MERC Special Laws1

MERCANTILE LAW REVIEW | DEAN ABELLA

GUILLAMON, DIANE STEFFI

Republic Act No. 7042 June 13, 1991

AN ACT TO PROMOTE FOREIGN INVESTMENTS, PRESCRIBE THE PROCEDURES FOR REGISTERING ENTERPRISES DOING BUSINESS IN THE

PHILIPPINES, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled::

Section 1. Title. - This Act shall be known as the, "Foreign Investments Act of 1991".

Section 2. Declaration of Policy. - It is the policy of the State to attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute to national industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. Foreign investments shall be encouraged in enterprises that significantly expand livelihood and employment opportunities for Filipinos; enhance economic value of farm products; promote the welfare of Filipino consumers; expand the scope, quality and volume of exports and their access to foreign markets; and/or transfer relevant technologies in agriculture, industry and support services. Foreign investments shall be welcome as a supplement to Filipino capital and technology in those enterprises serving mainly the domestic market.

As a general rule, there are no restrictions on extent of foreign ownership of export enterprises. In domestic market enterprises, foreigners can invest as much as one hundred percent (100%) equity except in areas included in the negative list. Foreign owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino participation in their businesses by taking in Filipino partners, electing Filipinos to the board of directors, implementing transfer of technology to Filipinos, generating more employment for the economy and enhancing skills of Filipino workers.

Section 3. Definitions. - As used in this Act:

a) The term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board

of Directors of both corporations must be citizens of the Philippines, in order that the corporations shall be considered a Philippine national;

b) The term "investment" shall mean equity participation in any enterprise organized or existing under the laws of the Philippines;

c) The term "foreign investment" shall mean as equity investment made by a non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange;

d) The praise "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account;

e) The term "export enterprise" shall mean an enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output fails to consistently export at least sixty percent (60%) thereof; and

g) The term "Foreign Investments Negative List" or "Negative List" shall mean a list of areas of economic activity whose foreign ownership is limited to a maximum of forty ownership is limited to a maximum of forty percent (40%) of the equity capital of the enterprise engaged therein.

Section 4. Scope. - This Act shall not apply to banking and other financial institutions which are governed and regulated by the General Banking Act and other laws under the supervision of the Central Bank.

Section 5. Registration of Investments of Non-Philippine Nationals. - Without need of prior approval, a non-Philippine national, as that term is defined in Section 3 a), and not otherwise disqualified by law may upon registration with the Securities and Exchange Commission (SEC), or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry in the case of single proprietorships, do business as defined in Section 3 (d) of this Act or invest in a domestic enterprise up to one hundred percent (100%) of its capital, unless participation

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of non-Philippine nationals in the enterprise is prohibited or limited to a smaller percentage by existing law and/or limited to a smaller percentage by existing law and/or under the provisions of this Act. The SEC or BTRCP, as the case may be, shall not impose any limitations on the extent of foreign ownership in an enterprise additional to those provided in this Act: Provided, however, That any enterprise seeking to avail of incentives under the Omnibus Investment Code of 1987 must apply for registration with the Board of Investments (BOI), which shall process such application for registration in accordance with the criteria for evaluation prescribed in said Code: Provided, finally, That a non-Philippine national intending to engage in the same line of business as an existing joint venture in his application for registration with SEC. During the transitory period as provided in Section 15 hereof, SEC shall disallow registration of the applying non-Philippine national if the existing joint venture enterprise, particularly the Filipino partners therein, can reasonably prove they are capable to make the investment needed for they are competing applicant. Upon effectivity of this Act, SEC shall effect registration of any enterprise applying under this Act within fifteen (15) days upon submission of completed requirements.

Section 6. Foreign Investments in Export Enterprises. - Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership.

Export enterprises which are non-Philippine nationals shall register with BOI and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise that fails to meet the export ratio requirement. The SEC or BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to the domestic market to not more than forty percent (40%) of its total production; failure to comply with such SEC or BTRCP order, without justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in Section 14 hereof.

