting of the Monetary Board. There are 2 requirements for the exercise of this power, they are: a) There must be the concurrence of 2 other members of the monetary Board b) He must submit a report to the President and Congress within 72 hours after the action has been taken.

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BANKING LAWS g) At the soonest possible time, the Governor shall call a meeting of the Monetary Board to submit his action for ratification.

THE DEPUTY GOVERNORS - the Governor, with the approval of the Monetary Board, shall appoint not more than 3 deputy governors who shall perform duties as may be assigned to them by the Governor and the Board. - In the absence of the Governor, the Deputy designated shall act as chief executive of the Bangko Sentral and shall exercise the powers and perform the duties of the Governor. QUALIFICATIONS OF THE MEMBERS OF THE BOARD 1. must be a natural born citizen of the Philippines 2. at least 40 yrs old for the Governor and at least 35 yrs old for the other members 3. of good moral character 4. of unquestionable integrity 5. of known probity and patriotism 6. with recognized competence in social and economic discipline DISQUALIFICATIONS OF THE MEMBERS OF THE BOARD 1. Disqualified from being a director, officer, employee, consultant, and lawyer, agent ore stockholder of any bank, quasi-bank or any other institution subject to supervision or examination by the Bangko Sentral; 2. Members coming from private sector shall not hold any other public office/public employment during their tenure; 3. Connected directly with any multilateral banking or financial institution or has substantial interest in any private bank in the Philippines within 1 year prior to his appointment; 4. Employed in any such institution within 2 years after expiration of his term except when he serves as an official representative of the Philippines to such institution. REMOVAL - the President may remove any member for the following reasons: 1. if the member is subsequently disqualified under the provision of this Act; 2. if he is physically or mentally incapacitated that he cannot properly discharge his duties and responsibilities and such incapacity lasted for more than 6 months; 3. if the member is guilty of acts or operations which are of fraudulent or illegal character or which are manifestly opposed to the aims and interest of Bangko Sentral; or 4. if the member no longer possesses the qualification specified in this Act.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Vacancy - created by death, resignation or removal of any member shall be filled by the appointment of a new member to complete the unexpired period of the term of the member concerned. Meetings - meet at least once a week Quorum - presence of 4 members shall constitute a quorum - PROVIDED, that in all cases the Governor or his duly designated alternate shall be among the 4. Vote - concurrence of at least 4 members for decisions of monetary Board Salary - shall be fixed by the President of the Philippines at a sum commensurate to the importance and responsibility attached to the position - any member of the Monetary Board with personal or pecuniary interest in any matter in the agenda of Board shall disclose his interest to the Board and shall retire from the meeting when matter is taken up. OPERATIONS OF THE BANGKO SENTRAL 1. Shall prepare data and conduct economic research for the guidance of the monetary board in the formulation and implementation of its policies. - Data includes: a) forecast of the balance of payments of Philippines b) statistics on the monthly movement of the monetary aggregates, of prices and other statistical series c) economic studies useful for the formulation and analysis of monetary, banking, credit and exchange policies 2. Shall have authority to request from government offices and instrumentalities, or GOCC’s, any data which it may require for the proper discharge of its functions and responsibilities. 3. Shall promote and sponsor the training of technical personnel in the field of money and banking – authorized to defray the costs of study, at home or abroad, of qualified employees of the Bangko Sentral, of promising university graduates or any other qualified person who shall be determined by proper competitive examinations. 4. Shall have supervision over, and conduct periodic or special examinations of, banking institutions and quasi-banks, including subsidiaries and affiliates engaged in allied activities. Subsidiary - a corporation more than 50% of voting stock of which is owned by a bank or quasi-bank

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BANKING LAWS Affiliate - a corporation the voting stock of which, to the extent of 50% or less, is owned by a bank or quasi-bank or which is related or linked to such institution or intermediary through common stockholders or such other factors as determined by the Board. SUPERVISION AND EXAMINATION - the department heads and examinees of the supervising or examining departments are hereby authorized to: a. administer oaths of any director, officer or employee of any institution under their respective supervision or subject to their examination; b. compel the presentation of all books, documents, papers or records necessary in their judgment to ascertain the facts relative to the true condition of any institution; c. compel the presentation of books and records of persons and entities relative to or in connection with the operations, activities or transactions of the institutions under examination.  b & c is subject to the provisions of existing laws protecting or safeguarding the secrecy as confidentiality of bank deposits as well as investments of private persons, natural or juridical, in debt institutions issued by the Government General rule - no restraining order or injunction shall be issued by the court enjoining the Bangko Sentral from examining any institution subject to the supervision or examination by the Bangko Sentral. Exceptions 1. action of Bangko Sentral is plainly arbitrary and made in bad faith; and 2. petitioner files with the clerk or judge of court in which the action is pending a bond executed in favor of Bangko Sentral, in an amount fixed by the court. When is supervision and examination conducted? - the supervising and examining department head, personally or by his deputy, shall examine the books of every banking institution once in every 12 months and in such other times as the Monetary Board by an affirmative vote of 5 members may deem expedient. - PROVIDED; that there shall be an interval of at least 12 months between annual examinations. - examination of its books, cash and available assets and general condition may be made at any time during banking hours when requested to do so by the Bangko Sentral. Fees - banking and quasi-banking institutions which are subject to examination shall pay to Bangko Sentral an annual fee in an amount equivalent to a percentage as may be prescribed by the Monetary Board of its average total assets during the preceding year

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

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2009 BAR OPERATIONS -

paid within the first 30 days of each year, shown in its end-of-the-month balance sheet

THE CONSERVATOR Whenever on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors; shall appoint a conservator. Powers of the Conservator 1. take charge of assets, liabilities and the management thereof; 2. reorganize the management 3. collect all monies and debts due said institution 4. exercise all powers necessary to restore viability of its banking institution 5. report and be responsible to the Monetary Board; and 6. shall have the power to overrule or revoke the actions of the previous management and Board of directors of the bank or quasi-bank Term of office - the conservatorship shall not exceed 1 year Remuneration of the Conservator - To be fixed by the Monetary Board in an amount not to exceed 2/3 of the salary of the President of the Institution in 1 year, payable in 12 equal monthly payments. - Rules on Remuneration: 1. if at any time within the 1 year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year. 2. if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. 3. if the Monetary Board appoints a conservator connected with the Bangko Sentral, he shall not be entitled to receive any remuneration or emolument from the Bangko Sentral during the conservatorship. Termination of the Conservatorship 1. When the Monetary Board is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. 2. When on the basis of the report of the conservator or of the Monetary Board’s own findings, determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, provisions on receivership and liquidation will apply.

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BANKING LAWS THE AUDITOR Chairman of the Commission on Audit shall act as the exofficio auditor of the Bangko Sentral and is empowered and authorized to: a. appoint a representative who shall be the auditor of Bangko Sentral b. fix salary of such representative c. appoint and fix the salaries and number or personnel to assist said representative in his work. The representative must be: a. a certified public accountant b. with at least 10 years experience No relative of any member of the Monetary Board or the th Chairman of the Commission within the 6 degree of consanguinity or affinity shall be appointed such representative. RECEIVERSHIP AND LIQUIDATION Receivership - Banking institution  Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver. - Quasi-banking Institution  any person of recognized competence in banking or finance may be designated as receiver by the Monetary Board. -

A receiver shall be appointed when the Monetary Board finds that a bank or quasi-bank: a. is unable to pay its liabilities as they become due in the ordinary course of business, BUT it shall not include inability to pay caused by extraordinary demands induced by financial panic in banking community; b. has insufficient realizable assets, as determined by Bangko Sentral, to meet its liabilities; c. cannot continue in business without involving probable losses to its depositors/creditors; d. has willfully violated a cease and desist order that had become final and involves acts/transactions which amount to fraud or a dissipation of the assets of the institution.

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during rehabilitation receivership, the assets are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of an attachment, execution or otherwise.

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Equality is equity means when a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should stand on an equal footing. Not anyone of them should be given any preference by paying one or some of them ahead of the others.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Requirements before a bank may be found insolvent and declared dissolved 1. an examination shall be conducted by the head of the appropriate supervising or examining department or his examiners or agents into the condition of the bank; 2. it shall be disclosed in the examination that the condition of the bank is one of insolvency or that its continuance in business would involve probable loss to its depositors and creditors; 3. the department head concerned shall inform the Monetary Board in writing, of the facts; and 4. the Monetary Board shall find the statements of the department head to be true. 

The bank shall be considered as insolvent when the realizable assets of a bank or a non-bank financial intermediary performing quasi-banking functions as determined by the Central Bank are insufficient to meet its liabilities.

Powers of the Receiver 1. Immediately gather and take charge of all the assets and liabilities of the institution; 2. Administer the assets and liabilities for the benefit of its creditors; and 3. Exercise the general powers of receiver under the Revised Rules of Court BUT shall not pay or commit any act that will involve the transfer or disposition of any assets of the institution; 4. May deposit or place the funds of the institution in nonspeculative investments. 



The receiver shall determine as soon as possible, but not later than 90 days from take-over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public. If the receiver determines that the institution cannot be rehabilitated or permitted to resume business, the Monetary Board shall notify in writing the Board of Directors of its findings and direct the receiver to proceed with the liquidation of the institution.

Liquidation -

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Banking Institution  receiver shall file ex parte with the proper RTC a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation Quasi-banking Institution  receiver shall also file an ex parte petition for assistance in liquidation, the plan to be adopted by the monetary Board.

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BANKING LAWS Procedure of Liquidation: 1. the court shall, upon acquiring jurisdiction, upon motion of the receiver, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted; 2. convert the assets of the institution to money, dispose of the same to the creditors and other parties, for the purpose of paying the debts in accordance with the rules on concurrence and preference of credit; 3. may institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against the institution. Important points to remember:  ** the assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall from the moment of institution was placed under receivership or liquidation be exempt from any order of garnishment, levy, attachment or execution.  ** the actions of the Monetary Board taken under appointment of conservator, receivership or liquidation shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground of excess of jurisdiction or with such abuse of discretion as to amount to lack or excess of jurisdiction. REPORTS AND PUBLICATIONS The reports to be submitted and published by the Banko Sentral are the following: 1. General balance sheet- shows the volume and composition of its assets and liabilities as of the last working day of the month. WHEN TO PUBLISH: Within 60 days after the end of each month except for the month of December which shall be submitted within ninety days after the end thereof. 2. Analysis of economic and financial development. WHEN TO PUBLISH: Not later than 90 days after the end of each quarter. 3. Profit and loss statement- reasonable detail of Banko Sentral’s operation. WHEN TO PUBLISH: Within 90 days after the end of the year. 4. A review of the state of the financial system. WHEN TO PUBLISH: 120 days after the end of each semester. 5. Abnormal movements in monetary aggregates and the general price level WHEN TO PUBLISH: as soon as practicable 6. Remedial measures in response to such abnormal movements. WHEN TO PUBLISH: not later than 72 hrs after they are taken 7. Annual report on the condition of the Bangko Sentral. WHEN TO PUBLISH: before the end of March of each year

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS The annual report shall also include: 1. a financial condition of the Bangko Sentral; and 2. a statistical appendix which shall present the following: a. monthly movement of monetary aggregate and their components b. monthly movement of purchases and sales of foreign exchange and of int’l reserves of the Bangko Sentral c. balance of payments of the Philippines d. monthly indices of consumer prices and of import and export prices e. monthly movement, in summary form, of exports and imports by volume and value f. monthly movements of the accounts of the Bangko Sentral and of other banks g. principal data on gov’t receipts and expenditures and on the status of the public debt, both domestic and foreign; and h. texts of the major legal and administrative measures adopted by the gov’t and the monetary Board during the year which relate to the functions or operations of the Bangko Sentral or of the financial system. PROFITS AND LOSSES - Net Profits  in the calculation of profits, the Bangko Sentral shall make adequate allowance or establish adequate reserves for bad and doubtful accounts. - the net profits and losses shall be determined by the Bangko Sentral within the first 30 days following the end of each year - the determination and carrying out the distribution of the net profits shall be made within the first 650 days following the end of each fiscal year and the rules on such distribution are: a. 50% of the net profits shall be carried to surplus; and b. the remaining 50% shall revert back to the national treasury Revaluation of profits and losses - Profits or losses arising from any revaluation of the Bangko Sentral’s net assets or liabilities in gold or foreign currencies shall not be included in the computation of the annual profits and losses – it shall be offset by any amounts which are: a. owed by the Philippines to any international or regional inter-gov’t financial institution of which the Philippines is a member; or b. owed by these institutions to the Philippines. Revaluation of International Reserves - this is a special frozen account where the remaining profit or loss shall be carried and the net balance of which shall appear either among the liabilities or among the assets of Bangko Sentral, depending on whether the revaluations have produced net profits or net losses

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BANKING LAWS Fiscal Year st st - begins on January 1 and end on December 31 of each year

THE BANGKO SENTRAL AND THE MEANS OF PAYMENT The unit of monetary value in the Philippines is the peso. Currency - means all Philippine notes and coins issued or circulating in accordance with the provisions of the Act.  the Bangko Sentral shall have the sole power and authority to issue currency, within the territory of the Philippines  the Bangko Sentral shall also have the authority to investigate, make arrests, conduct searches and seizures in accordance with law, for the purpose of maintaining the integrity of the currency.  the Monetary Board may issue regulations as it may deem advisable in order to prevent the circulation of foreign currency or of currency substitutes as well as prevent the reproduction of facsimiles of Bangko Sentral notes Liability for notes and coins - notes and coins issued by the Bangko Sentral shall be liabilities of the Banko Sentral and may be issued only against, and in amounts not exceeding, the assets of the Bangko Sentral. - all notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Gov’t of the Philippines and shall be legal tender in the Philippines for all debts, both public and private. - Coins shall be legal tender: a. in the amounts not exceeding P50 for denominations of 25cents and above; and b. in amounts not exceeding P20 for denominations of 10cents or less Characteristics of the currency The Monetary Board shall, with approval of the President: 1. Prescribe the denominations, dimensions, designs, inscriptions and other characteristics of notes issued by Bangko Sentral; 2. Prescribe the weight, fineness, designs, denominations and other characteristics of the coins issued by the Bangko Sentral; 3. Prescribe the amounts of the notes and coins to be printed and minted. Notes shall bear the signatures, in facsimiles, of the President and of the Governor of the Bangko Sentral. INTERCONVERTIBILITY OF CURRENCY Bangko Sentral shall exchange, on demand and without charge, Philippine currency of any denomination for Philippine notes and coins of any other denomination

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS requests. If Bangko Sentral is temporarily unable to provide notes or coins of the denominations requested, it shall meet its obligations by delivering notes and coins of the denominations which most nearly approximate those requested. Replacement of currency unfit for circulation General rule: Bangko Sentral shall withdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and coins. Exception: coins which show signs of filing, clipping or perforation, and notes which have lost more than 2/5 of their surface or all of the signatures inscribed thereon shall not be replaced by the Bangko Sentral and shall be withdrawn from circulation and demonetized without compensation to the bearer. Replacement of old notes and coins Replacement happens when Bangko Sentral call in for replacement of notes of any series or denominations which are more than % years old and coins which are more than 10 years old. Notes and coins called in for replacement in accordance with this provision shall remain legal tender for a period of 1 year from the date of call – after this period, they shall cease to be legal tender but during the following year or for such longer period, it maybe exchanged at par and without charge in the Bangko Sentral. Demand deposits – all those liabilities of the Bangko Sentral and of other Banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. 

checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor

GUIDING PRINCIPLES OF MONETARY ADMINISTRATION BY THE BANGKO SENTRAL A. Domestic Monetary stabilization Monetary Board shall endeavor to control any expansion or contraction in monetary aggregates which is prejudicial to the attainment or maintenance of price stability. Monetary Board shall have due regard for their effects on the availability and cost of money and credit to particular sectors of the economy as well as to the economy as a whole, and their effects on the relationship of domestic prices and costs to world prices and costs.

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BANKING LAWS Actions when abnormal movements in monetary aggregates occur – whenever abnormal movements in the monetary aggregates, in credit or in prices endanger the stability of the Philippine economy or important sectors thereof, the Monetary Board shall: a. take such remedial measures as are appropriate and within the powers granted to the Monetary Board and the Bangko Sentral; and b. submits to the President of the Philippines and Congress and make public, a detailed report which shall include: 1. causes of the rise or fall of the monetary aggregates of credit or of prices; 2. the extent to which the changes in the monetary aggregates, in credit, or in prices have been reflected in changes in the level of domestic output, employment, wages and economic activity in general and the nature and significance of any such changes; and 3. the measures which the Monetary Board has taken and the other monetary, fiscal or administrative measures which it recommends to be adopted. B. International Monetary Stabilization The Bangko Sentral shall exercise its powers to preserve the International value of the peso and to maintain its convertibility into other freely convertible currencies primarily for, although not necessarily limited to, current payments, for foreign trade and industry. How to maintain such stability and convertibility: The Bangko Sentral shall maintain International reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies. Guide to monetary board in judging adequacy of international reserves: 1. the prospective receipts and payment of foreign exchange by the Philippines; 2. give special attention to the volume and maturity of the Bangko Sentral’s own liabilities in foreign currencies; 3. give special attention also to the volume and maturity of the foreign exchange assets and liabilities of other banks operating in the Philippines; and 4. give special attention to the volume and maturity of the foreign exchange assets and liabilities of all other persons and entities in the Philippines. Composition of International reserves It includes, but not limited to: a. gold; and b. assets in foreign currencies which includes: - documents and instruments customarily employed for the international transfer of funds

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS - demand and time deposits in Central Banks, treasuries and commercial banks abroad - foreign gov’t securities; and - foreign notes and coins The Monetary Board shall: 1. endeavor to hold the foreign exchange resources of the Bangko Sentral in freely convertible currencies; 2. give particular consideration to the prospects of continued strengths and convertibility of the currencies in which the reserve is maintained, including anticipated demands to such currencies; 3. issue regulations determining the other qualifications which foreign exchange assets must meet in order to be included in the international reserves of the Bangko Sentral.

Actions when international stability of peso is threatened: The Monetary Board shall: a. take such remedial measures as are appropriate and within the powers granted to the Monetary Board and the Bangko Sentral; and b. submits to the President and to congress a detailed report which shall include a description and analysis of: 1. nature and causes of existing or imminent decline; 2. remedial measures already taken or to be taken by the Monetary Board 3. monetary, fiscal or administrative measures; and 4. character and extent of the cooperation required from other gov’t agencies for the successful execution of the policies of the Monetary Board. When threatened: 1. whenever the international reserve of the Bangko Sentral falls to a level which the Monetary Board considers inadequate to met the prospective net demands on the Bangko Sentral for foreign currencies; 2. whenever the international reserves appears to be in imminent danger of falling to such a level; 3. whenever the international reserve is falling as a result of payments or remittances abroad which is contrary to the national welfare.

INSTRUMENTS OF BANGKO SENTRAL ACTION In order to achieve the primary objective of price stability, the Monetary Board shall rely on its moral influence and the powers granted to it for the management of monetary aggregates.

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BANKING LAWS Purchases and sales 1. Gold - the Bangko Sentral may buy and sell gold in any form; such purchases and sales shall be made in the national currency at the prevailing international market price as determined by the Monetary Board. 2. Foreign Exchange - The Bangko Sentral may buy and sell foreign notes and coins, and documents and instruments of types customarily employed for the int’l transfer of funds. - Foreign exchange may be had with the following entities or persons: a. Banking institutions operating in the Philippines; b. The government, its political subdivisions and instrumentalities c. Foreign or int’l financial institutions d. Foreign gob’s and their instrumentalities; and e. Other entities and persons which the Monetary Board is hereby empowered to authorize as foreign exchange dealers.

How to maintain convertibility of peso 1. buy any quantity of foreign exchange offered 2. sell any quantity of foreign exchange demanded by such institution PROVIDED, that the foreign currencies so offered or demanded are freely convertible into gold or Us dollars; but their requirement shall not apply to demands for foreign notes and coins. 

Bangko Sentral shall avoid the acquisition and holdings of currencies which are not freely convertible and may acquire such currencies to an amount exceeding the minimum balance necessary to cover current demands only when such is considered by Monetary Board to be in the national interest.

EXCHANGE RATES – the Monetary Board shall determine: 1. The exchange rate policy of the country; 2. The rates of which the Bangko Sentral shall buy and sell spot exchange; 3. Establish deviation limits from the effective exchange rate(s) as it may deem proper; and 4. The rates for other types of foreign exchange transactions by the Bangko Sentral including purchases and sales of foreign notes and coins. 

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The Bangko Sentral shall not collect any additional commissions/charges of any sort other than the actual telegraphic/ cable costs incurred by it. The Bangko Sentral shall endeavor to maintain at all times a net positive foreign asset position so that its gross foreign exchange assets will

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS always exceed its gross foreign liabilities – in case the amount in peso of the liabilities exceed twice the amount in peso of the assets; Bangko Sentral shall submit a report to Congress stating the origin of these liabilities and the manner they will be paid within 60 days from the date the limit is exceeded. EMERGENCY RESTRICTIONS ON EXCHANGE OPERATIONS During an exchange crisis or in time of national emergency or crisis, the Monetary Board: 1. May temporarily suspend or restrict sales of exchange by the Bangko Sentral, with the concurrence of at least 5 of its members; and 2. May subject all transactions in gold and foreign exchange to license by the Bangko Sentral and any foreign exchange thereafter obtained by any person or entity in the Philippines be delivered to Bangko Sentral or to any bank or agent designated by the Bangko Sentral for the purpose. REGULATIONS OF FOREIGN EXCHANGE OPERATION OF BANKS 1. May require the banks to sell to Bangko Sentral or to other banks all or part of their surplus holdings of foreign exchange; 2. Determine the net assets and net liabilities of banks and shall take into account the bank’s net worth, outstanding liabilities or such other financial or performance ratios; 3. Require banks to have a Balanced Currency Position – maintain a balanced position between their assets and liabilities in Philippine peso or in any other currency in which they operate; 4. Issue regulations governing bank’s purchases and sales of non-spot exchanges; 5. Banks shall bear the risks of noncompliance with the terms of foreign exchange documents and instruments which they buy and sell and other typically commercial or banking risks; 6. Banks shall report to Bangko Sentral the volume and composition of their purchases and sales of gold and foreign exchange each day and furnish additional information with regard to the movements in their accounts in foreign currencies; 7. Monetary Board may also require other persons and entities to report to it currently all transactions or operations in gold and in foreign exchange. LOANS TO BANKS INSTITUTIONS

AND

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OFFICIAL

Credit Policy - the rediscounts, discounts, loans and advances which the Bangko Sentral is authorized to extend to banking institutions shall be used to influence the volume of credit consistent with the objective of price stability.

A. NORMAL CREDIT OPERATIONS 1. Commercial credits – the Bangko Sentral may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments with maturities of not more than 180 days from date of rediscount, discount or acquisition and resulting from transactions related to: a. importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the Philippines; or b. storing of non-perishable goods and products which are duly insured and deposited, under conditions assuring their preservation in authorized bonded warehouses or in other places approved by the monetary board 2. Production credits – the Bangko Sentral may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments having maturities of not more than 360 days from the date of their rediscount, discount or acquisition and resulting from transactions related to production or processing of agricultural, animal, mineral and industrial products.  this shall be secured by a pledge of the respective crops or products but if the original loan granted by the Bangko Sentral is secured by a lien or mortgage on real estate property 70% of the appraised value equals or exceeds the amount of loans granted, then products need not be pledged. 3. Other credits – special credit instruments not otherwise rediscountable under (a) and (b) may be rediscountable in accordance with rules and regulation which Bangko Sentral shall prescribe. 4. Advances may be granted by Bangko Sentral against `the following kinds of collateral: a. gold coins or bullion; b. securities representing obligations of the Bangko Sentral or other domestic credit institutions of recognized solvency; c. credit instruments for commercial credits; d. credit instruments for production credits; e. utilized portions of advances in current account covered by regular overdraft agreements; f. negotiable treasury bills, certificate of indebtedness, notes and other negotiable obligations of the gov’t maturing within 3 years from date of advance; and g. negotiable bonds issued by the gov’t having maturities of not more than 10 years from date of advance B. SPECIAL CREDIT OPERATIONS Loans for liquidity purposes – the Bangko Sentral may extend loans and advances to banking institutions for a period of not more than 7 days without any collateral for the purpose of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS providing liquidity to the banking system in times of need. C. EMERGENCY CREDIT OPERATIONS 1. In periods of national or local emergency or during imminent financial panic which directly threaten monetary banking stability, the Monetary Board may, by a vote of at least 5 of its members, authorize Bangko Sentral to grant extraordinary loans or advances secured by assets.  Amount of loan or advance: shall not exceed the sum of 50% of total deposits and deposit substitutes of the banking institution.  Manner of Paying: shall be disbursed in 2 or more st tranches; 1 tranch shall be limited to 25% of the total deposits and deposit substitute of the institution and shall be secured by gov’t securities to the extent of their applicable loan valued and other unencumbered first class collaterals which monetary Board may approve. 2. the Monetary Board may, at its discretion, even during normal periods, authorize Bangko Sentral to grant emergency loans or advances for the purpose of assisting a bank in precarious financial condition or under serious financial pressures brought by unforeseen events or events which through foreseeable could not be prevented by the bank. REQUISITES: a. monetary board shall ascertain that the bank is not insolvent; b. that the bank has the assets defined to secure the advances; c. there should be a concurrent vote of at least 5 members of the Monetary Board Credit term or requirements 1. the Bangko Sentral shall collect interest and other appropriate charges on all loans and advances it extends 2. the document rediscounted, discounted or accepted as collateral by the Bangko Sentral should bear the endorsement of the institution from which they are received; 3. documents rediscounted, discounted, or accepted as collateral by Bangko Sentral must be withdrawn by the borrowing institution in the dates of their maturities or upon liquidation of obligation - banks shall have the right at any time to withdraw any document presented as collateral upon payment in full of the corresponding debt to Bangko Sentral including interest charges. 4. monetary board prescribe additional conditions which borrowing institutions must satisfy in order to have access to the credit of Bangko Sentral OPEN MARKET OPERATIONS The open market purchases and sales of securities by Bangko Sentral shall be made exclusively in accordance with its primary objective of achieving price stability.

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BANKING LAWS What to buy and sell in open market 1. evidences of indebtedness issued directly by the Government 2. evidences of indebtedness issued by Government instrumentalities and fully guaranteed by the Government  these evidences of indebtedness must be freely negotiable and regularly serviced and must be available to the general public through banking institutions and local government treasuries in denominations of a thousand pesos or more 3. Bangko Sentral may also issue, place, buy and sell freely negotiable evidences of indebtedness of the Bangko Sentral in order to provide the latter with effective instruments for open market operations  these issuances shall only be made in cases of extraordinary movement in price levels. Bangko Sentral’s Portfolio - at least once a month, the Monetary Board shall review the portfolio of Bangko Sentral especially considering whether a sufficiently large part of the portfolio consists of assets with early maturities, in order that contraction in Bangko Sentral credit may be effected promptly whenever the national monetary policy so requires.

BANK RESERVES - in order to control the volume of money created by the credit operations of the banking systems, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities - this required reserves of each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral - the Monetary Board may exempt from reserve requirement deposits and deposit substitutes with remaining maturities of 2 years or more as well as interbank borrowings. DEPOSIT SUBSTITUTES - an alternative form of obtaining funds from the public (other than deposits) through the issuance, endorsement or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations; examples of these instruments are: 1. banker’s acceptances 2. promissory notes 3. participations 4. certificates of assignment and similar instruments with recourse; and 5. purchase agreements 

the Monetary Board may fix and alter the minimum reserve ratios applicable to deposits denominated in both peso and foreign currencies, as well as to deposit substitutes, which each bank maintains.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS Computation of reserves - It shall be calculated daily at the end of the day on the basis of the amount of the institution’s reserves and the amount of its liability accounts against which reserves are required to be maintained. - Whenever it becomes necessary to increase reserve requirements against existing liabilities, the increase shall be made in a gradual manner and shall not exceed 4% points in any 30 day period. Reserve deficiencies - occurs whenever the reserve position of any bank or quasi-bank is below the required minimum; EFFECT: shall pay the Bangko Sentral 1/10 of 1% per day on the amount of the deficiency or the prevailing 91 day treasury bill rate plus 3% points, whichever is higher 



The banks and quasi-banks shall ordinarily be permitted to affect any reserve deficiency occurring on one or more days of the week with any excess reserves which they may hold on other days of the same week and shall be required to pay the penalty only on the average daily deficiency during the week. The Monetary Board may modify or set aside the reserve deficiency penalties for part or the entire period of a) a strike or lockout affecting a bank or quasi-bank, b) or of a national emergency affecting operations of banks or quasi-banks.

Interbank settlement Bangko Sentral shall establish facilities for interbank clearing under such rules and regulations as the Monetary Bank may prescribe; the deposit reserves maintained by the banks in the Bangko Sentral serve as basis for the clearing of checks and the settlement of interbank balances. Exemption from attachment and other purposes Deposits maintained by banks with the Bangko Sentral as part of their reserve requirement shall be exempt from attachment, garnishment, or any other order or process of any court, government agency or any other administrative body issued to satisfy the claim of a party other than the government.  The Monetary Board shall use the powers granted to it to ensure that the supply, availability and cost of money are in accord with the needs of the Philippine economy and that bank credit is not granted for speculative purposes prejudicial to the national interest.

FUNCTIONS AS BANKER AND FINANCIAL ADVISOR OF THE GOVERNEMENT Functions as Banker of the Government 1. The Bangko Sentral shall act as a banker of the Government, its political subdivisions and instrumentalities. 2. The Bangko Sentral shall represent the Government in all dealings, negotiations and transactions with the

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3.

4.

5.

International Monetary Fund, International Bank for Reconstruction and Development and with other foreign or international financial institutions or agencies. The Bangko Sentral shall be the official depository of the Government, its political subdivision and instrumentalities as well as GOCC’s, their cash balances should be deposited with the Bangko Sentral, with only minimum working balances to be held by government owned banks and such other banks as the Monetary Board may designate. The Bangko Sentral shall open a general cash account for the treasurer of the Philippines, in which the liquid funds of the government shall be deposited In the performance of its functions as fiscal agent, the Bangko Sentral may engage the services of other government owned and controlled banks and of other domestic banks for operations in localities at home or abroad in which the Bangko Sentral does not have offices or agencies adequately equipped to perform said operations

THE MARKETING SECURITIES FOR GOVERNMENT

AND STABILIZATION OF THE ACCOUNT OF THE

The issue of government securities - the issue of securities representing obligations of the government and its instrumentalities may be made through the Bangko Sentral which may act as agent of, and for the account of, the government or its respective subdivisions or instrumentality. - HOWEVER, Bangko Sentral shall not guarantee the placement of said securities, and shall not subscribe to their issue except to replace its maturing holdings of securities. The placing of government securities - the Bangko Sentral may place the securities through direct sale to financial institutions and the public - the Bangko Sentral shall not be a member of any stock exchange or syndicate, but may intervene therein for the sole purpose of regulating their operations in the placing of government securities.

FUNCTIONS AS FINANCIAL ADVISOR OF THE GOVERNMENT Financial advices on official credit operations: a. the government (through the secretary of Finance) b. political subdivisions and instrumentalities of the government; BEFORE undertaking any credit operations abroad shall request the opinion, in writing, of the Monetary Board on the monetary implications of the contemplated actions. Basis of opinion: 1. based on the gold and foreign exchange resources and obligations of the nation;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 2.

COMMERCIAL LAW

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BANKING LAWS

based on the effects of the proposed operation on the balance of payments; and based on money aggregates

3.

SECURITIES STABILIZATION FUND - shall be administered by the Bangko Sentral for the account of the Government. - Operation: consists of purchases and sales, in the open market, of bonds and other evidence of indebtedness issued or fully guaranteed by the Governmen - Purpose: to increase the liquidity and stabilize the value of said securities in order to promote private investment in government obligations - Resources: shall come from the balance of the fund held by the Central Bank - Profits and Losses: shall retain any net profits which it may make on its operations, regardless of whether said profits arise from capital gains or from interest earnings; shall correspondingly bear any net losses which it may incur.

PRIVILEGES AND PROHIBITIONS PRIVILEGES 1.

Tax Exemptions - the Bangko Sentral shall be exempt for a period of 5 years from the approval of the Act from all national, provincial, municipal and city taxes, fees, charges and assessments. - this exemption shall apply to a. all property of Bangko Sentral, b. resources, receipts, expenditures, profits and income of Bangko Sentral, c. as well as to all contracts, deeds, documents and transactions relate to the conduct of the business of Bangko Sentral

2.

Exemption from custom duties - the importation and exportation by the Bangko Sentral of a. notes and coins; b. of gold and other metals to be used for the conduct of business of Bangko Sentral and c. importation of all equipment needed for bank note production, minting of coins, metal refining and other security printing operations.

PROHIBITIONS 1. the Bangko shall not acquire shares of any kind or accept them as collateral 2. shall not participate in the ownership or management of any enterprise, either directly or indirectly 3. shall not engage in development banking or financing

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS c. d. e.

RURAL BANKS ACT OF 1992 R.A. NO. 7353 









No rural bank shall be operated without a certificate of authority from the Monetary Board of the Central Bank. Rural banks shall be organized in the form of stock corporations Upon consultation with the rural banks in the area, duly established cooperatives and corporations primarily organized to hold equities in rural banks may organize a rural bank and/or subscribe to the shares of stock of any rural bank. Provided, that a cooperative or corporation owning or controlling the whole or majority of the voting stock of the rural bank shall be subject to special examination and to such rules and regulations as the Monetary Board may prescribe. The capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock with the exception of shareholdings of corporations organized primarily to hold equities in rural banks and of Filipino- controlled domestic banks. If the subscription of private share holders to the capital stock cannot be secured or is not available, or insufficient to meet the normal credit needs of the locality -- the Land Bank of the Philippines, the Development Bank of the Phil., or any governmentowned or controlled bank or financial institution shall subscribe to the capital stock of such rural bank, which shall be paid in full at the time of subscription, in an amount equal to the fully paid subscribed and unimpaired, capital of the private stockholders. PROVIDED, such shares may be sold at any time at market value to private individuals who are citizens of the Philippines, and that the registered stockholders shall have the right of preemption within 1 year from the date of offer in proportion to their respective holdings, but in the absence of such buyer, preference shall be given to residents of the locality or province where the rural bank is located. To provide supplemental capital until the bank has accumulated enough capital of its own or stimulate private investments, the same institutions shall also subscribe within 30 days to the capital stock of any rural bank in an amount equal to the equity investment of the private shareholders which shall be paid in full at the time of the subscription – right of preemption is also available; If such stock held is sold to private individuals, the same may be converted into common stock. Stocks held shall be made preferred only as to assets upon liquidation and without power to vote and shall share in dividend distributions from the date of issuance in the amount: st nd a. 4%-- on the 1 and 2 years rd th b. 6%-- on the 3 and 4 years

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

th

th

8%-- on the 5 and 6 years th th 10%-- on the 7 and 8 years th th 12%-- on the 9 to the 15 years without preference

The corporate secretary of the bank shall submit to the Central Bank and the SEC a report on every transfer of preferred stock to private shareholders. When all the preferred shares of stock have been sold to private shareholders, the Articles of Incorporation of the bank shall be amended to reflect the conversion.



All members of the Board of Directors of the rural bank shall be citizens of the Philippines at the time of their assumption to office  NO director or officer shall for himself or as a representative or agent of another, borrow any of the deposits or funds of such banks, nor shall he become a guarantor, indorser, or surety for loans from such bank or others, or in any manner be an obligor for money borrowed from the bank or loaned by it except with the written approval of the majority of the directors of the bank, excluding the director concerned. Any such approval shall be entered upon the records of the corporation and a copy of such entry shall be transmitted to the appropriate supervising department.  The Monetary Board may regulate the amount of credit accommodations that may be extended directly to the directors, officers or stockholders of rural banks of banking institutions. However, the outstanding credit accommodations to each of its stockholders owning 2% or more of the subscribed capital stock, its directors, or officers shall be limited to an amount equivalent to the respective outstanding deposits and book value of the pad-in capital contributions in the bank.



Loans or advances extended by rural banks shall be primarily for the purpose of meeting the normal credit needs of farmers, fishermen or farm families owning or cultivating land dedicated to agricultural production as well as the normal credit needs of cooperatives and merchants. In granting loans, preference shall be given to the application of farmers and merchants whose cash requirements are small Loans may be granted by rural banks on the security of lands on the following: a. those without Torrens title where the owner of private property can show 5 years or more of peaceful, continuous and uninterrupted possession in concept of owner b. portions of friar land estates or other lands administered by the Bureau of Lands that are covered by sales contracts and the purchasers have paid at least 5 years installment thereon, without the necessity of prior approval and consent by the Director of Lands



Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS c.

d.

portions of other estates under the administration of the Department of Agrarian Reform or other governmental agency which are likewise covered by sales contracts (same conditions as above stated) homesteads or free patent lands pending the issuance of titles but already approved

e.

f.

g. 









When the corresponding titles are issued, the same shall be delivered to the Register of Deeds of the province where such lands are situated for the annotation of the encumbrance In case of lands homestead or free patent titles, copies of the notices for the presentation of the final proof shall also be furnished the creditor rural bank; That the applicant has already made improvements on the land and the loan applied for is to be used for further development of the same or for other productive economic activities The appraisal and verification of the status of a land is a full responsibility of the rural bank and any loan granted on any land which shall be found later to be forest zone shall be for the sole account of the rural bank.

Rural banks may, devote a portion of their loanable funds to meeting the normal credit needs of small business enterprise; Provided, the loans shall not exceed 15% of he net worth of a rural bank or such amount as the Monetary Board may prescribe. All supervised past due and restructured past due loans, including those covered under existing rehabilitation programs of the Central Bank, and 50% of non-supervised past due shall be converted into preferred stocks of the rural bank and issued in favor of the Land Bank of the Phil., the DBP or any government-owned or controlled bank or financial institution, Provided: a. penalties thereon are waived except accrued interest on arrearages b. equivalent penalties due from corresponding farmers are waived c. rural banks that prefer to settle their arrearages under a plan of payment or a combination of both plan of payment and conversion may do so d. rural banks shall match these preferred stocks wit private equity in equal annual installments over a period of 15 years to begin 3 years after conversion

SUPERVISORY POWERS OF THE MONETARY BOARD a. placing the limits to the maximum credit allowed to any individual borrower b. prescribing the interest rate c. determining the loan period and loan procedures d. indicating the manner in which technical assistance shall be extended to rural banks

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h. i.

imposing a uniform accounting system and manner in keeping the accounts and records of rural banks instituting periodic surveys of loan and lending procedures, audits, test-check of cask and other transactions of the rural banks conducting training courses for personnel of rural banks supervising the business operations of the rural bank, in general prescribe the amount, value and class of stock issued by any rural bank

SUPERVISORY POWERS OF THE CENTRAL BANK a. enforce laws, orders, instructions, rules and regulations promulgated by the Monetary Board applicable to rural banks b. to require rural banks, their directors, officers and agents to conduct and manage the affairs of the banks in a lawful and orderly manner c. upon proof of violation of the provisions above mentioned, or that the affairs of the bank are conducted in a manner substantially prejudicial to the interest of the government, depositors or creditors, to take over the management of such bank when authorized to do so by the Monetary Board after due hearing process until a new board of directors and officers are elected and qualified 

The management of the rural bank by the Central Bank shall be without expense to the rural bank, except such is actually necessary for its operation, pending the election and disqualification of a new board of directors and officers



The director and the examiners of the central bank charged with the supervision of rural banks are authorized to administer oaths to any director, officer or employee of any rural bank or to any voluntary witness and to compel the presentation of all books, documents, papers or records necessary in his or their judgment to ascertain the facts relative to the true condition of any rural bank of to any loan.

POWERS OF RURAL BANKS a. Accept savings and time deposits b. Open current or checking accounts, provided the bank has net assets of at least P5,000,000 c. Act as correspondent for other financial institutions d. Act as collection agent e. Act as official depository of municipal, city or provincial funds in the municipality. City or province where it is located

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS f.

g. h.

Rediscount paper wit the PNB, Land Bank of the Phil., Development Bank of the Phil., or any banking institution, including its branches and agencies Offer other banking services as provided in sec. 72 RA No. 337 Extend financial assistance to private and public employees

Investment in allied undertakings shall include: 1. Banks, financial institutions and non-bank financial intermediaries 2. Warehousing and other post-harvest facilities 3. Fertilizer and agricultural chemical and pesticides distribution 4. Farm equipment distribution 5. Trucking and transportation of agricultural products 6. Marketing of agricultural products 7. Leasing 8. Other undertakings as may be determined by the Monetary Board, provided: a. the total investment to equities shall not exceed 25% of the net worth of the rural bank b. the equity investment in any single enterprise shall be limited to 15% of the net worth of the rural bank c. the equity investment in any single enterprise shall remain a minority holding in that enterprise 

The LBP, DBP, or any government owned or controlled bank or financial institution shall within 6 days of certification of the Monetary Board, which shall be final, extend to a rural bank loans repayable in 10 years, with concessional rates of interest, against security which may be offered by any stockholder/s of said bank provided: a. That the Monetary Board is convinced that the resources of the bank are inadequate to meet the legitimate credit requirements of the locality wherein the bank is established b. That there is dearth of private capital in the said locality c. That it is not possible for the stockholders of the rural bank to increase the paid-up capital thereof.



In an emergency or when a financial crisis is imminent, the Central Bank may give a loan to any rural bank against assets of the rural bank which may be considered acceptable by a concurrent vote of at least 4 members of the Monetary Board To encourage consolidation and mergers of rural banks, there are 5 or more rural banks within the region that merge and consolidate within 3 years from the enactment of this Act, the merged or consolidated entity will be given the ff incentives for a period of 7 years: a. Its deposit liabilities shall be subjected to only 1/3 of reserves normally required for rural banks b. Its reserve requirement can all be maintained under interest-bearing government securities



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BANKING LAWS

c.



but kept unencumbered with government financial institutions or the Central Bank It shall have unrestricted branching right within the region, free from any assessment or surcharges required in setting up a branch but under the coordination with the Central Bank which will have to assess that there are qualified personnel, control and procedures to operate the branch

Every individual acting as officer or employee of a rural bank and handling funds or securities amounting to P5, 000 or more in any 1 year, shall be covered by an adequate bond as determined by the Monetary Board; the by-laws of the bank may also provide for the bonding of other employees or officers of rural banks

EXEMPTIONS a. Stockholdings in a rural bank shall be exempt from any ownership ceiling for a period of 10 years from the approval of this Act. The exemption shall require the approval of the Monetary Board b. The foreclosure of mortgages covering loans granted by rural banks and executions of judgment thereon involving real properties levied upon by the sheriff shall be exempt from the publications in newspaper where the total amount of loan, excluding interest due and unpaid, does not exceed P100, 000. It shall be sufficient if the notices of foreclosure and execution of judgment are posted in the most conspicuous area of the municipal building, the municipal public market, rural bank, barangay hall, barangay public market where the land mortgaged is situated during the period of 60 days immediately preceding the public auction or execution of judgment. Proof of publication shall be accomplished by an affidavit. c. All rural banks shall be exempt from the payment of all taxes, fees and charges of whatever nature and description, except the corporate income tax and local taxes, fees and charges, for a period of 5 years from the date of commencement of operations and from the approval of this Act for rural banks already in operation as of approval of this Act. d. Deposits of rural banks with government-owned or controlled financial institutions like the LBP, DBP, and the PNB are exempted from the Single Borrower’s Limit imposed by the General Banking Act. e. Any city or municipal trial court judge in his capacity as notary public ex officio shall administer oath or acknowledge the instruments of any rural bank and its borrowers or mortgagors, free from all charges, fees and documentary stamp tax relative to any loan or transaction not exceeding P50,000 f. The registration of any instrument to any register of deeds by any rural bank and its borrowers or mortgagors, shall be free from all charges, fees and documentary stamp tax, relating to loans or transactions in an amount not exceeding P50, 000. In instruments related to assignments of several

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS mortgages consolidated in a single deed, if any, shall be levied only on the amount in excess of P50,000 of the consideration in the assignment of each mortgage

a.

Any municipal trial judge or register of deeds who shall demand or accept, directly or indirectly, any gift, fee, commission or other form of compensation in connection with the service, or shall arbitrarily or without reasonable cause delay the acknowledgment or administration of oath or the registration of documents required to be performed and by said register of deeds shall be punished by a fine of not more than P1, 000 or by imprisonment for not more than 1 year, or both

b.

Any bank not organized under this Act and any person, association, or corporation doing the business of banking, not authorized under this Act which shall use the words “Rural Banks” as part of the name or title of such bank or of such person, association, or corporation, shall be punished by a fine of not less than P50 for each day during which said words are so used.

PROHIBITIONS A fine of not more than P10, 000, or imprisonment for not less than 6 months but not more than 10 years or both, at the discretion of the court, shall be imposed upon: a. Any officer, employee, or agent of a rural bank who shall: 1. Make false entries in any bank report or statement 2. Without order of a court, disclose any information relative to the funds or properties in the custody of t he bank belonging to private individuals, corporations, or any other entity 3. Accept gifts, fees or commission or any other form of remuneration in connection with the approval of a loan from said bank 4. Overvalue or aid in overvaluing any security for the purpose of influencing in any way the action of the bank in any loan 5. Appear and sign as guarantor, indorser, or surety for loans granted 6. Violate any of the provisions of this Act

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b. Any applicant for a loan from, or borrower of a rural bank who shall: 1. Misuse, misapply, or divert the proceeds of the loan obtained by him from its declared purposes 2. Fraudulently overvalue property offered as security for a loan fro said bank 3. Give out or furnish false or willful misrepresentation of material facts for the purpose of obtaining, renewing, or increasing a loan or extending the period thereof 4. Attempt to defraud the said bank in the event of court action to recover a loan 5. Offer any officer, employee or agent of a rural bank as a gift, fee or commission or other form of compensation in order to influence such bank personnel into approving a loan application 6. Dispose or encumber the property or the crops offered as security for the loan c. Any examiner, or officer or employee of the Central Bank of the Phil. or of any department , bureau, office, branch or agency of the government who is assigned to examine, supervise, assist or render technical service to rural banks who shall connive or aid in the commission of the same

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS  AN ACT TO ORDAIN A COOPERATIVE CODE OF THE PHILIPPINES R.A. NO. 6938 CHAPTER XIII—SPECIAL PROVISIONS RELATING TO COOPERARIVE BANKS Cooperative bank - is one organized by, the majority shares of which is owned and controlled by, cooperatives primarily to provide financial and credit services to cooperatives. The term cooperative bank shall include cooperative rural banks



 Functions of a cooperative bank 1. To carry on banking and credit services for the cooperatives 2. To receive financial aid or loans from the government and the Central Bank of the Phil. for and in behalf of the cooperative banks and primary cooperatives and their federations engaged in business and to supervise the lending and collection of loans 3. To mobilize savings of its members for the benefit of the cooperative and their federations 4. To act as a balancing medium for the surplus funds of cooperatives and their federations 5. To discount bills and promissory notes issued and drawn cy cooperatives 6. To issue negotiable instruments to facilitate the activities of cooperatives 7. To issue debentures subject to the approval of and under conditions and guarantees to be prescribed by the government 8. To borrow money from banks and other financial institutions within the limit to be prescribed by the Central Bank 9. To carry out all other functions as may be prescribed by the Authority. Provided, that the performance of any banking function shall be subject to prior approval by the Central Bank and it satisfies all requirements for registration as a cooperative 

No entry shall be registered by the Cooperative Development Authority as a cooperative bank unless articles of cooperation and by-laws thereof as well as its establishment and operation as a cooperative bank have been approved by the Central Bank.



Membership of a cooperative bank shall include only cooperatives and federations of cooperatives.



The number, composition and voting rights of the board of directors shall be defined in the articles of cooperation and by-laws of the cooperative bank.



Cooperatives may obtain loans from a cooperative bank. Loans granted by a coop. bank shall be reported to the Central Bank.

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BANKING LAWS The cooperative banks registered under this code shall be under the supervision of the Central Bank. The Central Bank upon consultation with the agency and the cooperative movement shall formulate guidelines regarding the operation and banking transactions of cooperative banks. Cooperative banks may be exempted from Central Bank rules and regulations, applicable to other types of banks, which would impede the cooperative rural bank from performing legitimate financial and banking to its members. A national coop. shall have a minimum authorized share capital of P200, 000,000. The authorized share capital shall be divided into such number of shares with a minimum par value of P1, 000 per share A local coop. bank shall have a minimum authorized share capital of P20,000,000 divided into such number of shares with a minimum par value of P100 per share.

Privileges - subject to the approval of the Central Bank and compliance w/ applicable banking laws, rules and regulations 1. Coop. banks registered under this code shall be given the same privilege granted to the rural banks, private development banks, commercial banks, and all other banks to rediscount notes with the Central Bank, the Land Bank of the Philippines and other banks without affecting in any way the provisions if this code 2. To act as depository of government funds 

Whenever a coop. bank organized under this code is distressed or may need assistance in the rehabilitation of its financial condition or to avoid bankruptcy, the Monetary Board of the Central Bank shall designate an official of the Central Bank or a person of recognized competence in banking or finance as receiver or conservator of the said bank.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

FOREIGN CURRENCY DEPOSIT ACT RA 6426 Background Republic Act no. 6426 established the foreign currency deposit account system in the country in 1972. essentially, it allowed any person to deposit, and banks to accept for deposit, any foreign currency acceptable as part of our international reserve.  -

Who may deposit: Any person a. Judicial b. Natural



Authority of the Central Bank: a. To accept deposits and to accept foreign currencies in trust: Provided, that numbered accounts for recording and servicing of such deposits shall be allowed; b. To issue certificates to evidence such deposits; c. To discount such certificates; d. To accept said deposits as collateral as loans subject to such rules and regulations as maybe promulgated by the Central Bank from time to time. e. To pay interest in foreign currency on such deposits.

 -

Tax exemption of interests on deposits. The interest on deposits belonging to non – resident nor engaged in trade or business in the Phils., shall be exempt from income tax.

Unique features of the Act Unlike ordinary bank deposits, foreign currency deposits have the following features: (a) Absolute Confidentiality - a foreign currency deposit cannot be examined, inquired or looked into y any person or office, whether public or private, or judicial, administrative or legislative (Sec. 8, as amended by PD 1246(1977) except: 1. 2.

 Purpose: Foreign currencies which are acceptable as acceptable as part of the international reserved except those which are required by the Central Bank to be surrendered.  -

-

-

-

-



Foreign Currency cover requirements: Shall maintain at all times a 100% foreign currency cover for their deposit liabilities of which cover at least 15% shall be in the form of foreign currency deposit with the Central Bank A balance in the form of foreign currency deposits or foreign currency loans or securities which loans or securities shall be of short term maturities and readily marketable. May include loans to domestic enterprises which are export evented or registered with the Board of Investments. Foreign currency cover shall be in the same currency as that of the corresponding foreign currency deposit liability. The Central Bank may pay interest on the foreign currency deposit and if requested shall exchange the foreign currency notes and coins into foreign currency instruments drawn on its depository banks. Withdrawability and transferability of deposits: - There shall be no restriction on the withdrawal by the depositor of his deposit or on the transferability of his deposit.

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3.

4.

Upon the written permission of the depositor; Without need of a court order, if the anti-money laundering council determines that a particular deposit or investment with any banking institution is related to any one of the following unlawful activities: a. kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended (Sec. 3(i)(1)); b. violations of sections 4,5,6,8,9,10,12,13,14,15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002 (Sec. 3(i)(2)); and c. hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the revised penal code, as amended, including those perpetrated by terrorists against noncombatant persons and similar targets (Sect. 3(i)(12). Upon order of the court, if the anti-money laundering council determines that a particular deposit or investment with any banking institution is related to any one of the unlawful activities under Sec. 3(i), except those referred to in Section 3(i)(1), (2) and (12), of RA 9160 or a money laundering offense under Section 4 (Sec. 11, RA 9160);and, Inquiry into or examination of any deposit or investment with any banking institution when the examination is made by the BSP in the course of a periodic or special examination in accordance with the rules of examination of the BSP (Sec. 11, RA 1960; see also Sec. 4, RA 8791).

(b) Numbered Accounts - authorized banks may adopt a numbered account system for recording and servicing deposits in non-checking accounts (Sec. 3 in relation to Sec. 9 (a), RA 9160, as amended).

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS (c) Taxes - the foreign currency deposits, including interests and all other income or earnings of such deposits, are exempt from any and all taxes whatsoever irrespective of whether or not these deposits are made by residents or non-residents and, in the latter case, irrespective whether or not the non-residents are engaged in trade or business in the Philippines (Sec. 6, as amended by PD 1246). Note, however, that under sections 24(B)(1), 27(D)(1) and 28(A)(7)(a) of the NIRC, the interest receive by the individual (Except a nonresident individual), domestic corporation and resident foreign corporation from such deposits shall, effective January 1, 1998, be subject to a final income tax of 7.5%. (d) Court order or process - they are exempt from attachment, garnishment or any other order or process of any court, legislative or administrative body, or government agency whatsoever (Sec. 8 as amended by PD 1246) except the Court of Appeals, upon application ex parte by the antimoney laundering council and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) of the anti-money laundering act, may freeze the account into which the monetary instrument or property is deposited (Sec. 10, RA 9160, as amended). (e) New enactment or regulation - in the event a new enactmentor regulation is issued decreasing the rights granted under the law, such new enactment or regulation shall not apply to foreign currency deposits already made or existing at the time of issuance of such new enactment or regulation (Sec. 12-A, as inserted by PD 1246). Case Salvacion, et al vs. Central Bank, et al. GR No. 94723, Aug. 21, 1997 Petitioner Karen E. Salvacion, a minor, was detained and raped by Greg Bartelli, an American tourist. Salvacion was later on rescued by the police, Bartelli was arrested, and criminal cases for serious illegal detention and rape were filed against the latter. A case for damages was also filed by Salvacion and her parents against Bartelli. Bartelli was able to escape from jail and the criminal cases against him were thereafter archived. However, the civil case for damages against Bartelli continued and judgment was rendered in favor of Salvacion and her parents. At the time of his arrest, Bartelli maintained a U.S Dollar deposit account with China Banking Corporation (CBC). When the petitioner to have the bank deposit of Bartelli with CBC garnished to satisfy the judgment rendered in their favor, the bank refused citing Section 8 of Republic Act No. 6426, as amended, which exempt foreign currency

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BANKING LAWS deposit accounts from attachment, garnishment or any other order or process of any court, legislative or administrative body, or government agency whatsoever. The court ruled that Section 8 of Republic Act No. 6426 does not protect and would not apply to the foreign currency deposit of a transient alien depositor under the peculiar circumstances of this case and ordered CBC to release to Salvacion and her parents the dollar deposit of bartelli in such amount as would satisfy judgment. Comment: this case should not be understood as removing from foreign currency deposits accounts maintained by transient alien depositors the benefit and protection afforded by that Section 8 of Republic Act No. 6426. such benefit and protection may be removed only under circumstances similar to the facts of this case. Case Intengan, et al vs CA, et al, G.R. No. 128996, February 15, 2002 The court held that the accounts in question, being U.S. Dollar deposits, are not covered by the law on secrecy of bank deposits (RA 1405, as amended) but by the foreign currency deposit act (RA 6426, as amended). Thus, a case for violation of the latter law should have been the proper case brought against private respondents Vic Lim, a vice president of Citibank, and Joven Reyes, Vice President/Business Manager of the Global Consumer Banking Group of Citibank, who admitted that they had disclosed details of petitioners’ dollar deposits without the latter’s written permission. According to the court, Lim’s act of disclosing details of petitioners’ bank records regarding their foreign currency deposits, with the authority of Reyes, would appear to belong tot hat species of criminal acts punishable by special laws called malum prohibitum. The private respondents, however, could no longer be charged under RA 6426, a special law, as the offense has prescribed. Being a special law, the provisions of Act No. 3326, entitled “An Act to Establish Periods of Prescription for Violations Penalized by Special Acts and Municipal Ordinances and to Provide When Prescription Shall Begin to Run’, as amended by Act No. 3763, are applicable. A violation of RA 6426 shall subject the offender to imprisonment of not less than 1 year or more than 5 years, or to a fine of not less than P5,000.00 nor more than P25,000.00, or both. Applying Act 3326, the offense prescribes in 8 years. The filing of complaint or information for alleged violation of RA 1405 did not have the effect of tolling the prescriptive period. It is the filing of the complaint or information corresponding to the correct offense which produces that effect.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS THRIFT BANKS ACT OF 1995 R.A NO. 7906 THRIFT BANKS - include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws, and any banking corporations that may be organized for the following purposes: a. Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgage in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or not, or in financing for homebuilding and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, draft, bills of exchange, acceptances or notes arising out of commercial transactions; b. Providing short-term working capital, medium and term financing, to businesses engaged in agriculture, services, industry and housing and c. Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals. ORGANIZATION - A thrift bank shall be organized in the form of Stock Corporation. The Monetary Board (of the Central Bank of the Philippines) shall fixed the minimum paid-up capital taking into account the development thrusts of this Act and due protection of the public. No thrift bank shall be organized without a certificate of authority from monetary board. -

The articles of incorporation, or any amendment thereto shall not be registered by the SEC unless accompanied by a certificate of authority issued by the monetary board under its official seal.  Requirements for the issuance of certificate: 1. All the requirements of the existing laws and regulations to engage in business for which the applicant is proposed to be incorporated have been complied with 2. That public interest and the economic conditions, both general and local, justify the authorization 3. The amount of capital, the financing organization, direction and administration, as well as the integrity and the responsibility of the organizers and the administrators reasonably assure the safety of the interest which the public may entrust to them

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The monetary board may pass upon and review the qualifications of persons who are elected or appointed bank directors and officers, and disqualify those unfit. At least majority of the members of the board of directors shall be citizen of the Philippines. NO appointive or elected official, whether full time or part time, shall at the same time serve as officer of any thrift bank, except in cases where such service is incident to financial assistance provided by the government owned or controlled corporation to the bank. In case of merger or consolidation, the limitation on the number of directors in a corporation (sec. 14 of the corporation code of the Philippines) shall not be applied so that membership in the new board may include up to the total number of directors provided for in the respective articles of incorporation of the merging/consolidating banks.

OWNERSHIP AND CAPITAL REQUIREMENTS - At least 40% of the voting stock shall be owned by citizens of the Philippines, except where a new bank may be established as a result of a merger/consolidation with foreign holdings in which case, the resulting foreign holdings shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond 60% of the voting stock of thrift banks. - The percentage of the foreign-owned voting stocks shall be determined by the citizenship of individual holders and in case of corporations owning shares, by the citizenship of each stockholder in the said corporations. - The combined capital accounts shall not be less than an amount equal to 10% of the risk assets. Risk assets  total asset minus the following assets: a. cash on hand b. amount from Bangko Sentral c. evidences of indebtedness of the republic of the Philippines and of the Bangko Sentral. And any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Rep. of the Phil. d. loans to extent covered by hold-out on, or assignment of deposits maintained in the lending bank and held in the Philippines e. other non-risk items as the Monetary Board may authorize to be deducted from the total assets. 

Whenever the capital accounts are deficient, the Monetary Board shall limit or prohibit the distribution of net profit and shall require that part or all of net profits be used to increase the capital accounts until the requirement has been met. The Board may restrict or prohibit the making of new investments of any sort by bank, with the exception of purchases of evidences of indebtedness above mentioned.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS POWERS OF THRIFT BANKS 1. accept savings and time deposit 2. open current or checking accounts, provided that the bank has net assets of at least P20,00,000 3. act as correspondent for other financial institutions 4. act as collection agent for government entities, including but not limited to, the BIR, SSS, & the Bureau of customs 5. act as official depository national agencies and municipal, city or provincial funds in the municipality, city or province where the thrift bank is located 6. rediscount paper with the PNB, Land Bank of the Philippines, Development Bank of the Philippines, and other GOCC’s 7. issue mortgage and chattel mortgage certificates, buy and sell them for its own account or for others, or accept and receive them in payment or as amortization of its loan  such mortgage and chattel mortgage certificates shall be issued exclusively in national currency and exclusively for the financing of equipment loans, mortgage loans for the acquisition of machinery and other fixed installations, conservation, enlargement or improvement of productive properties and real estate mortgage loans for (1) the construction, acquisition, expansion or improvement of rural and urban properties; (2) the financing of similar loans and mortgages; and (3) such other purposes as may be authorized by the Monetary Board. 8. purchase, hold and convey real estate 9. engage in quasi-banking and monetary market operations 10. open domestic letters of credit 11. extend credit facilities to private and government employees 12. extend credit against the security of jewelry, precious stones and articles of similar nature Limitations on lending authority  the direct indebtedness to thrift banks of any person, company, corporation, or firm, including the indebtedness of members of a partnership and association, for money borrowed shall in no time exceed 15% of unimpaired capital and surplus of the bank except: a. loans secured by obligation of the Central Bank b. loans fully guaranteed by the government as to payment of principal and interest c. loans to the extent covered by the hold-out on, or assignment of, deposits maintained in the lending bank and held in the Philippines d. other loans or credits as the Monetary Board may specify a non-risk assets 

The total indebtedness may amount to a further 15% of the unimpaired capital and surplus of such bank provide the additional indebtedness is for the purpose of financing subdivision or

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BANKING LAWS housing development, medium and low income borrowers and agriculture on a full secured basis. Investments in allied undertakings  include institutions engaged in the following activities: 1. banking and financing 2. warehousing and other post harvesting activities 3. fertilizer & agricultural chemical & pesticides distribution 4. farm equipment distribution 5. trucking and transportation 6. marketing of agricultural products 7. leasing 8. other undertakings as determined by the Board  Provided: a. that the total investments in equities shall not exceed 25% of the net worth of the thrift bank b. the equity investment in any single enterprise shall be limited to 15% of the net worth of the thrift bank c. the equity investment in any single enterprise shall remain a minority holding in that enterprise d. the equity investment in other banks shall be subject to the same provisions governing similar investments of commercial banks and shall be deducted from the investing bank’s net worth for the purpose of computing of the prescribed ratio as provided in sec.9 hereof (re: combined capital accounts) SUPERVISORY POWERS OF THE MONETARY BOARD OVER THRIFT BANKS a. placing limits to the maximum credit allowed to any individual borrower b. indicating the manner in which technical assistance shall be extended to thrift banks c. imposing a uniform accounting system and manner of keeping the accounts and records of thrift banks d. instituting periodic surveys of loans and lending procedures, audits, test-check of cash and other transactions of the thrift banks SUPERVISORY POWERS OF THE CENTRAL BANK OVER THRIFT BANKS a. to enforce the laws, orders, instructions, rules and regulations promulgated by the Monetary Board applicable to thrift banks b. to require thrift banks, their directors, officers and agents to conduct and manage the affairs of the thrift bank in a lawful and orderly manner c. to appoint a conservator upon proof that the bank or its board of directors or officers are conducting and managing the affairs of the bank in a manner contrary to laws, orders, instructions promulgated by the Monetary Board or in manner substantially prejudicial to the interest of the government, depositors, creditors, or the general public 

The director and examiners of the department of Bangko Sentral charged with the supervision of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS thrift banks are authorized to administer oaths to any director, officer, or employee of any thrift bank or to any voluntary witness and to compel the presentation of al books, documents, papers or records necessary in his or their judgment to ascertain the facts relative to the true conditions of any thrift bank or to any loan. INCENTIVES 1. Reserve requirement imposed in thrift banks by the Monetary Board shall enjoy equitable preferential terms those imposed on commercial banks 2. Thrift banks shall have unrestricted branching right within the region, free from any assessment or surcharges required in setting up a branch, but under the coordination with the Bangko Sentral which will have to assess that there are qualified personnel, control and procedures to operate the branch. 3. A thrift bank may publish its statement of condition in a newspaper of general circulation, or post it in the most conspicuous area of its premises, municipal building, municipal public market, barangay hall and barangay public market, if any, where the bank concerned is located. EXEMPTIONS a. all thrift banks, whether created organized under this Act or in operation as of the date of effectivity of this Act, shall be exempt from payment of all taxes, fees and charges for a period of 5 years, counted from the date of commencement of operations for banks created under this Act and from the date of effectivity of this Act for existing banks b. The foreclosure of mortgage covering loans granted and executions of judgments thereon involving real properties and levied upon by a sheriff shall be exempt from publication requirements where the total amount of the loan, excluding interest due and unpaid, does not exceed P100,000. ** It shall be sufficient publication if the notice of foreclosure and execution of judgment are posted in the conspicuous area of a thrift bank’s premises, municipal building, mun. public market, barangay hall, and barangay public market where the land mortgaged is situated within a period of 60 days immediately preceding the public auction of the execution of judgment. Proof of publication shall be accomplished by an affidavit of the sheriff of the officer conducting the foreclosure sale or execution of judgment. c. Any metropolitan, municipal, or municipal circuit trial court judge in his capacity as notary public ex officio shall administer oath or acknowledge the instrument of any thrift bank and its borrowers or mortgagor free from all charges, fees and documentary stamp tax, collectible under existing laws, relative to any loan or transaction not exceeding P50.00 d. The registration of any instrument, whether voluntary or involuntary to the register of deeds by any thrift bank and its borrowers and mortgagors shall be free from all charges, fees and documentary

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BANKING LAWS stamp tax relaying to loans or transactions in an amount not exceeding P50,000. 

e.

Charges shall be collected, if any, on the amount in excess of P50, 000. Instrument related to assignments of several mortgages consolidated in a single deed, if any, shall be levied only on the amount in excess of P50, 000 of the consideration in the assignment of each mortgage.

