Alex Dy Comm Law Review Outline

1
ATENEO LAW SCHOOL

COMMERCIAL LAW REVIEW
INSURANCE CODE
ATTY. ALEXANDER C. DY
2ND SEMESTER, SY 2012-2013
I. GENERAL CONCEPTS
A. INSURANCE
1. Definition Sec. 2(1), I.C.1: A contract of insurance is an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage, or liability arising from an
unknown or contingent event.
2. Elements
a. The insured has an insurable interest xSecs. 12-14, I.C.;
b. The insured is subject to a risk of loss by the happening of the designated peril Sec. 3, par.
1, I.C.: Any contingent or unknown event, whether past or future, which may damnify a
person having an insurable interest, or create a liability against him, may be insured against.
Sec. 4, I.C.: But not for or against drawing of any lottery, or for or against any chance or
ticket in a lottery drawing a prize.
Concept of Risk:
i.
Pure risk (may result in loss or not) distinguished from speculative risk (may result in loss
or gain)
ii. Risk distinguished from peril (specific cause of loss)

iii. May be past event (Example: in marine insurance, whether ship lost or not lost)
iv. Risk distinguished from fortuitous event (act of god) and condition (in life insurance, only
uncertainty is when death will occur)
v. Risk distinguished from hazard (circumstances/conditions that create or increase risk)
vi. Risk distinguished from loss (end result)
c. The insurer assumes the risk xSec. 2, I.C.;
d. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
e. In consideration of the insurers promise, the insured pays a premium xSec. 77, I.C.
Are Health Care Agreements Insurance Contracts?
SeePhilamcare Health Systems, Inc. v. Court of Appeals, 379 SCRA 356 (2002): (1) health
care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity,
once the member incurs hospital, medical or any other expense arising from sickness, injury or
other stipulated contingent, the health care provider must pay for the same to the extent agreed
upon under the contract; (2) thus, provisions of Insurance Code on insurable interest (every person
has insurable interest in life and health of himself), misrepresentation (if opinion called for,
answers in good faith and without intent to deceive will not avoid a policy even if they are
untrue), concealment (must be established by satisfactory and convincing evidence), rescission,
and interpretation will apply;
1 Presidential Decree No. 1460, as amended, otherwise known as the Insurance Code of the
Philippines (I.C.).
2
But See Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 600
SCRA 413 (2009): DST on insurance policies requires (1) document must be policy of insurance
or obligation in the nature of indemnity; and (2) the maker should be transacting the business of
insurance; HMO not in insurance business based on principal object and purpose test because it
provides prepaid medical services through participating physicians, so mere assumption of risk is
not enough to constitute insurance; HMO supervised by DOH, not regulated by IC, note that
previous cases not applicable since issue here is tax provision.
3. Characteristics
a. Aleatory (one or both parties bind themselves to give or to do something in consideration of
what other shall give or do upon happening of event which is uncertain, or to occur at an
indeterminate time) Art. 2010, Civil Code2; Not wagering Sec. 25, I.C.
b. Indemnity (party insured is entitled to compensation for such loss as has been occasioned by
perils insured against, the right to recover being commensurate with loss sustained) Sec. 17,
I.C. Exceptions: (i) life insurance; (ii) accident insurance where the result is death; and (iii)
valued policies
c. Personal (entered into with reference to character of insured for integrity and prudence)
d. Unilateral (executed as to insured and executory as to insurer upon payment of premiums)
e. Conditional insurer not obligated to pay unless loss arises from specified perils; But
distinguish between property insurance and life insurance (where death is certain to occur,
only that time of death is uncertain)
f.
Uberrimae Fidae (perfect good faith) Tang v. Court of Appeals, 90 SCRA 236 (1979)
4. Perfection/Requisites Arts. 1318-1319, Civil Code; Secs. 77 and 226, I.C.; Perez v. Court
of Appeals, 323 SCRA 613 (2000): Insurance contract is perfected when insurer accepts
application and communicates it to insured (consensual), manifested by delivery of policy
(formal), and insured pays premium (real).
Rule on Consent/Offer/Acceptance: Insurance is consensual, so offer must be accepted for
perfection. Consistent with Cognition Theory, insurance contract perfected the moment offeror
learns of acceptance of offer by other party. Hence, mere delay by insurer to act on application is
not deemed acceptance, but insurer may be subject to abuse of right (Arts. 19-21, Civil Code).
SeeEnriquez v. Sun Life Assurance Co. of Canada, 41 Phil. 269 (1920): If offer and
acceptance made by correspondence, acceptance shall not be binding until it has been made
known to offeror;
But See Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance
Corporation, 551 SCRA 1 (2008): upon purchase of a memorial lot, insurance contract is created
and effective, valid, and binding until terminated, and mere inaction of insurer on insurance
application must not work to prejudice insured
5. Kinds of Insurance
a. According to Governing Law: (i) private (voluntary) governed by I.C.; or (ii) government or
social insurance (mandatory) governed by special laws.
b. According to Object: (i) Life and Health Insurance; (ii) Property Insurance; or (3) Liability
Insurance
c. Classes of Insurance:
i.
Marine Insurance
2 The New Civil Code of the Philippines.
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ii. Casualty Insurance
iii. Fire Insurance
iv. Life Insurance
(a) Term Insurance insured on a temporary basis for a limited period
(b) Whole Life Insurance insured during entire lifetime
(c) Endowment Policy insured paid a certain amount or face value of policy if insured
survives a certain period and beneficiary will get proceeds if insured does not survive.
(d) Industrial Life premiums payable either monthly or oftener
v. Compulsory Motor Vehicle Liability Insurance
vi. Suretyship
B. INSURANCE DISTINGUISHED FROM OTHER CONTRACTS
1. Suretyship Art. 2047, Civil Code: contract whereby a person binds himself solidarily with
principal debtor; Sec. 2(1), par. 2, I.C.: suretyship deemed to be insurance contract only if made
by a surety who is doing an insurance business as provided in I.C.
2. Pre-Need Plans Sec. 3.9, SRC3: contracts which provide for performance of future services or
payment of future monetary considerations at the time of need (pension, education, interment)
3. Variable Contracts Sec. 232, I.C.: policy or contract, either group or individual, by insurance
company providing for benefits or other contractual payments or values, which vary to reflect
investment results of any segregated portfolio of investment or of a segregated account
C. INSURANCE BUSINESS
1. Doing an Insurance Business Sec. 2(2), I.C.
a. making or proposing to make, as insurer, any insurance contract;
b. making or proposing to make, as surety, any contract of suretyship as vocation and not merely
incidental to any other legitimate business or activity of surety;
c. doing any kind of business including a reinsurance business, specifically recognized as
constituting doing of insurance business within meaning of I.C.;
d. doing or proposing to do any business in substance equivalent to any of foregoing in manner
designed to evade provisions of I.C.
Fact that no profit derived from making insurance contracts or no separate or direct consideration
is received therefor, not deemed conclusive to show that making thereof does not constitute doing
insurance business.
Note: Phil. American Life Insurance Company v. Ansaldo, 234 SCRA 509 (1994): contract of
agency between insurance company and its agent not included within meaning of doing insurance
business; hence, Insurance Commission without jurisdiction over disputes arising therefrom
2. Mutual Insurance Companies White Gold Marine Services, Inc. v. Pioneer Insurance
Surety Corporation, 464 SCRA 448 (2005): Mutual Protection & Indemnity Club is a form of
insurance against third party liability, where the third party is anyone other than the P&I Club and
its members. It is a cooperative enterprise where members are both insurer and insured, where
members all contribute, by a system of premiums and assessments to the creation of a fund from
3 Republic Act No. 8799, otherwise known as the Securities Regulations Code. See also Republic
Act No. 9829, otherwise known as the Pre-need Code of the Philippines.
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which all losses and liabilities are paid, and where profits are divided among themselves, in
proportion to their interest.
D. LAWS GOVERNING INSURANCE
1. I.C. See Sec. 5, I.C.
2. Civil Code Art. 2011, Civil Code
a. Revocation of irrevocable beneficiaries in terminated marriages xArts. 43(4), 50, and 64,
Family Code4
b. Void donations xArts. 739, 2012, Civil Code
c. Life annuity contracts xArts. 2021-2027, Civil Code
d. Compulsory motor vehicle liability insurance xArt. 2186, Civil Code
e. Insurers right of subrogation xArt. 2207, Civil Code
Example:The Insular Life Assurance Company, Ltd. V. Ebrado, 80 SCRA 181 (1977): Art.
2012 of Civil Code provides any person who is forbidden from receiving any donation under
Article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make
a donation to him, while Art. 739 declares void donations made between persons who were
guilty of adultery or concubinage at the time of the donation, hence, common-law wife cannot be
beneficiary
3. General Principles on Insurance Constantino v. Asia Life Insurance Co., 87 Phil. 248
(1950): U.S. Rule applied (not New York Rule) that insurance is not merely suspended (in cases of
war), but abrogated for non-payment of premiums, since time of payment is peculiarly the essence
of the contract
4. Corporation Code5 for insurance corporations; Sec. 185, par. 2, I.C.
5. xSpecial Laws (Government Insurance)
a. Revised Government Service Insurance Act of 1977 6 covers insurance of government
employees
b. Social Security Act of 19547 covers insurance of employees in private employment;
c. Property Insurance Law8 covers insurance of government property;
d. R.A. No. 48989 provides life, disability and accident insurance coverage to barangay
officials;
e. E.O. No. 25010 provides increased insurance benefits for barangay officials under R.A. No.
4898, as well as members of Sangguniang Panalalawigan, Panglungsod, and Bayan; and
f.
PDIC Charter11 insures deposits of all banks entitled to benefits of insurance thereunder.
E. INTERPRETATION OF INSURANCE CONTRACTS
4 Executive Order No. 209, as amended, otherwise known as the Family Code of the Philippines.
5 Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines.
6 Presidential Decree No. 1146, as amended.
7 Republic Act No. 1161, as amended.
8 Republic Act No. 656, as amended by Presidential Decree No. 245.
9 Republic Act No. 4898, as amended by Republic Act No. 5756.
10 Executive Order No. 250.
11 Republic Act No. 3591, as amended.
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1. Clear Provision Given Ordinary Meaning Union Manufacturing Co., Inc. v. Phil.
Guaranty Co., 47 SCRA 271 (1972)
See Ty v. First National Surety & Assurance Co., Inc., 1 SCRA 1324 (1961)12: If policy states,
The loss of a hand shall mean the loss by amputation through the bones of the wrist, then
insurer not liable if hand not amputated. Note, injury only caused temporary total disability.
But See Panaton v. Malayan Insurance Co., Inc., 2 Court of Appeals Report 78: If policy
covers loss of legs and defines it as amputation of both legs, then insurer liable even if no
amputation so long as permanent and total paralysis of both legs.
2. Ambiguous Provision Interpreted Against Insurer Del Rosario v. Equitable Ins. And
Casualty Co., Inc., 8 SCRA 343 (1963)
See Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., 98 Phil. 85 (1955): If
warranty prohibited storage in premises of oils, (animal and/or vegetable and/or mineral and/or
their liquid products having a flash point below 300 o Fahrenheit), storage of gasoline (which has
flash point below 300o Fahrenheit) not a violation because in ordinary parlance, oils means
lubricants and not gasoline or kerosene.
3. Stipulations Cannot Be Segregated See Gulf Resorts Inc. v. Philippine Charter Insurance
Corporation, 458 SCRA 550 (2005): If fire, typhoon an earthquake policies cover clubhouse,
furniture, buildings, and two swimming pools, with the insurance on the pools only against the
peril of earthquake shock, other properties not covered against earthquake shock.
4. Judicial Construction Cannot Alter Terms Misamis Lumber Corp. v. Capital Ins. &
Surety Co., Inc., 17 SCRA 228 (1966)
SeeFortune Insurance and Surety Co., Inc. v. Court of Appeals, 244 SCRA 308 (1995): If
insurance against theft and robbery excludes any loss caused by any dishonest, fraudulent or
criminal act of insured or any officer, employee, partner, director, trustee or authorized
representative of insured whether acting alone or in conjunction with others, then loss caused by
robbery with complicity of outsourced security guards (being authorized representatives of
insured) is excluded, and insurer not liable.
II. PARTIES
A. INSURED
1. Definition the person to be indemnified; the person who applied for and to whom an insurance
policy is issued.
2. Capacity Art. 1390, Civil Code
a. Married women Sec. 3, pars. 2 and 4, I.C.; Art. 73, Family Code
b. Minors Sec. 3, pars. 3-5, I.C.; Art. 38, Civil Code; xR.A. No. 680913
3. Disqualification: Public Enemy (State at war with Philippines or citizen or subject thereof)
Sec. 7, I.C.; Filipinas Compania de Seguros v. Christern Henefeld & Co., 89 Phil. 4\54
(1951); xConstantino v. Asia Life Insurance Co., 87 Phil. 248 (1950)
12 See also Ty v. Filipinas Compania de Seguros, et al., 17 SCRA 364 (1966).

13 Republic Act No. 6809 amended Article 234 of the Family Code by reducing the age of majority
from 21 years to 18 years.
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4. Trustee or Agent Sec. 54, I.C.: If in agents name, only his interest is insured; if on behalf of
principal, agent must disclose
5. Partner Sec. 55, I.C.: As a rule, insurance is on his separate interest alone, unless otherwise
provided
B. INSURER
1. Definition the person who undertakes to indemnify another by a contract of insurance; Sec. 184,
I.C.
a. Insurance Corporations xSec. 185, par. 1, I.C.
b. Mutual Insurance Companies xSec. 262, I.C.
c. Professional Reinsurers xSec. 280, I.C.
d. Mutual Benefit Associations>? Excluded from definition of insurer under Sec. 184, I.C. but
still subject to I.C. regulation xSec. 390, I.C.
2. Capitalization/Certificate of Authority Secs. 6, 186-187, I.C.
3. Prohibited Acts Secs. 361-362, I.C.
C. BENEFICIARY
1. Definition the person who receives a benefit or advantage, or who is entitled to the benefit of
the contract, i.e., the one to whom the insurance is payable or who is entitled to the proceeds of
the policy on the occurrence of the event designated.
2. To Whom Insurance Proceeds Payable Secs. 53 and 56, I.C.: person in whose name or for
whose benefit insurance is made, unless otherwise specified
a. General Rule: See Bonifacio Bros., Inc. v. Mora, 20 SCRA 261 (1967): It is only the
insured, not the ones who repaired or supplied materials, that can sue insurer if insured
vehicle is damaged; See Del Val v. Del Val, 29 Phil. 534 (1915): Life insurance proceeds
are separate and individual property of beneficiaries, not of heirs of person whose life was
insured.
b. Exceptions:
i.
Stipulation Pour Autrui Art. 1311, Civil Code; See Coquia v. Fieldmens Insurance
Co., Inc., 26 SCRA 178 (1968): If policy provides that insurer will indemnify any
authorized driver who is driving the motor vehicle, the insurer liable to authorized driver
or his heirs, not just to the insured.
ii. Indemnity against liability to third persons See Guingon v. Del Monte, 20 SCRA
1043 (1967): If policy provides that insurer liable for all sums which the insured shall
become legally liable to pay in respect of death of or bodily injury to any person, then
third party entitled to sue insurer directly. Note: If indemnity is against actual loss or
payment of the insured, third persons cannot sue insurer directly, because insured will
only be reimbursed.
iii. Assignee See Rizal Commercial Banking Corporation v. Court of Appeals, 289
SCRA 292 (1998): General rule is that there should be endorsement of the insurance
contracts with consent of the insurer. Here, although there was no actual endorsements,
the endorsement documents were prepared by sister company of insurer, upon instructions
of insured, pursuant to the mortgage with the assignee; hence, assignment deemed valid.
3. Designation/Revocation/Forfeiture of Beneficiary for Life Insurance
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a. No designation In Re: Mario V. Chanliongco, 79 SCRA 364 (1977); Vda. de
Consuegra v. Governments Service Insurance System, 37 SCRA 315 (1971): Laws of
succession shall apply, and proceeds will form part of estate of deceased insured.
b. Invalid designation Art. 2012 in relation to Art. 739, Civil Code
i.
Those made between persons who are guilty of adultery or concubinage at the time of the
donation;
ii. Those made between persons found guilty of the same criminal offense, in consideration
thereof;
iii. Those made to a public officer or his wife, descendants and ascendants, by reason of his
office.
See Social Security System v. Davac, et al., 17 SCRA 863 (1966): If designation is invalid,
laws of succession shall apply, and proceeds will form part of estate of deceased insured
See The Insular Life Assurance Company, Ltd. v. Ebrado, 80 SCRA 181 (1977): If
insured married, common-law wife disqualified.
See Southern Luzon Employees Ass. v. Golpeo, et al., 96 Phil. 83 (1954): Conviction for
adultery or concubinage not necessary for disqualification; but illegitimate children not
disqualified as such
c. Revocable designation: Designation of beneficiary is revocable unless otherwise stipulated
Sec. 11, I.C.; Gercio v. Sun Life Assurance Co. of Canada, 48 Phil. 53 (1925): old rule
irrevocable if no stipulation.
d. Irrevocable designation See Nario v. Philippine American Life Ins. Co., 20 SCRA 434
(1967): Irrevocable designation creates a vested right to the proceeds, so insured cannot put an
end to the policy without beneficiarys consent, and if insured does not pay premiums,
beneficiary may continue paying it.
See Philippine American Life Insurance Company v. Pineda, 175 SCRA 416 (1989):
Insured may not add additional beneficiaries without consent of previously designated
beneficiaries, and If beneficiaries are minors, they must be represented for consent to be valid.
e. Exceptions to irrevocable designation Art. 43(4), 50, and 64, Family Code: Upon finality
of decree terminating subsequent bigamous marriage, void marriage, and voidable marriage,
or decree of legal separation, innocent spouse may revoke designation of guilty spouse.
f.
Forfeiture Sec. 12, I.C.: In life insurance, if beneficiary is principal, accomplice, or

accessory in bringing about willful death of insured, proceeds forfeited in favor of nearest
relative.
g. Insured Outlives Policy (Endowment Policy) Sec. 180, I.C.; See Villanueva v. Oro, 81
Phil. 464 (1948): Insurance proceeds will go to insured if he outlives policy, but to beneficiary
if insured does not.
h. Beneficiary Predeceases Insured If no stipulation for contingency, then: (a) if irrevocable
(vested right), proceeds to estate of beneficiary; or (b) if revocable (not vested right), proceeds
to estate of insured.
4. Designation of Beneficiary for Property Insurance Sec. 18, I.C.: No contract or policy of
insurance shall be enforceable except for benefit of some person having insurable interest in
property insured.
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D. INSURANCE AGENT AND INSURANCE BROKER
1. Insurance Agent Sec. 300, I.C.; Aisporna v. Court of Appeals, 113 SCRA 459 (1982): To be
considered an agent, solicitation must be for compensation.
2. Insurance Broker Sec. 301, I.C.; Philippine Health-Care Providers, Inc. v. Estrada, 542
SCRA 616 (2008): One who brings parties together, hence entitled to commission for such, unlike
agent where sale is basis for commission.
3. Authority to Receive Payment/Effect of Payment Sec. 306, I.C.; See Malayan Insurance
Co., Inc. v. Arnaldo, 154 SCRA 672 (1987); South Sea Surety and Insurance Co., Inc. v.
Court of Appeals, 244 SCRA 744 (1995): Insurer delivering to insurance agent or broker and
insurance policy deemed to have authorized such agent to receive premium on its behalf
III. INSURABLE INTEREST
A. CONCEPT
1. Definition In general, a person has an insurable interest in the subject matter insured where he
has such a relation or connection with, or concern in, such subject matter that he derive pecuniary
benefit or advantage from its preservation or will suffer pecuniary loss or damage from its
destruction, termination or injury by the happening of the event insured against.
2. Necessity of Insurable Interest; Consequence of Lack of Secs. 18 and 25, I.C.: An insurable
interest on the part of the person taking out the policy is essential to the validity and enforceability
of the contract of insurance, and if such interest is lacking, the policy is void. 14
B. IN LIFE AND HEALTH INSURANCE
1. Who Has Insurable Interest Sec. 10, I.C.: Every person has an insurable interest in the life
and health of
a. Himself, or his spouse, and of his children Sec. 10(a), I.C.; Philamcare Health Care
Systems, Inc. v. Court of Appeals, 379 SCRA 356 (2002); Gercio v. Sun Life Assurance Co. of
Canada, 48 Phil. 53 (1925)
Note: Blood relationship alone will not suffice in other cases, such as parents or siblings. 15
b. Any person on whom he depends wholly or in part for education or support, or in whom he
has a pecuniary interest Sec. 10(b), I.C.;
i.
Legal support Art. 195, Family Code: The following are obliged to support each other:
(a) The spouses;
(b) Legitimate ascendants and descendants;
(c) Parents and their legitimate children and the legitimate and illegitimate children of the
latter;
(d) Parents and their illegitimate children and the legitimate and illegitimate children of
the latter; and
(e) Legitimate brothers and sisters, whether of the full or half-blood.
14 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 37.
15 Aquino, Essentials of Insurance Law, 2009 Ed., pp. 48-49.
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ii. Other support: No requirement that the person whose life to be insured must be legally
obligated to provide education or support, so may take out insurance on life of a family
friend.16
c. Any person under legal obligation to him for the payment of money, respecting property or
service, of which death or illness might delay or present the performance Sec. 10(c), I.C.
See Great Pacific Life Assurance Corp. v. Court of Appeals, 316 SCRA 677 (1999):
Mortgage Redemption Insurance is device for protection of both mortgagee and mortgagor;
in case of death of mortgagor, proceeds of MRI applied to payment of mortgaged debt.
Note: Pecuniary interest in life and health of partner or employee. 17 El Oriente, Fabrica de
Tabacos, Inc., v. Posadas, 56 Phil. 147 (1931): manager of business
d. Any person upon whose life any estate or interest vested in him depends Sec. 10(d), I.C.;
Example: If A allows B to use his land as long as A is alive, then B has insurable interest in
life of A.18
Note: (1) Beneficiary need not have insurable interest in life of insured; (2) Consent of insured is
necessary, if another takes out insurance on his life, except in case of parent insuring life of infant
child.19
2. When Insurable Interest Must Exist Sec. 19, I.C.: when insurance takes affect, but need not
exist thereafter or when loss occurs
3. Transfer to Minor Upon Death of Original Owner Sec. 3, last par., I.C.: policy taken out by
original owner on life of minor automatically vests in minor upon death of original owner, unless
otherwise provided in policy
4. Transfer by Will or Succession Upon Death of Insured Sec. 181, I.C.: policy of insurance
upon life or health may pass by transfer, will or succession to any person, whether transferee has
insurable interest or not, and transferee may recover what insured could have recovered
C. IN PROPERTY INSURANCE
1. Who Has Insurable Interest Sec. 13, I.C.: Every interest in property [whether legal or
beneficial, not limited to ownership or possession], whether real or personal, or any relation
thereto, or liability in respect thereof, of such nature that a contemplated peril might directly
damnify the insured, is an insurable interest. Sec. 14, I.C.: It may consist in
a. Existing Interest Sec. 14(a), I.C.; Examples:
i.
Traders Insurance & Surety Co. v. Golangco, et al., 95 Phil. 824 (1954): possessor of
building who collects rentals from occupants has insurable interest in building;
ii. Filipino Merchants Insurance Co., Inc. v. Court of Appeals, 179 SCRA 638 (1989):
vendee/consignee has equitable title over goods even while goods still in transit (even if
no delivery yet pursuant to perfected contract of sale);
iii. Gaisano Cagayan, Inc. v. Insurance Company of North America, 490 SCRA 286
(2006): unpaid seller retains insurable interest over goods even if ownership had already
transferred to vendee upon delivery;
16 Aquino, Essentials of Insurance Law, 2009 Ed., p. 49.

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iv. Ong Ling Sing v. FEB Leasing & Finance Corporation, 425 SCRA 333 (2007):
lessee has insurable interest over the property leased;
v. Lampano v. Jose, 30 Phil. 537 (1915): unpaid contractor has insurable interest over
building which he constructed
b. Inchoate Interest founded on existing interest Sec. 14(b), I.C.: Example: stockholder has
insurable interest in corporate property20
c. Expectancy, coupled with existing interest in that out of which the expectancy arises Secs.
14(c) and 16, I.C.; Example: owner of land has insurable interest in expected crops; But son
has no insurable interest in property of father, since expectancy not founded on actual right or
valid contract21
d. Mortgagor/Mortgagee Secs. 8 and 9, I.C.; Art. 2127, Civil Code; Mortgagor (to full value
of property) and mortgagee (only to extent of amount of credit) may take out separate policies
with same or different insurers.
22
i.
Insurance by Mortgagor Without Making Loss Payable to or Assigning Policy to

Mortgagee See Sec. 53: Only mortgagor can recover from insurer, since insurance will
be applied exclusively to his interest.
ii. Insurance by Mortgagor Making Loss Payable to or Assigning Policy to Mortgagee 23

Sec. 8, I.C.; See also discussions on Mortgage Redemption Insurance
(a) Insurance is still deemed to be upon interest of mortgagor, who does not cease to be a
party to original contract; See Saura Import & Export Co., Inc. v. Philippine
International Surety Co., Inc., 8 SCRA 143 (1963), cancellation of policy not
binding on insured mortgagor, since insurer failed comply with its duty to notify
insured mortgagor of such cancellation;
(b) Any act of mortgagor, prior to loss, which would otherwise avoid insurance, will have
same effect although property is in hands of mortgagee. Example: violation of
warranty by mortgagor will bar mortgagee from recovery.
But See Sec. 9: If insurer assents to transfer of insurance from mortgagor to
mortgagee and, at time of his assent, imposes further obligations on assignee, making
new contract with him, act of mortgagor cannot affect rights of assignee.
(c) Any act which, under contract of insurance is to be performed by mortgagor, may be
performed by mortgagee with same effect as if performed by mortgagor. Example:
sending of notice and proof of loss.
(d) Upon occurrence of loss, mortgagee entitled to recover to extent of his credit; See
Great Pacific Life Assurance Corp. v. Court of Appeals, 316 SCRA 677 (1999): if
mortgagee has already foreclosed on property insured, mortgagee cannot collect
insurance proceeds (from mortgage redemption insurance).
(e) Upon recovery of mortgagee to extent of his credit from insurer, mortgagor is
released from indebtedness.
iii. Insurance by Mortgagee Without Reference to Right of Mortgagor
23 Perez, The Insurance Code and Insolvency Law, 2006 Ed., pp. 29-32.
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(a) Mortgagee may collect from insurer upon occurrence of loss to extent of his credit.
(b) Unless otherwise provided, mortgagor has no right to collect balance of proceeds of
policy after payment of interest of mortgagee; See San Miguel Brewery v. Law
Union and Rock Insurance Co., 40 Phil. 674 (1920): mortgagee has insurable
interest only to extent of mortgage, and mortgagor cannot recover balance of proceeds
since policy covered interest of mortgagee without reference to right of mortgagor.
(c) Upon payment to mortgagee-insured, insurer becomes subrogated to rights of
mortgagee against mortgagor; See Palileo v. Cosio, 97 Phil. 919 (1955).
(d) Mortgagee can no longer collect the mortgagors indebtedness after receiving full
payment of his credit from insurer; Palileo v. Cosio, 97 Phil. 919 (1955).
(e) Mortgagor not released from his debt by insurers payment to mortgagee; Palileo v.
Cosio, 97 Phil. 919 (1955).
e. Carrier or Depositary Sec. 15, I.C.; Lopez v. Del Rosario and Quiogue, 44 Phil. 98
(1922): carrier or depositary of any kind (e.g., bailee) has insurable interest in thing held by
him as such, to extent of his liability, but not to exceed value thereof.
2. Measure of Insurable Interest Secs. 17 and 15, I.C.; San Miguel Brewery v. Law Union
and Rock Insurance Co., 40 Phil. 674 (1920); Ong Ling Sing v. FEB Leasing & Finance
Corporation, 425 SCRA 333 (2007): measurable interest in property is extent to which injured
might be damnified by loss or injury thereof.
3. Effect of Lack of Insurable Interest Sec. 18, I.C.: No contract or policy of insurance on
property shall be enforceable except for benefit of some person having insurable interest in
property insured;
i.
When there is insurable interest: See Sharuff & Co. v. Baloise Fire Insurance Co., 64 Phil.
258 (1937): change of firm name does not negate insurable interest; See Garcia v.
Hongkong Fire & Marine Insurance Co., 45 Phil. 122 (1923); mistake in designation of
property insured does not negate insurable interest, because insurer estopped;
ii. When there is no insurable interest: See Cha v. Court of Appeals, 277 SCRA 690 (1997): If
lessees entered into contract of lease with lessor that lessees shall not insure against fire their
merchandise without prior approval of lessor, else the policy is deemed assigned to lessor, and
loss occurs, proceeds cannot be paid to lessor, who has no insurable interest over merchandise
of lessee; however, only automatic assignment provision is void, so insurer must pay proceeds
to lessees.
4. When Insurable Interest Must Exist Sec. 19, I.C.; Tai Tong Chuache & Co. v. Insurance
Commission, 158 SCRA 366 (1988): when insurance takes effect, and when loss occurs, but need
not exist in the meantime.
5. Effect of Change of Interest in Thing Insured
a. General rule: If change of interest in any part of thing insured not accompanied by
corresponding change in interest in insurance, insurance suspended until both interests vested
in the same person Sec. 20, I.C.; hence, if loss occurs during period when policy is under
suspension, insurer is not liable.24
i.
When there is change in interest: absolute transfer of insureds entire interest in property
insured to one not previously interested or insured. Note: If there is prohibition against
transfer without consent of insured, policy not just suspended, but avoided. 25
24 Perez, The Insurance Code and Insolvency Law, 2006 Ed., pp. 55-56.
25 Perez, The Insurance Code and Insolvency Law, 2006 Ed., pp. 56 and 59.
12
ii. When there is no change in interest:26
(a) mortgage of property, as mortgagor retains interest as owner See Bachrach v.
British American Assurance Co., 17 Phil. 555 (1910): mortgage does not transfer
interest in property; so even if without consent of insurer, insurance not suspend;
(b) lease of property insured, as lessor retains interest as owner;
(c) execution of property insured, as judgment debtor retains interest over property as
long as right of redemption subsists;
(d) foreclosure of property insured, as mortgagor retains interest over property as long as
right of redemption subsists;
(e) sale of property insured, if vendor has not absolutely parted with his rights respecting
property.
b. Exceptions, when insurance is not suspended:
i.
Life, accident, and health insurance Sec. 20, I.C.
ii. Change of interest in a thing insured, after occurrence of injury which results in loss
Sec. 21, I.C.
iii. Change of interest in one or more of several distinct things, separately insured by one
policy Sec. 22, I.C.
iv. Change of interest, by will or succession, on death of insured Sec. 23, I.C.
v. Transfer of interest by one of several partners, joint owners, or common owners, jointly
insured, to the others Sec. 24, I.C.
vi. Insurance policy framed to inure to benefit of whomsoever becomes owner of the interest
insured Sec. 57, I.C.
6. Effect of Transfer of Thing Insured Sec. 58, I.C.; San Miguel Brewery v. Law Union and
Rock Insurance Co., 40 Phil. 674 (1920): does not transfer the policy, but suspends it until same
person becomes owner of both the policy and thing insured.
IV.
PREMIUM
A. PAYMENT REQUIRED
1. Payment of Premiums: Necessary for Validity and Binding Effect Secs. 77 and 306, par. 2,
I.C.; South Sea Surety and Insurance Co., Inc. v. Court of Appeals, 244 SCRA 744 (1995);
Areola v. Court of Appeals, 236 SCRA 643 (1994): agents receipt of premium binds insurer.
2. Effect of Non-Payment Sec. 64(a), I.C.: ground for cancellation
Non-Payment in War: National Leather Co. Inc. v. U.S. Life Insurance Co., 87 Phil. 410
(1950): does not merely suspend but puts and end to insurance, even in war; Sales de Gonzaga
v. Crown Life Insurance Co., 91 Phil. 10 (1952): during war, even if insurer fails to advise
insured of new address, insurer still entitled to timely payment of premiums
Remedy for Non-Payment: SeeValenzuela v. Court of Appeals, 191 SCRA 1 (1990): Remedy
for non-payment of premiums is to put an end to and render the insurance policy not binding;
insurer cannot treat insurance as valid to collect premiums, should but treat it as invalid for
purposes of indemnity.
13
Note: Insurer estopped from claiming non-payment of premiums if: (1) insurer accepted and
retained overdue premiums with knowledge of fact of loss; and (2) insurer refused to accept
premiums.27
3. Statutory Exceptions
a. Grace period of 30 days/1 month (after the first premium is paid) Sec. 77, I.C.: In case
insurance coverage relates to life or industrial life (health) insurance when grace period
applies, it is valid and binding.
i.
For individual life or endowment insurance Sec. 227(a), I.C.
ii. For group life insurance Sec. 228(a), I.C.

iii. For industrial life insurance Sec. 230(a), I.C.
b. Acknowledgment receipt (conclusive) Sec. 78, I.C.; American Home Assurance
Company v. Chua, 309 SCRA 250 (1999): when insurer makes written acknowledgment of
receipt of premiums, acknowledgment is conclusive evidence of payment of premiums.
c. Acceptance by obligee of surety bond (even if obligor has not paid premium) Sec. 177, I.C.;
Philippine Pryce Assurance Corp. v. Court of Appeals, 230 SCRA 164 (1994): when bond
or suretyship contract is issued and already accepted by oblige or creditor, such bond or
suretyship is enforceable despite non-payment of premiums
d. Cover notes (if premium cannot yet be computed) Sec. 52, I.C.; Pacific Timber v. Court
of Appeals, 112 SCRA 199 (1982): Cover note is binding even if premium was not paid
because no premium could be fixed on cover note until all particulars of shipment are known.
e. Non-lapse of individual life or endowment insurance
i.
Automatic policy loan Sec. 227(g), I.C.: If cash surrender value is available, insurer will
deduct from such loan value (cash surrender value) any unpaid balance of premium.
ii. Application of dividend Sec. 227(e), I.C.: If policy is participating, it may be provided
that dividends shall be applied to premiums.
iii. Reinstatement clause Sec. 227(j), I.C.: Policyholder entitled to have policy reinstated at
any time within three years from date of default unless cash surrender value duly paid, or
extension period expired; Lalican v. Insular Life Assurance Company Limited, 597
SCRA 159 (2009): Conditions for reinstatement as stated in the policy must be met for
there to be valid reinstatement.
4. Jurisprudential Exceptions
a. Estoppel and credit extension See UCPB General Insurance Co., Inc. v. Masagana
Telemart, Inc., 356 SCRA 307 (2001):28 Insurer should be made liable even if premiums were
not paid as of time of loss since loss occurred before expiration of credit term practiced by
parties. It is unjust and inequitable if recovery on policy would not be permitted against
27 Perez, The Insurance Code and Insolvency Law, 2006 Ed., pp.149-150.
28 This overturned UCPB General Insurance Co., Inc. v. Masagana Telemart, Inc., 308 SCRA 259
(1999), which held that no extension of time to pay premiums is allowed. Note that under the old law
(Sec. 72 of the Insurance Act), credit extensions by agreement were expressly allowed, such that
jurisprudence provided for credit extensions based on agreements, thus: (1) Philippine Phoenix Surety &
Insurance Company v. Woodworks, Inc., 92 SCRA 419 (1979): if no provision in policy and proof that
credit extension was accepted by insured, there is no estoppel on part of insurer; (2) Arce v. Capital
Insurance & Surety Co., Inc., 117 SCRA 63 (1982): If credit extension was granted but expired without
payment, insurer not liable; and (3) Capital Insurance & Surety Co., Inc. v. Plastic Era Co., Inc., 65 SCRA
134 (1975): Acceptance of postdated check binds insurer, such that even if check bounced, insurer is
liable, in absence of contrary stipulation.
14
insurer which had consistently granted 60 to 90-day credit term for payment of renewal
premiums despite its full awareness of Sec. 77. Estoppel bars it from taking refuge under Sec.
77, since insured relied in good faith on such practice.
b. Installments and partial payment See Makati Tuscany v. Court of Appeals, 215 SCRA
462 (1992): In this case, insurer accepted all the installment payments for 3 years. There is
nothing in Sec. 77 that prohibits parties from allowing payment of premiums in installments,
or to consider contract as valid and binding upon payment of first premium. Otherwise,
insurer allowed to renege on its liability under contract if loss occurred before completion of
payment of entire premium. 29 Note: Tibay v. Court of Appeals, 257 SCRA 126 (1996): If
parties agree that despite partial payment, insurance not in force, payment only held in trust,
insurance not even partially effective.
B. RETURN OF PREMIUM
1. When Insured Entitled
a. If thing insured not exposed to peril insured against Secs. 79(a), I.C.
b. If time policy surrendered before expiration (but only pro rata return of premium for
unexpired portion) Sec. 79(b), I.C.
c. When policy voidable on account of fraud or misrepresentation of insurer or his agent, or on
account of such facts of which insured was ignorant without his fault Sec. 81, I.C.;
Examples: (i) insurer misrepresented to insured that policy had loan feature; (ii) insured did
not know that he had no insurable interest.30
d. When by default of insured (other than actual fraud), insurer never incurred liability under the
policy Sec. 81, I.C.; Great Pacific Life Insurance Corporation v. Court of Appeals, 184
SCRA 501 (1990): Example: life insurance procured on life of another without consent. 31
e. When over-insurance by several insurers (but only to retable return of premium, proportioned
to amount by which aggregate sum of insured in all policies exceeds insurable value of thing
at risk) Sec. 82, I.C.
2. When Insured Not Entitled
a. If thing insured is exposed to peril insured against for any period, however short, insured not
entitled to return of premium Sec. 80, I.C.; Makati Tuscany v. Court of Appeals, 215
SCRA 462 (1992): If risk is entire and contract is indivisible, insured not allowed to refund if
insurer was exposed to risk for any period.
b. In life insurance Sec. 79(b), I.C.
c. When insured guilty of fraud or misrepresentation Sec. 81, I.C.
V. THE POLICY
A. POLICY OF INSURANCE
29 Remedy if loss occurs before payment of all installments completed Philippine Phoenix Surety &
Insurance, Inc. v. Woodworks, Inc., 20 SCRA 1270 (1967): (although decided under the old law), it was
held that installments are allowed, and insurer entitled to collect balance.
30 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p.158.
31 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p.158.
15
1. Definition Sec. 49, I.C.: written instrument on which contract of insurance set forth; Perez v.
Court of Appeals, 323 SCRA 613 (2000): without assent of both parties, no contract of insurance.
Insurance by Correspondence: Enriquez v. Sun Life Assurance Co. of Canada, 41 Phil. 269
(1920): when application and acceptance of insurance contract is by correspondence, acceptance
shall not give rise to valid insurance contract until acceptance made known to applicant;
Lucero Vda. de Singayen v. Insular Life Assurance Co., 62 Phil. 9 (1935): delivery of policy
to agent of insured sufficient.
Distinguished from Marine Risk Note: See Eastern Shipping Lines, Inc. v. Prudential
Guarantee and Assurance, Inc., 599 SCRA 565 (2009): it is marine open policy which is main
insurance contract (blanket insurance to cover all goods to be shipped), and not marine risk note
(specifies particular goods/shipment insured on a specific transaction)
2. Form Secs. 50 and 226, I.C.: printed; must be approved by Insurance Commissioner, but
failure to obtain approval does not affect validity of terms of contract, only subjects insurer to
liability for prosecution.32
Language: See Tang v. Court of Appeals, 90 SCRA 236 (1979): Insurer not obliged to prove
that terms of contract were fully explained to insured; rather, insured who alleges fraud or
mistake, who must prove it. Moreover, insurer not seeking to enforce insurance, but to avoid it.
3. Basic Provisions Sec. 51, I.C.
a. Parties to the contract;
b. Amount of insurance (except in open or running policies);
c. Premium;
d. Property or life insured;
e. Interest of insured in property insured if he is not the owner;
f.
Risks insured against; and
g. Period of insurance.
5. Additional Matters Secs. 227, 228, 230, I.C.
6. Designation of Beneficiaries Secs. 53-57, I.C.
7. Rider, Clause, Warranty or Endorsement Sec. 50, I.C.: Requisites for validity:
a. must be attached to policy;
b. descriptive name must be mentioned and written on blank spaces provided in original policy
printed form;
c. if not applied for by insured, must be countersigned by insured.
Effect: Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Company,
Inc., 379 SCRA 423 (2002): any rider, clause, warranty or endorsement pasted or attached to the
policy is considered part of such policy or contract of insurance, with same effect as if actually
embodied therein.
8. Interpretation and Proof Art. 1377, Civil Code
9. Application of Rules to Modification of Policy Sec. 47, I.C.
B. COVER NOTES
16
1. Definition and Binding Effect Sec. 52, I.C.: may be issued to bind insurance temporarily
pending issuance of policy, which policy should be issued within 60 days from issuance of cover
note, unless extended or renewed with approval of Insurance Commissioner, and such extension is
not contrary to and for purposes of violating provisions of I.C.
2. When Not Binding See Lim v. Sun Life Assurance Co. of Canada, 41 Phil. 263 (1920):
provisional policy is not binding, and is but a mere acknowledgment of receipt of premiums,
since it expressly stated that it is effective only upon approval and issuance of policy by head
office; Great Pacific Life Assurance Company v. Court of Appeals, 89 SCRA 543 (1979): not
binding if insurance still subject to approval, i.e., whether insured is insurable based on standard
rates.
3. Separate Premium Not Required See Pacific Timber v. Court of Appeals, 112 SCRA 199
(1982): Cover note binding even if no premium was paid, because no premiums could be fixed
until all particulars of shipment are known; therefore, no premium required, since no basis for
computation of premiums. If cover note treated as separate policy which requires separate
premium, its purpose and function meaningless.
C. KINDS OF INSURANCE POLICY Sec. 59, I.C.
1. Open Policy Secs. 60, 161 (Marine), and 171 (Fire), I.C.: value of things insured not agreed
upon, but left to be ascertained in case of loss.
Note: See Development Insurance Corporation v. Intermediate Appellate Court, 143 SCRA
62 (1986): Actual loss, as determined, will represent total indemnity, but indemnity not to exceed
face value of policy.
3. Valued Policy Secs. 61, 156 to 160 (Marine), and 171 (Fire), I.C.: expresses on its face an
agreement that things insured shall be valued at specified sum.
4. Running Policy Sec. 62, I.C.: contemplates successive insurances, and provides that object of
policy may from time to tome be defined, especially as to subjects of insurance, by additional
statements or endorsements. Example: insurance for stock-in-trade.
D. CANCELLATION, RENEWAL, REFORMATION
1. Grounds for Cancellation
a. By Insurer: Grounds Sec. 64, I.C.; Philamcare Health Systems, Inc. v. Court of
Appeals, 379 SCRA 356 (2002)
i.
non-payment of premiums
ii. conviction of crime increasing hazard insured against

iii. discovery of fraud or material misrepresentation
iv. discovery of acts or omissions increasing hazard insured against
v. physical changes in property insured making it uninsurable
vi. Insurance Commissioner determines policy or insured may violate I.C.
b. By insured: surrender of policy Sec. 79(b), I.C.
c. By either party Paulino v. Capital Insurance, 105 Phil. 1315 (1959): per stipulation in
policy
2. Notice Requirements for Cancellation
17
a. In General Sec. 65, I.C.; Saura Import & Export Co., Inc. v. Philippine International
Surety Co., Inc., 8 SCRA 143 (1963): personal notice to insured is necessary
i.
in writing
ii. mailed or delivered to named insured at address shown in policy Malayan Insurance
Co., Inc. v. Arnaldo, 154 SCRA 672 (1987): actual receipt of notice of cancellation
essential, and insurer cannot rely on presumption of regularity that notice sent by mail
through our mailing section
iii. state which of grounds set forth in Sec. 64 is relied upon
iv. state that, upon written demand of named insured, insurer will furnish facts on which
cancellation is based
b. For compulsory motor vehicle liability insurance
i.
If cancellation by insurer: Must give written notice of cancellation to land transportation

operator and Land Transportation Office at least 15 days prior to effective date of
cancellation Sec. 380, I.C.
ii. If cancellation by land transportation operator: Must, prior to effective date of

cancellation, secure similar policy, surety bond, cash deposit to replace policy to be
cancelled Sec. 381, I.C.
2. Renewal Sec. 66, I.C.: In case of insurance other than life, named insured entitled to renew
policy upon payment of premium on effective date, unless insurer at least 45 days prior to
expiration notifies insured of intent not to renew policy
3. Reformation San Miguel Brewery v. Law Union and Rock Insurance Co., 40 Phil. 674
(1920): if writing of policy attended by mistake, court to order reformation to conform to intent of
parties
VI.
ASCERTAINING AND CONTROLLING RISKS
A. CONCEALMENT
1. Definition Sec. 26, I.C.: neglect to communicate that which a party knows and ought to
communicate
2. What Must Be Communicated; Requisites Sec. 28, I.C.
a. Facts within his knowledge Rules on time of knowledge:33
i.
Insured must have knowledge of fact at time of effectivity of policy.
ii. If insured came to know of fact after application, must communicate such fact prior to
effectivity, unless otherwise agreed.
iii. If insured came to know of fact after effectivity, need not communicate such fact.
b. Facts material to the contract Secs. 31 and 107 (Marine), I.C.:
i.
Test of Materiality: not determined by event, but solely by probable and reasonable
influence of facts upon party to whom communication is due, in forming estimate of
disadvantages of proposed contract, or in making his inquiries.
ii. Causal Connection Not Necessary: See Sunlife Assurance Company of Canada v.
Court of Appeals, 245 SCRA 268 (1995): questions on health material (concealment of
18
confinement and diagnosis of renal failure) even if cause of death unrelated (e.g., plane
crash), and good faith no defense to concealment.
iii. When Illness Material: Argente v. West Coast Life Insurance Co., 51 Phil. 725 (1928):
cerebral congestion and Bells palsy; Saturnino v. Philippine American Life Ins. Co.,
7 SCRA 316 (1963): cancer; Great Pacific Life Assurance Company v. Court of
Appeals, 89 SCRA 543 (1979): mongoloid; Vda de Canilang v. Court of Appeals, 233
SCRA 443 (1993): hospitalization for 2 weeks prior to filing of application.
iv. When Illness Not Material: mere cold; slight attack of influenza; diarrhea about 2 years
previously.34
c. Other party has no means of ascertaining such facts; and
d. He makes no warranty as to such facts Sec. 29, I.C.
3. What Need Not Be Communicated, Except in Answer to Inquiries
a. Facts other party knows Sec. 30(a), I.C.; Insular Life Assurance v. Feliciano, 73 Phil.
201 (1941): if insurers agent knew of information allegedly concealed, then insurer deemed
to know; Insular Life Assurance Co. v. Feliciano, 74 Phil. 468 (1943): reversal of earlier
case, since insured, authorizing agent/medical examiner to write answers, effectively
constituted them as agents of insured
b. Facts other party ought to know
i.
Those which, in the exercise of ordinary care, the other ought to know, and of which the
former has no reason to suppose him ignorant Secs. 30(b), I.C.
ii. All general causes which are open to his inquiry, equally with that of the other, and which
may affect the political and material perils contemplated; and all general usages of trade
Sec. 32, I.C.
c. Facts of which other party waives communication Secs. 30(c) and 33, I.C.:
i.
Express waiver by terms of insurance; or
ii. Implied waiver by neglect to make further inquiry as to facts, where distinctly implied in
other facts communicated) See Ng Gan Zee v. Asian Crusader Life Assurance
Corp., 122 SCRA 461 (1983): if insured disclosed that he was operated on tumor
associated with ulcer of the stomach and insurer failed to make further inquiries, such
constitutes a waiver; hence, no concealment.
Waiver of Medical Examination Not Waiver of Material Information: See Saturnino v.
Philippine American Life Ins. Co., 7 SCRA 316 (1963): in non-medical: life insurance,
waiver of medical examination renders even more material the information required of
applicant concerning his health (e.g., previous operation),
d. Facts which prove or tend to prove existence of risk excluded by a warranty, and which are
not otherwise material Sec. 30(d), I.C.
e. Facts relating to a risk excepted from the policy and which are not otherwise material Sec.
30(e), I.C.
f.
Nature and amount of interest (except upon inquiry) Secs. 34; Except Sec. 51(e), I.C.: the
interest of insured in property insurance, if he is not absolute owner thereof
g. Opinion or judgment (even upon inquiry) Secs. 35; But See Sec. 108, I.C.: information of
belief or expectation of third person in reference to material fact, deemed material
4. Effect
19
a. Concealment, whether intentional or unintentional Sec. 27, I.C.: entitles injured party to
rescind; Yu Pang Cheng v. Court of Appeals, 105 Phil. 930 (1959); Sunlife Assurance
Company of Canada v. Court of Appeals, 245 SCRA 268 (1995).
i.
Basis: It misleads or deceives insurer into accepting the risk, or accepting it at the rate of
premium agreed upon.
ii. Tests: (a) whether insurer misled or deceived into entering into contract or fixing premium
by withholding of material information within insureds knowledge; (b) probable and
reasonable influence of the facts, not the subjective belief or state of mind of insured.
iii. Proof: Concealment must be proven by convincing evidence.
b. Concealment of matters tending to prove falsity of warranty, if intentional or fraudulent Sec.
29, I.C.: entitles insurer to rescind; Gen. Insurance & Surety Corp. v. Ng Hua, 106 Phil.
1117 (1960): concealment of co-insurance in case there is warranty that there is no coinsurance.
5. Application Sec. 47, I.C.: Rules on concealment apply both to original formation of insurance
and to modification of policy
B. REPRESENTATION
1. Definition and Characteristics: oral or written statement of a fact or condition affecting the risk
made by the insured to the insurance company, tending to induce the insurer to assume the risk
a. Form: oral or written Sec. 36, I.C.
b. When Made Sec. 37, I.C.
i.
At time of issuance of policy; or
ii. Before issuance of policy Sec. 41, I.C.: may be altered or withdrawn before effectivity
of contract, but not afterwards.
c. Interpretation Sec. 38, I.C.: same rules as contracts in general
i.
Presumed to refer to date of effectivity of contract Sec. 42, I.C.
ii. Representation as to future deemed promissory, unless merely statement of belief or

expectation Sec. 39, I.C.
iii. Representation cannot qualify express provision in insurance contract, but may qualify an
implied warranty Sec. 40, I.C.
2. Falsity: when facts fail to correspond with its assertions or stipulations Sec. 44, I.C.; Note:
substantial, not literal, truth is sufficient, e.g., insured does not drink alcohol, no misrepresentation
if he occasionally drank beer.
But Sec. 43, I.C. If insured has no personal knowledge of a fact, he may repeat information he
has upon the subject, and which he believes to be true, with explanation that he does so on
information of others (except by agent of insured), and insured not responsible for its truth; See
Harding v. Commercial Union Assurance Company, 38 Phil. 464 (1918): No
misrepresentation if insured did not state out of her own personal knowledge the value of thing
insured, but merely repeated information given by her husband, and disclosed source of
information.
3. Materiality Sec. 46 and Sec. 31, I.C.: Same test as in concealment
4. Effect of False and Material Representation Sec. 45, I.C.:
20
a. Injured party entitled to rescind contract from time when representation becomes false; See
Saturnino v. Philippine American Life Ins. Co., 7 SCRA 316 (1963): Insured represented
that she never had cancer or tumor or undergone operation not withstanding that 2 months
before issuance of policy, she was operated on for cancer; hence, misrepresentation; See
Musgi v. West Coast Life Insurance Co., 61 Phil. 864 (1935): If applicant answered in
negative knowing that he had been confined in hospital on several occasions for various
ailments, including incipient pulmonary tuberculosis, answers substantially false; hence,
misrepresentation..
b. Right to rescind waived by acceptance of premium payments despite knowledge of ground for
rescission Gonzalez La O v. Yek Tong Lin Fire & Marine Insurance Co., Ltd., 55 Phil.
386 (1930); Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., 98 Phil. 85
(1955).
c. Where no misrepresentation See Edillon v. Manila Bankers Life Insurance Corp., 117
SCRA 187 (1982): if age disclosed on policy, no misrepresentation.
5. Application Sec. 47, I.C.: Rules on misrepresentation apply both to original formation of
insurance and to modification of policy.
C. WARRANTIES
1. Definition and Characteristics: written statement or stipulations inserted on the face of the
contract itself, or clearly incorporated therein as a part thereof by proper words of reference,
whereby the insured expressly contracts as to the existence of certain facts, circumstances, or
conditions, the literal truth of which is essential to the validity of the contract of insurance.
a. Kinds
i.
Express or implied Sec. 67, I.C.
ii. Affirmative or Promissory Secs. 71 and 72, I.C.

b. To what warranties relate: past, present, future, or any or all of these Sec. 68, I.C.
c. Form: no particular form or words necessary Sec. 69, I.C.
2. Express Warranties: must be contained in policy itself, or in other instrument signed by insured
and referred to in policy as part thereof, e.g., rider Sec. 70, I.C.; Ang Giok Chip v.
Springfield Fire & Marine Insurance Co., 56 Phil. 375 (1931): if warranty contained in rider,
need not be signed by insured, because rider is part of policy.
3. Affirmative Warranties Sec. 71, I.C.: Statement relating to person or thing insured, or to the
risk, as a fact
4. Promissory Warranties Secs. 72 and 73, I.C.: Statement which it is intended to do or not to do
a thing which materially affects the risk; but if performance preceded by loss, or becomes
unlawful or impossible, then omission to fulfill warranty does not avoid policy
5. Effect of Breach
a. Breach of material warranty or provision: entitles other party to rescind Sec. 74, I.C.;
Young v. Midland Textile Insurance Co., 30 Phil. 617 (1915): causal connection between
violation of warranty and loss is not necessary
Warranty Not Violated: See Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd.,
98 Phil. 85 (1955): warranty prohibiting storage of gasoline not breached because storage of
gasoline incidental to business of insured.
21
b. Breach of immaterial provision: does not avoid policy Sec. 75, I.C.; Gen. Insurance &
Surety Corp. v. Ng Hua, 106 Phil. 1117 (1960)
c. Breach of warranty without fraud: merely exonerates insurer from time it occurs, or where it
is broken in its inception, prevents policy from attaching to the risk Sec. 76, I.C.
D. OTHER DEVICES
1. Conditions collateral terms that do not relate to risk covered or statement of facts but in nature
of collateral promises and stipulations35
2. Exceptions, Exclusions, or Exemptions limitations or restrictions on operation of general
provisions of insurance contract by special proviso36
E. INCONTESTABLE CLAUSE
1. Rescission of Insurance Contract (for Life and Non-Life Insurance) Sec. 48, par. 1, I.C.
a. Time to rescind: prior to commencement of action Tan Chay Heng v. West Coast Life
Insurance Co., 51 Phil. 80 (1927): Sec. 48 applies only when there is contract to rescind, not
when defense is contract is void or there is no contract, in which case there is nothing to
rescind.
b. Effect of failure to rescind before commencement of action: cannot rescind, but may raise
ground as a defense Argente v. West Coast Life Insurance Co., 51 Phil. 725 (1928): if
insurer failed to rescind, it can no longer cancel policy but may raise ground as defense, not to
abrogate contract but to defeat recovery.
c. Waiver of right to rescind Gonzalez La O v. Yek Tong Lin Fire & Marine Insurance Co.,
Ltd., 55 Phil. 386 (1930): if, with knowledge of existence of other insurances in violation of
policy, insurer preferred to continue policy, its action amounted to waiver of rescission of
contract.
2. Incontestible Clause (for Life Insurance Only) Sec. 48, par. 3, and Secs. 227(b), 228(b), and
230(b), I.C.
a. Requisites of incontestability
i.
It must be a life insurance policy
ii. It must be payable on the death of the insured

iii. It must have been in force during the lifetime of the insured for a period of two years
See Tan v. Court of Appeals, 174 SCRA 403 (1989): if insured dies within two-year
period, policy no longer in force, therefore not incontestable; See Philamcare Health
Systems, Inc. v. Court of Appeals, 379 SCRA 356 (2002): may have shorter periods by
agreement, as in health care memberships, e.g., 12 months for asthma, 6 months for
diabetes
b. Effects and purpose of incontestability: to prevent inequity of insurers resisting claims
c. Defenses not barred by incontestability: defenses other than concealment and false
representation of material facts, such as: 37
i.
non-payment of premiums;

22
ii. violation of condition;
iii. insured has no insurable interest;
iv. cause of death excepted;
v. vicious fraud (insurance taken out in scheme to murder insured);
vi. necessary notice or proof of loss not given.
F. STIPULATION ON LIMITATION OF ACTION Sec. 63, I.C.: any condition, stipulation, or agreement
limiting commencement of action to less than one (1) year from time when cause of action accrues is
void.
VII.
LOSS AND NOTICE OF LOSS
A. LOSS
1. Concepts and Definitions38
a. Loss: Injury or damage sustained by insured in consequence of happening of one or more
events (accidents or misfortunes) against which insurer, in consideration for the premium, has
undertaken to indemnity the insured
b. Proximate Cause (or Efficient Cause): Event which in a natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and without which the injury
would not have occurred
c. Remote Cause: Cause which some independent force merely took advantage of to accomplish
something which is not the natural effect thereof
d. Immediate Cause: Cause or condition nearest to the time and place of injury
e. Peril Insured Against: Event (accident or misfortune) against which insured insurer has
undertaken to indemnify the insured.
2. Losses for which Insurer Liable
a. Loss of which a peril insured against was the proximate cause Sec. 84, I.C.
b. Loss caused by a peril not insured against to which the thing insured was exposed in the
course of rescuing the same from the peril insured against Sec. 85, I.C.
c. Loss caused by efforts to rescue the thing insured from a peril insured against Sec. 85, I.C.
d. Loss, the immediate cause of which was the peril insured against, if the proximate cause
thereof was not excepted in the contract Sec. 86, I.C.; Paris-Manila Perfume Co. v.
Phoenix Assurance Co., 49 Phil. 758 (1926): in fire insurance policy where damage by
explosion is excepted, insurer must prove that fir is caused by explosion, and where insurer
cannot present evidence whether explosion caused fire or fire caused explosion, it is liable to
insured.
e. Loss caused by negligence of the insured Sec. 87, I.C.; FGU Insurance Corporation v.
Court of Appeals, 454 SCRA 337 (2005): however, if insureds negligence is so gross that it is
tantamount to misconduct, or wrongful or willful act, insurer is not liable.
23
3. Losses for which Insurer Not Liable
a. Loss of which a peril insured against was only a remote cause Sec. 84, I.C.
b. Loss, the immediate cause of which was the peril insured against, if the proximate cause
thereof was excepted in the contract Sec. 86, I.C.
c. Loss caused by willful act or through connivance of insured, e.g., arson Sec. 87, I.C.; But
See Sec. 180-A, I.C. (suicide);East Furniture Inc. v. Globe & Rutgers Fire Ins. Co., 57
Phil. 576 (1932); Prats & Co. v. Phoenix Insurance Co., 52 Phil. 807 (1929)
4. Void Agreement Sec. 83, I.C.: agreement not to transfer claim of insured after loss has
happened is void if made fore the loss, except in case of life insurance.
B. NOTICE AND PROOF

1. Requisites for Recovery After Loss
a. Give notice of loss without unnecessary delay Sec. 88, I.C.
b. When required by policy, submit a preliminary proof of loss Sec. 89, I.C.
2. Notice of Loss in Fire Insurance Sec. 88, I.C.; If not given without unnecessary delay, insurer
exonerated
3. Proof of Loss
i.
Purpose Pacific Banking Corp. v. Court of Appeals, 168 SCRA 1 (1988): submission of
proof of loss is sine qua non to right to maintain action on policy.
ii. Proof Required Sec. 89, I.C.: if preliminary proof required, best evidence within the power
of insured sufficient.
ii. Certification of Third Person Sec. 92, I.C.: if policy requires certificate or testimony of third
person, sufficient for insured to use reasonable diligence to procure it, and in case of refusal,
then furnish reasonable evidence that such refusal is not on any just grounds of disbelief in
facts to be certified or testified; Malayan Insurance Co., Inc. v. Arnaldo, 154 SCRA 672
(1987): certification by Integrated National Police as to extent of loss is sufficient.
4. Defects Sec. 90, I.C.: if not raised by insurer without unnecessary delay as grounds of objection,
deemed waived; Bachrach v. British American Assurance Co., 17 Phil. 555 (1910): denial of
liability on other grounds was waiver of defect in proof of loss.
5. Delay Sec. 91, I.C.: if caused by act of insurer, or if insurer omits to object promptly and
specifically on that ground, waived; Pacific Timber v. Court of Appeals, 112 SCRA 199
(1982); Philippine Charter Insurance Corporation v. Chemoil Lighterage Corporation, 462
SCRA 77 (2005)
VIII.
CLAIMS SETTLEMENT AND SUBROGATION
A. CLAIMS SETTLEMENT
24
1. Claims Settlement Sec. 241, I.C.: No insurance company doing business in the Philippines
shall refuse, without just cause, to pay or settle claims arising under coverages provided by its
policies, nor shall any such company engage in unfair claim settlement practices.
2. Unfair Claims Settlement Practices Sec. 241, I.C.: Any of the following acts by the insurance
company, if committed without just cause and performed with such frequency as to indicate a
general business practice, shall constitute unfair claims settlement practices:
a. knowingly misrepresenting to claimants pertinent facts or policy provisions relating to
coverage at issue;
b. failing to acknowledge with reasonable promptness pertinent communications with respect to
claims arising under its policies;
c. failing to adopt and implement reasonable standards for prompt investigation of claims arising
under its policies;
d. not attempting in good faith to effectuate prompt, fair and equitable settlement of claims
submitted in which liability has become reasonably clear; or
e. compelling policyholders to institute suits to recover amounts due under its policies by
offering without justifiable reason substantially less than the amounts ultimately recovered in
suits brought by them.
3. Period to Settle Claims
a. Life Insurance Sec. 242, I.C.:
i.
General Rule: proceeds payable immediately upon maturity; Fernandez v. National

Life Insurance Co., 105 Phil. 59 (1959): in life insurance, maturity upon death, not upon
submission of proof, which is merely procedural.
ii. If policy provides that proceeds payable in installments or as annuity: installments or

annuities payable as they fall due; or
iii. If policy maturing upon death of insured: proceeds payable within 60 days after
presentation of claim and filing of proof of death of insured.
b. Non-Life Insurance Sec. 243, I.C.:
i.
General Rule: proceeds payable: (a) within 30 days after proof of loss received by insurer;
and (b) ascertainment of loss or damage is made either by agreement of parties or by
arbitration; or
ii. If ascertainment of loss not made (with or without claims adjuster) within 60 days after
insurers receipt of proof of loss, payment made within 90 days after receipt of proof of
loss.
c. When Claim Justifiably Rejected Secs. 242 and 242, I.C.: if fraudulent.
4. Sanctions
a. For unfair claims settlement practices Sec. 241, I.C.: suspension or revocation of certificate
of authority of insurer by Insurance Commissioner
b. For unreasonable denial or withholding of claim Secs. 242 to 244, I.C.: insurance company
shall pay: (i) attorneys fees; (ii) other expenses incurred by insured by reason thereof; (iii)
interest of 24% (twice the ceiling prescribed by Monetary Board) of the amount of claim; and
(iv) amount of claim.
B. PRESCRIPTIVE PERIOD
25
1. Limitation of Action by Agreement Sec. 63, I.C.: any condition, stipulation, or agreement
limiting commencement of action to less than one (1) year from time when cause of action
accrues is void.
2. Limitation Not Merely Procedural Ang v. Fulton Fire Ins. Co.: stipulation on limitation of
actions prevails over rules on prescription, provided that agreed period is not less than one year
from denial of claim; limitation is important to ensure that evidence of origin and cause of loss has
not yet disappeared.
3. Computation of One-Year Period Agric. Credit & Cooperative Financing Administration
v. Alpha Ins. & Surety Co., Inc., 24 SCRA 151 (1968): one year period counted from denial of
claim; Sun Insurance Office, Ltd. v. Court of Appeals, 195 SCRA 193 (1991): if claim was
denied by insurer but insured filed a petition for reconsideration, one year period still counted
from denial of claim at first instance and not from denial of petition for reconsideration; New
Life Enterprises v. Court of Appeals, 207 SCRA 669 (1992): if claim was denied by insurer but
insured sent request for clarification, one year period still counted from denial of claim at first
instance and not from receipt of clarificatory letter.
4. When No Period Agreed Upon, or When Agreement as to Period Void Arts. 1145 to 1146,
Civil Code: insured may bring action within prescriptive period in Civil Code, i.e., ten years for
written contracts, and six years in case of oral contract, from time cause of action accrues.
5. Compulsory Motor Vehicle Liability Insurance Secs. 384-385; See Chapter XII.B below
C. SUBROGATION
1. Subrogation, Effect of Payment By Insurer Art. 2207, Civil Code: in property insurance, if
insured received indemnity from insurer for injury or loss arising out of wrong or breach of
contract, insurer subrogated to rights of insured against wrongdoer or person violating contract.
2. Basis: based on principle of natural justice and created to afford relief to those required (insurers)
to pay legal obligation which ought to have been met by another.39
3. By Operation of Law Aboitiz Shipping Corporation v. Insurance Company of North
America, 561 SCRA 262 (2008): subrogation not dependent upon, nor grows out of, any privity of
contract or upon written assignment of claim, but accrues simply upon payment of insurance
claim by insurer.
4. Rights of Insurer/Insured Aboitiz Shipping Corporation v. Insurance Company of North
America, 561 SCRA 262 (2008)
a. Insurers rights limited to insureds rights.
b. Insured entitle to recover deficiency from person causing loss or injury only if amount paid by
insurer does not fully cover injury or loss.
5. When Insurer Not Subrogated:40
i.
in life insurance (which is not a contract of indemnity)
ii. if proximate cause of damage was negligence of insured himself

iii. if insurer pays to insured loss not covered by policy
iv. if insured fails to comply with legal or stipulated condition precedent prior to filing of action
against wrongdoer, or otherwise releases third person liable to insured:
(a) if release is prior to payment by insurer to insured, insured cannot collect from insurer
26
(b) if release is after payment by insurer to insured, insurer may recover from insured
IX.
DOUBLE INSURANCE AND REINSURANCE
A. DOUBLE INSURANCE
1. Definition Sec. 93, I.C.: Where the same person is insured by several insurers separately in
respect to the same subject and interest
2. Requisites Sec. 93, I.C.
a. Same person is insured
b. Two or more insurers that insured the person separately
c. Insurance is over the same subject
d. Same interest is involved Geagonia v. Court of Appeals, 241 SCRA 152 (1995):
mortgagor and mortgagee have different interests, so no double insurance
e. Same peril is insured against
Test of Double Insurance: if insured, in case of happening of risk insured against, can be directly
benefited by recovering on both policies.41
3. Other Insurance Clause: Purpose is to prevent over-insurance and thus avert fraud
Examples: Pacific Banking Corp. v. Court of Appeals, 168 SCRA 1 (1988): if policy expressly
requires notice be given by insured of existence of other policies upon same property; Pioneer
Insurance and Surety Corporation v. Yap, 61 SCRA 426 (1974): if policy requires that
procurement of other insurance be with consent of insurer; New Life Enterprises v. Court of
Appeals, 207 SCRA 669 (1992): if insured required to disclose other insurance effected over same
subject matter.
4. Over-Insurance (as to amount) By Double Insurance (as to number of insurers): Rules Sec.
94, I.C.:
a. Insured may claim payment from insurers in any order, up to amount for which insurers
individually liable under their respective contracts, unless policy provides otherwise.
b. Insured must credit amount received from any of insurers against valuation agreed upon (if
valued policy) and against full insurable value (if open policy).
c. In case insured received excess of valuation (if valued policy) and insurable value (if open
policy), he must hold excess in trust for insurers according to right of contribution among
themselves.
d. Among themselves, insurers bound to contribute ratably to loss in proportion to mamount for
which they are liable under their policies.
B. REINSURANCE
1. Definition (Purpose) Sec. 95, I.C.: one by which insurer procures a third person to insure him
against loss or liability by reason of such original insurance (to distribute risk among several
insurers).
27
a. Retrocession reinsurance made on a second and subsequent level, concerning same original
risks written by first ceding company.42
b. Reinsurance Policy vs. Reinsurance Treaty See Phil. American Life Ins. Co. v. Auditor
General, 22 SCRA 135 (1968): reinsurance policy is contract of indemnity one insurer makes
with another to protect insurer from risk already assumed, while reinsurance treaty is merely
an agreement between two insurance companies whereby one agrees to cede and the other to
accept reinsurance business; See Fieldmens Insurance Co., Inc. v. Asian Surety &
Insruance Co., Inc., 34 SCRA 36 (1970): even if reinsurance treaty is cancelled, does not
ipso facto result in termination of all reinsurance concessions thereunder, which continue to
be in force until expiration of individual reinsurance policies.
b. Automatic vs. Facultative Reinsurance Treaty Equitable Insurance and Casualty Co.,
Inc. v. Rural Insurance and Surety Co., Inc., 4 SCRA 343 (1962): Reinsurer has right to
accept or not to accept participation in risk insured, but if accepted, obligation is absolute and
liability assumed thereunder can be discharged only by payment of share of losses.
2. Distinguished from Double Insurance43
a. In double insurance, insurer remains as insurer, while in reinsurance, insurer becomes insured.
b. In double insurance, subject matter is property, while in reinsurance, subject matter is
insurers risk or liability.
c. In double insurance, same interest and risk are insured with another insurer, while in
reinsurance, different risk and interest is insured.
3. When Required
a. Sec. 215, I.C. if non-life insurer insures in any one risk amount exceeding 20% of its net
worth, must reinsure in excess of such limits
b. Sec. 275, I.C. if foreign insurance company withdraws from RP, primary liabilities to RP
residents must be reinsured by other insurance company authorized to transact business in RP
4. Matters to be Communicated by Reinsured Sec. 96, I.C.: Except if automatic reinsurance
treaty, insurer must communicate all representations of original insured, and also all knowledge
and information he possesses material to the risk
5. Reinsurers Extent of Liability Sec. 97, I.C.: Reinsurance presumed to be indemnity against
liability, not merely against damage; therefore, reinsurer not liable to reinsured if latter not liable
to original insured, but reinsured entitled to payment even before payment to original insured
6. Original Insured No Interest in Reinsurance Sec. 98, I.C.; Artex Development Co., Inc. v.
Wellington Insurance Co., Inc., 51 SCRA 352 (1973): reinsured alone may claim against
reinsurer; Coquia v. Fieldmens Insurance Co., Inc., 26 SCRA 178 (1968): exception is if
contract of reinsurance is made directly for the benefit of the reinsureds policy holders
(stipulation pour autrui); Guingon v. Del Monte, 20 SCRA 1043 (1967): Test: if contract is for
indemnity against liability to third persons, as opposed to indemnity for actual loss or payment,
then third persons cannot claim directly against reinsurer; Gibson v. Revilla, 92 SCRA 219
(1979): in action by reinsured, reinsurer is entitled to avail itself of every defense which reinsured
could raise in an action by person originally insured.
X.
MARINE INSURANCE
28
A. DEFINITION AND COVERAGE
1. Definition: Insurance Against Loss Or Damage Sec. 99(1), I.C.:
a. To vessels, craft, aircraft,* vehicles, goods, freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities, choses in action, evidences of debts, valuable
papers, bottomry, and respondentia interests, and all other kinds of properties and interests in
connection with perils of navigation, transit or transportation; and to goods or merchandise
while being assembled, packed, crated, baled, compressed or similarly prepared for
shipment** Sec. 99(1)(a), I.C.
i.
Named Perils Policy; Perils of the Sea vs. Perils of the Ship See Go Tiaoco y
Hermanos v. Union Ins. Society of Canton, 40 Phil. 40 (1919): ordinarily, marine
insurance covers perils of the sea (violent action of winds or waves that cannot be
foreseen or attributable to anyone), but not perils of the ship (natural action of sea,
normal wear and tear, negligence of shipowner)
ii. All Risk Policy See Filipino Merchants Insurance Co., Inc. v. Court of Appeals,
179 SCRA 638 (1989): if all risk marine insurance, covers both perils other than willful
and fraudulent act of insured; by stipulation, may cover perils of navigation, war risks,
builders risks, inchmaree clause (loss to hull or machinery through negligence of
master and crew, explosions, busting, breaking, or latent defects in machinery)
b. To persons or property in connection with marine transit or transportation insurance, except
life insurance and insurance against loss by reason of bodily injury to any person arising out
of ownership, maintenance or use of automobiles Sec. 99(1)(b), I.C.
c. To precious stones, jewels, jewelry, precious metals, whether in course of transportation or
otherwise** Sec. 99(1)(c), I.C.
d. To bridges, tunnels, other instrumentalities of transportation and communication** Sec.
99(1)(d), I.C.
2. Kinds of Marine Insurance44
a. Ocean Marine Insurance
i.
Insurance over vessel, craft, other conveyances (e.g., hull, builders risk, port risk only,
fleet, full form, and total loss only policies);
ii. Insurance for protection of carrier against liability to others for loss or damage to property
of another (e.g., running down clause, marine protection and indemnity insurance; excess
protection and indemnity insurance; water pollution liability);
iii. Insurance over cargoes being transported (e.g., trip or single risk cargo policy, open cargo
policy);
iv. Insurance over freight and income
v. Compulsory passenger and cargo liability insurance45
b. Inland Marine Insurance**
i.
Insurance over goods that are being imported or exported;
ii. Insurance over infrastructure for transportation and communication;

45 Pursuant to Republic Act No. 9295, the Domestic Shipping Act of 2004.
29
iii. Personal property floaters (e.g., precious stones, jewels, jewelry, precious metals, personal
effects, wedding gift, cold storage, bicycle, mobile machinery and equipment floaters)
c. Aircraft Hull Policy* (aviation insurance, may cover ground and flight)
3. Marine Protection and Indemnity Insurance Sec. 99(2), I.C.: Insurance against legal
liability; White Gold Marine Services, Inc. v. Pioneer Insurance Surety Corporation, 464
SCRA 448 (2005): P&I Club is association of shipowners providing mutual insurance
coverage/benefits
B. INSURABLE INTEREST
1. Owner of Ship Sec. 100, I.C.: Has insurable interest in ship
a. Even if charterer agrees to pay ships value in case of loss Sec. 100, I.C.: insurer liable only
to extent insured cannot recover from charterer.
b. If ship hypothecated by bottomry Sec. 101, I.C.; See Art. 719, Code of Commerce (loan
on bottomry secured by ship; loan on respondentia secured by cargo): only to excess of ships
value over amount secured by bottomry
2. Owner of Ship Sec. 103, I.C.: Has insurable interest in freightage, i.e., Sec. 102, I.C.: all
benefits derived from charter of ship or carriage of goods, which owner would have earned
a. If charter party Sec. 104, I.C.: when ship has broken ground
b. If no charter party and freightage is to be paid Sec. 104, I.C.: when goods are on board, and
ship and goods are ready for voyage
3. One Who Has Insurable Interest in Thing Insured Sec. 105, I.C.: Has insurable interest in
profits
4. Charterer of Ship Sec. 106, I.C.: To extent that he is liable to be damnified by its loss
C. ASCERTAINING AND CONTROLLING RISKS
1. Concealment
a. What must be communicated
i.
Sec. 104, I.C.: In addition to matters under Sec. 28, and except those in Sec. 30, all
information material to the risk; and exact and whole truth with respect to representations
and answers to inquiries
ii. Sec. 105, I.C.: Information or belief or expectation of third party in relation to material
fact deemed material
iii. Sec. 106, I.C.: Knowledge of prior loss presumed if information might have reached
insured in usual mode and rate of transmission
b. Concealment as to following Sec. 110, I.C.: Does not vitiate entire contract, but exonerates
insurer from loss resulting from risk concealed
i.
National character of insured
ii. Liability of things insured to capture and detention

iii. Liability to seizure from breach of foreign laws of trade
iv. Want of necessary documents
v. Use of false and simulated papers
30
2. Representation
a. Sec. 111, I.C.: Insurer entitled to rescind contract if representation is Intentionally false in any
material respect (Compare with Sec. 45, where intent not essential)
b. Sec. 112, I.C.: Falsity of representation as to expectation, in absence of fraud, does not avoid
contract
3. Implied Warranties
a. Seaworthiness of ship Sec. 113, I.C.
i.
Definition and Extent

(a) Condition and structure of ship: reasonably fit to perform the service and to encounter
ordinary perils of the voyage contemplated Sec. 114, I.C.; Madrigal, Tiangco &
Co. v. Hanson, Orth & Stevenson, Inc., 103 Phil. 345 (1958)
(b) Extent: ship properly laden, provided with competent master, sufficient number of
competent officers and seamen, requisite appurtenances and equipment Sec. 116,
I.C.
(c) For purpose of insurance on the cargo: ship fit to receive cargo Sec. 119, I.C.
Waiver of Seaworthiness: See Philippine American General Insurance Co., Inc. v.
Court of Appeals, 273 SCRA 262 (1997): implied warranties may be waived by insurer,
but waiver must be in writing and in the clearest language.
ii. When seaworthiness required Secs. 115 and 117, I.C.: at commencement of risk, or if
specified, at start of every voyage
iii. Unseaworthiness during voyage: unreasonable delay in repairing defect exonerates insurer
Sec. 118, I.C.; Roque v. Intermediate Appellate Court, 139 SCRA 596 (1985)
b. No improper deviation Sec. 125, I.C. (Deviation which is not proper)
i.
When there is deviation Sec. 123, I.C.

(a) Departure from course of voyage Secs. 121 and 122, I.C.: based on mercantile
usage, or way which to master of ordinary skill and discretion is most natural, direct
and advantageous
(b) Unreasonable delay in pursuing the voyage
(c) Commencement of entirely different voyage
ii. When deviation proper Sec. 124, I.C.