Section 7. Foreign Investments in Domestic Market Enterprises. - Non-Philippine nationals may own up to one hundred percent (100%) of domestic market enterprises unless foreign ownership therein is prohibited or limited by existing law or the Foreign Investment Negative List under Section 8 hereof.

A domestic market enterprise may change its status to export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent (60%) or more of its output.

Section 8. List of Investment Areas Reserved to Philippine Nationals (Foreign Investment Negative List). - The Foreign Investment Negative List shall have three (3) component lists: A, B, and C:

a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws.

b) List B shall contain the areas of activities and enterprises pursuant to law:

1) Which are defense-related activities, requiring prior clearance and authorization from Department of National Defense (DND) to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or

2) Which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and steambath houses and massage clinics.

Small and medium-sized domestic market enterprises with paid-in equity capital less than the equivalent of five hundred thousand US dollars (US$500,000) are reserved to Philippine nationals, unless they involve advanced technology as determined by the Department of Science and Technology. Export enterprises which utilize raw materials from depleting natural resources, with paid-in equity capital of less than the equivalent of five hundred thousand US dollars (US$500,000) are likewise reserved to Philippine nationals.

Amendments to List B may be made upon recommendation of the Secretary of National Defense, or the Secretary of Health, or the Secretary of Education, Culture and Sports, indorsed by the NEDA, or upon recommendation motu propio of NEDA, approved by the President, and promulgated by Presidential Proclamation.

c) List C shall contain the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments, as determined by NEDA applying the criteria provided in Section 9 of this Act, approved by the President and promulgated in a Presidential Proclamation.

The Transitory Foreign Investment Negative List established in Sec. 15 hereof shall be replaced at the end of the transitory period by the first Regular Negative List to the formulated and recommended by the NEDA, following the process and criteria provided in Section 8 and 9 of this Act. The first Regular Negative List shall be published not later than sixty (60) days before the end of the transitory period provided in said section, and shall become immediately effective at the end of the transitory period. Subsequent Foreign Investment Negative Lists shall become effective fifteen (15) days after publication in two (2) newspapers of general circulation in the Philippines: Provided, however, That each Foreign Investment Negative List shall be prospective in operation and shall in no way affect foreign investments existing on the date of its publication.

Amendments to List B and C after promulgation and publication of the first Regular Foreign Investment Negative List at the end of the transitory period shall not be made more often than once every two (2) years.

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Section 9. Determination of Areas of Investment for Inclusion in List C of the Foreign Investment Negative List. - Upon petition by a Philippine national engage therein, an area of investment may be recommended by NEDA for inclusion in List C of the Foreign Investment Negative List upon determining that it complies with all the following criteria:

a) The industry is controlled by firms owned at least sixty percent (60%) by Filipinos;

b) Industry capacity is ample to meet domestic demand;

c) Sufficient competition exists within the industry;

d) Industry products comply with Philippine standards of health and safety or, in the absence of such, with international standards, and are reasonably competitive in quality with similar products in the same price range imported into the country;

e) Quantitative restrictions are not applied on imports of directly competing products;

f) The leading firms of the industry substantially comply with environmental standards; and

g) The prices of industry products are reasonable.

The petition shall be subjected to a public hearing at which affected parties will have the opportunity to show whether the petitioner industry adequately serves the economy and the consumer, in general, and meets the above stated criteria in particular. NEDA may delegate evaluation of the petition and conduct of the public hearing to any government agency having cognizance of the petitioner industry. The delegated agency shall make its evaluation report and recommendations to NEDA which retains the right and sole responsibility to determine whether to recommend to the President to promulgate the area of investment in List C of the Negative List. An industry or area of investment included in List C of the Negative List by Presidential Proclamation shall remain in the said List C for two (2) years, without prejudice to re-inclusion upon new petition, and due process.

