ATENEO LAW SCHOOL

COMMERCIAL LAW REVIEW ATTY. ALEXANDER C. DY

INSURANCE CODE 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 insurer’s 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.”).

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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

ii. Casualty Insurance

2 The New Civil Code of the Philippines.

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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. Insurer’s 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 19776 – 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 300o 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 agent’s 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. Fieldmen’s 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 beneficiary’s 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. 49.17 Aquino, Essentials of Insurance Law, 2009 Ed., p. 49.18 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 42.19 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 40.

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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.

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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 –

20 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 49.21 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 50.22 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 29.23 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 mortgagor’s 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 insurer’s 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 insured’s 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.

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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): agent’s 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.

26 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 56.

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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 insurer which had consistently granted 60 to 90-day credit term for payment of renewal

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.

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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

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.

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.

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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

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

32 Perez, The Insurance Code and Insolvency Law, 2006 Ed., pp.102-103.

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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

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

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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 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 Bell’s palsy; Saturnino v. Philippine American Life Ins. Co., 7

33 Perez, The Insurance Code and Insolvency Law, 2006 Ed., pp.63-65.

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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 insurer’s 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

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).

34 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 77.

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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 insured’s 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 co-insurance.

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.:

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

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Musñgi 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.

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.

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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;

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);

35 Aquino, Essentials of Insurance Law, 2009 Ed., p. 147.36 Aquino, Essentials of Insurance Law, 2009 Ed., p. 148.37 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 100.

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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 insured’s negligence is so gross that it is tantamount to misconduct, or wrongful or willful act, insurer is not liable.

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.

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

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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

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:

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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 insurer’s 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) attorney’s 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

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.

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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. Insurer’s rights limited to insured’s 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

(b) if release is after payment by insurer to insured, insurer may recover from insured

IX. DOUBLE INSURANCE AND REINSURANCE

A. DOUBLE INSURANCE

39 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 182.40 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 185.

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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).

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 Fieldmen’s Insurance Co., Inc. v. Asian Surety & Insruance Co., Inc., 34 SCRA 36 (1970): even if reinsurance treaty is cancelled, does not

41 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 192.42 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 200.

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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 insurer’s 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. Reinsurer’s 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. Fieldmen’s Insurance Co., Inc., 26 SCRA 178 (1968): exception is if contract of reinsurance is made directly for the benefit of the reinsured’s 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

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

43 Perez, The Insurance Code and Insolvency Law, 2006 Ed., p. 202.

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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, builder’s 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, builder’s 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;

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

44 Aquino, Essentials of Insurance Law, 2009 Ed., pp. 211-214.45 Pursuant to Republic Act No. 9295, the “Domestic Shipping Act of 2004”.

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B. INSURABLE INTEREST

1. Owner of Ship – Sec. 100, I.C.: Has insurable interest in ship

a. Even if charterer agrees to pay ship’s 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 ship’s 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

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.

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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.

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)

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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.

(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.

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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 insurer’s 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 insured’s 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

ii. Insurer not liable for insured’s 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”

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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 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

A. DEFINITION AND COVERAGE

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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

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 insurer’s 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

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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. Employer’s liability and workmen’s 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) Driver’s 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; driver’s 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 violator’s 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. Fieldmen’s insurance Co., Inc., 124 SCRA 618 (1983): unauthorized use of motor vehicle for 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

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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 one’s 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 insured’s 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.

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, insurer’s 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

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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; 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

A. DEFINITION AND COVERAGE

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)

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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, surety’s 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.

XIV. LIFE INSURANCE

A. DEFINITION AND COVERAGE

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. 2021-2027, 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,

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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 latter’s 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

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

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ATENEO DE MANILA LAW SCHOOL2ND SEMESTER, SY 2012-2013

OUTLINE ON PHILIPPINE DEAN CESAR L. VILLANUEVA CORPORATE LAW46 & ATTY. ALEXANDER C. DY

I. HISTORICAL BACKGROUND

1. Philippine Corporate Law:47 A-sort-of codification of American Corporate LawWhen 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 anónima 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 LawThe 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 CodeBatas 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 LawPhilippine 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

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 "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.