(a) Caused by circumstances beyond control of ship owner, master
(b) Necessary to comply with a warranty, or to avoid a peril (whether or not peril is
insured against)
(c) Made in good faith, and upon reasonable grounds of belief in its necessity to avoid a
peril
(d) Made in good faith, for the purpose of saving human life or reliving another vessel in
distress.
iii. Effect of improper deviation Sec. 126, I.C.: insurer not liable for any loss subsequent
thereto
c. Ship will carry requisite documentary proof if nationality or neutrality is expressly warranted,
and not suspicious documents Sec. 120, I.C.
31
d. Vessel will not engage in an illegal venture
D. LOSS
1. Kinds of Loss Secs. 127 and 128, I.C.
a. Total loss Secs. 129 and 137, I.C.
i.
Actual (absolute total loss)
ii. Constructive (technical total loss)

b. Partial loss (not total)
2. Actual Total Loss
a. Definition Sec. 130, I.C.;
i.
Total destruction of thing insured
ii. Irretrievable loss of thing by sinking, or by being broken up

iii. Damage to thing which renders it valueless to owner for purpose for which he held it
Philippine Mfg. Co. v. Union Insurance Society of Canton, 42 Phil. 378 (1921): when
vessel was sunk, even if raised, if valueless, then actual total loss; Pan Malayan
Insurance Corp. v. Court of Appeals, 201 SCRA 382 (1991): if shipment of rice seeds
became wet and started to germinate or sprout, then actual total loss
iv. Event that effectively deprives owner of possession, at port of destination, of thing
insured Malayan Insurance Corporation v. Court of Appeals, 270 SCRA 242
(1997): arrest of vessel covered
b. Presumption of actual loss Sec. 132, I.C.: continued absence of ship without being heard of
c. Right to payment of insured Sec. 135, I.C.: if actual total loss, insured entitled to payment
without notice of abandonment
3. Constructive Total Loss
a. Definition Secs. 131 and 139, I.C.; Oriental Assurance Corporation v. Court of
Appeals, 200 SCRA 459 (1991): if insured as one inseparable unit, then computed based on
such;
i.
More than 3/4 in value is actually lost, or would have to be expended to recover it from
peril
ii. Injured to such extent as to reduce its value by more than 3/4
iii. If thing insured is a ship, and contemplated voyage requires expense of more than 3/4 of
value of thing, or taking risk which prudent man would not take
iv. If thing insured is cargo or freightage, and voyage cannot be performed or other ship
procured within reasonable time and diligence, without incurring above expense (but
freightage cannot be abandoned without abandoning ship)
b. Right to abandon of insured Secs. 131 and 139, I.C.
i.
Definition Sec. 138, I.C.: Act of insured by which, after constructive total loss, he
declares the relinquishment to the insurer of his interest in thing insured
ii. Requisites of abandonment

(a) Must be neither partial nor conditional Sec. 140, I.C.
32
(b) Must be made within reasonable time after receipt of reliable information of loss
Sec. 141, I.C.
(c) If information of loss incorrect, or thing restored, abandonment ineffectual Sec. 142,
I.C.
iii. Notice of abandonment
(a) In writing; if oral, written notice within 7 days Sec. 143, I.C.
(b) Explicit, specify cause, show probable cause Sec. 144, I.C.
(c) Abandonment only upon cause specified Sec. 145, I.C.
iv. Acceptance of abandonment Secs. 150 and 151: whether express or implied, conclusive
upon parties
v. Refusal to accept proper abandonment Secs. 149 and 154, I.C.: does not prejudice
insured, insurer still liable
vi. Effect of insurers payment even if no formal abandonment Sec. 147, I.C.: insurer
entitled to remains of thing, proceeds or salvage
vii. Effects of abandonment
(a) Equivalent to transfer by insured of his interest to insurer, with all chances of
recovery and indemnity Sec. 146, I.C.
(b) Acts done in good faith by agents of insured in respect of thing insured, subsequent to
the loss, are at risk of insurer and for his benefit Sec. 148, I.C.
(c) Irrevocable once made and accepted, unless ground unfounded Sec. 152, I.C.
(d) On accepted abandonment of ship, freightage earned prior to loss belongs to insurer
of freightage, but freightage earned after loss belongs to insurer of ship Sec. 153,
I.C.
c. Insured may recover actual loss if he omits to abandon Sec. 155, I.C.
4. Reshipment; Liabilities of Insurer Secs. 133 and 134, I.C.: when ships prevented at
intermediate port, from completing voyage, by perils insured against, marine insurer continues to
be liable after goods are reshipped, including damages, expenses of discharging, storage
reshipment, extra freightage, all other expenses incurred in saving cargo reshipped.
5. General and Particular Average
a. Kinds of Averages Arts. 802-812, Code of Commerce
i.
Simple or particular average all damages and expenses upon vessel or cargo which have
not inured to common benefit or profit of all persons interested in vessel and cargo.
ii. General or gross average all damages and expenses deliberately caused in order to save
vessel and/or cargo, from real and known risk.
b. Liability for Contribution to General Average
i.
Insurer liable for insureds contribution to general average, in which case, insurer has
right of subrogation after payment to insured Secs. 136, 164 and 165, I.C.; Jarque v.
Smith, Bell & Co., 56 Phil. 758 (1930): insurer of ship liable to contribute to general
average for jettison of cargo
33
ii. Insurer not liable for insureds contribution to general average: (a) after separation of
interest liable to contribution; or (b) insured, having right and opportunity to enforce
contribution from others, neglected or waived exercise of right Sec. 165, I.C.
c. Free from Particular Average (FPA) Clause Sec. 136, I.C.: Effects
i.
If damage to thing insured is particular average, insurer not liable unless loss suffered is
total, i.e., insured is deprived of whole of such thing.
ii. If damage to thing insured is general average, insurer liable whether loss is partial or total,
or for contribution of insured for his proportion of all general average losses assessed
upon thing insured which was saved.
E. MEASURE OF INDEMNITY Secs. 156 to 163, and 166, I.C.: co-insurance
1. Valued Policies
a. Effect of Valuation Sec. 156, I.C.:
i.
General Rule: Valuation is conclusive provided that: (a) insured has some interest at risk;
and (b) there is no fraud on his part;
ii. Exception: If thing insured has been hypothecated by bottomry or respondentia before its
insurance, without knowledge of person procuring insurance, in which case real value
must be shown;
iii. Effect of over-valuation: insurer entitled to rescind if fraudulent.
b. Co-Insurance Sec. 157, I.C.: Marine insurer is liable upon a partial loss, only for such
proportion of the amount insured by him as the loss bears to the value of whole interest of the
insured in the property insured.
c. Loss of Cargo/Profits
i.
Valuation: If only part of freightage or cargo is exposed to risk, valuation applies only in
proportion to such part Sec. 159, I.C.
ii. Loss of Profits: conclusively presumed from loss of property out of which expected to
arise, and valuation fixed amount Sec. 160, I.C.
iii. Effect of Partial Loss of Cargo: If partial loss of cargo, and profits separately insured,
insurer liable to proportion of profits equivalent to proportion which value of property lost
bears to value of whole cargo Sec. 158, I.C.
2. Open Policies Sec. 161, I.C.: Estimation of value, with cost of insurance to be added:
a. Value of ship: at beginning of risk, including all articles/charges which add to its permanent
value or which are necessary to prepare it for voyage insured
b. Value of cargo: actual cost to insured, when laden on board; or if cannot be ascertained,
market value at time and place of lading, including charges; but does not include loss incurred
in raising money for its purchase, or to any drawback on its exportation, or to fluctuation of
market at port of destination
Note Sec. 162, I.C.: If cargo insured against partial loss arrives in damaged condition, loss
of insured deemed to be same proportion of value which market price at port of destination of
thing damaged, bears to market price of thing bought if sound
c. Value of freightage: gross freightage, exclusive of primage
3. Sue and Labor Clause Sec. 163, I.C.: Marine insurer liable for all expenses attendant upon loss
which forces ship into port to be repaired; and when it is stipulated that insured shall labor for
34
recovery of property, insurer is liable for expense incurred, such expenses being in addition to a
total loss, if that afterward occurs.
4. Application of Old Materials Sec. 166, I.C.: In case of partial loss of ship or equipment, old
materials are to be applied toward payment for new. Unless otherwise stipulated, mariner insurer
liable for only two-thirds of remaining cost of repairs after such deduction, except anchors must
be paid in full.
XI.
FIRE INSURANCE

1. Definition and Coverage Sec. 167, I.C.: Insurance against loss by fire, lightning, windstorm,
tornado, or earthquake and other allied risks, when such risks are covered by extension to fire
insurance policies or under separate policies.
a. Hostile Fire vs. Friendly Fire: fire insurance covers loss by hostile fire (burns at a place
where it is not intended to be, or breaks out from where it is intended to be and becomes
uncontrollable), and not by friendly fire (confined within place where it was intended to be
and employed for ordinary purpose of lighting, heating or manufacturing)
2. Prohibition Sec. 173, I.C.: No fire insurance pledged, hypothecated, transferred to agent or
representative of issuing company, otherwise void; See Sec. 83, I.C.: after loss occurs, no
restriction on transfer
B. MATTERS AFFECTING POLICY
1. Change in Use or Condition of Thing Insured: Requisites to Rescind Sec. 168, I.C.:
a. There must be a violation of the provisions of the policy.
Note: If act of insured subsequent to execution of policy does not violate provisions thereof,
even though it increases risk and causes loss, does not affect fire insurance contract Sec.
170, I.C.; See Bachrach v. British American Assurance Co., 17 Phil. 555 (1910): keeping
of inflammable materials on premises does not avoid policy if incidental to business,
moreover, no provision in policy expressly prohibiting such keeping.
b. The alteration was made without the consent of the insurer.
c. The alteration was made by means within the control of the insured.
d. The alteration increased the risk of loss; Examples: use of basement as dancehall and for
gambling; change from dwelling to boarding house.
Note: If alteration does not increase the risk, no effect on fire insurance contract Sec. 169,
I.C.; Example: change from occupancy to vacancy.
2. Acts of Insured Sec. 170, I.C.; See P.D. No. 1618 for prima facie evidence of arson
C. MEASURE OF INDEMNITY
1. Open Policy Sec. 171, I.C.: measure of indemnity is expense to insured at time of
commencement of fire to replace thing lost or injured in condition in which it was at time of
injury.
See Galian v. State Assurance Co., 29 Phil. 413 (1915): if no valuation, based on cost of
replacement; if ordinary household articles, expert testimony not required, insured may testify
35
2. Valued Policy Sec. 171, I.C.: if total loss: insurer shall pay whole amount so insured; if partial
loss: insurer shall pay full amount of partial loss.
a. Valuation Sec. 172, I.C. examination of building or structure to be valued shall be done by
independent appraiser instead of insurer:
b. Option to Rebuild Clause Ong Guan Can and Bank of the P.I v. Century Ins. Co., 46
Phil. 592 (1924): option to replace or rebuild, if stipulated, makes insurers obligation
alternative, in which case insurer must notify insured of his election to rebuild, otherwise,
insurer must pay for amount of loss.
XII. CASUALTY AND COMPULSORY MOTOR
VEHICLE LIABILITY INSURANCE
A. CASUALTY INSURANCE
1. Definition and Coverage Sec. 174, I.C.
a. Definition Loss or liability arising from accident or mishap, excluding those which by law
or custom are considered as falling exclusively within the scope of other types of insurance,
i.e., fire and marine.
b. Coverage: It includes:
i.
Employers liability and workmens compensation insurance
ii. Public liability insurance

iii. Motor vehicle liability insurance Sec. 373, I.C.: contract of insurance against passenger
and third party liability for death or bodily injuries and damage to property arising from
motor vehicle accidents.
Authorized Driver Clause: Cross-reference with Theft Insurance
(a) Drivers License Presumed Genuine CCC Insurance Corporation v. Court of
Appeals, 31 SCRA 264 (1970): Usually, insurers provide in policy that authorized
drivers of vehicle insured are: (a) insured himself; or (b) person permitted or ordered
by him to drive who has license to do so; drivers license presumed genuine, such that
licensed driver, even if no read, no write, is authorized driver
(b) Effect of Expired License Tanco, Jr. v. Philippine Guaranty Co., 15 SCRA 313
(1965): if license expired, even if renewed one week after accident, not authorized
driver; Stokes v. Malayan Insurance Co., Inc., 127 SCRA 766 (1984): Irish
citizen whose 90-day tourist visa expired, not authorized driver; Gutierrez v.
Captial Insurance & Surety Co., Inc., 130 SCRA 100 (1984): driver with expired
traffic violators receipt, not authorized driver
(c) When License Not Necessary Palermo v. Pyramid Insurance Co., Inc., 161
SCRA 677 (1988): if driver is insured himself, then authorized driver even if
license expired
(d) Unauthorized Use Villacorta v. Insurance Commission, 100 SCRA 467 (1980):
car service shop employee who used car for illegal purpose, if with consent of owner,
still authorized driver, but if taken for joyride without consent, insurer liable under
theft clause; Association of Baptists for World Evangelism, Inc. v. Fieldmens
insurance Co., Inc., 124 SCRA 618 (1983): unauthorized use of motor vehicle for
36
joy-ride constitutes theft and prior conviction for theft not required to render insurer
liable on theft, burglary clause
(e) If Theft, License to Drive Not Necessary: Malayan Insurance Co., Inc. v. Court of
Appeals, 146 SCRA 45 (1986): taking of motor vehicle without permission equals
theft, so if it met with an accident, insurer liable because damage was sustained in
course of unlawful taking, even if thief is not licensed to drive, and even if policy
requires driver at time of accident to be duly licensed; Perla Compania de
Seguros, Inc. v. Court of Appeals, 208 SCRA 487 (1992): if motor vehicle
unlawfully taken, it is theft clause, and not authorized driver clause that should
apply, so insurer liable even if license is expired.
iv. Plate glass insurance
v. Burglary and theft insurance
vi. Personal accident and health insurance as written by non-life insurance companies
Accident:
(a) Nature of Accident: Pan Malayan Insurance Corporation v. Court of Appeals,
184 SCRA 54 (1990): accident takes place without ones foresight or expectation,
not synonymous to no fault and does not exclude fault, recklessness, or negligence
of third parties;
(b) When Still Accident: Sun Insurance Office, Ltd. v. Court of Appeals, 211 SCRA
554 (1992): willfully exposing himself to needless peril similar to suicide, but
pointing gun at temple after taking out magazine still accidental because of belief of
no danger; De la Cruz v. Capital Ins. & Surety Co., Inc., 17 SCRA 559 (1966): not
accidental if it is natural result of insureds voluntary act, unaccompanied by anything
unforeseen except death or injury, so death during boxing match accidental
(c) Parties Liable Art. 2180, par. 5 and Art. 2184, Civil Code: In motor vehicle
mishap, owner is solidarily liable with his driver, if former, who was in vehicle, could
have by use of due diligence, prevented misfortune; FGU insurance Corporation
v. Court of Appeals, 287 SCRA 718 (1998): rule does not apply to rent-a-car, since no
mater-driver relationship, only lessor-lessee, so owner not liable if no fault or
negligence on his part
vii. Others pollution liability insurance, pharmacist liability insurance, medical malpractice
insurance, garage insurance, directors and officers liability insurance, etc.
B. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI)
1. Definition Secs. 373 and 374, I.C.: It shall be unlawful for any land transportation operator or
owner of a motor vehicle, to operate the same in the public highways unless there is in force in
relation thereto a policy of insurance or guarantee in cash or surety bond issued in accordance
with the I.C. to indemnify the death or bodily injury, a third party or passenger, as the case may
be, arising from the use thereof.
2. Coverage and Nature
a. Compulsory Nature Secs. 374 to 377 and 379, I.C.: motor vehicle cannot be registered or
renewed with LTO unless it is covered by insurance, cash deposit or surety bond issued by
insurance company authorized by Insurance Commissioner.
b. Limitations Sec. 374, I.C. as amended by P.D. Nos. 1455 and 1814: property damage to
third parties is no longer included.
37
c.
Right to Sue Insurer Shafer v. Judge, RTC of Olongapo City, Br. 75, 167 SCRA 386
(1988): Since third party liability, person injured by motor vehicle covered can directly sue
insurer, in order to protect injured person against insolvency of insured who causes injury.
d. When Liability Accrues First Integrated Bonding & Insurance Co., Inc. v. Hernando,
199 SCRA 796 (1991): If insurance policy insures directly against liability, insurers liability
accrues immediately upon occurrence of injury upon which liability depends, and does not
depend on recovery of judgment by injured party against insured.
e. Insurer Not Solidarily Liable with Insured Vda. de Maglana v. Consolacion, 212 SCRA
268 (1992); Government Service Insurance System v. Court of Appeals, 308 SCRA 559
(1999): liability of insurer based on insurance contract is direct, but not solidary with vehicle
owner, which is based on torts; hence, injured party may claim from insurer to extent of
insurance policy, and from vehicle owner for the balance
3. No Fault Indemnity Provision Sec. 378, I.C.: any claim for death or injury to any passenger or
third party for CMVLI shall be paid without necessity of proving fault or negligence of any kind;
a. Limit on Amount Sec. 378(i), I.C.: Five Thousand Pesos (P5,000.00) per person
b. Proof of Loss Sec. 378(ii), I.C.: police report, death certificate, medical report, sufficient;
Tiu v. Arriesgado, 437 SCRA 426 (2004): even if insurance contract not attached to claim,
and evidence subsequently presented, sufficient, because nature of CMVLI is to provide
immediate compensation
c. Rules on Claims Sec. 378(iii), I.C.; Perla Compania de Seguros, Inc. v. Ancheta, 164
SCRA 144 (1988):
i.
A claim may be made against one motor vehicle only.
ii. If victim is an occupant of a vehicle, claim shall lie against insurer of vehicle in which he
is riding, mounting or dismounting from.
iii. In any other case (i.e., if victim is not an occupant of a vehicle), claim shall lie against
insurer of directly offending vehicle.
iv. In all cases, right of party paying claim to recover against owner of vehicle responsible
for accident shall be maintained.
4. Rules on Cancellation Secs. 380 and 381, I.C.: No cancellation of policy, guaranty or bond
shall be valid unless written notice given to LTO, and before cancellation, new policy, guaranty or
bond is given.
5. Effect of Change of Ownership of Motor Vehicle Sec. 382, I.C.: No need of issuing new
policy until next date of registration, provided insurer agrees to continuation of policy and gives
endorsement.
6. Claims Procedure
a. Notice of Claim Sec. 384, I.C.; Vda. de Gabriel v. Court of Appeals, 264 SCRA 137
(1996): Written notice of claim setting forth nature, extent and duration of injuries sustained
must be made within six (6) months; otherwise, waived.
b. Evaluation of Claim Sec. 385, I.C.: Insurer to ascertain truth and extent of claim and pay
within five (5) working days after agreement is reached. If no agreement, no fault
indemnity under Sec. 378, I.C. shall be paid, without prejudice to claimant pursuing his claim
further, and insurer cannot compel him to execute quitclaim or release.
c. Filing of Action Sec. 384, I.C.: Action for recovery of loss due to injury must be brought
before Insurance Commissioner or the Courts within one (1) year from denial of claim;
38
Travellers Insurance & Surety Corp. v. Court of Appeals, 272 SCRA 536 (1997): written
claim required, then only after denial will one-year prescriptive period begin to run;
Summit Guaranty & Insurance Co., Inc. v. Arnaldo, 158 SCRA 331 (1988): one-year
prescriptive period runs from denial of claim for reimbursement;
7. Prohibited Acts and Sanctions Secs. 386 to 389, I.C.
XIII. SURETYSHIP
1. Definition and Coverage Sec. 175, I.C.; Sec. 2, pars. 1 and 2, I.C.; Security Pacific
Assurance Corporation v. Tria-Infante, 468 SCRA 526 (2005)
a. agreement whereby surety guarantees performance by principal or obligor of an obligation or
undertaking in favor of oblige;
b. includes official recognizances, stipulations or bonds issued by any company by virtue of and
under Act No. 536, as amended by Act No. 2206.
2. Nature of Liability Sec. 176, I.C.: National Shipyards & Steel Corp. v. Torrento, 20 SCRA
427 (1967); National Power Corporation v. Court of Appeals, 145 SCRA 533 (1986)
a. joint and several with obligor;
b. limited to amount of bond; and
c. determined strictly by terms of contract of suretyship in relation to principal contract between
obligor and oblige;
See Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551 (1966): (i) in case of doubt,
suretyship in form prepared by compensated surety must be construed against surety and in
favor of promisee or construed in same manner as contracts of insurance; (ii) however, in
absence of doubt, suretys liability determined by terms appearing within four corners of
surety contract, and cannot be extended by implication or enlarged by construction.
3. Suppletory Application of Civil Code Sec. 178, I.C.; Art. 2047 and Arts. 1207-1222, Civil
Code; whenever necessary in interpreting provisions of contract of suretyship.
B. PREMIUM Sec. 177, I.C.
1. Entitlement to Payment of Premium: as soon as contract of suretyship or bond is perfected and
delivered to obligor.
Note: No contract of suretyship or bonding is valid and binding unless and until premium paid,
except if oblige has accepted bond; Philippine Pryce Assurance Corp. v. Court of Appeals, 230
SCRA 164 (1994)
2. Entitlement to Service Fee Only (50% of premium due, plus cost of stamps and other taxes due
on the bond):
a. when contract of suretyship or bond is not accepted by obligee; or
b. when contract of suretyship or bond is not filed with obligee.
Note: If non-acceptance of bond or suretyship contract is due to fault or negligence of surety, no
service fee, stamps or taxes can be collected.
39
XIV. LIFE INSURANCE
1. Definition and Coverage Sec. 179, I.C.: insurance on human lives and insurance appertaining
thereto or connected therewith;
a. Payable upon death of insured or his surviving a specified period Sec. 180, par. 1, I.C.;
Examples: general, ordinary or old line life insurance; limited payment life insurance; term
life insurance
b. Payment of endowments or annuities Sec. 180, par. 2, and Sec. 2, par. 1, I.C.; Secs. 20212027, Civil Code; Examples: endowment insurance; advance insurance; annuities
Life Insurance Distinguished from Accident and Health Insurance: Usual purpose of life
insurance is to provide fund for benefit of estate, heirs, or beneficiaries of insured after his death,
while usual purpose of personal accident and health insurance is to protect not against loss of life,
but loss of time, earning capacity and expenses; But See Gallardo v. Morales, 107 Phil. 903
(1960): however, when one of risks insured in an accident insurance is death of insured by
accident, such insurance may also be regarded as life insurance.
2. Who Exercises Rights of Minor Insured or Beneficiaries Sec. 180, par. 3, I.C., as amended
by Art. 225, Family Code; Nario v. Philippine American Life Ins. Co., 20 SCRA 434 (1967):
vested right to full face value, not cash surrender value, so disposition or alienation mujst be with
consent or judicial authorization; Pineda v. Court of Appeals, 226 SCRA 754 (1993): parents
are legal guardians if market value does not exceeding P50,000.00, otherwise, bond is required;
Beneficiaries: Bank of the Philippine Islands v. Posadas, 56 Phil. 215 (1931): proceeds
payable to estate of insured, if conjugal/paraphernal, proportionately; Del Val v. Del Val, 29
Phil. 534 (1915): proceeds go to estate, and laws on succession apply
3. Liability of Insurer for Suicide and Accidental Death
a. Suicide Sec. 180-A, I.C.; See Sec. 87, I.C.: Suicide compensable only after policy in force
for two (2) years (unless policy provides for a shorter period), except if state of insanity,
which is compensable regardless of date of commission
b. Where Assault or Murder Excluded
i.
Insurer still liable Calanoc v. Court of Appeals, 98 Phil. 79 (1955) making arrest as
officer of law exception, does not apply to night watchman asked by friend to investigate
in latters house, no proof of intent to kill, therefore still accidental and insurer liable;
Finman General Assurance Corp. v. Court of Appeals, 213 SCRA 493 (1992):
stabbing, without proof of intent to kill, still accidental
ii. Insurer not liable Kanapi v. Insular Life Assurance Co., Ltd., 94 Phil. 397 (1954)
accident death benefit clause does cover murder because intentional, so not entitled to
additional premium; Biagtan v. The Insular Life Assurance Company, Ltd., 44 SCRA
58 (1972): accidental death benefit clause does not cover robbery with homicide
because intent to kill
B. TRANSFER OF POLICY
1. By Transfer, Will or Succession Sec. 181, I.C.: Policy passes to any person by transfer, will or
succession, whether or not with insurable interest
2. Notice to Insurer Sec. 182, I.C.: Notice to insurer of transfer not necessary unless expressly
provided
40
C. MEASURE OF INDEMNITY Sec. 183, I.C.: Valued policy, unless insurable interest susceptible of
pecuniary estimatation (e.g., creditor), in which case amount of loss suffered is basis for payment);
Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Company, Inc., 379
SCRA 423 (2002): automatic increase clause included in measure of indemnity
ATENEO DE MANILA LAW SCHOOL

OUTLINE ON PHILIPPINE
CORPORATE LAW46
DEAN CESAR L. VILLANUEVA

& ATTY. ALEXANDER C. DY
I. HISTORICAL BACKGROUND
1. Philippine Corporate Law:47 A-sort-of codification of American Corporate Law
When attention was drawn to the fact that there was no entity in Spanish law exactly corresponding
to the notion of a corporation in English and American law, the then Philippine Commission enacted
the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the
standard commercial entity and to hasten the day when the sociedad annima of the Spanish law would
be obsolete. The statute is a sort of codification of American Corporate Law. Harden v. Benguet
Consolidated Mining, 58 Phil. 141 (1933).
2. The Corporation Law
The first corporate statute, the Corporation Law (Act No. 1459) became effective on 01 April 1906.
It had various piece-meal amendments during its 74-year history, but rapidly became antiquated and
not adapted to the changing times.
3. The Corporation Code
Batas Pambansa Blg. 68 took effect on 01 May 1980, adopting various corporate doctrines
enunciated by the Supreme Court under the old Corporation Law; clarified the obligations of corporate
directors and officers; expressed in statutory language established principles and doctrines; and
provided for a chapter on close corporations. 48
4. Proper Treatment of Philippine Corporate Law
46Unless otherwise indicated, all references to sections pertain to the Corporation Code of the Philippines.
47The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as
differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.
"Corporate Law" to
41
Philippine Corporate Law comes from the U.S. common law system. Although we have a
Corporation Code that provides for statutory principles, Corporate Law is essentially, and continues to
be, the product of commercial developments, much of which can be expected to happen in the world of
commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principles
into the changing concepts and mechanism of the commercial world.
II. CONCEPTS
1. Definition (Sec. 2; Articles 44(3), 45, 46, and 1775, Civil Code)
A corporation is an artificial being created by operation of law, and invested by law upon its coming
into existence with a personality separate and distinct from the persons composing it, as well as from
any other legal entity to which it may be related. PNB v. Andrada Electric & Engineering Co., 381
SCRA 244 (2002).49
2. FOUR (4) CORPORATE ATTRIBUTES BASED ON SECTION 2:
(a) An Artificial Being It has juridical capacity to contract and enter into transactions.
(b) Creature of the Law It is created by operation of law
(c) Strong Juridical Personality It has a right of succession
(d) Creature of Limited Powers It has only such powers, attributes and properties as are
expressly authorized by law or incident to its existence.
A corporation has no powers except for the powers which are expressly conferred on it by
the Corporation Code, found in its charter, and those that are implied by or are incidental to its
existence. It exercises its powers through its Board of Directors and/or its duly authorized
officers and agents. Pascual and Santos, Inc. v. The Members of the Tramo Wakas
Neighborhood Assn. Inc., 442 SCRA 438 (2004).50
3. TRI-LEVEL EXISTENCE OF THE CORPORATION
(a) Aggregation of Assets and Resources
(b) Business Enterprise or Economic Unit
(c) Juridical Entity
4. TRI-LEVEL RELATIONSHIPS INVOLVED IN A CORPORATE SETTING
(a) JURIDICAL ENTITY LEVEL, which treats of the aspects of the State-corporation relationship
(b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual
relationship on four (4) levels:
Between the corporation and its agents/representatives to act in the real world, such
as its directors and officers, which is governed also by the Law on Agency
Between the corporation and its shareholders or members
Between the shareholders and the corporate directors, trustees and officers
Between and among the shareholders in a common venture
48Corporation Code applies even to corporations organized under the old Corporation Law. Castillo v. Balinghasay, 440 SCRA
442 (2004).
49Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF
Corp., 556 SCRA 25 (2008).
50De Liano v. Court of Appeals, 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27
(2004); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006); Cebu Bionic Builders Supply, Inc. v. DBP, 635
SCRA 13 (2010).
42
(c) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and
third-parties or outsiders, essentially governed by Contract Law and Labor Law.
Between the corporation and its employees, governed by Labor Laws
Between the corporation and those it contracts and transact with, govern by Contract
Laws
Between the corporation and the publics it affects with its enterprise, governed
essentially by Torts or Quasi-Delict Laws.
5. THEORIES ON THE FORMATION OF CORPORATION
(a) Theory of Concession (Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]).
To organize a corporation that could claim a juridical personality of its own and transact business as
such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as
the State may deem necessary to impose. cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5
SCRA 645 (1962)
It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act, and the procedure and
conditions provided under the law for the acquisition of such juridical personality must be complied
with. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber
property can only be construed the grant of a juridical personality to such an association . . .
nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a
finding that such association acquired a separate juridical personality, even when it adopts sets of
constitution and by-laws. Intl Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA
674 (2000).
When the law vests in a government instrumentality corporate powers, the instrumentality does not
become necessarily a corporation. Unless the government instrumentality is organized as a stock or
non-stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers. MIAA v. Court of Appeals, 495 SCRA 591 (2006).
All corporations, big or small, must abide by the provisions of the Corporation Code, and even a
simple family corporation cannot claim an exemption nor can it have rules and practices other than
those established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997).
(b) Theory of Enterprise Entity (BERLE, 47 COL. L. REV. 343 [1947])
A corporation is but an association of individuals, allowed to transact under an assumed corporate
name, and with a distinct legal personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such a body. PSE v. Court of Appeals, 281
SCRA 232 (1997).
Corporations are composed of natural persons and their separate corporate personality is not a
shield for the commission of injustice and inequity, such as to avoid the execution of the property of a
sister company. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
6. ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM:
(a) Four Advantageous Characteristics of Corporate Medium:
(i) STRONG AND SOLEMN JURIDICAL PERSON
A corporation is an entity separate and distinct from its stockholders. While not in fact and in
reality a person, the law treats the corporation as though it were a person by process of fiction or by
regarding it as an artificial person distinct and separate from its individual stockholders. Remo, Jr.
v. IAC, 172 SCRA 405 (1989).
The transfer of the corporate assets to the stockholders is not in the nature of a partition among
co-owners but is a conveyance from one party to another. Stockholders of F. Guanzon and Sons,
Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
43
Execution pending appeal may be allowed when the prevailing party is already of advanced age
and in danger of extinction, but not in this case where the winning party is a corporation. [A]
juridical entitys existence cannot be likened to a natural personits precarious financial condition
is not by itself a compelling circumstance warranting immediate execution and does not outweigh
the long standing general policy of enforcing only final and executory judgment. Manacop v.
Equitable PCIBank, 468 SCRA 256 (2005).
(ii) CENTRALIZED MANAGEMENT
As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees
which exercises almost all the corporate powers in a corporation. Firme v. Bukal Enterprises and
Dev. Corp., 414 SCRA 190 (2003).
The exercise of corporate powers of the corporation rest in the Board of Directors save in those
instances where the Corporation Code requires stockholders approval for certain specific acts.
Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002).
(iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS
One of the advantages of the corporation is the limitation of an investors liability to the amount
of investment, which flows from the legal theory that a corporate entity is separate and distinct from
its stockholders. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA
631 (1998).
It is hornbook law that corporate personality is a shield against personal liability of its officers
a corporate officer and his spouse cannot be made personally liable under a trust receipt where he
entered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust
Corp. v. Court of Appeals, 356 SCRA 671 (2001).
Obligations incurred by the corporation acting through its directors, officers and employees, are
its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA
77 (2001).
Where the creditor of the corporation sues not only the company but also all stockholders to
reach their unpaid subscription which appear to be the only visible assets of the company, then the
controlling doctrine is that a stockholder is personally liable for the financial obligations of the
corporation to the extent of his unpaid subscription. Halley v. Printwell, Inc. 649 SCRA 116
(2011).
(iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP (SHARES) FOR INVESTORS
It is the inherent right of the stockholder to dispose of his shares of stock (which he owns as any
other property of his) anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v.
Ritratto Group, Inc., 362 SCRA 216 (2001).
Authority granted to corporations to regulate the transfer of its stock does not empower the
corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be followed in effecting transfer.
Thomson v. Court of Appeals, 298 SCRA 280 (1998).
(b) Disadvantages:
(1) Abuse of corporate management; breach of trust
(2) Abuse of limited liability feature
(3) High cost of maintenance of the corporate medium
(4) Double taxation
Dividends received by individuals from domestic corporations are subject to final 10%
tax for income earned on or after 01 January 1998 (Sec. 24(B)(2), 1997 NIRC)
Inter-corporate dividends between domestic corporations, however, are not subject to any
income tax (Sec. 27(D)(4), 1997 NIRC)
44
There is re-imposition of the 10% improperly accumulated earnings tax for holding
companies (Sec. 29, 1997 NIRC)

7. COMPARED WITH OTHER BUSINESS MEDIA
(a) Sole Proprietorships
A sole proprietorship is not vested with juridical personality to file or defend an action. xExcellent
Quality Apparel, Inc. v. Win Multiple-Rich Builders, Inc., 578 SCRA 272 (2009).
(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)
Can a Defective Attempt to Form a Corporation Result at Least in a Partnership?
Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989);

Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
(c) Joint Ventures
Joint venture is an association of persons or companies jointly undertaking some commercial
enterprise; generally all contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy in connection therewith, and
duty, which may be altered by agreement to share both in profit and losses. Kilosbayan, Inc. v.
Guingona, Jr., 232 SCRA 110 (1994).
(d) Cooperatives (Art. 3, R.A. No. 6938)
Cooperatives are established to provide a strong social and economic organization to ensure that the
tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333
SCRA 425 (2000).
(e) Business Trusts (Article 1442, Civil Code)
(f) Sociedades Annimas
A sociedad annima was considered a commercial partnership where upon the execution of the
public instrument in which its articles of agreement appear, and the contribution of funds and personal
property, becomes a juridical personan artificial being, invisible, intangible, and existing only in
contemplation of lawwith power to hold, buy, and sell property, and to sue and be sueda
corporationnot a general copartnership nor a limited copartnership . . . The inscribing of its articles
of agreement in the commercial register was not necessary to make it a juridical person; such
inscription only operated to show that it partook of the form of a commercial corporation. Mead v.
McCullough, 21 Phil. 95 (1911).
The sociedades annimas were introduced in Philippine jurisdiction on 01 December 1888 with the
extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce.
Those articles contained the features of limited liability and centralized management granted to a
juridical entity. But they were more similar to the English joint stock companies than the modern
commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
The Corporation Law recognizes the difference between sociedades annimas and corporations and
will not apply legal provisions pertaining to the latter to the former. Phil. Product Co. v. Primateria
Societe Anonyme, 15 SCRA 301 (1965).
(g) Cuentas En Participacion
A cuentas en participacion is an accidental partnership constituted in a manner that its existence
was only known to those who had an interest in the same, there being no mutual agreement between
the partners, and without a corporate name indicating to the public in some way that there were other
people besides the one who ostensibly managed and conducted the business, governed under Article
239 of the Code of Commerce. Those who contract with the person under whose name the business of
such partnership of cuentas en participacion is conducted, shall have only a right of action against such
person and not against the other persons interested, and the latter, on the other hand, shall have no right
45
of action against third person who contracted with the manager unless such manager formally transfers
his right to them. Bourns v. Carman, 7 Phil. 117 (1906).
III. NATURE AND ATTRIBUTES OF A CORPORATION
1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)
The Constitution explicitly prohibits the regulation by special laws of private corporations, except
for government-owned or controlled corporations (GOCCs). Veterans Federation of the Philippines v.
Reyes, 483 SCRA 526 (2006).
Congress cannot enact a law creating a private corporation with a special charter, and it follows that
Congress can create corporations with special charters only if such are GOCCs. Feliciano v.
Commission on Audit, 419 SCRA 363 (2004).
P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the formation of a
private corporation by special legislative act which is not a GOCC, since NDC was merely required to
extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old
investors and stockholders of the insolvent Agrix upon proof of their claims against the abolished
corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990).
PNRC which was constituted under a special law, is not a GOCC because it is not by its charter
owned by the Government, although it is intended to do public functions, it is owned by the private
sector. Consequently, the PNRC Charter, insofar as it creates the PNRC as a private corporation and
grants it corporate powers, is void for being unconstitutional. The other provisions of the PNRC
Charter remain valid as they can be considered as a recognition by the State that the unincorporated
PNRC is the local National Society of the International Red Cross and Red Crescent Movement, and
thus entitled to the benefits, exemptions and privileges set forth in the PNRC Charter. Liban v. Gordon,
593 SCRA 68 (2009).
2. CORPORATION AS A PERSON:
(a) Entitled to Due Process and Equal Protection
The due process clause is universal in its application to all persons, and covers private corporations
within the scope of the guaranty insofar as their properties are concerned. Smith Bell & Co. v.
Natividad, 40 Phil. 136, 144 (1920).
(b) Unreasonable Searches and Seizure
A corporation is protected by the constitutional guarantee against unreasonable searches and
seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of the
amount of shares of stock or of the interest of each of them in said corporation because the corporation
has a personality distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383
(1967).
A corporation is but an association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for
such body. Its property cannot be taken without compensation; can only be proceeded against by due
process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37
SCRA 823 (1971).
(c) Not Entitled to Privilege Against Self incrimination
It is elementary that the right against self-incrimination has no application to juridical persons.
Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and franchises,
46
may refuse to show its hand when charged with an abuse of such privilege. Hale v. Henkel, 201 U.S. 43
(1906).51
3. Practice of Profession
Corporations cannot engage in the practice of a profession since they lack the moral and technical
competence required by the PRC. ULEP v. The Legal Clinic, 223 SCRA 378 (1993).
A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in
the practice of optometry. Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298
(1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002).
COUNTER-REVOLUTION: Architectural professional corporations allowed under Rep. Act No. 9266.
4. Liability for Torts
A corporation is civilly liable in the same manner as natural persons for torts, because the rules
governing the liability of a principal for a tort committed by an agent are the same whether the
principal be a natural person or a corporation, and whether the agent be a natural or artificial person.
That a principal is liable for every tort which he expressly directs or authorizes, is just as true of a
corporation as a natural person. PNB v. Court of Appeals, 83 SCRA 237 (1978).
Corporate tort consists in the violation of a right given or the omission of a duty imposed by law;
a breach of a legal duty. The failure of the corporate employer to comply with the duty under the Labor
Code to grant separation pay to employees in case of cessation of operations constitutes tort and its
stockholder who was actively engaged in the management or operation of the business should be held
personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors,
surgeons and medical practitioners in the conduct of its business of facilitating medical and surgical
treatment. Within that reality, three legal relationships crisscross: (1) between the hospital and the
doctor practicing within its premises; (2) between the hospital and the patient being treated or
examined within its premises; and (3) between the patient and the doctor. Regardless of its relationship
with the doctor, the hospital may be held directly liable to the patient for its own negligence or failure
to follow established standard of conduct to which it should conform as a corporation. Professional
Services, Inc. v. Court of Appeals, 611 SCRA 282 (2010).
5. Corporate Criminal Liability (Articles 102 and 103, Revised Penal Code):
West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914);
People v. Tan Boon Kong, 54 Phil. 607 (1930);
Sia v. Court of Appeals, 121 SCRA 655 (1983). BUT: The Trust Receipts Law recognizes the
impossibility of imposing the penalty of imprisonment on a corporation, hence, if the entrustee is a
corporation, the law makes the officers or employees or other persons responsible for the offense liable
to suffer the penalty of imprisonment. Ong v. Court of Appeals, 401 SCRA 6478 (2003).
No criminal suit can lie against a corporation. Times, Inc. v. Reyes, 39 SCRA 303 (1971). BUT:
A corporation can be a real-party-in-interest for the purpose of bringing a civil action for malicious
prosecution for the damages incurred by the corporation for the criminal proceedings brought against
its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).
When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to
the Board of Directors, and to each director separately and individually. People v. Concepcion, 44 Phil.
129 (1922).
The existence of the corporate entity does not shield from prosecution the corporate agent who
knowingly and intentionally causes the corporation to commit the crime. The corporation obviously
acts, and can act, only by and through its human agents, and it is their conduct which the law must
deter. The employee or agent of a corporation engaged in unlawful business naturally aids and abets in
the carrying on of such business and will be prosecuted as principal if, with knowledge of the business,
51Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).
47
its purpose and effect, he consciously contributes his efforts to its conduct and promotion [illegal
recruitment in this case], however slight his contribution may be. The Executive Secretary v. Court of
Appeals, 429 SCRA 81 (2004).
BUT: Apart from its sweeping allegation that respondents misappropriated or converted its money
placements, petitioner failed to establish the particular role or actual participation of each respondent in
the criminal act; neither was it shown that they assented to its commission. It is basic that only
corporate officers shown to have participated in the alleged anomalous acts may be held criminally
liable. Cruzvale, Inc. v. Eduque, 589 SCRA 534, 546 (2009).
If the crime is committed by a corporation, the directors, officers, employees or other officers
thereof responsible for the offense shall be charged and penalized for the crime, precisely because of
the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned;
hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may be
charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both
fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.
Ching v. Secretary of Justice, 481 SCRA 602 (2006).
When a criminal statute designates an act of a corporation or a crime and prescribes punishment
therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed
only by the corporation. But when a penal statute does not expressly apply to corporations, it does not
create an offense for which a corporation may be punished. On the other hand, if the statute, defines a
crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the
officers, directors, or employees of such corporation or other persons responsible for the offense, only
such individuals will suffer such penalty. Corporate officers or employees, through whose act, default
or omission the corporation commits a crime, are themselves individually guilty of the crime. Ching
v. Secretary of Justice, 481 SCRA 602 (2006). BUT SEE:Consolidated Bank v. Court of Appeals,
356 SCRA 671 (2003).
The owners of a corporate organization are its stockholders and they are to be distinguished from
its directors and officers. Stockholders, being basically investors in the corporation, and with the
management of its business generally vested in the Board of Directors, cannot be held liable for the
criminal offense committed on behalf of the corporation, unless they personally took part in the same.
Espiritu v. Petron Corp., 605 SCRA 245 (2009).
6. Recovery of Moral and Other Damages
A corporation, being an artificial person, cannot experience physical sufferings, mental anguish,
fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral
damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation
which, if besmirched, may be a ground for the award of moral damages. Mambulao Lumber Co. v.
Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998).
BUT: 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 an
obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but
which requires a clear proof of malice or bad faith. ABS-CBN Broadcasting Corp. v. Court of Appeals,
301 SCRA 589 (1999).
NONETHELESS: Likewise, an educational corporations claim for moral damages arising from libel
falls under Article 2219(7) of the Civil Code, which expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of defamation, and does not qualify whether the
plaintiff is a natural or juridical person. Therefore, a juridical person can validly complain for libel or
any other form of defamation and claim for moral damages. Filipinas Broadcasting Network v. Ago
Medical and Educational Center, 448 SCRA 413 (2005).
PREVAILING RULE: A corporation, being an artificial person and having existence only in legal
contemplation, has no feelings, emotions nor senses; therefore, it cannot experience physical suffering
and mental anguish. Mental suffering can be experienced only by one having a nervous system and it
48
flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by an artificial person.
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).52
7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123)
EXCEPTION: TEST OF CONTROLLING OWNERSHIP
The 1987 Constitution provides for the Filipinization of public utilities by requiring that any form
of authorization for the operation of public utilities should be granted only to citizens of the
Philippines or to corporation or associations organized under the laws of the Philippines at least sixty
per centum of whose capital is owned by such citizens. The evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public utilities, which may be inimical to the
national interest. This specific provision explicitly reserves to Filipino citizens control of public
utilities, pursuant to an overriding economic goal of the 1987 Constitution: to conserve and develop
our patrimony and to ensure a a self-reliant and independent national economy effectively controlled
by Filipinos. We rule that the term capital in Sec. 11, Art. XII of the Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case only to common
shares, and also preferred shares that are entitled to vote, and not the total outstanding capital stock
comprising both common and non-voting preferred shares. Gamboa v. Teves, 652 SCRA 690 (2011).
Affirmed in Heirs of Gamboa v. Teves, G.R. No. 176579, 09 October 2012.
(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Art. XII, 1987 Constitution)
(b) Ownership of Private Land (Sec. 7, Art. XII, 1987 Constitution)
Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is not
qualified to own land in the Philippines, and therefore also disqualified to own the rights to ownership
of lands in the Philippinesit is basic that an assignor or seller cannot assign or sell something he
does not own at the time the ownership, or the rights to the ownership, are to be transferred to the
assignee or buyer. The assignment by PNCC of the real properties to a nominee to be designated by
Radstock is a circumvention of the constitutional prohibition against a private foreign corporation
owning lands in the Philippines. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607
SCRA 413 (2009).
The registration of the donation of land to an unincorporated religious organization, whose trustees
are foreigners, would violate constitutional prohibition and the refusal would not be in violation of the
freedom of religion clause. The fact that the religious association has no capital stock does not suffice
to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. . .
and the spirit of the Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui Si Temple,
97 Phil. 58 (1955).
BUT: Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of
Deeds of Davao, 102 Phil. 596 [1957]).
If the foreign shareholdings in a landholding corporation exceed 40%, it is not the foreign
stockholders ownership of the shares which is adversely affected by the capacity of the corporation to
own landthat is, the corporation becomes disqualified to own land. J.G. Summit Holdings, Inc. v.
Court of Appeals, 450 SCRA 169 (2005).
The prohibition in the Constitution applies only to ownership of land; it does not extend to
immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we would have
a strange situation where the ownership of immovable property such as trees, plants and growing fruit
52LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260
SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA
629 (2001); Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008); Employees
Union of Bayer Phils. V. Bayer Philippines, Inc., 636 SCRA 473 (2010).
49
attached to the land would be limited to Filipinos and Filipino corporations only. J.G. Summit
Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005).
(b) Public Utilities (Sec. 11, Art. XII, Constitution)
The primary franchise, that is, the right to exist as such, is vested in the individuals who compose
the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative
authority so to do. The special or secondary franchises are vested in the corporation and may ordinarily
be conveyed or mortgaged under a general power granted to a corporation to dispose of its property,
except such special or secondary franchises as are charged with a public use. J.R.S. Business Corp. v.
Imperial Insurance, 11 SCRA 634 (1964).
The nationality test for public utilities applies not at the time of the grant of the primary franchise
that makes a corporation a juridical person, but at the grant of the secondary franchise that authorizes
the corporation to engage in a nationalized industry. People v. Quasha, 93 Phil. 333 (1953).
The Constitution requires a franchise for the operation of a public utility; however, it does not
require a franchise before one can own the facilities needed to operate a public utility so long as it does
not operate them to serve the public. There is a clear distinction between operation of a public utility
and the ownership of the facilities and equipment used to serve the public. Tatad v.Garcia, Jr., 243
SCRA 436 (1995).
(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)
Sources: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2,
P.D. 576; SEC Opinion, 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion,
15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4 - December, 1991), at p.
31.
(i) Cable Industry: Cable TV operations shall be governed by E.O. No. 205 (s.1987). If CATV
operators offer public telecommunications services, they shall be treated just like a public
telecommunications entity. (NTC Memo Circular No. 8-9-95)
Cable TV is a form of mass media which must, therefore, be owned and managed by Filipino
citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino
citizens pursuant to the mandate of the Constitution. (DOJ Opinion No. 95, s. 1999, citing Allied
Broadcasting, Inc. v. Federal Communications Commission, 435 F.2d 70).
(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
(e) War-Time Test. Haw Pia v. China Banking Corp., 80 Phil. 604 (1948); Filipinas Compania de
Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 (1951); Davis Winship v. Philippine Trust
Co., 90 Phil. 744 (1952).
(f) Investment Test as to Philippine Nationals (Sec. 3[a] & [b], R.A. 7042, Foreign Investments
Act of 1992)
Under Sec. 3 of the FIA 91, a corporation organized under the laws of the Philippines of which
at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of
the Philippines, is considered a Philippine National. Unchuan v. Lozada, 585 SCRA 421 (2009).
(g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November
1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14 December 1989,
XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990)
BUT SEE: SEC-OGC Opinion No. 10-31, dated 09 December 2010, addressed to Mr. Leonardo A.
Civil, Chairman of the Board of Co-O Small Scale Miners Association, Inc., penned by General
Counsel Vernette G. Umali-Paco.
50
Q: Up to what level do you apply the grandfather rule? Palting v. San Jose Petroleum Inc., 18
SCRA 924 (1966).
(h) Special Classifications (Sec. 140)
IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF
PIERCING THE VEIL OF CORPORATE FICTION
A. MAIN DOCTRINE: A Corporation Has A Personality Separate and Distinct from its Stockholders or
Members. (Sec. 2; Article 44, Civil Code; Jardine Davies, Inc. v. JRB Realty, Inc.,
463 SCRA 555 [2005]).
1. Importance of Main Doctrine:
A corporation, upon coming into existence, is invested by law with a personality separate and
distinct from those persons composing it as well as from any other legal entity to which it may be
related, with the following consequences:
(a) This separate and distinct personality is, however, merely a fiction created by law for
conveyance and to promote the ends of justice. LBP v. Court of Appeals, 364 SCRA 375
(2001).53
(b) The first consequence of the doctrine of legal entity of the separate personality of the
corporation may not be made to answer for acts and liabilities of its stockholders or those of
legal entities to which it may be connected or vice versa. General Credit Corp. v. Alsons Dev.
and Investment Corp., 513 SCRA 225 (2007).54
2. Applications:
(a) Majority Equity Ownership and Interlocking Directorship:
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. Sunio v. NLRC , 127 SCRA 390 (1984).55
Ownership of a majority of capital stock and the fact that majority of directors of a corporation are
the directors of another corporation creates no employer-employee relationship with the latters
employees. DBP v. NLRC, 186 SCRA 841 (1990).56
Having interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.
Velarde v. Lopez, 419 SCRA 422 (2004).57
However, mere substantial identity of incorporators of two corporations does not necessarily imply
fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing
evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law,
the corporations are to be rightly treated as distinct and separate from each other. Laguio v. NLRC, 262
SCRA 715 (1996).
53Martinez v. Court of Appeals, 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel
and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009).
54McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Association (PEAPTGWO) v. NLRC, 581 SCRA 598 (2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009).
55Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated
Wood Products, Inc. v. CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin
Suarez Fancisco, 433 SCRA 273 (2004); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Pantranco
Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
56Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Philippines v. Ong, 491 SCRA 581
(2006); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Presidential
Agrarian Reform Council, 660 SCRA 525 (2011).
57Also Sesbreno v. Court of Appeals, 222 SCRA 466 (1993); G Holdings, Inc. v. National Mines and Allied Workers Union
Local, 103 (NAMAWU), 604 SCRA 73 (2010).
51
A corporate defendant against whom a writ of possession has been issued, cannot use the fact that it
has obtained controlling equities in the corporate plaintiffs to suspend enforcement of the writ, for they
are separate juridical persons, and thus their separate business and proprietary interests remain.
Silverio, Jr. v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005).
(b) Being Corporate Officer:
Being an officer or stockholder of a corporation does not by itself make ones property also that of
the corporation, and vice-versa, for they are separate entities, and that shareholders who are officers are
in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal
person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991).58
The mere fact that one is President does not render the property he owns the property of the
corporation, since the president, as an individual, and the corporation are separate entities. Cruz v.
Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001).
It is hornbook law that corporate personality is a shield against personal liability of its officersa
corporate officer and his spouse cannot be made personally liable under a trust receipt where he
entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T. Ty
v. Court of Appeals, 356 SCRA 61 (2001).59
The President of the corporation which becomes liable for the accident caused by its truck driver
cannot be held solidarily liable for the judgment obligation arising from quasi-delict, since the fact
alone of being President is not sufficient to hold him solidarily liable for the liabilities adjudged against
the corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).
When the compulsory counterclaim filed against corporate officers for their alleged fraudulent act
indicate that such corporate officers are indispensable parties in the litigation, the original inclusion of
the corporation in the suit does not thereby allow the denial of a specific counter-claim being filed to
make the corporate officers personally liable. A corporation has a legal personality entirely separate
and distinct from that of its officers and cannot act for and on their behalf, without being so authorized.
Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004).
(c) Dealings Between Corporation and Stockholders:
The fact that the majority stockholder had used his own money to pay part of the loan of the
corporation cannot be used as the basis to pierce: It is understandable that a shareholder would want
to help his corporation and in the process, assure that his stakes in the said corporation are secured.
LBP v. Court of Appeals, 364 SCRA 375 (2001).
Use of a controlling stockholders initials in the corporate name is not sufficient reason to pierce,
since by that practice alone does it mean that the said corporation is merely a dummy of the individual
stockholder, provided such act is lawful. LBP v. Court of Appeals, 364 SCRA 375 (2001).
The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a
collection case against the corporation, does not make such stockholder personally liable for the
corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the
inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v.
IAC, 172 SCRA 405 (1989).60
Just because two foreign companies came from the same country and closely worked together on
certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil
of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).
(d) On the Properties of the Corporation: The creation by DBP as the mother company of the three
mining corporations to manage and operate the assets acquired in the foreclosure sale lest they
58Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590
(2010).
59Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).
60PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
52
deteriorate from non-use and lose their value, does not indicate fraud or wrongdoing and will not
constitute application of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).
(e) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be
extended to nor enjoyed even by the controlling stockholders. Manila Gas Corp. v. Collector of
Internal Revenue, 62 Phil. 895 (1936).
(f) Obligations and Debts:
Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or
credit that of the corporation. Traders Royal Bank v. CA, 177 SCRA 789 (1989).
A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its
members in their individual capacity, even when the corporation is organized for the benefit of the
members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976).
Stockholders have no personality to intervene in a collection case covering the loans of the
corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195
SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999).
The majority stockholder cannot be held personality liable for the attorneys fees charged by a
lawyer for representing the corporation. Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993).
The obligations of a stockholder in one corporation cannot be offset from the obligation of the
stockholder in a second corporation, since the corporation has a separate juridical personality. CKH
Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997).
B. PIERCING THE VEIL OF CORPORATE FICTION:
1. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
The notion of corporate entity will be pierced or disregarded and the individuals composing it will
be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as
a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of
the stockholders. Gochan v. Young, 354 SCRA 207 (2001).61
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud
that may work inequities among members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been fraud and proof of it. For the separate
juridical personality of a corporation to be disregarded, the wrong-doing must be clearly and
convincingly established. It cannot be presumed. Suldao v. Cimech System Construction, Inc., 506
SCRA 256 (2006).
The legal fiction of separate corporate existence is not at all times invincible and the same may be
pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle
to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against
forum-shopping. While it is settled that the piercing of the corporate veil has to be done with caution,
this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises,
Inc. v. Ocampo, 391 SCRA 176 (2002).
2. Objectives and Effect of the Application of the Doctrine
Under the doctrine of piercing the veil of corporate fiction, the courts look at the corporation as a
mere collection of individuals or an aggregation of persons undertaking business as a group,
61DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); R &
E Transport, Inc. v. Latag, 422 SCRA 698 (2004);.Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v.
Court of Appeals, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Siain Enterprises, Inc v. Cupertino Realty Corp.,
590 SCRA 435 (2009).
53
disregarding the separate juridical personality of the corporation unifying the group. Traders Royal
Bank v. Court of Appeals, 269 SCRA 15 (1997).62
The rationale behind piercing a corporations identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of
those who use the corporate personality as a shield for undertaking certain proscribed activities.
However, in the case at bar, instead of holding certain individuals or person responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a corporation which is being
ordered to answer for the personal liability of certain individual directors, officers and incorporators
concerned. Hence, it appears to us that the doctrine has been turned upside down because of its
erroneous invocation. Francisco Motors Corp. v CA, 309 SCRA 72 (1999).
Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted
and controlled by the same parties, both law and equity will, when necessary to protect the rights of
third parties, disregard the legal fiction that two corporations are distinct entitled and treat them as
identical or one and the same. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA
225 (2007).63
The attempt to make the security agencies appear as two separate entities, when in reality they were
but one, was a devise to defeat the law [i.e., in this case to avoid liabilities under labor laws] and
should not be permitted. Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006); or where,
the fraud was committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real
Dev. Bank, 470 SCRA 86 (2005).
(a) Recent Attempts to Narrow the Objectives for Availing of Piercing: Piercing is not allowed unless
the remedy sought is to make the officer or another corporation pecuniarily liable for corporate
debts. (?) Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
(b) Applicable to Third-Parties: That respondents are not stockholders of the sister corporations
does not make them non-parties to this case, since it is alleged that the sister corporations are mere
alter egos of the directors-petitioners, and that the sister corporations acquired the properties sought
to be reconveyed to FGSRC in violation of directors-petitioners fiduciary duty to FGSRC. The
notion of corporate entity will be pierced and the individuals composing it will be treated as
identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of
the stockholders. Gochan v. Young, 354 SCRA 207 (2001).
3. Nature of the Piercing Doctrine as an Equitable Remedy: The doctrine of piercing the corporate veil
is an equitable doctrine developed to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216
(2001). Consequently:
(a) It is a Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available. Umali v. Court of Appeals, 189 SCRA 529
(1990).
(b) Can Be Availed-of Only to Prevent Fraud: Piercing doctrine is meant to prevent fraud, and
cannot be employed when the net result would be to perpetrate fraud or a wrong. Gregorio Araneta,
Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to
shield them. Villanueva v. Adre, 172 SCRA 876 (1989).
(c) Piercing Doctrine Not Applicable to Theorizing or to Advance/Create New Rights or Interest:
Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of co-
62Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009)

63Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012).
54
ownership to justify continued use and possession by stockholders of corporate properties.
Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
BUT SEE: Where clear evidence presented support the fact that a corporations affiliates have
received large amounts which became the consideration for the company execution of a real estate
mortgage over its properties, then the piercing doctrine shall be applied to support the fact that the real
estate mortgage was valid and supported by proper consideration. Siain Enterprises, Inc v.
Cupertino Realty Corp., 590 SCRA 435 (2009).
The piercing cannot be availed of in order to dislodge from SECs jurisdiction a petition for
suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should
be treated as the real petitioners to the exclusion of the petitioning corporate debtor: doctrine only
applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime. Union Bank v. Court of Appeals, 290 SCRA 198 (1998).
Application of the piercing of the subsidiary company to merge it with the holding company
cannot be allowed to support a theory of set-off or compensation, there being no allegation much less
any proof of fraud. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).
An employee who has officially retired from the company and availed of her retirement benefit,
but who continued to be employed as a consultant with affiliate companies, cannot employ piercing in
order to treat her stint with the affiliate companies as part of her employment with the main company
she retired fromthere is no fraud or employment of unfair shielding. Rivera v. United Laboratories,
Inc., 586 SCRA 269 (2009).
(d) Basis Must Be Clear Evidence
To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing
cannot be presumed and must be clearly and convincingly established. Application of the doctrine of
piercing the corporate veil should be done with caution. A court should be mindful of the milieu where
it is to be applied. It must be certain that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was
never unintended may result from an erroneous application. PNB v. Andrada Electric & Engineering
Co., 381 SCRA 244 (2002).64 Thus:
The organization of the corporation at the time when the relationship between the
landowner and the developer were still cordial cannot be used as a basis to hold the
corporation liable later on for the obligations of the landowner to the developer under the
mere allegation that the corporation is being used to evade the performance of obligation
by one of its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA
315 (1999).
In this case, the Court finds that the Remington failed to discharge its burden of proving
bad faith on the part of Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the corporate veil. DBP v.
Court of Appeals, 363 SCRA 307 (2001).65
Neither has it been alleged or proven that Merryland is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency conduit or
adjunct of Cardale. Even assuming that the businesses of Cardale and Merryland are
interrelated, this alone is not justification for disregarding their separate personalities,
absent any showing that Merryland was purposely used as a shield to defraud creditors
and third persons of their rights. Francisco v. Mejia, 362 SCRA 738 (2001).66
64General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Association (PEAPTGWO) v. NLRC, 581 SCRA 598 (2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011).
65 Also McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
66Also Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).
55
The mere assertion by a Filipino litigant against the existence of a tandem between two
Japanese corporations cannot be the basis for piercing, which can only be applied by
showing wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362
SCRA 620 (2001).
The party seeking to pierce has the burden of presenting clear and convincing evidence to justify the
setting aside of the separate corporate personality rule. The question of whether a corporation is a mere
alter ego is a purely one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric
& Engineering Co., 381 SCRA 244 (2002).67
(e) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz
v. Dalisay, 152 SCRA 482 (1987); D.R. CATC Services v. Ramos, 477 SCRA 18 (2005).
(f) Piercing Has Only Res Judicata Effect: Application of the doctrine to a particular case does not
deny the corporation of legal personality for any and all purposes, but only for the particular
transaction or instance, or the particular obligation for which the doctrine was applied. Koppel
(Phil.) Inc. v. Yatco, 77 Phil. 496 (1946).68
3. CLASSIFICATION OF PIERCING CASES:
DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate
corporate personality would be inconsistent with the business purpose of the legal fiction, or
when piercing the corporate fiction is necessary to achieve justice or equity for those who deal
in good faith with the corporation, or when the use of the separate juridical personality is used to
confuse legitimate issues.
FRAUD PIERCING: When corporate entity used to commit a crime, to undertake fraud or do a
wrong, or that the corporate veil is used as a means to evade the consequences of ones criminal
or fraudulent acts
ALTER-EGO PIERCING: When corporate entity merely a farce since the corporation is merely the
alter ego, business conduit, or instrumentality of a person or another entity
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law
covers and isolates the corporation from any other legal entity to which it may be related, is allowed.
These are: 1) defeat of public convenience, as when the corporation is used as vehicle for the evasion
of existing obligation; 2) fraud cases or when the corporate entity is used to justify wrong, protect
fraud, or defend a crime; or 3) alter ego cases, where the corporation is merely a farce since it is a mere
alter ego or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225
(2007).69
(a) Rundown on Piercing Application: This Court pierced the corporate veil to ward off a judgment
credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability
arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to
shield unfair objectives to cover up an otherwise blatant violation of the prohibition against forum
shopping. Only is these and similar instances may the veil be pierced and disregarded. PNB v.
Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
67Also Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR
Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).
68Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).
69citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed), at p. 576. Also Pantranco Employees Association (PEA-PTGWO) v.
NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Sarona v. NLRC, 663 SCRA
394 (2012).
56
(b) Summary of Probative Factors: Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).70
The absence of these elements prevents piercing the corporate veil. Lim v. Court of Appeals, 323
SCRA 102 (200).71
(c) Distinction Between Fraud Piercing and Alter-ego Piercing: Lipat v. Pacific Banking Corp.,
402 SCRA 339 (2003).
4. DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING):
Corporate Juridical Personality Cannot Be Employed:
(a) To Confuse Legitimate Issues: Telephone Engineering and Service Co., Inc. V. WCC, 104
SCRA 354 (1981).
(b) To Raise Legal Technicalities: Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).
One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely
Transportation Co., 5 SCRA 1011 (1962).72
When used to avoid a contractual commitment against a non-competition clause. Villa Rey
Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).
Where a debtor registers his residence to a family corporation in exchange of shares of stock and
continues to live therein, then the separate juridical personality may be disregarded. PBCom v. CA, 195
SCRA 567 (1991).
Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations
or confuse the legitimate issues (as in this case where the actions of management of the two
corporations created confusion as to the proper employer of claimants), it would be discarded and the
two corporations would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against
forum-shopping. Where the corporation itself has not been remiss in vigorously prosecuting or
defending corporate causes and in using and applying remedies available to it, then shareholders,
whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed
to pursue the same claims. First Philippine International Bank v. Court of Appeals, 252 SCRA 259
(1996).
(c) The Case for Thinly-Capitalized Corporations: McConnel v. CA, 1 SCRA 722 (1961).
The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means
perpetrated upon the investing public who were made to believe that ASBHI had the financial capacity
to repay the loans it enticed petitioners to extend, despite the fact that it had an authorized capital
stock of only P500,000.00 and paid up capital of only P125,000.00), with the deficient capitalization
evidenced by its articles of incorporation, the treasurers affidavit, the audited financial statements.
Moreover, respondents argument assumes that there is legal obligation on the part of petitioners to
undertake an investigation of ASBHI before agreeing to provide the loans. There is no such obligation.
It is unfair to expect a person to procure every available public record concerning an applicant for
credit to satisfy himself of the latters financial standing. At least, that is not the way an average person
takes care of his concerns. Gabionza v. Court of Appeals, 565 SCRA 38 (2008).
Where the corporation was under the control of its stockholders who ran-up quite a high obligation
with the printing company knowing fully well that their corporation was not in a position to pay for the
accounts, and where in fact they personally benefited from the operations of the company to which
they never paid their subscription in full, would constitute piercing of the veil to allow the creditor to
70PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); Jardine Davies, Inc. v. JRB
Realty, Inc., 463 SCRA 555 (2005); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
71Child Learning Center, Inc. v. Tagorio, 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513
SCRA 225 (2007); Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).
72Also Mendoza and Yotoko v. Banco Real Dev. Bank, 470 SCRA 86 (2005).
57
be able to collect what otherwise were debts owed by the company which has no visible assets and has
ceased all operations. Halley v. Printwell, Inc. 649 SCRA 116 (2011).
(d) Avoidance or Minimization of Taxes: Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA
160 (1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).
Use of nominees to constitute the corporation for the benefit of the controlling stockholder who
.
sought to avoid payment of taxes. Marvel Building v. David, 9 Phil. 376 (1951)
The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is
to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the
corporations: With regard to their claim that [the companies] Ellice and Margo were meant to be used
as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to
reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the
law permits, cannot be doubted. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
HOWEVER: The mere existence of parent-subsidiary relations, or the fact that one corporation is
affiliated with another corporation does not justify piercing based on serving public convenience.
Comm. of Internal Revenue v. Norton and Harrison, 11 SCRA 704 (1954).73
5. FRAUD CASES:
When the legal fiction of the separate corporate personality is abused, such as when the same is
used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil.
Francisco v. Mejia, 362 SCRA 738 (2001).
The general rule is that obligations incurred by a corporation, acting through its directors, officers or
employees, are its sole liabilities. However, there would be piercing of the veil when the corporation is
used by any of them as a cloak or cover for fraud or illegality or injustice. Here, the fraud was
committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470
SCRA 86 (2005).
Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the
piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may
be held individually and personally liable for his or her actions. Lafarge Cement Phils., Inc. v.
Continental Cement Corp., 443 SCRA 522 (2004).
However, mere allegation of fraud or bad faith, without evidence supporting such claims cannot
warrant the piercing of the corporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501,
363 SCRA 307 (2001).
(a) Acts by Controlling Shareholder:
The fact that a corporation owns all of the stocks of another corporation, taken alone, is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a
subsidiarys separate existence shall be respected, and the liability of the parent corporation, as well as
the subsidiary shall be confined to those arising in their respective business. A corporation has a
separate personality distinct from its stockholders and from other corporations to which it may be
conducted a legal fiction created by law for convenience and to prevent injustice. Nisce v. Equitable
PCI Bank, Inc., 516 SCRA 231 (2007).74
Where a stockholder, who has absolute control over the business and affairs of the corporation,
entered into a contract with another corporation through fraud and false representations, such
stockholder shall be liable solidarily with co-defendant corporation even when the contract sued upon
was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962
(1967).
73Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997). Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).
74Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).
58
Where the corporation is used as a means to appropriate a property by fraud which property was
later resold to the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano,
Sr. v. Uy, 344 SCRA 238 (2000).
(b) Tax Evasion or Fraud:
In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a
corporation is merely an adjunct, business conduit or alter ego of another corporation or when they
practice fraud on internal revenue laws, the fiction of their separate and distinct corporate identities
shall be disregarded, and both entities treated as one taxable person, subject to assessment for the same
taxable transaction. Commissioner of Internal Revenue v. Menguito, 565 SCRA 461 (2008).
(c) Guiding Principles in Fraud Cases:
Why is there inordinate showing of alter-ego elements?
There must have been fraud or an evil motive in the affected transaction, and the mere proof
of control of the corporation by itself would not authorize piercing;
The corporate fiction is used as a means to commit the fraud or avoid the consequences
thereof; and
The main action should seek for the enforcement of pecuniary claims pertaining to the
corporation against corporate officers or stockholders.
Respondent corporations may be engaged in the same business or even share the same address, or
have interlocking incorporators, directors or officers, in the absence of fraud or other public policy
consideration, does not warrant piercing the veil of corporate fiction. McLeod v. NLRC, 512 SCRA 222
(2007), quoting from Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992), and Del
Rosario v. NLRC, 187 SCRA 777 (1990).
HOWEVER: Mere ownership by a single stockholder or by another corporation of all or nearly all of
the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate
personality. The substantial identity of the incorporators of two or more corporations does not imply
that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said
separate juridical personality of a corporation, the wrongdoing must be proven clearly and
convincingly. Martinez v. Court of Appeals, 438 SCRA 130 (2004).
6. ALTER-EGO CASES:
(a) Using Corporation as Conduit or Alter Ego:
A corporation has a personality separate and distinct from the persons composing it, as well as from
any other legal entity to which it may be related. Equally well-settled is the principle that the corporate
mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a
person or of another corporation. Sarona v. NLRC, 663 SCRA 394 (2012).
Where the capital stock is owned by one person and it functions only for the benefit of such
individual owner, the corporation and the individual should be deemed the same. Arnold v. Willets
and Patterson, Ltd., 44 Phil. 634 (1923).
When corporation is merely an adjunct, business conduit or alter ego of another corporation, the
fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v.
Jarencio, 163 SCRA 205 (1988).75
The fictive veil of corporate personality holds lesser sway for subsidiary corporations whose shares
are wholly if not almost wholly owned by its parent company. The structural and systems overlap
inherent in parent and subsidiary relations often render the subsidiary as mere local branch, agency or
adjunct of the foreign parent. Thus, when the foreign parent company leased a large parcel of land
75General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).
59
purposely for the benefit of its subsidiary, which took over possession of the leased premises, the
subsidiary was a mere alter ego of ESSO Eastern. Mariano v. Petron Corp., 610 SCRA 487 (2010).
The fact that a corporation owns all of the stocks of another corporation, taken alone, is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a
subsidiarys separate existence shall be respected, and the liability of the parent corporation, as well as
the subsidiary shall be confined to those arising in their respective business. A corporation has a
separate personality distinct from its stockholders and from other corporations to which it may be
conducted a legal fiction created by law for convenience and to prevent injustice. Nisce v. Equitable
PCI Bank, Inc., 516 SCRA 231 (2007).
(b) Mixing-up Operations; Disrespect to the Corporate Entity:
Employment of same workers; single place of business, etc., may indicate alter ego situation. La
Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953); Shoemart v. NLRC,
225 SCRA 311 (1993).
The facts that two corporations may be sister companies, and that they may be sharing personnel
and resources, without more, is insufficient to prove that their separate corporate personalities are
being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v.
Where 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. Sibagat Timber Corp. v. Garcia, 216
SCRA 70 (1992).
Mixing of personal accounts with corporate bank deposit accounts. Ramirez Telephone Corp. v.
Bank of America, 29 SCRA 191 (1969).
(c) Guiding Principles in Alter-Ego Cases:
Doctrine applies even in the absence of evil intent, because of the direct violation of a central
corporate law principle of separating ownership from management;
Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity,
others cannot also be expected to be bound by the separate juridical entity;
Piercing in alter ego cases may prevail even when no monetary claims are sought to be
enforced against the stockholders or officers of the corporation.
HOWEVER: The mere existence of a parent-subsidiary relationship between two corporation, or that
one corporation is affiliated with another company does not by itself allow the application of the alterego piercing doctrine. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals,
181 SCRA 669 (1990).
A subsidiary corporation has an independent and separate juridical personality, distinct from that of
its parent company, hence, any claim or suit against the latter does not bind the former and vice-versa.
Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005).
If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary will be confined to those arising in their
respective businesses. Even when the parent corporation agreed to the terms to support a standby credit
agreement in favor of the subsidiary, does not mean that its personality has merged with that of the
subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).
7. PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE
(a) Need to Bring a New Case Against the Officer. McConnel v. CA, 1 SCRA 723 (1961).
A suit against individual shareholders is not a suit against the corporation. Failure to implead the
corporations as defendants and merely annexing a list of such corporations to the complaints is a
60
violation of due process for it would in effect be disregarding their distinct and separate personality
without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).
Although both lower courts found sufficient basis for the conclusion that PKA and Phoenix Omega
were one and the same, and the former is merely a conduit of the other the Supreme Court held void
the application of a writ of execution on a judgment held only against PKA, since the RTC obtained no
jurisdiction over the person of Phoenix Omega which was never summoned as formal party to the case.
The general principle is that no person shall be affected by any proceedings to which he is a stranger,
and strangers to a case are not bound by the judgment rendered by the court. Padilla v. Court of
Appeals, 370 SCRA 208 (2001); Violago v. BA Finance Corp., 559 SCRA 69 (2008).
(b) When corporate officers are sued in their official capacity when the corporation was not made a
party, the corporation is not denied due process. Emilio Cano Enterprises v. CIR, 13 SCRA 291
(1965).
We suggest as much in Arcilla v. Court of Appeals, (215 SCRA 120 [1992]), an appellate
proceedings involving petitioner Arcillas bid to avoid the adverse CA decision on argument that he is
not personally liable for the amount adjudged since the same constitutes a corporate liability which
nevertheless cannot be enforced against the corporation which has not been impleaded as a party
below. Violago v. BA Finance Corp., 559 SCRA 69 (2008).
(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine.
Jacinto v. Court of Appeals, 198 SCRA 211 (1991).76
V. xCLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
(a) Public Corporation (Sec. 3, Act No. 1459).
(b) Quasi-public Corporation. Marilao Water Consumers Asso. v. IAC, 201 SCRA 437 (1991);
(c) Private Corporation (Sec. 3, Act 1459).
Governments majority shares does not make an entity a public corporation. National Coal Co., v.
Collector of Internal Revenue, 46 Phil. 583 (1924).
But being a GOCC makes it liable for laws and provisions applicable to the Government or its
entities and subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359
(1952).
Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the
Government, and its funds and assets are not considered government in nature and not subject to audit
by the COA, the fact that it received a special charter from the government, that its governing board are
appointed by the Government, and that its purpose are of public character, for they pertain to the
educational, civic and social development of the youth which constitute a very substantial and
important part of the nation, it is not a public corporation in the same sense that municipal corporation
or local governments are public corporation since its does not govern a portion of the state, but it also
does not have proprietary functions in the same sense that the functions or activities of governmentowned or controlled corporations, is may still be considered as such, or under the 1987 Administrative
Code as an instrumentality of the Government, and it employees are subject to the Civil Service Law.
Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries
under the general corporation law are governed by the Civil Service Law and not by the Labor Code,
has been supplanted by the 1987 Constitution. The present doctrine in determining whether a GOCC is
subject to the Civil Service Law is the manner of its creation, such that government corporations
created by special charter are subject the Civil Service Law, while those incorporated under the general
76Arcilla v. Court of Appeals, 215 SCRA 120 (1992).
61
corporation law are governed by the Labor Code. PNOC-Energy Dev. Corp. v. NLRC, 201 SCRA 487
(1991); Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
Sec. 31 of Corporation Code (Liability of Directors and Officers) is applicable to corporations
which have been organized by special charters since Sec. 4 of Corporation Code renders the provisions
supplementarily applicable to all corporations, including those with special or individual charters, such
as cooperatives organized under P.D. 269, so long as those provisions are not inconsistent with such
charters. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
A corporation is created by operation of law under the Corporation Code while a government
corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp.
Employees Union v. Calleja, 237 SCRA 271 (1994).
The test to determine whether a corporation is government owned or controlled, or private in nature
is simple. Is it created by its own charter for the exercise of a public function, or by incorporation
under the general corporation law? Those with special charters are government corporations subject to
its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are
compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999)
While public benefit and public welfare may be attributable to the operation of the Bases
Conversion and Development Authority (BCDA), yet it is certain that the functions it performs are
basically proprietary in naturethe promotion of economic and social development of Central Luzon,
particularly, and the countrys goal for enhancement. Therefore, the rule that prescription does not run
against the State will not apply to BCDA, it being said that when title of the Republic has been
divested, its grantees, although artificial bodies of its own creation, are in the same category as
ordinary persons. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).
Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the
government, and the intervention in a transaction of the Office of the President through the Executive
Secretary does not change the independent existence of a government entity as it deals with another
government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001).
Water districts can validly exists as corporate entities under PD 198, and provided they are
government-owned or controlled, and their board of directors and other personnel are government
employees subject to civil service laws and anti-graft laws. Feliciano v. COA, 419 SCRA 363 (2004).
A government-owned or controlled corporation must be organized as a stock or non-stock
corporation. The MIAA is not a government-owned or controlled corporation because it is not
constituted of capital divided into shares of stock, and neither is it a nonstock corporation because it
has no members. MIAA is a government instrumentality vested with corporate powers to perform
efficiently its government functions. Manila International Airport Authority v. Court of Appeals, 495
SCRA 591 (2006).
Senator Gordon had not violated the provisions of Sec. 13, Art. VI of the Constitution, when he
accepted chairmanship of the PNRC, as the latter is not a government office nor a GOCC. Although
PNRC has its special charter, the Chairman of PNRC is not appointed by the President or any member
of the Executive Branch. Although Camporendodo v. NLRC had ruled that PNRC is GOCC because it
is constituted under a special charter, it failed to consider the definition of a GOCC as provided under
Sec. 2(13) of the Administrative Code of 1987, which requires that a GOCC to be such must be owned
by the government, and in the case of a stock corporation, at least a majority of its capital stock must
be owned by the government. Liban v. Gordon, 593 SCRA 68 (2009).
2. As to Place of Incorporation:
(a) Domestic Corporation
(b) Foreign Corporation (Sec. 123)
3. As to Purpose of Incorporation:
(a) Municipal Corporation
(b) Religious Corporation (Secs. 109 and 116)
62
Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive
upon the civil tribunals, then a church member who is expelled from the membership by the church
authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in
the civil courts. Long v. Basa, 366 SCRA 113 (2001).
(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
(d) Charitable, Scientific or Vocational Corporations
(e) Business Corporation
4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole (Secs. 110 to 115; Roman Catholic Apostolic Administrator of Davao, Inc. v.
LRC and the Register of Deeds of Davao City, 102 Phil. 596 [1957]).
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127
SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the public
domain, because of the constitutional prohibition qualifying only individuals to acquire land and the
provision under the Public Land Act which applied only to Filipino citizens or natural persons, has
been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986).77
5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)
(c) Corporation by Estoppel (Sec. 21)
6. As to Existence of Shares (Secs. 3 and 5):
(a) Stock Corporation
(b) Non-Stock Corporation
VI. CORPORATE CONTRACT LAW

