Special Laws 2003

COMMERCIAL LAW REVIEWER SAINT LOUIS UNIVERSITY BAR OPERATIONS

SPECIAL LAWS

CHATTEL MORTGAGE LAW(Act No. 1508, in relation to Articles 1484, 1485,

2140 and 2141, NCC)

Chattel Mortgage, definedChattel mortgage is a contract by virtue of which

personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. (Art. 2140).

Characteristics of chattel mortgageIt is:(1) an accessory contract because it is for the purpose of

securing the performance of a principal obligation;(2) a formal contract because of its validity, registration in the

Chattel Mortgage Register is indispensable; and(3) a unilateral contract because it produces only obligations

on the part of the creditor to free the thing from the encumbrance on fulfillment of the obligation.

Laws principally governing chattel mortgagesThey are:(1) the Chattel Mortgage Law, Act No. 1508, as amended;(2) the Civil Code;(3) the Revised Administrative Code; and(4) the Revised Penal Code

Essential requisites of chattel mortgage(1) constituted to secure the fulfillment of a principal obligation;(2) that the mortgagor be the absolute owner of the thing

mortgage;(3) the persons constituting the mortgage have the free

disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. (Art.2085)

It is also of the essence that when the principal obligation becomes due, the thing in which mortgage

consists may be alienated for the payment to the creditor (Art. 2087).

Mortgagor may be a third person. It is not necessary that the principal debtor should always be the mortgagor. (Art. 2085, par. 2).

Subject matter of chattel mortgageOnly movable or personal properties (certain

deviations, however, have been allowed) such as:(1) shares of stock ( the mortgage to be registered both in the

Chattel Mortgage Registries of the province where the mortgagor resides, and the province where the corporation has its principal business);

(2) interest in business;(3) growing crops;(4) large cattles;(5) machinery treated by the parties as personal property

subsequently installed on leased land;(6) motor vehicles (the mortgage to be registered also with the

Land Transportation Office)- with respect to vehicles used for public services,

the mortgage must also carry the approval of LTFRB.

(7) house built on rented land but as between the parties only under the doctrine of estoppel; and

(8) house to be demolished and portable nipa huts for what are really mortgaged in this case are the materials thereof and they are, therefore, personal property.

Growing crops and large cattle are considered personal property under the Chattel Mortgage Law. They cannot,

however, be the object of a contract of pledge because they are considered immovable under the Civil Code which principally governs pledge

Similarities between Pledge and Chattel mortgageThey are:(1) Both are executed to secure performance of a principal

obligation;(2) Both are constituted only on personal property;(3) Both are indivisible;(4) Both constitute lien on the property;(5) In both cases, when the debtor defaults, the property must

be sold for the payment of the creditor; and (6) Both are extinguished by the fulfillment of the principal

obligation and by the destruction of the property pledged or mortgaged.

Distinctions between Chattel mortgage and Pledge(1) In chattel mortgage, the delivery of the personal property to

the mortgagee is not necessary, while in pledge, such delivery is necessary;

(2) In chattel mortgage, the registration of the same in the Chattel Mortgage Register is necessary for its validity, while in pledge, registration in the Registry of Property is not necessary;

(3) The procedure for the sale of the thing given as security is different. In chattel mortgage, the procedure is found in Section 14 of Act No. 1508, as amended, while in pledge, it is found in Article 2112 of the NCC;

(4) In chattel mortgage, the excess over the amount due after foreclosure, goes to the debtor, while in pledge, if the property is sold, the debtor is not entitled to the excess unless it is otherwise agreed upon or except in the case of legal pledge; and

(5) In chattel mortgage, the creditor is entitled to recover any deficiency except if the chattel mortgage is a security for the purchase of personal property in installments (see Art. 1484), while in pledge, the creditor is not entitled to recover the deficiency notwithstanding any stipulation to the contrary.(Art. 2115).

Chattel mortgage and Real Estate mortgage distinguished(1) In chattel mortgage, the thing mortgaged must be personal

or movable property; in real estate mortgage, the thing mortgaged must be real or immovable property;

(2) An affidavit of good faith is required to be executed in a chattel mortgage but not in a real estate mortgage;

(3) In chattel mortgage, the mortgagor cannot alienate the thing mortgaged without the written consent of the mortgagee annotated on the back of the mortgage instrument; in real estate mortgage, the mortgagor can alienate the thing mortgaged without the written consent of the mortgagee and any stipulation prohibiting such alienation is void.

(4) In chattel mortgage, redemption of the thing mortgaged may be made only before the sale thereof; in real estate mortgage, the thing mortgaged may be redeemed after it is judicially sold but before judicial confirmation of the sale, or if extra judicially sold, within 1 year from and after the date of sale.

Extent of chattel mortgageIt covers only property in the contract, and excludes

like or substituted property thereafter acquired by the mortgagor, notwithstanding any thing in the contract to the contrary.

Exception: In the case of stock or merchandise contained in drugstores, grocery stores, etc., which are constantly sold and substituted with new stock.

A stipulation in the chattel mortgage extending its scope and effect to after-acquired property is valid and binding

Prepared by the COMMERCIAL LAW SECTION Chief MARLON CORPUZ Assistant Chief MA. LOURDES COMTIAG Members MARLON BACUNO, VOLTAIRE GARCIA, JEANNYLENE ISIP, BEVERLY MANZANO, KATHRYN BOLINAS, LOTTA OBADO, GRESIL SANTOS and VENUS DUGAYON. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS 2003.

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where the after-acquired property is in renewal or, in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods.

Ruling: Acme Shoe, et al. v. CA, et al,. August 22, 1996.While a pledge, real estate mortgage, or

antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.

Affidavit of Good Faith, definedAn oath in a contract of chattel mortgage wherein the

parties “severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purpose and that the same is just and valid obligation and one not entered into for the purpose of fraud.

The absence of the affidavit vitiates a mortgage only as against third persons without notice, like creditors and subsequent encumbrancers

Creation of a chattel mortgageThe law as it now stands provides for only one way for

executing a valid chattel mortgage, i.e., the registration of the personal property in the Chattel Mortgage Register as security for the performance of an obligation.

When to registerThe law does not provide any specific time within

which a chattel mortgage should be recorded in the Chattel Mortgage Register.

Duty of Register of DeedsThe duties of a register of deeds in respect to the

registration of chattel mortgages are of purely ministerial character.

Right of redemption(1) When the condition of a chattel mortgage is broken, the

following may redeem:(a) the mortgagor;(b) a person holding a subsequent mortgage; or(c) a subsequent attaching creditor

(2) An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it.

(3) The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale thereof. (Sec. 13, Act No. 1508).

Right acquired by second mortgagee and subsequent purchaser(1) Before payment of debt – After a chattel mortgage is

executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee in case of a second mortgage. As between the first and second mortgages, therefore, the latter can only recover the property from the former by paying him the mortgage debt.

(2) After payment of debt – If the only leviable or attachable interest of a chattel mortgagor in a mortgaged property is his right of redemption, it follows that the judgment or attaching creditor who purchased the property at the execution sale could not acquire anything except such right of redemption. He is not entitled to the actual possession and delivery of the property without first paying the mortgaged debt.

Kinds of Foreclosure of chattel mortgage(1) Judicial foreclosure – the mortgagee institutes an action in

court; and(2) Extrajudicial foreclosure – the sale is made by the

mortgagee himself when authorized by the chattel mortgage contract or by special law.

Period to forecloseThe mortgagee may, after 30 days from the time of

the condition broken, caused the mortgaged property to be sold at a public auction by a public officer.

The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattel with at least ten (10) days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the mortgage obligation.

Application of proceeds of saleThe proceeds of the sale are to be applied in the

following order:(1) Costs and expenses of keeping and sale;(2) Payment of the obligation secured by the mortgage;(3) Claims of persons holding subsequent mortgages in their

order; and(4) Balance, if any, shall be paid to the mortgagor, or person

holding under him. (Sec. 14, Act No.1508).

Right of mortgagee to recover deficiency(1) Where mortgaged foreclosed – the creditor may maintain

an action for the deficiency although the Chattel Mortgage Law is silent on this point. The reason is that a chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment. The action must be brought within 10 years from the cause of action accrues.

(2) Where mortgage constituted as security for purchase of personal property payable in installments – no deficiency can be asked and any agreement to the contrary shall be void. (Art. 1484).

(3) Where mortgaged property subsequently attached and sold – the chattel mortgagee is entitled to deficiency judgment in action for specific performance (Art. 1484[1]) where the mortgaged property is subsequently attached and sold. The execution sale in such a case is not a foreclosure sale.

Recto Law (Articles 1484-1485, NCC)It is the law, now reflected in Articles 1484 and 1485

of the NCC, which provides that in a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:


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(1) Exact fulfillment of the obligation, should the vendee fail to pay (specific performance);

(2) Cancel the sale, should the vendee’s failure to pay cover two or more installments (not the same as rescission because here the vendor gets back the object of the sale and retains the installments paid; however, this is not available in the absence of stipulation in the contract);

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void.

REAL ESTATE MORTGAGE(Articles 2124 – 2131, NCC)

Real Estate Mortgage, definedA contract whereby the debtor guarantees the

performance of the principal obligation by subjecting real property or real rights as security in case of non-performance of such obligation within the period agreed upon.

Essential Requisites of Real Estate Mortgage(1) It must be constituted to secure the performance of the

principal obligation.(2) The mortgagor must be the absolute owner of the property

mortgaged.(3) The mortgagor should have the free disposal of the

property mortgaged, and in the absence thereof, he should be legally authorized for the purpose.

(4) When the principal obligation becomes due, the property mortgaged may be alienated for the payment of such obligation.

(5) The subject matter of the contract must be immovable property or alienable real rights upon immovables.

Subject Matter of MortgageThey are:(1) immovables; and(2) alienable real rights imposed upon immovables.