48Corporation Code applies even to corporations organized under the old Corporation Law. Castillo v. Balinghasay, 440 SCRA 442 (2004).

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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

(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)

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).

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“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. Int’l 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).

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 entity’s existence cannot be likened to a natural person—its 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

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One of the advantages of the corporation is the limitation of an investor’s 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)

• 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 ProprietorshipsA 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 VenturesJoint 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

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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 Anónimas

A sociedad anónima 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 person—an artificial being, invisible, intangible, and existing only in contemplation of law—with power to hold, buy, and sell property, and to sue and be sued—a corporation—not 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 anónimas 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 anónimas 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 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

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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 ProtectionThe 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 SeizureA 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, 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 ProfessionCorporations 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 TortsA 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).

51Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).

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“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, 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

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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 corporation’s 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 flows from real ills, sorrows, and griefs of life—all 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

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).

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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 Philippines—it 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 land—that 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 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)

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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.

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

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).

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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 latter’s 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).

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 one’s 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 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. 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

54McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Association (PEA-PTGWO) 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).

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).

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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 stockholder’s 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 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 attorney’s 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).

60PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

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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, 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 corporation’s 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

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).

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).

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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-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 corporation’s 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 SEC’s 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 from—there is no fraud or employment of unfair shielding. Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009).

(d) Basis Must Be Clear EvidenceTo 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

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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

• 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.

64General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Association (PEA-PTGWO) 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 Int’l Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).

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).

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• 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 one’s 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).

(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

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).

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).

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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 treasurer’s affidavit, the audited financial statements. “Moreover, respondent’s 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 latter’s 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 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).

73Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997). Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).

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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 subsidiary’s 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).

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

74Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).

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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 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 subsidiary’s 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. Court of Appeals, 370 SCRA 208 (2001).

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;

75General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).

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• 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 alter-ego 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 subsidiary’s 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 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 Arcilla’s 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).

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

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Government’s 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 government-owned 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 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 nature—the promotion of economic and social development of Central Luzon, particularly, and the country’s 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).

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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)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

77Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).

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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).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 DoctrineFounded 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 Children’s 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. Int’l 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”

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).

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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 corporation’s assets before the dissolution of 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. Court of Appeals, 301 SCRA 152 (1999).

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).

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(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) 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).

79Also Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).

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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)

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 association’s 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.

80P.C. Javier & Sons, Inc. v. Court of Appeals, 462 SCRA 36 (2005).

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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 corporation’s 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).

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 CharterA 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

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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).

(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.Peña v. Court of Appeals, 193 SCRA 717 (1991).

The nature of by-laws being intramural instruments would mean that they are not binding on third-parties, 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 corporation’s 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)

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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 LodgedA 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. Court of Appeals, 352 SCRA 334 (2001).81

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 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. ABS-CBN 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

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

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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); Peña 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?

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. Court of Appeals, 372 SCRA 587 (2001).

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 PowersAs 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).

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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 corporation’s 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 agent’s authority must be in writing, otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998).82

(b) Borrow FundsThe 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 SuedUnder 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 Board has no such power or authority to sue on the corporation’s behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).83

(i) Power to Bind the Corporation in a SuitWhen 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 necessary—a 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

82AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).

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).

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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 earlier cases that uphold service of summons upon a construction project manager;86 a corporation’s 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 corporation’s 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 AgentsIt 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 corporation’s 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).

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).

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. Avendaño, 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).

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(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 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 Board—absent 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 DoctrineThe 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:

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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)

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 d’etre 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. Court of Appeals, 352 SCRA 334 (2001).

94Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. Court of Appeals, 177 SCRA 594 (1989).

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).