1. Pre-Incorporation Contracts
(a) Who Are Promoters?
Promoter is 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. (Sec. 3.10,
Securities Regulation Code [R.A. 8799])
(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc.,
73 Phil. 557 [1942]).
(c) Theories on Liabilities for Promoter's Contracts:
Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 (1937);
Rizal Light & Ice Co., Inc. v. Public Service Comm., 25 SCRA 285 (1968);
Caram, Jr. v. CA, 151 SCRA 372 (1987).
2. De Facto Corporation (Sec. 20)
(a) Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).
77Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).
63
By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation
whose right to exercise corporate powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958];
Albert v. University Publishing Co., 13 SCRA 84 [1965]; Asia Banking Corp. v. Standard Products,
46 Phil. 145 [1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G. No. 35, p. 7331)
(a) Nature of Doctrine
Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine
applies when persons assume to form a corporation and exercise corporate functions and enter into
business relations with third persons. Where no third person is involved in the conflict, there is no
corporation by estoppel. A failed consolidation therefore cannot result in a consolidated corporation by
estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)
A party cannot challenge the personality of the plaintiff as a duly organized corporation after having
acknowledged same when entering into the contract with the plaintiff as such corporation for the
transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).78
A person who accepts employment in an unincorporated charitable association is estopped from
alleging its lack of juridical personality. Christian Childrens Fund v. NLRC, 174 SCRA 681 (1989).
One who deals with an unincorporated association which is not duly incorporated is not estopped to
deny its corporate existence when his purpose is not to avoid liability, but precisely to enforce the
contract against the action for the purported corporation. Intl Express Travel v. Court of Appeals, 343
SCRA 674 (2000).
Under the law on estoppel including that under Sec. 21 of Corporation Code, those acting on behalf
of an ostensible corporation and those benefited by it, knowing it to be without valid existence, are held
liable as general partners. Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA
728 (1999).
(b) Two Levels: (i) With Fraud; and (ii) Without Fraud
When the incorporators represent themselves to be officers of the corporation which was never duly
registered with the SEC, and engage in the name of the purported corporation in illegal recruitment,
they are estopped from claiming that they are not liable as corporate officers under Sec. 25 of
Corporation Code which provides that all persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all the debts, liabilities and damages
incurred or arising as a result thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Pineda, G.R.
No. 117010, 18 April 1997 (unpub).
4. TRUST FUND DOCTRINE
(a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code)
(b) Nature of the Trust Fund Doctrine:
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are
preferred over the stockholders in the distribution of corporate assets. There can be no distribution of
assets among the stockholders without first paying corporate creditors. Hence, any disposition of
corporate funds to the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA,
167 SCRA 540 (1988).
Even when the foreclosure on the corporate assets was wrongful done, stockholders have no
standing to recover for themselves moral damages; otherwise, it would amount to the appropriation by,
and the distribution to, such stockholders of part of the corporations assets before the dissolution of
78The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained to a
commercial partnership which required registration in the registry under the terms of the Code of Commerce).
64
the corporation and the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579
(1998).
Under the trust fund doctrine, the capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors. Comm. of Internal Revenue v.
The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment of
the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of
the corporation, no part of the subscribed capital stock may be turned over or released to the
stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus
dividends must never impair the subscribed capital stock; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the
consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).
We clarify that the trust fund doctrine is not limited to reaching the stockholders unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts. All assets and property belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the possession of the stockholders, regardless of full
payment of their subscriptions may be reached by the creditors in satisfaction of its claim. Halley v.
Printwell, Inc. 649 SCRA 116 (2011), citing Villanueva, Philippine Corporate Law (2001), p. 558.
(c) To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44
Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929])
Under the common law, there were originally conflicting views on whether a corporation had the
power to acquire or purchase its own stocks. Only a few American jurisdictions adopted the strict
English rule forbidding a corporation from purchasing its own shares. In some American states
where the English rule used to be adopted, statutes granting authority to purchase out of surplus
funds were enacted, while in others, shares might be purchased even out of capital provided the
rights of creditors were not prejudiced. The reason underlying the limitation of share purchases
sprang from the necessity of imposing safeguards against the depletion by a corporation of its assets
and against the impairment of its capital needed for the protection of creditors. Turner v. Lorenzo
Shipping Corp., 636 SCRA 13 (2010).
(d) Rescission of Subscription Agreement Based on Breach
The violation of terms embodied in a subscription agreement, with are personal commitments, do
not constitute legal ground to rescind the subscription agreement since such would violate the Trust
Fund Doctrine and the procedures for the valid distribution of assets and property under the
Corporation Code. In the instant case, the rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine and the Corporation Code, since the rescission of a
subscription agreement is not one of the instances when distribution of capital assets and property of
the corporation is allowed. Distribution of corporate assets among the stockholders cannot even be
resorted to achieve corporate peace. Ong Yong v. Tiu, 401 SCRA 1 (2003).
VII. ARTICLES OF INCORPORATION
1. Nature of Charter: The charter is in the nature of a contract between the corporation and the
government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
The articles of incorporation has been described as one that defines the charter of the corporation
and the contractual relationships between the state and the corporation, the stockholders and the State,
and between the corporation and its stockholders. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
2. Procedure and Documentary Requirements (Sec. 14 and 15)
(a) As to Number and Residency of Incorporators (Sec. 10)
65
It is possible for a business to be wholly owned by one individual, and the validity of its
incorporation is not affected when he gives nominal ownership of only one share of stock to each of
the other four incorporators. This arrangement is not necessarily illegal, but it valid only between and
among the incorporators privy to the agreement. It does not bind the corporation which will consider
all stockholders of record as the lawful owners of their registered shares. As between the corporation
on the one hand, and its stockholders and third persons on the other, the corporation looks only to its
books for the purpose of determining who its shareholders are. Nautica Canny Corp. v. Yumul, 473
SCRA 415 (2005).
(b) Corporate Name (Secs. 18, 14(1) and 42)
Similarity in corporate names between two corporations would cause confusion to the public
especially when the purposes stated in their charter are also the same type of business. Universal Mills
Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977).
The name of a corporation is essential not only for its existence as a juridical person, but also in
manner of dealing with it, and in the exercise of its juridical capacities; it cannot be changed except in
the manner provided for by law. Red Line Trans. v. Rural Transit, 60 Phil. 549).
Sec. 18 of Corporation Code expressly prohibits the use of a corporate name which is identical or
deceptively or confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. The policy behind
the foregoing prohibition is to avoid fraud upon the public that will occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. Industrial Refractories Corp. v. Court of Appeals,
390 SCRA 252 (2002).79
Incorporators must choose a name at their peril; and the use of a name similar to one adopted by
another corporation, whether a business or a nonprofit organization, if misleading or likely to injure
the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having
a prior right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo
Jesus, 372 SCRA 171 (2001).
To fall within the prohibition of the law Revised Guidelines in the Approval of Corporate and
Partnership Names, two requisites must be proven, to wit: (a) That the complainant corporation
acquired a prior right over the use of such corporate name; and (b) the proposed name is either: (i)
identical, or (ii) deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or (iii) patently deceptive, confusing or contrary to existing laws.
Philips Export B.V. v. Court of Appeals, 206 SCRA 457, 463 (1992)
A corporation has no right to intervene in a suit using a name, not even its acronym, other than its
registered name, as the law requires and not another name which it had not registered. Laureano
Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997).
There would be no denial of due process when a corporation is sued and judgment is rendered
against it under its unregistered trade name, holding that [a] corporation may be sued under the name
by which it makes itself known to its workers. Pison-Arceo Agricultural Dev. Corp. v. NLRC, 279
SCRA 312 (1997).
A corporation may change its name by the amendment of its articles of incorporation, but the same
is not effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan, 34 SCRA 252
(1970).
A change in the corporate name does not make a new corporation, and has no effect on the identity
of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of Appeals,
216 SCRA 738 (1992).80
(c) Purpose Clause (Secs. 14(2) and 42)
79Also Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).
80P.C. Javier & Sons, Inc. v. Court of Appeals, 462 SCRA 36 (2005).
66
The statement of the primary purpose in the articles of incorporation is means to protect
shareholders so they will know the main business of the corporation and file derivative sutis if the
corporation deviates from the primary purpose. Uy Siuliong v. Director of Commerce and Industry, 40
Phil. 541 (1919).
The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The
articles of incorporation must state the primary and secondary purposes of the corporation, while the
by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure
or facilitate the accomplishment of said purpose. Therefore, the Court brushed aside the contention
that the corporations were organized to illegally avoid the provisions on land reform and to avoid the
payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice Agro-Industrial Corp., 418
SCRA 431 (2003).
(d) Corporate Term (Sec. 11)
No extension of term can be effected once dissolution stage has been reached, as it constitutes new
business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968).
Article 605 of the Civil Code clearly limits any usufruct constituted in favor of a corporation or
association to 50 years. A usufruct is meant only as a lifetime grant. Unlike a natural person, a
corporation or associations lifetime may be extended indefinitely. The usufruct would then be
perpetual. This is especially invidious in cases where the usufruct given to a corporation or association
covers public land. NHA v. Court of Appeals, 456 SCRA 17 (2005).
(e) Principal Place of Business (Sec. 51)
Although the Rules of Court do not provide that when the plaintiff is a corporation, the complaint
should be filed in the location of its principal office as indicated in its articles of incorporation,
jurisprudence has, however, settled that the place where the principal office of a corporation is located,
as stated in the articles, indeed establishes its residence. This ruling is important in determining the
venue of an action by or against a corporation, as in the present case. Hyatt Elevators and Escalators
Corp. v. Goldstar Elevators, Phils., Inc., 473 SCRA 705 (2005), citing VILLANUEVA, PHILIPPINE
CORPORATE LAW (1998), p. 162.
Place of residence of the corporation is the place of its principal office. Clavecilla Radio System v.
Antillon, 19 SCRA 379 (1967)
The residence of its president is not the residence of the corporation because a corporation has a
personality separate and distinct from that of its officers and stockholders. Sy v. Tyson Enterprises, Inc.,
119 SCRA 367 (1982).
(f) Minimum Capitalization (Sec. 12)
- Why is maximum capitalization required to be indicated?
(g) Subscription and Paid-up Requirements (Sec. 13)
The entries in the articles of incorporation of the original issuances of shares of stock has a stronger
weight that the stock and transfer book in determining the validity and issuance of such shares. Lanuza
v. Court of Appeals, 454 SCRA 54 (2005).
(h) Steps and Documents Required in SEC
3. Grounds for Disapproval (Sec. 17)
When the proposed articles show that the object is to organize a barrio into a separate
corporation for the purpose of taking possession and having control of all municipal property within
the incorporated barrio and administer it exclusively for the benefit of the residents, the object is
unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914).
It is well to note that, if a corporations purpose, as stated in the articles of incorporation, is
lawful, then the SEC has no authority to inquire whether the corporation has purposes other than
those stated, and mandamus will lie to compel it to issue the certificate of incorporation. Gala v.
Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
67
4. Amendments to the Articles of Incorporation (Sec. 16).
5. Commencement of Corporate Existence (Sec. 19).
VIII. BY-LAWS
1. Nature and Functions:
The power to adopt by-laws is an inherent power on the part of those forming a corporation or any
other form of association. Gokongwei v. SEC, 89 SCRA 337 (1979).
By-laws have traditionally been defined as regulations, ordinances, rules or laws adopted by an
association or corporation or the like for its internal governance, including rules for routine matters
such as calling meetings and the like. If those key by-law provisions on matters such as quorum
requirements, meetings, or on the internal governance of the local/chapter are themselves already
provided for in the constitution, then it would be feasible to overlook the requirements for by-laws.
Indeed in such an event, to insist on the submission of a separate document denominated as By-Laws
would be an undue technicality, as well as a redundancy. San Miguel Corp. v. Mandaue Packing
Products Plants Union-FFW, 467 SCRA 107 (2005).
As the rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders or members and directors and officers
with relation thereto and among themselves in their relation to it, by-laws are indispensable to
corporations. These may not be essential to corporate birth but certainly, these are required by law for
an orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276
SCRA 681 (1997).
(a) Common Law Limitations on By-Laws
(i) By-Laws Cannot Be Contrary to Law and Charter
A by-law provision that empowers the Board of Directors to cancel the shares of any member
and return to the owner thereof the value thereof was declared void for being in violation of the
provision in the Corporation Law that provided that capital can only be returned after dissolution.
Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927)
A by-law provision granting to a stockholder permanent seat in the Board of Directors is
contrary to the provision in Corporation Code requiring all members of the Board to be elected by
the stockholders. Even when the members of the association may have formally adopted the
provision, their action would be of no avail because no provision of the by-laws can be adopted if it
is contrary to law. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
By-laws are intended merely for the protection of the corporation, and prescribe regulation, not
restrictions; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v.
CA, 210 SCRA 510 (1992).
The by-laws provisions cannot be such or be amended to be able to go around the security of
tenure clause of employees nor impair the obligation of existing contracts or rights. . . If we were to
rule otherwise, it would enable an employer to remove any employee from his employment by the
simple expediency of amending its by-laws and providing that his/her position shall cease to exist
upon the occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village
Homeowners, 300 SCRA 469 (1998).
(ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of By-laws.
Authority granted to a corporation to regulate the transfer of its stock does not empower the
corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be followed in effecting transfer.
Thomson v. Court of Appeals, 298 SCRA 280 (1998).
68
(iii) By-Law Provisions Cannot Discriminate.
(b) Binding Effects on By-laws:
By-law provisions on the required quorum for special meetings of the Board have the force of law
and are binding even on third-parties who deal with the properties of the corporation.Pea v. Court
of Appeals, 193 SCRA 717 (1991).
The nature of by-laws being intramural instruments would mean that they are not binding on thirdparties, except those who have actual knowledge of their contents.China Banking Corp. v. Court of
Appeals, 270 SCRA 503
Neither can we concede that such contract would be invalid just because the signatory thereon was
not the Chairman of the Board which allegedly violated the corporations by-laws. Since by-laws
operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons
who deal with the corporation, unless they have knowledge of the same. PMI Colleges v. NLRC, 277
SCRA 462 (1997).
2. Adoption Procedure (Sec. 46)
There can be no automatic dissolution simply because the incorporators failed to file the required
by-laws under Sec. 46 of Corporation Code. There is no outright demise of corporate existence.
Proper notice and hearing are cardinal components of due process in any democratic institution, agency
or society. In other words, the incorporators must be given the chance to explain their neglect or
omission and remedy the same. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).
A corporation which has failed to file its by-laws within the prescribed period does not ipso facto
lose its powers as such, and may be considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to which such corporations may be a
party. [?] Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
3. Contents (Sec. 47)
4. Amendments and Revisions of By Laws (Sec. 48)
IX. CORPORATE POWERS AND AUTHORITY

1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines
v. COA, 190 SCRA 154 [1990])
(a) Classification of Corporate Powers: Express; Implied; and Incidental
A corporation has only such powers as are expressly granted to it by law and by its articles of
incorporation, those which may be incidental to such conferred powers, those reasonably necessary to
accomplish its purposes and those which may be incident to its existence. Pilipinas Loan Company v.
SEC, 356 SCRA 193 (2001).
(b) Where Corporate Power Lodged
A corporation has no power except those expressly conferred on it by the Corporation Code and
those that are implied or incidental to its existence. In turn, a corporation exercises said powers through
its board of directors and/or its duly authorized officers and agents. . . In turn, physical acts of the
corporation, like the signing of documents, can be performed only by natural persons duly authorized
for the purpose by corporate by-laws or by a specific act of the board of directors. Shipside Inc. v.
Unless otherwise provided by the Corporation Code, corporate powers are exercised by the Board
of Directors, which they may delegate either to an executive committee, officers or contracted
managers. The delegation, except for the executive committee, must be for specific purposes, which
81Salenga v. Court of Appeals, 664 SCRA 635 (2012).
69
makes the officers the agents of the corporation, and accordingly the general rules of agency as to the
binding effects of their acts would apply. For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must specially authorize them to do so. ABSCBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 572 (1999).
2. Express Powers
(a) Enumerated Powers (Secs. 36)
(b) Extend or Shorten Corporate Term (Secs. 37 and 81[1])
(c) Increase or Decrease Capital Stock (Sec. 38)
Despite the board resolution approving the increase in capital stock and the receipt of payment on
the future issues of the shares from the increased capital stock, such funds do not constitute part of the
capital stock of the corporation until approval of the increase by SEC. Central Textile Mills, Inc. v.
NWPC, 260 SCRA368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union members,
amounts to nothing but a premature and plain distribution of corporate assets to obviate a just sharing
to labor of the vast profits obtained by its joint efforts with capital through the years, and would
constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).
(d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)
(e) Sell or Dispose of Assets (Sec. 40)
The property of the corporation is not the property of the stockholders or members, and as such,
may not be sold without express authority from the Board of Directors. Litonjua v. Eternit Corp., 490
SCRA 204 (2006).
The Corporation Code defines a sale or disposition of substantially all assets and property of a
corporation as one by which the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated any sale or disposition short of this will
not need stockholder ratification, and may be pursued by the majority vote of the Board of Directors.
Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate
property and assts, if thereby the corporation would be rendered incapable of continuing the business
or accomplishing the purposes for which it was incorporated. Such a sale or disposition must be
understood as valid only if it does not prejudice the creditors of the assignor, which necessarily implies
that the assignee assumes the debts of the assignor. Caltex (Phils.), Inc. v. PNOC Shipping and
Transport Corp., 498 SCRA 400 (2006).
Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of
Corporation Code requiring ratification of members representing at least two-thirds of the membership,
would make the sale null and void. Islamic Directorate v. Court of Appeals, 272 SCRA 454 (1997);
Pea v. CA, 193 SCRA 717 (1991).
(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; De la Rama v. Ma-ao
Sugar Central Co., 27 SCRA 247 [1969]).
(g) Declare Dividends (Sec. 43)
Dividends from retained earnings can only be declared to those who are stockholders of the
corporation; dividends cannot be declared to creditors as part of the settlement of debts. Nielson & Co.
v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).
Stock dividend is the amount that the corporation transfers from its surplus profit account to its
capital account. It is the same amount that can loosely be termed as the trust fund of the corporation.
NTC v. CA, 311 SCRA 508 (1999).
(h) Management Contracts (Sec. 44): Why the difference in rule between entity and individual?
70
A management contract is not the same as an agency contract, and therefore is not revocable at will.
Nielson & Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. Moya, 195
SCRA 247 (1991).
3. Implied Powers
When the articles expressly provide that the purpose of the corporation was to engage in the
transportation of person by water, such corporation cannot engage in the business of land
transportation, which is an entirely different line of business, and, for which reason, may not acquire
any certificate of public convenience to operate a taxicab service. Luneta Motor Co. v. A.D. Santos,
Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to undertake
stevedoring services to unload coal into its pier since it is not reasonably necessary for the operation of
its power plant. NPC v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawnbroker. Philipinas
Loan Co. v. SEC, 356 SCRA 193 (2001).
A mining company has not power to engage in real estate development. Heirs of Antonio Pael v.
An officer who is authorized to purchase the stock of another corporation has implied power to
perform all other obligations arising therefrom such as payment of the shares of stock. Inter-Asia
Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).
4. Incidental Powers
As a creature of the law, the powers and attributes of a corporation are those set out, expressly or
implied, in the law. Among the general powers granted by law to a corporation is the power to sue in its
own name. This power is granted to a duly-organized corporation, unless specifically revoked by
another law. Umale v. ASB Realty Corp., 652 SCRA 215 (2011).
The act of issuing checks is within the ambit of a valid corporate act, for it as for securing a loan to
finance the activities of the corporation, hence, not an ultra vires act. Atrium Management Corp. v. CA,
353 SCRA 23 (2001).
5. Other Powers (Sec. 36)
(a) Sell Land and Other Properties
When the corporations primary purpose is to market, distribute, export and import merchandise, the
sale of land is not within the actual or apparent authority of the corporation acting through its officers,
much less when acting through the treasurer. Articles 1874 and 1878 of Civil Code requires that when
land is sold through an agent, the agents authority must be in writing, otherwise the sale is void. San
Juan Structural v. CA, 296 SCRA 631 (1998).82
(b) Borrow Funds
The power to borrow money is one of those cases where even a special power of attorney is
required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the corporation
to be approved by its Board of Directors. The argument that the obtaining of loan was in accordance
with the ordinary course of business usages and practices of the corporation is devoid of merit because
the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in
behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
(c) Power to Sue and Be Sued
Under Sec. 36 in relation to Sec. 23 of Corporation Code, where a corporation is an injured party, its
power to sue is lodged with its Board of Directors. A minority stockholder who is a member of the
82AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp.,
414 SCRA 190 (2003).
71
Board has no such power or authority to sue on the corporations behalf. Tam Wing Tak v. Makasiar,
350 SCRA 475 (2001).83
(i) Power to Bind the Corporation in a Suit
When the power to sue is delegated by the by-laws to a particular officer, such officer may
appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board
resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
For counsel to sign the certification for the corporation, he must specifically be authorized by the
Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA,
415 SCRA 573 (2003).
(ii) Certificate of Non-Forum Shopping:
Where the corporation is real party-in-interest, neither administrator or a project manager could
sign the certificate against forum-shopping without being duly authorized by resolution of the
Board of Directors, Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230 (2001); nor the General Manager
who has no authority to institute a suit on behalf of the corporation even when the purpose is to
protect corporate assets. Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).
If the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the
certification against forum shopping is necessarya certification not signed by a duly authorized
person renders the petition subject to dismissal. Gonzales v. Climax Mining Ltd., 452 SCRA 607
(2005).84
When a corporate officers has been granted express power by the Board of Directors to institute
a suit, the same is considered broad enough to include the power of said corporate officer to execute
the verification and certification against forum shopping required in initiatory pleadings under the
Rules of Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620 (2009).
In a number of cases, the Court has declared invalid an act of an officer in behalf of the
corporation without covering board resolution: signing the certificate of non-forum shopping in a
petition filed in behalf of the corporation. 85 Nonetheless, even if the counsel executed the
verification and certificate of non-forum shopping before the board authorized him, the passing of
the board resolution of authorization before the actual filing of the complaint. Median Container
Corp. v. Metropolitan Bank and Trust Co., 561 SCRA 622 (2008); the submission in the motion for
reconsideration of the authority to sign the verification and certification constitutes substantial
compliance with the procedural requirements. Asean Pacific Planners v. City of Urdaneta, 566
SCRA 219 (2008).
A President of a corporation, among other enumerated corporate officers and employees, can
sign the verification and certification against non-forum shopping in behalf of the corporation
without the benefit of a board resolution. South Cotabato Communications Corp. v. Sto. Tomas, 638
SCRA 566 (2011).
(iii) Service of Summons on Corporations
Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term general manager and
unlike the old provision in the Rules of Court, it does not include the term agent. Consequently,
the enumeration of persons to whom summons may be served is restricted, limited and exclusive
following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the
83Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v.
Court of Appeals, 497 SCRA 638 (2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010); Cebu Bionic Builders Supply,
Inc. v. DBP, 635 SCRA 13 (2010).
84Also DBP v. Court of Appeals, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); Metro Drug
Distribution, Inc. v. Narcisco, 495 SCRA 286 (2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010).
85Philippine Airlines, Inc. v. Flight Attendance and Stewards Association of the Philippines (FASAP) , 479 SCRA 605 (2006);
Metro Drug Distribution, Inc. v. Narciso, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. Commissioner of Internal Revenue,
545 SCRA 10 (2008).
72
earlier cases that uphold service of summons upon a construction project manager; 86 a corporations
assistant manager;87 ordinary clerk of a corporation; 88 private secretary of corporate executives; 89
retained counsel;90 officials who had charge or control of the operations of the corporation, like the
assistant general manager; 91 or the corporations Chief Finance and Administrative Officer; 92 no
longer apply since they were decided under the old rule that allows service of summons upon an
agent93 of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65 (1999).
(d) Power to Hire Employees and Appoint Agents
It is well settled that except where the authority of employing servants and agents is expressly
vested in the board of directors or trustees, an officer or agent who has general control and
management of the corporations business, or a specific part thereof, may bind the corporation by the
employment of such agents and employees as are usual and necessary in the conduct of such business.
But the contracts of employment must be reasonable. Yu Chuck v. Kong Li Po, 46 Phil. 608, 614
(1924).
(e) Provide Gratuity Pay for Employees (Sec. 36[10])
Providing gratuity pay for employees is an express power of a corporation under the Corporation
Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of
resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).
(f) Donate (Sec. 36[9])
(g) Enter Partnership or Joint Venture. Tuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC
Opinion, dated 29 February 1980.
6. ULTRA VIRES DOCTRINE

(a) Types of Ultra Vires Acts (Sec. 45)
A corporation has no power except those expressly conferred on it by the Corporation Code, its
charter, and those that are implied or incidental to its existence. In turn, a corporation exercises said
powers through its Board of Directors and /or its duly authorized officers and agents. Monfort
Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
(i) First Type Ultra Vires: An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond the power
conferred upon it by law. The term ultra vires is distinguished from an illegal act for the
former is merely voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated. Atrium Management Corp. v. Court of Appeals,
353 SCRA 23 (2001).
(ii) Second Type Ultra Vires: When the President enters into speculative contracts, without prior
board approval, and without subsequent submission of those contracts to the Board for approval
or ratification, nor were the transactions included in the reports of the corporation, such contracts
86Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).
87Gesulgon v. NLRC, 219 SCRA 561 (1993).
88Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 (1992); G & G Trading Corp. v. Court of Appeals,
158 SCRA 466 (1988).
89Summit Trading and Dev. Corp. v. Avendao, 135 SCRA 397 (1985); also Vlason Enterprises Corp. v. Court of Appeals, 310
SCRA 26 (1999).
90Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966).
91Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978).
92Far Corporation v. Francisco, 146 SCRA 197 (1986).
93Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA 86 (1982).
73
do not bind the corporation. It must be pointed out that the Board of Directors, not the President,
exercises corporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA
559 (2001).
Contracts or acts of a corporation must be made either by the Board of Directors or by a
corporate agent duly authorized by the Boardabsent such valid delegation/authorization, the rule
is that the declaration of an individual directors relating to the affairs of the corporation, but not in
the course of, or connected with the performance of authorized duties of such director, are held not
binding on the corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
Generally, the acts of the corporate officers within the scope of their authority are
binding on the corporation. However, under Article 1910 of the New Civil Code, acts done
by such officers beyond the scope of their authority cannot bind the corporation unless it has
ratified such acts expressly or tacitly, or is estopped from denying them. . . . Thus, contracts
entered into by corporate officers beyond the scope of authority are unenforceable against
the corporation unless ratified by the Corporation. Woodchild Holdings, Inc. v. Roxas
Electric Constructions Co., Inc., 436 SCRA 235 (2004).
(iii) Third Type Ultra Vires:
Although the arrangement between the two mining companies was prohibited under the terms of
the old Corporation Law, the Supreme Court did not declare the nullity of the agreements on the
ground that only private rights and interests, as distinguished from public interests, were involved in
the case.Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 (1933).
(b) General Judicial Attitude Towards the Ultra Vires Doctrine
The plea of ultra vires will not be allowed to prevail, whether interposed for or against a
corporation, when it will not advance justice but, on the contrary, will accomplish a legal wrong to the
prejudice of another who acted in good faith. Zomer Dev. Corp. v. International Exchange Bank, 581
SCRA 115 (2009).
(c) Ratification of Ultra Vires Acts:
Acts done by the Board of Directors which are ultra vires cannot be set-aside if the acts have been
ratified by the stockholders. Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 (1954).
Even when a particular corporate act does not fall within the express or implied powers of the
corporation, nevertheless it will not be set aside when, not being malum prohibitum, the corporation,
through its senior officers or its Board of Directors, are estopped from questioning the legality of such
act, contract or transaction. Carlos v. Mindoro Sugar Co., 57 Phil. 343 (1932).94
Acts done in excess of corporate officers scope of authority cannot bind the corporation. However,
when subsequently a compromise agreement was on behalf of the corporation being represented by its
President acting pursuant to a Board of Directors resolution, such constituted as a confirmatory act
signifying ratification of all prior acts of its officers. National Power Corp. v. Alonzo-Legasto, 443
SCRA 342 (2004).
X. DIRECTORS, TRUSTEES AND OFFICERS
Board of Directors is the body which (1) exercises all powers provided for under the Corporation
Code; (2) conducts all business of the corporation; and (3) controls and holds all property of the
corporation. Its members have been characterized as trustees or directors clothed with a fiduciary
character. It is clearly separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405
SCRA 220 (2003).
1. Doctrine of CENTRALIZED MANAGEMENT: Powers of Board of Directors (Sec. 23)
94Republic
v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. Court of Appeals, 177 SCRA 594 (1989).
74
Section 23 expressly provides that the corporate powers of all corporations shall be exercised by
the Board of Directors. Just as a natural person may authorize another to do certain acts in his
behalf, so may the Board of Directors validly delegate some of its functions to individual officers or
agents appointed by it. Thus, contracts or acts of a corporation must be made either by the Board of
Directors or by a corporate agent duly authorized by the board. Absent such valid
delegation/authorization, the rule is that the declarations of an individual director relating to the
affairs of the corporation, but not in the course of, or connected with the performance of authorized
duties of such director, are held not binding on the corporation. Manila Metal Container Corp. v.
PNB, 511 SCRA 444 (2006).95
(a) Rationale for Centralized Management Doctrine:
The raison detre behind the conferment of corporate powers on the Board of Directors is not
lost on the Court indeed, the concentration in the Board of the powers of control of corporate
business and appointment of corporate officers and managers is necessary for efficiency in any large
organization. Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of corporate
business. Filipinas Port Services v. Go, 518 SCRA 453 (2007).
A corporation is an artificial being and can only exercise its powers and transact its business
through the instrumentalities of its Board of Directors, and through its officers and agents, when
authorized by resolution or by its by-laws. Consequently, when legal counsel was clothed with
authority through formal board resolution, his acts bind the corporation which must be held bound
the actuations of its counsel of record. De Liano v. Court of Appeals, 370 SCRA 349 (2001).
The physical acts of the corporation, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate by-laws or by a special act of the board
of directors. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v.
(a) Theories on Source of Board Power
Delegated Powers Coming from the Stockholders: The Board of Directors is a creation of the
stockholders and controls and directs the affairs of the corporation by delegation of the
stockholders. By drawing themselves the powers of the corporation, they occupy positions of
trusteeship in relation to the stockholders.Angeles v. Santos, 64 Phil. 697 (1937).
One of the most important rights of a qualified shareholder or member is the right to vote for the
directors or trustees who are to manage the corporate affairs. The right to choose the persons who
will direct, manage and operate the corporation is significant, because it is the main way in which a
stockholder can have a voice in the management of corporate affairs, or in which a member in a
nonstock corporation can have a say on how the purposes and goals of the corporation may be
achieved. Once the directors or trustees are elected, the stockholders or members relinquish
corporate powers to the board in accordance with law. Tan v. Sycip, 499 SCRA 216 (2006).
(b) Board Must Act As a Body (Sec. 25)
Exercise of the powers of the Board of Directors may either be express and formal through the
adoption of a board resolution in a meeting called for the purpose, or it may be implied where the
Board collectively and knowingly allows the President to enter into important contracts in the
pursuit of the business of the corporation. Board of Liquidators v. Heirs of Maximo M. Kalaw,
20 SCRA 987 [1967];
A Director-Treasurer of the corporation has no power to bind the company even in transactions
that are pursuant to the primary purpose of the corporation, especially when the by-laws specifically
95Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Gamboa v. Victoriano, 90 SCRA 40 (1979);Reyes v. RCPI Employees
Credit Union, Inc., 499 SCRA 319 (2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA
221 (2007); Republic v. Coalbrine International, 617 SCRA 491 (2010).
75
provided that the acts entered into can only be done by the Board of Directors. Ramirez v.
Orientalist Co., 38 Phil. 634 (1918).
Between the act of the Board as a body affirming informally the perfectio of a contract entered
into in behalf of the corporation by a senior officer, and the subsequent formal board resolution
rejecting the same contract, the former must prevail under the doctrine of estoppel. Acua v. Batac
Producers Cooperative Marketing Assn., 20 SCRA 526 [1967]).
A corporation, through its Board of Directors, should act in the manner and within the
formalities prescribed by its charter or by the general law. Thus, directors must act as a body in a
meeting called pursuant, otherwise, any action taken therein may be questioned by any objecting
director or shareholder. Be that as it may, jurisprudence tells us that an action of the Board of
Directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by
the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent
course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183 (1995).
(c) Effects of Bogus Board The acts or contracts effected by a bogus board would be void
pursuant to Art. 1318 of Civil Code because of the lack of consent. Islamic Directorate of the
Philippines v. Court of Appeals, 272 SCRA 454 (1997).
(d) Executive Committee (Sec. 35)
It is within the power of the Board of Directors to authorize any person or committee to
undertake corporate acts. The board has power to constitute even an executive committee, even
when no such committee is provided for in the articles and by-laws of the corporation. Filipinas
Port Services, Inc. v. Go, 518 SCRA 453 (2007).
2. BUSINESS JUDGMENT RULE:
Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36 (1962).
PSE v. Court of Appeals, 281 SCRA 232 (1997).
(a) BJR First Branch:
Questions of policy and management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for
the judgment of the board of directors. Cua, Jr. v. Tan, 607 SCRA 645 (2009).
The board of directors is the business manager of the corporation, and so long as it acts in
good faith, its orders are not reviewable by the courts. Estacio v. Pampanga I Electric
Cooperative, Inc., 596 SCRA 542 (2009).
No court can, as an integral part of resolving the issues between squabbling stockholders,
order the corporation to undertake certain corporate acts, since it would be in violation of the
business judgment rule. Ong Yong v. Tiu, 401 SCRA 1 (2003).
Corporate policies need not be in writing. Contracts entered into by a corporate officer or
obligations or prestations assumed by such officer for and in behalf of such corporation are
binding on the said corporation only if such officer acted within the scope of his authority or if
such officer exceeded the limits of his authority, the corporation has ratified such contracts or
obligations. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
(b) BJR Second Branch:
Directors and officers who purport to act for the corporation, keep within the lawful scope of
their authority and act in good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts, which are properly attributed to the corporation alone. Benguet
Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
If the cause of the losses is merely error in business judgment, not amounting to bad faith or
negligence, directors and/or officers are not liable. For them to be held accountable, the
76
mismanagement and the resulting losses on account thereof are not the only matters to be
proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and
with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill-will partaking of the
nature of fraud. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
3. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS
(a) Theory of Estoppel or Ratification
The principle of estoppel precludes a corporation and its Board of Directors from denying
the validity of the transaction entered into by its officer with a third party who in good faith,
relied on the authority of the former as manager to act on behalf of the corporation. Lipat v.
Pacific Banking Corp., 402 SCRA 339 (2003).
In order to ratify the unauthorized act of an agent and make it binding on the corporation, it
must be shown that the governing body or officer authorized to ratify had full and complete
knowledge of all the material facts connected with the transaction to which it relates.
Ratification can never be made on the part of the corporation by the same person who
wrongfully assume the power to make the contract, but the ratification must be by the officer or
governing body having authority to make such contract. Vicente v. Geraldez, 52 SCRA 210
(1973).
The admission by counsel on behalf of the corporation of the latters culpability for personal
loans obtained by its corporate officers cannot be given legal effect when the admission was
without any enabling act or attendant ratification of corporate act, as would authorize or even
ratify such admission. In the absence of such ratification or authority, such admission does not
bind the corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).
Acts done in excess of corporate officers scope of authority cannot bind the corporation.
However, when subsequently a compromise agreement was on behalf of the corporation being
represented by its President acting pursuant to a Board of Directors resolution, such constituted
as a confirmatory act signifying ratification of all prior acts of its officers. National Power
Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004).
(b) Doctrine of Laches or Stale Demands

The principle of laches or stale demands provides that the failure or neglect, for an
unreasonable and unexplained length of time, to do that which by exercising due diligence could
or should have been done earlier, or the negligence or omission to assert a right within a
reasonable time, warrants a presumption that the party entitled to assert it either has abandoned
it or declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
(c) Doctrine of Apparent Authority: Art. 1883, Civil Code.
Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc., 436 SCRA 235
(2004).
Francisco v. GSIS, 7 SCRA 577 (1963).
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).
Yao Ka Sin Trading v. Court of Appeals, 209 SCRA 763 (1992).
The general rule remains that, in the absence of authority from the Board of Directors, no person,
not even its officers, can validly bind a corporation. If a corporation, however, consciously lets one
of its officers, or any other agent, to act within the scope of an apparent authority, it will be
estopped from denying such officers authority. . . Unmistakably, the Courts directive in Yao Ka
77
Sin Trading is that a corporation should first prove by clear evidence that its corporate officer is not
in fact authorized to act on its behalf before the burden of evidence shifts to the other party to
prove, by previous specific acts, that an officer was clothes by the corporation with apparent
authority. Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009).
If a corporation knowingly permits one of its officers to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts, the corporation
will, as against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agents authority. Soler v. Court of Appeals, 358 SCRA 57 (2001); Rural Bank of
Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99, 110-111 (2000)
The authority of a corporate officer dealing with third persons may be actual or apparent . . . the
principal is liable for the obligations contracted by the agent. The agent apparent representation
yields to the principal's true representation and the contract is considered as entered into between
the principal and the third person. First Philippine International Bank v. Court of Appeals, 252
SCRA 259 (1996).
Persons who deal with corporate agents within circumstances showing that the agents are acting
in excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v. Court
Apparent authority may be ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act, or, in other words the apparent authority to
act in general with which is clothes them; or (2) the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.
Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003); Associated Bank v.
Pronstroller, 558 SCRA 113 (2008).
When an officer in a banking corporation arrange a credit line agreement and forwards the same
to the legal department at its head officer, and the bank did no disaffirm the contract, then it is
bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004.
A corporation cannot disown its Presidents act of applying to the bank for credit
accommodation, simply on the ground that it never authorized the President by the lack of any
formal board resolution. The following placed the corporation and its Board of Directors in estoppel
in pais: Firstly, the by-laws provides for the powers of the President, which includes, executing
contracts and agreements, borrowing money, signing, indorsing and delivering checks; secondly,
there were already previous transaction of discounting the checks involving the same personalities
wherein any enabling resolution from the Board was dispensed with and yet the bank was able to
collect from the corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).
Per its Secretarys Certificate, the foundation had given its President ostensible and apparent
authority to inter alia deal with the respondent Bank, and therefore the foundation is estopped from
questioning the Presidents authority to obtain the subject loans from the respondent Bank.
Lapulapu Foundation, Inc., v. Court of Appeals, 421 SCRA 328 (2004).
A verbal promise given by the Chairman and President of the company to the general manager
and chief operating officer to give the latter unlimited sick leave and vacation leave benefits and its
cash conversion upon his retirement or resignation, when not an integral part of the companys rules
and policies, is not binding on the company when it is without the approval of the Board of
Directors. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
The acceptance of the offer to purchase by the clerk of the branch of the bank, and the
representation that the manager had already approved the sale (which in fact was not true), cannot
bind the bank to the contract of sale, it being obvious that such a clerk is not among the bank
officers upon whom putative authority may be reposed by a third party. There is, thus, no legal basis
to bind the bank into any valid contract of sale with the buyers, given the absolute absence of any
approval or consent by any responsible officer of the bank. DBP v. Ong, 460 SCRA 170 (2005).
78
Rationale for the Doctrine of Apparent Authority: Naturally, the third person has little or no
information as to what occurs in corporate meeting; and he must necessarily rely upon the external
manifestations of corporate consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability fixed upon it by its agents in
accordance with law. What transpires in the corporate board room is entirely an internal matter.
Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the
scope of Atty. Solutas authority. Indeed, the public has the right to rely on the trustworthiness of
bank officers and their acts. Associated Bank v. Pronstroller, 558 SCRA 113 (2008).
4. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89 SCRA
336 [1979]).
(a) A director must own at least one share of stock. Pea v. CA, 193 SCRA 717 (1991).96
The law does not require that a Vice-President be a stockholder. Baguio v. Court of Appeals, 226
SCRA 366 (1993).
(b) Beneficial ownership under voting trust arrangement no longer qualifies. Lee v. CA, 205
SCRA 752 (1992).
5. Election of Directors and Trustees
(a) Directors (Secs. 24 and 26; Premium Marble Resources v. CA, 264 SCRA 11)
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for election,
and who have actually been elected by the stockholders, on an annual basis. Only in that way
can the directors continued accountability to the shareholders, and the legitimacy of their
decisions that bind the corporations stockholders, be assured. The shareholder vote is critical to
the theory that legitimizes the exercise of power by the directors or officers over properties that
they do not own. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
Corporations are required under Section 26 of the Corporation Code to submit to the SEC
within thirty (30) days after the election the names, nationalities, and residences of the directors,
trustees and officers of the Corporation. In order to keep stockholders and the public transacting
business with domestic corporation properly informed of their organization operational status,
the SEC has issued the rule requiring the filing of the General Information Sheet. Monfort
Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
When the names of some of the directors who signed the board resolution does not appear in
the General Information Sheet filed with the SEC, then there is doubt whether they were indeed
duly elected members of the Board legally constituted to bring suit in behalf of the Corporation.
Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
(b) CUMULATIVE VOTING (Sec. 24; Cumulative Voting in Corporate Elections: Introducing
Strategy in the Equation, 35 SOUTH CAROLINA L. REV. 295)
(c) Trustee (Secs. 92 and 138)
6. Vacancy in Board (Sec. 29)
A by-law provision or company practice of giving a stockholder a permanent seat in the Board
would be against the provision of Secs. 28 and 29 of Corporation Code which requires member of
the board of corporations to be elected. Grace Christian High School v. Court of Appeals, 281
SCRA 133 (1997).
The theory of delegated power of the board of directors similarly explains why, under Section
29 of the Corporation Code, in cases where the vacancy in the corporations board of directors is
caused not only by the expiration of a members term, the successor so elected to fill in a vacancy
shall be elected only for the unexpired term of his predecessors in office. The law has authorized the
96Also Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).
79
remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or
impair the corporations operations; yet, in recognition of the stockholders right to elect the
members of the board, it limited the period during which the successor shall serve only to the
unexpired term of his predecessor in office. Valle Verde Country Club, Inc. v. Africa, 598
SCRA 202 (2009).
7. Term of Office, Hold-over Principle
Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the
original directors, hold-over until qualification of their successors. Government v. El Hogar
Filipino, 50 Phil. 399 (1927).
The remedy is quo warranto to question the legality and proper qualification of persons elected
to the board. Ponce v. Encarnacion, 94 Phil. 81 (1953).
The remaining members of a corporations board of directors cannot elect another director to
fill in a vacancy caused by the resignation of a hold-over director. The holdover period is not part of
the term of office of a member of the board of directors. Consequently, when during the holdover
period, a director resigns from the board, the vacancy can only be filled-up by the stockholders,
since there is no term left to fill-up pursuant to the provisions of Section 29 of the Corporation
which mandates that a vacancy occurring in the board of directors caused by the expiration of a
members term shall be filled by the corporations stockholders. That a director continues to serve
after one year from his election (i.e., on a holdover capacity), cannot be considered as extending his
term. This holdover period, however, is not to be considered as part of his term, which, as declared,
had already expired. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
8. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]).
Only stockholders or members have the power to remove the directors or trustees elected by
them, as laid down in Sec. 28 of Corporation Code. Raniel v. Jochico, 517 SCRA 221, 230 (2007).
9. Directors or Trustees Meetings (Secs. 49, 53, 54 and 92)
(a) Quorum
For stock corporations, the quorum referred to in Section 52 of the Corporation Code is
based on the number of outstanding voting stocks. For nonstok corporations, only those who are
actual, living members with voting rights shall be counted in determining the existence of a
quorum during members meetings. Dead members shall not be counted. Tan v. Sycip, 499
SCRA 216 (2006).
In stock corporations, the presence of a quorum is ascertained and counted on the basis of the
outstanding capital stock, as defined by Section 137 of the Corporation Code. Tan v. Sycip, 499
SCRA 216 (2006).
When the principle for determining quorum for stock corporations is applied by analogy to
nonstock corporations, only those who are actual members with voting rights should be counted.
Tan v. Sycip, 499 SCRA 216 (2006).
(b) Abstention: In a board meeting, an abstention is presumed to be counted as an affirmative vote
insofar as it may be construed as an acquiescence in the action of those who voted
affirmatively; but such presumption, being merely prima facie would not hold in the face of
clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972).
(c) Minutes of Meetings
The signing of the minutes by all the members of the board is not requiredthere is no
provision in the Corporation Code that requires that the minutes of the meeting should be signed
by all the members of the board. The signature of the corporate secretary gives the minutes of
the meting probative value and credibility. People v. Dumlao, 580 SCRA 409 (2009).
80
The entries contained in the minutes are prima facie evidence of what actually took place
during the meeting, pursuant to Section 44, Rule 130 of the Revised Rule on Evidence. People
v. Dumlao, 580 SCRA 409 (2009).
(i) Resolution versus Minutes of Meetings: A resolution is distinct and different from the
minutes of the meetinga board resolution is a formal action by a corporate board of
directors or other corporate body authorizing a particular act, transaction, or appointment,
while, on the other hand, minutes are a brief statement not only of what transpired at a
meeting, usually of stockholders/members or directors/trustees, but also at a meeting of an
executive committee. People v. Dumlao, 580 SCRA 409 (2009).
10. Compensation of Directors (Sec. 30)
Directors and trustees are not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office, founded on the presumption that
directors and trustees render service gratuitously, and that the return upon their shares adequately
furnishes the motives for service, without compensation. But they can receive remunerations for
executive officer position. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216
(1997).97
11. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS
(a) Directors as Fiduciaries
Pre-Corporation Code: Palting v. San Jose Petroleum, Inc., 18 SCRA 924.
Nature of Duties of Directors and Officers: Prime White Cement Corp. v. IAC, 220
SCRA 103 (1993).
In Philippine jurisdiction, the members of the Board of Directors have a three-fold duty:
duty of obedience, duty of diligence, and the duty of loyalty. Accordingly, the members of the
board of directors (1) shall direct the affairs of the corporation only in accordance with the
purpose for which it was organized; (2) shall not willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing
the affairs of the corporation; and (3) shall not acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees. Strategic Alliance Dev. Corp. v. Radstock
Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2001,
p. 318.
(b) Duty of Obedience
A corporation, through its Board of Directors, should act in the manner and within the
formalities, if any, prescribed by its charter or by the general law. Lopez Realty, Inc. v. Fontecha,
247 SCRA 183 (1995)
(c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v. Dresser,
251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam, 488 A.2d 858,
Supreme Court of Delaware, 1985).
For wrongdoing to make a director personally liable for debts of the corporation, the
wrongdoing approved or assented to by the director must be a patently unlawful act. Mere
failure to comply with the notice requirement of labor laws on company closure or dismissal of
employees does not amount to a patently unlawful act. Patently unlawful acts are those
declared unlawful by law which imposes penalties for commission of such unlawful acts.
There must be a law declaring the act unlawful and penalizing the act. Carag v. NLRC, 520
SCRA 28 (2007); Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009).
97Singson v. Commission on Audit, 627 SCRA 36 (2010).
81
Holding a corporate officer personally liable for directing the corporate affairs with gross
negligence or in bad faith does not amount to an application of the doctrine of piercing the veil
of corporate fiction, for such personal liability is imposed directly under Section 31 to directors
and officers of corporation who are guilty of violating their duty of diligence. Sanchez v.
Republic, 603 SCRA 229 (2009).
(d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough, 21 Phil. 95 [1911]).
Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979]).
Self-Dealings (Secs. 32 and 33)
Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]).
When a director-majority stockholder, who is the administrator of corporate affairs directly

negotiating the sale of corporate landholdings to the Government at great prices, purchases the
stocks of a shareholder without informing the latter of the on-going negotiations, such director
is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means
of concealing his knowledge of important corporate affairs. Strong v. Repide, 41 Phil. 947
(1909).
- Applies to confidential employees (cf. Sing Juco v. Llorente, 43 Phil. 589 [1922])
(e) Duty to Creditors and Outsiders
(f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89 SCRA 336
[1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]).
(g) Contracts Between Corporations with Interlocking Directors (Sec. 33)
The rule under Sec. 33 of Corporation Code allowing annulment of contracts between
corporations with interlocking directors resulting in the prejudice to one of the corporation, has
no application to cases where fraud is alleged to have been committed to third parties. DBP v.
(h) SEC Revised Code of Corporate Governance (SEC Memorandum. Circular No. 6, series of
2009)
12. CORPORATE OFFICERS
The general principles of agency govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, by-laws, or relevant provisions of lawwhen
authorized, their acts bind the corporation, otherwise, their acts cannot bind it. Yasuma v. Heirs of
Cecilio S. De Villa, 499 SCRA 466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
(a) Powers of Corporate Officers:
Just as a natural person may authorize another to do certain acts for and on his behalf, the Board
of Directors may validly delegate some of its functions and powers to officers, committees or agents
the authority of such individuals to bind the corporation is generally derived from law, corporate
by-laws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. Cebu Mactan Members Center Inc. v. Tsukahara,
593 SCRA 172 (2009).While it is a general rule that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation, the Board may validly
delegate some of its functions and powers to its officers, committee and agents. Associated
Bank v. Pronstroller, 558 SCRA 113 (2008).98
While the Court agrees that those who belong to the upper corporate echelons would have more
privileges, it cannot be presume the existence of such privileges or benefitshe who claims the
98Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009).
82
same is burdened to prove not only the existence of such benefits but also that he is entitled to the
same. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
Even though a judgment, decree or order is addressed to the corporation only, the officers as well
as the corporation itself, may be punished for contempt for disobedience to its terms, at least if they
knowingly disobey the courts mandate, since a lawful judicial command to a corporation is in
effect a command to the officers. Heirs of Trinidad de Leon Vda. De Roxas v. Court of Appeals, 422
SCRA 101 (2004).
(i) Rule on Corporate Officers Power to Bind Corporation
An officers power as an agent of the corporation must be sought from the statute, charter,
the by-laws or in a delegation of authority to such officer, from the acts of the board of directors
formally expressed or implied from a habit or custom of doing business. Vicente v. Geraldez, 52
SCRA 210 (1973); Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
As a general rule, the acts of corporate officers within the scope of their authority are binding
on the corporation, but when these officers exceeded their authority, their actions cannot bind the
corporation, unless it has ratified such acts or is estopped from disclaiming them. Reyes v. RCPI
Employees Credit Union, Inc., 499 SCRA 319 (2006).
(ii) President. Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998).
It is the Board of Directors, not the President, that exercises corporate powers. It must be
emphasized that the basis for agency is representation and a person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
A corporation may not distance itself from the acts of a senior officer: "the dual roles of
Romulo F. Sugay should not be allowed to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA
700 (1961).
The President is considered as the corporations agent, and as such, his knowledge of the
repeal of a resolution in another juridical person in which his corporation has an interest, is
ascribed to his principal under the theory of imputed knowledge. Rovels Enterprises, Inc. v.
Ocampo, 392 SCRA 176 (2002).
The President of the corporation which becomes liable for the accident caused by its truck
driver cannot be held solidarily liable for the judgment obligation arising from quasi-delict, since
the fact alone of being President is not sufficient to hold him solidarily liable for the liabilities
adjudged against the corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco,
433 SCRA 273 (2004).
(iii) Corporate Secretary
In the absence of provisions to the contrary, the corporate secretary is the custodian of
corporate recordshe keeps the stock and transfer book and makes proper and necessary entries
therein. It is his duty and obligation to register valid transfers of stock in the books of the
corporation; and in the event he refuses to comply with such duty, the transferor-stockholder
may rightfully bring suit to compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793
(1997).
Although the corporate secretarys duty to record transfers of stock is ministerial, he cannot
be compelled to do so when the transferees title to said shares has no prima facie validity or is
uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership
rights over the pledged shares and thus cannot compel the corporate secretary to record his
alleged ownership of such shares on the basis merely of the contract of pledge. Mandamus will
not issue to establish a right, but only to enforce one that is already established. Lim Tay v. Court
of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).
A sale that fails to comply with Sec. 40 of Corporation Code, cannot be invalidated when the
buyer relies upon a Secretarys Certificate confirming authority. A secretarys certificate which is
83
regular on its face can be relied upon by a third party who does not have to investigate the truths
of the facts contained in such certification; otherwise business transactions of corporations
would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267
SCRA 380 (1997).
(iv) Corporate Treasurer
A corporate treasurers function have generally been described as to receive and keeps funds
of the corporation, and to disburse them in accordance with the authority given him by the board
or the properly authorized officers. Unless duly authorized, a treasurer, whose power are
limited, cannot bind the corporation in a sale of its assets, which obviously is foreign to a
corporate treasurers function. San Juan Structural v. Court of Appeals, 296 SCRA 631, 645
(1998).
A corporate treasurer whose negligence in signing a confirmation letter for rediscounting of
crossed checks, knowing fully well that the checks were strictly endorsed for deposit only to the
payees account and not to be further negotiated, may be personally liable for the damaged
caused the corporation. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
(v) Manager
Although a branch manager of a bank, within his field and as to third persons, is the general
agent and is in general charge of the corporation, with apparent authority commensurate with the
ordinary business entrusted him and the usual course and conduct thereof, yet the power to
modify contracts of the bank remains generally with the board of directors. Being a branch
manager alone is insufficient to support the conclusion that he has been clothed with apparent
authority to verbally alter terms of the banks written contract, such a the mortgage contract.
Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).
(b) POWER OF THE BOARD TO APPOINT AND TERMINATE CORPORATE OFFICERS
(i) Who Is a Corporate Officer? (Sec. 25)
Corporate officers are those officers of a corporation who are given that character either by
the Corporation Code or by the corporations by-laws. Gurrea v. Lezama, 103 Phil. 553
(1958); Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).99
An office is created by the charter of the corporation and the officer is elected by the
directors or stockholders, while an employee usually occupies no office and generally is
employed not by action of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such employee. Okol v.
Slimmers World International, 608 SCRA 97 (2009).
Ordinary company employees are generally employed not by action of the directors and
stockholders but by that of the management officer of the corporation who also determines the
compensation to be paid such employees. Corporate officers, on the other hand, are elected or
appointed by the directors or stockholders, and are those who are given that character either by
the Corporation Code or by the corporations by-laws. Gomez v. PNOC Dev. and Management
Corp., 606 SCRA 187 (2009).
Corporate officers in the context of Presidential Decree No. 902-A are those officers of the
corporation who are given that character by the Corporation Code or by the corporations bylaws. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009); WQPP
Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010).
A mere manager not so named in the by-laws does is not an officer of the corporation.
Pamplona Plantation Company v. Acosta, 510 SCRA 249 (2006).
99PSBA v. Leao, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Visayan v. NLRC, 196 SCRA 410 (1991); Easycall
Communications Phils., Inc. v. King, 478 SCRA 102 (2005); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011).
84
When the by-laws provide for the position of Superintendent/ Administrator, it is clearly a
corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC
and not the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997).
Although the by-laws provide expressly that the Board of Directors shall have full power to
create new offices and to appoint the officers thereto, any office created, and any officer
appointed pursuant to such clause does not become a corporate officer, but is an employee and
the determination of the rights and liabilities relating to his removal are within the jurisdiction of
the NLRC; they do not constitute intra-corporate controversies. A different interpretation can
easily leave the way open for the Board of Directors to circumvent the constitutionally
guaranteed security of tenure of the employee by the expedient inclusion in the By-Laws of an
enabling clause on the creation of just any corporate officer position. (at p. 27). The rulings in
Tabang v. NLRC, 266 SCRA 462 (1997), and Nacpil v. International Broadcasting Corp., 379
SCRA 653 (2002), should no longer be controlling. Matling Industrial and Commercial
Corp. v. Coros, 633 SCRA 12 (2010).100
Corporate officers in the context of Presidential Decree No. 902-A are those officers of the
corporation who are given that character by the Corporation Code or by the corporations bylaws. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).
(ii) Nature of Exercise of Power to Terminate Officers
An officers removal is a corporate act, and if such removal occasions an intra-corporate
controversy, its nature is not altered by the reason or wisdom, or lack thereof, with which the
Board of Directors might have in taking such action. Perforce, the matter would come within the
area of corporate affairs and management, and such a corporate controversy would call for SEC
adjudicative expertise [now RTC Special Commercial Courts], not that of NLRC. De Rossi v.
NLRC, 314 SCRA 245 (1999); Okol v. Slimmers World International, 608 SCRA 97 (2009).
One who is included in the by-laws of a corporation in its roster of corporate officers is an
officer of said corporation and not a mere employeebeing a corporate officer, his removal is
deemed to be an intra-corporate dispute cognizable by the SEC and not by the Labor Arbiter.
Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).
13. LIABILITIES OF CORPORATE OFFICERS: Sec. 31; Vazquez v. Borja, 74 Phil. 560 (1944);
Palay, Inc. v. Clave, 124 SCRA 638 (1093).101
Unless they have exceeded their authority, corporate officers are, as a general rule, not
personally liable for their official acts, because a corporation, by legal fiction, has a personality
separate and distinct from its officers, stockholders and members. Price v. Innodata Phils., Inc., 567
SCRA 269 (2008).102
Officers of a corporation may become liable for its loans when they have breached their duty of
diligence under Section 31 of the Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007);
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); or when they have contractually made
themselves personally liable for a corporate loan. Prisma Construction & Dev. Corp. v. Menchavez,
614 SCRA 590 (2010).
A corporation has a personality separate and distinct from the persons composing or
representing it; hence, personal liability attaches only in exceptional cases, such as when the
director, trustee, or officer is guilty of bad faith or gross negligence in directing the affairs of the
corporation. Continental Cement Corp. v. Asea Brown Boveri, Inc., 659 SCRA 137 (2011).103
100Reiterated in Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011).

101Pabalan v. NLRC, 184 SCRA 495 [1990]; Sulo ng Bayan, Inc. v. Araneta, Inc.
Inc., 72 SCRA 347 (1976); Mindanao Motors
Lines, Inc. v. CIR, 6 SCRA 710 (1962).
102Lowe, Inc. v. Court of Appeals, 596 SCRA 140 (2009); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011).
103Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Ban, Inc. v. Pena, 659 SCRA 418 (2011).
85
In the absence of malice, bad faith, or a specific provision of law making a corporate officer,
liable, such corporate officer cannot be made personally liable for corporate liabilities. Where the
the Chairman and President of the corporation has made himself accountable in the promissory note
in his personal capacity and as authorized by the Board Resolution, and in the absence of any
representation on the part of corporation that the obligation is all its own because of its separate
corporate identity, we see no occasion to consider piercing the corporate veil as material to the
case. Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).
To hold a director personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be established clearly and
convincingly. Bad faith is never presumed. Bad faith does not connote bad judgment or negligence.
Bad faith imports a dishonest purpose. Bad faith means [a] breach of a known duty through some ill
motive or interest. Bad faith partakes of the nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007).
Generally, officers or directors under the old corporate name bear no personal liability for acts
done or contracts entered into for the corporation, if duly authorized. Republic Planters Bank v.
Corporate officers who entered into and signed contracts on behalf of the corporation in their
official capacities cannot be made personally liable thereunder in the absence of stipulation to that
effect, due to the personality of the corporation being separate and distinct from the persons
composing it. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Rustan
Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v. Walter Bull and
Co., 84 Phil. 164 (1949).
A president cannot be held solidarily liable personally with the corporation absent evidence of
showing that he acted maliciously or in bad faith. EPG Constructions Co. v. CA, 210 SCRA 230
(1992).
The finding of solidary liability among the corporation, its officers and directors would patently
be baseless when the decision contains no allegation, finding or conclusion regarding particular acts
committed by said officers and director that show them to have been individually guilty of
unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When
corporate officers and directors are sued merely as nominal parties in their official capacities as
such, they cannot be held liable personal for the judgment rendered against the corporation. NPC. v.
Court of Appeals, 273 SCRA 419 (1997); Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291
(1965); Arcilla v. Court of Appeals, 215 SCRA 120 (1992).
An officer-stockholder who signs in behalf of the corporation to a fraudulent contract cannot
claim the benefit of separate juridical entity: Thus, being a party to a simulated contract of
management, petitioner Uy cannot be permitted to escape liability under the said contract by using
the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced to
avoid injustice and inequity. Paradise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).
(a) Rundown on Officers Liabilities. Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA
14 (1994).104
Bad faith does not arise just because a corporation fails to pay its obligation, because the
inability to pay ones obligation is not synonymous with fraudulent intent not to honor the
obligations. In order to piece the veil of corporate fiction, for reasons of negligence by the director,
trustee or officer in the conduct of the transactions of the corporation, such negligence must be
gross. Magaling v. Ong, 562 SCRA 152 (2008).
Directors or trustees who willfully or knowingly vote for or assent to patently unlawful acts of
the corporation or acquire any pecuniary interest in conflict with their duty as such directors or
104MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. Court of Appeals, 311 SCRA 700 (1999); Atrium Management Corp. v.
Court of Appeals, 353 SCRA 23 (2001); Malayang Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 77
(2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); H.L. Carlos Construction, Inc. v. Marina Properties Corp.,
421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007).
86
trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation. EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
While the limited liability doctrine is intended to protect the stockholder by immunizing him
from personal liability for the corporate debts, a corporate officer may nevertheless divest himself
of this protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid
Bank Corp., 408 SCRA 544 (2003).
The corporate representatives signing as a solidary guarantee as corporate representative did not
undertake to guarantee personally the payment of the corporations debt embodied in the trust
receipts. Debts incurred by directors, officers and employees acting as such corporate agents are not
theirs but the direct liability of the corporation they represent. As an exception, directors or officers
are personally liable for the corporations debt if they so contractually agree or stipulate. Tupaz IV v.
x(b) Special Provisions in Labor Laws:
Since a corporate employer is an artificial person, it must have an officer who can be presumed
to be the employer, being the person acting in the interest of (the) employer as defined in Art. 283
of the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986).
(i) Overturning the A.C. Ransom Ruling:
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation because Section 31 of the Corporation Code is still the
governing law on personal liability of officers for the debts of the corporation. David v. National
Federation of Labor Unions, 586 SCRA 100 (2009).
Corporate officers cannot be held personally liable for damages on account of the employees
dismissal because the employer corporation has a personality separate and distinct from its
officers who merely acted as its agents. Malayang Samahan ng mga Mangagagawa sa M.
Greenfields v. Ramos, 357 SCRA 77 (2001).105
Corporate officers are not personally liable for money claims of discharged employees unless
they acted with evident malice and bad faith in terminating their employment. AHS/Philippines
v. Court of Appeals, 257 SCRA 319 (1996).106
Only the responsible officer of a corporation who had a hand in illegally dismissing an
employee should be held personally liable for the corporate obligations arising from such act.
Maglutac v. NLRC, 189 SCRA 767 (1990);107 and for the separate juridical personality of a
corporation to be disregarded as to make the highest corporate officer personally liable on labor
claims, the wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187
SCRA 777 (1990).
A corporation, being a juridical entity, may act only through its directors, officers and
employees and obligations incurred by them, acting as corporate agents, are not theirs but the
direct accountabilities of the corporation they represent. In labor cases, corporate directors and
officers are solidarily liable with the corporation for the termination of employment of
employees done with malice or bad faith. Brent Hospital, Inc. v. NLRC, 292 SCRA 304
(1998).108
105AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009).
106Reiterated in Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and
Stewards Association of the Philippines v.