Characteristics of Mortgage(1) real contract;(2) accessory contract;(3) subsidiary contract; and(4) unilateral contract because it creates only an obligation on

the part of the creditor who must free the property from the encumbrance once the obligation is fulfilled.

Kinds of MortgagesA mortgage may be:(1) Voluntary – one which is agreed to be between the parties

or constituted by the will of the owner of the property on which it is created.

(2) Legal – one required by law to be executed in favor of certain persons.

(3) Equitable – one which, although it lacks the proper formalities of mortgage, shows the intention of the parties to make the property as a security for a debt.

Effects of Mortgage(1) Creates real right – A mortgage creates a real right; a lien

inseparable from the property mortgaged, which is

enforceable against the whole word. Until discharged, it follows the property wherever it goes and subsists notwithstanding changes of ownership.

(2) Creates merely on encumbrance – A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a lien thereon. It gives the mortgagee no right or claim to the possession of the property, and, therefore, a mere mortgagee has no right to eject an occupant of the property mortgaged.

Extent of MortgageA real estate mortgage constituted on immovable

property is not limited to the property itself but also extends to all its accessions, improvements, growing fruits and rents or income, as well as to the proceeds of insurance should the property be destroyed, or the expropriation value of the property should it be expropriated.

Foreclosure, definedForeclosure is the remedy available to the mortgagee

by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given.

Validity and Effects of Foreclosure(1) In a real estate mortgage, when the principal obligation is not paid when due, the mortgage has the right to foreclose the mortgage and to have the property seized and sold with a view of applying the proceeds to the payment of the principal obligation.

Foreclosure is valid where the debtor is in default of his obligation.

(2) The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness in case of default of payment.

The power to foreclose a mortgage or not resides in the mortgagee.(3) Once the proceeds have been applied to the payment of

obligation, the debtor cannot anymore be required to pay, unless, of course, there is a deficiency between the amount of the loan and the foreclosure sale price, because the obligation has already been extinguished.

(4) The rule is that statutory provisions governing public notice of foreclosure sales must be strictly complied with, and even slight deviations there from will invalidate the sale or render it at least voidable.

Kinds of Foreclosure(1) Judicial foreclosure – it is an ordinary action; governed by

Rule 68 of the rules of Court(2) Extrajudicial foreclosure – foreclosure under power of sale

contained in the mortgage; governed by Act No. 3135, as amended

Judicial Foreclosure under the Rules of Court (Rule 68) Judicial action for the Purpose A mortgage may be foreclosed judicially by bringing

an action for that purpose, in the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof, is situated.

Order of Mortgagor to pay Mortgage debt If the court finds the complaint to be well-founded, it

shall order the mortgagor to pay the amount due upon the mortgage debt or obligation with interest and other charges within a period of not less than 90 days or more than 120 days from entry of judgment (Sec. 2, Rule 68)


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Sale to the highest bidder If the mortgagor fails to pay at the time directed in the

order, the court, upon motion, shall order the property to be sold to the highest bidder at public auction (Sec. 3, Ibid.)

Confirmation of Sale The sale when confirmed by an order of the court,

also upon motion, shall operate to divest the rights of all parties to the action and to vest their rights in the purchaser subject to such right of redemption as may be allowed by law.

Execution of Judgment No judgment rendered in an action for foreclosure or

mortgage can be executed otherwise than in the manner prescribed by law on mortgages, because parties to an action are not authorized to change the procedure which it prescribed.

Application of proceeds of sale The proceeds of the sale shall be applied to the

payment of the:(a) costs of sale;(b) the amount due the mortgagee;(c) claims of junior emcumbrances or

persons holding subsequent mortgages in the order of their priority; and

(d) the balance, if any. Execution of sheriff’s certificate In judicial foreclosure, the foreclosure is not complete

until the sheriff’s certificate is executed acknowledged and recorded. In the absence of a certificate of sale, no title passes by the foreclosure proceedings to the vendee.

EXTRAJUDICIAL FORECLOSURE OF REAL

ESTATE MORTGAGE(Act No. 3135, as amended by Act No. 4118)

Purpose of the law (Sec. 1)To regulate the manner in which the extrajudicial

foreclosure and redemption of real estate mortgages may be made.

Where to conduct the sale of the mortgaged real estate

The sale must be made within the province in which the property sold is situated.

In case the place within said province in w3hich the sale is to be made is the subject of stipulation, such the sale in said place in the municipal building of the municipality in which the property or part thereof is situated.

Notice RequirementNotice shall be given by posting notices of the sale for

not less than twenty (20) days in at least three public places of the municipality or city where the property is situated.

If the property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.

personal notice to the mortgagee is not required to be a newspaper of general circulation]

- it is enough that “it is published for the dissemination of local news and general information: that is has a bonafide subscription list of

paying subscribers; that it is published at regular intervals.”

How should the sale be madeThe sale must be made:

(1) at public auction;(2) between 9 o’clock in the morning and 4 o’clock in the

afternoon; and(3) shall be under the direction of then sheriff of the province,

the justice or auxiliary justice of the place of the municipality in which such sale has to be made, or of a notary public of said municipality, who shall be entitled to collect the fee foe each day of actual work performed, in addition to his expenses.

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

Who may redeem the foreclosed property(1) the debtor;(2) his successors in interest, or(3) any judicial creditor or judgment creditor of said

debtor, or(4) any person having a lien on the property or deed of

trust under which the property is sold.

Period of RedemptionAt any time within the term of one (10 year from the

date when the certificate of sale issued by the Sheriff is registered in the Office of Register of Deeds.

Right to Recover the deficiencyIn extrajudicial foreclosure of mortgage, the

mortgagee has the right to recover the deficiency from the debtor where the proceeds of the sale are insufficient to pay the debt.Procedure to be followed in Extra judicial Foreclosure of mortgage (Supreme Court Administrative Order No.3 dated October 19, 1984)(1) Application must be filed before the Executive Judge

through the clerk of court who is also the Ex-Office Sheriff;(2) In case of real estate mortgage, before the auction sale is

conducted, the clerk of court must examine whether the requirements of the law have been complied with, that is, whether the notice of sale has been posted for not less than 20 days in at least three (3) public places of the municipality or city where the property is situated, and if such property is worth more than P400.00, that such notice has been published once a week for at least three (30 consecutive weeks in a newspaper of general circulation in the municipality or city

(3) The certificate of sale must be approved by the Executive Judge or in his absence, by the Vice Executive Judge;

(4) Where the application concerns the extrajudicial foreclosure of mortgages of real estate and/or chattels in different locations covering one indebtedness, only one filing fee corresponding to such indebtedness shall be collected

(5) The clerk of court, apart from the official receipt of the fees, shall issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the description of the real estate and/or chattels mortgaged and their respective locations, which certificate shall serve the purpose of having the application docketed with the Clerk of Court of the places where other properties are located and of allowing the extrajudicial foreclosure to proceed thereat.

(6) The notice of sale shall be published in a newspaper of general circulation pursuant to Section 1 of PD 1079 and non-compliance therewith shall constitute a violation of Section 6 thereof.


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(7) The application shall be raffled among all sheriffs, including those assigned to the Office of the Clerk of Court and Sheriffs assigned in the branches.

(8) After the redemption period has expired, the Clerk of Court shall archive the records.

(9) No auction sale shall be held unless there arte at least two (2) participating bidders, otherwise, the sale shall be postponed to another date. If on the new date set forth for the sale there shall not be at least two (2) bidders, the sale shall then proceed. The names of the bidders shall be reported to the Sheriff of the Notary Public, who conducted the sale to the Clerk of Court before the issuance of the certificate of sale.

Redemption (of foreclosed property), definedRedemption may be defined as a transaction by which

the mortgagor reacquires or buys the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created.

Kinds of RedemptionThey are:

(1) Equity of Redemption – the right of the mortgager to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property. In judicial foreclosure, the mortgagor may exercise his equity of redemption before but not after the sale is confirmed by the court.

(2) Right of Redemption – the right of the mortgagor to redeem the mortgaged property within a certain period after it was sold for the satisfaction of the mortgage debt. In all cases of extrajudicial sale, the mortgagor may redeem the property at any time within the term of one (1) year from and after the date of registration of the sale. In judicial foreclosure, the general rule is that the mortgagor cannot exercise his right of redemption after the sale is confirmed by the court.

Effect of Exercise of the right of redemptionThe redemption defeats the inchoate right of the

purchaser and restores the property to the same condition as if no sale had been made. It does not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of the lien foreclosed.

Effect of failure to exercise the right of redemptionIf no redemption is made within the prescribed period,

the purchaser has the absolute right to a writ of possession which is the final process to carry out or consummate the extrajudicial foreclosure. Henceforth, the mortgagor loses his right over the property.

THE INSOLVENCY LAW(Act No. 1956, as amended)

Insolvency, Defined- the state of a person whose liabilities are more than

his assets. It is that relative condition of man’s assets and liabilities that the former if all made immediately available, would not be sufficient to discharge the latter (balance sheet test).

- the inability of a person to pay his debts as they become due in the ordinary course of business (equity test).

Insolvency law (IL) is subsidiary to the Civil Code.

For the (IL) to be APPLICABLE:

- there must be a proceeding in insolvency in the proper RTC.

Purposes of IL(1) To effect an equitable distribution of the bankrupt’s property among his creditors.(2) To benefit the debtor in discharging him from his liabilities and enabling him to start afresh with the property set apart to him as exempt.(3) To have a uniform procedure in asserting the claims against an entity threatened by insolvency in a manner which would prevent creditors from obtaining any preference by paying one or some ahead of the others.

Nature of the Proceedings Under the ILThe proceedings are considered in rem, hence

binding upon the whole world. All persons having an interest on the subject matter involved, whether notified or not are equally bound.