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(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 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. Acuña 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:

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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 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 RatificationThe 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 latter’s 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

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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 officer’s authority. . . Unmistakably, the Court’s directive in Yao Ka 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 agent’s 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 of Appeals, 269 SCRA 601 (1997).

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 President’s act of applying to the bank for credit accommodation, simply on the ground that it never authorized the President by the lack of any

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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 Secretary’s 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 President’s 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 company’s 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).

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. Soluta’s 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. Peña 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 corporation’s 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

96Also Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).

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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 corporation’s board of directors is caused not only by the expiration of a member’s 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 remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation’s 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 corporation’s 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 member’s term shall be filled by the corporation’s 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) QuorumFor 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

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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 MeetingsThe signing of the minutes by all the members of the board is not required—there 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).

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 meeting—a 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

97Singson v. Commission on Audit, 627 SCRA 36 (2010).

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Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2001, p. 318.

(b) Duty of ObedienceA 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).

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. Court of Appeals, 363 SCRA 307 (2001).

(h) SEC Revised Code of Corporate Governance (SEC Memorandum. Circular No. 6, series of 2009)

12. CORPORATE OFFICERS

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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 law—when 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 benefits—he who claims the 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 court’s 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 Officer’s Power to Bind Corporation An officer’s 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. People’s 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 corporation’s 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

98Yu Chuck v. “Kong Li Po,” 46 Phil. 608, 614 (1924); Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009).

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adjudged against the corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).

(iii) Corporate SecretaryIn the absence of provisions to the contrary, the corporate secretary is the custodian of

corporate records—he 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 secretary’s duty to record transfers of stock is ministerial, he cannot be compelled to do so when the transferee’s 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 Secretary’s Certificate confirming authority. A secretary’s certificate which is 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 TreasurerA corporate treasurer’s 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 treasurer’s 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 payee’s 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) ManagerAlthough 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 bank’s 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 corporation’s by-laws. Gurrea v. Lezama, 103 Phil. 553 (1958); Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).99

99PSBA v. Leaño, 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).

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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 corporation’s 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 corporation’s by-laws. 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).

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 corporation’s by-laws. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).

(ii) Nature of Exercise of Power to Terminate OfficersAn officer’s 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 employee—being 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

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).

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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

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. Court of Appeals, 216 SCRA 738 (1992).

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

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).

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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 Officer’s 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 one’s 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 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 corporation’s 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 corporation’s debt if they so contractually agree or stipulate. Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005).

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.

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).

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); Peñaflor v. Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010).

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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

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 CorporationA.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 employer”—the 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:

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).

109Reiterated in Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996).

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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 personally liable for the debts of the corporation—the 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 CorporationThe 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 corporation’s 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 stockholder’s 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

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).

112Reiterated in David v. National Federation of Labor Unions, 586 SCRA 100 (2009).

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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 pre-emptive 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).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 land—that 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).

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(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 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 stock—it 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

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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).

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)

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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 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 corporation’s 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).

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The SEC’s 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)

7. Rights to Inspect and Copy Corporate Records

(a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).The stockholder’s right of inspection of the corporation’s 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

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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 member’s 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 same—where 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 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. 01-2-04-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 JudgmentGeneral 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 of Appeals, 292 SCRA 503 (1998).

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 trust—not of mere error of judgment or abuse of discretion—and 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

113Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 SCRA 588 (2009); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).

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A stockholder’s 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).

(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 suit—there 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 SuitThe 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

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).

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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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 corporation’s 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 decedent’s 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, 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 corporation’s 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).

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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 corporation’s 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 SuitVenue 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 (c) Service (d) Shares

(b) Property (d) Retained Earnings

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 corporation’s books. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).118

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).

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).

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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)

(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 holder’s 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 holder’s interest and status in a corporation—it 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 of Appeals, 292 SCRA 503 (1998).

(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

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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).

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); Escaño 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 concerned—as 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 concerned—as 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).

