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the creditor
STUDY GUIDE OF THE 3. As to effected creditors of the
seller/mortgagor
Void contract

SPECIAL COMMERCIAL F. Interpretation of Statute

LAWS
The law is penal in nature and in derogation of the right to alienate
property without restriction. Thus, its provisions must be strictly
construed against the State and liberally in favor of the accused.
Prof. Tristan A. Catindig
1.2 Case

I. BULK SALES LAW Sale Of Foundry Shop Not Covered By BLS

Act 3952 (1932), as amended by RA 111 (1947)
PEOPLE V WONG SZU TUNG (1954)
1.1. Topics
The object of the sale a foundry shop is not covered by the
provisions of the Bulk sales law. What was sold was the shop
A. Purpose
itself, together with the goodwill and credits, equipment, tools and
To prevent the defrauding of creditors by the secret sale or
machinery thereof (including a Dodge truck), which are not the
disposal or mortgage in bulk of all or substantially all of merchants
stock of merchandise, goods, wares, provisions or materials in bulk
stock of goods in bulk
referred to in the law. A foundry shop manufactures iron works or
processes or casts metals. It does not sell merchandise.
B. Types of Sales in Bulk

Sec. 2
1) Any sale, transfer, mortgage or assignment of a stock of goods,
wares, merchandise, provisions, or materials otherwise than in
the ordinary course of trade and the regular prosecution of the
business of the vendor, mortgagor, transferor, or assignor; or
2) sale, transfer, mortgage or assignment of all, or substantially
all, of the business or trade theretofore conducted by the vendor,
mortgagor, transferor, or assignor, or
3) of all, or substantially all, of the fixtures and equipment used in
and about the business of the vendor, mortgagor, transferor, or
assignor, shall be deemed to be a sale and transfer in bulk, in
contemplation of this Act:
II. GENERAL BONDED WAREHOUSE ACT
Act 3893 (1931), as amended by RA 237 (1948)
2.1 Topics
A. Purpose
1) regulate the business of receiving commodities for storage;
2) to protect persons who may want to avail of the services;
3) to encourage the establishment of more warehouses.
B. Business of receiving commodity for storage

C. Duties of Person Selling in Bulk Sec. 2

1) the warehouseman is obligated to return the very same
Sec 3, 4, 5 and 9 commodity delivered to him or to pay its value;
1) Deliver a sworn written statement of the names and addresses 2) the commodity delivered is to be milled for the owner thereof;
of all creditors to whom the vendor or mortgagor may be indebted, 3) the commodity delivered is commingled with the commodity
indicating the amount of indebtedness due or owing, or to become belonging to other persons, and the warehouseman is obligate to
due or owing (Sec. 3); return commodity of the same kind or to pay its value.
2) To apply the proceeds of the sale or mortgage pro-rata to
creditors (Sec. 4); C. Requirement of License
3) At least 10 days before sale/transfer/execution of mortgage,
make detailed inventory and to preserve the same showing the
Sec. 3
quantity and, to the extent possible, the cost price to the vendor,
To achieve the purposes mentioned above, any person who wants
etc. of each article to be included in the sale, etc. (Sec. 5);
to engage in the business of receiving commodities for storage is
4) Give notice to every creditor at least 10 days before the sale or
required by the Act to first secure a license therefore from the DTI
transfer (Sec. 5);
5) Registration of the documents in Bureau of Trade Regulation
and Consumer Protection (Sec. 9). D. Duties of Bonded Warehouseman
1) insure the commodity received for storage against fire (Sec. 6);
2) receive for storage any commodity of the kind customarily
D. When Law not Applicable
stored by him in the warehouse, so far as his license and the
1) All creditors give written waiver (Sec. 2);
capacity of his warehouse will permit, without making any
2) Judicial sales (Sec. 8)
discrimination between the persons desiring to avail themselves of
warehouse facilities (Sec. 8);
E. Consequences of non-compliance with duties
3) keep a complete record of all commodities received by him, of
the receipts issued therefore, of the withdrawals, of the liquidation,
From San Beda reviewer
and of al the receipts returned to and cancelled by him (Sec. 9)
1. Between the parties Valid contract
2. Between persons other than Valid contract
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2.2 Cases provisions of the Bonded Warehouse Act. Under SEC 1 of the
Warehouse Receipts Act, one would gather the impression that the
Receipt of Palay for Milling issuance of a warehouse receipt in the form provided by it is
merely permissive and directory and not obligatory.
LIMJOCO V DIRECTOR OF COMMERCE (1965)

FACTS: Petitioner and husband are owners of a rice mill. The III. WAREHOUSE RECEIPTS ACT
issue was whether of not the General Bonded Warehouse Act is
applicable to her business. Petitioner argues that since her Act 2137 (1912)
business is the milling of palay, the delivery thereof to her is merely
incidental to such business and does not constitute storage within 3.1 Topics
the meaning of the statute.
A. Purpose
HELD: The General Bonded Warehouse Act is applicable. SEC 2 To prescribe the rights and duties of a warehouseman and to
is too clear to permit of any exercise in construction or semantics. regulate the relationship between a warehouseman and:
It does not stop at the bare use of the word "storage," but 1) the depositor of goods;
expressly provides that any contract or transaction wherein the 2) holder of a warehouse receipt for the goods;
palay delivered is to be milled for and on account of the owner 3) person lawfully entitled to the possession of the goods; or
shall be deemed included in the business of receiving rice for 4) other persons.
storage for the purpose of the Act. In other words, it is enough that
the palay is delivered, even if only to have it milled. The main B. Obligation to issue receipt
intention of the lawmaker is to give protection to the owner of the
commodity against possible abuses (and we might add Sec. 2
negligence) of the person to whom the physical control of his A warehouseman is required to issue a receipt for the commodity
properties is delivered. he receives for storage. No form is prescribed, but it should at least
contain the following information:
1. Location of the warehouse
GOZALES V GO TIONG (1958)
2. Date of Issue
3. Receipt number
FACTS: Prior to the issuance of the license to Go Tiong to operate
4. Language to indicate if the receipt were negotiable or non-
as bonded warehouseman, he had on several occasions received
negotiable
palay for deposit from plaintiff Gonzales, totaling 368 sacks, for
5. Rate of storage charges
which he issued .After he was licensed as bonded warehouseman,
6. Description of goods or packages containing them
Go Tiong again received various deliveries of palay from plaintiff,
7. Signature of the warehouseman or his agentLanguage
totaling 492 sacks, for which he issued the corresponding receipts,
indicating if the warehouseman is an owner solely or jointly with
all the grand total of 860 sacks, valued at P8,600 at the rate of P10
others, of the goods deposited and
per sack.
8. Statement of advances made by the warehouseman for which
he claims a lien
On or about March 15, 1953, plaintiff demanded from Go Tiong the
value of his deposits in the amount of P8,600, but he was told to
return after two days, which he did, but Go Tiong again told him to C. Degree of Care
come back. A few days later, the warehouse burned to the ground.
When plaintiff filed suit co claim his losses, Go Tiong argued that Sec. 3
the formers claim is governed by the Civil Code and not by the That degree of care which a reasonably careful man would
Bonded Warehouse Act (Act No. 3893, as amended by Republic exercise in regard to similar goods of his own.
Act No. 247), for the reason that, as already stated, what Go Tiong
issued to plaintiff were ordinary receipts, not the warehouse D. Kinds or Receipts (Sec. 4-7)
receipts contemplated by the Warehouse Receipts Law, and 1) Non-negotiable receipt
because the deposits of palay of plaintiff were gratuitous. a. one which states that the goods received by the warehouseman
will be delivered to the depositor or to any other specified person
HELD: Bonded Warehouse Act applicable. Act No. 3893 as b. the word non-negotiable should be placed plainly upon its face
amended is a special law regulating the business of receiving 2) Negotiable receipt
commodities for storage and defining the rights and obligations of a. One which states that the goods received by the warehouseman
a bonded warehouseman and those transacting business with him. will be delivered to the bearer or to the order of any person named
Consequently, any deposit made with him as a bonded in such receipt.
warehouseman must necessarily be governed by the provisions of b. Can not be converted to non-negotiable
Act No. 3893. The kind or nature of the receipts issued by him for
the deposits is not very material much less decisive. Though it is E. Obligation to Deliver Goods (Sec. 8-9)
desirable that receipts issued by a bonded warehouseman should 1) Deliver to whom upon demand
conform to the provisions of the Warehouse Receipts Law, said a. Holder of the receipt for the goods
provisions in our opinion are not mandatory and indispensable in b. Depositor
the sense that if they fell short of the requirements of the 2) The demand should be accompanied by:
Warehouse Receipts Act, then the commodities delivered for a. An offer to satisfy the warehousemans lien
storage become ordinary deposits and will not be governed by the b. An offer to surrender the receipt if it is negotiable
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c. A readiness and willingness to sign an acknowledgement, when 1) A warehouseman must keep the goods of a depositor separate
the goods are delivered, that they have been delivered if such is from the goods of other depositors, or from the goods of the same
requested by the warehouseman. depositor for which a separate receipt has been issued.
F. Liability for Misdelivery or Conversion (Sec. 10, 17-18) 2) Rationale: permit the inspection and redelivery of the goods
1) Where a warehouseman delivers the goods to one who is not in deposited at all times
fact lawfully entitled to the possession of them 3) EXCEPT:
2) He would also be liable for misdelivery even if he delivers to a a. The goods are fungible, AND
person holding a non-negotiable receipt or a negotiable receipt, as b. The commingling is authorized by agreement or by custom.
provided in SEC 9(b) or (c) of the Act, if prior to such delivery he
had either: J. Other Liabilities of Warehouseman
a. Been requested, by or on behalf of the person lawfully entitled to 1) Failure to mark a receipt intended to be non-negotiable as non-
a right of property or possession in the goods, not to make such negotiable (Sec. 7)
deliver; or a. Because the holder of the receipt may treat the same as
b. Had information that the delivery about to be made was to one negotiable.
not lawfully entitled to the possession of the goods. 2) Failure to take up and cancel a negotiable receipt when goods
are delivered (Sec. 11)
G. Rights of Holder of Receipt Covering Goods vs. Owner of a. The warehouseman shall be liable for failure to deliver the
Goods goods to any one who purchases for value in good faith
Not being a negotiable instrument (but a Document of Title), the i. WON such purchaser acquired title to the receipt before or after
holder of the receipt can only acquire such rights /title to the goods the delivery of the goods by the warehouseman.
as the person negotiating the receipt had. Thus, as between the ii. Shall be guilty of a crime punishable by fine or imprisonment.
owner of the good, and a holder of the receipt of the good which b. EXCEPT:
was apparently stolen, the former has a better right. i. Goods have been lawfully sold to satisfy a warehousemans lien.
ii. Goods have been lawfully sold or disposed of because of their
H. When negotiable receipt not required to be surrendered (Sec. 9, perishable or hazardous nature.
14 and 16) 3) Failure to take up and cancel a negotiable receipt or to place
1) Warehouseman is justified in delivering goods to the following upon it a statement of what goods have been delivered, when
persons (Sec. 9): goods are partly delivered (Sec. 12)
a. the person lawfully entitled to the possession of the goods, or a. Same as #2.
his agent; 4) For altered receipts
b. A person who is either himself entitled to delivery by the terms of Kind of Alteration Warehousemans Liability
a non-negotiable receipt issued for the goods, or who has written Immaterial Liable according to the terms of
authority from the person so entitled either indorsed upon the the receipts as originally issued
receipt or written upon another paper; or Authorized Liable according to the terms of
c. A person in possession of a negotiable receipt by the terms of the receipts as authorized
which the goods are deliverable to him or order, or to bearer, or Unauthorized but without Liable according to the terms of
which has been indorsed to him or in blank by the person to whom fraudulent intent the receipts as they were before
delivery was promised by the terms of the receipt or by his mediate the alteration
or immediate indorser. Unauthorized but with Liable according to the terms of
2) Where a negotiable receipt has been lost or destroyed (Sec. 14) fraudulent intent the receipts as originally issued,
a. A court of competent jurisdiction may order the delivery of the even against: i) a purchaser of
goods upon: the receipt for value with notice
i. satisfactory proof of such loss or destruction and of the alteration; 2) to the person
ii. upon the giving of a bond with sufficient sureties to be approved who made the alteration and to
by the court to protect the warehouseman from any liability or any person who took it with
expense notice of the alteration.
b. The court may also in its discretion order the payment of the
warehouseman's reasonable costs and counsel fees. However, in the latter case, such
c. The delivery of the goods under an order of the court as material and fraudulent alteration
provided in this SEC, shall not relieve the warehouseman from shall excuse the warehouseman
liability to a person to whom the negotiable receipt has been or from any other liability to the said
shall be negotiated for value without notice of the proceedings or of persons.
the delivery of the goods.
3) Warehouseman cannot set up title in himself (Sec. 16) 5) For non-existence or misdescription of goods (Sec. 20)
a. No title or right to the possession of the goods, on the part of the a. Liable for damages to holder of a receipt if at time of its issue,
warehouseman shall excuse the warehouseman from liability for goods not yet existed or by failure of the goods to match desciption
refusing to deliver the goods according to the terms of the receipt. b. EXCEPT:
b. EXECEPT: such title or right is derived directly or indirectly from i. Statement of the marks or labels upon them or upon the
a transfer made by the depositor at the time of or subsequent to packages containing them;
the deposit for storage, or from the warehouseman's lien, ii. Statement that the goods are of a certain kind at that the
packages containing the goods contain goods of a certain kinds or
I. Commingling of Goods (Sec. 22-23) by words of similar import
Eg: received box said to contain... and not box containing
6) For commingling goods (Sec. 24)
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a. Shall be liable severally to each depositor for the care and
redelivery of the depositors share of the mass of commingled
goods to the same extent and under the same circumstances as if
the goods had been kept separate
7) For issuing receipts for goods not received (Sec. 50)
a. Shall be guilty of a crime if he issues a receipt for goods that
have not actually been received by him or are not under his actual
control at the time of the issuance of the receipt
8) For issuing receipts containing false statements (Sec. 51)
a. Shall be guilty of a crime if he fraudulently issues a receipt for
goods knowing that it contains any false statement
9) For issuing duplicate receipts not so marked (Sec. 52)
a. Guilty of crime if issues a duplicate or additional negotiable
receipt for goods knowing that a former negotiable receipt for the
same goods or any part of them is outstanding and uncancelled,
without plainly placing upon the face of the receipt the word
duplicate
b. EXCEPT: in the case of a lost or destroyed receipt after
proceedings as provided for in Sec. 14
10) For issuing receipts for the warehousemans goods which do
not state that fact (Sec. 53)
a. Guilty of a crime if he issues a negotiable receipt for oods
deposited with or held by him of which he knows that he is the
owner, solely or jointly or in common with others, if he fails to state
such ownership in the receipt
11) For delivery of goods without obtaining negotiable receipt (sec.
54)
a. Guilty of a crime if he delivers gods our of his possession
knowing that a negotiable receipt is oustanding and cancelled
b. EXCEPT:
i. Goods have been lawfully sold to satisfy a warehousemans lien.
ii. Goods have been lawfully sold or disposed of because of their
perishable or hazardous nature.
iii. In the case of lost or destroyed receipt after proceedings (Sec.
14)
K. Warehousemans Lien (Sec. 27, 28, 29, and 31)
1) Definition
a. A warehouseman has a lien on the goods deposited with him or
on the proceeds thereof in the his hands for all lawful charges for
storage and preservation of the goods, money advanced by him in
relation to such goods such as the expenses of transportation or
labor, etc.
2) Against what property
a. All goods belonging to the person liable for the charges
b. All goods belonging to others deposited by the person liable for
the charges who has been entrusted with the possession of the
goods and could have validly pledged the same
3) Lose Lien
a. Warehouseman may lose lien by:
i. surrendering the possession of the goods because it is
possessory in nature
ii. refusing to deliver the goods when a demand is made with which
he is bound to comply
4) Effect of sale to satisfy lien
a. The warehouseman shall not, after the sale, be liable for failure
to deliver the goods to the depositor or owner of the goods or to
the holder of the receipt
3.2 Case
PNB V JUDGE BENITO C. SE, JR. (1996)
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FACTS: PNB filed for attachment of several quedans of sugar in
the possession of Noahs Ark Sugar refinery. The sugar was
security for loans of PNBs clients which they failed to pay. Noahs
Ark claimed that they were the owners of the sugar.
HELD: While the PNB is entitled to the stocks of sugar as the
endorsee of the quedans, delivery to it shall be effected only upon
payment of the storage fees. Imperative is the right of the
warehouseman to demand payment of his lien at this juncture,
because, in accordance with SEC 29 of the Warehouse Receipts
Law, the warehouseman loses his lien upon goods by surrendering
possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without
requiring payment of his lien, because a warehousemans lien is
possessory in nature.
SEC 14. Lost or destroyed receipts. Where a negotiable
receipt has been lost or destroyed, a court of competent
jurisdiction may order the delivery of the goods upon satisfactory
proof of such loss or destruction and upon the giving of a bond with
sufficient sureties to be approved by the court to protect the
warehouseman from any liability or expense, which he or any
person injured by such delivery may incur by reason of the original
receipt remaining outstanding. The court may also in its discretion
order the payment of the warehouseman's reasonable costs and
counsel fees.
The delivery of the goods under an order of the court as provided
in this SEC, shall not relieve the warehouseman from liability to a
person to whom the negotiable receipt has been or shall be
negotiated for value without notice of the proceedings or of the
delivery of the goods.
SEC 36. Effect of sale. After goods have been lawfully sold to
satisfy a warehouseman's lien, or have been lawfully sold or
disposed of because of their perishable or hazardous nature, the
warehouseman shall not thereafter be liable for failure to deliver
the goods to the depositor or owner of the goods or to a holder of
the receipt given for the goods when they were deposited, even if
such receipt be negotiable.
IV. CHATTEL MORTGAGE LAW
Act 1508 (1906), in relation to Articles 1484, 1485, 2140
and 2140 Civil Code
Act 1508
Sec. 3 Chattel mortgage defined. A chattel mortgage is a
conditional sale of personal property as security for the payment of
a debt, or the performance of some other obligation specified
therein, the condition being that the sale shall be void upon the
seller paying to the purchaser a sum of money or doing some other
act named. If the condition is performed according to its terms the
mortgage and sale immediately become void, and the mortgagee
is thereby divested of his title.
Sec 4 Validity. A chattel mortgage shall not be valid against any
person except the mortgagor, his executors or administrators,
unless the possession of the property is delivered to and retained
by the mortgagee or unless the mortgage is recorded in the office
of the register of deeds of the province in which the mortgagor
resides at the time of making the same, or, if he resides without the
Philippine Islands, in the province in which the property is situated:
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Provided, however, That if the property is situated in a different
province from that in which the mortgagor resides, the mortgage
shall be recorded in the office of the register of deeds of both the
province in which the mortgagor resides and that in which the
property is situated, and for the purposes of this Act the city of
Manila shall be deemed to be a province.
Sec 5 Form. A chattel mortgage shall be deemed to be
sufficient when made substantially in accordance with the following
form, and shall be signed by the person or persons executing the
same, in the presence of two witnesses, who shall sign the
mortgage as witnesses to the execution thereof, and each
mortgagor and mortgagee, or, in the absence of the mortgagee,
his agent or attorney, shall make and subscribe an affidavit in
substance as hereinafter set forth, which affidavit, signed by the
parties to the mortgage as above stated, and the certificate of the
oath signed by the authority administering the same, shall be
appended to such mortgage and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
"This mortgage made this ____ day of ______19____ by
_______________, a resident of the municipality of
______________, Province of ____________, Philippine Islands
mortgagor, to ____________, a resident of the municipality of
___________, Province of ______________, Philippine Islands,
mortgagee, witnesseth:
"That the said mortgagor hereby conveys and mortgages to the
said mortgagee all of the following-described personal property
situated in the municipality of ______________, Province of
____________ and now in the possession of said mortgagor, to
wit:
(Here insert specific description of the property mortgaged.)
"This mortgage is given as security for the payment to the said
______, mortgagee, of promissory notes for the sum of
____________ pesos, with (or without, as the case may be)
interest thereon at the rate of ___________ per centum per
annum, according to the terms of __________, certain promissory
notes, dated _________, and in the words and figures following
(here insert copy of the note or notes secured).
"(If the mortgage is given for the performance of some other
obligation aside from the payment of promissory notes, describe
correctly but concisely the obligation to be performed.)
"The conditions of this obligation are such that if the mortgagor, his
heirs, executors, or administrators shall well and truly perform the
full obligation (or obligations) above stated according to the terms
thereof, then this obligation shall be null and void.
"Executed at the municipality of _________, in the Province of
________, this _____ day of 19_____
____________________
(Signature of mortgagor.)
"In the presence of
"_________________
"_________________
(Two witnesses sign here.)
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FORM OF OATH.
"We severally swear that the foregoing mortgage is made for the
purpose of securing the obligation specified in the conditions
thereof, and for no other purpose, and that the same is a just and
valid obligation, and one not entered into for the purpose of fraud."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, personally
appeared ____________, the parties who signed the foregoing
affidavit and made oath to the truth thereof before me.
"_____________________________"
(Notary public, justice of the peace, 1 or other officer, as the case
may be.)
Sec 6 Corporations. When a corporation is a party to such
mortgage the affidavit required may be made and subscribed by a
director, trustee, cashier, treasurer, or manager thereof, or by a
person authorized on the part of such corporation to make or to
receive such mortgage. When a partnership is a party to the
mortgage the affidavit may be made and subscribed by one
member thereof.
Sec 7 Descriptions of property. The description of the
mortgaged property shall be such as to enable the parties to the
mortgage, or any other person, after reasonable inquiry and
investigation, to identify the same.
If the property mortgaged be large cattle," as defined by SEC one
of Act Numbered Eleven and forty-seven, 2 and the amendments
thereof, the description of said property in the mortgage shall
contain the brands, class, sex, age, knots of radiated hair
commonly known as remolinos, or cowlicks, and other marks of
ownership as described and set forth in the certificate of ownership
of said animal or animals, together with the number and place of
issue of such certificates of ownership.
If growing crops be mortgaged the mortgage may contain an
agreement stipulating that the mortgagor binds himself properly to
tend, care for and protect the crop while growing, and faithfully and
without delay to harvest the same, and that in default of the
performance of such duties the mortgage may enter upon the
premises, take all the necessary measures for the protection of
said crop, and retain possession thereof and sell the same, and
from the proceeds of such sale pay all expenses incurred in caring
for, harvesting, and selling the crop and the amount of the
indebtedness or obligation secured by the mortgage, and the
surplus thereof, if any shall be paid to the mortgagor or those
entitled to the same.
A chattel mortgage shall be deemed to cover only the property
described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository as
the property originally mortgaged, anything in the mortgage to the
contrary notwithstanding.
Sec. 8 Failure of mortgagee to discharge the mortgage. If the
mortgagee, assign, administrator, executor, or either of them, after
performance of the condition before or after the breach thereof, or
after tender of the performance of the condition, at or after the time
fixed for the performance, does not within ten days after being
requested thereto by any person entitled to redeem, discharge the
mortgage in the manner provided by law, the person entitled to
redeem may recover of the person whose duty it is to discharge
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the same twenty pesos for his neglect and all damages occasioned
thereby in an action in any court having jurisdiction of the subject-
matter thereof.
Sec. 13 When the condition of a chattel mortgage is broken, a
mortgagor or person holding a subsequent mortgage, or a
subsequent attaching creditor may redeem the same by paying or
delivering to the mortgagee the amount due on such mortgage and
the reasonable costs and expenses incurred by such breach of
condition before the sale thereof. An attaching creditor who so
redeems shall be subrogated to the rights of the mortgagee and
entitled to foreclose the mortgage in the same manner that the
mortgagee could foreclose it by the terms of this Act.
Sec. 14 Sale of property at public auction; Officer's return; Fees;
Disposition of proceeds. The mortgagee, his executor,
administrator, or assign, may, after thirty days from the time of
condition broken, cause the mortgaged property, or any part
thereof, to be sold at public auction by a public officer at a public
place in the municipality where the mortgagor resides, or where
the property is situated, provided at least ten days' notice of the
time, place, and purpose of such sale has been posted at two or
more public places in such municipality, and the mortgagee, his
executor, administrator, or assign, shall notify the mortgagor or
person holding under him and the persons holding subsequent
mortgages of the time and place of sale, either by notice in writing
directed to him or left at his abode, if within the municipality, or
sent by mail if he does not reside in such municipality, at least ten
days previous to the sale.
The officer making the sale shall, within thirty days thereafter,
make in writing a return of his doings and file the same in the office
of the register of deeds where the mortgage is recorded, and the
register of deeds shall record the same. The fees of the officer for
selling the property shall be the same as in the case of sale on
execution as provided in Act Numbered One hundred and ninety, 4
and the amendments thereto, and the fees of the register of deeds
for registering the officer's return shall be taxed as a part of the
costs of sale, which the officer shall pay to the register of deeds.
The return shall particularly describe the articles sold, and state the
amount received for each article, and shall operate as a discharge
of the lien thereon created by the mortgage. The proceeds of such
sale shall be applied to the payment, first, of the costs and
expenses of keeping and sale, and then to the payment of the
demand or obligation secured by such mortgage, and the residue
shall be paid to persons holding subsequent mortgages in their
order, and the balance, after paying the mortgages, shall be paid
to the mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as
required by SEC sixteen of Act Numbered Eleven hundred and
forty-seven 5 shall be issued by the treasurer of the municipality
where the sale was held to the purchaser thereof.
Art. 1484. 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:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or
more installments;
(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
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against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void. (1454-A-a)
Art. 1485. The preceding article shall be applied to contracts
purporting to be leases of personal property with option to buy,
when the lessor has deprived the lessee of the possession or
enjoyment of the thing. (1454-A-a)
Art. 2140. By a chattel mortgage, personal property is recorded in
the Chattel Mortgage Register as a security for the performance of
an obligation. If the movable, instead of being recorded, is
delivered to the creditor or a third person, the contract is a pledge
and not a chattel mortgage. (n)
Art. 2141. The provisions of this Code on pledge, insofar as they
are not in conflict with the Chattel Mortgage Law shall be
applicable to chattel mortgages. (n)
4.1 Topics
Essential Requisites
1) That it be constituted to secure the fulfilment of a principal
obligation;
2) That the mortgagor be the absolute owner of the thing
mortgaged;
3) That the persons constituting the mortgage have the free
disposal of their property or, in the absence thereof, that they be
legally authorized for the purpose; and
4) That the object be personal and movable property.
Formal Requirements
1) Signed by the person executing the same in the presence of two
witnesses;
2) Accompanied by an affidavit of good faith and a certificate of
oath;
3) Mortgaged property must be described in such a manner as to
enable anybody reading the document, after reasonable inquiry
and investigation, to be able to identify the same.
Registration: When And Where
When
No specific time is provided under the law. However, such
registration must be made:
1) before the mortgagor has complied with his principal obligation;
and
2) no right of an innocent third person is prejudiced.
Where
1) Where the mortgagor resides in the Philippines, in his place of
residence;
2) Where the mortgagor resides abroad, in the place where the
property is situated;
3) Where the mortgagor resides in a place different from where the
property is situated, in the place where the mortgagor resides and
where the property is situated, except where the amount of the
mortgage is more than Php50,000 in which case the registration of
the mortgage in the province where the property is situated shall
be sufficient registration.
For motor vehicles, the chattel mortgage must also be registered
with the Land Transportation Office to bind third persons.
After-Acquired, Future Or Substituted Property
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Future or after-acquired property can be subject of a chattel
mortgage if:
1) The properties mortgaged are:
a. Perishable; or
b. Subject to inevitable wear and tear; or
c. Intended to be sold or used but with the understanding that they
would be replaced with similar properties to be thereafter acquired
by the mortgagor
2) In the case of other properties, if the inclusion of such future or
after-acquired properties is expressly stipulated and a supplement
to the mortgage specifically listing and describing such property is
executed and registered in the chattel mortgage register.
Like or substituted property cannot be deemed covered by a
chattel mortgage, unless the property is described in a supplement
to the mortgage.
After-Incurred Obligation
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 that can be compelled upon, the security itself, however,
does not come into existence or arise until after a chattel amending
the old contract conformably with the form prescribed by the
Chattel Mortgage Law. Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation
can constitute an act of default on the part of the borrower of the
financing agreement whereon the promise is written but, of course,
the remedy of foreclosure can only cover the debts extant at the
time of constitution and during the life of the chattel mortgage
sought to be foreclosed.
One of the requisites of a chattel mortgage is the execution of an
affidavit of good faith, which requires an oath that the mortgage is
for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is
a just and valid obligation, and one not entered into for the purpose
of fraud.
This requirement makes it obvious that the debt referred to in the
law is a current, not an obligation that is yet merely contemplated.
(Acme Shoe v CA)
Right Of Junior Mortgagee
Art. 13
After a first mortgage is executed, there remains in the mortgagor
a mere right of redemption and only this right passes to the second
mortgagee by virtue of the second mortgage.
Foreclosure Procedure
Art 14; SC Circular No. 7-2002, Dated January 22, 2002
1) 30 days after the condition of a chattel mortgage is broken, the
mortgagee may cause the mortgaged property or any part thereof
to be sold at public auction by a public officer at a public place in
the municipality where the mortgagor resides or where the property
is situated.
2) The application for the foreclosure of the mortgage should be
filed with the Executive Judge through the Clerk of Court.
3) After receipt of the application, the Clerk of Court shall, among
other duties:
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a. Raffle the application among the Sheriffs; and
b. Cause the posting of the notice of sale.
4) Notice of the time, place and purpose of such sale must be
posted, at least 10 days before the date of sale, at 2 or more public
places in the municipality where the mortgagor resides or where
the property is situated.
5) The mortgagee shall notify the mortgagor and the persons
holding subsequent mortgages of the time and place of sale, at
least 10 days before the sale, either by notice in writing directed to
him or left at his abode, if within the municipality, or sent by mail if
he does not reside in such municipality.
6) The officer making the sale shall, within 30 days thereafter,
make in writing a return of his doings and file the same in the office
of the registry of deeds where the mortgage is recorded, and the
registry of deeds shall record the same. The return shall
particularly describe the articles sold and state the amount
received for each article.
Redemption
There is no right of redemption in Chattel Mortgage. There is only
an EQUITY of REDEMPTION.
1) Period within which equity of redemption may be exercised.
From the date the condition of the Chattel Mortgage is broken but
BEFORE the foreclosure sale of the collateral thereof.
> 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 AND is a period of grace for the mortgagor to
discharge the mortgage obligation.
2) Amount to be paid.
a. The amount due on such mortgage; and
b. The costs and expenses incurred by such breach of condition
before the sale thereof.
3) Persons entitled to redeem.
a. Mortgagor;
b. A person holding a subsequent mortgage;
c. A subsequent attaching creditor.
Claim For Deficiency; Rule And Exception
Rule: A chattel mortgagee may sue for a deficiency following
foreclosure.
Exception: in the case of personal property sold in installments
where the chattel mortgagor/vendees failure to pay covers 2 or
more installments.
4.2 Cases
Chattel Mortgage On House Not Binding On Third Persons Not
Parties To Contract
PIANSAY V DAVID (1964)
FACTS: Conrado David received a loan from Claudia Vda. De Uy
Kim. In order to secure the loan, he executed a chattel mortgage
on a house. The chattel mortgage was registered with the Register
of Deeds. The mortgaged house was sold to Claudia at a public
auction, which Claudia, in turn, sold to Salvador Piansay.
Meanwhile, Marcos Mangubat filed a complaint against Conrado
for collection of a loan. Marcos levied upon the house that was in
possession of Salvador, and at the same time, demanded payment
of rentals from Salvador.
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ISSUE: WON the chattel mortgage constituted in favour of Claudia
is valid
HELD: NO. Claudia had no right to foreclose the chattel mortgage
constituted in her favor, because it was in reality a mere contract of
an unsecured loan. Therefore, the contract of sale between
Claudia and Salvador was of no effect.
Regardless of the validity of a contract constituting a chattel
mortgage on a house, as between the parties to said contract, the
same cannot and does not bind third persons, who are not parties
to the aforementioned contract or their privies. As a consequence,
the sale of the house is null and void insofar is Marcos Mangubat
is concerned.
Chattel Mortgage Over House Built On Another Persons Land
TUMALAD V VIVENCIO (1971)
FACTS: Petitioners executed a chattel mortgage in favor of
respondents over their house, which is located in a land that is
being rented by petitioners from Madrigal & Company, Inc. The
mortgage was registered in the Registry of Deeds and was
executed to guarantee a loan.
Since the petitioners defaulted on their loan, the mortgage was
extrajudicially foreclosed and the house was sold to respondents at
a public auction.
Respondents commenced a civil case in the municipal court, which
decided against the petitioners and ordered the latter to vacate the
premises and to pay rent until the premises is completely vacated.
Petitioners argue that the chattel mortgage is void ab initio relying
on the following grounds:
1) That their signatures on the chattel mortgage was obtained
through fraud, deceit or trickery; and
2) That the subject matter of the chattel mortgage is a house, and
being an immovable, it can only be subject of a real estate
mortgage and not a chattel mortgage.
ISSUE: WON the chattel mortgage is valid
HELD: YES. That parties to a deed of chattel mortgage may agree
to consider a house as personal property for the purposes of said
contract is good only insofar as the contracting parties are
concerned. This is based partly upon the principle of estoppel.
In a case, the SC held that a mortgaged house built on a rented
land was held to be a personal property, not only because the
deed of mortgage considered it as such, but also because it did not
form part of the land, for it now settled that an object placed on
land by one who had only a temporary right to the same, does not
become immobilized by attachment. Hence, if a house belonging
to a person stands on a rented land belonging to another person, it
may be mortgaged as a personal property as so stipulated in the
document of mortgage. It should be noted, however that the
principle is predicated on statements by the owner declaring his
house to be a chattel, a conduct that may conceivably estop him
from subsequently claiming otherwise.
In the case at bar, the house on rented land is expressly
designated as chattel mortgage. Although there is no specific
statement referring to the subject house as personal property, yet
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by ceding, selling or transferring a property by way of chattel
mortgage, petitioners could only have meant to convey the house
as chattel, or at least, intended to treat the same as such, so that
they should not now be allowed to make an inconsistent stand by
claiming otherwise.
Moreover, the subject house stood on a rented lot to which
petitioners merely ad a temporary right as lessee, and although
this cannot in itself determine the status of the property, it does so
when combined with other factors to sustain the interpretation that
the parties, particularly the mortgagors, intended to treat the house
as personalty.
Finally, it is the petitioners themselves, as debtor-mortgagors, who
are attacking the validity of the chattel mortgage. The doctrine of
estoppels applied to petitioners.
Chattel Mortgage Over Machinery
MAKATI LEASING V WEAREVER TEXTILE MILLS (1983)
FACTS: In order to obtain financial accommodations from
petitioner Makati Leasing and Finance Corp., private respondent
Wearever Textile Mills, discounted and assigned several
receivables with the former. To secure the collection of the
receivables assigned, private respondent executed a Chattel
Mortgage over certain raw materials inventory as well as a
machinery.
Upon private respondents default, petitioner filed a complaint to
effect the seizure of the machinery. The lower court issued a writ of
seizure and in order to enforce the said writ, the sheriff went to the
premises and removed the main drive motor of the subject
machinery.
Private respondent questions the act of the sheriff arguing that the
drive motor the machinery in suit cannot be subject of a chattel
mortgage because it is real property pursuant to Art. 415 of the
New of Civil Code, the same being attached to the ground by
means of bolts and the only way to remove it would be to drill out
or destroy the concrete floor.
ISSUE: WON the machinery in suit is real or personal property
HELD: It is personal property. As the parties to the contract so
agree and no innocent third party will be prejudiced thereby, there
is absolutely no reason why a machinery, which is movable in its
nature and becomes immobilized only by destination or purpose,
may not be likewise treated as such. This is because one who has
so agreed is stopped from denying the existence of the chattel
mortgage.
The characterization of the subject machinery as chattel by the
private respondent is indicative of intention and impresses upon
the property the character as determined by the parties. In other
words, the parties to a contract may by agreement treat as
personal property that which by nature would be real property, as
long as no interest of third parties would be prejudiced thereby.
In addition, records show that no steps were taken to nullify the
mortgage and that the private respondent has benefited from the
contract. Equity dictates that one should not benefit at the expense
of another. Private respondent could not now therefore, be allowed
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to impugn the efficacy of the chattel mortgage after it has benefited
therefrom.
After-Acquired Property
TORRES V LIMJAP
FACTS: Jose B. Henson executed in favor of the respondents a
chattel mortgage on his drug store in order to secure a loan. In the
instrument of the chattel mortgage, it was stipulated that the
mortgagor was authorized to sell the goods covered thereby and to
replace them with other goods thereafter acquired.
Petitioner attacks the validity of the stipulation and insists that a
stipulation authorizing the disposal and substitution of the chattels
mortgaged does not operate to extend the mortgage to after-
acquired property, and that such stipulation is in contravention of
the express provision of the last paragraph of SEC 7 Act No. 1508.
ISSUE: WON the chattel mortgage on the after-acquired property
is valid
HELD: YES. In the interpretation and construction of a statute, the
intent of the law-maker should always be ascertained and given
effect. In enacting Act No. 1508, the primary aim of the law-making
body was undoubtedly to promote business and trade and to give
impetus to the economic development of the country. Bearing this
in mind, it could not have been the intention of the Philippine
Commission to apply the provision of SEC 7 to stores open to the
public for retail business, where the goods are constantly sold and
substituted with new stock.
A stipulation in the mortgage, extending its scope and effect to
after-acquired property, is valid and binding where the after-
acquired property is in renewal of, or in substitution for, goods on
hand when the mortgage was executed, or is purchased with the
proceeds of the sale of such goods.
In other words, a mortgage may be made to include future
acquisitions of goods to be added to the original stock mortgaged,
but the mortgage must expressly provide that such future
acquisitions shall be held as included in the mortgage.
In sum, the court held:
1) That the provision of the last paragraph of SEC 7 of Act No.
1508 is not applicable to drug stores, bazaars and all other stores
in the nature of a revolving and floating business; and
2) That the stipulation in the chattel mortgages in question,
extending their effect to after-acquired property, is valid and
binding.
After-Incurred Obligation
ACME SHOE V CA (1996)
FACTS: Petitioner Chua Pac, the president and general manager
of co-petitioner Acme Shoe, Rubber & Plastic Corporation,
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executed for and in behalf of the company, a chattel mortgage in
favor of private respondent Producers Bank. The mortgage stands
as a security for petitioners corporate loan of Php3M. However, a
provision in the chattel mortgage agreement states that the
mortgage shall also stand as a security for the payment of
subsequent promissory note or notes, either as a renewal or a new
loan.
In due time, the petitioner paid the Php3M loan. Subsequently,
however, it obtained additional financial accommodations from
respondent and failed to settle this additional loan.
Respondent then applied for an extrajudicial foreclosure of the
chattel mortgage. The petitioner seeks to enjoin the foreclosure.
ISSUE: WON a clause in a chattel mortgage, which extend its
coverage to obligations yet to be contracted or incurred, is valid
and effective
HELD: NO. 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 that can be compelled upon, the security itself, however,
does not come into existence or arise until after a chattel amending
the old contract conformably with the form prescribed by the
Chattel Mortgage Law. Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation
can constitute an act of default on the part of the borrower of the
financing agreement whereon the promise is written but, of course,
the remedy of foreclosure can only cover the debts extant at the
time of constitution and during the life of the chattel mortgage
sought to be foreclosed.
One of the requisites of a chattel mortgage is the execution of an
affidavit of good faith, which requires an oath that the mortgage is
for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is
a just and valid obligation, and one not entered into for the purpose
of fraud.
This requirement makes it obvious that the debt referred to in the
law is a current, not an obligation that is yet merely contemplated.
In the chattel mortgage here involved, the only obligation specified
in the chattel mortgage contract was the Php3M loan which
petitioner corporation later fully paid. By virtue of SEC 3 of the
Chattel Mortgage Law, the payment of the obligation automatically
rendered the chattel mortgage void or terminated.
With the full payment of the Php3M loan, there was no longer any
chattel mortgage that could cover the new loans that were
concluded thereafter.
Specific Performance
SOUTHERN MOTORS V MOSCOSO (1961)
FACTS: Private respondent Southern Motors, Inc. sold to
petitioner Angel Moscoso a Chevrolet truck. Upon making a down
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payment, Angel executed a promissory note and a chattel
mortgage on the truck.
Upon the failure of Angel to pay the installments, Southern Motors
filed a complaint against Angel, to recover the unpaid balance of
the purchase price. A writ of attachment was issued by the lower
court and the Chevrolet truck and a house and lot belonging to
Angel were attached by the sheriff. The sheriff then sold the truck
at a public auction in which Southern Motors was the only bidder.
The trial court then condemned Angel to pay Southern Motors the
deficiency.
Angel questions this order of the court and alleged that the
attachment caused to be levied on the truck and its immediate sale
at public auction, was tantamount to the foreclosure of the chattel
mortgage on said truck.
Southern Motors counters and claims that in filing the complaint, it
chose to exact fulfilment of the obligation (specific performance)
and is thus entitled to sue for the unpaid balance of the purchase
price.
ISSUE: WON the deficiency of the purchase price can still be
recovered
HELD: YES. The case is governed by Art. 1484 of the New Civil
Code. (SEE Art. 1484, NCC)
Southern Motors had chosen the first remedy. The complaint is an
ordinary civil action for recovery of the remaining unpaid balance
die on the promissory note. This is shown by the following
circumstances:
1) Southern Motors had not adopted the procedure or methods
outlined by Sec. 14 of the Chattel Mortgage Law but those
prescribed for ordinary civil actions
2) Southern Motors not only attached the truck but also the house
and lot of Angel.
Nothing unlawful or irregular in Southern Motors act of attaching
the mortgaged truck itself. As Southern Motors has chosen to
exact the fulfilment of Angels obligation, the former may enforce
execution of the judgment rendered in its favor on the personal and
real property of the latter not exempt from execution sufficient to
satisfy the judgment.
Attachment is merely an incident to an ordinary civil action.
Therefore, the mortgage creditor may recover judgment on the
mortgage debt and cause an execution on the mortgaged property
and may cause an attachment to be issued and levied on such
property, upon beginning his civil action.
No Recourse Against Additional Mortgaged Property
1) Residential house and lot
LEVY HERMANOS V PACIFIC COMMERCIAL (1941)
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FACTS: In addition to a chattel mortgage on the motor vehicles
that they bought, the Hermanos also executed a mortgage on a
residential lot and house of strong materials.
HELD: The SC held that the mortgage is void insofar as it included
the house and lot of vendees. It said that the vendor cannot be
allowed to insist on the sale of the house and lot of the vendees for
to do so would be equivalent to obtaining a writ of execution
against them concerning other properties which are separate and
distinct from those which are sold on installment. This would be
contrary to public policy limiting the vendors right to foreclose the
chattel mortgage only on the thing sold.
2) Parcel of land mortgaged by third party
CRUZ V FILIPINAS INVESTMENT (1968)
FACTS: Plaintiff Ruperto G. Cruz purchased on installments, from
Far East Motor Corporation, an Isuzu Diesel Bus, for which
Ruperto executed a promissory note and a chattel mortgage on the
same vehicle.
As an additional security, Felicidad Vda. De Reyes, in the form of a
SECOND MORTGAGE, a parcel of land and a building.
Far East Motor Corp. then assigned all its rights and interest in the
Deeds of Chattel Mortgage and in the Deed of Real Estate
Mortgage to Filipinas Investment and Finance Corp.
Ruperto defaulted. Filipinas took steps to foreclose the chattel
mortgage, however, the vehicle had been damaged in an accident.
This is the reason why after the foreclosure sale of the chattel, the
proceeds were not sufficient to discharge fully indebtedness of
Ruperto.
Therefore, Filipinas prepared to foreclose the real estate mortgage
on Mrs. Reyes land by paying the mortgage indebtedness of Mrs.
Reyes to DBP, requesting the sheriff to take possession, and by
posting notices of sale.
Although Filipinas admits that the remedies in Art. 1484 of the New
Civil Code is alternative, it claims that what is being withheld from
the vendor therein is only the right to recover against the
purchaser, and not a recourse to the additional security put up,
not by the purchaser himself, but by a third person.
ISSUE: WON Filipinas, which has already extrajudicially foreclosed
the chattel mortgage executed by the buyer, Ruperto, may also
extrajudicially foreclose the real estate mortgage constituted by
Mrs. Reyes on her own land, as additional security, for the
payment of the balance of Rupertos obligation, still remaining
unpaid
HELD: The remedies in Art. 1484 of the NCC are alternative, not
cumulative, that the exercise of one would bar the exercise of the
others. The reason for this doctrine was to remedy the abuses
committed in connection with the foreclosure of chattel mortgages.
To sustain Filipinas argument is to overlook the fact that if the
guarantor should be compelled to pay the balance of the purchase
price, the guarantor will in turn be entitled to recover what she has
paid from the debtor vendee; so ultimately, it will be the vendee
who will be made to bear the payment of the balance of the price,
despite the earlier foreclosure of the chattel mortgage given by
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him. Thus, the protection given by Art. 1484 would be indirectly
subverted, and public policy overturned.
Neither is there validity to Filipinas allegation that, since the law
speaks of action, the restriction should be confined only to the
bringing of judicial suits or proceedings in court.
The word action is without a definite or exclusive meaning.
Considering the purpose for which the prohibition contained in Art.
1484 was intended, the word action used therein may be
construed as referring to any judicial or extrajudicial proceeding by
virtue of which the vendor may lawfully be enabled to exact
recovery of the supposed unsatisfied balance of the purchase price
from the purchaser or his privy. Certainly, an extrajudicial
foreclosure of real estate mortgage is one such proceeding.
Right Of Recourse Against Seller/Assignor
FILIPINAS INVESTMENT V VITUG (1969)
FACTS: Julian R. Vitug executed and delivered to Supreme Sales
& Development Corp. a promissory note, accompanied by a chattel
mortgage to secure his purchase of a 4-door consul sedan. Then,
Supreme Sales negotiated and assigned all its rights, title, and
interests to the same to Filipinas Investment & Finance Corp., the
assignment indicating that it is with recourse against Supreme
Sales.
Julian defaulted in the payment of 4 installments due which
resulted in the entire obligation becoming due and demandable.
Pursuant to this, Filipinas obtained a writ of replevin but this
became unnecessary as Julian voluntarily surrendered possession
of the car. The car was sold at a public auction but since the
proceeds still left a deficiency, Filipinas wants to hold Supreme
Sales liable.
Supreme Sales claims that the with-recourse provision in the
assignment is violative of the Recto Law, which declares null and
void any agreement in contravention thereof.
ISSUE: WON the Recto Law is applicable in the case at bar,
making the with recourse provision contained in the agreement null
and void
HELD: NO. The remedy presently being sought is not against the
buyer of the car but against the seller. Under the Recto Law, what
Congress seeks to protect are only the buyers on installment who
more often than not have been victimized by sellers who, before
the enactment of this law, succeeded in unjustly enriching
themselves at the expense of the buyers because aside from
recovering the goods sold, upon default of the buyer in the
payment of two instalments, still retained for themselves all
amounts already paid, in addition, furthermore, to other damages,
such as attorneys fees, and costs. Surely, Congress could not
have intended to impair and much less do away with the right of
the seller to make commercial use of his credit against the buyer,
provided said buyer is not burdened beyond what this law allows.
In the case at bar, the assignment made by Supreme Sales to
Filipinas of the promissory note and mortgage of Julian Vitug
precisely stipulated that Filipinas had a right of recourse against
the seller should the buyer fail to pay. Since the Recto Law is not
applicable in this case, the said provision remains valid.
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The case is remanded for further proceedings.
Right Of Unpaid Seller Under Art. 1484, Civil Code, Alternative Not
Cumulative
SPOUSES ROSARIO V PCI LEASING AND FINANCE, INC.
(2005)
FACTS: Spouses Rosario purchased an Isuzu Elf pick up utility
vehicle from Car Merchants, Inc. covered by a Purchase
Agreement. In order to pay the balance of the purchase price, the
spouses contracted a loan with PCI Leasing wherein they
executed a promissory note in favor of PCI Leasing agreeing that
in case of default, the sum and interest shall immediately become
due and demandable. In addition, the spouses also executed a
chattel mortgage in favor of PCI Leasing over the vehicle.
Since the spouses failed to pay their loan, PCI Leasing instituted a
complaint that led to the issuance of the trial court of a writ of
replevin, in pursuance of which the sheriff seized the vehicle and
turned over the possession to PCI Leasing.
The spouses Car Merchants had assigned to PCI Leasing its right
to collect the balance; hence, it was subrogated to the rights of Car
Merchants subject to the limitations of Art. 1484NCC. Furthermore,
they allege that since PCI Leasing opted to foreclose the chattel
mortgage, it was estopped from collecting the unpaid balance of
the purchase price.
ISSUE: WON PCI Leasing is the assignee of Car Merchant; WON
Art. 1484 of the NCC is applicable
HELD: NO. There is no factual basis on the claim that Car
Merchants had assigned its rights to collect the balance of the
purchase price to PCI Leasing. In fact, what the evidence shows is
that the spouses secured a loan from PCI Leasing and even
executed a promissory note and a chattel mortgage in its favor.
Under Art. 1625 of the NCC, an assignment of credit, right or
action must appear in a public document to bind third persons.
Since there is no evidence that Car Merchants executed such a
deed, Art 1484 of the NCC does not apply in this case.
Even assuming that Art 1484 is applicable, PCI Leasing is not
proscribed from suing the spouses for their unpaid balance. The
fact is that PCI Leasing did not foreclose the chattel mortgage, but
opted to sue the spouses for the balance of their account under
the promissory note, with a plea for writ of replevin. By securing a
writ of replevin, the respondent did not thereby foreclose the
chattel mortgage. If there has been no foreclosure of the chattel
mortgage or a foreclosure sale, then the prohibition against further
collection of the balance price does not apply.
A creditor is not obliged to foreclose a chattel mortgage even if
there is one; precisely the law says that any of the remedies may
be exercised by the seller.
Only Actual Sale Of Mortgaged Chattel Bars Foreclosing Creditor
From Recovering Unpaid Balance
MAGNA FINANCIAL SERVICES GROUP, INC. V COLARINA
(2005)
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FACTS: Elias Colarina bought on installment a Suzuki Multicab
from Magna Financial Services Group, Inc. whereby he executed
an integrated promissory note and deed of chattel mortgage over
the vehicle.
Since Colarina failed to pay the monthly amortization, Magna filed
a Complaint for Foreclosure of Chattel Mortgage with Replevin.
From the complaint, it will show that Magna availed itself of the first
and third remedies under Art. 1484 of the NCC.
A writ of replevin was issued by the court and upon service of the
same to Colarina, he voluntarily surrendered possession of the
vehicle to the sheriff, who in turn, surrendered possession to
Magna.
Colarina points to the inconsistency of the remedies or reliefs
sought by the Magna in its Complaint where it prayed for the
custody of the chattel mortgage and at the same time asked for the
payment of the unpaid balance on the motor vehicle.
ISSUE: WON Magna opted to foreclose the chattel mortgage
HELD: YES. A contract of chattel mortgage is in the nature of a
conditional sale of personal property given as a security for the
payment of a debt, or the performance of some other obligation
specified therein, the condition being that the sale shall be void
upon the seller paying to the purchaser a sum of money or doing
some other act named. If the condition is performed according to
its terms, the mortgage and sale immediately become void, and
the mortgagee is thereby divested of his title. On the other hand, in
case of non payment, foreclosure is one of the remedies available
to a mortgagee by which he subjects the mortgaged property to the
satisfaction of the obligation to secure that for which the mortgage
was given.
Foreclosure may be effected either judicially or extrajudicially, that
is, by ordinary action or by foreclosure under power of sale
contained in the mortgage. Extrajudicial foreclosure, as chosen by
the petitioner, is attained by causing the mortgaged property to be
seized by the sheriff, as agent of the mortgagee, and have it sold
at public auction in the manner prescribed by SEC 14 of Act No.
1508, or the Chattel Mortgage Law. This rule governs extrajudicial
foreclosure of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of
foreclosure under Article 1484(3) of the Civil Code, it is bound by
its election and thus may not be allowed to change what it has
opted for.
ISSUE: WON there has been an actual foreclosure of the subject
vehicle
HELD: NO. Where the mortgagee elects a remedy of foreclosure,
the law requires the actual foreclosure of the mortgaged chattel.
It is actual sale of the mortgaged chattel in accordance with Sec.
14 of Act No. 1508 that would bar the creditor (who chooses to
foreclose) from recovering any unpaid balance. And it is deemed
that there has been foreclosure of the mortgage when all the
proceedings of the foreclosure, including the sale of the property at
public auction, have been accomplished.
Be that as it may, although no actual foreclosure as contemplated
under the law has taken place in this case, since the vehicle is
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already in the possession of Magna and it has persistently and
consistently elected the remedy of foreclosure, the Court of
Appeals, thus, ruled correctly in directing the foreclosure of the
said vehicle without more.
PD 1417
Further Amending SEC 198 Of The Revised Administrative
Code As Amended By Republic Act Nos. 116 And 2711, By
Increasing The Fees Collectible In Connection With
Registration Of Chattel Mortgages
WHEREAS, there has been an unprecedented increase in the cost
of equipment, materials and supplies used by the Land
Registration Commission;
WHEREAS, it is in consonance with sound fiscal policy that the
registration fees collectible by the Land Registration Commission
through its registries of deeds be adjusted accordingly.
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of
the Philippines, by virtue of the powers in me vested by the
Constitution, do hereby decree and order:
SEC 1. SEC 198 of the Revised Administrative Code, as amended
by Republic Act Nos. 116 and 2711, is hereby further amended to
read as follows:
"Sec. 198. Registration of chattel mortgages and fees collectible in
connection therewith. Every register of deeds shall keep a primary
entry book and a registration book for chattel mortgages; shall
certify on each mortgage filed for record, as well as on its
duplicate, the date, hour, and minute when the same was by him
received; and shall record in such books any chattel mortgage,
assignment, or discharge thereof, and any other instruments
relating to a recorded mortgage, and all such instruments shall be
presented to him in duplicate the original to be filed and the
duplicate to be returned to the person concerned.
The recording of a mortgage shall be effected by making an entry,
which shall be given a correlative number, setting forth the names
of the mortgages and the mortgagor, the sum or obligation
guaranteed, date of the instrument, name of the notary before
whom it was sworn to or acknowledged, and a note that the
property mortgaged, as well as the terms and conditions of the
mortgage, is mentioned in detail in the instrument filed, giving the
proper file number thereof. The recording of other instruments
relating to a recorded mortgage shall be effected by way of
annotations on the space provided therefor in the registration book,
after the same shall have been entered in the primary entry book.
The register of deeds shall also certify the officer's return of sale
upon any mortgage, making reference upon the record of such
officer's return to the volume and page of the record of the
mortgage, and a reference of such return on the record of the
mortgage itself, and give a certified copy thereof, when requested,
upon payment of the lawful fees for such copy; and certify upon
each mortgage officer's return of sale or discharge of mortgage,
and upon any other instrument relating to such a recorded
mortgage, both on the original and on the duplicate, the date, hour
and minute when the same is received for record and record such
certificate with the return itself and keep an alphabetical index or
mortgagors and mortgagees, which record and index shall be open
to public inspection.
Duly certified copies of such records and of filed instruments shall
be receivable as evidence in any court.
The register of deeds shall collect the following fees for services
rendered by him under this SEC:
(a) For entry or presentation of any document in the primary entry
book, five pesos. Supporting papers presented together with the
principal document need not be charged any entry or presentation
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
fee unless the party in interest desires that they be likewise
entered.
(b) For filing and recording each chattel mortgage, including the
necessary certificates and affidavits, the fees established in the
following schedule shall be collected:
"1. When the amount of the mortgage does not exceed six
thousand pesos, seven pesos for the first five hundred pesos or
fractional part thereof, and three pesos for each additional five
hundred pesos or fractional part thereof.
"2. When the amount of the mortgage is more than six thousand
pesos but does not exceed thirty thousand pesos, forty-eight pesos
for the initial amount not exceeding eight thousand pesos, and
eight pesos for each additional two thousand pesos or fractional
part thereof.
"3. When the amount of the mortgage is more than thirty thousand
pesos but does not exceed one hundred thousand pesos, one
hundred fifty pesos for initial amount not exceeding thirty-five
thousand pesos, and fourteen pesos for each additional five
thousand pesos or fractional part thereof.
"4. When the amount of the mortgage is more than one hundred
thousand pesos but does not exceed five hundred thousand
pesos, three hundred fifty-two pesos for the initial amount not
exceeding one hundred ten thousand pesos and twenty pesos for
each additional ten thousand pesos or fractional part thereof.
"5. When the amount of the mortgage is more than five hundred
thousand pesos, one thousand one hundred sixty-two pesos for
the initial amount not exceeding five hundred twenty thousand
pesos, and thirty pesos for each additional twenty thousand pesos
or fractional part thereof: Provided, however, That registration of
the mortgage in the province where the property is situated shall
be sufficient registration: And provided, further, That if the
mortgage is to be registered in more than one city or province, the
register of deeds of the city or province where the instrument is
first presented for registration shall collect the full amount of the
fees due in accordance with the schedule prescribed above, and
the register of deeds of the other city or province where the same
instrument is also to be registered shall collect only a sum
equivalent to twenty per centum of the amount of fees due and
paid in the first city or province, but in no case shall the fees
payable in any registry be less than the minimum fixed in this
schedule.
"(c) For recording each instrument of sale, conveyance, or transfer
of the property which is subject of a recorded mortgage, or of the
assignment of mortgage credit, the fees established in the
preceding schedule shall be collected on the basis of ten per
centum of the amount of the mortgage or unpaid balance thereof:
Provided, That the latter is stated in the instrument.
"(d) For recording each notice of attachment, including the
necessary index and annotations, eight pesos.
"(e) For recording each release of mortgage, including the
necessary index and reference, the fees established in the
schedule under paragraph (b) above shall be collected on the
basis of five per centum of the amount of the mortgage.
"(f) For recording each release of attachment, including the proper
annotations, five pesos.
"(g) For recording each sheriff's return of sale, including the index
and reference, seven pesos.
"(h) For recording a power of attorney, appointment of judicial
guardian, administrator, or trustee, or any other instrument in
which a person is given power to act in behalf of another in
connection with a mortgage, ten pesos.
"(i) For recording each instrument or order relating to a recorded
mortgage, including the necessary index and reference, for which
no specific fee is provided above five pesos.
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"(j) For certified copies of records, such fees as are allowed by law
for copies kept by the register of deeds.
"(k) For issuing a certificate relative to, or showing the existence or
non-existence of, and entry in the registration book, or a document
on file, for each such certificate containing not more than two
hundred words, five pesos; if it exceeds that number, an additional
fee of one peso shall collected for every one hundred words or
fractional part thereof, in excess of the first two hundred words.
"(l) For services rendered in attending to requests for references
to, or researches on any document on file in the registry, there
shall be collected a fee of two pesos per document."
SEC 2. This decree shall take effect upon its approval.
Done in the City of Manila, this 9th day of June, in the year of Our
Lord, nineteen hundred and seventy-eight
Circular No. 7-2002
To: All Executive Judges, Clerks Of Court, Sheriffs In The
Office Of The Clerk Of Court And Branch Sheriffs In The
Regional Trial Courts
Subject: Guidelines For The Enforcement Of Supreme Court
Resolution Of December 14, 1999 In Administrative Matter No.
99-10-05-0 (Re: Procedure In Extra-Judicial Foreclosure Of
Mortgage), As Amended By The Resolutions Dated January
30, 2001 And August 7, 2001
These guidelines are issued pursuant to the Supreme Court En
Banc Resolution of December 14, 1999 in Administrative Matter
No. 99-10-05-0, as amended by the resolutions of January 30,
2001 and August 7, 2001, directing the Office of the Court
Administrator to prepare the guidelines for the enforcement of A.M.
No. 99-10-05-0 on the extra-judicial foreclosure of mortgages.
Sec. 1. All applications for extra-judicial foreclosure of mortgage,
whether under the direction of the Sheriff or a notary public
pursuant to Art. No. 3135, as amended, and Act 1508, as
amended, shall be filed with the Executive Judge, through the
Clerk of Court, who is also the Ex-Officio Sheriff (A.M. No. 99-10-
05-0, as amended, March 1, 2001).
Sec. 2. Upon receipt of the application, the Clerk of Court shall:
a. Examine the same to ensure that the special power of
attorney authorizing the extra-judicial foreclosure of the real
property is either inserted into or attached to the deed of real
estate mortgage (Act No. 3135, Sec. 1, as amended);
b. Give a file number to the application and endorse the
date and time of its filing and thereafter docket the same, keeping,
in this connection, separate docket books for extra-judicial
foreclosure sales conducted by the Sheriff and those conducted by
notaries public;
c. For the conduct of extra-judicial foreclosure of real estate
or chattel mortgage under the direction of the sheriff, collect the
appropriate filing fees and issues the corresponding official receipt
pursuant to the following schedule:
If the amount of the indebtedness or the mortgagees claim is:
(1) Less than P50,000.00 ..
P275.00
(2) P50,000.00 or more but less than
P100,000.00 ..... 400.00
(3) P100,000.00 or more but less than
P150,000.00 . 500.00
(4) P150,000.00 or more but less than
P200,000.00 . 650.00
(5) P200,000.00 or more but less than
P250,000.00 .. 1,000.00
(6) P250,000.00 or more but less than
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
P300,000.00 .. 1,250.00 municipality or city (Sec. 3, Act No. 3135, as amended). The
(7) P300,000.00 or more but less than
P400,000.00 .. 1,500.00 time each week during which said notice shall be distributed
(8) P400,000 or more but less than
P500,000.00 .. 1,750.00 periodicals as defined in Sec. 1 of P.D. No. 1079, which
(9) P500,000.00 or more but not more than
P100,000,000.00 ... 2,000.00 16, 2001). Unless otherwise stipulated by the parties to the
(10) For each P1,000.00 in excess of
P1,000,000.00.. 10.00 served a copy of the notice of the extra-judicial foreclosure.
(SEC 7 (c), Rule 141, Rules of Court, as amended by A.M. No. 00-
2-01-SC, February 1, 2000).
Cooperatives, thrift banks, and rural banks are not exempt from the
payment of filing fees and other fees under these guidelines (A.M.
No. 98-9-280-RTC, September 29, 1998; A.M. No. 99-3-93-RTC,
April 20, 1999; and A.M. No. 92-9-408-0).
d. In case the application is for the extra-judicial foreclosure of
mortgages of real estates and/or chattels in different locations
covering one indebtedness, issue, apart from the official receipt for
the fees, a certificate of payment indicating the amount of
indebtedness, the filing fees collected, the mortgages sought to be
foreclosed, the real estates and/or chattels mortgaged and their
respective locations, for purposes of having the application
docketed with the Clerks of Court in the places where the other
properties are located and of allowing the extra-judicial foreclosure
to proceed thereat. (A.M. No. 99-10-05-0, par. 2(e)).
Sec. 3. The application for extra-judicial foreclosure shall be raffled
under the supervision of the Executive Judge, with the assistance
of the Clerk of Court and Ex-Oficio Sheriff, among all Sheriffs
including those assigned to the Office of the Clerk of court and
Sheriffs assigned in the branches of the court. A Sheriff to whom
the case has been raffled shall be excluded in the succeeding
raffles and shall participate again only after all other Sheriffs shall
have been assigned a case by raffle (Administrative Circular No. 3-
98, Feb. 5, 1998).
Sec. 4. The Sheriff to whom the application for extra-judicial
foreclosure of mortgage was raffled shall do the following:
a. Prepare a Notice of Extra-judicial Sale using the
following form:
NOTICE OF EXTRA-JUDICIAL SALE
Upon extra-judicial petition for sale under Act 3135 / 1508 filed
__________________ against (name and address of Mortgator/s)
to satisfy the mortgage indebtedness which as of ___________
amounts to P _________________, excluding penalties, charges,
attorneys fees and expenses of foreclosure, the undersigned or
his duly authorized deputy will sell at public auction on (date of
sale) _______________ at 10:00 A.M. or soon thereafter at the
main entrance of the ___________ (place of sale) to the highest
bidder, for cash or managers check and in Philippine Currency,
the following property with all its improvements, to wit:
(Description of Property)
All sealed bids must be submitted to the undersigned on the
above stated time and date.
In the event the public auction should not take place on the
said date, it shall be held on _______________,
_______________ without further notice.
________________ (date)
SHERIFF
b. (1) In case of foreclosure of real estate mortgage, cause
the publication of the notice of sale by posting it for not less than
twenty (20) days in at least three (3) public places in the
municipality or city where the property is situated and if such
property is worth more than four hundred (P400.00) pesos, by
having such notice published once a week for at least three (3)
consecutive weeks in a newspaper of general circulation in the
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Executive Judge shall designate a regular working day and definite
personally by him for publication to qualified newspapers or
distribution shall be effected by raffle (A.M. No. 01-1-07-SC, Oct.
mortgage contract, the debtor-mortgagor need not be personally
For real estate mortgages covering loans not exceeding
P100,000.00, exclusive of interests due and unpaid, granted by
rural banks (RA No. 7353, Sec. 6) or thrift banks (RA No. 7906,
Sec. 18),publication in a newspaper shall be dispensed with, it
being sufficient that the notices of foreclosure are posted for a
period of sixty (60) days immediately preceding the public auction
in the most conspicuous areas of the municipal building, the
municipal public market, the rural bank, the barangay hall, and the
barangay public market, if any, where the land mortgaged is
situated. Proof of publication shall be accomplished by an affidavit
of the Sheriff and shall be attached to the records of the case.
(2) In case of foreclosure of a chattel mortgage, post the notice for
at least ten (10) days in two (2) or more public places in the
municipality where the mortgagor resides or where the property is
situated (Sec. 14, Act No. 1508, as amended).
Sec. 5. Conduct of the extra-judicial foreclosure sale
a. The bidding shall be made through sealed bids which
must be submitted to the Sheriff who shall conduct the sale
between the hours of 9 a.m. and 4 p.m. of the date of the auction
(Act 3135, Sec. 4). The property mortgaged shall be awarded to
the party submitting the highest bid and, in case of a tie, an open
bidding shall be conducted between the highest bidders. Payments
of the winning bid shall be made either in cash or in managers
check, in Philippine currency, within five (5) days from notice.
b. The sale must be made in the province in which the real
property is situated and, in case the place within the said province
in which the sale is to be made is the subject of stipulation, such
sale shall be made in said place in the municipal building of the
municipality in which the property or part thereof is situated (Act
No. 3135, as amended, Sec. 2);
in case of a chattel mortgage, the sale shall be made at a place in
the municipality where the mortgagor resides or where the property
is situated (Sec. 14, Act No. 1508, as amended).
Sec. 6. After the sale, the Clerk of Courts shall collect the
appropriate fees pursuant to Sec. 9(1), Rule 141, as amended by
A.M No. 00-2-01-SC, computed on the basis of the amount
actually collected by him, which fee shall not exceed P100,000.00
(A.M. No. 99-10-05-0, March 1, 2001, 2[d]). The amount paid shall
not be subject to a refund even if the foreclosed property is
subsequently redeemed.
Sec. 7. In case of foreclosure under Act No. 1508, the Sheriff shall,
within thirty (30) days from the sale, prepare a return and file the
same in the Office of the Registry of Deeds where the mortgage is
recorded.
Sec. 8. The Sheriff or the notary public who conducted the sale
shall report the name/s of the bidder/s to the Clerk of Court.
Sec. 9. Upon presentation of the appropriate receipts, the Clerk of
Court shall issue and sign the Certificate of Sale, subject to the
approval of the Executive Judge or, in the latters absence, the
Vice-Executive Judge. Prior to the issuance of the certificate of
Sale, the Clerk of court shall, in extra-judicial foreclosure
conducted under the direction of the sheriff, collect P300.00 as
provided in SEC 20(d), Rule 141, as amended, and in extra-judicial
foreclosure sales conducted under the direction of a notary public,
collect the appropriate fees pursuant to Rule 141, 20(e), which
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
amount shall not exceed P100,000.00 (Minute Res., A.M. No. 99-
10-05-0, August 7, 2001).
Sec. 10. After the Certificate of Sale has been issued, the Clerk of
Court shall keep the complete records for a period of one (1) year
from the date of registration of the certificate of sale with the
Register of Deeds, after which the records shall be archived.
Notwithstanding the foregoing, juridical persons whose property is
sold pursuant to an extra-judicial foreclosure shall have the right to
redeem the property until, but not later than, the registration of the
certificate of foreclosure sale which in no case shall be more than
three (3) months after foreclosure, whichever is earlier (R.A. 8791,
SEC 47). In case the property is redeemed, the Clerk of Court shall
assess the redemptioners fee as provided in SEC 7 (k), Rule 141,
as amended. If the property is not redeemed, the Clerk of Court
shall, as a requisite for the issuance of the final Deed of Sale,
assess the highest bidder the amount of P300.00 as provided in
SEC 20(d), Rule 141, as amended.
Sec. 11. These guidelines shall take effect on April 22, 2002.
Issued this 22nd day of January 2002
V. AN ACT TO REGULATE THE SALE OF
PROPERTY UNDER SPECIAL POWERS INSERTED
IN OR ANNEXED TO REAL ESTATE MORTGAGES
Act 3135, as amended by Act 4118 (1933), Sec 6 RA
7353 (1992), Sec 18 RA 7906 (1995), Sec 47 RA 8791
(2000)
5.1 Topics
Remedies Available To Mortgagee Upon Default Of Mortgagor
Foreclosure: A remedy available to the mortgagee where he
subjects the mortgaged property to the satisfaction of the
obligation to secure for which the mortgage was given. It may be
effected either judicially or extrajudicially.
Authority To Foreclose Mortgage Extrajudicially
1) The only instance when an extrajudicial foreclosure may be
effected is when a sale is made and a Special Power of Attorney to
extrajudicially foreclose is inserted or attached to the Real Estate
Mortgage (REM).
2) If the REM is silent as to the manner of foreclosing the
mortgage, extrajudicial foreclosure may not be effected and Rule
68 of the Rules of Court in Judicial Foreclosure shall apply.
Procedure
Where to file
> Application should be filed with the Executive Judge through the
Clerk of Court.
> After the receipt of the application, the Clerk of Court shall:
1) examine the same to ensure that the special power if attorney
authorizing the EJF of the real property is either inserted or
attached to the deed of real estate mortgage.
2) raffle the application among the Sheriffs
3) cause the posting and /or publication of the notice of sale
Where to sell
> place where each of the mortgaged property is located.
> The sale must be made in the province where the property to be
sold is situated. Sale outside the province is illegal.
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> If the mortgage deed specified a place in the municipality in the
province where the sale would be made, such sale shall be made
in such place.
> If the place of sale in the municipality was not stipulated, the sale
shall be made in the municipal building of the municipality in
which the property or part thereof is situated.
Posting Requirement/ Publication Requirement
1) Notices of the sale shall be posted for not less than 20 days
in at least 3 public places in the city or municipality where the
property is situated.
2) If property is worth more than P400, the notice of the sale shall
also be published once a week for 3 consecutive weeks in a
newspaper of general circulation in the city or municipality.
EXCEPTION to the requirement of newspaper publication
even if mortgaged property is worth more than P400:
> For real estate mortgages covering loans not exceeding
P100,000, exclusive of interests due and unpaid, granted by rural
or thrift banks, publication in a newspaper shall be dispensed with,
it being sufficient that notices of foreclosure are posted for a period
of 60 days immediately preceding the public auction in the most
conspicuous areas at the premises of the rural bank or thrift bank,
as the case may be, and at the municipal building, municipal public
market, barangay hall and barangay public market if any or where
the land is situated
Unless otherwise stipulated by the parties in the mortgage
contract, the debtor/mortgagor need not be personally served a
copy of the notice of extrajudicial foreclosure.
No personal notice is required because an EJF is an action in rem
requiring only the publication of the notice of the sale to bind the
parties interested.
> Failure to post notice is NOT per se a ground for invalidating the
sale provided that the notice thereof is duly published in a
newspaper of general circulation. (DBP vs. Aguirre)
> The object of the notice is to inform the public of the sale and to
secure as many bidders as possible to get the best price for the
property.
> Republication: Republication in the manner prescribed by Act
3135 is necessary for the validity of a postponed EJF sale. The
absence of such republication invalidates the foreclosure sale.
Conduct Of Sale
1) Sale shall be by public auction or bidding made through sealed
bids.
2) Sealed bids are submitted to the Sheriff who shall conduct the
sale between the hours of 9:00 A.M. to 4:00 P.M. of the date of
auction. The sale shall be under the direction of:
a. Sheriff of the province; or
b. Municipality or auxiliary municipal judge of the municipality in
which the sale is to be made; or
c. Notary public of the said municipality
3) Property shall be awarded to the highest bidder, in case of a tie,
an open bidding shall be conducted between the highest bidders.
> No auction sale shall be held unless there are at least 2
participating bidders (in case of second sale, if there is only one
bidder, the sale shall proceed)
4) Payment of the winning bid shall be made either in cash or in
managers check, in Philippine currency, within 5 days from notice.
> Inadequacy of the price would not nullify the sale unless the
price is so inadequate as to shock the conscience of the court. In
fact the property may be sold for less than its FMV because the
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
lesser the price the easier for the owner to effect redemption.
(Valmonte v CA)
> If the proceeds of the sale are in excess of the amount claimed
by the mortgagee, the excess shall be turned over to the
mortgagor.
5) Creditor may be barred from participating in the bidding, only IF
so provided in the mortgage deed. Hence, creditor or any of his
representatives may participate absent any express provision in
the mortgage or trust deed barring him.
6) Certificate of sale issued by the clerk of court must be approved
by the executive judge or in his absence the vice-executive judge.
No certificate of sale shall be issued in favor of the highest bidder
until all fees have been paid
Possession By Purchaser Of Foreclosed Property
1. During redemption period
The purchaser of the foreclosed property is not automatically
entitled to possession of the property. He must file an ex parte
application and give a bond in the amount equivalent to the use of
the property for a period of 12 months. Upon approval of the bond,
the court shall order the issuance of a writ of possession.
However, a writ of possession may be issued in an EJF of REM,
only if the debtor is in possession and no third party has
intervened. (PNB vs. CA)
2. After the lapse of the redemption period
Consolidation of the title becomes a matter of right on the part of
the purchaser and the issuance of a certificate of sale in his favor
becomes ministerial upon the Registry of Deeds.
To obtain possession, the purchaser may either ask for a writ of
possession or bring an independent action such as a suit of
ejectment.
Remedy Of Debtor If Foreclosure Not Proper
The debtor, in the proceedings in which possession was
requested, but not later than 30 days after the purchaser was given
possession, petition the sale to be set aside and the writ of
possession cancelled, specifying the damages suffered by him,
because the mortgage was not violated or the sale was not made
in accordance with the provisions hereof, and the court shall take
cognizance of this petition in accordance with the summary
procedure provided in SEC 112 of Act 496 (now SEC 108 of PD
1529) and if it finds the complaint of the debtor justified, it shall
dispose in his favor of all or part of the bond which the parties may
have furnished by the person who obtained the possession. Either
of the parties may appeal from the order of the judge in
accordance with SEC 14 of Act 496 (no SEC 33 of PD 1529), but
the order of possession shall continue in effect during the
pendency of the appeal.
Redemption
Who may redeem
1) the debtor
2) his successor in interest
3) any judicial creditor having an interest
4) any person having a lien on the property subsequent to the
mortgage under which the property is sold.
Period of Redemption
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One year from the date of the registration of certificate of sale.
SEC 6. In all cases in which an extrajudicial sale is made under the
special power hereinbefore referred to, the debtor, his successors
in interest or any judicial creditor or judgment creditor of said
debtor, or any person having a lien on the property subsequent to
the mortgage or deed of trust under which the property is sold,
may redeem the same at any time within the term of one year
from and after the date of the sale, and such redemption shall be
governed by the provisions of SECs 29-31 and 35 of the Rules of
Court.
Date of Sale: has been construed by the Supreme Court as the
date of registration of the sheriffs certificate of foreclosure sale in
the office of the Register of Deeds concerned.
Where the mortgaged property sold to third party by the mortgagor:
transfers only the right to redeem the property and the right to
possess, use and enjoy the same during the redemption period.
Where the mortgaged property sold to third party by mortgagee
after the foreclosure: the mortgagor may still redeem it at the
amount of the principal obligation plus interest until the time of
actual redemption and not of the purchase price.
Requisites For A Valid Exercise Of Right Of Redemption
1) The redemption must have been made within a year from the
date of registration of the certificate of sale.
2) Payment of the Purchase price of the property plus 1% interest
per month with the taxes, if paid by the purchaser and the amount
of his prior lien, if any computed from the date of the registration of
the sale up to the time of redemption.
3) Written notice of the redemption must be served on the officer
who made the sale and a duplicate filed with the proper Registry of
Deeds.
4) The redemption must be made before the sale is confirmed by
the court.
5. Tender of payment must be made for the full amount of the
purchase price, otherwise, to allow payment by instalments would
be to allow the extension of the redemption period.
2 Kinds of Redemption
1) Equity of Redemption right of the mortgagor in case of a
judicial foreclosure to recover the mortgaged property after his
default in the performance the conditions of the mortgage but
before the confirmation of sale of the mortgaged property.
2) Right of redemption right of the mortgagor in case of
extrajudicial foreclosure to redeem the mortgaged property
within a certain period after it was sold for the satisfaction of the
mortgage debt. This is the kind of redemption contemplated in ACT
3135.
Equity of Redemption Right of Redemption
Governing Law
Governed by Rule 68 of the Governed by SEC 29-31 of
Rules of Court Rule 39
Applicability
1. in judicial foreclosure of 1. in judicial foreclosure of REM
REM; involving a bank as a
2. in EJF of REM involving a mortgagee, whether the
bank as a mortgagee and a mortgagor is a natural or a
juridical person as a mortgagor juridical person;
2. in EJF of REM
However, no right of
redemption exists if it involves a
bank as a mortgagee and a
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To whom conferred
Conferred by law only to the
mortgagor but acquired by
second mortgagee since his
right is subordinate to the first
mortgagee.
Period
Can be exercised within a
period of not less than 90 days
nor more than 120 days from
entry of judgment or even after
foreclosure of sale but prior to
confirmation.
When Exercised
Can be exercised after entry of
judgment but before foreclosure
sale and after foreclosure sale
but prior to confirmation of sale.
Redemption Price
Redemption price depends on
the judgment of the court as to
the amount due to plaintiff upon
mortgage debt with interest and
charges approved by the court
and costs.
juridical person as a mortgagor.
Conferred by law to the
mortgagor, his successors-in-
interest or any judgment
creditor of the mortgagor.
Can be exercised within 1 year
from date of registration of
certificate of sale.
Can be exercised ONLY after
the foreclosure sale.
Redemption price depends on
the purchase price as fixed in
Sec 26 Rule 39 ROC except in
cases under SEC 78 of the
General Banking Law, the
amount and the interest to be
paid by the mortgagor will be
the amount due and the rate
stipulated in the mortgage loan
not the purchase price and
legal interest under the ROC.
of one (1) of two (2) remedies, but he cannot have both. The
mortgagee may: 1) foreclosure the mortgage; or 2) file an ordinary
action to collect the debt.
When the mortgagee chooses the foreclosure of the mortgage as a
remedy, he enforces his lien by the sale on foreclosure of the
mortgaged property. The proceeds of the sale will be applied to the
satisfaction of the debt. With this remedy, he has a prior lien on the
property. In case of a deficiency, the mortgagee has the right to
claim for the deficiency resulting from the price obtained in the sale
of the real property at public auction and the outstanding obligation
at the time of the foreclosure proceedings
On the other hand, if the mortgagee resorts to an action to collect
the debt, he thereby waives his mortgage lien. He will have no
more priority over the mortgaged property. If the judgment in the
action to collect is favorable to him, and it becomes final and
executory, he can enforce said judgment by execution. He can
even levy execution on the same mortgaged property, but he will
not have priority over the latter and there may be other creditors
who have better lien on the properties of the mortgagor.
CALTEX submits that the principles enunciated in the Bachrach
case are not applicable nor determinative of the case at bar for the
reason that the factual circumstances obtained in the said case are
totally different from the instant case. In the Bachrach case, the
plaintiff instituted an action to foreclose the mortgage after the
money judgment in its favor remained unsatisfied whereas in the
present case, CALTEX initially filed a complaint for collection of the
debt and during the pendency thereof foreclosed extrajudicially the
mortgage.