Remedies open to an insolvent debtorUnder the law, the insolvent debtor may be permitted

to:1. to petition the court to suspend payments of his

debts; OR2. to be discharged from his debts and liabilities by

voluntary or involuntary insolvency proceedings. (Sec. 1).

Suspension of payments, DefinedIt is the postponement by court order, of the payments

of debts of one who, while possessing sufficient property to cover his debts, foresees the impossibility of meeting them when they respectively fall due. (Sec. 2, par. 1).

Purpose of Suspension- to suspend or delay payments.

Basis of Suspension- the probability of the debtor’s inability to meet his

obligations when they respectively fall due.

Procedural Requirements

The petition should be filed by a debtor—1. possessing sufficient property to cover all his debts;2. foreseeing the impossibility of meeting them when they

respectively fall due; and3. petitioning that he be declared in the state of suspension of

payments. The petition need not be verified.

The petition should be accompanied by—1. a verified schedule containing a full and true statement of

the debts and liabilities of the petitioner with a list of creditors, residence, sum due, nature of liability, consideration, existing pledge, lien or security. (Sec. 15);

2. a verified inventory containing a list of creditors, description of all the property including those exempt from execution and statement as to value of each item of property, location and encumbrances thereon. (Sec. 16);

3. a statement of assets and liabilities;4. proposed agreements he requests of his creditors.

Effects of Filing of PetitionThe following are the effects:1. No disposition in any manner of his property may be made

by the petitioner except insofar as concerns the ordinary


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operations of commerce or of industry in which he is engaged. (Sec. 3, par. 2).

2. No payments may be made by the petitioner except in the ordinary course of his business or industry. (ibid.);

3. Upon request to the court, all pending executions against the debtor shall be suspended except execution against property especially mortgaged. (Sec. 6).

Creditors affected by the filing of petitionOnly those creditors included in the schedules filed by

the debtor shall be cited to appear and take part in the meeting.(Sec. 5).

Creditors NOT affected by order of suspension of paymentsThey are the following:1. Persons having claims for personal labor, maintenance,

expenses of last illness or funeral of the wife or children of the debtor incurred in sixty (60) days immediately preceding the filing of the petition; and

2. Persons having legal or contractual mortgages. (Sec. 9).

Steps in Suspension1. Filing of petition by the debtor. (Sec. 2);2. Issuance by the court of an order calling a meeting of

creditors. (Sec. 3);3. Publication of the order and service of summons.

(Sec. 4);4. Meeting of creditors for the consideration of debtor’s

proposition. (Sec. 4);5. Approval by creditors of the debtor’s proposition. (Sec.

8);6. Objections, if any, made w/in 10 days following the

meeting. (Sec. 11); and7. Issuance by the court of an order directing that the

argument be carried out in case the decision is declared valid. (Sec. 11)

Rule of DOUBLE MAJORITY in the meeting of creditors

The majority shall be 2/3 of the creditors voting upon same proposition, which 2/3 represent at least 3/5 of the total liabilities of the debtor. (Sec. 8[e]).

When proposed agreement deemed rejected If the number of the creditors required for holding a

meeting does not attend thereat. The two majorities mentioned in Sec. 8[e] are not in

favor of the proposed agreement. (Sec. 10).

Causes for Objection to Decisions of CreditorsThey are:

1. Defects in the call for the meeting, in the holding thereof, and in the deliberation had thereat which prejudice the rights of the creditors;

2. Fraudulent connivance between one or more creditors and the debtor to vote in favor of the proposed agreement; and

3. Fraudulent conveyance of claims for the purpose of obtaining a majority. (Sec. 12).

Corporate Suspension of PaymentsSection 5(d) of PD 902-A has transferred original and

exclusive jurisdiction over petitions for suspensions of payments by corporation to the SEC, and in addition, it increased the coverage of “suspension of payments” for corporation to include a situation when the assets of the debtor-corporation are less than its liabilities, when it is under a management committee or a rehabilitation receiver.

Pursuant to the Subsection 5.2 of the Securities Regulation Code, the jurisdiction of the SEC over corporate suspension of payments proceedings is transferred to the RTCs. Consequently, the existing jurisprudence on corporate suspension of payments proceedings under Section 5(d) of PD 902-A should now apply to the RTC.

Power to Appoint Management Committee under PD 902-A

Under Section 6(c) and (d) of PD 902-A, in order to effectively exercise its jurisdiction, the RTC is empowered:1. To appoint one or more receivers of the property, real or

personal, which is the subject of action pending before the RTC in accordance with the pertinent provisions of the Rules of Court;

2. In appropriate cases, appoint a rehabilitation receiver of corporations not supervised or regulated by other government agencies who shall have, in addition to the powers of a regular receiver under the provisions of the Rules of Court, such functions and powers as provided in the Decree; and

3. Upon petition or motu proprio, to appoint a management committee, board, or body to undertake the management of corporations not supervised or regulated by other government agencies in appropriate cases when there is imminent danger of dissipation, loss wastage or destruction of assets of other properties or paralyzation of business operations of such corporations which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public.

Legal effect of Appointment of Management Committee/Rehabilitation Receiver

Section 6(c) of PD 902-A provides that “upon appointment of a management committee, rehabilitation receiver, board or body. . . all actions for claims against the corporation. . . under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly.”

Differences between Suspension of Payments Proceedings under the Insolvency Law (IL) and under PD 902-A1. The appointment of a management committee or a

rehabilitation receiver automatically takes the case out of the provisions of IL and would make the provisions of PD 902-A exclusively applicable;

2. Under the IL, the suspensive effect of the order issued pursuant to the petition for suspension of payment does not cover secured creditors, while the suspensive effect under PD 902-A upon appointment of the management committee or rehabilitation receiver, would cover all corporate creditors, both secured and unsecured;

3. Under the IL, in the absence of any agreement among the corporate creditors, the suspension would expire after 3 months; whereas, under PD 902-A, the suspensive effect has no time limit and would prevail for so long as the corporate debtor is under a management committee or rehabilitation receiver and there is no directive to have its assets liquidated;

4. The effectiveness of final agreement on the manner of payment of the obligations of the corporate debtor is subject to the qualifying majority votes required under the IL; whereas, under PD 902-A, the management committee or the rehabilitation receiver is granted sufficient powers to take such measures as are necessary to bring back to financial health the distressed company without need to obtain approval of the corporate creditors.

Corporate Rehabilitation, definedCorporate rehabilitation as a process “to try to

conserve and administer the corporation’s assets in the hope


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that it may eventually be able to return from financial stress to solvency. It contemplates of the continuation of corporate life and activities so that it may be able to return to its former condition of successful operations and financial stability.”

Preference of secured creditors retainedSecured creditors retain their preference over

unsecured creditors, but enforcement of such preference is equally suspended upon the appointment of a management committee, rehabilitation receiver board or body. This suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a totally unsecured creditor. PD 902-A does not state anything to this effect. What it merely provides is that all actions for claims against the corporation, partnership or association shall be suspended .This should give the receiver a chance to rehabilitate the corporation if there should still be a possibility for doing so. The key phrase is equality in equity

However, in the event that the rehabilitation is no longer feasible and claims against the distressed corporation would eventually have to be settled, the secured creditors shall enjoy preference over the unsecured creditors, subject only to the provisions of the NCC on Concurrence and Preference of Credit.

Power to Liquidate Corporate DebtorUnder Sec. 6(d), the RTC may, on the basis of the

findings and recommendation of the management committee, or rehabilitation receiver, board or body, or in its own findings, determine that the continuance in business or such corporation or entity would not be feasible or profitable nor work to the best interest of the stockholders, parties-litigants, creditors, or the general public, and order the dissolution of such corporation or entity and its remaining assets liquidated accordingly.

VOLUNTARY INSOLVENCY

Concept of Voluntary Insolvency A voluntary insolvency proceeding is exactly what its

name implies and the debtor is under no obligation, and cannot be forced, to bring such proceeding; nor with his default, through failure to appeal in an involuntary proceeding, convert the proceedings to a voluntary ones.

Nature of Voluntary InsolvencyAn insolvent debtor, owing debts exceeding in amount

the sum of P1,000.00 may apply to be discharged from his debts and liabilities by petition to the RTC of the province or city in which he has resided for six (6) months next preceding the filing of such petition.

Distinctions between Suspension of Payments and Insolvency1. In the former, the purpose is to suspend or delay the

payment of debts, while in the latter, to discharge the debtor from the payment of debts;

2. In the former, the debtor has sufficient property to pay his debts, while in the latter, the debtor does not have sufficient property to pay all his debts;

3. In the former, the amount of indebtedness is not affected, while in the latter, the creditors receive less than their credits, and in case where there are preferences, some creditors may not receive any amount at all; and

4. In the former, the number of the creditors is immaterial, while in the case of involuntary insolvency, three or more creditors are required.

Steps in Voluntary InsolvencyProcedure in general for voluntary insolvency:

1. Filing of the petition by the debtor praying for the declaration of insolvency (Sec. 14);

2. Issuance of an order of adjudication declaring the petitioner insolvent (Sec. 18);

3. Publication and service of the order declaring a state of insolvency (Sec. 19);

4. Meeting of creditors to elect the assignee in insolvency (Sec. 30);

5. Conveyance of the debtor’s property by the clerk of court to the assignee (Sec. 32);

6. Liquidation of the debtor’s assets and payment of his debts (Sec. 33);

7. Composition, if agreed upon (Sec. 63);8. Discharge of the debtor on his application (Sec. 64), except

a corporation (Sec. 52);9. Objection to the discharge, if any (Sec. 66); and10. Appeal in certain cases (Sec. 62)

Requisites of Petition for Voluntary InsolvencyThe petition, which must be verified, is to be filed –

1. by an insolvent debtor,2. owing debts exceeding in amount the sum of P1,000.00,3. in the RTC of the province or city in which he has resided

for six (6) months next preceding the filing of such petition, and

4. setting forth in his petition the following:(a) his place of residence;(b) the period of his residence therein immediately

prior to the filing of petition;(c) his inability to pay all his debts in full;(d) his willingness to surrender all his property,

estate, and effects not exempt from execution for the benefit of the creditors; and

(e) an application to be adjudged insolvent (Sec. 14).