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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 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 non-existent 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 corporation’s 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-à-vis DBP’s financial accommodation extended to PJI, but it was a valid and duly executed assignment, subject to a

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resolutory condition, which was the settlement of PJI’s 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 stockholders—what 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).

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)

119Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).

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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).

(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 company’s 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

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 founder’s share was raised but not resolved by the Court.

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(f) Stock Options

(g) Re-Classification of Shares“Reclassification of shares does not always bring any substantial alteration in the subscriber’s

proportional interest. But the exchange is different—there 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 subscriber’s rights and privileges—which 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 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 corporation’s 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\TransfersAs 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 NPC’s assets by operation of law—these properties may be used to satisfy the Court’s 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).

121Philippines National Bank v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); McLeod v. NLRC, 512 SCRA 222 (2007).

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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).

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-à-vis the estate, should continue to remain with it even after the percentage of the estate’s 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 SEC’s 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

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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 Global’s 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 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 SEC’s 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 MDII’s 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 latter’s employees.

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).

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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 company’s 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).

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. Peñafrancia 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 corporation’s 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 Chapter-Federation 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)

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]).

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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 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 DissolutionThe 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).

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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”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 proceedings—they 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 3-year 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

124Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).

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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 placed on the Board, their power to pursue liquidation did not terminate upon the expiration of the 3-year 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)

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).

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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)

(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

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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 LawsA 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 non-stock 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).

3. Delinquency of Membership DuesSec. 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 member’s 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 OfficersThe 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 CorporationThe 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).

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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 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 State’s 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 shopping—while 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).

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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 Int’l 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 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 corporation’s 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

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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 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

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).

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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).

Even a series of transactions which are occasional, incidental and casual—not of a character to indicate a purpose to engage in business—do 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

Campañia 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 corporation’s corporate personality in a suit brought before the Philippine courts; and (4) if a foreign

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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

(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 of Appeals, 266 SCRA 537 (1997).

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 tribunal’s jurisdiction over its person is not equivalent to service of summons, nor does it constitute an acquiescence to the court’s jurisdiction. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312, 327 (1997).

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).

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 Int’l Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962).

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(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).

(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. Penalty Clause for Violations of the Provisions of the Code (Sec. 144)

2. Cross-reference (Sec. 27).

3. Specific application (Sec. 74).

4. Strict Principles in Criminal Law; the issue of malice.

5. 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 CorporationsSec. 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. SEC Power and Supervision (Secs. 108 and 143; PD 902-A)

2. Special Corporations (Sec. 4)

3. New Requirements on Existing Corporations (Sec. 148).

4. Applicability of Other Provision of old Corporation Law (Secs. 145 and 146).

—oOo—

30 OCTOBER 2012\SCRA 620 - 669

134FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Int’l v. NLRC, 178 SCRA 569 (1989); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1987).

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ATENEO LAW SCHOOL

COMMERCIAL LAW REVIEW ATTY. ALEXANDER C. DY

TRANSPORTATION LAW 2ND SEMESTER, SY 2012-2013

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

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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 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.

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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 carrier’s 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)

(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, doesn’t 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)

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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 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 “shipper’s Load and Count” arrangement, need not be checked and inventoried by carrier (United States Lines, Inc. v. Commissioner of Customs, 151 SCRA 189 [1987])

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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

a. Art. 1736: The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them, without prejudice to the provisions of Art. 1738.

i. Loading of cargo on carrier’s barge preparatory to loading on ship, contract of carriage already commenced (Compañia 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;

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(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;

(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) PAL’s 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

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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 Passenger’s 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.

b. Baggage in Passenger’s 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)

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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)

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 carrier’s 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-owner’s 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

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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])

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)

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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 workmen’s 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 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; Crew’s 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:

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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.

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;

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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;

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

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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% 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”

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(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.