Philippine Airlines, 559 SCRA 252 (2008); M+W Zander Philippines, Inc. v. Enriquez, 588 SCRA 590 (2009); AMA Computer
College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009); Lowe, Inc. v. Court of Appeals, 596 SCRA 140, 155 (2009); Peaflor
v. Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010).
107Reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271
SCRA 247 (1997)
108Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011); Grandteq Industrial Steel Products, Inc. v.
Estrella, 646 SCRA 391 (2011); Alert Security and Investigation Agency, Inc. v. Pasawilan, 657 SCRA 655 (2011); Lynvil Fishing
Enterprises, Inc. v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading Co., Inc. v. Blas, 667 SCRA 727 (2012).
87
In labor cases, corporate directors and officers are solidarily liable with the corporation for
the termination of employment of corporate employees done with malice or in bad faith. In this
case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the
employees. They were the one, who as high-ranking officers and directors of the corporation,
signed the Board Resolution retrenching the employees on the feigned ground of serious
business losses that had no basis apart from an unsigned and unaudited Profit and Loss
Statement which, to repeat, had no evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA
35 (1997).
(ii) Limiting the A.C. Ransom Ruling to Insolvent Corporation
A.C. Ransom is not in point because there the corporation actually ceased operations after the
decision of the Court was promulgated against it, making it necessary to enforce it against its
former president. When the corporation is still existing and able to satisfy the judgment in favor
of the private respondent, the corporate officers cannot be held personally liable. Lim v. NLRC,
171 SCRA 328 (1989).
A.C. Ransom will apply only where the persons who are made personally liable for the
employees claims are stockholders-officers of employer-corporation. In the case at bar, a mere
general manager while admittedly the highest ranking local representative of the corporation, is
nevertheless not a stockholder and much less a member of the Board of Directors nor an officer
thereof. De Guzman v. NLRC, 211 SCRA 723 (1992).
(iii) Upholding the A.C. Ransom Ruling:
Under the Labor Code, in the case of corporations, it is the president who responds personally
for violation of the labor pay laws. Villanueva v. Adre, 172 SCRA 876 (1989).
A.C. Ransom doctrine has been reiterated subsequently in Restuarante Las Conchas v. Llego,
314 SCRA 24 (1999).109
Since a corporation is an artificial person, it must have an officer who can be presumed to be
the employer, being the person acting in the interest of the employerthe corporation, in the
technical sense only, is the employer. The manager of the corporation falls within the meaning of
an employer as contemplated by the Labor code, who may be held jointly and severally liable
for the obligation of the corporation to its dismissed employees. NYK International Knitwear
Corp. Phil. V. NLRC, 397 SCRA 607 (2003).
(iv) Definitive Overturning of A.C. Ransom Ruling:
It is settled that in the absence of malice, bad faith, or specific provisions of law, a
stockholder or an officer of a corporation cannot be made personally liable for corporate
liabilities. McLeod v. NLRC, 512 SCRA 222 (2007).110
Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade
payment of backwages to the 22 strikers. This situation, or anything similar showing malice or
bad faith on the part of Patricio, does not obtain in the present case. [What applies therefore is
the ruling ] [i]n Santos v. NLRC, [254 SCRA 673 (1996)]. McLeod v. NLRC, 512 SCRA 222
(2007).111
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McCleod v. NLRC, 512 SCRA
22 (2007), that Article 212(e) of the Labor Code, by itself, does not make a corporate officer
109Reiterated in Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996).
110Citing Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001); Bogo-Medellin Sugarcane Planters Asso.,
Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC,
449 SCRA 360 (2005); Coca-Cola Bottlers Phils., Inc. v. Daniel, 460 SCRA 494 (2005); Suldao v. Cimech System Construction, Inc.,
506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v. Eastern Telecommunications
Philippines, Inc., 642 SCRA 338 (2011). Grandteq Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011).
111Reiterated in H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation
Company v. Acosta, 510 SCRA 249 (2006); Elcee Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73
(2007).
88
personally liable for the debts of the corporationthe governing law on personal liability of
directors or officers for debts of the corporation is still Section 31 of the Corporation Code.
Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).112
(c) Personal Liability of Trustees and Officers of Non-Stock Corporation
The non-stock corporation acted in clear bad faith when it sent the final notice to a member
under the pretense they believed him to be still alive, when in fact it had very well known that he
had already died. Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).
Non-stock corporations and their officers are not exempt from the obligation imposed by Articles
19, 20 and 21 under the Chapter on Human Relations of the Civil Code, which provisions enunciate
a general obligation under law for every person to act fairly and in good faith towards one another.
Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).
XI. RIGHT OF STOCKHOLDERS AND MEMBERS
1. What Does Share Represent?
While shares of stock constitute personal property, they do not represent property of the corporation
[i.e., they are properties of the stockholders who own them]. A share of stock only typifies an aliquot
part of the corporations property, or the right to share in its proceeds to that extent when distributed
according to law and equity, but the holder is not the owner of any part of the capital [properties] of the
corporation, nor is he entitled to the possession of any definite portion of its assets. The stockholder is
not a co-owner of corporate property. Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds
of Manila, 6 SCRA 373 (1962).
The registration of shares in a stockholders name, the issuance of stock certificates, and the right to
receive dividends which pertain to the shares are all rights that flow from ownership. Lim Tay v. Court
of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).
As early as the case of Fisher v. Trinidad, the Court already declared that [t]he distinction
between the title of a corporation, and the interest of its members or stockholders in the property of the
corporation, is familiar and well-settled. The ownership of that property is in the corporation, and not
in the holders of shares of its stock. The interest of each stockholder consists in the right to a
proportionate part of the profits whenever dividends are declared by the corporation, during its
existence, under its charter, and to a like proportion of the property remaining, upon the termination or
dissolution of the corporation, after payment of its debts. Mobilia Products, Inc. v. Umezawa, 452
SCRA 736 (2005).
2. Preemptive Rights (Sec. 39)
Pre-emptive right under Section 39 of the Corporation Code refers to the right of a stockholder of a
stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. Although it can validly be withdrawn, it cannot be done in breach of
fiduciary duties such as to perpetuate control over the corporation. Majority Stockholders of Ruby
Industrial Corp. v. Lim, 650 SCRA 461 (2011).
The early pronouncement in Datu Tagoranao Benito v. SEC, 123 SCRA 722 (1983) that preemptive right only covers increases in authorized capital stock, the new wordings under Section 39 as
to cover all issuances of shares has been corrected in Dee v. SEC, 199 SCRA 238 (1991).
3. Right to Transfer or Dispose of Shareholdings (Sec. 63)
(a) Restriction on Transfers: Lambert v. Fox, 26 Phil. 588 (1914).
(i) Right of Refusal: Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).
112Reiterated in David v. National Federation of Labor Unions, 586 SCRA 100 (2009).
89
Section 63 contemplates no restriction as to whom the stocks may be transferred. It does not
suggest that any discrimination may be created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to
dispose them in favor of whomever he pleases, without limitation in this respect, than the general
provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
The only limitation imposed by Sec. 63 is when the corporation holds any unpaid claim against
the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its
officers, cannot create restrictions in stock transfers, because Restrictions in the traffic of stock
must have their source in legislative enactment, as the corporation itself cannot create such
impediment. By-laws are intended merely for the protection of the corporation, and prescribe
relation, not restriction; they are always subject to the charter of the corporation. Rural Bank of
Salinas v. CA, 210 SCRA 510 (1992).
The right of first refusal is primarily an attribute of ownership. Conversely, a waiver thereof is
an act of ownership. To allow the PCGG to vote the sequestered shares for this purpose would be
sanctioning its exercise of an act of strict ownership. PCGG v. SEC, G.R. No. 82188, 30 June 1988
(unrep.)
The agreement of co-shareholders to mutually grant the right of first refusal to each other, by
itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to
Filipinos and Filipino corporations; if the foreign shareholdings of a landholding corporation exceed
40%, it is not the foreign stockholders ownership of the shares which is adversely affected by the
capacity of the corporation to own landthat is, the corporation becomes disqualified to own land.
This finds support under the basic corporate law principle that the corporation and its stockholders
are separate juridical entities. In this vein, the right of first refusal over shares pertains to the
shareholders whereas the capacity to own land pertains to the corporation. J.G. Summit Holdings,
Inc. v. Court of Appeals, 450 SCRA 169 (2005).
In a landholding corporation which by constitutional mandate is limited to 40% foreign equity,
and where there exists a right of first refusal agreement between the co-shareholders, the fact that
the corporations owns land cannot deprive stockholders of their right of first refusal. No law
disqualifies a person from purchasing shares in a landholding corporation even if the latter will
exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.
J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005).
(ii) Restraint of Trade: An agreement by which a person obliges himself not to engage in
competitive trade for five years is valid and reasonable and not an undue or unreasonable
restraint of trade and is obligatory on the parties who voluntarily enter into such agreement.
xOllendorf v. Abrahamson, 38 Phil. 585 (1918).
(b) Remedy If Registration Refused:Ponce v. Alsons Cement Corp., 393 SCRA 602.
Mandamus will not lie to compel the corporate secretary to register the transfer of shares in the
corporate books when the petitioner is not the registered stockholder nor does he hold a power of
attorney from the latter. This is under the general rule that as between the corporation one the one
hand and its shareholders on other, the corporation looks only to its books for the purpose of
determining who its shareholders are, so that a mere indorsee of a certificate of stock, claiming to
be the owner, will not necessarily be recognized as such by the corporation and its officers, in
absence of express instructions of the registered owner to make such transfer to the indorsee, or a
power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911); Rivera v.
Florendo, 144 SCRA 643 (1986).
The claim for damages of what the shares could have sold had the demand been complied with is
deemed to be speculative damage and non-recoverable Batong Buhay Gold Mines v. CA, 147 SCRA
4 (1987)
Period to Enforce: Considering that the law does not prescribe a period within which the
registration of purchase of shares should be effected, the action to enforce the right does not accrue
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until there has been a demand and a refusal concerning the transfer. Ponce v. Alsons Cement Corp.,
393 SCRA 602 (2002).
A stipulation on the stock certificate that any assignment would not be binding on the
corporation unless registered in the corporate books as required under the by-laws and without
providing when registration should be made, would mean that the cause of action and the
determination of prescription period would begin only when demand for registration is made and
not at the time of the assignment of the certificate. Won v. Wack Wack Golf & Country Club, 104
Phil. 466 (1958).
4. Rights to Dividends (Sec. 43)
Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%,
cumulative and participating, the stockholders do not become entitled to the payment thereof as a
matter of right without necessity of a prior declaration of dividends. Sec. 43 of Corporation Code
prohibits the issuance of any stock dividend without the approval of stockholders, representing not less
than two-thirds (2/3) of the outstanding capital stock, which underscores the fact that payment of
dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, interest
bearing stocks, on which the corporation agrees absolutely to pay interest before dividends are paid to
the common stockholders, is legal only when construed as requiring payment of interest as dividends
from net earnings or surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
In the liquidating of a corporation, after the payment of all corporate debts and liabilities, the
remaining assets, if any, must be distributed to the stockholders in proportion to their interests in the
corporation. The share of each stockholder in the assets upon liquidation is what is known as
liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).
The term dividend in its technical sense and ordinary acceptation is that part of portion of the
profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division
among the holders of it capital stockit is a payment, and the right thereto is an incident of ownership
of stock. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).
When the Court directed that a total of 111,415 shares of PLDT be reconveyed to the Republic by
way of declaring the Republic to be the rightful owner of said shares, that necessarily included the
reconveyance to the Republic of the dividends and interest accruing thereto. Cojuangco v.
Sandiganbayn, 586 SCRA 790 (2009).
5. Right to Vote and to Attend Meetings (Secs. 6 and 89)
The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders meeting, or whether a requisite proportion of the stock of the corporation is voted to
adopt a certain measure or act. Only stock actually issued and outstanding may be voted. Under
Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in
the articles of incorporation or declared delinquent under Section 67 of the Code. Neither the
stockholders nor the corporation can vote or represent shares that have never passed to the ownership
of stockholders, or, having so passed, have again been purchased by the corporation. These shares are
not to be taken into consideration in determining majorities. When the law speaks of a given proportion
of the stock, it must be construed to mean shares that have passed from the corporation, and that may
be voted. Tan v. Sycip, 499 SCRA 216 (2006).
One of the rights of a stockholder is the right to participate in the control and management of the
corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to
the ownership of corporate stock, and as such is a property right. Castillo v. Balinghasay, 440 SCRA
442 (2004).
Until challenged successfully in proper proceedings, a registered stockholder has a right to
participate in any meeting, and in the absence of fraud the action of the stockholders meeting cannot
be collaterally attacked on account of such participation, even if it be shown later on that the shares had
been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933).
91
The sequestration of shares does not entitle the government to exercise acts of ownership over the
shares; even sequestered shares may be voted upon by the registered stockholder. Cojuangco Jr. v.
Roxas, 195 SCRA 797 (1991).
The right to vote sequestered shares of stock registered in the names of private individuals or
entities and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the
registered owner. The PCGG may, however, be granted such voting right provided it can (1) show
prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate
imminent danger of dissipation of the assets, thus necessitating their continued sequestration and
voting by the government until a decision, ruling with finality on their ownership, is promulgated by
the proper court. Nevertheless, the foregoing "two-tiered" test does not apply when the funds that are
prima facie public in character or, at least, are affected with public interest. Inasmuch as the subject
UCPB shares in the present case were undisputably acquired with coco levy funds which are public in
character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character"
test, not the "two-tiered" one, applies. Republic v. COCOFED, 372 SCRA 462 (2001). Also Trans
Middle East (Phils) v. Sandiganbayan, 490 SCRA 455 (2006).
Treasury shares cannot be voted upon. Tan v. Sycip, 499 SCRA 216 (2006).
(a) Instances When Stockholders Entitled to Vote:
- Amendment of articles of incorporation (Sec. 16)
- Election of directors and trustees (Sec. 24)
- Investment in another business or corporation (Secs. 36 and 42)
- Increase and Decrease of capital stock (Sec. 38)
- Incurring, or increasing bonded indebtedness (Sec. 38)
- Sale, disposition or encumbrance of all or substantially all of the corporate assets (Sec.
40)
- Declaration of stock dividends (Sec. 43).
- Management contracts (Sec. 44)
- Adoption, amendment and repeal of by-laws (Sec. 48).
- Fixing of consideration of no par value shares (Sec. 62)
- Merger and consolidation (Sec. 72)
(b) Joint Ownership (Sec. 56)
(c) Treasury Share No Voting Rights (Sec. 57)
(d) Pledgor, Mortgagors and Administrators (Sec. 55)
When shares are pledged by means of endorsement in blank and delivery of the covering certificates
to a loan, the pledgee does not become the owner thereof simply by the failure of the registered
stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that
the shares be registered in his name. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998).
Although the Rules of Court, while permitting an executor or administrator to represent or to bring
suits on behalf of the deceased, do no prohibit the heirs from representing the deceased. When no
administrator has been appointed, there is all the more reason to recognize the heirs as the proper
representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).
(e) Voting Rights of Members
In stock corporation, shareholders may generally transfer their shares. Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to
the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of
the decedent are held by the administrator or executor. On the other hand, membership in and all rights
arising from a nonstock corporation are personal and non-transferable, unless the articles of
incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of
92
whether or not dead members are entitled to exercise their voting rights (through their executor or
administrator), depends on those articles of incorporation or bylaws. Tan v. Sycip, 499 SCRA 216
(2006).
Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by
the death of the member. Section 91 of the Corporation Code further provides that termination
extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of
the incorporation or the bylaws. Applying Section 91 to the present case, we hold that dead members
who are dropped from the membership roster in the manner for the cause provided for in the By-Law
of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite
quorum for the annual members meeting. With 11 remaining members, the quorum in the present case
should be 6. therefore, there being a quorum, the annual members meeting, conducted with six
members present, was valid. Tan v. Sycip, 499 SCRA 216 (2006).
(f) Conduct of Stockholders' Meetings:
(i) Kinds and Requirements of Meetings (Secs. 49 and 50);
(ii) Place and Time of Meeting (Secs. 51 and 93);
(iii) Quorum (Sec. 52)
Quorum is based on the totality of the shares which have been subscribed and issued whether it be
founders shares or common shares. To base the computation of quorum solely on the obviously
deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and
outstanding shares indicated in the articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. The stock and transfer book cannot be used as the sole basis
for determining the quorum as it does not reflect the totality of shares which have been subscribed,
more so when the articles of incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book. Lanuza v. Court of Appeals, 454
SCRA 54 (2005).
6. Contracts and Agreement Affecting Shareholdings
(a) Proxy (Sec. 58)
Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns
the validation of such secured and submitted proxies. It is possible that an intra-corporate controversy
may animate a disgruntled shareholder to complain to the Securities and Exchange Commission (SEC)
a corporations violations of SEC rules and regulations, but that motive alone should not be sufficient
to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are
exercisable on a motu proprio basis. GSIS v. Court of Appeals, 585 SCRA 679 (2009).
The SECs power to pass upon the validity of proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its abrogated jurisdictional powers. The fact that the
jurisdiction of the regular courts under Section 5(c) is confined to the voting on election of officers,
and not on all matters which may be voted upon by stockholders, elucidates that the power of the
Securities and Exchange Commission (SEC) to regulate proxies remains extant and could very well be
exercised when stockholders vote on matters other than the election of directors. GSIS v. Court of
Appeals, 585 SCRA 679 (2009).
(b) Voting Trust Agreements (Sec. 59; Lee v. CA, 205 SCRA 752 [1992]).
The trustor has a right to terminate the VTA for breach thereof. Everett v. Asia Banking
Corporation, 49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).
(c) Pooling Agreements or Shareholders Agreements (Sec. 100)
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7. Rights to Inspect and Copy Corporate Records
(a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).
The stockholders right of inspection of the corporations books and records is based upon his
ownership of shares in the corporation and the necessity for self-protection. Puno v. Puno Enterprises,
599 SCRA 585 (2009).
(b) Limitations on Right
The only express limitations on the right of inspection under Sec. 74 of Corporation Code are: (a) it
should be exercised at reasonable hours on business days; (b) the person demanding the right to
examine and copy excerpts from the corporate records and minutes has not improperly used any
information secured through any previous examination of records; and (c) the demand is made in good
faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992).
Summary of Rulings: The right to inspect corporate books and records:
Is exercisable through agents and representatives, otherwise it would often be useless to the
stockholder who does not know corporate intricacies. W.G. Philpotts v. Philippine
Manufacturing Co., 40 Phil. 471 (1919).
Cannot be denied on the ground that the director is on unfriendly terms with the officers of
the corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57
Phil. 266 (1932).
Although it includes the right to make copies, does not authorize bringing the books or
records outside of corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
Does not include the right of access to minutes until such minutes have been written up and
approved by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
Cannot be limited to a period of ten days shortly prior to the annual stockholders meeting,
as such would be an unreasonable restriction and violates the legal provision granting the
exercise of such right at reasonable hours. Pardo v. Hercules Lumber Co., 47 Phil. 964
(1924).
(c) Specified Records (Secs. 74, 75 and 141)
(d) Remedies If Denied: Mandamus Gonzales v. PNB, 122 SCRA 489 (1983).
Burden of proof to show that examination is for improper purpose is on the part of the corporation.
Republic v. Sandiganbayan, 199 SCRA 39 (1999).
(e) Criminal Sanction under Section 144
In the recent case of Ang-Abaya v. Ang, 573 SCRA 129 (2008), the Court had the occasion to
enumerate the requisites before the penal provision under Section 144 of the Corporation Code may be
applied in a case of violation of a stockholder or members right to inspect the corporate books/records
as provided for under Section 74 of the Corporation Code. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517
(2009).
In a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper
use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are
able to prove the samewhere the corporation denies inspection on the ground of improper motive or
purpose, the burden of proof is taken from the shareholder and placed on the corporation. Sy Tiong
Shiou v. Sy Chim, 582 SCRA 517 (2009).
(f) Confidential Nature of SEC Examinations (Sec. 142)
8. Appraisal Right (Secs. 81 to 86 and 105)
A stockholder who dissents from certain corporate actions has the right to demand payment of the
fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in
Section 81 of the Corporation Code. Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the
94
stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose of
enabling the dissenting stockholder to have his interest purchased and to retire from the corporation.
Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010).
9. DERIVATIVE SUITS (Interim Rules of Procedure Governing Intra-Corporate Controversies)
Derivative suits are governed by a special set of procedural rules known as the Interim Rules of
Procedure Governing Intra-Corporate Controversies under Republic Act No. 8799 (A.M. No. 01-204-SC; effective 01 April 2001). Section 1, Rule 1 thereof expressly lists derivative suits among the
cases covered by it. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009).
(a) Derivative Suit Must Be Effected When Board Cannot Properly Exercise Business Judgment
General Rule: In the absence of a special authority from the Board of Directors to institute a
derivative suit for and in behalf of the corporation, the president or managing director is disqualified by
law to sue in her own name. The power to sue and be sued in any court by a corporation is lodged in
the Board that exercises its corporate powers and not in the president or officer thereof. Bitong v. Court
While questions of policy and management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the
judgment of the Board of Directors; yet where the corporate directors are guilty of breach of trustnot
of mere error of judgment or abuse of discretionand intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation. However, the corporation is the real party in interest in a derivative suit and the suing
stockholder is only a nominal party. Cua, Jr. v. Tan, 607 SCRA 645 (2009).
Under Sec. 36 of the Corporation Code, in relation to Sec. 23, where a corporation is an injured
party, its power to sue is lodged with its board of directors or trustees. An individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to
protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the
ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real party in interest. Chua v. Court of
Appeals, 443 SCRA 259 (2004).113
(b) Nature of the Power to File Derivative Suit
A stockholders right to institute a derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. Yu v. Yukayguan, 589 SCRA 588 (2009).
A derivative suit is an action brought by minority shareholders in the name of the corporation to
redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy
designed by equity and has been the principal defense of the minority shareholders against abuses by
the majority. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
The whole purpose of the law authorizing a derivative suit is to allow the stockholders/member to
enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action.
R.N. Symaco Trading Corp v. Santos, 467 SCRA 312 (2005).114
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be sued or hold the control of the corporation-in such
actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in
interest. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
113Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 SCRA 588 (2009); Hi-Yield Realty, Inc. v.
114Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities
Ltd., 607 SCRA 413 (2009).
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(c) Requisites of Derivative Suit
In the case of, we enumerated the foregoing requisites before a stockholder can file a derivative suit:
(a) the party bringing suit should be a shareholder during the time of the act or transaction complained
of, the number of shares not being material; (b) the party has tried to exhaust intra-corporate remedies,
relief, but the latter has failed or refused to heed his plea; and (c) the cause of action actually devolves
on the corporation; the wrongdoing or harm having been or being caused to the corporation and not to
the particular stockholder bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 (1989).115
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays
down the following requirements which a stockholder must comply with in filing a derivative suit: 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. Yu v. Yukayguan, 589 SCRA 588 (2009).116
The fact that it is a family corporation does not in any way exempt a stockholder from complying
with the clear requirements and formalities of the rules for filing derivative suitthere is nothing in the
pertinent laws or rules supporting the distinction between, and the difference in the requirements for,
family corporations vis-a-vis other types of corporations, in the institution by a stockholder of a
derivative suit. Yu v. Yukayguan, 589 SCRA 588 (2009).
(d) Who May Bring the Suit
The relators must be stockholders both at time of occurrence of the events constituting the cause of
action and at the time of the filing of the derivative suit. Pascual v. Orozco, 19 Phil. 83 (1911);
Gochan v. Young, 354 SCRA 207 (2001).
A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation
is a necessary party to the suit. And the relief which is granted is a judgment against a third person in
favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not
asserting it, a stockholder may intervene and defend on behalf of the corporation. Chua v. Court of
Appeals, 443 SCRA 259 (2004).
Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in
which case Cruz is only a nominal party while Filport is the real party-in-interest. Filipinas Port
Services, Inc. v. Go, 518 SCRA 453 (2007).
A minority stockholder and member of the board has no power or authority to sue on the
corporations behalf. Nor can we uphold this as a derivative suit, since it is required that the minority
stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders similarly situated
who may wish to join him in the suit. There is now showing that petitioner has complied with the
foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Hi-Yield Realty, Inc. v. Court
of Appeals, 590 SCRA 548, 556 (2009).
A minority stockholder can file a derivative suit against the president for diverting corporate income
to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991).
The status of heirs as co-owners of shares of stocks prior to the partition of the decedents estate
does not immediately and necessarily make them stockholders of the corporation-unless and until
there is compliance with the Section 63 of the Corporation Code on the manner of transferring shares,
115Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007)Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593
(2008); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
116Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities
Ltd., 607 SCRA 413 (2009); Cua, Jr. v. Tan, 607 SCRA 645 (2009).
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the heirs do not become registered stockholders of the corporation. Reyes v. Regional Trial Court of
Makati, Br. 142, 561 SCRA 593 (2008); Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009).
A lawyer engaged as counsel for a corporation cannot represent members of the same corporations
board of directors in a derivative suit brought against them. To do so would be tantamount to
representing conflicting interests, which is prohibited by the Code of Professional Responsibility.
Hornilla v. Salunat, 405 SCRA 220 (2003).
(e) Exhaustion of Intra-Corporate Remedies: Everett v. Asia Banking Corp., 49 Phil. 512 (1927);
Angeles v. Santos, 64 Phil. 697 (1937).
A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can
be filed without prior demand upon the Board of Directors where the legality of the constitution of the
Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993).
Further, while it is true that the complaining stockholder must satisfactorily show that he has
exhausted all means to redress his grievances within the corporation, except when such remedy is
complete control of the person against whom the suit is being filed. The reason is obvious: a demand
upon the board to institute an action and prosecute the same effectively would have been useless and an
exercise in futility. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 557 (2009).
The obvious intent behind the rule requiring the stockholder filing a derivative suit to first exert all
reasonable efforts to exhaust all remedies available under the articles of incorporation, by laws, laws or
rules governing the corporation or partnership to obtain relief he desires is to make the derivative suit
the final recourse of the stockholders, after all other remedies to obtain the relief sought had failed. Yu
v. Yukayguan, 589 SCRA 588 (2009).
(f) Nature of Relief or Remedies Prayed For: Evangelista v. Santos, 86 Phil. 387 [1950]; Republic
Bank v. Cuaderno, 19 SCRA 671 (1967); Reyes v. Tan, 3 SCRA 198 (1961).
In a derivative suit, any monetary benefits under the decision of the court shall pertain to the
corporation and not to the stockholders or members. R.N. Symaco Trading Corp. v. Santos, 467 SCRA
312 (2005).
The allegations of injury to the relators can co-exist with those pertaining to the corporation, and
does not disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise
to an additional cause of action for damages against the erring directors. Gochan v. Young, 354 SCRA
207 (2001).
In a derivative action, the real party in interest is the corporation itself, not the shareholders who
actually instituted it. A suit to enforce preemptive rights in a corporation is not a derivative suit, and
therefore a temporary restraining order enjoining a person from representing the corporation will not
bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the
corporation. Lim v. Lim-Yu, 352 SCRA 216 (2001).
Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18
SCRA 602 (1966).
Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a
stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation,
to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders.
This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the
corporation is the real party in interest while the stockholder filing suit for the corporations behalf is
only nominal party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405
SCRA 220 (2003).
(g) Venue for Derivative Suit
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Venue of derivative suit: Under Section 5, Rule 1 of the Interim Rules, the proper venue for
derivative suit would be in the RTC which has jurisdiction over the principal office of the corporation.
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
10. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 122)
XII. SHARES OF STOCK
1. Shareholders Not Corporate Creditors. Garcia v. Lim Chu Sing, 59 Phil. 562 (1934).
2. Subscription Contract (Secs. 60 and 72; Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]).
(a) Purchase Agreement. Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942).
(b) Pre-Incorporation Subscription (Sec. 61)
When properties were assigned pursuant to a pre-incorporation subscription agreement, but the
corporation fails to issue the covered shares, the return of such properties to the subscriber is a direct
consequence of rescission and does not amount to corporate distribution of assets prior to dissolution.
On Yong v. Tiu, 375 SCRA 614 (2002).
(c) Release from Subscription Obligation: Tan v. Sycip, 499 SCRA 216 (2006).117
(d) Condition of Payment Provided in By-laws. De Silva v. Aboitiz & Co., 44 Phil. 755 (1923).
3. Consideration (Sec. 62):
(a) Cash
(b) Property
(c) Service
(d) Retained Earnings
(d) Shares
Stock dividends are in the nature of shares of stock, the consideration for which is the amount of
unrestricted retained earnings converted into equity in the corporations books. Lincoln Phil. Life v.
When a person pays to the corporation a deposit for future subscription, no subscription agreement
has been constituted, and consequently there is no liability for the payment of the documentary stamp
tax on such deposit for future subscription for the reason that there is yet no subscription that creates
rights and obligations between the subscriber and the corporation. Commissioner of Internal Revenue
v. First Express Pawnshop Co., 589 SCRA 253 (2009).
4. Watered Stocks (Sec. 65)
5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v.
Baltazar, 93 Phil. 404 [1953]).
A stockholder who is employed with the company, cannot offset his unpaid subscription against his
awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca
v. NLRC, 172 SCRA 442 (1989).
6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; Philippine Trust Co. v. Rivera, 44 Phil. 469
[1923]; Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932])
The prescriptive period to recover on unpaid subscription does not commence from the time of
subscription but from the time of demand by Board of Directors to pay the balance of subscription.
Garcia v. Suarez, 67 Phil. 441 (1939).
(a) Who May Question a Delinquency Sale? (Sec. 68 and 69).
7. Certificate of Stock (Sec. 63)
117Velasco v. Poizat, 37 Phil. 802 (1918); PNB v. Bituloc Sawmill, Inc., 23 SCRA 1366 (1968); National Exchange Co. v. Dexter,
51 Phil. 601 (1928).
118The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in
the latest audited financial statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln
Phil. Life Insurance Co., 379 SCRA 423 (2002).
98
(a) Nature of Certificate:Tan v. SEC, 206 SCRA 740 (1992);De los Santos v. Republic, 96 Phil.
577 (1955);Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002); Nautica Canning Corp. v.
Yumul, 473 SCRA 415 (2005); C.N. Hodges v. Lezama, 14 SCRA 1030 (1965).
A certificate of stock is the paper representative or tangible evidence of the stock itself and of the
various interests therein. The certificate is not a stock in the corporation but is merely evidence of the
holders interest and status in the corporation, his ownership of the share represented thereby. It is not
in law the equivalent of such ownership. It expresses the contract between the corporation and the
stockholder, but is not essential to the existence of a share of stock or the nature of the relation of
shareholder to the corporation. Makati Sports Club, Inc. v. Cheng, 621 SCRA 103 (2010).
A certificate of stock is the evidence of a holders interest and status in a corporationit is prima
facie evidence that the holder is a shareholder of a corporation; it is not the share itself. Lincoln Phil.
Life v. Court of Appeals, 293 SCRA 92 (1998); Lao v. Lao, 567 SCRA 558 (2008).
The fact that the stock certificates registered in the name of one person are found in the possession
of another stockholder does not prove that the possessor is the owner of the covered shares. A stock
certificate is merely a tangible evidence of ownership of shares of stock. Its presence or absence does
not affect the right of the registered owner to dispose of the shares covered by the stock certificate.
Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005).
A certificate of stock could not be considered issued in contemplation of law unless signed by the
president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court
(b) Quasi-negotiable Character of Certificate of Stock:Bachrach Motor Co. v. Lacson Ledesma, 64
Phil. 681 (1937).
In order for a transfer of stock certificate to be effective, it must be properly indorsed and that title
to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of
stock. Indorsement of the certificate of stock is a mandatory requirement of law for an effective
transfer of a certificate of stock. Razon v. IAC, 207 SCRA 234 (1992).
The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or
any other person legally authorized to make the transfer shall be sufficient to effect the transfer of
shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by
the owner is the operative act of transfer of shares from the lawful owner to the new transferee. But to
be valid against third parties, the transfer must be recorded in the books of the corporation. Bitong v.
Court of Appeals, 292 SCRA 503 (1998); Raquel-Santos v. Court of Appeals, 592 SCRA 169 (2009).
Even when a formal Deed of Assignment covering the shares was duly executed, without the
endorsement and delivery of the covering certificates of stocks, the covered shares cannot be deemed
to transferred and registered in the names of the assignees. Rural Bank of Lipa City v. Court of
Appeals, 366 SCRA 188 (2001); Rivera V. Florendo, 144 SCRA 643 (1986).
(c) Right to Certificate of Stock for Fully Paid Shares: Sec. 64; Baltazar v. Lingayen Gulf
Elect. Power Co., Inc., 14 SCRA 522 [1965];Tan v. SEC, 206 SCRA 740 (1992).
(d) Lost or Destroyed Certificates (Sec. 63 and 73)
While Sec. 73 of Corporation Code appears to be mandatory, the same admits exceptions, such that
a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which
has been lost without complying with the requirements under said section. It would be an internal
matter for the corporation to find measures in ascertaining who are the real owners of stock for
purposes of liquidation. It is well-settled that unless proven otherwise, the stock and transfer book is
the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to
Ms. Ma. Cecilia Salazar-Santos).
(e) Forged and Unauthorized Transfers. Delos Santos v. Republic, 96 Phil. 577 (1955); J.
Santamaria v. HongKong and Shanghai Banking Corp., 89 Phil. 780 (1951); Neugene
Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999).
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8. STOCK AND TRANSFER BOOK: Secs. 63, 72 and 74; Fua Cun v. Summers, 44 Phil. 704 (1923);
Monserrat v. Ceran, 58 Phil. 469 (1933); Chua Guan v. Samahang Magsasaka, Inc., 62 Phil.
472 (1935); Uson v. Diosomito, 61 Phil. 535 (1935); Escao v. Filipinas Mining Corporation,
74 Phil. 71 (1944); Bachrach Motors v. Lacson-Ledesma, 64 Phil. 681 (1937); Nava v. Peers
Marketing Corp., 74 SCRA 65 (1976).
The stock and transfer book records the names and addresses of all stockholders arranged
alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and
the date of payment thereof, a statement of every alienation, sale or transfer of stock made the date
thereof and by and to whom made, and such other entries as may be prescribed by law. A stock and
transfer book, like other corporate books and records, is not in any sense a public record, and thus is
not exclusive evidence of the matters and things which ordinarily are or sh9ould be written therein.
Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
(a) Validity of Transfers:
Under Sec. 63 of Corporation Code, the sale of stocks shall not be recognized as valid unless
registered in the books of the corporation insofar as third persons, including the corporation, are
concernedas between the parties to the sale, the transfer shall be valid even if not recorded in the
books of the corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001).
As between the General Information Sheet and the corporate books, it is the latter that is
controlling. Lao v. Lao, 567 SCRA 558 (2008).
A transfer of shares which is not recorded in the books of the corporation is valid only as between
the parties, hence, the transferor has the right to dividends as against the corporation without notice of
transfer but it serves as trustee of the real owner of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to receive the dividends. Cojuangco v. Sandiganbayn,
586 SCRA 790 (2009).
The view that under Section 63 of the Corporation Code, the sale of the stocks shall not be
recognized as valid unless registered in the books of the corporation is valid only insofar as third
persons, including the corporation, are concernedas between the parties to the sale, the transfer shall
be valid even if not recorded in the books of the corporation. Batangas Laguna Tayabas Bus Co. v.
Bitanga, 362 SCRA 635 (2001).
A transferee has no right to intervene as a stockholder in corporate issue on the strength of the
transfer of shares allegedly executed by a registered stockholder. It is explicit under Sec. 63 that the
transfer must be registered to affect the corporation and third persons. Magsaysay-Labrador v. CA, 180
SCRA 266 (1989).
The purpose of registration is two-fold: to enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for, and to inform the corporation of any change
in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities
of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to
participate in any meeting; his vote can be properly counted to determine whether a stockholders
resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who
has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must
secure such a standing by having the transfer recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus
Company, Inc. v. Bitanga, 362 SCRA 635 (2001). [CLV- I agree with the dissenting opinion of
Justice Puno: The rule [Section 63] is intended to protect the interest of the corporation and
third persons who may be prejudiced by the transfer of the shares of stocks. It follows, therefore,
that as between the parties to the sale, the transfer shall be valid even if not recorded in the books of
the corporation.]
A bona fide transfer of shares, not registered in the corporate books, is not valid as against a
subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual
notice of said transfer or not. All transfers not so entered on the books of the corporation are absolutely
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void; not because they are without notice or fraudulent in law or fact, but because they are made so
void by statute. Garcia v. Jomouad, 323 SCRA 424 (2000).
Pursuant to Sec. 63, a transfer of shares of stock not recorded in the stock and transfer book is nonexistent as far as the corporation is concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only into its books for the purpose of
determining who its shareholders are. Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
The absence of a deed of sale evidencing the sale of shares of stock does not necessarily show
irregularity since Section 63 of the Corporation Code itself does not require any deed for the validity of
the transfer of shares stock, it being sufficient that such transfer be effected by delivery of the stock
certificates duly endorsed. The Corporation Code acknowledges that the delivery of a duly indorsed
stock certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode
of transfer is valid between the parties. In order to bind third persons, however, the transfer must be
recorded in the books of the corporation. Clearly then, the absence of a deed of assignment is not a
fatal flaw which renders the transfer invalid as the Republic posits. In fact, as has been held in Rural
Bank of Lipa City, Inc. v. Court of Appeals, [366 SCRA 188 (2001)] the execution not a deed of sale
does not necessarily make the transfer effective. Republic v. Estate of Hans Menzi, 475 SCRA 20, 38
(2005).
(b) Who May Make Entries: Entries made on the stock and transfer book by any person other than
the corporate secretary, such as those made by the President and Chairman, cannot be given any
valid effect. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997)
(c) Attachments: Attachments of shares of stock are not included in the term transfer as provided in
Sec. 63 of Corporation Code. Both the Revised Rules of Court and the Corporation Code do not
require annotation in the corporations stock and transfer books for the attachment of shares to be
valid and binding on the corporation and third parties. Chemphil Export & Import Corp. v. CA, 251
SCRA 257 (1995).
(d) Meaning of Unpaid Claims: Unpaid claims under Sec. 63 refers to any unpaid subscription,
and not to any indebtedness which a stockholder may owe the corporation arising from any other
transactions, like unpaid monthly dues. Fua Cun v. Summers, 44 Phil. 704 (1923); China Banking
Corp. v. CA, 270 SCRA 503 (1997).
(e) Equitable Mortgage Assignment: It seems that the assignment of voting shares as security for a
loan operates to give the assignee not only the right to vote on the shares, but would also treat the
assignee as the owner of the shares (not just an equitable mortgage): It is true that the assignment
was predicated on the intention that it would serve as security vis--vis DBPs financial
accommodation extended to PJI, but it was a valid and duly executed assignment, subject to a
resolutory condition, which was the settlement of PJIs loan obligation with DBP. APT v.
Sandiganbayan, 341 SCRA 551, 560 (2000).
9. Situs of Shares of Stocks (Sec. 55)
Situs of shares of stock is the domicile of the corporation to which they pertain to. Wells Fargo
Bank and Union v. Collector, 70 Phil. 325 (1940).119
XIII. CAPITAL STRUCTURE
1. Power to Issue Shares of Stock
The power to issue shares of stock in a corporation is lodged in the board of directors and no
stockholders meting is required to consider it because additional issuances of shares of stock does not
need approval of the stockholderswhat is only required is the board resolution approving the
additional issuance of shares. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461
(2011).
119Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
101
2. Concept of Capital Stock (Central Textile Mills v. National Wage and Productivity Comm., 260
SCRA 368 [1996]).
By express provision of Sec. 13 of Corporation Code, paid-up capital is that portion of the
authorized capital stock which has been both subscribed and paid. . . Not all funds or assets received by
the corporation can be considered paid-up capital, for this term has a technical signification in
Corporation Law. Such must form part of the authorized capital stock of the corporation, subscribed
and then actually paid up. MSCI-NACUSIP Local Chapter v. National Wages and Productivity
Commission, 269 SCRA 173 (1997).
The term capital and other terms used to describe the capital structure of a corporation are of
universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital
refers to the value of the property or assets of a corporation. The capital subscribed is the total amount
of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not
necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the
corporation receives, inclusive of the premium if any, in consideration of the original issuance of the
shares. NTC v. Court of Appeals, 311 SCRA 508 (1999).
The outstanding capital stock is defined under Sec. 137 of the Corporation Code as the total
shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as
there is binding subscription agreement) except treasury shares. Thus, quorum is based on the totality
of the shares which have been subscribed and issued, whether it be founders shares or common shares.
Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
An investment is an expenditure to acquire property or other assets in order to produce revenue.
It is the placing of capital or laying out of money in a way intended to secure income or profit from its
employment. To invest is to purchase securities of a more or less permanent nature, or to place
money or property in business ventures or real estate, or otherwise lay it out, so that it may produce a
revenue or income. President of PDIC v. Reyes, 460 SCRA 473 (2005).
An investment, being in the nature of equity, and unlike a deposit of money or a loan that earns
interest, cannot be assured of a dividend or an interest on the amount invested, for dividends on
investments are granted only after profits or gains are generated. President of PDIC v. Reyes, 460
SCRA 473 (2005).
When a person pays to the corporation a deposit for future subscription, no subscription agreement
has been constituted, and consequently there is no liability for the payment of the documentary stamp
tax on such deposit for future subscription for the reason that there is yet no subscription that creates
rights and obligations between the subscriber and the corporation. Commissioner of Internal Revenue
v. First Express Pawnshop Co., Inc., 589 SCRA 253 (2009).
3. Classification of Shares (Sec. 6)
It is not correct to say that holders of the preferred shares lose all their voting rights. Section 6 of
the Corporation Code provides for the situations where non-voting shares like preferred shares are
granted voting rights. Philippine Coconut Producers Federation. v. Republic, 600 SCRA 102 (2009).
Sec. 6 of the Corporation Code which prohibits the classification of shares as non-voting, except
when they are expressly classified as preferred or redeemable shares, will apply to corporation
organized under the old Corporation Law. Sec. 148 of the Corporation Code expressly provides that it
shall apply to corporations in existence at the time of the effectivity of the Code. Castillo v.
Balinghasay, 440 SCRA 442 (2004).
(a) Common Shares
A common stock represents the residual ownership interest in the corporation. It is a basic class of
stock ordinarily and usually issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits. Commissioner of Internal Revenue v. Court of Appeals,
301 SCRA 152 (1999).
102
(b) Preferred Shares (Republic Planters Bank v. Agana, 269 SCRA 1 [1997]).
Participating and Non-participating
Cumulative and Non-cumulative
Par Value and No Par Value
Preferred stocks are those which entitle the shareholder to some priority on dividends and asset
distribution. CIR v. Court of Appeals, 301 SCRA 152 (1999).
In the absence of provisions in the articles of incorporation denying voting rights to preferred
shares, preferrsed shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders. In fact, under the Corporation Code only
preferred or redeemable shares can be deprived of the right to vote. Common shares cannot be
deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid. Gamboa v. Teves, G.R. No. 176579,
28 June 2011.
(b) Redeemable Shares (Sec. 8;Republic Planters Bank v. Agana, 269 SCRA 1)
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in
exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury.
Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder
in payment for the stock, and continues in business as before. The redemption of stock dividends
previously issued is used as a veil for the constructive distribution of cash dividends. Commissioner of
Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
(c) Founder Shares (Sec. 7)120
(d) Treasury Shares (Sec. 9; Commissioner v. Manning, 66 SCRA 14 [1975]).
A treasury share, which may be common or preferred, may be used for a variety of corporate
purposes, such as for a stock bonus plan for management and employees, or for acquiring another
company. It may be held indefinitely, resold or retired. While held in the companys treasury, the stock
earns no dividends and has no vote in company affairs. Philippine Coconut Producers Federation, Inc.
v. Republic, 600 SCRA 102 (2009).
(e) Stock Warrants
(f) Stock Options
(g) Re-Classification of Shares
Reclassification of shares does not always bring any substantial alteration in the subscribers
proportional interest. But the exchange is differentthere would be a shifting of the balance of stock
features like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se yields income for tax purposes. . . In this case, the exchange of
shares, without more, produces no realized income to the subscriber. There is only a modification of
the subscribers rights and privilegeswhich is not a flow of wealth for tax purposes. The issue of
taxable dividend may arise only once a subscriber disposes of his entire interests and not when there is
still maintenance of proprietary interest. Commissioner of Internal Revenue v. Court of Appeals, 301
SCRA 152 (1999).
The conversion of common shares into preferred shares, pursued to the amendment of the SMC
articles of incorporation, is a legitimate exercise of corporate powers under the Corporation Code. The
conversion does not amount to SMC using its funds to effect conversion, but would amount merely to a
120In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the articles of incorporation provide expressly a
class of shares to have the exclusive right to vote and be voted for into the Board of Directors, that such shares would essentially be
founders share was raised but not resolved by the Court.
103
reconfiguration of said (common) shares into preferred shares. Philippine Coconut Producers
Federation, Inc. v. Republic, 600 SCRA 102 (2009).
4. Hybrid Securities (Government v. Phil. Sugar Estates, 38 Phil. 15 [1918]).
5. Quasi-Reorganization
(a) Reduction of Capital Stock (Sec. 38)
Reduction of capital stock cannot be employed to avoid the corporations obligations under
the Labor Code. xMadrigal & Co. v. Zamora, 151 SCRA 355 (1987).
(b) Stock Splits
(c) Stock Consolidations
XIV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. ACQUISITIONS AND TRANSFERS
1. Concept of Business Enterprise or Economic Unit or Going Concern
2. Types of Acquisitions\Transfers
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is present: (1) where the purchasers expressly
or impliedly agrees to assume the debts; (2) where the transaction amounts to a consolidation or merger
of the corporations, (3) where the purchasing corporation is merely a continuation of the selling
corporation, and (4) where the selling corporation fraudulently enters into the transactions to escape
liability for those debts. Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965).121
When a corporation transferred all its assets to another corporation to settle its obligations that
would not amount to a fraudulent transfer. McLeod v. NLRC, 512 SCRA 222 (2007).
Even under the provisions of the Civil Code, a creditor has a real interest to go after any person to
whom the debtor fraudulently transferred its assets. Caltex (Phils.), Inc. v. PNOC Shipping and
Transport Corp., 498 SCRA 400 (2006).
PSALM took ownership over most of NPCs assets by operation of lawthese properties may be
used to satisfy the Courts judgment, and such being the case, the employees may go after such
properties. NPC Drivers and Mechanics Association (NPC DAMA) v. NPC., 606 SCRA 409 (2009).
3. Business Enterprise Transfers:A.D. Santos v. Vasquez, 22 SCRA 1156 (1968);Laguna Trans.
Co., Inc. v. SSS, 107 Phil. 833 (1960);McLeod v. NLRC, 512 SCRA 222 (2007)
The general rule is that a corporation has a personality separate and distinct from those of its
stockholders and other corporations to which it may be connected, a fiction created by law for
convenience and to prevent injustice. Settled is the rule that where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the
debts and liabilities of the transferor. Pantranco Employees Association (PEA-PTGWO) v. NLRC,
581 SCRA 598 (2009).
Although the business enterprise was operated under a partnership scheme and later transferred to a
corporation, the business enterprise is deemed to have been in operation for the required two-year
period as to come under the coverage of the SSS Law. San Teodoro Dev. v. SSS, 8 SCRA 96 (1963);
and since the corporation assumed all the assets and liabilities of the partnership, then the corporation
cannot be regarded, for purposes of the SSS Law, as having come into being only on the date of its
incorporation but from the date the partnership started the business. Oromeca Lumber Co. v. SSS, 4
SCRA 1188 (1962).
121Philippines National Bank v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); McLeod v. NLRC, 512 SCRA 222
(2007).
104
Although a corporation may have ceased business operations and an entirely new company has been
organized to take over the same type of operations, it does not necessarily follow that no one may now
be held liable for illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210
SCRA 277 (1992).
It should be rather clear that, as between the estate and the corporation, the intention of
incorporation was to make the corporation liable for past and pending obligations of the estate as the
transportation business itself was being transferred to and placed in the name of the corporation. That
liability on the part of the corporation, vis--vis the estate, should continue to remain with it even after
the percentage of the estates shares of stock in the corporation should be diluted. Buan v.
Alcantara, 127 SCRA 845 (1984).
4. Equity Transfers (Phividec v. Court of Appeals, 181 SCRA 669 [1990]).
B. MERGER AND CONSOLIDATIONS

1. Concepts (McLeod v. NLRC, 512 SCRA 222 [2007]).
A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined business.
Since a merger or consolidation involves fundamental changes in the corporation, as well as in the
rights of stockholders and creditors, there must be an express provision of law authorizing them. PNB
v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
2. Procedure:
(a) Plan of Merger or Consolidation (Sec. 76)
(b) Stockholders' or Members' Approval (Sec. 77)
(c) Articles of Merger or Consolidation (Sec. 78)
(d) Approval by SEC (Sec. 79)
As specifically provided under Section 79 of the Corporation Code, the merger shall only be
effective upon the issuance of a certificate of merger by the Securities and Exchange Commission
(SEC), subject to its prior determination that the merger is not inconsistent with the Code or existing
laws. Where a party to the merger is a special corporation governed by its own charter, the Code
particularly mandates that a favorable recommendation of the appropriate government agency should
first be obtained. The issuance of the certificate of merger is crucial because not only does it bear out
SECs approval but also marks the moment whereupon the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its
rights, and properties as well as liabilities shall be taken and deemed transferred to and vested in the
surviving corporation. Poliand Industrial Ltd. V. NDC, 467 SCRA 500 (2005).
(e) Submission of Financial Statements Requirements: For applications of merger, the audited
financial statements of the constituent corporations (surviving and absorbed) as of the date not
earlier than 120 days prior to the date of filing of the application and the long-form audit report for
absorbed corporation(s) are always required. Long form audit report for the surviving corporation is
required if it is insolvent. (SEC Opinion 14, s. of 2002, 15 November 2002).
3. Effects of Merger or Consolidation (Sec. 80; Associated Bank v. Court of Appeals, 291 SCRA 511
[1998])
Global is bound by the terms of the contract entered into by its predecessor-in-interest, Asian Bank.
Due to Globals merger with Asian Bank and because it is the surviving corporation, it is as if it was
the one which entered into contract with Surecomp. In the merger of two existing corporation, one of
the corporations survives and continues the business, while the other is dissolved, and all its rights,
properties, and liabilities are acquired by the surviving corporation. In the same way, Global also has
105
the right to exercise all defenses, rights, privileges, and counter-claims of every kind and nature which
Asian Bank may have or invoke under the law. Global Business Holdings Inc. v. Surecompsoftware,
B.V., 633 SCRA 94 (2010)
Ordinarily, in the merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are dissolved and all their rights,
properties and liabilities are acquired by the surviving corporation. Poliand Industrial Ltd. V. NDC, 467
SCRA 500 (2005); McLeod v. NLRC, 512 SCRA 222 (2007).
When the procedure for merger/consolidation prescribed under the Corporation Code are not
followed, there can be no merger or consolidation, and corporate separateness between the constituent
corporations remains, and the liabilities of one entity cannot be enforced against another entity. PNB v.
Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
It is settled that in the merger of two existing corporations, one of the corporations survives and
continues the business, while the other is dissolved and all its rights, properties and liabilities are
acquired by the surviving corporation. The surviving corporation therefore has a right to institute a
collection suit on accounts of one of one of the constituent corporations. Babst v. Court of Appeals,
350 SCRA 341 (2001).
The merger does not become effective upon the mere agreement of the constituent corporations
since a merger or consolidation involves fundamental changes in the corporation, as well as in the
rights of stockholders and creditors, there must be an express provision of law authorizing them. The
issuance of the certificate of merger is crucial because not only does it bear out SECs approval but it
also marks the moment when the consequences of a merger take place. Mindanao Savings and Loan
Asso. V. Willkom, 634 SCRA 291 (2010).
C. EFFECTS ON EMPLOYEES OF CORPORATION
1. Assets Only Transfers (Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 [1989])
There is no law requiring that the purchaser of MDIIs assets should absorb its employees . . . the
most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer]
to give preference to the qualified separated employees of MDII in the filling up of vacancies in the
facilities. MDII Supervisors & Confidential Employees Asso. v. Pres. Assistance on Legal Affairs, 79
SCRA 40.
2. Business-Enterprise Transfers (Central Azucarera del Danao v. CA, 137 SCRA 295 [1985];
Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999).122
Furthermore, under the principle of absorption, a bona fide buyer or transferee of all, or
substantially all, the properties of the seller or transferor is not obliged to absorb the latters employees.
The most that the purchasing company may do, for reasons of public policy and social justice, is to
give preference of reemployment to the selling companys qualified separated employees, who in its
judgment are necessary to the continued operation of the business establishment. Barayoga v. Asset
Privation Trust, 473 SCRA 690 (2005), citing Manlimos v. NLRC, The New Valley Rimes Press v.
NLRC.
Where a corporation is closed for alleged losses and its equipment are transferred to another
company which engaged in the same operations, the separate juridical personality of the latter can be
pierced to make it liable for the labor claims of the employees of the closed company. National
Federation of Labor Union v. Ople, 143 SCRA 124 (1986).
In the case of a transfer of all or substantially all of the assets of a corporation (i.e., business
enterprise transfers), the liabilities of the previous owners to its employees are not enforceable against
the buyer or transferee, unless (a) the latter unequivocally assumes them; or (b) the sale or transfer was
made in bad faith. Barayoga v. Asset Privatization Trust, 473 SCRA 690 (2005).
122Yu v. NLRC, 245 SCRA 134 [1995]; Sunio v. NLRC, 127 SCRA 390 [1984]; San Felipe Neri School of Mandaluyong, Inc. v.
NLRC, 201 SCRA 478 (1991).
106
Where the change of ownership is done in bad faith, or is used to defeat the rights of labor, the
successor-employer is deemed to have absorbed the employees and is held liable for the transgressions
of his or her precedessor. Peafrancia Tours and Travel Transport v. Sarmiento, 634 SCRA 279 (2010).
3. Equity Transfers: Pepsi Cola Distributors v. NLRC, 247 SCRA 386 (1995); Manlimos v. NLRC,
242 SCRA 145 (1995).123
4. Mergers and Consolidations (Filipinas Port Services v. NLRC, 177 SCRA 203 [1989]; Filipinas
Port Services v. NLRC, 200 SCRA 773 [1991]; National Union Bank Employees v. Lazaro, 156 SCRA
123 [1988]); First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993).
It is more in keeping with the dictates of social justice and the State policy of according full
protection to labor to deem employment contracts as automatically assumed by the surviving
corporation in a merger, even in the absence of an express stipulation in the articles of merger or the
merger plan. By upholding the automatic assumption of the nonsurviving corporations existing
employment contracts by the surviving corporation in a merger, the Court strengthens judicial
protection of the right to security of tenure of employees affected by a merger and avoids confusion
regarding the status of their various benefits. Bank of P.I. v. BPI employees Union-Davao ChapterFederation of Unions in BPI Unibank, 658 SCRA 828 (2011).
5. Spin-Offs (SMC Employees Union-PTGWO v. Confessor, 262 SCRA 81 [1996]).
XV. xREHABILITATION AND INSOLVENCY
XVI. CORPORATE DISSOLUTION AND LIQUIDATION
1. No Vested Rights to Corporate Fiction: No person who assets a claim against a juridical entity can
claim any constitutional right to the perpetual existence of such entity. Gonzales v. SRA, 174 SCRA 377
(1989).
2. Voluntary Dissolution (Sec. 117)
(a) No Creditors Affected (Sec. 118)
(b) There Are Creditors Affected (Secs. 119 and 122).
When a corporation is contemplating dissolution, it must submit tax return on the income earned by
it from the beginning of the year up to the date of its dissolution and pay the corresponding tax due.
BPI v. Court of Appeals, 363 SCRA 840 (2001).
(c) Shortening of Corporate Term (Sec. 120)
Where a corporation is contemplating dissolving itself, it is required to submit tax return on the
income earned by it from the beginning of the year up to the date of its dissolution and pay the
corresponding tax due. Bank of P.I. v. Court of Appeals, 363 SCRA 840 (2001).
3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A; Sec. 2, Rule 66, Rules of Court)
(a) Quo Warranto
Dissolution is a serious remedy granted by the courts only in extreme cases and only to ensure that
there is an avoidance of prejudice to the public. Even when the prejudice were public in nature, the
remedy is to enjoin or correct the mistake; and only when it cannot be remedied anymore that
123Robledo v. NLRC, 238 SCRA 52 [1994]; Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); DBP v. NLRC, 186 SCRA
841 [1990]; Coral v. NLRC, 258 SCRA 704 [1996]; Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 [1995]).
107
dissolution should be imposed. Republic v. Bisaya Land Transportation Co., 81 SCRA 9 (1978). Policy
followed in Government v. El Hogar Filipino, 50 Phil. 399 (1927).
In Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 (1967), dissolution was imposed
on a corporation that was engaging in banking activities without a license from the Central Bank, and
risking the savings of the public.
(b) Expiration of Term
Where the corporate life of a corporation as stated in its articles of incorporation expired, without a
valid extension having been effected, it was deemed dissolved by such expiration without need of
further action on the part of the corporation. Majority Stockholders of Ruby Industrial Corp. v. Lim,
650 SCRA 461 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2010 ed.), p. 841.
(c) Non-user of Charter and Continuous Inoperation (Sec. 22)
Organize involves the election of officers, providing for the subscription and payment of the
capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity
with the capacity to transact the legitimate business for which the corporation was created.
Organization relates merely to the systematization and orderly arrangement of the internal and
managerial affairs and organs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil.
711.
The failure to file the by-laws does not automatically operate to dissolve a corporation but is now
considered only a ground for such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988).
(d) Demand of Minority Stockholders for Dissolution.
When it comes to close or family corporations, there was recognition under the Corporation Law of
a equitable right to demand dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93
Phil. 404 (1953).
Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy,
especially when the situation can be remedied such as giving minority stockholders a veto power to
any decision. Chase v. Buencamino, 136 SCRA 365 (1985).
4. Legal Effects of Dissolution
The termination of the life of a juridical entity does not by itself cause the extinction or diminution
of the rights and liability of such entity, since it is allowed to continue as a juridical entity for 3 years
for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property, and to distribute its assets. Republic v. Tancinco, 394
SCRA 386 (2002).
A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity.
For dissolution to be effective [t]he requirements mandated by the Corporation Code should have
been strictly complied with. Vesagas v. Court of Appeals, 371 SCRA 509 (2002).
A corporation cannot extend its life by amendment of its articles of incorporation effected during
the three-year statutory period for liquidation when its original term of existence had already expired,
as the same would constitute new business. Alhambra Cigar & Cigarette Manufacturing Company,
Inc. v. SEC, 24 SCRA 269 (1968).
When the period of corporate life expires, the corporation ceases to be a body corporate for the
purpose of continuing the business for which it was organized. PNB v. Court of First Instance of Rizal,
Pasig, Br. XXI, 209 SCRA 294 (1992).
5. Meaning of Liquidation
108
Following the voluntary or involuntary dissolution of a corporation, liquidation, or the settlement of
the affairs of the corporation, consists of adjusting the debts and claims, that is, of collecting all that is
due to the corporation, the settlement and adjustment of claims against it and the payment of its just
debts. Yu v. Yukayguan, 589 SCRA 588 (2009).124
Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is
the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the
process of reducing assets to cash, discharging liabilities and dividing surplus or loss. PVB Employees
Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001).
A derivative suit is fundamentally distinct and independent from liquidation proceedingsthey are
neither part of each other nor the necessary consequence of the other. There is therefore no basis from
one action to result in the other. Yu v. Yukayguan, 589 SCRA 588 (2009).
6. Methods of Liquidation (Sec. 122)
(a) The Board of Trustees Pursuing Liquidation; Subject to the 3-year Period
Since the old Corporation Law did not contain any provision that allowed any action after the 3year period for liquidation, then the old rule was that all actions for or against the corporation as abated
after the expiration thereof. National Abaca Corp. v. Pore, 2 SCRA 989 (1961).
When the liquidation of a dissolved corporation has been placed in the hands of a receiver o
assignee, the 3-year period prescribed by law for liquidation cannot be made to apply, and that the
receiver or trustee may institute all actions leading to the liquidation of the assets of the corporation
even after the expiration of said period. Sumera v. Valencia, 67 Phil. 721 (1939).
A corporation that has reached the stage of dissolution is no longer qualified to receive a secondary
franchise. Buenaflor v. Camarines Industry, 108 Phil. 472 [1960]).
There is nothing in the Corporation Law provisions which bars an action for the recovery of the
debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. It
immaterial that the present action was filed after the expiration of the three years . . . for at the very
least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite
the fact that actual liquidation has not terminated and the one in charge thereof is still holding the
assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment
aforementioned, made within the three years, definitely established the Government as a creditor of the
corporation for whom the liquidator is supposed to hold assets of the corporation. Republic v.
Marsman Dev. Co., 44 SCRA 418 (1972). Reiterated under the Corporation Code in Paramount
Insurance Corp. v. A.C. Ordonez Corp., 561 SCRA 327 (2008).
(b) Liquidation Pursued Thru a Court-Appointed Receiver
There can be no doubt that under Secs. 77 and 78 of Corporation Law, the Legislature intended to
let the shareholders have the control of the assets of the corporation upon dissolution in winding up its
affairs. The normal method of procedure is for the directors and executive officers to have charge of
the winding up operations, though there is the alternative method of assigning the property of the
corporation to the trustees for the benefit of its creditors and shareholders. While the appointment of a
receiver rests within the sound judicial discretion of the court, such discretion must, however, always
be exercised with caution and governed by legal and equitable principles, the violation of which will
amount to its abuse, and in making such appointment the court should take into consideration all the
facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the
corporate business. China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933).
(c) Liquidation Pursued Thru a Trustee
When upon dissolution the affairs of the corporation were placed in a Board of Liquidators, they
were duly constituted as trustees for the liquidation of the corporate affairs, and there being no term
124Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
109
placed on the Board, their power to pursue liquidation did not terminate upon the expiration of the 3year period. Board of Liquidators v. Kalaw, 20 SCRA 987 (1967)
For purposes of dissolution and liquidation of a corporation, the term trustee should include
counsel of record who may be deem to have authority to pursue pending litigation after the expiration
of the 3-year liquidation period.Gelano v. Court of Appeals, 103 SCRA 90 (1981).
If the 3-year extended life has expired without a trustee or receiver having been designated, the
Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so
continue as trustees to complete liquidation; and in the absence of a Board, those having pecuniary
interest in the assets, including the shareholders and the creditors of the corporation, acting for and in
its behalf, might make proper representations with the appropriate body for working out a final
settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717 (1995).125
Under Section 122 of the Corporation Code, a corporation whose corporate existence is terminated
in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it and to enable it to settle and close its affairs,
culminating in the disposition and distribution of its remaining assets. If the three-year extended life
has expired without a trustee or receiver having been expressly designated by the corporation within
that period, the board of directors (or trustee) itself, may be permitted to continue as trustees by legal
implication to complete the corporation liquidation. Pepsi-Cola Products Phils., Inc. v. Court of
Appeals, 443 SCRA 571 (2004).
7. Who Are Liable After Dissolution and Winding-Up?
Even after the expiration of the e-year period, corporate creditors can still pursue their claims
against corporate assets against the officers or stockholders who have taken over the properties of the
corporation. Tan Tiong Bio v. Commissioner, 100 Phil. 86 (1956).126
Although a corporate officer is not liable for corporate obligations, such as claims for wages,
however, when such corporate officer ceases corporate property to apply to his own claims against the
corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that
certain creditors had similarly valid claims, he took advantage of his position as general manager and
applied the corporation's assets in payment exclusively to his own claims. De Guzman v. NLRC, 211
SCRA 723 (1992).
A trustee appointed for purposes of liquidation does not become personally liable for the
outstanding obligations of the corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
7. Reincorporation: Chung Ka Bio v. IAC, 163 SCRA 534 (1988).
XVII. CLOSE CORPORATIONS
1. Definition (Sec. 96)
The concept of a close corporation organized for the purpose of running a family business or
managing family property has formed the backbone of Philippine commerce and industry. Through this
device, Filipino families have been able to turn their humble, hard-earned life savings into going
concerns capable of providing them and their families with a modicum of material comfort and
financial security as a reward for years of hard work. A family corporation should serve as a reward for
years of hard work. A family corporation should serve as a rallying point for family unity and
prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the
concepts of mutual aid and security that are the original driving forces behind the formation of family
corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of
family corporate disputes. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
(a) De Jure Close Corporations: Articles of Incorporation Requirements (Sec. 97)
125Reiterated in Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002).
126Reiterated in Republic v. Marsman Dev. Co.,, 44 SCRA 418 (1972).
110
(i) Restriction on Transfer of Shares (Secs. 98 and 99)
(ii) Pre-Emptive Rights (Sec. 102)
(iii) Amendment (Sec. 103)
(b) De Facto Close Corporation:
Manuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678 (1993).
San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998).
2. Agreements by Stockholder (Sec. 100)
3. No Necessity of Board (Sec. 101; Sergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]).
4. Deadlocks (Sec. 104)
5. Withdrawal and Dissolution (Sec. 105)
Even prior to the passage of Corporation Code which recognized close corporations, the Supreme
Court had on limited instances recognized the common law rights of minority stockholders to seek
dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
XVIII. NON-STOCK CORPORATIONS AND FOUNDATIONS
1. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94[5])
It is not inconsistent with the nature of a nonstick corporation for its to incidentally earn profits in
pursuing its eleemosynary purpose. What is prohibited is to operate the company for profit and/or
distribute any profits so earned to its officers and members. Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, 5 SCRA 321 (1962); Collector of Internal Revenue v. University of Visayas, 1
SCRA 669 (1961).
A non-stock corporation may only be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not
engage in undertakings such as the investment business where profit is the main or underlying purpose.
Although the non-stock corporation may obtain profits as an incident to its operation such profits are
not to be distributed among its members but must be used for the furtherance of its purposes. People v.
Menil, G.R. 115054-66, 12 September 1999 [unrep.])
The incurring of profit or losses does not determine whether an activity is for profit or non-profit,
and the courts will consider whether dividends have been declared or its members or that is property,
effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out
the objectives of the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
In a mutual life insurance corporation, organized as a non-stock nonprofit corporation, the so-called
dividend that is received by members-policyholders is not a portion of profits set aside for
distribution to the stockholders in proportion to their subscription to the capital stock of a corporation.
One, a mutual company has no capital stock to which subscription is necessary; there are no
stockholders to speak of, but only members. And, two, the amount they receive does not partake of the
nature of a profit or income. The quasi-appearance of profit will not change its character; it remains an
overpayment, a benefit to which the member-policyholder is equitably entitled. Republic v. Sunlife
Assurance Company of Canada, 473 SCRA 129 (2005).
2. Non-Applicability of the Nationalization Laws
A foreigner may a member or an officer of a non-stock corporation. Save for the position of the
Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign
citizens becoming officers in corporations engaged in business does not apply to the activities of a nonstock corporation which do not fall within the coverage of a nationalized industry or area of business
reserved by law exclusively to Filipino citizens. (SEC Opinion No. 12, series of 2002, 21 November
2002).
111
3. Delinquency of Membership Dues
Sec. 69 of the Code refers specifically to unpaid subscriptions to capital stock, the sale of which is
governed by Sec. 68. Indeed, there are fundamental differences that defy equivalence or even an
analogy between sale of delinquent stock under Section 68 and sale that occurred in this case.
Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).
Neither Article 1146 or Article 1149 is applicable but Article 1140 of the Civil Code which provides
that an action to recover movables shall prescribe in eight (8) years. Calatagan Golf Club, Inc. v.
Clemente, Jr., 585 SCRA 300 (2009).
The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21 of the Civil
Code under the Chapter on Human Relations; The obligation of a corporation to treat every person
honestly and in good faith extends even to its shareholders or members, even if the latter find
themselves contractually bound to perform certain obligations to the corporation. Calatagan Golf
Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).
A non-stock corporation may seize and dispose of the membership share of a fully-paid member on
account of its unpaid debts to the corporation (i.e., unpaid monthly dues) when it is authorized to do so
under the corporate by-laws (not by the articles of incorporation), and in spite of the fact that Sec. 67
of Corporation Code on delinquency sale pertains to payment of shares subscription. The right of a
non-stock corporation to expel a member through the forfeiture of such members share may be
established in the by-laws alone, and need not be embodied in the articles of incorporation. This is
authorized under Sec. 91 of Corporation Code providing that membership shall be terminated in the
manner and for causes provided in the articles of incorporation or the by-laws of a non-stock
corporation. Valley Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009).
4. Board of Trustees and Corporate Officers
The second paragraph of Section 108 of the Corporation Code, although setting the term of the
members of the Board of Trustees at five years, contains a proviso expressly subjecting the duration to
what is otherwise provided in the articles of incorporation or by-laws of the educational corporation
that contrary provision control on the term of office. Barayuga v. Advestist University of the
Philippines, 655 SCRA 640 (2011).
A trustee occupying his office in a hold-over capacity could be removed at any time, without cause,
upon the election or appointment of his successor. Barayuga v. Advestist University of the Philippines,
655 SCRA 640 (2011).
5. Conversion of Non-Stock Corporation to Stock Corporation
The conversion of a non-stock educational institution into a stock corporation is not legally feasible,
as it violates Sec. 87 of Corporation Code that no part of the income of a non-stock corporation may be
distributable as dividends to its members, trustees or officers. Thus, the Commission has previously
ruled that a non-stock corporation cannot be converted into a stock corporation by a mere amendment
of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-stock
corporation be dissolved first under any of the methods specified Title XIV of the Corporation Code.
Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary
gains to themselves. (SEC Opinion dated 24 February 2003; SEC Opinion dated 10 December 1992).
5. What Is a Foundation? (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Rev. Reg. No. 2; BIR-NEDA
Regulations No. 1-81, as amended)
Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity may, in the absence of
compliance with such requirements, still show that it falls under the provisions of Sec. of NIRC.
Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956).
6. Dissolution: Right of Members to Proportionate Share of Remaining Assets (Secs. 94 and 95; Sec.
34(H)(2)(c), 1997 NIRC).
In the event of dissolution of a non-stock corporation, its assets shall be distributed in accordance
with the rules as provided for under Secs. 94 and 95 of Corporation Code. Unless, it is so provided in
112
the Articles of Incorporation or By-Laws, the members are not entitled to any beneficial or vested
interest over the assets of the non-stock corporation. In other words, non-stock, non-profit corporations
hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter.
(SEC Opinion dated 24 February 2003; SEC Opinion dated 13 May 1992).
XIX. FOREIGN CORPORATIONS
1. Definition (Sec. 123)
A foreign corporation is one which owes its existence to the laws of another state, and generally,
has no legal existence within the state in which it is foreign. Avon Insurance PLC v. Court of Appeals,
278 SCRA 312 (1997)
A fundamental rule of international jurisdiction is that no state can by its laws, and no court which
is only a creature of the state, can by its judgments and decrees, directly bind or affect property or
persons beyond the limits of that state. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
(a) Concept of residence: State Investment House v. Citibank, 203 SCRA 9 (1991).
2. License to Do Business in the Philippines
(a) Rationale for Requiring License: Marshall-Wells v. Elser, 46 Phil. 71 (1924).
The purpose of the law in requiring that foreign corporations doing business in the country be
licensed to do so, it to subject the foreign corporations doing business in the Philippines to the
jurisdiction of the courts. Otherwise, a foreign corporation illegally doing business here because of its
refusal or neglect to obtain the required license and authority to do business may successfully though
unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of
the local courts. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
The same danger does not exist among foreign corporations that are indubitably not doing business
in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason
for it to be subject to the States regulation. As we observed, in so far as the State is concerned, such
foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the courts
jurisdiction would violate the essence of sovereignty. Avon Insurance PLC v. CA, 278 SCRA 312
(1997).
(b) Application for License (Secs. 124 and 125; Art. 48, Omnibus Investment Code)
(c) Resident Agent (Sec. 127 and 128)
Being a resident agent of a foreign corporation does not mean that he is authorized to execute the
requisite certification against forum shoppingwhile a resident agent may be aware of actions filed
against his principal (a foreign corporation doing business in the Philippines), he may not be aware of
actions initiated by its principal, whether in the Philippines against a domestic corporation or private
individual, or in the country where such corporation was organized and registered, against a Philippine
registered corporation or a Filipino citizen. Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA
147 (2005).
A complaint filed by a foreign corporation is fatally defective for failing to allege its duly
authorized representative or resident agent in Philippine jurisdiction. New York Marine Managers, Inv.
c. Court of Appeals, 249 SCRA 416 (1995).
When a corporation has designated a person to receive service of summon pursuant to the
Corporation Code, the designation is exclusive and service of summons on any other person is
inefficacious. H.B. Zachry Company Intl v. CA, 232 SCRA 329 (1994)
(d) Issuance of License (Sec. 126; Art. 49, Omnibus Investment Code)
A foreign corporation licensed to do business should be subjected to no harsher rules that is required
of domestic corporation and should not generally be subject to attachment on the pretense that such
113
foreign corporation is not residing in the Philippines. Claude Neon Lights v. Phil. Advertising Corp., 57
Phil. 607 (1932).
(e) Amendment of License (Sec. 131)
3. Concepts of Doing Business in the Philippines; Effects of Not Obtaining the Licesnse
(a) Statutory Concept of Doing Business (Art. 44, Executive Order No. 226, Omnibus Investment
Code; Sec. 3(d), R.A. No. 7042, Foreign Investment Act of 1991).
Under Sec. 123 of the Corporation Code, a foreign corporation must first obtain a license and a
certificate from the appropriate government agency before it can transact business in the Philippines.
Where a foreign corporation does business in the Philippines without the proper license, it cannot
maintain any action or proceeding before Philippine courts as provided in Section 133 of the
Corporation Code. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).
The Foreign Investments Act of 1991, repealed Articles 44-56 of Book II of the Omnibus
Investments Code of 1987, enumerated in Sec. 3(d) not only the acts or activities which constitute
doing business but also those activities which are not deemed doing business. Cargill, Inc. v. Intra
Strata Assurance Corp., 615 SCRA 304 (2010).
An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine
courts; an unlicensed foreign corporation not doing business in the Philippines can sue before
Philippine courts. B. Van Zuiden Bros., Ltd v. GTVL Manufacturing Industries, Inc., 523 SCRA 233
(2007).
A foreign corporation without a license is not ipso facto incapacitated from bringing an action in
Philippine courts. A license is necessary only if a foreign corporation is transacting or doing
business in the country. Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Tech., 427
SCRA 593 (2004).
(b) Jurisprudential Concepts of Doing Business
Doing Business implies a continuity of commercial dealings and arrangements and the
performance of acts or works or the exercise of some of the functions normally incident to the purpose
or object of its organization. Mentholatum v. Mangaliman, 72 Phil. 525 (1941).
Transactions Seeking Profit Although each case must be judged in light of its attendant
circumstances, jurisprudence has evolved several guiding principles for the application of these tests.
By and large, to constitute doing business, the activity to be undertaken in the Philippines is one that
is for profit-making. Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology
Phil. Corp., 427 SCRA 593 (2004), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 596 et seq.
(1998 ed.); Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010), citing C.VILLANUEVA,
PHILIPPINE CORPORATE LAW 801-802 (2001).
Participating in a bidding process constitutes doing business because it shows the foreign
corporations intention to engage in business in the Philippines. In this regard, it is the performance by
a foreign corporation of the acts for which it was created, regardless of volume of business, that
determines whether a foreign corporation needs a license or not. European Resources and
Technologies, Inc. v. Ingenieuburo Birkhanh + Nolte, 435 SCRA 246 (2004).
On Insurance Business A foreign corporation with a settling agent in the Philippines which issues
twelve marine policies covering different shipments to the Philippines is doing business in the
Philippines. General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding policies is doing
business in the Philippines. Manufacturing Life Ins. v. Meer, 89 Phil. 351 (1951).
Air Carriers Off-line air carriers having general sales agents in the Philippines are engaged in or
doing business in the Philippines and that their income from sales of passage documents here is income
114
from within the Philippines. In other words, as long as the uplifts of passengers and cargo occur to or
from the Philippines, income is included in Gross Philippine Billings (GPB). South African Airways v.
Commissioner of Internal Revenue, 612 SCRA 665 (2010).
Single Transaction Where a single act or transaction, however, is not merely incidental or casual
but indicates the foreign corporation's intention to do other business in the Philippines, said single act
or transaction constitutes doing business. Far East Int'l. v. Nankai Kogyo, 6 SCRA 725 (1962).
It is not really the fact that there is only a single act done that is material for determining whether a
corporation is engaged in business in the Philippines, since other circumstances must be considered.
Where a single act or transaction of a foreign corporation is not merely incidental or casual but is of
such character as distinctly to indicate a purpose on the part of the foreign corporation to do other
business in the state, such act will be considered as constituting business. Litton Mills, Inc. v. Court of
Appeals, 256 SCRA 696 (1996).
Territoriality Rule To be doing or transaction business in the Philippines for purposes of
Section 133 of the Corporation Code, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine territory on a
continuing basis in its own name and for its own account. B. Van Zuiden Bros., Ltd v. GTVL
Manufacturing Industries, Inc., 523 SCRA 233 (2007), citing VILLANUEVA, PHILIPPINE CORPORATE
LAW 813 (2001).
Contract Test Pacific Vegetable Oil Corp. v. Singson, Advanced Decision Supreme Court,
April 1955 Vol., p. 100-A; Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635
(1977).127
Acts of Solicitations Solicitation of business contracts constitutes doing business in the
Philippines. Marubeni Nederland B.V. v. Tensuan, 190 SCRA 105.
Transactions with Agents and Brokers Granger Associates v. Microwave Systems, Inc., 189
SCRA 631 (1990).128
(c) Different Rules on Trademark and Tradenames. Western Equipment & Supply Co. v. Reyes,
51 Phil. 115 (1927).129
(d) Doctrine on Unrelated or Isolated Transactions. Eastboard Navigation, Ltd. v. Juan Ysmael and
Co., Inc., 102 Phil. 1 (1957);Antam Consolidated v. CA, 143 SCRA 288 (1986).
Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing
or carrying on of business. Typical examples of these are the making of a single contract, sale, sale
with the taking of a note and mortgage in the state to secure payment thereof, purchase, or note, or the
mere commission of a tort. In these instances, there is no purpose to do any other business within the
country. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).
Sec. 133 of the Corporation is clear in depriving foreign corporations which are doing business in
the Philippines without a license from bringing or maintaining actions before, or intervening in
Philippines courts. The law does not prohibit foreign corporations from performing single acts of
business. A foreign corporation needs no license to sue before Philippine courts on an isolated
transactions. Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 (2004).
127Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990).

128La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984);
Schmid & Oberly v. RJL, 166 SCRA 493 [1988]; Wang
Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1974).
129Leviton Industries v. Salvador, 114 SCRA 420 (1982); Converse Rubber v. Universal Rubber, 147 SCRA 154 (1987);
Converse Rubber Corp. v. Jacinto Rubber & Plastic Co., 97 SCRA 158 (1980); Universal Rubber Products, Inc. v. CA, 130 SCRA
104 (1984); Puma Sportschunhfabriken Rudolf Dassler, K.G. v. IAC, 158 SCRA 233 (1988); Philips Export B.V. v. CA, 206 SCRA
457 (1992).
115
Even a series of transactions which are occasional, incidental and casualnot of a character to
indicate a purpose to engage in businessdo not constitute the doing or engaging in business as
contemplated by law. Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 (2004).
Case-Law Examples of Isolated Transactions:
Collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei Union v. La
Campaia Transatlantica, 8 Phil. 766 (1907).
Loss of goods bound for Hongkong but erroneously discharged in Manila. The Swedish East
Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 (1968).
Infringement of trade name. General Garments Corp. v. Director of Patens, 41 SCRA 50
(1971); Universal Rubber Products, Inc. v. Court of Appeals, 130 SCRA 104 (1988).
Recovery of damages sustained by cargo shipped to the Philippines. Bulakhidas v. Navarro,
142 SCRA 1 (1986).
Sale construction equipment to the Government with no intent of continuity of transaction.
Gonzales v. Raquiza, 180 SCRA 254 (1989).
Recovery on a Hongkong judgment against a Manila resident. Hang Lung Bak v. Saulog, 201
SCRA 137 (1991).
Appointment of local lawyer by foreign movie companies who have registered intellectual
property rights over their movies in the Philippines, to protect such rights for piracy: We
fail to see how exercising one's legal and property rights and taking steps for the vigilant
protection of said rights, particularly the appointment of an attorney-in-fact, can be deemed
by and of themselves to be doing business here. Columbia Pictures Inc. v. Court of Appeals,
261 SCRA 144 (1996).
4. Effects of Failure to Obtain License:
(a) On the Contract Entered Into: Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA
424 (1983).
Sec. 69 of old Corporation Law was intended to subject the foreign corporation doing business in
the Philippines to the jurisdiction of our courts and not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring domicile for the purpose of business without
taking the necessary steps to render it amenable to suit in the local courts. Marshall-Wells Co., v.
Elser, 46 Phil. 70 (1924).
(b) Standing to Sue (Sec. 133; Marshall-Wells v. Elser, 46 Phil. 71 [1924])
Summary of Doing Business: The principles regarding the right of a foreign corporation to bring
suit in Philippine courts may thus be condensed in four statements: (1) if a foreign corporation does
business in the Philippines without a license, it cannot sue before Philippine courts; (2) if a foreign
corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts
on an isolated transaction or on a cause of action entirely independent of any business transaction; (3)
if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity
which has contracted with said corporation may be estopped from challenging the foreign corporations
corporate personality in a suit brought before the Philippine courts; and (4) if a foreign corporation
does business in the Philippines with the required license, it can sue before Philippine courts on any
transaction. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).130
Need to Allege: The fact that a foreign corporation is not doing business in the Philippines must be
alleged if a foreign corporation desires to sue in Philippines courts under the isolated transactions
rule. Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966).131
130Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004).
131This overturned the previous doctrine in Marshall-Wells (as well as in In re Liquidation of the Mercantile Bank of China, etc.,
65 Phil. 385 (1938), that the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a
matter of affirmative defense. Also Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).
116
(c) Criminal Liability under Sec. 144: Home Insurance Co. v. Eastern Shipping Lines, 123
SCRA 424 (1983).
(d) Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business in
the Philippines without license cannot maintain suit against the foreign corporation just as the
foreign corporation cannot maintain suit, under the principle of pari delicto. Top-Weld Mfg. v.
ECED, 119 SCRA 118 (1985).
BUT SEE:Communication Materials v. Court of Appeals, 260 SCRA 673 (1996).
(e) Estoppel Doctrine: A foreign corporation doing business in the Philippines may sue in Philippine
courts although it is without license to do business here against a Philippine citizen who had
contracted with and been benefited by said corporation and knew it to be without the necessary
license to do business, under the principle of estoppel. Merrill Lynch Futures, Inc. v. CA, 211
SCRA 824 (1992).132
A foreign corporation not licensed to do business in the Philippines is not absolutely
incapacitated from filing a suit in local court. Aboitiz Shipping Corp. v. Insurance Company of
North America, 561 SCRA 262 (2008).
(f) Proper Doctrine: Eriks Ltd. v. Court of Appeals, 267 SCRA 567 (1997).
5. Suits Against Foreign Corporations:
(a) Jurisdiction Over Foreign Corporations (Sec. 14, Rule 14, Rules of Court; General Corp. of
the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).133
For purpose serving summons a foreign corporation in accordance with Rule 14, Section 14, it is
sufficient that it be alleged in the complaint that it is doing business in the Philippines. Hahn v. Court
When it is shown that a foreign corporation is doing business in the Philippines, summons may be
served on (a) its resident agent designated in accordance with law; (b) if there is no resident agent, the
government official designated by law to that effect; or (c) any of its officers or agent within the
Philippines. The mere allegation in the complaint that a local company is the agent of the foreign
corporation is not sufficient to allow proper service to such alleged agent; it is necessary that there
must be specific allegations that establishes the connection between the principal foreign corporation
and its alleged agent with respect to the transaction in question. French Oil Mills Machinery Co.v. CA,
295 SCRA 462 (1998).
(b) Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the
tribunals jurisdiction over its person is not equivalent to service of summons, nor does it constitute
an acquiescence to the courts jurisdiction. Avon Insurance PLC v. Court of Appeals, 278 SCRA
312, 327 (1997).
(c) Odd Doctrine: Facilities Management Corp. v. De la Osa, 89 SCRA 131 (1979).134
CONTRA: The sine qua non requirement for service of summons and other legal processes or any
such agent or representative is that the foreign corporation is doing business in the
Philippines. Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1988); Signetics
Corp. v. CA, 225 SCRA 737 (1993).
BUT NOW SEE: Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
132Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon
Technology Phil. Corp., 427 SCRA 593 (2004); Global Business Holdings, Inc. v. Surecomp Software, B.V., 633 SCRA 470 (2010).
133Johnlo Trading Co., v Flores, 88 Phil. 741 (1951); Johnlo Trading Co. v. Zulueta, 88 Phil. 750 (1951); Pacific Micronisian
Line, Inc. v. Del rosario, 96 Phil. 23 (1954); Far East Intl Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962).
134FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Intl v. NLRC, 178 SCRA 569 (1989); Wang Laboratories, Inc. v.
Mendoza, 156 SCRA 44 (1987).
117
(d) Stipulation on Venue: When the contract sued upon has a venue clause within the Philippines, it is
deemed a confirmation by the foreign corporation, even though not doing business in the
Philippines, to be sued in local courts. Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).
6. Laws Applicable to Foreign Corps. (Sec. 129; Grey v. Insular Lumber Co., 67 Phil. 139 (1938)
7. Amendment of Articles of Incorporation (Sec. 130)
8. Merger and Consolidation (Sec. 132; Art. 51, Omnibus Code)
9. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investment Code)
10. Withdrawal of Foreign Corporation (Sec. 136)
XX. PENALTY PROVISIONS OF THE CODE
1.
2.
3.
4.
5.
Penalty Clause for Violations of the Provisions of the Code (Sec. 144)
Cross-reference (Sec. 27).
Specific application (Sec. 74).
Strict Principles in Criminal Law; the issue of malice.
Historical Background of Sec. 144 (Sec. 190 1/7 of the Corporation Law)
Sec. 190 was not intended to make every casual violation of one of the Corporation Law provisions
ground for involuntary dissolution of the corporation and that the court was entitled to exercise
discretion in such matters. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
Penalties imposed in Sec. 190(A) for the violation of the prohibition in question are of such nature
that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these
proceedings can be maintained only by the Attorney-General in representation of the Government.
Harden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).
6. Violation of Sec. 133 by Foreign Corporations

Sec. 133, which unlike its counterpart Sec. 69 of Corporation Law provided specifically for penal
sanctions for foreign corporations engaging in business in the Philippines without obtaining the
requisite license, should be deemed to have a penal sanction by virtue of Section 144 of the
Corporation Code. Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
XXI. MISCELLANEOUS
1.
2.
3.
4.
SEC Power and Supervision (Secs. 108 and 143; PD 902-A)

Special Corporations (Sec. 4)
New Requirements on Existing Corporations (Sec. 148).
Applicability of Other Provision of old Corporation Law (Secs. 145 and 146).
oOo
30 OCTOBER 2012\SCRA 620 - 669
118
ATENEO LAW SCHOOL

TRANSPORTATION LAW
I. INTRODUCTION
A.
PRINCIPAL TRANSPORTATION LAWS AND SCOPE OF APPLICATION

1. Arts. 1732 to 1736, Civil Code of the Philippines (CCP) provisions on common carriers:
Apply ONLY to common carriers, but NOT private carriers (Home Insurance Co. v. American
Steamship Agencies, 23 SCRA 24); hence, presumption of negligence in the event that goods are
lost, destroyed or deteriorate in the custody of the carrier does NOT apply to a private carrier
(National Steel Corp. v. Court of Appeals, 283 SCRA 45)
2. Arts. 347 to 379, 573 to 736, and 806 to 869, Philippine Code of Commerce (PCC)
provisions on commercial contracts for transportation overland and maritime commerce: Apply to
private carriers but could apply to common carriers such as those dealing with bills of lading, loan
on bottomry or respondentia, general or particular average, collision, etc. (National Development
Co. v. Court of Appeals, 164 SCRA 693)
3. Carriage of Goods by Sea Act (COGSA) [Comm. Act No. 65] applies to contracts of
carriage of goods covered by bills of lading or similar documents of title where the cargo is either
exported or imported (overseas trade) [Title II, Sec. 13, COGSA], but if cargo is carried within
the Philippines (inter-island trade), then carriage of goods is subject to PCC provisions on
maritime commerce [Title I, Sec. 5, 2nd par., COGSA]
4. Warsaw Convention (WC) applies to international transportation of persons, baggage or
goods performed by an aircraft gratuitously or for hire (American Airlines v. Court of Appeals,
327 SCRA 482 [2000])
B.
HIERARCHY OF APPLICATION Art. 1766, CCP