Documents to accompany the PetitionThey are the following:

1. A verified schedule which must contain –(a) a full and true statement of all debts and liabilities

of the insolvent debtor; and(b) an outline of the facts giving rise or which might

give rise to a cause of action against such insolvent debtor (Sec. 15); and

2. A verified inventory which must contain –(a) an accurate description of all the personal and

real property of the insolvent exempt or not from execution including a statement as to its value, location, and encumbrances thereon; and

(b) an outline of the facts giving rise or which might give rise to a right of action in favor of the insolvent debtor (Sec. 16).

Effect of errors in description or omission of property in inventory

1. That the property is erroneously or ambiguously described in the insolvent’s inventory will not affect the title of purchasers in the insolvency proceedings. All the property of the insolvent passes to his assignee and is administered in the insolvency proceedings regardless of the errors in the inventory.

2. If the insolvent omits property from his inventory, through either mistake or fraud, it is the duty of the assignee to have the inventory amended so as to include it and to take possession and administer it.

3. Even property exempt from execution must be included in order to preclude possible fraudulent omissions under the pretext that such property is exempt. But where the petitioner did not attach an inventory to its petition for insolvency, alleging under oath that it had no property to inventory, the lack of inventory was held not fatal to the petition because it


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must be assumed, until proven otherwise, that the petitioner was stating the truth.

Effect of the Filing of PetitionOnce the petition is filed, it ipso facto takes away and

deprives the debtor-petitioner of the right to do or commit any act of preference as to creditors, pending the final adjudication.

Effect of court order declaring the debtor insolventUpon the filing of the petition, the court, as a matter of

course, shall issue an order declaring the petitioning debtor insolvent (Sec. 19). The effects of such order are the following:1. All the assets of the debtor not exempt from execution are

taken possession of by the sheriff until the appointment of a receiver or assignee (Ibid.);

2. The payment to the debtor of any debts due to him and the delivery to the debtor or to any person for him of any property belonging to him, and the transfer of any property by him are forbidden (Ibid.);

3. All civil proceedings pending against the insolvent debtor shall be stayed (Ibid.); and

4. Mortgages or pledges, attachments or executions on property of the debtor duly recorded and not dissolved are not, however, affected by the order (Sec. 59).

Prohibited Acts of an InsolventThe following are forbidden:

1. The payment to the debtor of any debts due him.2. The delivery to the debtor or to any person for him of any

property for him of any property belonging to said debtor.3. The transfer of any property by the debtor.

All civil proceedings pending against the insolvent are stayed, either by forbidding the maintenance of such

actions, or by authorizing the insolvency court to grant such stay.

INVOLUNTARY INSOLVENCY

Nature of Involuntary Insolvency ProceedingsIt is not a mere personal action against the insolvent

for the collection of debts; but its purpose is to impound all of his non-exempt property, to distribute it equitably among his creditors, and to release him from further liability. It is accordingly a proceeding in rem as well as in personam.

Steps in Involuntary InsolvencyThey are the following:1. Filing of the petition by three or more creditors, who are

residents of the Philippines, with an aggregate credit of not less than P1,000.00, none of whom become a creditor by assignment within thirty (30) days prior to the filing of the petition;

2. Issuance of the order requiring the debtor to show cause why he should not be adjudged insolvent;

3. Service of order to show cause;4. Filing of answer or motion to dismiss;5. Hearing of the case;6. Issuance of order or decision adjudging the debtor

insolvent;7. Publication and service of order;8. Meeting of creditors for election of an assignee in

insolvency;9. Conveyance of the debtor’s property by clerk of court to the

assignee;10. Liquidation of assets and payment of debts;11. Composition, if agreed upon;12. Discharge of the debtor on his application, except a

corporation;13. Objection to the discharge, if any; and14. Appeal in certain cases.

Requisites of Petition for Involuntary InsolvencyThe petition is to be filed by –1. Three or more creditors,2. None of whom has become such a creditor by assignment,

within 30 days prior to the filing of said petition,3. Whose credits accrued in the Philippines,4. The total amount of which credits is not less than

P1,000.00, and5. In the RTC of the province or city in which the debtor

resides or has his principal place of business.

The petition –1. Must be verified by at least three of the petitioning

creditors,2. Must set forth one or more acts of insolvency mentioned in

the law, and 3. Must be accompanied by a bond, approved by the court

with at least two sureties, in such a penal sum as the court shall direct.

Acts of InsolvencyThe following are acts of insolvency when a creditor

can invoke in filing a petition to declare a debtor in a state of involuntary insolvency:1. Intention to depart or departure from the Philippines to

defraud creditors;2. Absence from the Philippines to defraud creditors;3. Concealment of debtor to avoid legal process;4. Concealment or removal of his property to avoid legal

process;5. Confession of judgment in favor of a creditor to defraud

other creditors;6. Allowing default judgment in favor of a creditor to defraud

other creditors;7. Allowing his property to be taken under legal process in

preference of a particular creditor to defraud other creditors;

8. Making conveyance, assignment or transfer of his property to defraud his creditors;

9. Making conveyance, assignment or transfer of his property in contemplation of insolvency;

10. Default of a merchant or a tradesman to pay his current obligations for a period of 30 days;

11. Failure to pay money on deposit or received in a fiduciary capacity for a period of 30 days after demand; and

12. Insufficiency of property to satisfy an execution issued against him.

Adjudication of InsolvencyWhere the debtor fails to appear or admits the

allegations of the petition, or the evidence of the petitioner is sufficient, an adjudication of insolvency shall be made. The declaration of insolvency retroacts to the date of the filing of the petition for insolvency.

Distinctions between voluntary insolvency and involuntary insolvency1. In the former, one creditor is sufficient, while in the latter,

three or more creditors are required;2. In the former, it is filed by the insolvent debtor, while in the

latter, it is filed by three or more creditors who possess the qualifications required by law;

3. In the former, the debtor must not be guilty of any of the acts of insolvency enumerated in Section 20, while in the latter, the debtor must have committed one or more of such acts of insolvency;

4. In the former, the amount of indebtedness must exceed P1,000.00, while in the latter, it must not be less than P1,000.00;

5. In the former, a bond is not required, while in the latter, the petition must be accompanied by a bond;


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6. In the former, an order of adjudication of insolvency may be granted ex parte, while in the latter, it is granted only after hearing;

7. In the former, the petition is filed in the RTC of the province or the city in which the debtor has resided for 6 months, while in the latter, the length of residence is immaterial; and

8. In the former, the court issues the order of adjudication declaring the petitioner insolvent upon the filing of the voluntary petition, while in the latter, the debtor is not adjudicated insolvent until after the hearing of the case.

ASSIGNEES

Assignee, DefinedA person elected by the creditors or appointed by the

court to whom an insolvent debtor makes an assignment of all his property for the benefit of his creditors.

Creditors not entitled to vote in the election of assignee

They are the following:1. Those who did not file their claims at least two days prior to

the time appointed for such election (Sec. 29);2. Those whose claims are barred by the statute of limitations

(Ibid.);3. Secured creditors unless they surrender their security or

lien to the sheriff or receiver or unless they shall first have the value of such security fixed as provided in Section 59; and

4. Holders of claims for unliquidated damages arising out of pure tort.

Bond of AssigneeAfter his election, the assignee is required to give a

bond for the faithful performance of his duties. To establish his official character and his right to sue in that capacity, it is incumbent on the assignee to show that the bond required has been given.

Properties if insolvent that pass to the assigneeThey are:

1. All real and personal property, estate and effects of the debtor including all deeds, books and papers in relation thereto;

2. Properties fraudulently conveyed;3. Right of action for damages to real property; and4. The undivided share or interest of the insolvent debtor in

property held under co-ownership

Properties of insolvent that do not pass to the assignee

They are:1. Property exempt from execution;2. Property held in trust;3. Property of the conjugal partnership or absolute community

so long as said partnership or community exists insofar as the insolvent debtor’s obligations have redounded to the benefit of the former;

4. Property over which a mortgage or pledge exists unless the creditor surrenders his security or lien;

5. After-acquired property except fruits and income of property owned by the debtor and which had passed to the assignee in insolvency;

6. Non-leviable assets like a life insurance policy which does not have any cash surrender value; and

7. Right of action for tort which is purely personal in nature.

Effects of assignmentThey are:

1. The assignee takes the property in the plight and conditions that the insolvent held it;

2. Upon appointment, the legal title to all the property of the insolvent is vested in the assignee, and the control of the property is vested in court;

3. All actions to recover all the estate, debts and effects of the insolvent shall be brought by the assignee and not by the creditors; and

4. The assignment shall—- dissolve any attachment levied within one month

next preceding the commencement of insolvency proceedings;

- vacate and set aside judgment entered in any action commenced within 30 days immediately prior to the commencement of insolvency proceedings; and

- vacate and set aside any execution issued thereon; and

- vacate and set aside any judgment entered by default or consent of the debtor within 30 days prior to the commencement of insolvency proceedings.