Any thrift bank shall be exempt from any ownership ceiling for a period of 10 years from the effectivity of this act.

PROHIBITIONS A fine of not more than P10, 000 or imprisonment for not less than 6 months but not more that 10 years, or both shall be imposed upon: A. Any officer, employee, or agent of a thrift bank who shall: 1. Make false entries in any bank report or statement 2. Without order of a court of competent jurisdiction, disclose any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity. 3. Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan from said bank 4. Overvalue or aid in the overvaluing any security for the purpose of influencing in any way the action of the bank on any loan 5. Appear and sign as guarantor, indorser, or surety for loans granted 6. Violate any provision of this Act B. Any applicant for a loan from, or borrower of a thrift bank who shall: 1. Misuse, misapply or divert the proceeds of the loan obtained by him from its declared purposes 2. Fraudulently overvalue property offered as security for a loan from said bank 3. Give out or furnish false or willful misinterpretation of material facts for the purpose of obtaining, renewing, or increasing a loan extending the period thereof 4. Attempt to defraud the said bank in the event of court action to recover the loan 5. Offer any officer, employee or agent of a thrift bank a gift, fee, commission or other forms of compensation in order to influence such bank personnel into approving a loan application 6. Dispose or encumber the property offered as security for a loan C. Any examiner, or officer or employee of the Bangko Sentral or of any department, bureau, office, branch, or agency of the government who is assigned to examine, supervise, assist or render technical service to thrift banks and who shall connive or aid in the commission of the same

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

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D. Any MeTC, MTC, or MCTC judge or register of deeds who shall demand or accept, directly or indirectly, any gift, fee, commission, or any other from of compensation in connection with the service, or shall arbitrarily and without reasonable cause delay the acknowledgment or administration of oath or the registration of documents – shall be punished with a fine of not more than P1, 000 or imprisonment of not more that 1 year, or both. E. Any bank not organized under this Act and any person, association, or corporation doing business of banking, not authorized under this Act or existing laws which shall use the words “Development Bank,” “Savings Bank,” “Savings and Mortgage Bank,” or Savings and Loan Association,” as part of the name or title of such bank or of such person, assoc., or corp. – shall be punished by a fine of not less than P100, but in no case to exceed P30,000, for each day during which the said words are used.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS  SECRECY OF BANK DEPOSITS LAW RA 1405 All deposits of whatever nature with banks or banking institutions in the Philippines, including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities is covered by this law. Money-market placement is NOT covered, because it is NOT deposited in the bank. Purposes of the law 1. Encourage people to deposit in banking institutions; and 2. Discourage private hoarding so that banks may lend such funds and assist in the economic development of the country Prohibited Acts 1. Examination and inquiry or looking into all deposits, of whatever nature, with the banks in the Philippines including investment in bonds issued by the government. 2. Any disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning the said deposits. GENERAL RULE All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government, its political subdivisions and instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office. EXCEPTIONS: A. RA 1405 1. when the examination is made in the course of a special or general examination of a bank and is specifically authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit; 2. when the examination is made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank; 4. upon written permission of the depositor, or in cases of impeachment; 5. upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases of unexplained wealth under the Anti-graft Law; 6. in cases where the money invested or deposited is the subject matter of the litigation.

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BANKING LAWS It shall be unlawful for any official or employee of a bank to disclose to any person other than those under the exceptions, or for an independent auditor hired by a bank to conduct its regular audit to disclose to any person other than a bank director, official or employee authorized by the bank, any information concerning said deposits.

B. Anti-Graft and Corrupt Practices Act - Upon the order of a competent court or tribunal in cases involving unexplained wealth This law is intended to amend RA 1405 by providing an additional exception to the rule against the disclosure of bank deposits (PNB v Gancayco, September 30, 1965)

C. National Internal Revenue Code - Upon inquiry by the Commissioner of Internal Revenue into the bank deposits of 1. A decedent to determine his gross estate; 2. Any taxpayer who has filed an application for compromise of his tax liability under Sec. 204(A)(2) by reason of financial incapacity to pay his tax liability  He must file a written waiver of his privilege under RA 1405 or other general or special laws and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer D. Anti-Money Laundering Act - Inquiry or examination by the AMLC upon order of any competent court in cases of violation of the AMLA, if there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering offense - Except that no court order shall be required in the following unlawful activities: 1. Kidnapping for ransom under Art. 267, RPC 2. Violations of the Comprehensive Dangerous Act of 2002 3. Hijacking and other violations under RA 6235 4. Destructive arson and murder under RPC, including those perpetrated by terrorists against non-combatant persons and similar targets E. Unclaimed Balances Act - Disclosure to the Treasurer of the Philippines of dormant deposits for at least 10 years IMPORTANT POINTS TO REMEMBER:   

Court cannot order production of bank deposit records of depositor unless exempted. Stockholders cannot inquire as to the existence of bank deposits and how much, of his debtor Writ of garnishment may be issued against debtor’s bank deposits because the inquiry refers only as to WON the debtor had a deposit in the bank concerned. There was really no inquiry as to the outstanding balance.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS

Requisites for In-Camera Inspection of Bank Deposits 1. Pending case before a court of competent jurisdiction 2. Account must be clearly identified 3. The inspection is limited to the subject of the pending litigation 4. The bank personnel and account holder must be notified to be present during the inspection 5. The inspection must cover only the account identified in the pending case 

Investigation by the Office of the Ombudsman is NOT considered pending litigation before any court of competent authority. Such investigation would not warrant the opening of the bank account for inspection.

PENALTIES 1. Imprisonment of not more than 5 years; or 2. A fine of not more than P20,000; or 3. Both, in the discretion of the court

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UNCLAIMED BALANCES LAW

ELEMENTS OF UNCLAIMED BALANCES 1. Include credits or deposits of a. Money b. Bullion c. Security, or d. Other evidence of indebtedness 2. The credit or deposit must be with a bank, building and loan association, or trust corporation; and 3. The credit or deposit is in favor of a person a. Who is known to be dead, or b. Who has not made further deposits or withdrawals during the preceding 10 years or more LEGAL CONSEQUENCE The unclaimed balances may be subject to escheat proceedings, a. after proper publication and b. the depositors still do not lay claim to them 

Demand drafts CANNOT be escheated, but telegraphic notes can be escheated (Republic v FNCB, December 30, 1961)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

ANTI-MONEY LAUNDERING ACT R.A. 9160 Anti-Money Laundering - A crime whereby the proceeds of an unlawful activity are translated thereby making them appear to have originated from legitimate sources. Purposes: 1. integrity & confidentiality of bank accounts shall be protected and preserved 2. Ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity. 3. Philippines shall not extend cooperation in transnational and prosecutions of persons involved in money laundering activities wherever committed. Three stages: 1. Placement/infusion - physical and actual delivery of cash proceeds that originated from an illegal activity such as: a. smuggling of bulk currency b. illegal-sourced money with legitimate deposits c. cash deposits in small denominations d. cash deposits with several banks 2.

Layering - Process of separating the illicit proceeds from their source by creating "layers" of transactions with the end in view of disguising the source and make it appear as insignificant.

3.

Integration - Layered accounts are then re-introduced into the economy under the stamp of legitimacy; through the re-entry into the financial system it would appear that the laundered money is normal or legitimate business funds.

DEFINITIONS  transaction - any act establishing any right or obligation or giving rise to any contractual or legal relationship between the parties; includes any movement or activity concerning funds by any means with a covered institution  proceeds - Amount taken from an unlawful activity; includes material results, profits, effect and any amount realized from any illegal activity. - All monetary, financial or economic means, documents, papers, things or devices used in having or having any relation to any unlawful

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



activity and all moneys, expenditures, payments, disbursements, costs, outlays, charges, accounts for the financing operations and maintenance of any illegal activity. monetary instrument - coins, currency of legal tender in the Philippines, or of any other country - drafts, checks and notes - securities or negotiable instruments, bonds, commercial papers, deposit certificates, trust certificates, custodial receipts or deposit substitute instruments, trading orders, transaction tickets and confirmation of sale or investments and money market instruments client - any person or corporate entity that maintains an account or transacts business with any financial institution on whose behalf an account is maintained or a transaction is conducted, as well as the beneficiary of said transaction. suspicious transaction - one that merits closer examination, in order to verify that it is from a legitimate source such as a. no underlying legal/trade obligation b. client is not properly identified c. amount involved is not commensurate with the business or financial capacity of the client d. client's transaction is structured in order to avoid being the subject of reporting requirements e. circumstance relating to the transaction WHICH IS OBSERVED TO deviate from the profile of the client and/or the client's past transactions with the covered institution f. transaction is in a way related to an unlawful activity under this Act that is about to be, is being or has been committed g. Any transaction that is similar OR ANALOGOUS to any of the foregoing. unlawful activities a. drug trafficking or violation of RA No. 9165 (Comprehensive Dangerous Act of 2002) b. kidnap for ransom c. anti-graft and corrupt practices act d. plunder e. robbery and extortion f. jueteng and masiao ( illegal gambling) g. piracy on the high seas h. qualified theft i. swindling j. smuggling (under RPC and RA Nos. 455 &1937) k. violations of E-commerce Act of 2000 l. hijacking covered institutions - banks, non-banks, quasi-banks, trust entities

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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



- insurance companies - those supervised by SEC threshold - Highest/significant level of deposit or placement an account may reach on a transactional basis. covered transaction - Transaction in cash or other equivalent monetary instrument involving a total amount in excess of P500, 000.00 within one banking day.

1. 2.

3.

ANTI-MONEY LAUNDERING COUNCIL (AMLC) Composition: 1. Governor of Bangko Sentral ng Pilipinas as Chairman 2. Insurance Commissioner 3. Chairman of Security & Exchange Commissioner @AMLC is a collegial body where Chairman & members of AMLC are entitled to one vote each

4.

General Rule: AMLC acts unanimously in discharge of functions Exception: In case of incapacity, absence or disability, any member to discharge his functions, the officer designated shall act in his stead. SECRETARIAT - Headed by Exec. Director,, appointed by AMLC for a term of % years - qualifications: a. member of Phil. Bar b. at least 35 years of age c. of good moral character d. with unquestionable integrity & known probity e. Must have served for at least 5 years in Insurance Commission, SEC or BSP & shall hold full-time permanent position within the BSP. General Rule: Members of AMLC, Executive Director, all members of Secretariat, on detail, on secondment shall not reveal in any manner any information by reason of their office Exception: Under any orders of the court, Congress, or any government offices authorized by law @MEETING: AMLC shall meet every first Monday of the month or as often as may be necessary at the call of Chairman - through modern technologies such as, but not limited to TELECONFERENCING & VIDEOCONFERENING

Functions:

To require and receive covered or suspicious transaction reports from covered institution all covered transactions and suspicious transactions shall be reported to AMLC within 5 working days from occurrence thereof, unless the Supervising Authority prescribes a longer period not exceeding 10 working days. To issue orders addressed to the appropriate supervising authority or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report or request for assistance from a foreign state, or believed by the council, on the basis of substantial evidence, to be in whole or in part, wherever located representing, involving, or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity To institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General - the Revised Penal code shall apply when the court ordered for the seizure of any monetary instrument or property, in whole or in part, directly or indirectly a.

5.

6.

7.

8.

9. @BUDGET: appropriated by Congress - Used to defray operational expenses, including indemnification for LEGAL COST & EXPENSES.

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payment in lieu of forfeiture any particular money cannot, with due diligence, be located b. substantially alleged, destroyed, diminished in value c. concealed, removed to prevent the same from being found d. located outside the Philippines e. place or brought outside the jurisdiction of the court f. Commingled with other monetary instruments or property belonging to either the offender himself or third person. To cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses To investigate suspicious transactions deemed suspicious after an investigation by the AMLC, money laundering activities, and other violations of this Act To apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity - effective immediately upon determination of probable cause - shall be for a period of 20 days unless extended by the court To implement such measures as may be necessary and justified under the law to counteract money laundering To receive and take action in respect to any request from foreign states for assistance in their own antimoney laundering operations - through conventions, resolutions & other directives of any organizations of which Philippines is a member. HOWEVER, AMLC

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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a. b.

may refuse to comply with such request, when: it contravenes provision of Constitution it prejudices national interest of the Philippines

requirements for requests for mutual assistance from foreign sates: a. investigation/prosecution b. grounds c. identity of said person d. covered institution believed to have been any information which may be of assistance to the investigation e. all particulars necessary for the issuance of the order/processes f. other information 10. To develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offender - through nationwide information campaigns - to heighten awareness of the public of their civic duty 11. To enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government including government-owned and controlled corporations in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering offense and prosecution of offenders 12. To impose administrative sanctions for the violation of laws, rules, regulations and orders and resolutions

-

-

Scope of authority of the AMLC to inquire into bank deposits; - inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of the law, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering offense except that no court is needed for cases qualified by the law. Effect when freeze orders are ordered by the AMLC with the passage of RA 9194: - Shall remain in force for a period of 30 days after the affectivity of RA 9194, UNLESS extended by the Court of Appeals. Offenses and their respective penalties: 1.) Crime of money laundering 1. knowledge that any monetary instrument or property represents, involved or relates the proceeds of any unlawful activity, transact or

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2.

-

3.

-

attempts to transact said monetary instrument or property 7-14 years; not less than 3M and not more than twice the value of monetary instrument or property involved in the offense knowledge that any monetary instrument or property involves proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering 4-7 years; not less than 1.5M but not more than 3M Knowledge that any monetary instrument or instrument is required to be disclosed and files with AMLC fails to do so. 6 mos.-4 years; not less than 100,000.00 but not more than 500,000.00, or both.

2.) Failure to keep records - 6 mos -1 year; not less than 100,000.00 but not more than 500,000.00, or both 3.) Failure to report covered transactions - 6 mos-4 years; not less than 100,000.00 but not more than 500,000.00, or both 4.) Malicious reporting - any person who,, with malice, or in bad faith, reports or files a completely unwarranted or false information relative to money laundering transaction against any person - 6 mos-4 years; not less than100,000.00 but not more than 500,000.00 at the discretion of the court, Provided, the offender is not entitled to avail of the benefits of the Probation Law 

if offender is a corporation (who participated in the commission or shall have knowingly permitted or failed to prevent its participation) - penalty shall be imposed upon the responsible officers



if offender is a juridical person - penalty: revocation of license



if offender is an alien - penalty: 6 mos-4 years; not less than 100,000.00 but not more than 500,000.00, at discretion of the court, and Deportation



if offender is a public official/employee - penalty: 6 mos-4 years; not less than 100,000.00 but not more than 500,000.00 AND Perpetual/Temporary Disqualification

5.) Breach of confidentiality - in case of breach of confidentiality that is published or reported by media, the responsible reporter, writer, president

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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-

publisher, manager and editor-in-chief shall be liable 3-8 years; not less than 500,000.00 but not more than 1M

Jurisdiction of Money Laundering cases: RTC - all cases on money laundering Sandiganbayan - acts/omissions by public officers and private persons who are in conspiracy with such public officers

e. f. g.

2. a.

b. Prosecution of money laundering 1. any person maybe charged with & convicted of both the offense of money laundering & unlawful activity 2. any proceeding relating to unlawful activity shall be given precedence over the prosecution of any offense or violation without prejudice to the freezing order & other remedies 3. knowledge of offender that monetary instrument relates to proceeds of unlawful activity shall be established by DIRECT EVIDENCE or inferred from attendant circumstances 4. No case of money laundering may be filed to the prejudice of a candidate for an electoral office during an election period. HOWEVER, this prohibition shall not constitute a bar to the prosecution of any money laundering case filed in court before the election period. 5. AMLC may apply for provisional remedies to prevent monetary instrument or property subject thereof from being removed, concealed, and converted with other organizations where there is conviction for money laundering; the court shall issue judgment of forfeiture in favor of government of Philippines. HOWEVER, no asset shall be forfeited to the prejudice of a candidate for an electoral office during an election period. 6. Restitution for any aggrieved party

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c.

contact numbers beneficial owners, if any verification of the authority and identification of the person purporting to act on behalf of the client Recordkeeping Requirements existing and new accounts - shall be maintained and stored for 5 years from Oct 17, 2001 from the dates of the accounts or transactions whichever is later closed accounts - shall be preserved and safely stored for at least 5 years from the dates when they were closed records in case a money laundering case has been filed in court - Said file must be retained beyond the period stipulated in the two preceding subsections, as the case may be until it is confirmed that case has finally resolved or terminated by the court.

Key Elements in Fighting Money Laundering 1. The criminalization of money laundering 2. Institution of a system of suspicious transactions 3. Relaxing of bank secrecy laws 4. Creation of an anti-money laundering council or task force 5. Institution of procedures for effective international cooperation

Prevention of Money Laundering 1. Customer Identification requirement - the ff. minimum documents shall be obtained for Individual customers: a. name b. present address c. date & place of birth d. nationality e. nature of work and name of employer or nature of self-employment/business f. tax identification number, SSS, GSIS number g. specimen signature h. source of funds i. names of beneficiaries in case of insurance contracts and whenever applicable a. b. c. d.

for Corporate and Juridical entities: articles of incorporation/partnership by-laws list of directors/partners list of principal stockholders owning at least 2% of the capital stock

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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178

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THE PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT (PD 3591 AS AMENDED BY RA 7400)

Purpose of the law The purpose of the law is to create a government-owned entity, the PDIC, that shall insure the deposit liabilities of all banks entitled to the benefits of insurance under the Act. Such insurance is intended to protect depositors from situations that prevent banks from paying out deposits, as in bank failures or closures, ant to encourage people to deposit in banks.

A transferred deposit is a deposit in an insured bank made available to a depositor by the PDIC as payment of the insured deposit of such depositor in a closed bank and assumed by another insured bank. By paying its liabilities to depositors in this manner, the PDIC hopes to persuade these depositors to keep their savings in banks where such funds could be lent out, rather than hoarded and kept out of the banking system. Deposit liabilities required to be insured with the PDIC (Sec. 4) The deposit liabilities of any bank engaged in the business receiving deposits are required to be insured with the PDIC.

Composition of governing board a. The Secretary of Finance who shall be the ex officio chairman of the board without compensation. b. The Government of the Central Bank, who shall be the ex officio member of the board without compensation. c. The president of the corporation, who shall be appointed by the President of the Philippines from either the Government or Private sector to serve on a full-time basis for a term of 6 years. The President shall also serve vice chairman of the board. d. The members from the private sector, to be appointed for a term of 6 years without reappointment from the President of the Philippines: Provided, that of those first appointed, the first appointee shall serve a period of 2 years. Deposit The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by passbook check, and/or certificate of deposit, printed or issued in accordance with Central Bank Rules and Regulations and other applicable laws, together with such other obligations of a bank, which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the bank: Provided, That any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall no be a deposit for any of the purposes of this Act or included as part of the total deposits or insured deposit: Provided, Further, That, subject to the approval of the Board of Directors, any insured bank which is incorporated the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch.

When the PDIC becomes liable to pay the insured deposits (Sec. 10[c]) The PDIC becomes liable to pay the insured deposits in a bank when the is closed by the Monetary Board of the Bangko Sentral ng Pilipinas, that is, prohibited from doing further business in the Philippines, on account of insolvency and other grounds under the law. Extent of the PDIC’s liability to a bank depositor (Sec. 3[g] The PDIC’s liability is up to P100,000 per depositor/ per capacity. Liability of the PDIC On a per bank basis. When an insured bank is closed on account of insolvency how will payment of the insured deposits in such bank be made BY the PDIC? (Sec. 10[c])  The PDIC shall pay either in cash or by making available to each depositor a transferred deposit in another insured bank in an amount equal to the insured deposit of such depositor. If a depositor has several accounts with the bank, how will the liability of the PDIC to him be calculated? (Sec. 3[g])  The liability of the PDIC will be calculated by adding together all deposits in the bank maintained by the depositor in the same capacity and the same right for his benefit either in his own name in the name of others. Effect of payment to the depositor of his insured deposit Payment to the depositor of his insured deposit (1) discharges the PDIC from any further liability to the depositor, and (2) subrogates the PDIC to all the rights of the depositor against the closed bank to the extent of such payment.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Notice requirement imposed by the Act on banks (Sec. 16[a]) Every insured bank is required by the Act to display at each place of business maintained by the bank a sign or signs stating that its deposits are insured by the PDIC. A similar statement shall be included by the bank in its advertisements. 

PDIC vs. CA, December 22, 1997 - The PDIC was created by law and as such, is governed primarily by the provisions of the special by the provisions of the special law creating it. The liability of the PDIC for insured deposits therefore is statutory and, under RA 3591, such liability rests upon the existence of deposits with the insured bank, not on the negotiability or non-negotiability of the certificates evidencing these deposits. - In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. A deposit, as defined in section 3(f) of RA 3591, may be constituted only if money or the equivalent of money is received by a bank. 

Trust funds deposited with an insured bank and bearer time deposit certificates with no registered payee are excluded from the insurance coverage



PDIC can stop insurance coverage if assessments against the insured bank are not paid in 30 days after notice

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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PHILIPPINE DEPOSIT INSURANCE CORP. CHARTER AMENDMENTS

Notes compiled by ATTY. MARIA LULU G. REYES College of Law Saint Louis University

SUMMARY OF CHANGES   

Enhancements and refinements to powers of the corporation New safeguards for PDIC personnel New sanctions and penalties

ENHANCEMENTS & REFINEMENT TO THE POWERS OF THE CORPORATION The Basic Policy of PDIC “The Corporation shall … promote and safeguard the interest of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits.” (Sec. 1, second par.) Mandate of PDIC  Insure Bank deposits  Receiver / liquidator of closed banks

As deposit insurer (Sec.4 (g)) 

“Insured deposit” means the amount due to any depositor for deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed P250, 000. (Sec.4( g))



A joint account is insured separately from any individually – owned deposit account, regardless “and,” “or” or “and / or” is used.



Additional provisions on joint accounts  Insured amount of deposit is divided to as many equal shares as there are individuals unless stipulated otherwise in the deposit document.  All deposits in joint accounts of a depositor are added together, but the sum of his / her insured deposit in all joint accounts should not exceed P250,000

Computation of Max. Deposit Insurance Cover (MDIC) Example 1: Jose, no outstanding loan (amounts in thousand pesos)

1. Jose Individual 2. Jose Joint Accounts 2.1 Jose and / or Pilar 2.2 Jose and Pilar 2.3 Jose or Anita Total Total Insured deposit Total Uninsured Deposit

Deposit Balance

Dep. Share

300

300

250

Jose 250

Pilar n/a

Anita n/a

250 400 300

125 200 150

250 250 250

125 125 125

125 125 0

0 0 125

625 500 275

250 250 75

125 125 25

1,250 875 375

Max Insurance Cover

Share in max. Insurance cover

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Jose’s total share is 625 but his maximum insurance cover is only 500. The 125 in excess of 500 is part of his uninsured deposit Summary

Total Deposit Share 775 325 150 ______ 1,250

Jose Pilar Anita Total

Share in Insurance Cover 625 250 125

Insured Depositor

Uninsured Deposit

500 250 125 _____ 875

275 75 25 ______ 375

Depositors with outstanding loans  Outstanding loans, whether matured or unmatured, are netted out from total outstanding deposits, not from the insured portion of the deposit.  If the depositor is a co-owner of a joint account, his / her insured deposit is determined by deducting the outstanding loan from his / her share of the joint account. His / he5r loan obligation is not deducted from the share of co-owner.

Example 2: Jose &/ or Pilar (with outstanding loan) Deposit – P400, 000 Outstanding Loan: Jose – P50, 000 (unmatured); Pilar – P150, 000 (matured)

Jose Pilar Total

Deposit Share (A)

O/S Loan (B)

Net (C=A-B)

200 200 400

50 150 200

150 50 200

Max Insurance Cover (D) 125 125 250

Insured Deposit (E)

Uninsured Deposit (F)

125 50 175

25 25

Depositors with loan secured by hold – out  If a loan is secured by a hold-out on a joint ‘and / or” account, the loan balance is netted out from the entire account, regardless of who among the owners of the joint account is the borrower.  If a loan is secured by a hold-out on a joint “and” account, the loan balance is netted out from the share of the borrower, unless the other owner (s) consented to the hold-out agreement.

Example 3a: Jose &/ or Pilar. Deposit of P400, 000; Jose and Pilar signed the hold-out agreement for a loan of P150, 000 Acct. Balance (A)

O/S Loan (B)

Net (C=A-B)

400

150

250

Jose Pilar Total

400

150

250

Deposit Share (D) 125

Max Cover (E) 125

Insured Deposit (E) 125

Uninsured Deposit (F) -

125

125

125

-

250

250

250

-

Example 3b: Jose &/ or Pilar. Deposit of P400, 000; Jose w/ outstanding loan of P150, 000 secured by hold-out, only Jose is signatory to hold out agreement Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Acct. Balance (A)

Deposit Share

O/S Loan (B)

Net (C=A-B)

Max Cover (E) 125

Insured Deposit (E) 50

Uninsured Deposit (F) -

400

200 200

150 0

50 200

125

125

75

400

250

250

250

175

75

Jose Pilar Total

 

400

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PDIC cannot terminate the insured status of any bank which continues to operate or received deposits. If any insured bank fails or refuses to pay any assessment the remedies are:  An action for collection before the appropriate court  Administrative sanctions against responsible bank officials

As Receiver / Liquidator Of Closed banks   

PDIC is the statutory receiver of all closed banks. (Sec. 8-ninth, PDIC Charter; Sec. 30, R.A. 7653) Monetary Board shall give prior notice to PDIC of its appointment as receiver of closed bank. (Sec. 10 (a)) As receiver, it shall have full control, management and administration of the affairs of the closed bank. (Sec.10 (b))

  

The Authority of PDIC Examine insured banks Investigate frauds, irregularities and anomalies Provide financial assistance to distressed banks

Examine insured banks (Sec.8)  

Examinations conducted with prior approval of monetary board No examination can be conducted within 12 months from last examination date

Investigate frauds, Irregularities and anomalies  



The Board shall appoint investigators who shall have the power to conduct investigations on frauds, irregularities and anomalies committed in banks (Sec. 9 (b-1)) Bases—  Reports of examination conducted by PDIC and / or BSP  Complaints from depositors or from other government agency (Sec. 9(b-1)) Power of the investigators  Administer oaths  Examine, take and preserve the testimony of any person relating to the subject of investigation (Sec. 9 (b-1))

Financial Assistance (Sec.17 (c)) Condition: When the grant of the assistance is less expensive than actual payoff and liquidation of the bank Exception: When the MB has determined that there are systemic consequences of a probable failure or closure of an insured bank. Definition of systemic risk: Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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 The possibility that failure of one bank to settle net transactions with other banks will trigger a chain reaction leading to a shutdown of banking activity,  Likelihood of sudden unexpected collapse of confidence in a significant portion of the banking or financial system with potential real economic effects

Live banks Modes:  Make loans  Purchase of assets  Assume liabilities  Make deposits Criteria:  Essential to provide adequate banking service in the community; or  Maintain financial stability

Closed banks Modes:  Assume liabilities  Purchase assets Criteria:  Vital to the interest of the community; or  A severe financial climate exists which threatens the stability of a number of banks possessing significant resources.  Approval: - reopening and resumption of operations approved by MB

Recipient of Financial assistance:  banks in danger of closing  a corporation—  acquiring control of a bank in danger of closing  consolidating with or acquiring the assets of insured bank in danger of closing 

Assistance to an insured bank may take the form of –  Loans  Purchase of assets  Assumption of liabilities  Making deposits  With concurrence of Monetary Board, equity or quasi-equity infusion

SAFEGUARD FOR PDIC PERSONNEL

Legal Assistance      

PDIC shall underwrite or advance litigation costs and expenses in connection with any civil, criminal or administrative action or proceeding involving PDIC personnel. Such PDIC personnel are made a party to the action or proceeding by reason of or in connection with exercise of authority or performance of functions or duties. (Sec 9 (f)) Personnel separated from service shall continue to be provided with legal protection in connection with any act done or omitted by them in good faith during their tenure/employment. In the event of compromise/settlement, the personnel to be indemnified are those identified not to have committed any negligence or misconduct. PDIC to advance litigation expenses upon receipt of an undertaking by the PDIC personnel to repay the amount advanced should it determined by the Board that he is not entitled to be indemnified. (Sec.9(g)) Assistance includes grant or advance of legal fees to enable concerned PDIC personnel to engage a counsel of his choice.(Sec.9(h))

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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SANCTION AND PENALTIES Punishable acts  

Willful refusal to submit reports (Sec. 21(f)1) Unjustified refusal to permit examination and audit of deposit record or affairs of institution (Sec.21(f)2)



Willful making of false statement or entry in bank report or document required by PDIC (Sec 21 (f)3)



Submission of false material information in relation to financial assistance extended to the bank (Sec 21 (f)4)



Splitting deposits or creation of fictitious loans or deposit accounts (Sec 21(f)5)



Refusal to allow PDIC to take over, or obstructing the takeover of a closed bank placed under its receivership (Sec 21 (f)6)



Refusal to turn over or destroying or tampering bank records (sec21(f)7)



Fraudulent disposal, transfer or concealment of any asset, property or liability of a closed bank (Sec21 (f)8)



Violation of or causing any person to violate the exemption from garnishment, levy, attachment or execution (sec21(f))



Willful failure or refusal to comply with or violation of the provisions of R.A. 3591, commission of any other irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Board (Sec.21(f)10) Criminal Penalties

  

Imprisonment of prision mayor or Fine of not less than P50,000 but not more than P2 million Or both at the discretion of the court (Sec.21 f)



Injunctions No court except the Court of Appeals shall issue a TRO, Preliminary injunction, or preliminary mandatory injunction against the PDIC.



Any injunction issued in violation of this provision is void & without force and effect; judge who issued the same shall be suspended for at least 60 days without pay. (Sec.22)



Supreme Court may issue a restraining order or injunction on matters of extreme urgency involving a constitutional issue, such that unless a TRO is issued, grave injustice and irreparable injury will arise.



Party applying for the TRO or injunction shall post a bond in an amount to be fixed by the Supreme Court

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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BANK RECEIVERSHIP AND LIQUIDATION Notes compiled by: ATTY. MARIA LULU G. REYES College of Law Saint Louis University

The placement of a bank under conservatorship is not a precondition to its placement under receivership. (Sec. 30, R.A.7653) RECEIVERSHIP 

Options of Monetary Board over Distressed bank  Order the placement of bank under conservatorship (Sec 29, RA 7653)  Order the placement of bank under receivership (Sec. 30, RA 7653)

CONSERVATORSHIP  Ground: The bank or a quasi-bank is in a state of continuing inability or willingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. (Sec. 29, R.A. 7653) 



Who may be appointed as conservator? Any person who is competent and knowledgeable in bank operations and management. A person connected with BSP may be appointed as conservator. (Sec. 29,RA 7653) Period of conservatorship--Should not exceed 1 year. (Sec. 29, R.A.7653)

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Grounds – 1. When the bank is unable to pay its liabilities as they become due in the ordinary course of business. This shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community. 2.

The bank has insufficient realizable assets to meet its liabilities.

3.

The bank continue in business without involving probable losses to its depositors or creditors.

4.

The bank has willfully violated a cease and desist order under section 37 involving acts or transactions which amount to fraud or a dissipation of the assets of the institution. (Sec. 30, R.A.7653)

Summary nature of bank closure If the grounds enumerated under Section 30 0f RA 7653 are present, the Monetary board may summarily and without prior hearing forbid the bank from doing business and designate PDIC as the bank’s receiver. (Sec. 30, R.A.7653) Is there a violation of due process if a bank is ordered closed without prior hearing?

Powers of conservator The Monetary Board shall grant to the conservator; as it may deem necessary, the following powers:     

to take charge of the assets, liabilities, and the management of the bank; reorganize the management; collect all monies and debts due said institution; Exercise all powers necessary to restore its viability. (Sec. 29,R.A. 7653) The conservator shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. (Sec. 29, R.A.7653)

None. Prior hearing is not required before a bank can be ordered closed and placed under receivership. (Rural bank of Buhi, Inc. v. CA, 162 SCRA 288, 302; CB vs. Triumph Savings Bank, March 30, 1993) Rationale of receivership 

“One can just imagine the dire consequences of a prior hearing; bank runs would be the order of the day, resulting in panic and hysteria. In the process, fortunes may be wiped out and disillusionment will run gamut of the entire banking community.” (Buhi, ibid)

Termination of Conservatorship  When MB is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. (Sec. 29, R.A.7653)  When MB determines that the continuance in business of the bank would involve probable loss to its depositors or creditors. In which case, bank will be placed under receivership. (Sec. 29, R.A.7653)

The mere filing of a case for receivership can trigger a bank run.



A hearing may be done subsequent to the closure. “Close now hear later.” (Ibid.)

Exercise of Police Power 

Closure of a bank is an exercise of police power of the State. (CB v. CA, G.R. No. 88353, May 8, 1992; CB v. CA, G.R. No. L-50031-32, July 27,1981)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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The exercise may be the subject of judicial review.(Ibid.)

 

Remedy of aggrieved bank owners Petition for certiorari to be filled by the stockholders of record representing the majority of the capital stock within (10) days from receipt by the board of directors of the bank of the order directing receivership. (Sec. 30, R.A.7653)

  

Rationale why only stockholders are allowed to question order of receivership  



 

To ensure that the order of MB is not frustrated or defeated by the incumbent BOD or officers who may immediately resort to court action to prevent its implementation or enforcement/ It is presumed that such a resolution is directed principally against acts of said BOD and officers which placed the bank in a state of continuing inability to maintain a condition of liquidity adequate to protect the interest of depositors and creditors. Intended to protect and safeguard the rights and interests of the stockholders. The authority to decide on whether to contest the resolution should be lodged with the stockholders owning a majority of the shares for they are expected to be more objective in determining whether the resolution is plainly arbitrary and issued in bad faith. (Central Bank vs. CA, May 8, 1992; Central Bank vs. Triumph Savings, March 30,1993)

Period of Receivership Maximum of ninety (90) days from take over . (Sec. 30, R.A.7653) Effect of placing a bank under receivership The bank is prohibited from doing business. . (Sec. 30, R.A.7653) Concept of “doing business” “… a continuity of commercial dealings and arrangements, and contemplates to that, extent, the performance of acts or words or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization.” (Provident Savings Bank vs. CP, may 17, 1993) “… bank would not be able to do new business,i.e., to grant new loans or to accept new deposits.” (Provident Savings Bank vs. CP, may 17, 1993) Effects of receivership 

‘Receivership is equivalent to an injunction to restrain the bank officers from intermeddling with the property of the bank in any way.” (Villanueva vs. CA, 244 SCRA 396)

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

 

articles of Incorporation/By-Laws of bank are suspended. (Sec.10[b], RA 3591, as amended) the powers, function and duties, as well as all allowances, remunerations and perquisites of the directors, officers and stockholders are suspended. (Sec.10[b],Ibid) Bank retains judicial personality. (Manalo vs. PAIC, Oct. 8, 2001) The only limitation is that the bank can sue and be sued only through its receiver. (Supra.) The assets of the bank are considered under custodia legis. (Sec.30,RA7653; Sec. 10 (b) R.A. 3591, as amended) Assets of the bank are exempt from any order of garnishment, levy, attachment, or execution. (Ibid.) A judge, officer of the court or any person who shall cause the issuance or implementation of writ of garnishment, levy, attachment or execution shall be criminally and/or administratively liable under Sec21, (f) (9) of RA 3591, as amended. Stay of execution against the assets of bank. (Lipana vs. DBR, Sept. 24,1987) Central Bank vs. Morfe (March 12, 1975) Trust Fund doctrine—“ The assets are held in trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference of another by an attachment, execution or otherwise.”

Rationale for stay of execution  Execution would unduly deplete the assets of the bank to the obvious prejudice of another depositors and creditors, including depositors. (Lipana, supra.)  One of the reasons of placing a bank under receivership is to prevent creditors from having advantage over the assets of the bank. (Lipana, supra.) Duties/responsibilities of Receiver 

Immediately gather and take charge of all the assets and liabilities of the bank, administer the same for the benefit of its creditors.(Sec30,RA 7653)  Exercise the general the general powers of a receiver under the Rules of Court (Ibid)  Determine if the bank could be rehabilitated and permitted to resume business.(Ibid)  Bring suits to enforce liabilities to or recoveries of the closed bank. (Sec.10 [c] [1],RA 3591, as amended)  Appoint and hire persons or entities of recognized competence in banking or finance as its deputies and assistants. (Sec.10 [c] [2]2, ibid)  Suspend or terminate the employment of officers and employees of the bank (Sec.10 [e] [3], ibid.)  Collect loans and other claims of the closed bank. For this purpose, receiver may modify, compromise or restructure the terms and conditions of such loans or claims as may be deemed advantageous to the interest of the creditors and claimants of the closed bank.(Sec.10 [c] [5]),supra)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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



Hire or retain private counsel as may be necessary. (Sec. 10 [c] [6], supra) Borrow or obtain a loan, or mortgage, pledge or encumber any asset of the closed bank, when necessary to preserve or prevent dissipation of the assets, or to redeem foreclosed assets of the closed bank, or to minimize losses to the depositors and creditors. (Sec.10 [c] [7],supra) If the stipulated interest on deposit is unusually high compared with the prevailing applicable interest rate, the Receiver may exercise such powers which may include a reduction of interest rate to a reasonable rate: Provided, that any modification or reduction shall apply only to unpaid interest.(Sec 10 [c] [8]), supra) Exercise such other powers as are inherent and necessary for the effective discharge of the duties of PDIC as receiver.(Sec.10 [c] [9])

Prohibitions during receivership period - Receiver shall not pay or commit any act that will involve the transfer of any assets of the bank. (Sec.30,RA 7653) - Exceptions:  Payment of administrative expenditures (Sec.30,ibid)  Assets of bank may be placed in non-speculative investments. (Sec.30,ibid)  Payment of accrued utilities, rentals and salaries of personnel of the closed bank, for a period not exceeding three (3) months, from the available funds of the closed bank. (Sec.10 [c] [4], RA 3591, as amended)

LIQUIDATION Filing of Petition for Assistance in the Liquidation (PAL) The receiver is mandated to file an ex parte Petition for Assistance in the Liquidation (PAL) of closed bank in the proper RTC pursuant to a liquidation plan adopted by PDIC. . (Sec.30,RA 7653) Giving due course to PAL When the proper RTC gives due course to the PAL, it is constituted as the Liquidation Court (LC) of the closed bank. . (Sec.30,RA 7653) Jurisdiction of Liquidation Court (LC)  







Possible Outcome of Receivership  Receiver may determine that the bank could be rehabilitated. . (Sec.30,RA 7653)

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The court shall adjudicate disputed claims against the closed bank. The court shall assist in the enforcement of individual liabilities of the stockholders, directors and officers of the bank. The court shall decide on issues as may be material in the implementation of the liquidation plan adopted. . (Sec.30,RA 7653) The Liquidation Court has exclusive jurisdiction over “disputed claims” against the closed bank. (Star Forwarders, Inc. v. Navarro, 191 SCRA 403;Hernandez vs. RB Lucena, January 10,1978) The exclusive jurisdiction of the liquidation court pertains only to the adjudication of claims against the bank. It does not cover the reverse situation where it is the bank which files a claim against another person or entity. (Domingo Manalo vs. PAIC Savings and Mortgage Bank, Oct.8,2001)

What if it is determined that the bank cannot be rehabilitated?

Rationale  The judicial liquidation is intended to prevent multiplicity of action against the insolvent bank.  The lawmaking body contemplated that for convenience only one court, if possible, should pass upon the claims against the insolvent bank and that the liquidation court should assist the liquidator and control his operations. (Hernandez,ibid.)



Concept of “disputed claim”

 Receiver may determine that the bank could not be rehabilitated. . (Sec.30,RA 7653)

 

Receiver shall notify the Monetary Board of its findings. The Monetary Board shall order the liquidation of the bank The Monetary Board shall appoint PDIC as liquidator of the bank. . (Sec.30,RA 7653)



“Disputed claims” refer to all claims, whether they be against the assets of the insolvent bank, for specific performance, breach of contract, damages, or whatever. (Ong vs. CA, Feb.1,1996)



“To limit the jurisdiction of the Liquidation Court against the assets of the bank is to remove significantly and without basis the cases that may be brought against a bank in case of insolvency.”(Ibid.)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Nature of Liquidation Proceedings   

The PAL is in the nature of a special proceeding. It resembles a proceeding for settlement of estate of deceased person. Multiple Appeal is allowed; period to file notice of appeal is 30 days; record of appeal is required to perfect appeal. (PaBCEO vs. CA, March 20,1995)

the receivership/liquidation; other additional expenses caused thereby. (Sec.31, R.A.7653) Liquidating Dividends 

Distribution of assets to the creditors shall be under order of the duly constituted liquidation court and in accordance with the rules on concurrence and preference of credits under the Civil Code. (Sec.31, R.A.7653)



Payment of insured deposit by PDIC partake of the nature of public finds; are considered preferred credit similar to taxes due to the National Government in the order of preference under Art. 2244 of the Civil Code. (Sec. 15, PDIC Charter)

Filing of claims by creditors All disputed claims must be filed with the LC. Approval/disapproval of Claims   

 

The disputed claims may be approved or disapproved by the LC All approved claims will be classified as to their legal preference. (PaBCEO vs. CA,ibid.) “A liquidation proceeding is a single proceeding which consists of a number of cases properly classified as claims.” . (PaBCEO vs. CA,ibid.) Although the claims are litigated in the same proceeding, the treatment is individual. Each claim is heard separately. And, the Order issued relative to a particular claim applies only to said claim, leaving the other claims unaffected, as each claim is considered separate and distinct from the others.” . (PaBCEO vs. CA,ibid.)

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Republic vs. Peralta [G.R. No. L- 56568. May 20,1987.] 



“ It is thus important to begin by outlining the scheme constituted by the provisions of the Civil Code on this subject. Those provisions may be seen to classify credits against a particular insolvent into three general categories, namely: a) Special preferred credits listed in Articles 2241 and 2242, b) Ordinary preferred credits listed in Article 2244; and c) Common credits under Article 2245.”

Preparation of Project of Distribution (POD) Specially Preferred credits (Art.2241 & 2242, CC) 







The Liquidator is mandated to prepare a Project of Distribution (POD) of the Assets of the bank among its creditors. - The POD specifies in detail the assets available for distribution to creditors whose claims were earlier allowed. (Pacific Bank v. PaBCEO) The payment shall be in accordance with the rules on concurrence and preference of credits as provided under the Civil Code. (Sec.31, RA 7653) Rule on concurrence and preference of credit applicable only if the assets of the bank are not enough to pay all creditors. Trust funds are excluded from distributable assets of a closed bank. “Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings.” (Art. 2240, Civil Code)





  

Ordinary Preferred Credits, Article 2244 CC 

Receivership and Liquidation Fees and Expenses  



Payment shall be made prior to the distribution of the assets. Aside from the cost of the liquidation proceedings, liquidator is allowed to periodically charge reasonable fees and expenses. (Sec.31, R.A. 7653; Sec. 12, PDIC Charter) Shall include: salaries of such personnel whose employment is rendered necessary in discharge of

These credits constituted liens or encumbrances on the specific movable or immovable property to which they relate. Considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. (Art. 2243,CC) Art.2241 and 2242 jointly with Arts. 2246 to 2249 establish a two-tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. All other special preferred credits stand on the same second tier to be satisfies, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate.



Art. 2244 creates no liens on determinate property which follow such property. What Article 2244 creates are simply rights in favor f certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority. Only in respect of the insolvent’s “free property” is an order of priority established by Article 2244.

Central Bank vs. Morfe (March 12,1975) “Judgment for payment of time deposit rendered after the declaration of insolvency, but prior to the institution

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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of the liquidation proceedings, are not considered preferred credits within the meaning of Art. 2244 of Civil Code. Rationale of Morfe ruling: A general depositor of a bank is merely a general creditor, and, as such, is not entitled to any preference or priority over other general creditors.

surplus dividends at the legal rate of interest from date of takeover to date of distribution, to creditors and claimants of the closed bank in accordance with legal priority before distribution to the shareholders of the closed bank” (Section 12 par. 2, PDIC Charter) Filing of Motion for Approval of POD with the LC 

 The effect of a judgment obtained against it by a creditor is only to fix the amount of debt. A creditor can be acquire no lien which will give any preference or advantage over other general creditors.



Surplus dividends If the assets of the bank are more than enough to pay its liabilities, the creditors are entitled to surplus dividends. Nature of Surplus Dividends  Interest in the form of damages or as compensation for withholding of money. (3 Michie on Banks and Banking, supra, p.531, citing Cooper vs, Parsons, 148 F. 2d 21, aff’g Parsons vs. Barry, 59 F, Supp. 221.)

The POD shall be presented to the LC, through a motion for its approval. “The second phase [of the liquidation proceedings] involves the approval by the Court of the distribution plan prepared by the duly appointed liquidator. The distribution plan specifies in detail the total amount available for distribution to creditors whose claim were earlier allowed. The Order finally disposes of the issue of how much property is available for disposal. Moreover, it ushers in the final phase of the liquidation proceeding--- payment of all allowed claims in accordance with the order of legal priority and the approved distribution plan.” (PaBCEO vs. CA, ibid.) The motion for approval of POD shall be submitted for approval by the LC.

Payment of Claims in accordance to the POD Upon approval of the POD by the LC, the liquidator shall pay the creditors of the bank.

Surplus Dividends Prior to PDIC Charter Amendments

After PDIC Charter Amendments

Legal basis: Foreign Authorities Section 12, PDIC Charter Distribution: According to legal Pro Rata preference Rate: Legal Rate Legal Rate Period of computation: From date of closure to date the claims were approved by the LC. From date of takeover to In case of disputed claims, date of distribution surplus shall be computed from the time it was allowed by LC.

Termination of Liquidation Proceedings 









The approval by the LC of the Final POD paves the way to the termination of the liquidation proceedings. Upon approval of the Final POD, the Liquidator shall hold as trustee the liquidating and/or surplus dividends Creditors shall have a period of three (3) years from date of last notice within which to claim payment therefore. After the lapse of the 3-year period, unclaimed payments shall be escheated to the Republic of the Philippines in accordance with Rule 91 of the Rules of Court. In the absence of any controversy, the liquidator will dispose pertinent bank records in accordance with the applicable laws, rules and regulations after a period of one (1) year from approval of the motion.

 “The surplus after paying all debts belongs to the stockholders and should be ratable divided among them. In determining whether there is surplus it has been held that creditors, although their principal has been returned in full, are entitled to interest thereon at the legal rate from the date the bank closed, or from the date of filing their claims, before any distribution can be made to stockholders.” (9 C.J.S. Banks and Banking & 550)  “After the payment of all liabilities and claims against the closed bank, the Corporation shall pay any Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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INSURANCE CODE PD 1460

5.

LAWS GOVERNING THE INSURANCE CONTRACTS 1. 2.

3.

4.

Insurance Code of 1978 (PD No. 1460), which superseded PD No. 612 as amended and special laws. Civil Code a) Article 739 and 2012 on void donations b) Article 2011 applicability of the Civil Code c) Articles 2021-2027 Life annuity Contracts d) Article 2186 Compulsory Motor Vehicle Liability Insurance e) Article 2207- insurer’s right of subrogation Special laws- Article 2011 of the Civil Code a) Insurance Code of 1978 PD1460 b) The Revised Government Service Insurance Act of 1977 PD No. 1146 with respect to the insurance of Government employees. c) Social security act of 1954 RA No. 1161 with respect to insurance of employees in private employment. d) Code of CommercE Others a) RA No. 656 as amended by PD No.245-Property Insurance Law b) RA No. 4898 as amended by RA No. 5756 providing life, disability and accident insurance coverage to barangay officials. c) Executive Order No. 250 (July 25, 1987) increase, integrates and rationalizes the insurance benefits of barangay officials under RA No. 4898 and members of the Sanggunian under PD No. 1147 d) RA No. 3591 as amended-establish the Philippine Deposit Insurance Corporation which insures the deposits of all banks which are entitled to the benefits of insurance under this act

Officer in charge with the implementation of laws of the Insurance Code The officer-in-charge is the Insurance Commissioner of the Insurance Commission Administrative functions of the Insurance Commissioner The Commissioner has the following functions: A. Administrative function (CRISPFe) 1. To issue Certificate of authority to qualified insurers 2. To Regulate the sale and issuance of variable contracts, to license persons selling them and to issue rules and regulations governing the same 3. To Issue rulings, instructions circulars, orders and decisions for the enforcement of the provisions of the code subject to approval of the Secretary of Finance. 4. To stop the operation of an insolvent insurance company and determine within 30

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6.

days whether to rehabilitate or liquidate the company. To impose appropriate fines and Penalties on insurance companies and on their officers and agents for refusal to comply with any order, instruction… of the Commissioner , or for mismanagement To see that all insurance laws are Faithfully executed

7. B. Adjudicative function (Jurisdiction) The Commissioner has the power to adjudicate claims and complaints for amounts not exceeding P100k per claim involving: 1. Loss, damage or liability of insurer under any policy or insurance contract 2. Liability of a reinsurer 3. Liability under the contract of suretyship 4. Liability of a mutual benefit association to its members 5. Counterclaims against the insured 6. Cross-claims against a co-party 7. Third party claims by the insurer against another party.  This authority is concurrent with the courts, but filing of the complaint with the Commissioner shall preclude the civil courts from taking cognizance.  The final order or decision of the Commissioner shall have the force and effect of a judgment, and may be appealed to the Court of Appeals within 15 days from notice of the award judgment, or of denial of motion for reconsideration or new trial.  The decision may be subject of a writ of execution  Claims in excess of P100k – RTC  Cause of action commences from the time of the denial of his claim by the insurer, express or implied (Sun vs. CA 195 SCRA 193) Contract of Insurance - an agreement - whereby one undertakes for a consideration to indemnify another - against (1) loss, (2) damage or (3) liability - arising from an (1) unknown or (2) contingent event. "Doing an insurance business" or "transacting an insurance business" shall include (RISO) (a) doing any kind of business, including a Reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (b) making or proposing to make, as insurer, any Insurance contract; (c) making or proposing to make, as surety, any contract of Suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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(d) Others - doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.  The fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. 3

2

Characteristics of an Insurance Contract (C UVAP ) 1. Consensual – perfected by the meeting of minds 2. Conditional – subject to conditions – happening of the event insured against and/or other conditions like payment of premium 3. Contract of Indemnity – promise of insurer to make good a loss 4. Unilateral – impose legal duties only on the insurer who promises to indemnify in case of loss 5. Voluntary – willingness of the parties  Under the Motor Vehicle Insurance, Third Party Liability Insurance is mandatory for vehicle registration 6. Aleatory – depends on some contingent event 7. Personal – it binds only the parties to it and their assignees  Exception: When there is a Stipulations pour autrui or a provision in favor of a third person not a party to the contract. Under this doctrine, a third person is allowed to avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and deliberately conferred a favor upon such person 8. Contract of perfect good faith for both parties (uberrimae fidei) 9. It is not a wagering contract- the insurer does not insure the happening or non-happening of an unknown or contingent event. 10. It is a risk contributing device- to persons similarly situated covering the same risk. 11. It is a contract of adhesion-interpreted strictly against the maker of the contract.

2.

3.

4.

Insured subject to loss through the destruction or impairment of that interest by the happening of designated perils Insurer assumes the risk of loss -Such assumption is part of a general scheme to distribute actual losses among a large group of persons bearing somewhat similar risk Payment of premium – ratable contribution to a general insurance fund as consideration to the insurer’s promise

Requisites of contract of Insurance 1. Subject matter in which the Insured has an insurable interest 2. Peril Insured against – contingent or unknown event, past or future and a duration for the risk thereof 3. A promise to damnify in a fixed or ascertainable amount 4. Payment of premium 5. Meeting of minds of the parties Note: No policy of insurance shall be issued or delivered unless in the form previously approved by the Insurance Commissioner. What may be insured against 1. A Future Contingent Event resulting in loss or damages e.g. destruction of a building from fire in Fire Insurance or the death of the insured in a Life Insurance policy Note that the word “Loss” embraces injury or damage. A loss may be partial or total 2. A Past Unknown Event resulting in loss or damage This is best exemplified in a Marine Insurance where at the time the policy is executed, the vessel subject of the insurance may have already sunk, but that fact was unknown to the parties at the time of the execution of the policy 3. Contingent Liability This is best illustrated in Reinsurance where the liability of the insurer is in turn insured by him with a second insurer. 

Classes of Insurance 1. Life Insurance 2. Non-life Insurance a. Fire Insurance b. Marine Insurance c. Casualty Insurance d. Suretyship Elements of Contract of Insurance 1. Insurable interest of the insured – interest of some kind susceptible of pecuniary or monetary estimation

Drawing of any lottery, or for/against any chance or ticket in a lottery drawing a prize may not be insured. A contract of insurance is a contract of indemnity and not a wagering or gambling contract

Parties to an Insurance Contract 1. Insurer 2. The Insured 3. Beneficiary INSURER - is the person, natural or juridical, who holds a certificate of authority from the Insurance

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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-

-

Commissioner and who undertakes to indemnify another by a contract of insurance Banks cannot be insurers Paid-up capital requirement for insurance companies o P2M and a contributed surplus of o P1M for life insurance o P500k for non-life insurance o P5M in case of reinsurance co. For Insurance Cooperative, recommendation from the Cooperative Development Authority is required An Insurance agent should perform the function for a compensation

INSURED - Generally, any person with capacity to contract and having an insurable interest in the life and property insured may be the insured - A married woman may take insurance on her life or on that of her children without need of her husband’s consent - A public enemy cannot be insured. - Public enemy means any citizen or juridical entity of the country with which the Philippines may be at war Effects of War on Insurance Contracts 1. War prevents an insurance contract from being entered into between citizens and juridical entities of the warring states 2. For existing insurance contracts, the rules are: a. Property Insurance – war abrogates the contract (Kentucky Rule) b. Life Insurance – war terminates the policy, but the insured is entitled to the equitable value of the policy arising from the premiums actually paid, when commercial relations are resumed (U.S. Rule) BENEFICIARY -

-

-

The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy The beneficiary is the person designated to receive the proceeds of the policy when the risk attaches. He may be the (1) insured himself in the property insurance or (2) the insured or (3)a third person in life insurance The father or mother of a minor who is an insured or beneficiary of a life policy, may exercise, for said minor, all rights under the policy up to P20k without the need of a court authority or a bond (sec 180)

A. Beneficiary of one who insures his own life - As a general rule, the insured who insures his own life may designate any person, including his estate as his beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured - The Insured has the right to change the designation of the beneficiary, unless he has expressly designated an irrevocable beneficiary in his policy

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Effects if the designation of beneficiary is irrevocable The insured cannot 1. Assign the policy 2. Take the cash surrender value 3. Allow his creditors to attach or execute on the policy 4. Add a new beneficiary or 5. Change the irrevocable designation to revocable, even though the change is just and reasonable  Ratio: The irrevocability of the designated beneficiary and his heirs have acquired from the date of the policy vested rights over the policy (Philam vs. Pineda 175 SCRA 201) 



General rule: - the proceeds of a life insurance policy belong to the designated beneficiary to the exclusion of the heirs of the insured (Picar vs GSIS 33 SCRA 324) Exception: Persons Disqualified as Beneficiaries - A beneficiary in life insurance is like a donee, hence, the civil code provision on the disqualifications of a donee shall apply. Donations made between the following persons are void 1. Donation between persons guilty of adultery or concubinage 2. Donations between persons found guilty of the same criminal offense, in consideration thereof 3. Donations made to a public officer or his wife, descendants and ascendants, by reason of his office.

When interest of the beneficiary is forfeited - The interest of the beneficiary in a life insurance policy shall be forfeited when the beneficiary is the Principal, Accomplice, or accessory in willfully bringing about the death of the insured - In this event, he nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified - The nearest relatives of the insured in the order of enumeration are the following: 1. Legitimate children 2. Parents 3. Grandparents illegitimate children 4. Surviving spouse 5. Brothers and sisters of the full blood 6. Brothers and sisters of the half blood 7. Nephews and nieces. NOTES: (a) Where a specified person is beneficiary, the proceeds will inure to the beneficiary. Q: A took out a life insurance policy and designated his wife, B, as the sole beneficiary. All the premiums of the policy were paid out from his salaries. A died intestate leaving B and 3 children. Divide the proceeds of the policy (1961 Bar)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS A: All of the proceeds of the policy will go to the designated policy, B. The source of the premium here is immaterial (Miravite, 2002ed., p200) (b) If the premiums are paid from (1) salaries of the insured or (2) other conjugal properties or funds, and the beneficiary is the estate of the insured, the proceeds of the life insurance policy is considered conjugal.

B. Beneficiary of Life Insurance on the life of another person. Where a policy is taken by a third person on the life of the insured, and said third person designates himself as the beneficiary, the third person must have an insurable interest on the life of the insured, at the time the policy became effective. C. Beneficiary of Property Insurance The beneficiary of the property insurance must have an insurable interest over the subject matter of the insurance existing at the time the policy was taken and at the time the loss took place

INSURABLE INTEREST -

-

Insurable interest is a right or relationship In regard to the subject matter of the insurance Such that the insured will derive 1. pecuniary benefit or advantage from its preservation and 2. will suffer pecuniary loss or damage from its destruction or injury by the happening of the event insured against

A. Insurable Interest in Life Insurable interest in life is the interest which a person has 1. In his life or 2. In the lives of other persons a. Of his spouse and of his children b. On whom he depends wholly or in part for education or support (Wife insuring Husband’s life) c. Under legal obligation to him to pay money, to deliver property or to render service (Creditor insuring the life of its Debtor) d. Upon whose file any estate or interest vested upon him. (Legatee of a usufruct insuring the life of the usufructuary) 



A corporation has an insurable interest in the lives of its officers when the death or illness of said officers would materially and injuriously affect the corporation. The corporation and the heirs of the manager can insure the life of the manager-decedent in agreed proportion, since both have insurable interest over the life of the latter

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When Insurable Interest should exist It must exist at the time the insurance is taken. B. Insurable Interest in property Rule: No contract or policy of insurance on property shall be enforceable except for the benefit of some person having insurable interest in the property insured Insurable interest Life insurance Property Insurance Insurable interest must Insurable interest must exist exist only at the time the at the time the policy is policy is taken taken and at the time the loss occurs The beneficiary need The beneficiary must have not have an insurable an insurable interest in the interest on the insured’s property insured life There is no limit to the Insurable interest is limited amount of insurable to the actual value of the interest interest in the property What is considered as insurable interest in property Insurable interest in property is every interest in property whether real or personal, or any relation thereto, or liability in respect thereof, of such a nature that the contemplated peril might directly cause damage to the insured What insurable interest in property consists of An insurable interest in property consist of 1. An existing interest 2. An inchoate interest founded on an existing interest 3. An expectance coupled with an existing interest in that out of which the expectance arises Examples of an insurable inchoate right in the property 1. Contractor’s interest to the completed building for unpaid construction cost 2. Lessor’s interest on the improvements made by the lessee 3. Naked owner’s interest over the property which another person has beneficial title A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable (e.g. property which one expects to inherit or that of a general or unsecured creditor insuring the property of his debtor who is alive even though destruction of such property would render worthless any judgment he might obtain note further in the latter case, the creditor can insure the property of a deceased debtor since all personal liability ceases with the death of the debtor. The proceedings to subject the estate to the payment of the debt of the deceased are against all who have an interest in the property. Of course, an unsecured creditor has an insurable interest in the life of his debtor )

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS b. The vendee-consignee of goods in transit under a perfected contract of sale is vested with an equitable title to the goods even before receipt by him of the goods to constitute an insurable interest in the property (Fil Merchants vs CA 179 SCRA 638)

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c.

Any act by the mortgagor prior to the loss which would avoid the policy, will thus avoid the policy, even if the property is in the hands of the mortgagee Any act which under the contract of insurance is to be performed by the mortgagor (e.g. payment of premium) may be performed by the mortgagee with the same effect, as if performed by the mortgagor. In case of loss, the mortgagee is entitled to the proceeds to the extent of his credit, consequently, the debt is extinguished.

A carrier or depositary of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not exceed the value thereof.

d.

Extent of insurable interest of a mortgagor/ee in a mortgaged property a. The mortgagor has an insurable interest on his property as owner up to the full value of his property, irrespective of any mortgage on said property in general. b. The insurable interest of a mortgagee is up to the extent of his credit.

Effect if the mortgagor assigns the policy to the mortgagee with the insurer’s consent, but the latter imposes new conditions on the assignee (union mortgage clause) (Sec. 9) If at the time of the assent, the insurer imposes further obligations on the assignee making a new contract with him, the act of the mortgagor cannot affect the rights of said assignee.



Each may take separate insurances over the same property up to the extent of their respective insurable interests.





Where the mortgagee independently of the mortgagor insured his own interest in the mortgaged property, he is entitled to the proceeds of the policy in case of loss before payment of the mortgage. But in such case, the mortgagee is not allowed to retain his claim against the mortgagor but it passes by subrogation to the insurer to the extent of the insurance paid. In other words, the payment of the insurance to the mortgagee does not relieve the mortgagor from his principal obligation but only changes the creditor.

When insurance is on the interest of the mortgagor (loss payable clause/ standard mortgage clause) (Sec. 8) - The insurance is on the mortgagor’s interest where the mortgagor takes insurance on the property in his own right making the loss payable to the mortgagee - The mortgagor may: i. Take insurance on the property, and assign the same to the mortgagee (this operates merely as an equitable transfer of the policy so as to enable the assignee to recover the proceeds) ii. Constitute the mortgagee as beneficiary as his interest may appear iii.  In case of fire, marine and casualty insurance, the assignment must be with the consent of the insurer because it is a personal contract. (Note that life insurance may be freely assigned before or after loss occurs to any person whether he has an insurable interest or not) Effects of insurance taken on the interest of the mortgagor a. Mortgagor continues to be a party to the contract

Take note of the distinctions between the assignment or transfer of: a. The Policy itself which transfers the fights to the contract to another insured b. The proceeds of the policy after the loss has happened , which involves a money claim under, or a right of action on the policy c. The subject matter of the insurance, such as a house insured under a fire policy which has the effect of suspending the insurance (infra)

When insurable interest should exist It must exist at the time the policy is taken and at the time the loss incurred but it need not exist in the meantime Ratio: To prevent a person from taking out an insurance policy on property upon which he has no insurable interest and collecting the proceeds of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager which is void. (Cha vs CA 277 SCRA 690) Effect of a change of interest on the thing insured - A change in the interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person. 

Mere transfer of a thing insured does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured. For a transferee to have an insurable interest over a policy undertaken by the transferor, the insurance policy should be assigned to him, when he bought the property.



A change of interest in a thing insured, after the occurrence of an injury which results in a loss,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS does not affect the right of the insured to indemnity for the loss 

A change of interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance passes to the person taking his interest in the thing insured. Otherwise stated, the insurance on property passes automatically, upon the death of the insured , to the heir, legatee or devisee who acquires interest in the thing insured.



A transfer of interest by one of several partners, joint owners etc. who are jointly insured, will not avoid the insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured.



A change of interest where there are several things separately insured by one policy, does not avoid the insurance as to the others Example: A insured his car for P100k and jeep for P85k under the single policy, the sale of one will not affect the insurance of the car. BUT if the car and jeep were not separately valued in the policy , the sale of the jeep without the insurer’s consent affects also the insurance of the car

Stipulations prohibited in an insurance policy 1. Stipulations for the payment of loss whether the person insured has or has not any interest in the subject matter of the insurance 2. Stipulation that the policy shall be received as proof of insurable interest. Amount of insurance The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. Rules to be followed in cases where the property is insured for less than its true or market value  In case of total loss: The property owner is entitled to receive the face value of the policy but in no case exceeding the market value of the property.  In case of partial loss: The property owner is entitled only the amount in proportion to his loss and the market value of the property as against the to face value of the policy. Ratio An owner of property who insures the same for less that its true value is co-insurer for the uninsured portion of the property if the policy is a valued one.  HOWEVER if the policy is an open one, the owner can collect the actual partial loss not exceeding the face value of the policy Example: X has a property worth P10,000. He insures it against fire for P8,000. How much shall he collect from

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INSURANCE LAW then insurance in case of total loss? If there is Partial loss in the amount of P6,000? In case of total loss – P 8,000 – face value of the policy In case of partial loss - open policy – P6,000 – the actual partial loss not exceeding the face value of the policy In case of partial loss – valued policy – 6/10 of P8,000 or P4,800- the amount in proportion to his loss and the market value of the property as against the to face value of the policy.

