Deans Circle

2016
University of Santo Tomas
Digested by: DC 2016 Members
Editors:
Tricia Lacuesta
Lorenzo Gayya
Cristopher Reyes
Macky Siazon
Janine Arenas
Ninna Bonsol
Lloyd Javier

MERCANTILE
LAW
Supreme Court decisions penned by Associate Justice
Presbitero J. Velasco, Jr.

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016

Table of Contents

Negotiable Instruments ..................................................................................................................................... 1

Rights of a Holder ............................................................................................................................................ 1
Holder in Due Course .................................................................................................................................. 1
Consideration ................................................................................................................................................... 3
Accommodation Party ..................................................................................................................................... 3
Corporation Law................................................................................................................................................... 5
Grandfather Rule ............................................................................................................................................. 5
Doctrine of Piercing the Veil ........................................................................................................................... 6
Board of Directors and Trustees ..................................................................................................................... 7
Shares of Stock................................................................................................................................................. 8
Insolvency......................................................................................................................................................... 9

1|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
NEGOTIABLE INSTRUMENTS LAW
Rights of the Holder
Holder in Due Course
SPOUSES PEDRO AND FLORENCIA VIOLAGO v. BA FINANCE CORPORATION AND AVELINO VIOLAGO
G.R. No. 158262, July 21, 2008, Velasco, Jr., J.
A holder in due course holds the instrument free from any defect of title of prior parties and from
defenses available to prior parties among themselves, and may enforce payment of the instrument for the full
amount thereof
Facts:
To increase the sales quota of Violago Motor Sales Corporation (VMSC), its president Avelino Violago
(Avelino) offered to sell his car to his cousin Pedro Violago and his wife Florencia (Spouses). Avelino said that
the spouses need only pay the amount of p60,500 while the balance will be financed by BA Finance
Corporation (BA Finance). Under these terms, the spouses agreed to purchase a car. The spouses signed a
promissory note under which they bound to pay p209,601 in 36 monthly installments. In turn, the spouses a
chattel mortgage over the car in favor of VMSC as security for the amount of the promissory note. VMSC then
indorsed the promissory note to BA Finance. After VMSC received the amount of p209,601, it assigned its
rights and interests under the promissory note and chattel mortgage in favor of BA Finance. Meanwhile, the
spouses remitted to VMSC the amount of p60,500. The spouses were unaware that the car had already been
sold to Esmeraldo Violago (Esmeraldo), another cousin of Avelino. So, the spouses demanded for the delivery
of the car, but to no avail. Since there was no delivery, the spouses did not pay any amortization to BA
Finance. BA Finance then filed a complaint against the spouses for the delivery of the car, or if not possible,
the payment of the amount of the promissory note. As this happening, Esmeraldo conveyed the vehicle to Jose
Olvido who executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as security for a loan
covered by a promissory note in the amount of p260,664. This promissory note was later endorsed to BA
Finance, Cebu City branch.
In their defense, the spouses contended that BA Finance is not a holder in due course under the
Negotiable Instruments Law (NIL) since it knew through its Cebu Branch that the car was never delivered to
the spouses.
Issue:
Whether BA Finance is a holder in due course under the NIL
Ruling:
Yes. BA Finance meets all the requisites to be a holder in due course, namely: a) Promissory note is
complete and regular on its face; b) Promissory note was endorsed by VMSC to BA Finance; c) BA Finance
when it accepted the Note, acted in good faith and for value; d) BA Finance was never informed, before and at
the time the Promissory Note was endorsed to the it, that the vehicle sold to the spouses was not delivered to
them and that VMSC had already previously sold the vehicle to Esmeraldo. Although Jose Olvido mortgaged
the vehicle to Generoso Lopez, who assigned his rights to the BA Finance Corporation Cebu Branch, the same
occurred only on May 8, 1987, much later than August 4, 1983, when VMSC assigned its rights over
the Chattel Mortgage by the spouses to BA Finance. A holder in due course holds the instrument free from any
defect of title of prior parties and from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof. Since BA Finance is a holder in due course, petitioners