Section 10. Strategic Industries. - Within eighteen (18) months after the effectivity of this Act, the NEDA Board shall formulate and publish a list of industries strategic to the development of the economy. The list shall specify, as a matter of policy and not as a legal requirement, the desired equity participation by Government and/or private Filipino investors in each strategic industry. Said list of strategic industries, as well as the corresponding desired equity participation of government and/or private Filipino investors, may be amended by NEDA to reflect changes in economic needs and policy directions of Government. The amended list of strategic industries shall be published concurrently with publication of the Foreign Investment Negative List.

The term "strategic industries" shall mean industries that are characterized by all of the following:

a) Crucial to the accelerated industrialization of the country,

b) Require massive capital investments to achieve economies of scale for efficient operations;

c) Require highly specialized or advanced technology which necessitates technology transfer and proven production techniques in operations;

d) Characterized by strong backward and forward linkages with most industries existing in the country, and

e) Generate substantial foreign exchange savings through import substitution and collateral foreign exchange earnings through export of part of the output that will result with the establishment, expansion or development of the industry.

Section 11. Compliance with Environmental Standards. - All industrial enterprises regardless of nationality of ownership shall comply with existing rules and regulations to protect and conserve the environment and meet applicable environmental standards.

Section 12. Consistent Government Action. - No agency, instrumentality or political subdivision of the Government shall take any action on conflict with or which will nullify the provisions of this Act, or any certificate or authority granted hereunder.

Section 13. Implementing Rules and Regulations. - NEDA, in consultation with BOI, SEC and other government agencies concerned, shall issue the rules and regulations to implement this Act within one hundred and twenty (120) days after its effectivity. A copy of such rules and regulations shall be furnished the Congress of the Republic of the Philippines.

Section 14. Administrative Sanctions. - A person who violates any provision of this Act or of the terms and conditions of registration or of the rules and regulations issued pursuant thereto, or aids or abets in any manner any violation shall be subject to a fine not exceeding One hundred thousand pesos (P100,000).

If the offense is committed by a juridical entity, it shall be subject to a fine in an amount not exceeding ½ of 1% of total paid-in capital but not more than Five million pesos (P5,000,000). The president and/or officials responsible therefor shall also be subject to a fine not exceeding Two hundred thousand pesos (P200,000).

In addition to the foregoing, any person, firm or juridical entity involved shall be subject to forfeiture of all benefits granted under this Act.

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SEC shall have the power to impose administrative sanctions as provided herein for any violation of this Act or its implementing rules and regulations.

Section 15. Transitory Provisions. - Prior to effectivity of the implementing rules and regulations of this Act, the provisions of Book II of Executive Order 226 and its implementing rules and regulations shall remain in force.

During the initial transitory period of thirty-six (36) months after issuance of the Rules and Regulations to implement this Act, the Transitory Foreign Investment Negative List shall consist of the following:

A. List A:

1. All areas of investment in which foreign ownership is limited by mandate of Constitution and specific laws.

B. List B:

1. Manufacture, repair, storage and/or distribution of firearms, ammunitions, lethal weapons, military ordinance, explosives, pyrotechnics and similar materials required by law to be licensed by and under the continuing regulation of the Department of National Defense; unless such manufacturing or repair activity is specifically authorized with a substantial export component, to a non-Philippine national by the Secretary of National Defense;

2. Manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and steam bathhouses, massage clinic and other like activities regulated by law because of risks they may pose to public health and morals;

3. Small and medium-size domestic market enterprises with paid-in equity capital or less than the equivalent of US$500,000, unless they involve advanced technology as determined by the Department of Science and Technology, and

4. Export enterprises which utilize raw materials from depleting natural resources, and with paid-in equity capital of less than the equivalent US$500,000.