CONCEALMENT Concealment is a neglect to communicate that which a party knows and ought to communicate to the other party. Requisites for concealment For concealment to vitiate a contract of insurance, the following must be present 1. the matter concealed must be material 2. there must be an obligation for the insured to reveal the concealed matter to the insurer Matters that must be communicated even in the absence of inquiry Each party to a contract of insurance must communicate in good faith all facts within his knowledge only when: 1. They are material to the contract 2. The other has not the means of ascertaining the said facts 3. As to which the party with the duty to communicate makes no warranty. Test of materiality A fact is material if knowledge of it would have affected the decision of the insurer to enter into the contract, in estimating the risk, or in fixing the premium 

Matters relating to the health of the insured are material and relevant to the approval and issuance of the life insurance policy as they definitely affect the insurer’s action on the application (Sunlife vs CA 245 SCRA 268)



It is well-settled that the insured need not die of the disease he had failed to disclose to the insurer, as it is sufficient that his non-disclosure misled the insurer in forming his estimates of the risk of proposed insurance policy or in making inquiries (ibid)



Lack of understanding by the illiterate insured of the statements and her application as to her state of good health does not negate the insurer’s right to rescind (Tang vs CA 90 SCRA 236)



Concealment exists where the assured had knowledge of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally withholds the same.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS

Matters which one has no duty to disclose Neither party to a contract of insurance is bound to communicate information of the matters following, except in answer to the inquiries of the other: 1. Those which are already known to the insurer 2. Those which, in the exercise of ordinary care, are ought to be known to the insurer or his agent, 3. Those undisclosed facts which are not material 4. Those which each party is bound to know: - general causes – eg. public events; and - general usages of trade - eg. rules of navigation all risks connected with navigation) 5. Information or the nature or amount of the interest of one insured except if insured is a lessee or a mortgagee (read sec 51) 6. Those of which the insurer waives communication  The right to information of material facts may be waived, either: a. Expressly – by the terms of the insurance b. Impliedly – by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated (Fact disclosed that one was confined in the hospital. The insurer did not inquire as to the cause of confinement, the latter is in estoppel) 7. Judgment upon the matters in question – eg. Opinion, speculation or expectation (How long will you live?) Consequences of concealment - The rule is concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. - However, an intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty is required to entitle the insurer to rescind - Good faith is no defense in concealment (Sunlife vs CA 245 SCRA 268) Exceptions: 1. Incontestability clause: In life insurance, after a policy has been in force for at least two years, the insurer cannot rescind the policy due to fraudulent concealment or misrepresentation of the insured. If the insured dies within two years from the effectivity of the policy, rescission due to concealment or misrepresentation of material matters may still be invoked by the insurer, provided done within two years from the effectivity of the policy 2.

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National character of insured Liability of insured thing to capture or detention Liability to seizure from breach of foreign laws Want of necessary documents Use of false or simulated papers

REPRESENTATION A representation is an oral or written statement of a fact or condition made by the insured at the time of or prior to the issuance of the policy, affecting the risk made by the insured to the insurer, tending to induce the insurer to assume the risk Misrepresentation vs. Concealment Misrepresentation

Concealment

Insured makes a statement of fact which is untrue

Insured maintains silence when he ought to speak

Kinds of representation 1. Oral 2. Written 3. Affirmative representation 4. Promissory representation Affirmative representation - It is any allegation as to the existence or nonexistence of a fact when the contract begins Promissory representation - It is any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance. A promissory representation is substantially a condition or a warranty. A promissory representation maybe: 1. Used to indicate a parole or oral promise made in connection with the insurance, but not incorporated in the policy. - the non-performance of such a promise cannot be shown by the insurer in defense of an action on the policy, but proof that the promise was made with fraudulent intent will serve to defeat the insurance 2. As an undertaking by the insured, inserted in the policy but not specifically made a warranty.

Certain concealments in Marine Insurance The following matters although concealed will not vitiate the contract of marine insurance except when they are caused the loss.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS Warranty vs. Representation Warranty It is part of contracts It is expressly set forth in the policy itself or incorporated therein by reference It is conclusively presumed material It must be strictly complied with

Representation It is mere collateral inducement, but it may qualify an implied warranty It may be oral or written in another instrument It must be proved to be material It requires only substantial truth or compliance

When representation is made - A representation may be made at the time of or before issuance of the policy. It may be altered or withdrawn before issuance of the policy, but not afterwards.  A representation must be presumed to refer to the date on which the contract goes into effect Hence: 1. There is NO FALSE representation if it is true at the time the contract takes effect although false at the time it was made. 2. There is FALSE representation if it is true at the time it was made but false at the time the contract takes effect – in this case the insurer is entitled to rescind When representation is deemed false - A representation is deemed to be false when the facts fail to correspond with its assertions or stipulations. Misrepresentation A misrepresentation in insurance is a statement: 1. As a fact of something which is untrue 2. Which the insured states with knowledge that it is untrue and with intent to deceive, or which he states positively as true without knowing it to be true and which has the tendency to mislead 3. where such fact in either case is material to the risk 



An insured who has no personal knowledge of a fact may communicated such information which he has, and believes it to be true, upon the subject matter with the explanation that said rd information was obtained from 3 persons. In this case he is not responsible if the information turns out to be false. Except if the information proceeds from an agent of the insured whose duty is to give information to his principal. This is so because knowledge of the agent is also knowledge of the principal

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INSURANCE LAW Effect of false representation or misrepresentation - If the representation is false on a material point, the injured party is entitled to rescind from the time when the representation becomes false. - HOWEVER, the right to rescind given to the insurer is waived by the acceptance of premium payments despite knowledge of the ground of rescission Test of materiality - Materiality is determined by the probable and reasonable influence of the facts on the party to whom communication is due, in forming his estimate of the contract, the risk and the premium -

When the original contract of insurance was modified by reason of concealment or misrepresentation on the part of the insured especially when modification pertains to material points, upon discovery of such concealment or misrepresentation, the insurer is allowed to rescind said modification.

Right to rescind – when available - In order that the insurer may rescind a contract of insurance, such right must be exercised prior to the commencement of an action on the contract. (Example, if the insured filed an action to collect amount of the insurance, it can no longer rescind the contract) Incontestability clause - Incontestability means that after the requisites are shown to exist, the insurer shall be estopped from contesting the policy or setting up any defense, except when allowed on the ground of public policy. - Requisites: 1. The policy is a life insurance policy 2. It is payable on the death of the insured 3. It has been in force during the lifetime of the insured for at least 2 years from its date of issue or of its last reinstatement NOTE: The period of two years for contesting a life insurance policy may be shortened but it cannot be extended by stipulation Effect when the policy becomes incontestable - When the policy of life insurance becomes incontestable, the insurer may not refuse to pay the same by claiming that: 1. The policy is void ab initio (voidable) 2. It is rescissible by reason of the fraudulent concealment of the insured or his agent or 3. It is rescissible by reason of the fraudulent misrepresentations of the insured or by his agent Defenses NOT barred by incontestability clause - The incontestability of a policy under the law is not absolute. The insurer may still contest the policy on the following grounds: 1. That the person taking the insurance lacked insurable interest as required by law; 2. The cause of the death of the insured is an excepted risk;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 3. 4. 5.

6.

7.

That the premiums have not been paid That the conditions of the policy relating to military or naval service have been violated; The fraud is of a particularly vicious type, as when the policy was taken out in furtherance of a scheme to murder the insured, or where the insured substitutes another person for the medical examination or where the beneficiary feloniously killed the insured; The beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; The action was not brought within the time specified.

WARRANTIES A warranty is a statement or promise stated in the policy itself or incorporated therein by reference, whereby the insured expressly contracts as to the present or future existence or certain facts, circumstances or conditions, the literal truth of which is essential to the validity of the contract of insurance What warranty relates to - It may relate to the past, the present, the future or to any or all of these. Kinds of warranties 1. Affirmative warranty - where the insured asserts the existence of a matter at or before the issuance of the policy 2. Promissory warranty - where the insured promise or undertakes that certain matters shall exist or will be done or omitted after the policy takes effect 3. Express warranty - where the assertion or promise is clearly set forth in the policy or incorporated therein by reference 4. Implied warranty - where the assertion or promise is not expressly set forth in the policy, but because of the general tenor of the terms of the policy, or from the very nature of the insurance contract, a warranty is necessarily inferred or understood. Required form to create a warranty - There is no particular form or words necessary to create a warranty. Whether a warranty is constituted or not depends upon the intention of the parties, the nature of the contract or the words used thereto. In case of doubt, the statement is presumed to be a mere representation and not a warranty. When an express warranty should be made - It should be made at or before the execution of a policy

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INSURANCE LAW Where an express warranty should be contained Express warranty may be contained either: 1. In the policy itself 2. In another instrument signed by the insured and referred to in the policy as making part of it. Mere reference is not sufficient to give warranty. 

A statement in a policy, of a matter relating to the person or thing insured, or to the risk as a fact is an express warranty. A statement which is in the nature of an opinion or belief is not a warranty

Promissory warranty - It is a statement in a policy that a thing which is material to the risk is intended to be done or not to be done after the policy takes effect. - As a general rule: the non-performance of a promissory warranty entitles the other party to rescind the contract: - Exceptions to the rule are: 1. Loss occurs before the time arrives for the performance of the promissory warranty 2. Performance becomes unlawful before the time arrives for the performance of the promissory warranty 3. Performance becomes impossible before the time arrives for the performance of the promissory warranty What happens when there is violation of material warranty or to other material provisions of the policy?  All breaches of warranty give to the insurer the right to rescind the contract. This rule is true even if the violation of the material warranty did not contribute to the loss.  If fraud intervenes in the breach, the insurer is freed from liability from the start, as the contract is fraud ab initio. The insured is not entitled to the return of the premiums paid.  If there is no fraud in the breach, the insurer is freed from the contract the moment the breach occurs, and is entitled to retain the premiums corresponding to the period up to the time of the breach. But if the breach was done at the time of the inception of the policy, the insured cannot recover for any loss arising thereafter, but all premiums should be returned to the insured

POLICY OF INSURANCE -

A policy of insurance is the written instrument in which a contract of insurance is set forth. It is the formal written instrument evidencing the contract of insurance entered between the insured and the insurer.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Form - The policy shall be in printed form which may contain blank spaces on which words, numbers and other matters necessary to complete the contract of insurance shall be written on. However, group insurance and group-annuity policies may be typewritten and need not be in printed form.

What extent does the contract of insurance cover undertaken by a partner? - A partner who insures partnership property in his own name limits the contract to his individual share unless the terms of the policy clearly show that the insurance was meant to cover also the shares of the other partners.

Rider in a contract of insurance - A rider is a printed or typed stipulation contained on a slip of paper attached to the policy and forming an integral part of the policy.

How ambiguities in an insurance contract are construed - Contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against the insurer, otherwise stated, it should be construed liberally in favor of the insured and against the insurer

Effect of a rider, clause, warranty or endorsement purporting to be a part of the contract and pasted on the policy - As a general rule, these attached papers become part of a contract of insurance. However it will not bind the insured unless it is properly referred to therein in the policy. If the rider, etc. is issued after the original policy was in force, it shall not bind the insured unless it is countersigned by the insured. Cover notes or interim policies - Cover notes or interim policies or binding slips may be issued to bind the parties temporarily pending the issue of the policy. It is intended to give temporary protection pending the investigation of the risk by the insurer or until the issue of formal policy. - These notes are good for 60 days only, unless renewed with the written approval of the Insurance Commissioner Contents of the policy A policy contains, among others the following 1. The parties 2. Amount of insurance (except in open or running policies) 3. Rate of premium 4. The property or life insured 5. The interest of the insured in the property if he is not the owner 6. Risk insured against 7. Duration of the insurance May an agent undertake a contract of insurance in favor of its principal? - Yes. The agent or trustee when making an insurance contract for and in behalf of his principal should indicate that he is merely acting in a representative capacity by signing as such agent or trustee, or by other general terms in the policy May a partner in a partnership insure partnership property? - Yes. Insurable interest in the property of a partnership exists in both partnership and the partners and a partner has an insurable interest in the firm’s property which will support a policy taken out thereof for his own benefit



In Cebu vs William 306 SCRA 762 the Supreme Court held: “although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se as binding as an ordinary contract, the court recognizes instances when reliance on such contracts cannot be favored especially where the facts and circumstances warrant that subject stipulations be disregarded. The facts and circumstances vis-à-vis the nature of the provision sought to be enforced should be considered, bearing in mind the principles of equity and fair play.”



In Rizal vs CA 336 SCRA 12, Supreme court said: “ it is settled that the terms in an insurance policy, which are ambiguous, equivocal, or uncertain are to be construed strictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where forfeiture is involved, and the reason for this is that the insured usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great care and deliberation by experts and legal advisers employed by and acting exclusively in the interest of the insurance company.

Kinds/classes of policies in non-life insurance 1. Open or unvalued policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss. In other words, it is one in which a certain agreed sum is written on the face of the policy not as the value of the property insured, but as the maximum limit of recovery in case of destruction the peril insured against. 2. Valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specified sum. In the absence of fraud or mistake, such value will be paid in case of total loss of the property, unless the insurance is for a lower amount. 3. Running policy is one which contemplates successive insurances and which provides that the subject of the policy may from time to time be defined

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Requisites for a valid cancellation of non-life insurance 1. Written prior notice to the insured, stating the facts and 2. For any of the following grounds a. Non-payment of premium b. Conviction of a crime arising out of acts increasing the hazard insured against c. Discovery of fraud or material misrepresentation d. Discovery of willful or reckless acts or omissions increasing the hazard insured against e. Physical changes in the property insured which result in the property becoming uninsurable f. A determination by the commissioner that the policy would violate the insurer

PREMIUM -

-

Premium is the consideration paid an insurer for undertaking to indemnify the insured against a specified peril

When is the insurer entitled to payment of the premium? As soon as the thing insured is exposed to the peril insured against Effect of the nonpayment of premium - GR: The policy or contract of insurance is not valid and binding. - Exceptions: 1. Life and Industrial Life policy whenever the grace period provision applies(sec 77) 2. Written acknowledgment of the receipt of premium by insurer (sec 78) 3. Payment in installments of the premium and partial payment made at the time of loss 4. Credit extension for the payment of premium 5. Estoppel – reliance in good faith on the practice of the insurance company 



Grace period: a) Life insurance – 30 days or 1 month within which the payment of any premium after the first may be made b) Industrial life insurance – 4 weeks and where the premiums are payable monthly, either 30 days or 1 month Written acknowledgment in a policy or contract of insurance of the receipt or premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid

stipulation, it is provided that the policy shall in any event be suspended or shall lapse. When the insured is entitled to recover premiums The insured is entitled to a return of the whole premium: 1. If the thing insured was never exposed to the risk insured against 2. When the contract is voidable due to the fraud or misrepresentation of the insurer or his agent 3. When the contract is voidable because of the existence of facts of which the insured is ignorant without his fault 4. When the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud The insured is entitled to a ratable return of premium on the following cases: 1. Where the insurance is made for a definite period of time and the insured surrenders policy before termination 2. Where there is over-insurance by several insurers Where the insurance is for a definite period of time and the insured cancels his policy by surrendering the policy, the insured is entitled to recover the premiums already paid equivalent to the unexpired term at a pro rata rate Exception to this rule: a. Where the insurance is not for a definite period b. Where the policy is a life policy c. Where a short period rate has been agreed upon Short period rate is that percentage, as agreed upon by the parties and appearing on the face of the policy, which the insurer shall retain from the premium in the event that the policy is surrendered by the insured for cancellation. The premiums to be returned where there is overinsurance by several insurers shall be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the value of the thing Example: X insures his house which has an insurable value of P1,500,000 as follows: Insurer

Amt Insurance

A Co.

P 1,200,000

P 24,000

B. Co

600,000

12,000

Aggregate sum Effect of nonpayment 1. 2.

Of First premium – prevents the inception of the policy Of subsequent premiums- it does not affect the validity of the contract unless, by express

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INSURANCE LAW

of

Premiums paid

P1,800,000.

In this case, there is an over insurance of P300,000, the amount by which the aggregate sum insured in the two policies exceeds the insurable value of the house. The proportion is P300k to P1800k or 1/6. Hence, 1/6 of P24k or P4k is what A co must return; and 1/6 of P12k or P2k is what B co must return

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS DOUBLE INSURANCE A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest Requisites There is no double insurance unless the following requisites exist: 1. The person insured is the same 2. Two or more insurers insuring separately 3. The subject matter is the same 4. The interest insured is also the same and 5. The risk or peril insured against is likewise the same Double Insurance vs Over-insurance Double Insurance

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Over-Insurance

In double insurance, there There is over-insurance may be no over-insurance when the amount of the as when the sum total of insurance is beyond the the amounts of the policies value of the insured’s issued does not exceed the insurable interest insurable interest of the insured There are always several There may be only one insurers insurer involved THEREFORE, double insurance and over-insurance may exist at the same time or neither may exist at all

Binding effect of stipulation against double insurance - A policy which contains no stipulation against additional insurance is not invalidated by the procuring of such insurance. However, a stipulation that insurance shall be avoided if additional insurance is procured without the insurer’s consent is valid and reasonable, and any breach thereof will prevent a recovery on the policy Effects of Double insurance a) The insured can insure with two or more companies unless prohibited by prior policy b) Where he is allowed, but over-insurance results, he can claim in case of loss, only up to the agreed valuation (in valued policy) or up to the full insurable value (in open policy) from any, some or all insurers, without prejudice to the insurers ratably apportioning the payments c) The insured can also claim a ratable return of the premiums on the over-insured amount d) Unrevealed other insurances, when required, is a material concealment/misrepresentation and gives to the insurer the right to rescind

REINSURANCE Reinsurance is a contract by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance

Nature of contract of reinsurance - A reinsurance is presumed to be a contract of indemnity against liability and not merely against damage. - The subject of the contract of reinsurance is the insurer’s risk and not the property insured under the original policy. The reinsurer agrees to indemnify the insurer , not against the actual payment made but against liabilities incurred Distinguish Reinsurance vs. Double Insurance Reinsurance

Double Insurance

The insurer becomes the insured in relation to the reinsurer The subject of the insurance is the original insurer’s risk It is an insurance of different interest The original insured has no interest in the contract of reinsurance which is independent of the original contract of insurance

The insurer remains as the insurer The subject of the insurance is the property It involves the same interest The insured is the party in interest in all the contracts

Reinsurance vs. Co-insurance - Co-insurance is the percentage in the value of the insured property which the insured himself assumes or undertakes to act as insurer to the extent of the deficiency in the insurance of the insured property. In case of loss or damage, the insurer will be liable only for such proportion of the loss or damage as the amount of insurance bears to the designated percentage of the value of the property insured. - Reinsurance is where the insurer procures a third party, called the reinsurer, to insure him against liability by reason of such original insurance. Basically, a reinsurance is an insurance against liability which the original insurer may incur in favor of the original insured Distinguish Reinsurance vs Reinsurance Treaty Reinsurance A reinsurance policy is a contract of indemnity one insurer makes with another to protect the first insurer from a risk it has already assumed It is a Contract of insurance

Reinsurance Treaty A reinsurance treaty is merely an agreement between two insurance companies where one agrees to cede and the other to accept reinsurance business pursuant to provisions specified in the treaty. It is a contract for insurance

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Matters which the reinsured must communicate to the reinsurer - The insurer who obtains reinsurance, except under automatic reinsurance treaties, must communicate the following to the reinsurer: a. All the representations of the original insured b. All the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk Automatic reinsurance treaties - This refers to a case when two or more insurance companies agree in advance that each will reinsure a part of any line of insurance taken by the other, such contract is self executing and the obligation attaches automatically on acceptance of a risk by the reinsured. In this case, the obligation to communicate is not necessary due to the selfexecuting and automatic feature of such insurance. Facultative reinsurance agreement - A facultative reinsurance agreement is a contract wherein the reinsurer may or may not accept participation in the risk insured. The term “facultative” is used in reinsurance contracts and it is so used in this particular case merely to define the right of the reinsurer to accept or not to accept participation in the risk insured. But once the share is accepted, the obligation is absolute and the liability assumed thereunder can be discharged by the one and only way – payment of the share of losses. There is neither alternative nor substitute prestation (Equitable Insurance vs Rural Insurance 4 SCRA 343)

Does the original insured have interest in a contract of reinsurance? - None. The original insured has no interest in a contract of reinsurance. - Reinsurance is a contract solely between the reinsured and the reinsurer and creates no privity of contract between the reinsurer and the original insured. However, if the contract of reinsurance is made directly for the benefit of the reinsured’s policyholders or if the reinsurer assumes and agrees to perform the reinsured’s contracts, the reinsurer becomes directly liable to the policyholders. It is necessary for the original insured to accept and communicate acceptance of such benefit to the reinsurer before revocation 

A reinsurer is entitled to avail of every defense which the reinsured may avail of against the original insured (Gibson vs Revilla 38 SCRA 219)

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INSURANCE LAW LOSS IN CONTRACT OF INSURANCE - Loss is the injury or damage sustained by the insured from the perils insured against

Proximate cause Proximate cause is the active efficient cause which sets in motion a train of events which in turn brings about a result without the intervention of any force operating and working actively from a new and independent force Remote cause Remote cause is a cause that does not necessarily or immediately produce an event or injury When the insurer becomes liable for losses The insurer is liable for: 1. Loss the proximate cause of which is the peril insured against although the peril not contemplated by the contract may not have been a remote cause of the loss 2. Loss the immediate cause of which is the peril insured against except where the proximate cause is an excepted peril 3. Loss through the negligence of the insured or of the insured’s agents or others, and 4. Loss in the course of efforts to rescue the thing from the peril insured against although the cause of loss is not a peril insured against. Loss which incurs liability 1. Loss by the insured’s willful act 2. Loss due to connivance of the insured; and 3. Loss where the excepted peril is the proximate cause Prerequisites for the recovery of loss in insurance against fire 1. Notice of loss which must be immediately given unless delay is waived expressly or impliedly by the insurer 2. Proof of loss according to the best evidence obtainable. Delay may also be waived expressly or impliedly by the insurer 

All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, within reasonable time, as grounds of objection, are waived.

When the insurer of property against fire is exonerated from liability - When no notice is given by the insured or by any other person entitled to the benefit of the insurance, within a reasonable time. Proof needed for preliminary proof of loss When preliminary proof of loss is required in the policy, it is sufficient that the insured gives the best evidence which he has in his power and not evidence necessary in a court of justice.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS PAYMENT OF CLAIMS A. Life Insurance 1. Where insured outlives maturity date, the claim is payable immediately on maturity of the policy. This is true in endowment insurance 2. Where policy matures by Insured’s death, the claim is payable within 60 days after presentation of the claim and filing of proof of death of the insured. In case of unreasonable delay, the insured is entitled to (1) Attorney’s fees (2) expenses incurred by reason of the unreasonable withholding (3) interest at the legal interest rate (6%) per annum as fixed by the monetary board (4)amount of the claim., (5) moral damages if bad faith or fraud is present and (6) exemplary damages if the act is wanton and oppressive. 3. Please note that for cases involving loss or injury, any person having any claim upon the policy shall, without delay present a written notice of claim within six (6) months from date of accident to the insured, otherwise, the claim shall be deemed waived. Action or suit for recovery of damages due to loss or injury must be brought, in proper cases, with the Commissioner of the Courts within one (1) year from denial of claim, otherwise, the claimant’s right of action shall prescribe B. Property Insurance 1. If amount of loss is determined by agreement or by arbitration, the claim is payable within 30 days after proof of loss is received by the insurer. 2. If ascertainment of loss is not made within 60 days, the claim is payable within 90 days from receipt of proof of loss by the insurer, if not paid, unreasonable delay is presumed (Cathay vs CA 174 SCRA 11) 3. Please note the 1 year prescriptive period to file an action after denial of claim. The prescriptive period is not suspended by the filing of a request for reconsideration after denial of claim (Sun vs CA 195 SCRA 193) C. Compulsory Motor vehicle liability Insurance 1. The insurance company will indemnify any authorized driver who is driving the motor vehicle of the insured and in the event of death of said driver, the company shall likewise indemnify his personal representatives and the company may at his option make indemnity payable directly to the claimants or heirs of claimants. In other words, under the compulsory vehicle liability insurance, direct payments may be made by the insurer to an accident victim of an insured vehicle

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INSURANCE LAW 2.

Pour autrui clauses inure to the benefit of any person injured by the person insured as if he were named in the policy

Article 2207 of the Civil Code makes it clear that the insurance company that has paid the indemnity for the injury or loss sustained by the property insured “shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract.” The insurer who pays the insured is an assignee in equity of the insured against the offender. (Malayan vs CA 165 SCRA 536) As a general rule: Payment by the insurer to the insured for loss under the policy entitles the insurer to be subrogated to the rights of the insured against the wrongdoer. The exceptions are: 1. Where the insured releases the wrongdoer from liability 2. Where the insurer pays without notifying the carrier, which in good faith had already paid the insured, and 3. Where the insurer pays the insured for a loss which is not included in the risk insured against, by the policy (Pan Malayan vs. CA 184 SCRA 54) Where the insured was paid by the insurer, the latter is subrogated to all rights of the former against the wrongdoer. If the insured after being paid by the insurer, releases the wrongdoer without the insurer’s consent, the insurer loses his right of subrogation against the wrongdoer. The insurer will however be entitled to recover from the insured what the insured originally received from the insurer as the proceeds of the policy (Manila vs. CA 154 SCRA 650)

CLASSES OF INSURANCE MARINE INSURANCE Insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or others insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time.

Coverage of Marine Insurance 1. Loss or damage to aircraft 2. Loss or damage to goods & merchandise for shipment 3. Persons in connection w/ marine insurance 4. Precious stones, jewels, jewelry, precious metals 5. Bridges, tunnels, & other instrumentalities of navigation Perils of Navigation - perils in making landings in river navigation and damage from rain in consequence of improper stowage.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS War risks - perils due directly to some hostile action, military maneuver, operational war danger Builders risks - damage to ways from launching as well as damage to the ship. Perils of the sea - all kinds of marine casualties & damages done to the ship or goods at sea by the violent action of the winds or waves; not foreseen & not attributable to the fault of anybody. Perils of the ship - losses or damages resulting from: a) natural and inevitable action of the sea b) ordinary wear and tear of ship c) negligent failure of the ship's owner to provide the vessel w/ proper equipment to convey the cargo under ordinary conditions. Inchmaree clause - provision in the policy that the insurance shall cover loss of, damage to, the hull or machinery through negligence of the master, charterers, engineers, or pilots, or through explosions, bursting of boilers, breakage of shafts, or through any latent defect in the machinery or hull not resulting from want of due diligence. Insurable Interest in Marine Insurance 1) Ship owner - over the vessel, except that if chartered, the insurance is only up to the amount not recoverable from the charterer - he also has an insurable on expected freightage; no insurable interest if he will be compensated by charterer in case of loss. 2)

3)

Cargo owner - over the cargo & expected profits Charterer - over the amount he is liable to the ship owner, if the ship is lost or damaged during the voyage.

Loan on Bottomry/Respondentia - loan in which under any condition whatever, the repayment of the sum loaned, and of the premium stipulated, depends upon the safe arrival in port of the goods on which it is made, or of the price they may receive in case of accident. Insurable interest on vessel hypothecated by bottomry 1.Owner/debtor -difference between the actual value of the vessel and the loan on bottomry. 2.Creditor -amount of the loan

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INSURANCE LAW Right of insurer & lender in case of loss - value of what may be saved/salvaged shall be divided between the lender & insurer, in proportion to the legitimate interest of each one. Freightage - benefits derived by the owner, either from: a) chartering of the ship b) its employment for the carriage of his own goods or those of others. Time when Insurable Interest on Freightage exists a) In case of a charter party, from the time the vessel has broken ground on the chartered voyage b) If no charter party & price is to be paid for the carriage of goods, from the time said goods are actually on board the vessel or from the time both ship & goods are ready for specified voyage. 

In Marine Insurance, insured is required to reveal all information which he possesses material to the risk.

Concealment that does not vitiate the contract except when they caused the loss 1. national character of the insured 2. liability of the thing insured to capture and detention 3. liability to seizure from beach of foreign laws of trade. 4. want of necessary documents 5. use of false & simulated papers Effect of concealment of matters - exonerates the insurer from a loss Effect if misrepresentation is intentionally false - rescission of contract by insurer Effect of falsity of representation as to expectation - non-avoidance of a contract of insurance Implied warranties in marine insurance a) the ship is seaworthy b) no improper deviation from the agreed voyage will be made c) vessel will not engage in illegal venture d) where nationality or neutrality of a ship or cargo is expressly warranted Seaworthiness - relative term depending of the NATURE of the ship, the VOYAGE, & the SERVICE in which she is at the time engaged. - Reasonable fitness to perform the service & to encounter the ordinary perils of the voyage contemplated by the parties. Effect of violation of implied warranty of seaworthiness - insurer will not be liable for a loss

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS When requirement of seaworthiness satisfied - General Rule: Seaworthiness of the vessel is required only at the commencement of the risk. - Exceptions: 1. insurance is made for a specified length of time 2. insurance is upon the cargo required to be transshipped at an immediate port Course of the voyage insured a) one agreed upon by the parties b) in the absence of agreement, the course of sailing fixed by mercantile usage c) if the course of sailing is not fixed by mercantile usage, one which to a master of ordinary skill and direction, would seem the most natural, direct & advantageous Deviation a) departure from the course of the voyage insured b) unreasonable delay in pursuing the voyage c) commencement of an entirely different voyage When deviation is proper a) when caused by circumstances over which neither the master nor the owner of the ship has any control b) when necessary to comply with warranty, or to avoid a peril, whether or not the peril is insured against c) when made in good faith, & upon reasonable grounds of belief in its necessity to avoid a peril d) when made in good faith, for the purpose of saving human life, or relieving another vessel in distress. Effect of improper deviation - insurers become immediately absolved from further liability LOSS A. TOTAL 1. Actual total loss ( exists when the subject matter of the insurance is wholly destroyed or lost or when it is so damaged as no longer to exist in its original charter) is caused by: a. total destruction of the thing insured b. irretrievable loss of the thing by sinking, or by leaving broken up c. any damage to the thing which renders it valueless d. other event which effectively deprives the owner of the possession 2. Constructive total loss ("technical total loss") - one that gives to a person insured a right to abandon B. PARTIAL LOSS - loss other than a total loss 

Presumption of actual loss: continued absence of a ship without being heard.

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INSURANCE LAW Continuation of liability of insurer - whenever the ship upon which the cargo insured was loaded cannot continue the voyage due to the peril insured against, & cargo is loaded on another vessel 

Abandonment - necessary only in constructive total loss

Average - extraordinary/accidental expense incurred during the voyage for the preservation of the vessel, cargo, or both and all damages to the vessel & cargo from the time it is loaded and the voyage commenced until it ends & the cargo unloaded. Kinds of average: 1. GROSS/GENERAL AVERAGES - include all the damages & expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from real & known risk - Requisites to the Right to claim general average contribution: a. common danger to the vessel/cargo b. part of the vessel/ cargo was sacrificed deliberately c. sacrifice must be for common safety/benefit of all d. must be made by the master or upon his authority e. not be caused by any fault of the party asking the contribution f. must be successful g. must be necessary 2.

SIMPLE/PARTICULAR AVERAGE - includes all the expenses & damages caused to the vessel or to her cargo which have not inured to the common benefit & profit of all the persons interested in the vessel & her cargo. - Partial loss caused by a peril insured against, which is not a general average loss

FPA CLAUSE - a situation wherein the insured & insurer stipulated in the policy that the vessel/cargo insured shall be free from particular average - effects: a. if damage to the thing insured is a PARTICULAR average, the insurer shall not be liable UNLESS the loss suffered is total b. if damage to the thing insured is a GENERAL average, insurer shall be liable whether the loss is partial or total or for the condition of the insured for his proportion of all general average losses assessed upon the thing insured which was saved. 

There is an ACTUAL TOTAL LOSS if the insured is effectively deprived of the use & possession of the property, whether by seizure/capture followed by condemnation/theft.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Abandonment - act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured - effect: insured is surrendering to the insurer whatever is left of the property insured, & resorting to the policy for indemnity, insurer then becomes the owner of whatever may remain of the insured thing & the insured may recover a total loss. Requisites for valid abandonment 1. actual relinquishment by the person insured of his interest in the thing insured 2. constructive total loss 3. abandonment must be neither partial nor conditional 4. made within a reasonable time after receipt of reliable information of the loss 5. factual 6. made by giving notice to the insurer which may be done orally or in writing 7. notice of abandonment must be explicit & must specify the particular cause of the abandonment When abandonment may be made 1. if more than 3/4 of the value of the thing insured is actually lost 2. if more than 3/4 of the value of the thing insured would have to be expended to recover it from the peril 3. if it is injured to such an extent as to reduce its value by more than 3/4 4. if the thing is insured is a ship & the contemplated voyage cannot be lawfully performed without incurring an expense to be insured of more than 3/4 the value of the thing abandoned. 5. If the thing insured is a ship and the contemplated voyage cannot be lawfully performed without incurring risk which a prudent man would not take under the circumstances 6. If the thing insured, being cargo or freightage, the voyage cannot be performed nor another ship procured by the master within reasonable time & with reasonable diligence Right of recovery 1. abandonment is made - recovery of TOTAL LOSS, insurer acquires all interest of the insured 2. no abandonment - recovery only of ACTUAL LOSS When abandonment becomes ineffectual - information which formed the basis of abandonment proved to be incorrect & there was in fact no total loss Form of Notice of Abandonment - no particular form; may be made orally unless required to be in writing, even notice by telegraph is sufficient if it complies with requirements

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if done orally, insured must submit to the insurer within 7 days from such oral notice, a written notice of the abandonment.

Effects of acceptance of abandonment 1. becomes irrevocable UNLESS the ground upon which it owes made proven to be unfounded 2. conclusive upon parties 3. admission of the loss & sufficiency of abandonment How acceptance of abandonment made a) express b) implied from the acts of the insurer - mere silence of the insurer for an unreasonable length of time after notice shall be construed as acceptance Effect of valuation - conclusive between the parties provided a) the insured has some interest at the risk b) there is no fraud on his part. Co-insurance - form of insurance in which the person who insures his property for less than the entire value is understood to be his own insurer for the difference which exists between value of property and amount of insurance Requisites for application 1. insured taken is less than the actual value of the thing insured 2. loss is partial Marine insurance vs fire insurance MARINE INSURANCE

FIRE INSURANCE

There is always coinsurance

No co-insurance UNLESS expressly stipulated in the policy

Fire insurance - a contract by which the insurer for a consideration agrees to indemnify the insured against loss, or damage to, property by fire, but may include loss by lightning, windstorm, tornado & earthquake & other allied risks, when such risks are covered by extension to fire insurance policies/ under separate policies Alteration - alteration in the use or condition of thing insured will entitle the insurer to rescind the contract provided following requisites are present: a) use or condition of the thing is specifically limited/stipulated in the policy. b) such case/condition as limited by the policy is altered c) the alteration is made without the consent of the insurer d) alteration is made by means within the control of the insured

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS e) f)

the alteration increases the risk violation of a policy provision

Co-insurance clause - clause requiring the insured to maintain insurance to an amount equal to a specified percentage of the value of the insured property under penalty of becoming co-insurer to the extent of such deficiency

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Fall-off Building Clause clause in fire insurance policy that if the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease.

Surety vs guarantor

SURETY insurer of debt Undertakes to pay if principal does not pay primary

No such rights Option to Rebuild Clause - option of insurer to repair, rebuild or replace buildings/structures wholly or partially damaged or destroyed, instead of the payment of the loss. - Alternative obligation, either pay the amount of the loss/ rebuild the building damaged CASUALTY INSURANCE - includes all forms of instrument against loss or liability arising from accident/mishap other than those within the scope of other types of insurance General division of casualty insurance 1. insurance against specified hazards which may affect the person/property of the insured - e.g. personal accident, robbery/theft, damage to or loss of motor vehicle 2.

insurance against specified hazards which may give rise to liability on the part of the insured for claims for injuries to others/damages to their property - e.g. workmen's compensation, motor vehicle liability

Life Insurance vs Accident/ Health Insurance LIFE INSURANCE

ACCIDENT/HEALTH INSURANCE

Usual object is to provide fund for the benefit of the estate/heirs beneficiaries of insured after the death of the insured

Protect against not a loss of life but a loss of time, earning capacity and expenses

Suretyship - contract whereby a person binds himself solidarily with principal debtor for the fulfillment of an obligation Nature of liability of surety 1. solidary 2. limited to the amount of the bond 3. determined by the terms of the contract of suretyship in relation to the principal contract between obligor and obligee

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GUARANTOR insurer of solvency of debtor Binds himself to pay if principal is unable to pay Secondary Can not be compelled to pay the creditor unless the latter has exhausted all the properties of the debtor

Surety vs Property Insurance SURETY

PROPERTY INSURANCE

Accessory contract

Principal contract

3 parties: surety, obligor and obligee

2 parties: insurer and insured

Credit accommodation

Contract of Indemnity

Surety can recover from principal Bond can be cancelled only with consent of the oblige, commissioner or the court Risk-shifting device premium paid being in the nature of a service fee Requires acceptance of the oblige to be valid

No such right, only right of subrogation May be cancelled unilaterally either by insured or insurer on grounds provided by law Risk-distributing device, premium paid as a ratable contribution to a common fund No need for acceptance by any third party

When surety entitled to service fee only a) when contract of suretyship/ bond is not accepted by obligee b) when contract of suretyship/ bond is not filed with obligee Types of surety bonds 1. Contract bonds a. Performance bonds b. Payment bonds 2. Official 3. Judicial Life Insurance - insurance payable on the death of a person or on his surviving a specified period or otherwise contingently on the continuance or cessation of life. - Nature: 1. liability absolutely certain 2. amount of insurance generally no limit 3. direct pecuniary loss not required

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS KINDS OF LIFE INSURANCE 1. GENERAL, ordinary or old line life insurance - fixed for a premium payable, without condition, at stated intervals, a sum certain is to be paid on death, without condition 2.

limited payment life insurance - specified premiums are to be paid for a specified period or until the death of insured if it occurs before the expiration of such period, and under which insurer is obligated to pay a specified sum on the death of the insured

3.

ENDOWMENT INSURANCE - contract to pay a certain sum to the insured if he lives a certain length of time, or if he dies before that time, to some other person indicated as beneficiary

4.

TERM LIFE INSURANCE - insurance for a term of years only, or until insured shall have arrived at a certain age

5.

ADVANCE INSURANCE - contract which provides for the payment to the insured of a lump sum immediately, in consideration of his agreement to make certain periodical payments to the insurer for a specified period, or for that end of the period, the performance of insured's obligation being secured by mortgage or deed of trust

6.

TONTINE INSURANCE - form of life insurance by which the policyholder under the same plan, that no dividends, return premium, or surrender value shall be received for a term of years called the "tontine period," the entire surplus from all sources being allowed to accumulate to the end of that period, and then divided among all who have maintained their insurance in force and who have survived.

No-fault Clause - any claim for death or injury shall be paid up to p5,000 without necessity of proving negligence or fault, provided the following proofs of loss under oath are submitted: 1. police report of accident 2. death certificate and evidence sufficient to establish proper payee 3. medical report and evidence of medical or hospital disbursement CLAIMS UNDER CMVLI - a claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from in any other case, against the insurer of the directly offending vehicle

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INSURANCE LAW Authorized driver clause - the clause means that it indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drives on his order or with his permission - the requirement that the person driving the insured vehicle is permitted in accordance with the licensing laws or other laws or regulations to drive the motor vehicle. It is applicable only if the person driving is other than the insured - where the car is unlawfully and wrongfully taken without the owner's consent or knowledge, such taking constitutes theft, and thus, it is the theft clause and not the "authorized driver clause" that should apply. Cooperation Clause - clause in an automobile insurance policy which provides in essence that the insured shall give all such information and assistance as the insurer may require, usually requiring attendance at trials or hearings Liability of insurer if insured was committing a felony - liabilities arising out of acts of negligence, which are also criminal, are also insurable on the ground that such acts are accidental. Thus, a motor insurance policy covering the insured’s liability for accidental injury caused by his negligence, even though gross and attended by criminal consequences such as homicide through reckless imprudence, will not be void as against public policy. But liability consequences of deliberate criminal acts are not insurable Jurisdiction of the insurance commissioner - Original exclusive jurisdiction with the Insurance Commissioner - Notice of claim must be filed within six months from the date of accident. Otherwise the claim shall be deemed waived. Action or suit must be brought in proper cases, with the Commission or the courts within one year from the denial of the claim, otherwise the claimant's right of action shall prescribe Functions of the commissioner 1. Adjudicatory functions 2. Administrative Functions - includes suspension or revocation of license, power to examine books and records Effect of death of insured through suicide - in life insurance contract, the insurer is liable in case of suicide in the following cases: 1. if committed after two years from the date of the policy's issue or its last reinstatement 2. if committed after a shorter period provided in the policy

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 3.

if committed in a state of insanity regardless of the date of the commission unless suicide is an excepted peril

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Any stipulation extending the 2-year period is null and void

COMMERCIAL LAW

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COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI) - is a protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner - Purpose: to give immediate financial assistance to victims of motor vehicle and/or their dependents, especially if they are poor regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS

INTELLECTUAL PROPERY CODE (R.A. No. 8293, effective January 1, 1998)

INTELLECTUAL PROPERY -those property rights which results from the physical manifestation of an original thought. (Ballantine’s Law Dictionary) COVERAGE – Intellectual property rights consists of: a) Copyrights and related rights; b) Trademarks and service marks; c) Geographic indications; d) Industrial designs; e) Patents; f) Layout-designs (Topographies) of Integrated Circuits; and g) Protection of Undisclosed Information. (Sec. 4) STATE POLICY IN RESPECT OF INTELLECTUAL PROPERTY RIGHTS (IPR) -There is a declaration of State Policy that, among others, the State recognizes that an effective intellectual and industrial property system is vital to the development of domestic and creative activity, facilitates transfer of technology, attracts foreign investments and ensures market access for our products, hence it shall protect and secure exclusive rights of scientists, inventors, artists, and other gifted citizens to their intellectual property and creations. (Sec. 2) INTERNATIONAL CONVENTION AND RECIPROTICY  Any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which 1) is a party to any convention, treaty, or agreement relating to intellectual property rights or the repression of unfair competition to which the Philippines is also a party, or 2) extends reciprocal rights to nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty, or reciprocal law, in addition to the rights to which any owner of an intellectual property rights is otherwise provided by law. (Sec. 3) REVERSE RECIPROCITY OF FOREIGN LAWS Section 231 – making enforceable on nationals of a foreign state all conditions, restrictions, limitations, diminutions, requirements or penalties that may be imposed by such foreign state on a Filipino national seeking intellectual property protection.

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LAW ON INTELLECTUAL PROPERTY TECHNOLOGY TRANSFER ARRANGEMENTS -contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market. (Sec. 4) PRESCRIPTIVE PERIOD OF ACTIONS FOR DAMAGES UNDER THE IPC -No damages may be recovered after four (4) years from the time the cause of action arose (Sec. 226) JURISDICTION OVER DISPUTES UNDER IPC A. Original Jurisdiction 1) Director General (IPO) -has original jurisdiction to resolve disputes relating to the terms of a license involving the author’s right to public performance or other communication of his work. 2)

Bureau of Legal Affairs -has jurisdiction over the ff: i. Opposition to applications for registration of marks; ii. Cancellation of trademarks; iii. Cancellation of patents, utility models and industrial designs; iv. Petition for compulsory licensing of patents; v. Administrative Complaints for violations of laws involving IPR where the total damages claimed is not less than P200,000.00

3)

Documentation, Information and Technology Transfer Bureau -has jurisdiction to settle disputes involving technology transfer payments

B. Appellate Jurisdiction 1) Director General -over all decisions rendered by the ff:  Dir. of Legal Affairs  Dir. of Patents  Dir. of Trademarks  Dir. of the Documentation, Information and Technology Transfer 2)

Court of Appeals -over decisions of the Director General in the exercise of his appellate jurisdiction over the decisions of the:  Dir. of Legal Affairs  Dir. of Patents  Dir. of Trademarks

3)

Secretary of Trade and Industry -over decisions of the Director General on the exercise of his appellate jurisdiction of the

 Reciprocal application is not automatic Rather, the Phils. may apply to the foreign national those restrictions that his country imposes on Filipino applicants

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Director of Documentation, Information and Technology Transfer; AND -over decisions of the Director General in the exercise of his original jurisdiction relating to the terms of license involving the author’s right. ADMINISTRATIVE PENALTIES IMPOSED FOR VIOLATIONS OF LAWS INVOLVING IPR -The Director for Legal Affairs may impose the ff: a) Issuance of a cease and desist order (CDO); b) Acceptance of voluntary assurance compliance (VAC) or voluntary assurance of discontinuance (VAD); c) Condemnation or seizure of products subject of the offense; d) Forfeiture of properties used in the commission of the offense; e) Imposition of administrative fines; f) Cancellation of permit, license, authority or registration; g) Withholding of permit, license, authority or registration; h) Assessment of damages; i) Censure; j) Analogous penalties or sanctions (Sec. 10.2 [b])

LAW ON PATENTS PATENT – an exclusive right acquired over an invention, to sell, use, and make the same whether for commerce or industry. PATENTABLE INVENTIONS -any technical solution of a problem in any field of human activity which is NEW, involves an INVENTIVE STEP and is INDUSTRIALLY APPLICABLE shall be patentable. The patentable invention may be, or may relate to, a product, or process, or an improvement of any of the foregoing. (Sec. 21) Requirements: 1) Technical solution of a problem in any field of human activity 2) Novelty – that which does not form part of a prior art consists of: a) that which has been made available to the public anywhere in the world before the filing date or the priority date of the application b) that which forms part of an application whether for patent, utility or industrial design, effective in the Philippines, provided that: i. the inventors or applicants are not the same ii. the contents of the application are published in accordance with the requirements of patent application rules. iii. the filing date of the prior art is earlier. 3) Inventiveness/Inventive Step -an invention involves an inventive step if, having regard to prior art, it is not obvious to a person skilled in

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LAW ON INTELLECTUAL PROPERTY the art of the time of the filing date or priority date of the application claiming the invention. (Sec. 26) 4) Industrial Applicability -an invention that can be produced and used in any industry. (Sec. 27) NON-PATENTABLE INVENTIONS The following shall be excluded from patent protection: a) Discoveries, Scientific Theories and Mathematical Methods; b) Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computer; c) Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body; d) Plant varieties or animal breeds of essentially biological process for the production of plants or animals; e) Aesthetic creations; f) Anything which is contrary to public order or morality (Sec. 22) RIGHT TO A PATENT The right to a patent belongs: a) to the inventor, his heirs, or assigns b) when 2 or more persons have made the invention separately and independently – to them jointly c) if two (2) or more persons have made the invention separately and independently of each other – to the person who filed an application for such invention (FIRST TO FILE RULE) d) where 2 or more applications are filed for the same invention – to the applicant who has the earliest filing date or the earliest priority date (FIRST TO FILE RULE) (Sec. 29) e) in case of inventions created pursuant to a commission – to the person who commissions the work UNLESS agreed otherwise. f) in case an employee made the invention in the course of his employment, the patent shall belong to:  the employee – if invention not part of his regular duties even if he uses the time, facilities and materials of the employer; OR  the employer – if the invention is the result of the performance of his regularly assigned duties unless agreed otherwise. RIGHTS ACQUIRED BY THE PATENTEE The patentee acquires the following rights under his patent a) Where the subject matter of a patent is a product, to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product; b) Where the subject matter of a patent is a process, to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using or offering for sale,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

COMMERCIAL LAW

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or importing any product obtained directly or indirectly from such process; to assign, or transfer by succession the patent, and to conclude licensing contracts for the same (Sec. 71)

UTILITY MODELS -models of implement or tools of any industrial product even if not possessed of the quality of invention but which is of “practical utility”

CONTENTS OF PATENT APPLICATION A patent application shall contain: 1) a request for the grant of patent; 2) a description of the invention; -the disclosure of the invention must be in a manner sufficiently clear and complete for it to be carried out by a skilled in the art. 3) Drawings necessary for the understanding of the invention; 4) One or more claims 5) An abstract (Sec. 32)

INDUSTRIAL DESIGN -any composition of lines or colors or any threedimensional form, whether or not associated with lines or colors provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft.

 must contain relevant information as to the identity of the person (no anonymous person)  if the applicant is not the inventor; he must show proof of authority to seek application for registration

Grounds: a) That the patent is invalid (Sec. 81); b) That what is claimed as the invention is not new or patentable; c) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or d) That the patent is contrary to public order or morality. (Sec. 61) e) failure to make payments of annual fees or dues

c)

UNITY OF INVENTION -every application for patent registration must contain an application over a simple invention or several inventions but must form part of a single general inventive concept PROCEDURE FOR THE GRANT OF PARENT a) According a filing date to the application (Sec. 41); b) Examination of compliance by applicant with the formal requirements specified in Sec. 32, i.e., contents of application (Sec. 42); c) Classification of application and search for prior art (Sec. 43) d) Publication of patent application in the IPO Gazette (Sec. 44); e) Inspection of the application documents by any interested party and written observations by any third party concerning the patentability of the invention (Secs. 44.2 and 47); f) Written request by the applicant, within 6 months from the date of publication of his patent application, for the substantive examination by the IPO of his application. (Sec 48); g) Grant of the patent (Sec. 50), or refusal of the examiner to grant the patent (Sec. 51); in the latter case, the refusal may be appealed to the Director of the Bureau of Patents; h) Publication of the grant of patent in the IPO Gazette (Sec. 52) TERM OF A PATENT, UTILITY MODEL, INDUSTRIAL DESIGN a) Patent – 20 yrs from the filing date of application, without renewal b) Utility model – 7 yrs, w/out renewal c) Industrial design – 5 yrs, renewable twice

CANCELLATION OF PATENTS Who may file?  any person  IPO motu proprio

Where to file?  BLA – if in violation of IPC (administrative)  RTC – otherwise INFRINGEMENT -the making, using, offering for sale, selling or importing a patented product or a product obtained directly or indirectly from a patented process or the use of a patented process without the authorization of the patentee. (Sec. 76) TEST OF PATENT INFRINGEMENT 1) Literal Infringement – resort is had to the “words” of the claim. 2) Doctrine of Equivalents – if two devices do the same work in substantially the same way, the same result, and produce substantially the same result, they are the same even though they differ in name, form, or shape. REMEDIES IN CASE OF INFRINGEMENT A) File civil case for the following purposes: 1) To recover from the infringer such damages as the court may award considering the circumstances of the case provided it shall not exceed 3 times the amount of the actual damages sustained plus attorney’s fees and other expenses of litigation; 2) To secure an injunction for the protection of his rights; 3) To receive a reasonable royalty, if the damages are inadequate or cannot be readily ascertained with reasonable certainty;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 4) To have the infringing goods, materials and implements predominantly used in the infringement disposed of outside the channels of commerce, or destroyed without compensation; 5) To hold the contributory infringer jointly and severally liable with the infringer. B) File criminal case within 3 years from date of commission of the crime for repetition of infringement (Sec. 84)

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LAW ON INTELLECTUAL PROPERTY identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. (Sec. 147) DURATION -the certificate of registration of a trademark shall be ten (10) years from the filing date of application provided the registrant shall file a declaration of actual th use within a year from the 5 anniversary of registration date (Sec. 145) -renewable for another 10 yrs. (Sec. 146)

LAW ON TRADEMARKS TRADEMARK – anything which is adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor SERVICE MARK – distinguishes the services of an enterprise from the service of other enterprises. It performs for services what a trademark does for goods. COLLECTIVE MARK - any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods and services of different enterprises which use the sign under the control of the registered owner of the collective mark (Sec. 121.2) TRADE NAMES – the person (whether natural or juridical) who does business and produces the goods or the services is designated by a trade name. -Under the law, there is no need to register trade names in order to secure protection for them. TRADE DRESS – involves the total image of a product, including such features as size, shape, color or color combinations, texture, and/or graphics. HOW MARKS ARE ACQUIRED -Under RA 8293, the rights in a mark shall be acquired through registration made validly in accordance with its provisions. (Sec. 122) -This proposition of law, however, may not be converted for it is not true that where there is no registration, there is no protection.  Acquisition through use -Whether or not a registered trademark is employed, when a person has identified in the mind of the public the goods he manufactures or deals in his business or services from those of others, such a person has a property right in the goodwill of said goods or services which will be protected in the same manner as other property rights (Sec. 168.1) RIGHTS CONFERRED -the owner of a registered mark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade

NON-REGISTRABLE TRADEMARKS, TRADE NAMES AND SERVICE MARK A mark cannot be registered if it: a) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute; b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation, or any simulation thereof; c) Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by written consent of the window; d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: (i) The same gods or services, or (ii) Closely related goods or services, or (iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion; e) Is identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be wellknown internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services: provided, that in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark; f) Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: provided, that use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered trademark: Provided further that the interests of the owner of the registered mark are likely to be damaged by such use;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS g) Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; h) Consists exclusively of signs that are generic for the goods or services that they seek to identify; i) Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in a bonafide and established trade practice; j) Consists exclusively of signs or indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; k) Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; l) Consists of color alone, unless defined by a given form; or m) Is contrary to public order or morality (Sec. 123) FILING DATE OF AN APPLICATION -The filing date of an application shall be the date on which the office received the following indications and elements in English or Filipino: a) An express or implicit indication that the registration of a mark is sought; b) Indications sufficient to contact the applicant or his representative, if any; c) Indications sufficient to contact the applicant or his representative, if any; d) A reproduction of the mark where registration is sought; and e) The list of the goods or services for which the registration is sought. (Sec. 127.1)  NO filing date shall be accorded until the required fee is paid (Sec. 127.2) PROCEDURE FOR REGISTRATION a) Examination to determine whether the application satisfies the requirements for the grant of a filing date. b) Examination to determine whether the application meets the requirements of Sec. 124 and the mark is registrable under Sec. 123. c) Denial of the application or amendment thereof or publication of the application; d) Opposition to the application; notice; hearing; decision by examiner; appeal to the Director of Bureau of Trademarks; appeal to the IPO Director General; appeal to the CA; e) Issuance of Certificate of registration f) Publication in the IPO Gazette of the fact of registration CANCELLATION OF TRADEMARK OR TRADENAME Who may file?  any person who believes that he is and will be damaged by the registration of a mark

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LAW ON INTELLECTUAL PROPERTY Where to file?  BLA Grounds: a) Mark becomes generic for goods for which it is registered; b) Abandonment of the mark; c) Registration obtained fraudulently or contrary to provisions of RA 8293; d) Mark used by, or with permission, or, registrant; e) Failure to use the mark within the Philippines for 3 uninterrupted years or longer. EFFECTS OF NON-USE  may be excused if caused by circumstances arising independently of the will of the trademark owner, such as military coup, or political changes that impede commerce  Registration is an administrative act declaratory of a pre-existing right that does not, of itself, perfect a trademark, for what does is actual use  Non-use is a ground for removing a mark from the register DOCTRINE OF SECONDARY MEANING -While a generic, indicative or descriptive mark will, as a general rule, be denied registration, there is a circumstance that will allow it to be registered. Under the doctrine of secondary meaning, when a mark has become distinctive of the applicant’s gods in commerce and, in the mind of the public, indicates a single source of consumers, it may be registered. WHAT CONSTITUTES AN INFRINGEMENT -Under RA 8293, any person shall, without the consent of the owner of the registered mark: 1) Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; or 2) Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy, or colorable imitation to labels, signs, prints, packages, wrappers, receptacles, or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on, or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive, shall be liable for infringement. (Sec. 155) TEST OF TRADEMARK INFRINGEMENT

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

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Dominancy Test – consists in seeking out the main, essential or dominant features of a mark. Holistic Test – takes stock of the other features of a mark, taking into consideration the entirety of the marks.

DIFFERENTIATED FROM UNFAIR COMPETITION 1) Cause of action: in infringement, the cause of action is the unauthorized use of a registered trademark; in unfair competition, it is the passing off of one’s goods as those of another merchant. 2) Fraudulent intent is not necessary in infringement, but necessary in UC. 3) Registration of trademarks: in infringement, it is a prerequisite; in UC, it is not required. 4) Class of goods involved: in infringement, the goods must be of similar class; in UC, the goods need not be of the same class.  infringement is a form of unfair competition

REMEDIES AVAILABLE IN CASE OF INFRINGEMENT OF A REGISTERED MARK a) Sue for damages (Sec. 156.1); b) Have the infringing goods impounded (Sec. 156.2); c) Ask for double damages (Sec. 156.3) d) Ask for injunction (156.4) e) Have the infringing goods disposed of outside the channels of commerce (Sec. 157.1) f) Have the infringing goods destroyed (Sec. 157.1) g) File criminal action (Sec. 170); h) Administrative Sanctions UNFAIR COMPETITION -any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition. How Committed a) Making one’s goods appear as the goods of another; b) Use of artifice or device to induce the false belief that one’s goods are those of another; c) False statements in the course of trade; or d) Any act contrary to good faith calculated to discredit another’s goods TEST OF UNFAIR COMPETITION -The test is whether certain goods have been clothed with an appearance likely to deceive the ordinary purchaser exercising ordinary care. REMEDIES AGAINST UNFAIR COMPETITION a) Damages which may either be:  reasonable profit which would have realized, or  actual profits collected by the defendant, or

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a certain percentage over the gross sales of defendant in case of the measure of damages cannot be readily ascertained; b) Damages may be doubled in cases where actual intent to mislead the public or to defraud the complaint is shown; c) Impounding of sales invoices and other documents evidencing sales; d) Injunction e) Destruction of goods found to be infringing, and all paraphernalia.

LAW ON COPYRIGHT COPYRIGHT – system of legal protection an author enjoys in the form of expression of ideas BASIC PRINCIPLES  Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as their content, quality or purpose (Sec. 172.2)  Protection extends only to the expression of the idea, not to the idea itself or to any procedure, system, method or operation, concept or principle, discovery or mere data. CREATION OF A WORK A copyright work is created when the two(2) requirements are met: 1) Originality – does not mean novelty or ingenuity, neither uniqueness nor creativity. It simply means that the work “owes its origin to the author” 2) Expression – there must be “fixation” To be “fixed”, a work must be embodied in a medium sufficiently:  permanent; or  stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration. -if it is not required that the medium be visible as long as there is a possibility of retrieval, then there is fixation -it is fixation that defines the time from when copyright subsists. Before fixation, there can be no infringement. WORKS PROTECTED BY COPYRIGHT A. Original Work - Literary and artistic works are original intellectual creations in the literary and artistic domain protected from the moment of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose, and shall include in particular: a) Books, pamphlets, articles and other writings b) Periodicals and newspapers c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form d) Letters

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS e)

f) g)

h)

i)

j) k)

l) m) n) o)

Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows Musical compositions, with or without words Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science Drawings or plastic works of a scientific or technical character Photographic works including works produced by a process analogous to photography; lantern slides Audiovisual works and cinematographic or any process for making audio-visual recordings Pictorial illustrations and advertisements Computer programs Other literary, scholarly, scientific and artistic works (Sec. 172)

B. Derivative Works – the following derivative works shall also be protected: a) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary works b) Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents. (Sec. 173) WORKS NOT PROTECTED -The following works are not protected: 1) Any idea, procedure, system, method or operation, concept, principle, discovery or mere data as such, even if expressed, explained, illustrated, or embodied in a work; 2) News of the day and other facts having the character of mere items of press information; 3) Any official text of a legislative, administrative or legal nature, as well as any official translation thereof. (Sec. 175) 4) Any work of the Government of the Philippines. (Sec. 176) -however, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office, may, among other things, impose as a condition the payment of royalties 5) Pleadings; 6) Decisions of courts and tribunals. -This pertains to the “original decisions” not to the SCRA published in volumes since these are protected under derivative works.

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LAW ON INTELLECTUAL PROPERTY RIGHTS OF AN AUTHOR (Author – a natural person who has created the work.) A. Economic Rights (Sec. 177) 1) Right to reproduce; 2) Right to create derivative works; 3) Right to first public distribution or first sale; 4) Right to rent out the original or a cop of an audiovisual or cinematographic work; 5) Right to public performance; 6) Right to other communication of the work to the public. B. Moral Rights (Sec. 193) 1) Right of attribution or paternity right; 2) Right of alteration or non-publication; 3) Right to preservation of integrity 4) Right not to be identified with work of others or with distorted work. Term of moral right -lifetime of the author and 50 years after his death Waiver of moral right 1) by a written instrument (Sec. 195) 2) by contribution to a collective work unless expressly reserved (Sec. 196) PRINCIPLE OF AUTOMATIC PROTECTION Under the Berne Convention, the enjoyment and exercise of copyright, including moral rights, shall not be the subject of any formality. OWNERSHIP OF COPYRIGHT 1. Single creator – copyright belongs to the author of the work, his heirs or assigns. 2. Joint creation – copyright belongs to the co-authors jointly as co-owners. But if the work consists of identifiable parts, the author of each part owns the part that he has created. 3. Employee’s creation – copyright belongs to the employee if the creation is not part of his regular duties even if he uses the time, facilities and materials of the employer; otherwise it belongs to the employer 4. Commissioned work – the work belongs to the person commissioning but the copyright remains with the creator unless there is a written stipulation to the contrary. 5. Cinematographic works – the producer has copyright for purposes of exhibition; for all other purposes, the producer, the author of the scenario, the composer, the film director, the author of the work are the creators. 6. Anonymous and pseudonymous works – the publishers shall be deemed the representative of the author unless: a. the contrary appears b. the pseudonyms or adopted name leaves no doubt as to the author’s identity or c. if the author discloses his identity (Sec. 179).

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

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8.

Collective works – the contributor is deemed to have waived his right unless he expressly reserves it. (Sec. 196) Collective work – a work created by two or more persons at the initiative and under the direction of another with the understanding that it will be disclosed by the latter under his own name and that the contributions of natural persons will not be identified. (Sec. 171.2) In case of transfers, the transferee shall own one or more or all the economic rights transferred provided: a. the assignment, if inter vivos, be in writing (Sec. 180.2) b. the assignment be filed with the National Library upon payment of the prescribed fee. (Sec. 182)

DURATION OF COPYRIGHT  Literary artistic works and derivative works of a SINGLE CREATOR - lifetime of the creator and for 50 years after his death  Joint creation – lifetime of last surviving co-creator and for 50 years after his death.  Anonymous or a work under a pseudonym not identifiable with the true name of the creator – 50 years after the date of their first publication.  Except where, before the expiration of said period, the author's identity is revealed or is no longer in doubt, the rule for single and joint creation shall apply  Photographic works – 50 years from the publication of the work, or from making the same term is given to audiovisual works produced by photography or analogous processes.  Work of Applied Art – 25 years from the date of making  Newspaper Article – lifetime of the author and 50 years after his death  A pure news report will no longer find protection under he new law, BUT a column or published comment will 

The work of performers not incorporated in RECORDING, PRODUCTS OF SOUND IMAGE RECORDINGS, and BROADCASTS, are protected for periods of 50 years, 50 years, and 20 years, respectively, counted from the end of the year of performance, recording, or broadcasts, respectively.

The term of protection shall be counted from the first day of January of the year following the death or of last publication (Sec. 214) LIMITATIONS TO THE RIGHTS ON COPYRIGHT 1) Private performance, private and personal use – applicable only “when a work has been lawfully made accessible to the public.” Personal Use -making a single reproduction, adaptation, arrangement or other transformation of another’s

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LAW ON INTELLECTUAL PROPERTY work exclusively for one’s own individual use in such cases as personal research, learning or amusement Private Use -making a reproduction, adaptation or other transformation of it, in a single person as in the case of “personal use” but also for a common purpose by a specific circle of persons only. 2)

Fair Use of a Copyrighted Work Fair Use - A privilege in persons other than the owner of the copyright to use the copyrighted material in a reasonable manner without its consent, notwithstanding the monopoly granted to the owner by the copyright. -the doctrine of fair use is meant to balance the monopolies enjoyed by the copyright owner with interests of the public and of society.

CRITERIA TO DETERMINE WHETHER USE IS FAIR OR NOT: a) Purpose and the character of the use b) Nature of the copyrighted work c) Amount and substantially of the portions used d) Effect of the use upon the potential market of the copyrighted work (Sec. 185) THE “FAIR-USES” OF PROTECTED MATERIAL ARE: a) Criticizing, commenting, and news reporting; b) Using for instructional purposes including producing multiple copies of classroom use, for scholarship, research and similar purposes (Sec. 185) 3)

WORKING OF ARCHITECTURE (Sec. 186) -include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original or in any form recognizably derived from the original; Provided, that the copyright in any such work shall not include the right to control the reconstruction, or rehabilitation in the same style as the original of a building to which that copyright relates 4) REPRODUCTION OF PUBLISHED WORK -exclusively for research and private study. 5)

REPROGRAPHIC REPRODUCTION BY LIBRARIES -any library or archive whose activities are not for profit may, without the authorization of the author of copyright owner, make a single copy of the work by reprographic reproduction.