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 ship’s 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 one—but 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 carrier’s lien subsist for 30 days. Art. 2241 of the Civil Code amended Art. 667 by making carrier’s lien good for 30 days, not 20 days.

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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 vessel’s capacity, first come, first served, “unless all are present,” in which case, the shippers will be allowed to loan in the proportion to 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 charterer’s 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.

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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.

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

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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.

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 non-negotiable 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.

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c. Other Relevant Provisions:

i. Art. 725 – No bottomry loan on salaries of crew.

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 vessel’s 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.

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iii. The person whose property has been saved must contribute to reimburse damage caused or expense incurred if the situation constitutes general average.

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;

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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

1. Suit should be filed within 1 year [Title I, Sec. 3(6), 4th par., COGSA] from:

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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 passenger’s 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.].

3. Moreover, Art. 22(2) of WC does not operate as exclusive enumeration of instances of airline’s 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;

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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 carrier’s 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 forum’s 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;

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.

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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 operator’s 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.

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])

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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])

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ATENEO LAW SCHOOL

COMMERCIAL LAW REVIEW ATTY. ALEXANDER C. DY

BANKING LAWS 2ND SEMESTER, SY 2012-2013AND 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 – Bañas 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 borrower’s own account

b. From 20 or more lenders at any one time

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.

135 Republic Act No. 8791 (“General Banking Law of 2000”), which repealed Republic Act No. 337 (“General Banking Act”)

136 Republic Act No. 7653 (“New Central Bank Act”), which repealed Republic Act No. 265 (“Central Bank Act”)

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D. BANKS DISTINGUISHED FROM TRUST ENTITIES

1. Definition – Sec. 79, GBL: A trust entity is a stock corporation duly authorized by the MB137 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

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):

137 Monetary Board138 Presidential Decree No. 129, as amended139 Republic Act No. 59080, as amended by Republic Act No. 8556140 Republic Act No. 2629141 Republic Act No. 8367142 Republic Act No. 6938143 Presidential Decree No. 612, as amended144 Prudential Bank v. Lim, 474 SCRA 485 (2005)145 Solidbank Corporation/Metropolitan Bank and Trust Company v. Tan, 520 SCRA123 (2007)

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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 depositors146 – 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 latter’s 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 employees147 – Philippine Commercial and International Bank v. Court of Appeals, 350 SCRA 446 (2001): Bank’s 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): Bank’s 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 records149 – Heirs of Eduardo Manlapat v. Court of Appeals, 459 SCRA 412 (2005): Bank is liable for delivering 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)

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)

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d.

e. Liability for negligence

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)

G. 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

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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 substitutesii. Buying and selling foreign exchange and gold or silver bullioniii. Acquiring marketable bonds and other debt securitiesiv. 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) Receive in custody funds, documents and valuable objectsii. 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 securitiesiii. Make collections and payments for the account of others and perform such other

services for their customers as are not incompatible with banking businessiv. Upon prior MB approval, act as managing agent, adviser, consultant or administrator of

investment management/advisory/ consultancy accountsv. Rent out safety deposit boxes

f. To issue guarantees – See xSec. 74, General Banking Act

C. THRIFT BANKS (TB) – Secs. 3.2(c), GBL1.2. 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

151 Republic Act No. 7906

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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), GBL7.8. 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), GBL10.11. 1. Governing Law – Sec. 71, par. 2, GBL

h. Organization, ownership, capital requirements, powers, supervision, and general conduct of business – xIslamic Bank Charter153

152 Republic Act No. 7353153 Republic Act No. 6848 (“Charter of Al Amanah Islamic Development Bank of the Philippines”)

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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.

(i) Governing Laws

154 Presidential Decree No. 114155 Rules and Regulations for Pawnshops156 Republic Act No. 3844157 Executive Order No. 81, Series of 1986158 Republic Act No. 3518159 Republic Act No. 7169160 Executive Order No. 80 Series of 1986161 Republic Act No. 7221162 Republic Act No. 7042

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(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 client’s 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

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.