1. CCP
2. PCC
3. Special Laws
II. COMMON CARRIERS UNDER CCP

A.
IN GENERAL
1. Definition; Essential Elements Art. 1732: Common carriers are persons, corporations, firms or
associations:
a. Engaged in the business of carrying or transporting passengers or goods or both, by land,
water, or air
i.
Contract of towage not a contract of carriage (Baer, Sr. & Co.s Successors v. La Cia.
Maritima, 6 Phil 215); Travel agency not common carrier (Crisostomo v. Court of
Appeals, 409 SCRA 528); But See customs broker, if obligated to deliver goods to
119
consignee, may be deemed common carrier (A.F. Sanchez Brokerage v. Court of
Appeals, 447 SCRA 427 [2005])
ii. No distinction if principal business (regular or scheduled basis) or ancillary/sideline
(occasional, episodic or unscheduled basis), still common carrier (De Guzman v. Court of
Appeals, 168 SCRA 612)
iii. If charter party, private carrier (Home Insurance Co. v. American Steamship Agencies,
Inc., 23 SCRA 24), but distinguish between: (a) Time or voyage charter, still a common
carrier because shipowner remains in control; and (b) Bareboat or demise charter, private
carrier because charter is in control (Planters Products, Inc. v. Court of Appeals, 226
SCRA 476)
iv. Lack of Certificate of Public Convenience immaterial to determine if common carrier
(Loadstar Shipping v. Court of Appeals, 315 SCRA 339 [1999])
b. For compensation
c. Offering their services to the public
i.
If special contract for carriage of passengers and freight, has not held himself out to
public, then private carrier (United States v. Tan Piaco, 40 Phil. 853)
ii. Need not be engaged in business of public transportation (schoolchildren sufficient) for
provisions of common carriers to apply (Fabre, Jr. v. Court of Appeals, 259 SCRA 426)
iii. No distinction between general public and narrow segment of general population
(Bascos v. Court of Appeals, 221 SCRA 318), limited clientele (e.g. petroleum products)
still a common carrier (First Philippine Industrial Corporation v. Court of Appeals. 300
SCRA 661), not quantity or extent (Asia Lighterage and Shipping, Inc. v. Court of
Appeals, 409 SCRA 528)
2. Common Carrier vs. Private Carrier: Importance of Distinction
a. Law applicable to the case;
b. Standard of diligence required of the carrier; and
c. Burden of proof applicable to the case.
3. Nature of Business; Power of State to Regulate Art. 1765: The Public Service Commission
may, on its own motion or on petition of any interested party, after due hearing, cancel the
certificate of public convenience granted to any common carrier that repeatedly fails to comply
with his or its duty to observe extraordinary diligence as prescribed in this Section.
4. Nature and Basis of Liability Art. 1733, Civil Code: Art. 1733. Common carriers, from the
nature of their business and for reasons of public policy, are bound to observe extraordinary
diligence in the vigilance over the goods and for the safety of the passengers transported by them,
according to all the circumstances of each case. Such extraordinary diligence in the vigilance
over the goods is further expressed in Articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the passengers is further set forth in Articles 1755 and
1756.
a. Culpa contractual arising from breach of contract of carriage
i.
Carriage of passengers, e.g., death, injuries sustained, downgrading from business to

economy class, rude behavior by carriers employees, discrimination, denied boarding,
special species of injury
ii. Carriage of goods: delay in delivery, loss of goods, damage to goods, improper stowage,
iii. Principles governing liability (Isaac .v A. L. Ammen Trans. Co., Inc., 101 Phil. 1046)
120
(a) Liability is contractual and arises from breach, i.e., failure to exercise extraordinary
diligence;
(b) If passenger, utmost diligence of very cautious person, with regard to all
circumstances;
(c) Presumed negligent if death or injury, with burden on carrier to show otherwise; and
(d) Carrier not an insurer of all risks against travel.
iv. Moral damages not recoverable in actions for breach of contract of carriage, except in
case of death of passenger by virtue of Art. 1764 in relation to Art. 2206
b. Culpa aquilana arising from tort, e.g. collision
i.
Culpa aquilana and culpa contractual, concentric, just because there is contract, doesnt
mean no extra-contractual liability (Cangco v. Manila Railroad Co., 38 Phil. 767);
Liability for tort may arise even under a contract, where tort is that which breaches the
contract, i.e., altercation on LRT platform (Light Rail Transit Authority v. Navidad, 397
SCRA 75)
ii. If culpa aquilana, contributory negligence; doctrine of last clear chance apply, but not
when passenger sues based on contract of carriage (Phil. Rabbit Bus Lines, Inc. v.
Intermediate Appellate Court, 189 SCRA 159)
c. Culpa criminal arising from crime, e.g., homicide through reckless imprudence (Art. 365,
Revised Penal Code)
5. Classes of Common Carriers Carrying or transporting passengers or goods or both, by land,
water, or air.
B.
COMMON CARRIAGE OF GOODS

1. Applicable Law Art. 1753: The law of the country to which the goods are to be transported
shall govern the liability of the common carrier for their loss, destruction or deterioration.
2. Liability and Presumption of Negligence
a. Diligence Required Art. 1733: Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the vigilance over
the goods x x x transported by them, according to all the circumstances of each case.
b. Liability Art. 1734: Common carriers are responsible for the loss, destruction, or
deterioration of the goods, unless the same is due to any of the causes in Art. 1734.
c. Presumption of Negligence Art. 1735: In all cases other than those mentioned in Art. 1734,
if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at
fault or to have acted negligently, unless they prove that they observed extraordinary diligence
as required in Art. 1733.
i.
Delivery of goods short or in bad order, creates presumption (Ynchausti Steamship Co. v.
Dexter and Unson, 41 Phil. 289; Mirasol v. Robert Dollar Co.,, 53 Phil. 125)
3. Exemption from Liability Art. 1734: Common carriers are responsible for the loss,
destruction, or deterioration of the goods, unless the same is due to any of the following causes
only:
a. Art. 1734(1): Flood, storm, earthquake, lightning, or other natural disaster or calamity;
i.
Art. 1739: In order that the common carrier may be exempted from responsibility, the
natural disaster must have been the proximate and only cause of the loss. However, the
common carrier must exercise due diligence to prevent or minimize loss before, during
121
and after the occurrence of flood, storm or other natural disaster in order that the common
carrier may be exempted from liability for the loss, destruction, or deterioration of the
goods.
(a) Force majeure is exemption from liability, provided no fraud, fault, or negligence on
part of captain or owners of ship (Tan Chiong Sian v. Inchausti & Co., 22 Phil. 153)
(b) If cargo owner transported on deck, borne by owner (G. Martini Ltd. v. Macondray
Co., 39 Phil. 934)
(c) Fire not considered natural disaster (Eastern Shipping Lines, Inc. v. Intermediate
Appellate Court, 150 SCRA 463)
(d) Must be proximate and only cause, so if typhoon coupled with previous damage to
ship, not exempt (Asia Lighterage and Shipping, Inc. v. Court of Appeals, 409
SCRA 340)
ii. Art. 1740: If the common carrier negligently incurs in delay in transporting the goods, a
natural disaster shall not free such carrier from responsibility.
b. Art. 1734(2): Act of the public enemy in war, whether international or civil Art. 1739: The
common carrier must exercise due diligence to prevent or minimize loss before, during and
after the occurrence of the act of the public enemy in order that the common carrier may be
exempted from liability for the loss, destruction, or deterioration of the goods.
c. Art. 1734(3): Act of omission of the shipper or owner of the goods Art. 1741: If the shipper
or owner merely contributed to the loss, destruction or deterioration of the goods, the
proximate cause thereof being the negligence of the common carrier, the latter shall be liable
in damages, which however, shall be equitably reduced.
d. Art. 1734(4): The character of the goods or defects in the packing or in the containers Art.
1742: Even if the loss, destruction, or deterioration of the goods should be caused by the
character of the goods, or the faulty nature of the packing or of the containers, the common
carrier must exercise due diligence to forestall or lessen the loss.
i.
If Bill of Lading so stipulates, then burden of proof that damages caused by negligence of
carrier is upon the shipper (Government of the Philippine Islands v. Ynchausti & Co., 40
Phil. 219)
ii. Carrier not relieved of liability if improper packing of goods is apparent (Southern Lines,
Inc. v. Court of Appeals, 4 SCRA 258)
iii. If bill of lading states in apparent good condition, then carrier estopped (Iron Bulk
Shipping Philippines, Co., Ltd. v. Remington Industrial Sales Corporation, 417 SCRA
229 [2003]), but prima facie presumption only applies to external condition, and not to
that not open to inspection (Philippine Charter Insurance Corporation v. Unknown
Owner of the Vessel M/V National Honor, 463 SCRA 202 [2005])
iv. If shippers Load and Count arrangement, need not be checked and inventoried by
carrier (United States Lines, Inc. v. Commissioner of Customs, 151 SCRA 189 [1987])
e. Art. 1734(5): Order or act of competent public authority Art. 1743: If through the order of
public authority the goods are seized or destroyed, the common carrier is not responsible,
provided said public authority had power to issue the order.
i.
If failed to prove authority of competent public authority to unload cargo, carrier still
liable (Ganzon v. Court of Appeals, 161 SCRA 646)
4. Duration of Extraordinary Responsibility
122
a. Art. 1736: The extraordinary responsibility of the common carrier lasts from the time
goods are unconditionally placed in the possession of, and received by the carrier
transportation until the same are delivered, actually or constructively, by the carrier to
consignee, or to the person who has a right to receive them, without prejudice to
provisions of Art. 1738.
i.
the
for
the
the
Loading of cargo on carriers barge preparatory to loading on ship, contract of carriage

already commenced (Compaia Maritima v. Insurance Company of North America, 12
SCRA 213)
ii. While goods in custody of customs authorities is not yet delivery to consignee, parties
may stipulate deemed delivered because carrier has no control (Lu Do & Lu Ym Corp. v.
Binamira, 101 Phil. 120)
iii. Carrier and arrastre operator have obligation to deliver goods, but not necessarily in all
cases because facts may vary (Eastern Shipping Lines, Inc. v. Court of Appeals, 234
SCRA 79)
iv. Distinguish: On board bill of lading states that goods received on board vessel which is
to carry goods; Received for shipment bills of lading issued when conditions abnormal
and insufficiency of shipping space (Magellan Mftg. Marketing Corp. v. Court of
Appeals, 201 SCRA 102 [1991])
b. Art. 1737: Even when they are temporarily unloaded or stored in transit, unless the shipper or
owner has made use of the right of stoppage in transitu.
c. Art. 1738: Even during the time the goods are stored in a warehouse of the carrier at the place
of destination, until the consignee has been advised of the arrival of the goods and has had
reasonable opportunity thereafter to remove them or otherwise dispose of them.
5. Agreement Limiting Liability
a. As to Diligence Required
i.
Valid Stipulation Art. 1744: A stipulation between the common carrier and the shipper
or owner limiting the liability of the former for the loss, destruction, or deterioration of
the goods to a degree less than extraordinary diligence shall be valid, provided it be:
(a) In writing, signed by the shipper or owner;
(b) Supported by a valuable consideration other than the service rendered by the common
carrier; and
(c) Reasonable, just and not contrary to public policy.
ii. Void Stipulation Art. 1745: Any of the following or similar stipulations shall be
considered unreasonable, unjust and contrary to public policy:
(a) Art. 1745(1): That the goods are transported at the risk of the owner or shipper;
(b) Art. 1745(2): That the common carrier will not be liable for any loss, destruction, or
deterioration of the goods;
(c) Art. 1745(3): That the common carrier need not observe any diligence in the custody
of the goods;
(d) Art. 1745(4): That the common carrier shall exercise a degree of diligence less than
that of a good father of a family, or of a man of ordinary prudence in the vigilance
over the movables transported;
(e) Art. 1745(5): That the common carrier shall not be responsible for the acts or
omission of his or its employees;
123
(f) Art. 1745(6): That the common carrier's liability for acts committed by thieves, or of
robbers who do not act with grave or irresistible threat, violence or force, is dispensed
with or diminished;
(g) Art. 1745(7): That the common carrier is not responsible for the loss, destruction, or
deterioration of goods on account of the defective condition of the car, vehicle, ship,
airplane or other equipment used in the contract of carriage.
b. As to Amount of Liability
i.
In General Art. 1750: A contract fixing the sum that may be recovered. by the owner or
shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable
and just under the circumstances, and has been fairly and freely agreed upon.
(a) Back of ticket stub too small to read, so not binding (Shewaram v. Philippine Air
Lines, 17 SCRA 606)
ii. As Appearing in B/L Art. 1749: A stipulation that the common carrier's liability is
limited to the value of the goods appearing in the bill of lading, unless the shipper or
owner declares a greater value, is binding.
(a) Absolute exemption from liability from negligence, or unqualified limitation of
liability to agreed valuation, both in valid, but only agreed valuation unless shipper
declare a higher value and pays a higher rate of freight, valid (H. E. Heacock & Co.
v. Macondray & Co., 42 Phil. 205)
(b) PALs limited carriage liability for loss or delay valid and binding absent higher value
declared for luggage and goods lost, printed on back of ticket, even if passenger did
not sign (Ong Yiu v. Court of Appeals, 91 SCRA 223; Pan American World Airways,
Inc. v. IAC, 164 SCRA 268)
(c) Warsaw Convention does not preclude application of Civil Code (?) in cases of
breach of contract of carriage, particularly willful misconduct of employees, i.e., bad
faith due to discourteous acts (Cathay Pacific Airways, Ltd. v. Court of Appeals, 219
SCRA 520)
c. Factors Affecting Agreement
i.
Adhesion Art. 1746: An agreement limiting the common carrier's liability may be
annulled by the shipper or owner if the common carrier refused to carry the goods unless
the former agreed to such stipulation.
ii. Delay Art. 1747: If the common carrier, without just cause, delays the transportation of
the goods or changes the stipulated or usual route, the contract limiting the common
carrier's liability cannot be availed of in case of the loss, destruction, or deterioration of
the goods. But See Art. 1748: An agreement limiting the common carrier's liability for
delay on account of strikes or riots is valid.
iii. No Competitor Art. 1751: The fact that the common carrier has no competitor along
the line or route, or a part thereof, to which the contract refers shall be taken into
consideration on the question of whether or not a stipulation limiting the common carrier's
liability is reasonable, just and in consonance with public policy.
d. No Effect on Presumption Art. 1752: Even when there is an agreement limiting the
liability of the common carrier in the vigilance over the goods, the common carrier is
disputably presumed to have been negligent in case of their loss, destruction or deterioration.
6. Rules on Passenger Baggage Art. 1754
a. Baggage Not in Passengers Custody: The provisions of Articles 1733 to 1753 shall apply to
the passenger's baggage which is not in his personal custody or in that of his employee.
124
b. Baggage in Passengers Custody The rules in Arts. 1998 and 2000 to 2003 concerning the
responsibility of hotel-keepers shall be applicable.
i.
In General Art. 1998: The deposit of effects made by the travellers in hotels or inns
shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for
them as depositaries, provided that notice was given to them, or to their employees, of the
effects brought by the guests and that, on the part of the latter, they take the precautions
which said hotel-keepers or their substitutes advised relative to the care and vigilance of
their effects.
ii. Acts of Employees Art. 2000: The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal property of the guests caused by
the servants or employees of the keepers of hotels or inns as well as strangers; but not that
which may proceed from any force majeure. The fact that travellers are constrained to
rely on the vigilance of the keeper of the hotels or inns shall be considered in determining
the degree of care required of him.
iii. Acts of Thief or Robber Art. 2001: The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with the use of arms or through an
irresistible force.
iv. Acts of Guest Art. 2002: The hotel-keeper is not liable for compensation if the loss is
due to the acts of the guest, his family, servants or visitors, or if the loss arises from the
character of the things brought into the hotel.
v. Limitation of Liability Art. 2003: The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not liable for the articles brought
by the guest. Any stipulation between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to 2001 is suppressed or
diminished shall be void.
C. COMMON CARRIAGE OF PASSENGERS
1. Nature and Extent of Responsibility
a. Diligence Required Art. 1733: Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the vigilance x x x
for the safety of the passengers transported by them, according to all the circumstances of
each case. Art. 1755: A common carrier is bound to carry the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious persons,
with a due regard for all the circumstances.
i.
Principles governing liability; placing arm on window sill protruding from bus is
contributory negligence (Isaac .v A. L. Ammen Trans. Co., Inc., 101 Phil. 1046)
ii. Carriers liable for damages caused by mechanical defects, because not deemed fortuitous
event (Landingin v. Pangasinan Transportation Co., 33 SCRA 284), and because
manufacturer deemed carriers agent (Necessito, et al v. Paras, et al., 104 Phil. 75)
iii. Duty of diligence extends to passengers and crew members, i.e., co-pilot who sustained
brain injury during a crash (Philippine Air Lines, Inc. v. Court of Appeals, 106 SCRA
391), and to stevedore hired to help load cargo, even if himself not a passenger ( Sulpicio
Lines, Inc. v. Court of Appeals, 246 SCRA 299)
iv. Duty does not extend to checking every entry in travel documents, so carrier not liable if
passenger denied shore pass (Japan Airlines v. Asuncion, 449 SCRA 544)
125
b. Presumption of Negligence Art. 1756: In case of death of or injuries to passengers,
common carriers are presumed to have been at fault or to have acted negligently, unless they
prove that they observed extraordinary diligence as prescribed in Articles 1733 and 1755.
2. Exemption from Liability Force Majeure, i.e., sudden act of passenger stabbing another
passenger (Bachelor Express, Incorporated v. Court of Appeals, 188 SCRA 217)
3. Duration of Extraordinary Responsibility
a. When Carriage Commences:
i.
If contract to carry (at some future time), perfected by mere consent under Art. 1356,
CCP, BUT contract of carriage itself should be considered a real contract, for not until
carrier is actually used can carrier be said to assume obligations of a carrier (British
Airways v. Court of Appeals, 218 SCRA 699 [1993])
ii. By stepping and standing on platform of bus, already considered a passenger ( Dangwa
Transportation Co., Inc. v. Court of Appeals, 202 SCRA 574 [1991])
iii. Best evidence is ticket.
b. When Carriage Ends:
i.
Reasonable time to leave carriers premises (La Mallorca v. Court of Appeals, 17 SCRA
793 [1966])
ii. Passenger has been landed at the port of destination and left the vessel-owners premises
(Aboitiz Shipping Corporation v. Court of Appeals, 179 SCRA 95 [1989])
iii. If stranded, still continues, even if diversion of flight due to fortuitous event (Philippine
Airlines, Inc. v. Court of Appeals)
4. Agreement Limiting Liability
a. Art. 1757: The responsibility of a common carrier for the safety of passengers as required in
Articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by the posting of
notices, by statements on tickets, or otherwise.
b. Art. 1758: When a passenger is carried gratuitously, a stipulation limiting the common
carrier's liability for negligence is valid, but not for willful acts or gross negligence. The
reduction of fare does not justify any limitation of the common carrier's liability.
5. Responsibility for Acts of Others
a. Employees
i.
Art. 1759: Common carriers are liable for the death of or injuries to passengers through
the negligence or willful acts of the former's 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 of the common carriers does not cease upon proof that they
exercised all the diligence of a good father of a family in the selection and supervision of
their employees.
ii. Art. 1760: The common carrier's responsibility prescribed in the preceding article cannot
be eliminated or limited by stipulation, by the posting of notices, by statements on the
tickets or otherwise.
iii. Liable for passenger killed by cab driver (holdup) in course of duty (Maranan v. Perez,
20 SCRA 413 [1967]) overturning previous rule that act of train guard in shooting
passenger because of personal grudge entirely unforeseeable so fortuitous event (De
Gillaco v. Manila Railroad Co., 97 Phil. 884 [1955])
126
b. Other Passengers or Strangers Art. 1763: A common carrier is responsible for injuries
suffered by a passenger on account of the willful acts or negligence of other passengers or of
strangers, if the common carrier's employees through the exercise of the diligence of a good
father of a family could have prevented or stopped the act or omission.
i.
Sudden act of passenger stabbing another passenger (Bachelor Express, Incorporated v.

Court of Appeals, 188 SCRA 217)
ii. Carrier not insurer, so may rebut presumption, not liable for bystander hurling a stone
(Pilapil v. Court of Appeals, 180 SCRA 546)
c. Passenger Himself
(a) Art. 1761: The passenger must observe the diligence of a good father of a family to avoid
injury to himself.
(b) Art. 1762: The contributory negligence of the passenger does not bar recovery of
damages for his death or injuries, if the proximate cause thereof is the negligence of the
common carrier, but the amount of damages shall be equitably reduced.
E.
DAMAGES RECOVERABLE Art. 1764

1. Art. 1764, CCP: Damages in cases comprised in this Section shall be awarded in accordance with
Title XVIII of this Book, concerning Damages.
2. Article 2206 shall also apply to the death of a passenger caused by the breach of contract by a
common carrier.
III. MARITIME COMMERCE UNDER PCC

[Taken from Villanueva, Commercial Law Review, 2009 Ed., pp. 71-116]
A. CHARACTERISTICS OF MARITIME TRANSACTIONS Arts. 573-585, PCC
1. Real: Art. 585 considers vessels as personal property, but Supreme Court has characterized
maritime transactions as having a real nature (Rubiso v. Rivera, 37 Phil 72 [1918]) since similar
to transactions over real property with respect to effectivity against third persons which are
effected through registration (with Maritime Port Authority or MARINA).
2. Hypothecary: Art. 587 provides for right of abandonment, i.e., in case of maritime transactions,
liability of shipowner is limited to vessel itself. If vessel sinks, liability of shipowner is generally
extinguished, although he may have other properties.
3. Exceptions to Hypothecary Nature:
a. Not applicable when shipowner is at fault, e.g., ship not seaworthy; lack of proper crew and
equipment; shipowner concurrently negligent with captain (as opposed to negligence solely
by captain)
b. Not applicable to liability for repairs on vessel that was completed before loss
c. Not applicable to extent covered by insurance, i.e., insurance takes place of vessel; hence,
liability subsists, but only to extent of insurance proceeds, excess is still hypothecary in nature
d. Not applicable to workmens compensation claims
4. What Are NOT Maritime Transactions:
a. Arrastre operations not maritime (ICTSI v. Prudential Guarantee, 320 SCRA 244 [1999])
b. Mortgage Lien under Ship Mortgage Act of 1978 (P.D. No. 1521): Sec. 2. P.D. No. 1521
authorizes, for purposes of financing the construction, acquisition, purchase or initial
127
operations of vessels, the constitution of a mortgage or any other lien or encumbrance on the
vessel or its equipment with any financing institution.
i.
Sec. 3: Requirement for validity registration with (now) MARINA
ii. Sec. 17: Priority of mortgage lien on vessel over all claims, except: Expenses, fees, and
costs taxed by court; Taxes due the Government; Crews wages; General average;
Salvage; Maritime liens arising prior to recording of mortgage; Damages arising out of
tort; and Preferred mortgage registered prior in time. Note: If proceeds of sale should not
be sufficient to pay all creditors, the unpaid portion shall be enforceable by personal
action against the debtor.
iii. N.B.: Allowing recovery against shipowner in foreclosure cases is deemed to be an
exception to the hypothecary nature of maritime transactions. Although there are quarters
who hold otherwise, since the mortgage is essentially not a maritime transaction.
B. VESSELS Arts. 573 to 585, PCC
1. Art. 573 Amended by Art. 1132 of the Civil Code as to prescriptive period for prescription
acquisitiva good faith, 4 years; bad faith, 8 years. The captain holds the position of a trustee,
so that prescription will not run in his favor.
2. Art. 574 Provides for the materials for the construction of a vessel.
3. Art. 575 Amended by Art. 1620 of the Civil Code: in the ownership of a vessel right of
preemption exists and right of legal redemption shall be exercised within the 30-day period
provided by Civil Code.
4. Art. 576 Enumerates what are deemed included in the sale of a vessel.
5. Art. 577 Right of buyer to freightage should sale take place during voyage.
6. Art. 578 Sale of vessel abroad, made before Filipino consul.
7. Art. 579 Vessel damaged during voyage causing inability to continue voyage. Advertise the
vessel for sale.
8. Art. 580 to 584 Preference of Credit: Superseded by P.D. No. 1521. Also, today vessel may be
attached unlike Art. 584, PCC.
9. Art. 585 Vessel is considered personal property regardless of its value.
C. PERSONS PARTICIPATING IN MARITIME COMMERCE Arts. 586 to 651, PCC
1. Shipowners and ship agents Arts. 586 to 608, 618, PCC
a. Art. 586 Liability of Ship Agent: The owner and ship agent are liable for acts of captain and
debts incurred by the captain for repair and provisioning the vessel. Note:
i.
Ship agent here is called naviero and in the absence of the owner is liable as if he were the
owner and exercises acts of ownership, like abandonment.
iii. Liability is imposed upon the ship agent as if he were the owner; he can exercise acts of
ownership and suffers liability as owner in the absence of the latter. The naviero
represents the owner, hence the local courts can acquire jurisdiction over him.
b. Art. 587 If shipowner is not present, then ship agent may exercise power of abandonment
and acts of ownership.
c. Art. 588 Captain acts as agent of vessel so shipowner or ship agent will not be liable if he
acts beyond the scope of his authority, except his investment on ship.
128
d. Arts. 589 to 601 Co-ownership of vessel gives rise to partnership by operation of law.
Features of co-ownership still remain so that acts of administration may be performed by
majority, whereas acts of ownership need concurrence of all co-owners. Majority determined
by giving co-owner who contributed least capital one vote, then he who contributes double
will have 2 votes, and so on.
So long as two or more persons are co-owners of vessel, immediately, partnership arises.
Normally, agreement before partnership can be created. This is one instance of partnership
coming into existence by operation of law; by mere fact of being co-owners of a vessel, a
partnership is created. (Commingling of similar fungible goods is another case).
e. Art. 602 Ship agent must reimburse captain for advances made by him. Position of captain
is that of agency coupled with interest.
f.
Art. 603 to 605 Law applicable on termination pay is the Labor Code, including the power
of owner or ship agent to dismiss captain and crew and as to just causes for dismissal.
g. Art. 606 to 607 Contemplate two instances of an agency coupled with interest. Captain as
agent may not be dismissed if he is a co-owner or partnership agreement stipulates as a
condition his appointment as captain.
h. Art. 608 Do not read; obsolete.
2. Captains and Masters of Vessels Arts. 609 to 625, PCC
a. Three (3) roles (Inter-Orient Maritime Enterprises v. NLRC, 235 SCRA 2678 (1994):
i.
General agent of the shipowner;
ii. Commander and the technical director of the vessel; and

iii. Representative of the country under whose flag he navigates.
b. Art. 609 Repealed by special law laying down the technical requirements for captain; now
governed by Pres. Decree 97, as amended by P.D. 1560.
c. Art. 610 Powers of Captain:
i.
Contract with crew; command and discipline crew;
ii. Enter into charter party;

iii. Contract for fuel and provisions;
iv. Contract for needed repairs of vessel.
d. Art. 612 Duties of Captain:
i.
Inventory of equipment;
ii. Copy of Code of Commerce on board;

iii. Log book; freight book; accounting book;
iv. Marine survey of vessel before loading;
v. Remain on board while loading;
vi. Demand pilot on departure and on arrival at each port;
vii. On bridge when sighting land;
viii.Arrivals under stress: to file marine protest in 24 hours;
ix. Record bottomry loan with Bureau of Customs;
x. Keep papers and properties of crew who may die;
129
xi. Comply with rules and regulation on navigation;
xii. Report to ship agent on arrival; and
xiii.In case of shipwreck: file marine protest, 24 hours.
e. Art. 613 Do not read; obsolete.
f.
Art. 614 Liability of captain for undue delay in commencing voyage.
g. Art. 615 Captain may not have another person to substitute him. Captain is liable for the
acts of the substitute.
h. Art. 616 During the voyage, should the vessel lack fuel or provisions, the captain is given 2
options:
i.
Deviate to the nearest port and buy things needed.
ii. If part of cargo consistsof fuel-provisions, captain may use it.

i.
Art. 617 Captain expressly prohibited from borrowing on respondentia loan.
j.
Art. 618 Liability of captain to ship agent for damages that ship agent may be liable for in
the following:
i.
Damages arising from neglect or want of skill of captain;
ii. Theft or robbery by crew;

iii. Mutiny;
iv. Fines and confiscations for failure to comply with the rules on navigation, customs or
health;
v. Misuse of powers by captain;
vi. Unjustified deviation.
k. Arts. 619 to 620 Law applicable are those provisions on Transportation of the Civil Code
when it comes to carriage of cargo.
l.
Art. 621 Personal liability where the captain borrows on bottomry loan which is not
justified.
m. Arts. 622 to 623 Provisions on privateers are obsolete since we no longer have them
nowadays.
n. Art. 624 Repetition of Art. 612: passage through and towing another, reasonable damage to
cargo, arrivals under stress and shipwreck require marine protest within 24 hours.
o. Art. 625 Obligation of captain to turn over cargo to consignee upon arrival at port of
destination.
3. Officers and Crew of Vessels Arts. 626 to 648, PCC
a. Arts. 626 to 633 Order of Succession in a Vessel:
i.
Captain (if disqualified or dies);
ii. First mate (who is in charge of navigation);

iii. Second mate (sees to the proper loading of cargo).
b. Art. 634 Superseded by the Tariff & Customs Code, as amended by P.D. No. 761, which
provides that: A certificate of Philippine registry shall be issued only to a vessel of domestic
ownership of more than 15 tons gross. Domestic ownership means ownership vested in
Filipino citizens or corporations or associations organized under Philippine laws at least 60%
130
of capital stock or capital of which is wholly owned by Filipino citizens (Sec. 1, P.D. No.
761).
c. Art. 635 Obsolete. There are now standard terms and conditions for contracts of
employment of seamen formulated by Philippine Overseas Employment Administration.
d. Arts. 636 to 641 Law applicable on power to dismiss and grounds for same is now covered
by Labor Code.
e. Art. 642 Do not read; obsolete.
f.
Art. 643 Hypothecary nature: Loss of vessel due to capture or wreck extinguishes liability
to pay wages.
g. Arts. 644 to 645 Repealed by Labor Code on minimum wages.

h. Art. 646 Gives preferred lien to members of crew over vessel for payment of wages.
i.
Art. 647 Grounds when captain and crew members may rescind contract of employment: (i)
war; (ii) change of destination; (iii) outbreak of disease; (iv) new owner of vessel. Article
should be deemed amended by law on separation pay.
j.
Art. 648 Complement of the Vessel: From the captain down to the last cabin boy.
4. Supercargoes Arts. 649 to 651, PCC [Taken from Villanueva, Commercial Law Review, 2009
Ed., p. 96]: Obsolete. There is no longer a super-cargo but what we have today is a purser, who
acts as the treasurer of the vessel.
D. SPECIAL CONTRACTS OF MARITIME COMMERCE
1. Charter Parties Arts. 652 to 692, PCC
a. Definition Art. 652: Written contract whereby the shipowner or the ship agent leases the
vessel to transport passengers or cargo for a fixed price (Marimperio v. CA, 156 SCRA 368
[1987]). Contract by which an entire ship, or some principal part thereof, is leased by the
owner to another person for a specified time or use (Caltex (Philippines), Inc. v. Sulpicio
Lines, Inc., 315 SCRA 709 [1999]).
b. Classification of Charter Parties: A charter party is classified into (a) contract of
affreightment; and (b) bareboat or demise charter (NFA v. Court of Appeals, 311 SCRA
700 [1999]).
i.
Contract of Affreightment: Charterer merely contracts a vessel to carry its cargo with the
corresponding duty to provide for the berthing space for the loading and unloading.
Charterer is merely required to exercise ordinary diligence in ensuring that a berthing
space be made available for the vessel. Charterer does not make itself an absolute insurer
against all events which cannot be foreseen or are inevitable. (NFA v. Court of Appeals,
311 SCRA 700 [1999]).
(a) Time charter
(b) Voyage charter
ii. Bareboat or Demise Charter: Charterer mans the vessel with his own people and becomes,
in effect, the owner for the voyage or service stipulated, subject to liability for damages
caused by negligence (Caltex (Philippines) v. Sulpicio Lines, Inc., 315 SCRA 709
[1999]).
b. Other Concepts:
i.
Primage bonus to be paid to the captain after successful voyage.
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ii. Demurrage another name for a penal clause to compensate the owner of the vessel for
its non-use.
iii. Lay days period when vessel will be delayed in port for loading and unloading.
iv. Deadfreight Under the law, the cargo not loaded is considered as deadfreight, which
covers the amount paid by or recoverable from the charterer for the portion of the ships
capacity the latter contracted for but failed to occupy. Explicit and succinct in Art. 680 of
Code of Commerce that the liability for deadfreight is on the charterer (NFA v. Court of
Appeals, 311 SCRA 700 [1999]).
c. Forms and Effects of Charter Parties Arts. 652 to 668, PCC
i.
Art. 652 Form and contents of charter party.
ii. Art. 653 If charter party is not yet signed: rights will be governed by bill of lading.
iii. Art. 654 Broker who intervenes in charter party may testify in case of litigation.
iv. Art. 655 In the absence of owner, captain may enter into a charter party.
v. Art. 656 Where charter party is silent as to lay days, apply custom.
vi. Art. 657 Should vessel be disabled, captain obliged to look for another onebut not to
exceed distance of 150 kilometers. Obsolete because of the easy means of communication
nowadays.
vii. Art. 658 Freightage accrues as follows:
(a) If chartered by month or day, from time loading begins.
(b) If on fixed period, from time period begins.
(c) If by weight, by gross weight.
viii.Art. 659 Merchandise sold to make necessary repairs should still pay freightage.
ix. Art. 660 Merchandise jettisoned does not pay freightage but shall be considered general
average.
x. Art. 661 Merchandise lost at sea or seized by pirates does not pay freightage.
xi. Art. 662 Freightage paid by merchandise recovered by salvage.
xii. Art. 663 Merchandise damaged due to inherent defect pays full freightage.
xiii.Art. 664 Where payment is based on weight and the cargo increases in weight during
the voyage, the charterer must pay the increase (this happens when live cargo reproduce
young).
xiv. Art. 665 Cargo carried is subject to the retaining lien by the shipowner.
xv. Arts. 666 to 667 Retaining lien may be waived by surrender of cargo, but carriers lien
subsist for 30 days. Art. 2241 of the Civil Code amended Art. 667 by making carriers lien
good for 30 days, not 20 days.
xvi. Art. 668 Consignation if consignee cannot be found or refuses to receive cargo.
d. Rights and obligations of Shipowners Arts. 669 to 678, PCC
i.
Art. 669 No difference in capacity greater than 2% allowed: Where the owner agrees to
carry more cargo than the capacity of vessel, reduction in freightage granted. If several
shippers have been accepted beyond the vessels capacity, first come, first served, unless
all are present, in which case, the shippers will be allowed to loan in the proportion to
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weight and space they have contracted. (Vessel must not sink lower than the Plimsoll
line.)
ii. Art. 670 One charterer (over one vessel): If his cargo is not sufficient to fill 3/5 of the
capacity of the vessel, the carrier has the right to unload the cargo and put it on a smaller
vessel at the expense of charterer.
iii. Art. 671 If the charterers cargo exceeds 3/5 of the capacity of the vessel, the carrier
cannot exercise this right.
iv. Art. 672 If the vessel has been chartered in whole by one party, the owner cannot
receive the cargo of any other person because the charter party is an exclusive contract.
v. Art. 673 The owner of the vessel is liable to the charterer for damages in case the
captain undue delays the voyage.
vi. Art. 674 If charterer brings more than that agreed upon, the carrier may accept the
increase in cargo and demand increase freightage provided the vessel is not overloaded.
vii. Art. 675 If the vessel has been chartered to load cargo in another port and upon arrival
in that port there is no cargo delivered, the captain has two alternatives:
(a) To look for other cargo; or
(b) If after the lay days have expired there is still no cargo, the captain should file a
marine protest (the third time) and return to home port in full ballast. The charterer
pays freightage in full. (Return in ballast: with no cargo but with some heavy
material placed in ship used to maintain proper stability.)
viii.Art. 676 No right of freightage if charterer can prove that vessel is not in condition to
navigate.
ix. Arts. 677 and 678 Read with Art. 692.
e. Obligations of Charterers Arts. 679 to 687, PCC
i.
Art. 679 Charterer May Sub-charter. This is similar to the law on lease where the
lessee is authorized to enter into a sub-lease, when there is no express prohibition.
ii. Art. 680 Charterer who cannot fill the vessel is liable for full freightage.
iii. Art. 681 Charterer is liable for damages if loaded cargo subjects the vessel to forfeiture
or confiscation. Under Art. 356, carrier can open the packages of shipper to find out
whether they contain items which may subject the vessel to forfeiture.
iv. Art. 682 If the merchandise should have been shipped for the purpose of illicit
commerce, and were taken on board with the knowledge of the person from whom the
vessel was chartered or of the captain, the latter, jointly with the shipowner, shall be liable
for all the losses which may be caused other shippers.
v. Art. 683 Where the vessel is in need of repairs, the charterer must wait until the vessel
is repaired.
vi. Art. 684 Before reaching the port of destination, the charterer may unload the vessel,
paying full freightage.
vii. Art. 685 Before beginning the trip, the charterer may unload the vessel paying one-half
(1/2) of the freightage (See Art. 688).
viii.Art. 686 The obligation to pay freightage after discharge of cargo.
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ix. Art. 687 The charterer and shippers cannot abandon cargo unless it consists of liquids
and 3/4 leaks out, (because of inherent defect of the cargo) with not more than 1/4
remaining in the containers.
f.
Total or Partial Rescission of Charter Parties Arts. 688 to 690

i.
Art. 688 Rescission by Charterer:

(a) Before loading the vessel, cancel unilaterally by paying one-half (1/2) of freightage
agreed upon. Consent of shipowner is not necessary; mere notice to him is sufficient.
This is the first distinction of a charter party from an ordinary lease because in an
ordinary lease, none of the parties may unilaterally cancel the contract and they
choose to do so, they have to pay the full consideration thereof plus any damages
caused;
(b) When the vessel is not up to the capacity agreed upon; or the flag under which it sails
differs from that agreed upon;
(c) When the vessel is not placed at the disposal of the charterer within the period agreed
upon;
(d) When the vessel returns due to pirates or bad weather and the charterer decides to
unload but he must pay full freightage;
(e) When the vessel returns for repairs if repairs take less than 30 days, pay full
freightage for voyage out; if it exceeds 30 days, freightage must be paid in proportion
to the distance covered.
ii. Art. 689 Total Rescission by Owner:

(a) When the charterer fails to load the vessel and lay days expire, the charterer must still
pay one half freightage;
(b) When the owner sells vessel, and new owner, despite his knowledge of the charter
party, decides to load the vessel with his own cargo; but should the new owner not
have any cargo, he must respect the charter party. This is the second basic distinction
between a charter party and an ordinary lease, because in an ordinary lease if the
buyer of the object was aware of the lease, he must respect the same.
iii. Art. 690 Total Rescission Due to Fortuitous Event:
(a) War;
(b) Blockade;
(c) Prohibition to receive cargo;
(d) Embargo of vessel by Government;
(e) Inability of vessel to navigate due to no fault of captain or ship agent.
Mere occurrence of any of these events will rescind the charter party.
iv. Art. 691 When a vessel is unable to put to sea for temporary cause not attributable to
the vessel, ship owner or ship agent is not liable for damages.
v. Art. 692 However, if the ship owner and the charterer have foreseen these events and
stipulate that if one of these events should occur, the vessel should go to a port agreed
upon, the occurrence of any of these events operated only to partially rescind or suspend
the charter party. This must be read together with Arts. 677 and 678. Partial rescission if
parties had foreseen possibility of occurrence of fortuitous event.
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2. Contracts of Transportation of Passengers on Sea Voyages Arts. 693 to 705, PCC:
Repealed by CCP on Transportation; apply the provisions on carriage of passengers on common
carriers. (See comment under Art. 349).
Note: The Civil Code is silent on the rights and duties of the parties strictly arising out of delay in
the voyage. However, Art. 698 of Code of Commerce (which is suppletory) provides for such a
situation as follows:
a. Where a voyage already begun should be interrupted, passengers shall be obliged to pay the
fare in proportion to the distance covered, without right to recover for losses and damages if
interruption is due to fortuitous event or force majeure;
b. But passengers shall have a right to indemnity if the interruption should have been caused by
the captain exclusively;
c. If interruption should be caused by disability of the vessel and a passenger should agree to
await the repairs, he may not be required to pay any increased price of passage, but his living
expenses during the stay will be for his own account. (Trans-Asia Shipping Lines v. Court of
Appeals, 254 SCRA 260 [1996])
3. Bills of Lading Arts. 706 to 718, PCC: Superseded by Arts. 1507 to 1520, CCP insofar as the
bill of lading functions as a document of title.
Articles 1507 to 1520 of the Civil Code consider a bill of lading as a document of title. They
cover the form of a bill of lading, the advantages of a negotiable bill of lading over a nonnegotiable bill of lading and, lastly, how a negotiable bill of lading is negotiated. Those articles of
the Civil Code are the same as the provisions of the Warehouse Receipts Law.
This article provides for a bill of lading (Art. 706). It is the second time that bill of lading is
mentioned (the first time is in Art. 350 which gives the contents of a bill of lading). It is discussed
twice because a bill of lading plays two (2) roles:
(a) Under Art. 350: as the best evidence of the existence of the contract of carriage;
(b) Under Art. 706 (more important): a bill of lading is a commercial instrument whereby the
right of possession over the subject matter thereof is passed from person to person.
Note:
Action to recover the cargo if not delivered prescribes in:

(a) Inter-island trade: 10 years - if there is a bill of lading
(b) Inter-island trade: 6 years - if there is no bill of lading
(c) Overseas trade: 1 year (COGSA).
4. Loans on Bottomry and Respondentia Arts. 719 to 736, PCC

a. Elements of Contracts Art. 719: Bottomry Loans (on ship) and Respondentia Loans (on
cargo), contain common elements:
i.
Exposure of security to marine peril (Art. 732; this is essential);
ii. Obligation of debtor conditioned only upon safe arrival of the security at the point of
destination.
b. Who May Contract
i.Bottomry: General Rule: the owner; if owner absent: captain.
ii.Respondentia: only the owner of the cargo.
c. Other Relevant Provisions:
i. Art. 725 No bottomry loan on salaries of crew.
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ii. Art. 726 Loan given in excess of security through over valuation by borrower, excess
must be returned with legal interest.
iii. Art. 727 When respondentia loan is not all used for the cargo, excess must be returned.
iv. Art. 728 Bottomry loan may be obtained only by owner, but captain may borrow in his
absence.
v. Art. 729 If the security in bottomry or respondentia is not subjected to marine peril, it
becomes an ordinary loan.
vi. Art. 730 Where several bottomry loans have been obtained, the last shall be first in
determining preference in payment. Reason: It was the later loan that made it possible for
vessels safe arrival
vii. Art. 731 Reflects hypothecary nature of bottomry and respondentia for loss of security
due to marine peril will extinguish obligation. Exceptions:
(a) Loss due to inherent defect;
(b) Loss due to the barratry on the part of captain (malfeasance);
(c) Loss due to fault or malice of borrower;
(d) Vessel was engaged in contraband;
(e) Cargo loaded different from that agreed upon.
viii.Art. 732 Lenders of bottomry and respondentia must contribute to general average once
jettison has made possible safe arrival of security.
ix. Art. 733 Exposure to marine peril takes place from the time anchors are weighed at the
port of departure until anchors are dropped at the port of destination.
x. Art. 734 In case of shipwreck and there is salvage, loan will depend upon the
repayment on what may be salvaged.
xi. Art. 735 Must be read with Sec. 101 of Insurance Code: The concurrence of bottomry
loan with Insurance, the insurable interest of the owner of the vessel is value of vessel less
bottomry loan.
xii. Art. 736 Delay ex re: Failure to pay premium on time on these loans gives rise to
liability for legal interest.
.5. Marine Insurance Arts. 737 to 805, PCC: Repealed by Insurance Code.
D. RISKS, DAMAGES AND ACCIDENTS OF MARITIME COMMERCE
1. Averages Arts. 806 to 818, PCC
a. Arts. 806 to 812: Rules on General and Particular Averages It should be noted that the
enumeration of particular as well as general averages in Arts. 809 and 811, respectively, is
merely to illustrate the rule. It is not an exclusive enumeration.
i.
Average is defined as a damage deliberately caused, or an expense deliberately incurred,

due to a marine peril and which has resulted in saving of vessel and/or cargo. Note: Fire
not commonly treated as calamity or natural disaster.
ii. Where both vessel and cargo are saved, it is general average; where only vessel or only
cargo is saved, it is particular average.
iii. The person whose property has been saved must contribute to reimburse damage caused
or expense incurred if the situation constitutes general average.
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b. Other Relevant Provisions:
i.
Arts. 813 and 814 The captain should call a meeting of persons on board who may be
affected as well as the officers of the vessel, before deciding on the damage or expense
which may give rise to general average. They shall decide by voting, but the captain shall
have the final decision
ii. Art. 815 Jettison of cargo: begins with those on deck and on the lower deck, those of
bigger bulk and smaller value.
iii. Art. 816 Cargo jettisoned, to be able to enjoy reimbursement for general average, must
be covered by a bill of lading.
iv. Art. 817 and 818 To lighten a vessel and need to transfer to lighters, pay this expense.
In case fire breaks out in a port and there is a need to sink vessel to save others: general
average.
2. Arrival Under Stress Arts. 819 to 825, PCC
a. Arts. 819 to 821 Arrivals under stress: (i) Lack of provisions or fuel; (ii) Pirates; (iii)
Inability to navigate.
i.
If the lack of fuel or provisions is not due to lack of foresight, or the fear of pirates is well
founded or the inability to navigate is not attributable to fault of captain or crew, then
these arrivals under stress become particular average of the vessel and shippers must wait
patiently. No damage need be paid to the shippers.
ii. If the arrival under stress is due to bad faith, then damages must be paid shippers for
delay, and vessel bears its own loss.
b. Arts. 822 to 825 If the cargo has to be unloaded, the same shall be the responsibility of the
captain, who shall also be liable for undue delay in the re-commencement of the voyage.
3. Collisions Arts. 826 to 839, PCC: Covers both Collision When both vessels are moving;
and Allision When one of the vessels is stationary
a. Rule The guilty vessel must pay for the damage caused by the collision, except if the guilty
vessel sinks because of its hypothecary nature; exception to exception: Abdulhaman case:
b. Five Cases Covered by Collision and Allision:
i.
Art. 826: One Vessel at Fault Such vessel is liable for damage caused to innocent vessel
as well as damages suffered by the owners of cargo of both vessels. Note exception and
exception to exception.
ii. Art. 827: Both Vessels at Fault Each vessel must bear its own loss, but the shippers of
both vessels may go against the ship owners who will be solidarily liable.
iii. Art. 828: Vessel at Fault Not Known Same rule as (b). (Doctrine of Inscrutable Fault)
iv. Art. 831:Third Vessel at Fault Same rule as (a) above.
v. Art. 830: Fortuitous Event No liability. Each bears its own loss.
c. Other Rules:
i.
Doctrine of Last Clear Chance: Supreme Court laid down three (3) stages of collision for
the reason that before actual contact, the vessel which had the last clear chance to avoid
the collision but did not do so is the one liable (Urrutia v. Baco River Plantation, 26 Phil.
623 [1914]); But See Williams v. Yangco, 27 Phil. 68 (1914): Art. 827, PCC applies, not
the doctrine of last clear chance.
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ii. Duty of Overtaking or Crossing Vessel: Duty of overtaking or crossing vessel to keep out
of the way remains even if the overtaking vessel cannot determine with certainty whether
she is forward of or aft more than 2 points from the vessel being overtaken. In case of
collision, it would be beyond cavil that the overtaking vessel must assume responsibility
as it was in a better position to avoid the collision; it should have blown its horn or given
signs to warn the other vessel that it was to overtake it. (Sulpicio Lines v. Court of
Appeals, 305 SCRA 478 [1999]).
iii. When Moving Vessel Strikes Stationary Object: Presumption of fault against a moving
vessel that strikes a stationary object, such as a dock or navigational aid (Far Eastern
Shipping v. Court of Appeals, 297 SCRA 30 [1998]).
d. Other Relevant Provisions:
i.
Art. 829 Ship owner may proceed against those responsible for civil and criminal
liability.
ii. Art. 832 Vessel moored caused by storm to collide with another vessel; this is Particular
Average.
iii. Art. 833 Presumption of loss if vessel sinks and cannot be salvaged.
iv. Art. 834 The fact that vessel has a pilot on board will not exempt said vessel from
liability.
v. Art. 835 After collision, the captain of innocent vessel should file marine protest within
24 hours after reaching the nearest port
Note:Failure to do so bars recovery, no matter how meritorious the case is. The exception
(Art. 386) is that this failure to file the marine protest on time will not prejudice:
(a) Cargo owners;
(b) Innocent vessel that does not have a buque, i.e., it is without a deck;
(c) Small crafts in bay or river traffic
vi. Art. 836 With regard to the necessity of a marine protest, it applies only to a vessel
being a buque.
vii. Art. 837 Hypothecary nature of collisions and other marine disasters: liability therefore
limited to the value of vessel, so that loss of vessel will extinguish liability. Even with
regard to liability for death of passengers in the sinking of a vessel (Yangco v. Laserna, 73
Phil. 330 [1941]). Exception is the ruling in Abdulhaman
viii.Art. 838 In paying damages, give preference for death and injury to persons.
ix. Art. 839 Do not read, collisions in foreign waters.
4. Shipwrecks Arts. 840 to 845, PCC; Arts. 840 to 845; Salvage Law (Act No. 2616)
a. Philosophy Salvage Law provides for compulsory reward to those who brave the perils of
the sea to save cargo or vessel in order to encourage such services. Whether owner of the
property saved likes it or not, he must give a reward, the maximum amount of which is 50%
of value of property saved:
b. Four Requisites for Salvage Reward to Be Warranted:
i.
There must be valid object of salvage, i.e., vessel, cargo, freight or wreck of vessel or
cargo;
ii. Such subject must have been exposed to marine peril;

iii. Salvage services must be rendered voluntarily, i.e., not arising from pre-existing duty;
138
iv. Salvage effort must be successful
c. Derelict Vessel or cargo badly damaged and abandoned by the crew to the mercy of the sea.
Mere abandonment of such vessel or cargo does not make it res nullius so that anybody can
claim it. The proper procedure must be followed:
i.
If vessel is abandoned, salvor must tow it to the nearest port where it will be delivered to
the municipal treasurer or to the collector of customs who will advertise the fact of
salvage
ii. If owner of salvaged vessel appears, he may take possession of the vessel and must pay a
reward amount not exceeding 50% of the value of the vessel
iii. Reward is determined by considering: Value of property saved; Zeal employed by those
who made the salvage; Danger to lives of those who participated; Number of persons who
took part; Services rendered; Expenses incurred.
iv. If no claim for the vessel is made within 3 months after the publication of the
advertisement, municipal treasurer will sell the property saved at public auction and the
reward and expenses shall be deducted from the proceeds. The balance is deposited with
the Treasury.
v. If no one claims the same after 3 years, 1/2 shall go to the salvors and the other half to the
government
vi. If one vessel saves another vessel, the reward going to the former shall be divided as
follows: 1/2 to the ship owner; 1/4 to the captain; 1/4 to the crew.
5. Proof and Liquidation of Averages Arts. 846 to 869, PCC: As previously indicated, whether
it is general or particular average, the person benefited by this damage or expense incurred, must
contribute his proportionate share. This share is determined by the amount of damage or expense
incurred: this is apportioned among the persons benefited in proportion to the value of their
properties saved. Of course in particular average, since there is only one interest involved, the
proportion is understood to pertain 100% to that interest. This liquidation may be made privately
or by judicial proceedings.
IV. INTERNATIONAL SHIPPING UNDER COGSA
A. COVERAGE
1. Applies to contracts of carriage of goods covered by bills of lading or similar documents of title
where the cargo is either exported or imported (overseas trade) [Title II, Sec. 13, Comm. Act No.
65],
2. But if cargo is carried within the Philippines (inter-island trade), then carriage of goods is subject
to PCC provisions on maritime commerce [Title I, Sec. 5, 2nd par., Comm. Act No. 65]
3. Nevertheless, parties free to stipulate for application of COGSA even if inter-island trade only.
B. LIMITATION OF LIABILITY
1. If no value is stated, maximum liability of carrier is US$500.00 per package [Title I, Sec. 4(5),
COGSA]
2. If value stated, apply the rule on qualified liability [Ibid.]
C. PRESCRIPTION
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1. Suit should be filed within 1 year [Title I, Sec. 3(6), 4th par., COGSA] from:
a. Delivery to arrastre operator in case of damage to the goods (Union Carbide Phils. v. MRR,
77 SCRA 359)
b. Time said goods should shave been delivered, i.e., date of departure of vessel where goods
were loaded from port of destination of such goods, in case of loss of the goods (Rizal Surety
& Insurance Co. v. Macondray, 22 SCRA 902)
2. Prescriptive period of 1 year applies to consignee, shipper, insurer of goods and legal holder of
bill of lading (Filipino Merchants Insurance Co., Inc. v. Alejandro, 145 SCRA 42)
3. Notice of claim need not be filed with the carrier before suit can be brought before proper court
[Title I, Sec. 3, COGSA]
4. Note: If inter-island trade:
a. Period to file is 10 years if shipment covered by bill of lading (Art. 1144, CCP), and 6 years
if contract of carriage is oral (Art. 1145, CCP).
b. Filing of notice of claim with carrier condition precedent to filing action in court (Arts. 366
and 377, PCC)
V. INTERNATIONAL AIR TRAVEL UNDER WC
A. COVERAGE
1. Applies to international transportation of persons, baggage or goods performed by an aircraft
gratuitously or for hire (American Airlines v. Court of Appeals, 327 SCRA 482 [2000])
2. Definition of international transportation
a. Where place of departure and place of destination are situated within territories of High
Contracting Parties whether or not there is a break in the transportation or a transshipment;
and
b. Where the place of departure and place of destination are within the territory of a single High
Contracting Party if there is an agreed stopping place within the territoty subject to another
power, even if such power is not a party to the Convention (Mapa v. Court of Appeals, 275
SCRA 286 [1997])
B. LIMITATION OF LIABILITY
1. Contract of air carriage requires declaration by passenger of a higher value to recover a greater
amount, and that air carrier is not liable for loss of baggage in amount in excess of limits specified
in the tariff which was filed with proper authorities, such tariff being binding on the passenger
regardless of passengers lack of knowledge thereof or assent thereto [Art. 22(1), WC; British
Airways v. Court of Appeals, 285 SCRA 450 (1998)].
2. However, no blind reliance on adhesion contracts where:
a. Facts and circumstances justify that they should be disregarded;
b. When benefits of limited liability waived by carrier for failure to raise timely objections
during trial when questions and answers regarding actual claims and damages sustained by
passenger were asked [Ibid.].
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3. Moreover, Art. 22(2) of WC does not operate as exclusive enumeration of instances of airlines
liability, or as absolute limit on extent of liability. Thus, it does not regulate or exclude following
areas:
a. Liability for other breaches of contract by carrier;
b. Misconduct of its officers and employees; and
c. For some particular or exceptional damage. (Alitalia v. IAC, 192 SCRA 9 [1990])
4. Thus, Supreme Court has granted damages for acts considered as bad faith, i.e., rude behavior on
part of carriers employes, deceit, denied boarding due to overbooking, downgrading due to
overbooking, discrimination, series of negligent acts. In fact, even without bad faith and actual
damages, nominal damages may still be awarded.
C. PRESCRIPTION
1. Suit should be filed within 2 years [Art. 29, WC].
2. 2 years is absolute bar; forecloses application of forums rules on interruption of prescriptive
periods (United Airlines v. Uy, 318 SCRA 576 [1999]).
VI. PUBLIC SERVICE ACT (Comm. Act No. 146, as amended)
A. PUBLIC SERVICE
1. Definition Sec. 13(b), Comm. Act No. 146: It includes every person who 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, railroad, street railway, traction railway, subway motor vehicle, steamboat, or
steamship line, ferries, and water craft, shipyard, ice-plant, electric light, heat and power or any
other public utility.
2. General Rule: Certificate of Public Convenience (CPC) Required
3. Requisites for CPC
a. Must be a citizen of the Philippines, or a domestic corporation or co-partnership, association
or joint-stock company, at least 60% of its stock or paid-up capital must belong entirely to
Filipino citizens;
b. Must be financially capable of undertaking the proposed service and meeting the
responsibilities incident to its operation (financial ability); and
c. Must prove that the operation of the public service proposed and the authorization to do
business will promote the public interest in a proper and suitable manner (public necessity).
4. When CPC Not Required: warehouses, iceplants, animal-drawn vehicles, banca, tugboats,
lighters, airships (except as to fixing of rates), radio companies (except as to fixing of rates),
public utitlities operated by national government (except as to fixing of rates), public markets
B. PUBLIC SERVICE COMMISSION (Replaced Since)
1. Powers which Require Notice and Hearing Sec. 26, Comm. Act 146:
a. Issuance of certificate of public convenience and certificate of public convenience and
necessity;
141
b. Fixing of rates, tolls and charges;
c. Setting-up of just and reasonable standards and classifications;
d. Issuance of orders requiring public services to establish and maintain extensions of facilities;
e. Suspension, revocation, modification of certificates of public convenience and certificates of
public convenience and necessity.
2. Powers which Do Not Require Notice and Hearing Sec. 17, Comm. Act 146:
a. Investigate any matter concerning public services;
b. Require any public service to furnish safe, adequate and proper service;
c. Appraise and value the property of any public service;
d. Grant any public service special permits to make extra or special trips;
e. Require any public service to properly keep books, records and accounts, and to make a report
on its finances; and
f.
Require public service to comply with laws and ordinances.
3. Replacement of PSC (Abolished under P.D. No. 1)

a. Land Transportation Office;
b. Land Transportation, Franchising and Regulatory Board, for land transportation;
c. Air Transportation Office, governing air transportation;
d. National Telecommunications Commission, for telecommunications;
e. Board of Energy (then Energy Regulatory Board, now the Energy Regulatory Commission)
for power utilities and services;
f.
National Electrification Administration, for the operation of electric companies;
g. National Water Resources Council for Waterworks;

h. Civil Aeronautics Board; and
i.
Marine Industry Authority, for water transportation.
Decisions of the boards replacing the Public Service Commission after appeal to the Secretary of
Transportation and Communication may be appealed by petitioner for review or certiorari, on the
following grounds: (a) lack of jurisdiction; or (b) abuse of discretion.
C. OTHER CONCEPTS
1. Prior Operator Rule Before allowing a new applicant to come in, the prior operator should be
allowed to expand his service, provided that his service is satisfactory, in order to avoid ruinous
competition. Exceptions:
a. Old operator fails or neglects to make improvement or effect increase in services.
b. Old operator only made an offer to meet increase in traffic when new application came in.
c. Old operator has not made an effort to meet an increase in traffic.
d. Old operators CPC was canceled because of abandonment.
e. Old operator does not oppose application.
f.
Old operator operated less units than what was authorized to operate.
142
g. If CPC is granted on a new route.
2. Kabit System Arrangement whereby a person who has been granted a CPC allows other
persons who own motor vehicles to operate them under his license, sometimes for a fee or
percentage of the earnings. Although parties to such an arrangement are not outrightly penalized
by law, the kabit system is invariable recognized as being contrary to public policy and therefore
void and inexistent under Art. 1409 of Civil Code (Lim v. Court of Appeals, 373 SCRA 394
[2002])
3. Boundary System Arrangement whereby the registered owner of a vehicle allows another
person to operate it as a common carrier under a lease arrangement between them, and thereby
avoiding the establishment of either an employer-employee or principal-agent relationship. This
arrangement does not exempt from liability the owner of a public vehicle who operates it under
the boundary system (Hernandez v. Dolor, 435 SCRA 668 [2004])
143
ATENEO LAW SCHOOL

BANKING LAWS
AND RELATED SPECIAL LAWS
I. GENERAL CONCEPTS
A.
CONCEPT OF BANKING
1. Definition Sec. 3.1, GBL135: entities engaged in the lending of funds obtained in the form of
deposits.
3. Elements
a. Engaged in lending of funds
b. Obtained in the form of deposits
c. From the public, which shall mean 20 or more persons Sec. 8.2, GBL
3. When Engaged in Banking
a. Authority from BSP not element Republic v. Security Credit and Acceptance Corporation,
19 SCRA 58 (1967): A corporation which accepted savings account deposits from the public
and which lent out the money deposited to borrowers, is engaged in banking, even if it did not
secure authority to engage in banking from BSP.
b. Even if membership required Central Bank v. Morfe, 20 SCRA 507 (1967): Even if
savings deposited with the organization is given as financial assistance to its members,
since anybody can be a depositor, the organization is in effect open to the public, and is
considered engaged in banking;
4. When Not Engaged in Banking Baas v. Asia Pacific Finance Corporation, 343 SCRA 527
(2000): Since transaction was not one involving a loan (deposits), but the purchase of receivables
at a discount, then it is engaged in investing, reinvesting or trading in securities, and not
considered engaged in banking.
B. BANKING DISTINGUISHED FROM QUASI-BANKING
1. Elements of Quasi-Banking Sec. 4, par. 3, GBL
a. Borrowing of funds for borrowers own account
b. From 20 or more lenders at any one time
135 Republic Act No. 8791 (General Banking Law of 2000), which repealed Republic Act No. 337
(General Banking Act)
144
c. Through issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes Sec. 95, NCBA136
d. For purposes of relending or purchasing of receivables and other obligations
2. Requirement of Separate License Sec. 6, pars. 1 and 2, GBL: BSP authority required for
banking and quasi-banking, except for Universal Bank (UB) and Commercial Bank (KB), which
if authorized as such, are authorized to engage in quasi-banking.
D.
BANKS DISTINGUISHED FROM TRUST ENTITIES

1. Definition Sec. 79, GBL: A trust entity is a stock corporation duly authorized by the MB 137 to
engage in trust business, i.e., act as trustee or administer any trust or hold property in trust or on
deposit for the use, benefit, or behoof of others
2. Conduct of Trust Business Sec. 80, GBL: A trust entity shall administer the funds or property
under its custody with due diligence.
3. Governing Law Secs. 79 to 93, GBL
E.
BANKS DISTINGUISHED FROM OTHER FINANCIAL INSTITUTIONS

1. Investment Houses xSecs. 2 and 3, Investment Houses Law138
2. Financing Companies xSec. 3(a), Financing Company Act139
3. Investment Companies xSec. 4, Investment Company Act140
4. Non-Stock Savings and Loans Associations xSec. 3, Revised Non-Stock Savings and Loans
Association Act of 1997141
5. Cooperatives xArt. 3, Cooperative Code142; But See xArt. 100, Cooperative Code
6. Insurance Companies xSec. 2, Insurance Code143
F.
NATURE OF BANKING BUSINESS Sec. 2, GBL

1. Vital Role in Economy144 Simex International (Manila) Inc. v. Court of Appeals, 183 SCRA
360 (1990): banks are indispensable institutions in the modern world, and play a vital role in
economic life, whether as passive entities for safekeeping and saving of money, or as active
instruments of business and commerce
a. Subject to reasonable regulation by the State Central Bank of the Philippines v. Court of
Appeals, 208 SCRA 652 (1992): police power allows placing of bank under conservatorship,
among other remedies
136 Republic Act No. 7653 (New Central Bank Act), which repealed Republic Act No. 265 (Central
Bank Act)
137 Monetary Board
138 Presidential Decree No. 129, as amended
139 Republic Act No. 59080, as amended by Republic Act No. 8556
140 Republic Act No. 2629
144 Prudential Bank v. Lim, 474 SCRA 485 (2005)
145
b. Strikes and Lockouts Sec. 22, GBL: banking industry indispensable to national interest,
therefore if strike/lockout unresolved within 7 days, BSP may report it to Secretary of Labor,
who shall assume jurisdiction, also, President may at any time assume jurisdiction.
2. Fiduciary Nature of Banking Business
a. Degree of diligence required145 Simex International (Manila) Inc. v. Court of Appeals, 183
SCRA 360 (1990): Banking is affected by public interest, so deposits are treated with utmost
fidelity (e.g., a bank is liable for failure to credit deposit, which took 23 days to correct);
Bank of the Philippine Islands v. Intermediate Appellate Court, 206 SCRA 408 (1992):
However, a bank is not expected to be infallible, but must observe established procedure to
check errors (e.g., procedure to detect wrong account number on deposit slip).
b. When utmost diligence required
i.
In dealing with accounts of depositors 146 Philippine Banking Corporation v. Court of

Appeals, 419 SCRA 487 (2004): A fiduciary obligation is deemed written into every
deposit agreement, so even prior to GBL effectivity, a bank is liable for wrongful acts of
officers within scope of the latters authority, but not beyond (e.g., officer offset a time
deposit with a fictitious PN); Bank of the Philippine Islands v. Casa Montessori
Internationale, 430 SCRA 261 (2004): Banks are bound to know signatures of its
customers (e.g., bank is liable for its failure to detect 8 instances of forgery in checks,
which is proximate cause of loss), moreover, there is no waiver or estoppel on the part
of a depositor due to his failure to report an error in bank statements.
ii.
In selection and supervision of employees 147 Philippine Commercial and

International Bank v. Court of Appeals, 350 SCRA 446 (2001): Banks liability is
primary, not vicarious, for fraud of officers if they have apparent authority, even if bank
did not benefit from such fraud (e.g., bank failed to detect lack of clearing stamps on
switched checks); Philippine National Bank v. Pike, 470 SCRA 328 (2005): Banks
liability is primary, not vicarious, for negligence of employees (e.g., allowing
withdrawal by non-account holder without signing withdrawal slip, and with no
passbook and authority).
iii.
To be mortgagees in good faith148 Cruz v. Bancom Finance Corporation, 379 SCRA

490 (2002): Banks cannot rely merely on face of title, but must observe precautions: (a)
to ascertain flaws in title (e.g., sale absolutely simulated); and (b) to examine condition
of property, because funds are being lent out.
iv.
Others: In the custody of documents; integrity of records 149 Heirs of Eduardo

Manlapat v. Court of Appeals, 459 SCRA 412 (2005): Bank is liable for delivering
145 Solidbank Corporation/Metropolitan Bank and Trust Company v. Tan, 520 SCRA123 (2007)
146 Simex International (Manila) Incorporated v. Court of Appeals, 183 SCRA 360 (1990); Bank of the
Philippine Islands v. Court of Appeals, 326 SCRA 641 (2000); Philippine Commercial International Bank v.
Court of Appeals, 350 SCRA 446 (2001); Firestone Tire & Rubber Company of the Philippines v. Court of
Appeals, 353 SCRA 601 (2001); Westmont Bank v. Ong, 375 SCRA 212 (2002); Traders Royal Bank v.
Radio Philippines Network, Inc., 390 SCRA 608 (2002); Consolidated Bank and Trust Corporation v. Court
of Appeals, 410 SCRA 562 (2003)
147 Metropolitan Bank and Trust Company v. Cabilzo, 510 SCRA 259 (2006); But See Go v.
Intermediate Appellate Court, 197 SCRA 22 (1991)
148 Development Bank of the Philippines v. Court of Appeals, 331 SCRA 267 (2000); Canlas v. Court
of Appeals, 326 SCRA 425 (2000); Premiere Development Bank v. Court of Appeals, 453 SCRA 630
(2005); Private Development Corporation of the Philippines v. Court of Appeals, 475 SCRA 591 (2005);
Citibank, N.A. v. Cabamongan, 488 SCRA 517 (2006); Metropolitan Bank and Trust Company, Inc. v.
SLGT Holdings, Inc., 536 SCRA 517 (2007); Omengan v. Philippine National Bank, 512 SCRA 305 (2007)
149 See Also United Coconut Planters Bank v. Basco, 437 SCRA 325 (2004)
146
titles to mortgaged properties to strangers for photocopying purposes, for damages
resulting therefrom.
v.
Exception: Utmost diligence requirement does not cover transactions outside of bank
deposits Reyes v. Court of Appeals, 363 SCRA 51 (2001): Exercise of utmost
diligence is not required in commercial transactions that do not involve their fiduciary
relationship with their depositors, as in cases of sale and issuance of foreign exchange
demand draft (e.g., bank made swift code error, but did everything in its power to
correct error).
c. Diligence Required applicabile to government financial institutions xGovernment Service

Insurance System v. Santiago, 414 SCRA 563 (2003)
147
d.
e. Liability for negligence
G.
i.
Rules on determination of negligence Philippine Bank of Commerce v. Court of

Appeals, 269 SCRA 695 (1997): May be based culpa aquilana using tort rules, i.e.,
proximate cause, last clear chance, contributory negligence 60-40 sharing of loss (e.g.,
failure to duly credit deposits); Consolidated Bank and Trust Corporation v. Court of
Appeals, 410 SCRA 562 (2003): Culpa contractual (breach of contract raised
presumption of negligence, defense of exercising required diligence not a complete
defense) vs. Culpa aquiliana (burden to prove bank was negligent, defense of
exercising required diligence complete defense).
ii.
Award of actual, moral, compensatory or temperate damages Araneta v. Bank of

America, 40 SCRA 144 (1970): If no pecuniary loss, temperate damages allowed for
injury to commercial credit or goodwill; Prudential Bank v. Court of Appeals, 328
SCRA 264 (2000): Moral damages allowed even if no malice or bad faith, exemplary
damages allowed also; Citytrust Banking Corporation v. Villanueva, 361 SCRA 446
(2001): If embarrassment or inconvenience timely and adequately corrected, no moral
damages; if damnum absque injuria, no compensation allowed
iii.
Cannot rely on judgment of other banks to escape liability xMetropolitan Bank and
Trust Company v. Cablizo, 510 SCRA 259 (2006)
iv.
Right to recover against erring employee xPacific Banking Corporation v. Court of

Appeals, 173 SCRA 102 (1989)
AUTHORITY TO OPERATE
1. Incorporation Secs. 17 and 46, Corporation Code; Sec. 14, GBL
3. Operation Sec. 6, GBL
a. Authority required Sec. 6, par. 1, GBL
b. MB determination if engaged in banking business Sec. 6, par. 2, GBL
c. Unauthorized advertisement/ business representation Sec. 64, GBL
d. Sanctions for operating without authority: quo warranto instituted by Solicitor General Sec.
6 in rel. to Sec. 66, GBL; Republic v. Security Credit and Acceptance Corporation, 19
SCRA 58 (1967): unauthorized banking subject to quo warranto; Central Bank v. Morfe, 20
SCRA 507 (1967): injury to public not pre-requisite for quo warranto proceedings.
II. CLASSIFICATION OF BANKS

A.
UNIVERSAL BANKS (UB) Sec. 3.2(a), GBL

1. Governing Law xGBL
2. Powers Sec. 23, GBL
a. Commercial Bank (KB) powers xSec. 29, GBL
148
b. Investment House150 powers xSec. 7, Investment Houses Law; xSEC Omnibus Rules and
Regulations for Investment Houses and Universal Banks Registered as Underwriter of
Securities
c. To invest in equity of non-allied enterprises xSec. 27, GBL
B.
COMMERCIAL BANKS (KB) Sec. 3.2(b), GBL

1. Governing Law xGBL
2. Powers
a. KB powers Sec. 29, GBL
(i)
Accepting drafts
(ii) Issuing letters of credit (L/Cs)
(iii) Discounting and negotiating promissory notes (PNs), drafts, bills of exchange, and
other evidences of debt
(iv) Accepting or creating demand deposits
i.
Receiving other types of deposits and deposit substitutes
ii. Buying and selling foreign exchange and gold or silver bullion
iii. Acquiring marketable bonds and other debt securities
iv. Extending credit
b. Engage in quasi-banking functions xSec. 6, par. 1, GBL
c. To invest in equity of allied enterprises xSecs. 31 and 32, GBL
d. To purchase, hold and convey real estate xSecs. 51 and 52, GBL
e. Other services xSec. 53, GBL
(i)
ii.
iii.
iv.
v.
f.
Receive in custody funds, documents and valuable objects

Act as financial agent and buy and sell, by order of and for the account of 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 MB approval, act as managing agent, adviser, consultant or administrator of
investment management/advisory/ consultancy accounts
Rent out safety deposit boxes
To issue guarantees See xSec. 74, General Banking Act
C.
THRIFT BANKS (TB) Secs. 3.2(c), GBL
1.
2. 1. Governing Law Sec. 71, pars. 1 and 3, GBL
a. Organization, ownership, capital requirements, powers, supervision, and general conduct of
business xThrift Banks Act151
b. Net worth to risk assets ratio xSec. 71, par. 3, in rel. to Sec. 33, GBL
c. Other matters: GBL of suppletory application
150 Sec. 3 of the Investment Houses Law defines Investment House as any enterprise which
engages or purports to engage, whether regularly or on an isolated basis, in the underwriting (i.e.,
guaranteeing distribution and sale) of securities of any kind issued by another corporation
149
3. 2. Definition/Purpose Sec. 3.2(c), GBL; Secs. 2 and 3(a), Thrift Banks Act: TB established to
meet needs for capital, personal and investment credit or medium- and long-term loans for
Filipino entrepreneurs.
a. Composed of:
(i)
Savings and mortgage banks
(ii) Stock savings and loans associations; and
(iii) Private development banks
b. For purposes of:
(i)
Accumulating savings of depositors and investing them in marketable bonds and other
debt securities, commercial papers and accounts receivable, drafts, bills of exchange,
acceptances, or notes arising out of commercial transactions
(ii) Providing short-term working capital, medium- and long-term financing, to businesses
engaged in agriculture, services, industry and housing
(iii) Providing diversified financial and allied services for its chosen market and
constituencies specially for small and medium enterprises and individuals
4. Powers Sec. 10, Thrift Banks Act
E.
RURAL BANKS (RB) Sec. 3.2(d), GBL
4.
5. 1. Governing Law Sec. 71, pars. 1 and 3, GBL;
d. Organization, ownership, capital requirements, powers, supervision, and general conduct of
business xRural Banks Act152
e. Other matters: GBL of suppletory application
6. 2. Definition/Purpose Sec. 2, Rural Banks Act: RB established to make needed credit available
and readily accessible in rural areas on reasonable terms
3. Powers Sec. 12, Rural Banks Act
F.
COOPERATIVE BANKS (Coop Banks) Sec. 3.2(e), GBL
7.
8. 1. Governing Law Sec. 71, pars. 1 and 3, GBL; Art. 99, Cooperative Code
f.
Organization, ownership, capital requirements, powers, supervision, and general conduct of

business xArts. 99 to 109, Cooperative Code
g. Other matters: GBL of suppletory application

9. 2. Definition/Purpose Art. 100, Cooperative Code: Coop Bank is organized by, the majority
shares of which is owned and controlled by, cooperatives primarily to provide financial and credit
services to cooperatives.
3. Powers: Same as RB See Sec. 12, Rural Banks Act
G.
ISLAMIC BANKS (IB) Sec. 3.2(f), GBL
10.
11. 1. Governing Law Sec. 71, par. 2, GBL
h. Organization, ownership, capital requirements, powers, supervision, and general conduct of
business xIslamic Bank Charter153

153 Republic Act No. 6848 (Charter of Al Amanah Islamic Development Bank of the Philippines)
150
2. Definition/Purpose Sec. 3, Islamic Bank Charter: IB created with primary purpose of
promoting and accelerating the socio-economic development of the Autonomous Region by
performing banking, financing and investment operations and to establish and participate in
agricultural, commercial and industrial ventures based on the Islamic concept of banking.
3. Powers Sec. 6, Islamic Bank Charter
H.
OTHER CLASSIFICATIONS OF BANKS Sec. 3.2(g), GBL: MB authorized to determine other

categories of banks as it may deem appropriate.
Note: Pawnshops Not Banks xPawnshop Regulation Act154; xBSP Circular No. 374155; First
Planters Pawnshop, Inc. v. Commissioner of Internal Revenue, 560 SCRA 606 (2008): non-bank
financial intermediaries (since primary function is lending), i.e., principal functions include lending,
investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired
by them, or otherwise coursed through them, either for their own account or for the account of others
I.
GOVERNMENT BANKS Sec. 3.2(g), GBL: UB or KB owned or controlled by the national

government, such as.
1. Land Bank of the Philippines (Land Bank) xSecs. 74 to 100-A, Code of Agrarian Reform of
the Philippines156
2. Development Bank of the Philippines (DBP) xRevised Charter of Development Bank of the
Philippines157
3. Philippine Veterans Bank (PVB) xPhilippine Veterans Bank Act158; xAn Act to Rehabilitate the
PVB159
4. Philippine National Bank (PNB) but now privatized xRevised Charter of Philippine National
Bank160; xPhilippine National Bank v. Velasco, 564 SCRA 512 (2008)
J.
FOREIGN BANKS
1. Modes of entry Sec. 2, Foreign Banks Liberalization Act161; Sec. 73, par. 1, GBL
a. By acquiring, purchasing or owning up to 100% of the voting stock of only 1 existing
domestic bank; Note: License to do business not required: Equity investment is not deemed
doing business Sec. 3(d), Foreign Investments Act of 1991162
b. By investing in up to 100% of a new banking subsidiary incorporated under the laws of the
Philippines; Note: License to do business not required: Equity investment is not deemed
doing business Sec. 3(d), Foreign Investments Act of 1991
c. By establishing branches with full banking authority; Note: Must be licensed to transact
business Sec. 133, Corporation Code; Hang Lung Bank, Ltd. v. Saulog, 201 SCRA 137
(1991): foreign bank not doing business in RP need not obtain license in order to sue.
154 Presidential Decree No. 114

155 Rules and Regulations for Pawnshops
157 Executive Order No. 81, Series of 1986
160 Executive Order No. 80 Series of 1986
151
(i) Governing Laws
(a) Creation, formation, organization or dissolution of corporations; fixing of relations,
liabilities, responsibilities, or duties of stockholders, members, directors or officers of
corporations to each other and the corporation: Law of place where foreign bank
established Sec. 77, GBL
(b) Entry into the Philippines through establishment of branches: xForeign Banks
Liberalization Act Sec. 72, par. 1, GBL
(c) Conduct of offshore banking business: xOffshore Banking System Decree163; Sec.
72, par. 2, GBL
(d) All other matters: GBL Sec. 77, GBL
(ii) Treatment of multiple branches Sec. 74, GBL: treated as one unit; See Citibank, N.A. v.
Sabeniano, 514 SCRA 441 (2007): Sec. 20 of GBL treats domestic bank and all branches
as one unit, but Sec. 74 of GBL treats all branches of a foreign bank as one unit, but as to
relation of local branches, Sec. 75 of GBL and Sec. 5 of Foreign Banks Liberalization Act
provide for Head Office Guarantee for clients to invoke in order to establish
accountability of head office for liabilities of its foreign branches. But the reverse does
not apply, so clients liability to RP branch does not extend to liability to head office and
branch in other countries (no off-setting).
(iii) Head office guarantee Sec. 75, GBL; Sec. 5, Foreign Banks Liberalization Act
(iv) Summons and legal processes Sec. 76, GBL; Sec. 12, Rule 14, 1997 Rules of Civil
Procedure
(v) Revocation of license Sec. 78, GBL
2. Subject to MB approval, guidelines Secs. 2 and 3, Foreign Banks Liberalization Act
3. Foreign bank may avail of only 1 mode of entry Sec. 2, Foreign Banks Liberalization Act
4. Control of 70% of resources or assets of entire banking system must be held by banks which
are at least majority-owned by Filipinos Sec. 73, par. 3, GBL; Sec. 3, par. 3, Foreign Banks
Liberalization Act
5. Equal treatment of local banks Sec. 73, par. 4, GBL; Sec. 8, Foreign Banks Liberalization
Act
III. DEPOSIT FUNCTION