6) REPRODUCTION OF COMPUTER PROGRAMS -allowed on the ff. conditions: a) only one copy is made; b) lawful owner made the copy; c) purpose of which the reproduction is made is legal like:  use to which the program is made and for which it was purchased demand the reproduction of a copy; or

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 

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the reproduction of a copy is necessary to guarantee against loss or destruction (Sec. 189.1)

IMPORTATION FOR PERSONAL PURPOSES -The importation of a copy of a work by an individual for his personal purposes shall be permitted without the authorization of the author of, or other owner of copyright in, the work under the following circumstances: a) Copies of the work are not available in the Philippines and: i. not more than one copy at one time is imported for strict individual use; ii. importation is by authority and for the use of Philippine Government; or iii. Religious, charitable, or educational society imported not more than 3 copies per title provided they are not for sale. b) Copies form part of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale: Provided, that such copies do not exceed three (3). (Sec. 190)

REMEDIES IN CASE OF INFRINGEMENT: 1) Injunction to prevent infringement 2) Damages assessed on the basis of the proof alleged by the plaintiff of sales made by the defendant of the infringing work minus whatever costs the defendant may be able to prove and appreciated by the court. 3) Delivery under oath of all implements employed in the production of the infringing products themselves and the infringing items, for impounding or destruction as the court may order. 4) Payment of moral and exemplary damages in the discretion of court. 5) Criminal Action DIFFERENCE BETWEEN COPYRIGHT, PATENT AND TRADEMARK 1) Subject Matter of the Right: Copyright – literary, scientific or artistic work; Patent – new, useful, and industrially applicable inventions; Trademark – goods manufactured or produced 2)

Where Right Registered: Copyright – National Library Patent and Trademark – IPO

3)

Duration of Right: Patent – 20 years from filing or priority date Trademark – 10 years Copyright – Generally up to 50 years after the death of the author.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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TRANSPORTATION LAWS 3.

the stipulation be reasonable, just and not contrary to public policy

TRANSPORTATION LAWS

COMMON CARRIERS (ARTICLES 1732-1766) - are persons, corporation, firms, or associations engaged in carrying or transporting passengers or goods or both, by land, water, or air for compensation of offering their services to the public. Extraordinary diligence is required to common carriers in transporting goods and passengers Reasons: 1. nature of the business 2. public policy Registered owner primarily and solidarily with driver under the KABIT SYSTEM. Kabit system is contrary to public policy; therefore, void and inexistent. CIRCUMSTANCES UNDER WHICH COMMON CARRIERES CANNOT BE HELD LIABLE FOR THE LOSS/DESTRUCTION OF GOODS: 1. flood, storm, earthquake, or other natural calamities 2. act of public enemy in war, either international or local 3. act or omission of the shipper or owner of the goods 4. character of the goods or defects of the packing 5. order of competent authority

SOME VALID STIPULATIONS LIMITING CARRIER'S LIABILITY: 1. account as strikes or riot 2. value of the goods appearing in bill of lading UNLESS shipper declares a greater value 3. contract fixing the sum that may be recovered VOID STIPULATIONS LIMITING CARRIER'S LIABILITY: 1. the goods are transported at the risk of the shipper 2. that the shipper is not liable for any loss or destruction of the goods 3. that the common carrier need not observed any diligence and less than that of good father of a family 4. that the common carrier shall not be responsible for any acts of its employee The law of the country to which the goods are to be transported shall govern the liability of common carrier for their loss, destruction, or deterioration. The act of the thief or robbers who entered the common carrier's vehicle is not deemed force majeure UNLESS it is done with the use of arms or through irresistible force. A common carrier is bound to carry the passengers safely as far as human care and foresight can provide using the utmost diligence of a very cautious person with a regard of circumstances.

Extraordinary diligence lasts from the time the cargoes are loaded in the vessel until they are discharged and delivered to the consignee.

In case of death or injuries to passengers, common carriers are presumed to be at fault UNLESS proved that they observe extra ordinary diligence.

Air carriers can terminate services of pilots for serious misconduct and drunkenness because of its extraordinary diligence.

LAST CLEAR CHANCE

INSTANCES WHICH ARE NOT CASO FORTUITO: 1. hijacking 2. acts of strangers like thieves or robbers acted with grave or violence 3. accidents due to defects of carrier 4. where tie blow-out    

Fire is not a natural disaster Notice of arrival of goods amounts to constructive delivery Shipper bound to observe all diligence in obtaining delivery of goods Common Carriers may be exempted from responsibility PROVIDED that natural disaster is the proximate and only cause of the loss.

STIPULATIONS LIMITING LIABILITY IS VALID PROVIDED THAT: 1. the stipulation be in writing signed by both parties 2. the stipulation be supported by a valuable consideration other than the service rendered by common carrier

-

this principle applies only in a suit between owners and drivers of two colliding vehicles. This is not applicable to Contract of Carriage.

Carrier not ordinarily liable for injuries to passengers due to fires, and explosions caused by articles brought into conveyance by other passengers. Ticket is a complete written contract by and between the shipper and passenger for it contains: 1. consent of the contracting parties 2. cause or consideration which is the fare paid by the 3. passengers 4. object which is the transportation of the passenger from 5. the place of departure to the place of destination. Reduction of fare does not justify any limitation of the common carrier's liability. Passenger bound notwithstanding his failure to sign plane ticket containing stipulation limiting liability known as contract of adhesion.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS The extraordinary diligence required for carriage of passengers cannot be dispensed with: 1. by stipulation 2. by posting of notices 3. by statement of tickets 4. otherwise however as an exception, parties may stipulate limiting carrier's liability where the passenger is carried gratuitously Common Carrier is liable for damages for defects of its equipment. Common Carrier is liable for the misconduct of its employees done in their own interest. Reason: the servant is clothed with the delegated authority and charged with duty by the carrier to execute his undertakings to carry the passenger safely. Carrier exempt from acts of employees not done in line of duty. The passenger must observe the diligence of a good father of a family or ordinary diligence to avoid injury to himself. EFFECTS OF NEGLIGENCE- where the proximate cause of the death/ injury to the passenger is his own negligence, common carrier is exempted from liability.

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TRANSPORTATION LAWS Article 19, the carrier shall be liable for damages occasioned by delay in transportation by air of passengers, baggage, or goods. DAMAGES RECOVERABLE WHEN DEATH OCCURS DUE TO COMMISSION OF A CRIME: 1. indemnity for death of a victim 2. indemnity for loss of earning 3. moral damages 4. exemplary damages 5. attorney's fees and expenses of litigation, 6. interest and properties FACTORS TO BE CONSIDERED IN AWARDING DAMAGES ARISING FROM DEATH: 1. number of years on the basis of which the damages shall be computed 2. rate at which the losses sustained should be fixed For fixed indemnity for death, there is no need to interrogate witness. Common carrier not liable for moral damages to passenger s injured due to negligence of driver. Carrier is liable when it issues to passenger a confirmed ticket for a particular ticket if he is not put in that flight.

EFFECT OF PASSENGER'S CONTRIBUTORY NEGLIGENCE- passenger's contributory negligence does not justify carrier's exemption from liability. However, the damages will be equitably reduced.

Carrier liable only for damages that are natural and probable consequence and breach of contract which includes medical, hospital and other expenses.

A common carrier is responsible for injuries suffered by a passenger on account of the lawful acts/negligence of other passengers or of strangers provided that the employees could have prevented the act or omission through the exercise of a good father of a family. Degree of diligence required of carriers employeesmerely that of the good father of a family or ordinary diligence.

ITEMS INCLUDED IN ACTUAL DAMAGES: 1. income to be earned upon completion of studies 2. the sum being carried by deceased passenger which was lost 3. amount spend to her funeral 4. attorney's fees and court expenses 5. loss of the merchandise carried by the deceased 6. loss of baggage containing medicine, boxes, and suitcases of personal belongings

Liability of air carrier under Warsaw Convention of October 12,1929, article 17, the carrier shall be liable for damages sustained in the event of death or injury of a passenger if accident took place on board the aircraft or in the course of embarking or disembarking. Article 18(1), the carrier shall be liable for damages sustained in the event of destruction or loss of or of damage to any checked baggage or any goods in the course of transportation. (2), the transportation of air shall comprise the period during which the baggage or goods are in the charge of the carrier whether an airport or on board an aircraft or in case of landing outside an airport. (3), the period of transportation by air shall not extend to any transportation by land, sea, or river outside an airport.

EXCEPTIONS TO RULE THAT CARRIER NOT LIABLE FOR MORAL DAMAGES IN BREACH OF CONTRACT: 1. where the mishap results in the death of passenger 2. where it is proved that the carrier is guilty of fraud or bad faith even if death does not result 3. where the passenger suffers social humiliation, wounded feelings, anxiety and mental anguish Surviving passenger is not entitled to moral damages. Mere carelessness of the carrier does not per se constitute an inference of malice or bad faith on its part. Carrier subsidiary liable for moral damages in actions ex delicto. Exemplary damages cannot be recovered as a matter of right.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Nominal and exemplary damages awarded for willful breach of contract committed through agent or employee. Carrier incurring only delay not liable for moral and exemplary damages but only to the limited amount printed in the plane ticket. Exemplary damages is allowable under Kabit System. Common Carrier in Nominal Damages for failure of carrier to bring passenger to his destination but mere violation of a Contract of Carriage does not warrant recovery for moral damages. In case of breach of the carrier's contractual obligation to carry his passenger safely to their destination, the carrier is solidarily liable for his driver's negligence. Exercise of due diligence in selecting driver is not a defense. Preponderance of evidence sufficient to prove civil liability arising from negligence.

OVER LAND TRASPORTATION (arts. 349–379, Code of Commerce) Effect of Civil Code on the provisions of the Code of Commerce on Overland Transportation - The NCC does not expressly repeal the provisions of the Code of Commerce on overland transportation. Instead, it makes such provision suppletory to the provisions of the NCC on common carriers Bill of Lading, Defined Written acknowledgement of receipt of goods and agreement to transport them to a specific place to a person named or to his order or bearer. - Ambiguity is construed against the carrier, the contract being one of adhesion. - Not essential to contract. -

Kinds of Bills of Lading (1). Negotiable bill of Lading – one in which it is stated that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document. (2). Non–Negotiable bill of Lading – the goods referred to therein will be delivered to a specified person. (3). Clean bill of Lading – One which does not indicate any defect in the goods (4). Foul bill of Lading – Contains a notation indicating that the goods are in bad Condition. (5). Spent bill of Lading – Covers goods that have already been delivered by the carrier without a surrender of a signed copy of the Lading. (6). Through bill of Lading – Issued by a carrier who is obliged to use the facilities of other carriers.

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TRANSPORTATION LAWS (7). On Board bill of lading – one in which it is stated that the goods have been received on board the vessel which is to carry the goods. (8). Received for Shipment bill of lading – it is stated that the goods have been received for shipment with or without specifying the vessel by which the goods are to be shipped. (9). Custody bill of Lading – issued by the carrier to the whom the goods have been delivered for shipment but the vessel indicated in the bill of leading which is to carry the goods has not yet reached the port where the goods are held for shipment. (10). Port bill of Lading – one which is issued by the carrier to whom the goods have been delivered, and the vessel to carry the goods is already in the port where the goods are held for shipment. Three–Fold nature of bills of Lading (1). A contract in itself and the parties are bound by its terms; (2). A receipt; and (3). A symbol of the covered by it  They are also documents of title, and if negotiable in form they can constitute negotiable documents of title. Legal effect of the Issuance of Bill of Lading Bill of lading constitute the legal evidence of the contract between the shipper and the carrier by the contents of which the disputes which may arise regarding their execution and performance shall be decided, no exception being admissible other than those of falsity and material error in the drafting. Effect of absence of a bill of lading It does not preclude liability on a contract of transportation. The disputes shall be determines by the legal proofs which the parties may present in support of their respective claims, according to the general provisions established in the Code for commercial contracts. When responsibility of carrier begins The responsibility of carrier commences from the moment he receives the merchandise. The Delivery to him must be made either to him personally, or through his duly authorized agent. Right to refuse packages Gen. Rule: – a common carrier cannot ordinarily refuse to carry a particular class of gods to the prejudice of the traffic in those goods. Exception: However, under Art. 365, carrier are authorized to refuse packages if they are unfit for transportation. Time for delivery of goods  Where no period fixed – The carrier shall be bound to forward them in the first shipment of the same or similar goods, which he makes to the points where he must deliver them. Should he not do so,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS



the damages caused by the delay shall be for his account. Where for delivery of goods – The carrier must deliver the goods within the time fixed. For failure to do so, the carriers shall pay the indemnity stipulated in the bill of lading. Also, damages shall be paid if the carrier refuses to pay the stipulated indemnity or is quality of fraud in the fulfillment of his obligation.

Limitation as to carrier’s liability (1). No Liability – The carrier will not be liable at all for the negligent acts of its crew and employees. This is NULL and VOID for being contrary to public policy (2). Limited Liability – Regardless of the value of the cargo, the maximum liability of the carrier will be, for example, P500. This id VOID for being contrary to public policy. (3). Qualified Liability – A stipulation in the bill of lading limiting the liability of the carrier to a valuation unless the shipper declares a higher value and pays a higher rate of freight is valid.  However, the carrier cannot limit its liability for injury to, or loss of, good shipped where such injury or lose was caused by its own negligence’s.

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TRANSPORTATION LAWS (1) Under Art. 363, in case of partial non-delivery, where the consignee proves that he cannot make use of the goods capable of delivery independently of those not delivered. (2) Under Art. 365, where the goods are rendered useless for sale and consumption for the purpose for which they are properly destined; or (3) Under Art. 371, where there is delay through the fault of the carrier. Two special sanctions for the enforcement by the carrier of the payment of expenses and transportation charges. They Are: (1). Under Art. 374, judicial sale of the goods transported; and (2). Under Art. 375, by creating a lien in favor of the carrier on the goods transported. Exemption from liability of the common carrier – A common carrier may be freed from liability for loss or damage if it proves any of the following: (a) Natural disaster (b) Act of the Public enemy in war © Act or omission of the shipper (d) Defect in the packing and character of the goods (e) Order of competent public authority

MARITIME COMMERCE Recovery of Damages from carriers for carriage of goods: (1) Inter-island – if gods arrived in damaged condition:  If damage is apparent, the shipper must file a claim immediately.  If damage is Not apparent he should file a claim within 24 hours from delivery.  The filing of claim is a condition precedent for recovery.  If the claim is filed, but the carrier refuses to pay: – Enforce carriers liability in court by filing a case:  Within 6 years, if no bill of lading has been issued, or  Within 10 years, if a bill lading has been issued. (2) Overseas – Where goods arrived in a damaged condition from a foreign port to a Philippines Port of Entry:  Upon discharge of goods, if the damage is apparent claim should be filed immediately;  If damage is not apparent, claim should be filed within 3 days from delivery. When may a consignee of goods abandon the goods and recover the value thereof from the carrier? In any of the following cases:

I.

VESSELS (in general) -extends to everything floating in and on the water, built in the form of vessel and used for navigation regardless of form, right or motive power.

MERCHANT VESSELS- engaged in the transportation of passengers and freight from one port to another or from one place to another. *Are vessels real or personal property? PERSONAL- but they partake to a certain extent, of the nature and conditions of real property, on account of their value and importance of the world of commerce. CHARACTERISTICS OF MARITIME TRANSACTIONS: 1. Real- similar to transactions over real property with respects too effectively against third persons, which is done through registration. The evidence of real nature is shown by (1) the limitation of the liability of the agents to the actual value of the vessel and the freight money and (2) the right to retain the cargo and embargo and detention of the vessel. 2. Hypothecary- the liability of the owner of the value of the vessel is limited to the vessel itself. 3. Preference of credits- Mortgage of a vessel properly registered becomes of preferred mortgage lien which shall have priority over all claims against the vessel in an extrajudicial foreclosure for:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS a. b. c. d. e. f. g. h. i. j.

credit in favor of the public treasury judicial cost of the proceedings; pilotage and tonnage charges and other sea and port changes; salaries of depositories and keepers of the vessel captain and crew's wages; general average salvage including contract salvage; maritime liens arising prior in time to the recording of the preferred mortgage; damages arising out of tort; and Preferred mortgage registered prior in time.

DOCTRINE OF LIMITED LIABILITY: General Rule: The liability of ship owners is limited to the amount of interest in said vessel such that where vessel is entirely lost, the obligation is extinguished. The interest extends to (1) the vessel itself, (2) equipment, (30 freightage and (4) insurance proceeds. Exceptions: 1. claims under Workmen's Compensation 2. injury or damage due to ship owners fault 3. the vessel is insured 4. expenses for repair on vessel before loss; 5. the vessel is not abandoned PHILIPPINE COAST GUARD (PCG) -vested with exclusive authority over the registration and documentation of Philippine vessels, issuance of all certificates, licenses or documents, necessary or incident to registration. VESSELS REQUIRED TO BE REGISTERED: 1. All vessels used in Philippine water. 2. Vessels of 3 tons gross shall not be registered UNLESS the owner shall so desire. 3. All undocumented vessels. Where Registration to be effected? - at its home port (when a coast guard district or station is on the same port); if none, at the nearest COAST GUARD DISTRICT OR STATION). OPTIONS AS TO SMALL BOATS: 1.) If vessel is of domestic ownership and 15 tons gross or less certificate of Philippine registry is optional. Purpose: declare nationality of a vessel 2.) Vessel (5 tons gross or less) & no certificate of Philippine registry  certificate of ownership is optional. Privileges: right to engage in Phil. Coastwise trade and protection of the authorities and the flag is also subject to the same privileges. 3.) Vessel (3 tons gross or less)  not be registered unless the owner shall so desire. PURPOSE OF REGISTRATION: - Purchaser's rights maybe maintained against a claim filed by the THIRD PERSON.

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TRANSPORTATION LAWS *Who shall be entitled to the freightage and who shall be obliged to pay the crew and other persons who make up the compliment of the vessel? A: It depends upon the time of the sale. If made while it is on a voyage, freightage shall pertain entirely to PURCHASER and payment of the crew and other persons who make up its compliment for same voyage shall be for his account. If made after the vessel has arrived at the port of its destination, freightage shall pertain to the VENDOR and other individuals who make up its complement shall be for his account, UNLESS the contrary is stipulated in either case. FORMALITIES FOR VOLUNTARY SALE ABROAD: 1. Execution of the bill of sale before consul of the Philippines at the port where it terminates its voyage. 2. Inscription in the registry of the consulate 3. Forwarding by the consul of a true copy of the instrument of purchase and sale to the registry of vessel. 4. Statement whether the vendor receives its price in whole or in part. FORMALITIES FOR SALE WHEN VESSEL RENDERED USELESS: 1. application for examination 2. notification of the consignee/ insurer 3. proof of damage and impossibility of the repair of the vessel 4. order for the sale of vessel at public auction RULES FOR THE SALE OF VESSEL AT PUBLIC AUCTION: 1. articles of the vessel shall be appraised after making an inventory 2. posting of the order of the auction 3. announcement 4. auction shall be held on the day fixed 5. Observance of special provisions, governing the sale of the vessel while it is on the foreign country. 2 METHODS OF SALE: 1. judicial 2. voluntary

EFFECT OF REGISTRATION OF JUDICIAL SALE - extinguish all other liabilities of the vessel *Effect of Registration of Voluntary Sale - if it take place while the vessels is on a voyage, the preferred & hypotyhecary nature of the credit subsists against the vessel until after its return to the port of registry and 3 months after the inscription of the sale in the registry of vessels or after the return, so as to prevent the possibility of fraud upon creditors through voluntary sale. PARTICIPANTS IN MARITIME COMMERCE: a. shipowners and ship agents b. captains and masters of the vessel c. officers and crew of the vessel

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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st

d. e.

c.1 sailing (1 mate) nd c.2 quartermaster (2 mate) c.3 engineer seamen supercargoes

A. SHIPOWNERS AND SHIP AGENTS Ship owner- person who has possession control in management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues. Ship agent-person entrusted with provisioning and representing the vessel in the port in which it may be found; also includes the ship owner LIABILITY OF SHIPOWNER AND SHIPAGENT: 1. for the acts of the captain 2. contracts entered into by the captain to repair, equip, and provision the vessel PROVIDED that the amount claimed was invested for the benefit of the vessel 3. Indemnities in favor of third person that may arise from the conduct of the captain in the care of goods and safety of passengers transported. 4. Tort or quasi-delict committed by captain EXCEPT collision with another vessel. 5. Damages in case of collision due to the fault, negligence or want of skill of captain, sailing mate or by other member of the complement. SHIPAGENT'S AND OWNERS LIABILITY LIMITED: - By abandoning the vessel with all her equipment and the freight it may have earned during the voyage(by NECESSARY IMPLICATION); limited to the value of the vessel or its insurance in view of the so-called REAL AND HYPOTHECARY nature of maritime law. - Effect: cessation of the responsibility of the owner POWER AND FUNCTIONS AND LIABILITIES OF SHIP AGENT: 1. capacity to trade; 2. discharge duties of the captain in case of the latter's absence; 3. contract in the name of the owners with respect to repairs, details of equipment, armament, and all that relate to the requirements of navigation; 4. order of new voyage and make a new charter or insure the vessel after obtaining authorization from the ship owners. DUTY OF SHIPAGENT TO DISCHARGE THE CAPTAIN AND MEMBERS OF THE CREW: - If the seamen contract is not for a definite period or voyage, he mat discharge them at his discretion - If for a definite period, he may not discharge them until after the fulfillment of their contracts EXCEPT on the ff. Grounds: a. insubordination in serious matters b. robbery c. theft d. habitual drunkenness e. damage caused to the vessel or to its cargo through malice, manifest or proven negligence

EFFECT/LOSS/DESTRUCTION OF VESSEL: 1. extinguishes liability arising from the conduct of the captain in the vigilance of the goods and for the safety of the passengers and for any liability arising from negligent acts of the captain 2. extinguishes liability for the wages for the captain and the crew and for advances made by the ship agent if the vessel is lost by shipwreck or capture 3. liability for collision B. CAPTAINS AND MASTERS OF THE VESSEL Captain- who govern vessels that navigate the high seas or ships of large dimensions and importance, although engaged in the coastwise trade Masters- who command smaller ships engaged exclusively in the coastwise trade NATURE OF POSITION: 1. General agent of the ship owner 2. Technical Director of the vessel 3. Representative of the Government of the country under whose flag he navigates QUALIFICATIONS: 1. Filipino citizen 2. Legal capacity to contract 3. Must have passed the required physical, mental examination required for licensing him as such INHERENT POWERS OF THE CAPTAIN: 1. appoint crew in the absence of ship agent 2. command and direct crew 3. impose correctional punishment on those who while on board vessel fail to comply with his orders or are wanting in discipline 4. make contracts for the charter of vessel in the absence of ship agent 5. supply, equip, and provision the vessel 6. order repair of vessel to enable it to continue its voyage SOURCES OF FUNDS TO COMPLY WITH THE INHERENT POWERS OF THE CAPTAIN: 1. from the consignee of the vessel 2. from the consignee of the cargo 3. by drawing on the ship agent 4. by a loan on bottomry 5. by sale of part of the cargo DUTIES OF THE CAPTAIN: 1. bring on board the proper certificate and document and a copy of the Code of Commerce 2. keep a logbook, accounting book and freight book 3. examine before the voyage 4. stay on board during the loading and unloading of the cargo 5. be on deck while leaving or entering the port 6. seeks protest, arrival under stress and in case of shipwreck

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS 7.

follow instruction of and render accounting to the ship agent 8. save the vessel lost in case of wreck 9. hold in custody properties left by deceased by passengers and crew members 10. comply with the requirements of customs, health, etc. at the port of arrival

6.

LIABILITIES OF THE SHIPAGENT/SHIPOWNER FOR ACTS DONE BY THE CAPTAIN TOWARDS PASSENGERS AND CARGOES MAKING THEM SOLIDARILY LIABLE TO THE LATTER: 1. damages to vessel and to cargo due to lack of skill and negligence 2. theft and robbery of the crew 3. losses and fines in violation of laws 4. damages due to mutinies 5. damages due to misuse of power 6. deviations 7. arrival under stress 8. damages due to non-observance of marine regulations

1. -

NO LIABILTY FOR THE FOLLOWING: 1. damages caused to the vessel by force majeure 2. obligations contracted for the repair, equipment and provisioning of the vessel UNLESS he has expressly bound himself personally or has signed a bill of exchange or promissory note in his name CARGO- which includes all goods, wares and merchandise aboard a ship which do not from part of the ship's stores. REQUIREMENTS FOR DEFENSE OF PUBLIC ENEMY: 1. act of public enemy in war was the proximate and only cause of the loss 2. common carrier exercise due diligence to prevent, minimize loss before, during, and after occurrence of the act of the public enemy in war FORMALITIES REQUIRED WHERE VESSEL HAS GONE THROUGH HURRICANE 1. Captain must make a protest before competent authority at the first port he touches 2. Such a protest must be made within 24 hours following his arrival 3. captain must ratify it within some period when he arrives at his destination 4. he must immediately proceed with the proof of the facts FORMALITIES REQUIRED WHERE VESSEL SHIPWRECKED: 1. captain must make a protest before the nearest competent authority 2. protest be made within 24 hours following his arrival 3. make sworn statement of the facts 4. authority/consul abroad shall verify said facts 5. such authority shall take other steps in carrying at the facts

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7. 8.

such authority shall also make statements of what may be the result of the proceeding in the logbook and in that of the sailing mate he shall deliver the original records to the captain captain must ratify the protest

C. OFFICERS AND CREW Sailing mate/First mate second chief of the vessel who takes the place of the captain in case of absence, sickness, or death and shall assume all of his duties, powers, and responsibilities

DUTIES: 1. provide himself with maps, and charts with astronomical tables necessary for the discharge of his duties 2. keep the Binnacle book 3. Change the course of the voyage on consultation with captain and the officers of the boat, following the decision of the captain in case of disagreements. 4. Responsible for all the damages caused to the vessel or to the cargo by reason of his negligence 2. -

Second mate takes command of the vessel in case of the inability or disqualification of the captain and the sailing mate, assuming in such case their powers and responsibilities and duties

DUTIES: 1. preserve the hull and rigging of the vessel 2. arrange well the cargo 3. discipline the crew 4. assign work to crew members 5. Inventory the rigging and equipment of vessel, if laid up. 3. -

the

Engineers Officers of the vessel but have no authority EXCEPT in matters to motor apparatus. When 2 or more are hired, one of them should be the Chief Engineer

DUTIES: 1. in charge of motor apparatus, spare parts, and other instruments pertaining to the engines 2. keep the engines and boilers in good condition 3. not to change or repair the engine without authority of the captain 4. inform the captain of any damage to the motor apparatus 5. keep an Engine book 6. supervise all personnel maintaining the engine 4. -

Members of the Crew hired by the ship agent. Where he is present and in his absence, the captain hires them preferring Filipinos, and in their absence, he ,ay take in foreigners but not exceeding 1/5 of the crew.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS CLASSES OF SEAMAN'S CONTRACT: 1. by the voyage 2. by the month 3. by share of profits or freightage JUST CAUSES FOR THE DISCHARGE OF SEAMAN WHILE CONTRACT SUBSISTS: 1. perpetration of a crime 2. repeated insubordination, want of discipline 3. repeated incapacity and negligence 4. habitual drunkenness 5. physical incapacity 6. desertion CAUSES OF REVOCATION OF VOYAGE: 1. war 2. blockade 3. prohibition to receive cargo at destination 4. embargo 5. inability of the vessel to navigate RULES IN CASE OF DEATH OF A SEAMAN: - The seaman's heirs are entitled to the payment as follows: 1. if death is natural: a. compensation up to time of death if engaged on voyage b. if by voyage- half of amount if death occurs on voyage out; and full if on voyage in c. if by shares- none if before departure; full if after departure 2. if death is due to defense of vessel- full payment 3. if captured in defense of vessel- full payment 4. if captured due to carelessness- wages up to the date of the capture NO LIABILY UNDER THE FOLLOWING CIRCUMSTANCES: 1.

2. 3.

If before beginning voyage, captain attempts to change it or a naval war with the power to which was destined occurs If a disease breaks out and be officially declared an epidemic in the port of destination If the vessel change owner or captain

COMPLEMENT OF THE VESSEL -

-

All persons on board, from the captain to the cabin boy, necessary for the management, maneuvers, and service, thus including the crew, the sailing mates, engineers, stalkers and other employees on board not having specific designations It does not include the passengers or the person whom the vessel is transported

FORMALITIES REQUIRED FOR SEAMAN'S AGREEMENT: 1. reduced to writing in Accounting Book 2. signed by parties 3. visaed by marine authority if executed in Philippine territory/consul or consular agents if executed abroad

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read to the seaman concerned and such fact must be stated in the agreement

Interdiction of Commerce - a governmental prohibition of commercial intercourse intended to bring about an entire cessation for the time being of all trade Embargo - a proclamation or order of the State usually issued in time of war/ threatened hostilities prohibiting the departure ships/ goods from some or all the ports of such State until further order Blockade - a sort of circumvallation of place by all foreign connections and correspondence is as far as human power can affect it to be cut-off D. SUPERCARGOES - person who discharge administrative duties assigned to him by ship agent or shippers, keeping an account and record of transaction as required in the accounting book of the captain

CHARTER PARTY - contract by virtue of which the owner or agent binds himself to transport merchandise or persons of a fixed price

CLASSES OF CHARTER PARTY 1.

As to extent of vessel hired a. total- whole of the vessel is chartered b. partial- only part of the vessel is chartered

2.

As to time a. until a fixed day/ for a determined number of days and months b. for a voyage(outgoing/return/roundtrip)

3.

As to freightage a. for a fixed amount for the whole cargo b. for a fixed amount per ton c. for an amount per month

FORMAILITIES REQUIRED FOR A CHARTER PARTY: 1. in writing 2. drawn in duplicate 3. signed by the parties 4. contain stipulation  not all requisites are essential for the validity of charter party Primage - belongs to owner/ freighters; - increase of the freight rate - considered gratuity to master if is stipulated

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Demurrage - sum which is fixed by the contract of carriage, or which is allowed, as remuneration to the owner of a ship for the detention of his vessel beyond the number of days allowed by the charter party for loading/unloading/sailing. "Lay days" - days allowed to charter parties for loading and unlading "Extra Lay Days" - days which followed after lay days have elapsed GOODS TRANSFERRED MAY BE: 1. sold by captain to necessary repairs 2. jettisoned for the common safety 3. loss by reason of shipwreck/stranding 4. seized by pirates/enemies 5. suffer deterioration/diminutions 6. increase by natural cause and weight or size

RIGHTS AND OBLIGATIONS OF CHARTER PARTY: A. Of the ship owner or ship agent 1. If the vessel chartered wholly not to accept cargo from others 2. To observe represented capacity 3. To unload cargo clandestinely placed 4. To substitute another vessel if load is less than 3/5 of capacity 5. To leave the port if the charter does not bring the cargo within the lay days and extra lay days allowed. 6. To place in a vessel in a good condition to navigate 7. To bring cargo to nearest neutral port in case of war or blockade B. Of the charterer 1. to pay the agreed charter price 2. to pay freightage or unboarded cargoes 3. to pay losses to others for loading uncontracted cargo and illicit cargo 4. to wait if the vessel needs repair 5. to pay expenses for deviation

2.

B. At ship owner’s request 1. If the extra lay days terminate without cargo being placed alongside the vessel

Sale by the owner of the vessel before loading

C. Fortuitous causes 1. war 2. blockade 3. prohibition to receive cargo 4. embargo 5. inability of the vessel to navigate Loan on Bottomry - loan made by ship owner or ship agent guaranteed by vessel itself and repayable upon arrival of vessel at destination

Loan on Respondentia -

loan , taken on security of the cargo laden on the vessel, and repayable upon safe arrival of cargo at safe designation

COMMON ELEMENTS OF LOANS ON BOTTOMRY AND RESPONDENTIA 1. exposure of security or marine peril 2. obligation of the debtor conditioned only upon safe arrival of security at the point of destination EXCEPTIONS TO THE HYPOTHECARY NATURE OF BOTTOMRY AND RESPONDENTIS: 1. loss due to inherent defect 2. loss due to the barratry on the part of the captain 3. loss due to the fault or malice of the borrower 4. that the vessel is engaged in contraband 5. that the cargo loaded on the vessel be different from that agreed upon ACCIDENTS IN MARITIME COMMERCE: 1. AVERAGES 2. ARRIVAL UNDER STRESS 3. COLLISION 4. SHIPWRECK I. -

RESCISSION OF CHARTER PARTY A. At charterer's request 1. by abandoning the charter and paying half of the freightage 2. error in tonnage or flag 3. failure to place the vessel at the charterer's disposal 4. return of the vessel due to pirates, enemies or bad weather 5. arrival at the port for repairs

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Averages an extraordinary or accidental expense incurred during the voyage in order to preserve the cargo, vessel or both and all damages or deterioration suffered by the vessel from departure to the port of destination and to the cargo from the port of loading to the port of consignment

CLASSES: 1. Particular/Simple - damage / expenses caused to the vessel or cargo that did not inured to the common benefit and borne by respective owner - the owner of the goods which give rise to expense or suffer damage shall bear this average 2. -

Gross/ General damage/ expenses deliberately caused in order to save the vessel, its cargo or both from real or known risk

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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-REQUISITES: a. common danger b. deliberate sacrifice c. success d. proper formalities and legal steps ORDER OF GOODS TO BE CAST OVERBOARD IN CASE OF JETTISON: 1. those which are on the deck, preferring the heaviest one with the least utility of value 2. those which are below the upper deck beginning with the one with greatest weight and smallest value

II. Arrival Under stress - arrival of a vessel at a port of destination on account of lack of provision, well-founded fear of seizure, pirates, or accidents in sea disabling navigation - when unlawful: 1. lack of provisions due to negligence to carry according to usage and customs 2. risk of enemies not well-known or manifest 3. defect due to improper repair 4. malice, negligence, lack of foresight, lack of skill III. COLLISION - impact of two vessels both of which are moving ALLISION - impact between a moving vessel and stationary one ZONES OF TIME IN COLLISION OF VESSELS: 1. First zone- all time up to the moment when risk of collision begins 2. Second Zone- time between moment when risk of collision begins and moment it becomes a practical certainty 3. Third Zone- time when collision is certain and time of impact CASES COVERED BY COLLISION AND ALLISION: 1. one vessel at fault- such vessel is liable for damage caused to innocent vessel as well as damages suffered by owners of cargo of both vessels 2. both vessels at fault- each vessel must bear its own loss but the shippers of both vessel may go against the ship owner who will be solidarily liable 3. vessel at fault not known- same as rule 2 4. third vessel at fault- same rule 1 5. fortuitous event- no liability, each bear its own loss IV. SHIPWRECK - loss of the vessel at sea as a consequence of its grounding or running against an object in sea or on the coast - if the wreck was due to malice, negligence or lack of skill of the captain, the owner of the vessel may demand indemnity from said captain.

COMMERCIAL LAW

228

TRANSPORTATION LAWS COMMON CARRIERS ( ARTICLES 1732-1766) Common Carriers - are PERSONS, CORPORATION, FIRMS, or ASSOCIATIONS engaged in CARRYING or TRANSPORTING PASSENGERS or GOODS or BOTH, by LAND, WATER, or AIR for COMPENSATION OF OFFERING THEIR SERVICES TO THE PUBLIC. Extraordinary diligence is required to common carriers in transporting goods and passengers Reasons: 1. nature of the business 2. public policy Registered owner primarily and solidarily with driver under the KABIT SYSTEM. Kabit system is contrary to public policy; therefore, void and inexistent. CIRCUMSTANCES UNDER WHICH COMMON CARRIERES CANNOT BE HELD LIABLE FOR THE LOSS/DESTRUCTION OF GOODS: 1. flood, storm, earthquake, or other natural calamities 2. act of public enemy in war, either international or local 3. act or omission of the shipper or owner of the goods 4. character of the goods or defects of the packing 5. order of competent authority Extraordinary diligence lasts from the time the cargoes are loaded in the vessel until they are discharged and delivered to the consignee. Air carriers can terminate services of pilots for serious misconduct and drunkenness because of its extraordinary diligence. INSTANCES WHICH ARE NOT CASO FORTUITO: 1. hijacking 2. acts of strangers like thieves or robbers acted with grave or violence 3. accidents due to defects of carrier 4. where tie blow-out Fire is not a natural disaster Notice of arrival of goods amounts to constructive delivery Shipper bound to observe all diligence in obtaining delivery of goods Common Carriers may be exempted from responsibility PROVIDED that natural disaster is the proximate and only cause of the loss. STIPULATIONS LIMITING LIABILITY IS VALID PROVIDED THAT: 1. the stipulation be in writing signed by both parties

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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the stipulation be supported by a valuable consideration other than the service rendered by common carrier the stipulation be reasonable, just and not contrary to public policy

Passenger bound notwithstanding his failure to sign plane ticket containing stipulation limiting liability known as contract of adhesion.

SOME VALID STIPULATIONS LIMITING CARRIER'S LIABILITY: 1. account of strikes or riot 2. value of the goods appearing in bill of lading UNLESS shipper declares a greater value 3. contract fixing the sum that may be recovered

The extraordinary diligence required for carriage of passengers cannot be dispensed with: 1. by stipulation 2. by posting of notices 3. by statement of tickets 4. otherwise however as an exception, parties may stipulate limiting carrier's liability where the passenger is carried gratuitously

3.

VOID STIPULATIONS LIMITING CARRIER'S Liability: 1. the goods are transported at the risk of the shipper 2. that the shipper is not liable for any loss or destruction of the goods 3. that the common carrier need not observed any diligence and less than that of good father of a family 4. that the common carrier shall not be responsible for any acts of its employee The law of the country to which the goods are to be transported shall govern the liability of common carrier for their loss, destruction, or deterioration. The act of the thief or robbers who entered the common carrier's vehicle is not deemed force majeure UNLESS it is done with the use of arms or through irresistible force. A common carrier is bound to carry the passengers safely as far as human care and foresight can provide using the utmost diligence of a very cautious person with a regard of circumstances. In case of death or injuries to passengers, common carriers are presumed to be at fault UNLESS proved that they observe extra ordinary diligence.

LAST CLEAR CHANCE -

this principle applies only in a suit between owners and drivers of two colliding vehicles. This is not applicable to Contract of Carriage.

Carrier not ordinarily liable for injuries to passengers due to fires, and explosions caused by articles brought into conveyance by other passengers. Ticket is a complete written contract by and between the shipper and passenger for it contains: 1. consent of the contracting parties 2. cause or consideration which is the fare paid by the passengers 3. object which is the transportation of the passenger from the place of departure to the place of destination. Reduction of fare does not justify any limitation of the common carrier's liability.

Common Carrier is liable for damages for defects of its equipment. Common Carrier is liable for the misconduct of its employees done in their own interest. Reason: the servant is clothed with the delegated authority and charged with duty by the carrier to execute his undertakings to carry the passenger safely. Carrier exempt from acts of employees not done in line of duty. The passenger must observe the diligence of a good father of a family or ordinary diligence to avoid injury to himself. EFFECTS OF NEGLIGENCE- where the proximate cause of the death/ injury to the passenger is his own negligence, common carrier is exempted from liability. EFFECT OF PASSENGER'S CONTRIBUTORY NEGLIGENCE- passenger's contributory negligence does not justify carrier's exemption from liability. However, the damages will be equitably reduced. A common carrier is responsible for injuries suffered by a passenger on account of the lawful acts/negligence of other passengers or of strangers provided that the employees could have prevented the act or omission through the exercise of a good father of a family. Degree of diligence required of carriers employeesmerely that of the good father of a family or ordinary diligence. Liability of air carrier under Warsaw Convention of October 12,1929, article 17, the carrier shall be liable for damages sustained in the event of death or injury of a passenger if accident took place on board the aircraft or in the course of embarking or disembarking. Article 18(1), the carrier shall be liable for damages sustained in the event of destruction or loss of or of damage to any checked baggage or any goods in the course of transportation. (2), the transportation of air shall comprise the period during which the baggage or goods are in the charge of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS

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the carrier whether an airport or on board an aircraft or in case of landing outside an airport. (3), the period of transportation by air shall not extend to any transportation by land, sea, or river outside an airport.

Carrier subsidiarily liable for moral damages in actions ex delicto.

Article 19, the carrier shall be liable for damages occasioned by delay in transportation by air of passengers, baggage, or goods.

Nominal and exemplary damages awarded for willful breach of contract committed through agent or employee.

DAMAGES RECOVERABLE WHEN DEATH OCCURS DUE TO COMMISSION OF A CRIME: 1. indemnity for death of a victim 2. indemnity for loss of earning 3. moral damages 4. exemplary damages 5. attorney's fees and expenses of litigation, 6. interest and properties

Carrier incurring only delay not liable for moral and exemplary damages but only to the limited amount printed in the plane ticket.

FACTORS TO BE CONSIDERED IN AWARDING DAMAGES ARISING FROM DEATH: 1. number of years on the basis of which the damages shall be computed 2. rate at which the losses sustained should be fixed For fixed indemnity for death, there is no need to interrogate witness. Common carrier not liable for moral damages to passenger s injured due to negligence of driver.

Exemplary damages cannot be recovered as a matter of right.

Exemplary damages is allowable under Kabit System. Common Carrier in Nominal Damages for failure of carrier to bring passenger to his destination but mere violation of a Contract of Carriage does not warrant recovery for moral damages. In case of breach of the carrier's contractual obligation to carry his passenger safely to their destination, the carrier is solidarily liable for his driver's negligence. Exercise of due diligence in selecting driver is not a defense. Preponderance of evidence sufficient to prove civil liability arising from negligence. -

Carrier is liable when it issues to passenger a confirmed ticket for a particular ticket if he is not put in that flight. Carrier liable only for damages that are natural and probable consequence and breach of contract which includes medical, hospital and other expenses. ITEMS INCLUDE IN ACTUAL DAMAGES: 1. income to be earned upon completion of studies 2. the sum being carried by deceased passenger which was lost 3. amount spend to her funeral 4. attorney's fees and court expenses 5. loss of the merchandise carried by the deceased 6. loss of baggage containing medicine, boxes, and suitcases of personal belongings EXCEPTIONS TO RULE THAT CARRIER NOT LIABLE FOR MORAL DAMAGES IN BREACH OF CONTRACT: 1. where the mishap results in the death of passenger 2. where it is proved that the carrier is guilty of fraud or bad faith even if death does not result 3. where the passenger suffers social humiliation, wounded feelings, anxiety and mental anguish Surviving passenger is not entitled to moral damages. Mere carelessness of the carrier does not per se constitute an inference of malice or bad faith on its part.

PUBLIC SERVICE LAW (C.A. No. 146 as amended and modified by PD No. 1 Integrated Reorganization Plan and E.O.546)

INTRODUCTION: PUBLIC SERVICE OR PUBLIC UTILITY DEFINED 

Public Service- includes every person that now or hereafter may own, operate, manage or control in the Philippines for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier, shipyard, ice plant, electric light, heat and power or any other utility, (Sec. 13 b, C.A. 146 as amended).



Public Utility- a business or service engaged in supplying the public with some commodity or service of public consequence. (Albano v. Reyes, 175 SCRA 264)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS ORDINARY AND PRIMARY PURPOSE OF THE PUBLIC SERVICE LAW

The state shall regulate or prohibit monopolies when the public interest so requires; no combination in restraint of trade or unfair competition shall be allowed



ORDINARY PURPOSE: To subject public services to state control and regulation. 

SPECIFIC PURPOSES: 1.

2.

To secure adequate, sustained service for the public at the least possible cost, and protect the public against unreasonable charges and poor inefficient service. To protect and conserve investments which have already been made for public service, and prevent ruinous competition.

OFFICES NOW CHARGED WITH ENFORCEMENT OF PUBLIC SERVICE LAW The Public Service Commission has been abolished. The following replaced it: 1.

2. 3.

BASIS OF THE LEGISLATIVE POWER TO REGULATE PUBLIC SERVICES: 

POLICE POWER, for the protection of the public as well as the utilities themselves. (Pantranco v. P.S.C., 70 Phil 221)



CONSTITUTIONAL BASIS: 1. ARTICLE XII, SECTION 11: > A franchise, certificate, or any other form of authorization for the operation of public utility shall be granted to: -

-

Filipino Citizens Corporations or associations organized under Philippine Laws where at least 60% of the capital is owned by Filipino Citizens. 100% Filipino Management

> Mass media and commercial telecommunications shall be: - 100% Filipino Capital, and - 100% Filipino management 2. ARTICLE XII, SEC 17: In times of national emergency, when the public interest so requires, the State may during the emergency and under reasonable terms, temporarily take over or direct the operation of any private owned public utility or business affected with public interests. 3. ARTICLE XII, SECTION 18 The state may, in the interest of national welfare or defense, establish and operate vital industries and upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the government. 4.

ARTICLE XII, SECTION 19

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4.

5. 6.

LAND TRANSPORTATION- Department of Transportation and Communication (DOTC) and the Land Transportation Franchising and Regulatory Board (LTFRB) WATER TRANSPORTATION- Maritime Industry Authority (MARINA) AIR TRANSPORTATION- Air Transportation Office (ATO) headed by an assistant secretary and the Civil Aeronautics Board, which has been placed under the DOTC as an attached agency. TELECOMMUNICATIONSNational Telecommunications Commission, which has been placed under the DOTC as an attached agency. ENERGY- Board of Energy but transferred to the Energy Regulatory Board (ERB) WATERWORKS- National Water Resources Council 

LIMITATIONS REGULATORY COUNCILS:

The DOTC shall be the primary entity in Transportation and Communication

ON THE BOARDS,

POWERS OF COMMISSIONS

THE AND

1.

General: Powers are limited from those granted in the legislation creating the body.

2.

Constitutional: Regulations imposed must not have the effect of depriving an owner of his property without due process of lawnor confiscating or appropriating private property without just compensation.

3.

Judicial: Boards, commissions are not judicial tribunals and therefore cannot determine judicial questions such as validity of contract.

4.

Jurisdiction: Extends only to persons engaged in public utilities, or over a public utility, which holds a Certificate of Public Convenience.

B.

JURISDICTION  General Rule: Over persons engaged in public utilities, or over a public utility, which holds a Certificate of Public Convenience.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS  Exemption: violators of a valid regulation promulgated under the law

c. d. 

C. a)

ISSUE CERTIFICATES

 CERTIFICATE OF PUBLIC CONVENIENCE & NECESSITY (CPCN) An authorization issued by the commission for the operation of public services for which a franchise is required by law.

1.

NATURE OF A CERTIFICATE OF PUBLIC CONVENIENCE It constitutes neither a FRANCHISE nor a CONTRACT. It confers no property rights and is a mere license or privilege.

2.

GENERAL RULE: NECESSITY OF CERTIFICATE OF PUBLIC CONVENIENCE or CERTIFICATE OF PUBLIC CONVENIENCE & NECESSITY Unless otherwise exempt, no public service shall operate without having been issued a certificate of public convenience (no franchise is required by law) or a certificate of public convenience and necessity (a prior franchise is required by law).

3.

EXCEPTIONS (Section 14, Public Service Law)

Certificate of public convenience, not necessary in the following: a. Warehouses b. Animal drawn vehicles, bancas powered by oar or sail; tugboats, lighters or pedal driven vehicles c. Airships except as to fixing of rates d. Radio Companies, except as to fixing of rates e. Public utilities operated by the National Government f. Government or political subdivisions except as to rates g. Iceplants h. Public Markets

4.

PUBLIC NECESSITY PUBLIC CONVENIENCE

Considerations: a) FINANCIAL RESPONSIBILITY OF APPLICANTS a) RELIABILITY OF THE APPLICATION b) PRIORITY OF FILING THE APPLICATION c) PRIORITY OF OPERATION

GENERAL POWERS OF THE COMMISSION

 CERTIFICATE OF PUBLIC CONVENIENCE (CPC) An authorization issued by the commission for the operation of public services for which no franchise either municipal or legislative is required by law.

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PRIOR APPLICANT RULE Priority in the filing of application for a CPC is, other conditions being equal, an important factor in determining the rights of the public service companies, and in the granting or refusal of a certificate. (Batangas Trans Co. v Orlanes, 52 Phil 455)

PRIOR OPERATOR RULE The law contemplates that the first licensee will be protected in his investment and will not be subjected to a ruinous competition. It is not therefore the policy of the law to issue a CPC to a second operator to cover the same field and in competition with a first operator who is rendering sufficient, adequate and satisfactory service, and who in all things and respects is complying with the rules and regulations of the commission. The old operator must be given the opportunity to improve and extend his lines. (Batangas Trans Co. v Orlanes, 52 Phil 455) BASIS OF THE PRIOR OPERATOR RULE Prevent ruinous and wasteful competition and interest of public will be preserved. EXCEPTIONS TO THE PRIOR OPERATOR RULE: 1.

Operator fails/ neglects to make improvement or effect the increase in service when given the opportunity.

2.

When Prior operator offers to meet increases in demand only when another operator offered to render additional service 3. Abandonment of operation 4. Prior operators did not oppose application 5. Prior operator cannot satisfy needs of the public 6. When opportunity to improve service is raised by prior operator only on appeal. 7. CPC granted to the applicant is a maiden franchise covering a new route, albeit overlapping with that of the old operator 8. Expiration of corporate existence of prior operator. 9. Monopoly 10. Passage through private subdivision which granted permit to another

REQUISITES BEFORE A CERTIFICATE OF PUBLIC CONVENIENCE MAY BE GRANTED: a. b.

CITIZENSHIP – Filipino Citizen; Filipino Corporations/ Associations FINANCIAL CAPACITY

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS b.) TO APPROVE – ANY FRANCHISE OR PRIVILEGE GRANTED BY ANY POLITICAL SUBDIVISION OF THE PHILIPPINES WHEN IN ITS JUDGMENT SUCH FRANCHISE OR PRIVILEGE WILL PROPERLY CONSERVE THE PUBLIC INTEREST. 

Requirement of previous notice and hearing.



The exercise of the said power is it discretionary as it is - subject to conditions, equipment, maintenance, service and operation;



In the exercise of the above-mentioned power it is also necessary to determine whether the exercise of the rights or privileges granted by the franchise are necessary and adequate for the public convenience.

N.B. The holder of a legislative franchise has preference over the holder of a municipal franchise granted more than a year later. If the holder of a municipal franchise was subsequently granted with a legislative franchise the former will be repealed by the latter. A municipality does not have the legal right to nullify a legislative franchise by arbitrarily refusing to approve plans of the company receiving the legislative franchise made pursuant to a provision therein. Note however that the Commission may disapprove a municipal franchise and it may deny an application without infringing the legislative prerogative of the municipal council, because the Commission merely exercises a power granted by law. PSC has power to regulate manner of disconnecting services by MERALCO to delinquent customer. It can compel MERALCO that before it can effect disconnection of it services to a delinquent customer it is required that it must first give a written notice of disconnection 48 hours in advance.

NATURE OF FRANCHISE: Franchise is NOT exclusive in nature. Section 11, Article XII, 1987 Philippine Constitution – “No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years.” Franchise subject to amendment and repeal. Section 11, Article XII, 1987 Philippine Constitution - Neither shall such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. General Rule: Exclusivity of franchise is not favored – that is why in all grants by the government to private corporations – the interpretation of rights privileges or franchises is taken against the grantee.

c.) THE COMMISSION HAS ALSO THE POWER TO FIX AND DETERMINE INDIVIDUAL AND JOINT RATES, TOLLS, CHARGES, CLASSIFICATIONS OR SCHEDULES THEREOF, KILOMETRAGE, AND OTHER SPECIAL RATES. (Section 16 (c) (PBQ – Bar 2000) 

That before the Commission can fix rates there must first be a notice and hearing.



HOWEVER, the Commission in its discretion can PROVISSIONALY approve rates proposed by public services WITHOUT NOTICE AND HEARING PROVIDED that WITHIN THIRTY (30) DAYS THEREAFTER A HEARING MUST BE HELD UPON PREVIOUS PUBLICATION AND NOTICE TO THE CONCERNS OPERATING IN THE TERRITORY AFFECTED.

HOWEVER – if exclusivity is given by law – it should be with the understanding that the company enjoying it is self sufficient and capable of supplying the needed service or product at moderate or reasonable prices.

E.g. ERB has authority to issue an order granting provisional increase of prices even without notice and hearing.

In reality a franchise is a contract between the State and the grantee. Question: Since a franchise is a contract is this governed by the non-impairment clause of the Constitution?

 1.

Answer: No, while it is true that a franchise is in the nature of a contract, which the parties to it must respect – it is not a contract such as is protected from impairment by the Constitution.

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EXTENT OF THE POWER OF THE COMMISSION TO FIX RATES. Rates are submitted by the public carriers but are subject to approval by the PSC which is NOT limited in the selection of the old or the new rates but could NOT establish such rates as are proper under the evidence presented.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 2.

3.

4.

5.

6.

7. 

The maximum rate fixed in a franchise, which its holder is authorized to collect, is always subject to a revision and regulation by the PSC. The PSC has also the power to order the refund of overcharges. – The requirement is not in the nature of a penalty – but is merely a measure by which the public services concerned are asked to return what they did not have the right to collect. In another case, the Court also said that when the Commission is empowered by law to fix the rates of freight which vessels may charge, it is implied that the vessels may not legally demand more than those rates. The Commission has the power to alter the established rates in a certificate of public convenience, especially where the order fixing the rates is in the nature of an experiment for a period of four months.\ Where it appears that a proposed joint fate system with transfers in relation to a point of contract between two transportation lines would serve the convenience of the public, the PSC has authority to find a public need and thereafter to approve such joint fare system. But the PSC cannot delegate to a public service its power to fix and determine the rates. DETERMINATION OF REASONABLE RATES.

JUST

AND

The fixing of rates is a legislative and governmental power over which the government has complete control. BUT it has no power to fix rates which are unreasonable or to regulate them arbitrarily, and that as to whether a given rate is fair and reasonable is a judicial question over which the courts have complete control. N.B. There is a legal presumption that the rates are reasonable and it must be conceded that the fixing of rates by the government through its authorized agent, involves the exercise of reasonable discretion and unless there is an abuse of that discretion 

REQUIREMENTS FOR REASONABLE RATE

1.

One which yields to the carrier a fair return upon the value of the property employed in performing the service; One which is fair to the public for the services rendered.

2.

A

JUST

AND

E.g. of circumstances justifying increase of rates – “exigencies of the present and the future – viewed in the light of recent developments and the experience gained in connection with the operation of another public utility analogously situated –“ d.) TO FIX JUST AND STANDARDS, CLASSIFICATIONS,

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REASONABLE REGULATIONS,

PRACTICES, MEASUREMENTS, OR SERVICE TO BE FURNISHED, IMPOSED, OBSERVED, AND FOLLOWED THEREAFTER BY ANY PUBLIC SERVICE. (SECTION 16 (D)) e.) TO ASCERTAIN AND FIX ADEQUATE AND SERVICEABLE STANDARDS FOR THE MEASUREMENT OF QUANTITY, QUALITY, PRESSURE, INITIAL OR SERVICE RENDERED BY ANY PUBLIC SERVICE AND TO PRESCRIBE REASONABLE REGULATIONS FOR THE EXAMINATION AND TEST OF SUCH PRODUCT OR SERVICE, AND TO PRESCRIBE REASONABLE REGULATIONS FOR THE EXAMINATION AND TEST OF SUCH PRODUCT OR SERVICE AND FOR THE MEASUREMENT THEREOF. (SECTION 16 (E)) f.) TO ESTABLISH REASONABLE RULES AND REGULATIONS, INSTRUCTIONS, SPECIFICATIONS, AND STANDARDS, TO SECURE THE ACCURACY OF ALL METERS AND APPLIANCES FOR MEASUREMENTS. (SECTION 16 (F)) g.) TO COMPEL ANY PUBLIC SERVICE TO FURNISH SAFE, ADEQUATE, AND PROPER SERVICE AS REGARDS THE MANNER OF FURNISHING THE SAME AS WELL AS THE MAINTENANCE OF THE NECESSARY MATERIAL AND EQUIPMENT. (SECTION 16 (G)) NOTES: The Commission has no power to change procedure relative to inspection and repair of water meters. The PSC is in duty bound to see to it that persons or companies, holding certificates of public convenience, render within a reasonable time the public service that they have been authorized to render for the benefit of the public. The PSC shall see to it that the companies holding Certificates of Pubic Convenience render their service with in a REASONABLE TIME.

h.) TO REQUIRE ANY PUBLIC SERVICE TO ESTABLISH, CONSTRUCT, MAINTAIN AND OPERATE ANY REASONABLE EXTENSION OF ITS EXISTING FACILITIES – SUCH EXTENSION IS REASONABLE AND PRACTICABLE AND WILL FURNISH SUFFICIENT BUSINESS TO JUSTIFY THE CONSTRUCTION OF THE SAID PUBLIC SERVICE REASONABLE WARRANTS THE ORIGINAL EXPENDITURE REQUIRED IN MAKING AND OPERATING SUCH EXTENSION. (SECTION 16 (H)) NOTES:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Before the PSC can exercise the above-mentioned duty – there must first be notice and hearing. Thus, the PSC has ample powers to require and authorize public services which certificates of public convenience to extend their service when the necessity of the public so demands. PSC may grant extension to applicant whose certificate is subject to condition of nonextension if the Commission is satisfied that public service or convenience requires or demands that the line of such extension be run, operated and served and that the applicant is financially capable of operating it, the Commission has the power to grant a certificate of public convenience to the applicant for the operation of such extension line. The PSC has also the power to compel a public service auto-bus operator to change its route in view of the fact that whatever rights the operator has to the utilization of the streets of a locality is only by virtue of the Certificate granted by the Commission. PSC can permit applicant to operate shorter route than that applied by him when the circumstances so demand and it is NOT for the oppositor to insist that he Commission should have conceded the applicant a longer route.

i.) TO DIRECT ANY RAILROAD, STREET RAILWAY OR TRACTION COMPANY TO ESTABLISH AND MAINTAIN AT ANY JUNCTION OR POINT OF CONNECTION OR INTERSECTION WITH ANY OTHER LINE OF SAID ROAD OR TRACK, OR WITH ANY OTHER LINE OF ANY OTHER RAILROAD, STREET, RAILWAY OR TRACTION TO PROMOTE THE CONVENIENCE OF SHIPPERS OF PROPERTY, OR PASSANGERS. SECTION 16 (I)

j.) TO AUTHORIZE, IN ITS DISCRETION, ANY RAILROAD, STREET RAILWAY OR TRACTION COMPANY TO LAY ITS TRACKS ACROSS THE TRACKS OF ANY RAILROAD, STREET RAILWAY OR TRACTION COMPANY OR ACROSS ANY PUBLIC HIGHWAY. SECTION 16 (J)

k.) TO DIRECT ANY RAILROAD OR STREET RAILWAY COMPANY TO INSTALL SUCH SAFETY DEVICES OR ABOUT SUCH OTHER REASONABLE MEASURES AS MAY IN THE JUDGMENT OF THE COMMISSION BE NECESSARY FOR THE PROTECTION OF THE PUBLIC AT PASSING GRADE CROSSING OF (1) public highways and railroads; (2) public highways and street railway; or

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TRANSPORTATION LAWS (3) railway and street railways. l.) TO FIX AND DETERMINE PROPER AND ADEQUATE RATES OF DEPRECIATION OF THE PROPERTY OF ANY PUBLIC SERVICE WHICH WILL BE OBSERVED IN A PROPER AND ADEQUATE DEPRECIATION ACCOUNT TO BE CARRIED FOR THE PROTECTION OF STOCKHOLDERS, BONDHOLDERS OR CREDITORS. THE INCOME FROM INVESTMENTS OF MONEY IN SUCH FUND SHALL LIKEWISE BE CARRIED IN SUCH FUND. THIS FUND SHALL NOT BE EXPENDED OTHERWISE THAN FOR DEPRECIATION, IMPROVEMENTS, NEW CONSTRUCTION, EXTENSIONS OR CONDITIONS TO THE PROPERTY OF SUCH PUBLIC SERVICE. SECTION 16 (L) NOTES: The rate base is PRESENT VALUE, and it would be wholly illogical to adopt a different rule for depreciation. If the rate base is present fair value, then the depreciation base as to depreciable property is the same thing. m.) TO AMEND, MODIFY OR REVOKE AT ANY TIME CERTIFICATE ISSUED WHENEVER THE FACTS AND CIRCUMSTANCES ON THE STRENGTH OF WHICH SAID CERTIFICATE WAS ISSUED HAVE BEEN MISREPRESENTED OR MATERIALLY CHANGED. SECTION 16 (M)

n.) TO SUSPEND OR REVOKE ANY CERTIFICATE ISSUED WHENEVER THE HOLDER THEREOF HAS VIOLATED OR WILLFULLY AND CONTUMACIOUSLY REFUSED TO COMPLY WITH ANY ORDER, RULE OR REGULATION OF THE COMMISSION. SECTION 16 (N) PROVIDED THAT THE COMMISSION FOR GOOD CAUSE MAY PRIOR TO THE HEARING SUSPEND FOR A PERIOD NOT TO EXCEED THIRTY (30) DAYS ANY CERTIFICATE OR THE EXERCISE OF ANY RIGHT OR AUTHORITY ISSUED OR GRANTED BY IT. o.) TO FIX, DETERMINE, AND REGULATE, AS THE CONVENIENCE OF THE STATE MAY REQUIRE, A SPECIAL TYPE OF AUTO-BUSSES, TRUCKS, AND MOTOR TRUCKS TO BE HEREAFTER CONSTRUCTED, PURCHASED, AND OPERATED BY OPERATORS AFTER THE APPROVAL OF THIS ACT; TO FIX AND THE DETERMINE THE SPECIAL REGISTRATION FEE FOR AUTO-BUSSES, TRUCKS, AND MOTOR TRUCKS SO CONSTRUCTED AND OPERATED. PROVIDED: THAT SAID FEES SHALL BE SMALLER THAN THOSE CHARGED FOR AUTOBUSSES, TRUCKS, AND MOTOR TRUCKS OF TYPES

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS NOT MADE REGULATION UNDER THIS SUBSECTION. SECTION 16 (O)

 GROUNDS FOR SUSPENSION OR REVOCATION OF CERTIFICATE

LIMITATIONS ON THE POWER TO AMEND a.

b.

That before a modification, amendment, or revocation shall be allowed, it must be shown that the conditions from which the certificate was granted no longer exist or have altered, or that the certificate holder has violated or deliberately refused to comply with the orders, rules and regulations of the Commission. There must be notice and hearing before the revocation can be effected.

The right to operate a public utility is a privilege granted by the state. Thus it can be revoked when the holder: 1. 2. 3. 4.

The right to a certificate of public convenience which has been forfeited by the holder’s voluntary and unauthorized abandonment of his service and failure to register his equipment should not be revived simply because the government would not be able to collect his tax liabilities.

E.g. A single hold-up incident is not a ground for revoking a certificate of public convenience. N.B. The grant of authority regarding unfranchised operation requires notice and hearing.

The mere failure of the Government to collect the tax liabilities of a holder of a certificate of public convenience is not a sufficient ground for revoking the Commission’s decision to cancel his certificate where the reasons therefore are that the holder has completely and voluntarily abandoned, without authority, the services required by his certificate.

Instances when NO NOTICE AND HEARING are necessary.

2.

3. 4.

5.

Where the order is a mere order of investigation preparatory to the final hearing and decision of the application. Where the modification of the certificate is only in form and not in substance, such as, an order granting an application for substitution. Where the order is merely to give additional time to register vehicles. An order for good cause suspending for a period not to exceed thirty days any certificate or the exercise or authority to issued or granted. Where the authorized line of the oppositor are different from those for the applicant, the former cannot be considered to have substantial interest in the application so as to require his personal notification of the hearing. NOTE: That lack of notice is deemed cured where the petitioners were able to timely oppose petitions. They are deemed to have been given due process of law which simply means the opportunity to be heard. Where the Commission entered its order without notice and hearing, the defect, if any, is cured by a hearing on the petitioner’s motion to reconsider the order. However, the defect is waived where the applicant petitions for another extension of sixty (60) days in which to install its franchise. PSC has the power to re-open case, under its power to revoke and modify.

Violates contumaciously refuses to comply with any rule, order or regulation of the commission Is a mere dummy Ceases operation by placing his bus in storage Abandons the service

 NO REVIVAL OF THE CPC DUE TO THE FOREGOING.

- Without notice and hearing? The Order canceling the Certificate is void.

1.

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Stoppage of operations sufficient ground for cancellation of certificate. But the mere failure in good faith to operate temporarily is NOT a ground for cancellation of the CPC.

D. PROCEEDINGS OF COMMISSION WITHOUT PREVIOUS HEARING. The Commission shall have power, without previous hearing, subject to established limitations and exceptions and saving provisions to the contrary: a.

b.

c.

To investigate, upon its own initiative, or upon complaint in writing, any matter, concerning any public service as regards matters under its jurisdiction; To require any public service to pay the actual expenses incurred by the Commission in any investigation if it shall be found in the same that any rate, toll, charge, schedule, regulation, practice, act or service thereof is in violation of any provision of this act or service thereof, is in violation of any provision of this Act or of any certificate, order, rule, regulation or requirement issued or established by the Commission; From time to time apprise and value the property of any public service, whenever in the judgment of the Commission it shall be necessary so to do, for the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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d.

e.

f.

g.

h. i.

j.

k.

l.

purpose of carrying out any of the provisions of this Act, and in making such valuation the Commission may have access to and use any books, documents, or records in the possession of any department, bureau, office, or board of the government of the Philippines or any political subdivision thereof; To provide, on motion by or at the request of any consumer or user of a public service, for the examination and test of any appliance used for measuring of any product or service of a public service; To permit any street railway or traction company to change its existing gauge to standard steam railroad gauge, upon such terms and conditions as the Commission shall prescribe. To grant to any public service special permits to make extra or special trips within the territory covered by its certificate of public convenience, and make special excursion trips outside of its own territory if the public interest or special circumstances required it: Provided, however, that in case a public service cannot render such extra service on its own line or in its own territory, a special permit for such extra service may be granted to any other public service; To require any public service to keep its books, records, and accounts so as to afford an intelligent understanding of the conduct of its business and to that end to require every public service of the same class to adopt a uniform system of accounting; To require any pubic service to furnish annual reports of finances and operations. To require every public service to file with the Commission a statement in writing, verified by the oaths of the owner of the president and the secretary thereof, if a corporation, setting forth the name, title of office or position, and post office address and the authority, power and duties of every officer, member of the board of directors, trustees executive committee, superintendent, chief or head of construction and operation thereof; To require any public service to comply with the laws of the Philippines and with any provincial resolution or municipal ordinance relating thereto and to conform to the duties imposed upon it thereby or by the provisions of its own character, whether obtained under any general or special law of the Philippines; To investigate any or all accidents that may occur on the property of any public service or directly or indirectly arising from or connected with its maintenance or operation in the Philippines; to require any public service to give the Commission immediate and effective notice of all or any such accidents, and to make such order or recommendation with respect thereto as the public interest may warrant or require; To require every public service as herein defined to file with it complete schedules of every classification employed and of every individual or joint rate, toll fare or charge made, charged or exacted by it for any product supplied or rendered within the Philippines and, in the case of public carriers, to file with it a

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TRANSPORTATION LAWS statement showing the itineraries or routes served as specified in such requirement. NOTES: The Commission not only has the general supervision over all public utilities and the power to investigate, upon its own initiative or a complaint in writing, any just causes or grievances against any of them, to make and enforce reasonable rules and regulations, and grant relief in all proper cases and that it not only has the power to make and enforce all reasonable rules and regulations for the operation of any public utility, including water crafts, vessels and steamships. The Commission can appoint members of the PNP stationed in the provinces, as officials in charge with enforcing its regulations. The Commission has also the express power to charge the expense of an investigation against the operators found guilty of violation of the conditions of his certificate or of a law or ordinance, as it has power, for the same cause, to suspend or revoke a certificate of public convenience. POWER TO GRANT COMMISSION TO GRANT PERMITS WITHOUT HEARING. 