2|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
cannot raise the defense of non-delivery of the object and nullity of the sale against the corporation. The NIL
considers every negotiable instrument prima facie to have been issued for a valuable consideration.
Consideration
TING TING PUA v. SPOUSES BENITO LO BUN TIONG and CAROLINE SIOK CHING TENG
G.R. No. 198660 October 23, 2013, Velasco, Jr., J.
Section 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose signature appears thereon to have become a
party for value.
Facts:
Respondents owed petitioner a sum of money for which the former gave the latter several checks. All
of the checks, however, were dishonored and petitioner has not been paid the amount of the loan plus the
agreed interest. Eventually, respondents approached her to get the computation of their liability including the
2% compounded interest. After bargaining to lower their liability, respondents gave her another postdated
check but like the other checks, it was dishonored by the drawee bank. Respondents deny the existence of the
debt. They hypothesize that petitioner Pua is simply acting at the instance of her sister, Lilian, to file a false
charge against them using a check left to fund a gambling business previously operated by Lilian and
respondent Caroline. While not saying so in express terms, the appellate court considered respondents
denial as worthy of belief. Petitioner filed a case in the RTC which ruled in her favor. On appeal by the
respondent, the CA overturned the decision ruling that petitioner "failed to establish the alleged indebtedness
in writing." Consequently, so the CA held, respondents were under no obligation to prove their defense.
Issue:
Whether respondent is indebted to petitioner and thus should be liable
Ruling:
Yes. The 17 original checks, completed and delivered to petitioner, are sufficient by themselves to
prove the existence of the loan obligation of the respondents to petitioner. Note that respondent Caroline had
not denied the genuineness of these checks. Instead, respondents argue that they were given to various other
persons and petitioner had simply collected all these 17 checks from them in order to damage respondents
reputation. This account is not only incredible; it runs counter to human experience, as enshrined in Sec. 16 of
the NIL which provides that when an instrument is no longer in the possession of the person who signed it
and it is complete in its terms "a valid and intentional delivery by him is presumed until the contrary is
proved."
Accommodation Party
EUSEBIO GONZALES v. PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK, EDNA OCAMPO, and
ROBERTO NOCEDA
G.R. No. 180257 February 23, 2011, Velasco, Jr., J.
An accommodation party is a person who has signs the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to some other person. The
relation between an accommodation party and the accommodated party is one of principal and surety, the
accommodation party being the surety.

3|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
Facts:
Gonzales was a client of respondent bank (PCIB). He was granted a Credit-On-Hand Loan
Agreement (COHLA) with his accounts as collateral on the limit of the credit line. Gonzales and his spouse
obtained 3 loans from the bank which was covered by 3 promissory notes and a real estate mortgage over a
parcel of land executed by Gonzales and spouses Panlilio who likewise obtained one of the loans together
with Gonzales. Thereafter, the spouses Panlilio, who received the total amount of the loan, failed to pay the
interests due from their PCIB account. When Gonzales issued a check in favor of Unson, it was dishonored by
the bank due to the termination by the PCIB of the credit line under COHLA and likewise froze Gonzales
foreign account.
Gonzales was forced to pay Unson in cash. Gonzales demanded the bank to unfreeze his account since
it was not him who benefitted from the loans but the spouses Panlilio. PCIB refused, compelling Gonzales to
file a case for damages against the bank for dishonor of the check issued in favor of Unson.
The RTC ruled in favor of PCIB which decision was affirmed by the CA. The lower courts found
Gonzales solidarily liable with spouses Panlilio and the dishonor of the check as well as the freezing of the
foreign account justified. Hence, this petition.
Issue:
(1) Whether Gonzales is solidarily liable with the spouses Panlilio
(2) Whether PCIB properly dishonored Gonzales check
Ruling:
(1) Yes. Gonzales merely accommodated the spouses Panlilio in order to facilitate the fast release of
the loan. By signing as borrower and co-borrower on the promissory notes with the proceeds of the loans
going to the spouses Panlilio, Gonzales has extended an accommodation to said spouses. As an
accommodation party, Gonzales is solidarily liable with the spouses Panlilio for the loans.
The accommodation party, as surety, is deemed an original promisor and debtor from the beginning;
he is considered in law as the same party as the debtor in relation to whatever is adjudged touching the
obligation of the latter since their liabilities are interwoven as to be inseparable. Although a contract of
suretyship is in essence accessory or collateral to a valid principal obligation, the suretys liability to the
creditor is immediate, primary and absolute; he is directly and equally bound with the principal. As an
equivalent of a regular party to the undertaking, a surety becomes liable to the debt and duty of the principal
obligor even without possessing a direct or personal interest in the obligations nor does he receive any
benefit therefrom.
(2) No. There was no proper notice to Gonzales of the default of the PhP 1,800,000 loan. It must be
borne in mind that while solidarily liable with the spouses Panlilio, Gonzales is only an accommodation party
and as such only lent his name and credit to the spouses Panlilio. While not exonerating his solidary liability,
Gonzales has a right to be properly apprised of the delinquency of the loan precisely because he is a cosignatory of the promissory notes and of his solidary liability.
A written notice on the default and deficiency of the PhP1,800,000 loan covered by the three
promissory notes was required to apprise Gonzales, an accommodation party. PCIB is obliged to formally
inform and apprise Gonzales of the defaults and the outstanding obligations, more so when PCIB was
invoking the solidary liability of Gonzales.