C. List C:

1. Import and wholesale activities not integrated with production or manufacture of goods;

2. Services requiring a license or specific authorization, and subject to continuing regulations by national government agencies other than BOI and SEC which at the time

of effectivity of this Act are restricted to Philippine nationals by existing administrative regulations and practice of the regulatory agencies concerned: Provided, That after effectivity of this Act, no other services shall be additionally subjected to such restrictions on nationality of ownership by the corresponding regulatory agencies, and such restrictions once removed shall not be reimposed; and

3. Enterprises owned in the majority by a foreign licensor and/or its affiliates for the assembly, processing or manufacture of goods for the domestic market which are being produced by a Philippine national as of the date of effectivity of this Act under a technology, know-how and/or brand name license from such licensor during the term of the license agreement: Provided, That, the license is duly registered with the Central Bank and/or the Technology Transfer Board and is operatively in force as of the date of effectivity of this Act.

NEDA shall make the enumeration as appropriate of the areas of the investment covered in this Transitory Foreign Investment Negative List and publish the Negative List in full at the same time as, or prior to, the publication of the rules and regulations to implement this Act.

The areas of investment contained in List C above shall be reserved to Philippine nationals only during the transitory period. The inclusion of any of them in the regular Negative List will require determination by NEDA after due public hearings that such inclusion is warranted under the criteria set forth in Section 8 and 9 hereof.

Section 16. Repealing Clause. - Articles forty-four (44) to fifty-six (56) of Book II of Executive Order No. 226 are hereby repealed.

All other laws or parts of laws inconsistent with the provisions of this Act are hereby repealed or modified accordingly.

Section 17. Separability. - If any part or section of this Act is declared unconstitutional for any reason whatsoever, such declaration shall not in any way affect the other parts or sections of this Act.

Section 18. Effectivity. - This Act shall take effect fifteen (15) days after approval and publication in two (2) newspaper of general circulation in the Philippines.

Approved: June 13, 1991

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Title XVI. – PLEDGE, MORTGAGE AND ANTICHRESIS

CHAPTER 1 > PROVISIONS COMMON TO PLEDGE AND MORTGAGEArt. 2085. The following requisites are essential to the contracts of pledge and mortgage:(1) That they be constituted to secure the fulfillment of a principal obligation;(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857)

Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n)

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858)

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860)Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n)

Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861)

Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862)---CHAPTER 3 > MORTGAGEArt. 2124. Only the following property may be the object of a contract of mortgage:(1) Immovables;(2) Alienable real rights in accordance with the laws, imposed upon immovables.Nevertheless, movables may be the object of a chattel mortgage. (1874a)

Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. (1875a)

Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. (1876)

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (1877)

Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (1878)

Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes. (1879)

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (n)Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. (1880a)

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ACT NO. 3135 – AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES

SECTION 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power.

SECTION 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated.

SECTION 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.

SECTION 4. The sale shall be made at public auction, between the hours or nine in the morning and four in the afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality in which such sale has to be made, or a notary public of said municipality, who shall be entitled to collect a fee of five pesos each day of actual work performed, in addition to his expenses.

SECTION 5. At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made.

SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.

SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any

part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

SECTION 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal

SECTION 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part thereof was rented; if the purchaser occupied the property as his own dwelling, it being town property, or used it gainfully, it being rural property, the redeemer may deduct from the price the interest of one per centum per month provided for in section four hundred and sixty-five of the Code of Civil Procedure.

SECTION 10. This Act shall take effect on its approval.

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ACT NO. 1508 – AN ACT PROVIDING FOR THE MORTGAGING OF

PERSONAL PROPERTY AND FOR THE REGISTRATION OF THE

MORTGAGES SO EXECUTED

Section 1. The short title of this Act shall be “The Chattel Mortgage Law.”

Sec. 2. All personal property shall be subject to mortgage, agreeably to the provisions

of this Act, and a mortgage executed in pursuance thereof shall be termed chattel

mortgage.