General Rule: The Commission has no power to grant special permits to operate a public service without NOTICE AND HEARING.



Exceptions: a. Permit to make extra or special trips within the territory covered by the certificate of public convenience; and b. Special excursion trips outside of the territory of the public service if public interest or special circumstances require it. c. It is a “well settled doctrine that for a provisional permit an ex parte hearing suffices. The decisive consideration is the existence of a public need.”

OPERATIONS OF PUBLIC SERVICE REGULATIONS AND PROHIBITIONS

SECTION 18. It shall be unlawful – to engage in any public service business without having first secured from the commission a certificate of public convenience or certificate of public convenience and necessity as provided for in this act, except grantees of legislative franchises expressly exempting such grantees from the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS requirement of securing a certificate from this commission as well as concerns at present existing expressly exempted from the jurisdiction of the commission, either totally or in part, by the provisions of section 13 of this act. SECTION 19. It shall be unlawful for any public service: a. To provide or maintain any service that is unsafe, improper or inadequate, or withhold or refuse any service which can be reasonably demanded and furnished; b. To make or give directly or indirectly, by itself or through its agents, attorneys or brokers, or any of them, discounts or rebates on authorized rates or grant credit for the payment of freight charges; c. To refuse or neglect, when requested by the director of posts or his authorized representative, to carry public mail in the regular trips of any public land transportation service maintained or operated by any such public service, upon such terms and conditions and for a consideration in such amount as may be agreed upon between the director of posts and the carrier. 

d. e.

f.

g.

To lay any railroad or street railway across any highway; Hereafter to issue any stock or stock certificates representing an increase of capital; or issue any share of stock without par value; or issue bonds or other evidence of indebtedness payable in more than one year from the issuance thereof; To capitalize franchise in excess of the amount, inclusive of any tax or annual charge actually paid to the government of the Philippines or any other political subdivision thereof as the consideration of the said franchise; To sell alienate, mortgage, encumber or lease its property, franchises, certificates privileges or rights, or any part thereof, with those of any public service. 

 NOTES:

b.

c.

Criterion for approval of a sale or encumbrance of a certificate of public convenience Under Sec. 20(g), the Commission (now regulatory boards, commissions and councils) has the power and authority to approve a sale or transfer of a CPC if: 1. There are just and reasonable grounds for making the transfer 2. The sale or transfer is not detrimental to the public interest. This provision, it is believed is applicable to all regulatory boards, commissions and councils, as a result of the transfer of powers and functions. The jurisdiction and supervision and control over all public services originally vested in the Public Service Commission have been distributed among the various regulatory boards, commissions and councils.

SECTION 20. The following are the acts which requires approval of the commission: To adopt, establish, fix, impose, maintain, collect or carry into effect any individual or joint rates, communication, mileage or other special rate, toll, fare, charge, classification or itinerary. To establish, construct, maintain, or operate new units or extend existing facilities or make any other addition to or general extension of the service; To abandon any railroad station or stop the sale of passenger tickets, or cease to maintain an agent to receive and discharge freight at any station now or hereafter established at which passenger tickets are now or may hereafter be regularly sold, or at which such agent is now or may hereafter be maintained, or make any permanent change in its time tables or itineraries on any railroad or in its service;

When may the public Service Commission or Regulatory Board approve sale or mortgage of public service property? The approval may be given before or after the consummation of the sale or mortgage. If the approval takes place after the transfer, the effect thereof is or may be retroactive. (Zamboanga Trans Co v Bachrach Motor Co, 52 Phil 244)

The law does not require that the same charge be made for carrying passengers or property, unless all the conditions are alike and contemporaneous. It does not prohibit the charging of a different rate for carrying passengers or property when the actual cost of handling and transporting the same is different. It is when the prove charged is for the purpose of favoring persons or localities or particular kinds of merchandise that the law intervenes and prohibits. It is favoritism and discrimination which the law prohibits.

a.

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

The effect of a sale of public service property without the approval of the pertinent public service regulatory body Such transfer is not binding against said commission and against third persons, and the original grantee continues to be responsible upon the franchise. Such approval is not however a condition precedent to the validity of the contract. The approval is only necessary to protect public interest. And as between the parties, the contract is valid and binding even

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS without such approval. (Darang v Belizar, January 31, 1967) The transferor continues to be regarded as operator – where the transfer is without PSC’s approval. In a transfer NOT APPROVED by the PSC, for damage caused a passenger the REGISTERED OWNER is DIRECTLY LIABLE to the passenger, BUT the TRNSFEREE is liable to the TRANSFEROR

h. To sell or register in its books the transfer or sale of shares of its capital stock, if the result of that sale in itself or in connection with another previous sale, shall be to vest in the transferee more than forty percentum of the subscribed capital of said public service. i. To sell, alienate or in any manner transfer shares of its capital stock to any alien if the result of that sale, alienation, or transfer in itself in itself or in connection with another previous sale shall be the reduction to less that 60% of the capital stock belonging to Philippine citizens. j. To issue, give or tender directly or indirectly, any free ticket, free pass or free or reduced rate of transportation for passengers, except to the following persons: (1) officers, agents employees, attorneys, physicians and surgeons of said public service, and members of their families; (2) inmates of hospitals or charity institutions and persons engaged in charitable work; (3) indigent, destitute and homeless persons when transported by charitable societies or hospitals, and the necessary agents employed in such transportation; (4) the necessary caretakers, going and returning, of livestock, poultry, fruit and other freight under uniform and non-discriminatory regulation; (5) employees of sleeping car corporations and telegraph and telephone corporations, railway and marine mail service employees when traveling in their official duty; (6) post office inspectors, custom officers and inspectors, and immigration inspectors when engaged in inspection; (7) witnesses attending any legal investigation in which public service is an interested party; (8) persons injured in accidents or wrecks, and physicians and nurses attending such persons;

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peace officers and men of regularly constituted fire departments.

NOTES: Rules relative to the extent of the power of the PSC with regard to approval of the sale, alienation, or mortgage of public service property: 1. 2.

3.

4. 5.

The approval by the Commission is discretionary. The approval by the Commission may be given before or after the consummation of the alienation in question. If the approval takes place after the transfer, the effect thereof is or may be retroactive. The PSC has also jurisdiction to approve the sale of Certificate of Public Convenience under receivership as well as the assigned made by the purchaser of his rights to such certificates to authorize an appellee to operate the transportation lines covered thereby. Certificates of Public Convenience are included in the term property- thus- it is liable to execution. In case of sale of CPC the approval of the PSC is NOT a mere formality that could be dispensed with or taken for granted. 









 1.

2. 3.

4.

Since a franchise is personal in nature, any transfer or lease thereof should be notified to the PSC so that the latter may take proper safeguards to protect the interest of the public. PSC not the courts, proper place to obtain conveyance of certificate and thresh out rights of parties in sale thereof. Pendency in court pf validity of transfer of franchise does not deprive PSC of power to approve transfer thereof. PSC has power to approve or disapprove sale even of Certificates under judicial attachment. PSC has power to approve or disapprove sale even of certificate subject of pending cancellation proceedings in PSC.

Court rulings as to the procedure for obtaining approval. Under par g of Section 20, the approval required shall be given after notice to the public and after hearing the persons interested at a public hearing; As to notice, it has been held that notice of sale by publication is sufficient. As to persons who may oppose the approval, it has been held that a party not affected by the sale cannot legally oppose it. The requirement regarding publication of the sale of the certificate of public convenience only refers to an application for the final approval of a deed of sale and to an ex parte petition for provisional approval,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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5.

and the memorandum order of the Commission only refers to the ale of temporary certificates of 5 to 10 years life and not to those issued for a normal life of 25 years; Moreover, the requirement regarding publication contained in the memorandum order is merely directory which can be waived by the Commission if it finds good reasons for doing as to promote public interest.

PENALTIES FOR VIOLATIONS Section 21. The Commission has the power to impose FINES not exceeding P200.00 per day for every day during which such default or violation continues – which fine can be impose only AFTER DUE NOTICE AND HEARING. Effect if fine is not paid? FAILURE to pay the FINE shall be DEEMED GOOD AND SUFFICIENT REASON FOR THE SUSPENSION OF THE CERTIFICATE OF SAID PUBLIC SERVICE UNTIL PAYMENT SHALL BE MADE. NOTES: 



Where the PSC is empowered by franchise of operator only to fix the rates – it has no authority to impose fines on said holder of franchise. In order that a respondent public service may be held criminally liable – the act committed by it must be expressly prohibited. In the absence of said express prohibition the holder of the franchise cannot be held criminally liable.

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TRANSPORTATION LAWS collect a fare less than that authorized by the PSC constitutes criminal contempt. 6. RTC may issue mandatory injunction to compel an operator to furnish service. Cases where the RTC cannot grant injunctions: 1. The RTC cannot issue injunctions against the orders of the Commission. 2. The RTC cannot enjoin an operator from doing what the Commission has authorized. Section 23. Any public service corporation that shall: a. perform, commit, or do any act or thing forbidden or prohibited; or b. shall neglect fail or omit to do or perform any act or thing herein to be done or performed SHALL BE PUNISHED: a. a fine NOT exceeding P25,000.00; or b. Imprisonment NOT exceeding 5 years; or c. BOTH in the discretion of the court. Section 24. Any public service person shall: a. perform, commit, or do any act or thing forbidden or prohibited; or c. shall neglect fail or omit to do or perform any act or thing herein to be done or performed SHALL BE PUNISHED by a. b. c.

a fine NOT exceeding P2,000.00; or Imprisonment NOT exceeding 2 years; or BOTH in the discretion of the court.

PROVIDED: Section 22. Observance of the orders, decisions, and regulations of the Commission and of the terms and conditions of any certificate may also be enforced by mandamus or injunction in appropriate cases. PROVIDED, that the Commission may compromise any case that may arise under this Act in such manner and for such amount as it may deem just and reasonable. NOTES: 1.

The RTC has concurrent jurisdiction with the Commission over cases of an operator violating his or its certificate. 2. However, the filing of the case before the Commission must not be premature. 3. RTC may grant an injunction against public service operators; 4. RTC may grant the injunction against a public service without authority to operate. 5. The disobedience to an order of a court forbidding a pubic service company to

That for operating a private passenger automobile as a public service without having a certificate of public convenience for the same the offender shall be subject to the penalties provided for in Section 67 (j) of Act 3992. NOTE: A person permitting his privately owned and registered car to be used for hire is punishable under this Section. Section 25. Any person who shall knowingly and willfully neglect, fail or omit to do or perform or who shall knowingly and willfully cause or join or participate with others in causing any public service corporation or company to neglect, fail or omit to do or perform xxx shall be PUNISHED a. a fine NOT exceeding P2,000.00; or

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Imprisonment NOT exceeding 2 years; or BOTH in the discretion of the court.

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TRANSPORTATION LAWS the MUNICIPAL POLICE for the execution of any order made for said purpose. NOTES:

Section 26. Any person who shall destroy, injure, or interfere with any apparatus or appliance owned or operated by or in charge of the Commission or its agents, shall be deemed guilty of a misdemeanor and upon conviction shall be PUNISHED a. a fine NOT exceeding P1,000.00; or b. Imprisonment NOT exceeding 6 months; or c. BOTH in the discretion of the court.



The Rules of Court is suppletory to the rules of the Commission.

COURT RULINGS AS TO PARTIES. 1.

While the Commission is authorized to make rules for the conduct of their business, it could not seat at naught the fundamental rule of all proceedings that only parties having a real interest will be heard.

2.

A party NOT affected or prejudiced cannot file an opposition.

3.

One public service corporation cannot assume the name and be substituted in the place of another public service corporation.

4.

A legal representative of the estate of the deceased applicant may be substituted for the latter.

5.

One who has been granted a legislative franchise to operate an ice plant, although not yet an operator of such public utility.

*Prescription of crime.

6.

The period of prescription commences to run from the day on which the crime is discovered by the offended party, the authorities or their agents. The commencement of a criminal action interrupts the running of the period of prescription.

The fact that a party is the lessee of a line does not bar him from applying for a certificate of its own in the same line.

7.

A case involving the grant of Certificate of Public Convenience to the respondent becomes moot and academic where the respondent ceases to be a bus operator, and it should be dismissed.

The 60 day prescription period under Section 26 of the Public Service Law is available defense only in criminal or penal proceedings.

8.

The PSC has no authority to authorize one corporation to assume the name of another.

Section 27. The Act shall NOT have the effect to release or waive any right of action by the Commission or by any person xxx. Section 28. Violations of the orders, decisions, and regulations of the Commission and of the terms and conditions of any certificate issued by the Commission shall prescribe after 60 days and violations of the provisions of this Act shall prescribed after 180 days.

NOTES:

PROCEDURE AND REVIEW Section 29.

COURT RULINGS AS TO NOTICE.

All hearings and investigations before the Commission shall be governed by rules adopted by the Commission – and in the conduct thereof the Commission shall not be bound by the technical rules of legal evidence:

1.

A public service is entitled to notice as to the charges against it, and to have an opportunity to answer such charge and to defend itself against it.

2.

A party affected by an order amending a certificate is entitled to a notice.

3.

An interested party who is not given notice is not bound by the decision.

4.

In certain cases, a defect in the order of a publication for a certificate of public convenience will not vitiate the certificate.

5.

Notice of hearing may however be waived.

PROVIDED: That the Public Service Commissioner may summarily punish any person who is guilty of misconduct in the presence of the presence of the Commissioner for CONTEMPT: PENALTY: FINE – not exceeding P200.00 or for IMPRISONMENT – not exceeding 10 days or BOTH. To enforce the provisions of this Section, the Commission may, if necessary request the assistance of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Where personal notice is required by the notice of hearing by the notice of hearing itself, failure to do so vitiates decision not withstanding publication of notice.

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But a finding of fact is not necessary for the validity of the Commission’s decisions.

3.

A decision of the Commission must be based on conditions at the time of hearing or decision.

4.

A decision of the Commission cannot include in a certificate a line excluded during the hearing.

COURT RULINGS AS TO RECEPTION OF EVIDENCE. 1.

The Commission cannot dismiss a case provisionally without receiving evidence.

5.

There is no time fixed for the Commission within which to render its decisions.

2.

The report of an inspector of the Commission must be made before the Court and subjected to cross examination.

6.

And the fact that the decision was rendered before the filing of the memorandum of the parties is no ground for its reversal.

3.

The Commission in the exercise of its quasi-judicial and administrative functions.

7.

Unless actually without basis, the interpretation based upon its orders by the PSC should not be disturbed by the Supreme Court.

4.

Reception of evidence may be delegated to the Chief Attorney of the Commission or an assistant to a Commissioner.

8.

PSC is empowered to approve provisional rates of utilities without prior hearing.

5.

The parties must be given opportunity to present their evidence.

9.

Law confines in administrative office questions of facts, jurisdictions of such office over the Courts.

6.

The Commission may also bake notice of certain facts.

Court rulings as to requirements of publication of application for hearing. 1.

2.

3.

Among the rules adopted by the PSC is that which requires that the order setting an application for hearing be published in two newspapers of general circulation at least 10 days prior to the date of the hearing. But where the corresponding notice of the application was published and served upon the parties and the application was amended by reducing the same line applied for, the failure to publish notice of the amendment cannot possibly impair the rights of any operator or affect the jurisdiction of the PSC to entertain the petition as amended and to grant the same. The rules of procedure in the Commission require an applicant for a certificate to operate a bus or TPU auto-truck service to publish in two newspapers of general circulation the order setting his application for hearing and in addition to sent by registered mail copy of the application and the order of hearing to all operators who may be affected thereby as appearing in the list furnished by the Commission.

Court rulings as to PSC decision. 1.

A decision of the Commission must have some evidence to support it.



Contempt Proceedings

Under Section 29 – the Commission may summarily punish a person for direct contempt but not for indirect contempt – at least insofar as their jurisdiction over public services is concerned. Direct Contempt - Direct contempt may consists in: 1.

misconduct in the presence of the Commissioners or so near them as to interrupt the hearing or session or any proceedings before them;

2.

refusal to be sworn as a witness or to answer as such when lawfully required to do so.

Indirect Contempt - Indirect contempt may consists of: 1.

failure to obey a subpoena issued by the Commission requiring the attendance and testimony of a witness of the production of necessary books, papers and documents,

2.

refusal to comply with any order or decision lawfully entered by the Commission.

Section 30. 1.

The Commission may issue subpoena and subpoena duces tecum, for witnesses in any manner or inquiry pending before the Commission and require the production of books, papers, tariffs, contracts, agreements,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2.

3.

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and all other documents which the Commission may deem necessary in any proceeding.

(See: Deposition of Witnesses - Rules 23 to 29 – 1997 Rules on Civil Procedure).

Any person who shall neglect or refuse to answer lawful inquiry or produce before the Commission books, papers, tariffs, contracts, agreements, and all other documents; or to answer any lawful inquiry shall be punished by a fine not exceeding P5,000.00 or by imprisonment not exceeding 1 year, or both, in the discretion of the court.

Section 33.

The Commissioner and associate commissioners, the chiefs of divisions, the attorneys of the Commission, and the deputy secretaries shall have the power to administer oaths in all matters under the jurisdiction of the Commission.

4.

Any person who shall testify falsely or make any false affidavit or oath before the Commission or before any of its members shall be guilty of perjury, and upon conviction thereof in a court of competent jurisdiction, shall be punished as provided by law.

5.

Witnesses appearing before the Commission in obedience to subpoena or subpoena duces tecum, shall be entitled to receive the same fees and mileage allowance as witnesses attending RTC civil cases.

Every order made by the Commission shall be served upon the person or public service affected thereby, within 10 days from the time said order is filed by personal delivery or by ordinary mail, upon the attorney of record or in case there be no attorney of record, upon the party interested; and in case such certified copy is sent by registered mail, the registry mail receipt shall be the prima facie evidence of the receipt of such order by the public service in due course of mail. Section 34. Any interested party may request the reconsideration of any order, ruling, or decision of the Commission by means of a petition filed not later than 15 days after the date of the notice of the order, ruling, or decision in question. NOTES:

6.

Any person who shall obstruct the Commission or either of the Commissioners while engaged in the discharge of official duties or who shall conduct himself in a rude, disorderly or disrespectful manner before the Commission – upon conviction of the same shall be punished for EACH offense by a FINE not exceeding P1,000.00 or by IMPRISONMENT not exceeding 6 months, or BOTH in the discretion of the court.

Limitation on Commission’s power to order rehearing. A rehearing cannot be granted by the PSC for the reconsideration of a question which has been decided by the SC on appeal to that tribunal. While the Commission is given wide power to grant rehearing, a distinction must be made between those orders that remain entirely within the powers of the Commission and those orders which are brought to the SC for review and final decision.

Section 31.

Motion must be based on facts.

No person shall be excused from a subpoena or subpoena duces tecum issued by the Commission EXCEPT when the testimony or evidence required of him may tend to incriminate him.

The right to be heard and present evidence in support of the allegations, contained in his motion of intervention, naturally follows, provided the motion for intervention or reconsideration state facts sufficient to justify a reconsideration of the questioned order and the granting of a new hearing.

Without the consent of the interested party NO member or employee of the Commission shall be compelled or permitted to give testimony in any civil suit to which the Commission is not a party, with regard to secrets obtained by him in the discharge of his official duty. Section 32. The Commission is also allowed to take deposition of witnesses who are residing within or without the Philippines to be taken in the manner prescribed by the Rules of Court.

Section 35. The Supreme Court is hereby given jurisdiction to review any order, ruling or decision of the Commission and to modify or set aside such order, ruling or decision when it clearly appears that there is no evidence before the Commission to support reasonably such order, ruling, or decision, or that the same is contrary to law, or that it was without jurisdiction of the Commission. NOTES:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS An unverified Motion for Reconsideration containing generalities cannot justify setting aside of a decision handed down in response to a clear public need, where there is evidence that the buses operated by the movant cannot accommodate all the passengers on those lines.

As to the National Water Resources Council – now Board- appeals to the RTC must be made within 15 days from the date the party appealing receives a copy of the decision. As to the Maritime Industry Authority – appeal may be made within 30 days from notice. 

Petition for review filed seven (7) months after receipt of notice of denial is considered to have been filed out of time.



Objections not raised in the Commission cannot be raised on appeal.

Petition for review – see Rule 45, Rules of Court



Compromise agreement of parties bars certiorari or review.

Petition for Certiorari – see Rule 65, Rules of Court



Motion for reconsideration condition precedent for appeal.



If the petitioner shows lack of interest in the case – the petitioner has no standing in the Court, and his petition for review of an order of the PSC must be dismissed with costs.

Remedies to set aside order of Commission. There are only two remedies available in the Supreme Court to set aside an order of the Public Service Commission. 1.

2.

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not

a

N.B. RTC not the CA has jurisdiction over actions to annul orders of the Commission – because even the above mentioned remedies was indicated to be available only to the SC – still you need to follow the Rules on Hierarchy of Courts which provides that Petition for Review or on Certiorari shall first be filed before the RTC, to CA and then to SC. 

As a rule, Court does not interfere with administrative action prior to its completion and finality.



Construction given by an administrative agency possessed of the necessary special knowledge, expertise and experience deserves great weight and respect, term radiotelephony includes cellular phones. (PLDT v. NTC, 190 SCRA 717).

Section 36. Any order, ruling, or decision of the Commission may be reviewed on the application of any person or public service may be reviewed on the application of any person or public service affected thereby, by certiorari in appropriate cases, or by petition to be known as petition for review, which shall be filed within 30 days from the notification of such order, ruling or decision.

Section 37. The institution of a writ of certiorari or other special remedies in the Supreme Court shall in no case supersede the Supreme Court shall so direct, and the appellant may be required by the Supreme Court to give bond in such form and of such amount as may be deemed proper. Section 38. The Chief of the legal division or any other attorneys of the Commission shall represent the same in all judicial proceedings. It shall be the duty of the Sol Gen to represent the Commission in any judicial proceedings if, for special reason, the Commissioner shall request his intervention. Section 39. Any proceeding in any court of the Philippines directly affecting an order of the Commission or to which the Commission is a party, shall have preference over all other civil proceedings pending in such court, EXCEPT election case.

NOTES: The rule on the 15 day and 30 day period is the same in the Energy Regulatory Period. But as to the LTFRB and the NTC – the period within which appeal may be made is within 30 days from notice.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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CONVENTION FOR HE UNIFICATION OF CERTAIN RULES RELATING TO INTERNATIONAL CARRIAGE BY AIR, SIGNED AT WARSAW ON OCT. 12 1929 (WARSAW CONVENTION) I)

Scope

This Convention applies to all international carriage of persons, luggage, or goods performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking. >This also applies to carriage performed by the State or by legally constituted public bodies provided it complies with the condition of the above stated. >This does not apply however to carriage performed under the terms of any international postal convention. “International carriage: means any carriage in which according to the contract made by the parties, the place of departure and the place of destination, whether or not situated either within he territories of two High Contracting parties, or within the territory of a single High Contracting party, if there in agreed stopping place within the territory subject to the to the laws of the state. >A carriage without such agreed stopping place between territories subject to he law of the contracting parties is not deemed to be international for the purposes of this act. A carriage to be performed by several successive air carriers is deemed, for the purpose of this act to be one undivided carriage, if it has been regarded by the parties as a single operation, whether it had been agreed upon under the form of a single contract or of a series of contract.

duplicate, one part for the passenger and the other for the carrier. >The absence, irregularity, or loss of the luggage ticket does not affect the validity of the contract unless in case the carrier did not deliver a ticket, or the ticket did not contain the statement of the number and weight of the luggage and the statement that the carriage is subject to the rules relating to liability established by this convention, the carrier cannot avail of the provision of the convention limiting his liability.

C) Air consignment note Every carrier of goods has the right to require the consignor to make out and deliver to him an “Air consignment note” And every consignor has the right to require the carrier to accept this document. >The absence or irregularity or loss of this note shall not affect the validity and existence of the contract. Provided that if the carrier accepts goods without the air consignment note or the particulars such as the place of destination, name and address of the consignee, apparent condition of the goods quantity and volume of the goods, the carrier cannot avail of the provision limiting his liability in case of a loss or damage top the goods. > The air consignment note is prima pacie evidence of the conclusion of the contract, of the receipt of the goods and of the condition of carriage. D) Rights of the consignor 1) 2)

3) II)

Documents of carriage

A) Passenger ticket For the carriage of passenger the carrier must deliver a passenger ticket which shall include the place and date of issue, destination and date of departure, agreed stopping place, and the liability or the carrier under international law. >The absence, irregularity, or loss of the passenger ticket does not affect the existence and the validity of the contract. >Should the carrier accept passenger without ticket, the carrier cannot avail of the provision of this Convention to exclude or limit his liability. B) Luggage ticket For the carriage of luggage, other than small personal objects of which the passenger takes charge himself, the carrier must issue a luggage ticket. which shall be in

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Consignor is responsible for the correctness of the particulars of the goods Liable for damage suffered by the carrier or any other person by reason of the irregularity, incorrectness, or incompleteness of the said particulars and statements. Right of stoppage or to withdraw the goods at the aerodrome of departure or destination or to be delivered to other person other than the consignee.

>If it is impossible to carry out the orders of the consignor the carrier must inform him of such impossibility. > If it involves the disposition of the goods the carrier must demand the consignment note, otherwise the carrier is liable to the consignee or to anyone in possession of the goods in case of damage to the goods. >The right of the consignor ceases at the moment the consignee received the goods. E) Right of the consignee 1) To deliver to him the goods upon arrival at the place of the destination. 2) To deliver to him the consignment note 3) To be given notice of the arrival of the goods.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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4) Right to enforce liability against the carrier in case of loss. F) Liability of the carrier 1) Liable for damage in the event of death or wounding of passenger or any other bodily injury if the injury or damage take place on board or in the course of the operation of embarking or disembarking. 2) To damages if the goods were damaged during the carriage by air. >The period of carriage does not extend to carriage by land or by sea except if the carriage by land… is for the purpose of loading, delivery, transshipment, any damage is presumed to have been the result of an event which took place during the carriage by air. 3) Liable for damage in case of delay in the carriage of the goods or luggage. F) Carrier is not liable. 1) If the carrier act with necessary measure to avoid the damage 2) If the carrier proves that the damage loss was due to negligence in the handling of the aircraft or pilotage. 3) May be exonerated wholly or partially if carrier proves contributory negligence on the part of the injured person. 



G) 1) 2) 3) 4) 5)

The carrier cannot avail of the provision of this convention in limiting or excluding him from any liability if the damage was caused by the willful misconduct on his part. Carrier is not entitled to the provision limiting his liability if the damage was caused by the agent of the carrier acting within the scope of his employment. Venue of action. RTC where the business of the carrier is located RTC of the place where the contract was made Court of the place of destination Court of the place of departure Court where the place has stopped over

H) Presciption of action. Within two (2) years from the date of arrival at the destination, or from the time the aircraft ought to have arrived, or from the time the carrier was stopped.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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ELECTRONIC COMMERCE ACT REPUBLIC ACT NO. 8792

AN ACT PROVIDING FOR THE RECOGNITION AND USE OF ELECTRONIC COMMERCIAL AND NONCOMMERCIAL TRANSACTIONS AND DOCUMENTS, PENALTIES FOR UNLAWFUL USE THEREOF AND FOR OTHER PURPOSES Otherwise known as ELECTRONIC COMMERCE ACT PART I A. INTRODUCTION 

History of the Electronic Commerce Act. The Electronic Commerce Act (Republic Act No. 8792; the “Act”) is the merged version of the House Bill No. 9971 (HB 9971) and Senate Bill No,. 1902 (SB 1902), primarily authored and sponsored by Senator Ramon Magsaysay, Jr. and Representatives Leandro Verceles, Jr. and Marcial Punzalan, Jr.



The Inter-Agency Task Force. The Electronic Commerce Act (Republic Act No. 8792; the “Act”) was signed into law on June 14, 2000. On that day, an inter-agency task force convened for the purpose of drafting the Act’s Implementing Rules and Regulations (“IRR”). The task force was co-chaired by the Department of Trade and Industry (DTI), Department of Budget and Management (DBP) and the Bangko Sentral ng Pilipinas (BSP). The IRR was digitally signed on July 14, 2000 by Secretaries Mar Roxas II (DTI), Benjamin Diokno (DBM) and Governor Rafael Buenaventura (BSP) during the plenary session of the Global Information Infrastructure Commission’s (GIIC) Asia Regional Conference held in Makati City, Manila.



issues respecting the validity of electronic contracts and the admissibility of electronic evidence would take years or even decades if left in the hands of Philippine judiciary. The only solution to the conundrum therefore, was to pass the Electronic Commerce Act and expressly recognize, in no uncertain terms, that doing business electronically is legal, valid and enforceable in a court of law. 

Guiding Principles of the Act.

1.

“Functional Equivalent” Approach Under this approach, the functions of a document or a signature is analyzed, and, if an equivalent exists in electronic form, then the latter will be adopted. 2.

Technology-neutrality It does not favor any particular technology. The Act was written with an overriding concern to embrace the full range of electronic technology without bias or prejudice. 3. Principle of media neutrality In sum, the Act recognizes electronic documents and signatures in whatever media they may be found. Media neutrality ensures no discrimination in the legal treatment of the electronic document from the time of its creation or delivery to the time of its receipt or acceptance. 

Role of the Act vis-à-vis Philippine Law.

The Act is not intended or designed to supplant any substantive law, particularly the law on contracts. In other words, Philippine substantive law will continue to apply to all e-commerce transactions.

B. DECLARATION OF PRINCIPLES FOR ELECTRONIC COMMERCE POLICIES 

Authority of DTI to Set Forth Policies. Section 2 of the IRR above was lifted from the Act itself was placed in the earlier portion of the IRR to establish the legal authority of the DTI, DBM and BSP to lay down the policies for the promotion of electronic commerce set forth in Section 3 of the IRR.



Source of the Policies. The policies in Section 3 were based on the Global Action Plan for Electronic Commerce published in the Alliance for Global Business (AGB).



Role of the Private Sector. The development of electronic commerce should be driven by market forces with minimal government intervention. Government’s role is nonetheless important insofar as it must provide and sustain a secure legal environment and a competitive business climate for electronic commerce.

Necessity of the Act.

To fill in some gaps in Philippine Law requiring certain contracts be in “writing” (e.g. statute of frauds) or that some documents be “signed” (e.g. negotiable instruments). Since the law already recognizes verbal or oral agreements, there should be no reason why electronic contracts would be denied validity. Before the advent of the Electronic Commerce Act, Philippine statutory law did not categorically validate electronic evidence. To make matters worse, it was universally acknowledged that the resolution of legal

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Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Harmonization of Laws. Electronic commerce, especially when conducted over the Internet, is necessarily global in nature. This means the companies engaged in electronic commerce may be required to comply with the laws of each country where they consummate transactions.

d. e.

Human Resources Development, and Legal

 a.

ITECC Legal Cluster. Taxation - To address issues concerning the taxation of electronic commerce, by providing assistance to the taxing authority, the BIR. Trade - To review import and export procedures with the end in view of expediting the flow of trade documents trough electronic facilities. Government Re-engineering - To provide a venue for coordinating ICT projects affecting multiple government agencies. Consumer Protection - To review consumer related laws such as the Consumer Act of the Philippines in order to determine if the rights of on-line consumers would fall within their protective mantle. Intellectual Property Rights - To address the multifarious policy issues facing intellectual property protection in the Digital Age. Security

b. Hence, countries with less stringent rules or weak enforcement measures may find themselves used as “safe harbors” for e-businesses performing acts or rendering services illegal or immoral in their home countries.

c.

d. 



Jurisdiction. As of NOW, there is NO EXISTING LAW TO DETERMINE THE JURISDICTION OF ELECTRONIC COMMERCE TRANSACTIONS IN THE PHILIPPINES. Taxation of Electronic Commerce. There are to sate, no explicit Philippine tax laws on electronic commerce and it appears that no law will be passed on this matter in the near future. However, it is undeniable that may of the activities involving electronic commerce are subject to existing tax laws.



Internet Consumer Trust Issues. Lack of faith in Internet Sites is undeniably a clear threat to electronic commerce.



Alternative Modes of Dispute Resolution. E-commerce players would be better served by privately-run dispute resolution centers with the expertise and infrastructure to handle complex disputes in a virtual environment. Such centers would have arbiters with the necessary technical and legal expertise to dispense justice in an even-handles manner.



E-Commerce Policy Formulation. The Philippine Government formulates policies respecting electronic commerce through the Information Technology Electronic Commerce Council (ITECC), which was created through Executive Order No. 264 signed by President Estrada. The ITECC is the merger of the National Information Technology Council (NITC) and the Electronic Commerce Promotion Council (ECPC). With the merger, the ITECC is the highest planning and policy advisory body on Information and Communications Technology in the Philippines. The membership of the ITECC reflects the vision that a strong partnership between government and the private sector is needed to achieve sustained growth in the ITC sector.

 a. b. c.

ITECC Clusters. Infrastructure Business Development Financial Services

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e.

f.

PART II A. ELECTRONIC COMMERCE IN GENERAL 

Objective. To provide a secure legal framework and environment for electronic commerce.



Applications. The Act applies equally to commercial and non-commercial activities unlike the Model Law and similar legislation in other countries where the enacted statutes govern only commercial transactions. By expanding the scope of the Act, electronic documents and signatures may now be used in all types of transactions and acts. More importantly, electronic evidence is now admissible in all types of civil, criminal and administrative proceedings. Non-commercial activities include, among others, acts, transactions and documents relating to national security, criminal offenses, marriage, paternity and filiation, adoption, parental authority donations, quasi-delicts, labor and employment labor relations, elections, suffrage, agrarian reform, immigration, and protection of the environment.



What is the Unique Feature of the Act? It applies to both commercial and noncommercial transactions because substantial portion of Internet, mobile and electronic-commerce traffic in the Philippines is not business related. If the Act were made to apply only to commercial transactions, the provisions thereof would be static and inflexible to adapt to the rapid pace of technology. Inevitably, electronic documents and signatures will find widespread application in

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS both commercial as well as non-commercial transactions. It is with this measure of foresight that the Philippine Congress decided to adopt a universal application for the Act. 

Definition of Terms. (Sec 6 Implementing Rules & Regulations)

(a) “Addressee” refers to a person who is intended by the originator to receive the electronic data message or electronic document, but does not include a person acting as an intermediary with respect to that electronic data message or electronic document. (b) “Commercial Activities” shall be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. The term shall likewise refer to acts, events, transactions, or dealings occurring between or among parties including, but not limited to, factoring, investments, leasing, consulting, insurance, and all other services, as well as the manufacture, processing, purchase, sale, supply, distribution or transacting in any manner, of tangible and intangible property of all kinds such as commodities, goods, merchandise, financial and banking products, patents, participations, shares of stock, software, books, works of art and other intellectual property. (c) “Computer” refers to any device or apparatus singly or interconnected which, by electronic, electro-mechanical, optical and/or magnetic impulse, or other means with the same function, can receive, record, transmit, store, process, correlate, analyze, project, retrieve and/or produce information, data, text, graphics, figures, voice, video, symbols or other modes of expression or perform any one or more of these functions. (d) “Convergence” refers to technologies moving together towards a common point and elimination of differences between the provisioning of video, voice and data, using digital and other emerging technologies; the coming together of two or more disparate disciplines or technologies; the ability of different network platforms to carry any kind of service; and the coming together of consumer devices such as, but not limited to, the telephone, television and personal computer. (e) “Electronic data message” refers to information generated, sent, received or stored by electronic, optical or similar means, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy. Throughout these Rules, the term “electronic data message” shall be equivalent to and be used interchangeably with “electronic document.” (f) “Information and Communications System” refers to a system for generating, sending, receiving, storing or otherwise processing electronic data messages or electronic documents and includes the computer system or other similar device by or in which data is recorded or stored and any procedures

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ELECTRONIC COMMERCE LAW related to the recording or storage of electronic data message or electronic document. (g) “Electronic signature” refers to any distinctive mark, characteristic and/or sound in electronic form, representing the identity of a person and attached to or logically associated with the electronic data message or electronic document or any methodology or procedures employed or adopted by a person and executed or adopted by such person with the intention of authenticating or approving an electronic data message or electronic document. (h) “Electronic document” refers to information or the representation of information, data, figures, symbols or other modes of written expression, described or however represented, by which a right is established or an obligation extinguished, or by which a fact may be proved and affirmed, which is received, recorded, transmitted, stored, processed, retrieved or produced electronically. Throughout these Rules, the term “electronic document” shall be equivalent to and be used interchangeably with “electronic data message.” (i) “Electronic key” refers to a secret code, which secures and defends sensitive information that crosses over public channels into a form decipherable only by itself or with a matching electronic key. This term shall include, but not be limited to, keys produced by single key cryptosystems, public key cryptosystems or any other similar method or process, which may hereafter, be developed. (j) “Intermediary” refers to a person who in behalf of another person and with respect to a particular electronic data message or electronic document sends, receives and/or stores or provides other services in respect of that electronic data message or electronic document. (k) “Non-Commercial Activities” are those not falling under commercial activities. (l) “Originator” refers to a person by whom, or on whose behalf, the electronic data message or electronic document purports to have been created, generated and/or sent. The term does not include a person acting as an intermediary with respect to that electronic data message or electronic document. (m) “Person” means any natural or juridical person including, but not limited to, an individual, corporation, partnership, joint venture, unincorporated association, trust or other juridical entity, or any governmental authority. (n) “Service provider” refers to a provider of – i.

Online services or network access, or the operator of facilities therefor, including entities offering the transmission, routing, or providing of connections for online communications, digital or otherwise, between or among points specified by a user, of electronic

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS data message or electronic documents of the user’s choosing; or ii.



electronic files therefore enjoy the same protection under the Act. It also refers to paper documents that are transformed into paperless form by digital imaging or scanning – as a result of which the paper document is transformed into an electronic data message even though its final destination is an optical CD-ROM disk.

The necessary technical means by which electronic data message or electronic documents of an originator may be stored and made accessible to a designated or undesignated third party.

Can a computer be an addressee?

Under letter (a) of Section 6 of the Act, an “addressee” must always be a natural or juridical person, since under the law, they are the only entities with the capacity to act with the legal consequences. Networks and computers are merely conduits or tools by which transactions are facilitated. As such, persons who employ these tools should be responsible for the results obtained by their use since the tools themselves cannot act independently from their users. Hence, a computer is no less a party to contract as a fax machine, telex, or other office tools. 

Convergence. Convergence under the Act refers to “partial convergence” because it is limited to the convergence of hardware or infrastructure only and does not include content such as software, movies, music and books. 

Electronic Data Message. Generally, the term “electronic data messages” is understood to mean any electronic file. The Act provides that such information must either be “generated, sent, received or stored by electronic, optical or similar means.” 





Electronic Data Messages “generated by electronic means” – includes word processing and other computer files, electronic mail, SMS (short message service or text messages), and other documents which are created through electronic devices. Electronic Data Messages “sent or received by electronic means” – Here, only the MODE OF TRANSMISSION is RELEVANT so that the output generated can be considered an electronic data message. In other words, a fax, telegram or telex messages would be included because there were transmitted through telecommunication networks – as would transaction receipts for credit cards, debit card, ATM card and other similar point of sale transactions. Electronic Data Messages “stored by electronic means” – It includes computer files which are not intended for transmission but merely for storage. Such

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

Understanding the nature of an Electronic document One should not think of an electronic document merely as a computer file but the information contained therein. Even if it is printed out on paper, it retains its character as an electronic data message so long as the information has not been altered. 

Are the output of devices directly connected to computers such as Print Outs from printers which are already paper documents excluded from the definition of Electronic Data Message? The output devices directly connected to computers such as printouts from laser, inkjet and dot-matrix printers are undeniably paper documents and would seem to be excluded from the definition of electronic data messages. Although the printouts encompass the image appearing on a computer monitor, the electronic data messages printed thereby are generated or stored by electronic means. They are therefore, electronic documents. Note that under the New Rules on Electronic Evidence, printouts are also originals for purposes of the Best Evidence Rule. 

Electronic Signatures. a. Anything in electronic form which identifies the user can be said to be his signature if it is logically attached to an electronic data message. For example, if Juan de la Cruz identifies himself in his email messages as follows: “juan dlc”, then the latter should be considered an electronic signature. Another example of an electronic signature is the name of a person appearing in the “From” field on the e-mail, since the same identifies a particular person and is logically affixed on an electronic data message. b. A signature can also be used to indicate the person’s consent to the contents of a document or authenticate the same. For example, if Juan de la Cruz wanted to approve an e-mail proposal, he might write a reply e-mail with nothing but the word “accepted” plus the usual mark “juan dlc”. The entire reply e-mail would constitute the electronic signature. c. Method employed by the signer to authenticate a data message. An example

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS is person signifying his consent to an online contract by filing up a registration form and clicking on the “I Accept” button. (i.e., the contents of the form plus the fact of clicking) will be considered as the electronic signature of the person. This is true also in case of digital signatures where the signature is not merely the person’s public key or his digital certificate but the entire authentication method utilized. In other words, an electronic signature may be proven by multiple documents provided that take as a whole, they fulfill the functions of a handwritten signature. Note however, that while electronic signatures are defined in the Act, only those which comply with the stringent requirements of Section 8 of the Act or Section 13 of the IRR, rise to the level of and are given the same legal protection as handwritten signatures. 

Can a computer be a party to a contract if it is programmed to accept electronic offers automatically? The party to the agreement is the person in whose behalf the electronic acceptance was sent. Hence, a computer can never be a party to an electronic contract. Note that as with the Model Law, the originator and the addressee area always “persons”, i.e. natural persons or juridical entities, which is consistent with the concept that only “persons” (not the tools they utilize) can perform acts or enter into transactions with legal effect. Note finally that an originator also includes one who creates an electronic document not for transmission but only for storage.

B. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES AND ELECTRONIC DOCUMENTS 

The Principle of Non-Discrimination.

The fundamental principle that electronic documents should not be discriminated against but should be given the same legal status as their paper based counterparts. THE MEDIUM IN WHICH THE INFORMATION IS CONTAINED SHALL NOT EFFECT ITS LEGAL CONSEQUENCE. 

Incorporation by Reference.

Even now, many of the electronic documents and data messages used in electronic commerce no longer contain all relevant information but merely make references thereto. Additionally, much of electronic commerce occurs through coded messages that become intelligible only when related to information extraneous to the said message. Under the law, the coded messages may be

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ELECTRONIC COMMERCE LAW considered an integral part of the data message because the extraneous information is deemed incorporated into the same. 

Freedom to Opt Out

The objective of the law is to facilitate electronic contracting while leaving the parties free to determine whether or not to use electronic records and signatures. Hence, if a person receives an e-mail offer to enter into an electronic contract, such person is free to ignore the same and request the counter-party to conduct the transaction offline. The reverse of the rule is likewise true that parties may not compel others to conduct business in a paper-based environment. In addition, the mere fact that a person transacts his business largely through electronic means does not deprive him of the right to enter into other transactions by non-electronic means. Verily, the Act was not intended to restrict the freedom to designate the manner or mode of contracting but merely to facilitate electronic transactions. As an exception to this rule, however, the conduct of a person may be used as evidence of his consent to enter into an electronic contract. 

Electronic Documents under the Model Law Under the Model Law, there are two (2) major classes of electronic documents – “writings” and “originals.” a.

Writings. Model Law states that an electronic data message that qualifies as an electronic “writing” will suffice. Specifically, all electronic data messages are considered “writings” so long as they are “accessible so as to be usable for subsequent reference.” “Writings” are not required to conform to any other requirement such as that relating to integrity, inalterability or reliability. This is consistent with the idea that since not all paperbased documents are free from unauthorized alteration and forgery, the same should not be imposed upon electronic documents. In other words, forges or fraudulent electronic documents should enjoy the same evidentiary benefits of admissibility and legal effects as their paper-based counterparts. b.

Originals. Applying the functional equivalent approach, the Model Law requires electronic “originals” to possess “a reliable assurance as to the integrity of the information and the ability to be displayed to the person to whom it is to be presented. “Original” electronic documents are pertinent especially where the uniqueness of the documents is particularly relevant (i.e. bills of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS landing, certificates of deposits and negotiable instruments). Evidently, reliability and integrity are essential to “originals” while, in contrast, these attributes are dispensable for “writings.” 

Documents which are required to be in writing. (i) Those falling under the Statute of Frauds. (ii) Negotiable Instruments (Section 1, NIL); (iii) Donations of personal property with value in excess of P5,000.00, (Article 748, Civil Code); (iv) Contract of Antichresis where the amount of the principal and interest must be in writing (Article 2134, Civil Code); (v) Stipulation to pay interest on loans (Article 1956, Civil Code); (vi) Power of Attorney to sell land or any interest therein (Article 1874, Civil Code); (vii) Assignment of copyright in whole or in part during the lifetime of the author (Section 180.2, Intellectual Property Code); (viii) Marriage Settlements (Article 77, Family Code); and (ix) Stipulations limiting a common carrier’s liability to less than extraordinary diligence. (Article 1744, Civil Code). c.



Generic Electronic documents They are neither “writings” nor “originals”, but are mere documentary evidence of the information contained therein.

Best Evidence Rule. The Best Evidence Rule states that when a document is the subject of inquiry, no evidence shall be admissible other than the original document itself. Section 7 (c) “originals” are not the originals referred to in the Best Evidence Rule. Electronic data messages and electronic documents by themselves are considered original documents for purposes of complying with the Best Evidence Rule. In this regard, since the electronic document is considered the functional equivalent of a written document, the procedure of its presentation as evidence in court shall follow the same rules governing paper-based documentary evidence, and its integrity and reliability need not be proved for this purpose. Consistent with the foregoing, the new Rules on Electronic Evidence provide that mere printouts are originals for purposes of the Best Evidence Rule.

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Note that while an electronic data message is by itself the original for purposes of the Best Evidence Rule, if a party wishes to prove that the electronic document is a “writing” or an “original” as defined under Act, the proponent must still independently present evidence of its reliability and integrity. 

What are Solemn Contracts? Solemn contracts are those which are valid only if the form prescribed by law is observed. Note that the Act applies not only to contracts or agreement but to other kinds of documents as well. 

Notarized Documents. In some instances, Philippine law requires that documents be acknowledged before a notary public for its validity. Notarized documents enjoy a higher degree of acceptability largely because the Rules of Court consider them public documents which are easier to present in evidence.

C. LEGAL RECOGNITION OF ELECTRONIC SIGNATURES (SEC 13 IRR) 

An electronic signature relating to an electronic document or electronic data message shall be equivalent to the signature of a person on a written document if the signature: (a) is an electronic signature as defined in Section 6(g) of these Rules; and (b) is proved by showing that a prescribed procedure, not alterable by the parties interested in the electronic document or electronic data message, existed. 

Presumption Relating to Electronic Signatures. - In any proceeding involving an electronic signature, the proof of the electronic signature shall give rise to the rebuttable presumption that: (a) The electronic signature is the signature of the person to whom it correlates; and (b) The electronic signature was affixed by that person with the intention of signing or approving the electronic data message or electronic document unless the person relying on the electronically signed electronic data message or electronic document knows or has notice of defects in or unreliability of the signature or reliance on the electronic signature is not reasonable under the circumstances.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 

Method of Authenticating Electronic Documents, Electronic Data Messages, and Electronic Signatures.



(b)



(a) By evidence that at all material times the information and communication system or other similar device was operating in a manner that did not affect the integrity of the electronic document or electronic data message, and there are no other reasonable grounds to doubt the integrity of the information and communication system;

The electronic signature shall be authenticated by proof that a letter, character, number or other symbol in electronic form representing the persons named in and attached to or logically associated with an electronic data message, electronic document, or that the appropriate methodology or security procedures, when applicable, were employed or adopted by a person and executed or adopted by such person, with the intention of authenticating or approving an electronic data message or electronic document; The electronic data message or electronic document shall be authenticated by proof that an appropriate security procedure, when applicable was adopted and employed for the purpose of verifying the originator of an electronic data message or electronic document, or detecting error or alteration in the communication, content or storage of an electronic document or electronic data message from a specific point, which, using algorithm or codes, identifying words or numbers, encryptions, answers back or acknowledgement procedures, or similar security devices.

Authenticating Electronic Documents Electronic Data Messages Burden of.

or

The person seeking to introduce an electronic document or electronic data message in any legal proceeding has the burden of proving its authenticity by evidence capable of supporting a finding that the electronic data message or electronic document is what the person claims it to be.

Modes for Establishing Integrity In the absence of evidence to the contrary, the integrity of the information and communication system in which an electronic data message or electronic document is recorded or stored may be established in any legal proceeding, among other methods:

Electronic documents, electronic data messages and electronic signatures, shall be authenticated by demonstrating, substantiating and validating a claimed identity of a user, device, or another entity in an information or communication system. Until the Supreme Court, by appropriate rules, shall have so provided, electronic documents, electronic data messages and electronic signatures, shall be authenticated, among other ways, in the following manner: (a)

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(b) By showing that the electronic document or electronic data message was recorded or stored by a party to the proceedings who is adverse in interest to the party using it; or (c) By showing that the electronic document or electronic data message was recorded or stored in the usual and ordinary course of business by a person who is not a party to the proceedings and who did not act under the control of the party using the record.



Admissibility and Evidential Weight For evidentiary purposes, an electronic document or electronic data message shall be the functional equivalent of a written document under existing laws. In any legal proceeding, nothing in the application of the rules on evidence shall deny the admissibility of an electronic data message or electronic document in evidence: (a) On the sole ground that it is in electronic form; or (b) On the ground that it is not in the standard written form.



What is the recommended mode of presenting evidence? Proof by affidavit and cross examination

C. COMMUNICATION OF ELECTRIC DATA MESSAGES OR ELECTRONIC EVIDENCE

ELECTRONIC CONTRACTS 

Philippine Contract Law/ Spiritual System

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS The Civil Code adheres to the spiritual system where contracts are valid if made in any way that indicates that the party wished to be bound. (See Article 1356 of the NCC) On the basis of the foregoing, the SC as repeatedly upheld the validity of contracts proven solely by testimonial evidence. Hence, as a general rule, a contract under Philippine Law will be valid in whatever form it may be found whether it be oral, paper based or for that matter, electronic. 



Recognition of Electronic Contracts Philippine law recognized electronic contracts even before the passage of this act. Basis: Article 17 of the NCC. By express codal provision therefore, the Philippines follows the lex loci contractus rule. In this regard, the Supreme Court has had occasion to rule that a power of attorney executed in Germany, must be tested as to its formal validity by the laws of that country and not the Civil Code. Thus, if the law were the electronic contract was entered into recognizes such form of agreements, those electronic agreements are extrinsically valid in the Philippines. Assuming further that such agreements are also intrinsically valid under the law of the place where it was entered into, then those electronic contracts would be valid in all respects under Philippine law. Validity of Electronic Contracts (Sec 16 ECommerce Act/ Sec 21 Implementing Rules & Regulations)  The Act does not amend the law on contracts but merely allows the requisite elements of offer and acceptance or its external manifestations, to be expressed in electronic form. 



Does the Act cover only the cases in which both the offer and the acceptance are communicated electronically? No. The Act also covers cases where only the offer or only the acceptance is electronically communicated. In other words, an email acceptance to a handwritten offer can be used as the basis to prove the existence of a contract. The Act intends only to amend the law with respect to the form of documents and transactions, not their intrinsic validity.

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Consummation of Electronic Transactions with Banks Realizing that Sec 16(2) of the ECommerce Act may be used to facilitate fraud with the unwitting and involuntary participation of banks, The BSP moved to insert the amendments into the IRR which now appears in Sec 22. They limited the application of the provision only to ATM networks and stressed the BSP’s authority vis a vis banks and other financial institutions – leaving open the possibility that the BSP will issue circulars to prevent the potential abuse of Sec 16(2) of the Act.

ELECTRONIC DATA MESSAGE 

General Rule: If the originator himself sends an electronic data message, then its authorship will be attributed to him, and e will be bound by the legal consequences arising from the sending of the electronic data message. These include civil and criminal liability for the contents of such messages. 

Expanded meaning of the word “Sent” It is not limited to situations where the electronic data message is transmitted, but should also apply to situations where the electronic data message is transmitted, but should also apply to situations where it is merely generated or stored. This is consistent with the definition of “originator” as being the person who purports to have created, generated and/or sent the electronic data message. Hence, if the originator personally stored the electronic document without sending it to a third party, then it will still be attributed to him. 

Exception: When the Data Message is not Sent by the Originator The Act recognizes that originators do not always sent their electronic Data messages personally.

ERRORS IN THE ELECTRONIC DATA MESSAGE 

Two Types of Errors Referred to in the Provision: Errors in the Electronic Data Message Errors in the transmission of the Electronic Data Message



Purpose for determining Error To assign fault or liability upon either the originator or addressee for an electronic data message when an error has occurred. If the addressee knew or should

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS have known the error, then he is not entitled to rely upon the assumption that the electronic document was sent by the originator. He is therefore solely liable for his actions taken upon that assumption. In the opposite case, of course, the liability rests with the originator.

AGREEMENT ON ACKNOWLEDGMENT OF RECEIPT OF ELECTRONIC DATA MESSAGES OR ELECTRONIC DOCUMENTS 

Application of the Provision (Sec 20 ECommerce Act; Sec 30 IRR) 1. Previous Agreement or Request – where the parties either agreed or the originator has requested an acknowledgment of receipt. Such form must be followed or the service of the same is invalid 2. No agreement as to form of Acknowledgment – in such case, the acknowledgment may be given through any means of communication or even by the conduct of the addressee.

TIME OF DISPATCH OF ELECTRONIC DATA MESSAGE OR ELECTRONIC DOCUMENT (Sec 21 E-Commerce Act; Sec 31 IRR) 

Dispatch For purposes of the Act, an electronic data message enters an information system at the time when it becomes available for processing within that information system.

TIME OF RECEIPT OF ELECTRONIC DATA MESSAGE OR ELECTRONIC DOCUMENT (Sec 22, E-Commerce Act; Sec 32 IRR) 



Designated Information System The mere indication of an electronic mail or telecopy address on a letterhead or other document should not be regarded as express designation of one or more information systems. The designation by the addressee must be specific and unequivocal. Non-Designated Information System The addressee had designated an information system but the message was not sent to the system. In this case, the message is deemed received only upon the addressee’s retrieval thereof.

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ELECTRONIC COMMERCE LAW PLACE OF DISPATCH AND RECEIPT OF ELECTRONIC DATA MESSAGE OR ELECTRONIC DOCUMENT (Sec 23, E-Commerce Act; Sec 33 IRR) 

Presumption as to the Place of Receipt and Dispatch – Party’s place of business or his habitual residence. However, the parties may agree upon the place.



Relevance of the Provision The provision is important in the context of existing legal requirements respecting the service or presentation of documents at a particular location.



Private International Law Under the IRR, the provision does not intend to determine which law will apply to a particular electronic data message. This arises from the simple fact that the application of the rule usually reveals two (2) locations – the place of dispatch and the place of receipt.

CHOICE OF SECURITY METHODS (Sec 24 ECommerce Act; Sec 34 IRR) 

Freedom of Choice This provision allows parties to utilize any security or authentication method appropriate to suit their needs.



Government Regulation This serves as a basis for the DTI or other government agency to issue rules and regulations over the use of encryption technologies, particularly public key encryption technologies.



Limitation The freedom given to the parties under the provision is subject to the rules and regulations of government agencies.

PART III ELECTRONIC COMMERCE IN CARRIAGE OF GOODS (Sections 25 & 26, E-Commerce Act; Sections 35 & 36, IRR) 

Actions Related to Contracts of Carriage of Goods.

The Rules applies to any action in connection with, or in pursuance of, a contract of carriage of goods, including but not limited to:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS (a) (i) furnishing the marks, number, quantity or weight of goods;(ii) stating or declaring the nature or value of goods; (iii) issuing a receipt for goods; (iv) confirming that goods have been loaded;



(b) (i) notifying a person of terms and conditions of the contract;(ii) giving instructions to a carrier;

(a) Technology Neutrality. - All solutions implemented shall neither favor a particular technology over another nor discriminate against or in favor of particular vendors of technology.

(c)

(i) claiming delivery of goods;(ii) authorizing release of goods;(iii) giving notices of loss of, or damage to goods;

(d) giving any other notice or statement in connection with the performance of the contract; (e) undertaking to deliver goods to a named person or a person authorized to claim delivery; (f)

granting, acquiring, renouncing, surrendering, transferring or negotiating rights in goods;

(g) acquiring or transferring rights and obligations under the contract. 

Transport Documents.

The law requires that any action referred to be carried out in writing or by using a paper document, that requirement is met if the action is carried out by using one or more electronic data messages or electronic documents.

Principles Governing E- Commerce Regulation -shall be mandatory upon all departments, bureaus, offices and agencies of the government, as well as all government-owned and-controlled corporations:

(b) Interoperability. - All implementation of technological solutions shall ensure the interoperability of systems forming part of the government network. (c) Elimination of Red Tape. Government processes shall be re-examined and if appropriate, simplified or re-engineered to maximize the functionality of technology and to eliminate unnecessary delays in the delivery of governmental services. (d) Security Measures. - Government shall implement appropriate security measures to guard against unauthorized access, unlawful disclosure of information, and to ensure the integrity of stored information. (e) Auditability. - All systems installed shall provide for an audit trail. 

Government Information System Plan (GISP). – The blue print for introducing information technology to every aspect of its operations. It is also referred to as the “Philippine Government On-Line.”

B. RPWEB

PART IV ELECTRONIC TRANSACTIONS IN GOVERNMENT A. Government Use of Data Messages, Electronic Documents and Electronic Signatures (Section 27 E-Commerce Act; Section 37 IRR) 

Philippine Government Vision: If said provisions are strictly complied with, the Phil. Government shall be able to perform all its functions electronically within 2 years. 

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Supplemental Regulation Despite the Two years deadline, private Citizens cannot force the Government to transact business electronically until such time tat appropriate agencies have the opportunity to determine the means, methods and regulations respecting the same.

(Section 28 E-Commerce Act; Section 40 IRR.) 

RPWEB

RPWEB is a strategy requiring all agencies and offices of the Philippine Government to connect to the internet to Promote the Use Of Electronic Documents and Electronic Data Messages In Government and to the General Public. 

Implementation 1. Implementing Agencies: DOTC, NTC, NCC 2. Mass Media – medium of communication limited to Filipino Citizens or Filipino owned Corporations or Associations.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS 3.

4.

COMMERCIAL LAW

Lead Agency – DTI- The law vests the DTI with the authority to direct the promotion and development of Electronic Commerce in the country as well as empowered to issue rules and regulations necessary to implement the Act. The Department of Budget and Management shall identify the fund source for the implementation of Sections 37, 39 and 40 of the Rules.

information and communication devices, without the knowledge and consent of the owner of the computer or information and communications system, including the introduction of computer viruses and the like, resulting in the corruption, destruction, alteration, theft or loss of electronic data messages or electronic document shall be punished by a minimum fine of one hundred thousand pesos (P100,000.00) and a maximum commensurate to the damage incurred and a mandatory imprisonment of six (6) months to three (3) years.

PART V

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FINAL PROVISIONS

Liability The liability of the service provider herein is limited not only to that arising from copyright infringement but to a whole range of offenses against third parties. It includes libel, defamation, threats, pornography, as well as the illegal conduct of its clients.

Lawful Access Apart from persons authorized by the individual having possession of the electronic document or signature, the appropriate government agency or entity including police officers may have access to the same, provided they comply with the constitutional protection against unreasonable searches and seizures. Law enforcement agencies must therefore procure a search warrant before conducting a search of a computer containing electronic evidence. 

2.

Piracy. - Piracy or the unauthorized copying, reproduction, dissemination, distribution, importation, use, removal, alteration, substitution, modification, storage, uploading, downloading, communication, making available to the public, or broadcasting of protected material, electronic signature or copyrighted works including legally protected sound recordings or phonograms or information material on protected works, through the use of telecommunication networks, such as, but not limited to, the internet, in a manner that infringes intellectual property rights shall be punished by a minimum fine of one hundred thousand pesos (P100,000.00) and a maximum commensurate to the damage incurred and a mandatory imprisonment of six (6) months to three (3) years. The foregoing shall be without prejudice to the rights, liabilities and remedies under Republic Act No. 8293 or Intellectual Property Code of the Philippines and other applicable laws.

3.

Other Penal Offenses. - Violations of the Consumer Act or Republic Act No. 7394 and other relevant or pertinent laws through transactions covered by or using electronic data messages or electronic documents, shall be

Obligation of Confidentiality.

Except for the purposes authorized under the Act, any person who obtained access to any electronic key, electronic data message, or electronic document, book, register, correspondence, information, or other material pursuant to any powers conferred under the Act, shall not convey to or share the same with any other person. 

Penal Provisions 1.

Hacking. - Hacking or cracking which refers to unauthorized access into or interference in a computer system/server or information and communication system; or any access in order to corrupt, alter, steal, or destroy using a computer or other similar

Love Bug The provision specifying the crime of hacking gained media attention before the Act was signed into law because of the “I love you Virus” incident which caused billions of dollars worth of damage to information networks of several companies.

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Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS penalized with the same penalties as provided in those laws.

COMMERCIAL LAW 4.

Oversight Committee. - There shall be a Congressional Oversight Committee composed of the Committees on Trade and Industry/Commerce, Science and Technology, Finance and Appropriations of both the Senate and House of Representatives, which shall meet at least every quarter of the first two years and every semester for the third year after the approval of this Act to oversee its implementation. The DTI, DBM, Bangko Sentral ng Pilipinas, and other government agencies as may be determined by the Congressional Committee shall provide a quarterly performance report of their actions taken in the implementation of this Act for the first three (3) years.

5.

DTI’s Continuing Authority to Implement the Act and Issue Implementing Rules. Among others, the DTI is empowered to promulgate rules and regulations, as well as provide quality standards or issue certifications, as the case may be, and perform such other functions as may be necessary for the implementation of this Act in the area of electronic commerce.

6.

Separability. - If any provision in these Rules or application of such provision to any circumstance is held invalid, the remainder of these Rules shall not be affected thereby.

7.

Effectivity. - These Rules shall take effect fifteen (15) days from the complete publication thereof in a newspaper of general circulation.

4. Other Violations of the Act.- Other violations of the provisions of the Act, shall be penalized with a maximum penalty of one million pesos (P1,000,000.00) or six-(6) years imprisonment. 

Miscellaneous Provisions 1.

2.

3.

Statutory Interpretation. - Unless otherwise expressly provided for, the interpretation of these Rules and the Act shall give due regard to the Act’s international origin - the UNCITRAL Model Law on Electronic Commerce and the need to promote uniformity in its application and the observance of good faith in international trade relations. The generally accepted principles of international law and convention on electronic commerce shall likewise be considered. Variation by Agreement. - Any provision of the Act may be varied by agreement between and among parties; Provided that such agreement involves only the generation, sending, receiving, storing or otherwise processing of an electronic data message or electronic document. Nothing shall authorize contracting parties to agree upon stipulations or covenants, which defeat the legal recognition, validity and admissibility of electronic data messages, electronic documents, or electronic signatures.

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Reciprocity. - All benefits, privileges, advantages or statutory rules established under this Act, including those involving practice of profession, shall be enjoyed only by parties whose country of origin grants the same benefits and privileges or advantages to Filipino citizens. Inasmuch as the Act merely contemplates the legal recognition of electronic forms of documents and signatures and does not amend any law governing the underlying substantive validity of acts or transactions, this provision shall be subject to existing Constitutional and statutory restrictions relative to activities which are reserved to Philippine citizens or juridical entities partially or wholly-owned by Philippine citizens.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

REAL ESTATE MORTGAGE (Articles 2124 – 2131, NCC)

Real Estate Mortgage, defined A contract whereby the debtor guarantees the performance of the principal obligation by subjecting real property or real rights as security in case of nonperformance of such obligation within the period agreed upon. Essential Requisites of Real Estate Mortgage (1) It must be constituted to secure the performance of the principal obligation. (2) The mortgagor must be the absolute owner of the property mortgaged. (3) The mortgagor should have the free disposal of the property mortgaged, and in the absence thereof, he should be legally authorized for the purpose. (4) When the principal obligation becomes due, the property mortgaged may be alienated for the payment of such obligation. (5) The subject matter of the contract must be immovable property or alienable real rights upon immovables. Subject Matter of Mortgage They are: (1) immovables; and (2) alienable real rights imposed upon immovables.

Characteristics of Mortgage (1) (2) (3) (4)

real contract; accessory contract; subsidiary contract; and unilateral contract because it creates only an obligation on the part of the creditor who must free the property from the encumbrance once the obligation is fulfilled.