5.2 Cases
Action For Foreclosure Of Mortgage Prescribes After 10 Years
From The Time The Right Of Action Accrued, I.E. When The
Mortgagor Defaults In The Payment Of His Obligation
CANDO V SPOUSES OLAZO (2007)
We disagree. Although the facts in the Bachrach case and in the
present case are not identical, there is similarity in the fact that the
plaintiffs in these two cases availed of both remedies although they
are entitled to a choice of only one.
BANK OF AMERICA NT & SA V AMERICAN REALTY CORP
(1999)

Even from a cursory reading of the appeal, it is indelibly clear that
the trial court committed an appalling blunder when it ruled that an
action for foreclosure of mortgage prescribes after ten (10) years
from the date of the mortgage contract. Under Article 1142 of the
Civil Code, a mortgage action prescribes after ten (10) years.
Jurisprudence, however, has clarified this rule by holding that a
mortgage action prescribes after ten (10) years from the time the
right of action accrued, which is obviously not the same as the date
of the mortgage contract. Stated differently, an action to enforce a
right arising from a mortgage should be enforced within ten (10)
years from the time the right of action accrues; otherwise, it will be
barred by prescription and the mortgage creditor will lose his rights
under the mortgage. The right of action accrues when the
mortgagor defaults in the payment of his obligation to the
mortgagee.
Remedies Available To Mortgagee Alternative, Not Successive Or
Cumulative
CALTEX PHILS v IAC (1989)
Where a debt is secured by a mortgage and there is a default in
payment on the part of the mortgagor, the mortgagee has a choice
Anent real properties in particular, the Court has laid down the rule
that a mortgage creditor may institute against the mortgage debtor
either a personal action for debt or a real action to foreclose the
mortgage.
In our jurisdiction, the remedies available to the mortgage creditor
are deemed alternative and not cumulative. Notably, an election of
one remedy operates as a waiver of the other. For this purpose, a
remedy is deemed chosen upon the filing of the suit for collection
or upon the filing of the complaint in an action for foreclosure of
mortgage, pursuant to the provision of Rule 68 of the of the 1997
Rules of Civil Procedure. As to extrajudicial foreclosure, such
remedy is deemed elected by the mortgage creditor upon filing of
the petition not with any court of justice but with the Office of the
Sheriff of the province where the sale is to be made, in accordance
with the provisions of Act No. 3135, as amended by Act No. 4118.
In the case at bench, private respondent ARC constituted real
estate mortgages over its properties as security for the debt of the
principal debtors. By doing so, private respondent subjected itself
to the liabilities of a third party mortgagor. Under the law, third
persons who are not parties to a loan may secure the latter by
pledging or mortgaging their own property. Notwithstanding, there
is no legal provision nor jurisprudence in our jurisdiction which
makes a third person who secures the fulfillment of another's
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
obligation by mortgaging his own property, to be solidarily bound
with the principal obligor. The signatory to the principal contract -
loan - remains to be primarily bound. It is only upon default of the
latter that the creditor may have recourse on the mortgagors by
foreclosing the mortgaged properties in lieu of an action for the
recovery of the amount of the loan.
SUICO RATTAN & BURI INTERIORS V CA (2006)
The remedy of extrajudicial foreclosure is deemed chosen not on
the day of the sale but on the day of the filing of a petition for
foreclosure with the office of the Provincial Chief. Since the filing of
petition for foreclosure was earlier than the filing of action for sum
of money, the remedy of foreclosure was chosen first, even if the
actual foreclosure sale was conducted after the filing of action for
sum of money.
The rule is that the remedies of action for sum of money and
foreclosure are alternative and not cumulative. Hence, the action
for sum of money by Metrobank was validly dismissed because it
already filed a petition for foreclosure before it filed the action. If it
had filed an action for recovery of deficiency instead of collection of
sum of money, it would not have been dismissed. (Because
recovery of deficiency is allowed for Real Estate Mortgage within
10 years after foreclosure)
Mortgage invalid if mortgagor not the property owner; doctrine of
mortgagee in good faith not applicable
ERENA V QUERRER-KAUFFMAN (2006)
One of the essential requisites of a mortgage contract is that the
mortgagor must be the absolute owner of the thing mortgaged. A
mortgage is thus invalid if the mortgagor is not the property owner.
In this case, the trial court and the CA are one in finding that based
on the evidence on record, the owner of the property is Kauffman
who was not the one who mortgaged the same to Erena.
The doctrine of mortgagee in good faith cannot apply in this case.
This doctrine is based on the rule that persons dealing with
properties covered by a TCT are not required to go beyond what
appears on the face of the title. But this is only in a situation where
the mortgagor has a fraudulent or defective title, but not when the
mortgagor is an impostor and a forger.
In a forged mortgage, as in this case, the doctrine of mortgagee in
good faith cannot be applied and will not benefit a mortgagee no
matter how large is his or her reservoir of good faith and diligence.
Such mortgage is void and cannot prejudice the registered owner
whose signature to the deed is falsified. When the instrument
presented is forged, even if accompanied by the owners duplicate
certificate of title, the registered owner does not lose his title, and
neither does the assignee in the forged deed acquire any right or
title to the property. An innocent purchaser for value is one who
purchases a titled land bay virtue of a deed executed by the
registered owner himself not a forged deed.
Newspaper of General Circulation
PEREZ V PEREZ (2005)
To be newspaper of general circulation, it is enough that it is
published for the dissemination of local news and general
18 of 143
information; that it has a bona fide subscription list of paying
subscribers and that it is published at regular intervals.
The newspaper must not also be devoted to the interests or
published for the entertainment of a particular class, profession,
trade, calling, race, or religious denomination. The newspaper
need not have the largest circulation as long as it is of general
circulation.
In this case, the Olongapo News was the only newspaper in
general circulation in Bataan at the time the notice of auction was
published
Waiver By Parties Of Posting And Publication Requirements Void
PNB V NEPOMUCENO PRODUCTIONS, INC. (2002)
FACTS: Petitioner PNB granted respondents a 4 Million Pesos
credit line to finance the filming of the movie Pacific Connection.
The loan was secured by mortgages on respondents real and
personal properties, to wit: (1) the Malugay property; (2) the
Forbes property; and (3) several motion picture equipments. The
credit line was later increased to 6 Million Pesos and finally to 7.5
Million Pesos. Respondents defaulted in their obligation. Petitioner
sought foreclosure of the mortgaged properties. The auction sale
was re-scheduled several times without need of republication of
the notice of sale, as stipulated in the Agreement to Postpone
Sale, until finally, the auction sale proceeded, with petitioner as the
highest bidder in the amount of P10,432,776.97. Aggrieved,
respondents filed a Civil Case with the RTC, an action for
annulment of foreclosure sale and damages with injunction.
Respondents contended that the foreclosure sale is null and void
because: (1) the obligation is yet to mature as there were
negotiations for an additional loan amount; (2) lack of publication;
(3) the purchase price was grossly inadequate and
unconscionable; and (4) the foreclosure proceedings were initiated
by petitioner in bad faith.
RTC ordered the annulment and setting aside of the foreclosure
proceedings and auction sale on the ground that there was lack
of publication of the notice of sale. Petitioner appealed to the
CA. CA dismissed petitioners appeal with regard to the Forbes
Park property as the same was already the subject of a Deed of
Reconveyance executed by petitioner in favor of respondents as
well as a Compromise Agreement dated between the same
parties. As to the Malugay property, CA affirmed the RTC
decision.
ISSUE: WON the parties to the mortgage can validly waive the
posting and publication requirements mandated by Act No. 3135.
HELD NO. Act. No. 3135, as amended, governing extrajudicial
foreclosure of mortgages on real property is specific with regard to
the posting and publication requirements of the notice of sale, to
wit:
Sec. 3. Notice shall be given by posting notices of the sale for not
less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or
city.
On this score, it is well settled that what Act No. 3135 requires is:
(1) the posting of notices of sale in three public places; and, (2) the
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
publication of the same in a newspaper of general circulation.
Failure to publish the notice of sale constitutes a jurisdictional
defect, which invalidates the sale. Petitioner and respondents
have absolutely no right to waive the posting and publication
requirements of Act No. 3135. While it is established that rights
may be waived, Article 6 of the Civil Code explicitly provides that
such waiver is subject to the condition that it is not contrary to law,
public order, public policy, morals, or good customs, or prejudicial
to a third person with a right recognized by law.
The principal object of a notice of sale in a foreclosure of mortgage
is not so much to notify the mortgagor as to inform the public
generally of the nature and condition of the property to be sold,
and of the time, place, and terms of the sale. Notices are given to
secure bidders and prevent a sacrifice of the property. Clearly, the
statutory requirements of posting and publication are mandated,
not for the mortgagors benefit, but for the public or third persons.
In fact, personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not even necessary, unless stipulated. As such, it is
imbued with public policy considerations and any waiver thereon
would be inconsistent with the intent and letter of Act No. 3135.
Moreover, statutory provisions governing publication of notice of
mortgage foreclosure sales must be strictly complied with and
slight deviations therefrom will invalidate the notice and render the
sale at the very least voidable.
Thus, in the recent case of Development Bank of the Philippines v.
Aguirre, the foreclosure sale held more than two (2) months after
the published date of sale was considered void for lack of
republication. Similarly, in the instant case, the lack of republication
of the notice of the subject foreclosure sale renders it void.
OUANO V CA (2003)
FACTS: Julieta M. Ouano obtained a loan from the PNB in the
amount of P104,280.00. As security for said loan, she executed a
real estate mortgage over two parcels of land. She defaulted on
her obligation. PNB filed a petition for extrajudicial foreclosure with
the City Sheriff of Mandaue City. The sheriff prepared a notice of
sale setting the date of public auction of the two parcels of land on
December 5, 1980 at 9:00 a.m. to 4:00 p.m. He caused the notice
to be published in the Cebu Daily Times, a newspaper of general
circulation in Mandaue City, in its issues of November 13, 20 and
27, 1980. He likewise posted copies thereof in public places in
Mandaue City and in the place where the properties are located.
However, the sale as scheduled and published did not take place
as the parties, on four separate dates, executed Agreements to
Postpone Sale (Agreements). These Agreements were
addressed to the sheriff, requesting the latter to defer the auction
sale to another date at the same time and place, without any
further republication of the Notice. In all the postponements, no
new notice of sale was issued, nor was there any republication or
reposting of notice for the rescheduled dates. Finally, on May 29,
1981, the sheriff conducted the auction sale, awarding the two
parcels of land to PNB, the only bidder. He executed a Certificate
of Sale certifying the sale for and in consideration of P195, 510.50.
As Julieta failed to redeem the properties within the one year
period from registration of sale, PNB consolidated its title on
February 12, 1983. On February 23 of the same year, it conveyed
the properties to Alfredo Ouano, the brother of Julieta, under a
Deed of Promise to Sell payable in five years. On March 28, 1983,
Julieta sent demand letters to PNB and Ouano, pointing out
19 of 143
irregularities in the foreclosure sale. On April 18, 1983, Julieta filed
a complaint with the RTC of Cebu for the nullification of the May
29, 1981 foreclosure sale. Ouano filed a motion for leave to
intervene, and filed his Answer in Intervention to protect his rights
over the properties.
While the case was pending, on February 25, 1986, PNB executed
a Deed of Sale in favor of Ouano. The Register of Deeds of
Mandaue City accordingly cancelled the TCTs in PNBs name and
issued in lieu thereof TCTs in the name of petitioner over the two
parcels of land. On January 29, 1990, the Regional Trial Court of
Cebu rendered a decision in favor of Julieta, holding that the lack
of republication rendered the foreclosure sale void. Not satisfied,
PNB and Ouano brought the case to the CA. In its decision, said
court affirmed the trial courts ruling on the same ground that there
was no compliance with the mandatory requirements of posting
and publication of notice of sale. Ouano filed a motion for
reconsideration, which was denied for lack of merit by the same
court on April 15, 1997.
ISSUE: WON requirements of Act No. 3135 were complied with in
the May 29, 1981 foreclosure sale
HELD: NO. Act No. 3135 (as amended by Act No. 4118) SEC 3,
which provides:
SEC. 3. Notice 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, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality of
city.
It is a well-settled rule that statutory provisions governing
publication of notice of mortgage foreclosure sales must be strictly
complied with, and that even slight deviations therefrom will
invalidate the notice and render the sale at least voidable. Failure
to advertise a mortgage foreclosure sale in compliance with
statutory requirements constitutes a jurisdictional defect
invalidating the sale. Consequently, such defect renders the sale
absolutely void and no title passes.
Ouano, however, insists that there was substantial compliance with
the publication requirement, considering that prior publication and
posting of the notice of the first date were made.
In Tambunting v. Court of Appeals, we held that republication in
the manner prescribed by Act No. 3135 is necessary for the validity
of a postponed extrajudicial foreclosure sale. Thus we stated:
Where required by the statute or by the terms of the foreclosure
decree, public notice of the place and time of the mortgage
foreclosure sale must be given, a statute requiring it being held
applicable to subsequent sales as well as to the first advertised
sale of the property
Ouano further contends that republication may be waived
voluntarily by the parties.
This argument has no basis in law.
See PNB vs. Nepomuceno
The principal object of a notice of sale in a foreclosure of mortgage
is not so much to notify the mortgagor as to inform the public
generally of the nature and condition of the property to be sold,
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
and of the time, place, and terms of the sale. Notices are given to
secure bidders and prevent a sacrifice of the property. Clearly, the
statutory requirements of posting and publication are mandated,
not for the mortgagors benefit, but for the public or third persons.
In fact, personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not even necessary, unless stipulated. As such, it is
imbued with public policy considerations and any waiver thereon
would be inconsistent with the intent and letter of Act No. 3135.
Publication, therefore, is required to give the foreclosure sale a
reasonably wide publicity such that those interested might attend
the public sale. To allow the parties to waive this jurisdictional
requirement would result in converting into a private sale what
ought to be a public auction.
Moreover, assuming arguendo that the written waivers are valid,
we find noticeable flaws that would nevertheless invalidate the
foreclosure proceedings. First, the Agreements, as worded, only
waived further republication of the notice of sale. Nothing in the
Agreements indicates that the parties likewise dispensed with the
reposting of the notices of sale. As there was no reposting of
notice of the May 29, 1981 sale, the foreclosure fell short of the
requirements of Act No. 3135. Second, we observe that the
Agreements were executed and filed with the sheriff several days
after each rescheduled date. The first agreement was timely filed,
two days prior to the originally scheduled sale on December 5,
1980. The subsequent agreements, however, was executed and
filed several days after the rescheduled sales. On the rescheduled
dates, therefore, no public sale occurred, nor was there any
request to postpone filed with the sheriff, except for the first one. In
short, the Agreements are clearly defective for having been
belatedly executed and filed with the sheriff. PNB is at fault. It is
the mortgagee who causes the mortgaged property to be sold, and
the date of sale is fixed upon his instruction. PNBs inaction on the
scheduled date of sale and belated filing of requests to postpone
may be deemed as an abandonment of the petition to foreclose it
filed with the sheriff. Consequently, its right to foreclose the
mortgage based on said petition lapsed.
Ouano asserts that Rule 39, SEC 24 of the Rules of Court, which
allows adjournment of execution sales by agreement of the parties
should be applied.
The said provision provides:
Sec. 24. Adjournment of Sale By written consent of debtor and
creditor, the officer may adjourn any sale upon execution to any
date agreed upon in writing by the parties. Without such
agreement, he may adjourn the sale from day to day, if it becomes
necessary to do so for lack of time to complete the sale on the day
fixed in the notice.
Distinction should be made of the three different kinds of sales
under the law, namely:
an ordinary execution sale (ROC Rule 39)
a judicial foreclosure sale (ROC Rule 68)
an extrajudicial foreclosure sale (Act 3135)
A different set of law applies to each class of sale mentioned. The
cited provision in the Rules of Court hence does not apply to an
extrajudicial foreclosure sale. Moreover, even assuming that the
aforecited provision applies, all it authorizes is the adjournment of
the execution sale by agreement of the parties. Nowhere does it
state that republication and reposting of notice for the postponed
sale may be waived. Thus, it cannot, by any means, sanction the
waiver in the case at bar.
20 of 143
Publication Of Notice Of Foreclosure Sale More Than Sufficient
Compliance With The Posting Notice Requirement Of The Law
OLIZON V CA(1994)
We take judicial notice of the fact that newspaper publications
have more far-reaching effects than posting on bulletin boards in
public places. There is a greater probability that an announcement
or notice published in a newspaper of general circulation, which is
distributed nationwide, shall have a readership of more people
than that posted in a public bulletin board, no matter how strategic
its location may be, which caters only to a limited few. Hence, the
publication of the notice of sale in the newspaper of general
circulation alone is more than sufficient compliance with the notice-
posting requirement of the law. By such publication, a reasonably
wide publicity had been effected such that those interested might
attend the public sale, and the purpose of the law had been
thereby subserved.
The object of a notice of sale is to inform the public of the nature
and condition of the property to be sold, and of the time, place and
terms of the sale. Notices are given for the purpose of securing
bidders and to prevent a sacrifice of the property. If these objects
are attained, immaterial errors and mistakes will not affect the
sufficiency of the notice; but if mistakes or omissions occur in the
notices of sale, which are calculated to deter or mislead bidders, to
depreciate the value of the property, or to prevent it from bringing a
fair price, such mistakes or omissions will be fatal to the validity of
the notice, and also to the sale made pursuant thereto.
In the instant case, the aforesaid objective was attained since
there was sufficient publicity of the sale through the newspaper
publication. There is completely no showing that the property was
sold for a price far below its value as to insinuate any bad faith, nor
was there any showing or even an intimation of collusion between
the sheriff who conducted the sale and respondent bank. This
being so, the alleged non-compliance with the posting requirement,
even if true, will not justify the setting aside of the sale.
Foreclosure Void If Sale Does Not Take Place On The Date
Specified In Published Notice
DBP V AGUIRRE (2001)
Failure to post notice is not per se a ground for invalidating the
sale, provided notice is duly published in a newspaper of general
circulation. In Olizon vs. CA, the Court held that newspaper have
more-far-reaching effects than posting on bulletin boards in public
places. Because of the greater probability of readership of more
people and that newspapers are distributed nationwide, there is a
reasonably wide publicity. Those interested might attend the public
sale. Publication in the newspaper of general circulation alone is
more than sufficient compliance with the notice-posting
requirement of the law.
Here, the sale was held more than two months after the published
date of the sale, rendering the sale void. In Masantol Rural Bank,
Inc. v. CA the Court stated that failure to publish the notice of
auction sale as required by the statute constitutes a jurisdictional
defect which invalidates the sale. Masantol squarely applies.
Although lack of republication of notice of sale has not been raised,
SC may rule on the relevant issue of DBPs lack of jurisdiction to
hold the foreclosure sale.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Republication Of Notice Of Sale
DBP V CA (2003)
Posting requirement was complied with in this case but not the
publication requirement. DBP published the notice of auction sale
scheduled on 12 August 1986. However, no auction sale took
place on 12 August 1986 because DBP, at the instance of ERHC,
agreed to postpone the same to 11 September 1986.
The Court held recently in Ouano v. Court of Appeals that
republication in the manner prescribed by Act No. 3135 is
necessary for the validity of a postponed extrajudicial foreclosure
sale. Another publication is required in case the auction sale is
rescheduled, and the absence of such republication invalidates the
foreclosure sale.
The Court also ruled in Ouano that the parties have no right to
waive the publication requirement in Act No. 3135.
Publication, therefore, is required to give the foreclosure sale a
reasonably wide publicity such that those interested might attend
the public sale. To allow the parties to waive this jurisdictional
requirement would result in converting into a private sale what
ought to be a public auction.
Foreclosure Of Mortgage Arising Out Of A Settlement Of Estate
Not Covered By Act 3135
PNB V CA (2001)
WON Act 3135 is applicable in the case? NO.
WON PNB may still recover deficiency from the estate? NO. Since
it elected to extra-judicially foreclose the mortgage.
The case at bar involves a foreclosure of mortgage arising out of a
settlement of estate, wherein the administrator mortgaged a
property belonging to the estate of the decedent, pursuant to an
authority given by the probate court. The Rules of Court on Special
Proceedings comes into play decisively. SEC 7, Rule 86 of the
Rules of Court is appropriately applicable to the case at hand and
not Act 3135.
Case law now holds that this rule grants to the mortgagee three
distinct, independent and mutually exclusive remedies that can be
alternatively pursued by the mortgagee creditor for the satisfaction
of his credit in case the mortgagor dies, among them:
1. To waive the mortgage and claim the entire debt from the estate
of the mortgagor as an ordinary claim;
2. To foreclose the mortgage judicially and prove any deficiency as
an ordinary claim; and
3. To rely on the mortgage exclusively, foreclosing the same at any
time before it is barred by prescription without right to file a claim
for deficiency.
The plain result of adopting the last mode of foreclosure, which
PNB did in this case, is that the creditor waives his right to recover
any deficiency from the estate.
21 of 143
Inadequacy of Bid Price
VALMONTE V CA (1999)
It is well-settled that when there is right to redeem, inadequacy of
price is of no moment for the reason that the judgment debtor has
always had the chance to redeem and reacquire the property. In
fact, the property may be sold for less of its fair market value
precisely because the lesser the price, the easier for the owner to
effect redemption.
Issuance Of A Writ Of Possession
SAMSON V RIVERA (2004)
This Court has consistently held that the duty of the trial court to
grant a writ of possession is ministerial. Such writ issues as a
matter of course upon the filing of the proper motion and the
approval of the corresponding bond. No discretion is left to the trial
court. Any question regarding the regularity and validity of the sale,
as well as the consequent cancellation of the writ, is to be
determined in a subsequent proceeding as outlined in SEC 8 of
Act 3135. Such question cannot be raised to oppose the issuance
of the writ, since the proceeding is ex parte. The recourse is
available even before the expiration of the redemption period
provided by law and the Rules of Court.
The purchaser, who has a right to possession that extends after
the expiration of the redemption period, becomes the absolute
owner of the property when no redemption is made. Hence, at any
time following the consolidation of ownership and the issuance of a
new transfer certificate of title in the name of the purchaser, he or
she is even more entitled to possession of the property. In such a
case, the bond required under SEC 7 of Act 3135 is no longer
necessary, since possession becomes an absolute right of the
purchaser as the confirmed owner.
This Court has long settled that a pending action for annulment of
mortgage or foreclosure does not stay the issuance of a writ of
possession. Therefore, the contention of petitioners that the RTC
should have consolidated Civil Case No. 01-6219 with LR Case
No. 01-2698 and resolved the annulment case prior to the
issuance of the Writ of Possession is unavailing.
DBP V SPOUSES GATAL (2005)
WON the RTC validly dismissed the petition for writ of possession
on the ground of Litis Pendentia given that a complaint for
injunction with TRO was pending, in which action sought to declare
the sale to Torrefranca as void and to uphold the spouses right to
pre-emption. NO.
The rights asserted and the reliefs sought by the parties in both
cases are not identical. Thus, Litis Pendentia is unavailing.
Sec 33, Rule 39 of the ROC: if no redemption be made within a
year from the date of the registration of the certificate of sale, the
purchaser is entitled to a conveyance and possession of the
property,
Here, no redemption was made within a year from January 1996.
So in August, 1997, more than a year after, DBP filed a petition for
writ of possession. This is in order.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Where, as here, the title is consolidated in the name of the
mortgagee, the writ of possession becomes a matter of right on the
part of the mortgagee, and a ministerial duty on the part of the
court to issue the same.
The pendency of a separate civil suit questioning the validity of the
sale of the mortgaged property cannot bar the issuance of the writ
of possession.
Posting Of Bond Not Necessary If Writ Of Possession Applied For
After Ownership Has Vested On The Creditor-Mortgagee
METROPOLITAN BANK AND TRUST COMPANY V SPOUSES
BANCE (2008)
The writ of possession was not irregular despite the fact that
petitioner did not post a bond. The posting of a bond as a
condition for the issuance of the writ of possession becomes
necessary only if it is applied for within one year from the
registration of the sale with the register of deeds, i.e., during the
redemption period inasmuch as ownership has not yet vested on
the creditor-mortgagee. After the one-year period, and no
redemption was made, the mortgagor loses all interest over it. In
this case, respondents were already stripped of their rights over
the properties when they failed to redeem the same within one
year from May 3, 1999, the date of registration of the sale. Hence,
when petitioner applied for the writ after the expiration of the
redemption period there was even more reason to issue the writ.
Exception To The Rule That Issuance Of Writ Of Possession
Ministerial And May Be Done Ex Parte
CHINA BANKING CORP V SPOUSES LOZADA (2008)
The exception provided under SEC 33 of Rule 39 of the Revised
Rules of Court (to the general rule that issuance of a writ of
possession is ministerial and may be done ex parte) contemplates
a situation in which a third party holds the property by adverse title
or right, such as that of a co-owner, tenant or usufructuary. The
co-owner, agricultural tenant, and usufructuary possess the
property in their own right, and they are not merely the successor
or transferee of the right of possession of another co-owner or the
owner of the property. The spouses Lozada cannot claim that their
right of possession over Unit No. 402 is analogous to any of these.
It is true that in the case presently before this Court, PPGI
executed in favor of the spouses Lozada the Contract to Sell
covering Unit No. 402 before it constituted in favor of CBC the real
estate mortgages on 51 Project units including Unit No. 402.
Nonetheless, it must be emphasized that what PPGI executed in
favor of the spouses Lozada was a Contract to Sell, a mere
promise to sell, which, at the moment of its execution, did not yet
transfer possession, much less, title to Unit No. 402 from PPGI to
the spouses Lozada. When PPGI constituted the real estate
mortgage on Unit No. 402 in favor of CBC six months later,
possession of and title to the property still resided in PPGI. And
when PPGI subsequently ceded possession of Unit No. 402, upon
its completion, to the spouses Lozada, such right was already
burdened by the terms and conditions of the mortgage constituted
thereon. By merely stepping into the shoes of PPGI, the spouses
Lozadas right of possession to Unit No. 402 cannot be less or
more than PPGIs.
22 of 143
The spouses Lozada, having succeeded PPGI in the possession of
Unit No. 402, cannot be considered a third party holding the said
property adversely to PPGI, the defaulting debtor/mortgagor.
Resultantly, the general rule, and not the exception, applies to the
instant Petition. It was the mandatory and ministerial duty of the
Makati City RTC to grant the ex parte petition of CBC and order
the issuance of a writ of possession in the latters favor over Unit
No. 402. It was likewise mandatory and ministerial for the Clerk of
Court to comply with the Makati City RTC order by issuing the writ
of possession, and for the Sheriff to implement the writ by first
issuing a notice to vacate to the occupants of Unit No. 402.
Nature Of Redemption Period
SPOUSES LANDRITO V CA (2005)
In Lazo v. Republic Surety & Insurance Co., Inc., this Court has
made it clear that it is only where, by voluntary agreement of the
parties, consisting of extensions of the redemption period, followed
by commitment by the debtor to pay the redemption price at a fixed
date, will the concept of legal redemption be converted into one of
conventional redemption.
Here, there is no showing whatsoever that petitioners agreed to
pay the redemption price. On the contrary, their act of filing their
complaint to declare the nullity of the foreclosure sale is indicative
of their refusal to pay the redemption price on the alleged deadline
set by the husband. At the very least, if they so believed that their
loan obligation was only for P1,000,000.00, petitioners should have
made an offer to redeem within one (1) year from the registration
of the sheriffs certificate of sale, together with a tender of the
same amount. This, they never did.
It must be remembered that the period of redemption is not a
prescriptive period but a condition precedent provided by law to
restrict the right of the person exercising redemption.
Correspondingly, if a person exercising the right of redemption has
offered to redeem the property within the period fixed, he is
considered to have complied with the condition precedent
prescribed by law and may thereafter bring an action to enforce
redemption. If, on the other hand, the period is allowed to lapse
before the right of redemption is exercised, then the action to
enforce redemption will not prosper, even if the action is brought
within the ordinary prescriptive period. Moreover, the period within
which to redeem the property sold at a sheriffs sale is not
suspended by the institution of an action to annul the foreclosure
sale. It is clear, then, that petitioners have lost any right or interest
over the subject property primarily because of their failure to
redeem the same in the manner and within the period prescribed
by law. Their belated attempts to question the legality and validity
of the foreclosure proceedings and public auction must accordingly
fail.
One Year Of Period Of Redemption Computed From Date Of
Registration Of Certificate Of Foreclosure Sale
REYES V NOBLEJAS (1967)
Redemption is not the concern merely of the auction-vendee and
the mortgagor, but also of the latters successors in interest or any
judicial creditor or judgment creditor of said mortgagor, or any
person having a lien on the property subsequent to the mortgage
under which the property has been sold. It is precisely for this
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reason that the certificate of sale should be registered, for only
upon such registration may it legally be said that proper notice,
though constructive, has been served unto possible redemptioners
contemplated in the law. It is for this reason that the date of sale
mentioned in SEC 6 of Act 3135 should be construed to mean the
date of registration of the certificate of sale in the office of the
register of deeds concerned. The Land Registration Commissioner
was right in ordering the Register of Deeds of Rizal to deny the
registration of the Deed of Sale and the Affidavit of Consolidation
of Ownership, the simultaneous registration of which documents
was sought by herein petitioner even before the certificate of sale
issued by the sheriff was registered.
Extension Of 1-Year Redemption Period
LAZO V REPUBLIC SURETY (1970)
The parties had abandoned entirely the concept of legal
redemption in this case and converted it into one of conventional
redemption, in which the only governing factor was the agreement
between them.
The plaintiffs' repeated requests for time within which to redeem,
each with a definite date of expiration, generated binding contracts
when approved by the defendant company. A contract, needless to
say, has the force of law between the parties. In any event, the
principle of estoppel would step in to prevent the plaintiffs from
going back upon their own acts and representations to the
prejudice of the other party who relied upon them. This is a
principle of equity and natural justice, expressly adopted in our
Civil Code (Arts. 1431 et seq.) and articulated as one of the
conclusive presumptions in Rule 31, Sec. 3(a), of our Rules of
Court as follows:
Whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to
falsify it.
IBAAN RURAL BANK V CA (1999)
When petitioner received a copy of the Certificate of Sale
registered in the Office of the Register of Deeds of Lipa City, it had
actual and constructive knowledge of the certificate and its
contents. For two years, it did not object to the two-year
redemption period provided in the certificate. Thus, it could be
said that petitioner consented to the two-year redemption period
especially since it had time to object and did not. When
circumstances imply a duty to speak on the part of the person for
whom an obligation is proposed, his silence can be construed as
consent. By its silence and inaction, petitioner misled private
respondents to believe that they had two years within which to
redeem the mortgage. After the lapse of two years, petitioner is
estopped from asserting that the period for redemption was only
one year and that the period had already lapsed.
The doctrine in Lazo vs. Republic Surety and Insurance Co., Inc.
does not apply in this case. In that case the court held that the one
year period of redemption provided in Act No. 3135 is only
directory and can be extended by agreement of the parties. But it
bears noting that in Lazo the parties voluntarily agreed to extend
the redemption period. Thus, the concept of legal redemption was
23 of 143
converted by the parties in Lazo into conventional redemption.
This is not so in the instant case. There was no voluntary
agreement. In fact, the sheriff unilaterally and arbitrarily extended
the period of redemption to two (2) years in the Certificate of Sale.
The parties were not even privy to the extension made by the
sheriff. Nonetheless, as above discussed, the bank cannot after
the lapse of two years insist that the redemption period was one
year only.
Additionally, the rule on redemption is liberally interpreted in favor
of the original owner of a property. The fact alone that he is
allowed the right to redeem clearly demonstrates the
solicitousness of the law in giving him another opportunity, should
his fortune improve, to recover his lost property.
Right Of Redemption Distinguished From Equity Of Redemption
HUERTA ALBA RESORT V CA (2000)
From the various decisions, resolutions and orders a quo it can be
gleaned that what petitioner has been adjudged to have was only
the equity of redemption over subject properties. On the distinction
between the equity of redemption and right of redemption, the case
of Gregorio Y. Limpin vs. Intermediate Appellate Court,7 [166
SCRA 87.] comes to the fore:
The equity of redemption is, to be sure, different from and should
not be confused with the right of redemption.
The right of redemption in relation to a mortgage - understood in
the sense of a prerogative to re-acquire mortgaged property after
registration of the foreclosure sale - exists only in the case of the
extrajudicial foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except only where the
mortgagee is the Philippine National Bank or a bank or banking
institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to
the mortgagor the right of redemption within one (1) year from the
registration of the sheriffs certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent
right of redemption exists. The law declares that a judicial
foreclosure sale, when confirmed by an order of the court, x x shall
operate to divest the rights of all the parties to the action and to
vest their rights in the purchaser, subject to such rights of
redemption as may be allowed by law. Such rights exceptionally
allowed by law (i.e., even after confirmation by an order of the
court) are those granted by the charter of the Philippine National
Bank (Acts No. 2747 and 2938), and the General Banking Act
(R.A. 337). These laws confer on the mortgagor, his successors in
interest or any judgment creditor of the mortgagor, the right to
redeem the property sold on foreclosure - after confirmation by the
court of the foreclosure sale - which right may be exercised within
a period of one (1) year, counted from the date of registration of
the certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial
foreclosure of a mortgage if the mortgagee is not the PNB or a
bank or banking institution. In such a case, the foreclosure sale,
when confirmed by an order of the court. x x shall operate to
divest the rights of all the parties to the action and to vest their
rights in the purchaser. There then exists only what is known as
the equity of redemption. This is simply the right of the defendant
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
mortgagor to extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day period after
the judgment becomes final, in accordance with Rule 68, or even
after the foreclosure sale but prior to its confirmation.
This is the mortgagors equity (not right) of redemption which, as
above stated, may be exercised by him even beyond the 90-day
period from the date of service of the order, and even after the
foreclosure sale itself, provided it be before the order of
confirmation of the sale. After such order of confirmation, no
redemption can be effected any longer.
Redemption Price To Be Paid By Accommodation Mortgagors
BELO V PNB (2001)
Eduardo Belo, assignor of the petitioners, is an accommodation
mortgagor. Accommodation mortgagors as such are not in any
way liable for the payment of the loan or principal obligation of the
debtor/borrower. The liability of the accommodation mortgagor
extends only up to the loan value of their mortgaged property and
not to the entire loan itself. Hence, it is only just that they be
allowed to redeem their mortgaged property by paying only the
winning bid price plus interest at the public auction sale with
respect only to the property belonging to the accommodation
mortgagor.
The principle of indivisibility of mortgage contracts does not apply
to the right of redemption of an accommodation mortgagor and her
assignees. Indivisibility arises only where there is a debt, that is,
there is a debtor-creditor relationship. But, this relationship is
wanting in the case at bar in the sense that petitioners are
assignees of an accommodation mortgagor and not of a debtor-
mortgagor. Hence, it is fair and logical to allow the petitioners to
redeem only the property belonging to their assignor, Eduardo
Belo.
With respect to the 4 parcels of land belonging to Eslabon
Spouses, petitioners being total strangers to said lots lack legal
personality to redeem the same. Fair play and justice demand that
respondent PNBs interest of recovering its entire bank claim
should not be at the expense of petitioners, as assignees of Belo,
who is not indebted to it.
Preserving The Right Of Redemption Beyond Redemption Period
HI-YIELD REALTY V CA (2002)
What is the redemptioners option therefore when the redemption
period is about to expire and the redemption cannot take place on
account of disagreement over the redemption price?
According to jurisprudence, the redemptioner faced with such a
problem may preserve his right of redemption through judicial
action which in every case must be filed within the one-year period
of redemption. The filing of the court action to enforce redemption,
being equivalent to a formal offer to redeem, would have the effect
of preserving his redemptive rights and "freezing" the expiration of
the one-year period. This is a fair interpretation provided the
action is filed on time and in good faith, the redemption price is
finally determined and paid within a reasonable time, and the rights
of the parties are respected.
24 of 143
Stated otherwise, the foregoing interpretation, as applied to the
case at bar, has three critical dimensions: (1) timely redemption or
redemption by expiration date (or, as what happened in this case,
the redemptioner was forced to resort to judicial action to "freeze"
the expiration of the redemption period); (2) good faith as always,
meaning, the filing of the private respondents action on August 13,
1993 must have been for the sole purpose of determining the
redemption price and not to stretch the redemptive period
indefinitely; and (3) once the redemption price is determined within
a reasonable time, the redemptioner must make prompt payment
in full.
In the instant case, the respondents did not tender payment within
the period set by the trial court. Instead, they asked for a 45-day
extension to tender payment. Such 45-day extension for payment
must be denied.
The pendency of the right of redemption depresses the market
value of the land until the period expires. Permitting private
respondent to file a suit for redemption, with either party unable to
foresee when final judgment will come, renders meaningless the
period fixed by the statute for effecting the redemption. It makes
the redemptive period indefinite and cripples any effort of the
landowner to realize the value of his land. In the same way, the
buyer cannot immediately recover his investment. Thus, unless
and until the redemption is resolved with finality, both the
landowners and buyers needs cannot be met. Petitioner and
private respondent herein were thus basically posed on similar
footing before redemption. But whoever of them stands to be
irreparably injured in the long run deserves the Courts equitable
protection.
In the instant case, the fact that private respondent made a formal
offer to redeem before the expiration of the period to redeem was
not squarely at issue. The focal issue here is whether or not the
extension of the redemptive period by the trial court was well within
private respondents preserved right to redeem. The
circumstances clearly show it was not.
The opportunity to redeem the subject property was never denied
to private respondent. His timely formal offer through judicial action
to redeem was likewise recognized. But that is where it ends. We
cannot sanction and grant every succeeding motion or petition -
specially if frivolous or unreasonable - filed by him because this
would manifestly and unreasonably delay the final resolution of
ownership of the subject property.
In this case, no definite tender of payment was made since there is
no consignation. Consignation should have been made to show
good faith and financial capability to redeem. Failure to consign
was downright reflective of Franciscos incapability to pay from the
very start
Case For Judicial Redemption Not Filed In Good Faith But For The
Purpose Of Stretching The Period Of Redemption Indefinitely
TOLENTINO V CA (2007)
The general rule in redemption is that it is not sufficient that a
person offering to redeem simply manifests his/her desire to do so.
The statement of intention must be accompanied by an actual and
simultaneous tender of payment. This constitutes the exercise of
the right to repurchase. Bona fide redemption necessarily implies a
reasonable and valid tender of the entire purchase price, otherwise
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
the rule on the redemption period fixed by law can easily be
circumvented.
The records show that the correct redemption price had been
determined prior to the filing of the complaint for judicial
redemption. Petitioner had been furnished updated Statements of
Account specifying the redemption price even prior to the
consolidation of the title of the foreclosed property in the bank's
name. The inclusion of late payment charges, foreclosure
expense, attorney's fees, liquidated damages, foreclosure fee, and
interests therein was pursuant to the Loan Agreement. Considering
that the Loan Agreement was read and freely adhered to by
petitioner, the stipulations therein are binding on her. Based on the
foregoing, it is clear that petitioner did not file the instant case for
judicial redemption in good faith. It was not filed for the purpose of
determining the correct redemption price but to stretch the
redemption period indefinitely, which is not allowed by law.
VI. BANGKO SENTRAL NG PILIPINAS LAW
RA 7653
6.1 Topics
State Policies
SEC 1 Declaration of Policy. The State shall maintain a
central monetary authority that shall function and operate as an
independent and accountable body corporate in the discharge of
its mandated responsibilities concerning money, banking and
credit. In line with this policy, and considering its unique functions
and responsibilities, the central monetary authority established
under this Act, while being a government-owned corporation, shall
enjoy fiscal and administrative autonomy.
How State Policies Are To Be Achieved
SEC 2 Creation of the Bangko Sentral. There is hereby
established an independent central monetary authority, which shall
be a body corporate known as the Bangko Sentral ng Pilipinas,
hereafter referred to as the Bangko Sentral. The capital of the
Bangko Sentral shall be Fifty billion pesos (P50,000,000,000), to
be fully subscribed by the Government of the Republic, hereafter
referred to as the Government, Ten billion pesos
(P10,000,000,000) of which shall be fully paid for by the
Government upon the effectivity of this Act and the balance to be
paid for within a period of two (2) years from the effectivity of this
Act in such manner and form as the Government, through the
Secretary of Finance and the Secretary of Budget and
Management, may thereafter determine.
SEC 6. Composition of the Monetary Board. The powers and
functions of the Bangko Sentral shall be exercised by the Bangko
Sentral Monetary Board, hereafter referred to as the Monetary
Board, composed of seven (7) members appointed by the
President of the Philippines for a term of six (6) years.
The seven (7) members are:
(a) the Governor of the Bangko Sentral, who shall be the Chairman
of the Monetary Board. The Governor of the Bangko Sentral shall
be head of a department and his appointment shall be subject to
confirmation by the Commission on Appointments. Whenever the
25 of 143
Governor is unable to attend a meeting of the Board, he shall
designate a Deputy Governor to act as his alternate: Provided,
That in such event, the Monetary Board shall designate one of its
members as acting Chairman;
(b) a member of the Cabinet to be designated by the President of
the Philippines. Whenever the designated Cabinet Member is
unable to attend a meeting of the Board, he shall designate an
Undersecretary in his Department to attend as his alternate; and
(c) five (5) members who shall come from the private sector, all of
whom shall serve full-time: Provided, however, That of the
members first appointed under the provisions of this subSEC,
three (3) shall have a term of six (6) years, and the other two (2),
three (3) years. No member of the Monetary Board may be
reappointed more than once.
SEC 9. Disqualifications. In addition to the disqualifications
imposed by Republic Act No. 6713, a member of the Monetary
Board is disqualified from being a director, officer, employee,
consultant, lawyer, agent or stockholder of any bank, quasi-bank or
any other institution which is subject to supervision or examination
by the Bangko Sentral, in which case such member shall resign
from, and divest himself of any and all interests in such institution
before assumption of office as member of the Monetary Board.
The members of the Monetary Board coming from the private
sector shall not hold any other public office or public employment
during their tenure. No person shall be a member of the Monetary
Board if he has been connected directly with any multilateral
banking or financial institution or has a substantial interest in any
private bank in the Philippines, within one (1) year prior to his
appointment; likewise, no member of the Monetary Board shall be
employed in any such institution within two (2) years after the
expiration of his term except when he serves as an official
representative of the Philippine Government to such institution.
SEC 11. Meetings. The Monetary Board shall meet at least
once a week. The Board may be called to a meeting by the
Governor of the Bangko Sentral or by two (2) other members of the
Board.
The presence of four (4) members shall constitute a quorum:
Provided, That in all cases the Governor or his duly designated
alternate shall be among the four (4).
Unless otherwise provided in this Act, all decisions of the Monetary
Board shall require the concurrence of at least four (4) members.
The Bangko Sentral shall maintain and preserve a complete record
of the proceedings and deliberations of the Monetary Board,
including the tapes and transcripts of the stenographic notes,
either in their original form or in microfilm.
SEC 15. Exercise of Authority. In the exercise of its authority,
the Monetary Board shall:
(a) issue rules and regulations it considers necessary for the
effective discharge of the responsibilities and exercise of the
powers vested upon the Monetary Board and the Bangko Sentral.
The rules and regulations issued shall be reported to the President
and the Congress within fifteen (15) days from the date of their
issuance;
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
(b) direct the management, operations, and administration of the
Bangko Sentral, reorganize its personnel, and issue such rules and
regulations as it may deem necessary or convenient for this
purpose. The legal units of the Bangko Sentral shall be under the
exclusive supervision and control of the Monetary Board;
(c) establish a human resource management system which shall
govern the selection, hiring, appointment, transfer, promotion, or
dismissal of all personnel. Such system shall aim to establish
professionalism and excellence at all levels of the Bangko Sentral
in accordance with sound principles of management.
A compensation structure, based on job evaluation studies and
wage surveys an subject to the Board's approval, shall be
instituted as an integral component of the Bangko Sentral's human
resource development program: Provided, That the Monetary
Board shal make its own system conform as closely as possible
with the principles provided for under Republic Act No. 6758:
Provided, however, That compensation and wage structure of
employees whose positions fall under salary grade 19 and below
shall be in accordance with the rates prescribed under Republic
Act No. 6758.
On the recommendation of the Governor, appoint, fix the
remunerations and other emoluments, and remove personnel of
the Bangko Sentral, subject to pertinent civil service laws:
Provided, That the Monetary Board shall have exclusive and final
authority to promote, transfer, assign, or reassign personnel of the
Bangko Sentral and these personnel actions are deemed made in
the interest of the service and not disciplinary: Provided, further,
That the Monetary Board may delegate such authority to the
Governor under such guidelines as it may determine.
(d) adopt an annual budget for and authorize such expenditures by
the Bangko Sentral as are in the interest of the effective
administration and operations of
(e) the Bangko Sentral in accordance with applicable laws and
regulations; and
(f) indemnify its members and other officials of the Bangko Sentral,
including personnel of the departments performing supervision and
examination functions against all costs and expenses reasonably
incurred by such persons in connection with any civil or criminal
action, suit or proceedings to which he may be, or is, made a party
by reason of the performance of his functions or duties, unless he
is finally adjudged in such action or proceeding to be liable for
negligence or misconduct.
In the event of a settlement or compromise, indemnification shall
be provided only in connection with such matters covered by the
settlement as to which the Bangko Sentral is advised by external
counsel that the person to be indemnified did not commit any
negligence or misconduct.
The costs and expenses incurred in defending the aforementioned
action, suit or proceeding may be paid by the Bangko Sentral in
advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of the member,
officer, or employee to repay the amount advanced should it
ultimately be determined by the Monetary Board that he is not
entitled to be indemnified as provided in this subSEC.
SEC 16. Responsibility. Members of the Monetary Board,
officials, examiners, and employees of the Bangko Sentral who
26 of 143
willfully violate this Act or who are guilty of negligence, abuses or
acts of malfeasance or misfeasance or fail to exercise
extraordinary diligence in the performance of hi duties shall be held
liable for any loss or injury suffered by the Bangko Sentral or other
banking institutions as a result of such violation, negligence,
abuse, malfeasance, misfeasance or failure to exercise
extraordinary diligence.
Similar responsibility shall apply to members, officers, and
employees of the Bangko Sentral for:
(1) the disclosure of any information of a confidential nature, or any
information on the discussions or resolutions of the Monetary
Board, or about the confidential operations of the Bangko Sentral,
unless the disclosure is in connection with the performance of
official functions with the Bangko Sentral, or is with prior
authorization of the Monetary Board or the Governor; or
(2) the use of such information for personal gain or to the detriment
of the Government, the Bangko Sentral or third parties: Provided,
however, That any data or information required to be submitted to
the President and/or the Congress, or to be published under the
provisions of this Act shall not be considered confidential.
SEC 18. Representation of the Monetary Board and the
Bangko Sentral. The Governor of the Bangko Sentral shall be
the principal representative of the Monetary Board and of the
Bangko Sentral and, in such capacity and in accordance with the
instructions of the Monetary Board, he shall be empowered to:
(a) represent the Monetary Board and the Bangko Sentral in all
dealings with other offices, agencies and instrumentalities of the
Government and all other persons or entities, public or private,
whether domestic, foreign or international;
(b) sign contracts entered into by the Bangko Sentral, notes and
securities issued by the Bangko Sentral, all reports, balance
sheets, profit and loss statements, correspondence and other
documents of the Bangko Sentral.
The signature of the Governor may be in facsimile whenever
appropriate;
(c) represent the Bangko Sentral, either personally or through
counsel, including private counsel, as may be authorized by the
Monetary Board, in any legal proceedings, action or specialized
legal studies; and
(d) delegate his power to represent the Bangko Sentral, as
provided in subSECs (a), (b) and (c) of this SEC, to other officers
upon his own responsibility: Provided, however, That in order to
preserve the integrity and the prestige of his office, the Governor of
the Bangko Sentral may choose not to participate in preliminary
discussions with any multilateral banking or financial institution on
any negotiations for the Government within or outside the
Philippines. During the negotiations, he may instead be
represented by a permanent negotiator.
SEC 47. Appointment and Personnel. The Chairman of the
Commission on Audit shall act as the ex officio auditor of the
Bangko Sentral and, as such, he is empowered and authorized to
appoint a representative who shall be the auditor of the Bangko
Sentral and, in accordance with law, fix his salary, and to appoint
and fix salaries and number of personnel to assist said
representative in his work. The salaries and other emoluments
shall be paid by the Commission. The auditor of the Bangko
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Sentral and personnel under him may be removed only by the
Chairman of the Commission.
The representative of the Chairman of the Commission must be a
certified public accountant with at least ten (10) years experience
as such. No relative of any member of the Monetary Board or the
Chairman of the Commission within the sixth degree of
consanguinity or affinity shall be appointed such representative.
How The BSP Handles In Distress?
Conservatorship (RA 7653 SEC 29 and RA 8971 SEC 67)
SEC 29. Appointment of Conservator. Whenever, on the
basis of a report submitted by the appropriate supervising or
examining department, the Monetary Board finds that a bank or a
quasi-bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary Board may
appoint a conservator with such powers as the Monetary Board
shall deem necessary to take charge of the assets, liabilities, and
the management thereof, reorganize the management, collect all
monies and debts due said institution, and exercise all powers
necessary to restore its viability. The conservator shall report and
be responsible to the Monetary Board and shall have the power to
overrule or revoke the actions of the previous management and
board of directors of the bank or quasi-bank. The conservator
should be competent and knowledgeable in bank operations and
management.
The conservatorship shall not exceed one (1) year.
The conservator shall receive remuneration to be fixed by the
Monetary Board in an amount not to exceed two-thirds (2/3) of the
salary of the president of the institution in one (1) year, payable in
twelve (12) equal monthly payments: Provided, That, if at any time
within one-year period, the conservatorship is terminated on the
ground that the institution can operate on its own, the conservator
shall receive the balance of the remuneration which he would have
received up to the end of the year; but if the conservatorship is
terminated on other grounds, the conservator shall not be entitled
to such remaining balance. The Monetary Board may appoint a
conservator connected with the Bangko Sentral, in which case he
shall not be entitled to receive any remuneration or emolument
from the Bangko Sentral during the conservatorship. The expenses
attendant to the conservatorship shall be borne by the bank or
quasi-bank concerned.
The Monetary Board shall terminate the conservatorship when it is
satisfied that the institution can continue to operate on its own and
the conservatorship is no longer necessary. The conservatorship
shall likewise be terminated should the Monetary Board, on the
basis of the report of the conservator or of its own findings,
determine that the continuance in business of the institution would
involve probable loss to its depositors or creditors, in which case
the provisions of SEC 30 shall apply.
SEC 67. Conservatorship. The grounds and procedures for
placing a bank under conservatorship, as well as, the powers and
duties of the conservator appointed for the bank shall be governed
by the provisions of SEC 29 and the last two paragraphs of SEC
30 of the New Central
27 of 143
Bank Act: Provided, That this SEC shall also apply to
conservatorship proceedings of quasi-banks. (n)
Closure (SEC 30 and R.A. 8791 SECs 53 & 56.4)
SEC 30. Proceedings in Receivership and Liquidation.
Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasibank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b) by the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable
losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under SEC
37 that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution; in
which cases, the Monetary Board may summarily and without need
for prior hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance
Corporation as receiver of the banking institution.
For a quasi-bank, any person of recognized competence in
banking or finance may be designed as receiver.
The receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the
benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the
funds of the institution in nonspeculative investments. The receiver
shall determine as soon as possible, but not later than ninety (90)
days from take over, whether the institution may be rehabilitated or
otherwise placed in such a condition so that it may be permitted to
resume business with safety to its depositors and creditors and the
general public: Provided, That any determination for the
resumption of business of the institution shall be subject to prior
approval of the Monetary Board.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business in accordance with
the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver
to proceed with the liquidation of the
institution. The receiver shall:
1. file ex parte with the proper regional trial court, and
without requirement of prior notice or any other action, a petition
for assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall, upon motion by
the receiver after due notice, adjudicate disputed claims against
the institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as
may be material to implement the liquidation plan adopted. The
receiver shall pay the cost of the proceedings from the assets of
the institution.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
2. convert the assets of the institutions to money, dispose
of the same to creditors and other parties, for the purpose of
paying the debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as
may be necessary to collect and recover accounts and assets of,
or defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
The actions of the Monetary Board taken under this SEC or under
SEC 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on petition for certiorari
on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship. The designation of a conservator under SEC 29
of this Act or the appointment of a receiver under this SEC shall be
vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the
designation of a receiver.
SEC 53. Other Banking Services. In addition to the operations
specifically authorized in this Act, a bank may perform the following
services:
53.1. Receive in custody funds, documents and valuable objects;
53.2. Act as financial agent and buy and sell, by order of and for
the account of their customers, shares, evidences of indebtedness
and all types of securities;
53.3. Make collections and payments for the account of others and
perform such other services for their customers as are not
incompatible with banking business;
53.4. Upon prior approval of the Monetary Board, act as managing
agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts; and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted under SubSECs
53.1, 53.2, 53.3 and 53.4 as depositary or as an agent.
Accordingly, it shall keep the funds, securities and other effects
which it receives duly separate from the bank's own assets and
liabilities.
The Monetary Board may regulate the operations authorized by
this SEC in order to ensure that such operations do not endanger
the interests of the depositors and other creditors of the bank.
In case a bank or quasi-bank notifies the Bangko Sentral or
publicly announces a bank holiday, or in any manner suspends the
payment of its deposit liabilities continuously for more than thirty
(30) days, the Monetary Board may summarily and without need
for prior hearing close such banking institution and place it under
receivership of the Philippine Deposit Insurance Corporation. (72a)
SEC 56. Conducting Business in an Unsafe or Unsound
Manner. In determining whether a particular act or omission,
which is not otherwise prohibited by any law, rule or regulation
affecting banks, quasi-banks or trust entities, may be deemed as
conducting business in an unsafe or unsound manner for purposes
28 of 143
of this SEC, the Monetary Board shall consider any of the following
circumstances:
56.4. The act or omission involves entering into any contract or
transaction manifestly and grossly disadvantageous to the bank,
quasi-bank or trust entity, whether or not the director or officer
profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting
its business in an unsafe or unsound manner, the Monetary Board
may, without prejudice to the administrative sanctions provided in
SEC 37 of the New Central Bank Act, take action under SEC 30 of
the same Act and/or immediately exclude the erring bank from
clearing, the provisions of law to the contrary notwithstanding. (n)
Receivership ( SEC 30; and R.A. 8791 SECs 69-70)
SEC 30. Proceedings in Receivership and Liquidation.
Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasibank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b) by the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable
losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under SEC
37 that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution; in
which cases, the Monetary Board may summarily and without need
for prior hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance
Corporation as receiver of the banking institution.
For a quasi-bank, any person of recognized competence in
banking or finance may be designed as receiver.
The receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the
benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the
funds of the institution in nonspeculative investments. The receiver
shall determine as soon as possible, but not later than ninety (90)
days from take over, whether the institution may be rehabilitated or
otherwise placed in such a condition so that it may be permitted to
resume business with safety to its depositors and creditors and the
general public: Provided, That any determination for the
resumption of business of the institution shall be subject to prior
approval of the Monetary Board.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume
business in accordance with the next preceding paragraph, the
Monetary Board shall notify in writing
the board of directors of its findings and direct the receiver to
proceed with the liquidation of the
institution. The receiver shall:
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
1. file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall, upon motion by
the receiver after due notice, adjudicate disputed claims against
the institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as
may be material to implement the liquidation plan adopted. The
receiver shall pay the cost of the proceedings from the assets of
the institution.
2. convert the assets of the institutions to money, dispose of the
same to creditors and other parties, for the purpose of paying the
debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as
may be necessary to collect and recover accounts and assets of,
or defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
The actions of the Monetary Board taken under this SEC or under
SEC 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on petition for certiorari
on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship. The designation of a conservator under SEC 29
of this Act or the appointment of a receiver under this SEC shall be
vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the
designation of a receiver.
SEC 69. Receivership and Involuntary Liquidation. The
grounds and procedures for placing a bank under receivership or
liquidation, as well as the powers and duties of the receiver or
liquidator appointed for the bank shall be governed by the
provisions of SECs 30, 31, 32, and 33 of the New Central Bank
Act: Provided, That the petitioner or plaintiff files with the clerk or
judge of the court in which the action is pending a bond, executed
in favor of the Bangko Sentral, in an amount to be fixed by the
court. This SEC shall also apply to the extent possible to the
receivership and liquidation proceedings of quasi-banks. (n)
SEC 70. Penalty for Transactions After a Bank Becomes
Insolvent. Any director or officer of any bank declared insolvent
or placed under receivership by the Monetary Board who refuses
to turn over the bank's records and assets to the designated
receivers, or who tampers with banks records, or who appropriates
for himself or another party or destroys or causes the
misappropriation and destruction of the bank's assets, or who
receives or permits or causes to be received in said bank any
deposit, collection of loans and/or receivables, or who pays out or
permits or causes to be paid out any funds of said bank, or who
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transfers or permits or causes to be transferred any securities or
property of said bank shall be subject to the penal provisions of the
New Central Bank Act. (85a)
Liquidation (SEC 30; and R.A. 8791 SEC 69)
SEC 30. Proceedings in Receivership and Liquidation.
Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasibank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided,
That this shall not include inability to pay caused by extraordinary
demands induced by
financial panic in the banking community;
(b) by the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses
to its depositors or creditors; or
(d) has willfully violated a cease and desist order under SEC 37
that has become final, involving
acts or transactions which amount to fraud or a dissipation of the
assets of the institution; in which cases, the Monetary Board may
summarily and without need for prior hearing forbid the
institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the
banking institution.
For a quasi-bank, any person of recognized competence in
banking or finance may be designed
as receiver.
The receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the
benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the
funds of the institution in nonspeculative investments. The receiver
shall determine as soon as possible, but not later than ninety (90)
days from take over, whether the institution may be rehabilitated or
otherwise placed in such a condition so that it may be permitted to
resume business with safety to its depositors and creditors and
the general public: Provided, That any determination for the
resumption of business of the institution shall be subject to prior
approval of the Monetary Board.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business in accordance with
the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver
to proceed with the liquidation of the institution. The receiver shall:
1. file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall, upon motion by
the receiver after due notice, adjudicate disputed claims against
the institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as
may be material to implement the liquidation plan adopted. The
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
receiver shall pay the cost of the proceedings from the assets of
the institution.
2. convert the assets of the institutions to money, dispose of the
same to creditors and other parties, for the purpose of paying the
debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as
may be necessary to collect and recover accounts and assets of,
or defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
The actions of the Monetary Board taken under this SEC or under
SEC 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on petition for certiorari
on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship. The designation of a conservator under SEC 29
of this Act or the appointment of a receiver under this SEC shall be
vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the
designation of a receiver.
SEC 69. Receivership and Involuntary Liquidation. The
grounds and procedures for placing a bank under receivership or
liquidation, as well as the powers and duties of the receiver or
liquidator appointed for the bank shall be governed by the
provisions of SECs 30, 31, 32, and 33 of the New Central Bank
Act: Provided, That the petitioner or plaintiff files with the clerk or
judge of the court in which the action is pending a bond, executed
in favor of the Bangko Sentral, in an amount to be fixed by the
court. This SEC shall also apply to the extent possible to the
receivership and liquidation proceedings of quasi-banks. (n)
How The BSP Handles Exchange Crises?
SEC 72. Emergency Restrictions on Exchange Operations.
In order to achieve the
primary objective of the Bangko Sentral as set forth in SEC 3 of
this Act, or protect the international
reserves of the Bangko Sentral in the imminence of, or during an
exchange crisis, or in time of national
emergency and to give the Monetary Board and the Government
time in which to take constructive
measures to forestall, combat, or overcome such a crisis or
emergency, the Monetary Board, with the
concurrence of at least five (5) of its members and with the
approval of the President of the Philippines,
may temporarily suspend or restrict sales of exchange by the
Bangko Sentral, and may subject all
transactions in gold and foreign exchange to license by the Bangko
Sentral, and may require that any
foreign exchange thereafter obtained by any person residing or
entity operating in the Philippines be
30 of 143
delivered to the Bangko Sentral or to any bank or agent designated
by the Bangko Sentral for the
purpose, at the effective exchange rate or rates: Provided,
however, That foreign currency deposits
made under Republic Act No. 6426 shall be exempt from these
requirements.
Functions of the BSP
SEC 50. Exclusive Issue Power. The Bangko Sentral shall
have the sole power and authority to issue currency, within the
territory of the Philippines. No other person or entity, public or
private, may put into circulation notes, coins or any other object or
document which, in the opinion of the Monetary Board, might
circulate as currency, nor reproduce or imitate the facsimiles of
Bangko Sentral notes without prior authority from the Bangko
Sentral.
The Monetary Board may issue such regulations as it may deem
advisable in order to prevent the circulation of foreign currency or
of currency substitutes as well as to prevent the reproduction of
facsimiles of Bangko Sentral notes.
The Bangko Sentral shall have the authority to investigate, make
arrests, conduct searches and seizures in accordance with law, for
the purpose of maintaining the integrity of the currency.
Violation of this provision or any regulation issued by the Bangko
Sentral pursuant thereto shall constitute an offense punishable by
imprisonment of not less than five (5) years but not more than
ten(10) years. In case the Revised Penal Code provides for a
greater penalty, then that penalty shall be imposed.
SEC 51. Liability for Notes and Coins. Notes and coins
issued by the Bangko Sentral
shall be liabilities of the Bangko Sentral and may be issued only
against, and in amounts not exceeding,
the assets of the Bangko Sentral. Said notes and coins shall be a
first and paramount lien on all assets
of the Bangko Sentral.
The Bangko Sentral's holdings of its own notes and coins shall not
be considered as part of its
currency issue and, accordingly, shall not form part of the assets or
liabilities of the Bangko Sentral.
SEC 52. Legal Tender Power. All notes and coins issued by
the Bangko Sentral shall
be fully guaranteed by the Government of the Republic of the
Philippines and shall be legal tender in the
Philippines for all debts, both public and private: Provided,
however, That, unless otherwise fixed by the
Monetary Board, coins shall be legal tender in amounts not
exceeding Fifty pesos (P50.00) for
denominations of Twenty-five centavos and above, and in amounts
not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos or less.
SEC 53. Characteristics of the Currency. The Monetary
Board, with the approval of
the President of the Philippines, shall prescribe the denominations,
dimensions, designs, inscriptions
and other characteristics of notes issued by the Bangko Sentral:
Provided, however, That said notes
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
shall state that they are liabilities of the Bangko Sentral and are
fully guaranteed by the Government of
the Republic of the Philippines. Said notes shall bear the
signatures, in facsimile, of the President of the
Philippines and of the Governor of the Bangko Sentral.
Similarly, the Monetary Board, with the approval of the President of
the Philippines, shall
prescribe the weight, fineness, designs, denominations and other
characteristics of the coins issued by
the Bangko Sentral. In the minting of coins, the Monetary Board
shall give full consideration to the
availability of suitable metals and to their relative prices and cost of
minting.
SEC 54. Printing of Notes and Mining of Coins. The
Monetary Board shall prescribe
the amounts of notes and coins to be printed and minted,
respectively, and the conditions to which the
printing of notes and the minting of coins shall be subject. The
Monetary Board shall have the authority
to contract institutions, mints or firms for such operations.
All expenses incurred in the printing of notes and the minting of
coins shall be for the account of
the Bangko Sentral.
SEC 55. Interconvertibility of Currency. The Bangko Sentral
shall exchange, on
demand and without charge, Philippine currency of any
denomination for Philippine notes and coins of
any other denomination requested. If for any reason the Bangko
Sentral is temporarily unable to
provide notes or coins of the denominations requested, it shall
meet its obligations by delivering notes
and coins of the denominations which most nearly approximate
those requested.
SEC 56. Replacement of Currency Unfit for Circulation. The
Bangko Sentral shall
withdraw from circulation and shall demonetize all notes and coins
which for any reason whatsoever are
unfit for circulation and shall replace them by adequate notes and
coins: Provided, however, That the
Bangko Sentral shall not replace notes and coins the identification
of which is impossible, coins which
show signs of filing, clipping or perforation, and notes which have
lost more than two-fifths (2/5) of their
surface or all of the signatures inscribed thereon. Notes and coins
in such mutilated conditions shall be
withdrawn from circulation and demonetized without compensation
to the bearer.
SEC 57. Retirement of Old Notes and Coins. The Bangko
Sentral may call in for
replacement notes of any series or denomination which are more
than five (5) years old and coins which
are more than (10) years old.
Notes and coins called in for replacement in accordance with this
provision shall remain legal
tender for a period of one (1) year from the date of call. After this
period, they shall cease to be legal
31 of 143
tender but during the following year, or for such longer period as
the Monetary Board may determine,
they may be exchanged at par and without charge in the Bangko
Sentral and by agents duly authorized
by the Bangko Sentral for this purpose. After the expiration of this
latter period, the notes and coins
which have not been exchanged shall cease to be a liability of the
Bangko Sentral and shall be
demonetized. The Bangko Sentral shall also demonetize all notes
and coins which have been called in
and replaced.
B. DEMAND DEPOSITS
SEC 58. Definition. For purposes of this Act, the term "demand
deposits" means all
those liabilities of the Bangko Sentral and of other banks which are
denominated in Philippine currency
and are subject to payment in legal tender upon demand by the
presentation of checks.
SEC 59. Issue of Demand Deposits. Only banks duly
authorized to do so may accept
funds or create liabilities payable in pesos upon demand by the
presentation of checks, and such
operations shall be subject to the control of the Monetary Board in
accordance with the powers granted
it with respect thereto under this Act.
SEC 60. Legal Character. Checks representing demand
deposits do not have legal
tender power and their acceptance in the payment of debts, both
public and private, is at the option of
the creditor: Provided, however, That a check which has been
cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor of cash in
an amount equal to the amount
credited to his account.
SEC 61. Guiding Principle. The Monetary Board shall
endeavor to control any
expansion or contraction in monetary aggregates which is
prejudicial to the attainment or maintenance
of price stability.
SEC 62. Power to Define Terms. For purposes of this article
and of this Act, the
Monetary Board shall formulate definitions of monetary
aggregates, credit and prices and shall make
public such definitions and any changes thereof.
SEC 63. Action When Abnormal Movements Occur in the
Monetary Aggregates, Credit, or Price Level. Whenever
abnormal movements in the monetary aggregates, in credit, or in
prices endanger the stability of the Philippine economy or
important sectors thereof, the Monetary Board
shall:
(a) take such remedial measures as are appropriate and within the
powers granted to the
Monetary Board and the Bangko Sentral under the provisions of
this Act; and
(b) submit to the President of the Philippines and the Congress,
and make public, a detailed
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
report which shall include, as a minimum, a description and
analysis of:
(1) the causes of the rise or fall of the monetary aggregates, of
credit or of prices;
(2) the extent to which the changes in the monetary aggregates, in
credit, or in prices
have been reflected in changes in the level of domestic output,
employment, wages
and economic activity in general, and the nature and significance
of any such
changes; and
(3) the measures which the Monetary Board has taken and the
other monetary, fiscal or
administrative measures which it recommends to be adopted.
Whenever the monetary aggregates, or the level of credit,
increases or decreases by more thanfifteen percent (15%), or the
cost of living index increases by more than ten percent (10%), in
relation to the level existing at the end of the corresponding month
of the preceding year, or even though any of these quantitative
guidelines have not been reached when in its judgment the
circumstances so warrant, the Monetary Board shall submit the
reports mentioned in this SEC, and shall state therein whether, in
the opinion of the Board, said changes in the monetary
aggregates, credit or cost of living represent a threat to the stability
of the Philippine economy or of important sectors thereof.
The Monetary Board shall continue to submit periodic reports to
the President of the Philippines and to Congress until it considers
that the monetary, credit or price disturbances have disappeared
or have been adequately controlled.
SEC 64. International Monetary Stabilization. The Bangko
Sentral shall exercise its powers under this Act to preserve the
international value of the peso and to maintain its convertibility into
other freely convertible currencies primarily for, although not
necessarily limited to, current payments for foreign trade and
invisibles.
SEC 65. International Reserves. In order to maintain the
international stability and convertibility of the Philippine peso, the
Bangko Sentral shall maintain international reserves adequate to
meet any foreseeable net demands on the Bangko Sentral for
foreign currencies.
In judging the adequacy of the international reserves, the Monetary
Board shall be guided by the prospective receipts and payments of
foreign exchange by the Philippines. The Board shall give special
attention to the volume and maturity of the Bangko Sentral's own
liabilities in foreign currencies, to the volume and maturity of the
foreign exchange assets and liabilities of other banks operating in
the Philippines and, insofar as they are known or can be
estimated, the volume and maturity of the foreign exchange assets
and liabilities of all other persons and entities in the Philippines.
SEC 66. Composition of the International Reserves. The
international reserves of
the Bangko Sentral may include but shall not be limited to the
following assets:
(a) gold; and
(b) assets in foreign currencies in the form of: documents and
instruments customarily employed
for the international transfer of funds; demand and time deposits in
central banks, treasuries
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and commercial banks abroad; foreign government securities; and
foreign notes and coins.
The Monetary Board shall endeavor to hold the foreign exchange
resources of the Bangko
Sentral in freely convertible currencies; moreover, the Board shall
give particular consideration to the
prospects of continued strength and convertibility of the currencies
in which the reserve is maintained,
as well as to the anticipated demands for such currencies. The
Monetary Board shall issue regulations
determining the other qualifications which foreign exchange assets
must meet in order to be included in
the international reserves of the Bangko Sentral.
The Bangko Sentral shall be free to convert any of the assets in its
international reserves into
other assets as described in subSECs (a) and (b) of this SEC.
SEC 81. Guiding Principles. The rediscounts, discounts, loans
and advances which
the Bangko Sentral is authorized to extend to banking institutions
under the provisions of the present
article of this Act shall be used to influence the volume of credit
consistent with the objective of price
stability.
SEC 82. Authorized Types of Operations. Subject to the
principle stated in the
preceding SEC of this Act, the Bangko Sentral may normally and
regularly carry on the following
credit operations with banking institutions operating in the
Philippines:
(a) Commercial credits. The Bangko Sentral may rediscount,
discount, buy and sell bills,
acceptances, promissory notes and other credit instruments with
maturities of not more than
one hundred eighty (180) days from the date of their rediscount,
discount or acquisition by
the Bangko Sentral and resulting from transactions related to:
(1) the importation, exportation, purchase or sale of readily
saleable goods and products,
or their transportation within the Philippines; or
(2) the storing of non-perishable goods and products which are
duly insured and
deposited, under conditions assuring their preservation, in
authorized bonded
warehouses or in other places approved by the Monetary Board.
(b) Production credits. The Bangko Sentral may rediscount,
discount, buy and sell bills,
acceptances, promissory notes and other credit instruments having
maturities of not more
than three hundred sixty (360) days from the date of their
rediscount, discount or acquisition
by the Bangko Sentral and resulting from transactions related to
the production or processing
of agricultural, animal, mineral, or industrial products. Documents
or instruments acquired in
accordance with this subSEC shall be secured by a pledge of the
respective crops or
products: Provided, however, That the crops or products need not
be pledged to secure the
documents if the original loan granted by the Bangko Sentral is
secured by a lien or mortgage
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on real estate property seventy percent (70%) of the appraised to banking institutions for a period of not more than seven (7) days
value of which equals or without any collateral for the purpose
exceeds the amount of the loan granted. of providing liquidity to the banking system in times of need.