Sec. 3. Chattel mortgage defined. – A chattel mortgage is a conditional sale of personal

property as security for the payment of a debt, or the performance of some other

obligation specified therein, the condition being that the sale shall be void upon the

seller paying to the purchaser a sum of money or doing some other act named. If the

condition is performed according to its terms the mortgage and sale immediately

become void, and the mortgagee is thereby divested of his title.

Sec. 4. Validity. – A chattel mortgage shall not be valid against any person except the

mortgagor, his executors or administrators, unless the possession of the property is

delivered to and retained by the mortgagee or unless the mortgage is recorded in the

office of the register of deeds of the province in which the mortgagor resides at the time

of making the same, or, if he resides without the Philippine Islands, in the province in

which the property is situated: Provided, however, That if the property is situated in a

different province from that in which the mortgagor resides, the mortgage shall be

recorded in the office of the register of deeds of both the province in which the

mortgagor resides and that in which the property is situated, and for the purposes of this

Act the city of Manila shall be deemed to be a province.

Sec. 5. Form. – A chattel mortgage shall be deemed to be sufficient when made

substantially in accordance with the following form, and shall be signed by the person or

persons executing the same, in the presence of two witnesses, who shall sign the

mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee,

or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an

affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to

the mortgage as above stated, and the certificate of the oath signed by the authority

administering the same, shall be appended to such mortgage and recorded therewith.

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

“This mortgage made this ____ day of ______19____ by _______________, a resident

of the municipality of ______________, Province of ____________, Philippine Islands

mortgagor, to ____________, a resident of the municipality of ___________, Province

of ______________, Philippine Islands, mortgagee, witnesseth:

“That the said mortgagor hereby conveys and mortgages to the said mortgagee all of

the following-described personal property situated in the municipality of

______________, Province of ____________ and now in the possession of said

mortgagor, to wit:

(Here insert specific description of the property mortgaged.)

“This mortgage is given as security for the payment to the said ______, mortgagee, of

promissory notes for the sum of ____________ pesos, with (or without, as the case

may be) interest thereon at the rate of ___________ per centum per annum, according

to the terms of __________, certain promissory notes, dated _________, and in the

words and figures following (here insert copy of the note or notes secured).

“(If the mortgage is given for the performance of some other obligation aside from the

payment of promissory notes, describe correctly but concisely the obligation to be

performed.)

“The conditions of this obligation are such that if the mortgagor, his heirs, executors, or

administrators shall well and truly perform the full obligation (or obligations) above

stated according to the terms thereof, then this obligation shall be null and void.

“Executed at the municipality of _________, in the Province of ________, this _____

day of 19_____

____________________

(Signature of mortgagor.)

“In the presence of

“_________________

“_________________

(Two witnesses sign here.)

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FORM OF OATH.

“We severally swear that the foregoing mortgage is made for the purpose of securing

the obligation specified in the conditions thereof, and for no other purpose, and that the

same is a just and valid obligation, and one not entered into for the purpose of fraud.”

FORM OF CERTIFICATE OF OATH.

“At ___________, in the Province of _________, personally appeared ____________,

the parties who signed the foregoing affidavit and made oath to the truth thereof before

me.

“_____________________________”

(Notary public, justice of the peace, 1 or other officer, as the case may be.)

Sec. 6. Corporations. – When a corporation is a party to such mortgage the affidavit

required may be made and subscribed by a director, trustee, cashier, treasurer, or

manager thereof, or by a person authorized on the part of such corporation to make or

to receive such mortgage. When a partnership is a party to the mortgage the affidavit

may be made and subscribed by one member thereof.

Sec. 7. Descriptions of property. – The description of the mortgaged property shall be

such as to enable the parties to the mortgage, or any other person, after reasonable

inquiry and investigation, to identify the same.

If the property mortgaged be large cattle,” as defined by section one of Act Numbered

Eleven and forty-seven, 2 and the amendments thereof, the description of said property

in the mortgage shall contain the brands, class, sex, age, knots of radiated hair

commonly known as remolinos, or cowlicks, and other marks of ownership as described

and set forth in the certificate of ownership of said animal or animals, together with the

number and place of issue of such certificates of ownership.