4|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
There is no dispute on the right of PCIB to suspend, terminate, or revoke the COHLA under the "cross
default provisions" of both the promissory notes and the COHLA. However, these cross default provisions do
not confer absolute unilateral right to PCIB, as they are qualified by the other stipulations in the contracts or
specific circumstances, like in the instant case of an accommodation party.

CORPORATION LAW
Nationality of Corporations
Grandfather Rule
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and
MCARTHUR MINING, INC. v. REDMONT CONSOLIDATED MINES CORP.
G.R. No. 195580 April 21, 2014, Velasco Jr., J.
There are two acknowledged tests in determining the nationality of a corporation: the control test and
the grandfather rule. The grandfather rule applies only when the 60-40 Filipino-foreign equity ownership is in
doubt.
Facts:
Redmont, a domestic corporation, learned that the areas where it wanted to undertake exploration
and mining activities were already covered by Mineral Production Sharing Agreement (MPSA) applications of
Narra, Tesoro and McArthur. Redmont filed before the Panel of Arbitrators (POA) of the DENR three separate
petitions for the denial of petitioners applications for MPSA. It alleged that at least 60% of the capital stock
of McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian
corporation. It also argued that given that petitioners capital stocks were mostly owned by MBMI, they were
likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino
citizens. In a resolution issued by POA, petitioners were disqualified from gaining MPSAs for being
considered as foreign corporations. On appeal to the Mines Adjudication Board, the latter reversed and set
aside the resolution of the POA denying also the motion for reconsideration filed by Redmont. However, the
CA upheld the findings of the POA.
Issue:
Whether petitioners are foreign corporations
Ruling:
Yes. The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality, pertains to the control test or the liberal rule. On the other hand, the second part of
the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted
as Philippine nationality," pertains to the stricter, more stringent grandfather rule. The grandfather rule or
the second part applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where
the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the
59% less Filipino).