(c) Other credits. Special credit instruments not otherwise D. EMERGENCY CREDIT OPERATION
rediscountable under the SEC 84. Emergency Loans and Advances. In periods of
immediately preceding subSECs (a) and (b) may be eligible for national and/or local
rediscounting in emergency or of imminent financial panic which directly threaten
accordance with rules and regulations which the Bangko Sentral monetary and banking stability, the
shall prescribe. Whenever Monetary Board may, by a vote of at least five (5) of its members,
necessary, the Bangko Sentral shall provide funds from non- authorize the Bangko Sentral to grant
inflationary sources: Provided, extraordinary loans or advances to banking institutions secured by
however, That the Monetary Board shall prescribe additional assets as defined hereunder:
safeguards for disbursing these Provided, That while such loans or advances are outstanding, the
funds. debtor institution shall not, except
upon prior authorization by the Monetary Board, expand the total
(d) Advances. The Bangko Sentral may grant advances against volume of its loans or investments.
the following kinds of The Monetary Board may, at its discretion, likewise authorize the
collaterals for fixed periods which, with the exception of advances Bangko Sentral to grant
against collateral named in emergency loans or advances to banking institutions, even during
clause (4) of the present subSEC, shall not exceed one hundred normal periods, for the purpose of
eighty (180) days: assisting a bank in a precarious financial condition or under
(1) gold coins or bullion; serious financial pressures brought by
(2) securities representing obligations of the Bangko Sentral or of unforeseen events, or events which, though foreseeable, could not
other domestic be prevented by the bank
institutions of recognized solvency; concerned: Provided, however, That the Monetary Board has
(3) the credit instruments to which reference is made in subSEC ascertained that the bank is not insolvent
(a) of this SEC; and has the assets defined hereunder to secure the advances:
(4) the credit instruments to which reference is made in subSEC Provided, further, That a concurrent vote
(b) of this SEC, for of at least five (5) members of the Monetary Board is obtained.
periods which shall not exceed three hundred sixty (360) days;
(5) utilized portions of advances in current amount covered by The amount of any emergency loan or advance shall not exceed
regular overdraft the sum of fifty percent (50%)
agreements related to operations included under subSECs (a) and of total deposits and deposit substitutes of the banking institution
(b) of this and shall be disbursed in two (2) or
SEC, and certified as to amount and liquidity by the institution more tranches. The amount of the first tranche shall be limited to
soliciting the twenty-five percent (25%) of the total
advance; deposit and deposit substitutes of the institution and shall be
(6) negotiable treasury bills, certificates of indebtedness, notes and secured by government securities to the
other negotiable extent of their applicable loan values and other unencumbered first
obligations of the Government maturing within three (3) years from class collaterals which the Monetary
the date of the Board may approve: Provided, That if as determined by the
advance; and Monetary Board, the circumstances
(7) negotiable bonds issued by the Government of the Philippines, surrounding the emergency warrant a loan or advance greater than
by Philippine the amount provided hereinabove,
provincial, city or municipal governments, or by any Philippine the amount of the first tranche may exceed twenty-five percent
Government (25%) of the bank's total deposit and
instrumentality, and having maturities of not more than ten (10) deposit substitutes if the same is adequately secured by applicable
years from the date of loan values of government
advance. securities and unencumbered first class collaterals approved by
The rediscounts, discounts, loans and advances made in the Monetary Board, and the principal
accordance with the provisions of this stockholders of the institution furnish an acceptable undertaking to
SEC may not be renewed or extended unless extraordinary indemnify and hold harmless from
circumstances fully justify such renewal suit a conservator whose appointment the Monetary Board may
or extension. find necessary at any time.
Advances made against the collateral named in clauses (6) and (7)
of subSEC (d) of this Prior to the release of the first tranche, the banking institution shall
SEC may not exceed eighty percent (80%) of the current market submit to the Bangko Sentral
value of the collateral. a resolution of its board of directors authorizing the Bangko Sentral
to evaluate other assets of the
C. SPECIAL CREDIT OPERATION banking institution certified by its external auditor to be good and
SEC 83. Loans for Liquidity Purposes. The Bangko Sentral available for collateral purposes
may extend loans and advances should the release of the subsequent tranche be thereafter applied
for.
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The Monetary Board may, by a vote of at least five (5) of its
members, authorize the release of
a subsequent tranche on condition that the principal stockholders
of the institution:
(a) furnish an acceptable undertaking to indemnify and hold
harmless from suit a conservator
whose appointment the Monetary Board may find necessary at any
time; and
(b) provide acceptable security which, in the judgment of the
Monetary Board, would be
adequate to supplement, where necessary, the assets tendered by
the banking institution to
collateralize the subsequent tranche.
In connection with the exercise of these powers, the prohibitions in
SEC 128 of this Act shall
not apply insofar as it refers to acceptance as collateral of shares
and their acquisition as a result of
foreclosure proceedings, including the exercise of voting rights
pertaining to said shares: Provided,
however, That should the Bangko Sentral acquire any of the
shares it has accepted as collateral as a
result of foreclosure proceedings, the Bangko Sentral shall dispose
of said shares by public bidding
within one (1) year from the date of consolidation of title by the
Bangko Sentral.
Whenever a financial institution incurs an overdraft in its account
with the Bangko Sentral, the
same shall be eliminated within the period prescribed in SEC 102
of this Act.
E. CREDIT TERMS
SEC 85. Interest and Rediscount. The Bangko Sentral shall
collect interest and other
appropriate charges on all loans and advances it extends, the
closure, receivership or liquidations of the
debtor-institution notwithstanding. This provision shall apply
prospectively.
The Monetary Board shall fix the interest and rediscount rates to
be charged by the Bangko
Sentral on its credit operations in accordance with the character
and term of the operation, but after due
consideration has been given to the credit needs of the market, the
composition of the Bangko Sentral's
portfolio, and the general requirements of the national monetary
policy. Interest and rediscount rates
shall be applied to all banks of the same category uniformly and
without discrimination.
SEC 86. Endorsement. The documents rediscounted,
discounted, bought or accepted
as collateral by the Bangko Sentral in the course of the credit
operations authorized in this article shall
bear the endorsement of the institution from which they are
received.
SEC 87. Repayment of Credits. Documents rediscounted,
discounted or accepted as
collateral by the Bangko Sentral must be withdrawn by the
borrowing institution on the dates of their
maturities, or upon liquidation of the obligations which they
represent or to which they relate whenever
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said obligations have been liquidated prior to their dates of
maturity.
Banks shall have the right at any time to withdraw any documents
which they have presented to
the Bangko Sentral as collateral, upon payment in full of the
corresponding debt to the Bangko Sentral,
including interest charges.
SEC 88. Other requirements. The Monetary Board may
prescribe, within the general
powers granted to it under this Act, additional conditions which
borrowing institutions must satisfy in
order to have access to the credit of the Bangko Sentral. These
conditions may refer to the rates of
interest charged by the banks, to the purposes for which their
loans in general are destined, and to any
other clearly definable aspect of the credit policy of the bank.
SEC 89. Provisional Advances to the National Government.
The Bangko Sentral
may make direct provisional advances with or without interest to
the National Government to finance
expenditures authorized in its annual appropriation: Provided, That
said advances shall be repaid before
the end of three (3) months extendible by another three (3) months
as the Monetary Board may allow
following the date the National Government received such
provisional advances and shall not, in their
aggregate, exceed twenty percent (20%) of the average annual
income of the borrower for the last three
(3) preceding fiscal years.
SEC 94. Reserve Requirements. In order to control the volume
of money created by
the credit operations of the banking system, all banks operating in
the Philippines shall be required to
maintain reserves against their deposit liabilities: Provided, That
the Monetary Board may, at its
discretion, also require all banks and/or quasi-banks to maintain
reserves against funds held in trust and
liabilities for deposit substitutes as defined in this Act. The required
reserves of each bank shall be
proportional to the volume of its deposit liabilities and shall
ordinarily take the form of a deposit in the
Bangko Sentral. Reserve requirements shall be applied to all
banks of the same category uniformly and
without discrimination.
Reserves against deposit substitutes, if imposed, shall be
determined in the same manner as
provided for reserve requirements against regular bank deposits,
with respect to the imposition,
increase, and computation of reserves.
The Monetary Board may exempt from reserve requirements
deposits and deposit substitutes
with remaining maturities of two (2) years or more, as well as
interbank borrowings.
Since the requirement to maintain bank reserves is imposed
primarily to control the volume of
money, the Bangko Sentral shall not pay interest on the reserves
maintained with it unless the Monetary
Board decides otherwise as warranted by circumstances.
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SEC 102. Interbank Settlement. The Bangko Sentral shall
establish facilities for
interbank clearing under such rules and regulations as the
Monetary Board may prescribe: Provided,
That the Bangko Sentral may charge administrative and other fees
for the maintenance of such
facilities.
The deposit reserves maintained by the banks in the Bangko
Sentral in accordance with the
provisions of SEC 94 of this Act shall serve as basis for the
clearing of checks and the settlement of
interbank balances, subject to such rules and regulations as the
Monetary Board may issue with respect
to such operations: Provided, That any bank which incurs on
overdrawing in its deposit account with the
Bangko Sentral shall fully cover said overdraft, including interest
thereon at a rate equivalent to onetenth
of one percent (1/10 of 1%) per day or the prevailing ninety-one-
day treasury bill rate plus three
percentage points, whichever is higher, not later than the next
clearing day: Provided, further, That
settlement of clearing balances shall not be effected for any
account which continues to be overdrawn
for five (5) consecutive banking days until such time as the
overdrawing is fully covered or otherwise
converted into an emergency loan or advance pursuant to the
provisions of SEC 84 of this Act:
Provided, finally, That the appropriate clearing office shall be
officially notified of banks with overdrawn
balances. Banks with existing overdrafts with the Bangko Sentral
as of the effectivity of this Act shall,
within such period as may be prescribed by the Monetary Board,
either convert the overdraft into an
emergency loan or advance with a plan of payment, or settle such
overdrafts, and that, upon failure to
so comply herewith, the Bangko Sentral shall take such action
against the bank as may be warranted
under this Act.
SEC 103. Exemption from Attachment and Other Purposes.
Deposits maintained
by banks with the Bangko Sentral as part of their reserve
requirements shall be exempt from
attachment, garnishments, or any other order or process of any
court, government agency or any other
administrative body issued to satisfy the claim of a party other than
the Government, or its political
subdivisions or instrumentalities.
SEC 110. Designation of Bangko Sentral as Banker of the
Government. The
Bangko Sentral shall act as a banker of the Government, its
political subdivisions and instrumentalities.
SEC 111. Representation with the International Monetary
Fund. The Bangko
Sentral shall represent the Government in all dealings,
negotiations and transactions with the
International Monetary Fund and shall carry such accounts as may
result from Philippine membership
in, or operations with, said Fund.
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SEC 112. Representation with Other Financial Institutions.
The Bangko Sentral
may be authorized by the Government to represent it in dealings,
negotiations or transactions with the
International Bank for Reconstruction and Development and with
other foreign or international financial
institutions or agencies. The President may, however, designate
any of his other financial advisors to
jointly represent the Government in such dealings, negotiations or
transactions.
SEC 113. Official Deposits. The Bangko Sentral shall be the
official depository of the
Government, its political subdivisions and instrumentalities as well
as of government-owned or
controlled corporations and, as a general policy, their cash
balances should be deposited with the
Bangko Sentral, with only minimum working balances to be held by
government-owned banks and such
other banks incorporated in the Philippines as the Monetary Board
may designate, subject to such rules
and regulations as the Board may prescribe: Provided, That such
banks may hold deposits of the
political subdivisions and instrumentalities of the Government
beyond their minimum working balances
whenever such subdivisions or instrumentalities have outstanding
loans with said banks.
The Bangko Sentral may pay interest on deposits of the
Government or of its political
subdivisions and instrumentalities, as well as on deposits of banks
with the Bangko Sentral.
SEC 114. Fiscal Operations. The Bangko Sentral shall open a
general cash account
for the Treasurer of the Philippines, in which the liquid funds of the
Government shall be deposited.
Transfers of funds from this account to other accounts shall be
made only upon order of the
Treasurer of the Philippines.
SEC 115. Other Banks as Agents of the Bangko Sentral. In
the performance of its
functions as fiscal agent, the Bangko Sentral may engage the
services of other government-owned and
controlled banks and of other domestic banks for operations in
localities at home or abroad in which the
Bangko Sentral does not have offices or agencies adequately
equipped to perform said operations:
Provided, however, That for fiscal operations in foreign countries,
the Bangko Sentral may engage the
services of foreign banking and financial institutions.
SEC 116. Remuneration for Services. The Bangko Sentral
may charge equitable
rates, commissions or fees for services which it renders to the
Government, its political subdivisions and
instrumentalities.
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ARTICLE II. THE MARKETING AND STABILIZATION OF
SECURITIES FOR THE
ACCOUNT OF THE GOVERNMENT
A. THE ISSUE AND PLACING OF GOVERNMENT SECURITIES
SEC 117. Issue of Government Obligations. The issue of
securities representing
obligations of the Government, its political subdivisions or
instrumentalities, may be made through the
Bangko Sentral, which may act as agent of, and for the account of,
the Government or its respective
subdivisions or instrumentality, as the case may be: Provided,
however, That the Bangko Sentral shall
not guarantee the placement of said securities, and shall not
subscribe to their issue except to replace
its maturing holdings of securities with the same type as the
maturing securities.
SEC 118. Methods of Placing Government Securities. The
Bangko Sentral may
place the securities to which the preceding SEC refers through
direct sale to financial institutions and
the public.
The Bangko Sentral shall not be a member of any stock exchange
or syndicate, but may
intervene therein for the sole purpose of regulating their operations
in the placing of government
securities.
The Government, or its political subdivisions or instrumentalities,
shall reimburse the Bangko
Sentral for the expenses incurred in the placing of the aforesaid
securities.
SEC 119. Servicing and Redemption of the Public Debt. The
servicing and
redemption of the public debt shall also be effected through the
Bangko Sentral.
B. BANGKO SENTRAL SUPPORT OF THE GOVERNMENT
SECURITIES MARKET
SEC 120. The Securities Stabilization Fund. There shall be
established a
"Securities Stabilization Fund" which shall be administered by the
Bangko Sentral for the account of the
Government.
The operations of the Securities Stabilization Fund shall consist of
purchases and sales, in the
open market, of bonds and other evidences of indebtedness
issued or fully guaranteed by the
Government. The purpose of these operations shall be to increase
the liquidity and stabilize the value
of said securities in order thereby to promote investment in
government obligations.
The Monetary Board shall use the resources of the Fund to
prevent, or moderate, sharp
fluctuations in the quotations of said government obligations, but
shall not endeavor to alter movements
of the market resulting from basic changes in the pattern or level of
interest rates.
The Monetary Board shall issue such regulations as may be
necessary to implement the
provisions of this SEC.
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SEC 121. Resources of the Securities Stabilization Fund.
Subject to SEC 132
of this Act, the resources of the Securities Stabilization Fund shall
come from the balance of the fund as
held by the Central Bank under Republic Act No. 265 as of the
effective date of this Act.
SEC 122. Profits and Losses of the Fund. The Securities
Stabilization Fund shall
retain net profits which it may make on its operations, regardless of
whether said profits arise from
capital gains or from interest earnings. The Fund shall
correspondingly bear any net losses which it
may incur.
ARTICLE III. FUNCTIONS AS FINANCIAL ADVISOR OF THE
GOVERNMENT
SEC 123. Financial Advice on Official Credit Operations.
Before undertaking any
credit operation abroad, the Government, through the Secretary of
Finance, shall request the opinion, in
writing, of the Monetary Board on the monetary implications of the
contemplated action. Such opinions
must similarly be requested by all political subdivisions and
instrumentalities of the Government before
any credit operation abroad is undertaken by them.
The opinion of the Monetary Board shall be based on the gold and
foreign exchange resources
and obligations of the nation and on the effects of the proposed
operation on the balance of payments
and on monetary aggregates.
Whenever the Government, or any of its political subdivisions or
instrumentalities, contemplates
borrowing within the Philippines, the prior opinion of the Monetary
Board shall likewise be requested in
order that the Board may render an opinion on the probable effects
of the proposed operation on
monetary aggregates, the price level, and the balance of
payments.
SEC 124. Representation on the National Economic and
Development Authority.
In order to assure effective coordination between the economic,
financial and fiscal policies of the
Government and the monetary, credit and exchange policies of the
Bangko Sentral, the Deputy
Governor designated by the Governor of the Bangko Sentral shall
be an ex officio member of the
National Economic and Development Authority Board.
Exclusive issue power
SEC 50. Exclusive Issue Power. The Bangko Sentral shall
have the sole power and
authority to issue currency, within the territory of the Philippines.
No other person or entity, public or
private, may put into circulation notes, coins or any other object or
document which, in the opinion of the
Monetary Board, might circulate as currency, nor reproduce or
imitate the facsimiles of Bangko Sentral
notes without prior authority from the Bangko Sentral.
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The Monetary Board may issue such regulations as it may deem

advisable in order to prevent Setting of bank reserve requirements
the circulation of foreign currency or of currency substitutes as well
as to prevent the reproduction of SEC 94. Reserve Requirements. In order to control the volume
facsimiles of Bangko Sentral notes. of money created by
the credit operations of the banking system, all banks operating in
The Bangko Sentral shall have the authority to investigate, make the Philippines shall be required to
arrests, conduct searches and maintain reserves against their deposit liabilities: Provided, That
seizures in accordance with law, for the purpose of maintaining the the Monetary Board may, at its
integrity of the currency. discretion, also require all banks and/or quasi-banks to maintain
Violation of this provision or any regulation issued by the Bangko reserves against funds held in trust and
Sentral pursuant thereto shall liabilities for deposit substitutes as defined in this Act. The required
constitute an offense punishable by imprisonment of not less than reserves of each bank shall be
five (5) years but not more than ten proportional to the volume of its deposit liabilities and shall
(10) years. In case the Revised Penal Code provides for a greater ordinarily take the form of a deposit in the
penalty, then that penalty shall be Bangko Sentral. Reserve requirements shall be applied to all
imposed. banks of the same category uniformly and
without discrimination.
Liability for notes and coins
Reserves against deposit substitutes, if imposed, shall be
SEC 51. Liability for Notes and Coins. Notes and coins determined in the same manner as
issued by the Bangko Sentral provided for reserve requirements against regular bank deposits,
shall be liabilities of the Bangko Sentral and may be issued only with respect to the imposition,
against, and in amounts not exceeding, increase, and computation of reserves.
the assets of the Bangko Sentral. Said notes and coins shall be a
first and paramount lien on all assets The Monetary Board may exempt from reserve requirements
of the Bangko Sentral. deposits and deposit substitutes
The Bangko Sentral's holdings of its own notes and coins shall not with remaining maturities of two (2) years or more, as well as
be considered as part of its interbank borrowings.
currency issue and, accordingly, shall not form part of the assets or Since the requirement to maintain bank reserves is imposed
liabilities of the Bangko Sentral. primarily to control the volume of
money, the Bangko Sentral shall not pay interest on the reserves
maintained with it unless the Monetary
Legal Tender Power Board decides otherwise as warranted by circumstances.

SEC 95. Definition of Deposit Substitutes. The term "deposit

SEC 53. Characteristics of the Currency. The Monetary
substitutes" is defined
Board, with the approval of
as an alternative form of obtaining funds from the public, other than
the President of the Philippines, shall prescribe the denominations,
deposits, through the issuance,
dimensions, designs, inscriptions
endorsement, or acceptance of debt instruments for the borrower's
and other characteristics of notes issued by the Bangko Sentral:
own account, for the purpose of
Provided, however, That said notes
relending or purchasing of receivables and other obligations.
shall state that they are liabilities of the Bangko Sentral and are
These instruments may include, but need
fully guaranteed by the Government of
not be limited to, bankers acceptances, promissory notes,
the Republic of the Philippines. Said notes shall bear the
participations, certificates of assignment and
signatures, in facsimile, of the President of the
similar instruments with recourse, and repurchase agreements.
Philippines and of the Governor of the Bangko Sentral.
The Monetary Board shall determine
what specific instruments shall be considered as deposit
Similarly, the Monetary Board, with the approval of the President of
substitutes for the purposes of SEC 94 of
the Philippines, shall
this Act: Provided, however, That deposit substitutes of
prescribe the weight, fineness, designs, denominations and other
commercial, industrial and other non-financial
characteristics of the coins issued by
companies for the limited purpose of financing their own needs or
the Bangko Sentral. In the minting of coins, the Monetary Board
the needs of their agents or dealers
shall give full consideration to the
shall not be covered by the provisions of SEC 94 of this Act.
availability of suitable metals and to their relative prices and cost of
minting.
SEC 96. Required Reserves Against Peso Deposits. The
Monetary Board may fix
and, when it deems necessary, alter the minimum reserve ratios to
peso deposits, as well as to deposit
substitutes, which each bank and/or quasi-bank may maintain, and
such ratio shall be applied uniformly
to all banks of the same category as well as to quasi-banks.

Instruments of action
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SEC 97. Required Reserves Against Foreign Currency
Deposits. The Monetary
Board is similarly authorized to prescribe and modify the minimum
reserve ratios applicable to deposits
denominated in foreign currencies.
SEC 98. Reserves Against Unused Balances of Overdraft
Lines. In order to
facilitate Bangko Sentral control over the volume of bank credit, the
Monetary Board may establish
minimum reserve requirements for unused balances of overdraft
lines.
The powers of the Monetary Board to prescribe and modify reserve
requirements against
unused balances of overdraft lines shall be the same as its powers
with respect to reserve requirements
against demand deposits.
SEC 99. Increase in Reserve Requirements. Whenever in the
opinion of the
Monetary Board it becomes necessary to increase reserve
requirements against existing liabilities, the
increase shall be made in a gradual manner and shall not exceed
four percentage points in any thirtyday
period. Banks and other affected financial institutions shall be
notified reasonably in advance of the
date on which such increase is to become effective.
SEC 100. Computation on Reserves. The reserve position of
each bank or quasibank
shall be calculated daily on the basis of the amount, at the close of
business for the day, of the
institution's reserves and the amount of its liability accounts
against which reserves are required to be
maintained: Provided, That with reference to holidays or non-
banking days, the reserve position as
calculated at the close of the business day immediately preceding
such holidays and non-banking days
shall apply on such days.
For the purpose of computing the reserve position of each bank or
quasi-bank, its principal
office in the Philippines and all its branches and agencies located
therein shall be considered as a
single unit.
SEC 101. Reserve Deficiencies. Whenever the reserve
position of any bank or quasibank,
computed in the manner specified in the preceding SEC of this Act,
is below the required
minimum, the bank or quasi-bank shall pay the Bangko Sentral
one-tenth of one percent (1/10 of 1%)
per day on the amount of the deficiency or the prevailing ninety-
one-day treasury bill rate plus three
percentage points, whichever is higher: Provided, however, That
banks and quasi-banks shall ordinarily
be permitted to offset any reserve deficiency occurring on one or
more days of the week with any
excess reserves which they may hold on other days of the same
week and shall be required to pay the
penalty only on the average daily deficiency during the week. In
cases of abuse, the Monetary Board
may deny any bank or quasi-bank the privilege of offsetting
reserve deficiencies in the aforesaid
manner.
38 of 143
If a bank or quasi-bank chronically has a reserve deficiency, the
Monetary Board may limit or
prohibit the making of new loans or investments by the institution
and may require that part or all of the
net profits of the institution be assigned to surplus.
The Monetary Board may modify or set aside the reserve
deficiency penalties provided in this
SEC, for part or the entire period of a strike or lockout affecting a
bank or a quasi-bank as defined in
the Labor Code, or of a national emergency affecting operations of
banks or quasi-banks. The
Monetary Board may also modify or set aside reserved deficiency
penalties for rehabilitation program of
a bank.
SEC 102. Interbank Settlement. The Bangko Sentral shall
establish facilities for
interbank clearing under such rules and regulations as the
Monetary Board may prescribe: Provided,
That the Bangko Sentral may charge administrative and other fees
for the maintenance of such
facilities.
The deposit reserves maintained by the banks in the Bangko
Sentral in accordance with the
provisions of SEC 94 of this Act shall serve as basis for the
clearing of checks and the settlement of
interbank balances, subject to such rules and regulations as the
Monetary Board may issue with respect
to such operations: Provided, That any bank which incurs on
overdrawing in its deposit account with the
Bangko Sentral shall fully cover said overdraft, including interest
thereon at a rate equivalent to onetenth
of one percent (1/10 of 1%) per day or the prevailing ninety-one-
day treasury bill rate plus three
percentage points, whichever is higher, not later than the next
clearing day: Provided, further, That
settlement of clearing balances shall not be effected for any
account which continues to be overdrawn
for five (5) consecutive banking days until such time as the
overdrawing is fully covered or otherwise
converted into an emergency loan or advance pursuant to the
provisions of SEC 84 of this Act:
Provided, finally, That the appropriate clearing office shall be
officially notified of banks with overdrawn
balances. Banks with existing overdrafts with the Bangko Sentral
as of the effectivity of this Act shall,
within such period as may be prescribed by the Monetary Board,
either convert the overdraft into an
emergency loan or advance with a plan of payment, or settle such
overdrafts, and that, upon failure to
so comply herewith, the Bangko Sentral shall take such action
against the bank as may be warranted
under this Act.
SEC 103. Exemption from Attachment and Other Purposes.
Deposits maintained
by banks with the Bangko Sentral as part of their reserve
requirements shall be exempt from
attachment, garnishments, or any other order or process of any
court, government agency or any other
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administrative body issued to satisfy the claim of a party other than
the Government, or its political
subdivisions or instrumentalities.
Control of bank credit
SEC 104. Guiding Principle. The Monetary Board shall use the
powers granted to it
under this Act to ensure that the supply, availability and cost of
money are in accord with the needs of
the Philippine economy and that bank credit is not granted for
speculative purposes prejudicial to the
national interests. Regulations on bank operations shall be applied
to all banks of the same category
uniformly and without discrimination.
SEC 105. Margin Requirements Against Letters of Credit.
The Monetary Board
may at any time prescribe minimum cash margins for the opening
of letters of credit, and may relate the
size of the required margin to the nature of the transaction to be
financed.
SEC 106. Required Security Against Bank Loans. In order to
promote liquidity and
solvency of the banking system, the Monetary Board may issue
such regulations as it may deem
necessary with respect to the maximum permissible maturities of
the loans and investments which the
banks may make, and the kind and amount of security to be
required against the various types of credit
operations of the banks.
SEC 107. Portfolio Ceilings. Whenever the Monetary Board
considers it advisable to
prevent or check an expansion of bank credit, the Board may place
an upper limit on the amount of
loans and investments which the banks may hold, or may place a
limit on the rate of increase of such
assets within specified periods of time. The Monetary Board may
apply such limits to the loans and
investments of each bank or to specific categories thereof.
In no case shall the Monetary Board establish limits which are
below the value of the loans or
investments of the banks on the date on which they are notified of
such restrictions. The restrictions
shall be applied to all banks uniformly and without discrimination.
SEC 108. Minimum Capital Ratios. The Monetary Board may
prescribe minimum
ratios which the capital and surplus of the banks must bear to the
volume of their assets, or to specific
categories thereof, and may alter said ratios whenever it deems
necessary.
SEC 37. Loans and Other Credit Accommodations Against
Real Estate. Except as
the Monetary Board may otherwise prescribe, loans and other
credit accommodations against real estate
shall not exceed seventy-five percent (75%) of the appraised value
of the respective real estate security,
plus sixty percent (60%) of the appraised value of the insured
improvements, and such loans may be
made to the owner of the real estate or to his assignees. (78a)
39 of 143
SEC 38. Loans and Other Credit Accommodations on Security
of Chattels and
Intangible Properties. Except as the Monetary Board may
otherwise prescribe, loans and other credit
accommodations on security of chattels and intangible properties,
such as, but not limited to, patents,
trademarks, trade names, and copyrights shall not exceed
seventy-five percent (75%) of the appraised
value of the security, and such loans and other credit
accommodations may be made to the title-holder of
the chattels and intangible properties or his assignees. (78a)
SEC 43. Authority to Prescribe Terms and Conditions of
Loans and Other Credit Accommodations. The Monetary
Board may, similarly, in accordance with the authority granted to it
in SEC 106 of the New Central Bank Act, and taking into account
the requirements of the economy for
the effective utilization of long-term funds, prescribe the maturities,
as well as related terms and
conditions for various types of bank loans and other credit
accommodations. Any change by the Board in
the maximum maturities shall apply only to loans and other credit
accommodations made after the date of
such action.
The Monetary Board shall regulate the interest imposed on
microfinance borrowers by lending
investors and similar lenders, such as, but not limited to, the
unconscionable rates of interest collected on
salary loans and similar credit accommodations. (78a)
Moral Influence
SEC 68. Means of Action. In order to achieve the primary
objective of price stability,
the Monetary Board shall rely on its moral influence and the
powers granted to it under this Act for the
management of monetary aggregates.
CASES:
No Need For Prior Hearing
RURAL BANK OF BUHI vs. CA
G.R. No. L-61689
20 June 1988
Facts:
Buhi is a rural bank that started its operations only on 26 Dec 1975
In 1980, an examination of the books and affairs of Buhi was
ordered conducted by the Rural Banks and Savings and Loan
Association (DRBSLA), Central Bank of the Philippines
which by law, has charge of the supervision and examination of
rural banks and savings and loan associations in the Philippines
Buhi refused
Financial assistance was suspended
DRBSLA (through Odra) conducted a general examination of
Buhis affairs and operations
It found , among others, massive irregularities in its operations
consisting of loans to unknown and fictitious borrowers
The money due in favor of Central Bank amounted to almost P3M
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Promissory notes evidencing these loans were rediscounted by CB
for cash
Buhi became insolvent and prejudiced its depositors and creditors
Odra recommended the placing of Buhi under receivership
The Monetary Board placed Buhi under under receivership with
Odra as the receiver
Odra authorized deputied to take control, possession and charge
of Buhi
Rosario, manager of Buhi, filed a petition for injunction against
Odra and the deputies
She is assailing the action of Odra in recommending receivership
as against the Rural Banks Act and done with gadalej
CB Monetary Board ordered the liquidation of Buhi
OSG filed a petition for Assistance in the Liquidation of Buhi
CB filed MTD on the complaint submitted by Rosario
Receivership is now moot and academic since the bank is already
in liquidation
Judge denied MTD and issued a TRO enjoining CB from further
managing and administering Buhi and to deliver the possession
and control thereof to Buhi under the same conditions and with the
same financial status as when the same was taken over, upon
filing of bond
Bond was filed, Judge issued writ of execution was made directing
the sheriff to implement courts order
Sheriff went to the premises of Buhi but the vault was locked and
no inventory was made
Buhi filed petitions to:
Force open bank vault
(later) order manager of City Trust to allow Buhi to withdraw rural
bank deposits
Order manager of Metrobank to release deposits of Buhi
All granted by court (wow accommodating court)
CB, Odra et al filed a petition for certiorari and prohibition with CA
CA issued a resolution restraining Judge from enforcing his order
Buhi did not comply with order of CA and file MR. MR denied
CB et al filed a motion with CA to cite Buhi in contempt
CA gave show cause order to Buhi and directed Ministry of
National Defense to cause the return of the possession and
management of Buhi to CB and Odra
Buhi filed objection to both
Alleging that the properties were already in the possession of Buhi
who is the lawful owner and the return could no longer be done
CA rendered its decision setting aside the order of lower court and
dismissing the petition of Buhi. MR denied
Buhi agreed and promised in open court to restore and return to
CB the possession and control of the bank within 3 days
After 3 days, manager of the bank adamantly refused to surrender
the premises
Manager placed under arrest since she still refused to obey the CA
Buhi filed petition for review on certiorari with preliminary
injunctionanager also filed a petition for the issuance of writ of
habeas corpus
Manager released
Issue: WON Monetary Board may place Buhi under receivership
without prior notice
Held: Yes
Ratio:
Relevant provision: SEC 29, Republic Act No. 265
SEC. 29. Proceedings upon insolvency. Whenever, upon examination by the head of the
appropriate supervising and examining department or his examiners or agents into the condition
of any banking institution, it shall be disclosed that the condition of the same is one of
insolvency, or that its continuance in business would involve probable loss to its depositors or
creditors, it shall be the duty of the department head concerned forthwith, in writing, to inform
the Monetary Board of the facts, and the Board may, upon finding the statements of the
40 of 143
department head to be true, forbid the institution to do business in the Philippines and shall
designate an official of the Central Bank, or a person of recognized competence in banking, as
receiver to immediately take charge of its assets and liabilities, as expeditiously as possible
collect and gather all the assets and administer the same for the benefit of its creditors,
exercising all the powers necessary for these purposes including, but not limited to, bringing
suits and foreclosing mortgages in the name of the banking institution.
The Monetary Board shall thereupon determine within sixty days whether the institution may be
recognized or otherwise placed in such a condition so that it may be permitted to resume
business with safety to its depositors and creditors and the general public and shall prescribe
the conditions under which such redemption of business shall take place as the time for
fulfillment of such conditions. In such case, the expenses and fees in the collection and
administration of the assets of the institution shall be determined by the Board and shall be paid
to the Central Bank out of the assets of such banking institution.
If the Monetary Board shall determine and confirm within the said period that the banking
institution is insolvent or cannot resume business with safety to its depositors, creditors and the
general public, it shall, if the public interest requires, order its liquidation, indicate the manner of
its liquidation and approve a liquidation plan. The Central Bank shall, by the Solicitor General,
file a petition in the Court of First Instance reciting the proceedings which have been taken and
praying the assistance of the court in the liquidation of the banking institution. The Court shall
have jurisdiction in the same proceedings to adjudicate disputed claims against the bank and
enforce individual liabilities of the stockholders and do all that is necessary to preserve the
assets of the banking institution and to implement the liquidation plan approved by the
Monetary Board. The Monetary Board shall designate an official of the Central Bank or a person
of recognized competence in banking, as liquidator who shall take over the functions of the
receiver previously appointed by the Monetary Board under this SEC. The liquidator shall, with
all convenient speed, convert the assets of the banking institution to money or sell, assign or
otherwise dispose of the same to creditors and other parties for the purpose of paying the debts
of such bank and he may, in the name of the banking institution, institute such actions as may
be necessary in the appropriate court to collect and recover accounts and assets of the banking
institution.
The provisions of any law to the contrary notwithstanding the actions of the Monetary Board
under this SEC and the second paragraph of SEC 34 of this Act shall be final and executory,
and can be set aside by the court only if there is convincing proof that the action is plainly
arbitrary and made in bad faith. No restraining order or injunction shall be issued by the court
enjoining the Central Bank from implementing its actions under this SEC and the second
paragraph of SEC 34 of this Act, unless there is convincing proof that the action of the Monetary
Board is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk
or judge of the court in which the action is pending a bond executed in favor of the Central
Bank, in an amount to be fixed by the court. The restraining order or injunction shall be refused
or, if granted, shall be dissolved upon filing by the Central Bank of a bond, which shall be in the
form of cash or Central Bank cashier's check, in an amount twice the amount of the bond of the
petitioner, or plaintiff conditioned that it will pay the damages which the petitioner or plaintiff may
suffer by the refusal or the dissolution of the injunction. The provisions of Rule 58 of the New
Rules of Court insofar as they are applicable and not inconsistent with the provisions of this
SEC shall govern the issuance and dissolution of the restraining order or injunction
contemplated in this SEC.
Insolvency, under this Act, shall be understood to mean the inability of a banking institution to
pay its liabilities as they fall due in the usual and ordinary course of business: Provided,
however, that this shall not include the inability to pay of an otherwise non-insolvent bank
caused by extraordinary demands induced by financial panic commonly evidenced by a run on
the banks in the banking community.
The appointment of a conservator under SEC 28-A of this Act or the appointment of receiver
under this SEC shall be vested exclusively with the Monetary Board, the provision of any law,
general or special, to the contrary notwithstanding.
There is no requirement whether express or implied, that a
hearing be first conducted before a banking institution may be
placed under receivership.
Conditions prerequisite to the action of the Monetary
Board to forbid the institution to do business in the Philippines and
to appoint a receiver to immediately take charge of the bank's
assets and liabilities.
An examination made by the examining department of the Central
Bank;
Report by said department to the Monetary Board; and
Prima facie showing that the bank is in a condition of insolvency or
so situated that its continuance in business would involve probable
loss to its depositors or creditors.
Whenever it shall appear prima facie that a banking institution is in
"a condition of insolvency" or so situated "that its continuance in
business would involved probable loss to its depositors or
creditors," the Monetary Board has authority:
To forbid the institution to do business and appoint a receiver
therefor; and
To determine, within 60 days, whether or not:
The institution may be reorganized and rehabilitated to such an
extent as to be permitted to resume business with safety to
depositors, creditors and the general public; or
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It is indeed insolvent or cannot resume business with safety to
depositors, creditors and the general public, and public interest
requires that it be liquidated.
If the bank can no longer resume business with safety to
depositors, creditors and the public, etc., its liquidation will be
ordered and a liquidator appointed by the Monetary Board.
The Central Bank shall thereafter file a petition in the Regional
Trial Court praying for the Court's assistance in the liquidation of
the bank.
Buhi argues that there is also that constitutional guarantee that no
property shall be taken without due process of law
The contention is without merit.
It has long been established and recognized in this jurisdiction that
the closure and liquidation of a bank may be considered as an
exercise of police power.
Exercise may, however, be subject to judicial inquiry and could be
set aside if found to be capricious, discriminatory, whimsical,
arbitrary, unjust or a denial of the due process and equal protection
clauses of the Constitution
Courts may interfere with the Central Bank's exercise of discretion
in determining whether or not a distressed bank shall be supported
or liquidated.
A hearing or an opportunity to be heard may be subsequent to the
closure.
One can just imagine the dire consequences of a prior hearing:
bank runs would be the order of the day, resulting in panic and
hysteria. In the process, fortunes may be wiped out, and
disillusionment will run the gamut of the entire banking community.
Courts may appoint receivers without prior presentation of
evidence and solely on the basis of the averments of the
pleadings. Rule 59 of the Revised Rules of Court allows the
appointment of a receiver upon an ex parte application.
Decisions of CB regarding receivership, etc are final and executory
Only one ground to set aside: convincing proof that the action is
plainly arbitrary and done with bad faith
Nature Of Liquidation Proceedings
PACIFIC BANKING CORPORATION EMPLOYEES
ORGANIZATION, et al vs. CA
G.R. No. 109373
20 March 1995
Held:
Distinction Between an Ordinary Action and a Special Proceeding:
It was necessary in this case to classify what was filed-- whether it
was an ordinary action or a special proceedingbecause the two
have different periods for appeal.
Action is the act by which one sues another in a court of justice for
the enforcement or protection of a right, or the prevention or
redress of the wrong; while special proceeding is the act by which
one seeks to establish the status or right of a party, or a particular
fact.
A petition for liquidation of an insolvent corporation is a special
proceeding.
It does not seek the enforcement or protection of a right nor the
prevention or redress of a wrong against a party.
It does not pray for affirmative relief for an injury arising from a
partys wrongful act or omission nor state a cause of action that
can be enforced against any person.
41 of 143
The petition only seeks a declaration of the corporations state of
insolvency and the concomitant right of creditors and the order of
payment of their claims in the disposition of the corpos assets.
Different from an Interpleader
An Interpleader involves claims on a subject matter against a
person who has no interest therein.
Not the case in liquidation proceedings where the Liquidator, as
representative of the corporation, takes charge of its assets and
liabilities for the benefit of the creditors.
Appeal
As in settlement of the estate of the deceased, multiple appeals
are allowed. The several claims of the creditors are separate ones
and a decision or final order with respect to any claim can be
appealed.
In special proceedings, unlike in ordinary actions, a record on
appeal must be filed in order for the appeal to be perfected. This is
because the original record of the case must remain in the trial
court where other claims may still be pending
In this case of corporate liquidation, there was failure to file record
on appeal. Hence, it being a special proceeding, the appeal was
not perfected.
AUTHORITY OF CONSERVATOR TO REVOKE CONTRACTS
FIRST PHILIPPINE INTERNATIONAL BANK vs. CA
G.R. No. 115849
24 January 1996
Facts:
The defendant Producer Bank of the Philippines acquired six
parcels of land with a total area of 101 hectares located at Don
Jose, Sta. Rose, Laguna. The original plaintiffs, Demetrio Demetria
and Jose O. Janolo, wanted to purchase the property and thus
initiated negotiations for that purpose.
In the early part of August 1987 said plaintiffs, upon the suggestion
of BYME (previous owner of lands who mortgaged it to Producer
Bank) investment's legal counsel, Jose Fajardo, met with
defendant Mercurio Rivera, Manager of the Property Management
Department of the defendant bank. After the meeting, plaintiff
Janolo, following the advice of defendant Rivera, made a formal
purchase offer to the bank through a letter.
Rivera replied and made a counter offer of P 5.5 M. Janolo
amended his offer to 4.250 M. There was no reply to Janolo's last
offer. What took place was a meeting on September 28, 1987
between the plaintiffs and Luis Co, the Senior Vice-President of
defendant bank. Rivera as well as Fajardo, the BYME lawyer,
attended the meeting.
Janolo wrote again saying that they are accepting the 5.5 offer.
On October 12, 1987, the conservator of the bank (which has been
placed under conservatorship by the Central Bank since 1984) was
replaced by an Acting Conservator in the person of defendant
Leonida T. Encarnacion. Rivera wrote back to say the proposal is
under consideration.
What thereafter transpired was a series of demands by the
plaintiffs for compliance by the bank with what plaintiff considered
as a perfected contract of sale, which demands were in one form
or another refused by the bank. As detailed by the trial court in its
decision, on November 17, 1987, plaintiffs through a letter to
defendant Rivera (Exhibit "G") tendered payment of the amount of
P5.5 million "pursuant to (our) perfected sale agreement."
Defendants refused to receive both the payment and the letter.
Plaintiffs demanded the execution by the bank of the documents
on what was considered as a "perfected agreement."
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
However, no response came from the Acting Conservator. On
December 14, 1987, Janolo and Demetria made a second tender
of payment this time through the Acting Conservator, defendant
Encarnacion. The letter contained checks and an acknowledgment
of the receipt of payment.
The foregoing letter drew no response for more than four months.
Then, on May 3, 1988, plaintiff, through counsel, made a final
demand for compliance by the bank with its obligations under the
considered perfected contract of sale. Defendants through Acting
Conservator Encarnacion repudiated the authority of defendant
Rivera and claimed that his dealings with the plaintiffs, particularly
his counter-offer of P5.5 Million are unauthorized or illegal.
Plaintiffs filed a suit for specific performance with damages against
the bank, its Manager Rivers and Acting Conservator Encarnacion.
In the course of the proceedings in the respondent Court, Carlos
Ejercito was substituted in place of Demetria and Janolo, in view of
the assignment of the latters' rights.
Issue1: WON the Contract Perfected
Held: Yes
Ratio:
There is no dispute that the object of the transaction is that
property owned by the defendant bank as acquired assets
consisting of six (6) parcels of land. It is likewise beyond cavil that
the bank intended to sell the property. The procedure in the sale of
acquired assets as well as the nature and scope of the authority of
Rivera on the matter is clearly delineated in the testimony of Rivera
himself.
The plaintiffs, therefore, at that meeting of August 1987 regarding
their purpose of buying the property, dealt with and talked to the
right person. Necessarily, it being inherent in his authority, Rivera
is the officer from whom official information regarding the price, as
determined by the Committee and approved by the Conservator,
can be had. And Rivera confirmed his authority when he talked
with the plaintiff in August 1987.
What transpired after the meeting of early August 1987 are
consistent with the authority and the duties of Rivera and the
bank's internal procedure in the matter of the sale of bank's assets.
Considering an aspect of the official duty of Rivera as some sort of
intermediary between the plaintiffs-buyers with their proposed
buying price on one hand, and the bank Committee, the
Conservator and ultimately the bank itself with the set price on the
other, and considering further the discussion of price at the
meeting of August resulting in a formal offer of P3.5 Million in cash,
there can be no other logical conclusion than that when, on
September 1, 1987, Rivera informed plaintiffs by letter that "the
bank's counter-offer is at P5.5 Million for more than 101 hectares
on lot basis," such counter-offer price had been determined by the
Past Due Committee and approved by the Conservator after
Rivera had duly presented plaintiffs' offer for discussion by the
Committee of such matters as original loan of borrower, bid price
during foreclosure, total claim of the bank, and market value.
Article 1318 of the Civil Code enumerates the requisites of a valid
and perfected contract as follows: "(1) Consent of the contracting
parties; (2) Object certain which is the subject matter of the
contract; (3) Cause of the obligation which is established."
There is no dispute on requisite no. 2. There is, however, a dispute
on the first and third requisites.
Petitioners allege that "there is no counter-offer made by the Bank,
and any supposed counter-offer which Rivera (or Co) may have
made is unauthorized. Since there was no counter-offer by the
Bank, there was nothing for Ejercito (in substitution of Demetria
and Janolo) to accept."
42 of 143
From the evidence found by respondent Court, it is obvious that
petitioner Rivera has apparent or implied authority to act for the
Bank in the matter of selling its acquired assets. (evidence: letters,
meetings, etc)
In the very recent case of Limketkai Sons Milling, Inc. vs. Court of
Appeals, et. al. 32, the Court, through Justice Jose A. R. Melo,
affirmed the doctrine of apparent authority as it held that the
apparent authority of the officer of the Bank of P.I. in charge of
acquired assets is borne out by similar circumstances surrounding
his dealings with buyers.
To be sure, petitioners attempted to repudiate Rivera's apparent
authority through documents and testimony which seek to
establish Rivera's actual authority. These pieces of evidence,
however, are inherently weak as they consist of Rivera's self-
serving testimony and various inter-office memoranda that purport
to show his limited actual authority, of which private respondent
cannot be charged with knowledge. In any event, since the issue is
apparent authority, the existence of which is borne out by the
respondent Court's findings, the evidence of actual authority is
immaterial insofar as the liability of a corporation is concerned
Petitioners also alleged that Demetria's and Janolo's P4.25 million
counter-offer in the letter dated September 17, 1987 extinguished
the Bank's offer of P5.5 million 34 .They disputed the respondent
Court's finding that "there was a meeting of minds when on 30
September 1987 Demetria and Janolo through Annex "L" (letter
dated September 30, 1987) "accepted" Rivera's counter offer of
P5.5 million under Annex "J" (letter dated September 17, 1987).
However, the above-cited authorities and precedents cannot apply
in the instant case because, as found by the respondent Court
which reviewed the testimonies on this point, what was "accepted"
by Janolo in his letter dated September 30, 1987 was the Bank's
offer of P5.5 million as confirmed and reiterated to Demetria and
Atty. Jose Fajardo by Rivera and Co during their meeting on
September 28, 1987. Note that the said letter of September 30,
1987 begins with"(p)ursuant to our discussion last 28 September
1987 . . .
We note that the Bank's repudiation, through Conservator
Encarnacion, of Rivera's authority and action, particularly the
latter's counter-offer of P5.5 million, as being "unauthorized and
illegal" came only on May 12, 1988 or more than seven (7) months
after Janolo' acceptance. Such delay, and the absence of any
circumstance which might have justifiably prevented the Bank from
acting earlier, clearly characterizes the repudiation as nothing
more than a last-minute attempt on the Bank's part to get out of a
binding contractual obligation.
Issue2: Is the Contract Enforceable?
Held: Yes
Ratio:
The bank's letter of September 1, 1987 (together with the other
letters including Janolos first offer) on the official price and the
plaintiffs' acceptance of the price on September 30, 1987, are not,
in themselves, formal contracts of sale. They are however clear
embodiments of the fact that a contract of sale was perfected
between the parties, such contract being binding in whatever form
it may have been entered into (case citations omitted).
But let it be assumed arguendo that the counter-offer during the
meeting on September 28, 1987 did constitute a "new" offer which
was accepted by Janolo on September 30, 1987. Still, the statute
of frauds will not apply by reason of the failure of petitioners to
object to oral testimony proving petitioner Bank's counter-offer of
P5.5 million. Hence, petitioners by such utter failure to object are
deemed to have waived any defects of the contract under the
statute of frauds, pursuant to Article 1405 of the Civil Code.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Issue3: May the Conservator Revoke the Perfected and
Enforceable Contract?
Held: No
Ratio:
It is not disputed that the petitioner Bank was under a conservator
placed by the Central Bank of the Philippines during the time that
the negotiation and perfection of the contract of sale took place.
Petitioners energetically contended that the conservator has the
power to revoke or overrule actions of the management or the
board of directors of a bank, under SEC 28-A of Republic Act No.
265 (otherwise known as the Central Bank Act) as follows:
Whenever, on the basis of a report submitted by the appropriate
supervising or examining department, the Monetary Board finds
that a bank or a non-bank financial intermediary performing quasi-
banking functions is in a state of continuing inability or
unwillingness to maintain a state of liquidity deemed adequate to
protect the interest of depositors and creditors, the Monetary Board
may appoint a conservator to take charge of the assets, liabilities,
and the management of that institution, collect all monies and
debts due said institution and exercise all powers necessary to
preserve the assets of the institution, reorganize the management
thereof, and restore its viability. He shall have the power to
overrule or revoke the actions of the previous management and
board of directors of the bank or non-bank financial intermediary
performing quasi-banking functions, any provision of law to the
contrary notwithstanding, and such other powers as the Monetary
Board shall deem necessary.
In the first place, this issue of the Conservator's alleged authority
to revoke or repudiate the perfected contract of sale was raised for
the first time in this Petition as this was not litigated in the trial court
or CA. It cannot be raised for the first time on appeal
In the second place, there is absolutely no evidence that the
Conservator, at the time of the contract was perfected, actually
repudiated or overruled said contract of sale. The Bank's acting
conservator at the time, Rodolfo Romey, never objected to the sale
of the property to Demetria and Janolo. What petitioners are really
referring to is the letter of Conservator Encarnacion, who took over
from Romey after the sale was perfected on September 30, 1987
(Annex V, petition) which unilaterally repudiated not the contract
but the authority of Rivera to make a binding offer and which
unarguably came months after the perfection of the contract. It
denied the counter offer. It said that only only the Board of
Directors/Conservator may authorize the sale of any property of
the corportion/bank..
In the third place, while admittedly, the Central Bank law gives vast
and far-reaching powers to the conservator of a bank, it must be
pointed out that such powers must be related to the "(preservation
of) the assets of the bank, (the reorganization of) the management
thereof and (the restoration of) its viability." Such powers,
enormous and extensive as they are, cannot extend to the post-
facto repudiation of perfected transactions, otherwise they would
infringe against the non-impairment clause of the Constitution. If
the legislature itself cannot revoke an existing valid contract, how
can it delegate such non-existent powers to the conservator under
SEC 28-A of said law?
Obviously, therefore, SEC 28-A merely gives the conservator
power to revoke contracts that are, under existing law, deemed to
be defective i.e., void, voidable, unenforceable or rescissible.
Hence, the conservator merely takes the place of a bank's board of
directors. What the said board cannot do such as repudiating a
contract validly entered into under the doctrine of implied authority
the conservator cannot do either. Ineluctably, his power is not
unilateral and he cannot simply repudiate valid obligations of the
43 of 143
Bank. His authority would be only to bring court actions to assail
such contracts as he has already done so in the instant case. A
contrary understanding of the law would simply not be permitted by
the Constitution. Neither by common sense. To rule otherwise
would be to enable a failing bank to become solvent, at the
expense of third parties, by simply getting the conservator to
unilaterally revoke all previous dealings which had one way or
another or come to be considered unfavorable to the Bank,
yielding nothing to perfected contractual rights nor vested interests
of the third parties who had dealt with the Bank.
ADDITIONAL MATERIAL:
CIRCULAR NO. 537
Series of 2006
Pursuant to SEC 52 of Republic Act No. 7653 and Monetary Board
Resolution No. 862 dated 6 July 2006, the maximum amount of
coins to be considered as legal tender is adjusted as follows:
1. One thousand pesos (P1,000.00) for denominations of 1-
Piso, 5-Piso and 10-Piso coins; and
2. One hundred pesos (P100.00) for denominations of 1-
sentimo, 5-sentimo, 10-sentimo, and 25-sentimo coins.
This Circular shall take effect after fifteen (15) days following its
publication in the Official Gazette or in a newspaper of general
circulation.
VII. THE GENERAL BANKING LAW OF 2000
7.1 Topics
State Policy
Concept of Intermediation
Distinction between banks and quasibanks
SEC 2. Declaration of Policy. The State recognizes the vital
role of banks in providing
an environment conducive to the sustained development of the
national economy and the fiduciary nature
of banking that requires high standards of integrity and
performance. In furtherance thereof, the State
shall promote and maintain a stable and efficient banking and
financial system that is globally
competitive, dynamic and responsive to the demands of a
developing economy. (n)
SEC 4. Supervisory Powers. The operations and activities of
banks shall be subject to
supervision of the Bangko Sentral. "Supervision" shall include the
following:
4.1. The issuance of rules of conduct or the establishment of
standards of operation for uniform
application to all institutions or functions covered, taking into
consideration the distinctive
character of the operations of institutions and the substantive
similarities of specific functions
to which such rules, modes or standards are to be applied;
4.2. The conduct of examination to determine compliance with
laws and regulations if the
circumstances so warrant as determined by the Monetary Board;
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
4.3. Overseeing to ascertain that laws and regulations are
complied with;
4.4. Regular investigation which shall not be oftener than once a
year from the last date of
examination to determine whether an institution is conducting its
business on a safe or
sound basis: Provided, That the deficiencies/irregularities found by
or discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of the institution (2-D);
or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the
operations of and exercise regulatory
powers over quasi-banks, trust entities and other financial
institutions which under special laws are
subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks" shall refer to entities
engaged in the borrowing of
funds through the issuance, endorsement or assignment with
recourse or acceptance of deposit
substitutes as defined in SEC 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act") for
purposes of relending or purchasing of receivables and other
obligations. (2-Da)
Classification of banks
3.2. Banks shall be classified into:
(a) Universal banks;
(b) Commercial banks;
(c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii)
Stock savings and loan
associations, and (iii) Private development banks, as defined in
Republic Act No. 7906
(hereafter the "Thrift Banks Act");
(d) Rural banks, as defined in Republic Act No. 7353 (hereafter the
"Rural Banks Act");
(e) Cooperative banks, as defined in Republic Act No. 6938
(hereafter the "Cooperative Code");
(f) Islamic banks as defined in Republic Act No. 6848, otherwise
known as the "Charter of Al
Amanah Islamic Investment Bank of the Philippines"; and
(g) Other classifications of banks as determined by the Monetary
Board of the Bangko Sentral
ng Pilipinas. (6-Aa)
SEC 71. Other Banking Laws. The organization, ownership
and capital requirements,
powers, supervision and general conduct of business of thrift
banks, rural banks and cooperative banks
shall be governed by the provisions of the Thrift Banks Act, the
Rural Banks Act, and the Cooperative
Code, respectively.
The organization, ownership and capital requirements, powers,
supervision and general conduct
of business of Islamic banks shall be governed by special laws.
The provisions of this Act, however, insofar as they are not in
conflict with the provisions of the
Thrift Banks Act, the Rural Banks Act, and the Cooperative Code
shall likewise apply to thrift banks, rural
44 of 143
banks, and cooperative banks, respectively. However, for
purposes of prescribing the minimum ratio
which the net worth of a thrift bank must bear to its total risk
assets, the provisions of SEC 33 of this
Act shall govern. (n)
Distinction between universal banks and commercial banks
SEC 23. Powers of a Universal Bank. A universal bank shall
have the authority to
exercise, in addition to the powers authorized for a commercial
bank in SEC 29, the powers of an
investment house as provided in existing laws and the power to
invest in non-allied enterprises as
provided in this Act. (21-B)
SEC 24. Equity Investments of a Universal Bank. A universal
bank may, subject to
the conditions stated in the succeeding paragraph, invest in the
equities of allied and non-allied
enterprises as may be determined by the Monetary Board. Allied
enterprises may either be financial or
non-financial.
Except as the Monetary Board may otherwise prescribe:
24.1. The total investment in equities of allied and non-allied
enterprises shall not exceed fifty
percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one enterprise, whether allied
or non-allied, shall not exceed
twenty-five percent (25%) of the net worth of the bank.
As used in this Act, "net worth" shall mean the total of the
unimpaired paid-in capital including
paid-in surplus, retained earnings and undivided profit, net of
valuation reserves and other adjustments as
may be required by the Bangko Sentral.
The acquisition of such equity or equities is subject to the prior
approval of the Monetary Board
which shall promulgate appropriate guidelines to govern such
investments. (21-Ba)
SEC 30. Equity Investments of a Commercial Bank. A
commercial bank may, subject
to the conditions stated in the succeeding paragraphs, invest only
in the equities of allied enterprises as
may be determined by the Monetary Board. Allied enterprises may
either be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
30.1. The total investment in equities of allied enterprises shall not
exceed thirty-five percent
(35%) of the net worth of the bank; and
30.2. The equity investment in any one enterprise shall not exceed
twenty-five percent (25%) of the
net worth of the bank.
The acquisition of such equity or equities is subject to the prior
approval of the Monetary Board
which shall promulgate appropriate guidelines to govern such
investments. (21A-a; 21-Ca)
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Distinction between universal banks or commercial banks and
other banks
SEC 33. Acceptance of Demand Deposits. A bank other than
a universal or
commercial bank cannot accept or create demand deposits except
upon prior approval of, and subject to
such conditions and rules as may be prescribed by the Monetary
Board. (72-Aa)
Distinction between allied and non-allied enterprises
SEC 23. Powers of a Universal Bank. A universal bank shall
have the authority to
exercise, in addition to the powers authorized for a commercial
bank in SEC 29, the powers of an
investment house as provided in existing laws and the power to
invest in non-allied enterprises as
provided in this Act. (21-B)
Institutions subject to BSP supervisory and regulatory powers
SEC 4. Supervisory Powers. The operations and activities of
banks shall be subject to
supervision of the Bangko Sentral. "Supervision" shall include the
following:
4.1. The issuance of rules of conduct or the establishment of
standards of operation for uniform
application to all institutions or functions covered, taking into
consideration the distinctive
character of the operations of institutions and the substantive
similarities of specific functions
to which such rules, modes or standards are to be applied;
4.2. The conduct of examination to determine compliance with
laws and regulations if the
circumstances so warrant as determined by the Monetary Board;
4.3. Overseeing to ascertain that laws and regulations are
complied with;
4.4. Regular investigation which shall not be oftener than once a
year from the last date of
examination to determine whether an institution is conducting its
business on a safe or
sound basis: Provided, That the deficiencies/irregularities found by
or discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of the institution (2-D);
or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the
operations of and exercise regulatory
powers over quasi-banks, trust entities and other financial
institutions which under special laws are
subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks" shall refer to entities
engaged in the borrowing of
funds through the issuance, endorsement or assignment with
recourse or acceptance of deposit
substitutes as defined in SEC 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act") for
purposes of relending or purchasing of receivables and other
obligations. (2-Da)
45 of 143
R.A.7653
SEC 25. Supervision and Examination. The Bangko Sentral
shall have supervision
over, and conduct periodic or special examinations of, banking
institutions and quasi-banks, including
their subsidiaries and affiliates engaged in allied activities.
For purposes of this SEC, a subsidiary means a corporation more
than fifty percent (50%) of
the voting stock of which is owned by a bank or quasi-bank and an
affiliate means a corporation the
voting stock of which, to the extent of fifty percent (50%) or less, is
owned by a bank or quasi-bank or
which is related or linked to such institution or intermediary through
common stockholders or such other
factors as may be determined by the Monetary Board.
The department heads and the examiners of the supervising
and/or examining departments are
hereby authorized to administer oaths to any director, officer, or
employee of any institution under their
respective supervision or subject to their examination and to
compel the presentation of all books,
documents, papers or records necessary in their judgment to
ascertain the facts relative to the true
condition of any institution as well as the books and records of
persons and entities relative to or in
connection with the operations, activities or transactions of the
institution under examination, subject to
the provision of existing laws protecting or safeguarding the
secrecy or confidentiality of bank deposits
as well as investments of private persons, natural or juridical, in
debt instruments issued by the
Government.
No restraining order or injunction shall be issued by the court
enjoining the Bangko Sentral from
examining any institution subject to supervision or examination by
the Bangko Sentral, unless there is
convincing proof that the action of the Bangko Sentral is plainly
arbitrary and made in bad faith and the
petitioner or plaintiff files with the clerk or judge of the court in
which the action is pending a bond
executed in favor of the Bangko Sentral, in an amount to be fixed
by the court. The provisions of Rule
58 of the New Rules of Court insofar as they are applicable and
not inconsistent with the provisions of
this SEC shall govern the issuance and dissolution of the
restraining order or injunction contemplated
in this SEC.
Authority to engage in banking institutions
SEC 6. Authority to Engage in Banking and Quasi-Banking
Functions. No person or
entity shall engage in banking operations or quasi-banking
functions without authority from the Bangko
Sentral: Provided, however, That an entity authorized by the
Bangko Sentral to perform universal or
commercial banking functions shall likewise have the authority to
engage in quasi-banking functions.
The determination of whether a person or entity is performing
banking or quasi-banking functions
without Bangko Sentral authority shall be decided by the Monetary
Board. To resolve such issue, the
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Monetary Board may, through the appropriate supervising and
examining department of the Bangko
Sentral, examine, inspect or investigate the books and records of
such person or entity. Upon issuance of
this authority, such person or entity may commence to engage in
banking operations or quasi-banking
functions and shall continue to do so unless such authority is
sooner surrendered, revoked, suspended or
annulled by the Bangko Sentral in accordance with this Act or
other special laws.
The department head and the examiners of the appropriate
supervising and examining
department are hereby authorized to administer oaths to any such
person, employee, officer, or director
of any such entity and to compel the presentation or production of
such books, documents, papers or
records that are reasonably necessary to ascertain the facts
relative to the true functions and operations
of such person or entity. Failure or refusal to comply with the
required presentation or production of such
books, documents, papers or records within a reasonable time
shall subject the persons responsible
therefore to the penal sanctions provided under the New Central
Bank Act.
Persons or entities found to be performing banking or quasi-
banking functions without authority
from the Bangko Sentral shall be subject to appropriate sanctions
under the New Central Bank Act and
other applicable laws. (4a)
Stock corporation
SEC 8. Organization. The Monetary Board may authorize the
organization of a bank or
quasi-bank subject to the following conditions:
8.1. That the entity is a stock corporation (7);
8.2. That its funds are obtained from the public, which shall mean
twenty (20) or more persons
(2-Da); and
8.3. That the minimum capital requirements prescribed by the
Monetary Board for each category
of banks are satisfied. (n)
No new commercial bank shall be established within three (3)
years from the effectivity of this Act. In the
exercise of the authority granted herein, the Monetary Board shall
take into consideration their capability
in terms of their financial resources and technical expertise and
integrity. The bank licensing process shall
incorporate an assessment of the bank's ownership structure,
directors and senior management, its
operating plan and internal controls as well as its projected
financial condition and capital base.
Not a close corporation
Par value stock
SEC 9. Issuance of Stocks. The Monetary Board may
prescribe rules and regulations
on the types of stock a bank may issue, including the terms thereof
and rights appurtenant thereto to
determine compliance with laws and regulations governing capital
and equity structure of banks:
Provided, That banks shall issue par value stocks only.
46 of 143
Ownership of shares
SEC 11. Foreign Stockholdings. Foreign individuals and non-
bank corporations may
own or control up to forty percent (40%) of the voting stock of a
domestic bank. This rule shall apply to
Filipinos and domestic non-bank corporations. (12a; 12-Aa)
The percentage of foreign-owned voting stocks in a bank shall be
determined by the citizenship of
the individual stockholders in that bank. The citizenship of the
corporation which is a stockholder in a
bank shall follow the citizenship of the controlling stockholders of
the corporation, irrespective of the place
of incorporation. (n)
MB Certificate of authority
Power of a universal bank
SEC 23. Powers of a Universal Bank. A universal bank shall
have the authority to
exercise, in addition to the powers authorized for a commercial
bank in SEC 29, the powers of an
investment house as provided in existing laws and the power to
invest in non-allied enterprises as
provided in this Act. (21-B)
SEC 24. Equity Investments of a Universal Bank. A universal
bank may, subject to
the conditions stated in the succeeding paragraph, invest in the
equities of allied and non-allied
enterprises as may be determined by the Monetary Board. Allied
enterprises may either be financial or
non-financial.
Except as the Monetary Board may otherwise prescribe:
24.1. The total investment in equities of allied and non-allied
enterprises shall not exceed fifty
percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one enterprise, whether allied
or non-allied, shall not exceed
twenty-five percent (25%) of the net worth of the bank.
As used in this Act, "net worth" shall mean the total of the
unimpaired paid-in capital including
paid-in surplus, retained earnings and undivided profit, net of
valuation reserves and other adjustments as
may be required by the Bangko Sentral.
The acquisition of such equity or equities is subject to the prior
approval of the Monetary Board
which shall promulgate appropriate guidelines to govern such
investments. (21-Ba)
SEC 25. Equity Investments of a Universal Bank in Financial
Allied Enterprises. A
universal bank can own up to one hundred percent (100%) of the
equity in a thrift bank, a rural bank or a
financial allied enterprise.
A publicly-listed universal or commercial bank may own up to one
hundred percent (100%) of the
voting stock of only one other universal or commercial bank. (21-B;
21-Ca)
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
SEC 26. Equity Investments of a Universal Bank in Non-
Financial Allied Enterprises.
A universal bank may own up to one hundred percent (100%) of
the equity in a non-financial allied
enterprise. (21-Ba)
SEC 27. Equity Investments of a Universal Bank in Non-Allied
Enterprises. The
equity investment of a universal bank, or of its wholly or majority-
owned subsidiaries, in a single nonallied
enterprise shall not exceed thirty-five percent (35%) of the total
equity in that enterprise nor shall it
exceed thirty-five percent (35%) of the voting stock in that
enterprise. (21-B)
SEC 28. Equity Investments in Quasi-Banks. To promote
competitive conditions in
financial markets, the Monetary Board may further limit to forty
percent (40%) equity investments of
universal banks in quasi-banks. This rule shall also apply in the
case of commercial banks. (12-E)
SEC 29. Powers of a Commercial Bank. A commercial bank
shall have, in addition to
the general powers incident to corporations, all such powers as
may be necessary to carry on the
business of commercial banking, such as accepting drafts and
issuing letters of credit; discounting and
negotiating promissory notes, drafts, bills of exchange, and other
evidences of debt; accepting or creating
demand deposits; receiving other types of deposits and deposit
substitutes; buying and selling foreign
exchange and gold or silver bullion; acquiring marketable bonds
and other debt securities; and extending
credit, subject to such rules as the Monetary Board may
promulgate. These rules may include the
determination of bonds and other debt securities eligible for
investment, the maturities and aggregate
amount of such investment. (21a)
SEC 53. Other Banking Services. In addition to the operations
specifically authorized in this Act, a bank may perform the following
services:
53.1. Receive in custody funds, documents and valuable objects;
53.2. Act as financial agent and buy and sell, by order of and for
the account of their customers,
shares, evidences of indebtedness and all types of securities;
53.3. Make collections and payments for the account of others and
perform such other services for
their customers as are not incompatible with banking business;
53.4. Upon prior approval of the Monetary Board, act as managing
agent, adviser, consultant or
administrator of investment management/advisory/consultancy
accounts; and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted under SubSECs
53.1, 53.2, 53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall keep the funds,
securities and other effects which it
receives duly separate from the bank's own assets and liabilities.
47 of 143
The Monetary Board may regulate the operations authorized by
this SEC in order to ensure
that such operations do not endanger the interests of the
depositors and other creditors of the bank.
In case a bank or quasi-bank notifies the Bangko Sentral or
publicly announces a bank holiday, or
in any manner suspends the payment of its deposit liabilities
continuously for more than thirty (30) days,
the Monetary Board may summarily and without need for prior
hearing close such banking institution and
place it under receivership of the Philippine Deposit Insurance
Corporation. (72a)
Powers of a commercial bank
SEC 29. Powers of a Commercial Bank. A commercial bank
shall have, in addition to
the general powers incident to corporations, all such powers as
may be necessary to carry on the
business of commercial banking, such as accepting drafts and
issuing letters of credit; discounting and
negotiating promissory notes, drafts, bills of exchange, and other
evidences of debt; accepting or creating
demand deposits; receiving other types of deposits and deposit
substitutes; buying and selling foreign
exchange and gold or silver bullion; acquiring marketable bonds
and other debt securities; and extending
credit, subject to such rules as the Monetary Board may
promulgate. These rules may include the
determination of bonds and other debt securities eligible for
investment, the maturities and aggregate
amount of such investment. (21a)
SEC 30. Equity Investments of a Commercial Bank. A
commercial bank may, subject
to the conditions stated in the succeeding paragraphs, invest only
in the equities of allied enterprises as
may be determined by the Monetary Board. Allied enterprises may
either be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
30.1. The total investment in equities of allied enterprises shall not
exceed thirty-five percent
(35%) of the net worth of the bank; and
30.2. The equity investment in any one enterprise shall not exceed
twenty-five percent (25%) of the
net worth of the bank.
The acquisition of such equity or equities is subject to the prior
approval of the Monetary Board
which shall promulgate appropriate guidelines to govern such
investments. (21A-a; 21-Ca)
SEC 31. Equity Investments of a Commercial Bank in
Financial Allied Enterprises.
A commercial bank may own up to one hundred percent (100%) of
the equity of a thrift bank or a rural
bank.
Where the equity investment of a commercial bank is in other
financial allied enterprises,
including another commercial bank, such investment shall remain
a minority holding in that enterprise.
(21-Aa; 21-Ca)
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SEC 32. Equity Investments of a Commercial Bank in Non-
Financial Allied
Enterprises. A commercial bank may own up to one hundred
percent (100%) of the equity in a nonfinancial allied enterprise.
(21-Aa)
SEC 53. Other Banking Services. In addition to the operations
specifically authorized
in this Act, a bank may perform the following services:
53.1. Receive in custody funds, documents and valuable objects;
53.2. Act as financial agent and buy and sell, by order of and for
the account of their customers,
shares, evidences of indebtedness and all types of securities;
53.3. Make collections and payments for the account of others and
perform such other services for
their customers as are not incompatible with banking business;
53.4. Upon prior approval of the Monetary Board, act as managing
agent, adviser, consultant or
administrator of investment management/advisory/consultancy
accounts; and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted under SubSECs
53.1, 53.2, 53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall keep the funds,
securities and other effects which it
receives duly separate from the bank's own assets and liabilities.
The Monetary Board may regulate the operations authorized by
this SEC in order to ensure
that such operations do not endanger the interests of the
depositors and other creditors of the bank.
In case a bank or quasi-bank notifies the Bangko Sentral or
publicly announces a bank holiday, or
in any manner suspends the payment of its deposit liabilities
continuously for more than thirty (30) days,
the Monetary Board may summarily and without need for prior
hearing close such banking institution and
place it under receivership of the Philippine Deposit Insurance
Corporation. (72a)
Areas of supervision and regulation of banks
Examination and investigation of banks
SEC 4. Supervisory Powers. The operations and activities of
banks shall be subject to
supervision of the Bangko Sentral. "Supervision" shall include the
following:
4.1. The issuance of rules of conduct or the establishment of
standards of operation for uniform
application to all institutions or functions covered, taking into
consideration the distinctive
character of the operations of institutions and the substantive
similarities of specific functions
to which such rules, modes or standards are to be applied;
4.2. The conduct of examination to determine compliance with
laws and regulations if the
circumstances so warrant as determined by the Monetary Board;
4.3. Overseeing to ascertain that laws and regulations are
complied with;
4.4. Regular investigation which shall not be oftener than once a
year from the last date of
48 of 143
examination to determine whether an institution is conducting its
business on a safe or
sound basis: Provided, That the deficiencies/irregularities found by
or discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of the institution (2-D);
or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the
operations of and exercise regulatory
powers over quasi-banks, trust entities and other financial
institutions which under special laws are
subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks" shall refer to entities
engaged in the borrowing of
funds through the issuance, endorsement or assignment with
recourse or acceptance of deposit
substitutes as defined in SEC 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act") for
purposes of relending or purchasing of receivables and other
obligations. (2-Da)
R.A. 7653 SEC 28. Examination and Fees. The supervising
and examining department head,
personally or by deputy, shall examine the books of every banking
institution once in every twelve (12)
months, and at such other times as the Monetary Board by an
affirmative vote of five (5) members, may
deem expedient and to make a report on the same to the Monetary
Board: Provided, That there shall be
an interval of at least twelve (12) months between annual
examinations.
The bank concerned shall afford to the head of the appropriate
supervising and examining
departments and to his authorized deputies full opportunity to
examine its books, cash and available
assets and general condition at any time during banking hours
when requested to do so by the Bangko
Sentral: Provided, however, That none of the reports and other
papers relative to such examinations
shall be open to inspection by the public except insofar as such
publicity is incidental to the proceedings
hereinafter authorized or is necessary for the prosecution of
violations in connection with the business
of such institutions.
Banking and quasi-banking institutions which are subject to
examination by the Bangko Sentral
shall pay to the Bangko Sentral, within the first thirty (30) days of
each year, an annual fee in an amount
equal to a percentage as may be prescribed by the Monetary
Board of its average total assets during
the preceding year as shown on its end-of-month balance sheets,
after deducting cash on hand and
amounts due from banks, including the Bangko Sentral and banks
abroad.
Acquisition by banks of own shares
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SEC 10. Treasury Stocks. No bank shall purchase or acquire
shares of its own capital
stock or accept its own shares as a security for a loan, except
when authorized by the Monetary Board:
Provided, That in every case the stock so purchased or acquired
shall, within six (6) months from the time
of its purchase or acquisition, be sold or disposed of at a public or
private sale. (24a)
Stockholdings of family groups and related interests
SEC 12. Stockholdings of Family Groups or Related Interests.
Stockholdings of
individuals related to each other within the fourth degree of
consanguinity or affinity, legitimate or
common-law, shall be considered family groups or related interests
and must be fully disclosed in all
transactions by such an individual with the bank. (12-Da)
SEC 13. Corporate Stockholdings. Two or more corporations
owned or controlled by
the same family group or same group of persons shall be
considered related interests and must be fully
disclosed in all transactions by such corporations or related groups
of persons with the bank. (12-Ba)
Independent directors
SEC 15. Board of Directors. The provisions of the Corporation
Code to the contrary
notwithstanding, there shall be at least five (5), and a maximum of
fifteen (15) members of the board of
directors of bank, two (2) of whom shall be independent directors.
An "independent director" shall mean a
person other than an officer or employee of the bank, its
subsidiaries or affiliates or related interests. (n)
Non-Filipino citizens may become members of the board of
directors of a bank to the extent of the
foreign participation in the equity of said bank. (Sec. 7, RA 7721)
The meetings of the board of directors may be conducted through
modern technologies such as,
but not limited to, teleconferencing and video-conferencing. (n)
Qualifications of directors and officers: the fit and proper rule
SEC 16. Fit and Proper Rule. To maintain the quality of bank
management and afford
better protection to depositors and the public in general, the
Monetary Board shall prescribe, pass upon
and review the qualifications and disqualifications of individuals
elected or appointed bank directors or
officers and disqualify those found unfit.
After due notice to the board of directors of the bank, the Monetary
Board may disqualify,
suspend or remove any bank director or officer who commits or
omits an act which render him unfit for the
position.
In determining whether an individual is fit and proper to hold the
position of a director or officer of
a bank, regard shall be given to his integrity, experience,
education, training, and competence. (9-Aa)
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Prohibition on public officials
SEC 19. Prohibition on Public Officials. Except as otherwise
provided in the Rural
Banks Act, no appointive or elective public official, whether full-
time or part-time shall at the same time
serve as officer of any private bank, save in cases where such
service is incident to financial assistance
provided by the government or a government-owned or controlled
corporation to the bank or unless
otherwise provided under existing laws. (13)
Compensation and other benefits of directors and officers
SEC 18. Compensation and Other Benefits of Directors and
Officers. To protect the
funds of depositors and creditors, the Monetary Board may
regulate the payment by the bank to its
directors and officers of compensation, allowance, fees, bonuses,
stock options, profit sharing and fringe
benefits only in exceptional cases and when the circumstances
warrant, such as but not limited to the
following:
18.1. When a bank is under comptrollership or conservatorship; or
18.2. When a bank is found by the Monetary Board to be
conducting business in an unsafe or
unsound manner; or
18.3. When a bank is found by the Monetary Board to be in an
unsatisfactory financial condition.
(n)
Ratio of net worth to total risk assets
SEC 34. Risk-Based Capital. The Monetary Board shall
prescribe the minimum ratio
which the net worth of a bank must bear to its total risk assets
which may include contingent accounts.
For purposes of this SEC, the Monetary Board may require that
such ratio be determined on
the basis of the net worth and risk assets of a bank and its
subsidiaries, financial or otherwise, as well as
prescribe the composition and the manner of determining the net
worth and total risk assets of banks and
their subsidiaries: Provided, That in the exercise of this authority,
the Monetary Board shall, to the extent
feasible, conform to internationally accepted standards, including
those of the Bank for International
Settlements (BIS), relating to risk-based capital requirements:
Provided, further, That it may alter or
suspend compliance with such ratio whenever necessary for a
maximum period of one (1) year: Provided,
finally, That such ratio shall be applied uniformly to banks of the
same category.
In case a bank does not comply with the prescribed minimum ratio,
the Monetary Board may limit
or prohibit the distribution of net profits by such bank and may
require that part or all of the net profits be
used to increase the capital accounts of the bank until the
minimum requirement has been met. The
Monetary Board may, furthermore, restrict or prohibit the
acquisition of major assets and the making of
new investments by the bank, with the exception of purchases of
readily marketable evidences of
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indebtedness of the Republic of the Philippines and of the Bangko
Sentral and any other evidences of
indebtedness or obligations the servicing and repayment of which
are fully guaranteed by the Republic of
the Philippines, until the minimum required capital ratio has been
restored.
In case of a bank merger or consolidation, or when a bank is under
rehabilitation under a program
approved by the Bangko Sentral, the Monetary Board may
temporarily relieve the surviving bank,
consolidated bank, or constituent bank or corporations under
rehabilitation from full compliance with the
required capital ratio under such conditions as it may prescribe.
Before the effectivity of the rules which the Monetary Board is
authorized to prescribe under this
provision, SEC 22 of the General Banking Act, as amended, SEC
9 of the Thrift Banks Act, and all
pertinent rules issued pursuant thereto, shall continue to be in
force. (22a)
BASLE ACCORD
Limits on loans, the SBL rules
SEC 35. Limit on Loans, Credit Accommodations and
Guarantees.
35.1. Except as the Monetary Board may otherwise prescribe for
reasons of national interest, the
total amount of loans, credit accommodations and guarantees as
may be defined by the
Monetary Board that may be extended by a bank to any person,
partnership, association,
corporation or other entity shall at no time exceed twenty percent
(20%) of the net worth of
such bank. The basis for determining compliance with single-
borrower limit is the total credit
commitment of the bank to the borrower.
35.2. Unless the Monetary Board prescribes otherwise, the total
amount of loans, credit
accommodations and guarantees prescribed in the preceding
paragraph may be increased
by an additional ten percent (10%) of the net worth of such bank
provided the additional
liabilities of any borrower are adequately secured by trust receipts,
shipping documents,
warehouse receipts or other similar documents transferring or
securing title covering readily
marketable, non-perishable goods which must be fully covered by
insurance.
35.3. The above prescribed ceilings shall include: (a) the direct
liability of the maker or acceptor of
paper discounted with or sold to such bank and the liability of a
general indorser, drawer or
guarantor who obtains a loan or other credit accommodation from
or discounts paper with or
sells papers to such bank; (b) in the case of an individual who
owns or controls a majority
interest in a corporation, partnership, association or any other
entity, the liabilities of said
entities to such bank; (c) in the case of a corporation, all liabilities
to such bank of all
subsidiaries in which such corporation owns or controls a majority
interest; and (d) in the
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case of a partnership, association or other entity, the liabilities of
the members thereof to
such bank.
35.4. Even if a parent corporation, partnership, association, entity
or an individual who owns or
controls a majority interest in such entities has no liability to the
bank, the Monetary Board
may prescribe the combination of the liabilities of subsidiary
corporations or members of the
partnership, association, entity or such individual under certain
circumstances, including but
not limited to any of the following situations: (a) the parent
corporation, partnership,
association, entity or individual guarantees the repayment of the
liabilities; (b) the liabilities
were incurred for the accommodation of the parent corporation or
another subsidiary or of
the partnership or association or entity or such individual; or (c) the
subsidiaries though
separate entities operate merely as departments or divisions of a
single entity.
35.5. For purposes of this SEC, loans, other credit
accommodations and guarantees shall
exclude:
(a) loans and other credit accommodations secured by obligations
of the Bangko Sentral or
of the Philippine Government; (b) loans and other credit
accommodations fully guaranteed by the
government as to the payment of principal and interest; (c) loans
and other credit accommodations
covered by assignment of deposits maintained in the lending bank
and held in the Philippines; (d)
loans, credit accommodations and acceptances under letters of
credit to the extent covered by
margin deposits; and (e) other loans or credit accommodations
which the Monetary Board may from
time to time, specify as non-risk items.
35.6. Loans and other credit accommodations, deposits
maintained with, and usual guarantees by
a bank to any other bank or non-bank entity, whether locally or
abroad, shall be subject to
the limits as herein prescribed.
35.7. Certain types of contingent accounts of borrowers may be
included among those subject to
these prescribed limits as may be determined by the Monetary
Board. (23a)
Restrictions on bank exposure; the DOSRI rules
SEC 36. Restriction on Bank Exposure to Directors, Officers,
Stockholders and Their
Related Interests. No director or officer of any bank shall,
directly or indirectly, for himself or as the
representative or agent of others, borrow from such bank nor shall
he become a guarantor, indorser or
surety for loans from such bank to others, or in any manner be an
obligor or incur any contractual liability
to the bank except with the written approval of the majority of all
the directors of the bank, excluding the
director concerned: Provided, That such written approval shall not
be required for loans, other credit
accommodations and advances granted to officers under a fringe
benefit plan approved by the Bangko
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Sentral. The required approval shall be entered upon the records
of the bank and a copy of such entry
shall be transmitted forthwith to the appropriate supervising and
examining department of the Bangko
Sentral.
Dealings of a bank with any of its directors, officers or stockholders
and their related interests
shall be upon terms not less favorable to the bank than those
offered to others.
After due notice to the board of directors of the bank, the office of
any bank director or officer who
violates the provisions of this SEC may be declared vacant and the
director or officer shall be subject
to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit
accommodations and guarantees
that may be extended, directly or indirectly, by a bank to its
directors, officers, stockholders and their
related interests, as well as investments of such bank in
enterprises owned or controlled by said directors,
officers, stockholders and their related interests. However, the
outstanding loans, credit accommodations
and guarantees which a bank may extend to each of its
stockholders, directors, or officers and their
related interests, shall be limited to an amount equivalent to their
respective unencumbered deposits and
book value of their paid-in capital contribution in the bank:
Provided, however, That loans, credit
accommodations and guarantees secured by assets considered as
non-risk by the Monetary Board shall
be excluded from such limit: Provided, further, That loans, credit
accommodations and advances to
officers in the form of fringe benefits granted in accordance with
rules as may be prescribed by the
Monetary Board shall not be subject to the individual limit.
The Monetary Board shall define the term "related interests."
The limit on loans, credit accommodations and guarantees
prescribed herein shall not apply to
loans, credit accommodations and guarantees extended by a
cooperative bank to its cooperative
shareholders. (83a)
Microfinancing
SEC 40. Requirement for Grant of Loans or Other Credit
Accommodations. Before
granting a loan or other credit accommodation, a bank must
ascertain that the debtor is capable of
fulfilling his commitments to the bank.
Toward this end, a bank may demand from its credit applicants a
statement of their assets and
liabilities and of their income and expenditures and such
information as may be prescribed by law or by
rules and regulations of Monetary Board to enable the bank to
properly evaluate the credit application
which includes the corresponding financial statements submitted
for taxation purposes to the Bureau of
Internal Revenue. Should such statements prove to be false or
incorrect in any material detail, the bank
may terminate any loan or other credit accommodation granted on
the basis of said statements and shall
have the right to demand immediate repayment or liquidation of the
obligation.
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In formulating rules and regulations under this SEC, the Monetary
Board shall recognize the
peculiar characteristics of microfinancing, such as cash flow-based
lending to the basic sectors that are
not covered by traditional collateral. (76a)
SEC 43. Authority to Prescribe Terms and Conditions of
Loans and Other Credit
Accommodations. The Monetary Board may, similarly, in
accordance with the authority granted to it
in SEC 106 of the New Central Bank Act, and taking into account
the requirements of the economy for
the effective utilization of long-term funds, prescribe the maturities,
as well as related terms and
conditions for various types of bank loans and other credit
accommodations. Any change by the Board in
the maximum maturities shall apply only to loans and other credit
accommodations made after the date of
such action.
The Monetary Board shall regulate the interest imposed on
microfinance borrowers by lending
investors and similar lenders, such as, but not limited to, the
unconscionable rates of interest collected on
salary loans and similar credit accommodations. (78a)
SEC 44. Amortization on Loans and Other Credit
Accommodations. The
amortization schedule of bank loans and other credit
accommodations shall be adapted to the nature of
the operations to be financed.
In case of loans and other credit accommodations with maturities
of more than five (5) years,
provisions must be made for periodic amortization payments, but
such payments must be made at least
annually: Provided, however, That when the borrowed funds are to
be used for purposes which do not
initially produce revenues adequate for regular amortization
payments therefrom, the bank may permit the
initial amortization payment to be deferred until such time as said
revenues are sufficient for such
purpose, but in no case shall the initial amortization date be later
than five (5) years from the date on
which the loan or other credit accommodation is granted. (79a)
In case of loans and other credit accommodations to microfinance
sectors, the schedule of loan
amortization shall take into consideration the projected cash flow of
the borrower and adopt this into the
terms and conditions formulated by banks. (n)
Prepayment of loans
SEC 45. Prepayment of Loans and Other Credit
Accommodations. A borrower may
at any time prior to the agreed maturity date prepay, in whole or in
part, the unpaid balance of any bank
loan and other credit accommodation, subject to such reasonable
terms and conditions as may be agreed
upon between the bank and its borrower. (80a)
Real Estate investments and acquisitions
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SEC 51. Ceiling on Investments in Certain Assets. Any bank
may acquire real estate
as shall be necessary for its own use in the conduct of its
business: Provided, however, That the total
investment in such real estate and improvements thereof, including
bank equipment, shall not exceed fifty
percent (50%) of combined capital accounts: Provided, further,
That the equity investment of a bank in
another corporation engaged primarily in real estate shall be
considered as part of the bank's total
investment in real estate, unless otherwise provided by the
Monetary Board. (25a)
SEC 52. Acquisition of Real Estate by Way of Satisfaction of
Claims.
Notwithstanding the limitations of the preceding SEC, a bank may
acquire, hold or convey real
property under the following circumstances:
52.1. Such as shall be mortgaged to it in good faith by way of
security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts
previously contracted in the course of
its dealings; or
52.3. Such as it shall purchase at sales under judgments, decrees,
mortgages, or trust deeds held
by it and such as it shall purchase to secure debts due it.
Any real property acquired or held under the circumstances
enumerated in the above paragraph
shall be disposed of by the bank within a period of five (5) years or
as may be prescribed by the
Monetary Board: Provided, however, That the bank may, after said
period, continue to hold the property
for its own use, subject to the limitations of the preceding SEC.
(25a)
Outsourcing of bank functions
SEC 55. Prohibited Transactions.
55.1. No director, officer, employee, or agent of any bank shall
(e) Outsource inherent banking functions.
Employment of casual and probationary personnel
SEC 55.4. Consistent with the provisions of Republic Act No. 1405,
otherwise known as the Banks
Secrecy Law, no bank shall employ casual or nonregular
personnel or too lengthy probationary personnel in the conduct of
its business involving bank deposits.
Declaration of dividends
SEC 57. Prohibition on Dividend Declaration. No bank or
quasi-bank shall declare
dividends greater than its accumulated net profits then on hand,
deducting therefrom its losses and bad
debts. Neither shall the bank nor quasi-bank declare dividends, if
at the time of declaration:
57.1 Its clearing account with the Bangko Sentral is overdrawn; or
57.2 It is deficient in the required liquidity floor for government
deposits for five (5) or more
consecutive days; or
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57.3 It does not comply with the liquidity standards/ratios
prescribed by the Bangko Sentral for
purposes of determining funds available for dividend declaration;
or
57.4 It has committed a major violation as may be determined by
the Bangko Sentral. (84a)
Authority to engage in trust business
Trust Receipt
SEC 79. Authority to Engage in Trust Business. Only a stock
corporation or a
person duly authorized by the Monetary Board to engage in trust
business shall act as a trustee or
administer any trust or hold property in trust or on deposit for the
use, benefit, or behoof of others. For
purposes of this Act, such a corporation shall be referred to as a
trust entity. (56a; 57a)
Diligence required
SEC 80. Conduct of Trust Business. A trust entity shall
administer the funds or
property under its custody with the diligence that a prudent man
would exercise in the conduct of an
enterprise of a like character and with similar aims.
No trust entity shall, for the account of the trustor or the beneficiary
of the trust, purchase or
acquire property from, or sell, transfer, assign or lend money or
property to, or purchase debt instruments
of, any of the departments, directors, officers, stockholders, or
employees of the trust entity, relatives
within the first degree of consanguinity or affinity, or the related
interests, of such directors, officers and
stockholders, unless the transaction is specifically authorized by
the trustor and the relationship of the
trustee and the other party involved in the transaction is fully
disclosed to the trustor or beneficiary of the
trust prior to the transaction.
The Monetary Board shall promulgate such rules and regulations
as may be necessary to prevent
circumvention of this prohibition or the evasion of the responsibility
herein imposed on a trust entity. (56)
Deposit required as security for faithful performance of trust duties
SEC 84. Deposit for the Faithful Performance of Trust Duties.
Before transacting
trust business, every trust entity shall deposit with the Bangko
Sentral as security for the faithful
performance of its trust duties, cash or securities approved by the
Monetary Board in an amount equal to
not less than Five hundred thousand pesos (P500,000.00) or such
higher amount as may be fixed by the
Monetary Board: Provided, however, That the Monetary Board
shall require every trust entity to increase
the amount of its cash or securities on deposit with the Bangko
Sentral whenever in its judgment such
increase is necessary by reason of the trust business of such
entity: Provided, further, That the paid-in
capital and surplus of such entity must be at least equal to the
amount required to be deposited with the
Bangko Sentral in accordance with the provisions of this
paragraph. Should the capital and surplus fall
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below said amount, the Monetary Board shall have the same
authority as that granted to it under the
provisions of the fifth paragraph of SEC 34 of this Act.
A trust entity so long as it shall continue to be solvent and comply
with laws or regulations shall
have the right to collect the interest earned on such securities
deposited with the Bangko Sentral and,
from time to time, with the approval of the Bangko Sentral, to
exchange the securities for others. If the
trust entity fails to comply with any law or regulation, the Bangko
Sentral shall retain such interest on the
securities deposited with it for the benefit of rightful claimants. All
claims arising out of the trust business
of a trust entity shall have priority over all other claims as regards
the cash or securities deposited as
above provided. The Monetary Board may not permit the cash or
securities deposited in accordance with
the provisions of this SEC to be reduced below the prescribed
minimum amount until the depositing
entity shall discontinue its trust business and shall satisfy the
Monetary Board that it has complied with all
its obligations in connection with such business. (65a)
Separation of trust business from general business
SEC 87. Separation of Trust Business from General Business.
The trust business
and all funds, properties or securities received by any trust entity
as executor, administrator, guardian,
trustee, receiver, or depositary shall be kept separate and distinct
from the general business including all
other funds, properties, and assets of such trust entity. The
accounts of all such funds, properties, or
securities shall likewise be kept separate and distinct from the
accounts of the general business of the
trust entity. (61)
Exemption of trust assets from claims
SEC 92. Exemption of Trust Assets from Claims. No assets
held by a trust entity in
its capacity as trustee shall be subject to any claims other than
those of the parties interested in the
specific trusts. (65)
Penalties for violations
Fine, imprisonment, etc.
R.A. 7653
SEC 34. Refusal to Make Reports or Permit Examination.
Any officer, owner, agent,
manager, director or officer-in-charge of any institution subject to
the supervision or examination by the
Bangko Sentral within the purview of this Act who, being required
in writing by the Monetary Board or by
the head of the supervising and examining department willfully
refuses to file the required report or
permit any lawful examination into the affairs of such institution
shall be punished by a fine of not less
than Fifty thousand pesos (P50,000) nor more than One hundred
thousand pesos (P100,000) or by
imprisonment of not less than one (1) year nor more than five (5)
years, or both, in the discretion of the
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court.
R.A. 7653
SEC 35. False Statement. The willful making of a false or
misleading statement on a
material fact to the Monetary Board or to the examiners of the
Bangko Sentral shall be punished by a
fine of not less than One hundred thousand pesos (P100,000) nor
more than Two hundred thousand
pesos (P200,000), or by imprisonment of not more than (5) years,
or both, at the discretion of the court.
R.A. 7653
SEC 36. Proceedings Upon Violation of This Act and Other
Banking Laws, Rules,
Regulations, Orders or Instructions. Whenever a bank or
quasi-bank, or whenever any person or
entity willfully violates this Act or other pertinent banking laws
being enforced or implemented by the
Bangko Sentral or any order, instruction, rule or regulation issued
by the Monetary Board, the person or
persons responsible for such violation shall unless otherwise
provided in this Act be punished by a fine
of not less than Fifty thousand pesos (P50,000) nor more than Two
hundred thousand pesos
(P200,000) or by imprisonment of not less than two (2) years nor
more than ten (10) years, or both, at
the discretion of the court.
Whenever a bank or quasi-bank persists in carrying on its business
in an unlawful or unsafe
manner, the Board may, without prejudice to the penalties provided
in the preceding paragraph of this
SEC and the administrative sanctions provided in SEC 37 of this
Act, take action under SEC 30
of this Act.
R.A. 7653
SEC 37. Administrative Sanctions on Banks and Quasi-banks.
Without prejudice to
the criminal sanctions against the culpable persons provided in
SECs 34, 35, and 36 of this Act, the
Monetary Board may, at its discretion, impose upon any bank or
quasi-bank, their directors and/or
officers, for any willful violation of its charter or by-laws, willful
delay in the submission of reports or
publications thereof as required by law, rules and regulations; any
refusal to permit examination into the
affairs of the institution; any willful making of a false or misleading
statement to the Board or the
appropriate supervising and examining department or its
examiners; any willful failure or refusal to
comply with, or violation of, any banking law or any order,
instruction or regulation issued by the
Monetary Board, or any order, instruction or ruling by the
Governor; or any commission of irregularities,
and/or conducting business in an unsafe or unsound manner as
may be determined by the Monetary
Board, the following administrative sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board
to be appropriate, but in no
case to exceed Thirty thousand pesos (P30,000) a day for each
violation, taking into
consideration the attendant circumstances, such as the nature and
gravity of the violation or
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irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to Bangko
Sentral credit facilities;
(c) suspension of lending or foreign exchange operations or
authority to accept new deposits or
make new investments;
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such
director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances,
preventively suspend any
director or officer of a bank or quasi-bank pending an investigation:
Provided, That should the case be
not finally decided by the Bangko Sentral within a period of one
hundred twenty (120) days after the
date of suspension, said director or officer shall be reinstated in his
position: Provided, further, That
when the delay in the disposition of the case is due to the fault,
negligence or petition of the director or
officer, the period of delay shall not be counted in computing the
period of suspension herein provided.
The above administrative sanctions need not be applied in the
order of their severity.
Whether or not there is an administrative proceeding, if the
institution and/or the directors and/or
officers concerned continue with or otherwise persist in the
commission of the indicated practice or
violation, the Monetary Board may issue an order requiring the
institution and/or the directors and/or
officers concerned to cease and desist from the indicated practice
or violation, and may further order
that immediate action be taken to correct the conditions resulting
from such practice or violation. The
cease and desist order shall be immediately effective upon service
on the respondents.
The respondents shall be afforded an opportunity to defend their
action in a hearing before the
Monetary Board or any committee chaired by any Monetary Board
member created for the purpose,
upon request made by the respondents within five (5) days from
their receipt of the order. If no such
hearing is requested within said period, the order shall be final. If a
hearing is conducted, all issues
shall be determined on the basis of records, after which the
Monetary Board may either reconsider or
make final its order.
The Governor is hereby authorized, at his discretion, to impose
upon banking institutions, for
any failure to comply with the requirements of law, Monetary Board
regulations and policies, and/or
instructions issued by the Monetary Board or by the Governor,
fines not in excess of Ten thousand
pesos (P10,000) a day for each violation, the imposition of which
shall be final and executory until
reversed, modified or lifted by the Monetary Board on appeal.
Suspension or removal of director or officer
54 of 143
SEC 66. Penalty for Violation of this Act. Unless otherwise
herein provided, the
violation of any of the provisions of this Act shall be subject to
SECs 34, 35, 36 and 37 of the New
Central Bank Act. If the offender is a director or officer of a bank,
quasi-bank or trust entity, the Monetary
Board may also suspend or remove such director or officer. If the
violation is committed by a corporation,
such corporation may be dissolved by quo warranto proceedings
instituted by the Solicitor General. (87)
Dissolution of bank
SEC 66. Penalty for Violation of this Act. Unless otherwise
herein provided, the
violation of any of the provisions of this Act shall be subject to
SECs 34, 35, 36 and 37 of the New
Central Bank Act. If the offender is a director or officer of a bank,
quasi-bank or trust entity, the Monetary
Board may also suspend or remove such director or officer. If the
violation is committed by a corporation,
such corporation may be dissolved by quo warranto proceedings
instituted by the Solicitor General. (87)
ADDITIONAL MATERIALS
BSP CIRCULARS
BSP CIRCULAR NOS. 488, 493, 543, 548, 642
Re: FUNCTIONS THAT BANKS COULD OUTSOURCE
SEC 1. Subsec. X169.3 Outsourcing of other banking functions of
the MORB is hereby amended to read, as follows:
Subject to prior approval of the Monetary Board, banks may
outsource the following functions, services or activities:
1. data imaging, storage, retrieval and other related
systems;
2. clearing and processing of checks not included in the
Philippine Clearing House System;
3. printing of bank deposit statements;
4. credit card services;
5. credit investigation and collection;
6. processing of export, import and other trading
transactions;
7. property appraisal;
8. property management services;
9. internal audit, subject to the following conditions:
a) the board of directors and senior management of the regulated
entity remain responsible for maintaining an effective system of
internal control and for providing active oversight of the outsourced
internal audit activities/functions;
b) the external service provider shall be an independent external
auditor included in the list of BSP selected external auditors or a
parent company which owns or controls more than fifty percent
(50%) of the subscribed capital stock of the outsourcing entity:
provided, that item b. of the general requirements under SEC 2 of
Circular no.410, series of 2003 shall apply to the parent company
while items b., d., e., and f. shall apply to the independent
external auditor.
c) the contract/service agreement with the external service
provider shall not be entered into for a period longer than five (5)
years;
d) There shall be a contingency plan to mitigate any significant
disruption, discontinuity or gap in audit coverage, particularly for
high-risk areas;
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
e) The written engagement contract or service agreement with
the external service provider shall, as a minimum:
i. Define the rights, expectations and responsibilities of both
parties;
ii. Set the scope and frequency of, and the fees to be paid for, the
work to be performed by the external service provider;
iii. State that the outsourced internal audit services are subject to
regulatory review and that BSP examiners shall be granted full and
timely access to internal audit reports and related working papers;
iv. State that the external service provider will not perform
management functions, make management decisions, or act or
appear to act in a capacity equivalent to that of a member of
management or an employee of the institution, and will comply with
professional and regulatory independence guidelines;
v. Specify that the external service provider must maintain the
audit reports and related working papers/files for at least five (5)
years;
vi. State that internal audit reports are the property of the
institution, that the institution will be provided with copies of related
working papers/files it deems necessary, and any information
pertaining to the institution must be kept confidential; and
vii. Establish a protocol for changing the terms of the service
contract and stipulations for default and termination of the
contract;
10. marketing loans, deposits and other bank products and
services, provided it does not involve the actual opening of deposit
accounts;
11. general bookkeeping and accounting services, provided
that these activities do not include servicing bank deposits or other
inherent banking functions;
12. offsite records storage services;
13. front/back office functions, i.e., trade support services
and downstream processing activities, by parent to a subsidiary or
vice-versa, subject to the following conditions:
a) The bank intending to outsource the aforementioned functions
shall certify that the front office functions to be done by its
parent/subsidiary (service provider) shall be limited to trade
support services;
b) The bank shall remain a parent/subsidiary of its subsidiary/
parent (service provider) and such service provider shall service
only entities belonging to its business group;
c) The bank shall certify that no inherent banking functions
involving deposit transactions shall be outsourced to its
parent/subsidiary (service provider);
d) The bank shall submit a Service Level Agreement duly signed
by the concerned parties and any amendments thereto, detailing
the functions to be outsourced, the respective responsibilities of
the bank and its parent/ subsidiary (service provider), and a
confidentiality clause; and
e) Any breach in any of the above conditions shall subject the
outsourcing of the aforementioned banking functions to all the
requirements of this SEC; and
14. back-up and data recovery operations; (as amended by BSP
CIR# 493) and
15. Call center operations for credit card and bank services
provided that such bank services do not involve inherent banking
functions; (as amended by BSP CIR#543) and16.
16. Such other activities as may be determined by the Monetary
Board."
The bank concerned must submit the same documentary
requirements listed in Subsec. X169.2b hereof, except where they
exclusively pertain to information technology operations.
Without need of prior Monetary Board approval, banks may
outsource the following functions, services or activities:
55 of 143
1. printing of bank loan statements and other non-deposit
records, bank forms and promotional materials;
2. transfer agent services for debt and equity securities;
3. messenger, courier and postal services;
4. security guard services;
5. vehicle service contracts;
6. janitorial services;
7. public relations services, procurement services, and temporary
staffing, provided that these activities do not include servicing bank
deposits or other inherent banking functions;
8. sorting and bagging of notes and coins;
9. maintenance of computer hardware, e.g., disk drives, printers,
monitors, UPS, network cabling systems;
10. payroll of bank employees;
11. telephone operator/receptionist services;
12. sale/disposal of acquired assets (ROPOA);
13. Human-resource related services (such as personnel training
and development, background investigation and salary
benchmarking service) (as amended by BSP CIR#642);
14. building, ground and other facilities maintenance; and
15. legal services from local legal counsel (amended by BSP
CIR#493);
16. compliance risk assessment and testing; (amended by BSP
CIR#493)
17. tax compliance services, provided that the service provider is
not also the external auditor of the bank; (as amended by BSP
CIR#548)
18. such other activities as may be determined by the Monetary
Board."
SEC 2. The provisions on outsourcing of SEC X169 and Subsecs.
X169.1 to X169.5 of the Manual of Regulations for Banks (MORB)
in so far as they are applicable to quasi-banks and other non-bank
financial institutions are hereby incorporated in the Manual of
Regulations for Non-Bank Financial Institutions (MORNBFI).
This Circular shall take effect fifteen (15) days following its
publication either in the Official Gazette or in a newspaper of
general circulation.
BSP CIRCULAR NO. 341
Series of 2002
RE: UNSAFE AND UNSOUND BANKING PRACTICES
Pursuant to Monetary Board Resolution No. 1055 dated 25 July
2002, the following guidelines shall be observed in implementing
SEC 56 of the General Banking Law of 2000 or Republic Act No.
8791:
SEC 1. Whether a particular activity may be considered as
conducting business in an unsafe or unsound manner, all relevant
facts must be considered. An analysis of the impact thereof on the
banks/quasi-banks/trust entities' operations and financial
conditions must be undertaken, including evaluation of capital
position, asset condition, management, earnings posture and
liquidity position.
In determining whether a particular act or omission, which is not
otherwise prohibited by any law, rule or regulation affecting banks,
quasi-banks or trust entities, may be deemed as conducting
business in an unsafe or unsound manner, the Monetary Board,
upon report of the head of the supervising or examining
department based on findings in an examination or a complaint,
shall consider any of the following circumstances:
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
a. The act or omission has resulted or may result in material loss
or damage, or abnormal risk or danger to the safety, stability,
liquidity or solvency of the' institution;
b. The act or omission has resulted or may result in material loss
or damage or abnormal risk to the institution's depositors,
creditors, investors, stockholders or to the Bangko Sentral or to the
pubiic in general;
c The act or omission has caused any undue injury, or has given
unwarranted benefits, advantage or preference to the bank or any
party in the discharge by the director or officer of his duties and
responsibilities through manifest partiality, evident bad faith or
gross inexcusable negligence; or
d. The act or omission involves entering into any contract or
transaction manifestly and grossly disadvantageous to the bank,
quasi-bank or trust entity, whether or not the director or officer
profited or will profit thereby.
Attached for guidance is a list of activities which may be
considered unsafe and unsound. (Annex A) The Monetary Board
may consider any other acts/omissions as unsafe and unsound
practices.
SEC 2. The Monetary Board may, at its discretion and based on
the seriousness and materiality of the acts or omissions, impose
any or all of the following sanctions provided under SEC 37 of
Republic Act No. 7653 and SEC 56 of Republic Act No. 8791,
whenever a bank, quasi-bank or trust entity conducts business in
an unsafe and unsound manner:
a. Issue an order requiring the institution to cease and desist from
conducting business in an unsafe and unsound manner and may
further order that immediate action be taken to correct the
conditions resulting from such unsafe or unsound practice;
b. Fines in amounts as may be determined by the Monetary Board
to be appropriate, but in no case to exceed Thirty Thousand pesos
(P30,000.00) a day on a per transaction basis taking into
consideration the attendant circumstances, such the gravity of the
act or omission and the size of the bank, quasi-bank or trust entity,
to be imposed on the bank, quasi-banks or trust entities, their
directors and/or responsible officers;
c. Suspension of interbank clearing privileges/immediate exclusion
from clearing;
d. Suspension of rediscounting privileges or access to Bangko
Sentral credit facilities;
e. Suspension of lending or foreign exchange operations or
authority to accept new deposits or make new investments;
f. Suspension of responsible directors and/or officers;
g. Revocation of quasi-banking cense; and/or
h. Receivership and liquidation under SEC 30 of RA 7653.
All other provisions of SECs 30 and 37 of R.A. 7653 whenever
appropriate shall also be applicable on the conduct of business in
an unsafe or unsound manner.
The imposition of the above sanctions is without prejudice to the
filing of appropriate criminal charges against culpable persons as
provided in SECs 34, 35 and 36 of R.A. 7653.
This Circular shall take effect immediately.
Annex A
List of Activities Which May Be Considered Unsafe and Unsound
Banking Practices
56 of 143
The activities enumerated herein are considered only as
guidelines and are not irrebutably presumed to be unsafe or
unsound. Conversely, not all practices which might under the
circumstances be termed unsafe or unsound are mentioned here.
The Monetary Board may NOW AND THEN consider any other
acts/omissions as unsafe or unsound practices.(opening par. As
amended by BSP CIR#640)
a. Operating with management whose policies and practices are
detrimental to the bank, quasi bank or trust entity and jeopardize
the safety of its deposits/deposit substitutes/trust accounts.
b. Operating with total adjusted capital and reserves that are
inadequate in relation to the kind and quality of the assets of the
bank, quasi-bank or trust entity.
c. Operating in a way that produces a deficit in net operating
income WITHOUT ADEQUATE MEASURES TO ENSURE A
SURPLUS IN NET OPERATING INCOME IN THE FUTURE. (as
amended by BSP CIR#640)
d. Operating with a serious lack of liquidity, especially in view of
the asset and deposit/deposit substitute/liability structure of the
bank, quasi-bank or trust entity.
e. Engaging in speculative and hazardous investment policies.
f. Paying excessive cash dividends in relation to the capital
position, earnings capacity and asset quality of the bank, quasi-
bank or trust entity.
g. Excessive reliance on large, high-COST or volatile deposits/
borrowings TO FUND AGGRESSIVE GROWTH THAT MAY BE
UNSUSTAINABLE.
FOR THIS PURPOSE, A BANK IS CONSIDERED OFFERING
HIGH-COST DEPOSITS/ BORROWINGS IF THE EFFECTIVE
INTEREST RATE PAID ON SAID DEPOSITS/ BORROWINGS
AND/OR NON-CASH INCENTIVES IS 50% OVER THE
PREVAILING COMPARABLE MARKET MEDIAN RATE FOR
SIMILAR BANK CATEGORIES, MATURITIES AND CURRENCY
DENOMINATION AND ACCOMPANIED BY OTHER
CIRCUMSTANCE/S SUCH AS:
1. UNDUE RELIANCE ON SOLICITATION AND ACCEPTANCE
OF BROKERED DEPOSITS;
2. BANK INCURS LARGE SUM OF DEPOSIT GENERATION
EXPENSES IN THE FORM OF COMMISSIONS, REFERRAL AND
SOLICITATION FEES AND RELATED EXPENSES AND/OR
PAYMENT OF ADVANCE INTEREST ON DEPOSITS;
3. DEFERRAL OF THE ABOVE DEPOSIT GENERATION
EXPENSES INCURRED TO DELAY RECORDING OF
EXPENSES AND/OR INACCURATE AMORTIZATION OF
ADVANCE INTEREST PAID ON DEPOSITS;
4. DEPOSIT PACKAGES OFFERED INCLUDE NON-CASH
INCENTIVES DISPROPORTIONATE TO THE AMOUNT OF
DEPOSITS SOUGHT WHICH GIVE UNDUE OR
UNWARRANTED ADVANTAGE OR PREFERENCE FOR THE
BANK; AND
5. BANK MARKETS, SOLICITS AND ACCEPTS DEPOSITS
OUTSIDE THE BANK PREMISES INCLUDING BRANCHES,
UNLESS OTHERWISE AUTHORIZED BY THE BSP UNDER
SECS X213 (SERVICING DEPOSITS OUTSIDE BANK
PREMISES) OR X621 (ELECTRONIC BANKING SERVICES) OF
THE MANUAL OF REGULATIONS FOR BANKS. (As amended
by BSP CIR#640)
h. Excessive reliance on letters of credit either issued by the bank
or accepted as collateral to loans advanced.
i. Excessive amounts of loan participations sold,
j. Paying interest on participations without advising participating
institution that ths course of interest was not from the borrower,
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
k. Selling participations without disclosing to the purchasers of
those participations materia!, non-public information known to the
bank
i. Failure to limit, control and document contingent liabilities,
m. Engaging in hazardous lending and lax collection policies and
practices, as evidenced by:
1 ) An excessive volume of loans subject to adverse classification;
2) An excessive volume of loans without adequate documentation,
including credit information;
3) Excessive net loan losses;
4) An excessive volume of loans in relation to the total assets and
deposits/deposit substitutes/trust liabilities of the bank, quasi-bank
or trust entity;
5) An excessive volume of weak and self-serving loans to persons
connected with the bank, quasi-bank or trust entity, especially if a
significant portion of these loans are adversely classified;
6) excessive concentrations of credit, especially if a substantial
portion of this credit is adversely classified;
7) indiscriminate participation in weak and undocumented loans
originated by other institutions;
8) failing to adopt written loan policies;
9) an excessive volume of past due or non-performing loans;
10) failure to diversify the loan portfolio/asset mix of the institution
11) failure to make provision for an adequate reserve for possible
loan losses
n. Permitting officers to engage in lending practices beyond the
scope of their position,
o. Operating the bank, quasi-bank or trust entity with inadequate
internal controls,
p. Failure to keep accurate and updated books and records.
q. Operating the institution with excessive volume of out-of-territory
loans,
r. Excessive volume of non-earning assets.
s. Failure to heed warnings and admonitions of the supervisory
authorities of the institution.
t. Continued and flagrant violation of any laws, rules, regulations or
written agreements between the institution and the Bangko Sentral
ng Pilipinas.
u. Any action likely to cause insolvency or substantial dissipation of
assetsor earnings of the institution or likely to seriously weaken its
condition or otherwise seriously prejudice the interest of its
depositors/investors/clients.
BSP CIRCULAR NO. 650Series of 2009
RE: AUTHORITY OF THRIFT BANKS TO ISSUE FOREIGN
LETTERS OF CREDIT
Subject : Authority of Thrift Banks to Issue Foreign Letters of
Credit (LCs) and Pay/Accept/Negotiate Import/Export Drafts/Bills
of Exchange
Pursuant to Monetary Board Resolution No. 283 dated 19
February 2009, the Manual of Regulations for Banks (MORB) is
hereby amended, as follows:
SEC 1. Subsec. 2101.7 on authority of thrift banks to issue foreign
letters of credit (LCs) and pay/accept/negotiate import/export
drafts/bills of exchange is hereby added and shall read, as follows:
Subsec. X2101.7 Authority of thrift banks to issue foreign
letters of credit (LCs) and pay/accept/negotiate import/export
drafts/bills of exchange. With prior Monetary Board approval, thrift
banks may be authorized to issue foreign letters of credit (LCs)
and pay/accept/negotiate import/export drafts/bills of exchange,
subject to compliance with the following conditions (at the time of
application unless otherwise indicated):
a) Minimum capital requirement of P= 1.0 billion;
57 of 143
b) Ten percent (10%) risk-based capital adequacy ratio (CAR);
c) CAMELS composite rating not lower than 3, with Management
component score not lower than 3 in the latest examination of the
bank;
d) Risk management system appropriate to its operations,
characterized by clear delineation of responsibility for risk
management, adequate risk measurement system, appropriately
structured risk limits, effective internal control system and
complete, timely and efficient risk reporting system;
e) Articles of incorporation which shall include among its powers or
purposes, the issuance of foreign LCs and
payment/acceptance/negotiation of import/export drafts/bills of
exchange (which may be submitted any time prior to engaging in
said activities);
f) Correspondent banking relationship or arrangement with
reputable foreign banks (which should be in place prior to
engaging in said activities);
g) Appointment of the officer with actual experience of at least two
(2) years as in-charge or at least as assistant in-charge of import
and export financing operations in a universal/ commercial bank
who will be in-charge of the said operations (prior to engaging in
said activities);
h) Appointment of bank personnel with actual experience and/or
training of at least six (6) months in import and export financing
operations in a universal/commercial bank who will handle the said
operations (prior to engaging in said activities);
i) No net weekly regular and liquidity reserve deficiencies during
the twelve (12) week period immediately preceding the date of
application;
j) No deficiency in asset and liquid asset cover for FCDU liabilities
for three (3) months immediately preceding the date of application;
k) No deficiency in liquidity floor requirement for government funds
held during the twelve (12) week period immediately preceding the
date of application;
l) No float items outstanding for more than sixty (60) calendar days
in the Due From/To Head Office/Branches/Offices and Due from
BSP accounts exceeding 1% of the total resources as of end of
month preceding the date of application;
m) No unbooked valuation reserves;
n) Compliant with ceilings on loans, other credit accommodations
and guarantees to directors, officers, stockholders, and their
related interests (DOSRI) for the quarter immediately preceding
the date of application;
o) Compliant with the single borrowers loan limit (SBL);
p) Compliant with the limit on real estate and improvements,
including bank equipment;
q) No uncorrected findings of unsafe and unsound banking
practices;
r) Generally compliant with banking laws, rules and regulations,
orders or instructions of the Monetary Board and/or BSP
Management; and
s) No past due obligations with the BSP or with any financial
institution.
SEC 2. Subsec. 2101.8 on application for authority to issue
foreign letters of credit and pay/accept/negotiate import/export
drafts/bills of exchange is hereby added, and shall read as follows:
Subsec. 2101.8 Application for authority to issue foreign
letters of credit (LCs) and pay/accept/negotiate import/export
drafts/bills of exchange. An application for authority to issue
foreign LCs and pay/accept/negotiate import/export drafts/bills of
exchange shall be signed by the president of the bank or officer of
equivalent rank and shall be accompanied by a certified true copy
of the resolution of the banks board of directors authorizing the
application.
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Marcos accused the BANK of unjustly demanding payment for the