163 Presidential Decree No. 1034, as amended164 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)

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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. Bank’s 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 DEPOSIT 167

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 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

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)

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(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

b. Pseudonyms – xArt. 178, Revised Penal Code; xCommonwealth Act No. 142, as amended; xArts. 379-380, Civil Code

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”)

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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 drawer’s 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 drawer’s 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 manager’s check – Equitable PCI Bank v. Ong, 502 SCRA 119 (2006): Manager’s 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): Manager’s check is one drawn by a bank’s 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 indorser’s 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)

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.

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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 bank’s 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)

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

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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

a. No ceiling – xSec. 1-a, 4-a, 45 of Usury Law171; 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

171 Act No. 2655 as amended

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reasonable, also, bank’s closure does not diminish liquidator’s 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;

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,

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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 bank’s DOSRI from availing of the credit facilities of the bank for their own purposes and benefit, in order not to lessen the bank’s 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 bank172

iv. Related Interests of DOS of bank173

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

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;

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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 DOSRI’s 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 bank’s DOSRIs shall not exceed 30% of their total loans, other credit accommodations and guarantees.

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;

(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

bank’s 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 institution’s 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 bank’s DOSRIs become obligated or may become

obligated to lending bank, by any means whatsoever to pay money or its equivalent.

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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 bank’s 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 BSP’s 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

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.

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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; People’s 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 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

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V. INVESTMENTS AND OTHER FUNCTIONS OF BANKS

A. EQUITY INVESTMENTS 175

1. Limits on Equity Investments of UB

a. In general – Sec. 24, par. 1, GBL: May invest in equity of allied enterprises176 (financial177 or non-financial178) and non-allied enterprises179; 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.

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(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).

D. OTHER FUNCTIONS/OPERATIONS

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);

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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 bank’s 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 business181

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)

ii. Foreign banks – Secs. 11 and 73, GBL; Foreign Banks Liberalization Act; See Chapter II(I) Above

181 As defined under Sec. 2, Insurance Code

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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 conservatorship, found by MB to be conducting business in unsafe and unsound manner, or in an unsatisfactory financial condition; Sec. 30, Corporation Code

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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)

a. Factors to be considered by MB: If act or omission –

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)

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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 bank’s 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

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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 bank’s 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

7. Effect: Bank cannot be compelled to pay same bonuses to employees – xProducers Bank of the Philippines v. NLRC, 355 SCRA 489 (2001)

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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

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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 Doctrine”183 – 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 bank’s 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

e. Disposition of banking franchise – Sec. 33, NCBA: BSP may award to another institution

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)

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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. Ybañez, SCRA (2004): does not diminish authority of designated receiver or liquidator to administer bank

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 latter’s obligations

E. PDIC CORRECTIVE ACTION – Sec. 7, PDIC Charter

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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 quasi-banks, and institutions performing similar functions;

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.

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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.

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).

184 Philippine Deposit Insurance Corporation185 Republic Act No. 3591, as amended

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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.

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 individually-owned deposit account; provided, that:

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.

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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, depositor’s rights against closed banks and its shareholders or receivership estate to which PDIC may have become subrogated, shall thereupon revert to depositor, while PDIC shall be discharged from any liability in insured deposit.

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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 DEPOSITS 191

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 bonds193 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.

189 Republic Act No. 1405, as amended190 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 depositor’s 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.

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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:

(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

(ii) In cases of impeachment196

(iii) Upon the order of a competent court in cases of bribery197 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 Act199 – 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. 10021196 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 RPC199 Republic Act No. 3019, as amended

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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 Ombudsman’s 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) kidnapping for ransom;206

(2) 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.