A.
NATURE OF DEPOSIT
1. Deposits as Simple Loans164 Arts. 1953 and 1980, Civil Code; Serrano v. Central Bank, 96
SCRA 96 (1980): Bank deposits (fixed, savings, current) are irregular deposits which are really
loans; hence, failure to honor time deposit is failure to pay obligation as debtor, and not breach of
trust from failure to return subject matter of deposit.
2. Bank as Debtor

164 San Carlos Milling Co., Ltd. v. Bank of the Philippine Islands, 59 Phil. 59 (1933); Hilado v. De la
Costa, 83 Phil. 471 (1949); People v. Ong, 204 SCRA 942 (1991); Moran v. Court of Appeals, 230 SCRA
799 (1994); Consolidated Bank and Trust Corporation v. Court of Appeals, 410 SCRA 562 (2003)
152
a. The relationship between a bank and its depositors is governed by contract, but since deposit
is a real contract, there must be delivery of money.
b. Bank acquires ownership of money deposited; obligation to pay amount, but no obligation to
return the same money165; Guingona, Jr. v. City Fiscal of Manila, 128 SCRA 577 (1984):
Thus, bank not liable for estafa for failure to pay deposit; BPI Family Bank v. Franco, 538
SCRA 184 (2007): Deposit of money is generic and fungible, so Art. 559 of Civil Code
(which allows owner unlawfully deprived of movable property to recover the same from
current possessor) does not apply.
c. Payment must be made to proper party-depositor Fulton Iron Works Co. v. China Banking
Corp., 55 Phil. 208 (1930): Depositor presumed owner of funds, bank without notice justified
in paying out to depositor; Bank of the Philippine Islands v. Court of Appeals, 232 SCRA
302 (1994): Since ownership of deposit disputed, determination by probate court provisional,
authority of heirs to withdraw not equivalent to court order to release deposit to heirs, hence,
bank no right to pay persons indisputably entitled thereto
d. Deposits are not preferred credits Central Bank v. Morfe, 63 SCRA 114 (1975): If bank
insolvent, deposits non-preferred credits subject to rules on preference of credits; See
Discussions on PDIC Charter (Chapter IX Below)
e. Bank has right to compensation Gullas v. Philippine National Bank, 62 Phil. 519 (1935):
General rule is that a bank has a right to set off of the deposit in its hands for payment of any
indebtedness to it on part of depositor; Republic v. Court of Appeals, 65 SCRA 186 (1975): A
depositor has every right to apply his credit with bank to loans he obtained, but compensation
does not take place ipso jure; Bank of the Philippine Islands v. Court of Appeals, 512 SCRA
620 (2007): While bank has right to set-off, it should act judiciously, i.e., notify depositor of
offset; otherwise, it may be held liable for damages.
f.
No breach of trust; Mandamus not a remedy xLucman v. Malawi, 511 SCRA 268 (2006)
3. Banks Duty of Utmost Care166 Sec. 2, GBL; Consolidated Bank and Trust Corporation v.
Court of Appeals, 410 SCRA 562 (2003): Fiduciary nature does not convert contract between
bank and its depositors from simple loan to trust agreement, whether express or implied; because
banks do not accept deposits to enrich depositors but to enrich themselves, thus banks allowed to
offer lowest possible interest rate on deposits and charge highest possible interest rate on loans,
and failure to pay deposit is failure to pay simple loan, not breach of trust
B.
KINDS OF DEPOSIT167
1. Demand Deposits Secs. 58-60, NCBA; BPI Family Savings Bank v. First Metro Investment
Corporation, 429 SCRA 30 (2004): All liabilities of banks denominated in Philippine currency
and subject to payment in legal tender upon demand by presentation of checks. It also includes
deposits, subject to withdrawal either by check or thru automated tellering machines (ATM), and
are otherwise known as current or checking accounts. The Bank may or may not pay interest on
these accounts.
2. Savings Deposits Interest-bearing deposits without a stated maturity which are withdrawable
either upon presentation of properly accomplished withdrawal slip together with the
165 Serrano v. Central Bank, 96 SCRA 96 (1980); People v. Puig, 563 SCRA 564 (2008).
166 Simex International (Manila), Inc. v. Court of Appeals, 183 SCRA 360 (1990); Go v. Intermediate
Appellate Court, 197 SCRA 22 (1991); Bank of the Philippine Islands v. Intermediate Appellate Court, 206
SCRA 408 (1992); Philippine Bank of Commerce v. Court of Appeals, 269 SCRA 695 (1997); Bank of the
Philippine Islands v. Court of Appeals, 326 SCRA 641 (2000); Firestone Tire & Rubber Company of the
Philippines v. Court of Appeals, 353 SCRA 601 (2001)
167 BSP Circular No. 512 (2006), as amended by BSP Circular Nos. 568 (2007) and 658 (2009)
153
corresponding passbook or thru ATM; See International Exchange Bank v. Commissioner of
Internal Revenue, 520 SCRA 688 (2007): Fixed savings deposit treated as time deposit
(provides higher interest rate if not withdrawn within required fixed period) as opposed to regular
savings deposit (also with passbook but withdrawable any time)
3. Negotiable Order of Withdrawal (NOW) Accounts Interest-bearing deposits which are
withdrawable by means of NOW; People v. Reyes, 454 SCRA 635 (2005): Now accounts are
interest-bearing accounts that combine payable on demand feature of checks and investment
feature of savings account, hence, NOW still deemed as check for purposes of estafa, although
gravamen is deceit, not negotiability
4. Time Deposits Interest-bearing deposits with specific maturity dates and evidenced by
certificates issued by the bank; BPI Family Savings Bank v. First Metro Investment
Corporation, 429 SCRA 30 (2004): Time deposits are deposits the payment of which cannot be
legally required within such specified number of days; International Exchange Bank v.
Commissioner of Internal Revenue, 520 SCRA 688 (2007): However, if withdrawn within
period, will be subject to interest as if regular savings deposit
5. Long Term Negotiable Certificates of Deposit Interest-bearing negotiable certificates of
deposit with a minimum maturity of 5 years.
6. If Foreign Currency Deposits Secs. 2 and 3, FCDA168
6. Money Market Placements Not Deposits Allied Banking Corporation v. Lim Sio Wan, 549
SCRA 504 (2008): Money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers do not directly deal with each
other but through middle man or dealer in open market. Money market transaction, like a deposit,
is a simple loan or mutuum, with the investor as a lender who loans his money to a borrower
through a middleman or dealer. Bank and client relationship is also creditor-debtor.
C.
CAPACITY OF DEPOSITORS
1. Minors Sec. 1, Presidential Decree No. 734: Minors at least 7 years of age and able to read and
write, have sufficient discretion, not otherwise disqualified by any other incapacity. 169 Sec. 22,
Thrift Banks Act
2. Married Women Sec. 5, Republic Act No. 7192
3. Corporations: Through signatories designated by Board of Directors Sec. 23, Corporation
Code
4. Bank Officers and Employees: Prohibited from maintaining demand deposits or current accounts
in banking office where they are assigned
D.
OPENING OF DEPOSIT ACCOUNTS

1. Know Your Customer Standards: At least 3 specimen signatures updated every 5 years, ID
optional
2. Prohibitions:
a. Anonymous Accounts/Fictitious Names Sec. 9(a), AMLA170
168 Republic Act No. 6426, as amended (Foreign Currency Deposit Act)
169 Sec. 22 of Thrift Banks Act contains a similar provision allowing minors (without a minimum age
requirement to open a bank deposit).
170 Republic Act No. 9160, as amended by Republic Act No. 9194 (Anti-Money Laundering Act of
2001)
154
b. Pseudonyms xArt. 178, Revised Penal Code; xCommonwealth Act No. 142, as amended;
xArts. 379-380, Civil Code
c. Exception: Numbered accounts Sec. 9(a), AMLA; Sec. 3(1), FCDA
3. Joint Accounts Arts. 485, 1207 and 1208, Civil Code
E.
ADMINISTRATION OF DEPOSIT ACCOUNTS

1. Deposit of Funds
a. Delivery required Art. 1934, Civil Code
b. Acceptability of withdrawal slips as deposits Firestone Tire & Rubber Co. of the Phil. v.
Court of Appeals, 353 SCRA 601 (2001): Deposit slips not legal tender, not negotiable,
therefore not acceptable.
c. Acceptance of checks without indorsement of payees Philippine National Bank v.
Rodriguez, 566 SCRA 513 (2008): Bank has duty to verify genuineness of signature of
drawer and to pay check strictly in accordance with drawers instructions, i.e., to the named
payee in the check, therefore, must require the check to be indorsed by the payee, otherwise,
bank will be liable for amount charged to drawers account; Go v. Metropolitan Bank and
Trust Company, 628 SCRA 107 (2010): Indorsement of crossed checks necessary for proper
negotiation of check especially if the payee or holder is not the one depositing the check.
d. Acceptance of managers check Equitable PCI Bank v. Ong, 502 SCRA 119 (2006):
Managers check is order of bank to pay, drawn upon itself, hence, regarded substantially as
good as cash; Security Bank and Trust Company v. Rizal Commercial Banking
Corporation, 577 SCRA 407 (2009): Managers check is one drawn by a banks manager
upon the bank itself, stands on the same footing as a certified check, which is deemed to have
been accepted by the bank that certified it
2. Withdrawal of Funds
a. From current accounts: Allowing withdrawal of value of check drawn:
(i)
In case of insufficiency of funds Moran v. Court of Appeals, 230 SCRA 799 (1994):
If deposit is sufficient, bank failure to pay entitled depositor to damages, conversely,
bank not liable for refusal to pay check for insufficiency of funds, even if funds
deposited later in the day; Villanueva v. Nite, 496 SCRA 459 (2006): If bank refuses to
pay check, payee-holder cannot sue bank, but instead sue drawer, who in turn may sue
bank
(ii)
Prior to clearing Associated Bank v. Tan, 446 SCRA 282 (2004): Bank allowing
withdrawal of face value of deposited check prior to clearing assumes risk of dishonor
(iii) In favor of other persons when check crossed Traders Royal Bank v. Radio
Philippines Network, Inc., 390 SCRA 608 (2002): If crossed check, bank duty bound to
ascertain indorsers title to check or nature of his possession because crossed check: (a)
may not be encashed but only deposited; (b) may be negotiated only once to one with
account in bank; (c) serves as warning that check issued for particular purpose and bank
must inquire if holder received check pursuant to said purpose, otherwise, he is not a
holder in due course.
b. From savings accounts Bank of the Philippine Islands v. Court of Appeals, 326 SCRA 641
(2000): Bank must require presentation of passbook and withdrawal slip and, if third party
withdraws, then presentation of authorization (SPA)
155
c. From time deposits Far East Bank and Trust Company v. Querimit, 373 SCRA 665
(2002): Bank must require surrender of certificate of time deposit.
d. From foreign currency deposits Sec. 5, FCDA: Based on contract.
e. If deceased depositor:
(i)
Tax clearance required Sec. 97, NIRC; But See: xSec. 28(A)(1)(a) and (6), NIRC
(ii)
Survivorship Agreements Vitug v. Court of Appeals, 183 SCRA 755 (1990):

Survivor-take-all feature allowed, obligation with term (death), not for unlawful
purpose (inofficious donation).
3. Interest on Deposits Demand, savings, NOW accounts, time deposits and deposit substitutes
shall not be subject to interest ceilings except when it constitutes unsafe and unsound banking
practice.
See Citibank, N.A. v. Cabamongan, 488 SCRA 517 (2006): deposit is a loan or forbearance of
money, so interest due is that stipulated in writing, and in absence thereof, 12% per annum
counted from time of demand.
4. Reserves Banks operating in Philippines required to comply with reserve requirements, i.e.,
percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in
deposit with BSP and therefore may not be lent.
5. Closing of Account Far East Bank and Trust Company v. Pacilan, Jr., 465 SCRA 372 (2005):
bank not liable for closing of account in exercise of banks rights under express rules and
regulations (due to frequent drawing of checks against insufficient funds)
G.
SECRECY OF BANK DEPOSITS See Chapter X Below
H.
GARNISHMENT
1. Procedure Sec. 9(c), Rule 39, 1997 Rules of Civil Procedure
2. Exempt Deposits
a. Foreign currency deposits Sec. 8, FCDA; But See xSalvacion v. Central Bank of the
Philippines, 278 SCRA 27 (1997)
b. Assets of institutions placed under receivership or liquidation Sec. 9, Rule 39, and Sec. 8,
Rule 57, 1997 Rules of Civil Procedure
c. Those exempt under the Rules of Court, such as provisions for individual and family use
sufficient for 4 months Sec. 13, Rule 39, 1997 Rules of Civil Procedure
3. No violation of Law on Secrecy of Bank Deposits xChina Bank v. Ortega, 49 SCRA 356
(1973); xPhilippine Commercial and Industrial Bank v. Court of Appeals, 193 SCRA 452 (1991)
4. No Liability for Release Pursuant to Court Order xRizal Commercial Banking Corporation
v. De Castro, 168 SCRA 49 (1988)
I.
DEPOSIT INSURANCE See Chapter IX Below
J.
UNCLAIMED BALANCES
1. Definition Sec. 1, Unclaimed Balances Law: dormant for ten (10) years
2. Report to Treasurer; Notice, Posting, Publication Mandatory Sec. 2, Unclaimed Balances
Law; xRepublic v. Court of Appeals, 345 SCRA 63 (2000)
156
3. Escheat Proceedings Sec. 3, Unclaimed Balances Law
4. Effects of Compliance/Non-Compliance Secs. 4 and 5, Unclaimed Balances Law
K.
ANTI-MONEY LAUNDERING ACT See Chapter XI(A) Below
IV. LOAN FUNCTION

A. BASIC CONCEPTS
1. Grant, Purpose, and Requirement of Loans Secs. 39 and 40, GBL;
a. Grant of loans Sec. 39, GBL: Only in amounts and for periods of time essential for effective
completion of operations to be financed; must be consistent with safe and sound banking
practices
b. Purpose of loans Sec. 39, GBL: Must be stated in application and in contract between bank
and borrower; if bank finds that proceeds employed, without its approval for other purposes,
bank has right to terminate loan and demand immediate repayment
c. Requirement for loans Sec. 40, GBL: Bank must ascertain that debtor capable of fulfilling
his commitments, hence, bank may require submission of financial statements; if financial
statements prove false or incorrect in any material detail, bank has right to terminate loan and
demand immediate repayment; United Coconut Planters Bank v. Ramos, 415 SCRA 596
(2003); Bank should verify identity and other information regarding its debtors; Banco de
Oro-EPCI, Inc. v. JAPRL Development Corporation, 551 SCRA342 (2008): Bank should
verify capacity to repay, if financial statements falsified, bank may terminate
2. Prohibited Transactions Secs. 55.1(c), 55.1(d), and 55.2, GBL: Prohibition against bank
officers and borrowers in overvaluing security, furnishing false statements, offering and accepting
gifts, fees, commissions for loan approval
3. Matters Subject to MB Regulation
a. Unsecured loans Sec. 41, GBL
b. Other security requirements Sec. 42, GBL; Sec. 106, NCBA
c. Terms and conditions Sec. 43, GBL
d. Renewal or extension Sec. 48 GBL; xSec. X332, MRB
e. Provisions for losses and write-offs Sec. 49 GBL
4. Development Assistance Incentives Sec. 46, GBL
5. Disclosure Requirements; Truth in Lending Act See Chapter XI(B) Below
B. TERMS AND CONDITIONS
1. Amortization Sec. 44, GBL: Adapted to nature of operations to be financed; if maturity more
than 5 years, provisions for periodic amortization; if purpose will not initially produce revenues,
may defer amortization, but initial date not later than 5 years
2. Pre-Payment Sec. 45, GBL: Borrower may, at any time, prepay loan or portion thereof, subject
to such reasonable terms agreed upon
3. Interest Art. 1956, Civil Code: Expressly stipulated in writing
157
a. No ceiling xSec. 1-a, 4-a, 45 of Usury Law 171; Bulos, Jr. v. Yasuma, 527 SCRA 727 (2007):
Although usury law suspended by C.B. Circular No. 905, s. 1982, still stipulated interest rates
are illegal if unconscionable (here 4% per month, other cases 3% per month unconscionable),
in which case, legal interest rate of 12% per annum shall apply; Bacolor v. Bangko Filipino
Savings and Mortgage Bank, Dagupan City Branch, 515 SCRA 79 (2007): 24% per annum
reasonable, also, banks closure does not diminish liquidators power to carry on
administration of bank including imposition of interest and institution of foreclosure
proceedings
b. Escalation clause; when allowable Art. 1308, Civil Code; Philippine National Bank v.
Court of Appeals, 196 SCRA 536 (1991): Provision allowing increase within limits allowed
by law at any time depending on whatever policy it may adopt in the future invalid because it
violates mutuality of contracts, especially in contracts of adhesion; New Sampaguita Builders
Construction, Inc. (NSBCI) v. Philippine National Bank, 435 SCRA 565 (2004): If
escalation clause annulled, subject to original or stipulated interest rate;
c. Floating rates of interest Consolidated Bank and Trust Corporation (Solid Bank) v. Court
of Appeals, 356 SCRA 671 (2001): If no reference rate upon which to peg variable interest
rate, then invalid
4. Extraordinary Inflation/Deflation Art. 1250, Civil Code; Equitable PCI Bank v. Ng Sheung
Ngor, 541 SCRA 223 (2007): (a) Valid escalation clause provides: (i) interest rate will only be
increased if applicable maximum interest rate increased by law or MB; and (ii) stipulated interest
rate will be reduced if maximum interest rate is reduced by law or MB; and (b) For extraordinary
inflation (or deflation to apply: (i) there is an official declaration of extraordinary inflation or
deflation from BSP: (ii) obligation is contractual in nature; and (iii) parties expressly agreed to
consider effects of extraordinary inflation or deflation.
C. SINGLE BORROWERS LIMIT (SBL) Sec. 35, GBL
1. Rationale: Credit risk or risk of loss due to the failure of a borrower to perform its contractual
obligations is one of the key risks that banks must adequately manage. SBL is a measure to deter
banks from concentrating their resources to one borrower.
2. Ceilings Sec. 35.1 and 35.2, GBL
a. Total credit commitment of bank to borrower shall at no time exceed 20% of net worth of
bank. Currently, BSP provides for a higher maximum limit of 25%, instead of the 20%
prescribed under the GBL.
Note: Net worth is the total 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 BSP Sec. 24, GBL
b. May be increased by an additional 10% of net worth of bank if adequately secured by trust
receipts, shipping documents, warehouse receipts or other similar documents transferring or
securing title covering readily marketable, non-perishable goods fully insured.
3. What Are Included/Excluded in Ceiling
a. Sec. 35.3, GBL: The prescribed ceilings shall include
i.
Direct liability of maker or acceptor of paper discounted with or sold to bank such bank
and liability of general indorser, drawer or guarantor who obtains a loan or discounts or
sells papers with such bank;
171 Act No. 2655 as amended
158
ii. If individual, include all liabilities of corporation, partnership, or association where he
owns or controls majority interest;
iii. If corporation, include all liabilities of subsidiaries in which corporation owns or controls
majority interest;
iv. If partnership, association, other entity, include liabilities of all members
b. Sec. 35.4, GBL: Notwithstanding that parent corporation, partnership, association, entity or
individual who controls majority interest in these entities has no liability to the bank,
liabilities of the subsidiary corporations or members of partnership, association, entity or such
individual shall be combined under certain circumstances, as prescribed by BSP, thus
i.
Parent guarantees repayment of the liabilities;
ii. Liabilities were incurred for accommodation of parent or other subsidiary thereof; or
iii. Subsidiaries operate merely as department/division of single entity.
c. Sec. 35.6, GBL: Interbank loan transactions subject to SBL; and
d. Sec. 35.7, GBL: Certain types of contingent accounts may be included among those subject to
SBL.
e. Sec. 35.5, GBL: The following are excluded:
i.
Loans and other credit accommodations secured by obligations of BSP or GOP, fully
guaranteed by GOP;
ii. Loans and other credit accommodations fully guaranteed by GOP as to payment of
principal and interest;
iii. Loans and other credit accommodations to the extent covered by hold-out on, or
assignment of, deposits maintained in lending bank;
iv. Loans and other credit accommodations to the extent covered by margin deposits; and
v. Other non-risk items, as determined by MB
4. Sanctions Violations of provisions of SBL subject to monetary and non-monetary penalties.
D. DOSRI ACCOUNTS Sec. 36, GBL; Sec. 26, NCBA; Secs. 32 and 33, Corporation Code
1. Rationale: Unqualified DOSRI lending has been a major factor in the collapse of banks. The
rationale of limits on DOSRI loans is to inhibit the banks DOSRI from availing of the credit
facilities of the bank for their own purposes and benefit, in order not to lessen the banks capacity
to meet the needs of the community it serves.
2. Coverage
a. Persons Covered
i.
Directors
ii. Officers
iii. Stockholders of record owning at least 1% of stock of the bank 172
172 (a) whether acting personally or through an attorney-in-fact, duly authorized representative, or
trustee designated pursuant to a proxy or voting trust agreement; and
(b) whether individually or collectively with: (i) his spouse and/or relative within first degree of
consanguinity or affinity; (ii) partnership of which he is a general partner; and (iii) corporation of which he
owns majority of the subscribed capital stock
159
iv. Related Interests of DOS of bank173
b. Transactions Covered:174
i.
Direct Borrowings: DOS becomes: (a) a borrower of the bank; (b) a guarantor, indorser,
surety for loans from the bank; or (c) the loan or credit accommodation to another party is
secured by property interest or right of the DOS.
ii. Indirect Borrowings: if any of the covered transactions, the borrower, guarantor, endorser
or surety is a RI.
3. Ceilings/Exclusions
a. Individual Ceiling amount equivalent to DOSRIs unencumbered deposits and book value of
paid-in capital contribution in bank, subject to following exclusions:
i.
Loans, other credit accommodations and guarantees to the extent secured by assets
considered as non-risk by MB;
ii. Loans, other credit accommodations and advances to officers in the form of fringe
benefits; and
iii. Loans, other credit accommodations and guarantees extended by Coop Bank to its
cooperative shareholders.
Note: Unsecured loans, other credit accommodations and guarantees to each of the banks
DOSRIs shall not exceed 30% of their total loans, other credit accommodations and
guarantees.
173 Related Interests refer to:

(i) DOS spouse and/or relative within first degree of consanguinity or affinity;
(ii) partnership of which DOSRI is a general partner;
(iii) co-owner with DOSRI of interest or right mortgaged, pledged, or assigned to secure the DOSRI
loans;
(iv) corporation, association or firm of which DOSRI is director of officer;
(v) corporation, association or firm of which DOSRI owns at least 20% of subscribed capital stock;
(vi) corporation, association or firm wholly or majority owned or controlled by any related entity or
group of entities mentioned in (ii), (iv) and (v) above;
(vii) corporation, association or firm which owns or controls directly or indirectly whether singly or as a
part of group of RI at least 20% of subscribed capital stock of substantial stockholder of lending bank or
which controls majority interest of the bank;
(viii) corporation, association or firm which has an existing management contract or any similar
arrangement with parent of lending bank.
174 Transactions covered includes:
(i) any advance by means of incidental or temporary overdraft, cash item, vale, etc.;
(ii) any advance of unearned salary or other unearned compensation for periods in excess of 30 days;
(iii) any advance by means of Drawings Against Uncollected Deposits (DAUDs);
(iv) outstanding availments under an established credit line;
(v) drawings against an existing letter of credit;
(vi) acquisition of any note, draft, bill of exchange or other evidence of indebtedness upon which the
banks DOSRIs may be liable as makers, drawers, acceptors, endorsers, guarantors or sureties;
(vii) indirect lending such as loans or other credit accommodations granted by another financial
intermediary to said DOSRIs from funds of the bank invested in the other institutions trust or othe
department when there is a clear relationship between the transactions;
(viii) increase of an existing indebtedness, as well as additional availments under a credit line or
additional drawings against a letter of credit;
(ix) sale of assets, such as shares of stock, on credit; and
(x) any other transaction as a result of which banks DOSRIs become obligated or may become
obligated to lending bank, by any means whatsoever to pay money or its equivalent.
160
b. Aggregate Ceiling amount shall not exceed 15% of total loan portfolio of bank or 100% of
its net worth, whichever is lower, subject to the following exclusions:
i.
Credit accommodations or portions thereof to the extent secured by assets considered as

non-risk by MB;
ii. Loans, other credit accommodations and advances to officers in the form of fringe
benefits;
iii. Loans, other credit accommodations and guarantees extended by Coop Bank to its
cooperative shareholders;
iv. Credit accommodations to a corporate stockholder: (a) which is a non-financial
institution; (b) whose shares are listed and traded in PSE; and (c) with no person or group
of persons related within first degree of consanguinity or affinity holds more than 20% of
subscribed capital stock.
v. Credit accommodations to GOCCs, in cases where a DOS of lending bank is a
representative of the government in the borrowing corporation and does not hold any
proprietary ins=terest in such coporation.
Note: Total unsecured loans, other credit accommodations and guarantees to banks DOSRIs
shall not exceed 30% of aggregate ceiling or the outstanding loans, other credit
accommodations and guarantees, whichever is lower.
3. Requirements
a. Dealings shall be upon terms not less favorable to bank than those offered to others;
b. Loan must be approved in writing by majority of all directors of bank, excluding director
concerned; and
c. Approval shall be entered upon records of bank and copy transmitted to BSPs Supervision
and Examination Department (SED).
4. Sanctions If there is a violation of Sec. 36 of GBL, upon due notice to Board of Directors, the
office of director or officer who violates may be declared vacant and the director or officer may be
subject to penal provisions of NCBA.
E. COLLATERAL/SECURITY
1. Unsecured Loans
2. Joint and Solidary Signature (JSS) Art. 2047, Civil Code; xArts. 1207 to 1225, Civil Code;
Philippine National Bank v. Court of Appeals, 198 SCRA 767 (1991): liability of surety based on
contract; Security Bank and Trust Company, Inc. v. Cuenca, 341 SCRA 781 (2000): suretyship
strictly construed against creditor, hence, surety not liable beyond amount or period stipulated,
even if continuing surety agreement, absent clear showing that surety waived right to be notified
or to give consent.
3. Loans Secured by Chattels or Intangible Property
a. Limits Sec. 38, GBL: not exceed 75% appraised value of security
b. Types of security
(i)
Chattel Mortgage See Chattel Mortgage Law, Chapter XI(C) Below
(ii)
Pledge xArts. 2085-2123, Civil Code
(iii) Hold-out and/or Assignment xArts. 1624-1635, Civil Code
161
4. Loans Secured by Real Estate Mortgages (REMs) See Also Real Estate Mortgage Law,
Chapter XI (D) Below
a. Limits Sec. 37, GBL: not exceed 75% appraised value of real estate, plus 60% appraised
value of insured improvements
b. Mortgagee in good faith vs. mortgagee in bad faith Philippine National Cooperative Bank
v. Carandang-Villalon, 139 SCRA 570 (1985): Old rule, bank not required to investigate title
of property; Development Bank of the Philippines v. Court of Appeals, 331 SCRA 267
(2000): Due diligence required of banks: (i) send representatives to premises; and (ii)
investigate who are real owners of property; Canlas v. Court of Appeals, 326 SCRA 425
(2000): Degree of diligence more than good father of a family, because public interest.
c. Acquisition of property by way of satisfaction of claims Sec. 52, GBL: Property (i)
mortgaged to bank in good faith by way of security for debts, (ii) conveyed to bank in
satisfaction of previously contracted debt, or (iii) purchased under judgments, decrees,
mortgages, trust deeds, bank may acquire but must dispose within 5 years
d. Dragnet Clause or Blanket Mortgage Clause Union Bank of the Philippines v. Court
of Appeals, 471 SCRA 751 (2005): Mortgage liability is usually limited to amount in contract,
but if manifest intent of parties that mortgaged property shall also answer for future loans,
then the clause is valid.
5. Foreclosure of REMs Sec. 47, GBL; See Also Real Estate Mortgage Law, Chapter XI (D)
Below
a. Types of foreclosure
(i)
Judicial Rule 68, Rules of Court
(ii)
Extra-judicial Act No. 3135, as amended
(iii) Specific rules for TB/RB/Coop Banks Sec. 6, Rural Banks Act; xSubsecs.2311.4 and
3311.4, MRB
b. Right and period of redemption Sec. 47, par. 1, GBL: General rule, one (1) year from
registration of certificate of sale.
i.
Exception: Extrajudicial foreclosure of property mortgaged by juridical person Sec.

47, par. 2, GBL: registration of certificate of sale, but not exceeding three (3) months
ii.
Exercise of right of redemption Metropolitan Bank and Trust Company v. Tan, 569
SCRA 814 (2009): Statement of intent to redeem must be with actual and simultaneous
tender of payment
iii.
Extension of redemption period Lazo v. Republic Surety and Insurance Co., 31

SCRA 329 (1970): Legal redemption converted by agreement of parties to conventional
redemption; Ibaan Rural Bank, Inc. v. Court of Appeals, 321 SCRA 88 (1999):
estoppel (2 year period annotated on certificate of sale).
iv.
Tolling of redemption period Sumerariz v. Development Bank of the Philippines, 21

SCRA 1374 (1967): Period not tolled; Peoples Financing Corporation v. Court of
Appeals, 192 SCRA 34 (1990): Not even by TRO; But See Consolidated Bank and
Trust Corporation (Solidbank) v. Intermediate Appellate Court, 150 SCRA 591
(1987): Yes, period tolled; See Also CMS Stock Brokerage, Inc. v. Court of Appeals,
275 SCRA 790 (1997): In prior case of Consolidated Bank, there was fraud, hence,
period tolled
c. Redemption Price Sec. 47, par. 1, GBL: amount due under mortgage deed plus stipulated
interest, costs, expenses less income; Sec. 6, Act No. 3135, as amended; Sec. 28, Rule 39,
1997 Rules of Civil Procedure; Union Bank of the Philippines v. Court of Appeals, 359
162
SCRA 480 (2001): Foreclosure of REM by banks governed by GBL (GBA then) which
amends Act No. 3135, hence, Section 30, Rule 39 of Rules of Court not applicable.
d. Possession Sec. 47, par. 1, GBL; Samson v. Rivera, 428 SCRA 759 (2004): Issue of WOP
ministerial, even within redemption period
e. Injunction and Bond Sec. 47, par. 1, GBL
163
V. INVESTMENTS AND OTHER FUNCTIONS OF BANKS
A. EQUITY INVESTMENTS175
1. Limits on Equity Investments of UB
a. In general Sec. 24, par. 1, GBL: May invest in equity of allied enterprises 176 (financial177 or
non-financial178) and non-allied enterprises 179; xAgan, Jr. v. Philippine International Air
Terminals Co., Inc., 402 SCRA 612 (2003)
(i)
Must be with prior approval of MB Sec. 24, par. 4, GBL
(ii)
Total investment in equities of allied and non-allied enterprises Sec. 24.1, GBL: Max.
50% of net worth
(iii) Investment in equity of any one enterprise Sec. 24.2, GBL: Max. 25% of net worth
(iv)
Definition of net worth Sec. 24, par. 3, GBL: total unimpaired paid-in capital
including paid-in surplus, retained earnings and undivided profits, net of valuation
reserves and other adjustments as may be required by BSP
(v)
Do the foregoing limits apply to debt-to-equity conversions? No. xSec. 52, GBL (by
analogy)
b. In specific areas
(i)
In financial allied enterprises Sec. 25, GBL: Up to 100% of TB, RB, or financial
allied enterprise; if publicly listed, up to 100% of only one other UB or KB
(ii)
In non-financial allied enterprises Sec. 26, GBL: Up to 100% of equity
(iii) In non-allied enterprises Sec. 27, GBL: Whether UB or its wholly or majority-owned
subsidiary, Max. 35% of equity and voting stock of non-allied enterprise
175 For other types of banks, See: (1) Sec. 12, Thrift Banks Act; (2) Sec. 13, Rural Banks Act; and (3)
Sec. 6(11), Islamic Bank Charter
176 Allied enterprises are related services that may be rendered by banks, and are classified into
financial and non-financial.
177 Banks may invest in equities of financial allied enterprises, which include: (i) leasing companies;
(ii) banks; (iii) investment houses; (iv) financing companies; (v) credit card companies; (vi) financial
institutions catering to SMEs, including venture capital corporations; (vii) companies engaged in stock
brokerage/securities dealership; (viii) companies engaged in foreign exchange dealership/ brokerage; and
(ix) trust corporations. In addition, UB may invest in the following financial allied enterprises: (i) insurance
companies; and (ii) holding companies.
178 Banks may invest in equities of non-financial allied enterprises, which include: (i) warehousing
companies; (ii) storage companies; (iii) safety deposit box companies; (iv) companies primarily engaged in
management of mutual funds, but not in mutual funds themselves; (v) management corporations
engaged in activity similar to management of mutual funds; (vi) companies engaged in providing computer
services; (vi) insurance agencies/brokerages; (viii) companies engaged in home building and home
development; (ix) companies providing drying and/or milling facilities for agricultural crops such as rice
and corn; (x) service bureaus, organized to perform, for and in behalf of banks and non-bank financial
institutions, services allowed to be outsourced; (xi) Philippine Clearing House Corporation, Philippine
Central Depositary, Inc., Fixed Income Exchange; (xii) health maintenance organizations; and (xiii) similar
activities as declared by MB.
179 Only UB may invest in equities of non-allied enterprises, which include: (i) enterprises engaged in
physically productive activities in agriculture, mining and quarrying, manufacturing, public utilities,
construction, wholesale trade and community and social services; (ii) industrial park projects and/or
industrial estate developments; (iii) financial and commercial complex projects; (iv) such other broad
categories as MB may declare.
164
(iv)
In quasi-banks Sec. 28, GBL: MB may limit to 40% of equity to promote competitive
conditions
2. Limits on Equity Investments of KB

a. In general Sec. 30, par. 1, GBL: May invest in equity of allied (financial and non-financial)
enterprises only
(i)
Must be with prior approval of MB Sec. 30, par. 3, GBL
(ii)
Total investment in equities of allied (financial or non-financial) enterprises Sec. 30.1,

GBL: Max. 35% of net worth
(iii) Investment in equity of any one enterprise Sec. 30.2, GBL: Max. 25% of net worth
b. In specific areas
(i)
In financial allied enterprises Sec. 31, GBL: Up to 100% of TB or RB; if other

financial allied enterprise, including another commercial bank, minority holding only
(ii)
In non-financial allied enterprises Sec. 32, GBL: Up to 100% of equity
(iii) In quasi-banks Sec. 28, GBL: MB may limit to 40% of equity to promote competitive
conditions
B. OTHER KB FUNCTIONS Sec. 29, GBL
1. Non-Core/Quasi-Banking Functions Sec. 4, GBL; Sec. 95, NCBA
2. Issuing L/Cs180 Sec. 105, NCBA; See Discussions Under Letters of Credit and Trust
Receipts Law
3. Foreign Exchange Operations: Buying and selling foreign exchange and gold or silver bullion
Secs. 76-80, NCBA
C. OTHER SERVICES Sec. 53, pars. 1-3, GBL
1. Custodian of Funds, Documents, Valuable Objects Sec. 53.1, GBL
2. Financial Agent Sec. 53.2, GBL; Panlilio v. Citibank, N.A., 539 SCRA 69 (2007): investment
management activities may be exercised by bank, and it creates principal-agent, not trustor-trustee
(trusts) or creditor-debtor (deposits), relationship, so governed by rules on agency
3. Collection/Payment Agent Sec. 53.3, GBL
4. Financial Adviser Sec. 53.4, GBL
5. Renting Out Safety Deposit Boxes Sec. 53.5, GBL; CA Agro-Industrial Development
Corporation v. Court of Appeals, 219 SCRA (1993): (a) It is not ordinary contract of lease
(because full and absolute control and possession of safety deposit box not with renter) but special
kind of deposit; (b) stipulation exempting from liability for loss due to fraud, negligence or delay
is void as contrary to law and public policy; (c) if no stipulation, degree of diligence is good father
of family; Sia v. Court of Appeals, 222 SCRA 24 (1993): while fortuitous event may exempt bank
from liability, its failure to give notice of the fortuitous event renders it liable (flooding which
damaged stamp collection).
180 Abad v. Court of Appeals, 181 SCRA 191 (1990); Reliance Commodities, Inc. v. Daewoo
Industrial Co., Ltd., 228 SCRA 545 (1993);Metropolitan Waterworks and Sewerage System v. Daway, 432
SCRA 559 (2004);
165
D. OTHER FUNCTIONS/OPERATIONS
1. Issue Guarantees See Sec. 74, General Banking Act
2. Act as Correspondent Bank Feati Bank & Trust Company v. Court of Appeals, 196 SCRA
576 (1991): If L/C transactions, correspondent banks liability depends on whether it is merely an
advising, or it is a confirming, bank; Philippine National Bank v. Court of Appeals, 259 SCRA
174 (1996): Local bank, while acting as correspondent bank, cannot intercept funds coursed
through it by foreign counterpart for transmittal and deposit to account of individual with another
local bank, and thereafter apply funds to obligations owed to it by individual
3. Credit Card Operations
4. Trust Operations Secs. 79 to 93, GBL: Provides for rules on trust operations by a trust entity
to govern trustor-trustee-beneficiary relationship; But trust operations must be carried on by a
separate unit.
E. PROHIBITED ACTS
1. Insurance business Sec. 54, GBL: bank shall not directly engage in insurance business 181
2. Outsourcing of inherent bank functions Sec. 55(1)(e), GBL
VI. BANK REGULATIONS
A.
OWNERSHIP/CAPITALIZATION OF BANKS
1. Organization Sec. 8, GBL
a. Stock corporation Sec. 8.1, GBL
(i)
Issuance of stocks Sec. 9, GBL: MB may prescribe rules and regulations on types of
stock issued by bank to ensure compliance with governing capital and equity structure;
provided, only par value shares may be issued by bank
(ii)
Treasury stocks Sec. 10, GBL: Bank cannot acquire own shares or accept own shares
as security for a loan, except with MB approval; provided, if so acquired, sold within 6
months; Fua Cun v. Summers, 44 Phil. 705 (1923): Bank has no lien on shares of stock
for indebtedness of stockholder; Filipinas Mils, Inc. v. Dayrit, 192 SCRA 177 (1990):
Based on Sec. 24 of GBA, both specific and general exception; now, under Sec. 10 of
GBL, only 1 exception, with MB approval
b. Funds obtained from the public (20 or more persons) Sec. 8.2, GBL
c. Minimum capital requirements (amount in million Pesos) Sec. 8.3, GBL; xBSP Circular
No. 257 (Series of 2000)
d. Capability and other requirements Sec. 8, par. 2, GBL: Determine capability in terms of
financial resources and technical expertise, assessment of ownership structure, directors,
senior management, operating plan, internal controls, financial projects and capital base
2. Stockholdings
a. Foreign stockholdings
i.
Individuals and non-bank corporations Sec. 11, GBL: aggregate up to 40% of voting
stock of domestic bank; xBSP Circular No. 256 (Series of 2000)
181 As defined under Sec. 2, Insurance Code
166
ii.
Foreign banks Secs. 11 and 73, GBL; Foreign Banks Liberalization Act; See
Chapter II(I) Above
b. Filipino stockholdings
(i)
Individuals and non-bank corporations Sec. 11, par. 1, GBL: individually up to 40%
of voting stock of domestic bank; xBSP Circular No. 256 (Series of 2000); xBSP
Circular No. 332 (Series of 2002)
(ii)
Domestic banks Sec. 25, GBL (for UB); Sec. 31, GBL (for KB)
c. Stockholdings of family groups or related interests Secs. 12 and 13, GBL: What must be
disclosed: transactions of (i) individual with bank if stockholdings of individuals related
within 4th degree of consanguinity or affinity, legitimate or common-law (considered family
groups); (ii) corporations with bank if 2 or more corporations owned by same family group or
group of persons (considered related interests); xBSP Circular No. 332 (Series of 2002)
d. Required public offering: At least 10% of capital stock of UB xSec. 2.2, BSP Circular No.
271 (Series of 2001)
B.
DIRECTORS AND OFFICERS

1. Composition of Board Secs. 15 and 17, GBL: (a) Corp. Code notwithstanding, 5-15 Directors
(but if merger or consolidation, up to 21), with at least 2 Independent Directors (person other than
officer or employee of bank, subsidiaries, related interests); (b) Non-Filipinos may be directors to
represent extent of foreign participation; Sec. 7, Foreign Banks Liberalization Act; Sec. 23,
Corporation Code
2. Qualifications
a. Own at least one share Sec. 23, Corporation Code
b. Fit and proper rule Sec. 16, GBL: (i) To maintain quality of bank management and afford
better protection to depositors and public, MB shall prescribe, pass upon, and review
qualifications and disqualifications of directors and officers and disqualify those unfit; (ii)
after due notice to Board of Directors of bank, MB may disqualify, suspend, or remove any
bank director or officer who commits or omits act which renders him unfit for the position;
(iii) in determining fitness, consider integrity, experience, education, training, competence
Busuego v. Court of Appeals, 304 SCRA 473 (1999): although involving Savings and Loans
Associations, MB has wide latitude in administrative proceedings and prior notice and hearing
not strictly required, so Sec. 16 of GBL controlling;
c. Other minimum qualifications xGuidelines for the Establishment of Banks
3. Disqualifications xGuidelines for the Establishment of Banks
a. Criminal conviction Sec. 27, Corporation Code; Sec. 17, PDIC Charter
b. Public officials (whether appointive or elective) Sec. 19, GBL: cannot serve as officer in
private bank, except if incidental to financial assistance of GOP/GOCC to bank, or otherwise
provided by law; Sec. 5, Rural Banks Act; xSec. 10, Appendix 38, MRB (Guidelines For The
Organization Of Cooperative Banks)
c. MB member/BSP personnel Secs. 9 and 27, NCBA: DQ as officer, director, lawyer or
agent, employee, consultant or stockholder, directly or indirectly, of any bank, quasi-bank, or
BSP-regulated entity, except non-stock savings and loans associations solely for BSP
employees
4. Compensation and Other Benefits Sec. 18, GBL: MB may regulate compensation and other
benefits in exceptional cases where circumstances warrant, i.e., bank under comptrollership or
167
conservatorship, found by MB to be conducting business in unsafe and unsound manner, or in an
unsatisfactory financial condition; Sec. 30, Corporation Code
5. Meetings Sec. 15, par. 3, GBL: teleconferencing and video-conferencing allowed; Sec. 25,
Corporation Code; xSEC Memorandum Circular No. 15 dated 20 November 2001
6. Powers of Directors
a. General Powers Sec. 23, Corporation Code; xBSP Circular No. 283 (Series of 2001);
xSubsec. X141.3, MRB
b. Specific Duties/ Responsibilities xSubsec. X141.5 and 4141Q5, MRB
c. Certification of Directors xBSP Circular No. 283 (Series of 2001)
7. Doctrine of Apparent Authority182 Prudential Bank v. Court of Appeals, 223 SCRA 350
(1993): bank liable to innocent third persons if representation is made in course of its business by
agent acting within general scope of his authority even though agent secretly abusing the same to
perpetrate fraud; First Philippine International Bank v. Court of Appeals, 252 SCRA 259
(1996): third person not chargeable with knowledge of internal memoranda showing limited actual
authority; BPI Family Savings Bank, Inc. v. First Metro Investment Corporation, 429 SCRA 30
(2004): third person not chargeable with what transpires in board room; Associated Bank v.
Pronstroller, 558 SCRA 113 (2008): apparent authority ascertained through: (a) general mannter
in which bank holds out officer or agent as having power to act, with which it clothes him; or (b)
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
within or beyond scope of his ordinary powers; Prudential Bank and Trust Company (now Bank
of the Philippine Islands) v. Abasolo, 631 SCRA 367 (2010): doctrine not applicable if there was
no reliance on representations of bank official
8. Prohibited Acts Sec. 55.1, GBL: make false entries in bank report or participate in fraudulent
transaction; disclose, without court order, information regarding deposits; accept
gifts/fees/commissions for loan approval; overvalue security; outsource inherent banking
functions
D.
BANK OPERATIONS
1. Branches Secs. 20, 74 to 75, GBL: (a) With prior MB approval, UB or KB may open branches
within or outside RP (other banks, pertinent law); (b) With prior MB approval, bank may use
branches as outsets for presentation/sale of financial products of allied undertaking/investment
house units; (c) Bank responsible for business in branches as if in head office, and bank and its
branches treated as one unit.
2. Banking Days and Hours Sec. 21, GBL: Unless BSP authorizes in interest of public, all banks
including branches and offices transact business on all working days (Mondays to Fridays, except
holidays) for at least 6 hours, and on Saturdays, Sundays and holidays for at least 3 hours (submit
report to BSP); xSec. X156, MRB; xCircular No. 500, Series of 2005
3. Independent Auditor Sec. 58, GBL: MB may require bank to engage services of independent
auditor
4. Financial Statements Secs. 60 to 62, GBL: (a) regular submission; (b) publication; (c) capital
stock
5. Electronic Transactions Sec. 59, GBL: BSP may regulate
6. Unsound Banking Practice Sec. 56, GBL; xBSP Circular No. 341 (Series of 2002)
182 Limketkai Sons Milling, Inc. v. Court of Appeals, 1 December 1995; Rural Bank of Milaor
(Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000); Philippine Commercial and International Bank v. Court
of Appeals, 350 SCRA 446 (2001)
168
a. Factors to be considered by MB: If act or omission
i.
Resulted or may result in material loss or damage, or abnormal risk or danger to safety,
stability, liquidity and solvency of bank
ii. Resulted or may result in material loss or damage, or abnormal risk to banks depositors,
creditors, investors, stockholders, BSP, public in general
iii. Caused undue injury or has given unwaranted benefits, advantage or preference to bank or
any party in discharge by director or officer of his duties and responsibilities through
manifest partiality, evident bad faith or gross inexcusable negligence
iv. Involves entering into contract or transaction manifestly and grossly disadvantageous to
bank, whether or not director or officer profited
b. Effect of persistence in conducting business in unsafe and unsound manner: MB may
i.
Without prejudice to administrative sanctions under Sec. 37 of NCBA
ii. Take action under Sec. 30 of NCBA (receivership and liquidation)

iii. Immediately exclude erring bank from clearing, provisions of law to the contrary
notwithstanding
7. Settlement of Disputes Sec. 63, GBL; Home Bankers Savings and Trust Co. v. Court of
Appeals, 318 SCRA 558 (1999): Primary recourse to PCHC arbitration for disputes between
banks involving check cleared, subject to right to petition court for measures to
safeguard/conserve matter subject of arbitration; Allied Banking Corporation v. Court of
Appeals, 294 SCRA 803 (1998): Decisions of Arbitration Committee final and executory, except
by way of appeal on questions of law to RTC (Sec. 13, PCHC Rules); Insular Savings Bank v.
Far East Bank and Trust Company, 492 SCRA 145 (2006): Remedies: (a) Petition RTC to issue
order vacating award on grounds provided under Sec. 24 of Arbitration Law; (b) Petition for
review under Rule 43 with CA on questions of fact, of law, or both; or (c) Petition for certiorari
under Rule 65 with CA on grounds of grave abuse of discretion by Arbitration Committee.
E.
OTHER REGULATIONS
1. Risk Based Capital Sec. 34, GBL:
a. MB Authority MB shall prescribe minimum net-worth-to-risk-assets ratio: (i) in accordance
with internationally accepted standards; (ii) which may be suspended if necessary for max.
period of 1 year; and (iii) which shall be applied uniformly to all banks of same category.
b. Effect of Non-Compliance MB may: (i) limit or prohibit distribution of net profits and
require the same to be used to increase capital accounts of bank until minimum requirements
are met; (ii) restrict or prohibit acquisition of major assets, making of new investments, except
purchase of readily marketable evidences of indebtedness of GOP or BSP or obligations
guaranteed by GOP, until minimum ratio restored.
2. Major Investments/Ownership of Real Property Secs. 50 to 52, GBL: (a) major acquisitions
or investments subject to MB criteria to avoid undue risk; (b) real estate necessary for its own use
allowed, but such real estate, improvements and equipment (including equity investment in realty
company) should not exceed 50% of combined capital accounts, except Sec. 52 (see previous
discussions)
3. Declaration of Dividends Sec. 57, GBL: Prohibited if: (a) clearing account with BSP
overdrawn; (b) deficient in liquidity floor for GOP deposits for 5 or more consecutive days; (c)
non-compliance with BSP liquidity standards; (d) committed major violation as determined by
BSP
169
F.
PENALTY FOR VIOLATIONS Sec. 66, GBL: quo warranto; Sec. 34-37, NCBA: refusal to make
reports, false statements, proceedings upon violation, administrative sanctions on banks and officers ;
Perez v. Monetary Board, 20 SCRA 592 (1967): BSP may cause prosecution, but not compelled by
mandamus; private person may initiate.
VII. BANKS IN DISTRESS;

CESSATION OF BANKING BUSINESS
A.
LOANS TO BANKS
1. Loans without collateral Sec. 83, NCBA: For purposes of providing liquidity to banking
system in times of need, BSP may extend loans and advances to banks for period not exceeding 7
days without collateral
2. Emergency loans Sec. 84, NCBA: (a) in periods of national and/or local emergency or of
imminent financial panic which directly threaten monetary and banking stability; (b) even during
normal periods, for purpose of assisting banks in precarious financial condition or under serious
financial pressures due to fortuitous events (provided bank is not insolvent), MB (by vote of at
least 5 members) may authorize BSP to grant extraordinary loans or advances to banks secured by
assets, in amount not exceeding 50% of total deposits and deposit substitutes of bank, released in
2 tranches of 25% maximum each
B.
CONSERVATORSHIP Sec. 67, GBL: applies to banks and quasi-banks; Secs. 29 and 30, NCBA
1. Ground Sec. 29, par. 1, NCBA: MB may appoint conservator when, based on report submitted
by appropriate SED, MB finds that bank/quasi-bank in state of continuing inability or
unwillingness to maintain condition of liquidity deemed adequate to protect interest of depositors
and creditors
2. Appointment of Conservator Sec. 29, par. 1 and Sec. 30, last par. NCBA: Designation of
conservator vested exclusively with MB; designation of conservator not precondition to
designation of receiver
3. Powers of Conservator Sec. 29, par. 1, NCBA: such powers as MB deems necessary to take
charge of assets, liabilities, and management, reorganize management, collect monies/debts due,
and restore viability; First Philippine International Bank v. Court of Appeals, 252 SCRA 259
(1996): conservator merely takes place of banks Board of Directors; hence, powers of
conservator, though enormous and extensive, cannot extend to post-facto repudiation of perfected
transactions, otherwise, would infringe non-impairment clause of Constitution, at most, merely
gives conservator power to revoke contracts that under existing law are deemed defective
4. Qualifications and Remuneration Sec. 29, pars. 2 and 3, NCBA
5. Period Sec. 29, par. 2, NCBA: Shall not exceed one (1) year
6. Termination of Conservatorship Sec. 29, par. 2 and last par., NCBA:
a. When MB satisfied that bank can continue to operate on its won and conservatorship no
longer necessary; or
b. If MB, on basis of report of conservator or its own findings, determines that continuance in
business of bank will involve probable loss to depositors or creditors, in which case, Sec. 30
of NCBA (receivership and liquidation) will apply
170
7. Effect: Bank cannot be compelled to pay same bonuses to employees xProducers Bank of the
Philippines v. NLRC, 355 SCRA 489 (2001)
8. Judicial Review Sec. 30, 2nd to last par., NCBA: MB action under Secs. 29 and 30 final and
executory, and may not be restrained, except on petition for certiorari on ground of grave abuse of
discretion amounting to lack or excess of jurisdiction. Petition may only be filed by stockholders
of record representing majority of capital stock within 10 days from receipt by Board of order
directing receivership, liquidation or conservatorship
C.
VOLUNTARY LIQUIDATION Sec. 68, GBL: If voluntary liquidation of RP bank or RP branch or

office of foreign bank, prior written notice sent to MB, and MB may intervene and take necessary
steps to protect creditors interest
D.
RECEIVERSHIP AND INVOLUNTARY LIQUIDATION Sec. 69, GBL: applies to banks and, to
extent possible, quasi-banks; Secs. 30 to 33, NCBA
1.
Governing Law In Re: Petition for Assistance in the Liquidation of the Rural Bank of Bokod
(Benguet), Inc., PDIC v. Bureau of Internal Revenue, 511 SCRA 123 (2006): NCBA governs,
and since it has substantially different provisions for involuntary dissolution and liquidation under
Corporation Code, requirements in one cannot be imposed in other
2.
Jurisdiction Koruga v. Arcenas, Jr., 590 SCRA 49 (2009): MB exercises exclusive jurisdiction
over proceedings for receivership of banks, and not the RTC
3.
Grounds MB may, summarily and without need of prior hearing, close bank and designate
PDIC as receiver:
a. Sec. 30, NCBA: Whenever, upon report of head of SED, MB finds that bank
i.
Is unable to pay liabilities as they become due in ordinary course of business (not include
inability to pay caused by extraordinary demands induced by financial panic in banking
community)
ii. has insufficient realizable assets, as determined by BSP, to meet its liabilities
iii. cannot continue in business without involving probable losses to its depositors or
creditors
iv. has willfully violated final CDO under Sec. 37 of NCBA, involving acts or transactions
amounting to fraud or dissipation of assets of bank
b. Sec. 36, NCBA: Whenever bank persists in carrying on its business in unlawful or unsafe
manner
c. Sec. 53, GBL: Whenever bank notifies BSP or publicly announces bank holiday, or in any
manner suspends payment of deposit liabilities continuously for more than 30 days
Banco Filipino Savings and Mortgage Bank v. Monetary Board, 204 SCRA 767 (1991): Under
Sec. 29 of Central Bank Act (R.A. No. 265), MB may order closure and receivership of bank upon
finding of insolvency or when continuance in business will involve probable loss to depositors
and creditors, but the following are mandatory requirements: (a) examination of condition of bank
conducted by head of appropriate SED or his examiners or agents; (b) examination discloses that
grounds exist; (c) department head concerned shall inform MB in writing of facts; (d) MB shall
find statements of department head to be true; here, no showing of insolvency, hence, closure
premature; Rural Bank of San Miguel, Inc. v. Monetary Board, Bangko Sentral ng Pilipinas,
516 SCRA 154 (2007): Under NCBA, which was repealed by NCBA, in 1993, only report of head
of SED is necessary, not examination conducted by head, purpose to make closure of bank
summary
171
3.
Who May Be Receiver Sec. 30, NCBA: PDIC for banks; any person of recognized competence
in banking or finance for quasi-banks
4.
Duties of Receiver Sec. 30, NCBA: The receiver shall:

a. immediately gather and take charge of all assets and liabilities of bank, administer the same
for benefit of creditors, exercise general powers of receiver under Rules of Court, but shall not
(except for administrative expenses) pay, or transfer or dispose of assets, but may make
nonspeculative investments;
See Larrobis, Jr. v. Philippine Veterans Bank, 440 SCRA 34 (2004): bank cannot do new
business (grant new loans or accept new deposits) but receiver obliged to collect pre-existing
debts and foreclose, if necessary
b. determine ASAP, not later than 90 days, if bank may be rehabilitated or otherwise placed in
condition that it may be permitted (by MB) to resume business with safety to its depositors;
c. otherwise, liquidate bank.
5.
Close Now-Hear Later Doctrine183 Central Bank of the Philippines v. Court of Appeals,
220 SCRA 536 (1993): No prior notice and hearing required, valid exercise of police power, and
may only be annulled if resolution determined by trial court to be arbitrary and issued in bad faith;
Bangko Sentral ng Pilipinas Monetary Board v. Antonio Valenzuela, 602 SCRA 698 (2009):
judicial review enters the picture only after MB has taken action, as there is no provision of law
requiring BSP to give banks Report of Examination, hence, MB action cannot be enjoined at that
stage
6.
Liquidation
a. As opposed to rehabilitation Philippine Veterans Bank Employees Union-N.U.B.E. v.
Hon. Benjamin Vega, 360 SCRA 33 (2001): Liquidation connotes winding up or settling with
creditors and debtors; rehabilitation connotes reopening or reorganization; concepts are
diametrically opposed
b. Actions to take Sec. 30, NCBA: MB shall notify in writing banks Board of Directors of
findings and direct receiver to proceed with liquidation: (i) file ex-parte petition for
liquidation pursuant to liquidation plan adopted by PDIC (for banks) or MB (for quasi-banks);
(ii) convert assets to money, and dispose in favor of creditors in accordance with concurrence
and preference of credits
c. How assets are distributed Secs. 31 and 32, NCBA: after payment of costs of liquidation
proceeding (including reasonable expenses and fees of receiver), pay debts of bank in
accordance with rule on concurrence preference of credits, using the assets of bank as well as
revenues and earnings realized during winding up process
d. All claims filed in liquidation court Ong v. Court of Appeals, 253 SCRA 105 (1996): all
claims (no need for prior pending action) against insolvent bank should be filed in liquidation
proceeding to avoid multiplicity of suits; Manalo v. Court of Appeals, 366 SCRA 752 (2001):
does not cover reverse situation where insolvent bank is claimant; Cudiamat v. Batangas
Savings and Loan Bank, Inc., 614 SCRA 735 (2010): exception to general rule, if to order
the aggrieved party to refile or relitigate its case before the liquidation court would be an
exercise in futility
183 Rural Bank of Buhi v. Court of Appeals, 162 SCRA 288 (1988); Rural Bank of Lucena, Inc. v.
Arca, 15 SCRA 66 (1965); Banco Filipino Savings and Mortgage Bank v. Monetary Board, 204 SCRA 767
(1991); Central Bank of the Philippines v. Court of Appeals, 220 SCRA 536 (1993)
172
e. Disposition of banking franchise Sec. 33, NCBA: BSP may award to another institution
7. Effects of Receivership and Liquidation
a. Restriction on capacity to act Villanueva v. Court of Appeals, 244 SCRA 395 (1995):
appointment of receiver suspends authority of bank and its directors and officers over its
property and effects, such that receivership is equivalent to injunction (if bank became
insolvent before its acceptance of offer came to knowledge of offeror, then offer became
ineffective; Abacus Real Estate Development Center, Inc. v. The Manila Banking
Corporation, 455 SCRA 97 (2005): receiver only has authority to administer bank assets for
benefit of creditors (granting exclusive option to purchase not administrative)
b. Penalties for transaction after bank becomes insolvent Sec. 70, GBL: subject to penal
provisions of NCBA
c. Effect on garnishment, levy on attachment or execution Sec. 30, NCBA: assets deemed in
custodia legis and from moment bank placed under receivership or liquidation, exempt from
order of garnishment, levy, attachment, or execution; Lipana v. Development Bank of Rizal,
154 SCRA 257 (1987): stay of execution warranted, otherwise, will prejudice other depositors
and creditors
d. Stoppage of business Provident Savings Bank v. Court of Appeals, 222 SCRA 125 (1993):
stoppage only for new business (grant new loans and accept new deposits), not to collect
existing loans and foreclose
e. Interest on deposits Fidelity Savings and Mortgage Bank v. Cenzon, 184 SCRA 141
(1990): insolvent bank closed by BSP not liable to pay interest on bank deposits, because
prohibited from doing business; But See Rural Bank of Sta. Catalina, Inc. v. Land Bank of
the Philippines, 435 SCRA 183 (2004): here, bank was declared in default and therefore
could not modify judgment ordering it to pay interest and penalties
8. Judicial Review
a. Availability of remedy Sec. 30, NCBA: Petition for certiorari may only be filed by
stockholders of record representing majority of capital stock within 10 days from receipt by
Board of order directing receivership, liquidation or conservatorship
b. Ground: grave abuse of discretion Central Bank v. Court of Appeals, 106 SCRA 143
(1981): bank officers pressured into relinquishing management and control of bank by Iglesia
Ni Kristo which had no intention to restore bank to original condition, BSP in promissory
estoppel for committing to support bank to restore it but failing to do so; Banco Filipino
Savings and Mortgage Bank v. Monetary Board, 204 SCRA 767 (1991): (see above)
c. Jurisdiction Sec. 4, Rule 65, Rules of Court
d. Who may question Central Bank of the Philippines v. Court of Appeals, 220 SCRA 537
(1993): only stockholders, not receiver; xCentral Bank of the Philippines v. Court of Appeals,
208 SCRA 652 (1992)
e. Actions of the MB final and executory; Injunction Central Bank of the Philippines v. Dela
Cruz, 191 SCRA 346 (1990): only upon convincing proof that action is plainly arbitrary and
made in bad faith (under Sec. 29, Central Bank Act), now GADALEJ (under Sec. 30, NCBA);
Sec. 22, PDIC Charter: only CA (not RTC) can enjoin PDIC
f.
Effect of Filing Petition for Review Banco Filipino Savings and Mortgage Bank v.
Ybaez, SCRA (2004): does not diminish authority of designated receiver or liquidator to
administer bank
173
g. Liability of the MB and PDIC Miranda v. Philippine Deposit Insurance Corporation, 501
SCRA 288 (2006): BSP and PDIC not solidarily liable with bank for the latters obligations
E.
PDIC CORRECTIVE ACTION Sec. 7, PDIC Charter

1. Grounds for Corrective Action: When PDIC determines that insured bank, its directors or
agents: (a) committed, committing or about to commit unsafe or unsound banking practices; or (b)
violated, violating, about to violate: (i) any provision of law or regulation applicable to the bank;
(ii) the PDIC Charter; (iii) an order of PDIC; or (iv) a written condition imposed by PDIC in
connection with any transaction with or grant by PDIC.
2. Corrective Actions Available: (a) PDIC may submit report to MB to secure corrective action and,
if no MB action within 45 days, PDIC may take corrective action; (b) PDIC may thereafter issue
cease and desist order to correct violations; (c) impose fines.
F.
PDIC FINANCIAL ASSISTANCE Sec. 12(c), PDIC Charter

1. When Financial Assistance Granted: When PDIC determines that
a. Insured bank is in danger of closing, in order to prevent such closing;
b. Resumption of operations of closed insured bank is vital to interests of community, or a sever
financial climate exists which threatens stability of a number of banks possessing significant
resources
c. Corporation acquiring control of, merging or consolidating with or acquiring assets: (i) of
insured bank in danger of closing, in order to prevent such closing; or (ii) of closed bank in
order to restore normal operations
2. Requirement for Grant: PDIC must determine that actual payoff and liquidation thereof will be
more expensive than exercise of PDIC power.
VIII. THE BANGKO SENTRAL NG PILIPINAS AND

THE SUPERVISION OF BANKS
A. THE BSP AND MB
1. State Policies Sec. 1, NCBA: The State shall maintain a central monetary authority that shall
function and operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary authority established
under NCBA, while being a government-owned corporation, shall enjoy fiscal and administrative
autonomy.
2. Creation of BSP Sec. 2, NCBA: There is hereby established an independent central monetary
authority, which shall be a body corporate known as the BSP. The capital of the BSP shall be
Fifty Billion Pesos (P50,000,000,000.00), to be fully subscribed by the Government and (within 2
years) fully paid.
3. Responsibility and Primary Objective Sec. 3, NCBA: BSP shall:
a. Provide policy directions in the areas of money, banking, and credit;
b. Have supervision over the operation of banks and exercise such regulatory powers as
provided in NCBA and other pertinent laws over operations of finance companies and quasibanks, and institutions performing similar functions;
174
c. Maintain price stability conducive to a balanced and sustainable growth of the economy;
d. Promote and maintain monetary stability and convertibility of the peso.
4. MB Powers and Function Sec. 6 and 16, NCBA: MB shall exercise powers and functions of
BSP, and shall have the following powers:
a. Issue rules and regulations;
b. Direct the management, operations, and administration of BSP;
c. Establish a human resource management system;
d. Exclusive and final authority to promote, transfer, assign or reassign personnel of BSP, and
delegate such authority to BSP Governor;
e. Adopt an annual budget and authorize expenditures by BSP; and
f.
Indemnify members and other officials of BSP for legal expenses.
B. SUPERVISION OF BANKS
1. Scope and Extent Sec. 4, GBL
2. Issuance of Regulations Sec. 4.1, GBL
3, Bank Examination Secs. 25, 27 and 28, NCBA; Secs. 4 and 7, GBL
4. Overseeing Compliance Secs. 4 and 58, GBL
5. Enforcement Secs. 34 to 37, NCBA
C. MONEY FUNCTION Secs. 49 to 60, NCBA
D. MONETARY POLICY
1. Domestic Monetary Stabilization Secs. 61 to 63, NCBA
2. International Monetary Stabilization Secs. 64 to 67, NCBA
3. Basic Tools of Monetary Policy
a. Operations in Gold and Foreign Exchange Secs. 69 to 75, NCBA
b. Regulation of Foreign Exchange Operations of Banks Secs. 76 to 80, NCBA
c. Loans to Banks and Financial Institutions Secs. 81 to 89, NCBA
d. Open Market Operations Secs. 90 to 92, NCBA
e. Reserve Requirements Secs. 94 to 103, NCBA
E. BANKER AND FINANCIAL ADVISER OF GOVERNMENT Secs. 110 to 124, NCBA
IX. PDIC184 CHARTER185
A. BASIC POLICY Sec. 1, PDIC Charter: PDIC shall promote and safeguard interests of depositing
public by way of providing permanent and continuing insurance coverage on all deposits.
184 Philippine Deposit Insurance Corporation

185 Republic Act No. 3591, as amended
175
B. CONCEPT OF INSURED DEPOSITS Sec. 4(g), PDIC Charter: Insured Deposit means the amount
due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the
depositor to the insured bank as of date of closure, but not to exceed Five Hundred Thousand Pesos
(P500,000.00).
C. LIABILITY TO DEPOSITORS
1. Deposit Liabilities Required to be Insured with PDIC Sec. 5, PDIC Charter: Deposit
liabilities186 of any bank or banking institution187, which is engaged in the business of receiving
deposits shall be insured with PDIC.
2. Commencement of Liability Secs. 4(g), PDIC Charter: upon closure of bank
3. Deposit Accounts Not Entitled to Payment Sec. 4(f), PDIC Charter:
a. Investment products such as bonds and securities, trust accounts, and other similar
instruments;
b. deposit accounts or transactions which are unfunded, or that are fictitious or fraudulent;
c. deposit accounts or transactions constituting, and/or emanating from, unsafe and unsound
banking practice/s, as determined by PDIC, in consultation with BSP, after due notice and
hearing, and publication of a cease and desist order issued by PDIC against such deposit
accounts or transactions; and
d. deposits that are determined to be the proceeds of an unlawful activity as defined under
AMLA.
See Philippine Deposit Insurance Corp. v. Court of Appeals, 283 SCRA 462 (1997): PDIC liable
only for deposits actually received by a bank (and therefore insured with PDIC), but not for
money not received, even if time deposit certificates indicates that it is insured with PDIC.
4. Extent of Liability Sec. 4(g), PDIC Charter: the amount due to any bona fide depositor for
legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as
of date of closure, but not to exceed Five Hundred Thousand Pesos (P500,000.00).
5. Determination of Insured Deposit Sec. 16(a), PDIC Charter: PDIC shall commence
determination of insured deposits due the depositors of a closed bank upon its actual takeover of
the closed bank. PDIC shall give notice to the depositors of the closed bank of the insured
deposits due them by whatever means deemed appropriate by PDIC; provided, that PDIC shall
publish notice once a week for at least 3 consecutive weeks in a newspaper of general circulation.
6. Calculation of Liability
a. Per Depositor, Per Capacity Rule Sec. 4(g), PDIC Charter: In determining such amount
due to any depositor, there shall be added together all deposits in the bank maintained in the
same right and capacity for his benefit either in his own name or in the name of others.
186 Sec. 4(f), PDIC Charter defines Deposit as 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 issued in accordance with BSP rules and
regulations and other applicable laws, together with such other obligations of a bank, which, consistent
with banking usage and practices, the PDIC Board of Directors shall determine and prescribe by
regulations to be deposit liabilities of a bank; provided, that any obligation of a bank which is payable at
the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of
the PDIC Charter or included as part of the total deposits or of insured deposits (underscoring supplied)
187 Sec. 4(b), PDIC Charter defines Bank and Banking Institution to include universal banks,
commercial banks, savings bank, mortgage banks, rural banks, development banks, cooperative banks,
stock savings and loans associations and branches and agencies in the Philippines of foreign banks and
all other corporations authorized to perform banking functions in the Philippines.
176
b. Joint Accounts Sec. 4(g), PDIC Charter: A joint account regardless of whether the
conjunction and, or, and/or is used, shall be insured separately from the individuallyowned deposit account; provided, that:
i.
If the account is held jointly by two or more natural persons or two or more juridical
person or entities, the maximum insured deposit shall be divided into as many equal
shares as there are individuals, juridical persons or entities, unless a different sharing is
stipulated in the document of deposit;
ii. If the account is held by a juridical person or entity jointly with one or more natural
persons, the maximum insured deposit shall be presumed to belong entirely to such
juridical person or entity;
iii. The aggregate of the interest of each co-owner over several joint accounts, whether
owned by the same or different combinations of individuals, juridical persons or entities,
shall likewise be subject to the maximum insured deposit of Five Hundred Thousand
Pesos (P500,000.00); and
iv. No owner/holder of any negotiable certificate of deposit shall be recognized as a depositor
entitled to the rights provided in PDIC Charter unless his name is register as owner/holder
thereof in the books of the issuing bank.
7. Mode of Payment Sec. 10(b), PDIC Charter: Whenever insured bank shall have been closed
by MB pursuant to Sec. 30 of NCBA, payment of insured deposits on such closed bank shall be
made by PDIC as soon as possible either (1) by cash or (2) by making available to each depositor
a transferred deposit in another insured bank in an amount equal to insured deposit of such
depositor; provided, that PDIC, in its discretion, may require proof of claims to be filed before
paying the insured deposits, and that in any case where PDIC is not satisfied as to the viability of
a claim for an insured deposit, it may require final determination of a court of competent
jurisdiction before paying such claim.
8. Effect of Payment of Insured Deposit
a. Sec. 16(b), PDIC Charter: Payment of insured deposit to any person by PDIC shall
discharge PDIC, and payment of transferred deposit to any person by the new bank or by an
insured bank in which a transferred deposit has been made available shall discharge PDIC and
such new bank or other insured bank, to the same extent that payment to such person by the
closed bank would have discharged it from liability on the insured deposit.
b. Sec. 15, PDIC Charter: PDIC, upon payment of any depositor, shall be subrogate to all rights
of the depositor against the closed bank to the extent of such payment.
9. Payments of Insured Deposits as Preferred Credit under Art. 2244, Civil Code Sec. 15,
PDIC Charter: All payments by PDIC of insured deposit in closed banks partake of the nature of
public funds, and as such, must be considered a preferred credit similar to the taxes due to the
National Government in the order of preference under Art. 2244 of the Civil Code; provided, that
this preference shall likewise be effective upon liquidation proceedings already commenced and
pending, where no distribution of assets has been made.
10. Failure to Settle Claim of Insured Depositor Sec. 14, PDIC Charter: Failure to settle claim
within six (6) months from date of filing of claim for insured deposit, where such failure was due
to grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction, subject
the directors, officers, or employees of PDIC to imprisonment from six (6) months to one (1) year.
11. Failure of Depositor to Claim Insured Deposits Sec. 16(e), PDIC Charter: Unless otherwise
waived by PDIC, if failure of depositor to claim insured deposit or enforce claim with PDIC
within two (2) years from actual takeover by PDIC, all rights of depositor shall be barred;
however, depositors rights against closed banks and its shareholders or receivership estate to
177
which PDIC may have become subrogated, shall thereupon revert to depositor, while PDIC shall
be discharged from any liability in insured deposit.
178
X. LAWS ON SECRECY OF BANK DEPOSITS188
A. GENERAL CONCEPTS
1. Purpose: To Encourage Deposits Sec. 1, Law on Secrecy of Bank Deposits189; Sec. 1,
FCDA190
2. Rationale: Right to Privacy Art. III, Secs. 2, 3, and 7 and Art. II, Sec. 28, 1987
Constitution; Republic v. Eugenio, 545 SCRA 384 (2008): Right to privacy of bank deposits is
statutory, not constitutional; thus, while bank accounts are not covered by the constitutional right
to information or requirement of full public disclosure, neither are they subject to the
constitutional requirements for issuance of search or arrest warrants
3. Applicable Law Intengan v. Court of Appeals, 377 SCRA 63 (2002): If accounts are U.S.
Dollar (or other foreign currency) deposits, applicable law is FCDA, and not R.A. 1405, which
applies to Philippine Peso deposits.
4. Applicability of Exclusionary Rule Art. III, Secs. 2 and 3, 1987 Constitution; Ejercito v.
Sandiganbayan (Special Division), 509 SCRA190 (2006): Fruit of the poisonous tree principle
is not applicable in absence of statutory provision calling for its application
B. RULES FOR PESO DEPOSITS191
1. Coverage Sec. 2, Law on Secrecy of Bank Deposits: All deposits192 of whatever nature with
banks or banking institutions in the Philippines, including investments in government bonds 193 are
absolutely confidential in nature. See Ejercito v. Sandiganbayan (Special Division), 509 SCRA
190 (2006): The phrase of whatever nature proscribes restrictive interpretation of deposits,
hence, definition of deposits is broad enough to cover trust accounts
2. Prohibited Acts and Persons Liable
a. Prohibited acts:
i.
No director, officer, employee or agent of any bank shall, 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 entities; provided, that with respect to bank deposits, the
provisions of existing laws shall prevail.194 Sec. 55.1(b), GBL:
188 See The Laws on Secrecy of Bank Deposits, A Legal Primer issued by the BSP, Office of the
General Counsel and Legal Services, upon which this portion of the Outline is based.
190 Republic Act No. 6426, as amended (Foreign Currency Deposit Act)
191 In case of other types of banks and financial institutions, rules may be found in: (1) Sec. 26(a)(2)
of the Rural Banks Act; (2) Sec. 21(a)(2) of the Thrift Banks Act; (3) Secs. 33 and 45, Islamic Bank
Charter; and (4) Sec. 6 of the Revised Non-Stock Savings and Loans Association Act of 1997.
192 Deposits refer to money or funds placed with a bank that can be withdrawn on the depositors
order or demand, such as deposit accounts in the form of savings, current and time deposits.
193 Investments in Government Bonds refers to bonds issued by the Government of the Philippines,
its political subdivisions and its instrumentalities. Government bonds are debts securities which are
unconditional obligations of the State, and backed by its full taxing power. Government bonds include
treasury bills, treasury notes, retail treasury bonds, dollar linked peso notes, and other risk-free bonds.
194 Sec. 54, GBL further provides that consistent with Law on Secrecy of Bank Deposits, no bank
shall employ casual or non-regular personnel or too lengthy probationary personnel in the conduct of its
business involving bank deposits.
179
ii. No person or government official, or any government bureau or office may examine,
inquire or look into a bank deposit or government bond investment in any of the instances
not allowed by law Sec. 2, Law on Secrecy of Bank Deposits
b. Persons liable Sec. 5, Law on Secrecy of Bank Deposits: any person who violates any
provision of this law:
i.
Any person or government official who, or any government bureau or office that,
examines, inquires or looks into a bank deposit or government bond investment in any of
the instances not allowed by law Sec. 2, Law on Secrecy of Bank Deposits
ii. Any official or employee of a banking institution who makes a disclosure concerning
bank deposits to another in any instance not allowed by law Sec. 3, Law on Secrecy of
Bank Deposits
3. Exceptions
a. Under the Law on Secrecy of Bank Deposits Sec. 2, Law on Secrecy of Bank Deposits
(i)
Upon written permission of the depositor or investor Premiere Development Bank v.