Kinds of Mortgages A mortgage may be: (1) Voluntary – one which is agreed to be between the parties or constituted by the will of the owner of the property on which it is created. (2) Legal – one required by law to be executed in favor of certain persons. (3) Equitable – one which, although it lacks the proper formalities of mortgage, shows the intention of the parties to make the property as a security for a debt.

Effects of Mortgage (1) Creates real right – A mortgage creates a real right; a lien inseparable from the property mortgaged, which is enforceable against the whole word. Until

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REAL ESTATE MORTGAGE LAW discharged, it follows the property wherever it goes and subsists notwithstanding changes of ownership. (2) Creates merely on encumbrance – A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a lien thereon. It gives the mortgagee no right or claim to the possession of the property, and, therefore, a mere mortgagee has no right to eject an occupant of the property mortgaged.

Extent of Mortgage A real estate mortgage constituted on immovable property is not limited to the property itself but also extends to all its accessions, improvements, growing fruits and rents or income, as well as to the proceeds of insurance should the property be destroyed, or the expropriation value of the property should it be expropriated.

Foreclosure, defined Foreclosure is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given.

Validity and Effects of Foreclosure (1) In a real estate mortgage, when the principal obligation is not paid when due, the mortgage has the right to foreclose the mortgage and to have the property seized and sold with a view of applying the proceeds to the payment of the principal obligation. Foreclosure is valid where the debtor is in default of his obligation. (2) The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness in case of default of payment. The power to foreclose a mortgage or not resides in the mortgagee. (3) Once the proceeds have been applied to the payment of obligation, the debtor cannot anymore be required to pay, unless, of course, there is a deficiency between the amount of the loan and the foreclosure sale price, because the obligation has already been extinguished. (4) The rule is that statutory provisions governing public notice of foreclosure sales must be strictly complied with, and even slight deviations there from will invalidate the sale or render it at least voidable. Kinds of Foreclosure (1) Judicial foreclosure – it is an ordinary action; governed by Rule 68 of the rules of Court

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS (2) Extrajudicial foreclosure – foreclosure under power of sale contained in the mortgage; governed by Act No. 3135, as amended Judicial Foreclosure under the Rules of Court (Rule 68)  Judicial action for the Purpose A mortgage may be foreclosed judicially by bringing an action for that purpose, in the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof, is situated.  Order of Mortgagor to pay Mortgage debt If the court finds the complaint to be wellfounded, it shall order the mortgagor to pay the amount due upon the mortgage debt or obligation with interest and other charges within a period of not less than 90 days or more than 120 days from entry of judgment (Sec. 2, Rule 68)  Sale to the highest bidder If the mortgagor fails to pay at the time directed in the order, the court, upon motion, shall order the property to be sold to the highest bidder at public auction (Sec. 3, Ibid.)  Confirmation of Sale The sale when confirmed by an order of the court, also upon motion, shall operate to divest the rights of all parties to the action and to vest their rights in the purchaser subject to such right of redemption as may be allowed by law.  Execution of Judgment No judgment rendered in an action for foreclosure or mortgage can be executed otherwise than in the manner prescribed by law on mortgages, because parties to an action are not authorized to change the procedure which it prescribed.  Application of proceeds of sale The proceeds of the sale shall be applied to the payment of the: (a) costs of sale; (b) the amount due the mortgagee; (c) claims of junior emcumbrances or persons holding subsequent mortgages in the order of their priority; and (d) the balance, if any.  Execution of sheriff’s certificate In judicial foreclosure, the foreclosure is not complete until the sheriff’s certificate is executed acknowledged and recorded. In the absence of a certificate of sale, no title passes by the foreclosure proceedings to the vendee.

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EXTRAJUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGE (Act No. 3135, as amended by Act No. 4118)

Purpose of the law (Sec. 1) To regulate the manner in which the extrajudicial foreclosure and redemption of real estate mortgages may be made. Where to conduct the sale of the mortgaged real estate The sale must be made within the province in which the property sold is situated. In case the place within said province in w3hich the sale is to be made is the subject of stipulation, such the sale in said place in the municipal building of the municipality in which the property or part thereof is situated. Notice Requirement Notice shall be given by posting notices of the sale for not less than twenty (20) days in at least three public places of the municipality or city where the property is situated. If the property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.  personal notice to the mortgagee is not required  to be a newspaper of general circulation] - it is enough that “it is published for the dissemination of local news and general information: that is has a bonafide subscription list of paying subscribers; that it is published at regular intervals.” How the sale should be made The sale must be made: (1) at public auction; (2) between 9 o’clock in the morning and 4 o’clock in the afternoon; and (3) shall be under the direction of then sheriff of the province, the justice or auxiliary justice of the place of the municipality in which such sale has to be made, or of a notary public of said municipality, who shall be entitled to collect the fee foe each day of actual work performed, in addition to his expenses. Persons who may participate in the bidding At any sale, the creditor, trustee, or other person, authorized to act for the creditor, may participate in the bidding, and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

Who may redeem the foreclosed property (1) the debtor; (2) his successors in interest, or (3) any judicial creditor or judgment creditor of said debtor, or (4) any person having a lien on the property or deed of trust under which the property is sold. Period of Redemption At any time within the term of one (10 year from the date when the certificate of sale issued by the Sheriff is registered in the Office of Register of Deeds. Right to Recover the deficiency In extrajudicial foreclosure of mortgage, the mortgagee has the right to recover the deficiency from the debtor where the proceeds of the sale are insufficient to pay the debt. Procedure to be followed in Extra judicial Foreclosure of mortgage (Supreme Court Administrative Order No.3 dated October 19, 1984) (1) Application must be filed before the Executive Judge through the clerk of court who is also the Ex-Office Sheriff; (2) In case of real estate mortgage, before the auction sale is conducted, the clerk of court must examine whether the requirements of the law have been complied with, that is, whether the notice of sale has been posted for not less than 20 days in at least three (3) public places of the municipality or city where the property is situated, and if such property is worth more than P400.00, that such notice has been published once a week for at least three (30 consecutive weeks in a newspaper of general circulation in the municipality or city (3) The certificate of sale must be approved by the Executive Judge or in his absence, by the Vice Executive Judge; (4) Where the application concerns the extrajudicial foreclosure of mortgages of real estate and/or chattels in different locations covering one indebtedness, only one filing fee corresponding to such indebtedness shall be collected (5) The clerk of court, apart from the official receipt of the fees, shall issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the description of the real estate and/or chattels mortgaged and their respective locations, which certificate shall serve the purpose of having the application docketed with the Clerk of Court of the places where other properties are located and of allowing the extrajudicial foreclosure to proceed thereat. (6) The notice of sale shall be published in a newspaper of general circulation pursuant to Section 1 of PD 1079 and non-compliance therewith shall constitute a violation of Section 6 thereof. (7) The application shall be raffled among all sheriffs, including those assigned to the Office of the Clerk of Court and Sheriffs assigned in the branches.

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REAL ESTATE MORTGAGE LAW (8) After the redemption period has expired, the Clerk of Court shall archive the records. (9) No auction sale shall be held unless there arte at least two (2) participating bidders, otherwise, the sale shall be postponed to another date. If on the new date set forth for the sale there shall not be at least two (2) bidders, the sale shall then proceed. The names of the bidders shall be reported to the Sheriff of the Notary Public, who conducted the sale to the Clerk of Court before the issuance of the certificate of sale. Redemption (of foreclosed property), defined Redemption may be defined as a transaction by which the mortgagor reacquires or buys the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created. Kinds of Redemption They are: (1) Equity of Redemption – the right of the mortgager to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property. In judicial foreclosure, the mortgagor may exercise his equity of redemption before but not after the sale is confirmed by the court. (2) Right of Redemption – the right of the mortgagor to redeem the mortgaged property within a certain period after it was sold for the satisfaction of the mortgage debt. In all cases of extrajudicial sale, the mortgagor may redeem the property at any time within the term of one (1) year from and after the date of registration of the sale. In judicial foreclosure, the general rule is that the mortgagor cannot exercise his right of redemption after the sale is confirmed by the court. Effect of Exercise of the right of redemption The redemption defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been made. It does not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of the lien foreclosed. Effect of failure to exercise the right of redemption If no redemption is made within the prescribed period, the purchaser has the absolute right to a writ of possession which is the final process to carry out or consummate the extrajudicial foreclosure. Henceforth, the mortgagor loses his right over the property.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

CHATTEL MORTGAGE LAW (Act No. 1508, in relation to Articles 1484, 1485, 2140 and 2141, NCC)

Chattel Mortgage, defined Chattel mortgage is a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. (Art. 2140). Characteristics of chattel mortgage It is: (1) an accessory contract because it is for the purpose of securing the performance of a principal obligation; (2) a formal contract because of its validity, registration in the Chattel Mortgage Register is indispensable; and (3) a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the encumbrance on fulfillment of the obligation. Laws principally governing chattel mortgages They are: (1) the Chattel Mortgage Law, Act No. 1508, as amended; (2) the Civil Code; (3) the Revised Administrative Code; and (4) the Revised Penal Code Essential requisites of chattel mortgage (1) constituted to secure the fulfillment of a principal obligation; (2) that the mortgagor be the absolute owner of the thing mortgage; (3) the persons constituting the mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. (Art.2085) - It is also of the essence that when the principal obligation becomes due, the thing in which mortgage consists may be alienated for the payment to the creditor (Art. 2087). - Mortgagor may be a third person. It is not necessary that the principal debtor should always be the mortgagor. (Art. 2085, par. 2). Subject matter of chattel mortgage Only movable or personal properties (certain deviations, however, have been allowed) such as: (1) shares of stock ( the mortgage to be registered both in the Chattel Mortgage Registries of the province where the mortgagor resides, and the province where the corporation has its principal business); (2) interest in business; (3) growing crops; (4) large cattles; (5) machinery treated by the parties as personal property subsequently installed on leased land;

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CHATTEL MORTGAGE LAW (6) motor vehicles (the mortgage to be registered also with the Land Transportation Office) - with respect to vehicles used for public services, the mortgage must also carry the approval of LTFRB. (7) house built on rented land but as between the parties only under the doctrine of estoppel; and (8) house to be demolished and portable nipa huts for what are really mortgaged in this case are the materials thereof and they are, therefore, personal property. Growing crops and large cattle are considered personal property under the Chattel Mortgage Law. They cannot, however, be the object of a contract of pledge because they are considered immovable under the Civil Code which principally governs pledge Similarities between Pledge and Chattel mortgage They are: (1) Both are executed to secure performance of a principal obligation; (2) Both are constituted only on personal property; (3) Both are indivisible; (4) Both constitute lien on the property; (5) In both cases, when the debtor defaults, the property must be sold for the payment of the creditor; and (6) Both are extinguished by the fulfillment of the principal obligation and by the destruction of the property pledged or mortgaged. Distinctions between Chattel mortgage and Pledge (1) In chattel mortgage, the delivery of the personal property to the mortgagee is not necessary, while in pledge, such delivery is necessary; (2) In chattel mortgage, the registration of the same in the Chattel Mortgage Register is necessary for its validity, while in pledge, registration in the Registry of Property is not necessary; (3) The procedure for the sale of the thing given as security is different. In chattel mortgage, the procedure is found in Section 14 of Act No. 1508, as amended, while in pledge, it is found in Article 2112 of the NCC; (4) In chattel mortgage, the excess over the amount due after foreclosure, goes to the debtor, while in pledge, if the property is sold, the debtor is not entitled to the excess unless it is otherwise agreed upon or except in the case of legal pledge; and (5) In chattel mortgage, the creditor is entitled to recover any deficiency except if the chattel mortgage is a security for the purchase of personal property in installments (see Art. 1484), while in pledge, the creditor is not entitled to recover the deficiency notwithstanding any stipulation to the contrary.(Art. 2115). Chattel mortgage and Real Estate mortgage distinguished (1) In chattel mortgage, the thing mortgaged must be personal or movable property; in real estate

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS mortgage, the thing mortgaged must be real or immovable property; (2) An affidavit of good faith is required to be executed in a chattel mortgage but not in a real estate mortgage; (3) In chattel mortgage, the mortgagor cannot alienate the thing mortgaged without the written consent of the mortgagee annotated on the back of the mortgage instrument; in real estate mortgage, the mortgagor can alienate the thing mortgaged without the written consent of the mortgagee and any stipulation prohibiting such alienation is void. (4) In chattel mortgage, redemption of the thing mortgaged may be made only before the sale thereof; in real estate mortgage, the thing mortgaged may be redeemed after it is judicially sold but before judicial confirmation of the sale, or if extra judicially sold, within 1 year from and after the date of sale. Extent of chattel mortgage It covers only property in the contract, and excludes like or substituted property thereafter acquired by the mortgagor, notwithstanding any thing in the contract to the contrary. Exception: In the case of stock or merchandise contained in drugstores, grocery stores, etc., which are constantly sold and substituted with new stock. A stipulation in the chattel mortgage extending its scope and effect to after-acquired property is valid and binding where the after-acquired property is in renewal or, in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods. Ruling: Acme Shoe, et al. v. CA, et al,. August 22, 1996. While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Affidavit of Good Faith, defined An oath in a contract of chattel mortgage wherein the parties “severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purpose and

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CHATTEL MORTGAGE LAW that the same is just and valid obligation and one not entered into for the purpose of fraud. The absence of the affidavit vitiates a mortgage only as against third persons without notice, like creditors and subsequent encumbrancers Creation of a chattel mortgage The law as it now stands provides for only one way for executing a valid chattel mortgage, i.e., the registration of the personal property in the Chattel Mortgage Register as security for the performance of an obligation. When to register The law does not provide any specific time within which a chattel mortgage should be recorded in the Chattel Mortgage Register. Duty of Register of Deeds The duties of a register of deeds in respect to the registration of chattel mortgages are of purely ministerial character. Right of redemption (1) When the condition of a chattel mortgage is broken, the following may redeem: (a) the mortgagor; (b) a person holding a subsequent mortgage; or (c) a subsequent attaching creditor (2) An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it. (3) The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale thereof. (Sec. 13, Act No. 1508). Right acquired by second mortgagee and subsequent purchaser (1) Before payment of debt – After a chattel mortgage is executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee in case of a second mortgage. As between the first and second mortgages, therefore, the latter can only recover the property from the former by paying him the mortgage debt. (2) After payment of debt – If the only leviable or attachable interest of a chattel mortgagor in a mortgaged property is his right of redemption, it follows that the judgment or attaching creditor who purchased the property at the execution sale could not acquire anything except such right of redemption. He is not entitled to the actual possession and delivery of the property without first paying the mortgaged debt.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

Kinds of Foreclosure of chattel mortgage (1) Judicial foreclosure – the mortgagee institutes an action in court; and (2) Extrajudicial foreclosure – the sale is made by the mortgagee himself when authorized by the chattel mortgage contract or by special law.

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CHATTEL MORTGAGE LAW however, this is not available in the absence of stipulation in the contract); (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void.

Period to foreclose The mortgagee may, after 30 days from the time of the condition broken, caused the mortgaged property to be sold at a public auction by a public officer. The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattel with at least ten (10) days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the mortgage obligation. Application of proceeds of sale The proceeds of the sale are to be applied in the following order: (1) Costs and expenses of keeping and sale; (2) Payment of the obligation secured by the mortgage; (3) Claims of persons holding subsequent mortgages in their order; and (4) Balance, if any, shall be paid to the mortgagor, or person holding under him. (Sec. 14, Act No.1508). Right of mortgagee to recover deficiency (1) Where mortgaged foreclosed – the creditor may maintain an action for the deficiency although the Chattel Mortgage Law is silent on this point. The reason is that a chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment. The action must be brought within 10 years from the cause of action accrues. (2) Where mortgage constituted as security for purchase of personal property payable in installments – no deficiency can be asked and any agreement to the contrary shall be void. (Art. 1484). (3) Where mortgaged property subsequently attached and sold – the chattel mortgagee is entitled to deficiency judgment in action for specific performance (Art. 1484[1]) where the mortgaged property is subsequently attached and sold. The execution sale in such a case is not a foreclosure sale. Recto Law (Articles 1484-1485, NCC) It is the law, now reflected in Articles 1484 and 1485 of the NCC, which provides that in a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay (specific performance); (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments (not the same as rescission because here the vendor gets back the object of the sale and retains the installments paid; Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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FINANCING COMPANY ACT RA 8556

REQUIREMENT FOR REGISTRATION Aside from requiring compliance with the provisions of the corporation code. 1.

FINANCING COMPANIES Corporations or partnerships, except those regulated by the Central Bank of the Philippines, the Insurance commissioner and the Cooperative Administration Office. Which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises, either by discounting or factoring commercial pares or accounts receivable, or by buying and selling contracts, leases, chattel mortgages or other evidence of indebtedness, or by leasing of motor vehicles, heavy equipment and industrial machinery, business and office machines and equipment, appliances and other movable property.

POLICIES: 1.

2.

3.

To regulates and promote activities of financing and leasing company to place their operations on a sound, competitive, stable and efficient basis To recognize and strengthen their critical role in providing medium and long term credit for investment in capital goods and equipments for small and medium enterprises. To curtail and prevent practices prejudicial to public interest / to have a better position and efficient service in a fair manner to the general public, industry, commerce, agriculture and thereby more fully contribute to sound development of the national economy

Financing Companies – are Corporations EXCEPT: 1. Banks 2. Investment houses 3. Saving and loam associations, 4. Insurance companies 5. Cooperatives 6. Other financial institutions organized under other special laws

SECURITY OF EXCHANGE COMMISSION (SEC) Empowered to enforce provisions implementing regulation EXCEPT as the BSP have supervisory authority under RA No. 7653

THE MONETARY BOARD OF THE BSP Empowered to prescribe the maximum rate of rental fees, services and other changes of financing company in consultation with financing companies and the SEC.

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2.

3.

All the requirements of existing laws to engage in the business should be complied with the applicant The organization, integrity and responsibility of the organizers should assure the protection of the interest of the general public. All the requirements of this Act have been complied with. Provided: financing companies registered prior to the approval of this Act shall fill an information sheet with the SEC with 60 days after notice.

RIGHTS AND POWER OF FINANCING COMPANY 1. Engage in quasi – banking and money market operations with prior approval of the BSP 2. Engage in trust operations subjects to the General banking Act upon prior approval of the BSP 3. Issue bonds and other capital instruments subject to rules and regulations of the BSP. 4. Rediscount their paper with government financial institutions 5. Participate in special loan or credit programs 6. Provide foreign currency loans and leases to ente4rprises who lain foreign currency by exports: REGISTRY OF FINANCIAL LEASE  The Registry of Deeds shall open and maintain a register of financial leases, adjunct to the chattel mortgage registry

LEASE REGISTER SHALL CONTAIN: 1. Name/ Description of property including a. Brand name/ name of manufacturer b. Name of model; if any c. Year of model; if available d. Serial number; if any 2. 3. 4. 5. 6. 7.

Acquisition cost Name of owner / finance company lessee Name of lessee Date of lease agreement/ schedule Date of expiry of lease Date of entry in lease registry

PENALTY/IES 1. A fine of not less than P 10,000 and not more than P 100,000.00 2. Imprisonment for not more than 6 mos. Or both at the discretion of the court, shall be imposed upon: a.

Persons, associations, partnerships or corporation, managing officer that shall: i. Engage in business without authority from the SEC ii. Hold themselves out to be financing companies iii. Violate provisions of this Act

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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FINANCING COMPANY ACT

Any officer, employee, or agent of a financing company who shall: 1. Knowingly and willingly make any false statement or misleading with respect to any material 2. Overvalues on aid in overvaluing any securities to influence action of the company on any loan or discounting line 3. Any officer, employee or examiner of the SEC who shall commit, connive, aid or assist in the commission of acts enumerated in the preceding section

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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THE INSOLVENCY LAW

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Procedural Requirements THE INSOLVENCY LAW (Act No. 1956, as amended)

Insolvency, Defined - the state of a person whose liabilities are more than his assets. It is that relative condition of man’s assets and liabilities that the former if all made immediately available, would not be sufficient to discharge the latter (balance sheet test). - the inability of a person to pay his debts as they become due in the ordinary course of business (equity test). - Insolvency law (IL) is subsidiary to the Civil Code. - For the (IL) to be applicable: there must be a proceeding in insolvency in the proper RTC.

The petition should be filed by a debtor— 1. 2. 3.

The petition should be accompanied by— 1.

2.

Purposes of IL (1) To effect an equitable distribution of the bankrupt’s property among his creditors. (2) To benefit the debtor in discharging him from his liabilities and enabling him to start afresh with the property set apart to him as exempt. (3) To have a uniform procedure in asserting the claims against an entity threatened by insolvency in a manner which would prevent creditors from obtaining any preference by paying one or some ahead of the others.

Nature of the Proceedings Under the IL The proceedings are considered in rem, hence binding upon the whole world. All persons having an interest on the subject matter involved, whether notified or not are equally bound. Remedies open to an insolvent debtor Under the law, the insolvent debtor may be permitted to: 1. to petition the court to suspend payments of his debts; OR 2. to be discharged from his debts and liabilities by voluntary or involuntary insolvency proceedings. (Sec. 1). Suspension of payments, Defined It is the postponement by court order, of the payments of debts of one who, while possessing sufficient property to cover his debts, foresees the impossibility of meeting them when they respectively fall due. (Sec. 2, par. 1). Purpose of Suspension - to suspend or delay payments. Basis of Suspension - the probability of the debtor’s inability to meet his obligations when they respectively fall due.

possessing sufficient property to cover all his debts; foreseeing the impossibility of meeting them when they respectively fall due; and petitioning that he be declared in the state of suspension of payments. The petition need not be verified.

3. 4.

a verified schedule containing a full and true statement of the debts and liabilities of the petitioner with a list of creditors, residence, sum due, nature of liability, consideration, existing pledge, lien or security. (Sec. 15); a verified inventory containing a list of creditors, description of all the property including those exempt from execution and statement as to value of each item of property, location and encumbrances thereon. (Sec. 16); a statement of assets and liabilities; proposed agreements he requests of his creditors.

Effects of Filing of Petition The following are the effects: 1. No disposition in any manner of his property may be made by the petitioner except insofar as concerns the ordinary operations of commerce or of industry in which he is engaged. (Sec. 3, par. 2). 2. No payments may be made by the petitioner except in the ordinary course of his business or industry. (ibid.); 3. Upon request to the court, all pending executions against the debtor shall be suspended except execution against property especially mortgaged. (Sec. 6). Creditors affected by the filing of petition Only those creditors included in the schedules filed by the debtor shall be cited to appear and take part in the meeting.(Sec. 5). Creditors NOT affected by order of suspension of payments They are the following: 1. Persons having claims for personal labor, maintenance, expenses of last illness or funeral of the wife or children of the debtor incurred in sixty (60) days immediately preceding the filing of the petition; and 2. Persons having legal or contractual mortgages. (Sec. 9). Steps in Suspension 1. Filing of petition by the debtor. (Sec. 2); 2. Issuance by the court of an order calling a meeting of creditors. (Sec. 3); 3. Publication of the order and service of summons. (Sec. 4);

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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4. 5. 6. 7.

Meeting of creditors for the consideration of debtor’s proposition. (Sec. 4); Approval by creditors of the debtor’s proposition. (Sec. 8); Objections, if any, made w/in 10 days following the meeting. (Sec. 11); and Issuance by the court of an order directing that the argument be carried out in case the decision is declared valid. (Sec. 11)

Rule of DOUBLE MAJORITY in the meeting of creditors The majority shall be 2/3 of the creditors voting upon same proposition, which 2/3 represent at least 3/5 of the total liabilities of the debtor. (Sec. 8[e]). When proposed agreement deemed rejected  

If the number of the creditors required for holding a meeting does not attend thereat. The two majorities mentioned in Sec. 8[e] are not in favor of the proposed agreement. (Sec. 10).

Causes for Objection to Decisions of Creditors They are: 1. Defects in the call for the meeting, in the holding thereof, and in the deliberation had thereat which prejudice the rights of the creditors; 2. Fraudulent connivance between one or more creditors and the debtor to vote in favor of the proposed agreement; and 3. Fraudulent conveyance of claims for the purpose of obtaining a majority. (Sec. 12). Corporate Suspension of Payments Section 5(d) of PD 902-A has transferred original and exclusive jurisdiction over petitions for suspensions of payments by corporation to the SEC, and in addition, it increased the coverage of “suspension of payments” for corporation to include a situation when the assets of the debtor-corporation are less than its liabilities, when it is under a management committee or a rehabilitation receiver. 

Pursuant to the Subsection 5.2 of the Securities Regulation Code, the jurisdiction of the SEC over corporate suspension of payments proceedings is transferred to the RTCs. Consequently, the existing jurisprudence on corporate suspension of payments proceedings under Section 5(d) of PD 902-A should now apply to the RTC.

Power to Appoint Management Committee under PD 902-A Under Section 6(c) and (d) of PD 902-A, in order to effectively exercise its jurisdiction, the RTC is empowered: 1. To appoint one or more receivers of the property, real or personal, which is the subject of action pending before the RTC in accordance with the pertinent provisions of the Rules of Court; 2. In appropriate cases, appoint a rehabilitation receiver of corporations not supervised or regulated by other

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government agencies who shall have, in addition to the powers of a regular receiver under the provisions of the Rules of Court, such functions and powers as provided in the Decree; and Upon petition or motu proprio, to appoint a management committee, board, or body to undertake the management of corporations not supervised or regulated by other government agencies in appropriate cases when there is imminent danger of dissipation, loss wastage or destruction of assets of other properties or paralyzation of business operations of such corporations which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public.

Legal effect of Appointment of Management Committee/Rehabilitation Receiver Section 6(c) of PD 902-A provides that “upon appointment of a management committee, rehabilitation receiver, board or body. . . all actions for claims against the corporation. . . under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly.” Differences between Suspension of Payments Proceedings under the Insolvency Law (IL) and under PD 902-A 1. The appointment of a management committee or a rehabilitation receiver automatically takes the case out of the provisions of IL and would make the provisions of PD 902-A exclusively applicable; 2. Under the IL, the suspensive effect of the order issued pursuant to the petition for suspension of payment does not cover secured creditors, while the suspensive effect under PD 902-A upon appointment of the management committee or rehabilitation receiver, would cover all corporate creditors, both secured and unsecured; 3. Under the IL, in the absence of any agreement among the corporate creditors, the suspension would expire after 3 months; whereas, under PD 902-A, the suspensive effect has no time limit and would prevail for so long as the corporate debtor is under a management committee or rehabilitation receiver and there is no directive to have its assets liquidated; 4. The effectiveness of final agreement on the manner of payment of the obligations of the corporate debtor is subject to the qualifying majority votes required under the IL; whereas, under PD 902-A, the management committee or the rehabilitation receiver is granted sufficient powers to take such measures as are necessary to bring back to financial health the distressed company without need to obtain approval of the corporate creditors. Corporate Rehabilitation, defined Corporate rehabilitation as a process “to try to conserve and administer the corporation’s assets in the hope that it may eventually be able to return from financial stress to solvency. It contemplates of the continuation of corporate life and activities so that it may

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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THE INSOLVENCY LAW

be able to return to its former condition of successful operations and financial stability.” Preference of secured creditors retained Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally suspended upon the appointment of a management committee, rehabilitation receiver board or body. This suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a totally unsecured creditor. PD 902-A does not state anything to this effect. What it merely provides is that all actions for claims against the corporation, partnership or association shall be suspended .This should give the receiver a chance to rehabilitate the corporation if there should still be a possibility for doing so. The key phrase is equality in equity However, in the event that the rehabilitation is no longer feasible and claims against the distressed corporation would eventually have to be settled, the secured creditors shall enjoy preference over the unsecured creditors, subject only to the provisions of the NCC on Concurrence and Preference of Credit. Power to Liquidate Corporate Debtor Under Sec. 6(d), the RTC may, on the basis of the findings and recommendation of the management committee, or rehabilitation receiver, board or body, or in its own findings, determine that the continuance in business or such corporation or entity would not be feasible or profitable nor work to the best interest of the stockholders, parties-litigants, creditors, or the general public, and order the dissolution of such corporation or entity and its remaining assets liquidated accordingly.

VOLUNTARY INSOLVENCY Concept of Voluntary Insolvency A voluntary insolvency proceeding is exactly what its name implies and the debtor is under no obligation, and cannot be forced, to bring such proceeding; nor with his default, through failure to appeal in an involuntary proceeding, convert the proceedings to a voluntary ones. Nature of Voluntary Insolvency An insolvent debtor, owing debts exceeding in amount the sum of P1,000.00 may apply to be discharged from his debts and liabilities by petition to the RTC of the province or city in which he has resided for six (6) months next preceding the filing of such petition. Distinctions between Suspension of Payments and Insolvency 1. In the former, the purpose is to suspend or delay the payment of debts, while in the latter, to discharge the debtor from the payment of debts; 2. In the former, the debtor has sufficient property to pay his debts, while in the latter, the debtor does not have sufficient property to pay all his debts; 3. In the former, the amount of indebtedness is not affected, while in the latter, the creditors receive less

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than their credits, and in case where there are preferences, some creditors may not receive any amount at all; and In the former, the number of the creditors is immaterial, while in the case of involuntary insolvency, three or more creditors are required.

Steps in Voluntary Insolvency Procedure in general for voluntary insolvency: 1. Filing of the petition by the debtor praying for the declaration of insolvency (Sec. 14); 2. Issuance of an order of adjudication declaring the petitioner insolvent (Sec. 18); 3. Publication and service of the order declaring a state of insolvency (Sec. 19); 4. Meeting of creditors to elect the assignee in insolvency (Sec. 30); 5. Conveyance of the debtor’s property by the clerk of court to the assignee (Sec. 32); 6. Liquidation of the debtor’s assets and payment of his debts (Sec. 33); 7. Composition, if agreed upon (Sec. 63); 8. Discharge of the debtor on his application (Sec. 64), except a corporation (Sec. 52); 9. Objection to the discharge, if any (Sec. 66); and 10. Appeal in certain cases (Sec. 62) Requisites of Petition for Voluntary Insolvency 1. 2. 3.

4.

The petition, which must be verified, is to be filed – by an insolvent debtor, owing debts exceeding in amount the sum of P1,000.00, in the RTC of the province or city in which he has resided for six (6) months next preceding the filing of such petition, and setting forth in his petition the following: (a) his place of residence; (b) the period of his residence therein immediately prior to the filing of petition; (c) his inability to pay all his debts in full; (d) his willingness to surrender all his property, estate, and effects not exempt from execution for the benefit of the creditors; and (e) an application to be adjudged insolvent (Sec. 14).

Documents to accompany the Petition They are the following: 1. A verified schedule which must contain – (a) a full and true statement of all debts and liabilities of the insolvent debtor; and (b) an outline of the facts giving rise or which might give rise to a cause of action against such insolvent debtor (Sec. 15); and 2. A verified inventory which must contain – (a) an accurate description of all the personal and real property of the insolvent exempt or not from execution including a statement as to its value, location, and encumbrances thereon; and

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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THE INSOLVENCY LAW

(b) an outline of the facts giving rise or which might give rise to a right of action in favor of the insolvent debtor (Sec. 16). Effect of errors in description or omission of property in inventory 1. That the property is erroneously or ambiguously described in the insolvent’s inventory will not affect the title of purchasers in the insolvency proceedings. All the property of the insolvent passes to his assignee and is administered in the insolvency proceedings regardless of the errors in the inventory. 2. If the insolvent omits property from his inventory, through either mistake or fraud, it is the duty of the assignee to have the inventory amended so as to include it and to take possession and administer it. 3. Even property exempt from execution must be included in order to preclude possible fraudulent omissions under the pretext that such property is exempt. But where the petitioner did not attach an inventory to its petition for insolvency, alleging under oath that it had no property to inventory, the lack of inventory was held not fatal to the petition because it must be assumed, until proven otherwise, that the petitioner was stating the truth. Effect of the Filing of Petition Once the petition is filed, it ipso facto takes away and deprives the debtor-petitioner of the right to do or commit any act of preference as to creditors, pending the final adjudication. Effect of court order declaring the debtor insolvent Upon the filing of the petition, the court, as a matter of course, shall issue an order declaring the petitioning debtor insolvent (Sec. 19). The effects of such order are the following: 1. All the assets of the debtor not exempt from execution are taken possession of by the sheriff until the appointment of a receiver or assignee (Ibid.); 2. The payment to the debtor of any debts due to him and the delivery to the debtor or to any person for him of any property belonging to him, and the transfer of any property by him are forbidden (Ibid.); 3. All civil proceedings pending against the insolvent debtor shall be stayed (Ibid.); and 4. Mortgages or pledges, attachments or executions on property of the debtor duly recorded and not dissolved are not, however, affected by the order (Sec. 59). Prohibited Acts of an Insolvent The following are forbidden: 1. The payment to the debtor of any debts due him. 2. The delivery to the debtor or to any person for him of any property for him of any property belonging to said debtor. 3. The transfer of any property by the debtor.

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All civil proceedings pending against the insolvent are stayed, either by forbidding the maintenance of such actions, or by authorizing the insolvency court to grant such stay.

INVOLUNTARY INSOLVENCY Nature of Involuntary Insolvency Proceedings It is not a mere personal action against the insolvent for the collection of debts; but its purpose is to impound all of his non-exempt property, to distribute it equitably among his creditors, and to release him from further liability. It is accordingly a proceeding in rem as well as in personam. Steps in Involuntary Insolvency They are the following: 1. Filing of the petition by three or more creditors, who are residents of the Philippines, with an aggregate credit of not less than P1,000.00, none of whom become a creditor by assignment within thirty (30) days prior to the filing of the petition; 2. Issuance of the order requiring the debtor to show cause why he should not be adjudged insolvent; 3. Service of order to show cause; 4. Filing of answer or motion to dismiss; 5. Hearing of the case; 6. Issuance of order or decision adjudging the debtor insolvent; 7. Publication and service of order; 8. Meeting of creditors for election of an assignee in insolvency; 9. Conveyance of the debtor’s property by clerk of court to the assignee; 10. Liquidation of assets and payment of debts; 11. Composition, if agreed upon; 12. Discharge of the debtor on his application, except a corporation; 13. Objection to the discharge, if any; and 14. Appeal in certain cases. Requisites of Petition for Involuntary Insolvency The petition is to be filed by – 1. Three or more creditors, 2. None of whom has become such a creditor by assignment, within 30 days prior to the filing of said petition, 3. Whose credits accrued in the Philippines, 4. The total amount of which credits is not less than P1,000.00, and 5. In the RTC of the province or city in which the debtor resides or has his principal place of business.

1. 2.

The petition – Must be verified by at least three of the petitioning creditors, Must set forth one or more acts of insolvency mentioned in the law, and

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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THE INSOLVENCY LAW

3.

Must be accompanied by a bond, approved by the court with at least two sureties, in such a penal sum as the court shall direct.

Acts of Insolvency The following are acts of insolvency when a creditor can invoke in filing a petition to declare a debtor in a state of involuntary insolvency: 1. Intention to depart or departure from the Philippines to defraud creditors; 2. Absence from the Philippines to defraud creditors; 3. Concealment of debtor to avoid legal process; 4. Concealment or removal of his property to avoid legal process; 5. Confession of judgment in favor of a creditor to defraud other creditors; 6. Allowing default judgment in favor of a creditor to defraud other creditors; 7. Allowing his property to be taken under legal process in preference of a particular creditor to defraud other creditors; 8. Making conveyance, assignment or transfer of his property to defraud his creditors; 9. Making conveyance, assignment or transfer of his property in contemplation of insolvency; 10. Default of a merchant or a tradesman to pay his current obligations for a period of 30 days; 11. Failure to pay money on deposit or received in a fiduciary capacity for a period of 30 days after demand; and 12. Insufficiency of property to satisfy an execution issued against him. Adjudication of Insolvency Where the debtor fails to appear or admits the allegations of the petition, or the evidence of the petitioner is sufficient, an adjudication of insolvency shall be made. The declaration of insolvency retroacts to the date of the filing of the petition for insolvency. Distinctions between voluntary insolvency and involuntary insolvency 1. In the former, one creditor is sufficient, while in the latter, three or more creditors are required; 2. In the former, it is filed by the insolvent debtor, while in the latter, it is filed by three or more creditors who possess the qualifications required by law; 3. In the former, the debtor must not be guilty of any of the acts of insolvency enumerated in Section 20, while in the latter, the debtor must have committed one or more of such acts of insolvency; 4. In the former, the amount of indebtedness must exceed P1,000.00, while in the latter, it must not be less than P1,000.00; 5. In the former, a bond is not required, while in the latter, the petition must be accompanied by a bond; 6. In the former, an order of adjudication of insolvency may be granted ex parte, while in the latter, it is granted only after hearing; 7. In the former, the petition is filed in the RTC of the province or the city in which the debtor has resided

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for 6 months, while in the latter, the length of residence is immaterial; and In the former, the court issues the order of adjudication declaring the petitioner insolvent upon the filing of the voluntary petition, while in the latter, the debtor is not adjudicated insolvent until after the hearing of the case.

ASSIGNEES Assignee, Defined A person elected by the creditors or appointed by the court to whom an insolvent debtor makes an assignment of all his property for the benefit of his creditors. Creditors not entitled to vote in the election of assignee They are the following: 1. Those who did not file their claims at least two days prior to the time appointed for such election (Sec. 29); 2. Those whose claims are barred by the statute of limitations (Ibid.); 3. Secured creditors unless they surrender their security or lien to the sheriff or receiver or unless they shall first have the value of such security fixed as provided in Section 59; and 4. Holders of claims for unliquidated damages arising out of pure tort. Bond of Assignee After his election, the assignee is required to give a bond for the faithful performance of his duties. To establish his official character and his right to sue in that capacity, it is incumbent on the assignee to show that the bond required has been given. Properties if insolvent that pass to the assignee 1.

2. 3. 4.

They are: All real and personal property, estate and effects of the debtor including all deeds, books and papers in relation thereto; Properties fraudulently conveyed; Right of action for damages to real property; and The undivided share or interest of the insolvent debtor in property held under co-ownership

Properties of insolvent that do not pass to the assignee They are: 1. Property exempt from execution; 2. Property held in trust; 3. Property of the conjugal partnership or absolute community so long as said partnership or community exists insofar as the insolvent debtor’s obligations have redounded to the benefit of the former; 4. Property over which a mortgage or pledge exists unless the creditor surrenders his security or lien;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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5.

6. 7.

After-acquired property except fruits and income of property owned by the debtor and which had passed to the assignee in insolvency; Non-leviable assets like a life insurance policy which does not have any cash surrender value; and Right of action for tort which is purely personal in nature.

Effects of assignment They are: 1. The assignee takes the property in the plight and conditions that the insolvent held it; 2. Upon appointment, the legal title to all the property of the insolvent is vested in the assignee, and the control of the property is vested in court; 3. All actions to recover all the estate, debts and effects of the insolvent shall be brought by the assignee and not by the creditors; and 4. The assignment shall— - dissolve any attachment levied within one month next preceding the commencement of insolvency proceedings; - vacate and set aside judgment entered in any action commenced within 30 days immediately prior to the commencement of insolvency proceedings; and - vacate and set aside any execution issued thereon; and - vacate and set aside any judgment entered by default or consent of the debtor within 30 days prior to the commencement of insolvency proceedings. Powers of the assignee The assignee shall have the power: 1. To sue and recover all the estate, debts and claims belonging to or due to the creditors; 2. To take into possession all the estate of the debtor except property exempt from execution; 3. In case of a non-resident or absconding or concealed debtor, to demand and receive of every sheriff all the property and moneys in his possession belonging to the debtor; 4. To sell, upon court order, any estate of the debtor which has come into his possession; 5. To redeem all mortgages and pledges and to satisfy any judgment which may be an encumbrance on any property sold by him; 6. To settle all accounts between the debtor and his debtors, subject to the approval of the court; 7. To compound, under the order of the court, with any person indebted to such debtor; and 8. To recover any property fraudulently by the debtor.

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4. To keep a regular account of all moneys received by him as assignee; 5. To petition the court to allow the private sale of the debtor’s property if it appears that it is for the best interest of the estate; 6. To file a just and true accounts of all receipts and payments; 7. To file accounts upon order of the court on motion of two or more creditors; 8. To distribute such dividends as he may be required; and 9. To file his final account within one (1) year from the date of order of adjudication.

Sale of assets 1.

2.

3.

Generally - The law provided for the reduction of the insolvent’s assets into cash by means of public sales. Proceedings for the sale of assets are proceedings in rem. The only question of jurisdiction is the power of the court over the subject matter without regard to the parties who may have interest in it. There are no adversary parties to the proceedings. Persons competent to purchase - On the sale in insolvency proceedings, the insolvent will not generally be permitted to purchase the assets, either in his own name or acting through a dummy. If he does so, the property purchased becomes subject to the claims of his creditors. But otherwise, any person legally qualified to contract may purchase at a judicial sale unless he has a duty to perform in reference thereto which is inconsistent with the character of a purchaser or is so connected with the transaction that his individual interest as a purchaser may be inconsistent with his duty. Title acquired - As a general rule, the purchaser at a judicial sale takes by virtue of his purchase all the right, title, and interest of the interest of the parties to the proceedings in and to the property conveyed to him. The circumstances that an insolvent schedule contain an erroneous or ambiguous description of certain property does not affect the title of the purchaser. All the property passes to the assignee and is sold regardless of its description in the schedules

Dividends in insolvency, Defined A parcel of the fund arising from the assets of the estate, rightfully allotted to a creditor entitled to share in the fund, whether in the same proportion with other creditors or in a different proportion. It is paid by the assignee only upon the order of the court.

Duties of the assignee The assignee shall have the following duties: 1. To register the assignment to him of the real estate of the debtor; 2. To file the schedule and the inventory of the property of the debtor; 3. To convert, as speedily as possible, the estate, real and personal, into money; Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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CLASSIFICATION AND PREFERENCE OF CREDITS Preference of credit, defined A legal situation whereby one person is given a superior right or claim over another. For this reason, the law as to preference shall be strictly construed. Concurrence of credits, defined Implies the possession by two or more creditors of equal rights or privileges over the same property or all of the property of the debtor. Classification of Credits (Arts. 2241, 2242, 2244, & 2245) I. Preferred and concurring with respect to specific movable property of the debtor (Art. 2241), which are -(1) Duties, taxes, and fees due thereon to the State or any subdivision thereof; (2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them; (3) Claims for the unpaid price of movable sold, as long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the thing pledge are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; (5) Credits for the making, repairs, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed; (6) Claims for laborers’ wages, on the goods manufactured or the work done; (7) For expenses of salvage, upon the goods salvaged; (8) Credits between the landlord and the tenant, arising from the agricultural leasehold contract, on the share of each in the fruits or harvest; (9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter; (10) Credits for lodging and supplies usually furnished to travelers by hotel-keepers, on the movables belonging to the guest, as long as such movables are in the hotel, but not for the money loaned to the guests; (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested; (12) Credits for rent for one (1) year, upon the personal property of the lessee existing on the immovable

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leased and on the fruits of the same, but not on the money or instruments of credit; (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale. In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within 30 days from the unlawful seizure.

II. Preferred and concurring with respect to specific immovable and real rights of the debtor (Art. 2242), which are— (1) Taxes due upon the land or building; (2) For the unpaid price of real property sold, upon the immovable sold; (3) Claims of laborers, masons, mechanic and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals, or other work, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals, and other works, upon aid buildings, canals or other works; (5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged; (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved; (7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits; (8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided; (9) Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated; (10) Credits of insurers, upon the property insured, for the insurance premium for two (2) years. Those credits which enjoy preference in relation to specific real property or real rights, exclude all other to the extent of the value of the immovable or real right to which the preference refers. (Art. 2248, NCC). If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right. (Art. 2249). III. Preferred insofar as to other real and personal properties of the debtor (Art. 2244). Order of preference is observed. These are— (1) Credits for services rendered the insolvent by employees, laborers, or household helpers preceding the commencement of the proceedings in insolvency;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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(2) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own; (4) Compensation due to the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the nature of the employment; (5) Credits and advancements made to the debtor for the support of himself or herself, and family, during the last year preceding the insolvency; (6) Support during the insolvency proceedings, and for 3 months thereafter; (7) Fines and civil indemnification arising from a criminal offense; (8) Legal expenses, and expenses incurred in the administration of the insolvent’s estate for the common interest of the creditors, when properly authorized and approved by the court; (9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1; (10) Taxes and assessments due any province other than those referred to in Articles 2241, No. 1, and 2242, No. 1; (11) Taxes and assessments due any city or municipality, other than those mentioned in Articles 2241, No. 1 and 2242, No. 1; (12) Damages for death or personal injuries caused by a quasi-delict; (13) Gifts due to public and private institutions of charity or beneficence; (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in the final judgment, if they had been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively The credits enumerated in Articles 2241 and 2242, although preferred as against other credits in respect to specific property of the insolvent, do not have preference as among themselves, and shall be satisfied pro rata from the specific property, after the payment of the duties, taxes and fees due the state or any subdivision thereof. On the other hand, the credits enumerated in Article 2244 not only are preferred as against other credits, but they are preferred as against each other, in the order of enumeration.

PARTNERSHIPS AND CORPORATIONS When partnership may be declared insolvent A partnership may be adjudged insolvent during the continuation of the partnership business or after its dissolution but before the final settlement thereof.

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Properties included in the insolvency proceedings Upon order of the court, the following property shall be taken: (1) All the property of the partnership; and (2) All the separate property of each of the partners, except— (a) separate properties of limited partners; and (b) properties which are exempt by law.

PROOF OF DEBTS Provable Debts The debts which may be proved against the estate of the debtor in insolvency proceedings are the following: 1. All debts due and payable from the debtor at the time of the adjudication of insolvency. 2. All debts existing at the time of the adjudication of insolvency but not payable until a future time, a discount being made if no interest is payable by the terms of the contract; 3. Any debt of the insolvent arising from his liability as indorser, surety, bail or guarantor, where such liability became absolute after the adjudication of insolvency but before the final dividend shall have been declared; 4. Other contingent debts and contingent liabilities contracted by the insolvent if the contingency shall happen before the order of final dividend; and 5. Any debt of the insolvent arising from his liability to any person liable as bail, surety, or guarantor or otherwise, for the insolvent, who shall have paid the debt in full or in part. Contingent claim, defined A claim in which liability depends on some future event that may or may not happen and which makes it uncertain whether there will be any liability. Debts that may NOT be proved The following debts are not provable or allowed in insolvency proceedings: 1. Claims barred by the statute of limitations; 2. Claims of secured creditors with a mortgage or pledge in their favor unless they surrender their security; 3. Claims of creditors who hold an attachment or execution on the property of the debtor duly recorded and not dissolved; 4. Claims on account of which a fraudulent preference was made or given; 5. Support, as it does not arise from any business transaction but from the relation of marriage; and 6. A claim for unliquidated damages arising out of a pure tort which neither constitutes a breach of an express contract nor results in any unjust enrichment of the tortfeasor that may form the basis of an implied contract.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Alternative rights of secured creditor They are the following: 1. To maintain his right under the security or lien and ignore the insolvency proceedings, in which case it is the duty of the assignee to surrender to him the property encumbered; or 2. To waive his right under the security or lien and thereby share in the distribution of the assets of the debtor, or 3. To have the value of the encumbered property appraised and then share in the distribution of the assets of the debtor with respect to the balance of his credit.

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When confirmation may be set aside The court may, upon application of a party in interest, filed at any time within 6 months after the composition has been confirmed, set the same aside and reinstate the case if it shall be made to appear upon trial: (1) That fraud was practiced in the procuring of such composition; and (2) That the knowledge thereof has come to the petitioner since the confirmation of such composition.  

the effect of lawful composition is equivalent to discharge. the corporation will not be discharged by a lawful composition. It is only for natural person.

COMPOSITION Composition defined It is an agreement, made upon a sufficient consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter for the sake of immediate or sooner payment, agree to accept a dividend less than the whole amount of their claims, to be distributed pro rata, in discharge and satisfaction of the whole debt. Requirements for a Valid Offer of Composition They are as follows: 1. The offer of the terms of composition must be made after the filing in court of the schedule of property and submission of the list of creditors; 2. The offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed; 3. It must be made after depositing in such place designated by the court, the consideration to be paid and the costs of the proceedings; and 4. The terms of the composition must be approved or confirmed by the court. When court may confirm composition The court shall confirm a composition on the application of the debtor if satisfied that: 1. It is for the best interest of the creditors; 2. The debtor has not been guilty of any of the acts, or of a failure to perform any of the duties which would create a bar to his discharge; and 3. The offer and its acceptance are in good faith and have not been made or procured in a manner forbidden by the Act. Effects of the Confirmation of Composition 1. 2. 3. 4.

The following are the effects: The consideration shall be distributed as the judge shall direct; The insolvency proceeding shall be dismissed; The title to the insolvent’s property shall revest in him; and The insolvent shall be released from his debts.

DISCHARGE Discharge defined A discharge is the formal and judicial release of an insolvent debtor from all his debts contracted prior to the insolvency proceedings, with the exception of those expressly named by law. By discharge, the debtor is released from the obligation of all his debts which were or might be proved in the proceedings, so that they are no longer a charge upon him and so that he may thereafter engage in business and acquire property without its being liable for the satisfaction of such former debts When to Apply for Discharge A debtor may apply—  to the RTC for a discharge,  at any time after the expiration of 3 months from the adjudication of insolvency,  BUT not later than 1 year from such adjudication of insolvency,  UNLESS the property of the insolvent has not been converted into money without his fault, thereby delaying the distribution of dividends among the creditors in which case the court may extend the period. Circumstances which bar Discharge No discharge shall be granted, or if granted, shall be invalid, in the following cases: (1) False swearing; (2) Concealment of any part of his estate or effects; (3) Fraud or willful neglect in the care of his property or in the delivery thereof to the assignee; (4) Procuring his property to be attached or seized on execution within 1 month before the commencement of insolvency proceedings; (5) Destruction, mutilation, alteration or falsification of his books, documents or papers; (6) Giving fraudulent preference to a creditor; (7) Non-disclosure to the assignee of a proven false or fictitious debt within 1 month after acquiring knowledge;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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(8) Being a merchant, failure to keep proper books of accounts; (9) Influencing the action of any creditor, at any state of the proceedings, by any pecuniary consideration; (10) Effecting any transfer, conveyance or mortgage in contemplation of insolvency; (11) Conviction of any misdemeanor under the Insolvency Law; (12) In case of voluntary insolvency, he has received the benefit of insolvency within 6 years next preceding his application for discharge; and (13) If insolvency proceedings in which he could have applied for a discharge are pending by or against him in the RTC of any other province or city. Legal effects of discharge (1) It releases the debtor from all claims, debts, liabilities and demand set forth in the schedule or which were or might have been proved against his estate in insolvency. Hence, non-provable debts are not affected whether or not they were properly scheduled. (2) It operates as a discharge of the insolvent and future acquisitions, but permits mortgages and other lien creditors to have their satisfaction out of the mortgage or subject of the lien; (3) It is a special defense which may be pleaded and be a complete bar to all suits brought on any such debts, claims, liabilities or demands; (4) It does not operate to release any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise; and (5) The certificate of discharge is prima facie evidence of the fact of release, and the regularity of such discharge. Where a debtor is judicially declared insolvent, the remedy of the guarantor or surety would be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities. Debts released by discharge (1) All claims, debts, and liabilities, and demands set forth in the schedule; and (2) All claims, debts, liabilities and demands which were or might have been proved against the estate in insolvency. Debts not released by discharge (1) Taxes or assessments due the Government, whether national or local; (2) Any debt created by the fraud or embezzlement of the debtor; (3) Any debt created by the defalcation of the debtor as a public officer or while acting in a fiduciary capacity; (4) Debt of any person liable for the same debt, for or with the insolvent debtor, either as partner, joint contractor, indorser, surety or otherwise.

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(5) Debts of a corporation because is not granted a discharge; (6) Claim for support; otherwise it will make the law a means of avoiding the enforcement of the obligation, moral and legal, devolving upon the husband to support his family; (7) Discharged debt but revived by a subsequent new promise to pay because the discharge does not put to an end the moral obligation to pay; (8) Claims for unliquidated damages arising out of a pure tort; (9) Claims of secured creditors; (10) Claims not in existence or not mature at the time of the discharge are generally unaffected thereby; and (11) Claims that are contingent at the time of the discharge are not barred thereby, and consequently, an action may be maintained against the debtor for collection thereof. When discharged may be revoked A discharge in insolvency may be revoked by the court which granted it on petition of any creditor— 1. Whose debt was proved or provable against the estate in insolvency, on the ground that the discharge was fraudulently obtained; 2. Who has discovered facts constituting the fraud subsequent to the discharged; and provided, 3. The petition is filed within one year after the date of the discharge.

FRAUDULENT PREFERENCES AND TRANSFERS Meaning of transfer A transfer within the meaning of the Insolvency Law, includes the sale and every other and different modes of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security. A deposit of money is not a transfer. When preferential transfer exists To constitute a preferential transfer, there must be a parting with the insolvent’s property for the benefit of the creditor and a consequent diminution of the insolvent’s estate with the result that such creditor receives a greater proportion of his claim than other creditors of the same class. A deposit of money to one’s credit in a bank does not create any preference. The estate of the depositor is not diminished for there is an obligation on the part of the bank to pay the amount of the deposit as soon as the depositor may see fit to draw a check against it. When fraudulent preference exists A fraudulent preference is committed when the debtor procures any part of his property to be attached, sequestered, or seized on execution or makes any payment, pledge, mortgage, assignment, transfer, sale or conveyance of any part of his property, whether directly

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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or indirectly, absolutely or conditionally, to any one under the following circumstances: 1. The debtor is insolvent or in contemplation of insolvency; 2. The transaction in question is made within 30 days before the filing of a petition by or against the debtor; 3. It is made with a view to giving preference to any creditor or person having a claim against him; and 4. The person receiving a benefit thereby has reasonable cause to believe: a. that the debtor is insolvent; and b. that the transfer is made with a view to prevent his property from coming to his assignee in insolvency, or to prevent the same from being distributed ratably among his creditors, or to defeat the object of or any way hinder the operation of or evade the provisions of the Insolvency Law. When presumption of fraud exists If such payment, pledge, mortgage, conveyance, sale, assignment, or transfer is not made in the usual and ordinary course of business of the debtor, or if such seizure is made under a judgment which the debtor has confessed or offered to allow, that fact shall be prima facie evidence of fraud. When fraudulent transfer exists A fraudulent transfer is any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of whatever character made by the insolvent within 1 month before the filing of a petition in insolvency by or against him, except for a valuable pecuniary consideration in good faith. Such a transfer is void.

(4) Making any payment, gift, sale, assignment, transfer or conveyance of property belonging to his estate with like intent; (5) Spending any part thereof in gaming; (6) Concealing from his assignee or omitting from the schedule any part of his property with intent to defraud; (7) Failing to disclose to his assignee the fact that a person has proved a false or fictitious claim against his estate within 1 month after coming to the knowledge or belief thereof; or (8) Attempting to account for any of his property by fictitious losses or expenses; II. Within 3 months before commencement of insolvency proceedings— 1. Obtaining on credit from any person any goods or chattels with intent to defraud, under the false pretense of carrying an ordinary course of business; 2. Making any pledge or disposition of, otherwise than by bona fide transactions in the ordinary course of his trade, with intent to defraud, any of his goods or chattels which have been obtained on credit and remained unpaid for; 3. Suffering loss in any kind of gaming when such loss is one of the causes determining the commencement of insolvency proceedings; 4. Selling at a loss or for less than the current price any goods brought on credit and still unpaid for; or 5. Advancing payment to the prejudice of his creditors.

III. During proceedings for suspension of payments— 1.

Effect of fraudulent transfer  As against the creditors of the insolvent— - any conveyance or assignment fraudulently made is void. Hence, no title is acquired by the transferee

2.

PENAL PROVISIONS

6.

Acts criminally punishable under this Act A debtor who commits any of the following acts shall, upon conviction thereof, be punished by imprisonment, for not less 3 months nor more than 5 years for each offense: I. After the commencement of insolvency proceedings -(1) Concealing any part of his estate; (2) Destroying, altering, mutilating or falsifying any book, deed, document, or writing relating thereto; (3) Removing the same with the intent to prevent or delay its recovery by the assignee;

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3. 4. 5.

Concealing or destroying any property belonging to his estate; Destroying, altering, mutilating or falsifying any book, deed, document, or writing relating thereto; Making any payment, sale, assignment, transfer, or conveyance of any property belonging to his estate; Spending any part thereof in gaming; Falsely swearing to the schedule and inventory with intent to defraud his creditors; or Violating in any manner whatsoever the injunction issued by the court under Section 3.

MISCELLANEOUS PROVISIONS Effect of death of insolvent debtor pending insolvency proceedings It depends— 1.

2.

If the debtor shall die after the order of adjudication, the proceedings shall be continued and concluded in like manner and with like validity, and effect as if he had lived. If the death occurs before the order of adjudication, the proceedings shall be discontinued. The claims must be filed in the proper testate or intestate

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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proceedings as provided by the Rules of Court on the settlement of a decedent’s estate. Duty of court where property exempt from execution It shall be the duty of the court having jurisdiction of the proceedings, upon petition and after hearing held upon due notice, to exempt and set apart, for the use and benefit of the insolvent, such real and personal property as is by law exempt from execution. When insolvency proceedings deemed to commence The filing of a petition by or against a debtor upon which, or upon an amendment of which, an order of adjudication in insolvency may be made, shall be deemed to be the commencement of proceedings in insolvency under the Act. When petition may be dismissed The court, upon giving due notice, may dismiss the petition and discontinue the proceedings at any time before the appointment of an assignee: 1. If it be a voluntary petition, upon the application of the debtor, if no creditor files written objections; 2. If a creditor’s petition, upon the application of the petitioning creditors; or 3. By written consent of all creditors filed in court, in which case, the proceedings may be dismissed at any time. After the appointment of an assignee, dismissal is not allowed without the consent of all parties interested in or affected thereby. When appeal may be taken to the Supreme Court An appeal may be taken to the Supreme Court in the following cases: (1) From an order granting or refusing an adjudication in insolvency and in the latter case, from the order fixing the amount of costs, expenses, damages, and attorney’s fees allowed the debtor; (2) From an order allowing or rejecting a creditor’s claim when the amount in dispute exceeds P300.00; (3) From an order allowing or denying a claim for property not belonging to the insolvent, presented under Section 48; (4) From an order settling an account of an assignee; (5) From an order against or in favor of setting apart homestead or other property claimed as exempt from execution; and (6) From an order granting or refusing a discharge to the debtor.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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THE TRUTH IN LENDING ACT R.A. 3765

A LAW SUPPLEMENTING OR COMPLIMENTING THE ANTI-USURY LAW CIRCUMVENTED EVEN BY BANKS

PURPOSE To protect citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. REQUIREMENT OF DISCLOSURE The creditor shall furnish the debtor prior to the consummation a loan or sale , a clear statement in writing containing the ff: 1. Cash price or delivered price of the property or service 2. Amounts to be credited as down payment and tradein 3. The difference the amounts of cash price and as down payment 4. The charges, individuality itemized 5. Total amount to be financed 6. The percentage that the finance charges bears to the total amount to be finance as a simple annual rate. Simple Annual Rate Is the uniform percentage, which represents the ratio, on annual basis, between the finance charges and the amount to be financed? In case of Simple Payment upon maturity: R = 2 x finance charge x 12 x 100 % Amount to be financed maturity rate in months In the case of normal installment type of credit of at least 1 yr. In deviation

EFFECT OF NON-DISCLOSURE 1. The creditor is liable to the debtor for P100 or amount equal to twice the finance charge, whichever is greater provided liability shall not exceed P2,000 on any credit transaction. Action to recover penalty must be brought within 1 year from date of violation. 2.

The creditor can be held criminally liable.

3.

The transaction is still valid.

SCOPE OF REQUIREMENTS The regulations shall apply the ff. types of credit transactions: 1. 2. 3. 4. 5. 6.

Any loans, mortgages, deeds of trust, advances and discounts Any conditional sale Any rental-purchase contract Any contract for hire, bailment or leasing of property Any option, demand, loan, ledge Any transaction or series of transactions having a similar purpose

THE FF. CATEGORIES OF CREDIT TRANSACTION ARE OUTSIDE THE SCOPE OF THE SAID REGULATIONS 1.

2.

Credit transactions which to not involve the payment of finance which to not involve the payment of finance charge by the debtor Credit transactions in which the debtor specifies a definite and fixed set of terms such as bank deposits, insurance contracts, etc.



Phil. Government - No punishment or penalty shall apply

 1. 2.

Any Person Fined by not less P 1,000 nor more than P 5, 000 Imprisonment for not less than 6 mos. Nor more than 1 year Both

3.

OFFICES AUTHORIZED TO ENFORCE RULES AND REGULATIONS 1.

R = 2x finance charge x no. of payments in a year Amount to be financed total number of payment + 1 In cases where the credit matures in less than a yr, the same formula will apply except that the number of payments in a year would refer to the number of installment periods. In cases where credit terms provides for premium or penalty charges depending on for example, the timeliness of the debtors payment, the annual rate to be disclosed in writing shall be the rate for regular payments.

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2. 3. 

Department of Commercial and Savings Bank Department of rural bank and Savings and Loan Association Office of Non-bank Financial Intermediaries

The respective heads of the 3 departments have the authority to examine all books, documents, papers or records of creditors

Creditor Shall include but shall not be limited to banks and banking institutions, insurance and bonding co., savings and loan associations, credit unions, financing companies, etc.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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280

RANDOM Q & A

RANDOM QUESTIONS AND ANSWERS in MERCANTILE LAW By Atty. Maria Lulu G. Reyes

CODE OF COMMERCE Question: Who are merchants? A - Merchants are natural and juridical persons, who, having legal capacity to engage in commerce, habitually devote themselves thereto (Art. 1, Code of Commerce). Habituality is determined by the intent, and not by the number of transaction involved.

NEGOTIABLE INSTRUMENTS LAW Question: What is an order instrument? AIt is an instrument which, on its face, is payable to order of a specified person, or to him or his order. Question: What is a bearer instrument? AIt is an instrument which, on its face, is payable to bearer. Question: X issued and delivered to Y the following instrument: “Pay to Y or bearer” the sum of P 10,000.00, thirty (30) days from sight. To: Z (Sgd) X Y indorsed the instrument by writing on its back the words: “Pay to A or order”, after which he signed it, and delivered the instrument to A, who delivered the same to B who paid value therefore in good faith. Is B entitled to payment fro m Z? Explain briefly. AYes. B became a holder of the instrument when A negotiated it by delivery to him. A bearer instrument is always negotiable by mere delivery despite the fact that the only or last indorsement thereon is a special indorsement. Unless it is restrictively indorsed for deposit only the bearer instrument continues to be negotiable by mere delivery.

Question: X needs money to pay an obligation to pay Y who is not satisfied with a check issued by X as Y does not believe in the credit of X. So X asks his rich friend, Z, to issue a check payable to the order of X in the amount of P100,000.00. X gave Z the sum of P500.00 as gratification for the letter’s act of issuing such check. X indorsed and delivered the check to Y who, in turn, negotiated it to A who knows that there was no consideration between X and Z, except the sum of P500.00. A presented the check for payment to the drawee bank which dishonored the same for insufficient funds. The requisite notices of dishonor were given to all parties concerned. 1.) When A demanded payment from Z, can the latter put up the defense of lack of consideration? 2.) Assuming that Z pays A the amount of the check, is the instrument discharged? A1.) No. Z cannot put up the defense of lack of consideration because the check was issued by Z as an accommodation party, and absence of consideration is in the nature of an accommodation. Despite his knowledge of such fact, A is still a holder in due course. 2.) The instrument is not discharged by the payment of the check by Z to A. Being an accommodation party, Z still needs the instrument in order to secure payment thereof from the debtor or the party, X. Z is not the principal debtor or the party ultimately liable. Hence, it is the payment by X , at or after maturity, which discharges the instrument. Question: X bought goods from Y on a 30-day credit at the price of P10, 000.00. In payment of the price, X drew or issued a check, drawn on Ace Bank, in the sum of P10, 000.00, payable to the order of Y. X sent the check by mail to Y. The check fell into the hands of Z who forged the signature of Y, making it appear that Y indorsed the check to Z. Thereof, Z deposited the check in his account with Super Bank which stamped thereon the words “ALL INDORSEMENT AND/OR LACK OF INDORSEMENT GUARANTEED”, before sending the check for clearing. After the expiration of three (3) days, and without hearing anything from Ace Bank, Super Bank allowed Z to withdraw the amount of the check. When Y complained about not having been paid for the price of the goods, it was then that X discovered that something went wrong with the check. When X demanded that Ace Bank pay, the latter demanded reimbursement from Super Bank. What are the rights and obligations, if any, of the parties? Discuss briefly.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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the 24-hour regulation for clearing house operation (Metropolitan Bank & Trust Company vs. First National City Bank, 118 SCRA 537). Thus when the drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability.

A1.) Y has the right to recover from X the sum of P10, 000.00 for the price of the goods under the contract of sale. Y cannot recover under the check, which is not in his possession, and, therefore, he is not a holder thereof. 2.) X has the right to demand that Ace Bank, the drawee bank, credit back the sum of P10, 000.00 to his account. The contract of deposit between X and Ace Bank authorizes the latter to debit X’s account only in payment of the checks as ordered by X.