If growing crops be mortgaged the mortgage may contain an agreement stipulating that

the mortgagor binds himself properly to tend, care for and protect the crop while

growing, and faithfully and without delay to harvest the same, and that in default of the

performance of such duties the mortgage may enter upon the premises, take all the

necessary measures for the protection of said crop, and retain possession thereof and

sell the same, and from the proceeds of such sale pay all expenses incurred in caring

for, harvesting, and selling the crop and the amount of the indebtedness or obligation

secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor

or those entitled to the same.

A chattel mortgage shall be deemed to cover only the property described therein and

not like or substituted property thereafter acquired by the mortgagor and placed in the

same depository as the property originally mortgaged, anything in the mortgage to the

contrary notwithstanding.

Sec. 8. Failure of mortgagee to discharge the mortgage. – If the mortgagee, assign,

administrator, executor, or either of them, after performance of the condition before or

after the breach thereof, or after tender of the performance of the condition, at or after

the time fixed for the performance, does not within ten days after being requested

thereto by any person entitled to redeem, discharge the mortgage in the manner

provided by law, the person entitled to redeem may recover of the person whose duty it

is to discharge the same twenty pesos for his neglect and all damages occasioned

thereby in an action in any court having jurisdiction of the subject-matter thereof.

Sec. 9-12. (inclusive) 3

Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or person

holding a subsequent mortgage, or a subsequent attaching creditor may redeem the

same by paying or delivering to the mortgagee the amount due on such mortgage and

the reasonable costs and expenses incurred by such breach of condition before the sale

thereof. An attaching creditor who so redeems shall be subrogated to the rights of the

mortgagee and entitled to foreclose the mortgage in the same manner that the

mortgagee could foreclose it by the terms of this Act.

Sec. 14. Sale of property at public auction; Officer’s return; Fees; Disposition of

proceeds. – The mortgagee, his executor, administrator, or assign, may, after thirty

days from the time of condition broken, cause the mortgaged property, or any part

thereof, to be sold at public auction by a public officer at a public place in the

municipality where the mortgagor resides, or where the property is situated, provided at

least ten days’ notice of the time, place, and purpose of such sale has been posted at

two or more public places in such municipality, and the mortgagee, his executor,

administrator, or assign, shall notify the mortgagor or person holding under him and the

persons holding subsequent mortgages of the time and place of sale, either by notice in

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writing directed to him or left at his abode, if within the municipality, or sent by mail if he

does not reside in such municipality, at least ten days previous to the sale.

The officer making the sale shall, within thirty days thereafter, make in writing a return of

his doings and file the same in the office of the register of deeds where the mortgage is

recorded, and the register of deeds shall record the same. The fees of the officer for

selling the property shall be the same as in the case of sale on execution as provided in

Act Numbered One hundred and ninety, 4 and the amendments thereto, and the fees of

the register of deeds for registering the officer’s return shall be taxed as a part of the

costs of sale, which the officer shall pay to the register of deeds. The return shall

particularly describe the articles sold, and state the amount received for each article,

and shall operate as a discharge of the lien thereon created by the mortgage. The

proceeds of such sale shall be applied to the payment, first, of the costs and expenses

of keeping and sale, and then to the payment of the demand or obligation secured by

such mortgage, and the residue shall be paid to persons holding subsequent mortgages

in their order, and the balance, after paying the mortgages, shall be paid to the

mortgagor or person holding under him on demand.

If the sale includes any “large cattle,” a certificate of transfer as required by section

sixteen of Act Numbered Eleven hundred and forty-seven 5 shall be issued by the

treasurer of the municipality where the sale was held to the purchaser thereof.

Sec. 15. 6, 6a

Sec. 16. This Act shall take effect on August first, nineteen hundred and six.

Enacted, July 2, 1906.

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Documents

MERC Special Laws1