Powers of the assigneeThe assignee shall have the power:

1. To sue and recover all the estate, debts and claims belonging to or due to the creditors;

2. To take into possession all the estate of the debtor except property exempt from execution;

3. In case of a non-resident or absconding or concealed debtor, to demand and receive of every sheriff all the property and moneys in his possession belonging to the debtor;

4. To sell, upon court order, any estate of the debtor which has come into his possession;

5. To redeem all mortgages and pledges and to satisfy any judgment which may be an encumbrance on any property sold by him;

6. To settle all accounts between the debtor and his debtors, subject to the approval of the court;

7. To compound, under the order of the court, with any person indebted to such debtor; and

8. To recover any property fraudulently by the debtor.

Duties of the assigneeThe assignee shall have the following duties:

1. To register the assignment to him of the real estate of the debtor;

2. To file the schedule and the inventory of the property of the debtor;

3. To convert, as speedily as possible, the estate, real and personal, into money;

4. To keep a regular account of all moneys received by him as assignee;

5. To petition the court to allow the private sale of the debtor’s property if it appears that it is for the best interest of the estate;

6. To file a just and true accounts of all receipts and payments;

7. To file accounts upon order of the court on motion of two or more creditors;

8. To distribute such dividends as he may be required; and9. To file his final account within one (1) year from the date of

order of adjudication.

Sale of assets1. Generally - The law provided for the reduction of the

insolvent’s assets into cash by means of public sales. Proceedings for the sale of assets are proceedings in rem.


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The only question of jurisdiction is the power of the court over the subject matter without regard to the parties who may have interest in it. There are no adversary parties to the proceedings.

2. Persons competent to purchase - On the sale in insolvency proceedings, the insolvent will not generally be permitted to purchase the assets, either in his own name or acting through a dummy. If he does so, the property purchased becomes subject to the claims of his creditors. But otherwise, any person legally qualified to contract may purchase at a judicial sale unless he has a duty to perform in reference thereto which is inconsistent with the character of a purchaser or is so connected with the transaction that his individual interest as a purchaser may be inconsistent with his duty.

3. Title acquired - As a general rule, the purchaser at a judicial sale takes by virtue of his purchase all the right, title, and interest of the interest of the parties to the proceedings in and to the property conveyed to him. The circumstances that an insolvent schedule contain an erroneous or ambiguous description of certain property does not affect the title of the purchaser. All the property passes to the assignee and is sold regardless of its description in the schedules

Dividends in insolvency, DefinedA parcel of the fund arising from the assets of the

estate, rightfully allotted to a creditor entitled to share in the fund, whether in the same proportion with other creditors or in a different proportion.

It is paid by the assignee only upon the order of the court.

CLASSIFICATION ANDPREFERENCE OF CREDITS

Preference of credit, definedA legal situation whereby one person is given a

superior right or claim over another. For this reason, the law as to preference shall be strictly construed.

Concurrence of credits, definedImplies the possession by two or more creditors of

equal rights or privileges over the same property or all of the property of the debtor.

Classification of Credits (Arts. 2241, 2242, 2244, & 2245)

I. Preferred and concurring with respect to specific movable property of the debtor (Art. 2241), which are --(1) Duties, taxes, and fees due thereon to the State or any

subdivision thereof;(2) Claims arising from misappropriation, breach of trust, or

malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them;

(3) Claims for the unpaid price of movable sold, as long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance

and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the thing pledge are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;

(5) Credits for the making, repairs, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed;

(6) Claims for laborers’ wages, on the goods manufactured or the work done;

(7) For expenses of salvage, upon the goods salvaged;(8) Credits between the landlord and the tenant, arising from

the agricultural leasehold contract, on the share of each in the fruits or harvest;

(9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter;

(10) Credits for lodging and supplies usually furnished to travelers by hotel-keepers, on the movables belonging to the guest, as long as such movables are in the hotel, but not for the money loaned to the guests;

(11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested;

(12) Credits for rent for one (1) year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on the money or instruments of credit;

(13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale.In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within 30 days from the unlawful seizure.

II. Preferred and concurring with respect to specific immovable and real rights of the debtor (Art. 2242), which are—(1) Taxes due upon the land or building;(2) For the unpaid price of real property sold, upon the

immovable sold;(3) Claims of laborers, masons, mechanic and other workmen,

as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals, or other work, upon said buildings, canals or other works;

(4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals, and other works, upon aid buildings, canals or other works;

(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;

(6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved;

(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits;

(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided;

(9) Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;

(10) Credits of insurers, upon the property insured, for the insurance premium for two (2) years.

Those credits which enjoy preference in relation to specific real property or real rights, exclude all other to the


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extent of the value of the immovable or real right to which the preference refers. (Art. 2248, NCC).

If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right. (Art. 2249).

III. Preferred insofar as to other real and personal properties of the debtor (Art. 2244). Order of preference is observed. These are—(1) Credits for services rendered the insolvent by employees,

laborers, or household helpers preceding the commencement of the proceedings in insolvency;

(2) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court;

(3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own;

(4) Compensation due to the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the nature of the employment;

(5) Credits and advancements made to the debtor for the support of himself or herself, and family, during the last year preceding the insolvency;

(6) Support during the insolvency proceedings, and for 3 months thereafter;

(7) Fines and civil indemnification arising from a criminal offense;

(8) Legal expenses, and expenses incurred in the administration of the insolvent’s estate for the common interest of the creditors, when properly authorized and approved by the court;

(9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province other than those referred to in Articles 2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other than those mentioned in Articles 2241, No. 1 and 2242, No. 1;

(12) Damages for death or personal injuries caused by a quasi-delict;

(13) Gifts due to public and private institutions of charity or beneficence;

(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in the final judgment, if they had been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively

The credits enumerated in Articles 2241 and 2242, although preferred as against other credits in respect to specific property of the insolvent, do not have preference as among themselves, and shall be satisfied pro rata from the specific property, after the payment of the duties, taxes and fees due the state or any subdivision thereof. On the other hand, the credits enumerated in Article 2244 not only are preferred as against other credits, but they are preferred as against each other, in the order of enumeration.

PARTNERSHIPS AND CORPORATIONS

When partnership may be declared insolventA partnership may be adjudged insolvent during the

continuation of the partnership business or after its dissolution but before the final settlement thereof.

Properties included in the insolvency proceedings:Upon order of the court, the following property shall be

taken:(1) All the property of the partnership; and (2) All the separate property of each of the partners,

except—(a) separate properties of limited partners;

and(b) properties which are exempt by law.

PROOF OF DEBTS

Provable DebtsThe debts which may be proved against the estate of

the debtor in insolvency proceedings are the following:1. All debts due and payable from the debtor at the time of the

adjudication of insolvency.2. All debts existing at the time of the adjudication of

insolvency but not payable until a future time, a discount being made if no interest is payable by the terms of the contract;

3. Any debt of the insolvent arising from his liability as indorser, surety, bail or guarantor, where such liability became absolute after the adjudication of insolvency but before the final dividend shall have been declared;

4. Other contingent debts and contingent liabilities contracted by the insolvent if the contingency shall happen before the order of final dividend; and

5. Any debt of the insolvent arising from his liability to any person liable as bail, surety, or guarantor or otherwise, for the insolvent, who shall have paid the debt in full or in part.

Contingent claim, definedA claim in which liability depends on some future

event that may or may not happen and which makes it uncertain whether there will be any liability.

Debts that may NOT be provedThe following debts are not provable or allowed in

insolvency proceedings:1. Claims barred by the statute of limitations;2. Claims of secured creditors with a mortgage or pledge in

their favor unless they surrender their security;3. Claims of creditors who hold an attachment or execution on

the property of the debtor duly recorded and not dissolved;4. Claims on account of which a fraudulent preference was

made or given;5. Support, as it does not arise from any business transaction

but from the relation of marriage; and6. A claim for unliquidated damages arising out of a pure tort

which neither constitutes a breach of an express contract nor results in any unjust enrichment of the tortfeasor that may form the basis of an implied contract.

Alternative rights of secured creditorThey are the following:

1. To maintain his right under the security or lien and ignore the insolvency proceedings, in which case it is the duty of the assignee to surrender to him the property encumbered; or

2. To waive his right under the security or lien and thereby share in the distribution of the assets of the debtor, or

3. To have the value of the encumbered property appraised and then share in the distribution of the assets of the debtor with respect to the balance of his credit.

COMPOSITION


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Composition definedIt is an agreement, made upon a sufficient

consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter for the sake of immediate or sooner payment, agree to accept a dividend less than the whole amount of their claims, to be distributed pro rata, in discharge and satisfaction of the whole debt.

Requirements for a Valid Offer of CompositionThey are as follows:

1. The offer of the terms of composition must be made after the filing in court of the schedule of property and submission of the list of creditors;

2. The offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed;

3. It must be made after depositing in such place designated by the court, the consideration to be paid and the costs of the proceedings; and

4. The terms of the composition must be approved or confirmed by the court.

When court may confirm compositionThe court shall confirm a composition on the

application of the debtor if satisfied that:1. It is for the best interest of the creditors;2. The debtor has not been guilty of any of the acts, or of a

failure to perform any of the duties which would create a bar to his discharge; and

3. The offer and its acceptance are in good faith and have not been made or procured in a manner forbidden by the Act.

Effects of the Confirmation of CompositionThe following are the effects:

1. The consideration shall be distributed as the judge shall direct;

2. The insolvency proceeding shall be dismissed;3. The title to the insolvent’s property shall revest in him; and4. The insolvent shall be released from his debts.

When confirmation may be set asideThe court may, upon application of a party in interest,

filed at any time within 6 months after the composition has been confirmed, set the same aside and reinstate the case if it shall be made to appear upon trial:(1) That fraud was practiced in the procuring of such

composition; and(2) That the knowledge thereof has come to the petitioner

since the confirmation of such composition. the effect of lawful composition is equivalent to discharge.the corporation will not be discharged by a lawful composition. It is only for natural person.

DISCHARGEDischarge definedA discharge is the formal and judicial release of an

insolvent debtor from all his debts contracted prior to the insolvency proceedings, with the exception of those expressly named by law.