201 Republic Act No. 6770202 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 10167204 As defined in Sec. 3(i), AMLA205 As defined in Sec. 4, AMLA206 Under Sec. 3(i)(1), AMLA: Kidnapping for ransom under Art. 267 of the Revised Penal Code207 Under Sec. 3(i)(2), AMLA: Violations of Secs. 3, 4, 5, 7, 8, and 9 of The Comprehensive

Dangerous Drugs Act

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(3) 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

(4) similar felonies or offenses punishable under penal laws of other countries; and

(5) terrorism or conspiracy to commit terrorism.

(ii) 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 BSP’s 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 PDIC 211 Charter 212 – 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 taxpayer’s 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.

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

208 An Act Prohibiting Certain Acts Inimical to Civil Aviation209 As defined under the Revised Penal Code210 Under Sec. 3(i)(12), AMLA211 Philippine Deposit Insurance Corporation212 Republic Act No. 3591, as amended by Republic Act No. 7400 and Republic Act No. 9576213 Republic Act No. 9732

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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.

k 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, corporations, or any other entities; provided, that with respect to bank deposits, the provisions of existing laws shall prevail. – Sec. 55.1(b), GBL

214 Act No. 3936, as amended by Presidential Decree No. 679215 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.

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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) kidnapping for ransom;(2) drug trafficking; (3) hijacking and other violations under R.A. No. 6235, destructive arson and

murder, including those perpetrated by terrorists against non-combatants and similar targets;

(4) similar felonies or offenses punishable under penal laws of other countries; and

(5) terrorism or conspiracy to commit terrorism.

(ii) 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 BSP’s periodic or special examination to ensure compliance with AMLA, in accordance with the rule of examination of BSP – Sec. 11, AMLA

217 Intengan v. Court of Appeals, 377 SCRA 63 (2002); Estrada v. Desierto, 445 SCRA 655 (2004)

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(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 taxpayer’s 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 ACT 218

1. Declared Policy – Sec. 2, AMLA

2. Covered Institutions – Sec. 3(a), AMLA

a. Banks and other entities, their subsidiaries and affiliates, supervised/regulated by BSP

b. Insurance companies and other entities supervised/regulated by Insurance Commission

218 Republic Act No. 9160, as amended by Republic Act Nos. 9194 and 10167

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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

j. Smuggling

k. Violations of the E-Commerce Act of 2000

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, closed-end 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

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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) Money laundering (ii) Failure to keep records(iii) Malicious reporting(iv) 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 BSP’s 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 ACT 222

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

221 SC Circular A.M. No. 05-11-04-SC222 Republic Act No. 3765

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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: Non-compliance 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.

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ATENEO LAW SCHOOL

COMMERCIAL LAW REVIEW ATTY. ALEXANDER C. DY

SECURITIES REGULATION CODE223 2ND SEMESTER, SY 2012-2013

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.

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.

223 This Outline is based primarily on Dean Cesar L. Villanueva’s Commercial Law Review, 2007 and 2009 Editions, with references to Atty. Lucila M. Decasa’s Securities Regulation Code, 2004 Edition, as indicated.

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(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;

(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;

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(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;

(b) Debt Instruments (issuer required to repay principal amount loaned by fixed maturity date, at stated rate of interest) – bonds, debentures, notes, evidences of indebtedness224, asset-backed securities225;

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

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(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;

(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;

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.

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(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 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;

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.

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(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) Broker’s transactions: Broker’s transactions, executed upon customer’s 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

(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

232Sec. 10.2.

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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

8. SEC Power over Pre-need Plans233 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:

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]

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(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;

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 one-tenth (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)

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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;

(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

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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

(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:

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(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

(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:

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 self-righteous 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 high-pressure sales techniques.

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(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.

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: “Churning”242; “Scalping”243; “Single day trading practice”244; “Front Running”245

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]

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 customer’s 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,

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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

(v) A person who learns such information by a communication from any of the foregoing insiders.

5.2 Insider’s 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 insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time 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:

p. 81]

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(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.

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

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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

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

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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 SEC’s 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

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;

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(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.