This Circular shall take effect fifteen (15) days following its total amount of the trust receipt agreements without deducting the
publication either in the Official Gazette or in a newspaper of 30% marginal deposit that he had already made. He decried the
general circulation. BANKs unlawful charging of accumulated interest because he
claimed there was no agreement as to the payment of interest. The
interest arose from numerous alleged extensions and penalties.
CASES Marcos reiterated that there was no agreement to this effect
because his time deposits served as the collateral for his
PHILIPPINE BANKING CORPORATION vs. CA remaining obligation.
Marcos also denied that he obtained another loan from the BANK
G.R. No. 127469
for P500,000 with interest at 25% per annum supposedly covered
15 January 2004
by Promissory Note No. 20-979-83 dated 24 October 1983.
Marcos bewailed the BANKs belated claim that his time deposits
Facts:
were applied to this void promissory note on 12 March 1985.
On 30 August 1989, Leonilo Marcos (Marcos) filed with the trial
In sum, Marcos claimed that:
court a Complaint for Sum of Money with Damages[3] against
His time deposit with the BANK in the total sum of
petitioner Philippine Banking Corporation (BANK).
P1,428,795.34[5] has earned accumulated interest since March
Marcos alleged that sometime in 1982, the BANK through
1982 up to the present in the total amount of P1,727,305.45 at the
Florencio B. Pagsaligan (Pagsaligan), one of the officials of the
rate of 17% per annum so his total money with defendant (the
BANK and a close friend of Marcos, persuaded him to deposit
BANK) is P3,156,100.79 less the amount of P595,875 representing
money with the BANK. Marcos yielded to Pagsaligans persuasion
the 70% balance of the marginal deposit and/or balance of the
and claimed he made a time deposit with the BANK on two
trust agreements; and
occasions. The first was on 11 March 1982 for P664,897.67. On
His indebtedness was only P851,250 less the 30% paid as
12 March 1982, Marcos claimed he again made a time deposit with
marginal deposit or a balance of P595,875, which the BANK
the BANK for P764,897.67. The BANK did not issue an official
should have automatically deducted from his time deposits and
receipt for the second deposit but it acknowledged a deposit of this
accumulated interest, leaving the BANKs indebtedness to him at
amount through a letter-certification Pagsaligan issued. The time
P2,560,025.79.
deposits earned interest at 17% per annum and had a maturity
Marcos prayed the trial court to declare Promissory Note No. 20-
period of 90 days.
979-83 void and to order the BANK to pay the amount of his time
Marcos alleged that Pagsaligan kept the various time deposit
deposits with interest. He also sought the award of moral and
certificates on the assurance that the BANK would take care of the
exemplary damages as well as attorneys fees for P200,000 plus
certificates, interests and renewals. Marcos claimed that from the
25% of the amount due.
time of the deposit, he had not received the principal amount or its
On 9 October 1989, the BANK filed its Answer with Counterclaim.
interest.
The BANK denied the allegations in the complaint. The BANK
Sometime in March 1983, Marcos wanted to withdraw from the
believed that the suit was Marcos desperate attempt to avoid
BANK his time deposits and the accumulated interests to buy
liability under several trust receipt agreements that were the
materials for his construction business. However, the BANK
subject of a criminal complaint.
through Pagsaligan convinced Marcos to keep his time deposits
The BANK alleged that as of 12 March 1982, the total amount of
intact and instead to open several domestic letters of credit. The
the various time deposits of Marcos was only P764,897.67 and not
BANK required Marcos to give a marginal deposit of 30% of the
P1,428,795.35 as alleged in the complaint. The P764,897.67
total amount of the letters of credit. The time deposits of Marcos
included the P664,897.67 that Marcos deposited on 11 March
would secure 70% of the letters of credit. Since Marcos trusted the
1982.
BANK and Pagsaligan, he signed blank printed forms of the
application for the domestic letters of credit, trust receipt
The BANK pointed out that Marcos delivered to the BANK the time
agreements and promissory notes.
deposit certificates by virtue of the Deed of Assignment dated 2
Marcos executed three Trust Receipt Agreements totalling
June 1989. Marcos executed the Deed of Assignment to secure
P851,250, broken down as follows: (1) Trust Receipt No. CD 83.7
his various loan obligations. The BANK claimed that these loans
dated 8 March 1983 for P300,000; (2) Trust Receipt No. CD 83.9
are covered by Promissory Note No. 20-756-82 dated 2 June 1982
dated 15 March 1983 for P300,000; and (3) Trust Receipt No. CD
for P420,000 and Promissory Note No. 20-979-83 dated 24
83.10 dated 15 March 1983 for P251,250. Marcos deposited the
October 1983 for P500,000. The BANK stressed that these
required 30% marginal deposit for the trust receipt agreements.
obligations are separate and distinct from the trust receipt
Marcos claimed that his obligation to the BANK was therefore only
agreements.
P595,875 representing 70% of the letters of credit.
When Marcos defaulted in the payment of Promissory Note No.
Marcos believed that he and the BANK became creditors and
20-979-83, the BANK debited his time deposits and applied the
debtors of each other. Marcos expected the BANK to offset
same to the obligation that is now considered fully paid. The BANK
automatically a portion of his time deposits and the accumulated
insisted that the Deed of Assignment authorized it to apply the time
interest with the amount covered by the three trust receipts
deposits in payment of Promissory Note No. 20-979-83.
totalling P851,250 less the 30% marginal deposit that he had paid.
In March 1982, the wife of Marcos, Consolacion Marcos, sought
Marcos argued that if only the BANK applied his time deposits and
the advice of Pagsaligan. Consolacion informed Pagsaligan that
the accumulated interest to his remaining obligation, which is 70%
she and her husband needed to finance the purchase of
of the total amount of the letters of credit, he would have paid
construction materials for their business, L.A. Marcos Construction
completely his debt. Marcos further pointed out that since he did
Company. Pagsaligan suggested the opening of the letters of
not apply for a renewal of the trust receipt agreements, the BANK
credit and the execution of trust receipts, whereby the BANK would
had no right to renew the same.
agree to purchase the goods needed by the client through the
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
letters of credit. The BANK would then entrust the goods to the
client, as entrustee, who would undertake to deliver the proceeds
of the sale or the goods themselves to the entrustor within a
specified time.
The BANK claimed that Marcos freely entered into the trust receipt
agreements. When Marcos failed to account for the goods
delivered or for the proceeds of the sale, the BANK filed a
complaint for violation of Presidential Decree No. 115 or the Trust
Receipts Law. Instead of initiating negotiations for the settlement
of the account, Marcos filed this suit.
The BANK denied falsifying Promissory Note No. 20-979-83. The
BANK claimed that the promissory note is supported by
documentary evidence such as Marcos application for this loan
and the microfilm of the cashiers check issued for the loan. The
BANK insisted that Marcos could not deny the agreement for the
payment of interest and penalties under the trust receipt
agreements. The BANK prayed for the dismissal of the complaint,
payment of damages, attorneys fees and cost of suit.
The trial court rendered its decision in favor of Marcos. Aggrieved,
the BANK appealed to the Court of Appeals.
On 10 December 1996, the Court of Appeals modified the decision
of the trial court by reducing the amount of actual damages and
deleting the attorneys fees awarded to Marcos.
Issue: WON the bank is liable for offsetting his time deposits
Held: Yes
Ratio:
The BANK is liable to Marcos for offsetting his time deposits with a
fictitious promissory note. The existence of Promissory Note No.
20-979-83 could have been easily proven had the BANK presented
the original copies of the promissory note and its supporting
evidence. In lieu of the original copies, the BANK presented the
machine copies of the duplicate of the documents. These
substitute documents have no evidentiary value. The BANKs
failure to explain the absence of the original documents and to
maintain a record of the offsetting of this loan with the time
deposits bring to fore the BANKs dismal failure to fulfill its fiduciary
duty to Marcos.
SEC 2 of Republic Act No. 8791 (General Banking Law of 2000)
expressly imposes this fiduciary duty on banks when it declares
that the State recognizes the fiduciary nature of banking that
requires high standards of integrity and performance. This
statutory declaration merely echoes the earlier pronouncement of
the Supreme Court in Simex International (Manila) Inc. v. Court of
Appeals requiring banks to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of
their relationship. The Court reiterated this fiduciary duty of banks
in subsequent cases.
Although RA No. 8791 took effect only in the year 2000, at the time
that the BANK transacted with Marcos, jurisprudence had already
imposed on banks the same high standard of diligence required
under RA No. 8791. This fiduciary relationship means that the
banks obligation to observe high standards of integrity and
performance is deemed written into every deposit agreement
between a bank and its depositor.
The fiduciary nature of banking requires banks to assume a degree
of diligence higher than that of a good father of a family. Thus, the
BANKs fiduciary duty imposes upon it a higher level of
accountability than that expected of Marcos, a businessman, who
negligently signed blank forms and entrusted his certificates of
time deposits to Pagsaligan without retaining copies of the
certificates.
The business of banking is imbued with public interest. The
stability of banks largely depends on the confidence of the people
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in the honesty and efficiency of banks. In Simex International
(Manila) Inc. v. Court of Appeals[36] we pointed out the depositors
reasonable expectations from a bank and the banks
corresponding duty to its depositor, as follows:
In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a
few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and as
promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as
and to whomever he directs.
As the BANKs depositor, Marcos had the right to expect that the
BANK was accurately recording his transactions with it. Upon the
maturity of his time deposits, Marcos also had the right to withdraw
the amount due him after the BANK had correctly debited his
outstanding obligations from his time deposits.
By the very nature of its business, the BANK should have had in its
possession the original copies of the disputed promissory note and
the records and ledgers evidencing the offsetting of the loan with
the time deposits of Marcos. The BANK inexplicably failed to
produce the original copies of these documents. Clearly, the BANK
failed to treat the account of Marcos with meticulous care.
The BANK claims that it is a reputable banking institution and that
it has no reason to forge Promissory Note No. 20-979-83. The trial
court and appellate court did not rule that it was the bank that
forged the promissory note. It was Pagsaligan, the BANKs branch
manager and a close friend of Marcos, whom the trial court
categorically blamed for the fictitious loan agreements. The trial
court held that Pagsaligan made up the loan agreement to cover
up his inability to account for the time deposits of Marcos.
Whether it was the BANKs negligence and inefficiency or
Pagsaligans misdeed that deprived Marcos of the amount due him
will not excuse the BANK from its obligation to return to Marcos the
correct amount of his time deposits with interest. The duty to
observe high standards of integrity and performance imposes on
the BANK that obligation. The BANK cannot also unjustly enrich
itself by keeping Marcos money.
Assuming Pagsaligan was behind the spurious promissory note,
the BANK would still be accountable to Marcos. We have held that
a bank is liable for the wrongful acts of its officers done in the
interest of the bank or in their dealings as bank representatives but
not for acts outside the scope of their authority. Thus, we held:
A bank holding out its officers and agents as worthy of confidence
will not be permitted to profit by the frauds they may thus be
enabled to perpetrate in the apparent scope of their employment;
nor will it be permitted to shirk its responsibility for such frauds,
even though no benefit may accrue to the bank therefrom (10 Am
Jur 2d, p. 114). Accordingly, a banking corporation is liable to
innocent third persons where the representation is made in the
course of its business by an agent acting within the general scope
of his authority even though, in the particular case, the agent is
secretly abusing his authority and attempting to perpetrate a fraud
upon his principal or some other person, for his own ultimate
benefit.
Note: The promissory note was considered as forged as the bank
did not show the original. Applying the Best Evidence Rule, the
original should have been shown not the machine print-out, which
was what was given by the Bank.
VIII. PHILIPPINE DEPOSIT INSURANCE
CORPORATION ACT
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Basic Policy (Sec.1)
To promote and safeguard the interests of the depositing public by
way of providing permanent and continuing insurance coverage on
all insured deposits.
Main Functions
1. Insurance of Banks (Sec.5)
To insure the deposit liabilities of any bank or banking institution
engaged in the business of receiving deposits or which thereafter
may engage in the business of receiving deposits.
2. Examination of Banks (Sec. 8 and 9)
To conduct examination of banks with prior approval of the
Monetary Board. No examination can be conducted within twelve
months from the last examination date.
The Board of Directors shall appoint examiners who shall have
power, on behalf of the PDIC to examine any insured bank. Such
examiner shall have the power to make a thorough examination of
all the affairs of the bank and in doing so, he shall have the power
to administer oaths, to examine and take and preserve the
testimony of any of the officers and agents thereof, and, to compel
the presentation of books, documents, papers, or records
necessary in his judgment to ascertain the facts relative to the
condition of the bank; and shall make a full and detailed report of
the condition of the bank to the PDIC.
The Board of Directors shall appoint claim agents who shall have
the power to investigate and examine all claims for insured
deposits and transferred deposits. Each claim agent shall have the
power to administer oaths and to examine under oath and take and
preserve testimony of any person relating to such claim
3. Rehabilitation of Banks (Sec.17)
Money of the PDIC not otherwise employed shall be invested in
obligations of the Republic of the Philippines or in obligations
guaranteed as to principal and interest by the Republic of the
Philippines.
The banking or checking accounts of the PDIC shall be kept with
the Bangko Sentral ng Pilipinas, with the Philippine National Bank,
or with any other bank designated as depository or fiscal agent of
the Philippine government.
4. Receivership of Closed Banks (Sec.10)
The PDIC as receiver shall control, manage and administer the
affairs of the closed bank. Effective immediately upon takeover as
receiver of such bank, the powers, functions and duties, as well as
all allowances, remunerations and perquisites of the directors,
officers, and stockholders of such bank are suspended, and the
relevant provisions of the Articles of InPDIC and By-laws of the
closed bank are likewise deemed suspended.
The assets of the closed bank under receivership shall be deemed
in custodia legis in the hands of the receiver. From the time the
closed bank is placed under such receivership, its assets shall not
be subject to attachment, garnishment, execution, levy or any
other court processes.
5. Liquidation of Closed Banks (Sec.30, R.A.7653)
Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko
Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses
to its depositors or creditors; or
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(d) has willfully violated a cease and desist order under SEC 37
that has become final, involving acts or transactions which amount
to fraud or a dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance PDIC
as receiver of the banking institution.
For a quasi-bank, any person of recognized competence in
banking or finance may be designed as receiver.
The receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the
benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the
funds of the institution in non-speculative investments. The
receiver shall determine as soon as possible, but not later than
ninety (90) days from take over, whether the institution may be
rehabilitated or otherwise placed in such a condition so that it may
be permitted to resume business with safety to its depositors and
creditors and the general public: Provided, That any determination
for the resumption of business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business in accordance with
the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver
to proceed with the liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance PDIC
for general application to all closed banks. In case of quasi-banks,
the liquidation plan shall be adopted by the Monetary Board. Upon
acquiring jurisdiction, the court shall, upon motion by the receiver
after due notice, adjudicate disputed claims against the institution,
assist the enforcement of individual liabilities of the stockholders,
directors and officers, and decide on other issues as may be
material to implement the liquidation plan adopted. The receiver
shall pay the cost of the proceedings from the assets of the
institution.
(2) convert the assets of the institutions to money, dispose of the
same to creditors and other parties, for the purpose of paying the
debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as
may be necessary to collect and recover accounts and assets of,
or defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
The actions of the Monetary Board taken under this SEC or under
SEC 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on petition for certiorari
on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of the
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institution of the order directing receivership, liquidation or
conservatorship.
Insured Deposits (Sec.4(g))
The amount due to any bona fide depositor for legitimate deposits
in an insured bank net of any obligation of the depositor to the
insured bank as of date of closure, but not to exceed P500,000.00.
Liability to Depositors
1. Deposit Liabilities Required to be Insured (Sec.5)
The deposit liabilities of any bank or banking institution, which is
engaged in the business of receiving deposits or which thereafter
may engage in the business of receiving deposits, shall be insured
with the PDIC.
2. Commencement of Liability (Sec.14)
Whenever an insured bank shall have been closed by the
Monetary Board, payment of the insured deposits on such closed
bank shall be made by the PDIC as soon as possible either (1) by
cash or (2) by making available to each depositor a transferred
deposit in another insured bank in an amount equal to insured
deposit of such depositor.
The PDIC, in its discretion, may require proof of claims to be filed
before paying the insured deposits, and that in any case where the
PDIC is not satisfied as to the viability of a claim for an insured
deposit, it may require final determination of a court of competent
jurisdiction before paying such claim.
Failure to settle the claim, within six (6) months from the date of
filing of claim for insured deposit, where such failure was due to
grave abuse of discretion, gross negligence, bad faith, or malice,
shall, upon conviction, subject the directors, officers or employees
of the PDIC responsible for the delay, to imprisonment from six (6)
months to one (1) year. The period shall not apply if the validity of
the claim requires the resolution of issues of facts and or law by
another office, body or agency including the case mentioned in the
first proviso or by the PDIC together with such other office, body or
agency.
3. Deposit Accounts Not Entitled to Payment (Sec.4(f))
Any obligation of a bank which is payable at the office of the bank
located outside of the Philippines shall not be a deposit or included
as part of the total deposits or of insured deposit.
Subject to the approval of the Board of Directors, any insured bank
which is incorporated under the laws of the Philippines which
maintains a branch outside the Philippines may elect to include for
insurance its deposit obligations payable only at such branch.
4. Liability for Contents of Safety Box
Not liable the Bank has no way of knowing what a depositor
places in his security deposit box (Catindig).
5. Determination of Insured Deposits (Sec.16)
The PDIC shall commence the determination of insured deposits
due the depositors of a closed bank upon its actual takeover of the
closed bank.
6. Calculation of Liability (Sec. 4(g))
Per Depositor, Per Capacity
In determining such amount due to any depositor, there shall be
added together all deposits in the bank maintained in the same
right and capacity for his benefit either in his own name or in the
name of others.
Joint Accounts
A joint account regardless of whether the conjunction "and," "or,"
"and/or" is used, shall be insured separately from any individually-
owned deposit account.
If the account is held jointly by two or more natural persons, or by
two or more juridical persons or entities, the maximum insured
deposit shall be divided into as many equal shares as there are
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individuals, juridical persons or entities, unless a different sharing
is stipulated in the document of deposit.
If the account is held by a juridical person or entity jointly with one
or more natural persons, the maximum insured deposit shall be
presumed to belong entirely to such juridical person or entity.
The aggregate of the interests of each co-owner over several joint
accounts, whether owned by the same or different combinations of
individuals, juridical persons or entities, shall likewise be subject to
the maximum insured deposit of P250,000.00.
Mode of Payments (Sec.14)
Payment shall be made by cash or transferred deposit.
Transferred Deposit. Deposit in another insured bank in an amount
equal to insured deposit of such depositor.
Effect of Payment (Secc. 15, 16(b))
Payment (a) of an insured deposit to any person by the PDIC and
(b) payment of a transferred deposit to any person by the new
bank or by an insured bank in which a transferred deposit has
been made available shall discharge the PDIC.
Payment as Preferred Credit (Art.2244, Civil Code)
Failure to Settle Claim of an Insured Depositor (Sec. 14)
The PDIC, in its discretion, may require proof of claims to be filed
before paying the insured deposits, and that in any case where the
PDIC is not satisfied as to the viability of a claim for an insured
deposit, it may require final determination of a court of competent
jurisdiction before paying such claim.
Failure to settle the claim, within six (6) months from the date of
filing of claim for insured deposit, where such failure was due to
grave abuse of discretion, gross negligence, bad faith, or malice,
shall, upon conviction, subject the directors, officers or employees
of the PDIC responsible for the delay, to imprisonment from six (6)
months to one (1) year.
The period shall not apply if the validity of the claim requires the
resolution of issues of facts and or law by another office, body or
agency including the case mentioned in the first proviso or by the
Corporation together with such other office, body or agency.
Failure of Depositor to Claim Insured Deposit (Sec.16(e))
If the depositor in the closed bank shall fail to claim his insured
deposits with the Corporation within two (2) years from actual
takeover of the closed bank by the receiver, or does not enforce
his claim filed with the corporation within two (2) years after the
two-year period to file a claim as mentioned hereinabove, all rights
of the depositor against the Corporation with respect to the insured
deposit shall be barred; however, all rights of the depositor against
the closed bank and its shareholders or the receivership estate to
which the Corporation may have become subrogated, shall
thereupon revert to the depositor. Thereafter, the Corporation shall
be discharged from any liability on the insured deposit.
Other Powers of the PDIC
1. To adopt and use a corporate seal;
2. To have succession until dissolved by an Act of Congress;
3. To make contracts
4. To sue and be sued, complain and defend, in any court of
law in the Philippines
5. To appoint its Board of Directors, officers and employees
6. To prescribe its by-laws
7. To exercise all powers granted
8. To prescribe rules and regulations
9. To establish its own provident fund
10. To compromise, condone, release any claim or settled
liability
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11. To underwrite or advance litigation costs or expenses
Prohibition against the Splitting of Deposits (Sec.21(f)(5))
Splitting of deposits occurs whenever a deposit account with an
outstanding balance of more than the statutory maximum amount
of insured deposit maintained under the name of natural or juridical
persons is broken down and transferred into two or more accounts
in the name/s of natural or juridical persons or entities who have no
beneficial ownership on transferred deposits in their names within
thirty (30) days immediately preceding or during a bank-declared
bank holiday, or immediately preceding a closure order issued by
the Monetary Board of the Bangko Sentral ng Pilipinas for the
purpose of availing of the maximum deposit insurance coverage.
Prohibition against Issuance of TROs (Sec.22)
No court, except the Court of Appeals, shall issue any temporary
restraining order, preliminary injunction or preliminary mandatory
injunction against the PDIC for any action under the PDIC Act.
This prohibition shall apply in all cases, disputes or controversies
instituted by a private party, the insured bank, or any shareholder
of the insured bank.
The Supreme Court may issue a restraining order or injunction
when the matter is of extreme urgency involving a constitutional
issue, such that unless a temporary restraining order is issued,
grave injustice and irreparable injury will arise. The party applying
for the issuance of a restraining order or injunction shall file a bond
in an amount to be fixed by the Supreme Court, which bond shall
accrue in favor of the Corporation if the court should finally decide
that the applicant was not entitled to the relief sought.
Any restraining order or injunction issued in violation of this is void
and of no force and effect and any judge who has issued the same
shall suffer the penalty of suspension of at least sixty (60) days
without pay.
IX. LAW ON SECRECY OF BANK DEPOSITS
Purpose
To encourage people to deposit their money in banks and thereby
discourage private hoarding so that the banks may lend out the
money and assist in the economic development of the country.
Prohibited Acts
1. The examination and inquiry or looking into all deposits of
whatever nature with banks in the Philippines (including
investments in bonds issued by the Government) by any person,
government, bureau or office.
2. The disclosure by any official or employee of any bank to any
unauthorized person of any information concerning said deposits.
Exceptions
1. Upon written permission of the depositor
2. In cases of impeachment
3. Upon order of a competent court in cases of bribery or
dereliction of duty of a public official
4. In cases where the money deposited or invested is the
subject matter of the litigation
5. Upon court order in cases of unexplained wealth (RA3019)
6. Upon order of the Commissioner of Internal Revenue in
respect of bank deposits of a decedent for the purpose of
determining gross estate
7. Upon order of the Commissioner of Internal Revenue in
respect of bank deposits of a taxpayer who has filed an application
for compromise of his tax liability by reason of financial incapacity
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8. Upon court order in cases filed by the Ombudsman
a. In case of unclaimed balances
b. Without court order if the Anti-Money Laundering Council
determines that a particular deposit or investment is related to any
one of the following unlawful activities:
i. Kidnapping for ransom
ii. Violations of the Comprehensive Dangerous
Drugs Act
iii. Hijacking, destructive arson, murder
c. Upon court order if the Anti-Money Laundering Council
determines that a particular deposit or investment is related to a
money laundering offense
d. Inquiry into or examination when made by the Bangko
Sentral
Garnishment of Deposit
China Banking Corporation v. Ortega
FACTS Judgment by default was rendered against Bautista Logging
Co., Inc., B&B Forest Development Corporation and Marino
Bautista in an action for the collection of a sum of money. To
satisfy the judgment, Tan Kim Liong sought the garnishment of a
bank deposit of B&B Forest with China Banking Corporation.
ISSUE Whether or not a banking institution may validly refuse to
comply with a court process garnishing the bank deposit of a
judgment debtor, by invoking the provisions of Republic Act No.
1405.
HELD No. It was not the intention of the legislature to place bank
deposits beyond the reach of execution to satisfy a final judgment.
There is no real inquiry in an order for garnishment and if the
existence of the deposit were disclosed, the disclosure was purely
incidental to the execution process.
PCIB v. CA
FACTS An action was filed by a group of laborers, who obtained a
favorable judgment for the payment of backwages against
Marinduque Mining Corporation (MMC). The NLRC issued a writ of
execution. The Sheriff of Negros Occidental then prepared a
Notice of Garnishment addressed to six banks directing the banks
concerned to immediately issue a check in the name of the Deputy
Provincial Sheriff of Negros Occidental in an amount equivalent to
the amount of the garnishment and that proper receipt would be
issued therefor. PCIB Bank Manager Jose Henares issued a debit
memo for the full balance of MMCs account and allowed its
encashment.
ISSUE Whether or not PCIB violated Republic Act No. 1405 when it
allowed the sheriff to garnish the deposit of MMC pursuant to a writ
of execution issued by the NLRC.
HELD No. Garnishment is considered as a specie of attachment for
reaching credits belonging to the judgment debtor and owing to
him from a stranger to the litigation. Under the above-cited rule, the
garnishee is obliged to deliver the credits to the proper officer
issuing the writ. The law exempts from liability the person having in
his possession or under his control any credits or other personal
property belonging to the defendant if such property be delivered
or transferred to the clerk, sheriff, or other officer of the court in
which the action is pending. Since there is no evidence that PCIB
divulged the information that the MMC had an account with it, and
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it is undisputed that the said account was properly the object of the
notice of garnishment and writ of execution carried out by the
deputy sheriff, a duly authorized officer of the court, PCIB is not
liable.
Concealment of Illegally Acquired Property
Banco Filipino v. Purisima
FACTS A complaint was filed by the Bureau of Internal Revenue
against Manuel Caturla. In the course of the preliminary
investigation thereof, the Tanodbayan issued a subpoena duces
tecum to the Banco Filipino Savings & Mortgage Bank,
commanding its representative to to furnish the Tanodbayan with
duly certified copies of the records in all its branches of the loans,
savings and time deposits and other banking transactions
appearing in the names of Caturla, his wife and their children.
ISSUE Whether or not such an inquiry is allowed as regards public
officials under investigation for a violation of the Anti-Graft &
Corrupt Practices Act
HELD Yes. while Republic Act No. 1405 provides that bank
deposits are absolutely confidential and therefore may not be
examined, inquired or looked into, except in those cases
enumerated therein, the Anti-Graft Law directs in mandatory terms
that bank deposits shall be taken into consideration in the
enforcement of this SEC, notwithstanding any provision of law to
the contrary. The only conclusion possible is that the Anti-Graft
Law is intended to amend Republic Act No. 1405 by providing an
additional exception to the rule against the disclosure of bank
desposits.
Cases of unexplained wealth are similar to cases of bribery or
dereliction of duty and no reason is seen why these two classes of
cases cannot be excepted from the rule making bank deposits
confidential. The policy as to one cannot be different from the
policy as to the other. This policy expresses the notion that a public
office is a public trust and any person who enters upon its
discharge does so with the full knowledge that his life, so far as
relevant to his duty, is open to public scrutiny.
The inquiry into illegally acquired property extends to cases where
such property is concealed by being held by or recorded in the
name of other persons. This proposition is made clear by R.A. No.
3019 which quite categorically states that the term, legitimately
acquired property of a public officer or employee shall not include
property unlawfully acquired by the respondent, but its ownership
is concealed by its being recorded in the name of, or held by,
respondent's spouse, ascendants, descendants, relatives or any
other persons.
Mellon Bank v. Magsino
FACTS Dolores Ventosa requested the transfer of $1,000 from the
First National Bank of Moundsville, West Virginia, U.S.A. to
Victoria Javier in Manila through the Prudential Bank. First National
Bank requested Mellon Bank, to effect the transfer. Unfortunately
the wire sent by Mellon Bank to Manufacturers Hanover Bank, a
correspondent of Prudential Bank, indicated the amount
transferred as US$1,000,000.00 instead of US$1,000.00. Javiers
husband used the money to purchase real property from Honorio
Poblador, Jr.
ISSUE Whether or not the accounts of third parties can be looked
into.
63 of 143
HELD Yes. Republic Act No. 1405 allows the disclosure of bank
deposits in cases where the money deposited is the subject matter
of the litigation. Inasmuch as the case is aimed at recovering the
amount converted by the Javiers for their own benefit, necessarily,
an inquiry into the whereabouts of the illegally acquired amount
extends to whatever is concealed by being held or recorded in the
name of persons other than the one responsible for the illegal
acquisition.
Case Pending in Court Required Before Ombudsman Can
Examine Bank Accounts
Marquez v. Desierto
FACTS The Ombudsman attempted to inspect certain deposit
accounts maintained at the Julia Vargas Branch of Union Bank
involved in a case pending with the Ombudsman.
ISSUE Whether or not the power of the Ombudsman to examine
and have access to bak accounts and records holds
notwithstanding the provisions of Republic Act No. 1405.
HELD No. Before an in camera inspection may be allowed, there
must first be a pending case before a court of competent
jurisdiction. The account must be clearly identified, the inspection
limited to the subject matter of the pending case, and the bank
personnel as well as the account holder must be notified to be
present during the inspection.
Foreign Currency Deposit Act
Salvacion v. Central Bank
FACTS Karen Salvacion was detained and raped by Greg Bartelli,
an American citizen. Bartelli was arrested but was able to escape
from jail. The civil case for damages continued, and judgment was
rendered against Bartelli.
ISSUE Whether or not Bartellis deposits with China Banking
Corporation can be garnished.
HELD Yes. Republic Act No. 6426 does not protect and would not
apply to the foreign currency deposit of a transient alien depositor
under the peculiar circumstances of this case.
Anti-Money Laundering Act
Common Stages of Money Laundering
Placement, layering, integration
Covered Institutions
1. Banks, non-banks, quasi-banks, trust entities, and all
other institutions and their subsidiaries and affiliates supervised or
regulated by the Bangko Sentral ng Pilipinas (BSP)
2. Insurance companies and all other institutions
supervised or regulated by the Insurance Commission
3. (i) Securities dealers, brokers, salesmen, investment
houses and other similar entities managing securities or rendering
services as investment agent, advisor, or consultant, (ii) mutual
funds, close and investment companies, common trust funds, pre-
need companies and other similar entities, (iii) foreign exchange
corporations, money changers, money payment, remittance, and
transfer companies and other similar entities, and (iv) other entities
administering or otherwise dealing in currency, commodities or
financial derivatives based thereon, valuable objects, cash
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substitutes and other similar monetary instruments or property