Question: Pedro Santos drew or issued the following instruments: “Pay to Juan Cruz or whoever is in possession hereof, the sum of P10,000.00, or, as he prefers, deliver to him one thousand piculs of sugars, within sixty (60) days from sight, with attorney’s fee equivalent to 10% in case of a collecting suit.

The exception to this general rule will be a case where the negligence of X in sending the check to Y by mail constitutes the proximate cause of the loss. In such a case, X’s negligence will prevent his recovery of the amount involved from the drawee bank, Ace Bank. 3.) Z, being the culprit is liable for the amount of the check to Super Bank if the latter is held liable in favor of Ace Bank, or to X in case the latter cannot recover from the Ace Bank, or to X in case the latter cannot recover from the Ace Bank under the exception to the general rule in Answer no.2. 4.) Super Bank is liable to Ace Bank under the indorsement made on the check before it was sent for clearing, namely, “ALL PRIOR INDORSEMENT AND/OR LACK OF INDORSEMENT GUARANTEED”. Under such indorsement/ guarantee, Super Bank, the collecting bank, warranted the validity of all indorsements on the back of the check, including the indorsement made by the culprit, Z, is the forger. (Philippine National Bank vs. Bank of Philippine Island, G.R. No. 27838, August 4, 1986.) Note: Answer No.4 is a departure from the ruling that as between the drawee bank and the collecting bank, the former should bear the loss, which ruling did not give weight to the collecting bank’s indorsement “ALL INDORSEMENT AND/OR LACK OF IT GUARANTEED” (Philippine National Bank vs. Court of Appeals and Philippine Commercial and Industrial Bank, L26001, Banking Corporation vs. Peoples Bank & Trust Company, L-28226. September 30, 1970, 34 SCRA 146.) Note further: In Republic Bank vs. Court of Appeals, G.R, No. L-42725, April 22, 1991, it was ruled that the unqualified endorsement of the collecting bank of the check should be read together with

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(Sgd.) Pedro Santos To: Jose Bustos No. 13 Quezon Avenue Quezon City, Metro Manila” Is the above instrument negotiable? Explain briefly AYes, it is negotiable. First, it is in writing and signed by the drawer. Second, it contains an unconditional order to pay the sum of P10, 000.00. The delivery of 1,000 piculs of sugar is at the option of the payee or holder. Third, it is payable within sixty (60) days from sight. This is a determinable future time namely, sixty (60) days from the date of presentment for acceptance. Fourth, it is payable to bearer, namely, “Juan Cruz, or whoever is in possession of the instrument. Fifth, it is addressed to a drawee, Jose Bustos, who is named therein. All the requirements of Section 1 of the Negotiable Instruments Law are complained with Question: Preparing to leave for a family vacation, X signed a PNB check and placed the same in his filing cabinet in his study room. He left instruction to Y, his housekeeper to fill it up in case there is a need for payment of water, electric and/or telephone bill/s while he was away. After X and his family left for vacation, Y filled up the check by making herself the payee and P50,000.00 as the amount thereof, antedating the date as the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS day when X left for vacation. Y indorsed the check by signing his name on the back thereof, and delivered the check to Z who paid value therefore in good faith. In turn, Z delivered the check to A who, at that time, already knew about the surrounding facts and circumstances. When A deposited the check with Ace Bank, his depositary bank, said bank credited the amount of P50,000.00 to A’s account. Upon his return, X discovered what happened to the check copy through clearing and had debited Z’s account to his account. What are the rights and obligations, if any, of the parties? Explain briefly. A1) X has the right to recover the amount of P50,000.00 from Y his housekeeper, who violated his instruction and who unduly benefited himself. 2) Z is a holder in due course as he took the check in good faith and for value. He was not aware of the breach of trust committed by Y against X. 3) A was not a holder in due course because at the time he took the check, he had already knowledge of the breach at trust committed by Y. However, since he took the check from Z, a holder in due course, A has all the rights of a holder in due course. Therefore, he is entitled to payment under the check and the personal defense of breach of trust by Y cannot be set up against him by X or5 any other party. 4) X has no right to demand that PNB credit back the amount of P50,000.00 to his account. As between X and PNB, it was the negligence of X which was the culprit, is X’s employee or agent and X should answer for the loss caused by his own employees. Question: What is the language of negotiability which characterizes a negotiable paper as a credit instrument? Afor money.

It is freedom to circulate as a substitute

Question: Since knowledge involves a state of mind difficult to establish, what prima facie presumption has been created by B.P. Blg. 22? AThat the drawer has knowledge of the insufficiency of his funds in or credit with the bank at the time of the issuance and on the check’s presentment for payment. Question: Is lack of involvement in the negotiation for the transaction a defense to a treasurer of the corporation who signed the check in his capacity as an officer of the corporation?

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ANo. It is not a defense. What the law punishes is the issuance of a bouncing check an not the purpose for which it was issued nor the terms and conditions relating to its issuance. The mere act of issuing a worthless check is malum prohibitum. The person or persons who actually sign the check in behalf of a corporation, company or entity are liable under Batas Pambansa Blg. 22. Question: Does the “Novation Theory” apply to B.P. 22? AIt does not apply where the offer to pay by the debtor, which was accepted by the creditor, turned out to be only am empty promise which effectively delayed the aggrieved party’s filing of a case for violation of Batas Pambansa Blg. 22 Question: What are the elements of the offense penalized under Batas Pambansa Blg. 22? A – The elements are: (1) the making, drawing and issuance of any check to apply to account or for value; (2) the knowledge of the maker, drawer or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon presentment; and (3) subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. Question: What is the nature of the violation of the Batas Pambansa Blg. 22? A – It is in the nature of a continuing crime. Question: What is the nature of a cashier’s check? AA cashier’s check is a primary obligation of the issuing bank and accepted in advance by its mere issuance and by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents. (Based on Tan v. CA, 239 SCRA 310)

CORPORATION LAW Question: X entered into a contract with an association which represented itself to be a corporation. When X sued the association under the contract, the latter set up the defense that it has no capacity to be sued. Will the defense prosper?

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

ANo. The association is estopped from denying its corporate capacity in the suit. It cannot allege lack of capacity to be sued to evade responsibility on a contract it has entered into and by virtues of which it received advantage and benefits. (Christian Children’s Fund vs. National Labor Relations Commission. G.R. No. 84502, June 30, 1989) Question: How do you determine whether a corporation can perform an act or thing necessary to carry out the purpose on its business? AYou have to determine whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the charter. For if the act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered the charter power of the corporate. A corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. Question: When are unpaid subscriptions due and payable? AUnpaid subscriptions are not due and payable until a call is made by the corporation for payment. Where the corporation has not presented a resolution of the board of directors calling for the payment of the unpaid subscription and no notice of such call has been sent to the stockholder, the corporation has no basis to set off the amount due the stockholder, from the amount receivable from him for the unpaid subscription. (Apodaca v. NLRC, G.R. No. 80039 April, 1989) Question: When is “piercing the veil of corporate fiction” proper? AWhere it appears that two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities, and treat them as identical. Question: Is a general manager of a corporation personally liable for the backwages of an employee of the corporation?

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ANo. A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from those of the persons composing it as well as from that of ant other entity to which it may be related. More ownership by a single stockholder or any another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate personality. The general manager of a corporation therefore should not be made personally answerable for the payment of the employee’s backwages unless he had acted maliciously or in bad faith in terminating the services of the employee. (Lim vs. NLRC, G.R. No. 79975, March 16, 1989) Question: Can the vice-president be held jointly and severally liable with the corporation for the unpaid wages of the company’s former president? AThe responsible officer of an employer corporation can be held personally, not say even criminally, liable for non-payment of backwages. (Gudes v. NLRC, G.R. No. 83023, March 22, 1990) Question: Are questions of policy of the corporate board subject to judicial review. ANo. They are left solely to the honest decision of the officers and directors of the corporation. The court is without authority to substitute its judgment for the judgment of the Board of Directors. The Board is the business manager of the corporation, and so long a sits acts in good faith its orders are not reviewable by the courts. (Sales v. SEC, G.R. No. 54330, January 13,1988) Question: It is enough to say that foreign corporations not doing business in the Philippines do not need a license in order to sue in the Philippine Courts? ANo. The proposition refers to the right to sue; the question here refers to pleading and procedure. Insofar as the allegations in the complaint have a bearing on the parties’ capacity to sue, all that is averred is that they are both foreign corporations existing under the laws of another state. This averment conjures two alternative possibilities: either they are engaged in business in the Philippines or they are not so engaged. If the first, they must have been duly licensed in order to maintain this suit. If the second, and the action sued upon is singular and isolated, no such license is required. In either case, the qualifying circumstances are an

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS essential part of the element of plaintiff’s capacity to sue and must be affirmatively pleaded. (Commissioner of Customs vs. K.M.K. Gani, Indrapal & Co., G.R. 73722, February 26, 1990) Question: What restrictions may be imposed on the right of a stockholder to sell or alienate his shares? A. Restrictions cannot be imposed upon stockholders by a by-law without statutory or charter authority. The owner of a corporate stock has the same uncontrollable right to sell or alienate, which attaches to the ownership of any other species of property. (Go Soc & Sons vs. IAC, G.R. No. 72342, February 19, 1987) Question: Apex Smelting Corporation has an authorized capital stock of P1, 000, 000.00, P5, 000, 000.00 of which has been subscribed and paid up. A year after its corporatio, the company made profits, and P250, 000.00 worth of unsubscribe shares of the authorized capital stock were used as stock dividends. Now the company needs additional capital of P1, 000, 000.00, which can be raised from the present stockholders, what step or steps can be taken to meet this need? Explain briefly. AThe Articles of Incorporation should be amended to increase the authorized capital stock in order to accommodate an infusion of P1,000,000.00 additional capital for the operation of the company. The amendment should be approved by at least 2/3 of the outstanding capital stock entitled to vote and by at least a majority of the members of the board of directors showing such approval of the Securities and Exchange Commission. Other requirements, such as the submission of the long form, must be complied within certain cases as in the case where the amendment involves financial matters like the present one. Question: X is one of the five (5) stockholders of a record of Acme Trading Corporation. Since he does not belong to the majority of the stockholders controlling the corporation. He was not included in the list of stockholders, to whom the treasury shares were sold. What right, if any, does X have? Explain briefly you answer. AHe has the right it invoke his preemptive right to subscribe to the corresponding portion of the reissuance of the treasury shares. In relation to the ratio, which his stockholding on record has to the amount of the reissued

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RANDOM Q & A treasury shares, taking into account the shares of the other stockholders of record Question: Jose is a stockholder of a corporation with a term expiring on August 31, 199. The majority of the members of the board of directors of the company approved and the adopted a resolution extending the term of the corporation for another twenty five (25) years. A similar resolution was previously adopted by the stockholders representing two third (2/3) of the outstanding capital stock. If consulted by Jose who objects to such extension, what advice will you give him? Explain briefly. AJose can exercise his right of appraisal within thirty (30) days from the date when the voting took place, approving such extension. Within ten (10) days from the date of his demand for the payment of his shares, he should surrender his certificate of stock for annotation that the shares covered thereby are dissenting shares; otherwise his right of appraisal terminates. After the appraisal of the value of his shares, the payment shall be made from unrestricted retained earnings of the corporation. Question: Achievers, Inc. made profits last five year, resulting in a substantial unrestricted retained earnings very much beyond its paid-up capital. The company decided to declare stock dividends out of the unissued shares of its authorized capital stock. If consulted by the management as to the steps taken, what advice will you give? Discuss briefly. AAll the subscription must first be fully paid. When this is done, a letter should be sent to the SEC requesting for exemption from registration of the authorized capital stock. The letter must be accompanied by the minutes of the stockholders meeting and also that of the meeting of the board of directors approving the additional issuance of the unissued as stock dividend as declared by the stockholders representing at least 2/3 of the outstanding shares of stock and by a majority of the members of the board of directors. Question: A stockholder of Glory Marketing Corporation, Pedro sold his shares to Santos. The transaction is covered by a duly notarized deed of sale/assignment. When Santos presented the document, duly signed and executed by Pedro, together with the certificate of stock covering the shares in question, to the corporate secretary for recording and the issuance of a new certificate of stock in the same of Santos, the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS corporate secretary refused. If consulted by Santos as what remedy is available to him under the circumstances, what advice will you give him? Explain briefly. AAssuming that the certificate of stock has been duly indorsed by Pedro, Santos can be considered as a stockholder of the corporation. In such a case, actual knowledge of the transfer from Pedro to Santos, on the part of the corporate secretary, is equivalent to registration. The knowledge of the corporate secretary is binding upon the corporation. Being a stockholder of the corporation, Santos can institute an action in the RTC vested with special jurisdiction under RA 8799 in order to compel the corporation and the corporate secretary to record the transfer and to issue a new certificate of stock of his name. This is example of intracorporate controversy since the action is between the stockholder, Santos, and the corporation, and the dispute concerns and/or arises out of the relationship between such stockholder and the corporation. If the certificate of stock has not been duly indorsed by Pedro, Santos should first secure such indorsement before presenting the document of transfer, together with the certificate of stock duly indorsed, to the corporate secretary for recording. Otherwise, he will not be considered a stockholder of the corporation and the action will not be considered an intracorporate controversy. (Rivera vs. Florendo, L-57586, October 8, 1986, 144 SCRA 643.) Question: How do you characterize the determination of the rights of the person and the concomitant liability of a corporation arising from the former’s ouster as a medical director and/or hospital administrator, which are corporate offices. A – It is an extra controversy subject to the jurisdiction of the Special Commercial Court under RA 8799. Where the medical director and/or hospital administrator was appointed by the corporation’s Board of Directors/Trustees, he is deemed an officer of the corporation. A corporate officer’s dismissal is always a corporate act, or a intra-corporate controversy, and the nature is not altered by the reason or wisdom with which the Board of Directors may have in taking such action. The question on remuneration, involving as it does, a person who is not a mere employee but a stockholder and officer, an integral part of the corporation, is not a simple labor problem but a

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RANDOM Q & A matter that comes within the area of corporate affairs and management and is in fact a corporate controversy in contemplation of the Corporation Code. Question: Distinguish between “office” and “employee”. A – An “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders. An “employee” usually occupies no office and generally is employed not by the action of the directors or stockholders but by managing officer of the corporation who also determines the compensation to be paid to such employee. Question: What is needed for the purpose of serving summons on a foreign corporation? A – For purposes of having summons served on a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. Question: Is a foreign corporation without a license ipso facto incapacitated from bringing an action? A – No. A license is necessary only if it is “transacting or doing business” in the country. Question: What is the test to determine whether a foreign corporation is “doing business” in the country. A – The test seems to be whether a foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The purpose of the law is not to prevent the foreign corporation from performing single or isolated acts, but to bar it from acquiring a domicile for the purpose of business without first taking the steps necessary to render it amenable to suits in the local courts. By securing a license, a foreign entity would be giving assurance that it will abide the decisions of our courts, even if adverse to it. The primary purpose of the license requirement is to compel a foreign corporation desiring to do business within the state to submit itself to the jurisdiction of the courts of the state.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Question: What is determinative of “doing business”? A – It is not really the number of quantity of the transactions, but more importantly, the intension of an entity to continue the body of its business in the country. The grant and extension of 90-day credit terms by a foreign corporation to a domestic corporation for every purchase made unarguably shows an intention to continue transacting with the latter since in the usual course of commercial transactions, credit is extended only to customers in good standing or to those on whom there is an intention to maintain long-term relationship. Question: What is meant by the phrase “isolated transaction”? A – The phrase “isolated transaction” has a definite and fixed meaning, i.e., a transaction or series of transactions set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization. Question: What is the extent of the authority of a resident agent, as representative of the foreign insurance company? A – A resident agent, as a representative of the foreign insurance company, is tasked only to receive legal processes on behalf of its principal and not to answer personally for any claim against the foreign corporation. Question: What is the preferred share of stock?

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RANDOM Q & A inability of the corporation to meet its debts as they mature. Question: Are the shareholders risk takers? A – Yes. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. Question: When is “interest bearing stock” legal? A – “Interest bearing stocks,” on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Question: What is required of the court in piercing the veil of corporate entity? A – Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. Question: Is mere ownership by a single stockholder or by another corporation of all or nearly all of the stock of the corporation itself a sufficient reason for disregarding the fiction of separate corporate personalities? A – No.

A – A preferred share of stock is one which entitles the holder thereof to a certain preferences over the holder of common stock. Preferences granted to preferred stockholders do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Question: What are the redeemable shares? A – Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either the issuing corporation, or the stockholder, or both at a certain redemption price. Redemption may not be made there the corporation is insolvent or if such redemption will cause insolvency or

Question: What is a certificate of indebtedness? A – A certificate of indebtedness pertains to certificate for the creation and maintenance of a permanent improvement revolving fund, similar to a “bond”.

Question: What is the concept of “unpaid claims” in Section 63 of the Corporation Code? A – It refers to “any unpaid claim arising from unpaid subscription”, and not to “any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction, such as monthly dues.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Question: Is dismissal or non-appointment of a corporate officer an intra-corporate matter? A – Yes. Sec. 5(c ) of P.D. NO. 902-A, in rel. to Sec. 5 of RA 8799, covers both election and appointment of corporate directors, trustees, officers and managers. A superintendent/Administrator who is included in the by-laws of an association in its roster of corporate officers is an officer of said corporation and not a mere employee. Such dismissal or non-appointment of a corporate officer is clearly an intra-corporate matter and jurisdiction properly belongs to the Securities and Exchange Commission. Jurisdiction pertains to the Special Commercial Court (no longer the Securities and Exchange Commission) even if the complaint by a corporate officer includes money claims since such claims are actually part of the perquisites of his position, and therefore interlinked with his relations with the corporation. Question: In unauthorized corporate contracts, who can make ratification in behalf of a corporation? A – Ratification cannot be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but ratification must be by an officer or governing body having authority to make such contract. Question: What is the liability of persons who assume to act as a corporation knowing it to be without authority to do so? A – They shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. Question: What is the effect of the purchase of shares of stock or membership certificate at public auction and the issuance to the purchaser of the corresponding Certificate of Sale? A – Such purchase transfers ownership of the same to the purchaser and thus entitles him to have the share registered in his name as member. Question: What is necessary for the validity of the sale of all or substantially all of the property of the corporation?

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A – For the sale of the only property of a corporation to be valid, the majority vote of the legitimate board, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should be obtained. The Securities and Exchange Commision has the unquestionable authority to pass upon the issue as to who among the different contending groups is the legitimate governing board of a corporate body. Question: What is the general rule concerning obligations, incurred by the corporation, acting through its directors, officers and employees? A – Such obligations are the sole liabilities of the corporation. Question: In labor cases, when are directors and officers solidarity liable with the corporation for the termination of employment of corporate employees? A – They are solidarily liable with the corporation for such termination of employment of corporate employees when done with malice or bad faith. Question: What is the nature of corporation bv estoppel? Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness, and where there is no third party involved and the conflict arises only among those assuming the form of a corporation, who know that it has not been registered, there is no corporation by estoppel. Question: What determines the jurisdiction of the Special Commercial Court in intra-corporate controversies under R.A. 8799? The jurisdiction of the Special Commercial Court is determined by the concurrence of two elements, namely: (1) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy. Question: Is there intra-corporate or partnership relation between two jeepney drivers’ and operators’ associations whose plan to consolidate into a single common association is still a proposal? A – No. Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the Securities and Exchange Commission.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Question: What debars the foreign corporation from access to out courts? A – it is not the absence of the prescribed license but “doing business” implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to or in progressive prosecution of the purpose and subject of its organization. A foreign corporation will not be regarded as doing business in the State simply because it enters into contracts with residents of the State, where such contracts are consummated outside the State. Sales made to customers in the State by an independent dealer who has purchased and obtained title from the corporation to the products sold are not a doing business by the corporation. The ground for barring recourse to our courts by an unlicensed foreign corporation doing or transacting business in the Philippines should properly be “lack of capacity to sue” and not “lack of personality to sue”. Question: What are the instances where personal liability of a corporate officer, director or trustee along with the corporation validly attach?

A – These instances are when: 1) He assents: (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2) He consents to the issuance of watered stocks, or who, having knowledge thereof, does not forthwith file with the corporate secretary any written objection thereto; 3) He agrees to hold himself personally and solidarily liable with the corporation; 4) He is made by specific provision of law, to personally answer for his corporate action. Question: What is the status of a “foreign corporation” within the state in which is foreign? A – Such foreign corporation has no legal existence within the state in which it is foreign. This proceeds from the principle that judicial existence of a corporation is confined within the territory of the state under whose laws it was incorporated and organized, and it has no legal status beyond such territory.

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RANDOM Q & A Question: What is the purpose of the law in requiring that foreign corporations doing business in the Philippines licensed to do so and that they appoint an agent for service of process? A – It is to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. Question: Is the party estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it? A – Yes. Moreover, where the parties are equally guilty of violating the law, they are in pari delicto, in which case it follows as a consequence that such party is not entitled to the relief prayed for. Question: Being an artificial being and having existence only in legal contemplation, has a corporation feelings, emotions or senses? A – No. It cannot therefore experience physical suffering and mental anguish as to entitle it to an award of moral damages. Question: What is the purpose of the fiction of separate distinct personality of a corporation? A – It is merely a fiction created by law for convenience and to promote justice. When the notion of separate judicial personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of a corporation may be disregarded or the veil of corporate fiction pierced. Question: What are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil? A – They are: (1) Stock ownership by one or common ownership of both corporations, (2) Identity of directors and officers, (3) The manner of keeping corporate books and records, (4) Methods of conducting the business. Question: What is the rest in determining the applicability of the doctrine of piercing the veil of corporate fiction? A – The test is as follows: (1) Control, not merely majority or complete stock control, but complete domination, not only of finances but of policy

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used to defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents “piercing the corporate veil.” Question: What is the so-called “Instrumentality Rule” or doctrine? A – It is otherwise known as “alter ego” doctrine. Question: What are the powers which may not be exercised by the EC? AThe Executive Committee cannot exercise the following: 1. approval of any action for which shareholders’/ stockholders’ action is required; 2. filling of vacancies in the board; 3. amendment or repeal of by-laws or adoption of new by-laws; 4. amendment or repeal of any resolution of the board, which by its express terms is not so amendable or repealable; 5. distribution of cash dividends to the shareholders.

TRANSPORTATION Question: What does a contract of air carriage generate? A – It generates a relation attended with a public duty and any discourteous conduct on the part of a carrier’s employee toward a passenger gives the latter an action for damages and, more so, where there is bad faith. In attention to and lack of care for the interests of its passengers who are entitled to its utmost consideration, particularly as to their convenience, amount to bad faith which entitles the passengers to an amount of moral damages. Question: Does the Warsaw Convention operate as an exclusive enumeration of the instances or declaring a carrier liable for breach of contract of carriage or as an absolute limit of the extent of that liability? A – No. It must not be construed to preclude the operation of the Civil Code and pertinent laws.

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Question: As a rule, what does general or gross average include? A – It includes all damages and expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from real and known risk. Question: What is the necessary to enable the carrier to claim contribution from the consignees for additional freight and salvage changes? A – The carrier must comply with the formalities prescribed under Articles 813 and 814 of the Code of Commerce in order to incur the expenses and cause the damage corresponding to gross average. The formalities are: (1) There must be a resolution of the captain, adopted after deliberation with the sailing mate and the other officers of the vessel, and after hearing the persons interested in the cargo who may be present; (2) The resolution adopted to cause the damages which constitute general average must necessarily be entered in the log book, stating the reason for the dissent, if any, and the urgent reasons or causes which impelled the captain of he acted of his own accord; (3) In the minutes and the resolution should be slated in detail the goods jettisoned; and (4) The captain shall deliver one copy of the first part he may make, within twenty –four hours after his arrival, and to ratify it immediately under oath. Question: What is the assumption of the doctrine of “last clear chance”? A – It assumes that the negligence of the defendant was subsequent to the negligence of the plaintiff and the same must be the proximate cause of the injury. Question: What is franchise? A – Franchise is a legislative grant, whether made directly by the legislature itself, or by anyone of its properly constituted instrumentalities. The grant, when made, binds the public, and is, directly or indirectly, the act of the state. Question: What is a “charter-party”? A – A “charter-party” is defined as a contract by which an entire ship, or some principal part

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS thereof, is let by the owner to another person for a specified time or use; a contract of affreightment by which the owner of a ship or other vessel lets the whole or a part of her to a merchant or other person for the conveyance of goods, on a particular voyage, in consideration of the payment of the freight. Question: What makes out a prima facie case against the common carrier? A – Mere proof of delivery of goods in good order to a common carrier, and of their arrival at the place of destination in bad order, makes out prima facie case against the common carrier. Question: What is the nature of the liability of the registered owner of a public service vehicle for damages arising from the tortuous act of the driver? A – Such liability is primary, direct and solidary with the driver. Question: What presumption arises from carrying a deck cargo? A – It is settled that carrying a deck cargo raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper management of the ship. Question: When does the right of abandonment of vessels not apply? A – The internal rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowner’s liability, does not apply to cases where the injury or average was occasioned by the shipowner’s own fault. Where the shipowner is likewise to be blamed, Article 587 of the Code of Commerce will not apply, and such situation will be covered by the provision of the Civil Code on common carriers. Question: Under Section 3(6) of the Carriage of Goods by Sea Act, what is extinguished if no suit is brought within one year? A – Only the carrier’s liability is extinguished. The ruling in Filipino Merchants (145 SCRA 42) should apply only to suits against the carrier filed either by the supplier, the consignee or the insurer, not to suits by the insured against the insurer.

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RANDOM Q & A Question: May Article 1745 and other Civil Code provisions on common carriers apply to private carrier? A – No, unless expressly stipulated by the parties in their charter party. In a contract of private carriage, the parties may freely stipulate their duties and obligations which perforce would be binding on them. Unlike in a contract involving common carrier, private carriage does not involve the general public. As a private carrier, a stipulation exempting the owner from liability for the negligence of its agent is not against public policy and is deemed valid. A charterer, in exchange for convenience and economy, may opt to set aside the protection of the law on common carriers. When the charterer decides to exercise this option, he takes a normal business risk. Question: What can be a basis for airline passengers’ action for damages A – The contract of air carriage generates a relation attended with a public duty, and neglect or malfeasance of the carrier’s employees naturally could give ground for an action for damages.

Question: Can the refusal by the airline to accord amenities to stranded passengers in case of cancellation of flight due to force majeure make the airline liable for damages? A – Assuming arguendo that airline passengers have no vested right to amenities in case of flight cancellation due to force majeure, what makes an airline liable for damages is its blatant refusal to accord the so-called amenities equally to all its stranded passengers who are similarly situated. Question: What are the two categories of international transportation? A – They are: (1) that where the place of departure and the place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there is a break in the transportation or a transshipment; and (2) that where the place of departure and the place of destination are within the territory of a single High Contracting Party if there is an agreed stopping place within a territory subject to the sovereignty, mandate, or authority of another power, even though the power is not a party to the Convention.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS Question: What is the effect or nature of a copy of an official entry in the ship captain’s logbook? A – It is legally binding and serves as an exception to the hearsay rule. Question: What is an apprentice in maritime law? A – An apprentice is a person bound in the form of law to a master, to learn from his art, trade or business, and to serve him during the time of his apprenticeship. An apprentice officer cannot be considered a superior officer. Question: Anthony is the owner and driver of a Mazda minibus which he uses to provide bus service for school children in the Makati area. One Sunday, the El Zhaddai asked Anthony to transport 20 of its members from Makati to the Luneta, for which service El Zhaddai offered Anthony 1,000 pesos. Anthony accepted and undertook the transport. While enroute to Makati, Anthony lost control of the steering wheel and caused the bus to collide with parked truck, causing injuries to some of his passengers. Is Anthony a common carrier? AYes. Anthony does not have to be engaged in the business of public transport for the provisions of the Civil Code on common carriage to apply. Article 1732 of the Civil Code, in defining common carriers, makes no distinction between the whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity. Neither does the law distinguish between a carrier offering its services to the general public and one who offers services only to a narrow segment of the general population. Question: Does a charter party between a ship owner and a charterer transform a common carrier into a private one as to negate the civil law presumption of negligence in the case of loss or damage to its cargo? AIt depends on the type of charter party. Charter parties are 2 types:(a) “contract of affreightment” which involves the use of shipping space on vessels leased by the owner in part or as a whole, to carry goods for others ; (b) “charter by demise” or “bareboat charter” where the whole vessel is leased to the charterer with a transfer to him of its entire command and possession and consequent control over its navigation, including the master and the crew who are his servants.

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RANDOM Q & A It is only in the case of charter by demise or bareboat charter where the common carrier becomes a private carrier. This is because this type of charter includes both the vessel and its crew; at least insofar as the particular voyage covering the charter-party is concerned. In the case of affreighnment (or time or voyage charter), the carrier remains common because the charter is limited to the ship only, the crew remaining under the control the direction of the shipowner. (Planters Products v. Court of Appeals, 226 SCRA 476) Question: What is a maritime protest? When, where and before whom should it be filled? What is the effect of non-filing of the protest? AA maritime protest is a sworn statement stating the circumstances of any of the following incidents: (a) collision; (b) arrival under stress (c) shipwreck; and (d) after the vessel has passed a hurricane and the cargo had been, damaged. The protest must be presented within 24 hours before the competent authority of the port nearest to where the incident took pace, or the first port of arrival; if the incident occurs in a foreign country, the Philippine consular representative. An action to recover losses and damages arising from the incident cannot be admitted if such protest is not made. The lack of protest, however, will not prejudice such action by owners of cargo who were not in a condition to make unknown their wishes. Question: Distinguish between a Certificate of Public Convenience and Necessity (CPCN) and a Certification of Public Convenience (CPC) AA CPC is an authorization issued for the operation of a public service for which no franchise, municipal or legislative, is required by law. A CPCN, on the other hand is an authorization issued for the operation of apublic-service for which a franchise is required. Question: What do you understand by the “prior operator” rule? ABy the prior operator rule, a first license has more or less a vested and preferential right over another who seeks to acquire a license and operate a public service over the same route, as long as the first license and complies with the issuing agency’s reasonable rules and regulations. Question: Contrary to the instructions of his employer, the captain or the M/V Morning Star

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS refused to leave for South Africa because, in his judgment, the vessel needed repairs necessary to ensure the safety of the voyage. For insubordination, the captain was terminated from his employment. Is the termination valid? ANo. A captain commonly performs 3 distinct roles (a) general agent of the shipowner, (b) commander and technical director of the vessel; and (c) representative of the country under whose flag he navigates. Of these, the most important is the role performed by him as commander of the vessel during its voyage and the protection of the passengers, crew and cargo. He must be accorded a reasonable measure of discretionary authority to decide what the safety of the ship and of its crew and cargo specifically requires on a stipulated voyage. He is right there on the vessel, in command of it and presumably knowledgeable as to the specific requirements of seaworthiness and the particular risks and perils of the voyage he is to embark upon. Thus, if the captain is convinced as a reasonably competent and prudent marirer that the shipowner’s or agent’s instructions will result, in very specific circumstances facing him, in imposing unacceptable risks of loss or serious danger to ship or crew he cannot seek absolution from his responsibility, if a marine casualty occurs in such instructions.(Inter Crient v. NLRC< 235 SCRA 268)

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RANDOM Q & A also as to their total personality, behavior, family background, and even their moral fiber. Despite all these, a driver newly-hired by Pascual stabbed his first passenger, Rogelio. Rogelio survived the assault and sued the Company for damages. The Company puts up the defense that the employee’s acts were beyond the scope of his employment, contrary to instructions given to him and constituted force majeure because the Company could not have foreseen that its driver would perpetrate the assault. Is the Company liable? AThe Company is liable. Under the Civil Code, common carriers are liable for injuries to passengers through the negligence or willful acts of its employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. This liability does not cease upon proof that they exercise the diligence of a good father of a family in selecting and supervising employees. Question: What does pilotage service consist of? A – Pilotage service consists of navigating a vessel from a specific point, usually about two (2) miles offshore, to an assigned area at the pier and vice-versa.

Question: What is an average in maritime law? What are the kinds of average?

Question: When may moral damages be recoverable in case of breach of contract of carriage?

AAn average is either (a) all the extraordinary or accidental expenses which may be incurred during the voyage for the preservation of the vessel or cargo or both; or (b) all damages or deterioration which the vessel may suffer from the casts anchor in the port of destination, and those suffered by the merchandise form the time it is loaded in the port of shipment until it is unloaded in the port of the consignment. Averages are of 2 kinds: (a) Simple or particular, these are the expenses and damages caused to the vessel or cargo which have not inured to the benefit and common profits of all the persons interested in the vessel and her cargo; and (b) general or gross which are all the damages and expenses which are deliberately caused in order to save the vessel, her cargo or both from a real or known risk. Question: Pascual Taxi Company prides itself in employing only experienced and courteous taxi drivers. In fact, applicants are examined not only with respect to their technical competence but

AMoral damages are recoverable in a damage suit predicated upon a breach of contract of carriage only in the following cases: 1) where the mishap results in the death of a passenger; 2) where it is proved that the carrier was guilty of fraud or bad faith, even if death does not result. In cases other than those two, moral damages will be disallowed. Question: When may an award of exemplary damages by proper? AIt is proper when the carriers, is committing the breach of contract, acted in wanton, fraudulent, reckless, oppressive or malevolent manner. Question: What kind of damages can be recovered where the breach of contract is incurred in good faith? AWhat can be recovered in such a case are only damages which are the natural and probable consequences of said breach and which

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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the parties have foreseen at the time the obligation was constitute. These damages consist of the actual damages. (China Air Lines, Ltd. V. IAC, G.R. No. 73835, January 17, 1989)

A – In policies where the law will generally imply a warranty of seaworthiness, such warranty can only be excluded by terms in writing in the policy in the clearest language.

Qustion: Name at least three grounds for arrival under

Question: What may the result of admission by the assurer of seaworthiness mean? A – Such result of admission of seaworthiness may mean one or two things, namely: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or (b) that the risk of unseaworthiness is assumed by the insurance company.

stress A- They are: 1. lack of provisions 2. well-founded fear of seizure, privateers or pirates 3. inability of the vessel to navigate due to an accident of the sea

Question: When does the right of subrogation accrue? INSURANCE Question: May an insurance contract, by special provisio, restrict or limit the operation of the general provisions? A – Yes. The insurance company shall express such limitation in clear and unmistakable language. Question: Has marine insurance developed as an all-risk coverage? A – Yes. Marine insurance developed as an allrisk coverage, using the phrase “perils of the sea” to encompass the wide and varied range of risks that were covered. Question: When does the prescriptive period to bring a suit in court under an insurance policy begin? A – It begins to run from the date of the insurer’s rejection of the claim filed by the insured, the beneficiary or any person claiming under an insurance contract. Question: In every marine insurance policy, what does the assured impliedly warrant to the assurer? A – The assured impliedly warrants to the assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the face of the policy. Hence, it becomes the obligation of the cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. Question: How may a warranty of seaworthiness be excluded in a marine insurance policy?

A – The right of subrogation is not dependent upon, nor does it from out of any privity of contract or upon payment by the insurance company of the insurance claim. It accrues simply upon payment by the insurance company of the insurance claim. Question: What is the coverage of an “all risks” insurance policy? A – An “all risks” insurance policy covers all kinds of loss other than those due to willful and fraudulent act of the insured. Question: May an aggrieved party still recover the deficiency from the person causing the loss in the event the amount paid by the insurance company does not fully cover the loss? A – Yes. Question: In insurance, when must the notice of claim be files? A – The notice of claim must be filed within six (6) months from the date of the accident. Otherwise, the claim shall be deemed waived. An application form does not prove that insurance was secured. Question: What is a valid precondition before the insurer can be compelled to turn over the whole amount of the insurance to the insurer? A – It is the signing of the Loss and Subrogation Receipt. Question: What do you understand by the “nofault” claim under a Compulsory Motor Vehicle Liability (CMVLI)?

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS AAn insurance company shall pay any claim for death or bodily injuries sustained by a passenger on third party without proving no fault or negligence of any kind subject to certain conditions. (Sec.378, ICP) Question: Under the “no fault insurance”, against whom should the claim be filed? AThe law is clear. The claim shall lie against insurer of the vehicle in which the occupant is riding, mounting or dismounting from and no other. The claimant is not free to choose from which insurer he will claim be made against the insurer in which the occupant is riding, mounting or dismounting from. Question: Is the rusting pipes in the course of a voyable “peril of the sea”? AYes. This is in view of the toll on the cargo of wind, water and salt conditions. (Cathay Insurance Company v. Court of Appeals, G.R. 46145, June 30, 1987) Question: What is an “all risks” policy of insurance? AAn “all risks” insurance policy insures against all causes of conceivable loss of damage, except as all causes of conceivable loss or damage, except as otherwise excluded in the policy or sue to fraud or intentional misconduct on the part of the insured. It covers all losses during the voyage whether arising from a marine peril or not, including pilferage losses during the war. Question: What is the measure of the insurer’s liability under a policy of insurance?

ANo. There is nothing in the law which mandates that the two periods must concur. On the contrary, the one-year period is only required “in proper cases”. Had the lawmakers intended it to be that way, then the phrase “improper cases” would not have been used. The one-year period should be counted from the date of rejection by the insurer, as this is the time when the cause of action accrues. Before such final rejection (Subbmit Guaranty and Insurance Company, Inc. v. Jose C. de Guzman, G.R. 50997, and two companion cases, June 30, 1987)

BANKING AND ALLIED LAWS Question: When it appears prima facie that a bank is in “a condition of insolvency” or so situated “that its condition in business would involve probable loss to its depositors or creditors”, what step/s may be taken by the Monetary Board? AThe Monetary Board may take the following steps: 1.) To forbid the bank to do business and appoint a receiver for the bank. 2.) To determinate within ninety (90) days whether or nota.) The bank may be reorganized and rehabilitated to such an extent as to be permitted to resume business with safety to the depositors, creditors and the general public. A conservator may be appointed for this purpose. b.)

AThe terms of the contract or policy constitute the measure of the insurer’s liability and compliance therewith is a condition precedent to the insured’s right of recovery from the insurer. (Perla Compania de Seguros, Inc. vs. Court of Appeals, G.R. 78860, May 28, 1990) Question: It is provided by law that notice of the claim must be filed within six months from date of the accident, otherwise the claim shall be deemed waived and action or suit for recovery of damage due to loss or injury must be brought, in proper cases, with the Commission or the Courts within one year from the date of accident, otherwise claimant’s right of action shall prescribe (Section 384). Are those two (2) periods mandatory and must always concur?

294

RANDOM Q & A

If it is indeed insolvent or cannot resume business with safety to the depositors, creditors and the general public, and the public interest requires that the bank be liquidated, a liquidator shall be appointed. Thereafter, the Central Bank shall file in the Regional Trial Court a petition for insolvency praying of the assistance of the court in liquidation, with the Bangko Sentral ng Pilipinas being represented by the Office of the Solicitor General.

Question: May the actions of the Monetary Board in appointing a conservator or to liquidate and

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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295

RANDOM Q & A

petitioning for an insolvency proceeding for a bank be challenged by an interested party?

notice or formal tender to the vendee or redemptioner?

AGenerally, it cannot be challenged. Such actions by the Monetary Board are final and executory. They cannot be set aside or even restrained by the court, except only upon convincing proof that the action is plainly arbitrary and not made in good faith.

ANo. Previous notice to the vendee or a meeting between the mortgagor and the redemptioner, or a previous formal tender before action is begun to enforce the right of redemption, is not required. The mortgagor is given a maximum of three (3) months or up to the registration of the foreclosure sale or real estate, whichever is earlier, within which to redeem the property by paying all the claims of the bank against them on the date of the sale, including all costs, and other expenses incurred by reason of the foreclosure sale and custody of the property, as well as charges and accrued interest.

Question: When and how may these exceptions (stated in the answer to the next preceding question) be asserted? AThese exceptions may be asserted as an affirmative defense or a counterclaim in the proceeding for assistance in liquidation. It is not necessary to assert the same as a cause of action in a separate and distinct action. Question: When does the rate of 12% interest referred to in Circular NO. 416 apply? A – It applies to load or forbearance of money, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged, and any other monetary judgment which does not involve or which has nothing to do with loads or forbearance of any money, goods or credit does not fall within the coverage for such imposition is not within the ambit of the authority granted to the Central Bank. Question: What is the rate of interest in a loan or forbearance of money? A – The interest due should be that stipulated, and, in the absence thereof, the rate shall be 12% per annum. Where an obligation arises “from a contract of purchase and sale and not from a contract of loan or mutuum,” the applicable rate is “6% per annum as provided in Article 2209 of the New Civil Code and not the rate of 12% per annum as provided in Central Bank Circular NO. 416.” Question: Is the ceiling prescribed by the Usury Law for interest rates still in force? A – No. Section 1 of Central Bank Circular No. 905, series of 1982, expressly removed the interest ceilings prescribed by the Usury law. Question: Before a mortgagor can exercise his right of redemption, is he required to make a previous

Question: X secured a loan from Bank M. In the loan contract, it is expressly provided under the socalled escalation clause as follows: “I hereby authorized the bank to correspondingly increase the interest rate stipulated in this contract without advance notice to me in the event a law increasing the lawful rate of interest that may be charged on this particular kind of loan.” Subsequently, CB Circular No. 494 increased the interest rate from 12% to 17% per annum. Correspondingly, the bank increased the rate of interest of the loan of X from 12% to 17% per annum. Is the act of the bank valid and binding? ANo. While an escalation clause like the one in question can be ordinarily, the bank cannot rely on it to raise the interest rate from 12% to 17% per annum in this case. Circular No. 494 of the Monetary Board is not the “law” contemplated by the parties. Nor should said circular be held applicable to loan secured by registered real property in the4 absence of any specific indication and in contravention of the policy behind the Usury Law (Banco Filipino Savings and Mortgage Bank vs. Navarro, G.R. No. 46591, July 28, 1987) Question: Central Bank Circular Nos. 265 and 534 require prior authority for taking out of the country of foreign currency. X has a foreign currency deposit with Bank A. X wants to withdraw from said account certain sum of foreign currency to be sent abroad. Does he need CB authority for this purpose? ANo. Under Sec.5, of Republic Act No. 6426, as amended, the transferability abroad of foreign currency deposits is unrestricted. Only one exception is provided for therein, which is, any restriction “arising from the contract

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS between the depositor and the bank”. Neither is a CB authority required for transferability abroad of foreign currency deposits. The underlying objective of the Foreign Currency Deposits Act, as amended, is to attract and invited the deposit of foreign currencies which are acceptable as part of the international reserve in duly authorized banks in order that they may be put into transferability of such funds, would defeat the very purpose of the law. The countervailing effect would be To discourage prospective foreign currency depositors to the detriment of the banking system. (Cancio v. CTA, G.R. No. 73382, October 22, 1987)

296

RANDOM Q & A

A – A trust receipt is a security agreement to which a bank requires a “security interest” in the goods. By virtue of a trust receipt agreement, the bank theoretically acquired ownership of the imported personal property. Question: While acting as local correspondent bank, does local bank have the right to intercept funds being coursed through it by its foreign counterpart for transmittal and deposit to the account of an individual with another local bank, and thereafter apply the said funds to certain obligations owed to it by said individual? A – No.

Question: What is the purpose of the special affidavit of a good faith in connection with a chattel mortgage? A– It is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. Question: What is an affidavit of good faith? What is the effect of the absence of an affidavit of good faith? AIt is an oath in a contract of chattel mortgage wherein the parties “severally swear that the mortgage is made for the purpose of securing the obligations specified in the condition thereof and for no other purpose and that the same is just and valid obligation and one not entered into for the purpose of fraud.” Question: Can a chattel mortgage secure after-incurred obligations? A – While a pledge, real estate mortgage or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, a chatted mortgage can only secure obligations existing at the time the mortgage was constituted. This is because of the Affidavit of Good Faith in the chattel mortgage. Question: May the contracting parties to a pledge agreement stipulate that the said pledge will also stand as security for any future advancements (or renewals thereof) that the pledgor may procure from the pledgee? A – Yes. (Note: This in not true in the case of a Chattel Mortgage where such stipulation cannot be made.)

FLAG LAW Question: In response to an invitation to bid for the purchase of office supplies by a government office, Acme Trading, A Filipino firm, submitted the lowest bid, covering supplies made in Taiwan. Having submitted the second lowest bid covering supplies made in the Philippines, using partly Korean raw materials and partly local products, Super Marketing protested the award of the contract to supply to Acme Trading. How will you resolve the controversy? Explain briefly. AUnder the Flag Law, Super Marketing should be preferred. The product which Acme Trading is offering to sell is not made in the Philippines. On the other hand, what Super Marketing is offering to sell is Philippine product, even if it is using partly Korean raw materials as long as the substantial portion of the materials is locally produced. Question: When may the Flag Law be invoked? AThe Flag Law may be invoked only against a bidder who is not a domestic entity who offers imported articles, materials or supplies of those made or produced in the Philippines from imported materials. But where all the materials, goods or supplies offered in the bids submitted are produced, made and manufactured in the Philippines substantially from articles, materials or supplies of the growth of the Philippines, and the bidders are domestic entities, the Flag Law finds no application. (Asbestos Integrated Manufacturing, Inc. v. Peralta, G.R. 45515, October 29,1987)

Question: What is the nature of the trust receipt? Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS ANTI- DUMPING LAW Question: Predicting a shortage of rice supply in the coming months, the Secretary of Agriculture decided to import rice from Thailand. Can the Rice Producers of the Philippine invoke the AntiDumping Law to prevent such importation? Discuss briefly. ANo. The rice to be imported is not meant to dump foreign rice into the country, but to solve a rice shortage. Moreover, there is nothing to protect in the local rice industry for the moment.

1.

discoveries, scientific theories and mathematical methods

2.

schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers

3.

methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human and animal body. This provision shall not to apply to products and composition for use in any of these.

4.

plant varieties or animal breeds or essential biological process for the production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes

5.

aesthetic creations

6.

anything which is contrary to public order to morality

RETAIL TRADE LAW Question: A Chinese national, Chua is a textile merchant with a bodega in Binondo. He supplies textile goods on consignment basis to Marta who operates a stall at the Divisoria Market. Is Chua violating the provision of Republic Act No. 1180, otherwise known as the Retail Trade Law? ANo. Chua is engaged in wholesale business, and not in retail business, and not in retail business which is reserved by the law for Filipino citizens when the capitalization of the business is not more than US$2.5 million. Chua sells to Marta who does not use or consume the textile goods herself, but who, in turn, sells the goods to her customers. Under the end-user doctrine, the transaction between Chua and Marta is wholesale, while that between Marta and her customer is retail.

INTELLECTUAL PROPERTY RIGHTS Question: What are the so-called “intellectual property rights” under the IPC? A1. copyright and related rights 2.

trademarks and service marks

3.

geographical indications

4.

industrial designs

5.

patents

6. layout-designs integrated circuits 7.

297

RANDOM Q & A

(topographies)

protection of undisclosed information

Question: What are non-patentable inventions? A-

of

Question: What is a trademark? A – Trademark refers to a word, name, symbol, emblem, sign or device or any combination thereof adopted and used by a merchant to identify, and distinguish from others, his goods of commerce. Trademark is basically an intellectual creation that is susceptible to ownership by the incorporeal right is distinct from the property in the material object subject to it. Question: 1.) Who is entitled to register in the principal register? 2.) What is the effect of registration in the principal register? 3.) In publication of the application necessary for registration in the principal register? A1.) Registration in the principal register is limited to the actual owner of the trademark. Proceedings therein on the issue of ownership may be contested through opposition or interference proceedings or, after registration, in a petition for cancellation. 2.) Registration in the principal register is constructive notice of the registrant’s claim of ownership, while registration in the supplemental register is merely proof of actual use of the trademark and notice that the registrant has used or appropriated it. 3.) In application for registration in the Principal Registrar, publication of the application is necessary. This is not so in application for registration in the Supplemental Register.

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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298

RANDOM Q & A

Question: What are the distinctions between infringement and unfair competition?

3.

A1.) Infringement of trademark is the unauthorized use of a trademark, whereas unfair competition is the passing off of one’s goods as those of another. 2.) In infringement of trademark, fraudulent intent is unnecessary, whereas in unfair competition, fraudulent intent is essential.

4.

A – To constitute infringement, it is not necessary that the whole or even large portion of the work shall have been copied. Question: What are the moral rights under the Intellectual Property Code? A(1) to make alterations of his work prior to or withhold it from publication; (2)

to require that the authorship of the works be attributed to him;

(3)

to object to any alteration, mutilation or other modification of his work which is prejudicial to his honor or reputation;

(4)

to restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work.

from the payment of certain debts. 3.

Some of the creditors may receive less than their credits. 4. In case of involuntary insolvency, three or more creditors are required.

Question: Distinguish voluntary solvency from involuntary insolvency.

3.) In infringement of trademark, the prior registration of the trademark is a prerequisite to the action, whereas in unfair competition, registration is not necessary. Question: To constitute infringement, to what extent must the work be copied?

suspend or delay the payment of debts. The amount of indebtedness is not affected. The number of creditors is immaterial

VOLUNTARY INSOLVENCY

INVOLUNARY INSOLVENCY

1.

One creditor sufficient.

2.

Filed by the debtor.

3.

No need for commissions of acts of insolvency.

4.

5.

is

Amount of indebtedness must exceed one thousand pesos (P1, 000.00)

1.

Three or more creditors are required

2.

Filed by three or more qualified creditors.

3.

Debtor must have committed one or more acts of insolvency.

4.

Indebtedness must not less than one thousand pesos(P1, 000.00)

5.

Bond is required.

Bond is not required

INSOLVENCY LAW Question: Distinguish suspension of payments from insolvency

SUSPENSION OF PAYMENTS 1.

2.

The debtor has sufficient property but he foresees the impossibility of meeting his debts as they fall. The purpose is to

INSOLVENCY

1.

The debtor does not have sufficient property to pay his debts.

2.

The purpose is to discharge the debtor

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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FREQUENTLY ASKED QUESTIONS In COMMERCIAL LAW

NEGOTIABLE INSTRUMENTS LAW 1. Subject matter: REQUISITES FOR NEGOTIABILITY

299

FAQs



Sec. 9, NIL, this makes the instrument payable to bearer because the name of the payee does not purport to be the name of any person. If the bill is addressed to two or more drawees in the alternative or in succession, it is not negotiable.

Years Asked: 2002, 2000, 1999,1998,1997,1996, 1993, 1992, 1989, and 1988

Concept: 











The requisites for negotiability are as follows: 1. It must be in writing and signed by the maker or drawer; 2. It must contain an unconditional promise or order to pay a sum certain in money; 3. It must be payable to order or to bearer; 4. it must be payable on demand or at determinable future time; and 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. (Section 1, Negotiable Instruments Law) In determining whether an instrument is negotiable or not, the sole test is whether or not the requisites of negotiability expressed in Section 1 of the Negotiable Instruments law are not met on the face of the instrument itself. The intrinsic validity of the instrument is of no moment. Even the acceptance or non-acceptance by the drawee of the instrument would be irrelevant. The fact that the instrument is not dated and does not mention the place of payment does not militate against its being negotiable. The date and place of payment are not material particulars required to make an instrument negotiable. However, when the day and the month is so placed but the year of maturity is not given, the instrument ceases to be so negotiable for the time for payment is not determinable in this case as the year is not stated. The serial number is not material particular to the negotiability of a check. Its alteration does not constitute material alteration of the instrument. The fact that the sum payable is to be paid with interest or that the maturities are in stated installments does not render the amount payable as uncertain. The fact that the instrument is payable to “cash” does not affect the negotiability of the instrument for under

Applicable Law: Sec. 1, 2, 4, 5, 6, 9, 10, 11, 13, 17 Negotiable Instruments Law Illustrative Cases: Caltex Phils. Inc. v. Court of Appeals 212 SCRA 448 Metropolitan Bank and Trust Company v. Court of Appeals 194 SCRA 169 Salas v. Court of Appeals 181 SCRA 296 PNB v. Manila Oil and Refining Company 43 Phil. 444

2. Subject matter: EFFECTS OF DELIVERY Concept: A. Delivery of Incomplete instrument (2006, 2003, 1997, 1993, 1978)  Where the instrument is wanting in any material particular, the person in possession thereof is prima facie presumed authorized to complete it.  A signature on a blank paper delivered by the person making the signature in order that it may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In both cases however, the instrument must be filled up strictly in accordance with the authority given and within reasonable time in order that it may be enforced against any person who became a party thereto prior to its completion. However, persons negotiating after its completion are liable because of their warranties.  A holder in due course may enforce the instrument as if it had been filled up strictly in accordance with the authority given and within a reasonable time. (Sec. 14,NIL) B. Incomplete and undelivered instrument (2006, 2000, 1985, 1982)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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

Non-delivery of an incomplete instrument is a real defense (Sec. 15, NIL) When an incomplete instrument has not been delivered, it will not, if completed and negotiated without the authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.

3.



Years asked: 2006, 2003, 2000, 1997, 1993, 1985, 1982, 1978 

Applicable Law: Secs. 14, 15, 16, NIL Illustrative cases: Kauffman v. National Bank Phil. 183

42

3. Subject Matter: HOLDER IN DUE COURSE Concept: 

A holder in due course is one who has taken the instrument under the following conditions: 1. That it is complete and regular upon its face. 2. That he became holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact; 3. That he took it in good faith and for value; 4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Years Asked: 2000, 1985,1978,1977

300

FAQs The check is issued for a specific purpose and the person who takes it not in accordance with said purpose does not become a holder in due course and is not entitled to payment thereunder. The act of crossing a check serves as a warning to the holder thereof that the check has been issued for a definite purpose so that the holder must inquire if he has received the check pursuant to that purpose; otherwise he is not a holder in due course. (Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, et. Al. G.R. No. 93048, March 3, 1994; 230 SCRA 643) Crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The crossing is special where the name of a bank or a business institution is written between the two parallel lines, which mean that the drawee should pay only with the intervention of that company. The crossing is general where the words written between two parallel lines are “and Co.” or “for payees account only.” (Associated Bank v. Court of Appeals, 208 SCRA 468)

Years asked: 2005, 2004, 1996, 1995, 1994, 1991 Applicable Law: Sec. 542, Code of Commerce Illustrative Cases: Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, et. Al. G.R. No. 93048, March 3, 1994; 230 SCRA 643 Associated Bank v. Court of Appeals, 208 SCRA 468

5. Subject matter: ACCOMODATION PARTY 1996,

1995,

1994,1993,

1992, Concept: 

Applicable Law: Sec. 52, NIL

4. Subject matter: EFFECTS OF CROSSING A CHECK Concept:  The effects of crossing a check (Sec.542, Code of Commerce) are as follows: 1. The check is for deposit only in the account of the payee and cannot be encashed; 2. The check may be negotiated only once to one who has an account with the bank;







An accommodation party is one who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value therefor and for the purpose of lending his name to some other person. The accommodation party is liable as a maker to a holder up to the sum of which he accommodated even if he did not receive any consideration for the promissory note. This is the nature of accommodation. The accommodation party is liable on the instrument to a holder in value. This is true even if the holder was aware at the time he took the instrument that the party is merely an accommodation party. Absence of consideration is in the nature of accommodation. Defense of the absence of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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

consideration cannot be validly interposed by accommodation party against a holder in due course. (Sec. 29, Negotiable Instruments Law) The party accommodating can recover what he has paid from the accommodated party since the relation between the two is in effect that of principal and surety. (PNB v. Maza & Macenas, 48 Phil, 207)



Years Asked: 2005, 1996, 1993, 1991, 1990, 1985, 1977, 1975 Applicable Law: Sec. 29, NIL



Illustrative Case: PNB v. Maza & Macenas, 48 Phil, 207



6. Subject matter: DEFENSES Concept: A. Alteration (1999, 1996, 1995, 1983)  Material Alteration is any alteration which changes the date, sum payable, time or place of payment, number or relation of parties, or medium or currency of payment, or adds a place where none is specified or which alters the effect of the instrument in any respect.  Under Sec. 124 of the Negotiable Instruments Law, a material alteration avoids the instrument, except as against the party who made, authorized, or assented to the alteration and subsequent indorsers. However, a holder in due course can enforce the instrument according to its original tenor and for the value placed therein.  The alteration of a serial number of a check does not alter the effect of the instrument, nor does it modify in any respect the obligation of a party thereto. It does not change the items which are required to be in Section 1, NIL. B. Forgery (2006, 2004, 1997, 1995, 1992, 1990, 1989, 1987, 1984, 1983, 1982, 1981, 1977, and 1976)  When a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be

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acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up forgery or want of authority. Parties to an instrument who are such prior to the forgery cannot be held liable by any party who became such at or subsequent to the forgery. However, a party who had been a party subsequent to the forgery and who later on indorses the same can be held liable to a holder in due course. Only the forged signature is wholly inoperative not the instrument itself, and not the genuine signatures. Despite the forgery of the signature, there may be parties who shall be precluded from setting up forgery or want of authority, such as: 1. those who warrants the genuineness of the instrument like acceptors, indorsers; 2. those who ratified the forgery express or implied; 3. those who were negligent The general rule is that in case of forgery of the indorsement of the payee of the check the drawee bank cannot debit the drawer’s account and that the loss shall be borne by the drawee bank. The depositary or collecting bank is liable to the drawee in case of forged indorsement because it guarantees all prior indorsement. However, this is subject to the qualification that the drawee himself was not negligent or guilty of such conduct as would stop him from asserting the forged character of the instrument as against the drawer. The legal consequences when a bank honors a forged check are as follows: 1. When Drawer’s Signature is Forged: Drawee-bank by accepting the check cannot set up the defense of forgery because by accepting the instrument, the drawee bank admits the genuineness, the drawee bank admits the genuineness of signature of the drawer (BPI Family Bank v. Buenaventura Sept. 30, 2005) 2. Forged Payee’s signature: When drawee-bank pays a the forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. In such case, the bank becomes liable since its primary duty is to verify the authenticity of the payee’s

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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Signature. (Trader’s Royal Bank v. Radio Philippines Network, Oct 10, 2002; Westmont Bank v. Ong, January 30, 2002) Forged Indorsment o Drawer’s account cannot be charged and if charged, he can recover from the drawee bank. (Associated Bank v. CA, Jan. 31, 1996) o Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to the payee. A collecting bank is not guilty of negligence over a forged indorsement on checks for it has no way of ascertaining the authority of the endorsement and when it caused the checks to pass through the clearing house before allowing withdrawal of the proceeds thereof. (Manila Lighter Transportation, Inc. V. CA, Feb. 15, 1990) On the other hand, a collecting bank which endorses a check bearing a forged endorsement and presents it to the drawee bank guarantees all prior endorsements including the forged endorsement itself and should be liable therefor . (Traders Bank v. RPN, Oct 10, 2002) o Drawee-bank can recover from the collecting bank (Great Eastern Life Ins. Co. v. Hongkong and Shanghai Bank, Aug. 23, 1922) because even if the indorsement on the check deposited by the bank’s client is forged, collecting bank is bound by its warranties as an indorser and cannot set up the defense of forgery as against drawee bank.(Association Bank v. CA, Jan. 31, 1996)

C. Lack of Consideration (1998, 1996, 1994, 1989, 1979)  Failure, absence of, or illicit consideration are only personal defenses. However, with respect to illegality, the exceptional cases when it

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is a real defense is if the statute declares the instrument void for any purpose. Absence of consideration is in the nature of an accommodation. Defense of absence of consideration cannot be validly interposed by an accommodation party as against a holder in due course. The defense of absence or lack of consideration is a personal defense that can not be used against a holder in due course. Therefore, the person invoking such defense is still liable to a holder in due course. (State Investment House v. IAC, 175 SCRA 310)

Years asked: 2006, 2004, 1999, 1998, 1997, 1996, 1995, 1994, 1992, 1990, 1989, 1987, 1984, 1983, 1982, 1979, 1977, and 1976 Applicable Law: Sec. 1, 124, NIL Illustrative Cases: BPI Family Bank v. Buenaventura Sept. 30, 2005 Manila Lighter Transportation, Inc. V. CA Feb. 15, 1990 Traders Bank v. RPN Oct 10, 2002 Great Eastern Life Ins. Co. v. Hongkong and Shanghai Bank Aug. 23, 1922 Association Bank v. CA Jan. 31, 1996 State Investment House v. IAC 175 SCRA 310 7. Subject Matter: LIABILITY OF PARTIES INSTRUMENT Concept: a.

TO

A

NEGOTIABLE

Of maker  The maker is the party primarily liable and (1) engages himself to pay according to the tenor of the instrument, and (2) admits the existence of the payee and his capacity to indorse.

b. Of Acceptor and Drawee who pays without accepting the instrument  The drawee is generally not liable until he accepts the instrument and becomes the drawee/acceptor. When he becomes a drawee/acceptor, he is primarily liable and (1) engages to pay according to the tenor of his acceptance, (2) admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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instrument,, (3) admits the existence of the payee and his capacity to indorse. The payee has no cause of action against the drawee-bank. The bank is not liable to the holder unless and until it accepts or certifies a check. The remedy of the holder is against the drawer, provided notice of dishonor is given to him on the basis of the transaction that gave rise to the issuance of the check. Once the bank\ certifies the check, the bank becomes liable thereon because certification is equivalent to acceptance and if procured by the holder, the drawer and all indorsers are discharged from liability. (Sec. 188 and 189, NIL) A drawee becomes liable the moment he accepts the instrument. Sec. 62 provides that the “acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance.”

Of Drawer  Secondarily liable and (1) admits the existence of the payee and his capacity to indorse; (2) engages that the instrument will be accepted or paid by the party primarily liable; and (3) engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid.

d. Of indorsers 1. Qualified Indorsers and persons negotiating by delivery Every person negotiating an instrument by delivery or by qualified indorsement warrants: o that the instrument is genuine and in all respects what it purports to be; o that he has a good title to it. o That all prior parties had capacity to contract; o That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. The warranty of persons negotiating by mere delivery extends to immediate parties. 2.

303

FAQs Every indorser who endorses without qualification, warrants to all subsequent holders in due course: o that the insttrfument is genuine and in all respect what it purports to be; o that he has good title to its; o that all prior parties had capacity to contract; o that the instrument is, at the time of the endorsement, valid and subsisting. The general indorser also engages that on due presentment, it shall be accepted or paid or both, as the case may be, according to its tenor; and if it be dishonored and the necessary proceedings on dishonor will be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to it. However, a general indorser of a bearer instrument warrants the foregoing only in favor of those persons who make title through the indorsement. (Sec. 66, 67 and 40, NIL) Years asked: 2002, 2001, 1999,1998, 1997, 1996, 1995, 1993, 1992,1991, 1990, 1989, 1988, 1987, 1986,1985, 1984, 1983, 1982, 1981, 1980, 1979, 1977, 1975 Applicable Law: Sec. 60-69, 188, 189, NIL

General indorsers (Sec. 66, NIL)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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TRANSPORTATION LAW 1. Subject Matter: COMMON CARRIER v. PRIVATE CARRIER; TEST IN DETERMINING A COMMON CARRIER Concept:  Art. 1732 of the Civil Code provides that common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water or air, for compensation, offering their services to the public.  The tests for determining whether a party is a common carrier of goods are the following: a. he must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods generally as a business and not as a casual occupation; b. he must undertake to carry goods of the kind to which his business is confined; c. he must undertake to carry by the method by which his business is conducted and over his established routes; and d. The transportation must be for hire.  Common Carrier v. Private Carrier Common carrier Private carrier Holds himself out in common, that Agrees in some is, to all persons who choose to special case with employ him, ready to carry for hire some private individual to carry for hire Bound to carry for all those who Not bound to carry offer such goods as it is for any reason unless accustomed to carry and tender it enters into a special reasonable compensation for agreement to do so. carrying them Subject to regulation as it is a Not subject to public service regulation Bound to exercise extraordinary Owes only diligence diligence of a good father of a family Cannot stipulate that it is exempt May enter into a from liability for the negligence of stipulation its agents or employees. Such exempting itself from stipulation is void as it is against liability for negligent public policy acts of its agents or employees.