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 OF SECURITIES AND SETTLEMENT OF TRANSACTIONS IN SECURITIES

1. Clearing Agencies

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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 Securities“246 – Sec. 43: Notwithstanding Section 63 of the Corporation Code, a corporation whose securities are registered or listed on a securities Exchange may:

(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

246Sec. 3.14: “Uncertificated security” is a security evidenced by electronic or similar records.

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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 agency’s 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

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

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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

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

COMMERCIAL LAW REVIEW ATTY. ALEXANDER C. DY

INTELLECTUAL PROPERTY CODE 2ND SEMESTER, SY 2012-2013

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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;

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.

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”

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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.

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

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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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

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

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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

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

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;

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d. Sec. 88: Mandatory Provisions – The provisions enumerated in Sec. 88 shall be included in voluntary license contracts.250

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.

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; 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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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:

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.

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3. Use of Invention by Government251 – 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

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;

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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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 –

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 patentee’s 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: Licensee’s 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.

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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:

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 attorney’s 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.

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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.

(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.

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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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

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

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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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.

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; 

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j. Secs. 56 to 60 – Surrender, Correction of and Changes in Patent;

k. Chapter VII – Remedies of a Person with a Right to Patent;

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.

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2. Formal Requirements/Procedure for Application and Grant of ID

a. Application – Secs. 114 to 115

b. Examination – Sec. 116

c. Registration – Sec. 117

E. SCOPE OF EXCLUSIVE RIGHTS

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 layout-design 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 layout-design: 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

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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.

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 layout-design.

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 Circuits255 – 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

A. SUBJECT MATTER OF PROTECTION

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;

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.

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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;

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 well-known 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 applicant’s 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.

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B. CONDITIONS OF PROTECTION

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

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sue for unfair competition, without prejudice to availing himself of other remedies provided for under the law.

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.

E. SCOPE OF EXCLUSIVE RIGHTS

1. Sec. 147.1: Owner of registered mark shall have exclusive right to prevent all third parties not having owner’s 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:

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Provided, further, That interests of owner of registered mark are likely to be damaged by such use.

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.

G. DURATION OF PROTECTION

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.

H. INFRINGEMENT AND REMEDIES

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..

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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, registrant’s ownership of mark, and of registrant’s 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.”

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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:

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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 one’s 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:

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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 person’s 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:

i. Sec. 152: Non-use of a Mark When Excused.

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ii. Sec. 153: Requirements of Petition; Notice and Hearing.

iii. Sec. 154: Cancellation of Registration.

V. TRADE NAMES

A. SUBJECT MATTER OF PROTECTION

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.

B. CONDITIONS OF PROTECTION

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.

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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

A. SUBJECT MATTER OF PROTECTION

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

a. Sec. 173.1(a): Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and

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.

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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

B. CONDITIONS OF PROTECTION

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

c. Sec. 178.6: For letters – writer, subject to the provisions of Art. 723, Civil Code; and

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

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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 author’s 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.

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E. SCOPE OF EXCLUSIVE RIGHTS

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;

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

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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 compatible with fair use: Provided, That source and name of author, if appearing in work, are mentioned;

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.

272 Sec. 184.2 of the IP Code provides that: 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.

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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.

274 Sec. 185.2 of the IP Code provides that: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.

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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.

275 Sec. 187.2 of the IP Code provides that: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.

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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.

G. DURATION OF PROTECTION

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, author’s 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.

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.

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 proprietor’s 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.

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H. INFRINGEMENT AND REMEDIES

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.

(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

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(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.

VII. NEIGHBORING RIGHTS

A. RIGHTS OF PERFORMERS

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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.

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

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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 Philippines is a party.

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 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

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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.

3. Duration of Protection

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

5. Points of Attachment

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.

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 Philippines is a party.

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.

2. Duration of Protection

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

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4. Points of Attachment

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.

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 Philippines is a party.

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