supervised or regulated by Securities and Exchange Commission Anti-Money Laundering Council
The Anti-Money Laundering Council is hereby created and shall be
Covered Transactions composed of the Governor of the Bangko Sentral ng Pilipinas as
'Covered transaction' is a transaction in cash or other equivalent chairman, the Commissioner of the Insurance Commission and the
monetary instrument involving a total amount in excess of Chairman of the Securities and Exchange Commission as
P500,000.00 within one banking day. member. The AMLC shall shall act unanimously in the discharge of
its functions as defined hereunder:
Suspicious Transactions 1. To require and receive covered or suspicious transaction
Transactions with covered institutions, regardless of the amounts reports from covered institutions
involved, where any of the following circumstances exist: 2. To issue orders addressed to the appropriate
1. There is no underlying legal or trade obligation, purpose Supervising Authority or the covered institutions to determine the
or economic justification true identity of the owner of any monetary instrument or preperty
2. The client is not properly identified subject of a covered transaction or suspicious transaction report or
3. The amount involved is not commensurate with the request for assistance from a foreign State, or believed by the
business or financial capacity of the client Council, on the basis fo substantial evidence, to be, in whole or in
4. Taking into account all known circumstances, it may be part, wherever located, representing, involving, or related to
perceived that the client's transaction is structured in order to avoid directly or indirectly, in any manner or by any means, the proceeds
being the subject of reporting requirements under the Act of an unlawful activitity
5. Any circumstances relating to the transaction which is 3. To institute civil forfeiture proceedings and all other
observed to deviate from the profile of the client and/or the client's remedial proceedings through the Office of th Solicitor General
past transactions with the covered institution 4. To cause the filing of complaints with the Department of
6. The transactions is in a way related to an unlawful Justice or the Ombudsman for the prosecution of money
activity or offense under this Act that is about to be, is being or has laundering offenses
been committed 5. To investigate suspicious transactions and covered
7. Any transactions that is similar or analogous to any of transactions deemed suspicious after an investigation by AMLC,
the foregoing money laundering activities and other violations of this Act
6. To apply before the Court of Appeals, ex parte, for the
Unlawful Activities or Predicate Crimes freezing of any monetary instrument or property alleged to be the
'Unlawful activity' refers to any act or omission or series or proceeds of any unlawful activity
combination thereof involving or having direct relation to following: 7. To implement such measures as may be necessary and
1. Kidnapping for ransom justified under this Act to counteract money laundering
2. Violations of the Comprehensive Drugs Act of 2002 8. To receive and take action in respect of, any request
3. Violations of the Anti-Graft and Corrupt Practices Act from foreign states for assistance in their own anti-money
4. Plunder under Republic Act No. 7080 laundering operations
5. Robbery and extortion 9. To develop educational programs on the pernicious
6. Jueteng and Masiao effects of money laundering, the methods and techniques used in
7. Piracy on the high seas the money laundering, the viable means of preventing money
8. Qualified theft laundering and the effective ways of prosecuting and punishing
9. Swindling offenders
10. Smuggling
10. To impose administrative sanctions for the violation of
laws, rules, regulations, and orders and resolutions issued
11. Violations of the Electronic Commerce Act
pursuant thereto
12. Hijacking, destructive arson and murder
13. Fraudulent Practices under the Securities Regulation Basic Activities Required of Covered Institutions to Prevent Money
Code Laundering
14. Felonies or offenses of a similar nature that are Covered institutions shall report to the AMLC all covered
punishable under the penal laws of other countries transactions and suspicious transactions within five(5) working
Money Laundering Offenses days from occurrences thereof, unless the Supervising Authority
Money laundering is a crime whereby the proceeds of an unlawful prescribes a longer period not exceeding ten working days. Should
activity as herein defined are transacted, thereby making them a transaction be determined to be both a covered transaction and
appear to have originated from legitimate sources. It is committed a suspicious transaction, the covered institution shall be required
by the following: to report the same as a suspicious transaction.
1. Any person knowing that any monetary instrument or
property represents, involves, or relates to, the proceeds of any Freezing of Monetary Instrument or Property
unlawful activity, transacts or attempts to transacts said monetary The Court of Appeals, upon application ex parte by the AMLC and
instrument or property. after determination that probable cause exists that any monetary
2. Any person knowing that any monetary instrument or instrument or property is in any way related to an unlawful activity,
property involves the proceeds of any unlawful activity, performs or may issue a freeze order which shall be effective immediately. The
fails to perform any act as a result of which he falicitates the freeze order shall be for a period of twenty days unless extended
offense of money laundering referred to in paragraph (a) above. by the court.
3. Any person knowing that any monetary instrument or
property is required under this Act to be disclosed and filed with Authority to Inquire Into Bank Deposits
the Anti-Money Laundering Council (AMLC), fails to do so.
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The AMLC may inquire into or examine any particular deposit or
investment with any banking institution or non-bank financial
institution upon order of any competent court in cases of violation
of the Anti-Money Laundering Act, when it has been established
that there is probable cause that the deposits or investments are
related to an unlawful activity or a money laundering except that no
court order shall be required in cases involving kidnapping for
ransom, violations of the Comprehensive Dangerous Drugs act,
hijacking, destructive arson, and murder.
Penal Provisions
1. Malicious Reporting. Any person who, with malice, or in
bad faith, reports or files a completely unwarranted or false
information relative to money laundering transaction against any
person shall be subject to a penalty to six (6) months to four (4)
years imprisonment and a fine of not less than P100,000.00 but
not more than P500,000.00, at the discretion of the court:
Provided, That the offender is not entitled to avail the benefits of
the Probation Law.
2. Breach of Confidentiality. The punishment of
imprisonment ranging from three (3) to eight (8) years and a fine of
not less than P500,000.00 but not more than P1,000,000.00 shall
be imposed. In the case of a breach of confidentiality that is
published or reported by media, the responsible reporter, writer,
president, publisher, manager and editor-in-chief shall be liable.
Prohibitions Against Political Harrassment
Act shall not be used for political prosecution or harassment or as
an instrument to hamper competition in trade and commerce.No
case for money laundering may be filed against and no assets
shall be frozen, attached or forfeited to the prejudice of a candidate
for an electoral office during an election period.
Human Security Act
Judicial Authorization to Examine Bank Deposits, Accounts and
Records
The provisions of Republic Act No. 1405 as amended, to the
contrary notwithstanding, the justices of the Court of Appeals
designated as a special court to handle anti-terrorism cases after
satisfying themselves of the existence of probable cause in a
hearing called for that purpose that: (1) a person charged with or
suspected of the crime of terrorism or, conspiracy to commit
terrorism, (2) of a judicially declared and outlawed terrorist
organization, association, or group of persons; and (3) of a
member of such judicially declared and outlawed organization,
association, or group of persons, may authorize in writing any
police or law enforcement officer and the members of his/her team
duly authorized in writing by the anti-terrorism council to: (a)
examine, or cause the examination of, the deposits, placements,
trust accounts, assets and records in a bank or financial institution;
and (b) gather or cause the gathering of any relevant information
about such deposits, placements, trust accounts, assets, and
records from a bank or financial institution. The bank or financial
institution concerned, shall not refuse to allow such examination or
to provide the desired information, when so, ordered by and served
with the written order of the Court of Appeals.
Application to Examine Bank Deposits, Accounts and Records
The written order of the Court of Appeals authorizing the
examination of bank deposits, placements, trust accounts, assets,
and records: (1) of a person charged with or suspected of the
crime of terrorism or conspiracy to commit terrorism; (2) of any
judicially declared and outlawed terrorist organization, association,
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or group of persons, or (3) of any member of such organization,
association, or group of persons in a bank or financial institution,
and the gathering of any relevant information about the same from
said bank or financial institution, shall only be granted by the
authorizing division of the Court of Appeals upon an ex parte
application to that effect of a police or of a law enforcement official
who has been duly authorized in writing to file such ex parte
application by the Anti-Terrorism Council created in SEC 53 of this
Act to file such ex parte application, and upon examination under
oath or affirmation of the applicant and, the witnesses he may
produce to establish the facts that will justify the need and urgency
of examining and freezing the bank deposits, placements, trust
accounts, assets, and records: (1) of the person charged with or
suspected of the crime of terrorism or conspiracy to commit
terrorism; (2) of a judicially declared and outlawed terrorist
organization, association or group of persons; or (3) of any
member of such organization, association, or group of persons.
Effective Period of Court Authorization
The authorization issued or granted by the authorizing division of
the Court of Appeals to examine or cause the examination of and
to freeze bank deposits, placements, trust accounts, assets, and
records, or to gather information about the same, shall be effective
for the length of time specified in the written order of the
authorizing division of the Court of Appeals, which shall not exceed
a period of thirty (30) days from the date of receipt of the written
order of the authorizing division of the Court of Appeals by the
applicant police or law enforcement official.
The authorizing division of the Court of Appeals may extend or
renew the said authorization for another period, which shall not
exceed thirty (30) days renewable to another thirty (30) days from
the expiration of the original period: Provided, That the authorizing
division of the Court of Appeals is satisfied that such extension or
renewal is in the public interest: and, Provided, further, That the
application for extension or renewal, which must be filed by the
original applicant, has been duly authorized in writing by the Anti-
Terrorism Council.
In case of death of the original applicant or in case he is physically
disabled to file the application for extension or renewal, the one
next in rank to the original applicant among the members of the
ream named in the original written order of the authorizing division
of the Court of Appeals shall file the application for extension or
renewal: Provided, That, without prejudice to the liability of the
police or law enforcement personnel under SEC 19 hereof, the
applicant police or law enforcement official shall have thirty (30)
days after the termination of the period granted by the Court of
Appeals as provided in the preceding paragraphs within which to
file the appropriate case before the Public Prosecutor's Office for
any violation of this Act.
If no case is filed within the thirty (30)-day period, the applicant
police or law enforcement official shall immediately notify in writing
the person subject of the bank examination and freezing of bank
deposits, placements, trust accounts, assets and records. The
penalty of ten (10) years and one day to twelve (12) years of
imprisonment shall be imposed upon the applicant police or law
enforcement official who fails to notify in writing the person subject
of the bank examination and freezing of bank deposits,
placements, trust accounts, assets and records.
X. TRUTH IN LENDING ACT
RA 3765 (1963)
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10.1 Topics
Purpose
SEC 2. Declaration of Policy. It is hereby declared to be the policy
of the State to protect its 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.
Obligation of creditors
SEC 3. As used in this Act, the term
(4) "Creditor" means any person engaged in the business of
extending credit (including any person who as a regular business
practice make loans or sells or rents property or services on a
time, credit, or installment basis, either as principal or as agent)
who requires as an incident to the extension of credit, the payment
of a finance charge.
SEC 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in
accordance with rules and regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the property or service to be
acquired;
(2) the amounts, if any, to be credited as down payment and/or
trade-in;
(3) the difference between the amounts set forth under clauses (1)
and (2);
(4) the charges, individually itemized, which are paid or to be paid
by such person in connection with the transaction but which are
not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos;
and
(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
Covered and excluded transactions
Covered transactions
SEC 3. As used in this Act, the term
(2) "Credit" means any loan, mortgage, deed of trust, advance, or
discount; any conditional sales contract; any contract to sell, or
sale or contract of sale of property or services, either for present or
future delivery, under which part or all of the price is payable
subsequent to the making of such sale or contract; any rental-
purchase contract; any contract or arrangement for the hire,
bailment, or leasing of property; any option, demand, lien, pledge,
or other claim against, or for the delivery of, property or money;
any purchase, or other acquisition of, or any credit upon the
security of, any obligation of claim arising out of any of the
foregoing; and any transaction or series of transactions having a
similar purpose or effect.
Sec. 3, CB Circular No. 158 implementing RA 3765
a) Any loans, mortgages, deeds of trust, advances and
discounts;
b) Any conditional sales contracts, any contract to sell, or
sale or contract of sale of property or services, either for present or
future delivery, under which part or all of the price is payable
subsequent to the making of such sale or contract;
c) Any rental-purchase contract;
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d) Any contract for the hire, bailment or leasing of property;
e) Any option, demand, lien, pledge or other claim against
or for delivery of, property or money;
f) Any purchase, or other acquisition of, or any credit upon
the security of, any obligation or claim arising out of any of the
foregoing; and
g) Any transaction or series of transactions having a similar
purpose or effect.
Excluded transactions
Sec. 3, CB Circular 158
a) Those that do not involve the payment of any finance
charge by the debtor; and
b) Those in which the debtor is the one specifying a definite
and fixed set of credit terms such as bank deposits, insurance
contracts, sale of bonds, etc.
Finance and non-finance charges
Finance charges
SEC 3. As used in this Act, the term
(3) "Finance charge" includes interest, fees, service charges,
discounts, and such other charges incident to the extension of
credit as the Board may be regulation prescribe.
Sec. 2 (h), CB Circular 158
Finance charges are the amounts to be paid by the debtor incident
to the extension of credit such as interests, discounts, collection
fees, credit investigation fees and attorneys fees.
Non-finance charges
Sec. 2(f), CB Circular 158
Non-finance charges are the amounts advanced by a creditor for
items normally associated with the ownership of property or the
availment of the services purchased which are not incident to the
extension of credit. For example, when a debtor purchases a car
on credit, the creditor may advance the insurance premium as well
as the registration fee for the account of the debtor.
Consequences of non-compliance with obligation
SEC 6. (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall be
liable to such person in the amount of P100 or in an amount equal
to twice the finance charged required by such creditor in
connection with such transaction, whichever is the greater, except
that such liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty may be brought by
such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under
this subSEC in which any person is entitled to a recovery, the
creditor shall be liable for reasonable attorney's fees and court
costs as determined by the court.
(b) Except as specified in subSEC (a) of this SEC, nothing
contained in this Act or any regulation contained in this Act or any
regulation thereunder shall affect the validity or enforceability of
any contract or transactions.
(c) Any person who willfully violates any provision of this Act or any
regulation issued thereunder shall be fined by not less than P1,00
or more than P5,000 or imprisonment for not less than 6 months,
nor more than one year or both.
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(d) No punishment or penalty provided by this Act shall apply to the
Philippine Government or any agency or any political subdivision
thereof.
(e) A final judgment hereafter rendered in any criminal proceeding
under this Act to the effect that a defendant has willfully violated
this Act shall be prima facie evidence against such defendant in an
action or proceeding brought by any other party against such
defendant under this Act as to all matters respecting which said
judgment would be an estoppel as between the parties thereto.
10.2 Cases
Excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the
promissory notes, cannot be given effect under the Truth in
Lending Act
New Sampaguita Builders Construction, Inc., et al. v. PNB
No penalty charges or increases thereof appear either in
the Disclosure Statements or in any of the clauses in the second
and the third Credit Agreements earlier discussed. While a
standard penalty charge of 6 percent per annum has been
imposed on the amounts stated in all three Promissory Notes still
remaining unpaid or unrenewed when they fell due, there is no
stipulation therein that would justify any increase in that charges.
The effect, therefore, when the borrower is not clearly informed of
the Disclosure Statements -- prior to the consummation of the
availment or drawdown -- is that the lender will have no right to
collect upon such charge or increases thereof, even if stipulated in
the Notes. The time is now ripe to give teeth to the often ignored
forty-one-year old Truth in Lending Act and thus transform it from
a snivelling paper tiger to a growling financial watchdog of hapless
borrowers.
Failure to disclose required information in disclosure statement
cured by disclosure thereof in loan transaction documents
DBP v. Arcilla
Issue: WON DBP complied with the disclosure requirement of RA
3765 and CB Circular 158?
Held: Yes. Under Circular No. 158 of the Central Bank, the
information required by R.A. No. 3765 shall be included in the
contract covering the credit transaction or any other document to
be acknowledged and signed by the debtor. If the borrower is not
duly informed of the data required by the law prior to the
consummation of the availment or drawdown, the lender will have
no right to collect such charge or increases thereof, even if
stipulated in the promissory note. However, such failure shall not
affect the validity or enforceability of any contract or transaction. In
the present case, DBP failed to disclose the requisite information in
the disclosure statement form authorized by the Central Bank, but
did so in the loan transaction documents between it and Arcilla.
Contrary to appellee's claim that he was not sufficiently informed of
the details of the loan, the records disclose that the required
informations were readily available in the three (3) promissory
notes he executed. Thus, DBP substantially complied with RA
3765 and CB Circular 158.
10.3 Additional Materials
a) Implementing Rules: CB Circular No. 158-63
b) Additional Implementing Rules: CB Circular No. 431-74
10.4 Related Statute
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Access Devices Regulation Act of 1998 (RA 8484)
a) Disclosure required upon credit card application or solicitation
SEC 4. Credit Card Application and Solicitation. Any
application to open a credit card account for any person under an
open-end credit plan or a solicitation to open such an account,
either by mail, telephone or other means, shall disclose in writing
or orally, as the case may be, the following information:
(a) Annual Percentage Rate
1) Each annual percentage rate of interest on the amount of
credit obtained by the credit card holder under such credit plan.
Where an extension of credit is subject to a variable rate, the fact
that the rate is variable, and the annual percentage rate in effect at
the time of the mailing.
2) Where more than one rate applies, the range of balances
to which each rate applies.
(b) Annual and other Fees
1) Any annual fee, other periodic fee, or membership fee
imposed for the issuance or availability of a credit card, including
any account maintenance fee or any other charge imposed based
on activity or inactivity for the account during the billing cycle.
2) Any minimum finance charge imposed for each period
during which any extension of credit which is subject to a finance
charge is outstanding.
3) Any transaction charge imposed in connection with use
of the card to purchase goods or services.
4) Any fee, penalty or surcharge imposed for the delay in
payment of an account.
(c) Balance Calculation Method the name or a detailed
explanation of the balance calculation method used in determining
the balance upon which the finance charge is computed.
(d) Cash Advance Fee any fee imposed for an extension of credit
in the form of cash.
(e) Over-the-Limit-Fee any fee imposed in connection with an
extension of credit in excess of the amount of credit authorized to
be extended with respect to such amount: Provided, however, That
in case the application or solicitation to open a credit card account
for any person under an open-end consumer credit plan be made
through catalogs, magazines, or other publications, the following
additional information shall be disclosed:
1) A statement, in a conspicuous and prominent location on
the application or solicitation, that:
i. the information is accurate as of the date the application
or solicitation was printed;
ii. the information contained in the application or solicitation
is subject to change after such date;
iii. the applicant should contact the creditor for information
on any change in the information contained in the application or
solicitation since it was printed;
2) The date the application or solicitation was printed; and
3) In a conspicuous and prominent location on the
application or solicitation, a toll free telephone number or mailing
address which the applicant may contact to obtain any change in
the information provided in the application or solicitation since it
was printed.
b) Detailed explanation and clear illustration of computation of
charges and fees
SEC 5. Computations. In addition to the foregoing, a credit card
issuer must, to the extent practicable, provide a detailed
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explanation and a clear illustration of the manner by which all
charges and fees are computed.
c) Exceptions to the disclosure requirement
SEC 6. Exceptions. The disclosures required under SEC 4 of
this Act may be omitted in any telephone solicitation or application
if the credit card issuer:
(a) does not impose any fee in connection with paragraph (b)(1),
SEC 4 of this Act;
(b) does not impose any fee in connection with telephone
solicitation unless the consumer signifies acceptance by using the
card;
(c) discloses clearly the information described in SEC 4 of this Act
in writing within thirty (30) days after the consumer requests the
card, but in no event later than the date of delivery of the card; and
(d) discloses clearly that the consumer is not obligated to accept
the card or account and the consumer will not be obligated to pay
any fees or charges disclosed unless the consumer elects to
accept the card or account by using the card.
d) Disclosure required prior to renewal
SEC 7. Disclosure Prior to Renewal. Except in telephone
solicitations a card issuer that imposes any fee described in SEC 4
shall transmit to a consumer's credit card account a clear and
conspicuous disclosure of:
(a) the date by which, the month by which, or the billing period at
the close of which, the account will expire if not renewed;
(b) the information described in SEC 4 which shall be transmitted
to a consumer at least thirty (30) days prior to the scheduled
renewal date of the consumer's credit card account;
(c) the information described in SEC 4 (a) (1) which shall be
transmitted to a consumer's credit card account; and
(d) the method by which the consumer may terminate continued
credit availability under the account: Provided, That the disclosures
required by this SEC must be made prior to posting a fee
described in SEC 4 (b) (1) to the account, or with the periodic
billing statement first disclosing that the fee has been posted to the
account subject to the condition that the consumer is given thirty
(30) day period to avoid payment of the fee or to have the fee
recredited to the account in any case where the consumer does
not wish to continue the availability of the credit.
e) Penalty for failure to disclose
SEC 8. Failure to Disclose. Credit card companies which shall
fail to disclose the information required under SECs 4, 5 and 7 of
this Act, after due notice and hearing, shall be subject to
suspension or cancellation of their authority to issue credit cards
by the Bangko Sentral ng Pilipinas, Securities and Exchange
Commission and such other government agencies.
XI. LETTERS OF CREDIT
ART 567-572 CODE OF COMMERCE
11.1 Topics
Governing Law
1. Articles 567-572 of the Code of Commerce, which
provides a skeletal introduction to the subject of letters of credit
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2. The Uniform Customs and Practice for Documentary
Credits issued by the International Chamber of Commerce, which
reflects accepted commercial usage and practice on the subject of
letters of credit and the application of which in the Philippines has
been acknowledged by the Supreme Court based on Article 2 of
the Code of Commerce which provides that in the absence of any
applicable provision in the Code of Commerce, commercial
transactions shall be governed by usages generally observed.
(See BPI v. De Reny Fabric Industries; Feati Bank v. CA; and
Bank of America, NT & SA v. CA)
Concept and nature
ARTICLE 567. Letters of credit are those issued by one merchant
to another or for the purpose of attending to a commercial
transaction.
Essential conditions
ARTICLE 568. The essential conditions of letters of credit shall be:
1. To be issued in favor of a definite person and not to order.
2. To be limited to a fixed and specified amount, or to one or
more undetermined amounts, but within a maximum the limits of
which has to be stated exactly.
Those which do not have any of these last circumstances shall be
considered as mere letters of recommendation.
Period of validity
ARTICLE 572. If the bearer of a letter of credit does not make use
thereof within the period agreed upon with the drawer, or, in default
of a period fixed, within six months, counted from its date in any
point in the Philippines, and within twelve months anywhere
outside thereof, it shall be void in fact and in law.
Basic parties and governing contracts
Basic parties of a letter of credit
a) The buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipt of the
documents of title;
b) The bank issuing the letter of credit, which undertakes to
pay the seller upon receipt of the draft and proper documents of
titles and to surrender the documents to the buyer upon
reimbursement; and
c) The seller, who in compliance with the contract of sale
ships the goods to the buyer and delivers the documents of title
and draft to the issuing bank to recover payment. (See Bank of
America v. NT & SA)
Governing contracts
a) Issuing bank and applicant/buyer/importer Their
relationship is governed by the terms of the application and
agreement for the issuance of the letter of credit by the bank
b) Issuing bank and beneficiary/seller/exporter Their
relationship is governed by the terms of the letter of credit issued
by the bank
c) Applicant and beneficiary Their relationship is
governed by the sales contract. (See Reliance Commodities v.
Deawoo Industrial)
Opening bank buyers bank which issues the letter of credit
Notifying bank corresponding bank of the opening bank through
which it advises the beneficiary of the existence of the letter of
credit
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Negotiating bank any bank in the city of the beneficiary
Paying bank - buys or discounts the drafts if such draft is drawn
on the opening bank or on another designated bank not in the city
of the beneficiary
Confirming bank upon the request of the beneficiary confirms
the letter of credit issued by the opening bank
Independence principle
The independence principle in a letter of credit transactions means
that a bank, in determining compliance with the terms of a letter of
credit is required to examine only the shipping documents
presented by the seller and is precluded from determining whether
the main contract is actually accomplished or not. This
arrangement assures the seller of prompt payment, independent of
any breach of the main sales contract. (See Bank of America NT &
SA).
Rule of strict compliance
The rule of strict compliance in a letter of credit transaction means
that the documents tendered by the seller or beneficiary must
strictly conform to the terms of the letter of credit, i.e., they must
include all documents required by the letter of credit. Thus, a
correspondent bank which departs from what has been stipulated
under the letter of credit, as when it accepts a faulty tender, acts
on its own risk and may not thereafter be able to recover from the
buyer or the issuing bank, as the case may be; the money thus
paid to the beneficiary. (See Feati Bank)
Documents associated with letters of credit transactions
a) Draft sometimes called a bill of exchange, it is an order
written by an exporter/seller instructing an importer/buyer or its
agent to pay a specified amount of money at a specified time.
b) Bill of lading document issued to the exporter by a
common carrier transporting the merchandise. It serves three
purposes: as a receipt, a contract and a document of title.
c) Commercial invoice a document signed and issued by
the seller and contains a precise description of the merchandise
and the terms of the sale such as unit prices, amount due from the
buyer and shipping conditions related to charges.
d) Consular invoice a document issued by the consulate
of the importing country to provide customs information and
statistics for that country and to help prevent false declarations of
value.
e) Certificate of analysis a document that may be required
to ascertain that certain specifications of weight, purity, sanitation,
etc. have been met.
f) Packing list an enumeration of the contents of
containers so that they can be identified, either for customs
purposes or for importer identification of the contents of separate
containers.
g) Export declaration a document prepared by the
exporter to assist the government to prepare export statistics.
11.2 Cases
Nature of letters of credit
Prudential Bank v. IAC
A letter of credit is defined as an engagement by a bank or other
person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the
conditions specified in the credit. Through a letter of credit, the
bank merely substitutes its own promise to pay for the promise to
pay of one of its customers who in return promises to pay the bank
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the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon.
Bank of America v. CA
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable interest of a seller, who
refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. To break the
impasse, the buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by virtue of the letter of
the letter of credit, the issuing bank can authorize the seller to draw
drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter
of credit. The buyer and the seller agree on what documents are to
be presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.
Under this arrangement, the seller gets paid only if he delivers the
documents of title over the goods, while the buyer acquires the
said documents of title over the goods only after reimbursing the
bank.
Process
1. Once the credit is established, the seller ships the goods
to the buyer and in the process secures the shipping documents or
DOT
2. To get paid, the seller executes a draft and presents it
together with the required documents to the issuing bank
3. The issuing bank redeems the draft and pays cash to the
seller if it finds the documents submitted by the seller conform with
what the letter of credit requires
4. The bank obtains possession of the documents upon
paying the seller
5. Transaction is completed when the buyer reimburses the
issuing bank and acquires the documents entitling him to the
goods.
Lee v. CA
Modern letters of credit are usually not made between natural
persons. They involve bank-to-bank transactions. Historically,
letters of credit was developed to facilitate the sale of goods
between distant and unfamiliar buyers and sellers. It was an
arrangement under which a bank, whose credit was acceptable to
the seller, would at the instance of the buyer agree to pay drafts
drawn on it by the seller, provided that certain documents are
presented such as bills of lading accompanied the corresponding
drafts.
Parties to a commercial letter of credit
1. Buyer or importer
2. Seller or the beneficiary
3. Opening bank buyers bank which issues the letter of
credit
4. Notifying bank corresponding bank of the opening bank
through which it advises the beneficiary of the existence of the
letter of credit
5. Negotiating bank any bank in the city of the beneficiary
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6. Paying bank buys or discounts the drafts if such draft is
drawn on the opening bank or on another designated bank not in
the city of the beneficiary
7. Confirming bank upon the request of the beneficiary
confirms the letter of credit issued by the opening bank
Standby letters of credit
Transfield Philippines, Inc. v. Luzon Hydro Corporation
Facts: Transfield Philippines and LHC entered into a turnkey
contract whereby the former undertook to construct a hydro-
electric power station by June 1, 2000. To secure performance of
the obligation on or before the target completion date, Transfield
opened in favor of LHC 2 standby letters of credit. Transfeild failed
to complete the project by the target date. Transfield filed a
Complaint for Injunction to restrain LHC from calling on the
securities.
Issue: WON the banks should dispose of the securities upon
application by LHC? Yes.
Held:
Concept of Standby letters of credit The use of credits in
commercial transactions serves to reduce the risk of non-payment
of the purchase price under the contract of sale of goods. Standby
credits however are used in non-sale settings where they serve to
reduce the risk of non-performance.
Commercial credit v. standby credit
1. Commercial credit involve of payment of money under a
contract of sale.
2. Commercial credits become payable upon the
presentation by the seller of documents that show he has taken
affirmative steps to comply with the sales agreement. Standby
credits is payable upon certification of a partys nonperformance of
the agreement.
3. Beneficiary of commercial credit must present
documents that he has performed his contract. While beneficiary of
standby credit must certify that his obligor has not performed the
contract.
Independence principle
BPI v. De Reny Fabric Industries
Facts: De Reny Fabric obtained letters of credit from BPI covering
the purchase by the corporation of dyestuffs from its American
supplier. Upon presentment of the bills of lading and drafts
covering the goods to the corresponding bank of BPI in the US the
supplier was paid. De Reny refused to pay BPI on the ground that
the goods delivered were defective.
Issue: WON the foreign corresponding banks of BPI had the duty
to take the necessary precaution to insure that the goods shipped
conformed with the item appearing of the letters of credit?
Held: No.
Under the terms of their commercial letter of credit agreements
with the bank, De Reny agreed that the Bank shall not be
responsible or liable for any defect or loss of the goods. But even
without such stipulation, the burden of loss still cannot be shifted to
the Bank on account of the seller breach of its obligation. Under
Uniform Customs and Practice for Commercial Documentary
Credits, banks in providing financing in international business
transactions, do not deal with the property to be exported or
shipped to the importer but only deal with the documents. Custom
in international banking and financing circles negate any duty on
the part of a bank to verify whether what has been described in
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letters of credit or drafts or shipping documents actually tallies with
what was loaded abroad ship.
Rule of strict compliance
Feati Bank v. CA
Facts: The letter of credit provided that the draft should be
presented to the issuing bank with the following documents:
commercial invoice, tally sheets, bills of lading and a certification
from Han-Axel Christiansen (consignor). The latter refused to issue
the certification. Feati Bank, a corresponding bank of the issuing
bank in the Philippines, refused to honor the drafts without the
certification.
Issue: WON a correspondent bank can be held liable under the
letter of credit despite non-compliance by the beneficiary with the
terms thereof.
Held: It is as settled rule in commercial transactions involving
letters of credit that the documents tendered must strictly conform
to the terms of the letter of credit. The tender of documents by the
beneficiary must include all documents required by the letter. A
correspondent bank which departs from what has been stipulated
under the letter of credit, as when it accepts a faulty tender, acts
on its own risks and it may not thereafter be able to recover from
the buyer or the issuing bank the money thus paid to the
beneficiary. Thus the rule of strict compliance.
Since a bank deals only with documents, it is not in a position to
determine whether or not the documents required by the letter of
credit are material or superfluous. There mere fact that the
document was specified therein readily means that the document
is of vital importance to the buyer.
XII. TRUST RECEIPTS LAW
PD 115 (1973)
12.1 Topics
Origin
The Trust Receipts Law has no legislative history to speak of as it
was a presidential issuance. It was closely patterned after the
Uniform Trust Receipts Act promulgated in 1993 by the US
National Conference of Commissioners on Uniform State Laws
and adopted by roughly two-thirds of the states. The UTRA was
replaced in 1952 by the Uniform Commercial Code. The UTRA,
just like the Trust Receipts Law, contemplated a tripartite
arrangement under which a buyer, called an entrustee, purchased
goods from a seller, with the financing being provided by a lender
called the entruster.
Nature and tripartite character of trust receipts transaction
SEC 4. What constitutes a trust receipt transaction. A trust receipt
transaction, within the meaning of this Decree, is any transaction
by and between a person referred to in this Decree as the
entruster, and another person referred to in this Decree as
entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed
document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
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entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods with
the purpose of ultimate sale: Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title
over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or otherwise deal
with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving
delivery to a depository or register; or
d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in the
business of selling goods, documents or instruments for profit who,
at the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who
sells the same to the buyer on credit, retaining title or other interest
as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.
Distinguish from pledge, conditional sale, chattel mortgage
and consignment
Pledge
In a pledge, the person doing the financing has possession of the
property; in a trust receipt, the property is in the possession of the
person financed.
Conditional Sale
In a conditional sale, there is a sale of the property from the seller
to the buyer; in a trust receipt, there is no sale of the property from
the entruster to the entrustee.
Chattel Mortgage
A chattel mortgage involves the creation of a lien on the property; a
trust receipt does not involve the creation of a lien.
Consignment
In a consignment, the consignor retains title to the property to
secure the indebtedness due from the consignee; in a trust
receipt, the seller does not retain title to the property but transfers
such title to the entruster.
Rights of entruster
SEC 7. Rights of the entruster. The entruster shall be entitled to
the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, or
to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on
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him in the trust receipt provided such are not contrary to the
provisions of this Decree.
The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or failure of
the entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to
the entrustee of the intention to sell, and may, not less than five
days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the
entruster may, at a public sale, become a purchaser. The proceeds
of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents
or instruments; (c) to the satisfaction of the entrustee's
indebtedness to the entruster. The entrustee shall receive any
surplus but shall be liable to the entruster for any deficiency. Notice
of sale shall be deemed sufficiently given if in writing, and either
personally served on the entrustee or sent by post-paid ordinary
mail to the entrustee's last known business address.
Obligations of entrustee
SEC 9. Obligations of the entrustee. The entrustee shall (1) hold
the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt; (2) receive the proceeds in trust for
the entruster and turn over the same to the entruster to the extent
of the amount owing to the entruster or as appears on the trust
receipt; (3) insure the goods for their total value against loss from
fire, theft, pilferage or other casualties; (4) keep said goods or
proceeds thereof whether in money or whatever form, separate
and capable of identification as property of the entruster; (5) return
the goods, documents or instruments in the event of non-sale or
upon demand of the entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to the provisions of this
Decree.
Non-liability of entruster for sale of goods made by entrustee
SEC 8. Entruster not responsible on sale by entrustee. The
entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty of sale or other
disposition of the goods, documents or instruments under the
terms of the trust receipt transaction be responsible as principal or
as vendor under any sale or contract to sell made by the entrustee.
Risk of loss of goods borne by entrustee
SEC 10. Liability of entrustee for loss. The risk of loss shall be
borne by the entrustee. Loss of goods, documents or instruments
which are the subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault or negligence
of the entrustee, shall not extinguish his obligation to the entruster
for the value thereof.
Acquisition by purchaser of goods free from entrusters
security interest
SEC 11. Rights of purchaser for value and in good faith. Any
purchaser of goods from an entrustee with right to sell, or of
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documents or instruments through their customary form of transfer,
who buys the goods, documents, or instruments for value and in
good faith from the entrustee, acquires said goods, documents or
instruments free from the entruster's security interest.
Security interest of entruster valid against all creditors of
entrustee
SEC 12. Validity of entruster's security interest as against
creditors. The entruster's security interest in goods, documents, or
instruments pursuant to the written terms of a trust receipt shall be
valid as against all creditors of the entrustee for the duration of the
trust receipt agreement.
12.2 Cases
Liability of entrustee not extinguished by return of goods to
entruster
Vintola v. IBAA
Facts: Vintolas were granted a letter of credit by IBAA to cover its
purchase of seashells. Thereafter, the Vintolas received the
seashells from the seller. Vintolas then executed a trust receipt
agreement with IBAA. The Vintolas defaulted on their obligation as
they were unable to sell the seashells. After IBAA demanded
payment from them, they returned the seashells to IBAA. The
Vintolas claim that their obligation to IBAA has been extinguished
inasmuch as they have relinquished possession thereof to IBAA,
as owner of the goods.
Issue: WON the obligation of the Vintolas under the trust receipt
agreement was extinguished? No
Held: IBAA did not become the real owner of the goods. It was
merely the holder of a security of title for the advances it had made
to the Vintolas. The goods remain the property of the Vintolas and
they hold it at their own risk. The trust receipt agreement did not
convert IBAA in to an investor, the latter remained a lender and
creditor. Since the IBAA is not the factual owner of the goods, the
Vintolas cannot claim that because they have surrendered the
goods to IBAA they are absolutely relieved of their obligation to
pay their loan because of their inability to dispose of the goods.
Trust receipts law deemed to cover capital goods
Allied Banking v. Ordones
Facts: PBM was given letter of credit by Allied Banking to cover the
purchase of Dolomites and Nozzle Bricks (insulating materials
which do not form part of the steel products). The drafts drawn
against the letter of credit was honored and paid by Allied Banking.
A trust receipt agreement was entered into between PBM and
Allied Banking. PBM failed to turn over the proceeds of the sale of
the goods or to return the goods themselves. Allied Banking filed a
criminal case against PBM for violation of PD 115. The DOJ held
that PD 115 covers only goods or components of goods which are
ultimately destined for sale.
Issue: WON PD 115 also covers goods that do not form part of the
finished product which are ultimately sold but are instead used up
in the operation of the equipment and machineries of the
entrustee-manufacturer? Yes
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Held: The Court takes judicial notice of customary banking and
business practices where trust receipts are used for importation of
heavy equipment, machineries and supplies used in manufacturing
operations. A construction should be avoided when it affords an
opportunity to defeat compliance with the terms of a statute. The
penal provision of PD 115 encompasses any act violative of an
obligation covered by the trust receipt; it is not limited to
transactions in goods which are to be sold, reshipped, stored or
processed as a component of a product ultimately sold. To uphold
the DOJs ruling would contravene not only the letter but the spirit
of PD 115.
Bipartite transaction deemed covered by trust receipts law
Robles v. CA
Facts: Ng entrusted to Robles office equipment which were all
covered by delivery trust receipts. For all these items, Robles
agreed to sell them and remit the proceeds of the sales to Ng or to
return the items if unsold. When Robles failed to comply with his
obligation, Ng filed a case for estafa against him. Robles claims
that the trust receipts were merely intended to evidence the fact
that the articles listed therein were delivered to and received by
him. He claims that these transactions were in fact sales on a trial
basis for a period of 2 days. Thus, when he failed to return the
pieces of equipment within the 2 day period he was deemed to
have purchased the same and his liability should therefore only be
civil i.e. to pay the purchase price.
Held: The provisions of the trust receipts clearly show that (1) Ng
retained ownership of the office equipment covered by the
receipts; (2) that possession of the goods were conveyed to
Robles subject to the fiduciary obligation either to return them
within a specified period of time or to pay or account for the price
of proceeds thereof. Surrounding circumstances also showed that
the transactions were not ordinary sales on trial basis. There were
6 transactions and each transaction involved the delivery of
several equipment indicating that Robles was not an ordinary
buyer who would himself use the articles bought but rather a
commission merchant.
Violation of trust receipts law offense against public order, not
against property
People v. Nitafan
Facts: Allied Banking Corporation charged Ang with estafa under
PD 115. Judge Nitafan dismissed the cased on the ground that the
penal clause of PD 115 is inoperative because it does actually
punish an offense mala prohibita. Nitafan also asserts that PD 115
is unconstitutional as it violates the constitutional prohibition
against imprisonment for non-payment of a debt.
Issue: WON an entrustee in a trust receipt agreement who fails to
deliver the proceeds of the sale or to return the goods if not sold to
the entruster bank is liable for the crime of estafa? Yes
Held: The Trusts Receipts Law punishes dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner or not. The
law does not seek to enforce payment of the loan. Thus, there can
be no violation of a right against imprisonment for non-payment of
a debt. PD 115 like BP 22 punished the act not as an offense
against property, but as an offense against public order. It is in the
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context of upholding public interest that the law now specifically
designates a breach of a trust receipt agreement to be an act that
shall make one liable for estafa.
Transaction a simple loan, not a trust receipt transaction
Colinares v. CA
Facts: Colinares obtained materials from CM Builders to renovate
the Carmelite Sisters Convent. The next day, Colinares applied for
a letter of credit from PBC in favor of the CM Builders. PBC
approved the letter of credit to cover the full invoice value of the
goods. Colinares signed a pro-forma trust receipt as security.
Colinares was charged for violation of PD 115.
Issue: WON the transaction was an ordinary loan and not a trust
receipt agreement under the Trust Receipts Law?
Held: The transaction intended by the parties was a simple loan
not a trust receipt agreement. Colinares received the merchandise
from CM Builders on October 30. On that day, ownership over the
merchandise was already transferred to Colinares who was to use
the materials for his construction project. It was only a day later
that Colinares went to the bank to apply for a loan to pay for the
merchandise.
This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released
to the importer in trust subsequent to the grant of the loan. The
bank acquires a security interest in the goods as holder of a
security title for the advances it had made to the entrustee. The
ownership of the merchandise continues to be vested in the person
who had advanced payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale
should be turned over to him by the importer or by his
representative or successor in interest. To secure that the bank will
be paid it takes full title to the goods at the very beginning and
continues to hold that title as his indispensible security until the
goods are sold and the vendee is called upon to pay for them.
Hence the importer has never owned the goods and is not able to
deliver possession. In a certain manner, trust receipts partake the
nature of a conditional sale where the importer becomes the
absolute owner of the merchandise as soon as he has paid its
price.
Acquittal in criminal case for estafa under Sec. 13 of PD 115 does
not extinguish civil liability arising from breach of trust receipts
contract
Tupaz IV v. CA
Facts: BPI charged Tupaz with estafa under Sec. 13 PD 115. The
trial court rendered judgment acquitting Tupaz of estafa on
reasonable doubt. However, the trial court found Tupaz solidarily
liable for the balance of the principle debt under the trust receipts.
Issue: WON Tupazs acquittal of estafa under Sec. 13 PD 115
extinguished their civil liability?
Held: The rule is that where the civil action is impliedly instituted
with criminal action, the civil liability is not extinguished by
acquittal:
1. where the acquittal is based on reasonable doubt as only
preponderance of evidence is required in civil cases;
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2. where the court expressly declares that the liability of the
accused is not criminal but civil in nature and
3. where the civil liability does not arise from or is not based
upon the criminal act of which the accused was acquitted.
Although the trial court aquitted Tupaz his acquittal did not
extinguish his civil liability. His liability arose not from the criminal
act of which he was acquitted but from the trust receipt contract (ex
contractu) which he signed in his personal capacity.
Entrustee has no authority to mortgage goods covered by trust
receipts
DBP v. Prudential Bank
Facts: Litex opened a letter of credit from Prudential Bank to cover
the importation of spindles etc. Prudential Bank released the
spindles to Litex under a trust receipt agreement. Subsequently,
Litex obtained a loan from DBP which was secured by real estate
and chattel mortgages over its plant and machineries including the
goods covered by the trust receipts. When Litex failed to pay its
loan, DBP foreclose the mortgages. Prudential filed a case for
damages against DBP.
Issue: WON Litex as entrustee could mortgage the goods covered
by the trust receipts?
Held: The articles were owned by Prudential Bank and they were
only held by Litex in trust. While it was allowed to sell the items,
Litex had no authority to dispose of them or any part thereof or
their proceeds through conditional sale, pledge or any other
means. Article 2085 (2) of the Civil Code requires that, in a
contract of pledge or mortgage, it is essential that the pledgor or
mortgagor should be the absolute owner of the thing pledged or
mortgaged. Article 2085 (3) further mandates that the person
constituting the pledge or mortgage must have the free disposal of
his property, and in the absence thereof, that he be legally
authorized for the purpose. Litex had neither absolute ownership,
free disposal nor the authority to freely dispose of the articles. Litex
could not have subjected them to a chattel mortgage. Their
inclusion in the mortgage was void and had no legal effect. There
being no valid mortgage, there could also be no valid foreclosure
or valid auction sale.
XIII. MERCHANTS AND COMMERCIAL
TRANSACTIONS
CODE OF COMMERCE (1888)
Who are merchants?
ARTICLE 1. For purposes of this Code, merchants are:
1. Those who, having legal capacity to engage in commerce,
habitually devote themselves to it;
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2. The commercial or industrial companies which may be
created in accordance with [this Code] existing legislation.
ARTICLE 2. Acts of commerce, whether those who execute
them be merchants or not, and whether specified in this Code or
not, should be governed by the provisions contained in it, in their
absence, by the usages of commerce generally observed in each
place; and in the absence of both rules, by those of the civil law.
Those acts contained in this Code and all others of
analogous character shall be deemed acts of commerce.
ARTICLE 3. The legal presumption of habitually engaging in
commerce shall exist from the moment the person who intends to
engage therein announces through circulars, newspapers,
handbills, posters exhibited to the public, or in any other manner
whatsoever, an establishment which has for its object some
commercial operation.
ARTICLE 4. Persons who possess the following qualifications
shall have legal capacity to habitually engage in commerce:
1. Having completed the age of twenty-one years.
2. Not being subject to the authority of the father or of the
mother nor to marital authority.
3. Having the free disposition of their property.
ARTICLE 5. Those under twenty-one years of age and those
incapacitated may continue, through their guardians, the business
engaged in by their parents or their predecessors. If the guardians
do not have legal capacity to trade or are under some
disqualifications, they shall be obliged to appoint one or more
factors having the legal qualifications who shall substitute them in
conduct of the business.
ARTICLE 6. (Repealed) 1
ARTICLE 7. (Repealed) 2
ARTICLE 8. The husband may freely revoke the authorization
impliedly or expressly granted to his wife to trade, stating the
revocation in a public instrument which shall also be recorded in
the commercial registry, published in the official periodical of the
town, if there be one, or otherwise in that of the town, if there be
one, or otherwise in that of the province, and announced to her
correspondents by means of circulars. The publication may also be
made, if the husband so demands, by proclamations and common
criers.
This revocation may, in no case, prejudice rights
acquired before its publication in the official periodical.
ARTICLE 9. (Repealed) 3
ARTICLE 10. (Repealed) 4
ARTICLE 11. (Repealed) 5
ARTICLE 12. (Repealed) 6
Who may NOT engage in commerce?
ARTICLE 13. The following may not engage in commerce nor
hold office or have any direct administrative or financial
intervention in commercial or industrial companies:
1. Those sentenced to the penalty of civil interdiction, while they
have not served their sentence or have not been amnestied or
pardoned.
2. Those declared bankrupt, while they have not obtained their
discharge [or have not been authorized, by virtue of an agreement
accepted at a general meeting of creditors and approved by
74 of 143
judicial authority, to continue at the head of the establishment, the
authority being understood in such case as limited to that
expressed in the agreement.]
3. Those who on account of special laws or provisions can not
trade.
ARTICLE 14. The following cannot engage in the mercantile
profession, in person or through another, nor hold office or have
any direct administrative or financial intervention in commercial or
industrial associations, within the limits of the districts, provinces or
towns in which they discharge their duties:
1. Justices, judges and officials of the fiscals office in active
service.
This provision shall not be applicable to the municipal mayors,
judges and prosecuting attorneys, nor to those who may
temporarily discharge judicial or prosecution duties.
2. Administrative, economic or military heads of districts,
provinces, or posts.
3. Those employed in the collection and administration of funds
of the State, appointed by the Government.
Those who administer and collect under contract and their
representative are excepted.
4. Stock and commercial brokers of whatever class they may
be.
5. Those who, under special laws and provisions, cannot trade
in specified territory.
ARTICLE 15. Foreigners and companies created abroad may
engage in commerce in the Philippines, subject to the laws of their
country with respect to their capacity to contract, and to the
provisions of this Code as regard the creation of their
establishments in Philippine territory, their mercantile operations,
and the jurisdiction of the courts of the nation.
The provisions of the article shall be understood to be
without prejudice to what, in particular cases, may be established
by treaties or agreements with other powers.
Title II - Commercial Registries
ARTICLE 16. In all the capitals of provinces shall be opened a
mercantile registry composed of two independent books in which
shall be inscribed:
1. Individual merchants.
2. Associations.
In the coastal provinces and in the interior ones where it is
considered convenient because of the presence of navigation, the
registry shall include a third book for the registration of vessels.
ARTICLE 17. Registration in the mercantile registry shall be
optional for individual merchants and compulsory for associations
which are created in accordance with this Code or with special
laws, and for vessels.
ARTICLE 18. The unregistered merchant cannot request the
inscription of any document in the mercantile registry, nor take
advantage of its legal effects.
ARTICLE 19. The register shall keep the books necessary for
registration, stamped, folioed and with a memorandum on the first
page of the number of pages which each book contains, signed by
the justice of the peace.
Where there are several justices of the peace, any one of them
may sign the memorandum.
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ARTICLE 20. The registrar shall enter in chronological order in the
registry and general index all the merchants and companies which
are registered, giving each sheet the correlative number which
corresponds to it.
ARTICLE 21. On the record sheet of each merchant or company
shall be entered:
1. The name, firm name, or title. cd
2. The class of commerce or transactions in which engaged.
3. The date on which the transactions shall commence or have
commenced.
4. The domicile, with a specification of the branches which may
have been established, without prejudice to the registration of the
branches in the registry of the province in which they may be
domiciled.
5. Instruments for the creation of commercial associations,
whatever their object or denomination may be, as well as those for
the modification, rescission or dissolution of such associations.
6. [General powers of attorney, and the revocation of the same,
should there be any, given to managers, factors, employees and
any other agents.]
7. [The authorization of the husband for his wife to engage in
commerce and the legal or judicial authority of the wife to
administer her property on account of the absence or incapacity of
the husband.]
8. [The revocation of the permission given to the wife to trade.]
9. [Dotal instruments], marriage settlement and the title which
prove the ownership of the paraphernal property of the wives of
merchants.
10. The issue of shares, certificates, and bonds of railroads and
of all classes of associations, be they associations for public
works, credit companies, or others, stating the series and number
of the certificates of each issue, their participation, interest,
payment and premium, should they have one or the other, the total
amount of the issue, and the property, works, rights or mortgages,
should there be any, by which their payment is secured. The
issues which may be made by individuals shall also be recorded in
accordance with the provisions of the preceding paragraph.
11. [The issues of bank notes, stating the date, class, series,
quantity and value of each issue.]
12. [The titles of industrial property, patents, and trademarks, in
the form and manner established by law.]
Foreign associations which desire to establish themselves or
create branches in the Philippines shall present and record in the
registry, besides their by-laws and the documents required of
Filipinos, a certificate issued by the Philippine consul that they are
constituted and authorized in accordance with the laws of their
respective countries.
ARTICLE 22. [In the registry of vessels there shall be stated:
1. The name of the vessel, kind of equipment, system or power
of the engines, if it is a steamer, stating whether they are nominal
or indicated horsepower; place of construction of the hull and
engines; year thereof, material of the hull, stating whether it is of
wood, iron, steel, or mixed; principal dimensions of length, breadth
of beam, and depth of hold; the gross and net tonnage; distinctive
signal which it bears in the International Code of Signals; finally,
the names and domiciles of the owners or part owners of the
same.
2. The changes in the ownership of vessels, in their name, or in
any of the other conditions enumerated in the foregoing paragraph.
3. The imposition, modification or cancellation of liens of any
class whatsoever which encumber vessels.]
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ARTICLE 23. As a general rule, the registration shall be made by
virtue of notarial copies of the documents which the interested
party may present.
The registration of notes, bonds, or order and bearer
instruments which do not carry mortgages of immovable property
shall be made upon presentation of the certified minutes where in
appears the resolution of the person or persons who made the
issue, and the conditions, requisites and guaranties thereof.
When these guaranties consist of mortgage of immovables, the
corresponding instrument shall be presented for annotation in the
mercantile registry.
ARTICLE 24. Unregistered articles of association shall produce
effect among the members who execute them, but they shall not
prejudice third person who, however, may make use thereof in so
far as favorable.
ARTICLE 25. All the resolutions or acts which effect an increase
or reduction in the capital of commercial associations, whatever
their denomination may be, and those which modify or alter the
conditions of recorded instruments, shall also be recorded in the
mercantile registry. The omission of this requisite shall produce the
effects mentioned in the preceding article.
ARTICLE 26. Registered documents shall produce legal effect to
the prejudice of third persons only from the date of their
registration, and cannot be invalidated by prior or subsequent
unregistered documents.
ARTICLE 27. [Dotal] instruments [and those] referring to
paraphernal property of the merchants wife, not registered in the
mercantile registry, shall have no right of preference over other
credits.
Immovable property and real rights over them, acquired
by the wife prior to the creation of the concurrent credits, shall be
excepted.
ARTICLE 28. If a merchant should fail to make in the registry the
inscription of the [dotal or] paraphernal property of his wife, the
latter herself may request it or it may be done for her by her
parents, by others or uncles by consanguinity, as well as by those
who discharge or may have discharged the duties of guardians or
curators of the wife, [or who constitute or may have constituted the
dowry.]
ARTICLE 29. [Unregistered powers of attorney shall give rise to
actions between the principal and the agent, but they cannot be
used to the prejudice of third persons, who, however, may rely
thereon in so far as they may be favorable.]
ARTICLE 30. The mercantile registry shall be public. The registrar
shall furnish those who may request it any data referring to what
may appear on the registration sheet of each merchant,
association or vessel. Likewise, he shall issue true copies of the
whole or part of said sheet to anyone who may ask for it in a
signed request.
ARTICLE 31. [The commercial registrar shall have under his
charge, where there is an exchange, copies of the daily quotations
of the properties negotiated and the exchanges fixed therein.
The copies shall serve as original instruments in all
cases of investigation and verfication of exchanges and quotations
on determined dates.]
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ARTICLE 32. [The office of commercial registrar shall be filled by
the government after a competitive examination.]
TITLE III - BOOKS AND BOOKKEEPING OF COMMERCE
ARTICLE 33. Merchants shall necessarily keep:
1. A book of inventories and balances.
2. A journal.
3. A ledger.
4. A book or books for copies of letters and telegrams.
5. Other books which may be required by special laws.
Associations and companies shall also keep a book or
books of minutes, in which shall be entered all resolutions referring
to the progress and operations of the entities, approved at general
meetings or at those of managing boards.
ARTICLE 34. They may also keep other books which they may
deem convenient, according to the system of bookkeeping they
may adopt.
These books shall not be subject to the provisions of
Article 36; but they may legalize those which they may consider
proper.
ARTICLE 35. Merchants may keep their books personally or
through persons whom they authorize for the purpose. If a
merchant does not keep his books personally, authorization shall
be presumed granted to him who keeps them unless there is proof
to the contrary.
ARTICLE 36. Merchants shall present the books referred to in
Article 33, bound, ruled, and folioed, to the justice of the peace of
the municipality in which they have their commercial
establishments in order that he may put on the first page of each
one a signed memorandum of the number of pages which the book
contains. The seal of the justice of the peace legalizing it shall,
furthermore, be stamped on all the pages of each book.
ARTICLE 37. The book of inventories and balance shall begin
with the inventory which the merchant must prepare at the time he
starts his operations, and shall contain:
1. An exact statement of the money, securities, credits, notes
receivable, movable and immovable property, merchandise and
goods of all kinds, appraised at their true value, and which
constitute his assets.
2. An exact statement of the debts and all kinds of pending
obligations, should there be any, and which form his liabilities.
3. He shall determine, in proper cases, the exact difference
between the assets and the liabilities, which shall be the capital
with which he begins his operations.
The merchant shall, furthermore, prepare annually and
enter in the same book the general balance of his business, with
the details mentioned in this article, and in accordance with the
entries in the journal, without any reservations or omissions, under
his signature and responsibility.
ARTICLE 38. In the journal shall be entered as the first item the
result of the inventory mentioned in the preceding article, divided
into one or various consecutive accounts, according to the system
of bookkeeping adopted.
Thereafter, all his operations shall follow day by day,
each entry stating the credit and debit of the respective accounts.
When the operations are numerous, whatever their
importance may be, or when they have taken place outside the
76 of 143
domicile, those referring to each account and which have taken
place in each day may be included in a single entry, but observing
in their statement, if itemized, the same order in which they took
place.
Likewise, the amounts which the merchant uses for his
household expenses shall be entered on the date on which they
are withdrawn from the funds, and they shall be carried into a
special account to be opened for that purpose in the ledger.
ARTICLE 39. The accounts referring to each object or person in
particular shall, furthermore, be opened with Debit and Credit in
the ledger, and to each of these accounts shall be transferred, in
strict order of dates, the entries in the journal referring to them.
ARTICLE 40. In the book of minutes which each association shall
carry shall be entered verbatim the resolutions agreed upon at its
meetings or at those of its managers, stating the date of each one,
those present in them, the votes cast, and other matters conducive
to an exact knowledge of what as agreed upon, authenticated with
the signatures of the managers, directors or administrators
charged with the management of the association or designated by
the by-laws or regulations by which it is governed.
ARTICLE 41. All the letters which a merchant may write regarding
his business and the telegraphic dispatches which he may send
shall be transferred, either by hand or by any mechanical means,
to the book for copies., fully and successively by order of dates,
including the subscribing clause and the signatures.
ARTICLE 42. Merchants shall carefully keep, in bundles and in
proper order, the letters and telegraphic dispatches which they
may receive relative to their transactions.
ARTICLE 43. Besides complying with and fulfilling the conditions
and formalities prescribed in this title, merchants must keep their
books with clearness, in the order of dates, without blanks,
interpolations, erasures or blots, and without showing signs of
having been altered by substituting or tearing out folios, or in any
other manner whatsoever.
ARTICLE 44. Merchants shall correct the errors or omissions
which they may make in entering in their books, immediately upon
noticing them, explaining clearly in what they consisted, and writing
the entry as it should have been written.
If some time should have elapsed since the error was
committed or since the omission was incurred, they shall make the
proper entry of correction, adding on the margin of the erroneous
entry a memorandum indicating the correction.
ARTICLE 45. No judge or court or authority may, on his own
initiative, make an inquiry to ascertain if merchants keep their
books in accordance with the provisions of this Code, nor make a
general investigation or examination of the bookkeeping in the
offices or counting-houses of merchants.
ARTICLE 46. [Neither may the communication, delivery or general
examination of the books, correspondence and other documents of
merchants, be decreed at the instance of a party, except in the
cases of liquidation, universal succession or bankruptcy.]
ARTICLE 47. [Outside of the cases mentioned in the preceding
article, the exhibition of the books and documents of merchants
may be decreed at the instance of a party or at the initiative of the
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court, only when the person to whom they belong has an interest
or responsibility in the case in which the exhibition is made.
The examination shall be made in the counting-house of
the merchant, in his presence or in that of the person whom he
commissions, and shall be limited to the points related to the
question at issue; these being the only ones that may be verified.]
ARTICLE 48. In order to measure the probative force of the books
of merchants, the following rules shall be observed:
1. The books of merchants shall be evidence against
themselves, no proof to the contrary being admissible; but the
adverse party cannot accept the entries which may be favorable to
him and reject those which may prejudice him, but having
accepted this means of proof, he shall be bound by the result
which it may show in its entirety, taking into equal consideration all
the entries relative to the question in litigation.
2. If there should be a conflict in the entries of the books kept by
two merchant, and those of one should have been kept with all the
formalities mentioned in this title, and those of the other should
suffer from any defect or should lack the requisites prescribed by
this Code, the entries of the books properly kept shall be admitted
against those of the defective one. unless the contrary is shown by
means of other evidence admissible in law.
3. If one of the merchants should not present his books or
should manifest that he does not have them, those of his
adversary, kept with all the legal formalities, shall be admitted
against him, unless it is shown that the absence of such books is
due to force majeure, and always saving proof by other means
admissible in suits against the entries exhibited.
4. If the books of the merchants should have all the legal
requisites and should be contradictory, the court shall decide by
the other proofs, weighing them according to the general rules of
law.
ARTICLE 49. Merchants and their heirs or successors shall keep
the books, telegrams, and correspondence of their business
in general, during all the time that this may last and for five years
after the liquidation of all their business and commercial affairs.
Documents which specially concern specific acts or
transactions may be rendered useless or destroyed upon the laps
of the prescriptive period of the actions which may arise therefrom,
unless some questions referring directly or indirectly to them
should be pending, in which case, they must be kept until the
conclusion thereof.
TITLE IV - GENERAL PROVISIONS RELATING TO COMMERCIAL
CONTRACTS
ARTICLE 50. Commercial contracts, in everything relative to their
requisites, modifications, exceptions, interpretations and extinction
and to the capacity of the contracting parties, shall be governed in
all matters not expressly provided for in this Code or in special
laws, by the general rules of the civil law.
[Telegraphic correspondence shall only be the basis of an
obligation between contracting parties who have previously
admitted this medium in a written contract, and provided the
telegrams fulfill the conventional conditions or conventional signs
which may have been previously fixed and agreed to by the
contracting parties.]
ARTICLE 51. Commercial contracts shall be valid and shall give
rise to obligations and causes of action in suits, whatever the form
and language in which they may be executed, the class to which
they may belong, and the amount they may involve, provided their
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existence is shown by any means established by the civil law.
However, the testimony of witness alone shall not be sufficient to
prove the existence of a contract which involves an amount
exceeding 1,500 pesetas unless supported by some other
evidence.
ARTICLE 52. From the provisions of the preceding article shall be
excepted:
1. Contracts which, in accordance with this Code or with special
laws, must be reduced to writing or require forms or formalities
necessary for their efficacy.
2. Contracts executed in a foreign country in which the law
requires certain instruments, forms or formalities for their validity,
although Philippine law does not require them.
In either case, contracts which do not satisfy the circumstances
respectively required shall not give rise to obligations or causes of
action.
ARTICLE 53. Illicit agreements do not give rise to obligations or
causes of action even should they refer to commercial transaction.
ARTICLE 54. Contracts entered into by correspondence shall be
perfected from the moment an answer is made accepting the offer
or the conditions by which the latter may be modified.
ARTICLE 55. Contracts in which an agent or broker intervenes
shall be perfected when the contracting parties shall have
accepted his offer.
ARTICLE 56. In a commercial contract in which a penalty for
indemnification against the party failing to comply therewith is
fixed, the injured party may demand through legal means the
fulfillment of the contract or the penalty stipulated; but the recourse
to one of these actions shall extinguish the other unless the
contrary is stipulated.
ARTICLE 57. Commercial contracts shall be executed and
complied with in good faith, according to the terms in which they
were made and drawn up, without evading through arbitrary
interpretations the plain, proper and usual meaning of the spoken
or written words, or limiting the effects which are naturally derived
from the manner in which the contracting parties may have
expressed their will and contracted their obligations.
ARTICLE 58. If a discrepancy should appear between the copies
of a contract which the contracting parties present, and, in its
execution, an agent or broker should have intervened, that which
appears in the books of the latter shall prevail provided they are
kept in accordance with law.
ARTICLE 59. If doubts which cannot be decided in accordance
with what is provided in Article 2 of this Code should arise, the
question shall be decided in favor of the debtor.
ARTICLE 60. In all computations of days, months and years, it
shall be understood that a day has twenty four hours, the months
as designated in the Gregorian calendar, and the year has three
hundred sixty-five days.
Bills of exchange, promissory notes, and loans, with respect to
which that specially provided for them by this Code shall govern,
are excepted.
ARTICLE 61. Days of grace, courtesy or others which under any
name whatsoever defer the fulfillment of commercial obligations,
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shall not be recognized, except those which the parties may have
previously fixed in the contract or which are based on a definite
provision of law.
ARTICLE 62. Obligations which do not have a period previously
fixed by the parties or
by the provisions of this Code, shall be demandable ten days after
having been contracted if they give rise only to an ordinary action,
and on the next day if they involve immediate execution.
ARTICLE 63. The effect of default in the performance of
commercial obligations shall commence:
1. In contracts with a day for performance fixed by the will of the
parties or by the law, on the day following their maturity.
2. In those which do not have such day fixed, from the day on
which the creditor makes a judicial demand on the debtor or
notifies him of the protest for loss and damages made against him
before a judge, notary or other public official authorized to admit
the same.
Who are merchants under the Commercial Code? (Art. 1)
1. those who having capacity engage in commerce,
habitually devote themselves thereto; and
2. commercial or industrial associations organized in
accordance with the Code
NOTE: The legal presumption of habitually engaging in commerce
shall exist from the time the person who intends to engage therein
gives announcement by means of circulars, newspapers, handbills,
posters, etc. for the purpose of conducting any commercial
transaction.
What are commercial transactions?
Commercial transactions refer to those acts covered by the
Code of Commerce and all others of analogous character. They
are governed by the provisions of the Code of Commerce; in
default of such provisions, by the commercial usages observed in
each place; and in the absence of both, by the rules of civil law.

TITLE II - JOINT ACCOUNTS Who cannot engage in commerce?

ARTICLE 239. Merchants may interest themselves in the
transaction of other merchants, contributing thereto the amount of
capital they may agree upon, and participating in the favorable or
unfavorable results thereof in the proportion they may
determine.
ARTICLE 240. With regard to their formation, joint accounts shall
not be subjected to any formality, and may be privately contracted
orally or in writing, and their existence may be proved by any of the
means accepted by law, in accordance with the provisions of
Article 51.
ARTICLE 241. In the transactions treated of in the foregoing
articles, no commercial name common to all the participants can
be adopted, nor can any further direct credit be made use of
except that of the merchant who transacts and manages the
business in his own name and under his individual liability.
The following cannot engage in commerce:
1. persons sentenced to civil interdiction;
2. persons declared bankrupt
3. persons who, on account of laws or special provisions,
may not engage in commerce.
For some of the rules to be observed in respect of commercial
contracts, see Articles 50-57 above (important parts are already
underlined).
Joint Accounts / cuentas en participacion is an arrangement
among merchants who interest themselves in the transactions of
other merchants, contributing thereto the part of the capital they
may agree upon, and who participate in the favorable or
unfavorable results thereof in the proportion they may determine
(Art. 239). (see Articles 240-243 above for rules governing joint
accounts)

ARTICLE 242. Persons transacting business with the merchant Joint Accounts vs. Partnerships
carrying on the joint business shall only have a right of action Joint Accounts Partnership
against the latter and not against the other persons interested, and 1. has no separate juridical 1. has juridical personality and
the latter, on the other hand, shall have no right of action against personality; can sue and be may sue and be sued under the
the third person who made the transaction with the manager sued only in the name of the partnership name
unless said manager formally cedes his rights to them. ostensible partner
2. prohibited from having a 2. has a firm name
ARTICLE 243. The liquidation shall be effected by the manager, commercial name (thus,
and after the transactions have been concluded, he shall render a business is conducted in the
proper account of its results. name of the ostensible partner)
3. business is managed by the 3. general partners have the
ostensible partner right of management
Commerce (definition) It is the exchange of goods, productions, 4. liquidation shall be made by 4. liquidation may, by
or property of any kind. It is intercourse by way of trade and traffic the ostensible partner agreement, be entrusted to a
between different peoples or states and the citizens or inhabitants partner or partners
thereof, including not only the purchase, sale, exchange of
commodities, but also the instrumentalities and agencies by which Case:
it is promoted and the means and appliances by which it is carried
on, and transportation of persons as well as goods. Bourns vs. Carman G.R. L-2800

Law merchant is an old translation of the Latin lex mercatoria: Facts:

an old international law of merchants and mariners growing out of The plaintiff in this action seeks to recover the sum of
their customary practices. It was a law practiced and enforced by $437.50, balance due on a contract for the sawing of lumber for
businessmen and shipowners in their own courts, without the lumber yard of Lo-Chim-Lim. Lo-Chim-Lim and his
professional judges or lawyers. codefendants alleged that at the time the contract was made, they
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
were the joint proprietors and operators of the said lumber yard
engaged in the purchase and sale of lumber under the name and
style of Lo-Chim-Lim. Apparently the plaintiff tries to show that the
other defendants were the partners of Lo-Chim-Lim in the said
lumber yard business.
Held:
As far as the evidence shows it seems that the business
was conducted by Lo-Chim-Lim in his own name, although he
gave to the appellants a share of the earnings of the business; but
what that share was has not been shown with certainty. The
contracts made with the plaintiff were made by Lo-Chim-Lim
individually in his own name, and there is no evidence that the
partnership ever contracted in any other form. Under such
circumstances we find nothing upon which to consider this
partnership other than as a partnership of cuentas en participacion.
It may be that, as a matter of fact, it is something different, but the
uncertain and scant evidence introduced by the parties does not
permit of any other designation of this partnership. We see
nothing, according to the evidence, but a simple business
conducted by Lo-Chim-Lim exclusively, in his own name, the
names of other persons interested in the profits and losses of the
business nowhere appearing.
A partnership constituted in such a manner, the
existence of which was only known to those who had an interest in
the same, there being no mutual agreements between the
partners, and without a corporate name indicating to the public in
some way that there were other people besides the one who
ostensibly managed and conducted the business, is exactly the
accidental partnership of cuentas en participacion defined in article
239 of the Code of Commerce.
Those who contract with the person under whose name
the business of such partnership of cuentas en participacion is
conducted, shall have only a right of action against such person
and not against the other persons interested, and the latter, on the
other hand, shall have no right of action against the third person
who contracted with the manager unless such manager formally
transfers his right to them. (Art 242 of the code Of Commerce.) It
follows, therefore that the plaintiff has no right to demand from the
appellants the payment of the amount claimed in the complaint, as
Lo-Chim-Lim was the only one who contracted with him. the action
of the plaintiff lacks, therefore, a legal foundation and should be
accordingly dismissed.
XIV. THE INSOLVENCY LAW
ACT 1956 (1909), AS AMENDED BY ACT 3544 (1929),
ACT 3616 (1929), AND ACT 3692 (1932)
14.1 Purpose
The purpose of the law is to provide for an orderly
mechanism by which the assets of the insolvent debtor could be
converted into money for distribution among his creditors and
thereby relieve the debtor from the weight of his debts and permit
him to start anew free from such debts.
79 of 143
14.2 Sources
(Spanish Code of Commerce as to suspension of payments)
Mitsui Bussan Kaisha vs. Hongkong & Shanghai Banking
Corp. G.R. 11079
Held:
(Actually, this is only narrates the history of Philippine Insolvency
Law)
In 1908 two bills (Assembly Bill No. 126 and Commission
Bill No. 87) were introduced in the Philippine Legislature and both
were rejected. The committee of the Commission, in reporting
upon the Assembly bill, stated in its report of June 12, 1908, that
"The law seeks to blend the American laws of insolvency and
bankruptcy with the Spanish law of bankruptcy. Such a policy is
sure to result in complications and to bring about a system so
cumbersome and unwieldly as to make it impracticable and
uneconomical."
Later a joint conference committee was appointed from
the two houses and it prepared a bill which was designated
Assembly Bill No. 576. This bill was passed without any material
changes and became Act No. 1956. By comparing the
Commission Bill No. 87 with Act No. 1956, it will be seen that every
SEC of the former is embodied in the latter. The only apparent
exception is SEC 41 of the Commission Bill, but the substantial
provisions of that SEC appear in subSEC 9 of SEC 48 of the Act.
Furthermore, there is little in the Act from SEC 14 which is not in
the Commission Bill. SubSEC 3 of SEC 71 of the Act contains
penal provisions which relate to the suspension of payments and
which are not in the Commission Bill. SEC 48 of the Act has no
counterpart in the Commission Bill. Again, a comparison of
Commission Bill No. 87 with the Insolvency Act of California,
enacted in 1895, SEC by SEC and clause by clause, shows that
the former is, in a great many respects, a copy of the latter. The
Commission Bill omits one of the acts of bankruptcy named in SEC
9 of the California Act. Also SEC 15 and 26, subSEC 5 of SEC 25,
and subSEC 3 of SEC 1, and several minor portions of the other
SECs of the California Act are omitted. These relate to procedure
in the main and are substantially governed by other provisions in
the Commission Bill. The concluding SECs of the Commission Bill
and of the California Act are different. The most important
difference is the inclusion in the Commission Bill of SEC 34, which
is wholly lacking in the California Act. This SEC deals with
preferred claims and has its counterpart in SEC 48b of the United
States Bankruptcy Act of 1898. Another addition is chapter 7 of the
Commission Bill entitled "Compositions." This chapter corresponds
closely to SEC 12 and 13 of the United States Bankruptcy Act of
1898. The result is that the only provisions in Act No. 1956, which
tend to show that the Legislature did not intend to adopt in this
jurisdiction the American theory of bankruptcy, are found in SEC
48. This SEC, by its nine subdivisions, specifies what property in
the hands of the insolvent may not be taken by the assignee.
These provisions are found neither in the United States Bankruptcy
Act of 1898 nor in the California Act of 1895. They are found,
however, in Assembly Bill No. 126 and were inserted for the
purpose of avoiding a conflict between Act No. 1956 and certain
well defined provisions of the Civil Code.
Act No. 1956 deals with three principal subjects, namely,
suspension of payments, voluntary insolvency, and involuntary
insolvency. That part of the Act referring to the first appears to
have been taken from the Spanish Code of Commerce, as
amended by the law of June 10, 1897. Formerly there were in
England and America marked distinctions between bankruptcy
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
laws and insolvency laws. The two principal distinctions, which
have been given by various authors, between these laws are: First,
bankruptcy laws applied only to traders and merchants, while
insolvency laws applied to all classes of persons; second, the
former discharged absolutely the debts of the honest debtor, while
the latter discharged only the person of the debtor from arrest and
imprisonment, but left the property subsequently acquired by the
debtor liable to the demands of his creditors. More recently in
some jurisdictions no attempt has been made to distinguish
between them. A bankruptcy law may contain those regulations
which are generally found in insolvency laws, and an insolvency
law may deal with those which are common in bankruptcy laws.
Whether these distinctions were recognized and maintained in
the Spanish system is of no importance. It is sufficient to say
that the Act, in so far as it relates to voluntary and involuntary
insolvency, is essentially a bankruptcy law because it
discharges the honest debtor.
Insolvency Act of California of 1895, as to voluntary and
involuntary insolvency
Sun Life Assurance vs. Ingersoll G.R. 16475
Held:
(again, historical background lang to ng Insolvency Law)
Now, it is a well-known fact in our legislative history that the
Insolvency Law (Act No. 1956) is in great part a copy of the
Insolvency Act of California, enacted in 1895, though it contains a
few provisions from the American Bankruptcy Law of 1898 (see
observation of Justice Trent in Mitsui Bussan Kaisha vs. Hongkong
and Shanghai Banking Corporation, 36 Phil., 27, 37). Again, upon
comparing the California Insolvency Law of 1895 with the
American Bankruptcy Act of 1867, it will be found that the former
contains much in common with the latter; and among the
provisions common to the Bankruptcy Act of 1867, the California
Insolvency Law of 1895, and the Insolvency Law in force in these
Islands (Act No. 1956), is precisely the provision which appears as
SEC 32 of our Act, defining the property which passes as assets to
the assignee in insolvency. (Bankruptcy Act of 1867, sec. 14;
California Insolvency Law of 1895, sec. 21; Philippine Insolvency
Law, sec. 32.)
Under each of said laws the assignee acquires all the
real and personal property, estate, and effects of the debtor, not
exempt by law from execution, with all deeds, books and papers
relating thereto; and while this language is broad, it nevertheless
lacks the comprehensiveness of SEC 70 (a) of the American
Bankruptcy Law of 1898 in the least two particulars; for under
subSEC 3 of SEC 70 (a) of the last mentioned law, the trustee in
bankruptcy acquires the right to exercise any powers which the
insolvent might have exercised for his own benefit, and under
subSEC 5 the trustee acquires any property of the insolvent which
the latter could by any means have assigned to another. The
Insolvency Law here in force, in common with the predecessor
laws above-mentioned, contains nothing similar to these
provisions.
14.3 Applicability to banks, quasi banks, and insurance
companies
The Insolvency law is NOT applicable to banks, quasi-banks, and
insurance companies.
SUSPENSION OF PAYMENTS
Nature
Who could file petition
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SEC 2. The debtor who, possessing sufficient property to cover all
his debts, be it an individual person, be it a sociedad or
corporation, foresees the impossibility of meeting them when they
respectively fall due, may petition that he be declared in the state
of suspension of payments by the court, or the judge thereof in
vacation, of the province or of the city in which he has resided for
six months next preceding the filing of his petition.
He shall necessarily annex to his petition a schedule and inventory
in the form provided in SECs fifteen, sixteen, and seventeen of this
Act, in addition to the statement of his assets and liabilities and the
proposed agreement he requests of his creditors.
Differentiate from insolvency proceeding
Suspension of payments vs. Insolvency proceeding
Suspension of Payments Insolvency Proceeding
1. object of suspension of 1. object is to compel
payments is the deferment of presentment of all debts, due or
the payment of debts until such not due, and secure a complete
time as the debtor, who discharge from such debts
possesses sufficient property to
cover all his debts, is able to
convert such assets into cash
or otherwise acquires the cash
necessary to pay his debts
2. amount of debts is not 2. the creditors receive less
affected although their payment than what they are entitled to;
is postponed in some cases, where
preferences are proper, some
creditors may not receive any
amount at all
Effect of filing of petition
On execution pending against debtor
On execution against property specially mortgaged
On action to collect sum of money still to be filed
against debtor
On other actions
SEC 6. If any execution be pending against the debtor it shall not
be consolidated with this proceeding, but the course thereof shall
be suspended before sale of property is made thereunder,
provided the debtor makes a request therefor to the court before
which the proceeding for suspension of payments is pending,
unless the execution be against property especially mortgaged
which is hereby exempted from the provisions of this SEC. The
suspension ordered by virtue of this SEC shall lapse when three
months shall have passed without the proposed agreement being
accepted by the creditors or as
soon as it is denied. No creditor other than those mentioned in
SEC nine shall sue or institute proceedings to collect his claim
from the debtor from the moment that suspension of payments is
applied for and while the proceedings are pending.
Procedure
(a) filing of petition by the debtor
(b) issuance by the court of an order calling for a meeting of
the creditors
(c) publication of the order and service thereof on the
creditors
(d) meeting of creditors for approval or disapproval of the
debtors proposition
(e) objection, if any and if justified, to the decision of the
meeting of creditors
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Issuance, publication and delivery of order calling creditors to
meeting (Secs. 3 and 5)
SEC 3. Upon receiving and filing the petition with the schedule and
documents mentioned in the next preceding SEC, the court, or the
judge thereof in vacation, shall make an order calling a meeting of
creditors to take place in not less than two weeks nor more than
eight weeks from the date of such order. Said order shall designate
the day, hour, and place of meeting of said creditors as well as a
newspaper of general circulation published in the province or city
in which the petition is filed, if there be one, and if there be none, in
a newspaper which, in the judgment of the judge, will best give
notice to the creditors of the said debtor, and in the newspaper so
designated said order shall be published as often as may be
prescribed by the court or the judge thereof.
Said order shall further contain an absolute injunction
forbidding the petitioning debtor from disposing in any manner of
his property, except in so far as concerns the ordinary operations
of commerce or of industry in which the petitioner is engaged, and,
furthermore, from making any payments outside of the necessary
or legitimate expenses of his business or industry, so long as the
proceedings relative to the suspension of payments are pending,
and said proceedings for the purposes of this Act shall be
considered to have been instituted from the date of the filing of the
petition.
SEC 5. Only creditors included in the schedule filed by the debtor
shall be cited to appear and take part in the meeting mentioned in
SEC three, and they shall be notified upon delivery or transmission
to them of a copy of the order calling the meeting to appear at
same with the written evidences of their respective claims, without
which they shall not be admitted.
Required quorum for holding of meeting
Required vote for approval of debtors proposal
SEC 8. The presence of the creditors representing at least three-
fifths of the liabilities shall be necessary for holding a meeting.
The meeting shall be held on the day and at the hour and place
designated, the judge, or commissioner deputized by him when he
is absent from the province where the meeting is held, acting as
president and the clerk as secretary thereof, subject to the
following rules:
(a) The clerk shall prepare for insertion in the minutes of the
meeting a statement of the persons present and their claims; the
judge, or, in default thereof, the commissioner, shall examine the
written evidences of the claims and the powers of attorney, if any.
If the persons present who have complied with the foregoing rules
represent at least three-fifths of the liabilities, the judge or
commissioner shall declare the meeting open for business.
(b) The petition of the debtor, the schedule of debts and of
property, the statement of assets and liabilities, and the proposed
agreement filed therewith shall be read forthwith by the clerk, and
the discussion shall be opened.
(c) The debtor may modify his proposition or propositions in
view of the result of the debate, or insist upon the ones already
made, and the judge or commissioner, without further discussion,
shall clearly and succinctly place these several propositions before
the meeting for a vote thereupon.
(d) The vote shall be taken by a call of names and shall be
inserted in and the minutes; a majority vote shall rule.
(e) To form a majority it is necessary
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1. That two-thirds of the creditors voting unite upon the
same proposition.
2. That the claims represented by said majority vote
amount to at least three-fifths of the total liabilities of the debtor
mentioned in the petition.
(f) After the result of the voting has been announced, all
protests made against the majority vote shall be admitted and
stated in the record, and the meeting shall be closed.
(g) The minutes of the meeting, containing a succinct
statement of all proceedings had therein, shall be drawn up, and
there shall be inserted therein the proposition or propositions voted
upon, which, after having been read and approved, shall be signed
by the judge or commissioner together with all persons taking part
in the voting; if any such persons shall be unable to write, any
person present shall sign, at their request, and the clerk shall
certify to all of the above.
Persons not bound by agreement on debtors proposal
SEC 9. Persons having claims for personal labor, maintenance,
expenses of last illness and funeral of the wife or children of the
debtor, incurred in the sixty days immediately preceding the filing
of the petition, and persons having legal or contractual mortgages,
may refrain from attending the meeting and from voting therein.
Such persons shall not be bound by any agreement determined
upon at such meeting, but if they should join in the voting they
shall be bound in the same manner as are the other creditors.
Termination of proceedings
SEC 11. If the decision of the meeting be negative as regards the
proposed agreement or if no decision is had in default of such
number or of such majorities, the proceeding shall be terminated
without recourse and the parties concerned shall be at liberty to
enforce the rights which may correspond to them. If the decision is
favorable to the debtor it may be objected to within ten days
following the date of the meeting by any creditor who attended the
meeting and who dissented from and protested against the vote of
the majority. The opposition or objection to the decision of the
majority favorable to the debtor shall be proceeded with as in any
other incidental motion, the debtor and the creditors who shall
appear declaring their purpose to sustain the decision of the
meeting being the defendants. The court shall hear and pass upon
such objection as soon as possible and in a summary manner, and
in its order, which shall be final, it shall declare whether or not the
decision of the meeting is valid. In case that the decision of the
meeting is held to be null, the court shall declare the proceeding
terminated and the parties concerned at liberty to exercise the
rights which may correspond to them; and in case the decision of
the meeting is declared valid, or when no opposition or objection to
said decision has been presented, the court shall order that the
agreement be carried out and the persons concerned shall be
bound by the decision of the meeting. The court may also issue all
orders which may be proper to enforce the agreement on motion of
any of the parties litigant. The order directing the agreement to be
made effective shall be binding upon all creditors included in the
schedule of the debtor who may have been properly summoned,
but not upon creditors mentioned in SEC nine who failed to attend
the meeting or refrained from voting therein, and their rights shall
not be affected by the agreement unless they may have expressly
or impliedly consented thereto.
Consequences of debtors failure to perform agreement
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SEC 13. If the debtor fails wholly or in part to perform the
agreement decided upon at the meeting of the creditors, all the
rights which the creditors had against the debtor before the
agreement shall revest in them. In such case the debtor may be
made subject to the bankruptcy and insolvency proceedings in the
manner established by the following chapters of this Act.
VOLUNTARY INSOLVENCY
14.5 Nature
Who could file petition
Schedule of debts and liabilities
Inventory of property
Differentiate from involuntary insolvency
Voluntary vs. Involuntary Insolvency
In voluntary insolvency, a debtor is deemed insolvent
upon his filing of a petition for voluntary insolvency; while in
involuntary insolvency, the debtor is considered insolvent upon the
issuance by the court of an order declaring him insolvent.
Procedure
a. filing of petition by the debtor
b. issuance by the court of an order
declaring, among other things, that the petitioner is insolvent
c. publication of order and service thereof on
the creditors
d. meeting of creditors for election of
assignee in insolvency
e. conveyance of debtors property to
assignee in insolvency
f. liquidation of assets and payment of debts
g. discharge of the debtor
h. objections to discharge, if any
i. appeal to the Supreme Court in certain
cases.
Filing of petition an act of insolvency
SEC 14. An insolvent debtor, owing debts exceeding in amount the
sum of one thousand pesos, may apply to be discharged from his
debts and liabilities by petition to the Court of First Instance of the
province or city in which he has resided for six months next
preceding the filing of such petition. In his petition he shall set forth
his place of residence, the period of his residence therein
immediately prior to filing said petition, his inability to pay all his
debts in full, his willingness to surrender all his property, estate,
and effects not exempt from execution for the benefit of his
creditors, and an application to be adjudged an insolvent. He shall
annex to his petition a schedule and inventory in the form
hereinafter provided. The filing of such petition shall be an act
of insolvency.
SEC 15. Said schedule must contain a full and true statement of
all his debts and liabilities, together with a list of all those to whom,
to the best of his knowledge and belief, said debts or liabilities are
due, the place of residence of his creditors and the sum due each,
the nature of the indebtedness or liability and whether founded on
written security, obligation, contract or otherwise, the true cause
and consideration thereof, the time and place when and where
such indebtedness or liability accrued, a declaration of any existing
pledge, lien, mortgage, judgment, or other security for the payment
of the debt or liability, and an outline of the facts giving rise or
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which might give rise to a cause of action against such insolvent
debtor.
SEC 16. Said inventory must contain, besides the creditors, an
accurate description of all the real and personal property, estate,
and effects of the petitioner, including his homestead, if any,
together with a statement of the value of each item of said
property, estate, and effects and its location, and a statement of
the incumbrances thereon. All property exempt by law from
execution shall be set out in said inventory with a statement of its
valuation, location, and the incumbrances thereon, if any. The
inventory shall contain an outline of the facts giving rise, or which
might give rise, to a right of action in favor of the insolvent debtor.
SEC 17. The petition, schedule, and inventory must be verified by
the affidavit of the petitioner, annexed thereto, and shall be in form
substantially as follows: I, _______________, do solemnly swear
that the schedule and inventory now delivered by me contain a full,
correct, and true discovery of all my debts and liabilities and of all
goods, effects, estate, and property of whatever kind or class to
me in any way belonging. The inventory also contains a full, true
and correct statement of all debts owing or due to me, or to any
person or persons in trust for me and of all securities and contracts
whereby any money may hereafter become due or payable to me
or by or through which any benefit or advantage whatever may
accrue to me or to my use, or to any other person or persons in
trust for me. The schedule contains a clear outline of the facts
giving rise, or which might give rise, to a cause of action against
me, and the inventory contains an outline of the facts giving rise, or
which might give rise, to any cause of action in my favor. I have no
lands, money, stock, or estate, reversion, or expectancy, or
property of any kind, except that set forth in said inventory. I have
in no instance created or acknowledged a debt for a greater sum
than I honestly and truly owe. I have not, directly or indirectly,
concealed, fraudulently sold, or otherwise fraudulently disposed of,
any part of my real or personal property, estate, effects, or rights of
action, and I have not in any way compounded with any of my
creditors in order to secure such creditors, or to receive or to
accept any profit or advantage therefrom, or to defraud or deceive
in any manner any creditor to whom I am indebted. So help me
God.
SEC 18. Upon receiving and filing said petition, schedule, and
inventory, the court, or the judge thereof in vacation, shall make an
order declaring the petitioner insolvent, and directing the sheriff of
the province or city in which the petition is filed to take possession
of, and safely keep, until the appointment of a receiver or
assignee, all the deeds, vouchers, books of account, papers,
notes, bonds, bills, and securities of the debtor, and all his real and
personal property, estate, and effects, except such as may be by
law exempt from execution. Said order shall further forbid 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, and shall further
appoint a time and place for a meeting of the creditors to choose
an assignee of the estate. Said order shall designate a newspaper
of general circulation published in the province or city in which the
petition is filed, if there be one, and if there be none, in a
newspaper which, in the opinion of the judge, will best give notice
to the creditors of the said insolvent, and in the newspaper so
designated said order shall be published as often as may be
prescribed by the court or the judge thereof. The time appointed for
the election of an assignee shall not be less than two, nor more
than eight, weeks from the date of the order of adjudication. Upon
the granting of said order all civil proceedings pending against the
said insolvent shall be stayed. When a receiver is appointed, or an
assignee chosen, as provided in this Act, the sheriff shall
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thereupon deliver to such receiver or assignee, as the case may
be, all the property, assets, and belongings of the insolvent which
have come into his possession, and he shall be allowed and paid
as compensation for his services the same expenses and fees as
would by law be collectible if the property had been levied upon
and safely kept under attachment.
SEC 19. A copy of said order shall immediately be published by
the clerk of said court, in the newspaper designated therein, for the
number of times and as prescribed by the court or the judge
thereof, and a copy of said order shall be delivered personally or
sent by the clerk forthwith by registered mail, postage prepaid, to
all creditors named in the schedule. There shall be deposited, in
addition to twenty-four pesos, which shall be received by the clerk
on commencing such proceedings, a sum of money sufficient to
defray the expense of the publication ordered by the court,
necessary postage, and ten centavos for each copy, to be
delivered personally or mailed to the creditors, which last-named
sum is hereby constituted the legal fee of the clerk for the personal
delivery or mailing required by this SEC.
INVOLUNTARY INSOLVENCY
Nature
Who could file petition
Must be accompanied by bond
Acts of insolvency
SEC 20. An adjudication of insolvency may be made on the
petition of three or more creditors, residents of the Philippine
Islands, whose credits or demands accrued in the Philippine
Islands, and the amount of which credits or demands are in the
aggregate not less than one thousand pesos: Provided, That none
of said creditors has become a creditor by assignment, however
made, within thirty days prior to the filing of said petition. Such
petition must be filed in the Court of First Instance of the province
or city in which the debtor resides or has his principal place of
business, and must be verified by at least three of the petitioners.
The following shall be considered acts of insolvency, and the
petition for insolvency shall set forth one or more of such acts: (1)
That such person is about to depart or has departed from the
Philippine Islands, with intent to defraud his creditors; (2) that
being absent from the Philippine Islands, with intent to defraud his
creditors, he remains absent; (3) that he conceals himself to avoid
the service of legal process for the purpose of hindering or
delaying or defrauding his creditors; (4) that he conceals, or is
removing, any of his property to avoid its being attached or taken
on legal process; (5) that he has suffered his property to remain
under attachment or legal process for three days for the purpose of
hindering or delaying or defrauding his creditors; (6) that he has
confessed or offered to allow judgment in favor of any creditor or
claimant for the purpose of hindering or delaying or defrauding any
creditor or claimant; (7) that he has willfully suffered judgment to
be taken against him by default for the purpose of hindering or
delaying or defrauding his creditors; (8) that he has suffered or
procured his property to be taken on legal process with intent to
give a preference to one or more of his creditors and thereby
hinder, delay, or defraud any one of his creditors; (9) that he has
made any assignment, gift, sale, conveyance, or transfer of his
estate, property, rights, or credits with intent to delay, defraud, or
hinder his creditors; (10) that he has, in contemplation of
insolvency, made any payment, gift, grant, sale conveyance, or
transfer of his estate, property, rights, or credits; (11) that being a
merchant or tradesman he has generally defaulted in the payment
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of his current obligations for a period of thirty days; (12) that for a
period of thirty days he has failed, after demand, to pay any
moneys deposited with him or received by him in a fiduciary
capacity; and (13) that an execution having been issued against
him on final judgment for money, he shall have been found to be
without sufficient property subject to execution to satisfy the
judgment. The petitioners may, from time to time, by leave of the
court, amend and correct the petition, so that the same shall
conform to the facts, such amendment or amendments to relate
back to and be received as embraced in the original petition. The
said petition shall be accompanied by a bond, approved by the
court, with at least two sureties, in such penal sum as the court
shall direct, conditioned that if the petition in insolvency be
dismissed by the court, or withdrawn by the petitioner, or if the
debtor shall not be declared an insolvent, the petitioners will pay to
the debtor alleged in the petition to be insolvent all costs,
expenses, and damages occasioned by the proceedings in
insolvency, together with a reasonable counsel fee to be fixed by
the court. The court may, upon motion, direct the filing of an
additional bond, with different sureties, when deemed necessary
Determination of solvency or insolvency of debtor
SEC 23. At the time fixed for the hearing of said order to show
cause, or at another time to which such hearing may be adjourned,
the debtor must answer the petition, or may demur for the same
causes as are provided for demurrer in other cases by the Code of
Civil Procedure. If he demur and the demurrer be overruled, the
debtor shall immediately answer the petition. Such answer shall
contain a specific denial of the material allegations of the petition
controverted by him, and shall be sworn to; and the issues raised
thereon shall be promptly tried and disposed of. If, upon such trial,
the issues are found in favor of the respondent, the proceedings
shall be dismissed, and the respondent shall be allowed all costs,
counsel fees, expenses, and damages sustained by reason of the
proceedings therein. Counsel fees, costs, expenses, and damages
shall be fixed and allowed by the court.
PROVISIONS COMMON TO VOLUNTARY AND INVOLUNTARY
INSOLVENCIES
14.7 Procedure if debtor defaults or is found insolvent
Debtor to file schedule of debts and liabilities and
inventory of property
SEC 24. If the respondent shall make default, or if, after trial, the
issues are found in favor of the petitioners, the court shall make an
order adjudging that said respondent is and was, at the time of
filing the petition, an insolvent debtor and that the debtor was guilty
of the acts and things charged in the petition, or such of them as
the court may find to be true; and shall require said debtor, within
such time as the court may designate, not to exceed three days, to
file in court the schedule and inventory provided for in SECs fifteen
and sixteen of this Act, duly verified as required of a petitioning
debtor: Provided, That in the affidavit of the insolvent, touching his
property and its disposition, he shall not be required to swear that
he has not made any fraudulent preference or committed any other
act in conflict with the provisions of this Act; but he may do so if he
desires. Said order shall further direct the sheriff of the province or
city where the insolvency petition is filed, or the receiver, if one has
been theretofore appointed, to take possession of and safely keep,
until the appointment of an assignee, all the deeds, vouchers,
books of account, papers, notes, bills, bonds and securities of the
debtor, and all his real and personal property, estate and effects,
except such as may be by law exempt from execution. Said order
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shall further forbid 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,
and shall further appoint a time and place for a meeting of the
creditors to choose an assignee of the estate. Said order shall
designate a newspaper of general circulation published in the
province or city in which the petition is filed, if there be one, and if
there be none, in a newspaper which, in the opinion of the judge,
will best give notice to the creditors of the said insolvent, and in the
newspaper so designated said order shall be published as often as
may be prescribed by the court or the judge thereof. The time
appointed for the election of an assignee shall not be less than two
nor more than eight weeks from the date of the order of
adjudication. Upon the granting of said order, all civil proceedings
pending against the said insolvent shall be stayed. When an
assignee is chosen as provided in this Act, the sheriff or receiver, if
there be one, shall thereupon deliver to such assignee all the
property, estate, and belongings of the insolvent, which have come
into his possession, and he shall be allowed and paid as
compensation for his services the same expenses and fees as
would by law be collectible if the property had been levied upon
and safely kept under attachment.
Sheriff to take possession of insolvents property
SEC 26. In all cases where the debtor resides out of the Philippine
Islands; or has departed from the Philippine Islands; or can not,
after due diligence, be found within the Philippine Islands; or
conceals himself to avoid service of the order to show cause, or
any other preliminary process or orders in the matter; or is a
foreign corporation having no managing or business agent,
cashier, or secretary within the Philippine Islands upon whom
service or orders and process can be made, and it therefore
becomes necessary to obtain service of process and order to show
cause, as provided in SEC twenty-two of this Act, then the
petitioning creditors, upon submitting the affidavits requisite to
procure an order of publication, and presenting a bond in double
the amount of the aggregate sum of their claims against the
debtor, shall be entitled to an order of the court directing the sheriff
of the province or city in which the matter is pending to take into
his custody a sufficient amount of property of the debtor to satisfy
the demands of the petitioning creditors and the costs of the
proceedings. Upon receiving such order of the court to take into
custody property of the debtor, it shall be the duty of the sheriff to
take possession of the property and effects of the debtor, not
exempt from execution, to an extent sufficient to cover the amount
provided for, and to prepare, within three days from the time of
taking such possession, a complete inventory of all the property so
taken, and to return it to the court as soon as completed. The time
for taking the inventory and making return thereof may be
extended for good cause shown to the court or a judge thereof.
The sheriff shall also prepare a schedule of the names and
residences of the creditors, and the amount due each, from the
books of the debtor, or from such other papers or data of the
debtor available as may come to his possession, and shall file
such schedule list of creditors and inventory with the clerk of the
court
Meeting of creditors for election of assignee in insolvency
Filing of claims by creditors prior to election
SEC 29. No creditor shall be entitled to vote for the election of an
assignee unless he shall have filed his claim in the office of the
clerk of the court in which the proceedings are pending at least two
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days prior to the time appointed for such election. All claims shall
contain a statement showing the amount and nature of the claim
and security, if any. The claim shall be verified by the claimant, or
his duly authorized agent or attorney. No claim barred by the
statute of limitations shall be proved or allowed against the estate
of an insolvent debtor for any purpose. Any person interested in
the estate of the insolvent may file exceptions to the legality or
good faith of any claim, by setting forth specifically in writing his
interest in the estate, and the grounds of his objection to such
claim. Such exceptions shall be verified by the affidavit of the party
objecting, or his duly authorized agent or attorney, and the affidavit
shall set out that such exceptions are not made for the purpose of
delay and are made in good faith in the best interests of said
estate. Exceptions to any claim must be filed with the clerk of the
court at least one day before the time appointed for the election of
an assignee, and such exceptions shall be heard and disposed of
by the court, on affidavit or other evidence, in a summary manner,
before the election of an assignee. No creditor or claimant who
holds any mortgage, pledge, or lien of any kind whatever as
security for the payment of his claim or attachment or execution on
property of the debtor duly recorded and not dissolved under this
Act shall be permitted to vote at the election of the assignee any
part of his secured claim unless he shall first have the value of
such security fixed as provided in SEC fifty-nine of this Act, or shall
surrender to the sheriff or receiver of the estate of the insolvent, if
there be a receiver, all such property, or assign such lien to such
sheriff or receiver. The surrender or assignment of such security or
lien shall be for the benefit of all creditors of the estate of the
insolvent. The value of such security, if fixed by the court, shall be
so fixed at least one day before the day appointed for the election
of an assignee, in which event the claimant may prove his demand
as provided in this SEC for any unsecured balance, subject to the
filing of exceptions as in all other claims.
Conveyance of insolvents property to assignee
SEC 32. As soon as an assignee is elected or appointed and
qualified, the clerk of the court shall, by an instrument under his
hand and seal of the court, assign and convey to the assignee all
the real and personal property, estate, and effects of the debtor
with all his deeds, books, and papers relating thereto, and such
assignment shall relate back to the commencement of the
proceedings in insolvency, and shall relate back to the acts upon
which the adjudication was founded, and by operation of law shall
vest the title to all such property, estate, and effects in the
assignee, although the same is then attached on mesne process,
as the property of the debtor. Such assignment shall operate to
vest in the assignee all of the estate of the insolvent debtor not
exempt by law from execution. It shall also dissolve any
attachment levied within one month next preceding the
commencement of the insolvency proceedings and vacate and set
aside any judgment entered in any action commenced within thirty
days immediately prior to the commencement of insolvency
proceedings and shall vacate and set aside any execution issued
thereon and shall vacate and set aside any judgment entered by
default or consent of the debtor within thirty days immediately prior
to the commencement of the insolvency proceedings.
Assignees right to recover insolvents property to assignee,
etc.
SEC 33. The assignee shall have the right to recover all the estate
debts, and effects of said insolvent. If, at the time of the
commencement of proceedings in insolvency, an action is pending
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in the name of the debtor, for the recovery of a debt or other thing
which might or ought to pass to the assignee by the assignment,
the assignee shall be allowed and admitted to prosecute the
action, in like manner and with like effect as if it had been originally
commenced by him. If there are any rights of action in favor of the
insolvent for damages, on any account, for which an action is not
pending, the assignee shall have the right to prosecute the same
with the same effect as the insolvent might have done himself if no
proceedings in insolvency had been instituted. If any action or
proceeding in which the insolvent is defendant is pending at the
time of the adjudication, the assignee may defend the same in the
same manner and with like effect as it might have been defended
by the insolvent. In a suit prosecuted or defended by the assignee,
a certified copy of the assignment made to him shall be conclusive
evidence of his authority to sue or defend.
Powers of assignee
SEC 36. The said assignee shall have power:
1. To sue and recover all the estate, assets, debts, and
claims, belonging to or due to such debtor; and no set-off or
counterclaim shall be allowed in any such for debts contracted by
the insolvent within thirty days immediately preceding the filing of
the petition of insolvency except in case of creditors specified in
SEC fifty of this Act.
2. To take into his possession all the estate of such debtor
except property exempt by law from execution, whether attached
or delivered to him, or afterwards discovered, and all books,
vouchers, evidence of indebtedness, and securities belonging to
the same.
3. In case of a non-resident or absconding or concealed
debtor, to demand and receive of every sheriff who shall have
attached any of the property of such debtor, or who shall have in
his possession any moneys arising from the sale of such property,
all such property and moneys, on paying him his lawful costs and
charges for attaching and keeping the same.
4. From time to time to sell at public auction after
advertisement in the manner provided by subSECs (1), (2), and (3)
of SEC four hundred and fifty-four of the Code of Civil Procedure,
upon order of the court, any of the estate, real and personal, which
has come into his possession, and which is vested in him as such
assignee, and on such sales to execute the necessary
conveyances and bills of sale.
5. To redeem all valid mortgages and conditional contracts,
and all valid pledges of personal property, and to satisfy any
judgments which may be an incumbrance on any property sold by
him; or to sell such property, subject to such mortgage, contracts,
pledges, judgments, or liens.
6. To settle all matters and accounts between such debtor
and his creditors, subject to the approval of the court.
7. Under the order of the court or judge appointing him, to
compound with any person indebted to such debtor, and thereupon
discharge all demands against such person.
8. To recover from any person receiving a conveyance, gift,
transfer, payment, or assignment, made contrary to any provision
of this Act, the property thereby transferred or assigned; or in case
a re-delivery of the property can not be had, to recover the value
thereof, with damages for the detention.
Conversion of insolvents property into money
SEC 39. The assignee shall as speedily as possible convert the
estate, real and personal, into money. He shall keep a regular
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account of all moneys received by him as assignee, to which every
creditor or other person interested therein may, at all reasonable
times, have access. No private sale of any property of the estate of
any insolvent debtor shall be valid unless made under the order of
the court, upon a petition in writing, which shall set forth the facts
showing the sale to be necessary. Upon filing the petition, notice of
the hearing thereof of at least ten days shall be given by
publication and mailing, in the same manner as is provided in SEC
nineteen of this Act. If it appears that a private sale is for the best
interests of the estate, the court shall order it to be made.
Proof of debts (SECs 53-62)
SEC 53. All debts due and payable from the debtor at the time of
the adjudication of insolvency, and all debts then existing but not
payable until a future time, a discount being made if no interest is
payable by the terms of the contract, may be proved against the
estate of the debtor.
SEC 54. If the debtor is bound as indorser, surety, bail, or
guarantor, upon any bill, bond, note, or other specialty or contract,
or for any debt of any person, and his liability shall not have
become absolute until after the adjudication of insolvency, the
creditor may prove the same after such liability shall have become
fixed, and before the final dividend shall have been declared.
SEC 55. In all cases of contingent debts and contingent liabilities,
contracted by the debtor, and not herein otherwise provided for,
the creditor may make claim therefor and have his claim allowed,
with the right to share in the dividends, if the contingency shall
happen before the order of the final dividend; or he may, at any
time, apply to the court to have the present value of the debt or
liability ascertained and liquidated, which shall be done in such
manner as the court shall order, and it shall be allowed for the
amount so ascertained.
SEC 56. Any person liable as bail, surety, or guarantor, or
otherwise, for the debtor, who shall have paid the debt, or any part
thereof, in discharge of the whole, shall be entitled to prove such
debt, or to stand in the place of the creditor, if he shall have proved
the same, although such payments shall have been made after the
proceedings in insolvency were commenced; and any person so
liable for the debtor, and who has not paid the whole of said debt,
but is still liable for the same, or any part thereof, may, if the
creditor shall fail or omit to prove such debt, prove the same in the
name of the creditor.
SEC 57. Where the debtor is liable to pay rent, or other debt falling
due at fixed and stated periods, the creditor may prove for a
proportionate part thereof up to the time of the insolvency, as if the
same became due from day to day, and not at such fixed and
stated periods.
SEC 58. In all cases of mutual debts and mutual credits between
the parties, the account between them shall be stated, and one
debt set off against the other, and the balance only shall be
allowed and paid. But no set-off or counterclaim shall be allowed of
a claim in its nature not provable against the estate: Provided, That
no set-off or counterclaim shall be allowed in favor of any debtor to
the insolvent of a claim purchased by or transferred to such debtor
within thirty days immediately preceding the filing, or after the filing
of the petition by or against the insolvent.
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SEC 59. When a creditor has a mortgage, or pledge of real or
personal property of the debtor, or a lien thereon, for securing the
payment of a debt owing to him from the debtor, or an attachment
or execution on property of the debtor duly recorded and not
dissolved under this Act, he shall be admitted as a creditor for the
balance of the debt only, after deducting the value of such
property, such value to be ascertained by agreement between him
and the receiver, if any, and if no receiver, then upon such sum as
the court or a judge thereof may decide to be fair and reasonable,
before the election of an assignee, or by a sale thereof, to be made
in such manner as the court or judge thereof shall direct; or the
creditor may release or convey his claim to the receiver, if any, or if
no receiver then to the sheriff, before the election of an assignee,
or to the assignee if an assignee has been elected, upon such
property, and be admitted to prove his whole debt. If the value of
the property exceeds the sum for which it is so held as security,
the assignee may release to the creditor the debtors right of
redemption thereon on receiving such excess; or he may sell the
property, subject to the claim of the creditor thereon, and in either
case the assignee and creditor, respectively, shall execute all
deeds and writings necessary or proper to consummate the
transaction. If the property is not sold or released, and delivered
up, or its value fixed, the creditor shall not be allowed to prove any
part of his debt, but the assignee shall deliver to the creditor all
such property upon which the creditor holds a mortgage, pledge, or
lien, or upon which he has an attachment or execution.
SEC 60. No creditor, proving his debt or claim, shall be allowed to
maintain any suit therefor against the debtor, but shall be deemed
to have waived all right of action and suit against him, and all
proceedings already commenced, or any unsatisfied judgment
already obtained thereon, shall be deemed to be discharged and
surrendered thereby; and after the debtors discharge, upon proper
application and proof to the court having jurisdiction, all such
proceedings shall be dismissed, and such unsatisfied judgments
satisfied of record: Provided, That no valid lien existing in good
faith thereunder shall be thereby affected. A creditor proving his
debt or claim shall not be held to have waived his right of action or
suit against the debtor when a discharge has have been refused or
the proceedings have been determined without a discharge. No
creditor whose debt is provable under this Act shall be allowed,
after the commencement of proceedings in insolvency, to
prosecute to final judgment any action therefor against the debtor
until the question of the debtors discharge shall have been
determined, and any such suit or proceeding shall, upon the
application of the debtor or of any creditor, or the assignee, be
stayed to await the determination of the court on the question of
discharge: Provided, That if the amount due the creditor is in
dispute, the suit, by leave of the court in insolvency, may proceed
to judgment for the purpose of ascertaining the amount due, which
amount, when adjudged, may be allowed in the insolvency
proceedings, but execution shall be stayed as aforesaid.
SEC 61. Any person who shall have accepted any preference,
having reasonable cause to believe that the same was made or
given by the debtor contrary to any provision of this Act, shall not
be allowed to prove the debt or claim on account of which the
preference was made or given, nor shall he receive any dividend
thereon, until he shall have surrendered to the assignee all
property, money, benefit, or advantage received by him under such
preference.
SEC 62. The court may, upon the application of the assignee, or of
any creditor, or without any application, before or after adjudication
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in insolvency, examine upon oath the debtor in relation to his
property and his estate and may examine any other person
tendering or making proof of claims, and may subpoena witnesses
to give evidence relating to such matters. All examinations of
witnesses shall be had and depositions shall be taken in
accordance with and in the same manner as is provided by the
Code of Civil Procedure.
Discharge (SECs 64-69)
When debtor may apply for discharge
SEC 64. At any time after the expiration of three months from the
adjudication of insolvency, but not later than one year from such
adjudication, unless the property of the insolvent has not been
converted into money, the debtor may apply to the court for a
discharge from his debts, and the court shall thereupon order
notice to be given to all creditors who have proved their debts to
appear on a day appointed for that purpose and show cause why a
discharge should not be granted to the debtor; said notice shall be
given by registered mail and by publication at least once a week,
for six weeks, in a newspaper published in the province or city, or,
if there be none, in a newspaper which, in the opinion of the judge,
will best give notice to the creditors of the said insolvent: Provided,
That if no debts have been proven, such notice shall not be
required.
When discharge may not be granted
SEC 65. No discharge shall be granted, or if granted shall be valid,
(1) if the debtor shall have sworn falsely in his affidavit annexed to
his petition, schedule, or inventory, or upon any examination in the
course of the proceedings in insolvency, in relation to any material
fact concerning his estate or his debts or to any other material fact;
or (2) if he has concealed any part of his estate or effects, or any
books or writing relating thereto; or (3) if he has been guilty of
fraud or willful neglect in the care or custody of his property or in
the delivery to the assignee of the property belonging to him at the
time of the presentation of his petition and inventory, excepting
such property as he is permitted to retain under the provisions of
this Act; or (4) if, within one month before the commencement of
such proceedings, he has procured his real estate, goods,
moneys, or chattels to be attached or seized on execution; or (5) if
he has destroyed, mutilated, altered, or falsified any of his books,
documents, papers, writings, or securities, or has made, or been
privy to the making of, any false or fraudulent entry in any book of
account or other document with intent to defraud his creditors; or
(6) if he has given any fraudulent preference, contrary to the
provisions of this Act, or has made any fraudulent payment, gift,
transfer, conveyance, or assignment of any part of his property, or
has admitted a false or fictitious debt against his estate; or (7) if,
having knowledge that any person has proven such false or
fictitious debt, he has not disclosed the same to his assignee within
one month after such knowledge; or (8) if, being a merchant or
tradesman, he has not kept proper books of account in Arabic
numerals and in accordance with the provisions of the Code of
Commerce; or (9) if he, or any other person on his account, or in
his behalf, has influenced the action of any creditor, at any stage of
the proceedings, by any pecuniary consideration or obligation; or
(10) if he has, in contemplation of becoming insolvent, made any
pledge, payment, transfer, assignment, or conveyance of any part
of his property, directly or indirectly, absolutely or conditionally, for
the purpose of preferring any creditor or person having a claim
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against him, or who is, or may be, under liability for him, or for the
purpose of preventing the property from coming into the hands of
the assignee, or of being distributed under this Act in satisfaction of
his debts; or (11) if he has been convicted of any misdemeanor
under this Act, or has been guilty of fraud contrary to the true intent
of this Act; or (12) in case of voluntary insolvency, has received the
benefit of this or any other Act of insolvency or bankruptcy within
six years next preceding his application for discharge; or (13) if
insolvency proceedings in which he could have applied for a
discharge are pending by or against him in the Court of First
Instance of any other province or city in the Philippine Islands.
Before any discharge is granted, the debtor shall take and
subscribe an oath to the effect that he has not done, suffered, or
been privy to any act, matter, or thing specified in this Act as
grounds for withholding such discharge or as invalidating such
discharge, if granted.
SEC 66. Any creditor opposing the discharge of a debtor shall file
his objections thereto, specifying the grounds of his opposition,
and after the debtor has filed and served his answer thereto, which
pleadings shall be verified, the court shall try the issue or issues
raised, according to the practice provided by law in civil actions.
SEC 67. If it shall appear to the court that the debtor has in all
things conformed to his duty under this Act, and that he is entitled
under the provisions thereof to receive a discharge, the court shall
grant him a discharge from all his debts, except as hereinafter
provided, and shall give him a certificate thereof, under the seal of
the court, in substance as follows: In the Court of First Instance of
the _____________, Philippine Islands. Whereas,
______________, has been duly adjudged an insolvent under the
Insolvency Law of the Philippine Islands, and appears to have
conformed to all the requirements of law in that behalf, it is
therefore ordered by the court that said _______________ be
forever discharged from all debts and claims, which by said
Insolvency Law are made provable against his estate, and which
existed on the _______ day of _________, on which the petition of
adjudication was filed by (or against) him, excepting such debts, if
any, as are by said Insolvency Law excepted from the operation of
a discharge in insolvency. Given under my hand, and the seal of
the court, this ____ day of ______________, Anno Domini
______________ Attest: ____________, clerk. (Seal)
_____________, judge.
Debts not discharged
SEC 68. No tax or assessment due to the Insular Government or
any provincial or municipal government, whether proved or not as
provided for in this Act, shall be discharged. Nor shall any debt
created by the fraud or embezzlement of the debtor, or by his
defalcation as a public officer or while acting in a fiduciary capacity,
be discharged under this Act, but the debt may be proved, and the
dividend thereon shall be a payment on account of said debt. No
discharge granted under this Act shall release, discharge or affect
any person liable for the same debt, for or with the debtor, either
as partner, joint contractor, indorser, surety, or otherwise.
SEC 69. A discharge, duly granted under this Act, shall, with the
exceptions aforesaid, release the debtor from all claims, debts,
liabilities, and demands set forth in his schedule, or which were or
might have been proved against his estate in insolvency, and may
be pleaded by a simple averment that on the day of its date such
discharge was granted to him, setting forth the same in full, and
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the same shall be a complete bar to all suits brought on any such
debts, claims, liabilities, or demands, and the certificate shall be
prima facie evidence in favor of such fact and of the regularity of
such discharge: Provided, however, That any creditor whose debt
was proved or provable against the estate in insolvency who shall
see fit to contest the validity of such discharge on the ground that it
was fraudulently obtained and who has discovered the facts
constituting the fraud subsequent to the discharge, may, at any
time within one year after the date thereof, apply to the court which
granted it to set it aside and annul the same.
Commissions due assignee
SEC 42. Assignees shall be allowed all necessary expenses in the
care, management, and settlement of the estate, and shall be
entitled to charge and receive for their services commissions upon
all sums of money coming to their hands and accounted for by
them, as follows: For the first thousand pesos, at the rate of seven
per centum; for all above that sum and not exceeding ten thousand
pesos, at the rate of five per centum; and for all above that sum, at
the rate of four per centum: Provided, however, That if the person
acting as assignee was receiver of the property of the estate
pending the election of an assignee, any compensation allowed
him as such receiver shall be deducted from the compensation to
which he otherwise would be entitled as such assignee: And
provided further, That if there should be two or more assignees the
court shall order an equitable division of the compensation herein
provided, and if for any reason an assignees term is completed
before the final settlement of the estate and a successor is
appointed the court shall not allow to any such assignee prior to
the settlement of the estate an amount exceeding four per centum
of the sums of money coming into his hands. Upon the final
settlement of the estate an equitable distribution of the
compensation of the assignee shall be made.
Composition
SEC 63. An insolvent may offer terms of composition to his
creditors after, but not before, he has filed in court a schedule of
his property and list of his creditors as provided in this Act. An
application for the confirmation of a composition may be filed in the
insolvency court after, but not before, it has been accepted in
writing by a majority in number of all creditors whose claims have
been allowed, which number must represent a majority in amount
of such claims and after the consideration to be paid by the
insolvent to his creditors and the money necessary to pay all debts
which have priority and the costs of proceedings have been
deposited in such place as shall be designated by and subject to
the order of the court. A time shall be fixed by the court for the
hearing upon an application for the confirmation of a composition,
and for the hearing of such objections as may be made to its
confirmation. The court shall confirm a composition if satisfied that
(1) it is for the best interest of the creditors; (2) that the insolvent
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)
that the offer and its acceptance are in good faith, and have not
been made or procured except as herein provided, or by any
means, promises, or acts herein forbidden. Upon the confirmation
of a composition the consideration shall be distributed as the judge
shall direct, and the case dismissed, and the title to the insolvents
property shall revest in him. Whenever a composition is not
confirmed, the estate in insolvency shall be administered as herein
provided. The court may, upon application of a party in interest,
filed at any time within six months after the composition has been
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confirmed, set the same aside, and reinstate the case if it shall be
made to appear upon a trial that fraud was practiced in the
procuring of such composition, and that the knowledge thereof has
come to the petitioner since the confirmation of such composition.
Fraudulent preferences and transfers
SEC 70. If any debtor, being insolvent, or in contemplation of
insolvency, within thirty days before the filing of a petition by or
against him, with a view to giving a preference to any creditor or
person having a claim against him or who is under any liability for
him, 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, either directly or indirectly, absolutely or conditionally, to
any one, the person receiving such payment, pledge, mortgage,
assignment, transfer, sale, or conveyance, or to be benefited
thereby, or by such attachment or seizure, having reasonable
cause to believe that such debtor is insolvent, and that such
attachment, sequestration, seizure, payment, pledge, mortgage,
conveyance, transfer, sale, or assignment 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 in any way hinder, impede,
or delay the operation of or to evade any of the provisions of this
Act, such attachment, sequestration, seizure, payment, pledge,
mortgage, transfer, sale, assignment, or conveyance is void, and
the assignee, or the receiver, may recover the property, or the
value thereof, as assets of such insolvent debtor. If 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. Any payment, pledge, mortgage, conveyance,
sale, assignment, or transfer of property of whatever character
made by the insolvent within one month before the filing of a
petition in insolvency by or against him, except for a valuable
pecuniary consideration made in good faith, shall be void. All
assignments, transfers, conveyances, mortgages, or incumbrances
of real estate shall be deemed, under this SEC, to have been
made at the time the instrument conveying or affecting such realty
was filed for record in the office of the register of deeds of the
province or city where the same is situated.
Dividends in insolvency
SEC 45. Whenever any dividend has been duly declared, the
distribution of it shall not be stayed or affected by reason of debts
being subsequently proved, but any creditor proving such a debt
shall be entitled to a dividend equal to those already received by
the other creditors before any further dividend is made to the latter,
if the failure to prove such claim shall not have resulted from his
own neglect.
Articles 2236-2251 of Civil Code
Art. 2236. The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject to the
exemptions provided by law. (1911a)
Art. 2237. Insolvency shall be governed by special laws insofar as
they are not inconsistent with this Code. (n)
Art. 2238. So long as the conjugal partnership or absolute
community subsists, its property shall not be among the assets to
be taken possession of by the assignee for the payment of the
insolvent debtor's obligations, except insofar as the latter have
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redounded to the benefit of the family. If it is the husband who is
insolvent, the administration of the conjugal partnership of absolute
community may, by order of the court, be transferred to the wife or
to a third person other than the assignee. (n)
Art. 2239. If there is property, other than that mentioned in the
preceding article, owned by two or more persons, one of whom is
the insolvent debtor, his undivided share or interest therein shall be
among the assets to be taken possession of by the assignee for
the payment of the insolvent debtor's obligations. (n)
Art. 2240. Property held by the insolvent debtor as a trustee of an
express or implied trust, shall be excluded from the insolvency
proceedings. (n)
CHAPTER 2
CLASSIFICATION OF CREDITS
Art. 2241. With reference to specific movable property of the
debtor, the following claims or liens shall be preferred:
(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 movables sold, on said
movables, so 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 things pledged
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, repair, 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
contract of tenancy on shares, 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 travellers
by hotel keepers, on the movables belonging to the guest as long
as such movables are in the hotel, but not for 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 year, upon the personal property of the
lessee existing on the immovable leased and on the fruits of the
same, but not on 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 thirty days from the
unlawful seizure. (1922a)
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Art. 2242. With reference to specific immovable property and real
rights of the debtor, the following claims, mortgages and liens shall
be preferred, and shall constitute an encumbrance on the
immovable or real right:
(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, mechanics and other workmen, as
well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works, upon
said 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 or 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 years. (1923a)
Art. 2243. The claims or credits enumerated in the two preceding
articles shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No. 1, Article 2241, and
No. 1, Article 2242, shall first be satisfied. (n)
Art. 2244. With reference to other property, real and personal, of
the debtor, the following claims or credits shall be preferred in the
order named:
(1) 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;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(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 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 support of
himself or herself, and family, during the last year preceding the
insolvency;
(6) Support during the insolvency proceedings, and for three
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 indicated in Articles 2241, No. 1, and 2242, No. 1;
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(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 a final judgment, if they have 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. (1924a)
Art. 2245. Credits of any other kind or class, or by any other right
or title not comprised in the four preceding articles, shall enjoy no
preference. (1925)
CHAPTER 3
ORDER OF PREFERENCE OF CREDITS
Art. 2246. Those credits which enjoy preference with respect to
specific movables, exclude all others to the extent of the value of
the personal property to which the preference refers.
Art. 2247. If there are two or more credits with respect to the same
specific movable property, they shall be satisfied pro rata, after the
payment of duties, taxes and fees due the State or any subdivision
thereof. (1926a)
Art. 2248. Those credits which enjoy preference in relation to
specific real property or real rights, exclude all others to the extent
of the value of the immovable or real right to which the preference
refers.
Art. 2249. 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. (1927a)
Art. 2250. The excess, if any, after the payment of the credits
which enjoy preference with respect to specific property, real or
personal, shall be added to the free property which the debtor may
have, for the payment of the other credits. (1928a)
Art. 2251. Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference, as
to the amount not paid, shall be satisfied according to the following
rules:
(1) In the order established in Article 2244;
(2) Common credits referred to in Article 2245 shall be paid pro
rata regardless of dates. (1929a)
14.8 Cases
Application of Civil Code provisions on concurrence and
preference of credits
De Barreto vs. Villanueva G.R. L-14938
Facts:
Cruzado sold land (which was foreclosed by RFC but
later resold to Cruzado) to Villanueva with a stipulation that
Villanueva will continue payment to RFC (for the reselling price).
Villanueva mortgaged the land to De Barreto when it obtained a
loan from the latter. Villanueva failed to pay both Cruzado and De
Barreto. On the one hand, De Barreto sued for foreclosure and
won. On the other hand, Cruzado filed a motion in that foreclosure
proceeding for the recognition of his vendors lien.
RTC: granted Cruzados motion that his lien be satisfied
by the foreclosure proceeds.
SC: affirmed RTC. But on MFR, reversed RTC ruling.
Held:
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
The question as to whether the Civil Code and the
Insolvency Law can be harmonized is settled by Article 2243, Civil
Code. The preferences named in Articles 2241 and 2242 are to be
enforced in accordance with the Involvency Law.
Thus, it becomes evident that one preferred
creditor's third-party claim to the proceeds of a foreclosure
sale (as in the case now before us) is not the proceeding
contemplated by law for the enforcement of preferences
under Article 2242, unless the claimant were enforcing a
credit for taxes that enjoy absolute priority. If none of the
claims is for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend
corresponding to each, because the rights of the other
creditors likewise enjoying preference under Article 2242 can
not be ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from decreeing that the proceeds
of the foreclosure sale be apportioned only between appellant and
appellee, is incorrect and must be reversed.
In the absence of insolvency proceedings (or other
equivalent general liquidation of the debtor's estate), the conflict
between the parties now before us must be decided pursuant to
the well established principle concerning register lands; that a
purchaser in good faith and for value (as the appellant concededly
is) takes registered property free from liens and encumbrances
other than statutory liens and those recorded in the certificate of
title. There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not acquire the character and
rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.
No lien on specific property created by Art. 110 of the Labor Code
DBP vs. Secretary of Labor G.R. 79351
Facts:
Difontorum and other co-employees obtained a favorable
judgment against RMC for illegal dismissal, ULP, etc. A writ of
execution was not satisfied (in 1984). In 1983, DBP foreclosed
RMCs premises. Thus, Difontorum et al. filed with the Minister of
Labor and Employment a motion for delivery of properties of RMC
in possession of DBP to MOLE for proper disposition pursuant to
Art. 110 of the Labor Code which gives employees 1st preference
over properties of the employer.
Held:
SC: Difontorum et al. are fools!!! It is clear from the
wording of the law that the preferential right accorded to
employees and workers under Article 110 may be invoked
only during bankruptcy or judicial liquidation proceedings
against the employer. The law is unequivocal and admits of
no other construction.
There is no first automatic lien. What Article 110 of
the Labor Code establishes is not a lien, but a preference of
credit in favor of employees. This simply means that during
bankruptcy, insolvency or liquidation proceedings involving
the existing properties of the employer, the employees have
the advantage of having their unpaid wages satisfied ahead of
certain claims which may be proved therein.
Contractors claim not entitled to preference in the absence of
insolvency proceeding
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J.L. Bernardo Construction, et al. vs. CA G.R. 105827
Facts:
The Municipality of San Antonio failed to pay petitioners
for the latters construction of the public market of San Antonio.
Petitioners then sued the municipality for breach of contract,
specific performance, etc. with a prayer for the enforcement of
contractors lien (based on Art. 2242 of the Civil Code).
RTC granted petitioners motion and awarded
possession and use of the building to them. CA reversed RTC.
SC: affirmed CA
Held:
Article 2242 only finds application when there is a
concurrence of credits, i.e. when the same specific property
of the debtor is subjected to the claims of several creditors
and the value of such property of the debtor is insufficient to
pay in full all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to determine
which of the creditors will be paid ahead of the others.
Fundamental tenets of due process will dictate that this statutory
lien should then only be enforced in the context of some kind of a
proceeding where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency proceedings.
This is made explicit by Article 2243 which states that the
claims and liens enumerated in articles 2241 and 2242 shall be
considered as mortgages or pledges of real or personal property,
or liens within the purview of legal provisions governing insolvency.
The action filed by petitioners in the trial court does
not partake of the nature of an insolvency proceeding. It is
basically for specific performance and damages. Thus, even if
it is finally adjudicated that petitioners herein actually stand in
the position of unpaid contractors and are entitled to invoke
the contractor's lien granted under Article 2242, such lien
cannot be enforced in the present action for there is no way of
determining whether or not there exist other preferred
creditors with claims over the San Antonio Public Market. The
records do not contain any allegation that petitioners are the only
creditors with respect to such property. The fact that no third party
claims have been filed in the trial court will not bar other creditors
from subsequently bringing actions and claiming that they also
have preferred liens against the property involved.
Transfers made within a month after date of cleavage
Union Bank of the Philippines vs. Spouses Ong G.R. 152347
Facts:
BMC (a corporation 70% of which is owned by Spouses
Ong) obtained a Php 40M credit line facility from Union Bank
wherein the Ongs assumed a solidary liability undertaking. On Oct.
22, 1991, Spouses Ong sold to Lee their house and lot in
Greenhills. On Nov. 22, 1991, BMC filed a petition for rehabilitation
with the SEC.
Petitioner avers that the Ong-Lee sales contract
partakes of a fraudulent transfer and is null and void in
contemplation of the aforequoted provision, the sale having
occurred on October 22, 1991 or within thirty (30) days before
BMC filed a petition for suspension of payments on November 22,
1991.
Held:
Petitioner's reliance on the afore-quoted provision is
misplaced for the following reasons:
First, SEC 70 of the Insolvency Law specifically
makes reference to conveyance of properties made by a
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debtor or by an insolvent who filed a petition, or against The Monetary Board shall terminate the conservatorship when it is
whom a petition for insolvency has been filed. Respondent
spouses Ong have doubtlessly not filed a petition for a declaration
of their own insolvency. Neither has one been filed against them. It
was never proven that respondent spouses are likewise insolvent.
It may be that BMC had filed a petition for rehabilitation
and suspension of payments with the SEC. The nagging fact,
however is that BMC is a different juridical person from the
respondent spouses. Accordingly, the alleged insolvency of BMC
cannot, as petitioner postulates, extend to the respondent spouses
such that transaction of the latter comes within the purview of SEC
70 of the Insolvency Law.
Second, the real debtor of petitioner bank in this case is
BMC. The fact that the respondent spouses bound themselves to
answer for BMCs indebtedness under the surety agreement
referred to at the outset is not reason enough to conclude that the
spouses are themselves debtors of petitioner bank.
Third, SEC 70 of the Insolvency Law considers
transfers made within a month after the date of cleavage void,
except those made in good faith and for valuable pecuniary
consideration. The twin elements of good faith and valuable
and sufficient consideration have been duly established.
Given the validity and the basic legitimacy of the sale in
question, there is simply no occasion to apply SEC 70 of the
Insolvency Law to nullify the transaction subject of the instant
case.
Additional materials
Articles 29-33 RA 7653
SEC 29. Appointment of Conservator. Whenever, on the basis
of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a quasi-bank
is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of
depositors and creditors, the Monetary Board may appoint a
conservator with such powers as the Monetary Board shall deem
necessary to take charge of the assets, liabilities, and the
management thereof, reorganize the management, collect all
monies and debts due said institution, and exercise all powers
necessary to restore its viability. The conservator shall report and
be responsible to the Monetary Board and shall have the power to
overrule or revoke the actions of the previous management and
board of directors of the bank or quasi-bank.
The conservator should be competent and knowledgeable in bank
operations and management. The conservatorship shall not
exceed one (1) year.
The conservator shall receive remuneration to be fixed by the
Monetary Board in an amount not to exceed two-thirds (2/3) of the
salary of the president of the institution in one (1) year, payable in
twelve (12) equal monthly payments: Provided, That, if at any time
within one-year period, the conservatorship is terminated on the
ground that the institution can operate on its own, the conservator
shall receive the balance of the remuneration which he would have
received up to the end of the year; but if the conservatorship is
terminated on other grounds, the conservator shall not be entitled
to such remaining balance. The Monetary Board may appoint a
conservator connected with the Bangko Sentral, in which case he
shall not be entitled to receive any remuneration or emolument
from the Bangko Sentral during the conservatorship. The expenses
attendant to the conservatorship shall be borne by the bank or
quasi-bank concerned.
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satisfied that the institution can continue to operate on its own and
the conservatorship is no longer necessary. The conservatorship
shall likewise be terminated should the Monetary Board, on the
basis of the report of the conservator or of its own findings,
determine that the continuance in business of the institution would
involve probable loss to its depositors or creditors, in which case
the provisions of SEC 30 shall apply.
SEC 30. Proceedings in Receivership and Liquidation.
Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko
Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses
to its depositors or creditors; or
(d) has willfully violated a cease and desist order under SEC 37
that has become final, involving acts or transactions which amount
to fraud or a dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance
Corporation as receiver of the banking institution.
For a quasi-bank, any person of recognized competence in
banking or finance may be designed as receiver.
The receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the
benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the
funds of the institution in non-speculative investments. The
receiver shall determine as soon as possible, but not later than
ninety (90) days from take over, whether the institution may be
rehabilitated or otherwise placed in such a condition so that it may
be permitted to resume business with safety to its depositors and
creditors and the general public: Provided, That any determination
for the resumption of business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business in accordance with
the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver
to proceed with the liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall, upon motion by
the receiver after due notice, adjudicate disputed claims against
the institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as
may be material to implement the liquidation plan adopted. The
receiver shall pay the cost of the proceedings from the assets of
the institution.
(2) convert the assets of the institutions to money, dispose of the
same to creditors and other parties, for the purpose of paying the
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debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as
may be necessary to collect and recover accounts and assets of,
or defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
The actions of the Monetary Board taken under this SEC or under
SEC 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on petition for certiorari
on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship.
The designation of a conservator under SEC 29 of this Act or the
appointment of a receiver under this SEC shall be vested
exclusively with the Monetary Board. Furthermore, the designation
of a conservator is not a precondition to the designation of a
receiver.
SEC 31. Distribution of Assets. In case of liquidation of a bank
or quasi-bank, after payment of the cost of proceedings, including
reasonable expenses and fees of the receiver to be allowed by the
court, the receiver shall pay the debts of such institution, under
order of the court, in accordance with the rules on concurrence and
preference of credit as provided in the Civil Code.
SEC 32. Disposition of Revenues and Earnings. All revenues
and earnings realized by the receiver in winding up the affairs and
administering the assets of any bank or quasi-bank within the
purview of this Act shall be used to pay the costs, fees and
expenses mentioned in the preceding SEC, salaries of such
personnel whose employment is rendered necessary in the
discharge of the liquidation together with other additional expenses
caused thereby. The balance of revenues and earnings, after the
payment of all said expenses, shall form part of the assets
available for payment to creditors.
SEC 33. Disposition of Banking Franchise. The Bangko Sentral
may, if public interest so requires, award to an institution, upon
such terms and conditions as the Monetary Board may approve,
the banking franchise of a bank under liquidation to operate in the
area where said bank or its branches were previously operating:
Provided, That whatever proceeds may be realized from such
award shall be subject to the appropriate exclusive disposition of
the Monetary Board.
Insurance Code
Title 13
SUSPENSION OR REVOCATION OF AUTHORITY
Sec. 247. If the Commissioner is of the opinion upon examination
of other evidence that any domestic or foreign insurance company
is in an unsound condition, or that it has failed to comply with the
provisions of law or regulations obligatory upon it, or that its
condition or method of business is such as to render its
proceedings hazardous to the public or to its policyholders, or that
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its paid-up capital stock, in the case of a domestic stock company,
or its available cash assets, in the case of a domestic mutual
company, or its security deposits, in the case of a foreign
company, is impaired or deficient, or that the margin of solvency
required of such company is deficient, the Commissioner is
authorized to suspend or revoke all certificates of authority granted
to such insurance company, its officers and agents, and no new
business shall thereafter be done by such company or for such
company by its agent in the Philippines while such suspension,
revocation or disability continues or until its authority to do
business is restored by the Commissioner. Before restoring such
authority, the Commissioner shall require the company concerned
to submit to him a business plan showing the company's estimated
receipts and disbursements, as well as the basis therefor, for the
next succeeding three years. (As amended by Presidential Decree
No. 1455).
Title 14
APPOINTMENT OF CONSERVATOR
Sec. 248. If at any time before, or after, the suspension or
revocation of the certificate of authority of an insurance company
as provided in the preceding title, the Commissioner finds that
such company is in a state of continuing inability or unwillingness
to maintain a condition of solvency or liquidity deemed adequate to
protect the interest of policy holders and creditors, he may appoint
a conservator to take charge the assets, liabilities, and the
management of such company, collect all moneys and debts due
said company and exercise all powers necessary to preserve the
assets of said company, reorganize the management thereof, and
restore its viability. The said conservator shall have the power to
overrule or revoke the actions of the previous management and
board of directors of the said company, any provision of law, or of
the articles of incorporation or by-laws of the company, to the
contrary notwithstanding, and such other powers as the
Commissioner shall deem necessary.
The conservator may be another insurance company
doing business in the Philippines, by officer or officers of such
company, or any other competent and qualified person, firm or
corporation. The remuneration of the conservator and other
expenses attendant to the conservation shall be borne by the
insurance company concerned.
The conservator shall not be subject to any action, claim
or demand by, or liability to, any person in respect of anything
done or omitted to be done in good faith in the exercise, or in
connection with the exercise, of the powers conferred on the
conservator.
The conservator appointed shall report and be
responsible to the Commissioner until such time as the
Commissioner is satisfied that the insurance company can
continue to operate on its own and the conservatorship shall
likewise be terminated should be Commissioner, on the basis of
the report of the conservator or of his own findings, determine that
the continuance in business of the insurance company would be
hazardous to policy holders and creditors, in which case the
provisions of Title 15 shall apply.
Title 15
PROCEEDINGS UPON INSOLVENCY
Sec. 249. Whenever, upon examination or other evidence, it shall
be disclosed that the condition of any insurance company doing
business in the Philippines is one of insolvency, or that its
continuance in business would be hazardous to its policyholders
and creditors, the Commissioner shall forthwith order the company
to cease and desist from transacting business in the Philippines
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and shall designate a receiver to immediately take charge of its
assets and liabilities, as expeditiously as possible collect and
gather all the assets and administer the same for the benefit of its
policyholders and creditors, and exercise all the powers necessary
for these purposes including, but not limited to, bringing suits and
foreclosing mortgages in the name of the insurance company.
The Commissioner shall thereupon determine within
thirty days whether the insurance company may be reorganized or
otherwise placed in such condition so that it may be permitted to
resume business with safety to its policyholders and creditors and
shall prescribe the conditions under which such resumption of
business shall take place as well as the time for fulfillment of such
conditions. In such case, the expenses and fees in the collection
and administration of the insurance company shall be determined
by the Commissioner and shall be paid out of the assets of such
company.
If the Commissioner shall determine and confirm within
the said period that the insurance company is solvent, as defined
hereunder, or cannot resume business with safety to its
policyholders and creditors, he shall, if the public interest requires,
order its liquidation, indicate the manner of its liquidation and
approve a liquidation plan and implement it immediately. The
Commissioner shall designate a competent and qualified person
as liquidator who shall take over the functions of the receiver
previously designated and, with all convenient speed, reinsure all
its outstanding policies, convert the assets of the insurance
company to cash, or sell, assign or otherwise dispose of the same
to the policyholders, creditors and other parties for the purpose of
settling the liabilities or paying the debts of such company and he
may, in the name of the company, institute such actions as may be
necessary in the appropriate Court to collect and recover accounts
and assets of the insurance company, and to do such other acts as
may be necessary to complete the liquidation as ordered by the
Commissioner.
The provisions of any law to the contrary
notwithstanding, the actions of the Commissioner under this SEC
shall be final and executory, and can be set aside by the Court
upon petition by the company and only if there is convincing proof
that the action is plainly arbitrary and made in bad faith. The
Commissioner, through the Solicitor General, shall then file the
corresponding answer reciting the proceeding taken and praying
the assistance of the Court in the liquidation of the company. No
restraining order or injunction shall be issued by the Court
enjoining the Commissioner from implementing his actions under
this SEC, unless there is convincing proof that the action of the
Commissioner is plainly arbitrary and made in bad faith and the
petitioner or plaintiff files with the Clerk or Judge of the Court in
which the action is pending a bond executed in favor of the
Commissioner in an amount to be fixed by the Court. The
restraining order or injunction shall be refused or, if granted, shall
be dissolved upon filing by the Commissioner, if he so desires, of a
bond in an amount twice the amount of the bond of the petitioner
or plaintiff conditioned that it will pay the damages which the
petition or plaintiff may suffer by the refusal or the dissolution of the
injunction. The provisions of Rule 58 of the New Rules of Court
insofar as they are applicable shall govern the issuance and
dissolution of the restraining order or injunction contemplated in
this SEC.
All proceedings under this Title shall be given preference
in the Courts. The Commissioner shall not be required to pay any
fee to any public officer for filing, recording, or in any manner
authenticating any paper or instrument relating to the proceedings.
As used in this Title, the term "Insolvency" shall mean
the inability of an insurance company to pay its lawful obligations
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as they fall due in the usual and ordinary course of business as
may be shown by its failure to maintain the margin of solvency
required under SEC 194 of this Code. (As amended by
Presidential Decree No. 1141 and further amended by Presidential
Decree No. 1455).
Sec. 250. In case of liquidation of an insurance company, after
payment of the cost of the proceedings, including reasonable
expenses and fees incurred in the liquidation to be allowed by the
Court, the Commissioner shall pay all allowed claims against such
company, under order of the Court, in accordance with their legal
priority.
Sec. 251. The receiver or the liquidator, as the case may be,
designated under the provisions of this title shall not be subject to
any action, claim or demand by, or liability to, any person in
respect of anything done or omitted to be done in good faith in the
exercise, or in connection with the exercise, of the powers
conferred on such receiver or liquidator.
P.D. 1529
SEC 83. Notice of insolvency. Whenever proceeding in
bankruptcy or insolvency, or analogous proceedings, are instituted
against a debtor who owns registered land, it shall be the duty of
the officer serving the notice of the institution of such proceedings
on the debtor to file a copy thereof with the office of the Register of
Deeds for the province or city where the land of the debtor lies.
The assignee or trustee appointed by the court in such
proceedings shall be entitled to the entry of a new certificate of the
registered land of the debtor or bankrupt, upon presenting and
filing a certified copy of the assignment in insolvency or order or
adjudication in bankruptcy with the insolvent's or bankrupt's
duplicate certificate of title; but the new certificate shall state that it
is entered to him as assignee in insolvency or trustee in
bankruptcy or other proceedings, as the case may be.
SEC 84. Judgment or order vacating insolvency proceedings.
Whenever any of the proceedings of the character named in the
preceding SEC against a registered owner, of which notice has
been registered, is vacated by judgment, a certified copy of the
judgment or order may be registered. Where a new certificate has
been entered in the name of the assignee or trustee, such
certificate shall be surrendered for cancellation and forthwith the
debtor shall be entitled to the entry of a new certificate to him.
CORPORATE REHABILITATION
SC Rules Procedure on Corporate Rehabilitation (AM No. 00-8-10-
SC)
Coverage (Rule 1)
These Rules shall apply to petitions for rehabilitation of
corporations, partnerships and associations pursuant to
Presidential Decree No. 902-A.
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Definitions of terms and construction (Rule 2)
Administrative Expenses
(a) Reasonable and necessary expenses that are incurred in
connection with the filing of the petition;
(b) Expenses incurred in the ordinary course of business after
the issuance of the stay order
- excluding interest payable to the creditors for loans and credit
accommodations existing at the time of the issuance of the stay
order; and
(c) Other expenses that are authorized under this Rules.
"Claim"
Include all claims or demands of whatever nature or charter
against a debtor or its property, whether for money or otherwise
"Control"
Power of a parent corporation to direct or govern the financial and
operating policies of an enterprise so as to obtain benefits from its
activities.
Control is presumed to exit when:
a. parent owns, directly or indirectly though subsidiaries, more
than one - half () of the voting power of the voting power of an
enterprise unless, such ownership does not constitute control.
b. parents owns one-half (1/2) or less of the voting power of an
enterprise when there is power.
a. Over more than one-half () of agreement with investors;
b. To direct or govern the financial and operating policies of the
enterprise under a statute or agreement;
c. To appoint or remove the majority of the member of the board of
directors or equivalent governing body; or
d. To cast the majority votes at meeting of the board of directors or
equivalent governing body.
"Foreign proceeding"
Collective judicial or administrative proceeding in a foreign
State, pursuant to a law regarding solvency where the assets and
affairs of the debtor are subject to control or supervision by a
foreign court, for the purpose of rehabilitation or re-organization.
"Group of companies"
Can cover only, corporations that are financially related to one
another as parent corporation, subsidiaries and affiliates.
"Parent"
A corporation directly or indirectly in control over another company.
(authors own meeting)
"Rehabilitation"
Restoration of the debtor to a position of successful operation and
solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover more if the
corporation continues operation.
"Secured claim"
Any clan whose payment or fulfillment is secured by contract or by
law, including any clam or credit enumerated under Articles 2241
and 2242 of the civil Code and Article 110, as amended, of the
Labor code of the Philippines.
"Subsidiary"
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A corporation where more than fifty percent (50%) of its voting
stock is owned or controlled directly or indirectly by another
corporation.
General Provision (Rule 3)
Nature of Proceeding (Sec 1)
- In Rem.
- Jurisdiction over all persons considered as acquired upon
publication of the notice of the commencement of the proceedings
in any newspaper or general circulation.
-The proceedings shall also be summary and non-adversarial in
nature.
- The following pleading are prohibited:
(a) Motion to dismiss;
(b) Motion for a bill of particulars:
(c) Petition for relief;
(d) Motion for extension;
(e) Motion for postponement
(f) Third-party complaint;
(g) Intervention;
(h) Motion to hear affirmative defenses; and
(I) Any pleading or motion which is similar to or of like effect as any
of the foregoing.
Service of pleadings and documents (Sec 3)
-Any pleading and/or document required by these Rules may be
filed with the court and/or served upon the other parties by fax or
e-mail.
-Date of transmission shall be deemed to be the date of
service.
-Where the pleading or document is voluminous, the court may,
upon motion, waive the requirement of service; provided that a
copy thereof together with all its attachments is duly filed with the
court and is 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.
Executory nature of orders (Sec 5)
-Any order issued by the court under these Rules is immediately
executory.
-A petition to review the order shall not stay the execution of
the order unless restrained or enjoined by the appellate court.
Nullification of Illegal Transfers and Preferences (Sec 6)
Upon motion the court may nullify any transfer of property or
any other conveyance, sale, payment or agreement made in
violation of its stay order or in violation of these Rules.
Stay Order (Sec 7)
If the court finds the petition to be sufficient in form and substance,
it shall; not later than five (5) working days from the filing of the
petition, issue an order:
Stay of enforcement of claims (Sec 7.b)
-staying 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 persons not
solidarily liable with the debtor;
-stay order shall not cover claims against letters of credit and
similar security arrangements issued by a third party to secure the
payment of the debtor's obligations;
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
-stay order shall not cover foreclosure by a creditor of property not
belonging to a debtor under corporate rehabilitation;
-where the owner of such property sought to be foreclosed is also
a guarantor or one who is not solidarily liable, said owner shall be
entitled to the benefit of excussion as such guarantor;
Prohibition against disposition and encumbrances of property
(Sec 7.c)
-the debtor cannot sell, encumber, transfer, or dispose in any
manner any of its properties except in the ordinary course of
business;
Prohibition against payment of pre-petition liabilities (Sec 7.d)
-the debtor cannot make any payment on its liabilities except as
provided in items (e), (f) and (g) of this SEC or when ordered by
the court pursuant to SEC 10 of Rule 3;
Prohibition against withholding of goods and services (Sec
7.e)
-the debtor's suppliers of goods or services cannot withhold supply
of goods and services in the ordinary course of business for as
long as the debtor makes payments for the services and goods
supplied after the issuance of the stay order;
Payment of post-petition administrative expenses (Sec 7.f)
-payment in full of all administrative expenses incurred after the
issuance of the stay order;
Payment of post-petition credits (Sec 7.g)
direct the payment of new loans or other forms of credit
accommodations obtained for the rehabilitation of the debtor with
prior court approval;
Preservation of claims against debtor (Sec 7 last par)
The issuance of a stay order does not affect the right to commence
actions or proceedings insofar as it is necessary to preserve a
claim against the debtor.
Concept of Adequate Protection of Property (Sec 10)
the creditor lacks adequate protection if it can be shown that:
(1) The debtor fails or refuses to honor a pre-existing agreement
with the to keep the property insured;
(2) The debtor fails or refuses to take commercially reasonable
steps to maintain the property; or
(3) The property has depreciated to an extent that the creditor is
undersecured
Qualifications and Disqualification of Rehabilitation Receiver
(Sec 11)
Qualifications:
(1) Expertise and acumen to manage and operate a business
similar in size and complexity to that of the debtor;
(2) Knowledge in management, finance and rehabilitation of
distressed companies;
(3) General familiarity with the rights of creditors in suspension of
payments or rehabilitation and general understanding of the duties
and obligations of a rehabilitation receiver;
(4) Good moral character, independence and integrity;
(5) Lack of conflict of interest as defined in this SEC; and
(6) Willingness and ability to file a bond in such amount as may be
determined by the court.
Disqualifications:
(1) He is creditor or stockholder of the debtor;
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(2) He is engaged in a line of business which competes with the
debtor;
(3) He is, or was within two (2) years from the filing of the petition,
a director, officer, or employee or the auditor or accountant of the
debtor;
(4) He is or was within two (2) years from the filing of the petition,
an underwriter of the outstanding securities of the debtor;
(5) He is related by consanguinity or affinity within the fourth civil
degree to any creditor, stockholder, director, officer, employee, or
underwriter of the debtor; or
(6) He has any other direct or indirect material interest in the
debtor or any creditor.
Powers and Functions of Rehabilitation Receiver (Sec 12)
- Not take over the management and control of the debtor
but shall closely oversee and monitor the operations of the debtor
during the pendency of the proceedings.
For this purpose, the rehabilitation receiver shall have the powers,
duties and functions of a receiver under Presidential Decree No.
902-A
1. considered as an officer of the court.
2. He shall be primarily tasked 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, as well as
3.implement the rehabilitation plan after its approval.
Accordingly, he shall have the following powers and functions:
(a) To verify the accuracy of the petition, including its annexes
such as the Schedule of Debts and Liabilities and the Inventory of
Assets submitted in support to the petition;
(b) To accept and incorporate, when justified, amendments to the
Schedule of Debts and Liabilities;
(c) To recommend to the court the disallowance of claims and
rejection of amendments t the Schedule of Debts and Liabilities
that lack sufficient proof and justification;
(d) To submit to the court and make available for review by the
creditors, a revised Schedule of Debts and Liabilities;
(e) To investigate the acts, conduct, properties, liabilities and
financial condition of the debtor, the operation of its business and
the desirability of the continuance thereof; and, any other matter
relevant to the proceeding or to the formulation of a rehabilitation
plan;
(f) To examine under oath the directors and officers of the debtor
and any other witnesses that he may deem appropriate;
(g) To make available to the creditors documents and notices
necessary for them to follow and participate in the proceedings;
(h) To report to the court any fact ascertained by him pertaining to
the causes of the debtor's problems, fraud, preferences,
dispositions, encumbrances, misconduct, mismanagement and
irregularities committed by the stockholders, directors,
management,, or any other person against the debtor;
(i) To employ such person or persons such as lawyers,
accountants, appraisers and staff are necessary in performing his
functions and duties as rehabilitation receiver;
(j) To monitor the operations of the debtor and to immediately
report to the court any material adverse change in the debtor's
business;
(k) To evaluate the existing assets and liabilities, earnings and
operations of the debtor;
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(l) To determine and recommend to the court the best way to
salvage and protect the interests of the creditors, stockholders and
the general public;
(m) To study the rehabilitation plan proposed by the debtor or any
rehabilitation plan submitted during the proceedings, together with
any comments made thereon;
(n) To prohibit and report to the court any encumbrance, transfer or
disposition of the debtor's property outside of the ordinary course
of business or what is allowed by the court;
(o) To prohibit and report to the court any payments outside of the
ordinary course of business;
(p) To have unlimited access to the debtor's employees, premises,
books, records and financial documents during business hours;
(q) To inspect, copy, photocopy or photograph any document,
paper, book, account or letter, whether in the possession of the
debtor or other persons;
(r) To gain entry into any property for the purpose of inspecting,
measuring, surveying or photographing it or any designated
relevant object or operation thereon;
(s) To take possession, control and custody of the debtor's assets;
(t) To notify counterparties and the court as to contracts that the
debtor has decided to continue to perform the breach;
(u) To be notified of and to attend all meetings of the board of
directors and stockholder of the debtor;
(v) To recommend any modification of an approved rehabilitation
plan as he may deem appropriate;
(w) To bring to the attention of the court any material change
affecting the debtor's ability to meet the obligations under the
rehabilitation plan;
(x) To recommend the appointment of a management committee in
the cases provided for under Presidential Decree No. 902-A, as
amended;
(y) To recommend the termination of the proceedings and the
dissolution of the debtor if he determines that the continuance in
business of such entity is no longer feasible or profitable or no
longer works to the best interest of the stockholders, parties-
litigants, creditors or the general public;
(z) To apply to the court for any order or directive that he may
deem necessary or desirable to aid him in the exercise of his
powers and performance of his duties and functions; and
(aa) To exercise such other powers as may from time to time be
conferred upon him by the court.
Contents of Rehabilitation Plan (Sec 18)
(a) desired business targets or goals and the duration and
coverage of the rehabilitation;
(b) terms and conditions of such rehabilitation which shall include
the manner of its implementation, giving due regard to the
interests of secured creditors such as, but not limited, to the non-
impairment of their security liens or interests;
(c) material financial commitments to support the rehabilitation
plan;
(d) means for the execution of the rehabilitation plan;
(e) a liquidation analysis; and
(f) such other relevant information to enable a reasonable
investor to make an informed decision on the feasibility of the
rehabilitation plan.
Effects of Rehabilitation (Sec 20)
(a) The plan and its provisions shall be binding upon the debtor
and all persons who may be affected thereby, 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;
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(b) The debtor shall comply with the provisions of the plan and
shall take all actions necessary to carry out the plan;
(c) Payments shall be made to the creditors in accordance with
the provisions of the plan;
(d) Contracts and other arrangements between the debtor and
its creditors shall be interpreted as continuing to apply to the extent
that they do not conflict with the provisions of the plan; and
(e) Any compromises on amounts or rescheduling of timing of
payments by the debtor shall be binding on creditors regardless
of whether or not the plan is successfully implemented.
Termination of Rehabilitation Proceeding (Sec 21)
-Upon motion, within ninety (90) days from the approval of the
rehabilitation plan, and after notice and hearing, the court may
revoke the approval thereof on the ground that the same was
secured through fraud.
Sec 23 (not in outline)
(a) Dismissal of the petition;
(b) Failure of the debtor to submit the rehabilitation plan;
(c) Disapproval of the rehabilitation plan by the court;
(d) Failure to achieve the desired targets or goals as set forth in
the rehabilitation plan;
(e) Failure of the debtor to perform its obligations under the plan;
(f) Determination that the rehabilitation plan may no longer be
implemented in accordance with its terms, conditions, restrictions
or assumptions; or
(g) Successful implementation of the rehabilitation plan.
Debtor-Initiated Rehabilitation (Rule 4)
Who may petition (Sec 1)
-Any debtor who foresees the impossibility of meeting its debts
when they respectively fall due, may petition the proper regional
trial court for rehabilitation.
- A group of companies may jointly file a petition for rehabilitation
when one or more of its constituent corporations foresee the
impossibility of meeting debts when they respectively fall due, and
the financial distress would likely adversely affect the financial
condition and/or operations of the other member companies of the
group is essential under the terms and conditions of the proposed
rehabilitation plan.
Opposition to or Comment on the Petition (Sec 4)
-Every creditor of the debtor or any interested party shall file his
verified opposition to or comment on the petition not later than
fifteen (15) days before the date of the initial hearing fixed in
the stay order. -After such time, no creditor or interested party
shall be allowed to file any comment thereon or opposition
thereto without leave of court.
-If the Schedule of Debts and Liabilities omits a claim or liability,
the creditor concerned shall attach to its comment or opposition a
verified statement of the obligations allegedly due it.
Approval of Rehabilitation Plan
By Court (Sec 7.b)
The court shall approve the new rehabilitation plan not later than
ninety (90) days from the date of the last initial hearing.
By Creditors (Sec 7.b.1)
Approval or endorsement of creditors holding at least two-
thirds (2/3) of the total liabilities of the debtor including secured
creditors holding more than fifty percent (50%) of the total
secured claims of the debtor and unsecured creditors holding
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
more than fifty percent (50%) of the total unsecured claims of the
debtor;
Cram Down (Sec 11)
The court may approve a rehabilitation plan even over the
opposition of creditors of the debtor, if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of
the creditors is manifestly unreasonable if the following are
present:
(a) The rehabilitation plan complies with the requirements
specified in SEC 18 of Rule 3;
(b) The rehabilitation plan would provide the objecting class
of creditors with payments whose present value projected in
the plan would be greater than that which they would have
received if the assets of the debtor were sold by a liquidator within
a six (6)-month period from the date of filing of the petition; and
(c) The rehabilitation receiver has recommended approval of
the plan.
In approving the rehabilitation plan, the court shall ensure that
the rights of the secured creditors are not impaired.
Creditor-initiated rehabilitation (Rule 5)
Who May Petition (Sec 1)
Any creditor or creditors holding at least twenty percent (20%)
of the debtor's total liabilities may file a petition with the proper
regional trial court for rehabilitation of a debtor that cannot meet its
debts as they respectively fall due.
Requirements (Sec 2)
The petition is accompanied by:
1. rehabilitation plan
2. list of at least three (3) nominees to the position of rehabilitation
receiver and
3. verified by a sworn statement that the affiant has read the
petition and that its contents are true and correct of his personal
knowledge or based on authentic records and that the petition is
being filed to protect the interests of the debtor, the stockholders,
the investors and the creditors of the debtor.
Pre-negotiated rehabilitation (Rule 6)
Requirements (Sec 1)
1. A debtor that foresees the impossibility of meeting its debts
as they fall due may, by itself or jointly with any of its creditors,
2. file a verified petition for the approval of a pre-negotiated
rehabilitation plan.
3. The petition shall comply with SEC 2 of Rule 4 and be
supported by an affidavit showing the written approval or
endorsement of creditors holding at least two-thirds (2/3) of the
total liabilities of the debtor, including secured creditors holding
more than fifty percent (50%) of the total secured claims of the
debtor and unsecured creditors holding more than fifty percent
(50%) of the total unsecured claims of the debtor.
Recognition of Foreign Proceedings (Rule 7)
Scope (Sec 1)
This Rule applies where:
(a) assistance is sought in a Philippine court by a foreign
court or a foreign representative in connection with a foreign
proceeding;
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(b) assistance is sought in a foreign State in connection with a
domestic proceeding governed by these Rules; or
(c) a foreign proceeding and a domestic proceeding are
concurrently taking place.
The sole fact that a petition is filed pursuant to this Rule does
not subject the foreign representative or the foreign assets
and affairs of the debtor to the jurisdiction of the local courts for
any purpose other than the petition.
Period for Recognition (Sec 5)
-Petition for recognition of a foreign proceeding shall be decided
within thirty (30) days from the filing thereof.
Effect of recognition of foreign procedure (Sec 8)
Upon recognition of a foreign proceeding:
(a) Commencement or continuation of individual actions or
individual proceedings concerning the debtor's assets, rights,
obligations or liabilities is stayed; provided, that such stay does
not affect the right to commence individual actions or
proceedings to the extent necessary to preserve a claim
against the debtor.
(b) Execution against the debtor's assets is stayed; and
(c) The right to transfer, encumber or otherwise dispose of any
assets of the debtor is suspended.
Procedural remedies (Rule 8)
Motion for recognition (Sec 1)
a. Prior to the approval of the rehabilitation plan.
-No relief can be extended to the party aggrieved by the court's
order on the motion through a special civil action for certiorari
under Rule 65 of the rules of Court. Such order can only be
elevated to the Court of Appeals as an assigned error in the
petition for review of the decision or order approving or
disapproving the rehabilitation plan.
b. After the approval of rehabilitation plan.
-An order issued after the approval of the rehabilitation plan
can be reviewed only through a special civil action for
certiorari under Rule 65 of the Rules of Court.
Review of decision or order on rehabilitation plan (Sec 2)
-an order approving or disapproving a rehabilitation plan can
only be reviewed through a petition for review to the Court of
Appeals under Rule 43 of the Rules of Court within fifteen (15)
days from notice of the decision or order.
Concept of debtor-in-place
-The rehabilitation receiver does not take over the management
and control of the debtor but simply oversees and monitors closely
the operations of the debtor during the pendency of the
proceedings
Appointment of management committee (Rule 9, Sec 1, SC
Interim Rules of Procedure for Intra-corporate Controversies)
The appointment of a management committee for a corporation,
partnership or association may be applied for as incident to any of
the cases that may be filed under the Rules or the Interim Rules on
Corporate Rehabilitation when there is imminent danger of:
a. dissipation, loss, wastage or destruction of assets or other
properties; and
b. paralyzation of its business operations which may be prejudicial
to the interest of the minority stockholders, parties-litigants or the
general public.
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committee or rehabilitation receiver to make the business viable

Cases: again, without having to divert attention and resources to litigations
in various fora. The suspension would enable the management
Equality is Equity committee or rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extra-judicial interference that
Alemars Sibal & Sons, Inc. vs. Elbinias, et.al., might unduly hinder or prevent the rescue of the debtor company.