Year asked: 2002, 2000, 1996, 1991 Applicable Provisions: Art. 1732, Civil Code of the Philippines Illustrative Cases: De Guzman v. Court of Appeals Dec. 22, 1988 First Philippine Industrial Corp. v. CA 300 SCRA 661 National Steel Corporation v. Court of Appeals 283 SCRA 45,61 Caltex Philippines v. Sulpicio Lines 315 SCRA 709 Coastwise Lighterage Corp. v. Court of Appeals 245 SCRA 797 Virgines Calvo v. UCPB General Insurance Co. No. March 19, 2002 Phil. American General Insurance Company v. PKS Shipping Company April 9, 2003 Asia Lighterage and Shipping, Inc. v. Court of Appeals August 19, 2003 2. Subject Matter: EXTRAORDINARY DILIGENCE AND PRESUMPTION OF NEGLIGENCE Concept:  In case of loss of effects of passengers or death or injuries to passengers, the common carrier is presumed to be at fault or to have acted negligently unless it has observed extraordinary diligence in the vigilance thereof. The court need not make an express finding of fault or negligence of common carriers as the law imposes to common carriers strict liability as long it is shown that there exist a contract between the passenger (or the shipper of the goods to be carried) and the common carrier and that the loss, deterioration injury or death took place during the existence of the contract.  The exercise of extraordinary diligence is a defense which could exempt a common carrier from liability. Years asked: 2000, 1997, 1996, 1990, 1989, 1988, 1986, 1983, 1982, 1979, 1978, 1975 Applicable Law: Arts. 1974, 1975, 1976 of the Civil Code of the Philippines 3. Subject Matter: DEFENSES OF COMMON CARRIERS Concept:

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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The defenses that a common carrier may use are the following: a. exercise of extraordinary diligence (Art. 1735 and 1736, NCC) b. flood, storm, earthquake, lightning or other natural disaster or calamity; c. acts or omission of the shipper or owner of the goods; d. the character of the goods or defects in the packing or in the containers; e. order or act of the competent public authority (Art. 1734,NCC) The above enumeration is exclusive or a closed list. If not one of those enumerated is present, the carrier is liable. The requisite diligence would not vary in case the contract is for transport of passengers; the carrier is obliged to carry the passenger safely as far as human care and foresight can provide, using the utmost diligence of every cautious person with due regard to all the circumstances. (Art. 1755, NCC) Hijacking of a carrier does not fall among the five categories of exempting causes. It would follow therefore that the hijacking of the carrier’s vehicle must be dealt with under Art. 1735 of the New Civil Code, in other words, the common carrier is presumed to be at fault or to have acted negligently unless there is proof of extraordinary diligence on the part of the common carrier. The carrier was not held liable where the goods were lost as a result of robbery attended by grave irresistible threat, violence or force. (De Guzman v. CA, September 15, 1993) The seizure of a passenger bus by armed men is not fortuitous event and does not excuse the carrier from liability where there is already a report from police agents that a certain group will attack the buses and the carrier did not take steps to safeguard the lives and properties of its passengers (Fortune Express, Inc. v. Court of Appeals, March 18, 1999) Contributory negligence on the part of the passenger is not a defense that will excuse the carrier from liability. It will only mitigate such liability. The carrier, knowing the fact of improper packing of the goods upon ordinary observation, still accepts the goods notwithstanding such condition,

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is not relieved of liability or loss or injury resulting there from. (Southern Lines, Inc. v. Court of Appeals, 4 SCRA 258) The common carrier is also liable for acts caused by third persons

Years asked: 2001, 1997, 1996, 1995, 1994, 1993, 1992, 1991 1989, 1987, 1986, 1985, 1984, 1979, 1978, 1976 Applicable Law: Art. 1734, 1735, 1755, New Civil Code Illustrative Cases: Delsan Transport Lines v. Court of Appeals November 15, 2001 De Guzman v. CA September 15, 1993 Fortune Express, Inc. v. Court of Appeals March 18, 1999 Southern Lines, Inc. v. Court of Appeals 4 SCRA 258 4. Subject Matter: STIPULATIONS REDUCING LIMITING LIABILITY

DILIGENCE

OR

Concept:  The parties cannot stipulate so as to totally exempt the carrier from exercising any degree of diligence whatsoever; and that the parties cannot stipulate that the common carrier shall exercise diligence of a good father of a family. In other words, in carriage of goods, the parties may stipulate that the diligence to be exercised by the common carrier shall be less than extraordinary diligence provided the following requisites are complied with; a. that the stipulation be in writing signed by both parties; b. that the stipulation be supported by a valuable consideration other than the service rendered by the common carrier; c. that the stipulation be reasonable, just and not contrary to law (Art. 1744, NCC)  Article 1750 is different from the above provision because it involves a stipulation fixing the amount that may be recovered which only requires that it is reasonable and just under the circumstances; and it is fairly agreed upon

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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The following are considered as valid stipulations relative to liability of common carriers: a. an agreement limiting the common carrier’s liability for delay on account of strikes and riots; b. a stipulation that the common carrier’s liability is limited to the value of the goods appearing in the bill of lading unless the shipper or owner declared a greater value (Edgar Cokaliong Shipping Lines v. UCPB Gen. Insurance, Co., June 25, 2003) --If the goods are to be shipped from a foreign port to the Philippines, the COGSA shall apply suppletorily. Under the COGSA, the liability of the carrier is US$500 per package in the absence of a shipper’s declaration of a higher value in the bill of lading. (Sec. 4(5), COGSA) The condition is part of the bill of lading even if not expressly stated. The purpose of limiting the stipulation in the bill of lading is to protect the common carrier. Such stipulation obliges the shipper/consignee to notify the common carrier of the amount that the latter may be liable for in case of loss of the goods. c. When a passenger is carried gratuitously, a stipulation limiting the carrier’s liability for negligence is valid, but not for willful acts or gross negligence. However reduction of fare does not justify any limitation of liability (Art. 1758,NCC) The following are considered as invalid stipulations with common carriers under Art. 1745, NCC: a. the goods are transported at the risk of the owner or shipper; b. the carrier will not be liable for any loss, destruction or deterioration of the goods; c. the carrier need not observe any diligence in the custody of the goods; d. the carrier shall exercise a degree of diligence less than that of a good father of a family over the movable transported; e. the carrier shall not be responsible for the acts or omissions of his or its employees;

306

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g.

the carrier’s liability for acts committed by thieves or robbers who do not act with grave or irresistible threat, violence or force is dispensed with or diminished; the carrier is not responsible for the loss, destruction or deterioration of the goods on account of the defective condition of the car, vehicle, ship or other equipment used in the contract of carriage.

Years asked: 2002, 2001, 1998, 1989, 1987, 1985, 1984, 1983, 1978 Applicable Law: Arts. 1744, 1757, 1748, 1758, 1745 of the New Civil Code Sec. 4(5) Carriage of Goods by Sea Act (COGSA) Illustrative Cases: Edgar Cokaliong Shipping Lines v. UCPB Gen. Insurance Co., June 23, 2003 Eastern Shipping v. IAC 150 SCRA 464 Belgian Overseas Chartering v. Phil. First Ins. Co. June 5, 2002 5.

Subject Matter: REGISTERED OWNER RULE AND KABIT SYTEM Concept:  The Registered Owner Rule states that the person who is the registered owner of a vehicle is liable for any damages caused by the negligent operation of the vehicle although the same was already sold or conveyed to another person at the time of the accident. The registered owner is liable to the injured party subject to his right of recourse against the transferee or the buyer. (Gaudioso Erezo, et. Al. v. Aluedo Jepte, September 30, 1957; Equitable Leasing Corporation v. Lucita Suyon, et. Al. September 5, 2002)  The registered owner is also liable even if the vehicle was leased to another person (BA Finance Corporation v. Court of Appeals, 215 SCRA 715)  The registered owner is not liable if the vehicle was taken from the garage without his knowledge and consent. To hold the registered owner liable would be absurd as it would then be holding liable the owner of a stolen vehicle for an accident caused by the person who stole such vehicle. (Duavit v. Court of Appeals, 173 SCRA 490)

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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The registered owner rule is not applicable whenever the persons involved are engaged in what is known as the “kabit system.” The “Kabit System” is an arrangement whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate them under his license, sometimes for a fee or percentage of earnings. Although the parties to such an agreement are not outrightly penalized by law, the kabit sytem is invariably recognized as being contrary to public policy and therefore void and inexistent under Art. 1409 of the Civil Code. (Abelardo Lim, et. Al., v. Court of Appeals, January 16, 2002; Baliwag Transit, inc. v. Court of Appeals, 147 SCRA 82) Under the Kabit system, the apparent owner (who has a certificate of public convenience) is liable to the injured person without right of recourse/ reimbursement against the actual owner. This is based on the principle of “pari delicto.”

Years asked: 2005, 1990, 1988, 1976 Illustrative Cases: Gaudioso Erezo, et. Al. v. Aluedo Jepte September 30, 1957 Equitable Leasing Corporation v. Lucita Suyon, et. Al. September 5, 2002 BA Finance Corporation v. Court of Appeals 215 SCRA 715 Duavit v. Court of Appeals 173 SCRA 490 Abelardo Lim, et. Al., v. Court of Appeals January 16, 2002; Baliwag Transit, inc. v. Court of Appeals 147 SCRA 82 6.

Subject Matter: DOCTRINE OF LIMITED LIABILITY Concept:  It is also called the exclusive real and hypothecary nature of maritime law which is embodied in Arts. 587, 590 and 837 of the Code of Commerce.  By limited liability is meant that the liability of the ship owner for damages in case of loss is limited to the value of the vessel involved. The ship owner’s other properties cannot be reached by the parties entitled to damages.  The total destruction of the vessel extinguishes maritime lien as there is no longer any res to which it can attach.

COMMERCIAL LAW

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FAQs  Under the doctrine of limited liability in maritime law, the liability of the ship owner arising from the operation of the ship is confined to the vessel, equipment and freight, or insurance if any, so that if the ship owner abandoned the ship, equipment and freight, his liability is extinguished.  Exception to the rule: when the ship owner of the vessel involved is guilty of negligence, the limited liability rule does not apply. In such case, the ship owner is liable to the full extent of the damages sustained by the aggrieved parties.  The Code of Commerce sanctions the application of the doctrine in the following cases: a. Civil liability for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried. (Art. 587, Code of Commerce) b. Civil liability arising from collisions (Art. 837,CC) c. Unpaid wages of the captain and the crew if the vessel and its cargo are totally lost by reason of capture or shipwreck (Art. 643,CC)  The exceptions are: a. when the injury to or death of a passenger is due either to the fault of the shipowner, or to the concurring negligence of the ship owner and the captain; b. when the vessel is insured (to the extent of the insurance proceeds); and c. in Workmen’s Compensation claims (Yangco v. Laserna, 73 Phil. 330; Chua yek Hong v. IAC, 166 SCRA183) d. if the carrier failed to overcome the presumption of negligence (Monarch Ins. Co. v. Court of Appeals; June 8, 2000) Years asked: 2000, 1998, 1997, 1994, 1991, 1989, 1985, 1982, 1979 Applicable Law: Code of Commerce, Secs. 587, 590, 643, 837 Illustrative Cases: Yangco v. Laserna, 73 Phil. 330 Chua Yek Hong v. IAC 166 SCRA183 Monarch Ins. Co. v. Court of Appeals June 8, 2000

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS Aboitiz Shipping Corp. v. Gen Accident Fire and Life Assurance Corp. 217 SCRA 359 o 7.

Subject Matter: DOCTRINE OF INSCRUTABLE FAULT Concept:  In a collision, the vessel at fault shall indemnify the damages sustained or losses incurred (Art. 826, CC), and if both vessels were at fault, each shall suffer its own damages, and both shall be solidarily liable to others (Art. 82728,CC). This solidarity expressed in Art. 827 of the Code of Commerce has been held to preclude a common carrier operating a vessel from interposing a defense of due diligence in the selection and supervision of its employees in an action against it by the shipper of the other colliding vessel as distinguished from the ordinary rule in liabilities for tort or culpa acquiliana. Under the “Doctrine of Inscrutable Fault,” where fault is established but it cannot be determined which of the two vessels were at fault, both shall be deemed to have been at fault.  Rules on the collision of Vessels: (Arts. 826, 827, 828, 830, 831 and 832, CC) o The collision may be due to the fault, negligence or lack of skill of the captain, sailing mate, or any other member of the complement of the vessel. The owner of the vessel at fault shall be liable for losses or damages. (Art. 826,CC) o The collision may be de to the fault of both vessels. Each vessel shall suffer its own losses, but as regards the owner of the cargoes, both vessels shall be jointly and severally liable (Art. 827,CC) o If it cannot be determined which vessel is at fault, each vessel shall also suffer its own losses and both shall be solidarily liable for losses or damages on the cargoes. (art. 828,CC) o The vessels may collide with each other through fortuitous event or force majeure. In this case, each shall bear its own damage. (Art. 830,CC) o Two vessels may collide with each other without their fault by reason of a third vessel. The

308

FAQs third vessel will be liable for losses and damages (Art. 831,CC) A vessel which is properly anchored and moored may collide with those nearby by reason of storm or other causes of force majeure. The vessel run into shall suffer its own damage or expense.(Art. 832, CC)

Years asked: 1998, 1997, 19995,1991, 1987 Applicable Law: Code of Commerce, Arts. 826, 827, 828, 830, 831, 832 8.

Subject Matter: LIABILITY OF A CHARTER PARTY Concept:  A charter party is a contract by which with the entire ship or some principal part thereof is let by the owner to another person for a specified period of time or use.  There are two types of charter parties— a. a contract of affeightment which involves the use of shipping space leased by the owner in part or as a whole, to carry goods for others, and Time charter—leased for a period of time, Voyage—for a single voyage. b. A charter by demise or bareboat—by the terms of which the whole vessel is let to the charterer which transfers to him the entire command and possession and consequent control over its navigation including the master and crew who are his servants. The charterer is treated as owner pro hac vice of the vessel. In such case, the common carrier becomes a private carrier. (Planters Products, Inc. v. Court of Appeals 226 SCRA 476) Years asked: 2004, 1991, 1989, 1987, 1981, 1980 Illustrative Cases: Planters Products, Inc. v. Court of Appeals 226 SCRA 476

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS

9. Subject Matter: PRESCRIPTIVE PERIOD UNDER THE CARRIAGE OF GOODS BY SEA ACT (COGSA) Concept:  When to file a claim with carrier—not a condition precedent a. upon discharge of the goods, if the damage is apparent, claim should be filed immediately; b. if the damage is not apparent, claim should be filed within 3 days from delivery.  When to file the court-case prescriptive period --within a period of one year from discharge  The prescriptive period of one year starts after the delivery of the goods or the date the goods should have been delivered.(Sec. 3,COGSA). The period does not apply to conversions or misdeliveries. It starts from the delivery to the arrastre operator, not consignee. A stipulation reducing the one year period is null and void, but a written agreement to suspend it is valid.  The rule applies also in cases of collision but when the goods should have been delivered, had the cargoes been saved. (Maritime Company of the Philippines v. Court of Appeals 164 SCRA 593)  The insurer who is exercising its right of subrogation is also bound by the one year prescriptive period (Fil. Merchants v. Alejandro, 145 SCRA 42)  However, the prescriptive period does not apply to claim against the insurer for the insurance proceeds. The claim against the insurer which is based on a written contract expires in ten years. (Mayer Steel Pipe Corp. v. Court of Appeals, 274 SCRA 432)  Damages arising from delay or late delivery is not the damage or loss contemplated under the COGSA. The goods are not actually lost or damaged. The applicable period is ten years. (Mitsui v. Court of Appeals, 287 SCRA 366)

COMMERCIAL LAW

309

FAQs Maritime Company of the Philippines v. Court of Appeals 164 SCRA 593 Fil. Merchants v. Alejandro 145 SCRA 42 Mayer Steel Pipe Corp. v. Court of Appeals 274 SCRA 432 Mitsui v. Court of Appeals 287 SCRA 366

Years asked: 2004, 2000, 1995, 1992, 1978, 1976 Applicable Law: Sec. 3, Carriage of Goods by Sea Act Illustrative Cases: Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS CORPORATION LAW 1. Subject matter: DISTINCT PERSONALITY OF A CORPORATION Concept: 



The corporation has a separate and distinct personality from that of the stockholders and the manager. The stockholders or the manager cannot be held solidarily liable for the obligations incurred by the corporation as a general rule. The liability of the corporation is that of the corporation and not that of its officers and stockholders who are not liable for corporate liabilities.



Year asked: 2000, 1999, 1997, 1996, 1989, 1988 2. Subject matter: PRE-EMPTIVE RIGHTS OF STOCKHOLDERS Concept: 

A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares of any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.  Under the Corporation Code, each stockholder has the pre-emptive right to all issues of shares made by the corporation in proportion to the number of shares he holds on record in the corporation.  All stockholders of a corporation shall enjoy pre-emptive right to subscribe to all issues on disposition of shares of any class in proportion to their respective shareholdings.  Pre-emptive rights must be exercised in accordance with the Articles of Incorporation or the By-Laws. When the Articles of Incorporation or the By-Laws are silent, the Board, may fix, by reasonable time within which the stockholders may exercise the right. Years asked: 2004, 2001, 1999, 1996, 1984, 1983, 3. Subject matter: DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY Concept:  The doctrine of “piercing the veil of corporate entity” is the doctrine that allows the courts to look behind the separate juridical personality of a corporation and treat the corporation as an association of persons and thereby make the individual actors personally liable for corporate

310

FAQs





liabilities. The fiction of corporate identity is disregarded and the individuals comprising it can be treated identically. The stockholders can be held directly liable for corporate obligations, even to the extent of their personal assets. The doctrine is applicable when the notion of legal entity is used to: 1. defeat public convenience 2. justify wrong 3. protect fraud 4. defend crime 5. shield a violation of the proscription against forum shopping 6. work inequities among members of the corporation internally involving no rights of the public or third persons 7. evade the lawful obligations of the corporation like a judgment credit 8. escape liability arising from a debt 9. avoid inclusion of corporate assets as part of the estate of the decedent 10. promote or shield unfair objectives Where there are grounds for piercing the veil of corporate entity, that is disregarding the fiction, the corporation will follow the nationality of the controlling members or stockholders since the corporation will then be considered as one and the same. The elements that must be present to justify the piercing of the veil of the corporate fiction on the ground that the corporation is a mere alter ego are the following: 1. control—not mere stock control but complete domination—not only of finances but of policy and business practice in respect to the transaction attacked and must have been such that the corporate entity as to this transaction had at the time no separate mind, will, or existence of its own; 2. such control must have been used by the defendant to commit a fraud or wrong to perpetuate the violation of a statutory or other positive legal breach of duty, or a dishonest and an unjust act in contravention of the plaintiff’s legal right; and 3. the said control and breach of duty must have proximately caused the injury or unjust loss complained of.

Years asked: 2006,2004, 2001, 1998, 1991, 19985, 1978 Illustrative cases: Concept Builders v. NLRC, Marabe, et. Al. May 29, 1996

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University

COMMERCIAL LAW

2009 BAR OPERATIONS PNB v. Andrada Electric April 17, 2002 First Philippine International Bank v. Court of Appeals January 24, 1996 Secosa v. heirs of Erwin Suarez Francisco June 29, 2004 Sibagat Timber Corp v. Garcia December 11, 1992 Arcilla v. Court of Appeals October 23, 1992 Cease v. Court of Appeals October 18, 1979 Villanueva v. Adre April 27, 1989 Commissioner of Internal Revenue v. Norton & Harrison Company 11 SCRA 714 Lipat v. Pacific banking Corporation, et. Al April 30, 2003 4. Subject matter: KINDS OF CORPORATION: DE FACTO AND DE JURE CORPORATION, CORPORATION BY ESTOPPEL AND CORPORATION BY PRESCRIPTION Concept: 





a De Jure corporation is a corporation organized in accordance with requirements of law; a de facto corporation is a corporation where there exists a flaw in its incorporation. The requisites for its existence are: a. the existence of a valid law under which it may be incorporated; b. an attempt in good faith to incorporate; c. use of corporate powers De jure v. de facto De jure

De facto

One created in strict or substantial conformity with the statutory requirements for incorporation

One which actually exists for all practical purposes as a corporation but which has legal right to corporate existence as against the State Right to exercise powers cannot be inquired into collaterally in private suit. But such inquiry may be made by the State in proper court proceeding.

Right to exist cannot be successfully attacked even in direct proceeding by the State.



311

FAQs

a corporation by estoppel is a group of persons which holds itself out as a



corporation and enters into a contract with a third person on the strength of such appearance cannot be permitted to deny its existence in an action under said contract. A corporation by prescription is a corporation which is not formally organized as such but has been duly recognized by immemorial usage as a corporation, with rights and duties maintainable at law.

Years asked: 2004, 1994, 1986 5. Subject Matter: INSTANCES WHERE THE CONCURRENCE OF THE STOCKHOLDERS ARE NECESSARY FOR THE EXERCISE OF THE POWERS OF THE CORPORATION Concept: 

Approval of the majority of the board and the concurrence of the stockholders representing 2/3 of the outstanding capital (or 2/3 of the member whenever applicable) is necessary in the exercise of the following powers: 1. power to extend or shorten corporate term (Section 37, Corporation Code of the Phils.) 2. increase/ decrease corporate stock (Sec. 38, CCP) 3. incur, create bonded indebtedness (Sec. 38, CCP) 4. to deny pre-emptive rights (Sec. 39, CCP) 5. sell, dispose, lease, encumber all or substantially all of corporate assets (Sec. 40, CCP) 6. to invest in another corporation, business other than the primary purpose (Sec. 42, CCP) 7. to declare stock dividends (Sec. 43, CCP) 8. to enter into management contract (Sec. 44, CCP) if: a. a stockholder or stockholders representing the same interest of both the managing and the manged corporations own or control more than 1/3 of the total outstanding capital entitled to vote of the managing corporation; or b. a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS





board of the managed corporation. 9. to amend the articles of incorporation (Sec. 16, CCP) approval of the stockholders representing majority of the outstanding capital is necessary together with board approval in the following instances: 1. to enter into management contract if any of the two instances stated above are absent; 2. to adopt, amend or repeal by-laws (Sec. 46 and 48, CCP) without board resolution, the stockholders may by: 1. 2/3 outstanding capital—delegate to the board the power to amend the by-laws (sec. 48, CCP) 2. majority of outstanding capital— revoke the power of the board to amend the by-laws which was previously delegated.

Years asked: 2001, 1998, 1996, 1995, 1993, 1987, 1984, 1983, 1982

b.

Concept: 



a corporation may acquire its own shares in the following instances: a. the corporation has unrestricted retained earnings in its books to cover the shares to be purchased/ acquired; b. for legitimate corporate purpose/s including but not limited to the following: 1. to eliminate fractional shares arising out of stock dividends; 2. to collect or compromise an indebtedness to the corporation arising out of unpaid subscription in a delinquency sale and to purchase delinquent shares sold during the sale; 3. to pay dissenting or withdrawing stockholders entitled to payment of their shares shares of stock may be transferred in the following: a. if represented by a certificate, the following must be strictly complied with: (1) delivery of the certificate; (2) indorsement by the owner or his agent; (3) to be valid to third parties, the transfer must be

recorded in the books of the corporation. (Rural Bank of Lipa v. Court of Appeals September 28, 2001) if not represented by the certificate (such as when the certificate has not yet been issued or where for some reason is not in the possession of the stockholder: 1. by means of a deed of assignment, and 2. such is duly recorded in the books of the corporation

Years asked: 04, 2001, 1996, 1994, 1992, 1989, 1984, 1982, 1981 Illustrative case: Rural Bank of Lipa v. Court of Appeals 7. Subject matter: DECLARATION OF DIVIDENDS Concept: 

Applicable laws: Corporation Code of the Philippines Secs. 37, 38, 39,40, 42, 43, 44, 16, 46, 48 6. Subject Matter: INSTANCES WHEN A CORPORATION MAY ACQUIRE OR TRANSFER ITS OWN SHARES

312

FAQs





who may declare dividends? (Sec. 43) 1. Board of Directors alone for cash and property dividends 2. Board of Directors with the approval of stockholders representing not less than 2/3 of outstanding capital for stock dividends the conditions that must be present to declare dividends are the following: 1. unrestricted retained earnings; 2. resolution of the board or if stock dividends, the board with the concurrence of 2/3 of outstanding capital Declaration of dividends is discretionary upon the board. Dividends are payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the Board of directors has the discretion to determine whether or not dividends are declared (Republic Planters Bank v. Agana, 269 SCRA 1). Exception. Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital. However, even if the retained surplus profits are in excess of 100% of the paid-in capital, the board may still refuse to declare dividends if: 1. Justified by definite corporate expansion projects/ programs approved by the Board; or 2. the corporation is prohibited under any loan agreement with any financial institution or creditor,

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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

whether local or foreign, from declaring dividends without its/ his consent, and such consent has not yet been secured; or 3. It can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation. Other rules concerning dividends: 1. Stockholders are entitled to dividends pro-rata based on the total number of shares and not on the amount paid for the shares (SEC Opinion dated July 16, 1996) 2. Stockholders at the time of declaration are the ones entitled to dividends. Dividends declared before the transfer of shares belong to the transferor and those declared after the transfer belongs to the transferee. (SEC Opinion, July 14, 1994) 3. the stockholder’s right to be paid dividends accrues as soon as the declaration is made in accordance with Sec. 43 of the Corporation Code. From that time, the stockholder can already demand payment thereof. (SEC opinion dated October 10, 1992) 4. Stock dividends can be declared at a premium (at value higher than par) (SEC Opinion dated October 23, 1992) 5. Even unpaid subscribers are entitled to dividends.

Years asked: 2005, 2001, 1991, 1990, 1989, 1987, 1982 Applicable law: SEC Opinion dated July 16, 1996 SEC Opinion dated July 14, 1994 SEC Opinion dated October 10, 1992 SEC Opinion dated October 23, 1992 Sec. 43, Corporation Code of the Philippines



e. f.

g.

h.

Applicable law: Corporation Code of the Philippines, Sections 6, 28, 81, 64, 118, 119, 63, 39, 74, 75 9. Subject mater: DISSOLUTION OF A CORPORATION Concept: 



8. Subject matter: RIGHTS OF STOCKHOLDERS

The basic rights of stockholders are the following: a. direct and indirect participation in management; b. voting rights (Sec. 6, CCP); c. right to remove directors (Sec. 28, CCP); d. proprietary rights;  right to dividends;

appraisal right (Sec. 81, CCP);  right to issuance of stock certificate for fully paid shares; (Sec. 64, CCP)  proportionate participation in the distribution of assets in liquidation (Secs. 118119, CCP);  right to transfer stocks in corporate books (sec. 63, CCP)  pre-emptive right (Sec. 39, CCP) right to inspect books and records (Sec. 74, CCP); right to be furnished with the most recent financial statement/ financial report (Secs. 74 and 75, CCP); right to recover stocks unlawfully sold for delinquent payment of subscription; right to file individual suit, representative suit and derivative suits.

Years asked: 1998, 1996, 1993, 199, 1988, 1985, 1984, 1983, 1981, 1976

Illustrative cases: Republic Planters Bank v. Agana 269 SCRA 1

Concept: 

313

FAQs



the dissolution of a corporation is the extinguishment of the franchise of a corporation and the termination of its corporate existence A corporation is dissolved by the following modes: 1. Voluntary dissolution a. where no creditors are affected (Sec. 118, CCP) b. where creditors are affected (Sec. 119, CCP) 2. Involuntary dissolution (Sec. 121, CCP) 3. Shortening term, (Sec. 120, CCP) and 4. Expiration of term Dissolution has the following effects: a. It results in the transfer of legal title to properties in the stockholders who become co-owners thereof; b. The corporation ceases as a body corporate to continue the business for which it was established;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS c.

d.

e.

f.

The stockholders are not prevented from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old; Though a dissolved corporation cannot be revived, those interested may reciprocate by re-filing the new Articles of Incorporation and bylaws; The corporation continues as a corporate body for three years for purposes of winding up or liquidation; Upon the expiration of the three year-winding up period, the corporation ceases to exist for all purposes.

Years asked: 2004, 2002, 2000, 1997, 1998, 1981 Applicable law: Corporation Code of the Philippines, sections 118, 119, 120, 121 10. Subject Matter: RECOVERY OF MORAL DAMAGES Concept: 





Moral damages cannot awarded in favor of corporations because they do not have feelings and mental state. Mental suffering can be experienced only by one having a nervous system and it flows from ills, sorrows and grief’s of life—all of which cannot be suffered by artificial person. (National Power Corporation v. Philipp brothers Oceanic, Inc. November 20, 2001) The Supreme Court clarified in ABS-CBN Broadcasting Corporation v. Court of Appeals (January 21, 1999) that moral damages are awarded to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral suffering he has undergone. The statement in People v. Manero and Mambulao Lumber co. v. PNB that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is obiter dictum. However, the Supreme Court ruled in Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center (January 17, 2005) that a corporation can recover moral damages under Art. 2219 (7) if it was the victim of defamation.

Years asked: 1998, 1985, 1978

COMMERCIAL LAW

314

FAQs Art. 2219 (7), Civil Code of the Philippines Illustrative cases: National Power Corporation v. Philipp brothers Oceanic, Inc. November 20, 2001 ABS-CBN Broadcasting Corporation v. Court of Appeals January 21, 1999 People v. Manero Mambulao Lumber Co. v. PNB Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center January 17, 2005 11. Subject matter: FOREIGN STOCKHOLDERS IN A CORPORATION and FOREIGN CORPORATION “DOING BUSINESS” IN THE PHILIPPINES Concept:  Stockholders in a corporation can be foreigners except in fully or partly nationalized corporations.  The fully or partly nationalized corporations are the following: a. Where no foreign stockholder is allowed as in 1. mass media recording (Art. XVI, Sec. 11, Constitution) 2. retail trade enterprises with paid-up capital of les than US $2.5 million (Sec. 5, R.A. No. 8762) 3. private security agencies (Sec. 4, R.A. No. 5487) 4. utilization of natural resources (Art. XII, Sec. 2, Constitution) 5. small-scale mining (Sec. 3, R. A. No. 7076) 6. cockpits (Sec. 5, P.D. No. 449) 7. manufacture, repair, stockpiling and/ or distribution of nuclear weapons (Art. II, Sec. 8, Constitution) 8. manufacture of firecrackers and other pyrotechnic devices (Sec. 5, R.A. No. 7183) b. Up to twenty percent (20%) foreign equity like private radio communications network (R. A. No. 3846) c. Up to twenty-five percent (25%) foreign equity like the following: 1. private recruitment, whether local or overseas, employment (Art. 27, P.D. No. 442) 2. construction and repair of locally funded

Applicable law: Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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



works (Sec. 1, C.A. 541) 3. construction of defense-related structures (Sec. 1, C. A. 541) d. Up to forty percent (40%) foreign equity 1. exploration, development and utilization of natural resources (Art. XII, Sec. 2, Constitution) 2. realty companies and other corporations that own private lands (Art. XII, Sec. 7, Constitution) 3. operation and management of public utilities (Art. XII, Sec.11, Constitution) 4. culture, production, milling, processing, trading except retail of rice and corn and byproducts (Secs. 5, P.D. No. 194; Sec. 15, R. A. No. 8762) 5. adjustment companies (Sec. 323, P.D.No. 612) 6. sauna and steam bath bathhouses, massage clinics and similar activities (r. A. No. 7042) e. Up to sixty (60%) foreign equity 1. financing companies (Sec. 6, R.A. No. 5980, as amended by R.A. No. 8556) 2. investment houses (Sec. 5, P.D. No. 129, as amended by R. A. No. 8366) A foreign corporation is said to be “doing business” in the Philippines under the Continuity Test implies a continuity of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, and the purpose and object of its organization. Under the Substance Test, a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized. In Pacific Vegetable Oil Corp. v. Singson (April 1955), the Supreme Court held

315

FAQs



that a foreign corporation is not doing business in the Philippines when it entered into a contract with a domestic corporation providing for the delivery and payment of copra from the Philippines where the said contract was negotiated, perfected and performed in the United States. Thus, even if the twin characterization tests (Continuity and Substance tests) of Mentholatum obtained in the case, so long as the perfection and consummation of series of transactions are done outside of the Philippine territorial jurisdiction, the same would not constitute doing business in the Philippines, even if the products themselves should be manufactured or processed in the Philippines. DOING BUSINESS UNDER THE FOREIGN INVESTMENT ACT OF 1991 1. DOING BUSINESS (Sec. 3(d)) a. soliciting orders, service contracts, opening offices (whether branch or liaison officer); b. appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totaling 180 days or more; c. participating in the management, supervision or control of nay domestic business, firm, entity or corporation in the Philippines; d. any act or acts that imply the continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization 2. NOT DOING BUSINESS(Sec. 3(d)) a. mere investment as a shareholder and exercise of rights as investor; b. having a nominee director or officer to

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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c.

316

FAQs represent its interest in the corporation; appointing representative or distributor which transact business in its own name and for its own account.

Years asked: 2002, 1998, 1995, 1990, 1979 Applicable law: Constitution, Art. XVI, Sec 11, Art. XII, Sec. 2; Art. II, Sec. 8; Art.XII, Sec. 2 and 7; Sec. 5, R. A. No. 8762 Sec 4, R.A. No. 5487 Sec. 3. R.A. No. 7076 Sec. 5, R. A. No. 449 Sec. 5, R.A. No. 7183 R.A. No. 3846 Art. 27, P.D. No. 442 Sec. 1, C.A. 541 Sec. 5, P.D. No. 194 Sec. 15, R.A. No. 8762 Sec. 323, P.D. No. 612 R.A. No. 7042 Sec. 6, R.A. No. 5980, as amended by R.A. No. 8556 Sec. 5, P.D. No. 129, as amended by R.A. No. 8366 Foreign Investment Act of 1991, Sec. 3 (d) Illustrative cases: Pacific Vegetable Oil Corp. v. Singson April 1955 Aetna Casualty and Surety Co. v. Pacific Star Lines 80 SCRA 835 Universal Shipping Lines, Inc. v. IAC 188 SCRA 170 Agilent Technologies v. Integrated Silicon Technology April 2004

INSURANCE LAW 1. Subject Matter: BENEFICIARY Concept: 











The beneficiary is the person designated to receive proceeds of policy when risk attaches. When one insures his own life, he may designate any person as the beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured. Exceptions: Persons specified in Art. 739 (in re Art. 2012) of the Civil Code cannot be designated a. those made between persons who were guilty of adultery and concubinage at the time of the donation; (conviction is not a condition precedent) b. those made between persons found guilty of the same criminal offense, in consideration thereof; c. those made to a public officer or his wife, descendants or ascendants by reason of his office If a person will insure the life of another payable to himself, he must have insurable interest on the life of the person whose life he is insuring The designation is revocable unless the right to revoke is expressly waived in the policy. o Thus, although Sec. 181 of the Insurance Code of the Philippines allows assignment of the life or health insurance policies to any person whether he has insurable interest or not, the insured cannot assign the policy if the designation of the beneficiary is irrevocable. The irrevocable beneficiary has vested right. o If there is no waiver of the right to revoke under Section 181, assignment of the policy may be deemed as implied revocation. o If the insured refuses to pay the premiums, the designated irrevocable beneficiary may continue the policy by paying premiums that are due. If the premiums are paid out of the conjugal funs, the proceeds are considered conjugal. If the beneficiary is other than the insured’s estate, the source of the premiums would not be relevant. (Del Val v. Del Val, 29 Phil. 534; BPI v. Posadas, 56 Phil. 215) If the insured or beneficiary is a minor and the amount involved does not exceed

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS P50,000.000, the father in the absence of judicial guardian, or in his absence or incapacity, the mother may exercise the minor’s rights under the policy, without the need of court authority or bond.

7.

that the action was not brought within the time specified.

Years asked: 1998,1997, 1994, 1991, 1989, 1983

Years Asked: 2005, 2000, 1998, 1991, 1985, 1981, 1978

Applicable law: Section 48, ICP

Applicable law: Section 11, 181 Insurance Code of the Philippines (ICP)

3. Subject Matter: CONCEALMENT AND MISREPRESENTATION

Illustrative case: Del Val v. Del Val 29 Phil. 534; BPI v. Posadas 56 Phil. 215; The Insular Life Assurance Co. v. Ebrado 80 SCRA 181 2. Subject Matter: INCONTESTABILITY CLAUSE Concept:  After a policy of life insurance made payable on the death of the injured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.  Requisites for application: 1. the insurance is a life insurance policy is payable on the death of the insured. 2. it has been in force during the lifetime of the insured for at least 2 years from the date of its issue or of its last reinstatement. The period of 2 years may be shortened but it cannot be extended by stipulation.  The following defenses are not barred by the incontestability clause: 1. that the person taking the insurance lacked insurable interest as required by law; 2. that the cause of the death of the insured is an accepted risk; 3. that the premiums had not been paid; (Sec. 77, 227 (b), 228 (b); 230 (b), ICP); 4. that the conditions of the policy relating to military or naval service has been violated (Secs. 227 (b), 228 (b), ICP); 5. that the fraud is of particularly of vicious type; 6. that the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or

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Concept: 

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Concealment is the neglect to communicate that which a party knows and ought to communicate (Sec. 26, ICP) Concealment vitiates the contract and entitles the insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter. (Section 27, ICP) The matter concealed need not be the cause of loss. Representations are factual statements made by the insured at the time of or prior to the insurance policy to give information to the insurer and otherwise induce him to enter into the insurance contract. The effect of misrepresentation is that the injured party is entitled to rescind from the time when the representation becomes false. It is well settled that the insured need not die of disease he failed to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming the estimate of the risks of the proposed insurance policy or in making inquiries. It is not material that the insured died of a different cause than the fact concealed. Where the matters which the insured failed to disclose were material and relevant to the approval and issuance of the insurance policy and they would have affected the insurer’s action on the insured application, the claim can be denied.

Years asked: 2001, 1998, 1997, 1996, 1993, 1989, 1987, 1984, 1983, 1980, 1979, 1977, 1975 Applicable law: Section 26, 27, 31 ICP Illustrative cases: Vda. De Canilang v. Court of Appeals 223 SCRA 443 Sunlife Assurance Company of Canada v. Court of Appeals 245 SCRA 268 Philamcare health Systems, Inc. v. Court of Appeals March 18, 2002 The Insular Life Ltd. V. Feliciano 74 Phil. 468

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS 4. Subject matter: INSURABLE INTEREST (2002, 2001, 2000)  Insurable interest in property v. insurable interest in life Insurable interest in Life As to extent Unlimited (save in life insurance effected by a creditor on the life of the debtor) As to the time when insurable interest must exist It is enough that the insurable interest exist at the time the policy takes effect and need not exist at the time of the loss

As to expectation of the benefit to be derived The expectation of the benefit to be derived need not have any legal basis As to the beneficiary’s interest The beneficiary need not have insurable interest over the life of the insured if the insured himself secured the policy. However, if the life insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured.

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318

FAQs In paragraph (a) of Section 10, mere relationship is sufficient while the rest (paragraphs b, c and d) requires pecuniary interest. Thus the interest of the creditor over the life of the debtor ceases upon full payment.

Insurable Interest in Property  Limited to the actual value of the interests thereon

It is necessary that the insurable interest exist when the insurance takes effect and when the loss occurs, but need not exist in the meantime.

There must be legal basis

The beneficiary must have insurable interest over the thing insured.

Insurable Interest in Life Insurance: (1997, 1987, 1976) Every person has an insurable interest in the life and health: o Of himself, his spouse and of his children, o Of any person on whom he depends wholly or in part for education or support, or in whom he has pecuniary interest; o Of any person under legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and o Of any person upon whose life any estate or interest vested in him depends. In general, the test is whether or not the person is interested in the preservation of the insured life despite the insurance.

Insurable Interest in Property Insurance (1999, 1998, 1997, 1994, 1991, 1987, 1982, 1979, 1977, 1975) o Insurable interest in property insurance is any interest therein, or liability in respect thereof and it may consist in an existing interest, an inchoate interest founded on an existing interest, or any expectancy coupled with an existing interest. o In general, a person has insurable interest in the property, if he derives pecuniary benefit or advantage from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction whether he has or has no title in, or lien upon, or possession of the property. (Filipino Merchants Insurance, Co., Inc. v. Court of Appeals, 179 SCRA 638) Hence pecuniary interest over the property is always necessary. o The existence of insurable interest is a matter of public policy. Hence, the principle of estoppel cannot be invoked. o For the beneficiary to recover on the fire or property insurance policy, it is required that he must have insurable interest in the property insured. o The businessman, as owner, and the creditor, as mortgagee have separate insurable interests in the same stocks-intrade. Each may insure such interest to protect his own interest.

Years asked: 2002, 2001, 2000, 1999, 1998, 1997, 1994, 1991, 1987, 1982, 1979, 1977, 1976, 1975 Applicable Law: Sections 10-25, Insurance Code of the Philippines Illustrative case: Filipino Merchants Insurance, Co., Inc. v. Court of Appeals 179 SCRA 638

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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COMMERCIAL LAW

2009 BAR OPERATIONS 5. Subject matter: DOUBLE INSURANCE Concept:  Double insurance exists where the same person is insured by several insurers separately in respect to same subject and interest (Sec. 93, ICP). It is not prohibited by law but it may be prohibited by an “other insurance clause.”  Requisites of double insurance: 1. the person insured is the same; 2. there are two or more insurers insuring separately; 3. the subject matter is the same; 4. the interest insured is also the same; 5. the risk or peril insured against is likewise the same.  When there is double insurance, the insured can claim in case of loss only up to the agreed valuation or up to the full insurable value for any, some or all insurers, without prejudice to the insurers ratably apportioning the payments. The insured can also recover before or after the loss, from both insurers the excess premium he has paid. (Sec. 94, ICP) Years asked: 2005, 1999, 1990 Applicable provisions: Section 93, 94, ICP

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The insurer is liable if: 1. the proximate cause of the loss is the peril insured against (Sec. 84) 2. the immediate cause of the loss is the peril insured against except where proximate cause is an excepted peril; 3. loss through negligence of insured except where there was gross negligence amounting to willful act; 4. loss caused by efforts to rescue the thing from peril insured against—if during the course of rescue, the thing is exposed to a peril, not insured against, which permanently deprives the insured of its possession, in whole or in part. (Sec. 85, ICP) The insurer is not liable: 1. loss by insured’s willful act or gross negligence; 2. loss due to connivance of the insured (Sec. 87, ICP), and 3. Loss where the excepted peril is the proximate cause.

Claims settlement in life insurance: (Sec. 242, ICP) 1. the proceeds shall be paid immediately upon the maturity of the policy if there is such a maturity date; 2. If the policy matures by the death of the insured, within 60 days after presentation of the claim and filing of the proof of the death of the insured. Claims settlement in property insurance: (Sec. 243, ICP) 1. Proceeds shall be paid within 30 days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement or by arbitration. 2. If no ascertainment is made within 60 days after receipt of proof of loss, the loss shall be paid within 90 days after such receipt.

Years asked: 2000, 1996, 1995, 1993, 1990, 1989, 1978 Applicable law: Sec. 84, 85, 87, 242, 243, ICP 7. Subject Matter: IMPLIED WARRANTIES IN MARINE INSURANCE Concept: 

6. Subject Matter: LOSS AND CLAIMS SETTLEMENT Concept: 

319

FAQs

the implied warranties in marine insurance are the following: 1. that the ship is seaworthy at the inception of the insurance (Sec. 113, ICP); 2. that the ship will not deviate from agreed voyage unless deviation is proper (Secs. 123, 124, 125, ICP); 3. that the ship will not engage in an illegal venture; 4. warranty of the possession of documents of neutrality: that the ship will carry the requisite documents of nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted; 5. presence of insurable interest.

Years asked: 2000, 1986, 1983 Applicable law: Secs. 113, 123, 124, 125, ICP 8. Subject matter: NO FAULT CLAUSE Concept: 

the injured third party or passenger is given the option to file a claim for death or injury without the necessity of proving fault or

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS negligence of any kind under the following conditions: 1. the total indemnity in respect of any person shall not exceed five thousand pesos; 2. the following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: a. police report of accident, and b. death certificate and evidence sufficient to establish the proper payee, or c. medical report and evidence of medical or hospital disbursement in respect of which refund is claimed. 3. claim may be made against one motor vehicle only.

COMMERCIAL LAW

320

FAQs Villacorta v. Insurance Comm. 100 SCRA 469 Ass’n of Baptist for World Evangelism, Inc. v. Fielmen’s Ins. Co., Inc. 124 SCRA 618

Years asked: 1994, 1989, 1977 Applicable law: Sec. 378, ICP 9. Subject matter: THEFT CLAUSE Concept: 

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The risk insured against in the policy may include theft. If there is such a provision and the vehicle was unlawfully taken, the insurer is liable under the theft clause and the authorized driver clause does not apply. The insured can recover even if the thief has no driver’s license. (Perla Compania de Seguros, Inc. v. Court of Appeals, 208 SCRA 487) Where the motor vehicle is unlawfully and wrongfully taken without the owner’s consent or knowledge, such taking constitutes theft, and therefore, it is the “theft clause” and not the “authorized driver’s clause” that should apply. There is theft if an employee took the vehicle of his employer without the latter’s consent and therefore liable to the insured for damage to the vehicle even if the employee did not have a driver’s license. The theft clause operates (this is present in a comprehensive policy unless theft is excepted) and not the “authorized driver’s clause”. The above rule is also true if an employee of a repair shop took the car that is being repaired for a “joy ride”

Years asked: 1993, 1988, 1985, 1981 Illustrative cases: Perla Compania de Seguros, Inc. v. Court of Appeals, 208 SCRA 487 Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS INTELECTUAL PROPERTY 1.

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Subject Matter: INFRINGEMENT OF COPRYRIGHT Concept: There is infringement when there is piracy or substantial reproduction. If so much is taken that the value of the original work is substantially diminished or the labors of the original author are substantially and to an injurious extent appropriated by another. The following acts do not constitute infringement of copyright: a. recitation or performance of a work: (1) made accessible to the public, (2) privately done, (3) free of charge, (4) strictly for charitable or religious institution; b. making of quotations from a published work: (1) compatible with fair use, (2) extent is justified by the purpose, (3) source and name of the author, appearing on work, must be mentioned; c. reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works, derived in public (1) for information purposes, (2) not expressly reserved, and (3) sources already indicated; d. reproduction and communication to the public of literary or artistic works as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose; e. inclusion of a work in a publication, broadcast, or other communication to the public, sound recording or film if made by way of illustration for teaching purposes compatible with fair use and the source and name of the author, appearing on work must be mentioned; f. recording made in schools, universities or educational institutions of a work included in a broadcast for the use of such schools, universities or educational institutions. g. Making of ephemeral recordings: (1) by a broadcasting organization, (2) by means of its own facilities, (3) for use of its own broadcast; h. Use made of a work by or under the direction or control of the Government for public interest compatible with fair use; i. Public performance or the communication to the public of a work in a place where no admission fee is charged by a club or institution for charitable or educational purpose only and the aim is not profit-making; j. Public display of the original or a copy of the work not made by means of a film, slide, television image or otherwise on screen or by means of any other device or process ; k. Any use made of work for the purpose of any judicial proceedings; or for giving of professional advice by a legal practitioner;

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FAQs l.

Single copy of a published work by natural person exclusively for research and private study (even without authorization of the owner); m. Reproduction by libraries of (1) fragile works,(2) isolated articles in composite works, (3) brief portions of published works,(4) to preserve or replace copy; n. One back-up copy of computer program.  Remedies against Infringement: a. injunction to prevent infringement; (Sec. 216, IPL) b. action for damages which should be filed within 4 years c. filing of a criminal case (Sec. 218,IPL) Years Asked: 1998, 1997, 1994, 1989, 1988, 1987, 1983, 1977 Applicable Law: Secs. 216, 218, Intellectual Property Code

2. Subject Matter: REGISTRATION OF TRADEMARKS Concept:  The rights in a mark shall be acquired through registration with the Intellectual Property Office or the IPO. (Sec. 122, IPC)  Registration is necessary before one can file an action for infringement.  The following are marks that cannot be registered: a. immoral, deceptive, or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute; b. consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation, or any simulation thereof; c. consists of the name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by written consent of the widow; d. identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: (1) the same goods or services, or (2) closely related goods or services or (3) if it nearly resembles such a mark as to be likely to deceive or cause confusion; e. generic terms for goods or services; f. characteristics of goods like quality or quantity; g. customary sign in everyday language;

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS h.

322

FAQs

color by itself.

not only by the IPC but also by Art. 27 of the New Civil Code

Years Asked: 1994, 1985, 1983, 1982, 1979, 1978, 1976 Applicable Law: Sec. 122, Intellectual Property Code

Years Asked: 1996, 1988, 1984, 1982, 1981, 1980 Applicable Law: Sec. 168, Intellectual Property Code

3. Subject Matter: UNFAIR COMPETITION Concept:  Unfair competition may be committed as follows: a. any person who shall employ deception or other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or shall commit any acts calculated to produce said result, shall be guilty of unfair competition b. selling goods and giving them the appearance of goods of another manufacturer or dealer, either as to the goods themselves or the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public c. using any artifice of employing other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public, or d. making false statement in the course of the trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another.

4. Subject matter: INFRINGEMENT OF PATENT Concept: 

The making, using, offering for sale, selling importing patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee is considered an infringement of patent.

Years asked: 1993, 1992, 1985, 1977 Applicable Law: Sec. 76, Intellectual Property Code

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Infringement of trademark v. Unfair Competition Infringement Unfair competition There is unauthorized use of a trademark

It is not necessary to establish fraudulent intent Registration of the trademark is necessary for the filling of an action for infringement Limited in scope

Involves passing off of one’s goods and giving one’s goods the appearance of that of another It is necessary to establish fraudulent intent Prior registration is not necessary Broader as it includes cases that are covered

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

Saint Louis University 2009 BAR OPERATIONS SPECIAL LAWS ON COMMERCIAL LAW 1. Subject matter: BULK SALES LAW Concept: 

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The sale of all the stock of goods, fixtures and entire business, not in the ordinary course of business or trade of the vendor is covered by the provisions of the Bulk Sales Law. Hence, before receiving from the vendee any part of the purchase price, the vendor must deliver to such vendee a written statement, duly sworn, containing the names and addresses of all creditors to whom said vendor may be indebted, together with the amount of indebtedness due or owing, on account of the goods, fixtures or business subject matter of the bulk sale. The vendee should require from the vendor submission of a written waiver of the Bulk Sales Law by the creditors as shown by the verified statement or to comply with the requirements of the Bulk Sales Law, that is, the seller, must notify his creditors of the terms and conditions of the sale (Sec. 2, Act No. 3952, as amended). The two instances when the sale, transfer, mortgage or assignment of stock of goods, wares, merchandise, provision or material otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor are not deemed to be a sale or transfer in bulk are the following: a. if the sale or transfer is made by the vendor, mortgagor, transferor or assignor who produces and delivers a written waiver of the provisions of the Bulk Sales Law from his creditors as shown by the verified statement; b. if the sale and transfer is made by the vendor, mortgagor, transferor or assignor who is an executor, administrator, receiver, assignee in insolvency, or public officer acting in judicial process.

Years asked: 2006, 2005, 2001, 2000, 1997, 1994, 1993, 1988, 1982 Applicable Law: Republic Act No. 3952

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FAQs 2. Subject Matter: LAW ON SECRECY OF BANK DEPOSITS (R.A. NO. 1405) Concept:  The law is intended to encourage people to deposit their money in banking institutions and also to discourage private hoarding so that the same may be properly utilized by banks to assist in the economic development of the country.  All deposits of whatever nature with banks or banking institutions in the Philippines including investment bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office. (Sec. 2, RA. No. 1405)  Exceptions: o when there is written permission of the depositor or investor; o special or general examination of a bank, authorized by the Bangko Sentral ng Pilipinas’ Monetary Board in connection with a bank fraud or serious irregularity; o examination by an independent Auditor, hired by a Bank and for the Bank’s exclusive use; o DOSRI Loans: Loans with their Banks of banks of Directors, Officers, Stockholders and related interests 1. loans in excess of 5% of the bank’s capital and surplus 2. the borrower waived his rights as regards the secrecy of bank deposits o impeachment cases; o upon the order of a competent court in cases of bribery or dereliction of duty of public officials; o upon the order of a competent court in cases where the money deposited or invested is the subject of litigation; o upon order of the competent court or tribunal in cases involving unexplained wealth under the Anti-Graft and Corrupt Practices Act, R.A. No. 3019 (Banco Filipino v. Purisima, 161 SCRA 576); o upon inquiry by the Commissioner of Internal Revenue for the purposes of determining the net estate of a deceased depositor; o upon the order of a competent court or in proper cases in the Anti-money Laundering Council where there is probable cause of money laundering and in some instances even without court order; o Disclosure to the Treasurer of the Philippines for dormant deposits for at

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS

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least ten (10) years under the Unclaimed balances Act (Sec.2, R.A. No. 3936) o Coup d’etat law (RA 6968, October 24, 1990) o When the state exercises/ invokes its Police Power The above-enumerated exceptions do not apply to foreign currency deposits. There is only one exception under the Foreign Currency Deposits Act (Intengan v. Court of Appeals, February 15, 2002) although another is provided for under the Anti-Money Laundering Law. These Exceptions are: o When there is written consent of depositor under Sec. 8 of the Foreign Currency Deposits Act; and o Upon the order of the court (or even without court order in proper cases) when there is probable cause of money laundering as provided for under Section 11 of the Anti-Money Laundering Act. The Anti-Money Laundering Council may inquire into the deposits upon order of the court when there is probable cause that the deposits are related to the crime of unlawful activities defined in Sec. 3 (1) and Sec. 4 of R.A. 9160. However, a court order is not even necessary when the offense or unlawful activity involved is any of the following: o Kidnapping for ransom under Art. 267 of the Revised Penal Code as amended, o Sections 4, 5, 7, 8,9, 10, 12, 13,14, 15, and 16 of R.A. No. 9165 otherwise known as the Comprehensive Dangerous Drugs Act of 2002, and o Hi-jacking and other violations of Republic Act No. 6235; destructive arson and murder as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets. Bank accounts may be garnished by the creditors of the depositor. There is no violation of the Law on Secrecy of Bank Deposits if the accounts are garnished. The amount of deposit is not actually disclosed and the intent of the legislature does not cover garnishment. The notice of garnishment served on a bank at the instance of the creditor of a depositor is not covered by the Law on Secrecy of Bank Deposits. Garnishment is just part of the process of execution. The moment notice of garnishment is served on a bank and there exists a deposit by the judgment debtor, the bank is directly accountable to the sheriff, for benefit of the judgment creditor, for the whole amount of the deposit. In such event, the amount of the deposit becomes, in effect, subject of the litigation. Whether the transaction is considered a sale of money placement does not make the money

324

FAQs “subject matter of litigation” within the meaning of Sec. 2(g), RA 1405 which prohibits the disclosure or inquiry into bank deposits “in cases where the money deposited or invested is the subject matter of litigation” nor will it matter whether the money is “swindled”. Years asked: 2006, 2005, 2004, 2001, 2000, 1998, 1997, 1995, 1994, 1992, 1991, 1990, 1989, 1988,1985, 1981, 1980, 1977, 1976 Applicable laws: Sec. 2, Republic Act 1405 (Law on Secrecy of Bank Deposits) Sec. 3 (1), 4, 11, Republic Act No. 9160 Sec. 2, Republic Act No. 3936 Sec. 8, Foreign Currency Deposits Act Anti-Money Laundering Act Illustrative cases: Banco Filipino v. Purisima 161 SCRA 576 Intengan v. Court of Appeals February 15, 2002 China Bank v. Ortega 49 SCRA 356 Salvacion, et.al. v. Central Bank of the Philippines, et.al. August 21, 1997 Benedicto and Riviera v. Court of Appeals 364 SCRA 334

3. Subject matter: INSOLVENCY LAW Conept:  Insolvency is declared when the liabilities of the debtor are more than his assets.  The assets of the debtor are to be converted to cash for distribution among his creditors.  The insolvency has for its object to obtain discharge from all debts and liability.  The Insolvency Law seeks: o to effect equitable distribution of the insolvent’s property among his creditors, and o To discharge the debtor from his liabilities so that he can start afresh with the property set apart to him as exempt 

Involuntary insolvency v. voluntary insolvency Involuntary Voluntary insolvency insolvency Three or more One creditor is creditors are sufficient required Filed by three or Filed by the debtor more qualified debtors Debtors must have No need for committed one or commission of acts of

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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2009 BAR OPERATIONS more acts of insolvency Indebtedness must not be less than one thousand pesos

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insolvency Amount of indebtedness must exceed one thousand pesos. Bond is not required

Petition must be accompanied by a bond An insolvent debtor, after a lawful discharge following an adjudication of insolvency, is released generally from all debts, claims, liabilities and demands which are or have been proved against his estate. Suspension of payments v. Insolvency Suspension of Insolvency payments Debtor has The debtor does not sufficient property have sufficient but he foresees the property to pay his impossibility of debts meeting his debts as they fall due The purpose is to The purpose is to suspend or delay discharge the debtor the payments of from the payment of debts certain debts The amount of Some of the creditors indebtedness is not may receive less than affected their credits The number of In case of involuntary creditors is insolvency, three or immaterial more creditors are required.

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At present, the jurisdiction over these cases has been transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court acting as a Special Commercial Court.  Sec. 5, PD 902-A The SEC has jurisdiction to declare suspension of payments with respect to corporations, partnerships, or associations, but not with respect to individuals. Years asked: 2006, 1997, 1996, 1994, 1991, 1990, 1988, 1987, 1985, 1984, 1981, 1976 Applicable law: Securities Regulations Code, R.A. No. 8799 5. Subject matter: CHATTEL MORTGAGE LAW Concept: 

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Years asked: 2005, 2004, 1999, 1998, 1997, 1995, 1991, 1988, 1982, 1980, 1979, 1978, 1976, 1975 Applicable Law: Insolvency law (Act No. 1956) 4. Subject matter: ORIGINAL AND EXCLUSIVE JURISDICTION OF THE SECURITIES AND EXCHANGE COMMISSION (SEC) Concept: 

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Formerly, the SEC has original and exclusive jurisdiction over cases involving: 1. devices or schemes amounting to fraud or misrepresentation; 2. controversies arising out of intracorporate or partnership representations; 3. controversies in the election or appointment of directors, officers, etc. 4. petitions to be declared in the state of suspension of payments.

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The registration of the chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or a lien which being recorded, it follows the chattel wherever it goes. The registration gives the mortgagee the symbolical possession. (Northern Motors, Inc. vs. Coquia, 68 SCRA 374 [1975]). Foreclosure of Chattel Mortgage 1. Public Sale – if the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of the mortgage, the creditor has no right to appropriate to himself the personal property (Article 2141, 2088) because he is permitted only to recover his credit from the proceeds of the sale of the property at public auction through a public officer in the manner prescribed in Section 14 of Act No. 1508. (Mahoney vs. Tuason, 39 Phil. 951 [1919]); Esguerra vs. Court of Appeals, 173 SCRA 1 [1989]). 2. Private Sale – if there is an express stipulation in the contract. Exception: fraud or duress The mortgagee may, after thirty (30) days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public officer (Section 14, Act No. 1508) The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage condition for the

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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mortgage creditor with at least ten (10) days notice to the mortgagor and posting of public notice of time, place and purpose of such sale, and is a period of grace for the mortgagor, to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor. (Cabral vs. Evangelista, 28 SCRA 1000 [1969]) Right of Mortgagee to Recover Deficiency 1. The creditor may maintain an action for the deficiency although the Chattel Mortgage Law is silent on this point (Ablaza vs. Ignacio, (unrep) 103 Phil. 1151 [1958]; Garrido vs. Tuason, 24 SCRA 727 [1968]’ Phil. National Bank vs. Manila Investment & Construction, Inc., supra; Bank of the Philippine Isalnd vs. Olutanga Lumber Co., 47 Phil. 20 [1924]). The action may be sought within ten (10) years from the time the cause of action accrues. 2. If the chattel mortgage is constituted, whether by the debtorvendee or a third person, as security for the purchase of personal property payable in installments, no deficiency judgment can be asked and any agreement to the contrary shall be void (Article 1484, Civil Code). 3. The chattel mortgagee is entitled to deficiency judgment in an action for specific performance (Article 1484 [1]) where the mortgaged property is subsequently attached and sold. The execution sale in such case is not a foreclosure sale. (Industrial Finance Corporation vs. Ramirez, 77 SCRA 152 [1977]). A chattel mortgage constituted over an immovable is binding only between the parties and is therefore unenforceable against third parties.

Years asked: 2001, 1999, 1997, 1991, 1990, 1987, 1986, 1985, 1984, 1983,1982, 1977, 1976 Applicable law: Sec. 14, Chattel Mortgage Law (Act No. 1508) Article 1484, 2141, 2088, Civil Code of the Philippines Illustrative cases:

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FAQs Northern Motors, Inc. vs. Coquia 68 SCRA 374 [1975] Mahoney vs. Tuason, 39 Phil. 951 [1919] Esguerra vs. Court of Appeals 173 SCRA 1 [1989] Cabral vs. Evangelista 28 SCRA 1000 [1969] Ablaza vs. Ignacio, (unrep) 103 Phil. 1151 [1958] Garrido vs. Tuason 24 SCRA 727 [1968] Bank of the Philippine Isalnd vs. Olutanga Lumber Co. 47 Phil. 20 [1924] Industrial Finance Corporation vs. Ramirez 77 SCRA 152 [1977] 6. Subject Matter: FORECLOSURE OF REAL ESTATE MORTGAGE LAW Concept: 

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The foreclosure of Real Estate Mortgages can either be: 1. Judicial foreclosure governed by Rule 68 of the Rules of Court. 2. Extrajudicial Foreclosure governed by Act. No. 3135 as amended, if and when the mortgagee is given a specific power or express authority to do so. Debtor has the right to redeem the property sold within the term of one year from and after the date of the sale (Section 6). The reckoning date in case of registered land is from the registration of the certificate of sale since it is only from such date that the sale takes effect as a conveyance. (Jose vs. Blue, 42 SCRA 351, [1971]; Gorospe vs. Santos, 69 SCRA 191 [1976]; General vs. Barrameda, 60 SCRA 162 [1976]. “Every conveyance of lands acquired under the free patent or homestead provisions, when proper, shall be subject to repurchase by the applicant, his widow or legal heirs, within a period of five years from the date of the conveyance.” (Section 119, C.A. No. 141 [Public Land Law], as amended) or foreclosure sale (Tupas vs. Damasco, 132 SCRA 593 [1984]). Rules on the Right of Mortgagee to Recover Deficiency 1. If there be a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the deficiency. (Development Bank of the Philippines vs. Mirang, 66 SCRA 141 [1975]. In judicial foreclosure, the Rules of Court specifically gives the mortgagee the right to claim for deficiency in case a deficiency exists (Section 6, Rule 70). While Act No. 3135 governing extrajudicial foreclosures of mortgage does not give a

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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mortgagee the right to recover deficiency after the public auction sale, neither does it expressly or impliedly prohibit such recovery. This right to recover deficiency had been categorically resolved in State Investment vs. Court of Appeals (217 SCRA 32 [1993]). Ergo, the mortgagee is entitled to recover the deficiency in case the sale proceeds are not sufficient to cover the debt in extrajudicial foreclosures. 2. The action to recover a deficiency after foreclosures prescribes after ten (10) years from the time the right of action accrues as provided in Article 1144(2) of the Civil Code (Development Bank of the Philippines vs. Tomeldan, 101 SCRA 171 [1980]. Rules on the Right of Redemption: 1. In all cases of extrajudicial sale, the mortgagor may redeem the property at any time within the term of one year from and after the date of registration of the sale (see Section 6, Act No. 3135; Reyes vs. Tolentino 42 SCRA 365 [1971]). 2. In judicial foreclosure of real estate mortgage, there is an equity of redemption which he can exercise at any time after service of judgment of foreclosure and within the 90-day period and even thereafter provided he does so before the foreclosure sale is confirmed by the court. (Anderson vs. Reyes, 54 Phil 944). Confirmation of the sale of mortgaged real property cuts off all the rights or interests of the mortgagor and of the mortgagee and persons holding under him, and with them the equity of redemption in the property and vests them in the purchaser. Confirmation retroacts to the date of the sale. It is a final order, not interlocutory. (Ocampo vs. Domalanta, 20 SRCA 1136 [1967]; Binalbagan Estate, Inc. vs. Gatuslao, 76 Phil. 128 [1946]; Villar vs. Javier, 97 Phil 604 [1955]; Lonzome vs. Amores, 134 SCRA 380 [1985]. Exception: Right of Redemption by Reason of Foreclosure of Mortgages because of the General Banking Laws In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed,

327

FAQs with interest thereon at the rate specified in the mortgage and all the costs and expenses incurred by the banking institution from the sale and custody of said property less the income derived therefrom. However, the purchased at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceedings. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.

1.

2.

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SUMMARY OF THE RULES: if the real estate mortgage has been foreclosed extrajudicially by a bank, the owner, if an individual, has the right of redemption of one year from the registration of the certificate of sale; if a real estate mortgage had been foreclosed extrajudicially by a bank, the owner, if a juridical person, has a right of redemption until, but not after the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than threee (3) months after foreclosure, whichever is earlier; if a real estate mortgage had been foreclosed judicially by a bank, the owner, whether an individual or a corporation, has the right of redemption of one year from registration of the certificate of sale.(Sec. 47, GBL)

Years asked: 2006, 2005, 2002, 1999, 1996, 1991, 1987, 1979, 1978 Applicable law: Article 1144(2) of the Civil Code

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.

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328

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Section 119, C.A. No. 141 [Public Land Law], as amended Rule 68, 70 (Sec. 6) of the Rules of Court. Sec. 78, Republic Act No. 337 Common Wealth Act No. 459 Republic Act No. 1300 Republic Act No. 2670 Sec. 6, Foreclosure of Real Estate Mortgage Law (Act No. 3135 in relation to R.A. No. 8791 Sec. 47, General banking Laws of 2000 Illustrative cases: Development Bank of the Philippines vs. Tomeldan 101 SCRA 171 [1980]. Reyes vs. Tolentino 42 SCRA 365 [1971] Anderson vs. Reyes 54 Phil 944 Ocampo vs. Domalanta 20 SCRA 1136 [1967] Binalbagan Estate, Inc. vs. Gatuslao 76 Phil. 128 [1946] Villar vs. Javier 97 Phil 604 [1955] Lonzome vs. Amores 134 SCRA 380 [1985]. State Investment vs. Court of Appeals 217 SCRA 32 [1993] Development Bank of the Philippines vs. Mirang, 66 SCRA 141 [1975] Tupas vs. Damasco 132 SCRA 593 [1984] Jose vs. Blue 42 SCRA 351, [1971] Gorospe vs. Santos 69 SCRA 191 [1976] General vs. Barrameda 60 SCRA 162 [1976]. Conzales vs. Phil. National Bank, 48 Phil. 824 [1926])

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair; CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIÑO, RANDALL F. LIDUA, APRIL GWEN T. MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS  2009.