By discharge, the debtor is released from the obligation of all his debts which were or might be proved in the proceedings, so that they are no longer a charge upon him and so that he may thereafter engage in business and acquire property without its being liable for the satisfaction of such former debts

When to Apply for DischargeA debtor may apply—

to the RTC for a discharge, at any time after the expiration of 3 months from the

adjudication of insolvency, BUT not later than 1 year from such adjudication of

insolvency, UNLESS the property of the insolvent has not been

converted into money without his fault, thereby delaying the distribution of dividends among the creditors in which case the court may extend the period.

Circumstances which Bar DischargeNo discharge shall be granted, or if granted, shall be

invalid, in the following cases:(1) False swearing;(2) Concealment of any part of his estate or effects;(3) Fraud or willful neglect in the care of his property or in the

delivery thereof to the assignee;(4) Procuring his property to be attached or seized on

execution within 1 month before the commencement of insolvency proceedings;

(5) Destruction, mutilation, alteration or falsification of his books, documents or papers;

(6) Giving fraudulent preference to a creditor;(7) Non-disclosure to the assignee of a proven false or

fictitious debt within 1 month after acquiring knowledge;(8) Being a merchant, failure to keep proper books of

accounts;(9) Influencing the action of any creditor, at any state of the

proceedings, by any pecuniary consideration;(10) Effecting any transfer, conveyance or mortgage in

contemplation of insolvency;(11) Conviction of any misdemeanor under the Insolvency Law;(12) In case of voluntary insolvency, he has received the benefit

of insolvency within 6 years next preceding his application for discharge; and

(13) If insolvency proceedings in which he could have applied for a discharge are pending by or against him in the RTC of any other province or city.

Legal effects of discharge(1) It releases the debtor from all claims, debts, liabilities and

demand set forth in the schedule or which were or might have been proved against his estate in insolvency. Hence, non-provable debts are not affected whether or not they were properly scheduled.

(2) It operates as a discharge of the insolvent and future acquisitions, but permits mortgages and other lien creditors to have their satisfaction out of the mortgage or subject of the lien;

(3) It is a special defense which may be pleaded and be a complete bar to all suits brought on any such debts, claims, liabilities or demands;

(4) It does not operate to release any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise; and

(5) The certificate of discharge is prima facie evidence of the fact of release, and the regularity of such discharge.

Where a debtor is judicially declared insolvent, the remedy of the guarantor or surety would be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities.

Debts released by discharge(1) All claims, debts, and liabilities, and demands set forth in

the schedule; and


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(2) All claims, debts, liabilities and demands which were or might have been proved against the estate in insolvency.

Debts not released by discharge(1) Taxes or assessments due the Government, whether

national or local;(2) Any debt created by the fraud or embezzlement of the

debtor;(3) Any debt created by the defalcation of the debtor as a

public officer or while acting in a fiduciary capacity;(4) Debt of any person liable for the same debt, for or with the

insolvent debtor, either as partner, joint contractor, indorser, surety or otherwise.

(5) Debts of a corporation because is not granted a discharge;(6) Claim for support; otherwise it will make the law a means of

avoiding the enforcement of the obligation, moral and legal, devolving upon the husband to support his family;

(7) Discharged debt but revived by a subsequent new promise to pay because the discharge does not put to an end the moral obligation to pay;

(8) Claims for unliquidated damages arising out of a pure tort;(9) Claims of secured creditors;(10) Claims not in existence or not mature at the time of the

discharge are generally unaffected thereby; and(11) Claims that are contingent at the time of the discharge are

not barred thereby, and consequently, an action may be maintained against the debtor for collection thereof.

When discharged may be revokedA discharge in insolvency may be revoked by the court

which granted it on petition of any creditor—1. Whose debt was proved or provable against the estate in

insolvency, on the ground that the discharge was fraudulently obtained;

2. Who has discovered facts constituting the fraud subsequent to the discharged; and provided,

3. The petition is filed within one year after the date of the discharge.

FRAUDULENT PREFERENCES ANDTRANSFERS

Meaning of transferA transfer within the meaning of the Insolvency Law,

includes the sale and every other and different modes of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security.

A deposit of money is not a transfer.

When preferential transfer existsTo constitute a preferential transfer, there must be a

parting with the insolvent’s property for the benefit of the creditor and a consequent diminution of the insolvent’s estate with the result that such creditor receives a greater proportion of his claim than other creditors of the same class.

A deposit of money to one’s credit in a bank does not create any preference. The estate of the depositor is not diminished for there is an obligation on the part of the bank to pay the amount of the deposit as soon as the depositor may see fit to draw a check against it.

When fraudulent preference existsA fraudulent preference is committed when the debtor

procures any part of his property to be attached, sequestered, or seized on execution or makes any payment, pledge, mortgage, assignment, transfer, sale or conveyance of any part of his

property, whether directly or indirectly, absolutely or conditionally, to any one under the following circumstances:1. The debtor is insolvent or in contemplation of insolvency;2. The transaction in question is made within 30 days before

the filing of a petition by or against the debtor;3. It is made with a view to giving preference to any creditor or

person having a claim against him; and4. The person receiving a benefit thereby has reasonable

cause to believe:a. that the debtor is insolvent; andb. that the transfer is made with a view to

prevent his property from coming to his assignee in insolvency, or to prevent the same from being distributed ratably among his creditors, or to defeat the object of or any way hinder the operation of or evade the provisions of the Insolvency Law.

When presumption of fraud existsIf such payment, pledge, mortgage, conveyance, sale,

assignment, or transfer is not made in the usual and ordinary course of business of the debtor, or if such seizure is made under a judgment which the debtor has confessed or offered to allow, that fact shall be prima facie evidence of fraud.

When fraudulent transfer existsA fraudulent transfer is any payment, pledge,

mortgage, conveyance, sale, assignment, or transfer of property of whatever character made by the insolvent within 1 month before the filing of a petition in insolvency by or against him, except for a valuable pecuniary consideration in good faith. Such a transfer is void.

Effect of fraudulent transfer As against the creditors of the insolvent—

- any conveyance or assignment fraudulently made is void. Hence, no title is acquired by the transferee

PENAL PROVISIONS

Acts criminally punishable under this ActA debtor who commits any of the following acts shall,

upon conviction thereof, be punished by imprisonment, for not less 3 months nor more than 5 years for each offense:I. After the commencement of insolvency proceedings --

(1) Concealing any part of his estate;(2) Destroying, altering, mutilating or falsifying any

book, deed, document, or writing relating thereto;(3) Removing the same with the intent to prevent or

delay its recovery by the assignee;(4) Making any payment, gift, sale, assignment,

transfer or conveyance of property belonging to his estate with like intent;

(5) Spending any part thereof in gaming;(6) Concealing from his assignee or omitting from

the schedule any part of his property with intent to defraud;

(7) Failing to disclose to his assignee the fact that a person has proved a false or fictitious claim against his estate within 1 month after coming to the knowledge or belief thereof; or

(8) Attempting to account for any of his property by fictitious losses or expenses;

II. Within 3 months before commencement of insolvency proceedings—


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1. Obtaining on credit from any person any goods or chattels with intent to defraud, under the false pretense of carrying an ordinary course of business;

2. Making any pledge or disposition of, otherwise than by bona fide transactions in the ordinary course of his trade, with intent to defraud, any of his goods or chattels which have been obtained on credit and remained unpaid for;

3. Suffering loss in any kind of gaming when such loss is one of the causes determining the commencement of insolvency proceedings;

4. Selling at a loss or for less than the current price any goods brought on credit and still unpaid for; or

5. Advancing payment to the prejudice of his creditors.

III. During proceedings for suspension of payments—1. Concealing or destroying any property belonging to his

estate;2. Destroying, altering, mutilating or falsifying any book, deed,

document, or writing relating thereto;3. Making any payment, sale, assignment, transfer, or

conveyance of any property belonging to his estate;4. Spending any part thereof in gaming;5. Falsely swearing to the schedule and inventory with intent

to defraud his creditors; or6. Violating in any manner whatsoever the injunction issued

by the court under Section 3.

MISCELLANEOUS PROVISIONS

Effect of death of insolvent debtor pending insolvency proceedings

It depends—1. If the debtor shall die after the order of adjudication, the

proceedings shall be continued and concluded in like manner and with like validity, and effect as if he had lived.

2. If the death occurs before the order of adjudication, the proceedings shall be discontinued. The claims must be filed in the proper testate or intestate proceedings as provided by the Rules of Court on the settlement of a decedent’s estate.

Duty of court where property exempt from executionIt shall be the duty of the court having jurisdiction of

the proceedings, upon petition and after hearing held upon due notice, to exempt and set apart, for the use and benefit of the insolvent, such real and personal property as is by law exempt from execution.

When insolvency proceedings deemed to commenceThe filing of a petition by or against a debtor upon

which, or upon an amendment of which, an order of adjudication in insolvency may be made, shall be deemed to be the commencement of proceedings in insolvency under the Act.

When petition may be dismissedThe court, upon giving due notice, may dismiss the

petition and discontinue the proceedings at any time before the appointment of an assignee:1. If it be a voluntary petition, upon the application of the

debtor, if no creditor files written objections;2. If a creditor’s petition, upon the application of the petitioning

creditors; or3. By written consent of all creditors filed in court, in which

case, the proceedings may be dismissed at any time.After the appointment of an assignee, dismissal is not allowed without the consent of all parties interested in

or affected thereby.

When appeal may be taken to the Supreme CourtAn appeal may be taken to the Supreme Court in the

following cases:(1) From an order granting or refusing an adjudication in

insolvency and in the latter case, from the order fixing the amount of costs, expenses, damages, and attorney’s fees allowed the debtor;

(2) From an order allowing or rejecting a creditor’s claim when the amount in dispute exceeds P300.00;

(3) From an order allowing or denying a claim for property not belonging to the insolvent, presented under Section 48;

(4) From an order settling an account of an assignee;(5) From an order against or in favor of setting apart

homestead or other property claimed as exempt from execution; and

(6) From an order granting or refusing a discharge to the debtor.