During rehabilitation, assets are held in trust for the equal benefit
of all creditors. As between creditors, equality is equity. All Serious Situation Test
creditors should stand on equal footing.
Pryce Corporation vs. CA.
Suspension of money claim
Receivers will be appointed whenever:
PAL vs. Spouses Kurangkang, et.al., 1. necessary in order to preserve the rights of the litigants; and/or
2. necessary in order to protect the interest of the public
The stay order is effective from the date of its issuance until - clear and imminent danger of losing corporation assets if a
the dismissal of the petition or the termination of the receiver is not appointed.
rehabilitation proceedings. The interim rules must likewise be
read and applied along with SEC 6(c) of P.D. 902-A, as so
amended, directing that upon the appointment of a XV. SEC REORGANIZATION DECREE
management committee, rehabilitation receiver, board or body
pursuant to the decree, all actions for claims against the PD 902-A AS AMENDED
distressed corporation pending before any court, tribunal,
board or body shall be suspended accordingly. A claim is Organization
said to be a right to payment, whether or not It is reduced to
judgment, liquidated or unliquidated, fixed or contingent, matured Sec 4, RA 8799
or unmatured, disputed or undisputed, legal or equitable, and Administrative Agency.
secured or unsecured. In Finasia Investments and Finance 4.1.
Corporation this Court has defined the word claim, contemplated - This Code is administered by SEC as collegial body composed of
in SEC 6(c) of P.D. 902-A, as referring to debts or demands of a Chairperson and 4 Commissioners
pecuniary nature and the assertion of a right to have money paid - appointed by Pres for term of 7y ea
as well. Verily, the claim of private respondents against - who serve as such until successor is appointed & qualified
petitioner PAL is a money claim for the missing luggages, a - Commissioner appointed to fill vacancy prior to expiration of term
financial demand, that the law requires to be suspended for w/c his / her predecessor was appointed, serves only for
pending the rehabilitation proceedings. unexpired portion of term.
- Unless context indicates otherwise, Commissioner incl
Non-suspension of claims against guarantors and sureties Chairperson.
solidarily liable with debtor 4.2.
- Commissioners must be
- natural-born citizens
MWSS vs. Hon. Daway - at least 40y for Chairperson and at least 35y for Commissioners
- of good moral character
Except when a letter of credit specifically stipulates otherwise, the - of unquestionable integrity
obligation of the banks issuing letters of credit are solidary with that - of known probity & patriotism
of the person or entity requesting for its issuance, the same being - w/ recognized competence in social & economic disciplines
a direct, primary, absolute and definite undertaking to pay the - Majority of Commissioners, incl Chairperson, shall be members
beneficiary upon the presentation of the set of documents required of Phil Bar.
therein. Being a solidary obligation, the letter of credit here is 4.3.
excluded from the jurisdiction of the rehabilitation court. - Chairperson is CEO of the Commission.
- Chairperson shall
- execute & administer policies, decisions, orders, resolutions
approved by Commission AND
- have gen executive direction & supervision of work & operation of
Commission and its members, bodies, boards, offices, personnel,
Purpose of Suspension of actions for claims against the and all admin biz
corporation 4.4.
- Salary of Chairperson & Commissioners shall be
Sobrejuanite, et.al., vs. ASB Development Corp - fixed by Pres
- based on objective classification system
The purpose for the suspension of the proceedings is to prevent a - at a sum comparable to members of Monetary Board and
creditor from obtaining an advantage or preference over another commensurate to importance attached to position
and to protect and preserve the rights of party litigants as well as 4.5.
the interest of the investing public or creditors. Such suspension is
intended to give enough breathing space for the management
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- Commission holds mtgs at least once a wk OR as often as - comparable w/ prevailing plan in Bangko Sentral and other govt
necessary upon call of Chairperson or upon request of 3 financial institutions AND
Commissioners. - subject to periodic rvw by Commission no more than once every
- Notice of mtg is given to all Commissioners and presence of 3 2y w/o prejudice to yearly merit rvws / increases based on
Commissioners constitutes quorum. In absence of Chairperson, productivity & efficiency.
the most senior Commissioner acts as presiding officer. - Commission shall be exempt fr laws, rules, regulations on
4.6. compensation, position classification, qualification standards.
- Commission may delegate any of its fcns to any dept / ofc of the - Commission shall endeavor to make its system conform as
Commission, an individual Commissioner or staff member of closely as possible w/ Compensation & Position Classification Act
Commission except its of 1989.
- rvw / appellate authority AND
- power to adopt, alter, supplement any rule Sec 76, RA 8799
- Commission may rvw upon own initiative or upon petition of party Repealing Clause.
any action of dept / ofc, individual Commissioner, or staff member - Revised Securities Act (BP 178) in its entirety AND Sec 2, 4, 8 of
of Commission. PD 902A as amended, are repealed.
- All other laws, orders, rules, regulations, or parts thereof,
Sec 6, RA 8799 inconsistent w/ this Code are repealed or modified.
Indemnification and Responsibilities of Commissioners.
6.1. Powers and Functions
- Commission shall indemnify ea Commissioner and officials of
Commission, incl personnel performing supervision & exam fcns Sec 3.
for all costs & expenses reasonably incurred in connection w/ any - Commission has absolute jurisdiction, supervision, control over
civil / criminal actions, suits, proceedings to w/c they may be or all corps, partnerships, assns, who are grantees of primary
made party by reason of their fcns / duties, unless theyre finally franchise and / or license or permit issued by govt to operate in
adjudged to be liable for gross negligence / misconduct. Phils
- In settlement / compromise, indemnification is provided only in - It has power to enlist aid of any and all enforcement agencies of
connection w/ such matters covered by settlement as to w/c govt, civil or military.
Commission is advised by external counsel that persons to be
indemnified didnt commit any gross negligence / misconduct. Sec 6.
- Costs & expenses in defending action, suit, proceeding may be - Commission has ff powers:
pd by Commission in advance of final disposition upon receipt of a. issue prelim / permanent injunctions, prohibitory / mandatory,
undertaking by or on behalf of Commissioner, officer, employee to where it has jurisdiction (RoC shall apply)
repay amt advanced shld it be determined by Commission that he / b. punish for contempt of Commission, direct & indirect, in
she isnt entitled. accordance w/ RoC
6.2. c. compel officers of corp / assn registered by it to call mtgs of
- Commissioners, officers, employees of Commission who willfully stockholders / members under its supervision
violate this Code OR are guilty of negligence, abuse, malfeasance d. pass upon validity of issuance & use of proxies & voting trust
or fail to exercise extraordinary diligence in performance of duties agreements for absent stockholders / members
shall be held liable. e. issue subpoena duces tecum and summon witnesses to appear
- Similar responsibility applies to Commissioners, officers, in proceedings of Commission; in appropriate cases order search
employees of Commission for & seizure or cause search & seizure of docs, papers, files, records,
1. disclosure of info, discussion, resolution of Commission of books of accts of entity under investigation
confidential nature OR abt confidential operations of Commission, f. impose fines and / or penalties for violation of this Decree, laws
unless disclosure is implemented by Commission, rules, etc
- in connection w/ official fcns w/ Commission OR g. authorize establishment of stock exchanges, commodity
- w/ prior authorization of Commissioners exchanges, other similar orgs AND supervise & regulate the same;
2. use of such info for personal gain or to detriment of govt, the incl authority to determine their number, size, location
Commission, 3rd parties h. pass upon, refuse, deny, after consultation w/ BoI, Dept of
- Data / info required to be submitted to Pres and / or Congress or Industry, NEDA or other govt agency, the application for
its committee OR to be published shall not be confidential. registration of corp, partnership, assn, org w/in its jurisdiction, if not
consistent w/ natl economic policies
Sec 7, RA 8799 i. suspend, revoke, after notice & hearing, the franchise / cert of
Reorganization. registration of corp, partnership, assn, upon any of grounds
7.1. provided by law, incl:
- Commission is authorized to provide for its reorganization, to 1. fraud in procuring cert of registration
streamline structure & operations, upgrade HR component and 2. serious misrepresentation as to what corp can do or is doing
enable it to more efficiently & effectively perform fcns & exercise 3. refusal to comply / defiance of lawful order of Commission
powers. restraining commission of acts w/c would amt to grave violation of
7.2. franchise
- All positions of Commission are governed by compensation & 4. continuous inoperation for at least 5y
position classification systems & qualification standards approved 5. failure to file by-laws w/in required period
by Commission based on comprehensive job analysis & audit of 6. failure to file reports in forms determined by Commission w/in
actual duties & responsibilities. period
- Compensation plan shall be
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
j. exercise other powers as implied, necessary, incidental to
express powers
- Hearings are conducted by Commission OR by Commissioner
OR other bodies, boards, committees and / or officer created /
designated by Commission for the purpose. Decision, ruling, order
may be appealed to Commission en banc w/in 30d after receipt by
appellant of notice of decision, ruling, order.
- Commission shall promulgate rules of procedures to govern
proceedings, hearings, appeals.
- Aggrieved party may appeal order, decision, ruling of
Commission en banc to SC by petition for rvw.
Sec 5, RA 8799
Powers and Functions of the Commission.
5.1.
- Commission shall act w/ transparency and have powers & fcns
provided by this Code, PD 902A, Corp Code, Investment Houses
Law, Financing Company Act, other laws.
- Commission, powers & fcns:
a. have jurisdiction & supervision over corp, partnership, assn who
are grantees of primary franchises and / or license / permit issued
by govt
b. formulate policies & recommendations on issues re securities
market, advise Congress & govt agencies on securities market,
propose legislation and amendments
c. approve, reject, suspend, revoke, require amendments to
registration statements, registration & licensing applications
d. regulate, investigate, supervise activities of persons to ensure
compliance
e. supervise, monitor, suspend, take over activities of exchanges,
clearing agencies, other SROs
f. impose sanctions
g. prepare, approve, amend, repeal rules, regulations, orders;
issue opinions, provide guidance on and supervise compliance w/
such rules
h. enlist aid of and / or deputize enforcement agencies of govt,
civil or military as well as pvt institution, corp, firm, assn or person
in implementation
i. issue cease & desist orders
j. punish for contempt of Commission, direct & indirect, in
accordance w/ RoC
k. compel officers of corp or assn to call mtgs of stockholders /
members under its supervision
l. issue subpoena duces tecum, summon witnesses to appear in
proceedings of Commission, order exam, search, seizure of docs,
papers, files, records, tax returns, books of accts of entity under
investigation
m. suspend, revoke, after notice & hearing the franchise / cert of
registration of corp, partnership, assn, upon grounds provided by
law
n. exercise other powers provided by law as well as those implied
fr, or w/c are necessary / incidental to express powers
XXX
Jurisdiction
Sec 5, RA 8799
Powers and Functions of the Commission.
XXX
5.2.
- Commissions jurisdiction over cases under Sec 5 PD 902A is
transferred to Courts of gen jurisdiction OR RTC.
100 of 143
- SC may designate RTC branches that exercise jurisdiction over
these cases.
Cases
Prof Catindig:
Read Espino and Easycall cases together. Read Cualoping and
Provident cases together. Compare and contrast.
REMOVAL FROM EMPLOYMENT OF CORPORATE OFFICERS
NOT WITHIN JURISDICTION OF NLRC
Espino v. NLRC
- A corporate officer's dismissal is always corporate act and / or
intra-corporate controversy. That nature isnt altered by reason /
wisdom w/c Board may have in taking such action.
- That Espino sought payment of backwages, other benefits, moral
& exemplary damages, atty's fees in complaint for illegal dismissal
will not prevent SEC fr exercising jurisdiction under PD 902A.
NLRC HAS JURISDICTION OVER CASE INVOLVING
OFFICER WHOSE POSITION IS NOT PROVIDED FOR IN THE
BY-LAWS AND WHO WAS NOT ELECTED BY THE BOARD OF
DIRECTORS
Easycall Communications Phils Inc v. King
- It had to be first established that the person removed / dismissed
was a corporate officer before removal / dismissal could properly
fall w/in jurisdiction of SEC and not NLRC.
- Corporate officers in context of PD 902A are those officers of
corp who are given that character either by Corp Code or by by-
laws. Under Sec 25 of Corp Code, the corporate officers are the
pres, sec, treas and such other officers as provided for in by-laws.
- An office is created by charter of the corp; the officer is elected
by directors / stockholders. On the other hand, an employee
occupies no ofc and generally is employed not by action of
directors / stockholders but by managing officer who also
determines compensation to be pd.
REGULATORY AND ADJUDICATORY FUNCTIONS OF SEC
DISTINGUISHED
SEC v. CA, Cualoping Securities and Fidelity Transfers
- SEC has both regulatory AND adjudicative functions.
- Under its regulatory responsibilities, SEC may
- pass upon applications for, suspend, revoke (after notice &
hearing), certificates of registration of corps, partnerships, assn
(excl cooperatives, homeowners' assn, labor unions)
- compel legal & regulatory compliances
- conduct inspections
- impose fines / penalties for violations of Revised Securities Act,
implementing rules & directives of SEC
- Justiciable controversy such as can occasion exercise of SEC's
exclusive jurisdiction would require assertion of right by proper
party against another who, in turn, contests it. It is one instituted
by & against parties having interest in subject matter appropriate
for judicial determination predicated on given state of facts. That
controversy must be raised by party entitled to maintain action.
Hes the person to whom right to seek judicial redress / relief
belongs w/c can be enforced against party charged w/ having been
responsible for, or to have given rise to, the cause of action. A
person / entity tasked w/ power to adjudicate stands neutral &
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
impartial and acts on basis of admissible representations of
parties.
- In this case, the proper parties that can bring the controversy &
can cause exercise by SEC of its orig & exclusive jurisdiction
would be all or any of those who are adversely affected by transfer
of pilfered certificates of stock. Any peremptory judgment by SEC,
w/o such proceedings having first been initiated, would be
precipitate.
DETERMINATION OF WHICH OF TWO STOCK AND
TRANSFER BOOKS IS VALID NOT AN INTRA-CORPORATE
DISPUTE
Provident International Resources Corp v. Joaquin T. Venus
- SECs regulatory authority over pvt corps encompasses a wide
margin of areas, touching nearly all of corps concerns.
- Under its regulatory responsibilities, SEC may
- pass upon applications for, suspend, revoke (after notice &
hearing), certificates of registration of corps, partnerships, assn
(excl cooperatives, homeowners' assn, labor unions)
- compel legal & regulatory compliances
- conduct inspections
- impose fines / penalties for violations of Revised Securities Act,
implementing rules & directives of SEC
- Considering that the SEC, after notice & hearing, has regulatory
power to revoke corporate franchise fr w/c a corp owes its legal
existence, SEC must likewise have lesser power of merely
recalling and canceling STB that was erroneously registered.
- As regulatory body, it is SECs duty to ensure that theres only
one set of STB for ea corp.
NLRC HAS NO JURISDICTION OVER CASE INVOLVING NON-
REELECTION OF DIRECTOR ETC.
Pearson and George (SE Asia) Inc v. NLRC
- Any question relating or incident to election of new Board of
Directors, non-reelection of Llorente as Director, his loss of
position of Managing Director, or abolition of said ofc are intra-
corporate matters. Disputes arising therefrom are intra-corporate
disputes w/c, if unresolved w/in corporate structure, may be
resolved in appropriate action only by SEC pursuant to its authority
under Sec 5 of PD 902A.
- This isnt a case of dismissal. The matter of whom to elect is a
prerogative that belongs to Board, and involves exercise of
deliberate choice and faculty of discriminative selection.
Generally, the relationship of person to a corp, whether as officer
or as agent or employee, isnt determined by nature of the svcs
performed, but by incidents of relationship as they actually exist.
INTRA-CORPORATE CONTROVERSIES (AM NO. 01-2-04-SC)
Cases Covered (Rule 1)
Sec 1.
a. Cases covered.
- These Rules govern in civil cases involving:
101 of 143
1. devices / schemes employed by OR act of board of directors,
biz associates, officers, partners, amounting to fraud /
misrepresentation w/c may be detrimental to public and / or
stockholders, partners, members of corp, partnership, assn
2. controversies
- out of intra-corporate, partnership, assn relations
- between & among stockholders, members, associates
- between any or all of them and the corp, partnership, assn of w/c
theyre stockholders, members, associates
3. controversies in election / appointment of directors, trustees,
officers, managers of corp, partnership, assn
4. derivative suits
5. inspection of corp books
b. Prohibition against nuisance and harassment suits.
- Nuisance & harassment suits are prohibited. In determining
whether suit is nuisance / harassment suit, court considers:
1. extent of shareholding / interest of initiating stockholder /
member
2. subject matter of suit
3. legal & factual basis
4. availability of appraisal rights
5. prejudice to corp, partnership, assn in relation to relief sought
- In case of nuisance / harassment suits, court may, motu proprio
or upon motion, dismiss the case.
Distinguish from SC Interim Rules of Procedure on Corporate
Rehabilitation
Modes of Discovery (Rule 3)
Sec 1. In general.
- A party can only avail of any of modes of discovery not later than
15d fr joinder of issues.
Sec 2. Objections.
- Any mode of discovery may be objected to
- w/in 10d fr receipt of discovery device AND
- only on ground that the matter requested is patently incompetent,
immaterial, irrelevant, privileged
- Court shall rule on objections not later than 15d fr filing.
Sec 3. Compliance.
- Compliance w/ mode of discovery shall be made w/in 10d fr
receipt of discovery device OR if there are objections, fr receipt of
ruling of court.
Sec 4. Sanctions.
- Sanctions in RoC for failure to avail of, or refusal to comply w/
modes of discovery apply.
- In addition, court may upon motion, declare party non-suited or
as in default, as case may be, if refusal to comply w/ mode of
discovery is patently unjustified.
Pre-trial (Rule 4)
Sec 1. Pre-trial conference; mandatory nature.
- W/in 5d after period for availment of, and compliance w/ modes of
discovery, whichever comes later, court issues & serves order
- setting the case for pre-trial conference AND
- directing parties to submit pre-trial briefs
- Parties shall file w/ court and furnish ea other copies of pre-trial
brief to ensure receipt by court & other party at least 5d before
date set for pre-trial.
- Parties set forth in pre-trial briefs ff:
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
1. brief statement of nature of case; summarize theory of party in
clear & concise language
2. allegations expressly admitted by either / both parties
3. allegations deemed admitted by either / both parties
4. docs not specifically denied under oath by either / both parties
5. amendments to pleadings
6. statement of issues, w/c separately summarizes factual & legal
issues
7. names of witnesses to be presented; summary of their
testimony as contained in affidavits
8. other pcs of evidence
9. specific proposals for amicable settlement
10. possibility of referral to mediation or other alternative modes of
dispute resolution
11. proposed schedule of hearings
12. other matters
Sec 2. Nature and purpose of pre-trial conference.
- During pre-trial conference, court shall ensure that parties
consider ff:
1. possibility of amicable settlement
2. referral to mediation / other forms of dispute resolution
3. facts that need not be proven, bec theyre of judicial notice or
expressly / deemed admitted
4. amendments to pleadings
5. possibility of obtaining stipulations & admission of facts & docs
6. objections to admissibility of testimonial, documentary, other
evidence
7. objections to form / substance of affidavit, or part thereof
8. simplification of issues
9. possibility of submitting case for decision on basis of position
papers, affidavits, documentary & real evidence
10. schedule of hearing dates
11. other matters
Sec 3. Termination.
- Prelim conference is terminated not later than 10d after
commencement, WON parties agreed to settle amicably.
Sec 4. Judgment before pre-trial.
- If, after submission of pre-trial briefs, court determines that upon
consideration of pleadings, affidavits, other evidence submitted, a
judgment may be rendered, court may order parties to file
simultaneously respective memoranda w/in non-extendible 20d fr
receipt of order.
- Court renders judgment, full or otherwise, not later than 90d fr
expiration of period to file memoranda.
Sec 5. Pre-trial order; judgment after pre-trial.
- Proceedings in pre-trial are recorded.
- W/in 10d after termination of pre-trial, court issues order w/c
recites
- matters taken up in conference
- actions taken
- amendments allowed in pleadings
- agreements / admissions made by parties
- Court shall rule on objections to or comments on admissibility of
documentary / other evidence, incl affidavit or part thereof.
- Shld action proceed to trial, order defines & limits issues and
shall strictly follow form in Annex "A".
- Contents of order control subsequent course of action, unless
modified before trial to prevent manifest injustice.
- After pre-trial, court may render judgment, full or partial, as
evidence presented during pre-trial may warrant.
102 of 143
Election Contests (Rule 6)
Sec 2. Definition.
- Election contests any controversy / dispute involving title / claim
to any elective ofc in stock / non-stock corp, validation of proxies,
manner & validity of elections, qualifications of candidates, incl
proclamation of winners to ofc of director, trustee, other officer
directly elected by stockholders in close corp or by members of
non-stock corp where article of incorporation or by-laws so provide.
Inspection of Corporate Books and Records (Rule 7)
Sec 1. Cases covered.
- This Rule applies to disputes exclusively involving rights of
stockholders / members to inspect books & records and / or to be
furnished w/ financial statements of corp under Corp Code.
Sec 2. Complaint.
- In addition to requirements in Sec 4 Rule 2, complaint must state
ff:
1. case is for enforcement of plaintiff's right of inspection of
corporate orders / records and / or to be furnished w/ financial
statements
2. demand for inspection & copying of books & records and / or to
be furnished w/ financial statements
3. refusal of defendant to grant demands of plaintiff and reasons
given
4. reasons why refusal to grant demands of plaintiff is unjustified &
illegal, stating law & jurisprudence
Sec 7. Decision.
- Court renders decision based on pleadings, affidavits,
documentary & other evidence attached w/in 15d fr receipt of last
pleading.
- Decision ordering defendants to allow inspection and / or to
furnish copies shall also
- order plaintiff to deposit estimated cost of manpower necessary
to produce books & records and cost of copying AND
- state limitations & conditions to exercise of right
Derivative Suits (Rule 8)
Sec 1. Derivative action.
- Stockholder / member may bring action in the name of corp /
assn provided that:
1. he was stockholder / member at time the acts / transactions
occurred and the time the action was filed
2. he exerted all reasonable efforts, and alleges the same w/
particularity in complaint, to exhaust all remedies available under
articles of incorporation, by-laws, laws / rules governing the corp /
partnership to obtain relief he desires
3. no appraisal rights are available for acts complained of
4. suit isnt nuisance or harassment suit
- in nuisance / harassment suit, court shall dismiss case.
Sec 2. Discontinuance.
- Derivative action shall not be discontinued, compromised, settled
w/o approval of court.
- During pendency of action, any sale of shares of complaining
stockholders shall be approved by court.
- If court determines that interest of stockholders / members are
substantially affected by discontinuance, compromise, settlement,
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
the court may direct that notice, by publication or otherwise, be
given to stockholders / members whose interest will be affected.
Management Committee (Rule 9)
Sec 1. Creation of a management committee.
- As incident to cases filed under these Rules OR Interim Rules
Corporate Rehabilitation, party may apply for appointment of mgmt
committee for corp, partnership, assn, when theres imminent
danger of:
1. dissipation, loss, wastage, destruction of assets / props
2. paralyzation of biz w/c may be prejudicial to minority
stockholders, parties-litigants, public
Sec 2. Receiver.
- If court finds application to be sufficient in form & substance,
court issues order
a. appointing rcver of known probity, integrity, competence and
w/o conflict of interest to take over corp, partnership, assn,
specifying such powers it deems appropriate
b. fixing bond of rcver
c. directing rcver to make report w/in 60d fr time he assumes ofc
d. prohibiting incumbent mgmt fr selling, encumbering,
transferring, disposing any of its props except in ordinary course of
biz
e. directing payment in full of admin expenses incurred after
issuance of order
Sec 4. Composition of the management committee.
- After notice & hearing, court may appoint mgmt committee
composed of 3 members chosen by court.
- In appointment, ff qualifications are considered
1. expertise & acumen to manage biz similar in size & complexity
as the corp, assn, partnership to be put under mgmt committee
2. knowledge in mgmt & finance
3. good moral character, independence, integrity
4. lack of conflict of interest
5. willingness & ability to file bond in amt determined by court
- W/o limiting generality of ff, member of mgmt committee may be
deemed to have conflict of interest if he is
1. engaged in line of biz w/c competes w/ corp, assn, partnership
sought to be placed under mgmt
2. director, officer, stockholder charged w/ mismgmt, dissipation,
wastage of prop of entity under mgmt
3. related by consanguinity / affinity w/in 4th civil degree to
director, officer, stockholder charged w/ mismgmt, dissipation,
wastage of props
Sec 5. Powers and functions of the management committee.
- Upon assumption to ofc of mgmt committee, rcver renders report
AND turns over mgmt & control of entity to mgmt committee.
- Mgmt committee has power to take custody of & control assets &
properties owned / possessed by entity.
- It shall take place of mgmt and board of directors, assume their
rights & responsibilities, and preserve assets & properties in
possession.
- W/o limiting generality of foregoing, mgmt committee exercises
powers & fcns:
1. investigate acts, conduct, props, liabilities, financial condition of
corp, assn, partnership
2. examine under oath the directors & officers, other witnesses
3. report to court any fact ascertained by it pertaining to causes of
problems, fraud, misconduct, mismgmt, irregularities
103 of 143
4. employ person/s such as lawyers, accountants, auditors,
appraisers, staff as necessary
5. report to court material adverse change in biz
6. evaluate existing assets & liabilities, earnings, operations of
corp, assn, partnership
7. determine & recommend to court the best way to salvage &
protect interest of creditors, stockholders, public, incl rehab of the
corp, assn, partnership
8. prohibit & report to court encumbrance, transfer, disposition of
debtor's prop outside of ordinary course of biz or whats allowed by
court
9. prohibit & report to court payments made outside of ordinary
course of biz
10. have unltd access to employees, premises, books, records,
financial docs during biz hrs
11. inspect, copy, photocopy, photograph any doc, paper, book,
acct, letter, whether in possession of corp, assn, partnership, other
persons
12. gain entry into prop for purposes of inspecting, measuring,
surveying, photographing it or any relevant object / operation
thereon
13. bring to attn of court any material change affecting entity's
ability to meet obligations
14. revoke resolutions passed by Executive Committee or Board
of Directors / Trustees or governing body of entity under mgmt and
pass resolution in substitution of the same
15. modify, nullify, revoke transactions w/c it deems detrimental /
prejudicial
16. recommend termination of proceedings & dissolution of entity
if continuance in biz is no longer feasible / profitable or no longer
works to best interest of stockholders, parties-litigants, creditors,
public
17. apply to court for order / directive to aid it in exercise of
powers & performance of duties
18. exercise other powers conferred upon it by court
Sec 7. Transactions deemed to be in bad faith.
- Transactions made by previous mgmt and directors are deemed
fraudulent & rescissible if made
- w/in 30d prior to appointment of rcver / mgmt committee OR
- during their incumbency as rcver / mgmt committee
Sec 9. Immunity from suit.
- Rcver & members of mgmt committee and persons employed by
them shall not be subject to action, claim, demand in connection w/
act done / omitted by them in good faith in exercise of their fcns &
powers.
- Official acts & transactions of rcver / mgmt committee approved /
ratified by court render them immune fr suit in connection w/ such
act / transaction.
Sec 12. Discharge of the management committee.
- Mgmt committee is discharged & dissolved under ff:
1. court, on motion or motu proprio, determined that necessity for
mgmt committee no longer exists
2. by agreement of parties
3. upon termination of proceedings
- Upon discharge & dissolution, mgmt committee submits final
report & renders acctg.
Cases
PURPOSE AND NATURE OF DERIVATIVE SUITS
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Chua v. CA
- Under Sec 36 of Corp Code in relation to Sec 23, where corp is
injured party, its power to sue is lodged w/ board of directors /
trustees. An individual stockholder is permitted to institute
derivative suit on behalf of corp where he holds stocks to protect /
vindicate corporate rights, when officials refuse to sue, or are the
ones to be sued, or hold control of the corp. In such actions, suing
stockholder is nominal party, w/ the corp as real party in interest.
- Derivative action is suit by shareholder to enforce corporate
cause of action. The corp is necessary party to the suit. The relief
granted is judgment against 3rd person in favor of corp. Similarly,
if corp has defense to action against it and isnt asserting it,
stockholder may intervene & defend on behalf of corp.
- Not every suit filed in behalf of corp is derivative suit. For
derivative suit to prosper, its required that minority stockholder
suing for and on behalf of corp must allege in his complaint that
hes suing on derivative cause of action on behalf of corp and other
stockholders similarly situated who may wish to join him.
- Its condition sine qua non that the corp be impleaded as party
bec not only is the corp an indispensable party, but its also the
present rule that it must be served w/ process. Judgment must be
made binding upon corp in order that the corp may get the benefit
of suit and may not bring subsequent suit against same defendants
for same cause of action. The corp must be joined as party bec it
is its cause of action thats being litigated and bec judgment must
be a res judicata against it.
NOT ALL STOCKHOLDERS / MEMBERS ARE
INDISPENSABLE PARTIES IN DERIVATIVE SUIT
Symaco Trading Corp v. Santos
- One of the requisites of derivative suit is that the party bringing
suit shld be stockholder / member at the time of action / transaction
complained of.
- The right to sue derivatively is an attribute of corporate ownership
w/c requires that the injury alleged be indirect as far as
stockholders / members are concerned, and direct only insofar as
corp is concerned.
- The whole purpose of law authorizing derivative suit is to allow
stockholder / member to enforce rights w/c are derivative
(secondary) in nature. A derivative action is suit by shareholder /
member to enforce corporate cause of action.
- Not all MFBAI members are indispensable parties in derivative
suit. Its enough that a member or minority of members file
derivative suit for and in behalf of corp. After all, members /
stockholders who filed derivative suit are merely nominal parties,
the real party-in-interest being the corp for and in whose behalf the
suit is filed. Any monetary benefits under the decision shall pertain
to the corp.
APPOINTMENT OF MANAGEMENT COMMITTEE VALID
Jacinto v. First Womens Credit Corp
- For minority stockholder to obtain appointment of interim mgmt
committee, he must do more than merely make prima facie
showing of denial of his right to share in concerns of the corp. He
must show that the corporate prop is in danger of being wasted &
destroyed and the biz of the corp is being diverted fr the purpose
for w/c it has been organized and there is serious paralization of
operations all to his detriment.
- Its only in strong case where theres showing that the majority
are clearly violating chartered rights of minority and putting their
interests in imminent danger that mgmt committee may be created.
104 of 143
Mere disagreement among stockholders as to affairs of corp
wouldnt in itself suffice as ground for appointment of mgmt
committee.
- At least where theres no imminent danger of loss of corporate
prop or of any other injury to stockholders, mgmt of corporate biz
shldnt be wrested away fr duly elected officers, who are prima
facie entitled to administer affairs of corp and placed in the hands
of mgmt committee.
- However, where dissension among stockholders is such that the
corp cant successfully carry on corporate fcns the appointment of
mgmt committee becomes imperative.
APPOINTMENT OF MANAGEMENT COMMITTEE NOT VALID
Sy Chim v. Sy Siy Ho & Sons Inc
- For minority stockholder to obtain appointment of interim mgmt
committee, he must do more than merely make prima facie
showing of denial of his right to share in concerns of the corp. He
must show that the corporate prop is in danger of being wasted &
destroyed and the biz of the corp is being diverted fr the purpose
for w/c it has been organized and there is serious paralization of
operations all to his detriment.
- The rationale for the need to establish confluence of the 2
requisites under Sec 1 Rule 9 by applicant for appointment of
mgmt committee is primarily based upon fact that such committee
& rcver appointed by court will immediately take over mgmt of the
corp, partnership, assn incl such power as appropriate, and any of
powers in Sec 5 of the Rule.
- Upon appointment of rcver, the elected / appointed officers of
corp are divested of mgmt of corp in favor of mgmt committee /
rcver. Such transference of mgmt will certainly have negative, if
not crippling effect, on operations / affairs of corp not only w/ banks
& other biz institutions including those abroad w/c it deals with. A
wall of uncertainty is erected; the short & long-term plans are
disrupted, if not derailed.
- The creation & appointment of mgmt committee & rcver is an
extraordinary & drastic remedy to be exercised w/ care; and only
when requirements under Interim Rules are shown. Its a drastic
course for benefit of minority stockholders, the parties-litigants or
gen public are allowed only under pressing circumstances and,
when theres inadequate / ineffectual legal or other remedies or
when they have been exhausted.
- Neither PD 902A and RA 8799 nor the Interim Rules of
Procedure define "imminent danger." "Danger" is a gen term, incl
peril, jeopardy, hazard, risk; as used in the Rule, it refers to
exposure / liability to injury. "Imminent" refers to something w/c is
threatening to happen at once, something close at hand,
something to happen upon the instant, close although not yet
happening, and on the verge of happening.
- In the absence of strong showing of imminent danger of
dissipation, loss, wastage, destruction of assets / props of corp and
paralysis of biz operations, the mere apprehension of future
misconduct based upon prior mismanagement will not authorize
appointment of mgmt committee / rcver.
Ao-As v. CA
- Appointment of mgmt committee inevitably results in drastic
summary removal of all directors & officers.
- Where the corp is solvent, rcver will not be appointed bec of past
misconduct and subsequent mere apprehension of future
misdoing, where present situation and prospects for the future are
not such as to warrant receivership.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
- Gen rule: Rcver or mgmt committee will not be appointed unless
necessary either to prevent fraud, or to save prop fr fraud /
threatened destruction, or at least in case of solvent corporation.
The burden of proof is heavy one w/c requires clear showing that
emergency exists. Similarly, rcver / mgmt committee shldnt be
appointed in action by minority stockholder against corporate
officers for accounting where corp is solvent and going concern
and rcver isnt necessary to preserve corporate prop pending
accounting.
- Mgmt committee shldnt be created when there was adequate
remedy available to pvt respondents for liquidation of unaccounted
funds. Appointment of rcver for going corp is last resort remedy,
and shldnt be employed when another remedy is available.
POWER TO CREATE MANAGEMENT COMMITTEE INCLUDES
POWER TO REORGANIZE THE SAME
Punongbayan v. Punongbayan
- A mgmt committee is tasked to manage, take custody of and
control existing assets, funds, records of corp AND to determine
the best way to protect interest of stockholders & creditors.
- Having the power to create mgmt committee, it follows that RTC
can order reorganization of existing mgmt committee. Such
appointment of new members doesnt mean creation of new mgmt
committee. Existing mgmt committee wasnt abolished.
XVI. THE SECURITIES REGULATION CODE
RA 8799 (2000)
LICENSING OF BROKERS
NICOLAS vs. CA
G.R. No. 122857
27 March 1998
RTC granted. CA dismissed.
February 19, 1987 Nicolas and Buan entered into a Portfolio
Management Agreement Nicolas will manage Buans stock
transactions for 3 months, with an automatic renewal clause.
August 19, 1987 Buan sought termination of the Agreement and
requested an accounting from Nicolas.
Three weeks after, Nicolas demanded management fees of
P68,263.67 for June 30, July 31 and August 19, 1987 as stated in
the Agreement. Ignored.
Nicolas filed in RTC a complaint for collection of sum of money.
Buans answer: Not entitled Nicolas mismanaged his
transactions resulting in losses.
RTC: Granted Buan should pay Nicolas management fees.
CA reversed and dismissed: Sweeping statement [that profits were
generated by Nicolas transactions] were unsubstantiated [Nicolas
profit and loss statements were relevant and admissible, but they
are not credible because self-serving].
Anchor Hocking Glass Corp. vs. White Cap.: The statements
simply tabulate the number of shares acquired from each
company, a column for profit and the last column for loss. The
105 of 143
statements were not authenticated by an auditor, nor by the person
who caused the preparation of the same.
Sample Statement submitted by Nicolas:
Profit & Loss Statement of Atty. Blesilo Buan for the Period Ended
June 30, 1987
Shares Issue Profit Loss
1,500 PLDT P 7,265.62
The ledger of accounts as proof of the transactions entered into
only shows the following data:
(1) dates in which the stocks were acquired;
(2) classified the acquired stocks to be in long or short term
trading;
(3) the price of each stock;
(4) which company's stocks were acquired; and,
(5) the total amount paid for each stock.
It does not show how much profit was realized from each
transaction."
SC: CA affirmed.
Portfolio Management Agreement states that Buan would pay
Nicolas 20% of all realized profits every end of the month as his
management fees.
"Profits" = "excess of return over expenditure in a transaction or
series of transactions" or "series of an amount received over the
amount paid for goods and services."
Nicolas bears burden of proving that the transaction realized gains
or profits.
Yes, stock brokers are entitled to commercial fees or
compensation:
"Revised Securities Act Rule 19-13. Charges for Services
Performed.
Charges by brokers or dealersshall be reasonable and not
unfairly discriminatory between customers."
Bauer & Cie vs. O'Donnel: Any fee or commission must be with
due regard to relevant circumstances.
But here, the statements are incomplete, yielding easily to the
inclusion or deletion of certain matters.. There are no concrete
bases or specifics as to the method of arriving at the amounts
indicated. It does not state when the stocks were purchased, the
type of stocks (whether Class "A" or "B" or common or preferred)
bought, when the stocks were sold, the acquisition and selling
price of each stock, when the profits, if any, were delivered to the
private respondent, the cost of safekeeping or custody of the
stocks, as well as the taxes paid for each transaction.
Bauer & Cie vs. O'Donne: Where a profit or loss statement shows
a loss, the statement must show income and items of expense to
explain the method of determining such loss.
There were no credible documentary evidence (e.g. receipts of the
transactions, order ticket, certificate of deposit; whether the stock
certificates were deposited in a bank or professional custodian,
and others) to support his claim that profits were indeed realized.
Nicolas's complaint is similar to an action for damages. The
recoverable damage not only be capable of proof but must actually
be proved with a reasonable degree of certainty. The awarding
court must posit specific facts as sufficient basis for measuring
compensatory or actual damages.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Lastly, Nicolas cant recover because he traded securities for the
account of others without the necessary license from the Securities
and Exchange Commission (SEC), violating SEC 19 of the
Revised Securities Act.
Agbayani: Purpose = protect the public and strengthen the
securities mechanism.
Am Jur: ". . ., an unlicensed person may not recover compensation
for services as a broker where a statute or ordinance requiring a
license is applicable and such statute or ordinance is of a
regulatory nature, was enacted in the exercise of the police power
for the purpose of protecting the public, requires a license as
evidence of qualification and fitness, and expressly precludes an
unlicensed person from recovering compensation by suit, or at
least manifests an intent to prohibit and render unlawful the
transaction of business by an unlicensed person."
WHERE BOTH PARTIES ARE EQUALLY AT FAULT, NEITHER ONE
COULD HAVE RECOURSE AGAINST THE OTHER
ABACUS SECURITIES CORPORATION vs. AMPIL
G.R. No. 160016
27 February 2006
Facts:
Abacus is engaged in business as a broker and dealer of securities
of listed companies at the Philippine Stock Exchange Center.
On April 8, 1997, Ampil opened a cash account with Abacus for his
transactions in securities;
Ampils purchases were consistently unpaid from April 10 to 30,
1997;
Ampil failed to pay in full, or even just his deficiency, for the
transactions on April 10 and 11, 1997;
Despite Ampils failure to cover his initial deficiency, Abacus
subsequently purchased and sold securities for Ampils account on
April 25 and 29;
Abacus did not cancel or liquidate a substantial amount of Ampils
stock transactions until May 6, 1997.
RTC RULING: RTC held that Abacus violated SECs 23 and 25 of
the Revised Securities Act (RSA) and Rule 25-1 of the Rules
Implementing the Act (RSA Rules) when it failed to: 1) require the
Ampil to pay for his stock purchases within three or four days from
trading; and 2) request from the appropriate authority an extension
of time for the payment of Ampils cash purchases. RTC noted
that despite Ampils non-payment within the required period,
Abacus did not cancel the purchases of Ampil. Neither did it
require him to deposit cash payments before it executed the buy
and/or sell orders subsequent to the first unsettled transaction.
According to the RTC, by allowing Ampil to trade his account
actively without cash, Abacus effectively induced him to purchase
securities thereby incurring excessive credits.
RTC also found Ampil to be equally at fault, by incurring excessive
credits and waiting to see how his investments turned out before
deciding to invoke the RSA. Thus, the RTC concluded that
Abacus and Ampil were in pari delicto and therefore without
recourse against each other.
CA RULING: CA upheld the lower courts finding that the parties
were in pari delicto. It castigated Abacus for allowing Ampil to
keep on trading despite the latters failure to pay his outstanding
obligations. It explained that the reason [behind Abacuss act] is
elemental in its simplicity. And it is not exactly altruistic. Because
whether [Ampils] trading transaction would result in a surplus or
deficit, he would still be liable to pay Abacus its commission.
106 of 143
[Abacuss] cash register will keep on ringing to the sound of
incoming money, no matter what happened to Ampil.
Hence, this Petition.
Issue: WON the pari delicto rule is applicable in the present case.
Held: In Pari Delicto rule applies only to transactions entered into
AFTER the initial trades made on April 10 and 11, 1997.
Ratio:
The provisions governing the above transactions are SECs 23 and
25 of the RSA and Rule 25-1 of the RSA Rules, which state as
follows:
SEC. 23. Margin Requirements.
xxx
(b) It shall be unlawful for any member of an exchange or
any broker or dealer, directly or indirectly, to extend or maintain
credit or arrange for the extension or maintenance of credit to or
for any customer
(1) On any security other than an exempted security, in
contravention of the rules and regulations which the Commission
shall prescribe under subSEC (a) of this SEC;
(2) Without collateral or on any collateral other than
securities, except (i) to maintain a credit initially extended in
conformity with the rules and regulations of the Commission and
(ii) in cases where the extension or maintenance of credit is not for
the purpose of purchasing or carrying securities or of evading or
circumventing the provisions of subparagraph (1) of this subSEC.
xxx
SEC. 25. Enforcement of margin requirements and restrictions on
borrowings. To prevent indirect violations of the margin
requirements under SEC 23 hereof, the broker or dealer shall
require the customer in nonmargin transactions to pay the price of
the security purchased for his account within such period as the
Commission may prescribe, which shall in no case exceed three
trading days; otherwise, the broker shall sell the security
purchased starting on the next trading day but not beyond ten
trading days following the last day for the customer to pay such
purchase price, unless such sale cannot be effected within said
period for justifiable reasons. The sale shall be without prejudice
to the right of the broker or dealer to recover any deficiency from
the customer. x x x.
RSA RULE 25-1
Purchases and Sales in Cash Account
(a) Purchases by a customer in a cash account shall be paid
in full within three (3) business days after the trade date.
(b) If full payment is not received within the required time
period, the broker or dealer shall cancel or otherwise liquidate the
transaction, or the unsettled portion thereof, starting on the next
business day but not beyond ten (10) business days following the
last day for the customer to pay, unless such sale cannot be
effected within said period for justifiable reasons.
(c) If a transaction is cancelled or otherwise liquidated as a
result of non-payment by the customer, prior to any subsequent
purchase during the next ninety (90) days, the customer shall be
required to deposit sufficient funds in the account to cover each
purchase transaction prior to execution.
xxx xxx xxx
(f) Written application for an extension of the period of time
required for payment under paragraph (a) be made by the broker
or dealer to the Philippine Stock Exchange, in the case of a
member of the Exchange, or to the Commission, in the case of a
non-member of the Exchange. Applications for the extension must
be based upon exceptional circumstances and must be filed and
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
acted upon before the expiration of the original payment period or
the expiration of any subsequent extension.
SEC 23(b) above -- the alleged violation of Abacus which provides
the basis for Ampils defense -- makes it unlawful for a broker to
extend or maintain credit on any securities other than in conformity
with the rules and regulations issued by Securities and Exchange
Commission (SEC). SEC 25 lays down the rules to prevent
indirect violations of SEC 23 by brokers or dealers. RSA Rule 25-1
prescribes in detail the regulations governing cash accounts.
The margin requirements set out in the RSA are primarily intended
to achieve a macroeconomic purpose -- the protection of the
overall economy from excessive speculation in securities. Their
recognized secondary purpose is to protect small investors.
The law places the burden of compliance with margin requirements
primarily upon the brokers and dealers. SECs 23 and 25 and Rule
25-1, otherwise known as the mandatory close-out rule, clearly
vest upon Abacus the obligation, not just the right, to cancel or
otherwise liquidate a customers order, if payment is not received
within three days from the date of purchase.
Ampil is liable for the first, but not for the subsequent trades
Nonetheless, these margin requirements are applicable only to
transactions entered into by the present parties subsequent to the
initial trades of April 10 and 11, 1997. Thus, we hold that Abacus
can still collect from Ampil to the extent of the difference between
the latters outstanding obligation as of April 11, 1997 less the
proceeds from the mandatory sell out of the shares pursuant to the
RSA Rules. Abacuss right to collect is justified under the general
law on obligations and contracts.
The right to collect cannot be denied to Abacus as the initial
transactions were entered pursuant to the instructions of Ampil.
The obligation of Ampil for stock transactions made and entered
into on April 10 and 11, 1997 remains outstanding. These
transactions were valid and the obligations incurred by Ampil
concerning his stock purchases on these dates subsist. At
that time, there was no violation of the RSA yet. Abacuss fault
arose only when it failed to: 1) liquidate the transactions on the
fourth day following the stock purchases, or on April 14 and 15,
1997; and 2) complete its liquidation no later than ten days
thereafter, applying the proceeds thereof as payment for Ampils
outstanding obligation.
Elucidating further, since the buyer was not able to pay for the
transactions that took place on April 10 and 11,, the broker was
duty-bound to advance the payment to the settlement banks
without prejudice to the right of the broker to collect later from the
client.
In securities trading, the brokers are essentially the counterparties
to the stock transactions at the Exchange. Since the principals of
the broker are generally undisclosed, the broker is personally liable
for the contracts thus made. Hence, Abacus had to advance the
payments for Ampils trades. Brokers have a right to be
reimbursed for sums advanced by them with the express or implied
authorization of the principal (in this case, Ampil).
In the present case, Abacus obviously failed to enforce the terms
and conditions of its Agreement with Ampil, purportedly acting on
the plea of Ampil to give him time to raise funds therefor. By failing
to ensure Ampils payment of his first purchase transaction within
the period prescribed by law, thereby allowing him to make
subsequent purchases, Abacus effectively converted Ampils cash
account into a credit account. However, extension or maintenance
of credits on nonmargin transactions, are specifically prohibited
under SEC 23(b). Thus, Abacus was remiss in its duty and cannot
be said to have come to court with clean hands insofar as it
intended to collect on transactions subsequent to the initial trades
of April 10 and 11, 1997.
107 of 143
Ampil is equally guilty for subsequent trades
On the other hand, we find Ampil equally guilty in entering into the
transactions in violation of the RSA and RSA Rules. We are not
prepared to accept his self-serving assertions of being an
innocent victim in all the transactions. Rather, he is an
experienced and knowledgeable trader who is well versed in the
securities market and who made his own investment decisions.
We note that it was Ampil who repeatedly asked for some time to
pay his obligations for his stock transactions. Abacus acceded to
his requests. It is only when sued upon his indebtedness that
Ampil raised as a defense the invalidity of the transactions due to
alleged violations of the RSA. It was Ampils privilege to gamble or
speculate, as he apparently did so by asking for extensions of time
and refraining from giving orders to his broker to sell, in the hope
that the prices would rise. Sustaining his argument now would
amount to relieving him of the risk and consequences of his own
speculation and saddling them on the Abacus after the result was
known to be unfavorable.
In the final analysis, both parties acted in violation of the law and
did not come to court with clean hands with regard to transactions
subsequent to the initial trades made on April 10 and 11, 1997.
Thus, the peculiar facts of the present case bar the
application of the pari delicto rule -- expressed in the maxims
Ex dolo malo non oritur action and In pari delicto potior est
conditio defendentis -- to all the transactions entered into by the
parties. The pari delecto rule refuses legal remedy to either party
to an illegal agreement and leaves them where they were.
In this case, the pari delicto rule applies only to transactions
entered into AFTER the initial trades made on April 10 and 11,
1997.
Since the INITIAL trades are valid and subsisting obligations,
Ampil is liable for them.
Dispositive: WHEREFORE, CA Decision and Resolution are
MODIFIED. Ampil is ordered to pay Abacus the difference
between the formers outstanding obligation as of April 11, 1997
less the proceeds from the mandatory sell out of shares pursuant
to the RSA Rules, with interest thereon at the legal rate until fully
paid.
TENDER OFFER RULES APPLY TO INDIRECT ACQUISITION OF SHARES
CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE
COMPANY
G.R. 171815
7 August 2007
Facts:
Union Cement or UCC (publicly listed) has 2 principal SH
(stockholders) UCHC (non-listed) owning 60.51% and Cemco
owning 17.03%.
Majority of UCHCs stocks were owned by BCI (21.31%) and ACC
(29.69%). Cemco owned 9% of UCHCs stocks.
5 July 2004: BCI informed the Philippine Stock Exchange (PSE)
that it and its subsidiary ACC had passed resolutions to sell to
Cemco all of the stocks of BCI and ACC in UCHC.
8 July 2004: In PSE Circular for Brokers No. 3146-2004 it was
stated that as a result of Cemcos acquisition of BCI and ACCs
shares in UCHC, its total beneficial ownership, direct and indirect,
in UCC has increased by 36% and amounted to at least 53% of the
shares of UCC.
15 July 2004: As a consequence of this disclosure, the PSE, in a
letter to the SEC inquired as to whether the Tender Offer Rule
under Rule 19 of the Implementing Rules of the Securities
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Regulation Code is not applicable to Cemcos purchase of the
majority of shares of UCC.
16 July 2004: Director Justina Callangan of the SECs Corporate
Finance Department replied that it was the stance of the
department that the tender offer rule was not applicable. However,
the matter must still have to be confirmed by the SEC en banc.
27 July 2004: In a subsequent letter, Director Callangan confirmed
that the SEC en banc had resolved that the Cemco transaction
was not covered by the tender offer rule.
28 July 2004, feeling aggrieved by the transaction, respondent
National Life Insurance Company of the Philippines, Inc., a
minority stockholder of UCC, sent a letter to Cemco demanding the
latter to comply with the rule on mandatory tender offer.
Cemco, however, refused.
5 August 2004: a Share Purchase Agreement was executed by
ACC and BCI, as sellers, and Cemco, as buyer.
19 August 2004: Respondent National Life filed a complaint with
the SEC asking it to reverse its 27 July 2004 Resolution and to
declare the purchase agreement of Cemco void and praying that
the mandatory tender offer rule be applied to its UCC shares.
Cemco, UCC, UCHC, BCI and ACC (all impleaded) filed their
comments:
COMMON POINT: the tender offer rule applied only to a direct
acquisition of the shares of the listed company and did not extend
to an indirect acquisition arising from the purchase of the shares of
a holding company of the listed firm.
CEMCO: while the SEC can take cognizance of respondents
complaint on the alleged violation by petitioner Cemco of the
mandatory tender offer requirement under SEC 19 of Republic Act
No. 8799, the same statute does not vest the SEC with jurisdiction
to adjudicate and determine the rights and obligations of the
parties since, under the same statute, the SECs authority is purely
administrative.
Having been vested with purely administrative authority, the SEC
can only impose administrative sanctions such as the imposition of
administrative fines, the suspension or revocation of registrations
with the SEC, and the like.
Nothing in the statute authorizes the SEC to issue orders granting
affirmative reliefs.
Since the SECs order commanding it to make a tender offer is an
affirmative relief fixing the respective rights and obligations of
parties, such order is void.
In the absence of any specific grant of jurisdiction by Congress, the
SEC cannot, by mere administrative regulation, confer on itself that
jurisdiction.
ALSO, the ruling on mandatory tender offer rule by the SEC and
the Court of Appeals should not have retroactive effect or be made
to apply to its purchase of the UCHC shares as it relied in good
faith on the letter dated 27 July 2004 of the SEC which opined that
the proposed acquisition of the UCHC shares was not covered by
the mandatory offer rule.
14 Feb 2005: SEC ruled in favor of the respondent reversed and
set aside its 27 July 2004 Resolution and directed petitioner
Cemco to make a tender offer for UCC shares to respondent and
other holders of UCC shares similar to the class held by UCHC in
accordance with SEC 9(E), Rule 19 of the Securities Regulation
Code.
The CA affirmed: It ruled that the SEC has jurisdiction to render the
questioned decision and, in any event, Cemco was barred by
estoppel from questioning the SECs jurisdiction. It, likewise, held
that the tender offer requirement under the Securities Regulation
Code and its Implementing Rules applies to Cemcos purchase of
UCHC stocks.
108 of 143
Issue/s & Held:
WON the SEC has jurisdiction over respondents complaint and to
require Cemco to make a tender offer for respondents UCC
shares - YES
WON the rule on mandatory tender offer applies to the indirect
acquisition of shares in a listed company, in this case, the indirect
acquisition by Cemco of 36% of UCC, a publicly-listed company,
through its purchase of the shares in UCHC, a non-listed company
- YES
WON the questioned ruling of the SEC can be applied retroactively
to Cemcos transaction which was consummated under the
authority of the SECs prior resolution - YES
Ratio:
First Issue - Jurisdiction
SEC was acting pursuant to Rule 19(13) of the Amended
Implementing Rules and Regulations of the Securities Regulation
Code, to wit:
13. Violation: If there shall be violation of this Rule by pursuing a
purchase of equity shares of a public company at threshold
amounts without the required tender offer, the Commission, upon
complaint, may nullify the said acquisition and direct the holding of
a tender offer. This shall be without prejudice to the imposition of
other sanctions under the Code.
The foregoing rule emanates from the SECs power and authority
to regulate, investigate or supervise the activities of persons to
ensure compliance with the Securities Regulation Code, more
specifically the provision on mandatory tender offer under SEC 19
thereof.
Another provision of the statute, which provides the basis of Rule
19(13) of the Amended Implementing Rules and Regulations of the
Securities Regulation Code, is SEC 5.1(n):
The Commission shall have, among others, the following powers
and functions:
(n) Exercise such other powers as may be provided by law as well
as those which may be implied from, or which are necessary or
incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws
The foregoing provision bestows upon the SEC the general
adjudicative power which is implied from the express powers of the
Commission or which is incidental to, or reasonably necessary to
carry out, the performance of the administrative duties entrusted to
it.
As a regulatory agency, it has the incidental power to conduct
hearings and render decisions fixing the rights and obligations of
the parties. In fact, to deprive the SEC of this power would render
the agency inutile, because it would become powerless to regulate
and implement the law.
Moreover, petitioner is barred from questioning the jurisdiction of
the SEC. It must be pointed out that petitioner had participated in
all the proceedings before the SEC and had prayed for affirmative
relief.
In fact, petitioner defended the jurisdiction of the SEC in its
Comment dated 15 September 2004. Petitioner did not question
the jurisdiction of the SEC when it rendered an opinion favorable to
it, such as the 27 July 2004 Resolution, where the SEC opined that
the Cemco transaction was not covered by the mandatory tender
offer rule.
Second Issue applicability of the mandatory tender offer rule
Tender offer is a publicly announced intention by a person acting
alone or in concert with other persons to acquire equity securities
of a public company. A public company is defined as a corporation
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
which is listed on an exchange, or a corporation with assets
exceeding P50,000,000.00 and with 200 or more stockholders, at
least 200 of them holding not less than 100 shares of such
company.
Stated differently, a tender offer is an offer by the acquiring person
to stockholders of a public company for them to tender their shares
therein on the terms specified in the offer. Tender offer is in place
to protect minority shareholders against any scheme that dilutes
the share value of their investments. It gives the minority
shareholders the chance to exit the company under reasonable
terms, giving them the opportunity to sell their shares at the same
price as those of the majority shareholders.
See text of Sec 19.1, SRC:
(a) Any person or group of persons acting in concert who intends
to acquire at least fifteen percent (15%) of any class of any equity
security of a listed corporation or of any class of any equity security
of a corporation with assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred (200) or more
stockholders with at least one hundred (100) shares each or who
intends to acquire at least thirty percent (30%) of such equity over
a period of twelve (12) months shall make a tender offer to
stockholders by filing with the Commission a declaration to that
effect; and furnish the issuer, a statement containing such of the
information required in SEC 17 of this Code as the Commission
may prescribe.
Such person or group of persons shall publish all requests or
invitations for tender, or materials making a tender offer or
requesting or inviting letters of such a security. Copies of any
additional material soliciting or requesting such tender offers
subsequent to the initial solicitation or request shall contain such
information as the Commission may prescribe, and shall be filed
with the Commission and sent to the issuer not later than the time
copies of such materials are first published or sent or given to
security holders.
Under existing SEC Rules, the 15% and 30% threshold acquisition
of shares under the foregoing provision was increased to thirty-five
percent (35%). It is further provided therein that mandatory tender
offer is still applicable even if the acquisition is less than 35% when
the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company.
The SEC and the Court of Appeals ruled that the indirect
acquisition by petitioner of 36% of UCC shares through the
acquisition of the non-listed UCHC shares is covered by the
mandatory tender offer rule. This interpretation given by the SEC
and the Court of Appeals must be sustained.
The rule in this jurisdiction is that the construction given to a
statute by an administrative agency charged with the interpretation
and application of that statute is entitled to great weight by the
courts, unless such construction is clearly shown to be in sharp
contrast with the governing law or statute.
The rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the
establishment of diverse administrative agencies for addressing
and satisfying those needs; it also relates to accumulation of
experience and growth of specialized capabilities by the
administrative agency charged with implementing a particular
statute.
The SEC and the Court of Appeals accurately pointed out that the
coverage of the mandatory tender offer rule covers not only direct
acquisition but also indirect acquisition or "any type of acquisition."
This is clear from the discussions of the Bicameral Conference
Committee on the Securities Act of 2000, on 17 July 2000:
SEN. S. OSMEA. Eto ang mangyayari diyan, eh. Somebody
controls 67% of the Company. Of course, he will pay a premium for
109 of 143
the first 67%. Control yan, eh. Eh, kawawa yung mga maiiwan, ang
33% because the value of the stock market could go down, could
go down after that, because there will be no more market. Wala
nang gustong bumenta. Wala nang... I mean maraming gustong
bumenta, walang gustong bumili kung hindi yung majority owner.
And they will not buy. They already have 67%. They already have
control. And this protects the minority. And we have had a case in
Cebu wherein Ayala A who already owned 40% of Ayala B made
an offer for another 40% of Ayala B without offering the 20%.
Kawawa naman yung nakahawak ngayon ng 20%. Ang baba ng
share sa market. But we did not have a law protecting them at that
time.
CHAIRMAN ROCO. So what is it that you want to achieve?
SEN. S. OSMEA. That if a certain group achieves a certain
amount of ownership in a corporation, yeah, he is obligated to buy
anybody who wants to sell.
CHAIRMAN ROCO. Pro-rata lang.
REP. TEODORO. As long as it reaches 30, ayan na. Any type of
acquisition just as long as it will result in 30... (p.50)... reaches 30,
ayan na. Any type of acquisition just as long as it will result in 30,
general tender, pro-rata.
Petitioner counters that the legislator's reference to "any type of
acquisition" during the deliberations on the Securities Regulation
Code does not indicate that congress meant to include the
"indirect" acquisition of shares of a public corporation to be
covered by the tender offer rule.
Petitioner also avers that it did not directly acquire the shares in
UCC and the incidental benefit of having acquired the control of
the said public company must not be taken against it.
These arguments are not convincing. The legislative intent of SEC
19 of the Code is to regulate activities relating to acquisition of
control of the listed company and for the purpose of protecting the
minority stockholders of a listed corporation. Whatever may be the
method by which control of a public company is obtained, either
through the direct purchase of its stocks or through an indirect
means, mandatory tender offer applies.
The petitioner posits that what it acquired were stocks of UCHC
and not UCC. By happenstance, as a result of the transaction, it
became an indirect owner of UCC. We are constrained, however,
to construe ownership acquisition to mean both direct and indirect.
What is decisive is the determination of the power of control. The
legislative intent behind the tender offer rule makes clear that the
type of activity intended to be regulated is the acquisition of control
of the listed company through the purchase of shares. Control may
[be] effected through a direct and indirect acquisition of stock, and
when this takes place, irrespective of the means, a tender offer
must occur.
The bottomline of the law is to give the shareholder of the listed
company the opportunity to decide whether or not to sell in
connection with a transfer of control.
Third Issue retroactive application of SEC ruling
The action of the SEC on the PSE request for opinion on the
Cemco transaction cannot be construed as passing merits or
giving approval to the questioned transaction.
The letter dated 27 July 2004 of the SEC was nothing but an
approval of the draft letter prepared by Director Callanga. There
was no public hearing where interested parties could have been
heard. Hence, it was not issued upon a definite and concrete
controversy affecting the legal relations of parties thereby making it
a judgment conclusive on all the parties. Said letter was merely
advisory.
Jurisprudence has it that an advisory opinion of an agency may be
stricken down if it deviates from the provision of the statute. Since
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop 110 of 143