5|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60%
or more of their equity interests. Such conclusion is derived from grandfathering petitioners corporate
owners, namely: MMI, SMMI and PLMDC. Going further, MBMIs Summary of Significant Accounting Policies
statement regarding the "joint venture" agreements that it entered into with the "Olympic" and "Alpha"
groups involves SMMI, Tesoro, PLMDC and Narra. The ownership of the "layered" corporations boils down to
MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with,
practically exercising majority control over the corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between and among the corporations, petitioners are NOT
Filipino nationals and must be considered foreign since 60% or more of their capital stocks or equity
interests are owned by MBMI.
Doctrine of Piercing the Corporate Veil (Test in Determining Applicability)
KUKAN INTERNATIONAL CORPORATION v. HON. AMOR REYES, in her capacity as Presiding Judge of
the Regional Trial Court of Manila, Branch 21, and ROMEO M. MORALES, doing business under the
name and style RM Morales Trophies and Plaques
G.R. No. 182729 September 29, 2010, Velasco, Jr., J.
The principle of piercing the veil of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is basically applied only to
determine established liability; it is not available to confer on the court jurisdiction it has not acquired, in the
first place, over a party not impleaded in a case.
Facts:
Romeo M. Morales, doing business under the name RM Morales Trophies and Plaques, was
awarded a P5 million contract for the supply and installation of signages in a building constructed in Makati.
The contract price was later reduced to P3,388,502. Morales complied with his contractual obligations but he
was paid only the amount of P1,976,371.07 leaving a balance of P1,412,130.93. He filed a case against Kukan,
Inc., for a sum of money with the RTC of Manila. The RTC rendered a decision in favor of Morales and ordered
Kunkan, Inc. to pay for the balance, damages and cost of the suit which became final and executory. During
the execution, the sheriff levied the personal properties found at the office of Kukan, Inc. Claiming it owned
the properties levied, Kukan International Corporation (KIC) field an Affidavit of Third Party Claim. Morales
filed an Omnibus Motion praying to apply the principle of piercing the veil of corporate entity. He alleged that
Kukan, Inc. and Kukan International Inc. (KIC) are one and the same corporation. His motion was granted. KIC
filed a Motion for Reconsideration which was denied. Upon appellate review, the CA likewise denied KICs
petition and Motion for Reconsideration. Hence, this petition.
Issue:
Whether the principle of piercing the veil of corporate entity was correctly applied
Ruling:
No. A corporation not impleaded in a suit cannot be subject to the courts process of piercing the veil
of its corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation and its property would infringe on its right to due
process. The doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case
after the court has already acquired jurisdiction over the corporation. Before this doctrine can be applied, the
court must first have jurisdiction over the corporation.
The implication of the above comment is two-fold: (1) the court must first acquire jurisdiction over
the corporation or corporations involved before its or their separate personalities are disregarded; and (2)

6|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of
action duly commenced involving parties duly brought under the authority of the court by way of service of
summons or what passes as such service.
No full-blown trial involving KIC was had when the RTC disregarded the corporate veil of KIC. KIC
was not impleaded in the collection case filed by Morales against Kukan Inc. It was dragged to the case after it
reacted to the improper execution of its properties and veritably hauled to court, not through the usual
process of service of summons, but by mere motion of a party with whom it has no privity of contract and
after the decision in the main case had already become final and executory.
Board of Directors and Trustees (Responsibility for Crimes)
ARNEL U. TY, MARIE ANTONETTE TY, JASON ONG, WILLY DY, and ALVIN TY v. NBI SUPERVISING AGENT
MARVIN E. DE JEMIL, PETRON GASUL DEALERS ASSOCIATION, and TOTALGAZ DEALERS ASSOCIATION
G.R. No. 182147 December 15, 2010, Velasco, Jr. J.
Even if the corporate powers of a corporation are reposed in it under the first paragraph of Sec. 23 of
the Corporation Code, the board of directors is not directly charged with the running of the recurring business
affairs of the corporation and may not be held liable under BP 33.
Facts:
Arnel Ty, Marie Antonette Ty, Jason Ong, Willy Dy, Alvin Ty, are the Directors of Omni Gas
Corporation (Omni) while Arnel was the president of Omni, engaged in the refilling of LPG cylinders in Pasig
City. Omni was investigated by the NBI for allegedly violating pertinent provision of BP No. 33 which in
essence penalizes the unauthorized use of LPG cylinders owned by Petron, Shell and Totalgaz, as well as the
under filling of the LPG cylinders by Omni.
After finding probable cause, the NBI caused the filing of the complaint with the Office of the Chief
State Prosecutor against Omni and its directors for violation of BP No. 33. To this Omni and its directors
opposed. However, the Office of the Chief State Prosecutor, DOJ Secretary, as well as the CA found merit in the
filing of the information against Omni and its directors.
Omni and its directors come to the Supreme Court assailing the decision of the CA in directing the
issuance of the Information for the prosecution of Omni and its directors insofar as to the liability of its
directors. Arnel, et al. avers that they cannot be held personally liable since Omni is a separate and distinct
juridical entity. Hence this petition.
Issue:
Whether Arnel, Marie, Ong, Dy and Ty can be held criminally liable for violation of BP No. 33
Ruling:
Yes, as regards Arnel who is the President and Director of Omni. On the other hand, Marie, Ong, Dy,
and Ty cannot be held liable as directors for the criminal acts committed by Omni.
The law applicable in this case is Sec. 4 of BP 33 which provides:
Sec. 4. Penalties.
When the offender is a corporation, partnership, or other juridical person, the president, the general
manager, managing partner, or such other officer charged with the management of the business affairs