CORPORATE REHABILITATIONInterim Rules of Procedure on Corporate Rehabilitation(A.M. No. 00-8-10-SC), effective December 15, 2000

What is the scope of the rules? (Rule 1, Sec. 2)The rules apply to petitions for rehabilitation filed by

corporations, partnerships and associations pursuant to PD 902-A, as amended.

How should the rules be construed? (Rule 2, Sec. 2)The rules are to be liberally construed in order to carry

out the objectives of Sections 5(d) and 6(c) and (d) of PD 902-A, and to assist the parties in obtaining a just, expeditious and inexpensive determination of cases.

What is the nature of the proceedings under the rules?(Rule 3)

The proceedings under the rules shall be in rem. Jurisdiction over all those affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in a newspaper of a general circulation in the Philippines.

The proceedings shall also be summary and non-adversarial in nature. For example-(a) motions to dismiss, for bills of particulars, for new trail or

for reconsideration, among others, are prohibited (Rule 3,Sec. 1);

(b) the court may decide matters on the basis of affidavits and other documentary evidence ( Rule 3, Sec. 1);

(c) pleadings and documents may be filed with the court or served on the other parties, when so authorized by the court, by facsimile transmission (fax) or electronic mail (email) (Rule 3, Sec. 3);

(d) incase of voluminous pleading or document, the court may, motu proprio or upon motion, waive the requirement of service, provided that a copy thereof, together with all its attachments, is duly filed with the court and made available for examination and reproduction by any party, and provided, further that a notice of such filing and availability is duly served on the parties (Rule 3, Sec. 5); and

(e) any orders issued by the court under the rules is immediately executory, and a petition for review or appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court (Rule 3, Sec. 5).

Who may petition for rehabilitation? (Rule 4, Sec. 1)(a) any debtor who foresees the impossibility of meeting its

debts when they respectively fall due; or


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(b) any creditor or creditors holding at least 25% of the debtor’s total liabilities.

Where should a petition for rehabilitation be filed? (Rule 3 Sec. 2)

Petitions for rehabilitation shall be filed in the appropriate Regional Trial Court having jurisdiction over the territory where the debtor’s principal office is located.

Are the rule of court applicable to the proceedings? (Rule 2, Sec. 2)

Yes, the rules of court, where appropriate, shall apply suppletorily to proceedings under the rules.

What are the contents of the petition filed by the debtor? (Rule 4, Sec. 2)(a) name and business of the debtor;(b) nature of debtor’s business;(c) history of the debtor;(d) cause of the debtor’s inability to pay its debts;(e) all the pending actions or proceedings known to the debtor

and the courts or tribunals where they are pending;(f) threats or demands to enforce claims or liens against the

debtor;(g) the manner by which the debtor may be rehabilitated and

how such rehabilitation may benefit the general body of creditors, employees and stockholders.

What should be attached to the petition filed by the debtor?(Rule 4, Sec.4)(a) audited financial statements as of the end of the debtor’s

last fiscal year;(b) interim financial statements as of the end of the month

prior to the filing of the petition;(c) schedule of debts and liabilities;(d) inventory of assets;(e) rehabilitation plan;(f) schedule of the debtor’s cash flow;(g) affidavit of general financial condition;(h) names of at least three nominees for the position of

Rehabilitation receiver, including their qualifications and contact information;

(i) certificate under oath attesting to the fact that (i) the filing has been duly authorized, and (ii) the directors and stockholders have irrevocably approved and/or consented to all actions or matters necessary and desirable to rehabilitate the debtor including, but not limited to, amendments to the articles of incorporation and by-laws (or articles of partnership); increase or decrease in the authorized capital stock; issuance of bonded indebtedness; alienation, transfer or encumbrance of assets of the debtor, and modification of shareholder’s rights.

What are the attachments tot eh petition filed by creditor(s)? (Rule 4 Sec. 4)(a) rehabilitation plan;(b) list of nominees to the position of rehabilitation receiver;

under what circumstance could the petition be dismissed? (Rule 4, Sec. 11)

the petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of initial hearing. The court may grant an extension beyond this period if it appears by convincing and compelling evidence that the debtor may be rehabilitated. In no instance, however, shall the period for approving or disapproving a rehabilitation plan exceed 18 months from the date of filing of the petition.

What are the contents of the order that the court shall issue if it finds the petition for rehabilitation to be sufficient in form and substance? (Rule 4, Sec. 6 and 11)

If the court finds the petition to be sufficient in form and substance, it shall, not later than 5 days from the filing of the petition issue an order which shall, among others:(a) appoint a rehabilitation receiver and fix his bond;(b) stay enforcement of all claims, whether for money or

otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor;

(c) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business;

(d) prohibit the debtor from making any payment of its outstanding liabilities as the date of filing of the petition;

(e) prohibit the debtor’s suppliers of goods or services from withholding supply of goods or services in the ordinary course or business for as long as the debtor makes payments from the services and goods supplied after the issuance of the stay order;

(f) fix the initial hearing on the petition not earlier than 45 days but not later than 60 days from the filing thereof;

(g) direct the petitioner to publish the order in a newspaper of general circulation in the Philippines once a week for two consecutive weeks;

(h) direct all creditors and interested parties (including the SEC) to file and serve on the debtor a verified comment or opposition to the petition, with supporting affidavits and documents, not later than 10 days before the date of the initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings.

For how long the stay holder to be effective?(Rule 4, Sec. 11)

The stay order shall be effective from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings.

Could the stay order be modified or terminated? Could conditions be set for its continuance? Could a claim be relieved from the coverage of the order?(Rule 4, Sec 12)

Yes, to all the questions. The court may, on motion or motu proprio, terminate, modify, or set conditions for the continuance of the stay order, or relieve a claim from the coverage thereof, upon showing that-(a) any of the allegations of the petition, or any of the contents of any attachment, or the verification thereof, has ceased to be true;(b) a creditor does not have adequate protection over property securing its claim; or(c) the debtor’s secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary fort eh rehabilitation of the debtor.

What is the concept of adequate protection over property?(Rule 4, Sec 12)

A creditor does not have adequate protection over property securing its claim if it can be shown that-(a) the debtor fails or refuses to honor a pre-existing agreement with the creditor to kept he property insured;(b) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or(c) the property has depreciated to the extent that the creditor is undersecured.

What are the contents of the rehabilitation plan? (Rule 4, Sec 5)(a) the desired business targets or goal, and the duration and

coverage of the rehabilitation;(b) the terms and conditions of such rehabilitation;(c) the material financial commitments to support the

rehabilitation plan;


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(d) the means for the execution of the rehabilitation plan, e.g. conversion of debts into equity, restructuring the debts, dacion en pago, sale of assets or controlling interest;

(e) liquidation analysis, i.e. an estimate of the proportion of the claims that the creditors and stockholders would receive if the debtor’s properties were liquidated;

(f) other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.

What is the power of the court to cram down a rehabilitation plan?(Rule 4, Sec. 23)

The power of the court to cram down a rehabilitation plan refers to its authority to approve a rehabilitation plan even over the opposition of the creditors holding a majority oft eh total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. In determining whether or not he opposition of the creditor is manifestly unreasonable, the court shall consider the following:(a) the plan would likely provide the objecting class of the

creditors with compensation greater than that which they would have received if the assets of the debtor were sold by the liquidator within a three-month period;

(b) that the shareholders or owners of the debtor lost at least their controlling interest as a result of the plan; and

(c) that the rehabilitation receiver has recommended approval of the plan.

What is the effect of the approval of the court of the rehabilitation plan on the debtor and creditors?(Rule 4, Sec. 24)

The approval of the rehabilitation plan by the court shall result, among other effects, in the said plan and its provisions being binding upon the debtor and all the persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled.

What is the primary task of the rehabilitation receiver? Does he take over the management and control of the debtor? (Rule 4, Sec 14)

The rehabilitation receiver implements the rehabilitation plan after its approval by the court. His primary task is to study the best way to rehabilitate the debtor and to ensure that the value of the debtor’s property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated.

He does not take over the management and control of the debtor but simple oversees and monitors closely the operations of the debtor during the pendency of the proceedings. This reflects the concept of debtor-in-place. For this purpose, he has been granted the powers, duties and functions of a receiver under PD 1402-A, as amended, and the Rules of Court.

RETAIL TRADE LIBERALIZATION ACT OF 2000

RA 8762

RETAIL TRADEAny act, occupation or calling of habitually selling

direct to the general public merchandise, commodities or goods for consumption.

PURPOSE:To promote consumer welfare in attracting, promoting

and welcoming productive investments that will bring down prices for the Filipino Consumer, create more jobs, promote tourism, assist small manufacturers, stimulate economic growth and enable Philippine goods and services to become globally competitive through the liberalization of the retail trade sector.

ELEMENTS:1. The seller must be habitually engaged in selling;2. The sale must be direct to the general public;3. The object of the sale is limited to merchandise,

commodities or goods for consumption.

EXCEPTION:1. Sales by a manufacture to the general public if his capital

does not exceed one hundred thousand pesos (P100, 000.00)

2. Sales by a farmer or agriculture selling the products of his farm.

3. Sales in restaurant operations by a hotel owner or inner- keeper irrespective of the amount of capital. Provided, that the restaurant is incidental to the hotel business.

4. Sales which are limited only to products manufactured, processed or assembled by a manufacture through single outlet, irrespective of capitalization.

5. Natural- born citizen of the Philippines who has lost his Philippines citizenship but who resides in the Philippines shall be granted the same rights as Filipino citizens.

FOREIGN EQUITY PARTICIPATIONForeign juridical entity must register with SEC and DTI

Foreign Individuals registered with DTI.

Category A – Enterprises with paid-up capital of the peso equivalent of less than US$2.5M shall be reserved exclusively for Filipino Citizens and Corporations wholly owned by Filipino Citizens.