Central Surety and Insurance Company, Inc., 579 SCRA 359 (2009): For consent to
be valid, it should be made knowingly, voluntarily and with sufficient awareness of
relevant circumstances and likely consequences.
Examples: Written waiver of bank secrecy is required:
(ii)
(a)
In order to avail of: (a) DOSRI loans Sec. 26, NCBA; xSec. X337, MRB; and
(b) loans secured by hold-out or assignment of CTDs xSec. X315(f), MRB;
(b)
In case of an application to comprise tax liability on the ground of financial

incapacity Sec. 6(F), NIRC195
In cases of impeachment 196
(iii) Upon the order of a competent court in cases of bribery 197 or dereliction of duty of
public officials198
(iv)
In cases where the money deposited or invested is the subject matter of the litigation
BSP Group, Inc. v. Go, 612 SCRA 596 (2010): Inquiry into bank deposits to be allowed
must be premised on the fact that the money deposited in the account is itself the
subject of the action; hence, if it is the money stolen, and not the money equivalent of
the checks deposited and sought to be admitted in evidence, that is the subject matter of
the action, then inquiry will not be allowed.
b. Under the Anti-Graft and Corrupt Practices Act 199 Sec. 8, Anti-Graft and Corrupt
Practices Act; Philippine National Bank v. Gancayco, 15 SCRA 91 (1965): Inquiry in cases
involving unexplained wealth is a clear exception to bank secrecy law, so bank deposits of a
public official, his spouse and unmarried children may be taken into consideration; Banco
Filipino Savings and Mortgage Bank v. Purisima, 161 SCRA 576 (1988): Inquiry extends to
195 Republic Act No. 8424, as amended by Republic Act No. 10021
196 Impeachment refers to impeachment of the President, Vice President, members of the Supreme
Court, members of the Constitutional Commissions (Commission on Elections, Civil Service Commission,
and Commission on Audit) and the Ombudsman for culpable violations of the Constitution, treason,
bribery, graft and corruption, and other high crimes of betrayal of public trust under Art. XI, Sec. 2, 1987
Constitution.
197 As defined in Arts. 203, 210-211 of the Revised Penal Code (RPC)
198 As defined in Arts. 204-209 of the RPC
180
cases where property is concealed or held or recorded in name of other persons, otherwise
there will be circumvention.
c. Under the Plunder Law200 Ejercito v. Sandiganbayan (Special Division), 509 SCRA190
(2006): Cases of unexplained wealth, such as plunder, are similar to bribery; therefore,
plunder constitutes exception to confidentiality of deposits.
d. Under the Ombudsman Act201 Sec. 15(8), Ombudsman Act: Ombudsman has power to
issue subpoena and subpoena duces tecum, take testimony in any investigation or inquiry, as
well as examine and access bank accounts and records.
Note: Marquez v. Disierto, 359 SCRA 772 (2001):202 Ombudsmans power to subpoena
deposit information of a government official (for in camera inspection) may be exercised
when the following conditions concur:
(i) there must be a pending case before a court of competent jurisdiction;
(ii) the account must be clearly identified;
(iii) the inspection must be limited to the subject matter of the pending case; and
(iv) the bank personnel and the account holder must be notified to be present during
inspection.
e. Under the AMLA203
(i)
Anti-Money Laundering Council (AMLC) may be authorized to examine and inquire

into bank deposits and investments with banks or non-bank financial institutions Sec.
11, AMLA
(a)
With court order, when there is probable cause that deposits or investments are
related to an unlawful activity204 or a money laundering offense205
Note: Republic Act No. 10167, which amended AMLA, expressly provides that
court order may be issued upon ex-parte application, effectively overturning
Republic v. Eugenio, 545 SCRA 384 (2008), which provides that court order may
be issued only upon hearing.
(b)
Without need of court order, when probable cause exists that deposits or
investments are related to:
(1)
(2)
kidnapping for ransom;206

drug trafficking;207
200 Republic Act No. 7080, as amended. Note: There is nothing in the Plunder Law which provides
for an exception to bank secrecy laws; hence, this is a jurisprudential exception.
202 Note: Ejercito v. Sandiganbayan (Special Division), 509 SCRA190 (2006): Marquez v. Disierto
ruling (accountholder must be notified) has no retroactive application.
203 Republic Act No. 9160, as amended by Republic Act Nos. 9194 and 10167
204 As defined in Sec. 3(i), AMLA
205 As defined in Sec. 4, AMLA
206 Under Sec. 3(i)(1), AMLA: Kidnapping for ransom under Art. 267 of the Revised Penal Code
207 Under Sec. 3(i)(2), AMLA: Violations of Secs. 3, 4, 5, 7, 8, and 9 of The Comprehensive
Dangerous Drugs Act
181
(3)
(4)
(5)
(ii)
hijacking and other violations under R.A. No. 6235, 208 destructive arson and
murder,209 including those perpetrated by terrorists against non-combatants
and similar targets;210
similar felonies or offenses punishable under penal laws of other countries;
and
terrorism or conspiracy to commit terrorism.
BSP is authorized to inquiry into or examine deposits or investments with any bank,
when the inquiry or examination is made in the course of the BSPs periodic or special
examination to ensure compliance with AMLA, in accordance with the rule of
examination of BSP Sec. 11, AMLA
(iii) BSP is authorized to conduct annual testing which is limited to determination of

existence and true identity of owners of numbered accounts Sec. 9, AMLA
f.
Under the PDIC211 Charter212 Sec. 8, PDIC Charter: PDIC and BSP may inquire into and
examine deposit accounts in case there is a finding of unsafe or unsound banking practice.
g. Under the NIRC

(i) Commissioner of Internal Revenue is authorized to inquire into bank deposit accounts in
relation to Sec. 6(F), NIRC:
(a) An application to compromise a taxpayers tax liabilities on the ground of financial
incapacity
(b) The determination of the net estate of a deceased depositor
(c) A request for tax information of specific taxpayers made by a foreign tax authority
pursuant to a tax treaty under The Exchange of Information on Tax Matters Act of
2009.
(ii) Turn-over to Commissioner of Internal Revenue of amount in bank accounts as may be
sufficient to satisfy writ of garnishment issued to collect delinquent taxes Secs. 205 and
208, NIRC:
h. Under the Human Security Act213 Secs. 27-43, Human Security Act: Court of Appeals,
designated as a special court, may issue an order authorizing law enforcement officers to
examine and gather information on deposits, placements, trust accounts, assets and records in
bank or financial institution in connection with anti-terrorism case.
Note: Human Security Act expressly provides that (a) the exception is only with respect to
R.A. No. 1405, and not FCDA; (b) the exclusionary rule applies in case of violation.
i.
Under the 1987 Constitution and Presidential Decree No. 1445 Art. IX-D, 1987
Constitution, P.D. No. 1445: Commission on Audit (COA) is authorized to examine and
audit government deposits pertaining to revenue and receipts of, and expenditures or uses of
funds and properties, owned or held in trust by, or pertaining to, the Government or any of its
subdivisions, agencies or instrumentalities, including government-owned and controlled
corporations with original charters.
208 An Act Prohibiting Certain Acts Inimical to Civil Aviation

209 As defined under the Revised Penal Code
210 Under Sec. 3(i)(12), AMLA
211 Philippine Deposit Insurance Corporation
212 Republic Act No. 3591, as amended by Republic Act No. 7400 and Republic Act No. 9576
182
j.
Under Executive Order No. 1 (1986) Sec. 3(e), E.O. No. 1 (1986); xDOJ Opinion No. 13
(Series of 1987): Presidential Commission on Good Government (PCGG), in conduct of its
investigations to recover ill-gotten wealth by Marcos, et al., may issue subpoenas requiring
attendance and testimony of witnesses and/or production of books, papers, contracts, records,
statement of accounts, and other documents.
Under the Unclaimed Balances Law214 Disclosure to the Treasurer of the Philippines for
dormant deposits for at least ten (10) years Secs. 1 and 2, Unclaimed Balances Law
l.
Under the Rules of Court

(i) Preliminary attachment Sec. 10, Rule 57, 1997 Revised Rules of Civil Procedure;
(ii) Garnishment Sec. 9(c), Rule 39, 1997 Revised Rules of Civil Procedure; China
Banking Corporation v. Ortega, 49 SCRA 356 (1973): Disclosure purely incidental to
execution process, and no legislative intent to place accounts beyond reach of execution
to satisfy final judgment.
m. Others
(i) 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 xDOJ Opinion No. 243 (Series of 1957); xMarquez v. Disierto, 359
SCRA 772 (2001)
(ii) Disclosure by a bank officer of employee upon order of the court in connection with a
deposit in a closed bank that was used in the perpetration of anomalies xSoriano v.
Manuzon, C.A. G.R.-S.P. No. 87634215
4. Penalty for Violation Sec. 5, Law on Secrecy of Bank Deposits: Violators of the law, upon
conviction, shall be subject to the following penalties: (i) imprisonment of not more than five (5)
years; (ii) fine of not more than P20,000.00; or (iii) both.
C. RULES FOR FOREIGN CURRENCY DEPOSITS
1. Coverage Sec. 8, FCDA: all foreign currency deposits216 authorized under FCDA are absolutely
confidential in nature.
See Salvacion v. Central Bank of the Philippines, 278 SCRA 27 (1997): FCDA intent to cover
only foreign lenders and investors, not transients, but this is exceptional case
See also Estrada v. Disierto, 445 SCRA 655 (2004): Seems to adopt view that foreign currency
deposits of Filipinos (as opposed to foreign lenders and investors, citing Salvacion v. Central
Bank of the Philippines), are not covered by FCDA and thus not exempt from BIR-issued
processes
2. Prohibited Acts and Persons Liable Sec. 8, FCDA; Secs. 55.1(b) and 55.4, GBL
a. Prohibited acts
i.
No director, officer, employee or agent of any bank shall, 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,
214 Act No. 3936, as amended by Presidential Decree No. 679

215 Affirmed by Supreme Court in Minute Resolution G.R. No. 174944 (2007)
216 Foreign Currency Deposits refer to funds in foreign currency which are accepted and held by
authorized banks in the regular course of business with the obligation to return an equivalent amount to
the owner thereof, with or without interest.
183
corporations, or any other entities; provided, that with respect to bank deposits, the
provisions of existing laws shall prevail. Sec. 55.1(b), GBL
ii. No person, government official, bureau or office, whether judicial or administrative or
legislative, or any other private or public entity, may examine, inquire or look into a
foreign currency deposit Sec. 8, FCDA
iii. Foreign currency deposits are exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative body
whatsoever Sec. 8, FCDA
b. Persons liable Sec. 10, FCDA: any person who violates any provision of this law:
i.
Any person or government official who, or any government bureau or office that,
examines, inquires or looks into a foreign currency deposit in any of the instances not
allowed by law Sec. 8, FCDA
ii. Any official or employee of a banking institution who makes a disclosure concerning
bank deposits to another in any instance not allowed by law Sec. 10, FCDA
3. Exceptions
a. Under the FCDA Sec. 8. FCDA: Upon written consent of the depositor217
See China Banking Corporation v. Court of Appeals, 511 SCRA 110 (2006): A co-payee of a
check who filed a suit for recovery of sum of money was considered, in a pro hac vice ruling,
as a depositor who may give consent to allow inquiry, in view of the distinctive circumstances
of the case.
Examples: Written waiver of bank secrecy is required:
(i) In order to avail of: (a) DOSRI loans Sec. 26, NCBA; xSec. X337, MRB; and (b) loans
secured by hold-out or assignment of CTDs xSec. X315(f), MRB
(ii) In case of an application to comprise tax liability on the ground of financial incapacity
Sec. 6(F), NIRC
b. Under the AMLA
(i)
Anti-Money Laundering Council (AMLC) may be authorized to examine and inquire

into bank deposits and investments with banks or non-bank financial institutions Sec.
11, AMLA
(a)
With court order, when there is probable cause that deposits or investments are
related to an unlawful activity or a money laundering offense
(b)
Without need of court order, when probable cause exists that deposits or
investments are related to:
(1)
(2)
(3)
(4)
(5)
(ii)
kidnapping for ransom;

drug trafficking;
hijacking and other violations under R.A. No. 6235, destructive arson and
murder, including those perpetrated by terrorists against non-combatants
and similar targets;
similar felonies or offenses punishable under penal laws of other countries;
and
terrorism or conspiracy to commit terrorism.
BSP is authorized to inquiry into or examine deposits or investments with any bank,
when the inquiry or examination is made in the course of the BSPs periodic or special
217 Intengan v. Court of Appeals, 377 SCRA 63 (2002); Estrada v. Desierto, 445 SCRA 655 (2004)
184
examination to ensure compliance with AMLA, in accordance with the rule of
examination of BSP Sec. 11, AMLA
(iii) BSP is authorized to conduct annual testing which is limited to determination of
existence and true identity of owners of numbered accounts Sec. 9, AMLA
c. Under the PDIC Charter Sec. 8, PDIC Charter: PDIC and BSP may inquire into and
examine deposit accounts in case there is a finding of unsafe or unsound banking practice.
d. Under the NIRC Commissioner of Internal Revenue is authorized to inquire into bank
deposit accounts in relation to Sec. 6(F), NIRC:
(i) An application to compromise a taxpayers tax liabilities on the ground of financial
incapacity
(ii) The determination of the net estate of a deceased depositor
(iii) A request for tax information of specific taxpayers made by a foreign tax authority
pursuant to a tax treaty under The Exchange of Information on Tax Matters Act of 2009.
e. Under the 1987 Constitution and Presidential Decree No. 1445 Art. IX-D, 1987
Constitution, P.D. No. 1445: Commission on Audit (COA) is authorized to examine and
audit government deposits pertaining to revenue and receipts of, and expenditures or uses of
funds and properties, owned or held in trust by, or pertaining to, the Government or any of its
subdivisions, agencies or instrumentalities, including government-owned and controlled
corporations with original charters.
f.
Under Executive Order No. 1 (1986) Sec. 3(e), E.O. No. 1 (1986); xDOJ Opinion No. 13
(Series of 1987): Presidential Commission on Good Government (PCGG), in conduct of its
investigations to recover ill-gotten wealth by Marcos, et al., may issue subpoenas requiring
attendance and testimony of witnesses and/or production of books, papers, contracts, records,
statement of accounts, and other documents.
g. Others (Garnishment) Salvacion v. Central Bank of the Philippines, 278 SCRA 27 (1997):
Garnishment of foreign currency deposit account of non-resident alien found guilty of raping
a minor was allowed on the basis of equity.
h. NOT Impeachment Philippine Savings Bank v. Senate Impeachment Court, G.R. No.
200238, 09 February 2012
4. Penalty for Violation Sec. 10, FCDA:
a. Violators of the law, upon conviction, shall be subject to the following penalties: (i)
imprisonment of not more than five (5) years; (ii) fine of not more than P20,000.00; or (iii)
both.
b. Bank or bank director or officer may be subject to: (i) revocation of the authority of the bank
to accept new foreign currency deposits; and (ii) administrative sanctions under Sec. 37,
NCBA, as may be applicable.
XI. RELATED SPECIAL LAWS
A. ANTI-MONEY LAUNDERING ACT218
1. Declared Policy Sec. 2, AMLA
2. Covered Institutions Sec. 3(a), AMLA
218 Republic Act No. 9160, as amended by Republic Act Nos. 9194 and 10167
185
a. Banks and other entities, their subsidiaries and affiliates, supervised/regulated by BSP
b. Insurance companies and other entities supervised/regulated by Insurance Commission
c. SEC supervised/regulated entities219
3. Obligations of Covered Institutions Sec. 9, AMLA
a. Customer Identification: Establish and record, and maintain a system of verifying true
identities of clients, including legal existence and organizational structure of corporate clients,
and their representatives, based on official documents
b. Record Keeping: Keep records for 5 years
c. Reporting of Covered and Suspicious Transactions: Report Covered Transactions and
Suspicious Transactions to AMLC220, within 5 working days from occurrence, which shall not
violate the Law on Secrecy of Bank Deposits, FCDA, and GBL
4. Covered Transactions: Transaction, in cash or other equivalent monetary instrument in excess of
P500,000 within 1 banking day Sec. 3(b), AMLA
5. Suspicious Transactions: Transaction with Covered Institution, regardless of amount involved,
where any of the enumerated suspicious circumstances exist Sec. 3(b-1), AMLA
6. Money-Laundering Crime: Committed when the proceeds of an Unlawful Activity are
transacted to make them appear to have originated from legitimate sources, by the following acts:
Sec. 4, AMLA
a. Transacting or attempting to transact, with monetary instrument or property, knowing it
represents, involves, or relates to proceeds of any Unlawful Activity
b. Facilitating money-laundering referred to in Item (a) above, by failing to perform an act
c. Failing to disclose and file report with AMLC of any monetary instrument or property as
required under AMLA
7. Unlawful Activities: Act or omission or series or combination thereof, involving or having
relation to the crimes enumerated Sec. 3(i), AMLA:
a. Kidnapping for ransom
b. Drug trafficking
c. Graft and corrupt practices
d. Plunder
e. Robbery and extortion
f.
Jueteng and masiao
g. Piracy on the high seas

h. Qualified theft
i.
Swindling
219 (a) Securities dealers, brokers, salesmen, investment houses, and other entities managing
securities or rendering services as investment agents, advisor, or consultants; (b) Mutual funds, closedend investment companies, common trust funds, pre-need companies, and other similar entities; (c)
Foreign exchange corporations, money changers, money payment, remittance, and transfer companies,
and other similar entities; (d) Other entities administering or dealing in currency, commodities or financial
derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or
property
220 Anti-Money Laundering Council
186
j.
Smuggling
k. Violations of the E-Commerce Act of 2000

l.
Hijacking, destructive arson and murder, including acts of terrorism against non-combatant
persons and similar targets
m. Fraudulent practices under the Securities Regulation Code

n. Felonies or offenses of similar nature that are punishable under the penal laws of other
countries.
8. Jurisdiction: Regional Trial Court/Sandiganbayan Sec. 5, AMLA
9. Prosecution Sec. 6, AMLA
10. Prohibition against Political Harassment Sec. 16, AMLA
11. Penalties and Other Consequences
a. Penalties Sec. 14, AMLA
(i)
(ii)
(iii)
(iv)
Money laundering
Failure to keep records
Malicious reporting
Breach of confidentiality
b. Civil Forfeiture Sec. 12, AMLA; xRules on Civil Forfeiture221; Republic v. Glasgow Credit
and Collection Services, Inc., 542 SCRA 95 (2008): 2 conditions: (1) there is a suspicious
transaction report or a covered transaction report deemed suspicious after investigation by
AMLC; and (2) court has, in a petition filed for the purpose, ordered seizure of any monetary
instrument or property related to such report. Criminal action for an unlawful activity is not a
prerequisite for institution of civil forfeiture proceeding, which is in rem.
12. Freezing of Accounts: Issued by Court of Appeals upon ex-parte application of AMLC after
determination of probable cause that monetary instrument or property is in any way related to
Unlawful Activity, for 20 days unless extended Sec. 10, AMLA
13. Examination of Accounts Sec. 11, AMLA
a. Upon order of a competent court based on an ex parte application in cases of violation of the
AMLA where there is probable cause of money laundering, AMLC may inquire into and
examine any particular deposit or investment, including related accounts, except that no court
order is required in cases of kidnapping for ransom, drug trafficking, hijacking, destructive
arson and murder, including those perpetrated by terrorists against non-combatants and
similar targets.
b. BSP inquiry into or examination of deposits or investments with any bank, when the inquiry
or examination is made in the course of the BSPs periodic of special examination of said
bank to ensure compliance with AMLA
14. AMLC; Composition and Powers Sec. 7, AMLA
15. Mutual Assistance among States Sec. 13, AMLA
B. TRUTH IN LENDING ACT222
221 SC Circular A.M. No. 05-11-04-SC

187
1. Declared Policy/Purpose Sec. 2, Truth in Lending Act: To protect citizens from 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.
2. Obligations of Creditors to Person to whom Credit is Extended Sec. 4, Truth in Lending
Act: Creditors shall furnish to every person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth the following
information:
a. Cash price or delivered price of property or service to be acquired;
b. Amounts, if any, to be credit as down payment and/or trade-in (if on installment price);
c. Difference between the cash and installment price;
d. Charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
e. Total amount to be financed; and
f.
Finance charge expressed in terms of pesos and centavos; and
g. Percentage that the finance bears to the total amount to be financed expressed a simply annual
rate on the outstanding unpaid balance of the obligation.
3. Consequences of Non-Compliance with Obligation Sec. 6, Truth in Lending Act: Noncompliance shall not affect validity or enforceability of any contract or transactions, but:
a. Creditor liable for damages to borrower, while violator may be fined P1,000.00 to P5,000.00,
or imprisoned for 6 months to 1 year, or both.
b. New Sampaguita Builders Construction, Inc. (NSBCI) v. Philippine National Bank, 435
SCRA 565 (2004): If borrower not clearly informed of Disclosure Statements prior to
consummation of loan, bank has no right to collect upon such charges, increases, even if
stipulated in the loan documents (PN), for violation of Truth in Lending Act.
188
ATENEO LAW SCHOOL

SECURITIES REGULATION CODE223
I. GENERAL PROVISIONS
1. Nature of SRC Blue Sky Law to protect public from unscrupulous promoters, who state
business or venture claims which have really no basis, and sell shares or interests therein to
investors, who are then left holding certificates representing nothing more than a claim to a square
of a blue sky.
(a) SRC Being Self-Executory Sec. 72.1
(b) Contractual Stipulations Against SRC Sec. 71: Void except against those in good faith
2. State Policy Underlying SRC Sec. 2:
(a) Establish a socially conscious, free market that regulates itself;
(b) Encourage the widest participation of ownership in enterprises;
(c) Enhance the democratization of wealth;
(d) Promote the development of the capital market;
(e) Protect investors;
(f) Ensure full and fair disclosure about securities;
(g) Minimize, if not totally eliminate, insider trading and other fraudulent or manipulative devices
and practices which distorts the free market.
2.1. Compared with RSA (B.P. Blg. 178) To protect the public from unsound, fraudulent
and worthless securities, i.e., truth in securities act [PSE v. CA, 281 SCRA 232 (1997)]
in three ways:
(a) Requiring through the process of registration issuers of securities to furnish the public
with full and accurate disclosure of all material facts concerning the issuer and the
securities so that the public may know what it is buying;
(b) Limiting margin and borrowing requirements to prevent undue speculations; and
(c) Punishing those who manipulate the market and from misrepresentations,
manipulations and fraudulent practices covering securities.
223 This Outline is based primarily on Dean Cesar L. Villanuevas Commercial Law Review, 2007 and
2009 Editions, with references to Atty. Lucila M. Decasas Securities Regulation Code, 2004 Edition, as
indicated.
189
2.2. Regulatory Controls Covered:
(a) Registration process by which a corporation or issue offers and sells its securities to
the public.
(b) Reporting requirements assuring continuous flow of disclosures and information
about the securities and issuer whose securities are traded.
(c) Anti-fraud provisions applicable to price manipulations, insider trading,
misstatements or misrepresentations by corporate management and others.
(d) Regulations on market participants like brokers, dealers and salesmen and securities
exchanges.
(e) Sanctions against those who violate provisions of SRC, as well as civil liability and/or
damages to investors injured by such violations. (DECASA, pp. 2-3)
(f) Removal of quasi-judicial functions of the SEC to allow it to concentrate on its
regulatory functions and powers, including the promulgation of rules and regulations
and to exercise investigatory powers.
II. SECURITIES AND EXCHANGE COMMISSION (SEC)
1. The Nature and Composition of SEC Sec. 4.1: SEC shall administer provisions of SRC
(a) Composition and qualifications Sec. 4.1, 4.2, 4.3: "Collegial body" composed of
Chairperson and four (4) Commissioners
(b) Meetings Sec. 4.5
(c) Powers that Can Be Delegated Sec. 4.6: All except its review or appellate authority and its
power to adopt, alter and supplement any rule or regulation.
(d) Internal Review Powers Sec. 4.6: SEC may review upon its own initiative or upon the
petition of any interested party any action of any department or office, individual
Commissioner, or staff member.
(e) Obligation to Indemnify Sec. 6.1
(f) When Commissioners and Officers Personally Liable Sec. 6.2
2. Statutory Bases of the Powers and Functions of SEC - Sec. 5.1: SEC shall act with
transparency and shall have the powers and functions provided by:
(a) The Securities Regulation Code;
(b) Pres. Decree No. 902-A;
(c) The Corporation Code;
(d) The Investment Houses Law;
(e) The Financing Company Act; and
(f) Other existing laws.
3. Powers and Functions of SEC Sec. 5.1
(a) Jurisdiction and supervision over all corporations, partnerships or associations which are the
grantees of primary franchises and/or a license or permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning the securities market, advise
Congress and other government agencies on all aspects of the securities market and propose
legislation and amendments thereto;
190
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and
other SRO;
(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued
pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations and orders;
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the
Government, civil or military as well as any private institution, corporation, firm, association
or person in the implementation of its powers and functions;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for contempt, both direct and indirect, in accordance with the pertinent provisions of
and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any its proceedings and in
appropriate cases, order the examination, search and seizure of all documents, papers, files
and records, tax returns, and books of accounts of any entity or person under investigation as
may be necessary for the proper disposition of the cases before it, subject to the provisions of
existing laws;
(m) Suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration
of corporations, partnerships or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted
SEC to achieve the objectives and purposes of these laws.
Note: See: (i) Sec. 55: Settlement Offers; and (ii) Sec. 66: Revelation of Information Filed
with SEC; (iii) Sec. 128, Corporation Code: Substituted Service Upon SEC.
4. Removal of Quasi-Judicial Functions of SEC Sec. 5.2: SEC jurisdiction over all cases
enumerated under Section 5 of Pres. Decree 902-A (i.e., fraud schemes; intra-corporate disputes;
election and termination cases of directors, trustees and officers; and petitions for suspension of
payments and/or rehabilitation) have been transferred to the appropriate Regional Trial Courts.
III. REGISTRATION OF SECURITIES
1. Definition of Securities Sec. 3.1: 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, and include:
(a) Equity Instruments (represent ownership rights in a corporation, i.e., management, surplus
profits, assets upon dissolution)) shares of stock; certificates of interest or participation in a
profit sharing agreement; certificates of deposit for a future subscription; proprietary or
nonproprietary membership certificates in corporations;
191
(b) Debt Instruments (issuer required to repay principal amount loaned by fixed maturity date, at
stated rate of interest) bonds, debentures, notes, evidences of indebtedness 224, asset-backed
securities225;
(c) Investment Instruments investment contracts226, fractional undivided interests in oil, gas or
other mineral rights;
(d) Derivatives227 option228 and warrants229;
(e) Trust Instruments Certificates of assignments, certificates of participation, trust certificates,
voting trust certificates or similar instruments
(f) Catch-all Other instruments as SEC may determine in the future.
Note: Public offering for purposes of registration, means a random or indiscriminate offering of
securities in general to anyone who will buy, whether solicited or unsolicited. 230
2. Sale, Offer for Sale Distribution of Securities
2.1. General Rule on Registration of Securities Sec. 8.1:
(a) Filing and Approval of Registration Statement by SEC Note: Full Disclosure (SRC)
vs. Merit System (RSA) [PSE v. CA, 281 SCRA 232 (1997)] Now, SEC has no power
to look into merits of securities to be sold to the public.
(b) Giving of Information Prior to Sale
Note: Sec. 8.1 covers only securities sold or offered for sale or distribution within the
Philippines.
2.2. SEC Power on Securities Transactions:
(a) Sec. 8.2: Grant "conditional approval" of the registration statements;
224 Evidences of Indebtedness are written representations of debt securities or obligations of

corporations, such as long-term commercial paper (maturity more than 365 days) or short-term
commercial paper (maturity of 365 days or less). [DECASA, p. 7, citing SRC Rule 3-1.S, Amended SRC
IRR]
225 Asset-backed securities are certificates issued by Special Purpose Entity (SPE), the repayment
of which shall be derived from a cash flow of assets in accordance with the plan. SPE is either Special
Purpose Corporation (SPC) or Special Purpose Trust (SPT). [DECASA, p. 5 citing R.A. No. 9267,
Securitization Act of 2004].
226 Under the Howey Test, Investment Contracts are contracts, transactions, or schemes
whereby a person: (1) makes an investment of money; (2) in a common enterprise; (3) with expectation of
profits; and (4) primarily from the efforts of others [Power Homes Unlimited Corp. v. SEC, 546 SCRA
567 (2008)]
227 Derivatives are financial instruments whose value changes in response to the change in a
specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a
credit rating or credit index, or similar variable or underlying factor. It requires no initial or little net
investment relative to other types of contracts that have similar responses to changes in market
conditions. It is settled at a future date. [DECASA, p. 6 citing SRC Rule 3-1.F, Amended SRC IRR]
228 Options are contracts that give buyer the right, but not the obligation, to buy (call options) or sell
(put options) an underlying security at a predetermined price, called the exercise or stake price, on or
before a predetermined date, called the expiry date, which can only be extended by the SEC upon
stockholders approval. [DECASA, p. 6 citing SRC Rule 3-1.F.1, Amended SRC IRR]
229 Warrants are rights to subscribe or purchase new shares or existing shares in a company on or
before a predetermined date, called the expiry date, which can only be extended in accordance with SEC
rules and regulations and/or Exchange rules. Warrants generally have a longer exercise period than
options and are evidenced by warrant certificates. [DECASA, p. 6 citing
230 DECASA, p. 23.
192
(b) Sec. 8.3: Define the terms and conditions under which any written communication,
including any summary prospectus, shall not be deemed to constitute an offer for sale;
(c) Sec. 8.4: Keep and open to public inspection at reasonable hours on business days, the
Register of Securities and all documents or information with respect to the securities
registered therein;
(d) Sec. 8.5: Audit the financial statements, assets and other information of a firm applying
for registration of its securities, when necessary to insure full disclosure or to protect the
interest of the investors and the public in general;
(e) Sec. 12.2: Require the registration statement to contain such information or documents as
it may, by rule, prescribe; and may dispense with any such requirement, or may require
additional information or documents, including written information from an expert,
depending on the necessity thereof or their applicability to the class of securities sought to
be registered.
Note: SEC has no power to reverse decision of PSE Board denying listing of securities [PSE
v. CA, 281 SCRA 232 (1997)].
3. Exempt Securities Sec. 9.1: Registration requirement shall not as a general rule apply to the
following classes of securities:
(a) Government Issues: Those issued/guaranteed by the Philippine Government, any political
subdivision or agency thereof, or any person controlled or supervised by, and acting as an
instrumentality of said Government;
(b) Issuances by Foreign Governments: Those issued/guaranteed by any foreign government
with which the Philippines maintains diplomatic relations, or any state, province or political
subdivision thereof on the basis of reciprocity, (but SEC may require compliance with the
specified form and content of disclosures);
(c) Certificates issued by a bankruptcy receiver/trustee duly approved by the proper
adjudicatory body;
(d) Those which by law are under the supervision and regulation of the Office of the
Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of
Internal Revenue;
(e) Bank Issues, except their own shares of stock: Those issued by a bank except its own shares
of stock. Note: If bank is listed in Exchange, not exempted from complying with reportorial
requirements as such [Union Bank v. SEC, 358 SCRA 479 (2001)].
Note: Sec. 9.2: SEC may, by rule or regulation after public hearing, add to the class of exempt
securities if it finds that the enforcement of the Code with respect to such securities is not
necessary in the public interest and for the protection of investors.
4. Exempt Transactions Sec. 10.1: Registration requirement shall not apply to securities sold or
offered for sale in the following transactions:
(a) Judicial sale of securities: At any judicial sale, or sale by an executor, administrator,
guardian, receiver, or trustee in insolvency or bankruptcy;
(b) Sale of foreclosed securities: By or for the account of a pledge holder, or mortgagee or any
other similar lienholder selling or offering for sale or delivery in the ordinary course of
business, not for the purpose of avoiding the provisions of the Code, to liquidate a bona fide
debt, a security pledged in good faith as security for such debt;
(c) Isolated transaction: An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or for his account, not being made in the course
193
of repeated and successive transactions of a like character, and such owner or representative
not being the underwriter231 of such security;
(d) Stock dividends: Stock dividend or other distribution out of surplus by a corporation,
actively engaged in the business authorized by its articles of incorporation, to its stockholders
or other security holders;
(e) Sale of shares to stockholders not underwritten: 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 therewith;
(f) Issuance of bonds to a single purchaser: Issuance of bonds or notes secured by mortgage
upon real estate 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;
(g) Transaction pursuant to right of conversion: Issue 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 surrendered has been registered under the Code or was, when sold, exempt from the
provisions of the Code, 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 Code; and that upon such conversion the par value of the
security surrendered in such exchange shall be deemed the price at which the securities issued
and delivered in such exchange are sold;
(h) Brokers transactions: Brokers transactions, executed upon customers orders, on any
registered Exchange or other trading market.
(i) Pre-incorporation subscription or subscription to a capital increase: Subscriptions of the
capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase
in its authorized capital stock, when no expense is incurred, or no commission, compensation
or remuneration is paid or given in connection therewith, and only when the purpose for
soliciting, giving or taking of such subscriptions is to comply with the requirements of such
law as to the percentage of the capital stock of a corporation which should be subscribed
before it can be registered and duly incorporated, or its authorized capital increased;
(j) Exchange of securities with existing security holders: The exchange of securities by the
issuer with its existing security holders exclusively, where no commission or other
remuneration is paid or given directly or indirectly for soliciting such exchange;
(k) Private placements: The sale of securities by an issuer to fewer than twenty (20) persons in
the Philippines during any twelve-month period.
(l) Sale to qualified buyers: The 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 Philippine Government or any political
subdivision thereof, or managed by a bank or other persons authorized by the Bangko
Sentral to engage in trust functions;
(v) Investment company; or
231Sec. 3.15: Underwriter is a person who guarantees on a firm commitment and/or declared best
effort basis the distribution and sale of securities of any kind by another company.
194
(vi) Such other person as SEC may by rule determine as qualified buyers, on the basis of such
factors as financial sophistication, net worth, knowledge, and experience in financial and
business matters, or amount of assets under management.
Note: Sec. 10.2: Power to Include Other Exempt Transactions SEC may exempt other
transactions, if it finds that the requirements of registration under the Code is not necessary in the
public interest or for the protection of the investors such as by reason of the small amount
involved or the limited character of the public offering. 232
Note: Sec. 10.3: Formal Application for Exemption Any person applying for an exemption,
shall file with SEC a notice identifying the exemption relied upon on such form and at such time
as SEC by rule may prescribe and with such notice shall pay to SEC a fee equivalent to one-tenth
(1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities.
Example: Issuance from authorized but previously unissued capital stock may be granted
exemption [Nestle Philippines v. CA, 203 SCRA 504 (1991)]
5. Procedure for Registration of Securities - The following provisions apply to the procedure for
registration of securities:
(a) Application Sec. 12.1;
(b) Prospectus Sec. 12.1;
(c) Other Information Sec. 12.2 and 12.3;
(d) Signatories to the Registration Statement Sec. 12.4;
(e) Written Consent of Expert Sec. 12.4;
(d) Certification by Selling Stockholders Sec. 12.4;
(e) Fees Sec. 12.5(a);
(f) Notice and Publication Sec. 12.5(b);
(g) SEC Power for Production of Books Sec. 13.2; and
(h) Ruling Sec. 12.6.
6. Effectivity of Registration Statement Sec. 12.7.
7. Grounds for Rejection and Revocation Sec. 13.1
7.1. Order Suspending Sale of Securities Sec. 13.4
7.2. Notice to Dealers and Brokers Sec. 13.5
7.3. Withdrawal of Registration Statement Sec. 13.6
7.4. Amendments to the Registration Statement Sec. 14.1 to 14.3
7.5. Action When There is False Statement Sec. 14.4 to 14.5
7.6. Suspension of Registration Sec. 15.1 to 15.3
232Sec. 10.2.
195
8. SEC Power over Pre-need Plans 233 and Commodity Futures Contract234 Sec. 74; Sec. 16;
Sec. 11: Until otherwise mandated by a subsequent law, SEC shall continue to regulate and
supervise commodity futures contracts and pre-need plans and the pre-need industry. But See:
Pre-Need Code, which transferred regulation and supervision of pre-need plans to the Insurance
Commission.
IV. REPORTORIAL REQUIREMENTS
1. Periodic and Other Reports of Issuers Sec. 17.2: Every issuer who:
(i) Has sold a class of its securities pursuant to a registration;
(ii) Has a class of securities listed for trading on an Exchange; and
(iii) With assets of at least P50.0 Million (or such other amount as SEC shall prescribe), and
having 200 or more holders each holding at least 100 shares of a class of its equity
securities (Public company);
(a) Sec. 17.1 Shall file with the SEC (a) Annual Report; and (b) Periodic Reports
(b) Sec. 17.3 Shall also file with the Exchange where securities are listed a copy of any report
filed with SEC
(c) Sec. 17.5 Shall and furnish each holder of such equity security the annual report.
B. Reports by 5% Holders of Equity Securities Sec. 18.1: Any person who acquires directly or
indirectly the beneficial ownership of more than 5% of such class of a Covered Issuer, shall within
ten (10) days after such acquisition (or such reasonable time as fixed by SEC), submit a sworn
statement containing the information in Sec. 18.1(a) to (d) to the:
(a) Issuer of the security;
(b) Exchange where the security is traded; and
(c) SEC.
V. PROTECTION OF SHAREHOLDER INTERESTS
1. Tender Offers
1.1. Obligations for Tender Offers Sec. 19.1(a): Any person, or group of persons acting in concert,
who intends to:
(a) Acquire at least fifteen percent (15%) of: or
(b) Acquire at least thirty percent (30%) over a period of twelve (12) months of:
(i) Any class of equity security of a listed corporation; or
(ii) Any class of equity security of a corporation with assets of at least P50.0 Million
and having 200 or more stockholders with at least 100 shares each;
233 Pre-Need Plans are contracts which provide for the performance of future services or the
payment of future monetary considerations at the time of actual need, for which planholders pay in cash or
installment at stated prices, with or without interest or insurance coverage and includes life, pension,
education, interment, and other plans which SEC may from time to time approve. [Sec. 3.9]
234 Commodity futures contracts are contracts providing for the making or taking delivery at a
prescribed time in the future of a specific quantity and quality of a commodity or the cash value thereof,
which is customarily offset prior to the delivery date, and includes standardized contracts having the
indicia of commodities futures. [DECASA, p. 41 citing SRC Rule 11(1)(2), Amended SRC IRR]
196
are obliged to do the following:
(a) Make a tender offer to stockholders by filing with SEC a declaration to that effect; and
furnish the issuer a statement containing such of the information required of issuers as
SEC may prescribe;
(b) Publish all requests or invitations for tender, or materials making a tender offer or
requesting or inviting letters of such a security;
(c) File with SEC and send to the issuer copies of any additional material soliciting or
requesting such tender offers subsequent to the initial solicitation or request;
(d) Pay at the time of filing of the statement with SEC a filing pay a fee of not more than onetenth (1/10) of one percent (1%) of the proposed aggregate purchase price.
Note: Sec. 19.1(b): Any solicitation or recommendation to the holders of such a security to
accept or reject a tender offer or request or invitation for tenders shall be made in accordance with
such rules and regulations as SEC may prescribe.
1.2. Withdrawal of Securities Deposited Pursuant to a Tender Offer Sec. 19.1(c)
1.3. When Securities Offered Exceed the Offer Made Sec. 19.1(d)
1.4. When Term of Tender Offer Varied Sec. 19.1(e)
1.5. Unlawful and Prohibited Acts Relating to Tender Offers Sec. 19.2: It shall be unlawful for
any person to make any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made, in the light of the circumstances under which
they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or
practices, in connection with any tender offer or request or invitation for tenders, or any
solicitation of security holders in opposition to or in favor of any such offer, request, or invitation.
SEC shall, for the purposes of this subsection, define and prescribe means reasonably designed to
prevent, such acts and practices as are fraudulent, deceptive, or manipulative.
2. Proxy Solicitations
2.1. Rules on Form, Issuance and Solicitation of Proxies Sec. 20.1: Proxies must be issued and
proxy solicitation must be made in accordance with rules and regulations to be issued by SEC, as
follows:
(a) Sec. 20.2: Proxies must be in writing, signed by the stockholder or his duly authorized
representative and filed before the scheduled meeting with the corporate secretary;
(b) Sec. 20.3: Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended; no proxy shall be valid and effective for a period longer than five (5)
years at one time;
(c) Sec. 20.4: No broker or dealer shall give any proxy, consent or authorization, in respect of any
security carried for the account of a customer, to a person other than the customer, without the
express written authorization of such customer;
(d) Sec. 20.5: A broker or dealer who holds or acquires the proxy for at least 10% (or such
percentage as SEC may prescribe) of the outstanding share of the issuer, shall submit a report
identifying the beneficial owner within ten (10) days after such acquisition, for its own
account or customer, to: (i) the issuer; (ii) the Exchange where traded; and (iii) to SEC.
3. Internal Record Keeping and Accounting Controls Sec. 22: Every Covered Issuer shall:
(a) Sec. 22.1: Make and keep books, records, and accounts which, in reasonable detail accurately
and fairly reflect the transactions and dispositions of assets of the issuer;
197
(b) Sec. 22.2: Devise and maintain a system of internal accounting controls sufficient to provide
reasonable assurances that:
(i) Transactions and access to assets are pursuant to management authorization;
(ii) Financial statements are prepared in conformity with generally accepted accounting
principles that are adopted by the Accounting Standards Council and the rules
promulgated by SEC with regard to the preparation of financial statements; and
(iii) Recorded assets are compared with existing assets at reasonable intervals and differences
are reconciled.
4. Transactions of Directors, Officers and Principal Stockholders
4.1 Reportorial Requirements Sec. 23.1: Every person who is:
(i) Directly or indirectly the beneficial owner of more than 10% of any class of any equity
security of a Covered Issuer; or
(ii) A director or an officer of the issuer of such security;
shall file:
(a) At the time either such requirement is first satisfied or within ten (10) days after he becomes
such a beneficial owner, director, or officer, a statement with SEC, and with the Exchange
where it may be listed, of the amount of all equity securities of such issuer of which he is the
beneficial owner; and
(b) Within ten (10) days after the close of each calendar month thereafter, if there has been a
change in such ownership during such month, shall file with SEC, and also in the Exchange
where listed, shall also file with the Exchange, a statement indicating his ownership at the
close of the calendar month and such changes in his ownership as have occurred during such
calendar month.
4.2 Unfair Use of Information Sec. 23.2: For the purpose of preventing the unfair use of
information which may have been obtained by such beneficial owner, director, or officer by
reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or
any sale and purchase, of any equity security of such issuer within any period of less than six (6)
months, unless such security was acquired in good faith in connection with a debt previously
contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding
the security purchased or of not repurchasing the security sold for a period exceeding six (6)
months.
This subsection shall not be construed to cover any transaction where such beneficial owner was
not such both at the time of the purchase and sale, or the sale and purchase, of the security
involved, or any transaction or transactions which SEC by rules and regulations may exempt as
not comprehended within the purpose of this subsection.
Suits to Recover Suit to recover such profit may be instituted before the RTC by the issuer, or
by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall
fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently to
prosecute the same thereafter, but no such suit shall be brought more than two (2) years after the
date such profit was realized.
4.3 Unlawful Sale of Securities Sec. 23.3: It shall be unlawful for any such beneficial owner,
director, or officer, directly or indirectly, to sell any equity security of such issuer if the person
selling the security or his principal:
(i) Does not own the security sold; or
198
(ii) If owning the security, does not deliver it against such sale within twenty (20) days
thereafter, or does not within five (5) days after such sale deposit it in the mails or other
usual channels of transportation;
but no person shall be deemed to have violated this subsection if he proves that notwithstanding
the exercise of good faith he was unable to make such delivery or deposit within such time, or that
to do so would cause undue inconvenience or expense.
Note: Sec. 23.4: The foregoing prohibition shall not apply to any purchase and sale, or sale and
purchase of an equity security not then or thereafter held by him in an investment account, by a
dealer in the ordinary course of his business and incident to the establishment or maintenance by
him of a primary or secondary market, otherwise than on an Exchange, for such security.
SEC may, by such rules and regulations as it deems necessary or appropriate in the public interest,
define and prescribe terms and conditions with respect to securities held in an investment account
and transactions made in the ordinary course of business and incident to the establishment or
maintenance of a primary or secondary market.
5.
Independent Directors Sec. 38 (See discussions under Exchange)
VI. SECURITIES FRAUD, MANIPULATION, INSIDER TRADING

1. Manipulation of Security Prices and Practices Sec. 24.1: It shall be unlawful for any person
acting for himself or through a dealer or broker, directly or indirectly:
(a) To create a false or misleading appearance of active trading in any listed security traded in an
Exchange or any other trading market:
(i) Wash Sale By effecting any transaction in such security which involves no change in
the beneficial ownership thereof;
(ii) Improper matched order By entering an order or orders for the purchase or sale of
such security with the knowledge that a simultaneous order or orders of substantially the
same size, time and price, for the sale or purchase of any such security, has or will be
entered by or for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial ownership.
(b) To effect, alone or with others, a series of transactions in securities that:
(i) Raises their price to induce the purchase of a security, whether of the same or a different
class of the same issuer or of a controlling, controlled, or commonly controlled company
by others;
(ii) Depresses their price to induce the sale of a security, whether of the same or a different
class, of the same issuer or of a controlling, controlled, or commonly controlled company
by others; or
199
(iii) Creates active trading to induce such a purchase or sale through manipulative devices
such as: marking the close;235 painting the tape;236 squeezing the float;237 hype
and dump;238 boiler room operations;239 and such other similar devices.
(c) Circulating unverified rumor-based market information To circulate or disseminate
information that the price of any security listed in an Exchange will or is likely to rise or
fall because of manipulative market operations of any one or more persons conducted for
the purpose of raising or depressing the price of the security for the purpose of inducing
the purchase or sale of such security.
(d) To make false or misleading statement with respect to any material fact, which he knew or
had reasonable ground to believe was so false or misleading, for the purpose of inducing
the purchase or sale of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of
any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the
price of such security, unless otherwise allowed by the Code or by rules of SEC.
2. Manipulative Devices Sec. 24.2: It shall be unlawful for any person:
(a) To use or employ, in connection with the purchase or sale of any security any manipulative or
deceptive device or contrivance; or
(b) To effect any short sale240 or any stop-loss order241 be executed in connection with the
purchase or sale of any security.
Note: Sec. 24.3: The foregoing provisions notwithstanding, SEC, having due regard to the public
interest and the protection of investors, may, by rules and regulations, allow certain acts or
transactions that may otherwise be prohibited under this section.
235 "Marking the close represents the practice of executing the last transaction or series of
transactions at or near the close of the trading day in order to affect its closing price."
236 Painting the tape represents an illegal practice by traders who manipulate the market by
buying and selling a security to create the illusion of high trading activity and to attract other traders who
may push up the price.
237 Squeezing the float refers to a wide range of practices from deadpan acceptance of
abnormally high price-to-sales ratios, to crystal ball gazing ten years out in order to find profits, to selfrighteous repetition of "this company is changing the world" mantra.
238 Hype and dump, is a practice whereby a speculator buys a particular stock, and then goes
into marketing campaign to hype its price, and then sell his lot at huge profit, leaving the late investors with
shares of very deflated price.
239 Boiler room operations, constitute fraudulent telemarketing operation involving high-pressure
sales of securities. In a typical boiler room, a rented space with desks, telephones, and experienced sales
people who talk to hundreds of people across the country every day skilled but dishonest salespeople,
often with years of experience selling dubious products and services over the phone, sit shoulder to
shoulder at phone banks all day to call potential investors using sophisticated sales scripts and highpressure sales techniques.
240 Short sale occurs when a speculator sells stocks which he does not own, in anticipation that the
price will decline and that he will be able to cover the sale by purchasing them back at a later date at a
lower price. This is done by borrowing stocks from another party who still receives the dividends paid on
the stocks while the short sale remains in effect. {DECASA, p. 78]
241 Stop loss order is an order placed to protect a recognized gain in the price of securities against
potential loss. The order reflects the lowest price that a seller is willing to sell at, even though this is lower
than the current market price. The opportunity for manipulation arises because the offer does not reflect
the current market price. The order is a hedge against market decline. [DECASA, pp. 77-78]
200
3. Regulation of Option Trading Sec. 25: No member of an Exchange shall, directly or indirectly
endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to
any security registered on a securities exchange.
The terms put, call, straddle, option, or privilege shall not include any registered
warrant, right or convertible security.
4. Fraudulent Transactions Sec. 26: It shall be unlawful for any person, directly or indirectly, in
connection with the purchase or sale of any securities to:
(a) Sec. 26.1: Employ any device, scheme, or artifice to defraud;
(b) Sec. 26.2: Obtain money or property by means of any untrue statement of a material fact of
any omission to state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading; or
(c) Sec. 26.3: Engage in any act, transaction, practice or course of business which operates or
would operate as a fraud or deceit upon any person.
Note: Fraud or deceit required, not mere negligence, on the part of offender [SEC v. CA, 246
SCRA 738 (1995)].
Examples: Churning242; Scalping243; Single day trading practice244; Front Running245
5. Insider Trading
5.1 Definition of Insider Sec. 3.8: The term insider means:
(i) The issuer;
(ii) A director or officer (or 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 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 officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
242 Churning is a situation where a broker-dealer is the sole or dominant market-maker in a

particular security and creates a market in that security by repeated purchases from, and resells to, its
individual retain customers at steady increasing prices. Its course of conduct violates anti-fraud provisions
if the broker-dealer does not make a full disclosure to the customers of the nature of the market with the
intent to defraud or with the wilful and reckless disregard for the interest of the customers. [DECASA, p.
81]
243 Scalping is a situation in which a broker-dealer or investment adviser recommends the
purchase of securities without disclosing its practice of purchasing such securities before making the
recommendation and then selling them at a profit when the price rises after the recommendation is
disseminated. [DECASA, p. 81]
244 Single day trading practice is a practice of buying and selling shares in a single trading session,
where the investors settle their accounts at the end of the day. While the transaction is not prohibited,
there is a risk meeting possible deficiencies in the customers account resulting from the transaction, and
may encourage free riding which is an improper extension of credit or purchase of shares without the
intent of paying at all or with the intent of paying only if the price goes up by the settlement date.
[DECASA, p. 81]
245 Front running is a market malpractice whereby brokers, also acting as dealers, prioritize their
own dealer accounts by executing their own orders on a particular issue ahead of their clients. [DECASA,
p. 81]
201
(v) A person who learns such information by a communication from any of the foregoing
insiders.
5.2 Insiders Duty to Disclose When Trading Sec. 27.1: It shall be unlawful for an insider to sell
or buy a security of the issuer, while in possession of material information with respect to the
issuer or the security that is not generally available to the public, unless:
(a) The insider proves 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
proves:
(i) that he disclosed the information to the other party; or
(ii) that he had reason to believe that the other party otherwise is also in possession of the
information.
Meaning of Material nonpublic Sec. 27.2: For purposes of this Section, information is
material nonpublic if: (a) It has not been 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 (b) 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.
5.3 Presumption on Insider Trading Sec. 27.1: A purchase or sale of a security of the issuer made
by an insider, or such insiders 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 for the
market to absorb such information.
Note: Sec. 27.1: This presumption shall be rebutted upon a showing by the purchaser or seller that
he was not aware of the material nonpublic information at the time of the purchase or sale.
5.4 Prohibition to Disclose Sec. 27.3: It shall be unlawful for any insider to communicate material
nonpublic information about the issuer or the security to any person who, by virtue of the
communication, becomes an insider, where the insider communicating the information knows or
has reason to believe that such person will likely buy or sell a security of the issuer while in
possession of such information.
5.5 Prohibitions on Tender Offer Situations Sec. 27.4: It shall be unlawful where a tender offer
has commenced or is about to commence for:
(a) Any person (other than the tender offeror) who is in possession of material nonpublic
information relating to such tender offer, to buy or sell the securities of the issuer that are
sought or to be sought by such tender offer if such person knows or has reason to believe that
the information is nonpublic and has been acquired directly or indirectly from the tender
offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such
tender offer, or any insider of such issuer; and
(b) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought
by such tender offer, and any insider of such issuer to communicate material nonpublic
information relating to the tender offer to any other person where such communication is
likely to result in a such violation.
Note: Sec. 27.4(b): The term securities of the issuer sought or to be sought by such tender offer
shall include any securities convertible or exchangeable into such securities or any options or
rights in any of the foregoing securities.
202
6. SEC Power to Issue Rules and Regulation to Prevent Fraudulent, Deceptive or Manipulative
Practices Sec. 72.2 to 72.4
VII. SECURITIES MARKET PROFESSIONALS
1. Securities Market Professionals SRC classifies brokers, dealers, salesmen and those associated
with them as forming the professionals of the securities market.
(a) Sec. 3.3: Broker is a person engaged in the business of buying and selling securities for the
account of others.
(b) Sec. 3.4: Dealer means any person who buys and sells securities for his/her own account in
the ordinary course of business.
(c) Sec. 3.5: Associated person of a broker or dealer is an employee thereof who, directly
exercises control of supervisory authority, but does not include a salesman, or an agent or a
person whose functions are solely clerical or ministerial.
(d) Sec. 3.13: Salesman is a natural person, employed as such or as an agent, by a dealer,
issuer or broker to buy and sell securities; but Note: Sec. 28.7: For purposes of registration,
shall not include any employee of an issuer whose compensation is not determined directly or
indirectly on sales of securities of the issuer.
2. Mandatory Registration of Security Market Professionals with SEC Sec. 28.1, 28.2, unless
Sec. 28.3: exempted from registration by SEC; Note: Purpose is to protect public and strengthen
securities mechanism. If not registered, cannot collect fees [Nicolas v. CA, 288 SCRA 307 (1998)]
3. Qualifications for Registration Sec. 28.4: SEC shall promulgate rules and regulations,
requiring, among other things, as a condition for registration that:
(a) If natural person pass written examination (proficiency/knowledge);
(b) If broker or dealer minimum net capital, provide bond/security; and
(c) If located outside the Philippines written consent to service of process upon SEC.
4. Requirements, Prohibitions and Obligations of Securities Market Professionals Sec. 28
4.1 Broker-Director Rule 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 a controlling person of the issuer.
4.2 Dealings in Compliance with SEC Rules Sec. 30.2: No broker or dealer shall effect any
transaction in securities or induce or attempt to induce the purchase or sale of any security
except in compliance with such rules and regulations as SEC shall prescribe to ensure fair
and honest dealings in securities and provide financial safeguards and other standards for the
operation of brokers and dealers, including the establishment of minimum net capital
requirements, the acceptance of custody and use of securities of customers, and the carrying
and use of deposits and credit balances of customers.
5. Revocation, Refusal or Suspension of Registration of Securities Market Professionals Sec. 29
5.1 Preventive Suspension Sec. 29.2
VIII. EXCHANGES AND OTHER SECURITIES TRADING MARKETS
203
1. Prohibition on Use of Unregistered Exchange Sec 32.1
2. Regulation of Over-the-Counter Markets Sec. 32.2
3. Exchanges
3.1 Definition of Exchange Sec. 3.7: Exchange is an organized marketplace or facility that brings
together buyers and sellers and executes trades of securities and/or commodities.
Note: The rules and regulations of the stock exchange form part of the contract covering securities
transacted within the facilities of the exchange [Carolina Industries, Inc. vs. CMS Stock
Brokerage, Inc., 97 SCRA 734 (1980)], because like any other association, an exchange has the
power to adopt its own constitution, by-laws, rules and regulations so far as they are not contrary
to law or public policy and which will secure to the members, exclusive rights and privileges
which the courts have fully recognized. Anyone who becomes a member of the exchange
voluntarily submits himself to the operation of those rules and is expected to be bound by and to
respect them [Lopez, Locsin, Ledesma & Co., Inc. v. CA, 168 SCRA 276 (1988)].
3.2 Registration of Exchanges Sec. 33.1: File application for registration; and Sec. 40: Comply
with registration requirements of SRO.
3.3 Compliance Requirements for Exchanges Sec. 33.2:
2.3 SEC Action on Application Sec. 33.3 and 33.4
2.4 Additional Fees of Exchanges Sec. 35
3. Broker-Dealer Segregation Rule Sec. 34.1: It shall be unlawful for any member-broker of an
Exchange to effect any transaction on such Exchange for its own account, the account of an
associated person, or an account with respect to which it or an associated person thereof exercises
investment discretion;
EXCEPT as follows:
(a) Any transaction by a member-broker acting in the capacity of a market maker;
(b) Any transaction reasonably necessary to carry on an odd-lot transactions;
(c) Any transaction to offset a transaction made in error; and
(d) Other transactions of a similar nature as SEC may define.
3.1 Obligation of Broker When Self-Dealing Sec. 34.2: n all instances where the member-broker
effects an Exchange transaction for its own account or the account of an associated person or an
account with respect to which it exercises investment discretion, it shall disclose to such customer
at or before the completion of the transaction it is acting for its own account, and this fact shall be
reflected in the order ticket and the confirmation slip.
3.2 Administrative Sanctions Sec. 34.3
4. SEC Powers with Respect to Exchanges and Other Trading Market
4.1 Power over an Exchange Sec. 33.6: Upon appropriate application in accordance with SEC rules
and regulations and upon such terms as SEC may deem necessary for the protection of investors,
an Exchange may withdraw its registration or suspend its operations or resume the same. But if
management prerogative of PSE, i.e., denial of listing application, SEC has no power [PSE v. CA,
281 SCRA 232 (1997)].
4.2 Power to Suspend Trading Sec. 36.1: If in SECs opinion such action is necessary or
appropriate for the protection of investors and the public interest so requires for 30 days, or if
more than 30 days but not exceeding 90 days, with approval of the President of the Philippines.
4.3 Uniform Trading Rules Sec. 36.2
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4.4 To Determine Number, Size and Location Sec. 36.3
4.5 Rules for Prompt Clearance and Settlement Sec. 36.4
4.6 Establishment of Trust Fund Sec. 36.5
5. Registration of Innovative and Other Trading Markets Sec. 37
6. Independent Directors Sec. 38: Every Covered Issuer shall have at least two (2) independent
directors or such independent directors shall constitute at least 20% of the members of such board,
whichever is the lesser.
For this purpose, an independent director shall mean 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 with the exercise of independent
judgment in carrying out the responsibilities of a director.
IX. SELF-REGULATORY ORGANIZATIONS
1. The Nature of Self-Regulatory Organizations Sec. 39.1: Self-regulatory organizations
("SRO") may be granted much independence by SEC when they are organized and operated in a
manner that they become responsible for the administration and enforcement of the relevant
provisions of the Code, its rules and regulations, and their own rules and regulations, as necessary
and appropriate for the protection of investors and the public interests, with full powers to deny
membership, barring any person from becoming associated with their members, and to discipline
their members and persons associated with their members under fair procedures. Under SRC,
SEC can register as SRO only "securities-related organizations.
2. What Are "Securities-Related Organizations"? Sec. 39.1: SRC defines them as "organizations
whose operations are related to or connected with the securities market such as but not limited to
associations of:"
(a) Brokers and dealers;
(b) Transfer agents;
(c) Custodians;
(d) Fiscal and paying agents;
(d) Computer services;
(e) News disseminating services;
(f) Proxy solicitors;
(g) Statistical agencies;
(h) Securities-rating agencies; and
(i) Securities information processors;
which are engaged in the business of:
(a) Collecting, processing, or preparing for distribution, or assisting, participating in, or
coordinating the distribution or publication of, information with respect to transactions in
or quotations for any security; or
(b) Distributing or publishing, whether by means of a ticker tape, a communications network,
a terminal display device, or otherwise, on a current and continuing basis, information
with respect to such transactions or quotations.
205
3. Powers of SEC with Respect to Securities-Related Organizations Sec. 39.1: The Code grants
SEC the following powers with respect to securities-related organizations:
(a) To register them as SRO;
(b) Otherwise to grant them licenses to operate;
(c) To regulate, supervise, examine, suspend or otherwise discontinue, as a condition for their
operations; and
(d) To prescribe rules and regulations necessary or appropriate in the public interest or for the
protection of investors to govern SRO and other organizations licensed or regulated,
including requiring all participants in the securities market to cooperate within and among
themselves and require electronic integration of their records, to ensure transparency and
facilitate exchange of information.
4. Securities Association
4.1 Registration of Securities Association Sec. 39.2
4.2 Requirements of Securities Association Sec. 39.4
4.3 Membership Procedural Rules Sec. 39.5
5. Periods in Registration of SRO Sec. 40
6. SRO Powers and Obligations Sec. 40
7. Procedure on Adoption or Changes of Rules by SRO Sec. 40
8. SRO Disciplinary Proceedings
8.1 Regular Disciplinary Proceedings Sec. 40.6
8.2 Summary Disciplinary Proceedings Sec. 40.6
8.3 Notice and Appeal to SEC Sec. 40.7
9. SEC Control and Supervision over SRO Sec. 40.5
X.
ACQUISITION AND TRANSFER

TRANSACTIONS IN SECURITIES
OF
SECURITIES
AND
SETTLEMENT
OF
1. Clearing Agencies
1.1 Definition Sec. 3.6: clearing agency is any person who acts as intermediary in making
deliveries upon payment to effect settlement in securities transactions.
1.2 Prohibition on Use of Unregistered Clearing Agency Sec. 41
1.3 Registration of Clearing Agencies Sec. 42
1.4 Evidentiary Value of Clearing Agency Record Sec. 44
2. Registration and Dealings in Securities
2.1 Recognition of Uncertificated Securities246 Sec. 43: Notwithstanding Section 63 of the
Corporation Code, a corporation whose securities are registered or listed on a securities Exchange
may:
246Sec. 3.14: Uncertificated security is a security evidenced by electronic or similar records.
206
(a) If so resolved by its Board of Directors and agreed by a shareholder, investor or securities
intermediary, issue shares to, or record the transfer of some or all of its shares into the
name of said shareholders, investors or, securities intermediary in the form of
uncertificated securities; without prejudice to the rights of the securities intermediary
subsequently to require the corporation to issue a certificate in respect of any shares
recorded in its name; and
(b) If so provided in its articles of incorporation and by-laws, issue all of the shares of a
particular class in the form of uncertificated securities and subject to a condition that
investors may not require the corporation to issue a certificate in respect of any shares
recorded in their name.
SEC by rule may allow other corporations to provide in their articles of incorporation and by-laws
for the use of uncertificated securities.
2.2 Rules on Transfers of Securities Sec. 43: Transfers of securities, including an uncertificated
securities, may be validly made and consummated by appropriate book-entries in:
(a) Securities accounts maintained by securities intermediaries;
(b) In the stock and transfer book held by the corporation; or
(c) The stock transfer agent;
with the following legal effects:
(a) Such bookkeeping entries shall be binding on the parties to the transfer;
(b) Such transfer has the effect of the delivery of a security in bearer form or duly indorsed in
blank representing the quantity or amount of security or right transferred, including the
unrestricted negotiability of that security by reason of such delivery;
(c) However, transfer of uncertificated shares shall only be valid, so far as the corporation is
concerned, when a transfer is recorded in the books of the corporation so as to show the
names of the parties to the transfer and the number of shares transferred;
(d) The registration of a transfer of a security into the name of and by a registered clearing
agency or its nominee shall be final and conclusive unless the clearing agency had notice
of an adverse claim before the registration was made; but this is without prejudice to any
rights which the claimant may have against the issuer for wrongful registration; and
(e) Nothing shall preclude compliance by banking institutions and their stockholders with the
applicable ceilings on shareholdings prescribed by law.
2.4 Pledging a Security or Interest Therein Sec. 45: In addition to other methods recognized by
law, a pledge of, or release of a pledge of, a security, including an uncertificated security, is
properly constituted and the instrument proving the right pledged shall be considered delivered to
the creditor under Articles 2093 and 2095 of the Civil Code if a securities intermediary indicates
by book-entry that such security has been credited to a specially designated pledge account in
favor of the pledgee.
Such pledge has the effect of the delivery of a security in bearer form or duly indorsed in
blank representing the quantity or amount of such security or right pledged.
In case of a registered clearing agency, the procedures and the exact time at which, such
book-entries are created shall be governed by the registered clearing agencys rules; however, the
corporation shall not be bound by the foregoing transactions unless the corporate secretary is duly
notified in such manner as SEC may provide.
3. SEC Power Over Securities Ownership Sec. 47
207
XII. MARGIN AND CREDIT
1. Margin
1.1 Purpose Sec. 48: The margin is required for the purpose of preventing the excessive use of
credit for the purchase or carrying of securities.
1.2 SEC Rules on Margin Sec. 48.1
1.3 Margin Allowance Standard Sec. 48.1: SRC mandates that the margin allowance shall be
based upon the following standard:
An amount not greater than whichever is the higher of (a) 65% of the current market price of the security, or
(b) 100% of the lowest market price of the security during the preceding thirty-six (36)
calendar months, but not more than 75% of the current market price.
Note: However, the Monetary Board may increase or decrease the above percentages, in order to
achieve the objectives of the Government with due regard for promotion of the economy and
prevention of the use of excessive credit.
14. Prohibition on Extension of Margin Sec. 48.2 and 48.3
2. Borrowings by Members, Brokers, and Dealers
2.1 Restrictions on Borrowings Sec. 49
3. Enforcement of Margin Requirements and Borrowing Restrictions
3.1 Indirect Violations of Margin Requirements Sec. 50
3.2 Indirect Violations of Borrowing Restrictions Sec. 50
XIII. LIABILITIES AND PENALTIES
1. Liabilities of Controlling Persons, Aider and Abettor
1.1 Liability of Controlling Persons Sec. 51.1
1.2 Obvious Rule Liability Rule Sec. 51.2
1.3 Hindering or Obstructing Act Sec. 51.3
1.4 Unlawful Aiding and Abetting Sec. 51.4
1.5 Substantial Assistance Sec. 51.5
2. Accounts, Records, Reports, and Examination of Exchanges and Members
2.1 Keeping of Records Sec. 52.1
2.2 Report on Extension of Credit Sec. 52.2
3. Civil Liabilities on Account of False Registration Statement Sec. 56
4. Civil Liabilities Arising in Connection With Prospectus, Communicat-ions and Reports Sec.
57.1
4.1 Causing False or Misleading Statements to be Filed with SEC Sec. 57.2
5. Civil Liability for Fraud in Connection with Securities Transactions - Sec. 58
6. Civil Liability for Manipulation of Security Prices Sec. 24
7. Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans Sec. 60
208
8. Civil Liability on Account of Insider Trading Sec. 27.1 and 61.2
9. Limitation of Actions Sec. 62
10. Rules on Rights and Damages Claim
10.1 For Actions on False Registration and Manipulative Devices Sec. 63
10.2 Other Remedies Available Sec. 69
11. Penalties for Violation of the Code Sec. 73
ATENEO LAW SCHOOL

INTELLECTUAL PROPERTY CODE
I. PATENTS
A. SUBJECT MATTER OF PROTECTION
1. Patentable Inventions Sec. 21: Any technical solution of a problem in any field of human
activity which is: (a) new; (b) involves an inventive step; and (c) is industrially applicable
shall be patentable. It may be, or may relate to:
a. machine;
b. product;
c. process;
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d. an improvement of any of the foregoing;
e. Sec. 22.4: micro-organisms; or
f.
non-biological and microbiological processes
2. Non-Patentable Inventions Sec. 22: The following shall be excluded from patent protection:
a. Sec. 22.1: Discoveries, scientific theories and mathematical methods;
b. Sec. 22.2: Schemes, rules and methods of performing mental acts, playing games or doing
business, and programs for computers;
c. Sec. 22.3: Methods for treatment of human or animal body by surgery or therapy and
diagnostic methods practiced on human or animal body. This provision shall not apply to
products and composition for use in any of these methods;
d. Sec. 22.4: Plant varieties or animal breeds or essentially biological process for the production
of plants or animals;247
e. Sec. 22.5: Aesthetic creations; and
f.
Sec. 22.6: Anything which is contrary to public order or morality.
B. CONDITIONS OF PROTECTION
1. Substantive Requirements
a. Sec. 23: Novelty An invention shall not be considered new if it forms part of a prior art.
i.
Sec. 24: Prior Art Prior art shall consist of:

(a) Sec. 24.1: Everything made available to public anywhere in the world, before filing
date or priority date of application claiming invention; and
(b) Sec. 24.2: Whole contents of application for patent, utility model, or industrial design
registration, published in accordance with IP Code, filed or effective in Philippines,
with filing or priority date earlier than filing or priority date of application: Provided,
That application which has validly claimed filing date of earlier application under
Sec. 31, shall be prior art with effect as of filing date of such earlier application:
Provided further, That applicant or inventor identified in both applications are not one
and same.
ii. Sec. 25.1: Non-Prejudicial Disclosure Disclosure of information contained in

application during the 12 months preceding filing date or priority date of application shall
not prejudice applicant on ground of lack of novelty if such disclosure was made by:
(a) Inventor;248
(b) Patent office and information was contained (a) in another application filed by
inventor and should not have been disclosed by the office, or (b) in application
filed without knowledge or consent of inventor by third party which obtained
information directly or indirectly from inventor; or
(c) Third party which obtained information directly or indirectly from inventor.
247 Section 22.4 further provides that: Provisions under this subsection shall not preclude Congress
to consider the enactment of a law providing sui generis of plant varieties and animal breeds and a system
of community intellectual rights protection
248 Sec. 25.2 provides that, For the purposes of Subsection 25.1, "inventor" also means any person
who, at the filing date of application, had the right to the patent.
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b. Sec. 26: Inventive Step Invention involves inventive step if, having regard to prior art, it is
not obvious to person skilled in art at time of filing date or priority date of application
claiming invention.
c. Sec. 27: Industrial Applicability Invention that can be produced and used in any industry
shall be industrially applicable.
2. Formal Requirements/Procedure for Application and Grant of Patent
a. Patent Application Secs. 32 to 39
b. Procedure After Application:
i.
Sec. 40: Filing Date Requirements
ii. Sec. 41: According a Filing Date

iii. Sec. 42: Formality Examination
iv. Sec. 43: Classification and Search
c. Publication and Procedure After Application:
i.
Sec. 44: Publication of Patent Application
ii. Sec. 45: Confidentiality Before Publication

iii. Sec. 46: Rights Conferred by a Patent Application After Publication
iv. Sec. 47: Observation by Third Parties
v. Sec. 48: Request for Substantive Examination
vi. Sec. 49: Amendment of Application
d. Grant of Patent
i.
Sec. 50: Grant of Patent
ii. Sec. 51: Refusal of the Application

iii. Sec. 52: Publication Upon Grant of Patent
iv. Sec. 53: Contents of Patent
e. Requirements/Actions After Grant
i.
Sec. 55: Annual Fees
ii. Sec. 56: Surrender of Patent

iii. Sec. 57: Correction of Mistakes of the Office
iv. Sec. 58: Correction of Mistake in the Application
v. Sec. 59: Changes in Patents
vi. Sec. 60: Form and Publication of Amendment
C. OWNERSHIP
1. The Inventor Sec. 28. Right to patent belongs to inventor, his heirs, or assigns.
2. Joint Invention Sec. 28: For inventions jointly made by 2 or more persons right to patent
shall belong to them jointly
3. Inventions Made for Hire
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a. Sec. 30.1: Person who commissions work shall own patent, unless contrary agreement.
b. Sec. 30.2: For employee who made invention in course of his employment contract, patent
shall belong to:
i.
Employee, if inventive activity is not part of his regular duties even if employee uses
time, facilities and materials of employer.
ii. Employer, if invention is result of performance of his regularly-assigned duties, unless

contrary agreement, express or implied.
4. Sec. 29: First to File Rule If 2 or more persons have made invention separately and
independently of each other, right to patent shall belong to person who filed an application for
such invention, or where 2 or more applications are filed for same invention, to applicant who has
earliest filing date or earliest priority date.
5. Sec. 31: Right of Priority Application for patent filed by any person who previously applied for
same invention in another country which by treaty, convention, or law affords similar privileges to
Filipino citizens, shall be considered as filed as of the date of filing foreign application: Provided:
a. Local application expressly claims priority;
b. It is filed within 12 months from date earliest foreign application was filed; and
c.. Certified copy of foreign application together with English translation is filed within 6 months
from date of filing in Philippines.
D. TRANSFER OF OWNERSHIP
1. Sec. 103: Transmission of Rights in General
a. Sec. 103.1: Patents or applications for patents and invention to which they relate, shall be
protected in same way as rights of other property under Civil Code.
b. Sec. 103.2. Inventions and any right, title or interest in and to patents and inventions covered
thereby, may be assigned or transmitted by inheritance or bequest or may be subject of license
contract.
c. Sec. 107: Rights of Joint Owners If 2 or more persons jointly own patent and invention
covered thereby, either by issuance of patent in their joint favor or by reason of assignment of
an undivided share in patent and invention or by reason of the succession in title to such share,
each of joint owners shall be entitled to personally make, use, sell, or import invention for his
own profit: Provided, however, That neither of joint owners shall be entitled to grant licenses
or to assign his right, title or interest or part thereof without consent of other owners, or
without proportionally dividing proceeds with such other owners.
d. Sec. 106: Recording
i.
Sec. 106.1: IPO record assignments, licenses and other instruments relating to
transmission of right, title or interest in and to inventions, and patents or application for
patents or inventions to which they relate.
ii. Sec. 106.2: Such instruments shall be void as against any subsequent purchaser or
mortgagee for valuable consideration and without notice, unless, it is so recorded in IPO,
within 3 months from date of said instrument, or prior to subsequent purchase or
mortgage.
2. Assignment
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a. Sec. 104: Assignment may be of entire right, title or interest in and to patent and invention
covered thereby, or of an undivided share thereof, in which event parties become joint owners
thereof. An assignment may be limited to specified territory.
b. Sec. 105: Form of Assignment
3. Voluntary Licensing
a. Sec. 85: Voluntary License Contract To encourage transfer and dissemination of
technology, prevent or control practices and conditions that may in particular cases constitute
abuse of intellectual property rights having adverse effect on competition and trade, all
technology transfer arrangements shall comply with the provisions of this Chapter.
b. Sec. 86: Jurisdiction to Settle Disputes on Royalties Director of the Documentation,
Information and Technology Transfer Bureau
c. Sec. 87. Prohibited Clauses - Except in cases under Sec. 91 (Exceptional Cases), the
provisions enumerated in Sec. 87 shall be deemed prima facie to have adverse effect on
competition and trade.249
d. Sec. 88: Mandatory Provisions The provisions enumerated in Sec. 88 shall be included in
voluntary license contracts.250
249 Sec. 87 enumerates the prohibited clauses, as follows:

87.1. Those which impose upon the licensee the obligation to acquire from a specific source capital
goods, intermediate products, raw materials, and other technologies, or of permanently employing
personnel indicated by the licensor;
87.2. Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the
products manufactured on the basis of the license;
87.3. Those that contain restrictions regarding the volume and structure of production;
87.4 Those that prohibit the use of competitive technologies in a non-exclusive technology transfer
agreement;
87.5. Those that establish a full or partial purchase option in favor of the licensor;
87.6. Those that obligate the licensee to transfer for free to the licensor the inventions or
improvements that may be obtained through the use of the licensed technology;
87.7. Those that require payment of royalties to the owners of patents for patents which are not used;
87.8. Those that prohibit the licensee to export the licensed product unless justified for the protection
of the legitimate interest of the licensor such as exports to countries where exclusive licenses to
manufacture and/or distribute the licensed product(s) have already been granted;
87.9. Those which restrict the use of the technology supplied after the expiration of the technology
transfer arrangement, except in cases of early termination of the technology transfer arrangement due to
reason(s) attributable to the licensee;
87.10. Those which require payments for patents and other industrial property rights after their
expiration, termination arrangement;
87.11. Those which require that the technology recipient shall not contest the validity of any of the
patents of the technology supplier;
87.12. Those which restrict the research and development activities of the licensee designed to
absorb and adapt the transferred technology to local conditions or to initiate research and development
programs in connection with new products, processes or equipment;
87.13. Those which prevent the licensee from adapting the imported technology to local conditions, or
introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor;
87.14. Those which exempt the licensor for liability for non-fulfillment of his responsibilities under the
technology transfer arrangement and/or liability arising from third party suits brought about by the use of
the licensed product or the licensed technology; and
87.15. Other clauses with equivalent effects.
250 Sec. 88 enumerates the mandatory clauses, as follows:
88.1. That the laws of the Philippines shall govern the interpretation of the same and in the event of
litigation, the venue shall be the proper court in the place where the licensee has its principal office;
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e. Sec. 89: Rights of Licensor In absence of contrary provision, grant of license shall not
prevent licensor from granting further licenses to third person nor from exploiting subject
matter of technology transfer arrangement himself.
f.
Sec. 90: Rights of Licensee Licensee entitled to exploit subject matter of technology
transfer arrangement during whole term thereof.
g. Sec. 92: Non-Registration with the Documentation, Information and Technology