7|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
thereof, or employee responsible for the violation shall be criminally liable; in case the offender is an
alien, he shall be subject to deportation after serving the sentence.
Arnel, as President, who manages the business affairs of Omni, can be held liable for probable
violations by Omni of BP 33. The fact that Arnel is ostensibly the operations manager of Multi-Gas
Corporation, a family-owned business, does not deter him from managing Omni as well. Where the language
of the law is clear and unequivocal, it must be taken to mean exactly what it says. As to the other petitioners,
unless otherwise shown that they are situated under the catch-all such other officer charged with the
management of the business affairs, they may not be held liable under BP 33, as amended, for probable
violations. With the exception of Arnel, the charges against other petitioners must be dismissed.
Shares of Stock (Nature of Stock)
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY v. NATIONAL TELECOMMUNICATIONS
COMMISSION, JOSEPH A. SANTIAGO, in his capacity as NTC Commissioner, and EDGARDO CABARRIOS,
in his capacity as Chief, CCAD
G.R. No. 152685, December 4, 2007, Velasco, Jr., J.
When stock dividends are distributed, the amount declared ceases to belong to the corporation but is
distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are
diminished by the amount of the declared dividend while the stockholders equity is increased. Therefore, stock
dividends acquired by shareholders for the monetary value they forego are under the coverage of the SRF and
the basis for the latter is such monetary value as declared by the board of directors.
Facts:
Under Section 40 (e) of the Public Service Act (PSA) the National Telecommunications Commission
(NTC) is authorized to collect from public telecommunications companies Supervision and Regulation Fees
(SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital and stock subscribed or paid for of a stock
corporation, partnership or single proprietorship of the capital invested, or of the property and equipment,
whichever is higher. Consequently, the NTC sent SRF assessments to petitioner PLDT. The SRF assessments
were based on the market value of the outstanding capital stock, including stock dividends, of PLDT. PLDT
protested the assessments contending that the SRF should be based on the par value of its outstanding capital
stock. Its protest was denied by the NTC as well as its motion for reconsideration. The case reached the
Supreme Court, and the Court, in G.R. No. 127937, ruled that the SRF should be based neither on the par value
nor the market value of the outstanding capital stock but on the value of the stocks subscribed or paid
including the premiums paid therefor. Furthermore, the Court ruled that in the case of stock dividends, it is
the amount that the corporation transfers from its surplus profit account to its capital account, that is, the
amount the stock dividends represent is equivalent to the value paid for its original issuance. Thereafter, the
NTC, in compliance with the decision of the Supreme Court in G.R. No. 127937, reassessed PLDT but now
based its assessment on the value of the stocks subscribed or paid, including the premiums paid for the
stocks, if any. Hence, this petition.
PLDT argues that the reassessment issued by NTC is in violation of the decision of the Court in G.R.
No. 127937 because according to PLDT, the Court in that case excluded stock dividends from the SRF
coverage.
Issue:
Whether stock dividends are included in computing Supervision and Regulation Fees

8|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
Ruling:
Yes. Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued
at the amount of the declared dividend taken from the unrestricted retained earnings of a corporation. Thus,
the value of the declaration in the case of a stock dividend is the actual value of the original issuance of said
stocks. In G.R. No. 127937 we said that "in the case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account" or "it is the amount that the corporation
receives in consideration of the original issuance of the shares." It is "the distribution of current or
accumulated earnings to the shareholders of a corporation pro rata based on the number of shares owned."
Such distribution in whatever form is valued at the declared amount or monetary equivalent.
Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the
declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a
corporation ploughs back a portion of its entire unrestricted retained earnings either to its working capital or
for capital asset acquisition or investments. It is simplistic to say that the corporation did not receive any
actual payment for these. When the dividend is distributed, it ceases to be a property of the corporation as the
entire or portion of its unrestricted retained earnings is distributed pro rata to corporate shareholders.
In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the
monetary value of their dividend for capital stock, and the monetary value they forego is considered the
actual payment for the original issuance of the stocks given as dividends. Therefore, stock dividends acquired
by shareholders for the monetary value they forego are under the coverage of the SRF and the basis for the
latter is such monetary value as declared by the board of directors.