Category B - Enterprises with paid-up capital of the peso equivalent of US$2.5M but less than US$7.5M may be wholly owned by foreigners except for the first 2 years after the effectivity of this Act wherein foreign participation shall be limited to not more than 60% of total equity.

Category C - Enterprises with paid-up capital of the peso equivalent of US$7.5M or more may be wholly owned by foreigners: provided, however, that in no case shall the investments for establishing a store in Categories B and C be less than the peso equivalent US830,000.

Category D - Enterprises specializing in high end or luxury products with paid-up capital of the peso equivalent of US$250,000 per store may be wholly owned by foreigners

REGISTRATION:

A. Foreign – owned corporation, association, partnership formed and organized under Philippines Laws

- Securities and exchange commission (SEC) and (DTI)

B. Foreign – owned single proprietorship – DTI


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Foreign investor shall be required to maintain in the Philippines the full amount of the prescribed minimum capital.

Exception: the foreign investor has notified the SEC and

DTI of its intention to repatriate its capital and cease operations in the Philippines.

The actual use in Philippines of the inwardly remitted minimum capital requirements – monitored by the SEC.

BANGKO SENTRAL NG PILIPINAS AND DTI - Will verify or confirm inward remittance

of the minimum required capital investment

- Failure retail stores shall secure certification from the said agencies.

Foreign investor acquiring shares of stock of Local Retailers whose net worth in excess of US $ 2,500,000.00 may purchase only up to a minimum of 60% of the equity within the first two (2) years from the affectivity percentage consistent with the allowable foreign participation.

QUALIFICATION OF FOREIGN RETAILERS :

1. A minimum of two hundred million US dollar (US$ 200,000.00) net worth in its parent corporation.

2. Five (5) retailing branches or franchises in operation anywhere around the world unless such retailers has at least one (1) store capitalized at a minimum of 25M

3. Five (5) year track record in retailing 4. Only rational from or judicial entities formed or incorporated

in countries which allow the entry of Filipino retailers, shall be allowed to engaged in retail trade in the Philippines

DTI – authorized to pre – qualify all foreign retailers and shall keep a record of qualified foreign retailers.

The Inter – Agency Committee on Tariff and Related Matters of the National Economic Development Authority (NEDA) Board shall formulate and regularly update a list of foreign retailers of high – end or luxury and render an annual report on the same to congress.

Prohibited Activities of Qualification Foreign Retailers:1. Not allowed to engage in certain retailing of activities

outsides their accredited stores through the use of mobile or rolling stores or carts

2. The use of sales representative3. Door to door selling4. Restaurants and sari- sari stores 5. Other retailing activities

Provided, such detailed list of prohibited activities shall hereafter be formulated by the DTI.

IMPLEMENTING AGENCIESThe DTI, in coordination with the SEC, the NEDA, and the BSP shall formulate and issue the implementing rules and regulations.

Penalty:

A. Any person found guilty:1. Imprisonment of not less than 6 years and one (1) day

but not more than eight (8) years

2. Five – of not less than 1M but more than 20M

B. In the case of associations, partnership, or corporations:

1. Imposed upon its partners, presidents, directors and manager and other officials responsible for the violation.

2. It not a Filipino citizen immediate deportation 3. If public officer to the penalty, dismissal and

permanent disqualification from public office.

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FINANCING COMPANY ACTRA 8556

FINANCING COMPANIES Corporations or partnerships, except those regulated

by the Central Bank of the Philippines, the Insurance commissioner and the Cooperative Administration Office. Which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises, either by discounting or factoring commercial pares or accounts receivable, or by buying and selling contracts, leases, chattel mortgages or other evidence of indebtedness, or by leasing of motor vehicles, heavy equipment and industrial machinery, business and office machines and equipment, appliances and other movable property.

POLICIES:

1. To regulates and promote activities of financing and leasing company to place their operations on a sound, competitive, stable and efficient basis

2. To recognize and strengthen their critical role in providing medium and long term credit for investment in capital goods and equipments for small and medium enterprises.

3. To curtail and prevent practices prejudicial to public interest / to have a better position and efficient service in a fair manner to the general public, industry, commerce, agriculture and thereby more fully contribute to sound development of the national economy

Financing Companies – are Corporations EXCEPT: 1. Banks2. Investment houses3. Saving and loam associations,4. Insurance companies 5. Cooperatives 6. Other financial institutions organized under other special

laws

SECURITY OF EXCHANGE COMMISSION (SEC) Empowered to enforce provisions implementing

regulation EXCEPT as the BSP have supervisory authority under RA No. 7653

THE MONETARY BOARD OF THE BSP Empowered to prescribe the maximum rate of rental

fees, services and other changes of financing company in consultation with financing companies and the SEC.


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REQUIREMENT FOR REGISTRATIONAside from requiring compliance with the provisions of

the corporation code.

1. All the requirements of existing laws to engage in the business should be complied with the applicant

2. The organization, integrity and responsibility of the organizers should assure the protection of the interest of the general public.

3. All the requirements of this Act have been complied with. Provided: financing companies registered prior to the approval of this Act shall fill an information sheet with the SEC with 60 days after notice.

RIGHTS AND POWER OF FINANCING COMPANY1. Engage in quasi – banking and money market operations

with prior approval of the BSP2. Engage in trust operations subjects to the General banking

Act upon prior approval of the BSP3. Issue bonds and other capital instruments subject to rules

and regulations of the BSP.4. Rediscount their paper with government financial

institutions5. Participate in special loan or credit programs 6. Provide foreign currency loans and leases to ente4rprises

who lain foreign currency by exports:

REGISTRY OF FINANCIAL LEASE The Registry of Deeds shall open and maintain a register of

financial leases, adjunct to the chattel mortgage registry

LEASE REGISTER SHALL CONTAIN:1. Name/ Description of property including

a. Brand name/ name of manufacturerb. Name of model; if anyc. Year of model; if availabled. Serial number; if any

2. Acquisition cost3. Name of owner / finance company lessee4. Name of lessee5. Date of lease agreement/ schedule6. Date of expiry of lease7. Date of entry in lease registry

PENALTY/IES1. A fine of not less than P 10,000 and not more than P

100,000.002. Imprisonment for not more than 6 mos. Or both at the

discretion of the court, shall be imposed upon:

a. Persons, associations, partnerships or corporation, managing officer that shall:

i. Engage in business without authority from the SEC

ii. Hold themselves out to be financing companies

iii. Violate provisions of this Actb. Any officer, employee, or agent of a financing

company who shall:1. Knowingly and willingly make any false

statement or misleading with respect to any material

2. Overvalues on aid in overvaluing any securities to influence action of the

company on any loan or discounting line

3. Any officer, employee or examiner of the SEC who shall commit, connive, aid or assist in the commission of acts enumerated in the preceding section

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THE TRUTH IN LENDING ACT

R.A. 3765

A LAW SUPPLEMENTING OR COMPLIMENTING THE ANTI-USURY LAW CIRCUMVENTED EVEN BY BANKS.

PURPOSE:To protect citizens from a lack of awareness of the

true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.

REQUIREMENT OF DISCLOSURE The creditor shall furnish the debtor prior to the consummation a loan or sale , a clear statement in writing containing the ff:1. Cash price or delivered price of the property or service2. Amounts to be credited as down payment and trade-in3. The difference the amounts of cash price and as down

payment4. The charges, individuality itemized5. Total amount to be financed6. The percentage that the finance charges bears to the total

amount to be finance as a simple annual rate.

Simple Annual Rate Is the uniform percentage, which represents the ratio, on annual basis, between the finance charges and the amount to be financed?

In case of Simple Payment upon maturity:R = 2 x finance charge x 12 x 100 % Amount to be financed maturity rate in months

In the case of normal installment type of credit of at least 1 yr. In deviation

R = 2x finance charge x no. of payments in a year Amount to be financed total number of payment + 1

In cases where the credit matures in less than a yr, the same formula will apply except that the number of payments in a year would refer to the number of installment periods.

In cases where credit terms provides for premium or penalty charges depending on for example, the timeliness of the debtors payment, the annual rate to be disclosed in writing shall be the rate for regular payments.

EFFECT OF NON DISCLOSURE:1. The creditor is liable to the debtor for P100 or amount

equal to twice the finance charge, whichever is greater provided liability shall not exceed P2,000 on any credit transaction. Action to recover penalty must be brought within 1 year from date of violation.


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2. The creditor can be held criminally liable.

3. The transaction is still valid.

SCOPE OF REQUIREMENTS: The regulations shall apply the ff. types of credit

transactions:

1. Any loans, mortgages, deeds of trust, advances and discounts

2. Any conditional sale3. Any rental-purchase contract4. Any contract for hire, bailment or leasing of property5. Any option, demand, loan, ledge 6. Any transaction or series of transactions having a similar

purpose

THE FF. CATEGORIES OF CREDIT TRANSACTION ARE OUTSIDE THE SCOPE OF THE SAID REGULATIONS:

1. Credit transactions which to not involve the payment of finance which to not involve the payment of finance charge by the debtor

2. Credit transactions in which the debtor specifies a definite and fixed set of terms such as bank deposits, insurance contracts, etc.

Phil. Government- No punishment or penalty shall apply

Any Person1. Fined by not less P 1,000 nor more than P 5, 0002. Imprisonment for not less than 6 mos. Nor more than 1

year3. Both

OFFICES AUTHORIZED TO ENFORCE RULES AND REGULATIONS

1. Department of Commercial and Savings Bank2. Department of rural bank and Savings and Loan

Association3. Office of Non-bank Financial Intermediaries

The respective heads of the 3 departments have the authority to examine all books, documents, papers or records of creditors

CreditorShall include but shall not be limited to banks and

banking institutions, insurance and bonding co., savings and loan associations, credit unions, financing companies, etc.


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