Transfer Bureau Technology transfer arrangements that conform with provisions of Secs.
86 and 87 need not be registered.
h. Sec. 92: Effect of Violation Non-conformance with any of provisions of Secs. 87 and 88,
however, shall automatically render technology transfer arrangement unenforceable, unless
approved and registered under provisions of Sec. 91 on exceptional cases.
E. SCOPE OF EXCLUSIVE RIGHTS
1. Sec. 71: Rights Conferred by Patent
a. Sec. 71.1: Exclusive rights:
i.
If subject matter is a product To restrain, prohibit and prevent any unauthorized person
or entity from making, using, offering for sale, selling or importing that product;
ii. If subject matter is a process To restrain, prevent or prohibit any unauthorized person or
entity from using the process, and from manufacturing, dealing in, using, selling or
offering for sale, or importing any product obtained directly or indirectly from such
process.
h. Sec. 71.2: To assign, or transfer by succession the patent, and to conclude licensing
contracts for the same.
2. Sec. 75: Extent of Protection and Interpretation of Claims

a. Sec. 75.1: Extent of protection conferred by patent shall be determined by claims, which are
to be interpreted in light of description and drawings.
b. Sec. 75.2: For purpose of determining extent of protection conferred by patent, due account
shall be taken of elements which are equivalent to elements expressed in claims, so that claim
shall be considered to cover not only all elements as expressed therein, but also equivalents.
See Doctrine of Equivalents, infra.
3. Sec. 46: Rights Conferred by Patent Application After Publication Applicant shall have all
rights of patentee under Sec. 76 against any person who, without his authorization, exercised any
of rights conferred under Sec. 71 in relation to invention claimed in published patent application,
as if patent had been granted for that invention: Provided, That said person had:
88.2. Continued access to improvements in techniques and processes related to the technology shall
be made available during the period of the technology transfer arrangement;
88.3. In the event the technology transfer arrangement shall provide for arbitration, the Procedure of
Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations
Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the
International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines
or any neutral country; and
88.4. The Philippine taxes on all payments relating to the technology transfer arrangement shall be
borne by the licensor.
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a. Sec. 46.1: Actual knowledge that invention that he was using was subject matter of published
application; or
b. Sec. 46.2: Received written notice that invention that he was using was subject matter of
published application being identified in said notice by its serial number: Provided, That
action may not be filed until after grant of patent on published application and within 4 years
from commission of acts complained of.
F. LIMITATION OR EXEMPTIONS TO SCOPE OF PATENT PROTECTION
1. Limitation of Patent Rights Sec. 72: Owner of patent has no right to prevent third parties from
performing, without his authorization, acts referred to in Sec. 71 hereof in following
circumstances:
a. Sec. 72.1: Using patented product put on the market in Philippines by owner of product, or
with his express consent, insofar as such use is performed after product has been so put on
said market;
b. Sec. 72.2: Act is done privately and on a non-commercial scale or for a non-commercial
purpose: Provided, That it does not significantly prejudice the economic interests of owner of
patent;
c. Sec. 72.3: Act consists of making or using exclusively for purpose of experiments that relate
to subject matter of patented invention;
d. Sec. 72.4: Act consists of preparation for individual cases, in pharmacy or by medical
professional, of medicine in accordance with medical prescription or acts concerning the
medicine so prepared;
e. Sec. 72.5: Invention is used in any ship, vessel, aircraft, or land vehicle of any other country
entering the territory of Philippines temporarily or accidentally: Provided, That such invention
is used exclusively for needs of ship, vessel, aircraft, or land vehicle and not used for
manufacturing of anything to be sold within Philippines.
2. Prior User Sec. 73
a. Sec. 73.1: Notwithstanding Sec. 72, any prior user, who, in good faith was using invention or
has undertaken serious preparations to use invention in his enterprise or business, before filing
date or priority date of application on which a patent is granted, shall have right to continue
use thereof as envisaged in such preparations within territory where patent produces its effect.
b. Sec. 73.2: Right of prior user may only be transferred or assigned together with his enterprise
or business, or with part of his enterprise or business in which use or preparations for use have
been made.
3. Use of Invention by Government 251 Sec. 74.1: Government agency or third person authorized
by Government may exploit invention even without agreement of patent owner where:
a. Public interest, in particular, national security, nutrition, health or development of other
sectors, as determined by appropriate agency of the government, so requires; or
b. Judicial or administrative body has determined that manner of exploitation, by owner of
patent or his licensee, is anti-competitive.
4. Compulsory Licensing
251 Sec. 74.2 provides that, The use by the Government, or third person authorized by the
Government shall be subject, mutatis mutandis, to the conditions set forth in Sections 95 to 97 and 100 to
102.
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a. Sec. 93: Grounds for Compulsory Licensing License to exploit patented invention, even
without agreement of patent owner, in favor of any person who has shown his capability to
exploit invention, under any of following circumstances:
i.
Sec. 93.1: National emergency or other circumstances of extreme urgency;
ii. Sec. 93.2: Public interest, in particular, national security, nutrition, health or development
of other vital sectors of national economy as determined by appropriate agency of
Government, so requires; or
iii. Sec. 93.3: Judicial or administrative body has determined that manner of exploitation by
owner of patent or his licensee is anti-competitive; or
iv. Sec. 93.4: In case of public non-commercial use of patent by patentee, without
satisfactory reason;
v. Sec. 93.5: If patented invention is not being worked in Philippines on commercial scale,
although capable of being worked, without satisfactory reason: Provided, That
importation of patented article shall constitute working or using patent.
b. Sec. 94: Period for Filing Petition for Compulsory License
c. Sec. 95: Requirement to Obtain License on Reasonable Commercial Terms
i.
Sec. 95.1: License will only be granted after petitioner has made efforts to obtain
authorization from patent owner on reasonable commercial terms and conditions but such
efforts have not been successful within reasonable period of time.
ii. Sec. 95.2: Requirement under Sec. 95.1 shall not apply:
(a) Where petition for compulsory license seeks to remedy practice determined after
judicial or administrative process to be anti-competitive;
(b) In situations of national emergency or other circumstances of extreme urgency Sec.
95.3: Right holder shall be notified as soon as reasonably practicable
(c) In cases of public non-commercial use Sec. 95.4: Right holder shall be informed
promptly
d. Sec. 96: Compulsory Licensing of Patents Involving Semi-Conductor Technology.
e. Sec. 97: Interdependence If invention protected by patent ("second patent") within country
cannot be worked without infringing another patent ("first patent") granted on prior
application or benefiting from earlier priority, compulsory license may be granted to owner of
second patent to extent necessary for working of his invention, subject to following:
i.
Sec. 97.1: Invention claimed in second patent involves important technical advance of
considerable economic significance in relation to first patent;
ii. Sec. 97.2: Owner of first patent entitled to a cross-license on reasonable terms to use
invention claimed in second patent;
iii. Sec. 97.3: Use authorized in respect of first patent shall be non-assignable except with
assignment of second patent; and
iv. Sec. 97.4: Terms and conditions of Secs. 95, 96 and 98 to 100.
f.
Sec. 98: Form and Contents of Petition
g. Sec. 99: Notice of Hearing

h. Sec. 100: Terms and Conditions of Compulsory License
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i.
Sec. 100.1: Scope and duration of such license limited to purpose for which it was
authorized;
ii. Sec. 100.2: License shall be non-exclusive;

iii. Sec. 100.3: License shall be non-assignable, except with part of enterprise or business
with which invention is being exploited;
iv. Sec. 100.4: Use of subject matter of license devoted predominantly for supply of
Philippine market: Provided, That limitation shall not apply where grant of license is
based on ground that patentees manner of exploiting patent is determined by judicial or
administrative process to be anti-competitive.
v. Sec. 100.5: License may be terminated upon proper showing that circumstances which led
to its grant have ceased to exist and are unlikely to recur: Provided, That adequate
protection shall be afforded to legitimate interest of licensee; and
vi. Sec. 100.6: Patentee shall be paid adequate remuneration taking into account the
economic value of grant or authorization, except that in cases where license was granted
to remedy practice which was determined after judicial or administrative process, to be
anti-competitive, need to correct the anti-competitive practice may be taken into account
in fixing the amount of remuneration.
j.
Sec. 101: Amendment, Cancellation, Surrender of Compulsory License.

i.
Sec. 101.1: Upon request of patentee or licensee, Director of Legal Affairs may amend
decision granting compulsory license, upon proper showing of new facts or circumstances
justifying such amendment.
ii. Sec. 101.2: Upon request of patentee, Director may cancel compulsory license:
(a) If ground for grant of compulsory license no longer exists and is unlikely to recur;
(b) If licensee has neither begun to supply domestic market nor made serious preparation
therefor;
(c) If licensee has not complied with prescribed terms of license.
iii. Sec. 101.3: Licensee may surrender license by a written declaration submitted to the IPO.
iv. Sec. 101.4: Director shall cause amendment, surrender, or cancellation in Register, notify
patentee, and/or licensee, and cause notice thereof to be published in IPO Gazette.
k. Sec. 102: Licensees Exemption from Liability Any person who works patented product,
substance and/or process under license granted under this Chapter, shall be free from any
liability for infringement: Provided however, That in case of voluntary licensing, no collusion
with licensor is proven. This is without prejudice to right of rightful owner of patent to
recover from licensor whatever he may have received as royalties under license.
G. DURATION OF PROTECTION
1. Sec. 54: Term of Patent 20 years from filing date of application.
H. INFRINGEMENT AND REMEDIES
1. Sec. 76 Civil Action for Infringement.
a. Definition:
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i.
Sec. 76.1: Making, using, offering for sale, selling, or importing patented product or
product obtained directly or indirectly from patented process, or use of patented process
without authorization of patentee constitutes patent infringement.
b. Tests to Determine Infringement:

i.
Literal Infringement If challenged matter clearly falls within claim (resort is made to
words of claim), literal infringement exists.
ii. Doctrine of Equivalents When device appropriates prior invention by incorporating

innovative concept and, despite some modification and change, performs substantially
same function in substantially same way to achieve substantially same result.
c. Jurisdiction with Regular Courts Sec. 76.2
d. Who May Bring Suit
i.
Sec. 76.2: Any patentee, or anyone possessing any right, title or interest in and to patented
invention, whose rights have been infringed, may bring civil action before court of
competent jurisdiction, to recover from infringer such damages sustained thereby, plus
attorneys fees and other expenses of litigation, and to secure an injunction for protection
of his rights.
ii. Sec. 77: Infringement Action by a Foreign National Any foreign national or juridical
entity who meets requirements of Sec. 3 and not engaged in business in Philippines, to
which patent has been granted or assigned under IP Code, may bring an action for
infringement of patent, whether or not it is licensed to do business in Philippines under
existing law.
e. Who May Be Held Liable
i.
Sec. 76.2: Infringer
ii. Sec. 76.6: Anyone who actively induces infringement of patent or provides infringer with
component of patented product or of product produced because of patented process
knowing it to be especially adopted for infringing patented invention and not suitable for
substantial non-infringing use shall be liable as contributory infringer and shall be jointly
and severally liable with infringer.
f.
Defenses Sec. 81: Defendant, in addition to other defenses available to him, may show the
invalidity of patent, or any claim thereof, on any of grounds on which petition of cancellation
can be brought under Sec. 61 hereof.
g. Presumptions Sec. 78: If subject matter of patent is process for obtaining product, any
identical product shall be presumed to have been obtained through use of patented process if
product is new or there is substantial likelihood that identical product was made by process
and owner of patent has been unable despite reasonable efforts, to determine process actually
used. In ordering defendant to prove that process to obtain identical product is different from
patented process, court shall adopt measures to protect, as far as practicable, his
manufacturing and business secrets.
h. Assessor in Infringement Action Sec. 83
i.
Reliefs Granted
i.
Damages
(a) Sec. 76.3: If damages are inadequate or cannot be readily ascertained with reasonable
certainty, court may award by way of damages sum equivalent to reasonable royalty.
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(b) Sec. 76.4: Court may, according to circumstances of case, award damages in sum
above amount found as actual damages sustained: Provided, That award does not
exceed 3 times amount of such actual damages.
(c) Sec. 80: Damages cannot be recovered for acts of infringement committed before
infringer had known; or had reasonable grounds to know of patent. It is presumed that
infringer had known of patent if on patented product, or on container or package in
which article is supplied to public, or on advertising material relating to patented
product or process, are placed words "Philippine Patent" with number of patent.
ii. Injunction Sec. 76.2
iii. Destruction of Infringing Materials Sec. 76.5: Court may, in its discretion, order that
infringing goods, materials and implements predominantly used in infringement be
disposed of outside channels of commerce or destroyed, without compensation.
iv. Patent Found Invalid May be Cancelled Sec. 82: In action for infringement, if court
shall find patent or any claim to be invalid, it shall cancel the same, and Director of Legal
Affairs upon receipt of final judgment of cancellation by court, shall record that fact in
register of IPO and publish notice to that effect in IPO Gazette.
j.
Prescription Sec. 79: No damages can be recovered for acts of infringement committed
more than 4 years before institution of action for infringement.
2. Sec. 84 Criminal Action for Repetition of Infringement: If infringement is repeated by

infringer or by anyone in connivance with him after finality of judgment of court against infringer,
offenders shall, without prejudice to institution of civil action for damages, be criminally liable
therefor and, upon conviction, shall suffer imprisonment for period of not less than 6 months but
not more than 3 years and/or fine of not less than P100,000 but not more than P300,000, at
discretion of court. Criminal action herein provided shall prescribe in 3 years from date of
commission of crime.
3. Sec. 61 Cancellation of Patents
a. Grounds Sec. 61.1:252 Any interested person may, upon payment of required fee, petition to
cancel patent or any claim thereof, or parts of the claim, on any of following grounds:
i.
What is claimed as invention is not new or patentable;
ii. Patent does not disclose invention in manner sufficiently clear and complete for it to be
carried out by any person skilled in the art; or
iii. Patent is contrary to public order or morality.
b. Procedure:
i.
Sec. 62. Requirement of the Petition.
ii. Sec. 63. Notice of Hearing.

iii. Sec. 64. Committee of Three.
iv. Sec. 65. Cancellation of the Patent.
v. Sec. 66. Effect of Cancellation of Patent or Claim.
4. Remedies of Person with Right to Patent
252 Sec. 61.2 provides that, Where the grounds for cancellation relate to some of the claims or parts
of the claim, cancellation may be effected to such extent only.
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a. Sec. 67.1:253 If a person referred to in Sec. 29 other than applicant, is declared by final court
order or decision as having right to patent, such person may, within 3 months after decision
has become final:
i.
Prosecute application as his own application in place of applicant;
ii. File new patent application in respect of same invention;

iii. Request that application be refused; or
iv. Seek cancellation of patent, if one has already been issued.
b. Sec. 68: If person, who was deprived of patent without his consent or through fraud is
declared by final court order or decision to be true and actual inventor, court shall order for
his substitution as patentee, or at option of true inventor, cancel patent, and award actual and
other damages in his favor if warranted by circumstances.
c. Sec. 70: Actions indicated in Secs. 67 and 68 shall be filed within 1 year from date of
publication made in accordance with Secs. 44 and 51, respectively.
d. Sec. 69: Court shall furnish IPO a copy of order or decision referred to in Secs. 67 and 68,
which shall be published in IPO Gazette within 3 months from date such order or decision
became final and executory, and shall be recorded in register of IPO.
II. UTILITY MODELS
A. APPLICABILITY OF PROVISIONS RELATING TO PATENTS
1. Sec 108.1: Subject to Sec. 109, provisions governing patents shall apply, mutatis mutandis, to
registration of utility models.
2. Sec. 108.2: Where right to patent conflicts with right to utility model registration in case referred
to in Sec. 29, said provision shall apply as if word patent were replaced by words "patent or utility
model registration."
B. SUBJECT MATTER OF PROTECTION
1. Sec. 109.1(a): An invention qualifies for registration as a utility model if it is: (a) new; and (b)
industrially applicable.
C. CONDITIONS OF PROTECTION
1. Substantive Requirements Sec. 109.1(b): Sec. 21, "Patentable Inventions", shall apply except
reference to inventive step as condition of protection.
2. Formal Requirements Sec. 109.2: Secs. 43 to 49 shall not apply in case of applications for
registration of utility model.
D. DURATION OF PROTECTION
1. Sec. 109.3: Utility model registration shall expire, without any possibility of renewal, at end of 7 th
year after date of filing of application.
253 Sec. 67.2 provides that, The provisions of Sec. 38.2 shall apply mutatis mutandis to a new
application filed under Sec. 67.1(b).
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E. CANCELLATION OF REGISTRATION
1. Sec. 109.4: In proceedings under Secs. 61 to 64, utility model registration shall be canceled on
following grounds:
a. Claimed invention does not qualify for registration as utility model and does not meet
requirements of registrability, in particular having regard to Secs. 109.1 and Ses. 22, 23, 24
and 27;
b. Description and claims do not comply with prescribed requirements;
c. Any drawing which is necessary for understanding of invention has not been furnished;
d. Owner of utility model registration is not inventor or his successor in title.
F. CONVERSION OF APPLICATIONS
1. Sec. 110.1: At any time before grant or refusal of patent, applicant for patent may, upon payment
of prescribed fee, convert his application into application for registration of utility model, which
shall be accorded filing date of initial application. Application may be converted only once.
2. Sec. 110.2: At any time before grant or refusal of utility model registration, applicant for utility
model registration may, upon payment of prescribed fee, convert his application into patent
application, which shall be accorded filing date of initial application.
G. PROHIBITIONS AGAINST FILING PARALLEL APPLICATIONS
1. Sec. 111: Applicant may not file 2 applications for same subject, one for utility model registration
and other for grant of patent whether simultaneously or consecutively.
III. INDUSTRIAL DESIGNS
A. APPLICABILITY OF PROVISIONS RELATING TO PATENTS
1. Sec. 119.1: Following provisions relating to patents shall apply mutatis mutandis to industrial
design registration.
a. Sec. 21 Novelty;
b. Sec. 24 Prior art: Provided, That disclosure is contained in printed documents or in any
tangible form;
c. Sec, 25 Non Prejudicial Disclosure;
d. Sec. 28 Right to a Patent;
e. Sec. 29 First to File Rule;
f.
Sec. 30 Inventions Created Pursuant to a Commission;
g. Sec. 31 Right of Priority: Provided, That application for industrial design shall be filed
within 6 months from earliest filing date of corresponding foreign application;
h. Sec. 33 Appointment of Agent or Representative;
i.
Sec. Refusal of the Application;
j.
Secs. 56 to 60 Surrender, Correction of and Changes in Patent;
k. Chapter VII Remedies of a Person with a Right to Patent;
221
l.
Chapter VIII Rights of Patentees and Infringement of Patents; and
m. Chapter XI Assignment and Transmission of Rights

2. Sec. 119.3: Following provisions relating to patents shall apply mutatis mutandis to layout-design
of integrated circuits registration:
a. Sec. 28 Right to a Patent;
b. Sec. 29 First to File Rule;
c. Sec. 30 Inventions Created Pursuant to a Commission;
d. Sec. 33 Appointment of Agent or Representative;
e. Secs. 56 to 60 Surrender, Correction of and Changes in Patent;
f.
Chapter VII Remedies of a Person with a Right to Patent;
g. Chapter VIII Rights of Patentees and Infringement of Patents; Provided, That layout-design
rights and limitation of layout-design rights provided hereunder shall govern:
h. Chapter X - Compulsory Licensing; and
i.
Chapter XI Assignment and Transmission of Rights
B. SUBJECT MATTER OF PROTECTION

1. Sec. 112(1): Industrial Design is any composition of lines or colors or any three-dimensional
form, whether or not associated with lines or colors: Provided, That such composition or form
gives a special appearance to and can serve as pattern for an industrial product or handicraft;
2. Sec. 112(2): Integrated Circuit means a product, in its final form, or an intermediate form, in
which the elements, at least one of which is an active element and some or all of the
interconnections are integrally formed in and/or on a piece of material, and which is intended to
perform an electronic function; and
3. Sec. 112(3): Layout-Design is synonymous with 'Topography' and means the three-dimensional
disposition, however expressed, of the elements, at least one of which is an active element, and of
some or all of the interconnections of an integrated circuit, or such a three-dimensional disposition
prepared for an integrated circuit intended for manufacture.
4. What is Not Protected Sec. 113.2: Industrial designs dictated essentially by technical or
functional considerations to obtain technical result or those contrary to public order, health or
morals shall not be protected.
C. CONDITIONS OF PROTECTION
1. Substantive Requirements Sec. 113.1: Only industrial designs that are: (a) new; or (b)
ornamental shall be protected under IP Code.
a. Sec. 113.3: Only layout-designs of integrated circuits that are original shall benefit from
protection under this Act. Layout-design shall be considered original if it is result of its
creator's own intellectual effort and is not commonplace among creators of layout-designs and
manufacturers of integrated circuits at time of its creation.
b. Sec. 113.4: Layout-design consisting of combination of elements and interconnections that are
commonplace shall be protected only if combination, taken as whole, is original.
2. Formal Requirements/Procedure for Application and Grant of ID
a. Application Secs. 114 to 115
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b. Examination Sec. 116
c. Registration Sec. 117
1. Rights for Industrial Designs Sec. 119.1: Same as Patents
2. Rights Conferred to the Owner of a Layout-Design Registration Sec. 119.4: Owner of
layout-design registration shall enjoy following rights:
a. to reproduce, whether by incorporation in integrated circuit or otherwise, registered layoutdesign in its entirety or any part thereof, except act of reproducing any part that does not
comply with requirement of originality; and
b. to sell or otherwise distribute for commercial purposes registered layout design, article or
integrated circuit in which registered layout-design is incorporated.
F. LIMITATION OR EXEMPTIONS TO SCOPE OF PROTECTION
1. Limitations of Industrial Design Rights Sec. 119.1: Same as Patent
2. Limitations of Layout Rights Sec. 119.5: Owner of layout design has no right to prevent third
parties from reproducing, selling or otherwise distributing for commercial purposes registered
layout-design in following circumstances:
a. Reproduction of registered layout-design for private purposes or for the sole purpose of
evaluation, analysis, research or teaching;
b. Act is performed in respect of layout-design created on basis of such analysis or evaluation
and which is itself original in meaning as provided herein;
c. Act is performed in respect of registered lay-out-design, or in respect of integrated circuit in
which such layout-design is incorporated, that has been put on market by or with consent of
right holder;
d. In respect of integrated circuit where person performing or ordering such an act did not know
and had no reasonable ground to know when acquiring integrated circuit or the article
incorporating such integrated circuit, that it incorporated an unlawfully reproduced layoutdesign: Provided, however, That after time that such person has received sufficient notice that
layout-design was unlawfully reproduced, that person may perform any of said acts only with
respect to stock on hand or ordered before such time and shall be liable to pay to right holder
a sum equivalent to at least 5% of net sales or such other reasonable royalty as would be
payable under freely negotiated license in respect of such layout-design; or
e. Act is performed in respect of identical layout-design which is original and has been created
independently by third party.
3. Sec. 119.2: If essential elements of industrial design which is subject of application have been
obtained from creation of another person without his consent, protection under this Chapter
cannot be invoked against injured party.
D. DURATION OF PROTECTION
1. Sec. 118.1: Registration of industrial design shall be for period of 5 years from filing date of
application, subject to renewal for not more than 2 consecutive periods of 5 years each.
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2. Sec. 118.5: Registration of layout-design shall be valid for period of 10 years, without renewal,
and such validity to be counted from tdate of commencement of protection accorded to layoutdesign.
E. CANCELLATION OF REGISTRATION
1. Sec. 120.1: Cancellation of Design Registration254 At any time during term of industrial design
registration, any person upon payment of required fee, may petition Director of Legal Affairs to
cancel industrial design on any of following grounds:
a. If subject matter of industrial design is not registerable within terms of Secs. 112 and 113;
b. If subject matter is not new; or
c. If subject matter of industrial design extends beyond content of application as originally filed.
3. Sec. 120.3: Cancellation of Layout-Design of Integrated Circuits 255 Any interested person
may petition that registration of layout-design be canceled on ground that:
a. Layout-design is not protectable under IP Code;
b. Right holder is not entitled to protection under IP Code; or
c. Application for registration of layout-design, was not filed within 2 years from its first
commercial exploitation anywhere in the world.
IV. TRADEMARKS
1. Registrable Mark Sec. 121.1: Any visible sign capable of distinguishing the goods (trademark)
or services (service mark) of an enterprise and shall include a stamped or marked container of
goods.
2. Non-Registrable Marks Sec. 123.1:256 A mark cannot be registered if it:
a. Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely
suggest connection with persons, living or dead, institutions, beliefs, or national symbols, or
bring them into contempt or disrepute;
b. Consists of 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 name, portrait or signature identifying a particular living individual except by his
written consent, or name, signature, or portrait of deceased President of Philippines, during
life of his widow, if any, except by written consent of widow;
254 Sec. 120.2 provides that, Where the grounds for cancellation relate to a part of the industrial
design, cancellation may be effected to such extent only. The restriction may be effected in the form of an
alteration of the effected features of the design.
255 Sec. 120.3 further provides that, Where the grounds for cancellation are established with respect
only to a part of the layout-design, only the corresponding part of the registration shall be canceled. Any
canceled layout-design registration or part thereof, shall be regarded as null and void from the beginning
and may be expunged from the records of the Intellectual Property Office. Reference to all canceled
layout-design registration shall be published in the IPO Gazette.
256 Sec. 123.3. of the IP Code provides that:
123.3. The nature of the goods to which the mark is applied will not constitute an obstacle to
registration.
224
d. Is identical with registered mark belonging to different proprietor or mark with an earlier
filing or priority date, in respect of:
i.
Same goods or services, or
ii. Closely related goods or services, or

iii. If it nearly resembles such mark as to be likely to deceive or cause confusion;
e. Is identical with, or confusingly similar to, or constitutes translation of a mark which is
considered by competent authority of Philippines to be well-known internationally and in
Philippines, whether or not it is registered here, as being already the mark of person other than
applicant for registration, and used for identical or similar goods or services: Provided, That
in determining whether mark is well-known, account shall be taken of knowledge of relevant
sector of public, rather than of public at large, including knowledge in Philippines which has
been obtained as a result of promotion of mark;
f.
Is identical with, or confusingly similar to, or constitutes translation of mark considered wellknown in accordance with preceding paragraph, which is registered in 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 mark in relation to those goods or services would indicate
connection between those goods or services, and owner of registered mark: Provided further,
That interests of owner of registered mark are likely to be damaged by such use;
g. Is likely to mislead public, particularly as to nature, quality, characteristics or geographical

origin of goods or services;
h. Consists exclusively of signs that are generic for 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 bona fide and established trade
practice;
j.
Consists exclusively of signs or of indications that may serve in trade to designate the kind,
quality, quantity, intended purpose, value, geographical origin, time or production of goods or
rendering of services, or other characteristics of goods or services;
k. Consists of shapes that may be necessitated by technical factors or by nature of goods

themselves or factors that affect their intrinsic value;
l.
Consists of color alone, unless defined by given form; or
m. Is contrary to public order or morality.

n. Is the emblem, official seal, or name of United Nations, whether in its full or abbreviated
form.257
3. Secondary Meaning Sec. 123.2: As regards signs or devices mentioned in paragraphs (j), (k),
and (l), nothing shall prevent registration of any such sign or device which has become distinctive
in relation to goods for which registration is requested as result of use that have been made of it in
commerce in Philippines. IPO may accept as prima facie evidence that mark has become
distinctive, as used in connection with applicants goods or services in commerce, proof of
substantially exclusive and continuous use thereof by applicant in commerce in Philippines for 5
years before date on which claim of distinctiveness is made.
257 Sec. 1 of Republic Act No. 226.
225
1. Substantive Requirements: Registration Sec. 122: Rights in mark acquired through
registration made validly in accordance with IP Code.
Note: Actual prior use not condition for registration of trademark.
2. Formal Requirements/Procedure for Application
a. Trademark Application Secs. 124 to 130
b. Procedure Upon Application:
i.
Sec. 132: Application Number and Filing Date
ii. Sec. 133: Examination and Publication

iii. Sec. 134: Opposition
iv. Sec. 135: Notice and Hearing
c. Registration of Trademark:
i.
Sec. 136: Issuance and Publication of Certificate
ii. Sec. 137: Registration of Mark and Issuance of a Certificate to the Owner or his Assignee
iii. Sec. 138: Certificates of Registration
d. Actions After Registration:
i.
Sec. 139: Publication of Registered Marks; Inspection of Register
ii. Sec. 140: Cancellation upon Application by Registrant; Amendment or Disclaimer of

Registration
iii. Sec. 141: Sealed and Certified Copies as Evidence
iv. Sec. 142: Correction of Mistakes Made by the Office
v. Sec. 143: Correction of Mistakes Made by Applicant
vi. Sec. 144: Classification of Goods and Services
C. OWNERSHIP
1. Registrant Sec. 122: Rights in a mark acquired through registration made validly in accordance
with IP Code.
2. Priority Right Sec. 131:
a. Sec. 131.1: Application for registration of mark filed in Philippines by person referred to in
Section 3, and who previously duly filed application for registration of same mark in one of
those countries, shall be considered as filed as of day application was first filed in foreign
country.
b. Sec. 131.2: No registration of a mark in Philippines by person described in this section shall
be granted until such mark has been registered in country of origin of applicant.
c. Sec. 131.3: Nothing in this section shall entitle owner of registration granted under this
section to sue for acts committed prior to date on which his mark was registered in this
country: Provided, That, notwithstanding foregoing, owner of well-known mark as defined in
Sec. 123.1(e) of IP Code, that is not registered in Philippines, may, against identical or
confusingly similar mark, oppose its registration, or petition cancellation of its registration or
sue for unfair competition, without prejudice to availing himself of other remedies provided
for under the law.
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d. Sec. 131.4: In like manner and subject to the same conditions and requirements, right
provided in this Section may be based upon subsequent regularly filed application in same
foreign country: Provided, That any foreign application filed prior to such subsequent
application has been withdrawn, abandoned, or otherwise disposed of, without having been
laid open to public inspection and without leaving any rights outstanding, and has not served,
nor thereafter shall serve, as basis for claiming right of priority.
D. TRANSFER OF OWNERSHIP
1. Assignment and Transfer of Application and Registration Sec. 149
a. Sec. 149.1: Application for registration of mark, or its registration, may be assigned or
transferred with or without transfer of business using the mark.
b. Sec. 149.2: Such assignment or transfer shall, however, be null and void if it is liable to
mislead public, particularly as regards nature, source, manufacturing process, characteristics,
or suitability for their purpose, of goods or services to which mark is applied.
c. Sec. 149.3: Assignment of application for registration of mark, or of its registration, shall be
in writing and require signatures of contracting parties. Transfers by mergers or other forms of
succession may be made by any document supporting such transfer.
d. Sec. 149.4: Assignments and transfers of registration of marks shall be recorded at IPO on
payment of prescribed fee; assignment and transfers of applications for registration shall, on
payment of same fee, be provisionally recorded, and mark, when registered, shall be in name
of assignee or transferee.
e. Sec. 149.5: Assignments and transfers shall have no effect against third parties until they are
recorded at IPO.
2. License Contracts Sec. 150
a. Sec. 150.1: Any license contract concerning the registration of mark, or application therefor,
shall provide for effective control by licensor of quality of goods or services of licensee in
connection with which mark is used. If license contract does not provide for such quality
control, or if such quality control is not effectively carried out, license contract shall not be
valid.
b. Sec. 150.2: License contract shall be submitted to IPO which shall keep its contents
confidential but shall record it and publish reference thereto. License contract shall have no
effect against third parties until such recording is effected. The Regulations shall fix procedure
for recording of license contract.
1. Sec. 147.1: Owner of registered mark shall have exclusive right to prevent all third parties not
having owners consent from using in course of trade identical or similar signs or containers for
goods or services which are identical or similar to those in respect of which trademark is
registered where such use would result in likelihood of confusion. In case of use of identical sign
for identical goods or services, likelihood of confusion shall be presumed.
2. Sec. 147.2: Exclusive right of owner of well-known mark defined in Sec. 123.1(e) which is
registered in Philippines, shall extend to goods and services which are not similar to those in
respect of which mark is registered: Provided, That use of that mark in relation to those goods or
services would indicate connection between those goods or services and owner of registered mark:
Provided, further, That interests of owner of registered mark are likely to be damaged by such use.
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F. LIMITATION ON SCOPE OF TRADEMARK PROTECTION
1. Sec. 148: Use of Indications by Third Parties for Purposes Other than those for which the
Mark is Used Registration of mark shall not confer on registered owner right to preclude third
parties from using bona fide their names, addresses, pseudonyms, geographical name, or exact
indications concerning kind, quality, quantity, destination, value, place of origin, or time of
production or of supply, of their goods or services: Provided, That such use is confined to
purposes of mere identification or information and cannot mislead public as to source of goods or
services.
1. Sec. 145: Duration Certificate of registration shall remain in force for 10 years; Sec. 146:
Renewal for periods of 10 years at its expiration.
2. Note: Sec. 145: Registrant shall file declaration of actual use and evidence to that effect, or shall
show valid reasons based on existence of obstacles to such use, as prescribed by the Regulations,
within 1 year from 5th anniversary of date of registration of mark. Otherwise, mark shall be
removed from the Register by IPO.
1. Sec. 156 Civil Action for Infringement.
a. Definition: Sec. 155: Any person who shall, without consent of owner of registered mark:
i.
Sec. 155.1: Use in commerce any reproduction, counterfeit, copy, or colorable imitation
of registered mark or same container or dominant feature thereof in connection sale,
offering for sale, distribution, advertising of any goods or services including other
preparatory steps necessary to carry out 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
ii. Sec. 155.2: Reproduce, counterfeit, copy or colorably imitate registered mark or 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 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 in civil action for
infringement by the registrant for the remedies hereinafter set forth: Provided, That
infringement takes place at moment any of acts stated in Sec. 155.1 or this section are
committed regardless of whether there is actual sale of goods or services using infringing
material.
b. Tests to Determine Infringement:
i.
Dominancy Test Focuses on similarity of prevalent features of competing trademarks.

If competing trademark contains main or essential or dominant features of another
trademark by reason of which confusion and deception are likely to result, infringement
takes place.
ii. Holistic Test Does not focus only on predominant words but considers also other
features appearing in labels. Trademarks in their entirety as they appear in their
respective labels are considered in relation to goods to which they are attached..
228
c. Jurisdiction with Regular Courts Sec. 163: All actions under Secs. 150, 155, 164, and 166
to 169 shall be brought before proper courts with appropriate jurisdiction under existing
laws.258
d. Who May Bring Suit
i.
Sec. 156.1: Owner of registered mark may recover damages from any person who
infringes his rights, and measure of damages suffered shall be either reasonable profit
which complaining party would have made, had defendant not infringed his rights, or
profit which defendant actually made out of infringement, or in event such measure of
damages cannot be readily ascertained with reasonable certainty, then court may award as
damages reasonable percentage based upon amount of gross sales of defendant or value of
services in connection with which mark or trade name was used in infringement of rights
of complaining party.
ii. Sec. 160: Any foreign national or juridical person who meets requirements of Sec. 3 of IP
Code and does not engage in business in Philippines may bring civil or administrative
action hereunder for opposition, cancellation, infringement, unfair competition, or false
designation of origin and false description, whether or not it is licensed to do business in
Philippines under existing laws.
e. Defenses
i.
Non-Registrability of Trademark Sec. 138: Certificate of registration of mark shall be

merely prima facie evidence of validity of registration, registrants ownership of mark,
and of registrants exclusive right to use same in connection with goods or services and
those that are related thereto specified in certificate.
ii. Equitable Principles Sec. 230: Equitable principles of laches, estoppel, and
acquiescence may be applied in action for infringement of trademark.
f.
Limitations on Actions for Infringement:

i.
Prior User Sec. 159.1: Notwithstanding the provisions of Sec. 155 hereof, registered
mark shall have no effect against any person who, before filing date or priority date, was
using mark for purposes of his business or enterprise; Provided, That his right may only
be transferred or assigned together with his enterprise or business or with part of his
enterprise or business in which mark is used.
ii. Innocent Infringer Sec. 159.2: Where infringer who is engaged solely in business of
printing mark or other infringing materials for others is innocent infringer, owner of right
infringed shall be entitled against such infringer only to injunction against future printing.
iii. Publisher Sec. 159.3: Where infringement complained of is contained in or is part of
paid advertisement in newspaper, magazine, or other similar periodical or in electronic
communication, remedies of owner of right infringed as against publisher or distributor of
such newspaper, magazine, or other similar periodical or electronic communication shall
be limited to injunction against presentation of such advertising matter in future issues of
such newspapers, magazines, or other similar periodicals or in future transmissions of
such electronic communications. Limitations of this subparagraph shall apply only to
innocent infringers: Provided, That such injunctive relief shall not be available to owner
258 Sec. 164 provides that, It shall be the duty of the clerks of such courts within one (1) month after
the filing of any action, suit, or proceeding involving a mark registered under the provisions of this Act, to
notify the Director in writing setting forth: the names and addresses of the litigants and designating the
number of the registration or registrations and within one (1) month after the judgment is entered or an
appeal is taken, the clerk of court shall give notice thereof to the Office, and the latter shall endorse the
same upon the filewrapper of the said registration or registrations and incorporate the same as a part of
the contents of said filewrapper.
229
of right infringed with respect to an issue of newspaper, magazine, or other similar
periodical or electronic communication containing infringing matter where restraining
dissemination of such infringing matter in any particular issue of such periodical or in an
electronic communication would delay delivery of such issue or transmission of such
electronic communication is customarily conducted in accordance with sound business
practice, and not due to any method or device adopted to evade this section or to prevent
or delay issuance of injunction or restraining order with respect to such infringing matter.
g. Reliefs Granted
i.
Damages
(a) Sec. 156.3. In cases where actual intent to mislead the public or to defraud
complainant is shown, in discretion of court, damages may be doubled.
(b) Sec. 158: - In any suit for infringement, owner of registered mark shall not be entitled
to recover profits or damages unless the acts have been committed with knowledge
that such imitation is likely to cause confusion, or to cause mistake, or to deceive.
Such knowledge is presumed if registrant gives notice that his mark is registered by
displaying with mark words "Registered Mark" or letter R within circle or if
defendant had otherwise actual notice of registration.
ii. Injunction Sec. 156.4: Complainant, upon proper showing, may also be granted
injunction.
iii. Impounding Evidence Sec. 156.2: On application of complainant, court may impound
during pendency of action, sales invoices and other documents evidencing sales.
iv. Destruction of Infringing Materials Sec. 157:
(a) Sec. 157.1: In any action arising under IP Code, in which violation of any right of
owner of registered mark is established, court may order that goods found to be
infringing be, without compensation of any sort, disposed of outside channels of
commerce in such manner as to avoid any harm caused to right holder, or destroyed;
and all labels, signs, prints, packages, wrappers, receptacles and advertisements in
possession of defendant, bearing registered mark or trade name or any reproduction,
counterfeit, copy or colorable imitation thereof, all plates, molds, matrices and other
means of making the same, shall be delivered up and destroyed.
(b) Sec. 157.2: In regard to counterfeit goods, simple removal of trademark affixed shall
not be sufficient other than in exceptional cases which shall be determined by
Regulations, to permit release of goods into channels of commerce.
v. Mark Found Invalid May be Cancelled Sec. 161: In any action involving registered
mark, court may determine right to registration, order cancellation of registration, in
whole or in part, and otherwise rectify register with respect to registration of any party to
action in exercise of this. Judgment and orders shall be certified by court to the Director,
who shall make appropriate entry upon the records of the Bureau, and shall be controlled
thereby.
h. Prescription Sec. 226: No damages may be recovered for infringement of trademark after 4
years from time cause of action arose.
2. Sec. 168 Civil Action for Unfair Competition.

a. Concepts:
230
i.
Protection of Goodwill Sec. 168.1: A person who has identified in mind of public
goods he manufactures or deals in, his business or services from those of others, whether
or not registered mark is employed, has property right in goodwill of said goods, business
or services so identified, which will be protected in same manner as other property rights.
ii. Definition of Unfair Competition Sec. 168.2: 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 one
having established such goodwill, or who shall commit any acts calculated to produce
said result, shall be guilty of unfair competition, and shall be subject to an action therefor.
iii. Acts of Unfair Competition Sec. 168.3: In particular, and without in any way limiting
scope of protection against unfair competition, following shall be deemed guilty of unfair
competition:
(a) Any person who is selling his goods and gives them general appearance of goods of
another manufacturer or dealer, either as to goods themselves or in wrapping of
packages in which they are contained, or the devices or words thereon, or in any other
feature of their appearance, which would be likely to influence purchasers to believe
that goods offered are those of a manufacturer or dealer, other than actual
manufacturer or dealer, or who otherwise clothes goods with such appearance as shall
deceive public and defraud another of his legitimate trade, or any subsequent vendor
of such goods or any agent of any vendor engaged in selling such goods with like
purpose;
(b) Any person who by any artifice, or device, or who employs any other means
calculated to induce the false belief that such person is offering the services of another
who has identified such services in mind of public; or
(c) Any person who shall make any false statement in course of trade or who shall
commit any other act contrary to good faith of nature calculated to discredit goods,
business or services of another.
b. Remedies Sec. 168.4: Remedies provided by Secs. 156, 157 and 161 shall apply mutatis
mutandis.
c. Distinctions Between Infringement and Unfair Competition:
i.
In infringement, prior registration of trademark necessary; in unfair competition,

registration of trademark not necessary.
ii. In infringement, fraudulent intent not necessary; in unfair competition, fraudulent intent is
essential.
iii. Infringement of trademark is unauthorized use of trademark; Unfair competition is
passing off ones goods as goods of another.
3. Sec. 162 Action for False or Fraudulent Declaration: Any person who shall procure
registration in IPO of mark by false or fraudulent declaration or representation, whether oral or in
writing, or by any false means, shall be liable in a civil action by any person injured thereby for
any damages sustained in consequence thereof.
4. Sec. 169 Action for False Designations of Origin; False Description or Representation.
a. Sec. 169.1: Any person who, on or in connection with any goods or services, or any container
for goods, uses in commerce any word, term, name, symbol, or device, or any combination
thereof, or any false designation of origin, false or misleading description of fact, or false or
misleading representation of fact, which:
231
i.
is likely to cause confusion, or to cause mistake, or to deceive as to affiliation, connection,

or association of such person with another person, or as to origin, sponsorship, or
approval of his or her goods, services, or commercial activities by another person; or
ii. in commercial advertising or promotion, misrepresents nature, characteristics, qualities, or

geographic origin of his or her or another persons goods, services, or commercial
activities, shall be liable to a civil action for damages and injunction provided in Secs. 156
and 157 of IP Code by any person who believes that he or she is or likely to be damaged
by such act.
b. Sec. 169.2: Any goods marked or labeled in contravention of provisions of this Section shall
not be imported into Philippines or admitted entry at any customhouse of Philippines. Owner,
importer, or consignee of goods refused entry at any customhouse under this section may have
any recourse under customs revenue laws or may have remedy given by IP Code in cases
involving goods refused entry or seized.
5. Sec. 170 Criminal Prosecution: Independent of civil and administrative sanctions imposed by
law, criminal penalty of imprisonment from 2 years to 5 years and a fine ranging from P50,000 to
P200,000, shall be imposed on any person who is found guilty of committing any of acts
mentioned in Secs 155, 168 and 169.1.
6. Sec. 151 Cancellation of Trademarks
a. Grounds Sec. 151.1: Petition to cancel registration of mark under IP Code may be filed
with Bureau of Legal Affairs by any person who believes that he is or will be damaged by
registration of mark under IP Code as follows:
i.
Within 5 years from date of registration of mark under IP Code.
ii. At any time, if registered mark becomes generic name for goods or services, or a portion
thereof, for which it is registered, or has been abandoned, or its registration was obtained
fraudulently or contrary to provisions of IP Code, or if registered mark is being used by,
or with permission of, registrant so as to misrepresent source of goods or services on or in
connection with which mark is used. If registered mark becomes generic name for less
than all of goods or services for which it is registered, petition to cancel registration for
only those goods or services may be filed. Registered mark shall not be deemed to be
generic name of goods or services solely because such mark is also used as name of or to
identify unique product or service. Primary significance of registered mark to relevant
public rather than purchaser motivation shall be test for determining whether registered
mark has become generic name of goods or services on or in connection with which it has
been used.
iii. At any time, if registered owner of mark without legitimate reason fails to use mark
within Philippines, or to cause it to be used in Philippines by virtue of license during an
uninterrupted period of 3 years or longer.
b. Concurrent Jurisdiction Sec. 151.2: Notwithstanding foregoing provisions, court or
administrative agency vested with jurisdiction to hear and adjudicate any action to enforce the
rights to registered mark shall likewise exercise jurisdiction to determine whether registration
of said mark may be cancelled in accordance with IP Code. Filing of suit to enforce registered
mark with proper court or agency shall exclude any other court or agency from assuming
jurisdiction over subsequently filed petition to cancel same mark. On other hand, earlier filing
of petition to cancel mark with Bureau of Legal Affairs shall not constitute prejudicial
question that must be resolved before action to enforce rights to same registered mark may be
decided.
c. Other Provisions:
232
i.
Sec. 152: Non-use of a Mark When Excused.
ii. Sec. 153: Requirements of Petition; Notice and Hearing.

iii. Sec. 154: Cancellation of Registration.
V. TRADE NAMES
1. Registrable Trade Name Sec. 121.3: Name or designation identifying or distinguishing an
enterprise.
2. Non-Registrable Marks Sec. 165.1: Name or designation may not be used as trade name if by
its nature or use to which such name or designation may be put, it is contrary to public order or
morals and if, in particular, it is liable to deceive trade circles or public as to nature of enterprise
identified by that name. Examples:
a. Consists of generic words
b. Consists of geographical name;
c. Legal Prohibitions: words that may not be used as trade name
i.
United Nations;259
ii. Bonded if not licensed under General Bonded Warehouse Act or established under
Tariff and Customs Code;260
iii. Bank, Banking, Banker, Quasi-Bank, Quasi-Banking, Quasi-Banker,
Savings and Loan Association, Trust Corporation, Trust Corporation, Trust
Company unless authorized to as such by Monetary Board (MB); 261
iv. Development Bank unless authorized to operate as such by MB; 262
v. Financing Company, Leasing Company, Financing and Leasing Company, or
Finance and Investment Company unless authorized as such by Securities and
Exchange Commission;263
vi. Cooperative unless registered as cooperative; 264
vii. Rural Bank unless authorized to operate as such by MB; 265 and
viii.National not used by any bank except Philippine National Bank. 266
d. Confusing Similarity Sec. 165.2(b): Any subsequent use of trade name by third party,
whether as trade name or mark or collective mark, or any such use of similar trade name or
mark, likely to mislead public, shall be deemed unlawful.
259 R.A. No. 226, Sec. 1.

260 R.A. No. 247, Sec. 3.
261 R.A. No. 8791, Sec. 64.
262 R.A. No. 4093, Sec. 16.
263 R.A. No. 5980, Sec. 14(c), as amended by R.A. No. 8556.
264 R.A. No. 6938, Sec. 124(1); R.A. No. 6939, Sec. 14.
265 R.A. No. 7353, Sec. 28.
266 Revised Charter of Philippine National Bank, Sec. 35.
233
1. Substantive Requirements Sec. 165.2(a): Notwithstanding any laws or regulations providing
for any obligation to register trade names, such names shall be protected, even prior to or without
registration, against any unlawful act committed by third parties.
C. TRANSFER OF OWNERSHIP
1. Sec. 165.4: Rules on assignment of trademarks are also applicable to assignment of trade names.
D. INFRINGEMENT AND REMEDIES
1. Sec. 165.3: Remedies for infringement of trademarks are also applicable to infringement of trade
names.
VI. COPYRIGHT
1. Original Works Sec. 172.1: Literary and Artistic Works. Original intellectual creations in
literary and artistic domain protected from moment of their creation. 267
2. Derivative Works Sec. 173.1: Following derivative works shall also be protected by
copyright:268
267 Under Sec. 172.1 of the IP Code, Literary and Artistic Works 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;
(e) Dramatic or dramatico-musical compositions; choreographic works or entertainment in
dumb shows;
(f) Musical compositions, with or without words;
(g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other works
of art; models or designs for works of art;
(h) Original ornamental designs or models for articles of manufacture, whether or not
registrable as an industrial design, and other works of applied art;
(i) Illustrations, maps, plans, sketches, charts and three-dimensional works relative to
geography, topography, architecture or science;
(j) Drawings or plastic works of a scientific or technical character;
(k) Photographic works including works produced by a process analogous to photography;
lantern slides;
(l) Audiovisual works and cinematographic works and works produced by a process
analogous to cinematography or any process for making audio-visual recordings;
(m) Pictorial illustrations and advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific and artistic works.
268 Sec. 173.2 of the IP Code provides that:
The works referred to in paragraphs (a) and (b) of Subsection 173.1 shall be protected as a
new works: Provided however, That such new work shall not affect the force of any subsisting
copyright upon the original works employed or any part thereof, or be construed to imply any right
to such use of the original works, or to secure or extend copyright in such original works.
234
a. Sec. 173.1(a): Dramatizations, translations, adaptations, abridgments, arrangements, and other
alterations of literary or artistic works; and
b. Sec. 173.1(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.
c. Sec. 174: Published Edition of Work In addition to right to publish granted by author, his
heirs or assigns, publisher shall have a copy right consisting merely of right of reproduction of
typographical arrangement of published edition of work.
3. Works Not Protected
a. Sec. 175: Unprotected Subject Matter Any idea, procedure, system method or operation,
concept, principle, discovery or mere data as such, even if they are expressed, explained,
illustrated or embodied in a work; news of the day and other miscellaneous facts having
character of mere items of press information; or any official text of legislative, administrative
or legal nature, as well as any official translation thereof.
b. Sec. 176.1: Works of the Government of the Philippines. No copyright shall subsist in any
work of Government of Philippines.269
1. Substantive Requirements Sec. 172.2: Works are protected by sole fact of their creation,
irrespective of their mode or form of expression, as well as of their content, quality and purpose.
2. Formal Requirements Sec. 191 (Registration and Deposit with National Library and the
Supreme Court Library); Sec. 192 (Notice of Copyright).
C. OWNERSHIP
1. The Author Sec. 178. Copyright ownership shall be governed by following rules:
a. Sec. 178.1: For original literary and artistic works author;
b. Sec. 178.5: For audiovisual work producer, author of scenario, composer music, film
director, and author of work so adapted;270
269 Sec. 176 of the IP Code further provides that:

176.1. x x x. 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. No prior approval or
conditions shall be required for the use of any purpose of statutes, rules and regulations, and
speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in
courts of justice, before administrative agencies, in deliberative assemblies and in meetings of
public character.
176.2. The Author of speeches, lectures, sermons, addresses, and dissertations mentioned in
the preceding paragraphs shall have the exclusive right of making a collection of his works.
176.3. Notwithstanding the foregoing provisions, the Government is not precluded from
receiving and holding copyrights transferred to it by assignment, bequest or otherwise; nor shall
publication or republication by the government in a public document of any work in which copy
right is subsisting be taken to cause any abridgment or annulment of the copyright or to authorize
any use or appropriation of such work without the consent of the copyright owners.
270 Section 178.5 further provides:
However, subject to contrary or other stipulations among the creators, the producers shall exercise the
copyright to an extent required for the exhibition of the work in any manner, except for the right to collect
performing license fees for the performance of musical compositions, with or without words, which are
incorporated into the work; and
235
c. Sec. 178.6: For letters writer, subject to the provisions of Art. 723, Civil Code; and
d. Sec. 179: For anonymous and pseudonymous works publishers deemed to represent authors,
unless contrary appears, or pseudonyms or adopted name leaves no doubts as to authors
identity, or if author discloses his identity.
2. Joint Works/Works Created by Several Persons Sec. 178.2:
a. General Rule: For works of joint authorship co-authors (in absence of agreement, their
rights governed by rules on co-ownership).
b. Exception: If parts can be used separately and author of each part can be identified author of
each part for part that he created;
3. Works Made for Hire
a. Sec. 178.3: For work created by author during and in the course of his employment:
i.
Employee, if creation of work is not part of his regular duties even if employee uses time,
facilities and materials of employer; or
ii. Employer, if work is result of performance of his regularly-assigned duties, unless

contrary agreement, express or implied.
b. Sec. 178.4: For work commissioned by person other than employer of author and who pays
for it and work is made in pursuance of commission, person who commissioned work shall
have ownership of work, but creator retains copyright, unless contrary written stipulation.
D. TRANSFER
1. Assignment of Copyright
a. Sec. 180: Rights of Assignee.
i.
Sec. 180.1. Copyright may be assigned in whole or in part. Within scope of assignment,
assignee is entitled to all rights and remedies which assignor had with respect to
copyright.
ii,. Sec. 180.2. Copyright is not deemed assigned inter vivos in whole or in part unless there
is written indication of such intention.
b. Sec. 181: Copyright and Material Object Copyright is distinct from property in material
object subject to it. Consequently, transfer or assignment of copyright shall not itself
constitute transfer of material object. Nor shall transfer or assignment of sole copy or of one
or several copies of work imply transfer or assignment of copyright.
2. License Sec. 180.3: Submission of literary, photographic or artistic work to newspaper,
magazine or periodical for publication shall constitute only license to make single publication
unless greater right is expressly granted. If 2 or more persons jointly own a copyright or any part
thereof, neither of owners shall be entitled to grant licenses without prior written consent of other
owner or owners.
3. Other Provisions
a. Sec. 182: Filing of Assignment of License.
b. Sec. 183: Designation of Society Copyright owners or their heirs may designate society of
artists, writers or composers to enforce their economic rights and moral rights on their behalf.
236

1. Moral Rights:
a. Scope Sec. 193: Author of work shall, independently of economic rights in Sec. 177 or grant
of an assignment or license with respect to such right, have right:
i.
Sec. 193.1: To require that authorship of works be attributed to him, in particular, right
that his name, as far as practicable, be indicated in prominent way on copies, and in
connection with public use of his work;
ii. Sec. 193.2: To make any alterations of his work prior to, or to withhold it from
publication;
iii. Sec. 193.3: To object to any distortion, mutilation or other modification of, or other
derogatory action in relation to, his work which would be prejudicial to his honor or
reputation; and
iv. Sec. 193.4: To restrain use of his name with respect to any work not of his own creation or
in distorted version of his work.
b. Sec. 194: Breach of Contract Author cannot be compelled to perform his contract to create
work or for publication of his work already in existence. However, he may be held liable for
damages for breach of such contract.
c. Sec. 195: Waiver of Moral Rights Author may waive his rights mentioned in Sec. 193 by
written instrument, but no such waiver shall be valid where its effects is to permit another:
i.
Sec. 195.1: To use name of author, or title of his work, or otherwise to make use of his
reputation with respect to any version or adaptation of his work which, because of
alterations therein, would substantially tend to injure literary or artistic reputation of
another author; or
ii. Sec. 195.2: To use name of author with respect to a work he did not create.
d. Sec. 196: Contribution to Collective Work When author contributes to collective work, his
right to have his contribution attributed to him is deemed waived unless he expressly reserves
it.
e. Sec. 197: Editing, Arranging and Adaptation of Work In absence of contrary stipulation at
time author licenses or permits another to use his work, necessary editing, arranging or
adaptation of such work, for publication, broadcast, use in motion picture, dramatization, or
mechanical or electrical reproduction in accordance with reasonable and customary standards
or requirements of medium in which work is to be used, shall not be deemed to contravene
author's rights secured by this Chapter. Nor shall complete destruction of work
unconditionally transferred by author be deemed to violate such rights.
2. Exploitation Rights
a. Economic Rights Sec. 177: Copyright or economic rights shall consist of exclusive right to
carry out, authorize or prevent following acts:
i.
Sec. 177.1: Reproduction of work or substantial portion of work;
ii. Sec. 177.2: Dramatization, translation, adaptation, abridgment, arrangement or other

transformation of work;
iii. Sec. 177.3: First public distribution of original and each copy of work by sale or other
forms of transfer of ownership;
237
iv. Sec. 177.4: Rental of original or a copy of audiovisual or cinematographic work, work
embodied in sound recording, computer program, compilation of data and other materials
or musical work in graphic form, irrespective of ownership of original or copy which is
subject of rental;
v. Sec. 177.5: Public display of original or copy of work;
vi. Sec. 177.6: Public performance of work; and
vii. Sec. 177.7: Other communication to public of work.
b. Other Rights
i.
Droit de Suite Sec. 200:271 Subsequent Sale or Lease of Work. In every sale or lease of
original work of painting or sculpture or of original manuscript of writer or composer,
subsequent to first disposition thereof by author, author or his heirs shall have inalienable
right to participate in gross proceeds of ale or lease to extent of 5%. This right shall exist
during lifetime of author and for 50 years after his death.
ii. Work of Architecture Sec. 186: Copyright in work of architecture shall include right to
control erection of any building which reproduces whole or substantial part of work either
in its original form or in any form recognizably derived from original; Provided, That
copyright in any such work shall not include right to control reconstruction or
rehabilitation in same style as original of building to which copyright relates.
F. LIMITATION OR EXEMPTIONS TO SCOPE OF COPYRIGHT PROTECTION
1. Limitation of Copyright Sec. 184.1: Following acts shall not constitute infringement of
copyright:272
a. Recitation or performance of work, once it has been lawfully made accessible to public, if
done privately and free of charge or if made strictly for charitable or religious institution or
society;
b. Making of quotations from published work if they are compatible with fair use and only to
extent justified for the purpose, including quotations from newspaper articles and periodicals
in form of press summaries: Provided, That source and name of author, if appearing on work,
are mentioned;
c. Reproduction or communication to public by mass media of articles on current political,
social, economic, scientific or religious topic, lectures, addresses and other works of same
nature, which are delivered in public if such use is for information purposes and has not been
expressly reserved: Provided, That source is clearly indicated;
d. Reproduction and communication to public of literary, scientific or artistic works as part of
reports of current events by means of photography, cinematography or broadcasting to extent
necessary for the purpose;
e. Inclusion of work in publication, broadcast, or other communication to public, sound
recording or film, if such inclusion is made by way of illustration for teaching purposes and is
271 Sec. 201 of the IP Code provides that:

Sec. 201. Works Not Covered. - The provisions of this Chapter shall not apply to prints,
etchings, engravings, works of applied art, or works of similar kind wherein the author primarily
derives gain from the proceeds of reproductions.
The provisions of this section shall be interpreted in such a way as to allow the work to be
used in a manner which does not conflict with the normal exploitation of the work and does not
unreasonably prejudice the right holder's legitimate interest.
238
compatible with fair use: Provided, That source and name of author, if appearing in work, are
mentioned;
f.
Recording made in schools, universities, or educational institutions of work included in

broadcast for use of such schools, universities or educational institutions: Provided, That such
recording must be deleted within reasonable period after they were first broadcast: Provided,
further, That such recording may not be made from audiovisual works which are part of
general cinema repertoire of feature films except for brief excerpts of work;
g. Making of ephemeral recordings by broadcasting organization by means of its own facilities

and for use in its own broadcast;
h. Use made of work by or under direction or control of Government, by National Library or by
educational, scientific or professional institutions where such use is in public interest and is
compatible with fair use;
i.
Public performance or communication to public of work, in place where no admission fee is

charged in respect of such public performance or communication, by club or institution for
charitable or educational purpose only, whose aim is not profit making, subject to such other
limitations as may be provided in Regulations;
j.
Public display of original or copy of work not made by means of film, slide, television image
or otherwise on screen or by means of any other device or process: Provided, That either work
has been published, or, that original or copy displayed has been sold, given away or otherwise
transferred to another person by author or his successor in title; and
k. Any use made of a work for purpose of any judicial proceedings or for giving of professional
advice by legal practitioner.
2. Fair Use Sec. 185.1: Fair use of copyrighted work for criticism, comment, news reporting,
teaching including multiple copies for classroom use, scholarship, research, and similar purposes
is not infringement of copyright. 273 In determining whether use made of work in any particular
case is fair use, factors to be considered shall include:
a. Purpose and character of use, including whether such use is of commercial nature or is for
non-profit education purposes;
b. Nature of copyrighted work;
c. Amount and substantiality of portion used in relation to copyrighted work as a whole; and
d. Effect of use upon potential market for or value of copyrighted work. 274
273 Sec. 185.1 further provides that:

Decompilation, which is understood here to be the reproduction of the code and translation of the forms of
the computer program to achieve the inter-operability of an independently created computer program with
other programs may also constitute fair use.
185.2 The fact that a work is unpublished shall not by itself bar a finding of fair use if such
finding is made upon consideration of all the above factors.
239
3. Reproduction of Published Works Sec. 187.1:275 Private reproduction of published work in
single copy, where reproduction is made by natural person exclusively for research and private
study, shall be permitted, without authorization of owner of copyright in work.
4. Repographic Reproduction by Libraries Sec. 188.1:276 Any library or archive whose activities
are not for profit may, without authorization of author of copyright owner, make single copy of
work by reprographic reproduction:
a. Where work by reason of its fragile character or rarity cannot be lent to user in its original
form;
b. Where works are isolated articles contained in composite works or brief portions of other
published works and reproduction is necessary to supply them; when this is considered
expedient, to person requesting their loan for purposes of research or study instead of lending
volumes or booklets which contain them; and
c. Where making of such copy is in order to preserve and, if necessary in event that it is lost,
destroyed or rendered unusable, replace a copy, or to replace, in permanent collection of
another similar library or archive, copy which has been lost, destroyed or rendered unusable
and copies are not available with publisher.
5. Reproduction of Computer Programmes Sec. 189.1:277 Reproduction in 1 back-up copy or
adaptation of computer program shall be permitted, without authorization of author of, or other
owner of copyright in, a computer program, by lawful owner of that computer program: Provided,
That copy or adaptation is necessary for:
a. Use of computer program in conjunction with computer for the purpose, and to extent, for
which computer program has been obtained; and
b. Archival purposes, and, for replacement of lawfully owned copy of computer program in
event that lawfully obtained copy of computer program is lost, destroyed or rendered
unusable.

187.2. The permission granted under Subsection 187.1 shall not extend to the reproduction
of:
(a) A work of architecture in form of building or other construction;
(b) An entire book, or a substantial past thereof, or of a musical work in which graphics form
by reprographic means;
(c) A compilation of data and other materials;
(d) A computer program except as provided in Section 189; and
(e) Any work in cases where reproduction would unreasonably conflict with a normal
exploitation of the work or would otherwise unreasonably prejudice the legitimate interests of the
author.
276 Section 188.2 of the IP Code provides that:
188.2. Notwithstanding the above provisions, it shall not be permissible to produce a volume
of a work published in several volumes or to produce missing tomes or pages of magazines or
similar works, unless the volume, tome or part is out of stock; Provided, That every library which,
by law, is entitled to receive copies of a printed work, shall be entitled, when special reasons so
require, to reproduce a copy of a published work which is considered necessary for the collection
of the library but which is out of stock.
277 Sec. 189.2 and 189.3 of the IP Code provides that:
189.2. No copy or adaptation mentioned in this Section shall be used for any purpose other
than the ones determined in this Section, and any such copy or adaptation shall be destroyed in
the event that continued possession of the copy of the computer program ceases to be lawful.
189.3. This provision shall be without prejudice to the application of Section 185 whenever
appropriate.
240
6. Importation for Personal Purposes Sec. 190.1:278 Importation of copy of work by individual
for his personal purposes shall be permitted without authorization of author of, or other owner of
copyright in, work under following circumstances:
a. When copies of work are not available in Philippines and:
i.
Not more than 1 copy at one time is imported for strictly individual use only; or
ii. Importation is by authority of and for the use of Philippine Government; or

iii. Importation, consisting of not more than 3 such copies or likenesses in any one invoice, is
not for sale but for use only of any religious, charitable, or educational society or
institution duly incorporated or registered, or is for encouragement of fine arts, or for any
state school, college, university, or free public library in Philippines.
b. When such copies form parts 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 3.
1. Moral Rights Sec. 198.1: Rights of an author under this chapter shall last during lifetime of
author and for 50 years after his death and shall not be assignable or subject to license. Person or
persons to be charged with posthumous enforcement of these rights shall be named in writing to
be filed with National Library. In default of such person or persons, such enforcement shall
devolve upon either author's heirs, and in default of heirs, Director of National Library.
2. Economic Rights Sec. 213.1: Subject to provisions of Secs. 213.2 to 213.6, copyright in works
under Secs. 172 and 173 shall be protected during life of author and for 50 years after his death.
This rule also applies to posthumous works.
a. Sec. 213.2: If works of joint authorship, economic rights protected during life of last surviving
author and for 50 years after his death
b. Sec. 213.3: If anonymous or pseudonymous works, copyright protected for 50 years from date
on which work was first lawfully published; Provided, That where, before expiration of said
period, authors identity is revelaed or is no longer in doubt, provisions of Secs. 213.1 and
213.2 shall apply; Provided, further, That such works if not published before shall be
protected for 50 years counted from making of work.
c. Sec. 213.4: If works of applied art, protection shall be for period of 25 years from date of
making.
d. Sec. 213.5: If photographic works, protection shall be for 50 years from publication of work
and, if unpublished, for 50 years from making.
278 Sec. 190.2 and 190.3 of the IP Code provides that:

190.2. Copies imported as allowed by this Section may not lawfully be used in any way to
violate the rights of owner the copyright or annul or limit the protection secured by this Act, and
such unlawful use shall be deemed an infringement and shall be punishable as such without
prejudice to the proprietors right of action.
190.3. Subject to the approval of the Secretary of Finance, the Commissioner of Customs is
hereby empowered to make rules and regulations for preventing the importation of articles the
importation of which is prohibited under this Section and under treaties and conventions to which
the Philippines may be a party and for seizing and condemning and disposing of the same in case
they are discovered after they have been imported.
241
e. Sec. 213.6: If audio-visual works, including those produced by process analogous to
photography or any process for making audio-visual recordings, protection shall be for 50
years from date of publication and, if unpublished, from date of making.
1. Sec. 216 Civil Action for Infringement
a. Definition: Doing by any person, without consent of owner of copyright, of anything sole
right to do which is conferred by state on owner of copyright.
b. Tests to Determine Infringement: Copying When ordinary observer comparing works can
readily see that one was copied from other.
c. Jurisdiction with Regular Courts Sec. 225
d. Defenses
i.
Ignorance and lack of intention NOT defense
ii. Loss of rights (sale, waiver, making work public)

iii. Prescription
e. Presumptions
i.
Sec. 218: Affidavit Evidence
ii. Sec. 219: Presumption of Authorship

iii. Sec. 220: International Registration of Work
f.
Reliefs Granted Sec. 216.1: Any person infringing right protected under IP Code shall be
liable:
i.
Damages
(a) Sec. 216.1(b): Pay to copyright proprietor or his assigns or heirs such actual damages,
including legal costs and other expenses, as he may have incurred due to infringement
as well as profits infringer may have made due to such infringement, and in proving
profits plaintiff shall be required to prove sales only and defendant shall be required
to prove every element of cost which he claims, or, in lieu of actual damages and
profits, such damages which to court shall appear to be just and shall not be regarded
as penalty.
(b) Sec. 216.1(e): Such other terms and conditions, including payment of moral and
exemplary damages, which court may deem proper, wise and equitable x x x even in
event of acquittal in criminal case.
ii. Injunction
(a) Sec. 216.1(a): To injunction restraining such infringement. Court may also order
defendant to desist from infringement, among others, to prevent entry into channels of
commerce of imported goods that involve infringement, immediately after customs
clearance of such goods.
iii. Impounding/Seizure of Infringing Materials
(a) Sec. 216.1(c): Deliver under oath, for impounding during the pendency of the action,
upon such terms and conditions as the court may prescribe, sales invoices and other
documents evidencing sales, all articles and their packaging alleged to infringe a
copyright and implements for making them.
242
(b) Sec. 216.2: In infringement action, court shall also have power to order seizure and
impounding of any article which may serve as evidence in court proceedings.
iv. Destruction of Infringing Materials
(a) Sec. 216.1(e): Such other terms and conditions which court may deem proper, wise
and equitable, and destruction of infringing copies of work even in event of acquittal
in criminal case.
(b) Sec. 21.6.1(d): Deliver under oath for destruction without any compensation all
infringing copies or devices, as well as all plates, molds, or other means for making
such infringing copies as the court may order.
g. Prescription Sec. 226: No damages may be recovered under IP Code after 4 years from
time cause of action arose.
2. Sec. 217 Criminal Action for Infringement
a. Sec. 217.1: Any person infringing any right secured by provisions of Part IV of IP Code or
aiding or abetting such infringement shall be guilty of crime punishable by:
i.
For First Offense: Imprisonment of 1 year to 3 years plus a fine ranging from P50,000 to
P150,000;
ii. For Second Offense: Imprisonment of 3 years and 1 day to 6 years plus a fine ranging
from P150,000 to P500,000;
iii. For Third and Subsequent Offense: Imprisonment of 6 years and 1 day to 9 years plus a
fine ranging from P500,000 to P1,500,000; and
iv. In all cases, subsidiary imprisonment in cases of insolvency.
b. Sec. 217.3: Any person who at time when copyright subsists in work has in his possession an
article which he knows, or ought to know, to be an infringing copy of the work for purpose of:
(a) Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article;
(b) Distributing the article for purpose of trade, or for any other purpose to extent that will
prejudice rights of copyright owner in work; or (c) Trade exhibit of article in public, shall be
guilty of an offense and shall be liable on conviction to imprisonment and fine as above
mentioned.
I. POINTS OF ATTACHMENT
1. Sec. 221.1: Protection afforded by IP Code to copyrightable works under Secs. 172 and 173 shall
apply to:
a. Works of authors who are nationals of, or have their habitual residence in Philippines;
b. Audio-visual works producer of which has his headquarters or habitual residence in
Philippines;
c. Works of architecture erected in Philippines or other artistic works incorporated in building or
other structure located in Philippines;
d. Works first published in Philippines; and
e. Works first published in another country but also published in Philippines within thirty days,
irrespective of nationality or residence of authors.
2. Sec. 221.2: Provisions of IP Code shall also apply to works that are to be protected by virtue of
and in accordance with any international convention or other international agreement to which
Philippines is a party.
243
VII. NEIGHBORING RIGHTS
A. RIGHTS OF PERFORMERS
1. Scope of Rights
a. Moral Rights Sec. 204.1: Independently of performer's economic rights, performer, shall,
as regards his live aural performances or performances fixed in sound recordings, have right
to claim to be identified as performer of his performances, except where omission is dictated
by manner of use of performance, and to object to any distortion, mutilation or other
modification of his performances that would be prejudicial to his reputation.
b. Exclusive Rights Sec. 203: Subject to provisions of Sec. 212, performers shall enjoy
following exclusive rights:
i.
Sec. 203.1: As regards their performances, right of authorizing:

(a) Broadcasting and other communication to public of their performance; and
(b) Fixation of their unfixed performance.
ii. Sec. 203.2: Right of authorizing direct or indirect reproduction of their performances
fixed in sound recordings, in any manner or form;
iii. Sec. 203.3: Subject to provisions of Sec. 206, right of authorizing first public distribution
of original and copies of their performance fixed in sound recording through sale or rental
or other forms of transfer of ownership;
iv. Sec. 203.4: Right of authorizing commercial rental to public of original and copies of
their performances fixed in sound recordings, even after distribution of them by, or
pursuant to authorization by performer; and
v. Sec. 203.5: Right of authorizing making available to public of their performances fixed in
sound recordings, by wire or wireless means, in such way that members of public may
access them from place and time individually chosen by them.
c. Droit de Suite Sec. 206: Unless otherwise provided in contract, in every communication to
public or broadcast of performance subsequent to first communication or broadcast thereof by
broadcasting organization, performer shall be entitled to additional remuneration equivalent to
at least 5% of original compensation he or she received for first communication or broadcast.
d. Contract Terms Sec. 207: Nothing in this Chapter shall be construed to deprive performers
of right to agree by contracts on terms and conditions more favorable for them in respect of
any use of their performance.
2. Limitations on Rights
a. Sec. 212: Secs. 203, 208 and 209 shall not apply where acts referred to in those Secs. Relate
to:
i.
Sec. 212.1: Use by natural person exclusively for his own personal purposes;
ii. Sec. 212.2: Using short excerpts for reporting current events;
iii. Sec. 212.3: Use solely for purpose of teaching or for scientific research; and
iv. Sec. 212.4: Fair use of broadcast subject to conditions under Sec. 185.
b. Sec. 205.1: Subject to provisions of Sec. 206, once performer has authorized broadcasting or
fixation of his performance, provisions of Sec. 203 shall have no further application.
244
c. Sec. 205.2: Provisions of Sec. 184 (Limitations on Copyright) and Sec. 185 (Fair Use of
Copyrighted Work) shall apply mutatis mutandis to performers.
3. Duration of Protection
a. Moral Rights Sec. 204.2: Rights granted to performer in accordance with Sec. 204.1 shall
be maintained and exercised 50 years after his death, by his heirs, and in default of heirs,
government, where protection is claimed.
b. Exclusive Rights Sec. 215.1: Rights granted to performers and producers of sound
recordings under IP Code shall expire:
i.
For performances not incorporated in recordings, 50 years from end of year in which
performance took place; and
ii. For sound and image and sound recordings and performances incorporated therein, 50
years from end of year in which recording took place.
4.
Infringement and Remedies Secs. 216 to 220: Same as Copyright
5. Points of Attachment
a. Sec. 222: Provisions of IP Code on protection of performers shall apply to:
i.
Sec. 222.1: Performers who are nationals of Philippines;
ii. Sec. 222.2: Performers who are not nationals of Philippines, but whose performances:
(a) Take place in Philippines; or
(b) Are incorporated in sound recordings protected under IP Code; or
(c) Which has not been fixed in sound recording but are carried by broadcast qualifying
for protection under IP Code.
b. Sec. 224.2: Provisions of IP Code shall also apply to performers who, and to producers of
sound recordings and broadcasting organizations which, are to be protected by virtue of and in
accordance with any international convention or other international agreement to which
B. RIGHTS OF PRODUCERS OF SOUND RECORDINGS
1. Scope of Rights
a. Exclusive Rights Sec. 208: Subject to provisions of Sec. 212, producers of sound
recordings shall enjoy following exclusive rights:
i.
Sec. 208.1: Right to authorize direct or indirect reproduction of their sound recordings, in
any manner or form; the placing of these reproductions in market and right of rental or
lending;
ii. Sec. 208.2: Right to authorize first public distribution of original and copies of their sound
recordings through sale or rental or other forms of transfer of ownership; and
iii. Sec. 208.3: Right to authorize commercial rental to public of original and copies of their
sound recordings, even after distribution of them by, or pursuant to authorization by
producer.
b. Communication to Public Sec. 209: If sound recording published for commercial
purposes, or reproduction of such sound recording, is used directly for broadcasting or for
other communication to public, or is publicly performed with intention of making and
245
enhancing profit, a single equitable remuneration for performer or performers, and producer
of sound recording shall be paid by user to both performers and producer, who, in absence of
any agreement shall share equally.
2. Limitations on Rights
a. Sec. 212: Secs. 203, 208 and 209 shall not apply where acts referred to in those Secs. Relate
to:
i.
Sec. 212.1: Use by natural person exclusively for his own personal purposes;
ii. Sec. 212.2: Using short excerpts for reporting current events;
iii. Sec. 212.3: Use solely for purpose of teaching or for scientific research; and
iv. Sec. 212.4: Fair use of broadcast subject to conditions under Sec. 185.
l. Sec. 210: Sec. 184 (Limitations on Copyright) and Sec. 185 (Fair Use of Copyrighted
Work) shall apply mutatis mutandis to producer of sound recordings.
a. Exclusive Rights Sec. 215.1: Rights granted to performers and producers of sound
recordings under IP Code shall expire:
i.
For performances not incorporated in recordings, 50 years from end of year in which
performance took place; and
ii. For sound and image and sound recordings and performances incorporated therein, 50
years from end of year in which recording took place.
4. Infringement and Remedies Secs. 216 to 220: Same as Copyright
a. Sec. 223: Provisions of IP Code on protection of sound recordings shall apply to
i.
Sec. 223.1: Sound recordings producers of which are nationals of Philippines;
ii. Sec. 223.2: Sound recordings first published in Philippines.

C. RIGHTS OF BROADCASTING ORGANIZATIONS
1. Scope of Rights
a. Exclusive Rights Sec. 211: Subject to provisions of Sec. 212, broadcasting organizations
shall enjoy exclusive right to carry out, authorize or prevent any of following acts:
i.
Sec. 211.1: Rebroadcasting of their broadcasts;
ii. Sec. 211.2: Recording in any manner, including making of films or use of video tape, of
their broadcasts for purpose of communication to public of television broadcasts of the
same; and
iii. Sec. 211.3: Use of such records for fresh transmissions or for fresh recording.
246
a. Exclusive Rights Sec. 215.2: In case of broadcasts, term shall be 20 years from date
broadcast took place. Extended term shall be applied only to old works with subsisting
protection under prior law.
3. Infringement and Remedies Secs. 216 to 220: Same as Copyright
a. Sec. 224.1: Provisions of IP Code on protection of sound recordings shall apply to:
i.
Sec. 224.1(a): Broadcasts of broadcasting organizations the headquarters of which are

situated in Philippines; and
ii. Sec. 224.1(b): Broadcasts transmitted from transmitters situated in Philippines.


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1

ATENEO LAW SCHOOL

ii. Risk distinguished from peril (specific cause of loss)

2 The New Civil Code of the Philippines.

E. INTERPRETATION OF INSURANCE CONTRACTS

12 See also Ty v. Filipinas Compania de Seguros, et al., 17 SCRA 364 (1966).

Forfeiture Sec. 12, I.C.: In life insurance, if beneficiary is principal, accomplice, or

16 Aquino, Essentials of Insurance Law, 2009 Ed., p. 49.

Insurance by Mortgagor Without Making Loss Payable to or Assigning Policy to

ii. Insurance by Mortgagor Making Loss Payable to or Assigning Policy to Mortgagee 23

Life, accident, and health insurance Sec. 20, I.C.

For individual life or endowment insurance Sec. 227(a), I.C.

ii. For group life insurance Sec. 228(a), I.C.

Risks insured against; and

ii. conviction of crime increasing hazard insured against

If cancellation by insurer: Must give written notice of cancellation to land transportation

ii. If cancellation by land transportation operator: Must, prior to effective date of

ASCERTAINING AND CONTROLLING RISKS

Insured must have knowledge of fact at time of effectivity of policy.

Express waiver by terms of insurance; or

At time of issuance of policy; or

Presumed to refer to date of effectivity of contract Sec. 42, I.C.

ii. Representation as to future deemed promissory, unless merely statement of belief or

Express or implied Sec. 67, I.C.

ii. Affirmative or Promissory Secs. 71 and 72, I.C.

It must be a life insurance policy

ii. It must be payable on the death of the insured

35 Aquino, Essentials of Insurance Law, 2009 Ed., p. 147.

LOSS AND NOTICE OF LOSS

38 Aquino, Essentials of Insurance Law, 2009 Ed., pp. 159-161.

B. NOTICE AND PROOF

CLAIMS SETTLEMENT AND SUBROGATION

General Rule: proceeds payable immediately upon maturity; Fernandez v. National

ii. If policy provides that proceeds payable in installments or as annuity: installments or

in life insurance (which is not a contract of indemnity)

ii. if proximate cause of damage was negligence of insured himself

DOUBLE INSURANCE AND REINSURANCE

Insurance over goods that are being imported or exported;

ii. Insurance over infrastructure for transportation and communication;

44 Aquino, Essentials of Insurance Law, 2009 Ed., pp. 211-214.

National character of insured

ii. Liability of things insured to capture and detention

Definition and Extent

When there is deviation Sec. 123, I.C.

ii. When deviation proper Sec. 124, I.C.

Actual (absolute total loss)

ii. Constructive (technical total loss)

Total destruction of thing insured

ii. Irretrievable loss of thing by sinking, or by being broken up

ii. Requisites of abandonment

A. DEFINITION AND COVERAGE

Employers liability and workmens compensation insurance

ii. Public liability insurance

A claim may be made against one motor vehicle only.

ATENEO DE MANILA LAW SCHOOL

DEAN CESAR L. VILLANUEVA

companies (Sec. 29, 1997 NIRC)

Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989);

62Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009)

76Arcilla v. Court of Appeals, 215 SCRA 120 (1992).

VI. CORPORATE CONTRACT LAW

IX. CORPORATE POWERS AND AUTHORITY

81Salenga v. Court of Appeals, 664 SCRA 635 (2012).

6. ULTRA VIRES DOCTRINE