Insolvency
PHILIPPINE NATIONAL BANK and EQUITABLE PCI BANK v. HONORABLE COURT OF APPEALS
G.R. No. 165571, January 20, 2009, Velasco, Jr., J.
There are two kinds of insolvency contemplated in it: actual insolvency, i.e., the corporations assets are
not enough to cover its liabilities; and technical insolvency defined under Sec. 3-12, i.e., the corporation has
enough assets but it foresees its inability to pay its obligations for more than one year.
Facts:
Philippine National Bank (PNB) and Equitable PCI Bank are members of the consortium of creditor
banks constituted pursuant to the Mortgage Trust Indenture (MTI) by and between Rizal Commercial
Banking Corporation-Trust and Investments Division, acting as trustee for the consortium, and ASB
Development Corporation (ASBDC, formerly Tiffany Tower Realty Corporation). Under the MTI, petitioners
granted a loan of PhP1,081,000,000 to ASBDC secured by a mortgage of five parcels of land with
improvements. Private respondents filed with the SEC a verified petition for rehabilitation. Private
respondents stated that they possess sufficient properties to cover their obligations but foresee inability to
pay them within a period of one year. Finding the petition sufficient in form and substance, the SEC Hearing
Panel issued an order suspending for 60 days all actions for claims against the ASB Group and appointing
Atty. Monico V. Jacob as interim receiver of the ASB Group. Atty. Jacob was later replaced by Atty. Fortunato
Cruz. The consortium of creditor banks, which included petitioners, filed their opposition praying for the
dismissal of the petition. The ASB Group submitted a rehabilitation plan but the consortium of creditor banks
moved for its disapproval. However, the Hearing Panel denied the opposition of the banks and held that the
ASB Group complied with the requirements of Sec. 4-1 of the Rules of Procedure on Corporate Recovery,
which allows debtors who are technically insolvent to file a petition for rehabilitation. The creditors filed a

9|P a ge

Mercantile law (Cases penned by J. Velasco) Deans Circle

2016
Supplemental Petition for Review on Certiorari with the SEC en banc to question the foregoing order but it
was dismissed. The CA affirmed the ruling of the SEC en banc. Hence, the case.
Issues:
Whether ASB Group is considered technically insolvent
Ruling:
Yes. The ASB Group filed with the SEC a petition for rehabilitation with prayer for suspension of
actions and proceedings pending rehabilitation. Contrary to petitioners arguments, the mere fact that the
ASB Group averred that it has sufficient assets to cover its obligations does not make it "solvent" enough to
prevent it from filing a petition for rehabilitation. A corporation may have considerable assets but if it
foresees the impossibility of meeting its obligations for more than one year, it is considered as technically
insolvent. Thus, at the first instance, a corporation may file a petition for rehabilitationa remedy provided
under Sec. 4-1. When Sec. 4-1 mentioned technical insolvency under Sec. 3-12, it was referring to the
definition of technical insolvency in the said section; it was not requiring a previous filing of a petition for
suspension of payments which petitioners would have us believe.
Petitioners harp on the SECs failure to examine whether the ASB Group is technically insolvent. They
contend that the SEC should wait for a year after the filing of the petition for suspension of payments when
technical insolvency may or may not arise. This is erroneous. The period mentioned under Sec. 3-12, "longer
than one year from the filing of the petition," does not refer to a year-long waiting period when the SEC can
finally say that the ailing corporation is technically insolvent to qualify for rehabilitation. The period referred
to the corporations inability to pay its obligations; when such inability extends beyond one year, the
corporation is considered technically insolvent. Said inability may be established from the start by way of a
petition for rehabilitation, or it may be proved during the proceedings for suspension of payments, if the
latter was the first remedy chosen by the ailing corporation. If the corporation opts for a direct petition for
rehabilitation on the ground of technical insolvency, it should show in its petition and later prove during the
proceedings that it will not be able to meet its obligations for longer than one year from the filing of the
petition.

10 | P a g e