the letter dated 27 July 2004 runs counter to the Securities a) National Treatment each WTO member shall accord to the
Regulation Code, the same may be disregarded as what the SEC nationals of other members treatment no less favorable than that
has done in its decision dated 14 February 2005. which it accords to its own nationals with regard to the protection of
Moreover, the implementing rules and regulations of the Code are intellectual property (subject to certain exceptions provided in the
sufficient to inform and guide the parties on how to proceed with Paris, Berne and Rome conventions and in the Treaty on
the mandatory tender offer. Intellectual Property in respect of Integrated Circuits)
b) Most-Favored Nation Treatment with regard to the
protection of intellectual property, any advantage, favor, privilege
or immunity granted by a member to the nationals of any other
country shall be accorded immediately and unconditionally to the
XVII. INTELLECTUAL PROPERTY CODE nationals of all other members
RA 8923 (1997), AS AMENDED BY RA 9150 (2001)
17.2 Case
THE TRIPS AGREEMENT
WTO Agreement not unconstitutional
17.1 Topics
TAADA vs. ANGARA
International Agreements on Intellectual Property 272 SCRA 18
a. Paris Convention (1883) Protection of Industrial 1997
Property
b. Berne Convention (1896) Protection of Literary and Facts:
Artistic Works After WWII, the GATT (General Agreement on Tariffs and Trade)
c. Madrid Agreement (1891) Repression of False or was born. Later, the WTO (World Trade Organization) was
Deceptive Indications of Source of Goods constituted to be the treatys administering body.
d. Madrid Agreement (1891) International Registration of The WTO was signed in Morocco by its founding members, one of
Marks which was the Philippines.
e. Hague Agreement (1925) International Deposit of The President of the Philippines (Ramos) ratified the WTO. The
Industrial Designs Senate concurred in this ratification.
f. Nice Agreement (1957) International Classification of The senate ratification is the subject of this petition for certiorari,
Goods and Services for the Purposes of the Registration of Marks mandamus, and prohibition, which questions the constitutionality of
g. Lisbon Agreement (1958) Protection of Appellations of the WTO.
Origin and their International Registration The WTO Final Act signed by the Philippines includes various
h. Rome Convention (1961) Protection of Performers, agreements and associated legal instruments, among which is the
Producers of Phonograms and Broadcasting Organizations TRIPS (Agreement on Trade-Related Aspects of Intellectual
i. Locarno Agreement (1968) International Classifications Property Rights)
of Industrial Designs The petition questions the constitutionality of certain provisions in
j. Patent Cooperation Treaty (1970) simultaneous filing the WTO Agreement. Among those questioned are provisions of
of international patent application the TRIPS on evidence
k. Geneva Convention (1971) Protection of Producers of
Phonograms against Unauthorized Duplication of their Issue: WON certain provisions of the Agreement impair the
Phonograms exercise of judicial power by this Honorable Court in promulgating
l. Strasbourg Agreement (1971) International Patent the rules of evidence.
Application Held: No
m. Vienna Agreement (1973) International Classification Ratio:
of the Figurative Elements of Marks Petitioners aver that paragraph 1, Article 34 of the General
n. Brussels Convention (1974) Distribution of Provisions and Basic Principles of the Agreement on Trade-
Programme-Carrying Signals Transmitted by Satellite Related Aspects of Intellectual Property Rights (TRIPS) intrudes
o. Budapest Treaty (1977) deposit of microorganisms for on the power of the Supreme Court to promulgate rules concerning
purposes of patent procedure pleading, practice and procedures.
p. Nairobi Treaty (1981) Protection of Olympic Symbol Article 34
q. Washington Treaty (1989) Intellectual Property in Process Patents: Burden of Proof
Respect of Integrated Circuits 1. For the purposes of civil proceedings in respect of the
r. Protocol on Madrid Agreement (1989) International infringement of the rights of the owner referred to in paragraph 1(b)
Registration of Marks of Article 28, if the subject matter of a patent is a process for
s. Trademark Law Treaty (1994) make registration obtaining a product, the judicial authorities shall have the authority
systems to order the defendant to prove that the process to obtain an
t. WIPO Copyright Treaty (1996) computer program and identical product is different from the patented process. Therefore,
databases, Members shall provide, in at least one of the following
u. WIPO Performances and Phonogram Treaty (1996) circumstances, that any identical product when produced without
the consent of the patent owner shall, in the absence of proof to
The WTO and TRIPS Agreements the contrary, be deemed to have been obtained by the patented
process:
Trade-Related Aspects of Intellectual Property Rights (TRIPS) (a) if the product obtained by the patented process is new;
Agreement - binding on all members of WTO
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
(b) if there is a substantial likelihood that the identical product was
made by the process and the owner of the patent has been unable
through reasonable efforts to determine the process actually used.
2. Any Member shall be free to provide that the burden of proof
indicated in paragraph 1 shall be on the alleged infringer only if the
condition referred to in subparagraph (a) is fulfilled or only if the
condition referred to in subparagraph (b) is fulfilled.
3. In the adduction of proof to the contrary, the legitimate interests
of defendants in protecting their manufacturing and business
secrets shall be taken into account.
From the above, a WTO Member is required to provide a rule of
disputable (note the words in the absence of proof to the
contrary) presumption that a product shown to be identical to one
produced with the use of a patented process shall be deemed to
have been obtained by the (illegal) use of the said patented
process, (1) where such product obtained by the patented product
is new, or (2) where there is substantial likelihood that the
identical product was made with the use of the said patented
process but the owner of the patent could not determine the exact
process used in obtaining such identical product.
Hence, the burden of proof contemplated by Article 34 should
actually be understood as the duty of the alleged patent infringer to
overthrow such presumption. Such burden, properly understood,
actually refers to the burden of evidence (burden of going
forward) placed on the producer of the identical (or fake) product to
show that his product was produced without the use of the
patented process.
The foregoing notwithstanding, the patent owner still has the
burden of proof since, regardless of the presumption provided
under paragraph 1 of Article 34, such owner still has to introduce
evidence of the existence of the alleged identical product, the fact
that it is identical to the genuine one produced by the patented
process and the fact of newness of the genuine product or the
fact of substantial likelihood that the identical product was made
by the patented process.
The foregoing should really present no problem in changing the
rules of evidence as the present law on the subject, Republic Act
No. 165, as amended, otherwise known as the Patent Law,
provides a similar presumption in cases of infringement of patented
design or utility model, thus:
SEC. 60. Infringement. - Infringement of a design patent or of a
patent for utility model shall consist in unauthorized copying of the
patented design or utility model for the purpose of trade or industry
in the article or product and in the making, using or selling of the
article or product copying the patented design or utility model.
Identity or substantial identity with the patented design or utility
model shall constitute evidence of copying.
Moreover, it should be noted that the requirement of Article 34 to
provide a disputable presumption applies only if (1) the product
obtained by the patented process is NEW or (2) there is a
substantial likelihood that the identical product was made by the
process and the process owner has not been able through
reasonable effort to determine the process used. Where either of
these two provisos does not obtain, members shall be free to
determine the appropriate method of implementing the provisions
of TRIPS within their own internal systems and processes.
Suffice it to say that the reciprocity clause more than justifies such
intrusion, if any actually exists. Besides, Article 34 does not
contain an unreasonable burden, consistent as it is with due
process and the concept of adversarial dispute settlement inherent
in our judicial system.
So too, since the Philippine is a signatory to most international
conventions on patents, trademarks and copyrights, the
111 of 143
adjustment in legislation and rules of procedure will not be
substantial.
INTELLECTUAL PROPERTY OFFICE
17.3 Topics
Structure and Functions
SEC 5. Functions of the Intellectual Property Office (IPO). - 5.1. To
administer and implement the State policies declared in this Act,
there is hereby created the Intellectual Property Office (IPO) which
shall have the following functions:
a) Examine applications for grant of letters patent for inventions
and register utility models and industrial designs;
b) Examine applications for the registration of marks, geographic
indication, integrated circuits;
c) Register technology transfer arrangements and settle disputes
involving technology transfer payments covered by the provisions
of Part II, Chapter IX on Voluntary Licensing and develop and
implement strategies to promote and facilitate technology transfer;
d) Promote the use of patent information as a tool for technology
development;
e) Publish regularly in its own publication the patents, marks, utility
models and industrial designs, issued and approved, and the
technology transfer arrangements registered;
f) Administratively adjudicate contested proceedings affecting
intellectual property rights; and
g) Coordinate with other government agencies and the private
sector efforts to formulate and implement plans and policies to
strengthen the protection of intellectual property rights in the
country.
5.2. The Office shall have custody of all records, books, drawings,
specifications, documents, and other papers and things relating to
intellectual property rights applications filed with the Office. (n)
SEC 6. The Organizational Structure of the IPO. - 6.1. The Office
shall be headed by a Director General who shall be assisted by
two (2) Deputies Director General.
6.2. The Office shall be divided into six (6) Bureaus, each of which
shall be headed by a Director and assisted by an Assistant
Director. These Bureaus are:
a) The Bureau of Patents;
b) The Bureau of Trademarks;
c) The Bureau of Legal Affairs;
d) The Documentation, Information and Technology Transfer
Bureau;
e) The Management Information System and EDP Bureau; and
f) The Administrative, Financial and Personnel Services Bureau.
6.3. The Director General, Deputies Director General, Directors
and Assistant Directors shall be appointed by the President, and
the other officers and employees of the Office by the Secretary of
Trade and Industry, conformably with and under the Civil Service
Law. (n)
SEC 7. The Director General and Deputies Director General. - 7.1.
Functions. - The Director General shall exercise the following
powers and functions:
a) Manage and direct all functions and activities of the Office,
including the promulgation of rules and regulations to implement
the objectives, policies, plans, programs and projects of the Office:
Provided, That in the exercise of the authority to propose policies
and standards in relation to the following: (1) the effective, efficient,
and economical operations of the Office requiring statutory
enactment; (2) coordination with other agencies of government in
relation to the enforcement of intellectual property rights; (3) the
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
recognition of attorneys, agents, or other persons representing
applicants or other parties before the Office; and (4) the
establishment of fees for the filing and processing of an application
for a patent, utility model or industrial design or mark or a collective
mark, geographic indication and other marks of ownership, and for
all other services performed and materials furnished by the Office,
the Director General shall be subject to the supervision of the
Secretary of Trade and Industry;
b) Exercise exclusive appellate jurisdiction over all decisions
rendered by the Director of Legal Affairs, the Director of Patents,
the Director of Trademarks, and the Director of the Documentation,
Information and Technology Transfer Bureau. The decisions of the
Director General in the exercise of his appellate jurisdiction in
respect of the decisions of the Director of Patents, and the Director
of Trademarks shall be appealable to the Court of Appeals in
accordance with the Rules of Court; and those in respect of the
decisions of the Director of Documentation, Information and
Technology Transfer Bureau shall be appealable to the Secretary
of Trade and Industry; and
c) Exercise original jurisdiction to resolve disputes relating to the
terms of a license involving the author's right to public performance
or other communication of his work. The decisions of the Director
General in these cases shall be appealable to the Secretary of
Trade and Industry.
7.2. Qualifications. - The Director General and the Deputies
Director General must be natural born citizens of the Philippines, at
least thirty-five (35) years of age on the day of their appointment,
holders of a college degree, and of proven competence, integrity,
probity and independence: Provided, That the Director General
and at least one (1) Deputy Director General shall be members of
the Philippine Bar who have engaged in the practice of law for at
least ten (10) years: Provided further, That in the selection of the
Director General and the Deputies Director General, consideration
shall be given to such qualifications as would result, as far as
practicable, in the balanced representation in the Directorate
General of the various fields of intellectual property.
7.3. Term of Office. - The Director General and the Deputies
Director General shall be appointed by the President for a term of
five (5) years and shall be eligible for reappointment only once:
Provided, That the first Director General shall have a first term of
seven (7) years. Appointment to any vacancy shall be only for the
unexpired term of the predecessor.
7.4. The Office of the Director General. - The Office of the Director
General shall consist of the Director General and the Deputies
Director General, their immediate staff and such Offices and
Services that the Director General will set up to support directly the
Office of the Director General. (n)
SEC 8. The Bureau of Patents. - The Bureau of Patents shall have
the following functions:
8.1. Search and examination of patent applications and the grant
of patents;
8.2. Registration of utility models, industrial designs, and integrated
circuits; and
8.3. Conduct studies and researches in the field of patents in order
to assist the Director General in formulating policies on the
administration and examination of patents. (n)
SEC 9. The Bureau of Trademarks. - The Bureau of Trademarks
shall have the following functions:
9.1. Search and examination of the applications for the registration
of marks, geographic indications and other marks of ownership
and the issuance of the certificates of registration; and
9.2. Conduct studies and researches in the field of trademarks in
order to assist the Director General in formulating policies on the
administration and examination of trademarks. (n)
112 of 143
SEC 10. The Bureau of Legal Affairs. - The Bureau of Legal Affairs
shall have the following functions:
10.1. Hear and decide opposition to the application for registration
of marks; cancellation of trademarks; subject to the provisions of
SEC 64, cancellation of patents, utility models, and industrial
designs; and petitions for compulsory licensing of patents;
10.2. (a) Exercise original jurisdiction in administrative complaints
for violations of laws involving intellectual property rights: Provided,
That its jurisdiction is limited to complaints where the total
damages claimed are not less than Two hundred thousand pesos
(P200,000): Provided further, That availment of the provisional
remedies may be granted in accordance with the Rules of Court.
The Director of Legal Affairs shall have the power to hold and
punish for contempt all those who disregard orders or writs issued
in the course of the proceedings. (n)
(b) After formal investigation, the Director for Legal Affairs may
impose one (1) or more of the following administrative penalties:
(i) The issuance of a cease and desist order which shall specify the
acts that the respondent shall cease and desist from and shall
require him to submit a compliance report within a reasonable time
which shall be fixed in the order;
(ii) The acceptance of a voluntary assurance of compliance or
discontinuance as may be imposed. Such voluntary assurance
may include one or more of the following:
(1) An assurance to comply with the provisions of the intellectual
property law violated;
(2) An assurance to refrain from engaging in unlawful and unfair
acts and practices subject of the formal investigation;
(3) An assurance to recall, replace, repair, or refund the money
value of defective goods distributed in commerce; and
(4) An assurance to reimburse the complainant the expenses and
costs incurred in prosecuting the case in the Bureau of Legal
Affairs.
The Director of Legal Affairs may also require the respondent to
submit periodic compliance reports and file a bond to guarantee
compliance of his undertaking;
(iii) The condemnation or seizure of products which are subject of
the offense. The goods seized hereunder shall be disposed of in
such manner as may be deemed appropriate by the Director of
Legal Affairs, such as by sale, donation to distressed local
governments or to charitable or relief institutions, exportation,
recycling into other goods, or any combination thereof, under such
guidelines as he may provide;
(iv) The forfeiture of paraphernalia and all real and personal
properties which have been used in the commission of the offense;
(v) The imposition of administrative fines in such amount as
deemed reasonable by the Director of Legal Affairs, which shall in
no case be less than Five thousand pesos (P5,000) nor more than
One hundred fifty thousand pesos (P150,000). In addition, an
additional fine of not more than One thousand pesos (P1,000) shall
be imposed for each day of continuing violation;
(vi) The cancellation of any permit, license, authority, or
registration which may have been granted by the Office, or the
suspension of the validity thereof for such period of time as the
Director of Legal Affairs may deem reasonable which shall not
exceed one (1) year;
(vii) The withholding of any permit, license, authority, or registration
which is being secured by the respondent from the Office;
(viii) The assessment of damages;
(ix) Censure; and
(x) Other analogous penalties or sanctions. (Secs. 6, 7, 8, and 9,
Executive Order No. 913 [1983]a)
10.3. The Director General may by Regulations establish the
procedure to govern the implementation of this SEC. (n)
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
SEC 11. The Documentation, Information and Technology Transfer
Bureau. - The Documentation, Information and Technology
Transfer Bureau shall have the following functions:
11.1. Support the search and examination activities of the Office
through the following activities:
(a) Maintain and upkeep classification systems whether they be
national or international such as the International Patent
Classification (IPC) system;
(b) Provide advisory services for the determination of search
patterns;
(c) Maintain search files and search rooms and reference libraries;
and
(d) Adapt and package industrial property information.
11.2. Establish networks or intermediaries or regional
representatives;
11.3. Educate the public and build awareness on intellectual
property through the conduct of seminars and lectures, and other
similar activities;
11.4. Establish working relations with research and development
institutions as well as with local and international intellectual
property professional groups and the like;
11.5. Perform state-of-the-art searches;
11.6. Promote the use of patent information as an effective tool to
facilitate the development of technology in the country;
11.7. Provide technical, advisory, and other services relating to the
licensing and promotion of technology, and carry out an efficient
and effective program for technology transfer; and
11.8. Register technology transfer arrangements, and settle
disputes involving technology transfer payments. (n)
SEC 12. The Management Information Services and EDP Bureau.
- The Management Information Services and EDP Bureau shall:
12.1. Conduct automation planning, research and development,
testing of systems, contracts with firms, contracting, purchase and
maintenance of equipment, design and maintenance of systems,
user consultation, and the like; and
12.2. Provide management information support and service to the
Office. (n)
SEC 13. The Administrative, Financial and Human Resource
Development Service Bureau. - 13.1. The Administrative Service
shall: (a) Provide services relative to procurement and allocation of
supplies and equipment, transportation, messengerial work,
cashiering, payment of salaries and other Office's obligations,
office maintenance, proper safety and security, and other utility
services; and comply with government regulatory requirements in
the areas of performance appraisal, compensation and benefits,
employment records and reports;
(b) Receive all applications filed with the Office and collect fees
therefor, and
(c) Publish patent applications and grants, trademark applications,
and registration of marks, industrial designs, utility models,
geographic indication, and lay-out-designs of integrated circuits
registrations.
13.2. The Patent and Trademark Administration Services shall
perform the following functions among others:
(a) Maintain registers of assignments, mergings, licenses, and
bibliographic on patents and trademarks;
(b) Collect maintenance fees, issue certified copies of documents
in its custody and perform similar other activities; and
(c) Hold in custody all the applications filed with the office, and all
patent grants, certificate of registrations issued by the office, and
the like.
13.3. The Financial Service shall formulate and manage a financial
program to ensure availability and proper utilization of funds;
113 of 143
provide for an effective monitoring system of the financial
operations of the Office; and
13.4. The Human Resource Development Service shall design and
implement human resource development plans and programs for
the personnel of the Office; provide for present and future
manpower needs of the organization; maintain high morale and
favorable employee attitudes towards the organization through the
continuing design and implementation of employee development
programs. (n)
SEC 14. Use of Intellectual Property Rights Fees by the IPO. -
14.1. For a more effective and expeditious implementation of this
Act, the Director General shall be authorized to retain, without
need of a separate approval from any government agency, and
subject only to the existing accounting and auditing rules and
regulations, all the fees, fines, royalties and other charges,
collected by the Office under this Act and the other laws that the
Office will be mandated to administer, for use in its operations, like
upgrading of its facilities, equipment outlay, human resource
development, and the acquisition of the appropriate office space,
among others, to improve the delivery of its services to the public.
This amount, which shall be in addition to the Office's annual
budget, shall be deposited and maintained in a separate account
or fund, which may be used or disbursed directly by the Director
General.
14.2. After five (5) years from the coming into force of this Act, the
Director General shall, subject to the approval of the Secretary of
Trade and Industry, determine if the fees and charges mentioned
in SubSEC 14.1 hereof that the Office shall collect are sufficient to
meet its budgetary requirements. If so, it shall retain all the fees
and charges it shall collect under the same conditions indicated in
said SubSEC 14.1 but shall forthwith, cease to receive any funds
from the annual budget of the National Government; if not, the
provisions of said SubSEC 14.1 shall continue to apply until such
time when the Director General, subject to the approval of the
Secretary of Trade and Industry, certifies that the above-stated
fees and charges the Office shall collect are enough to fund its
operations. (n)
SEC 15. Special Technical and Scientific Assistance. - The
Director General is empowered to obtain the assistance of
technical, scientific or other qualified officers and employees of
other departments, bureaus, offices, agencies and
instrumentalities of the Government, including corporations owned,
controlled or operated by the Government, when deemed
necessary in the consideration of any matter submitted to the
Office relative to the enforcement of the provisions of this Act.
(Sec. 3, R.A. No. 165a)
SEC 16. Seal of Office. - The Office shall have a seal, the form and
design of which shall be approved by the Director General. (Sec. 4,
R.A. No. 165a)
SEC 17. Publication of Laws and Regulations. - The Director
General shall cause to be printed and make available for
distribution, pamphlet copies of this Act, other pertinent laws,
executive orders and information circulars relating to matters within
the jurisdiction of the Office. (Sec. 5, R.A. No. 165a)
SEC 18. The IPO Gazette. - All matters required to be published
under this Act shall be published in the Office's own publication to
be known as the IPO Gazette. (n)
SEC 19. Disqualification of Officers and Employees of the Office. -
All officers and employees of the Office shall not apply or act as an
attorney or patent agent of an application for a grant of patent, for
the registration of a utility model, industrial design or mark nor
acquire, except by hereditary succession, any patent or utility
model, design registration, or mark or any right, title or interest
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
therein during their employment and for one (1) year thereafter.
(Sec. 77, R.A. No. 165a)
Jurisdiction over IP disputes and Appeals
SEC 7. The Director General and Deputies Director General. - 7.1.
Functions. - The Director General shall exercise the following
powers and functions:
b) Exercise exclusive appellate jurisdiction over all decisions
rendered by the Director of Legal Affairs, the Director of Patents,
the Director of Trademarks, and the Director of the Documentation,
Information and Technology Transfer Bureau. The decisions of the
Director General in the exercise of his appellate jurisdiction in
respect of the decisions of the Director of Patents, and the Director
of Trademarks shall be appealable to the Court of Appeals in
accordance with the Rules of Court; and those in respect of the
decisions of the Director of Documentation, Information and
Technology Transfer Bureau shall be appealable to the Secretary
of Trade and Industry; and
c) Exercise original jurisdiction to resolve disputes relating to the
terms of a license involving the author's right to public performance
or other communication of his work. The decisions of the Director
General in these cases shall be appealable to the Secretary of
Trade and Industry.
SEC 10. The Bureau of Legal Affairs. - The Bureau of Legal Affairs
shall have the following functions:
10.1. Hear and decide opposition to the application for registration
of marks; cancellation of trademarks; subject to the provisions of
SEC 64, cancellation of patents, utility models, and industrial
designs; and petitions for compulsory licensing of patents;
10.2. (a) Exercise original jurisdiction in administrative complaints
for violations of laws involving intellectual property rights: Provided,
That its jurisdiction is limited to complaints where the total
damages claimed are not less than Two hundred thousand pesos
(P200,000): Provided further, That availment of the provisional
remedies may be granted in accordance with the Rules of Court.
The Director of Legal Affairs shall have the power to hold and
punish for contempt all those who disregard orders or writs issued
in the course of the proceedings. (n)
(b) After formal investigation, the Director for Legal Affairs may
impose one (1) or more of the following administrative penalties:
(i) The issuance of a cease and desist order which shall specify the
acts that the respondent shall cease and desist from and shall
require him to submit a compliance report within a reasonable time
which shall be fixed in the order;
(ii) The acceptance of a voluntary assurance of compliance or
discontinuance as may be imposed. Such voluntary assurance
may include one or more of the following:
(1) An assurance to comply with the provisions of the intellectual
property law violated;
(2) An assurance to refrain from engaging in unlawful and unfair
acts and practices subject of the formal investigation;
(3) An assurance to recall, replace, repair, or refund the money
value of defective goods distributed in commerce; and
(4) An assurance to reimburse the complainant the expenses and
costs incurred in prosecuting the case in the Bureau of Legal
Affairs.
The Director of Legal Affairs may also require the respondent to
submit periodic compliance reports and file a bond to guarantee
compliance of his undertaking;
(iii) The condemnation or seizure of products which are subject of
the offense. The goods seized hereunder shall be disposed of in
such manner as may be deemed appropriate by the Director of
Legal Affairs, such as by sale, donation to distressed local
114 of 143
governments or to charitable or relief institutions, exportation,
recycling into other goods, or any combination thereof, under such
guidelines as he may provide;
(iv) The forfeiture of paraphernalia and all real and personal
properties which have been used in the commission of the offense;
(v) The imposition of administrative fines in such amount as
deemed reasonable by the Director of Legal Affairs, which shall in
no case be less than Five thousand pesos (P5,000) nor more than
One hundred fifty thousand pesos (P150,000). In addition, an
additional fine of not more than One thousand pesos (P1,000) shall
be imposed for each day of continuing violation;
(vi) The cancellation of any permit, license, authority, or
registration which may have been granted by the Office, or the
suspension of the validity thereof for such period of time as the
Director of Legal Affairs may deem reasonable which shall not
exceed one (1) year;
(vii) The withholding of any permit, license, authority, or registration
which is being secured by the respondent from the Office;
(viii) The assessment of damages;
(ix) Censure; and
(x) Other analogous penalties or sanctions. (Secs. 6, 7, 8, and 9,
Executive Order No. 913 [1983]a)
10.3. The Director General may by Regulations establish the
procedure to govern the implementation of this SEC. (n)
SEC 11. The Documentation, Information and Technology Transfer
Bureau. - The Documentation, Information and Technology
Transfer Bureau shall have the following functions:
11.1. Support the search and examination activities of the Office
through the following activities:
(a) Maintain and upkeep classification systems whether they be
national or international such as the International Patent
Classification (IPC) system;
(b) Provide advisory services for the determination of search
patterns;
(c) Maintain search files and search rooms and reference libraries;
and
(d) Adapt and package industrial property information.
11.2. Establish networks or intermediaries or regional
representatives;
11.3. Educate the public and build awareness on intellectual
property through the conduct of seminars and lectures, and other
similar activities;
11.4. Establish working relations with research and development
institutions as well as with local and international intellectual
property professional groups and the like;
11.5. Perform state-of-the-art searches;
11.6. Promote the use of patent information as an effective tool to
facilitate the development of technology in the country;
11.7. Provide technical, advisory, and other services relating to the
licensing and promotion of technology, and carry out an efficient
and effective program for technology transfer; and
11.8. Register technology transfer arrangements, and settle
disputes involving technology transfer payments. (n)
Administrative Penalties
SEC 10.2 (b) After formal investigation, the Director for Legal
Affairs may impose one (1) or more of the following administrative
penalties:
(i) The issuance of a cease and desist order which shall specify the
acts that the respondent shall cease and desist from and shall
require him to submit a compliance report within a reasonable time
which shall be fixed in the order;
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
(ii) The acceptance of a voluntary assurance of compliance or
discontinuance as may be imposed. Such voluntary assurance
may include one or more of the following:
(1) An assurance to comply with the provisions of the intellectual
property law violated;
(2) An assurance to refrain from engaging in unlawful and unfair
acts and practices subject of the formal investigation;
(3) An assurance to recall, replace, repair, or refund the money
value of defective goods distributed in commerce; and
(4) An assurance to reimburse the complainant the expenses and
costs incurred in prosecuting the case in the Bureau of Legal
Affairs.
The Director of Legal Affairs may also require the respondent to
submit periodic compliance reports and file a bond to guarantee
compliance of his undertaking;
(iii) The condemnation or seizure of products which are subject of
the offense. The goods seized hereunder shall be disposed of in
such manner as may be deemed appropriate by the Director of
Legal Affairs, such as by sale, donation to distressed local
governments or to charitable or relief institutions, exportation,
recycling into other goods, or any combination thereof, under such
guidelines as he may provide;
(iv) The forfeiture of paraphernalia and all real and personal
properties which have been used in the commission of the offense;
(v) The imposition of administrative fines in such amount as
deemed reasonable by the Director of Legal Affairs, which shall in
no case be less than Five thousand pesos (P5,000) nor more than
One hundred fifty thousand pesos (P150,000). In addition, an
additional fine of not more than One thousand pesos (P1,000) shall
be imposed for each day of continuing violation;
(vi) The cancellation of any permit, license, authority, or
registration which may have been granted by the Office, or the
suspension of the validity thereof for such period of time as the
Director of Legal Affairs may deem reasonable which shall not
exceed one (1) year;
(vii) The withholding of any permit, license, authority, or registration
which is being secured by the respondent from the Office;
(viii) The assessment of damages;
(ix) Censure; and
(x) Other analogous penalties or sanctions. (Secs. 6, 7, 8, and 9,
Executive Order No. 913 [1983]a)
Prescriptive Period of Actions for Damages
SEC 79. Limitation of Action for Damages. - No damages can be
recovered for acts of infringement committed more than four (4)
years before the institution of the action for infringement.
SEC 226. Damages. - No damages may be recovered under this
Act after four (4) years from the time the cause of action arose.
INTELLECTUAL PROPERTY RIGHTS IN GENERAL
PATENTS
17.5 Topics
Patentable Inventions
SEC 21. Patentable Inventions. - Any technical solution of a
problem in any field of human activity which is new, involves an
inventive step and is industrially applicable shall be Patentable. It
115 of 143
may be, or may relate to, a product, or process, or an improvement
of any of the foregoing. (Sec. 7, R.A. No. 165a)
Novelty
SEC 23. Novelty. . - An invention shall not be considered new if it
forms part of a prior art. (Sec. 9, R.A. No. 165a)
Prior Art
SEC 24. Prior Art. - Prior art shall consist of:
24.1. Everything which has been made available to the public
anywhere in the world, before the filing date or the priority date of
the application claiming the invention; and
24.2. The whole contents of an application for a patent, utility
model, or industrial design registration, published in accordance
with this Act, filed or effective in the Philippines, with a filing or
priority date that is earlier than the filing or priority date of the
application: Provided, That the application which has validly
claimed the filing date of an earlier application under SEC 31 of
this Act, shall be prior art with effect as of the filing date of such
earlier application: Provided further, That the applicant or the
inventor identified in both applications are not one and the same.
(Sec. 9, R.A. No. 165a)
Inventive Step or Non-Obviousness
SEC 26. Inventive Step. - An invention involves an inventive step
if, having regard to prior art, it is not obvious to a person skilled in
the art at the time of the filing date or priority date of the application
claiming the invention. (n)
Industrial Applicability
SEC 27. Industrial Applicability. - An invention that can be
produced and used in any industry shall be industrially applicable.
(n)
Non-Patentable Inventions
SEC 22. Non-Patentable Inventions. - The following shall be
excluded from patent protection:
[DMTPAP]
22.1. Discoveries, scientific theories and mathematical methods;
22.2. Schemes, rules and methods of performing mental acts,
playing games or doing business, and programs for computers;
22.3. Methods for treatment of the human or animal body by
surgery or therapy and diagnostic methods practiced on the human
or animal body. This provision shall not apply to products and
composition for use in any of these methods;
22.4. Plant varieties or animal breeds or essentially biological
process for the production of plants or animals. This provision shall
not apply to micro-organisms and non-biological and
microbiological processes.
Provisions under this subSEC shall not preclude Congress to
consider the enactment of a law providing sui generis protection of
plant varieties and animal breeds and a system of community
intellectual rights protection:
22.5. Aesthetic creations; and
22.6. Anything which is contrary to public order or morality. (Sec. 8,
R.A. No. 165a)
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Right to a Patent
[IHA]
SEC 28. Right to a Patent. - The right to a patent belongs to the
inventor, his heirs, or assigns. When two (2) or more persons have
jointly made an invention, the right to a patent shall belong to them
jointly. (Sec. 10, R.A. No. 165a)
First-to-File Rule
SEC 29. First to File Rule. - If two (2) or more persons have made
the invention separately and independently of each other, the right
to the patent shall belong to the person who filed an application for
such invention, or where two or more applications are filed for the
same invention, to the applicant who has the earliest filing date or,
the earliest priority date. (3rd sentence, Sec. 10, R.A. No. 165a.)
Right of Priority
[CTS]
SEC 31. Right of Priority. . - An application for patent filed by any
person who has previously applied for the same invention in
another country which by treaty, convention, or law affords similar
privileges to Filipino citizens, shall be considered as filed as of the
date of filing the foreign application: Provided, That: (a) the local
application expressly claims priority; (b) it is filed within twelve (12)
months from the date the earliest foreign application was filed; and
(c) a certified copy of the foreign application together with an
English translation is filed within six (6) months from the date of
filing in the Philippines. (Sec. 15, R.A. No. 165a)
Contents of Application
[RRDCA]
SEC 33. Appointment of Agent or Representative. - An applicant
who is not a resident of the Philippines must appoint and maintain
a resident agent or representative in the Philippines upon whom
notice or process for judicial or administrative procedure relating to
the application for patent or the patent may be served. (Sec. 11,
R.A. No. 165a)
SEC 34. The Request. - The request shall contain a petition for the
grant of the patent, the name and other data of the applicant, the
inventor and the agent and the title of the invention. (n) [PNT]
SEC 35. Disclosure and Description of the Invention. - 35.1.
Disclosure. - The application shall disclose the invention in a
manner sufficiently clear and complete for it to be carried out by a
person skilled in the art. Where the application concerns a
microbiological process or the product thereof and involves the use
of a micro-organism which cannot be sufficiently disclosed in the
application in such a way as to enable the invention to be carried
out by a person skilled in the art, and such material is not available
to the public, the application shall be supplemented by a deposit of
such material with an international depository institution. [SCC-
PSA-MDM]
35.2. Description. - The Regulations shall prescribe the contents of
the description and the order of presentation. (Sec. 14, R.A. No.
165a)
SEC 36. The Claims. - 36.1. The application shall contain one (1)
or more claims which shall define the matter for which protection is
sought. Each claim shall be clear and concise, and shall be
supported by the description. [ODCC]
36.2. The Regulations shall prescribe the manner of the
presentation of claims. (n)
116 of 143
SEC 37. The Abstract. - The abstract shall consist of a concise
summary of the disclosure of the invention as contained in the
description, claims and drawings in preferably not more than one
hundred fifty (150) words. It must be drafted in a way which allows
the clear understanding of the technical problem, the gist of the
solution of that problem through the invention, and the principal
use or uses of the invention. The abstract shall merely serve for
technical information. (n) [CCD]
Procedure of Grant of Patent
SEC 40. Filing Date Requirements. - 40.1. The filing date of a
patent application shall be the date of receipt by the Office of at
least the following elements: [EID]
(a) An express or implicit indication that a Philippine patent is
sought;
(b) Information identifying the applicant; and
(c) Description of the invention and one (1) or more claims in
Filipino or English.
40.2. If any of these elements is not submitted within the period set
by the Regulations, the application shall be considered withdrawn.
(n)
SEC 41. According a Filing Date. - The Office shall examine
whether the patent application satisfies the requirements for the
grant of date of filing as provided in SEC 40 hereof. If the date of
filing cannot be accorded, the applicant shall be given an
opportunity to correct the deficiencies in accordance with the
implementing Regulations. If the application does not contain all
the elements indicated in SEC 40, the filing date should be that
date when all the elements are received. If the deficiencies are not
remedied within the prescribed time limit, the application shall be
considered withdrawn. (n)
SEC 42. Formality Examination. - 42.1. After the patent application
has been accorded a filing date and the required fees have been
paid on time in accordance with the Regulations, the applicant
shall comply with the formal requirements specified by SEC 32 and
the Regulations within the prescribed period, otherwise the
application shall be considered withdrawn.
42.2. The Regulations shall determine the procedure for the re-
examination and revival of an application as well as the appeal to
the Director of Patents from any final action by the examiner. (Sec.
16, R.A. No. 165a)
SEC 43. Classification and Search. - An application that has
complied with the formal requirements shall be classified and a
search conducted to determine the prior art. (n)
SEC 44. Publication of Patent Application. - 44.1. The patent
application shall be published in the IPO Gazette together with a
search document established by or on behalf of the Office citing
any documents that reflect prior art, after the expiration of eighteen
(18) months from the filing date or priority date.
44.2. After publication of a patent application, any interested party
may inspect the application documents filed with the Office.
44.3. The Director General subject to the approval of the Secretary
of Trade and Industry, may prohibit or restrict the publication of an
application, if in his opinion, to do so would be prejudicial to the
national security and interests of the Republic of the Philippines.
(n)
SEC 45. Confidentiality Before Publication. - A patent application,
which has not yet been published, and all related documents, shall
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
not be made available for inspection without the consent of the
applicant. (n)
SEC 46. Rights Conferred by a Patent Application After
Publication. - The applicant shall have all the rights of a patentee
under SEC 76 against any person who, without his authorization,
exercised any of the rights conferred under SEC 71 of this Act in
relation to the invention claimed in the published patent
application, as if a patent had been granted for that invention:
Provided, That the said person had: [AK-RWN]
46.1. Actual knowledge that the invention that he was using was
the subject matter of a published application; or
46.2. Received written notice that the invention that he was using
was the subject matter of a published application being identified in
the said notice by its serial number: Provided, That the action may
not be filed until after the grant of a patent on the published
application and within four (4) years from the commission of the
acts complained of. (n)
SEC 47. Observation by Third Parties. - Following the publication
of the patent application, any person may present observations in
writing concerning the patentability of the invention. Such
observations shall be communicated to the applicant who may
comment on them. The Office shall acknowledge and put such
observations and comment in the file of the application to which it
relates. (n)
SEC 48. Request for Substantive Examination. - 48.1. The
application shall be deemed withdrawn unless within six (6)
months from the date of publication under SEC 41, a written
request to determine whether a patent application meets the
requirements of SECs 21 to 27 and SECs 32 to 39 and the fees
have been paid on time.
48.2. Withdrawal of the request for examination shall be
irrevocable and shall not authorize the refund of any fee. (n)
SEC 49. Amendment of Application. - An applicant may amend the
patent application during examination: Provided, That such
amendment shall not include new matter outside the scope of the
disclosure contained in the application as filed. (n)
SEC 50. Grant of Patent. - 50.1. If the application meets the
requirements of this Act, the Office shall grant the patent:
Provided, That all the fees are paid on time.
50.2. If the required fees for grant and printing are not paid in due
time, the application shall be deemed to be withdrawn.
50.3. A patent shall take effect on the date of the publication of the
grant of the patent in the IPO Gazette. (Sec. 18, R.A. No. 165a)
SEC 51. Refusal of the Application. - 51.1. The final order of
refusal of the examiner to grant the patent shall be appealable to
the Director in accordance with this Act.
51.2. The Regulations shall provide for the procedure by which an
appeal from the order of refusal from the Director shall be
undertaken. (n)
SEC 52. Publication Upon Grant of Patent. - 52.1. The grant of the
patent together with other related information shall be published in
the IPO Gazette within the time prescribed by the Regulations.
52.2. Any interested party may inspect the complete description,
claims, and drawings of the patent on file with the Office. (Sec. 18,
R.A. No. 165a)
117 of 143
SEC 53. Contents of Patent. - The patent shall be issued in the
name of the Republic of the Philippines under the seal of the Office
and shall be signed by the Director, and registered together with
the description, claims, and drawings, if any, in books and records
of the Office. (Secs. 19 and 20, R.A. No. 165a)
SEC 54. Term of Patent. - The term of a patent shall be twenty
(20) years from the filing date of the application. (Sec. 21, R.A. No.
165a)
SEC 55. Annual Fees. - 55.1. To maintain the patent application or
patent, an annual fee shall be paid upon the expiration of four (4)
years from the date the application was published pursuant to SEC
44 hereof, and on each subsequent anniversary of such date.
Payment may be made within three (3) months before the due
date. The obligation to pay the annual fees shall terminate should
the application be withdrawn, refused, or cancelled.
55.2. If the annual fee is not paid, the patent application shall be
deemed withdrawn or the patent considered as lapsed from the
day following the expiration of the period within which the annual
fees were due. A notice that the application is deemed withdrawn
or the lapse of a patent for non-payment of any annual fee shall be
published in the IPO Gazette and the lapse shall be recorded in
the Register of the Office.
55.3. A grace period of six (6) months shall be granted for the
payment of the annual fee, upon payment of the prescribed
surcharge for delayed payment. (Sec. 22, R.A. No. 165a)
SEC 56. Surrender of Patent. - 56.1. The owner of the patent, with
the consent of all persons having grants or licenses or other right,
title or interest in and to the patent and the invention covered
thereby, which have been recorded in the Office, may surrender
his patent or any claim or claims forming part thereof to the Office
for cancellation.
56.2. A person may give notice to the Office of his opposition to the
surrender of a patent under this SEC, and if he does so, the
Bureau shall notify the proprietor of the patent and determine the
question.
56.3. If the Office is satisfied that the patent may properly be
surrendered, he may accept the offer and, as from the day when
notice of his acceptance is published in the IPO Gazette, the
patent shall cease to have effect, but no action for infringement
shall lie and no right compensation shall accrue for any use of the
patented invention before that day for the services of the
government. (Sec. 24, R.A. No. 165a)
SEC 57. Correction of Mistakes of the Office. - The Director shall
have the power to correct, without fee, any mistake in a patent
incurred through the fault of the Office when clearly disclosed in
the records thereof, to make the patent conform to the records.
(Sec. 25, R.A. No. 165)
SEC 58. Correction of Mistake in the Application. - On request of
any interested person and payment of the prescribed fee, the
Director is authorized to correct any mistake in a patent of a formal
and clerical nature, not incurred through the fault of the Office.
(Sec. 26, R.A. No. 165a)
SEC 59. Changes in Patents. - 59.1. The owner of a patent shall
have the right to request the Bureau to make the changes in the
patent in order to:
(a) Limit the extent of the protection conferred by it;
(b) Correct obvious mistakes or to correct clerical errors; and
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
(c) Correct mistakes or errors, other than those referred to in letter
(b), made in good faith: Provided, That where the change would
result in a broadening of the extent of protection conferred by the
patent, no request may be made after the expiration of two (2)
years from the grant of a patent and the change shall not affect the
rights of any third party which has relied on the patent, as
published.
59.2. No change in the patent shall be permitted under this SEC,
where the change would result in the disclosure contained in the
patent going beyond the disclosure contained in the application
filed.
59.3. If, and to the extent to which the Office changes the patent
according to this SEC, it shall publish the same. (n)
SEC 60. Form and Publication of Amendment. - An amendment or
correction of a patent shall be accomplished by a certificate of
such amendment or correction, authenticated by the seal of the
Office and signed by the Director, which certificate shall be
attached to the patent. Notice of such amendment or correction
shall be published in the IPO Gazette and copies of the patent kept
or furnished by the Office shall include a copy of the certificate of
amendment or correction. (Sec. 27, R.A. No. 165)
Rights Conferred by a Patent
SEC 71. Rights Conferred by Patent. - 71.1. A patent shall confer
on its owner the following exclusive rights:
[RPP-MUSI-MDUSOSI-ATL]
(a) Where the subject matter of a patent is a product, to restrain,
prohibit and prevent any unauthorized person or entity from
making, using, offering for sale, selling or importing that product;
(b) Where the subject matter of a patent is a process, to restrain,
prevent or prohibit any unauthorized person or entity from using
the process, and from manufacturing, dealing in, using, selling or
offering for sale, or importing any product obtained directly or
indirectly from such process.
71.2. Patent owners shall also have the right to assign, or transfer
by succession the patent, and to conclude licensing contracts for
the same. (Sec. 37, R.A. No. 165a)
Term
SEC 54. Term of Patent. - The term of a patent shall be twenty
(20) years from the filing date of the application. (Sec. 21, R.A. No.
165a)
Cancellation of Patents
SEC 61. Cancellation of Patents. - 61.1. Any interested person
may, upon payment of the required fee, petition to cancel the
patent or any claim thereof, or parts of the claim, on any of the
following grounds:
[NN-ND-CP]
(a) That what is claimed as the invention is not new or Patentable;
(b) That the patent does not disclose the invention in a manner
sufficiently clear and complete for it to be carried out by any person
skilled in the art; or
(c) That the patent is contrary to public order or morality.
61.2. Where the grounds for cancellation relate to some of the
claims or parts of the claim, cancellation may be effected to such
extent only. (Secs. 28 and 29, R.A. No. 165a)
Remedies of True and Actual Inventor
118 of 143
SEC 68. Remedies of the True and Actual Inventor. - If a person,
who was deprived of the patent without his consent or through
fraud is declared by final court order or decision to be the true and
actual inventor, the court shall order for his substitution as
patentee, or at the option of the true inventor, cancel the patent,
and award actual and other damages in his favor if warranted by
the circumstances. (Sec. 33, R.A. No. 165a)
Limitations on the Rights of Patentees
SEC 72. Limitations of Patent Rights. - The owner of a patent has
no right to prevent third parties from performing, without his
authorization, the acts referred to in SEC 71 hereof in the following
circumstances:
[APEIS]
72.1. Using a patented product which has been put on the market
in the Philippines by the owner of the product, or with his express
consent, insofar as such use is performed after that product has
been so put on the said market;
72.2. Where the act is done privately and on a non-commercial
scale or for a non-commercial purpose: Provided, That it does not
significantly prejudice the economic interests of the owner of the
patent;
72.3. Where the act consists of making or using exclusively for the
purpose of experiments that relate to the subject matter of the
patented invention;
72.4. Where the act consists of the preparation for individual
cases, in a pharmacy or by a medical professional, of a medicine
in accordance with a medical prescription or acts concerning the
medicine so prepared;
72.5. Where the invention is used in any ship, vessel, aircraft, or
land vehicle of any other country entering the territory of the
Philippines temporarily or accidentally: Provided, That such
invention is used exclusively for the needs of the ship, vessel,
aircraft, or land vehicle and not used for the manufacturing of
anything to be sold within the Philippines. (Secs. 38 and 39, R.A.
No. 165a)
SEC 73. Prior User. - 73.1. Notwithstanding SEC 72 hereof, any
prior user, who, in good faith was using the invention or has
undertaken serious preparations to use the invention in his
enterprise or business, before the filing date or priority date of the
application on which a patent is granted, shall have the right to
continue the use thereof as envisaged in such preparations within
the territory where the patent produces its effect.
73.2. The right of the prior user may only be transferred or
assigned together with his enterprise or business, or with that part
of his enterprise or business in which the use or preparations for
use have been made. (Sec. 40, R.A. No. 165a)
SEC 74. Use of Invention by Government. - 74.1. A Government
agency or third person authorized by the Government may exploit
the invention even without agreement of the patent owner where:
[PI-JAAC]
(a) The public interest, in particular, national security, nutrition,
health or the development of other sectors, as determined by the
appropriate agency of the government, so requires; or
(b) A judicial or administrative body has determined that the
manner of exploitation, by the owner of the patent or his licensee is
anti-competitive.
74.2. The use by the Government, or third person authorized by
the Government shall be subject, mutatis mutandis, to the
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
conditions set forth in SECs 95 to 97 and 100 to 102. (Sec. 41,
R.A. No. 165a)
Patent Infringement
SEC 76. Civil Action for Infringement. - 76.1. The making, using,
offering for sale, selling, or importing a patented product or a
product obtained directly or indirectly from a patented process, or
the use of a patented process without the authorization of the
patentee constitutes patent infringement. [MUOSIUWA]
Civil Action
SEC 76. Civil Action for Infringement. - 76.1. The making, using,
offering for sale, selling, or importing a patented product or a
product obtained directly or indirectly from a patented process, or
the use of a patented process without the authorization of the
patentee constitutes patent infringement.
[DAIDC]
76.2. Any patentee, or anyone possessing any right, title or interest
in and to the patented invention, whose rights have been infringed,
may bring a civil action before a court of competent jurisdiction, to
recover from the infringer such damages sustained thereby, plus
attorney's fees and other expenses of litigation, and to secure an
injunction for the protection of his rights.
76.3. If the damages are inadequate or cannot be readily
ascertained with reasonable certainty, the court may award by way
of damages a sum equivalent to reasonable royalty.
76.4. The court may, according to the circumstances of the case,
award damages in a sum above the amount found as actual
damages sustained: Provided, That the award does not exceed
three (3) times the amount of such actual damages.
76.5. The court may, in its discretion, order that the infringing
goods, materials and implements predominantly used in the
infringement be disposed of outside the channels of commerce or
destroyed, without compensation.
76.6. Anyone who actively induces the infringement of a patent or
provides the infringer with a component of a patented product or of
a product produced because of a patented process knowing it to
be especially adopted for infringing the patented invention and not
suitable for substantial non-infringing use shall be liable as a
contributory infringer and shall be jointly and severally liable with
the infringer. (Sec. 42, R.A. No. 165a)
Defenses
[FKI]
SEC 79. Limitation of Action for Damages. - No damages can be
recovered for acts of infringement committed more than four (4)
years before the institution of the action for infringement. (Sec. 43,
R.A. No. 165)
SEC 80. Damages, Requirement of Notice. - Damages cannot be
recovered for acts of infringement committed before the infringer
had known, or had reasonable grounds to know of the patent. It is
presumed that the infringer had known of the patent if on the
patented product, or on the container or package in which the
article is supplied to the public, or on the advertising material
relating to the patented product or process, are placed the words
"Philippine Patent" with the number of the patent. (Sec. 44, R.A.
No. 165a)
SEC 81. Defenses in Action for Infringement. - In an action for
infringement, the defendant, in addition to other defenses available
to him, may show the invalidity of the patent, or any claim thereof,
119 of 143
on any of the grounds on which a petition of cancellation can be
brought under SEC 61 hereof. (Sec. 45, R.A. No. 165)
Burden of Proof in Infringement Process
SEC 78. Process Patents; Burden of Proof . - If the subject matter
of a patent is a process for obtaining a product, any identical
product shall be presumed to have been obtained through the use
of the patented process if the product is new or there is substantial
likelihood that the identical product was made by the process and
the owner of the patent has been unable despite reasonable
efforts, to determine the process actually used. In ordering the
defendant to prove that the process to obtain the identical product
is different from the patented process, the court shall adopt
measures to protect, as far as practicable, his manufacturing and
business secrets. (n)
Criminal Action
IMP 6MOS-3 YRS
FINE 100K-300K
3 YRS
SEC 84. Criminal Action for Repetition of Infringement. - If
infringement is repeated by the infringer or by anyone in
connivance with him after finality of the judgment of the court
against the infringer, the offenders shall, without prejudice to the
institution of a civil action for damages, be criminally liable therefor
and, upon conviction, shall suffer imprisonment for the period of
not less than six (6) months but not more than three (3) years
and/or a fine of not less than One hundred thousand pesos
(P100,000) but not more than Three hundred thousand pesos
(P300,000), at the discretion of the court. The criminal action
herein provided shall prescribe in three (3) years from date of the
commission of the crime. (Sec. 48, R.A. No. 165a)
Voluntary Licensing
Prohibited Clauses
SEC 87. Prohibited Clauses. - Except in cases under SEC 91, the
following provisions shall be deemed prima facie to have an
adverse effect on competition and trade:
[SPVCP TREUP CRALE]
87.1. Those which impose upon the licensee the obligation to
acquire from a specific source capital goods, intermediate
products, raw materials, and other technologies, or of permanently
employing personnel indicated by the licensor;
87.2. Those pursuant to which the licensor reserves the right to fix
the sale or resale prices of the products manufactured on the basis
of the license;
87.3. Those that contain restrictions regarding the volume and
structure of production;
87.4. Those that prohibit the use of competitive technologies in a
non-exclusive technology transfer agreement;
87.5. Those that establish a full or partial purchase option in favor
of the licensor;
87.6. Those that obligate the licensee to transfer for free to the
licensor the inventions or improvements that may be obtained
through the use of the licensed technology;
87.7. Those that require payment of royalties to the owners of
patents for patents which are not used;
87.8. Those that prohibit the licensee to export the licensed
product unless justified for the protection of the legitimate interest
of the licensor such as exports to countries where exclusive
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licenses to manufacture and/or distribute the licensed product(s)
have already been granted;
87.9. Those which restrict the use of the technology supplied after
the expiration of the technology transfer arrangement, except in
cases of early termination of the technology transfer arrangement
due to reason(s) attributable to the licensee;
87.10. Those which require payments for patents and other
industrial property rights after their expiration, termination
arrangement;
87.11. Those which require that the technology recipient shall not
contest the validity of any of the patents of the technology supplier;
87.12. Those which restrict the research and development
activities of the licensee designed to absorb and adapt the
transferred technology to local conditions or to initiate research
and development programs in connection with new products,
processes or equipment;
87.13. Those which prevent the licensee from adapting the
imported technology to local conditions, or introducing innovation
to it, as long as it does not impair the quality standards prescribed
by the licensor;
87.14. Those which exempt the licensor for liability for non-
fulfilment of his responsibilities under the technology transfer
arrangement and/or liability arising from third party suits brought
about by the use of the licensed product or the licensed
technology; and
87.15. Other clauses with equivalent effects. (Sec. 33-C (2), R.A
165a)
Mandatory Provisions
SEC 88. Mandatory Provisions. - The following provisions shall be
included in voluntary license contracts:
[PCAT]
88.1. That the laws of the Philippines shall govern the
interpretation of the same and in the event of litigation, the venue
shall be the proper court in the place where the licensee has its
principal office;
88.2. Continued access to improvements in techniques and
processes related to the technology shall be made available during
the period of the technology transfer arrangement;
88.3. In the event the technology transfer arrangement shall
provide for arbitration, the Procedure of Arbitration of the
Arbitration Law of the Philippines or the Arbitration Rules of the
United Nations Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation and Arbitration of the
International Chamber of Commerce (ICC) shall apply and the
venue of arbitration shall be the Philippines or any neutral country;
and
88.4. The Philippine taxes on all payments relating to the
technology transfer arrangement shall be borne by the licensor. (n)
Unenforceability of Non-Complying Technology Transfer
Agreement
SEC 92. Non-Registration with the Documentation, Information
and Technology Transfer Bureau. - Technology transfer
arrangements that conform with the provisions of SECs 86 and 87
need not be registered with the Documentation, Information and
Technology Transfer Bureau. Non-conformance with any of the
provisions of SECs 87 and 88, however, shall automatically render
the technology transfer arrangement unenforceable, unless said
technology transfer arrangement is approved and registered with
the Documentation, Information and Technology Transfer Bureau
under the provisions of SEC 91 on exceptional cases. (n)
120 of 143
Compulsory Licensing
Ground for Grant of Compulsory License
SEC 93. Grounds for Compulsory Licensing. - The Director of
Legal Affairs may grant a license to exploit a patented invention,
even without the agreement of the patent owner, in favor of any
person who has shown his capability to exploit the invention, under
any of the following circumstances:
[NPJPN]
93.1. National emergency or other circumstances of extreme
urgency;
93.2. Where the public interest, in particular, national security,
nutrition, health or the development of other vital sectors of the
national economy as determined by the appropriate agency of the
Government, so requires; or
93.3. Where a judicial or administrative body has determined that
the manner of exploitation by the owner of the patent or his
licensee is anti-competitive; or
93.4. In case of public non-commercial use of the patent by the
patentee, without satisfactory reason;
93.5. If the patented invention is not being worked in the
Philippines on a commercial scale, although capable of being
worked, without satisfactory reason: Provided, That the importation
of the patented article shall constitute working or using the patent.
(Secs. 34, 34-A, 34-B, R.A. No. 165a)
Terms and Conditions of Grant
SEC 100. Terms and Conditions of Compulsory License. - The
basic terms and conditions including the rate of royalties of a
compulsory license shall be fixed by the Director of Legal Affairs
subject to the following conditions:
[SNNPTP]
100.1. The scope and duration of such license shall be limited to
the purpose for which it was authorized;
100.2. The license shall be non-exclusive;
100.3. The license shall be non-assignable, except with that part of
the enterprise or business with which the invention is being
exploited;
100.4. Use of the subject matter of the license shall be devoted
predominantly for the supply of the Philippine market: Provided,
That this limitation shall not apply where the grant of the license is
based on the ground that the patentee's manner of exploiting the
patent is determined by judicial or administrative process, to be
anti-competitive.
100.5. The license may be terminated upon proper showing that
circumstances which led to its grant have ceased to exist and are
unlikely to recur: Provided, That adequate protection shall be
afforded to the legitimate interest of the licensee; and
100.6. The patentee shall be paid adequate remuneration taking
into account the economic value of the grant or authorization,
except that in cases where the license was granted to remedy a
practice which was determined after judicial or administrative
process, to be anti-competitive, the need to correct the anti-
competitive practice may be taken into account in fixing the
amount of remuneration. (Sec. 35-B, R.A. No. 165a)
Licensees Exemption from Liability
SEC 102. Licensee's Exemption from Liability. - Any person who
works a patented product, substance and/or process under a
license granted under this Chapter, shall be free from any liability
for infringement: Provided however, That in the case of voluntary
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
licensing, no collusion with the licensor is proven. This is without
prejudice to the right of the rightful owner of the patent to recover
from the licensor whatever he may have received as royalties
under the license. (Sec. 35-E, R.A. No. 165a)
Assignment or Transfer of Patent
Form
SEC 105. Form of Assignment. - The assignment must be in
writing, acknowledged before a notary public or other officer
authorized to administer oath or perform notarial acts, and certified
under the hand and official seal of the notary or such other officer.
(Sec. 52, R.A. No. 165) [WAC]
Need for Recording to Bind Third Parties
SEC 106. Recording. - 106.1. The Office shall record assignments,
licenses and other instruments relating to the transmission of any
right, title or interest in and to inventions, and patents or application
for patents or inventions to which they relate, which are presented
in due form to the Office for registration, in books and records kept
for the purpose. The original documents together with a signed
duplicate thereof shall be filed, and the contents thereof should be
kept confidential. If the original is not available, an authenticated
copy thereof in duplicate may be filed. Upon recording, the Office
shall retain the duplicate, return the original or the authenticated
copy to the party who filed the same and notice of the recording
shall be published in the IPO Gazette.
106.2. Such instruments shall be void as against any subsequent
purchaser or mortgagee for valuable consideration and without
notice, unless, it is so recorded in the Office, within three (3)
months from the date of said instrument, or prior to the subsequent
purchase or mortgage. (Sec. 53, R.A. No. 165a)
Utility Models
SEC 109. Special Provisions Relating to Utility Models. - 109.1. (a)
An invention qualifies for registration as a utility model if it is new
and industrially applicable.
Term
109.3. A utility model registration shall expire, without any
possibility of renewal, at the end of the seventh year after the date
of the filing of the application.
17.6 Cases
Test of Infringement
GODINES V CA
Facts:
The patent involved in this case is Letters Patent No. UM-2236
issued by the Philippine Patent Office to one Magdalena S. Villaruz
on July 15, 1976. It covers a utility model for a hand tractor or
power tiller. The above mentioned patent was acquired by SV-Agro
Industries Enterprises, Inc., herein private respondent, from
Magdalena Villaruz, its chairman and president, by virtue of a
Deed of Assignment executed by the latter in its favor. On October
31, 1979. In 1979, SV-Agro Industries suffered a decline of more
than 50% in sales in its Molave, Zamboanga del Sur branch. Upon
investigation, it discovered that power tillers similar to those
121 of 143
patented by private respondent were being manufactured and sold
by petitioner herein. Consequently, private respondent notified
Pascual Godines about the existing patent and demanded that the
latter stop selling and manufacturing similar power tillers. Upon
petitioner's failure to comply with the demand, SV-Agro Industries
filed before the Regional Trial Court a complaint for infringement of
patent and unfair competition.
RTC: held Pascual Godines liable for infringement of patent and
unfair competition.
CA: decision was affirmed by the appellate court.
Issue: WON Petitioner is guilty of Patent Infringement.
Held: Yes
Ratio:
We find no merit in his arguments. The question of whether
petitioner was manufacturing and selling power tillers is a question
of fact better addressed to the lower courts. In dismissing the first
argument of petitioner herein, the Court of Appeals quoted the
findings of the court, to wit:
It is the contention of defendant that he did not manufacture or
make imitations or copies of plaintiff's turtle power tiller as what he
merely did was to fabricate his floating power tiller upon
specifications and designs of those who ordered them. However,
this contention appears untenable in the light of the following
circumstances:
he admits in his Answer that he has been manufacturing power
tillers or hand tractors, selling and distributing them long before
plaintiff started selling its turtle power tiller in Zamboanga del Sur
and Misamis Occidental, meaning that defendant is principally a
manufacturer of power tillers, not upon specification and design
of buyers, but upon his own specification and design;
it would be unbelievable that defendant would fabricate power
tillers similar to the turtle power tillers of plaintiff upon
specifications of buyers without requiring a job order where the
specification and designs of those ordered are specified.
No document was (sic) ever been presented showing such job
orders, and it is rather unusual for defendant to manufacture
something without the specification and designs, considering that
he is an engineer by profession and proprietor of the Ozamis
Engineering shop.
On the other hand, it is also highly unusual for buyers to order the
fabrication of a power tiller or hand tractor and allow defendant to
manufacture them merely based on their verbal instructions.
This is contrary to the usual business and manufacturing practice.
This is not only time consuming, but costly because it involves a
trial and error method, repeat jobs and material wastage.
Defendant judicially admitted two (2) units of the turtle power tiller
sold by him to Policarpio Berondo.
Tests used in the case:
- Tests have been established to determine infringement.
These are :
LITERAL INFRINGEMENT: in using literal infringement as a test,
". . . resort must be had, in the first instance, to the words of the
claim. If accused matter clearly falls within the claim, infringement
is made out and that is the end of it."
To determine whether the particular item falls within the literal
meaning of the patent claims, the court must juxtapose the claims
of the patent and the accused product within the overall context of
the claims and specifications, to determine whether there is exact
identity of all material elements.
In appearance and form, both the floating power tillers of the
defendant and the turtle power tiller of the plaintiff are virtually the
same.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Viewed from any perspective or angle, the power tiller of the
defendant is identical and similar to that of the turtle power tiller of
plaintiff in form, configuration, design and appearance. The parts
or components thereof are virtually the same.
Moreover, it is also observed that petitioner also called his power
tiller as a floating power tiller.
(b) the DOCTRINE OF EQUIVALENTS: according to this doctrine,
(a)n infringement also occurs when a device appropriates a prior
invention by incorporating its innovative concept and, albeit with
some modification and change, performs substantially the same
function in substantially the same way to achieve substantially the
same result.
The reason for the doctrine of equivalents is that to permit the
imitation of a patented invention which does not copy any literal
detail would be to convert the protection of the patent grant into a
hollow and useless thing.
A careful examination between the two power tillers will show that
they will operate on the same fundamental principles.
More specifically, it is necessary and sufficient to constitute
equivalency that the same function can be performed in
substantially the same way or manner, or by the same or
substantially the same, principle or mode of operation; but where
these tests are satisfied, mere differences of form or name are
immaterial.
Compulsory Licensing
SMITH KLINE & FRENCH LABORATORIES V CA
Facts:
Petitioner is a foreign corporation with principal office at Welwyn
Garden City, England. It owns Philippine Letters Patent No. 12207
issued by the Bureau of Patents, Trademarks and Technology
Transfer (BPTTT) for the patent of the drug Cimetidine.
Private respondent is a domestic corporation engaged in the
business of manufacturing and distributing pharmaceutical
products. On 30 March 1987, it filed a petition for compulsory
licensing[3] with the BPTTT for authorization to manufacture its
own brand of medicine from the drug Cimetidine and to market the
resulting product in the Philippines. The petition was filed pursuant
to the provisions of SEC 34 of Republic Act No. 165 (An Act
Creating a Patent Office Prescribing Its Powers and Duties,
Regulating the Issuance of Patents, and Appropriating Funds
Therefor), which provides for the compulsory licensing of a
particular patent after the expiration of two years from the grant of
the latter if the patented invention relates to, inter alia, medicine or
that which is necessary for public health or public safety. Private
respondent alleged that the grant of Philippine Letters Patent No.
12207 was issued on 29 November 1978; that the petition was
filed beyond the two-year protective period provided in SEC 34 of
R.A. No. 165; and that it had the capability to work the patented
product or make use of it in its manufacture of medicine.
Petitioner opposed, arguing that private respondent had no cause
of action and lacked the capability to work the patented product;
the petition failed to specifically divulge how private respondent
would use or improve the patented product; and that private
respondent was motivated by the pecuniary gain attendant to the
grant of a compulsory license. Petitioner also maintained that it
was capable of satisfying the demand of the local market in the
manufacture and marketing of the medicines covered by the
patented product.
BPTTT decided for the Private Respondent approving the
application for a license. This was affirmed by the CA.
Issue: WON the grant of the license was proper
122 of 143
Held: Yes
Ratio:
Article 5 of the Paris Convention for the Protection of Industrial
Property,[8] or Paris Convention, for short, of which the
Philippines became a party thereto only in 1965.[9] Pertinent
portions of said Article 5, SEC A, provide:
A. xxx
(2) Each country of the union shall have the right to take
legislative measures providing for the grant of compulsory licenses
to prevent the abuses which might result from the exercise of the
exclusive rights conferred by the patent, for example, failure to
work.
xxx
(4) A compulsory license may not be applied for on the
ground of failure to work or insufficient working before the
expiration of a period of four years from the date of filing of the
patent application or three years from the date of the grant of the
patent, whichever period expires last; it shall be refused if the
patentee justifies his inaction by legitimate reasons. Such a
compulsory license shall be non-exclusive and shall not be
transferable, even in the form of the grant of a sub-license, except
with that part of the enterprise or goodwill which exploits such
license.
It is thus clear that SEC A(2) of Article 5 above unequivocally and
explicitly respects the right of member countries to adopt legislative
measures to provide for the grant of compulsory licenses to
prevent abuses which might result from the exercise of the
exclusive rights conferred by the patent. An example provided of
possible abuses is "failure to work;" however, as such is merely
supplied by way of an example, it is plain that the treaty does not
preclude the inclusion of other forms or categories of abuses.
Also Article 34 of R.A. No. 165 states:
EC. 34. Grounds for Compulsory Licensing. -- (1) Any person
may apply to the Director for the grant of a license under a
particular patent at any time after the expiration of two years from
the date of the grant of the patent, under any of the following
circumstances:
(e) If the patented invention or article relates to food or
medicine or manufactured products or substances which can be
used as food or medicine, or is necessary for public health or
public safety.
Parenthetically, it must be noted that paragraph (4) of SEC A,
Article 5 of the Paris Convention setting time limitations in the
application for a compulsory license refers only to an instance
where the ground therefor is "failure to work or insufficient
working," and not to any ground or circumstance as the treaty
signatories may reasonably determine.
Neither may petitioner validly invoke what it designates as the
GATT Treaty, Uruguay Round. This act is better known as the
Uruguay Final Act signed for the Philippines on 15 April 1994 by
Trade and Industry Secretary Rizalino Navarro. Forming integral
parts thereof are the Agreement Establishing the World Trade
Organization, the Ministerial Declarations and Decisions, and the
Understanding on Commitments in Financial Services. The
Agreement establishing the World Trade Organization includes
various agreements and associated legal instruments. It was only
on 14 December 1994 that the Philippine Senate, in the exercise of
its power under SEC 21 of Article VII of the Constitution, adopted
Senate Resolution No. 97 concurring in the ratification by the
President of the Agreement. The President signed the instrument
of ratification on 16 December 1994. But plainly, this treaty has no
retroactive effect. Accordingly, since the challenged BPTTT
decision was rendered on 14 February 1994, petitioner cannot
avail of the provisions of the GATT treaty.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
It cannot likewise be claimed that petitioner was unduly deprived of
its property rights, as R.A. No. 165 not only grants the patent
holder a protective period of two years to enjoy his exclusive rights
thereto; but subsequently, the law recognizes just compensation in
the form of royalties.
In Parke, Davies & Co. v. Doctors' Pharmaceuticals, Inc., we held:
The right to exclude others from the manufacturing, using, or
vending an invention relating to, food or medicine should be
conditioned to allowing any person to manufacture, use, or vend
the same after a period of three [now two] years from the date of
the grant of the letters patent. After all, the patentee is not entirely
deprived of any proprietary right. In fact, he has been given the
period of three years [now two years] of complete monopoly over
the patent. Compulsory licensing of a patent on food or medicine
without regard to the other conditions imposed in SEC 34 [now
SEC 35] is not an undue deprivation of proprietary interests over a
patent right because the law sees to it that even after three years
of complete monopoly something is awarded to the inventor in the
form of bilateral and workable licensing agreement and a
reasonable royalty to be agreed upon by the parties and in default
of such an agreement, the Director of Patents may fix the terms
and conditions of the license.
Patent Infringement
CRESER PRECISION SYSTEMS V CA
Facts:
Floro International Corp. (Floro) is a domestic corporation engaged
in the manufacture, production, distribution and sale of military
armaments, munitions, airmunitions and other similar materials.
January 23, 1990 Floro granted a Patent by Bureau of Patents,
Trademarks and Technology Transfer (BPTTT) covering an aerial
fuze, duly published in the September-October-1990 issue of the
Bureau of Patent's Official Gazette.
November 1993 Floros president, Mr. Gregory Floro, Jr.,
discovered that Creser Precision Systems, Inc. (Creser):
submitted samples Floros patented aerial fuze to the AFP for
testing.
was claiming the aerial fuze as its own
was planning to bid and commercially manufacture it without
license or authority from Floro.
December 3, 1993 Floro sent a letter to Creser advising it of its
existing patent and its rights thereunder, warning Creser of a
possible court action and/or application for injunction, should it
proceed with the scheduled testing by the military on December 7,
1993.
December 8, 1993 Creser filed in the RTC a complaint for
injunction and damages arising from the alleged infringement,
alleging that:
Creser is the first, true and actual inventor of an aerial fuze
denominated as "Fuze, PDR 77 CB4" developed as early as
December 1981 under the Self-Reliance Defense Posture Program
(SRDP) of the AFP;
sometime in 1986, Creser began supplying the AFP with the said
aerial fuze;
Floro's aerial fuze is identical in every respect to the Creser's fuze;
only difference: are miniscule and merely cosmetic in nature.
Creser prays for the issuance of TRO/injunction be issued
enjoining Floro from manufacturing, marketing and/or profiting
therefrom, and/or from performing any other act in connection
therewith or tending to prejudice and deprive it of any rights,
privileges and benefits to which it is duly entitled as the first, true
and actual inventor of the aerial fuze. TRO granted.
123 of 143
Floros defense: Creser has no patent no cause of action for
infringement; Creser's available remedy = petition for cancellation.
RTC: Granted. Floro enjoined.
RTC MFR: Affirmed.
Creser developed its aerial fuze way back in 1981 while Floro
began manufacturing only in 1987. Creser's aerial fuze was
PRESUMABLY copied or imitated.
Floro's assertion that an action for infringement may only be
brought by "anyone possessing right, title or interest to the
patented invention," (SEC 42, RA 165) qualified by Sec. 10, RA
165 to include only "the first true and actual inventor, his heirs,
legal representatives or assignees, " untenable.
Sec. 10 merely enumerates the persons who may have an
invention patented BUT does not necessarily limit to these persons
the right to institute an action for infringement.
Floro will not suffer irreparable injury. Floro's claim is primarily
hinged on its patent the validity of which is being questioned in this
case.
Floros grounds before CA:
Creser has no patent;
In an action for cancellation or invalidation of Floro's Letters Patent
proper venue = Office of the Director of Patents;
CA: Granted, RTC Reversed.
Creser: I can file, under SEC 42 of the Patent Law (R.A. 165), an
action for infringement, not as a patentee BUT as an entity in
possession of a right, title or interest in and to the patented
invention.
Absence of a patent DOES NOT:
prevent one from lawfully suing another for infringement of said
patent,
bar the first true and actual inventor of the patented invention from
suing another who was granted a patent in a suit for declaratory or
injunctive relief a remedy likened to a civil action for
infringement under SEC 42.
Issue: Can a non-patentee as the true inventor sue for patent
infringement?
Held: No, CA affirmed
Ratio:
R.A. 165 SEC. 42. Civil action for infringement. Any patentee, or
anyone possessing any right, title or interest in and to the patented
invention, whose rights have been infringed, may bring a civil
action before the proper CFI (now RTC), to recover from the
infringer damages sustained by reason of the infringement and to
secure an injunction for the protection of his right...
Only the patentee or his successors-in-interest may file an action
for infringement.
"anyone possessing any right, title or interest in and to the
patented invention" = refers only to the patentee's successors-in-
interest, assignees or grantees Moore vs. Marsh: since actions
for infringement of patent may be brought in the name of the
person or persons interested, whether as patentee, assignees, or
as grantees, of the exclusive right.
no infringement of a patent until a patent has been issued
Anchor Hocking Glass Corp. vs. White Cap.: since whatever right
one has to the invention covered by the patent arises alone from
the grant of patent.
Peck vs. Collins: a person or entity who has not been granted
letters patent over an invention and has not acquired any right or
title thereto either as assignee or as licensee, has no cause of
action for infringement because the right to maintain an
infringement suit depends on the existence of the patent.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
Creser admits it has no patent over its aerial fuze no legal basis
or cause of action for injunction and damages arising from Floros
alleged infringement.
While Creser = FIRST INVENTOR STILL it has NO RIGHT of
property upon which it can maintain a suit unless it obtains a
patent.
Bauer & Cie vs. O'Donnel: An inventor has no common-law right to
a monopoly of his invention. He has the right to make, use and
vend his own invention, but if he voluntarily discloses it, such as by
offering it for sale, the world is free to copy and use it with
impunity. A patent, however, gives the inventor the right to exclude
all others. As a patentee, he has the exclusive right of making,
using or selling the invention.
Remedy of declaratory judgment or injunctive suit on patent
similar to civil action for infringement under SEC 42 of the Patent
Law.
Infringement = available only to the patent holder or his
successors-in-interest.
BUT Creser still has a remedy he can, under SEC 28:
file a petition for cancellation of the patent within three (3) years
from the publication of said patent with the Director of Patents AND
raise as ground that patentee Floro is not the true and actual
inventor.
Creser however failed to do so cannot now assail validity of
Floro's patent. Floros patent when issued is presumably valid, and
NOW he is legally and factually the first and true inventor of the
invention.
Aguas vs. De Leon: "The validity of the patent and the question
over the investments, novelty and usefulness of the improved
process therein specified and described are matters better
determined by the Philippines Patent Office. The technical Staff of
the Philippines Patent Office, composed of experts in their field,
have, by the issuance of the patent in question, accepted the
thinness of the respondent's new tiles as a discovery. There is a
presumption that the Philippine Patent Office has correctly
determined the patentability of the improvement by the respondent
of the process in question."
INDUSTRIAL DESIGNS AND LAYOUT DESIGNS
(TOPOGRAPHIES) OF INTEGRATED CIRCUITS
17.7 Topics
Definitions of Industrial Design, Integrated Circuits and
Layout Design
SEC. 112. Definition of Terms:"
"1. An Industrial Design is any composition of lines or colors or any
three-dimensional form, whether or not associated with lines or
colors: Provided, That such composition or form gives a special
appearance to and can serve as pattern for an industrial product or
handicraft;
124 of 143
"2. Integrated Circuit means a product, in its final form, or an
intermediate form, in which the elements, at least one of which is
an active element and some or all of the interconnections are
integrally formed in and/or on a piece of material, and which is
intended to perform an electronic function; and
"3. Layout-Design is synonymous With 'Topography' and means
the three-dimensional disposition, however expressed, of the
elements, at least one of which is an active element, and of some
or all of the interconnections of an integrated circuit, or such a
three-dimensional disposition prepared for an integrated circuit
intended for manufacture.
Substantive Conditions for Protection
SEC. 113. Substantive Conditions/or Protection. - 113.1. Only
industrial designs that are new or ornamental shall benefit from
protection under this Act.
"113.2. Industrial designs dictated essentially by technical or
functional considerations to obtain a technical result or those that
are contrary to public order, health or morals shall not be
protected.
"113.3. Only layout -designs of integrated circuits that are original
shall benefit from protection under this Act. A layout-design shall
be considered original if it is the result of its creator's own
intellectual effort and is not commonplace among creators of
layout-designs and manufacturers of integrated circuits at the time
of its creation.
"113.4. A layout-design consisting of a combination of elements
and interconnections that are commonplace shall be protected only
if the combination, taken as a whole, is original.
Term
SEC. 118. The Term of Industrial Design or Layout-Design
Registration. - 118.1. The registration of an industrial design shall
be for a period of five (5) years from the filing date of the
application.
" 118.2. The registration of an industrial design may be renewed
for not more than two (2) consecutive periods of five (5) years
each, by paying the renewal fee.
"118.3. The renewal fee shall be paid within twelve (12) months
preceding the expiration of the period of registration. However, a
grace period of six (6) months shall be granted for payment of the
fees after such expiration, upon payment of a surcharge.
"118.4. The Regulations shall fix the amount of renewal fee, the
surcharge and other requirements regarding the recording of
renewals of registration.
" 118.5. Registration of a layout-design shall be valid for a period
often (10) years, without renewal, and such validity to be counted
from the date of commencement of the protection accorded to the
layout-design. The protection of a layout-design under this Act
shall commence:
"a) on the date of the first commercial exploitation, anywhere in the
world, of the layout-design by or with the consent of the right
holder: Provided, That an application for registration is filed with
the Intellectual Property Office within two (2) years from such date
of first commercial exploitation; or
"b) on the filing date accorded to the application for the registration
of the layout-design if the layout-design has not been previously
exploited commercially anywhere in the world."
Rights Conferred on Registered Owner of Layout Design
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
119.4. Rights Conferred to the Owner of a Layout-Design
Registration. - The owner of a layout-design registration shall enjoy
the following rights:
"(1) to reproduce, whether by incorporation in an integrated circuit
or otherwise, the registered layout-design in its entirety or any part
thereof, except the act of reproducing any part that does not
comply with the requirement of originality; and
"(2) to sell or otherwise distribute for commercial purposes the
registered layout design, an article or an integrated circuit in which
the registered layout-design is incorporated.
TRADEMARKS
Definitions of marks, collective marks, and trade names
SEC. 121. Definitions--
As used in Part III, the following terms have the following
meanings:
121.1. "Mark" means any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of an enterprise and
shall include a stamped or marked container of goods; (Sec. 38,
R.A. No. 166a)
121.2. "Collective mark" means any visible sign designated as
such in the application for registration and capable of
distinguishing the origin or any other common characteristic,
including the quality of goods or services of different enterprises
which use the sign under the control of the registered owner of the
collective mark; (Sec. 40, R.A. No. 166a)
121.3. "Trade name" means the name or designation identifying or
distinguishing an enterprise; (Sec. 38, R.A. No. 166a)
Notes:
- A mark may be a word mark such as a full name (Pierre
Cardin), a first name (Paloma), a surname (Honda), or a composite
mark (i.e., a combination of a word or letter and a device such as
the mark Caltex which has the word Caltex written across the
representation of a star, all of which are enclosed by a circle
device.
- A mark could also be a device mark which may be a
geometrical figure (Olympic rings), a stylized rendering of the
Alphabet (M of McDonalds), or a representation of any object (IBM
World).
Acquisition of ownership of mark
SEC. 122. How Marks are AcquiredThe rights in a mark shall
be acquired through registration made validly in accordance with
the provisions of this law. (Sec. 2-A, R.A. No. 166a)
Notes:
How Ownership Acquired
Mark Trade name
Acquired solely through Acquired through adoption and
registration use. Registration is not
required.
- Any person may apply for registration who is domiciled
or has a real and effective industrial establishment in a country
o Which is a party to any convention, treaty or agreement
relating to IPR or the repression of unfair competition, to which the
Philippines is also a party; OR
o Extends reciprocal rights to nationals of the Philippines.
125 of 143
Acquisition of trade names
Sec. 165. Trade Names or Business Names
165.1. A name or designation may not be used as a trade name if
by its nature or the use to which such name or designation may be
put, it is contrary to public order or morals and if, in particular, it is
liable to deceive trade circles or the public as to the nature of the
enterprise identified by that name.
165.2. (a) Notwithstanding any laws or regulations providing for
any obligation to register trade names, such names shall be
protected, even prior to or without registration, against any
unlawful act committed by third parties.
(b) In particular, any subsequent use of the trade name by a third
party, whether as a trade name or a mark or collective mark, or
any such use of a similar trade name or mark, likely to mislead the
public, shall be deemed unlawful.
165.3. The remedies provided for in SECs 153 to 156 and SECs
166 and 167 shall apply mutatis mutandis.
165.4. Any change in the ownership of a trade name shall be made
with the transfer of the enterprise or part thereof identified by that
name. The provisions of SubSECs 149.2 to 149.4 shall apply
mutatis mutandis.
Non-registrable marks
123.1. A mark cannot be registered if it:
(a) Consists of immoral, deceptive or scandalous matter, or matter
which may disparage or falsely suggest a connection with persons,
living or dead, institutions, beliefs, or national symbols, or bring
them into contempt or disrepute;
(b) Consists of the flag or coat of arms or other insignia of the
Philippines or any of its political subdivisions, or of any foreign
nation, or any simulation thereof;
(c) Consists of a name, portrait or signature identifying a particular
living individual except by his written consent, or the name,
signature, or portrait of a deceased President of the Philippines,
during the life of his widow, if any, except by written consent of the
widow;
(d) Is identical with a registered mark belonging to a different
proprietor or a mark with an earlier filing or priority date, in respect
of:
(i) The same goods or services, or
(ii) Closely related goods or services, or
(iii) If it nearly resembles such a mark as to be likely to
deceive or cause confusion;
(e) Is identical with, or confusingly similar to, or constitutes a
translation of a mark which is considered by the competent
authority of the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here, as being
already the mark of a person other than the applicant for
registration, and used for identical or similar goods or services:
Provided, That in determining whether a mark is well-known,
account shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including knowledge in
the Philippines which has been obtained as a result of the
promotion of the mark;
(f) Is identical with, or confusingly similar to, or constitutes a
translation of a mark considered well-known in accordance with the
preceding paragraph, which is registered in the Philippines with
respect to goods or services which are not similar to those with
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
respect to which registration is applied for: Provided, That use of
the mark in relation to those goods or services would indicate a
connection between those goods or services, and the owner of the
registered mark: Provided further, That the interests of the owner
of the registered mark are likely to be damaged by such use;
(g) Is likely to mislead the public, particularly as to the nature,
quality, characteristics or geographical origin of the goods or
services;
(h) Consists exclusively of signs that are generic for the goods or
services that they seek to identify;
(i) Consists exclusively of signs or of indications that have become
customary or usual to designate the goods or services in everyday
language or in bona fide and established trade practice;
(j) Consists exclusively of signs or of indications that may serve in
trade to designate the kind, quality, quantity, intended purpose,
value, geographical origin, time or production of the goods or
rendering of the services, or other characteristics of the goods or
services;
(k) Consists of shapes that may be necessitated by technical
factors or by the nature of the goods themselves or factors that
affect their intrinsic value;
(l) Consists of color alone, unless defined by a given form; or
(m) Is contrary to public order or morality.
Notes:
- If a component of an otherwise registrable mark is not
registrable, the applicant could disclaim the unregistrable
component.
Use of mark as a requirement
124.2. The applicant or the registrant shall file a declaration of
actual use of the mark with evidence to that effect, as prescribed
by the Regulations within three (3) years from the filing date of the
application. Otherwise, the application shall be refused or the mark
shall be removed from the Register by the Director.
Notes:
- Prior use is no longer a condition of filing. However, the
applicant shall file a declaration of actual use of the mark, with
evidence to that effect, within three years from the filing date of the
application; otherwise, the application shall be refused or the mark
removed from the register.
- AFTER FILING: The registrant is required to file a
declaration of actual use, and evidence to that effect, within 1 year
from the 5th anniversary of the date of registration of the mark;
otherwise the mark shall be removed from the register (SEC 145)
- AFTER FILING: Non-use of a mark may be excused if
caused by circumstances arising independently of the will of the
trademark owner. Lack of funds is not an excuse (SEC 152)
- AFTER FILING; USE OF OTHER ENTITY: Use of
another entity may be considered use of the owner if
o the company is related to the registrant; or
o if the use of the mark by such unrelated person in
respect of the nature and and quality of the goods or services is
controlled by the registrant (i.e. franchise)
Tests to determine confusing similarity between marks
123.1 (d) Is identical with a registered mark belonging to a different
proprietor or a mark with an earlier filing or priority date, in respect
of:
126 of 143
(i) The same goods or services, or
(ii) Closely related goods or services, or
(iii) If it nearly resembles such a mark as to be likely to deceive or
cause confusion;
Notes:
- How to determine if there is confusing similarity between
the marks
o The labels, packages or containers are presented for
examination and comparison.
o Where they are not presented, then the spelling, sound
or pronunciation of the marks may be resorted to. Similarity of
sound or pronunciation may be sufficient to make two marks
confusingly similar.
- TEST OF DOMINANCY: Focuses not simply on
similarities in size, form or color but on the main or essential
features of each mark, taken together. The test requires that if the
competing trademark contains the main or essential features of
another and confusion and deception is likely to result,
infringement takes place. Duplication or imitation is not necessary.
- HOLISTIC TEST: Considers the mark as a whole and
not as dissected. If the buyer is deceived, it is attributable to the
mark as a totality, not usually to any part of it.
- RELATED GOODS PRINCIPLE: Goods are related
when they belong to the same class or have the same descriptive
properties or physical attributes, or they serve the same purpose or
flow through the same channel of trade. It is held that the use of
identical marks on non-competing and unrelated goods is not likely
to cause confusion.
Cases:
Holistic Test
Del Monte Corporation et. al. vs. CA and Sunshine Sauce
Manufacturing Industry (1990)
FACTS: Del Monte authorized Philpack to register with the Patent
Office the Del Monte bottle configuration for which it was granted
trademark registration. It also obtained registration certificates for
its trademark DEL MONTE and its logo. Respondent Sunshine
Sauce Manufacturing was issued a Certificate of Registration by
the Bureau of Domestic Trade to engage in manufacturing,
packing, distributing and sale of various kinds of sauce, identified
by the Sushine Fruit Catsup logo. This was registered in the
supplemental registered. The product was contained in various
kinds of bottle including the Del Monte bottle which it bought from
junk shops.
Philpack, after making a demand upon Sunshine to desist from
using the Del Monte bottles filed a complaint against the latter for
infringement of trademark and unfair competition.
Sunshine contended that it has ceased to use the said bottles and
that its logo was substantially different from the Del Monte logo
and would not confuse the buying public to the detriment of
petitioners.
RTC dismissed the complaint holding that there were substantial
differences between the logos or trademarks of the parties; that the
defendant ceased to use petitioners bottles and that in any case, it
became owner thereof upon purchase from junk yards. It further
held that complainants failed to establish bad faith which was an
essential element of infringement of trademark or unfair
competition. The said decision was affirmed by the CA.
HELD: (Note that this case was decided under SEC 22 and 29 of
R.A. No. 166 or the Trademark Law)
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
The Supreme Court disagrees with the conclusion that there was
no infringement or unfair competition.
As correctly held by the lower court, side-by-side comparison is not
the final test of similarity.
The question is not whether the two articles are distinguishable by
their label when set side by side but whether the general confusion
made by the article upon the eye of the casual purchaser who is
unsuspicious and off his guard, is such as to likely result in his
confounding it with the original.
A number of courts have held that to determine whether a
trademark has been infringed, we must consider the mark as a
whole and not as dissected. If the buyer is deceived, it is
attributable to the marks as a totality, not usually to any part of it.
The court therefore should be guided by its first impression, for a
buyer acts quickly and is governed by a casual glance, the value of
which may be dissipated as soon as the court assumes to analyze
carefully the respective features of the mark.
At that, even if the labels were analyzed together it is not difficult to
see that the Sunshine label is a colorable imitation of the Del
Monte trademark. The predominant colors used in the Del Monte
label are green and red-orange, the same with Sunshine. The word
"catsup" in both bottles is printed in white and the style of the
print/letter is the same. Although the logo of Sunshine is not a
tomato, the figure nevertheless approximates that of a tomato.
As previously stated, the person who infringes a trade mark does
not normally copy out but only makes colorable changes,
employing enough points of similarity to confuse the public with
enough points of differences to confuse the courts. When as in this
case, Sunshine chose, without a reasonable explanation, to use
the same colors and letters as those used by Del Monte though the
field of its selection was so broad, the inevitable conclusion is that
it was done deliberately to deceive .
Test of Dominancy
Asia Brewery vs. CA and San Migue (1993)
FACTS: San Miguel Corporation (SMC) filed a complaint against
Asia Brewery Inc. (ABI) for infringement of trademark and unfair
competition on account of the latters Beer Pale Pilsen or Beer na
Beer product which has been competing with SMCs San Miguel
Pale Pilsen.
The RTC dismissed the complaint holding that ABI has not
committed trademark infringement or unfair competition against
SMC. The CA reversed the ruling of the RTC holding that the
bottles used by ABI are substantially identical with the bottles of
SMC and that this is calculated to deceive purchasers and
consumers into the belief that the beer is the product of the
plaintiff. ABI was therefore found guilty of infringement of
trademark and unfair competition.
ISSUE: The lone issue is whether ABI infringes SMCs trademark:
San Miguel Pale Pilsen with rectangular hops and malt design and
thereby commits unfair competition against the latter.
HELD: ABIs Beer Pale Pilsen Labor or design does not infringe on
SMCs San Miguel Pale Pilsen design.
Infringement is determined by the "test of dominancy" rather than
by differences or variations in the details of one trademark and of
another. Similarity in size, form and color, while relevant, is not
conclusive. If the competing trademark contains the main or
essential or dominant features of another, and confusion and
deception is likely to result, infringement takes place. Duplication
or imitation is not necessary; nor it is necessary that the infringing
label should suggest an effort to imitate (Co Tiong Sa vs. Director
of Patents).
127 of 143
There is hardly any dispute that the dominant feature of SMC's
trademark is the name of the product: SAN MIGUEL PALE
PILSEN, written in white Gothic letters with elaborate serifs at the
beginning and end of the letters "S" and "M" on an amber
background across the upper portion of the rectangular design.
On the other hand, the dominant feature of ABI's trademark is the
name: BEER PALE PILSEN, with the word "Beer" written in large
amber letters, larger than any of the letters found in the SMC label.
The trial court perceptively observed that the word "BEER" does
not appear in SMC's trademark, just as the words "SAN MIGUEL"
do not appear in ABI's trademark. Hence, there is absolutely no
similarity in the dominant features of both trademarks.
The use of ABI of the steinie bottle, similar but not identical to the
SAN MIGUEL PALE PILSEN bottle, is not unlawful. As pointed out
by ABI's counsel, SMC did not invent but merely borrowed the
steinie bottle from abroad and it claims neither patent nor
trademark protection for that bottle shape and design. SMC's being
the first to use the steinie bottle does not give SMC a vested right
to use it to the exclusion of everyone else. Being of functional or
common use, and not the exclusive invention of any one, it is
available to all who might need to use it within the industry. ABI
makes its own steinie bottle which has a fat bulging neck to
differentiate it from SMC's bottle.
Neither in sound, spelling or appearance can BEER PALE PILSEN
be said to be confusingly similar to SAN MIGUEL PALE PILSEN.
No one who purchases BEER PALE PILSEN can possibly be
deceived that it is SAN MIGUEL PALE PILSEN. No evidence
whatsoever was presented by SMC proving otherwise.
The Court likewise found several dissimilarities in the trade dress
or appearance of the competing products.
The fact that the words pale pilsen are part of ABIs trademark
does not constitute an infringement of SMCs trademark for those
words are generic words descriptive of color and of the type of
beer thus, those words may not be appropriated by SMC for its
exclusive use even if they are part of their registered trademark.
McDonalds Corporation vs. Macjoy Fastfood Corporation (2007)
FACTS: MacJoy Fastfood Corporation filed with the Bureau of
Patents, Trademarks and Technology Trasfer (now IPO) an
application for registration of the trademark Macjoy & Device for
fried chicken, chicken barbeque, burgers, fries, spaghetti, palabok,
tacos, sandwiches, halo-halo and steaks. McDonalds corporation
filed a verified Notice of Opposition against respondents
application claiming that the trademark MacJoy and Device so
resembles its corporate logo otherwise known as the Golden
Arches and its marks (Mc) such that, when used on identical or
related goods, the trademark applied for would confuse or deceive
purchasers into believing that the goods originate from the same
source or origin. It further alleged that the use of MacJOy and
device falsely tends to suggest a connection or affiliation with
McDonalds.
The IPO held that the predominance of the letter M and the
prefixes Mac/Mc in both marks lead to the conclusion that there is
confusing similarity between them especially since both are used
on almost the same products. The CA reversed the decision
finding no confusing similarity between the two holding that the
IPO unreasonably overlooked the differences in the device, letters
and marks.
HELD: Petition is impressed with merit.
In determining similarity and likelihood of confusion, jurisprudence
has developed two tests, the dominancy test and the holistic test.
The dominancy test focuses on the similarity of the prevalent
features of the competing trademarks that might cause confusion
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
or deception. In contrast, the holistic test requires the court to
consider the entirety of the marks as applied to the products,
including the labels and packaging, in determining confusing
similarity. Under the latter test, a comparison of the words is not
the only determinant factor.
The IPO used the dominancy test in concluding that there was
confusing similarity between the two trademarks. In reversing the
IPO, the CA while seemingly applying the dominancy test, in fact
actually applied the holistic test.
The Court finds that the dominancy test is more suitable. Under the
dominancy test, courts give greater weight to the similarity of the
appearance of the product arising from the adoption of the
dominant features of the registered mark, disregarding minor
differences. Courts will consider more the aural and visual
impressions created by the marks in the public mind, giving little
weight to factors like prices, quality, sales outlets and market
segments. The totality or holistic test only relies on visual
comparisons between two trademarks whereas the dominancy test
relies not only on the visual but also on the aural and connotative
comparisons and overall impressions between the two trademarks.
The court noted the use of the corporate M design logo and the
prefixes Mc/Mac. It also noted that both trademarks are used in the
sale of fastfood products. The differences and variations in styles
as the device depicting a head of chicken with cap and bowtie and
wings sprouting on both sides of the chicken head, the heart-
shaped "M," and the stylistic letters in "MACJOY & DEVICE;" in
contrast to the arch-like "M" and the one-styled gothic letters in
McDonalds marks are of no moment. These minuscule variations
are overshadowed by the appearance of the predominant features
mentioned hereinabove.
Well-known marks
123.1 (e) Is identical with, or confusingly similar to, or constitutes a
translation of a mark which is considered by the competent
authority of the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here, as being
already the mark of a person other than the applicant for
registration, and used for identical or similar goods or services:
Provided, That in determining whether a mark is well-known,
account shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including knowledge in
the Philippines which has been obtained as a result of the
promotion of the mark;
(f) Is identical with, or confusingly similar to, or constitutes a
translation of a mark considered well-known in accordance with the
preceding paragraph, which is registered in the Philippines with
respect to goods or services which are not similar to those with
respect to which registration is applied for: Provided, That use of
the mark in relation to those goods or services would indicate a
connection between those goods or services, and the owner of the
registered mark: Provided further, That the interests of the owner
of the registered mark are likely to be damaged by such use;
Notes:
- A well known mark is one which a competent authority of
the Philippines has designated to be well-known internationally and
in the Philippines.
- TEST: Account shall be taken of the knowledge of the
relevant sector of the public, rather than the public at large,
including knowledge in the Philippines obtained by promotion of
the mark.
- EFFECT: The general rule that the exclusive right to use
a trademark shall extend only to goods and services similar to
128 of 143
those in respect of which said trademark is registered does not
apply. When it comes to a well known mark, the exclusive right
shall extend to those good which are not similar provided that:
o The use of the mark in relation to those goods or
services would indicate a connection between those goods or
services and the owner of a registered mark, and
o The interests of the owner of the registered mark are
likely to be damaged by such use.
Also, an owner of a well-known mark may sue in the Philippines for
acts committed prior to the date the said mark was registered in
the Philippines (Sec. 131.3)
147.2. The exclusive right of the owner of a well-known mark
defined in SubSEC 123.1(e) which is registered in the Philippines,
shall extend to goods and services which are not similar to those in
respect of which the mark is registered: Provided, That use of that
mark in relation to those goods or services would indicate a
connection between those goods or services and the owner of the
registered mark: Provided further, That the interests of the owner
of the registered mark are likely to be damaged by such use. (n)
Application requirements and procedure
(SECs 124-144)
Notes:
- The mark must not be one of those considered as non-
registrable
- FORMAL REQUIREMENTS OF AN APPLICATION FOR
REGISTRATION OF A MARK:
a. Application must be in Filipino or English
b. Appointment of an agent or representative if applicant is
not domiciled in the Philippines
c. Additional requirements to be satisfied if the applicant
claims the priority of an earlier application
o If the applicant is claiming priority right, his application for
registration of a mark in the Philippines will not be granted until
such mark has been registered in the country of origin og the
applicant.
d. Classification of the goods or services
e. Signature of the applicant
- PROCEDURE FOR REGISTRATION
a. Examination of requirements for the grant of a filing date
(SEC 132)
b. Examination to determine if mark is registrable (SEC
133)
c. Denial of the application or amendment thereof or
publication (SEC 133.3)
d. Opposition, notice, hearing, decision, appeal to the
Director of Bureau of Trademarks, appeal to the IPO Director
General, appeal to the CA
e. Issuance of certificate of registration (SEC 136)
f. Publication in the IPO Gazette of the fact of registration
(SEC 136)
Classification of goods and services
124.1 (k) The names of the goods or services for which the
registration is sought, grouped according to the classes of the Nice
Classification, together with the number of the class of the said
Classification to which each group of goods or services belongs;
and
Sec. 144. Classification of Goods and Services
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
144.1. Each registration, and any publication of the Office which
concerns an application or registration effected by the Office shall
indicate the goods or services by their names, grouped according
to the classes of the Nice Classification, and each group shall be
preceded by the number of the class of that Classification to which
that group of goods or services belongs, presented in the order of
the classes of the said Classification.
144.2. Goods or services may not be considered as being similar
or dissimilar to each other on the ground that, in any registration or
publication by the Office, they appear in different classes of the
Nice Classification. (Sec. 6, R.A. No. 166a)
Disclaimer
SEC. 126. DisclaimersThe Office may allow or require the
applicant to disclaim an unregistrable component of an otherwise
registrable mark but such disclaimer shall not prejudice or affect
the applicants or owners rights then existing or thereafter arising
in the disclaimed matter, nor such shall disclaimer prejudice or
affect the applicants or owners right on another application of later
date if the disclaimed matter became distinctive of the applicants
or owners goods, business or services. (Sec. 13, R.A. No. 166a)
Priority Right
Sec. 131. Priority Right
131.1. An application for registration of a mark filed in the
Philippines by a person referred to in SEC 3, and who previously
duly filed an application for registration of the same mark in one of
those countries, shall be considered as filed as of the day the
application was first filed in the foreign country.
131.2. No registration of a mark in the Philippines by a person
described in this SEC shall be granted until such mark has been
registered in the country of origin of the applicant.
131.3. Nothing in this SEC shall entitle the owner of a registration
granted under this SEC to sue for acts committed prior to the date
on which his mark was registered in this country: Provided, That,
notwithstanding the foregoing, the owner of a well-known mark as
defined in SEC 123.1(e) of this Act, that is not registered in the
Philippines, may, against an identical or confusingly similar mark,
oppose its registration, or petition the cancellation of its registration
or sue for unfair competition, without prejudice to availing himself
of other remedies provided for under the law.
131.4. In like manner and subject to the same conditions and
requirements, the right provided in this SEC may be based upon a
subsequent regularly filed application in the same foreign country:
Provided, That any foreign application filed prior to such
subsequent application has been withdrawn, abandoned, or
otherwise disposed of, without having been laid open to public
inspection and without leaving any rights outstanding, and has not
served, nor thereafter shall serve, as a basis for claiming a right of
priority. (Sec. 37, R.A. No. 166a)
Notes:
- An owner of a registered mark cannot sue in the
Philippines for acts committed prior to the date on which the mark
was registered in the Philippines, except in the case of a well-
known mark (SEC 131.3)
129 of 143
Term
Sec. 145. DurationA certificate of registration shall remain in
force for ten (10) years: Provided, That the registrant shall file a
declaration of actual use and evidence to that effect, or shall show
valid reasons based on the existence of obstacles to such use, as
prescribed by the Regulations, within one (1) year from the fifth
anniversary of the date of the registration of the mark. Otherwise,
the mark shall be removed from the Register by the Office. (Sec.
12, R.A. No. 166a)
Rights conferred by registration
Sec. 147. Rights Conferred
147.1. The owner of a registered mark shall have the exclusive
right to prevent all third parties not having the owners consent
from using in the course of trade identical or similar signs or
containers for goods or services which are identical or similar to
those in respect of which the trademark is registered where such
use would result in a likelihood of confusion. In case of the use, of
an identical sign for identical goods or services, a likelihood of
confusion shall be presumed.
147.2. The exclusive right of the owner of a well-known mark
defined in SubSEC 123.1(e) which is registered in the Philippines,
shall extend to goods and services which are not similar to those in
respect of which the mark is registered: Provided, That use of that
mark in relation to those goods or services would indicate a
connection between those goods or services and the owner of the
registered mark: Provided further, That the interests of the owner
of the registered mark are likely to be damaged by such use. (n)
Notes:
- A certificate of registration is evidence of the ff:
o Validity of registration
o Registrants ownership of the mark, and
o Registrants exclusive right to use the mark in connection
with the goods or services and those that are related thereto as
specified in the certificate
- LIMITATIONS ON SUCH RIGHT:
o Duration
o Territorial (except for well-known marks)
Cases:
- Protection Limited to goods specified in registration
certificate
Faberge Inc. vs. IAC and Co Beng Kay (1992)
FACTS: The Director of Patents authorized Co Beng Kay to
register the trademark Brute for briefs manufactured and sold by
his corporation. Petitioner Faberge opposed on the ground of
similarity of said trademark with petitioners own symbol Brut
which it registered for after shave lotion, shaving cream,
deodorant, talcum powder and toilet soap. The CA ruled in favor of
respondents holding that the identical trademark can be used by
different manufacturers for products that are non-competing and
unrelated.
HELD: (Note that this case was decided under the old law)
Private Respondent may be permitted to register the trademark
Brute for briefs produced by it.
In as much as petitioner has not ventured in the production of
briefs, an item which is not listed in its certificate of registration,
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
petitioner cannot and should not be allowed to feign that private
respondent had invaded petitioners exclusive domain. The
certificate of registration issued by the Director of Patents can
confer upon petitioner the exclusive right to use its own symbol
only to those goods specified in the certificate, subject to any
conditions and limitations stated therein.
One who has adopted and used a trademark on his goods does
not prevent the adoption and use of the same trademark by other
for products which are of different description.
Canon Kabushiki Kaisha vs. CA and NSR Rubber Corporation
(2000)
FACTS: NSR Rubber Corporation filed an application for
registration of the mark CANON for sandals with the Bureau of
Patents, Trademarks and Technology Transfer. A verified notice of
opposition was filed by petitioner, a foreign corporation duly
organized and existing under the laws of Japan, alleging that it will
be damaged by the said registration. Petitioner presented evidence
showing registration for the mark CANON in various countries
covering goods such as paints, chemical products, toner, and dye
stuff. It also showed a trademark registration in the Philippines.
The BPTTT dismissed the opposition and said decision was
affirmed by the CA.
HELD: Petitioners arguments lack merit.
Ordinarily, the ownership of a trademark or tradename is a
property right that the owner is entitled to protect as mandated by
the Trademark Law. However, when a trademark is used by a
party for a product in which the other party does not deal, the sue
of the same trademark on the latters product cannot be validly
objected to. There is a world of difference between the paints,
chemical products, toner, and dyestuff of petitioner and the
sandals of private respondent.
The certificate of registration confers upon the trademark owner
the exclusive right to use its own symbol only to those goods
specified in the certificate, subject to the conditions and limitations
stated therein.11 Thus, the exclusive right of petitioner in this case
to use the trademark CANON is limited to the products covered by
its certificate of registration.
In cases of confusion of business or origin, the question that
usually arises is whether the respective goods or services of the
senior user and the junior user are so related as to likely cause
confusion of business or origin, and thereby render the trademark
or tradenames confusingly similar. Goods are related when they
belong to the same class or have the same descriptive properties;
when they possess the same physical attributes or essential
characteristics with reference to their form, composition, texture or
quality. They may also be related because they serve the same
purpose or are sold in grocery stores.
Use by third parties of names, etc. similar to registered mark
Sec. 148. Use of Indications by Third Parties for Purposes
Other than those for which the Mark is Used--Registration of
the mark shall not confer on the registered owner the right to
preclude third parties from using bona fide their names, addresses,
pseudonyms, a geographical name, or exact indications
concerning the kind, quality, quantity, destination, value, place of
origin, or time of production or of supply, of their goods or services:
Provided, That such use is confined to the purposes of mere
identification or information and cannot mislead the public as to the
source of the goods or services. (n)
130 of 143
Assignment and transfer of mark
Sec. 149. Assignment and Transfer of Application and
Registration
149.1. An application for registration of a mark, or its registration,
may be assigned or transferred with or without the transfer of the
business using the mark. (n)
149.2. Such assignment or transfer shall, however, be null and
void if it is liable to mislead the public, particularly as regards the
nature, source, manufacturing process, characteristics, or
suitability for their purpose, of the goods or services to which the
mark is applied.
149.3. The assignment of the application for registration of a mark,
or of its registration, shall be in writing and require the signatures
of the contracting parties. Transfers by mergers or other forms of
succession may be made by any document supporting such
transfer.
149.4. Assignments and transfers of registration of marks shall be
recorded at the Office on payment of the prescribed fee;
assignment and transfers of applications for registration shall, on
payment of the same fee, be provisionally recorded, and the mark,
when registered, shall be in the name of the assignee or
transferee.
149.5. Assignments and transfers shall have no effect against third
parties until they are recorded at the Office. (Sec. 31, R.A. No.
166a)
Cancellation of registration
Sec. 151. Cancellation
151.1. A petition to cancel a registration of a mark under this Act
may be filed with the Bureau of Legal Affairs by any person who
believes that he is or will be damaged by the registration of a mark
under this Act as follows:
(a) Within five (5) years from the date of the registration of
the mark under this Act.
(b) At any time, if the registered mark becomes the generic
name for the goods or services, or a portion thereof, for which it is
registered, or has been abandoned, or its registration was obtained
fraudulently or contrary to the provisions of this Act, or if the
registered mark is being used by, or with the permission of, the
registrant so as to misrepresent the source of the goods or
services on or in connection with which the mark is used. If the
registered mark becomes the generic name for less than all of the
goods or services for which it is registered, a petition to cancel the
registration for only those goods or services may be filed. A
registered mark shall not be deemed to be the generic name of
goods or services solely because such mark is also used as a
name of or to identify a unique product or service. The primary
significance of the registered mark to the relevant public rather
than purchaser motivation shall be the test for determining whether
the registered mark has become the generic name of goods or
services on or in connection with which it has been used. (n)
(c) At any time, if the registered owner of the mark without
legitimate reason fails to use the mark within the Philippines, or to
cause it to be used in the Philippines by virtue of a license during
an uninterrupted period of three (3) years or longer.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
151.2. Notwithstanding the foregoing provisions, the court or the
administrative agency vested with jurisdiction to hear and
adjudicate any action to enforce the rights to a registered mark
shall likewise exercise jurisdiction to determine whether the
registration of said mark may be cancelled in accordance with this
Act. The filing of a suit to enforce the registered mark with the
proper court or agency shall exclude any other court or agency
from assuming jurisdiction over a subsequently filed petition to
cancel the same mark. On the other hand, the earlier filing of
petition to cancel the mark with the Bureau of Legal Affairs shall
not constitute a prejudicial question that must be resolved before
an action to enforce the rights to same registered mark may be
decided. (Sec. 17, R.A. No. 166a)
Notes:
- When registration of a mark could be cancelled
(a) Within 5 years from the date of registration of the mark;
(b) at any time if the registered mark
a. becomes generic for the goods for which it was
registered;
b. has been abandoned
c. registration was obtained fraudulently
d. is being used by, or with the permission of the registrant
to misrepresent the source of goods or services
(c) If the registered owner of the mark without legitimate
reason, fails to use the mark within the Philippines, or to cause it to
be used by virtue of a license, for an uninterrupted period of at
least 3 years.
Infringement and Remedies
(Sec. 155-160)
What constitutes infringement
Notes:
- There is infringement if a registered mark is used in
commerce by a person without the consent of the registered owner
thereof.
- REMEDIES:
o Damages (156.1)
o Impounding of infringing goods (156.2)
o Double damages (156.3)
o Injunction (156.4)
o Disposal of infringing goods outside the channels of
commerce (157.1)
o Destruction of infringing goods (157.1)
o Criminal Action (170)
o Administrative Sanctions
- LIMITATIONS
o No action for infringement can be taken against a
person who, in good faith,
before filing date or priority date,
was using the mark for the purposes of his business or
enterprise.
Note: Such person may assign or transfer his right to use the
registered mark only together with his business or enterprise.
o Only injunction for future printing against an innocent
infringing printer
o Only an injunction against presentation of infringing
advertising matter in future issues against innocent infringing
advertisers.
Sec. 155. Remedies; InfringementAny person who shall,
without the consent of the owner of the registered mark:
131 of 143
155.1. Use in commerce any reproduction, counterfeit, copy, or
colorable imitation of a registered mark or the same container or a
dominant feature thereof in connection with the sale, offering for
sale, distribution, advertising of any goods or services including
other preparatory steps necessary to carry out the sale of any
goods or services on or in connection with which such use is likely
to cause confusion, or to cause mistake, or to deceive; or
155.2. Reproduce, counterfeit, copy or colorably imitate a
registered mark or a dominant feature thereof and apply such
reproduction, counterfeit, copy or colorable imitation to labels,
signs, prints, packages, wrappers, receptacles or advertisements
intended to be used in commerce upon or in connection with the
sale, offering for sale, distribution, or advertising of goods or
services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive, shall be liable in a
civil action for infringement by the registrant for the remedies
hereinafter set forth: Provided, That the infringement takes place at
the moment any of the acts stated in SubSEC 155.1 or this
subSEC are committed regardless of whether there is actual sale
of goods or services using the infringing material. (Sec. 22, R.A.
No 166a)
Damages
Notes:
- To bring a civil action for infringement, it is not required
that there be an actual sale of the goods or services using the
infringing material. Infringement takes place upon the mere use or
reproduction of the registered mark.
Sec. 156. Actions, and Damages and Injunction for
Infringement
156.1. The owner of a registered mark may recover damages from
any person who infringes his rights, and the measure of the
damages suffered shall be either the reasonable profit which the
complaining party would have made, had the defendant not
infringed his rights, or the profit which the defendant actually made
out of the infringement, or in the event such measure of damages
cannot be readily ascertained with reasonable certainty, then the
court may award as damages a reasonable percentage based
upon the amount of gross sales of the defendant or the value of
the services in connection with which the mark or trade name was
used in the infringement of the rights of the complaining party.
(Sec. 23, first par., R.A. No. 166a)
156.2. On application of the complainant, the court may impound
during the pendency of the action, sales invoices and other
documents evidencing sales. (n)
156.3. In cases where actual intent to mislead the public or to
defraud the complainant is shown, in the discretion of the court, the
damages may be doubled. (Sec. 23, first par., R.A. No. 166)
156.4. The complainant, upon proper showing, may also be
granted injunction. (Sec. 23, second par., R.A. No. 166a)
Notice Requirement
Sec. 158. Damages; Requirement of NoticeIn any suit for
infringement, the owner of the registered mark shall not be entitled
to recover profits or damages unless the acts have been
committed with knowledge that such imitation is likely to cause
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
confusion, or to cause mistake, or to deceive. Such knowledge is
presumed if the registrant gives notice that his mark is registered
by displaying with the mark the words "Registered Mark" or the
letter R within a circle or if the defendant had otherwise actual
notice of the registration. (Sec. 21, R.A. No. 166a)
Unfair competition or passing off
Notes:
- Colorable imitation is a form of unfair competition
whereby an article is made to look or sound like the real thing but it
is not.
Notes:
- UNFAIR COMPETITION is the use by a person of a
deception or other means in bad faith by which he passes of the
goods manufactured by him or in which he deals, or his business
or services, for those of another person who has established
goodwill in the goods such person manufactures or deals in, or his
business or services, who shall commit any acts calculated to
produce said result.
Infringement of Unfair Competition
Trademark
Nature of Unauthorized use of a Passing off ones
offense trademark goods as that of
another
Fraudulent Not necessary Essential element
Intent
Need for Prior registration is a Registration is not
Registration pre-requisite necessary
SEC. 168. Unfair Competition, Rights, Regulation and
Remedies
168.1. A person who has identified in the mind of the public the
goods he manufactures or deals in, his business or services from
those of others, whether or not a registered mark is employed, has
a property right in the goodwill of the said goods, business or
services so identified, which will be protected in the same manner
as other property rights.
168.2. Any person who shall employ deception or any other
means contrary to good faith by which he shall pass off the goods
manufactured by him or in which he deals, or his business, or
services for those of the one having established such goodwill, or
who shall commit any acts calculated to produce said result, shall
be guilty of unfair competition, and shall be subject to an action
therefor.
168.3. In particular, and without in any way limiting the scope of
protection against unfair competition, the following shall be
deemed guilty of unfair competition:
(a) Any person, who is selling his goods and gives them the
general appearance of goods of another manufacturer or dealer,
either as to the goods themselves or in the wrapping of the
packages in which they are contained, or the devices or words
thereon, or in any other feature of their appearance, which would
be likely to influence purchasers to believe that the goods offered
are those of a manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise clothes the goods with
such appearance as shall deceive the public and defraud another
132 of 143
of his legitimate trade, or any subsequent vendor of such goods or
any agent of any vendor engaged in selling such goods with a like
purpose;
(b) Any person who by any artifice, or device, or who
employs any other means calculated to induce the false belief that
such person is offering the services of another who has identified
such services in the mind of the public; or
(c) Any person who shall make any false statement in the
course of trade or who shall commit any other act contrary to good
faith of a nature calculated to discredit the goods, business or
services of another.
168.4. The remedies provided by SECs 156, 157 and 161 shall
apply mutatis mutandis. (Sec. 29, R.A. No. 166a)
Cases:
- Trademark infringement, unfair competition and well
known marks
Mighty Corporation and La Campana Fabreca de Tobaco vs. E.J.
Gallo Winery, et al and Andersen Group Inc. (2004)
FACTS: Gallo Winery is a foreign corporation not doing business in
the Philippines but organized under the laws of America where all
its wineries are located. It produces different kinds of wines and
brandy and sells them under different registered trademarks
including the GALLO and ERNEST & JULIO GALLO Trademarks.
Respondent domestic corporation is the distributor of Gallo Winery
in the Philippines. Gallo Winerys GALLO wine trademark and
Ernest and Julio Gallo wine trademark were registered in the
Philippine Patent Office (now IPO).
Petitioners Mighty Corporation and La Campana are engaged in
the cultivation, manufacture, distribution and sale of tobacco
products for which they have been using the Gallo Cigarette
Trademark since 1973.
Respondent sued petitioners for trademark and trade name
infringement and unfair competition.
The CA ruled in favor of respondents holding that Gallo cigarettes
and Gallo wines were identical, similar or related goods for the
reason that they are forms of vice and that the goods passed
through the same channels of trade.
HELD: The Court reversed the ruling of the CA, finding that there
was no trademark infringement or unfair competition.
Although the laws on trademark infringement and unfair
competition have a common conception at their root, that is, a
person shall not be permitted to misrepresent his goods or his
business as the goods or business of another, the law on unfair
competition is broader and more inclusive than the law on
trademark infringement. The latter is more limited but it recognizes
a more exclusive right derived from the trademark adoption and
registration by the person whose goods or business is first
associated with it. The law on trademarks is thus a specialized
subject distinct from the law on unfair competition, although the
two subjects are entwined with each other and are dealt with
together in the Trademark Law (now, both are covered by the IP
Code). Hence, even if one fails to establish his exclusive property
right to a trademark, he may still obtain relief on the ground of his
competitors unfairness or fraud. Conduct constitutes unfair
competition if the effect is to pass off on the public the goods of
one man as the goods of another. It is not necessary that any
particular means should be used to this end.
The Paris Convention protects well-known trademarks only (to be
determined by domestic authorities), while the Trademark Law
protects all trademarks, whether well-known or not, provided that
they have been registered and are in actual commercial use in the
Philippines.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
A crucial issue in any trademark infringement case is the likelihood
of confusion, mistake or deceit as to the identity, source or origin of
the goods or identity of the business as a consequence of using a
certain mark. Likelihood of confusion is admittedly a relative term,
to be determined rigidly according to the particular (and sometimes
peculiar) circumstances of each case. Thus, in trademark cases,
more than in other kinds of litigation, precedents must be studied in
the light of each particular case.
In this case, the differences especially in the goods to which the
trademark is registered for defeats respondents claims.
There are two types of confusion in trademark infringement. The
first is "confusion of goods" when an otherwise prudent purchaser
is induced to purchase one product in the belief that he is
purchasing another, in which case defendants goods are then
bought as the plaintiffs and its poor quality reflects badly on the
plaintiffs reputation. The other is "confusion of business" wherein
the goods of the parties are different but the defendants product
can reasonably (though mistakenly) be assumed to originate from
the plaintiff, thus deceiving the public into believing that there is
some connection between the plaintiff and defendant which, in
fact, does not exist.
In determining the likelihood of confusion, the Court must consider:
[a] the resemblance between the trademarks; [b] the similarity of
the goods to which the trademarks are attached; [c] the likely effect
on the purchaser and [d] the registrants express or implied
consent and other fair and equitable considerations.
McDonalds Corporation, et al. vs. L.C. Big Mak Burger, Inc. (2004)
FACTS: McDonlads owns a family of marks including the Big Mac
mark for its double-decker hamburger sandwich which has been
registered under Philippine laws. Respondent LC Big Mak Burger
Inc. operates fast food outlets and snack vans. It includes in its
menu hamburger sandwiches and other food items. When it
applied for registration of its mark, McDonalds opposed
respondents application on the ground that Big Mak was a
colorable imitation of its registered mark. Thereafter, petitioner
sued respondent for trademark infringement and unfair
competition.
RTC found respondent corporation liable. Said finding however,
was reversed by the CA.
HELD: (Note that this case was decided under RA No. 166 or the
old Trademark Law)
Respondents use of Big Mak results in the likelihood of confusion.
To establish trademark infringement, the following elements must
be shown: (1) the validity of plaintiff's mark; (2) the plaintiff's
ownership of the mark; and (3) the use of the mark or its colorable
imitation by the alleged infringer results in "likelihood of confusion."
Of these, the likelihood of confusion is the gravamen of trademark
infringement.
SEC 22 covers two types of confusion arising from the use of
similar or colorable imitation marks, namely, confusion of goods
(product confusion) and confusion of business (source or origin
confusion).
Under the Law, while there is confusion of goods when the
products are competing, confusion of business exists when the
products are non-competing but related enough to produce
confusion of affiliation. The registered trademark owner may use
his mark on the same or similar products, in different segments of
the market, and at different price levels depending on variations of
the products for specific segments of the market. The Court has
recognized that the registered trademark owner enjoys protection
in product and market areas that are the normal potential
expansion of his business.
133 of 143
Applying the dominancy test, the Court finds that respondents' use
of the "Big Mak" mark results in likelihood of confusion. First, "Big
Mak" sounds exactly the same as "Big Mac." Second, the first word
in "Big Mak" is exactly the same as the first word in "Big Mac."
Third, the first two letters in "Mak" are the same as the first two
letters in "Mac." Fourth, the last letter in "Mak" while a "k" sounds
the same as "c" when the word "Mak" is pronounced. Fifth, in
Filipino, the letter "k" replaces "c" in spelling, thus "Caloocan" is
spelled "Kalookan."
In short, aurally the two marks are the same, with the first word of
both marks phonetically the same, and the second word of both
marks also phonetically the same. Visually, the two marks have
both two words and six letters, with the first word of both marks
having the same letters and the second word having the same first
two letters. In spelling, considering the Filipino language, even the
last letters of both marks are the same.
The essential elements of an action for unfair competition are (1)
confusing similarity in the general appearance of the goods, and
(2) intent to deceive the public and defraud a competitor.The
confusing similarity may or may not result from similarity in the
marks, but may result from other external factors in the packaging
or presentation of the goods. The intent to deceive and defraud
may be inferred from the similarity of the appearance of the goods
as offered for sale to the public.Actual fraudulent intent need not
be shown.
Unfair competition is broader than trademark infringement and
includes passing off goods with or without trademark infringement.
Trademark infringement is a form of unfair competition.Trademark
infringement constitutes unfair competition when there is not
merely likelihood of confusion, but also actual or probable
deception on the public because of the general appearance of the
goods. There can be trademark infringement without unfair
competition as when the infringer discloses on the labels
containing the mark that he manufactures the goods, thus
preventing the public from being deceived that the goods originate
from the trademark owner. Passing off (or palming off) takes place
where the defendant, by imitative devices on the general
appearance of the goods, misleads prospective purchasers into
buying his merchandise under the impression that they are buying
that of his competitors.
Tradenames or business names (see Sec. 165 supra)
Notes:
- Tradenames are protected even if they are not registered
because they are not, in the first place, required to be registered.
Collective marks
Sec. 167. Collective Marks
167.1. Subject to SubSECs 167.2 and 167.3, SECs 122 to 164 and
166 shall apply to collective marks, except that references therein
to "mark" shall be read as "collective mark."
167.2 (a) An application for registration of a collective mark shall
designate the mark as a collective mark and shall be accompanied
by a copy of the agreement, if any, governing the use of the
collective mark.
(b) The registered owner of a collective mark shall notify the
Director of any changes made in respect of the agreement referred
to in paragraph (a).
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
167.3. In addition to the grounds provided in SEC 149, the Court
shall cancel the registration of a collective mark if the person
requesting the cancellation proves that only the registered owner
uses the mark, or that he uses or permits its use in contravention
of the agreements referred to in SubSEC 166.2 or that he uses or
permits its use in a manner liable to deceive trade circles or the
public as to the origin or any other common characteristics of the
goods or services concerned.
167.4. The registration of a collective mark, or an application
therefor shall not be the subject of a license contract. (Sec. 40,
R.A. No. 166a)
Cross-border protection of marks and trade names
Sec. 166. Goods Bearing Infringing Marks or Trade Names
No article of imported merchandise which shall copy or simulate
the name of any domestic product, or manufacturer, or dealer, or
which shall copy or simulate a mark registered in accordance with
the provisions of this Act, or shall bear a mark or trade name
calculated to induce the public to believe that the article is
manufactured in the Philippines, or that it is manufactured in any
foreign country or locality other than the country or locality where it
is in fact manufactured, shall be admitted to entry at any
customhouse of the Philippines. In order to aid the officers of the
customs service in enforcing this prohibition, any person who is
entitled to the benefits of this Act, may require that his name and
residence, and the name of the locality in which his goods are
manufactured, a copy of the certificate of registration of his mark or
trade name, to be recorded in books which shall be kept for this
purpose in the Bureau of Customs, under such regulations as the
Collector of Customs with the approval of the Secretary of Finance
shall prescribe, and may furnish to the said Bureau facsimiles of
his name, the name of the locality in which his goods are
manufactured, or his registered mark or trade name, and
thereupon the Collector
of Customs shall cause one (1) or more copies of the same to be
transmitted to each collector or to other proper officer of the
Bureau of Customs. (Sec. 35, R.A. No. 166)
169.2. Any goods marked or labeled in contravention of the
provisions of this SEC shall not be imported into the Philippines or
admitted entry at any customhouse of the Philippines. The owner,
importer, or consignee of goods refused entry at any customhouse
under this SEC may have any recourse under the customs
revenue laws or may have the remedy given by this Act in cases
involving goods refused entry or seized. (Sec. 30, R.A. No. 166a)
Criminal penalties for infringement, unfair competition, false
designation, origin, and false description or misrepresentation
SEC. 170. PenaltiesIndependent of the civil and administrative
sanctions imposed by law, a criminal penalty of imprisonment from
two (2) years to five (5) years and a fine ranging from Fifty
thousand pesos (P50,000) to Two hundred thousand pesos
(P200,000), shall be imposed on any person who is found guilty of
committing any of the acts mentioned in SEC 155, SEC 168 and
SubSEC 169.1. (Arts. 188 and 189, Revised Penal Code)
COPYRIGHTS
Basic Principles of copyright
134 of 143
172.2. Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as well as of their
content, quality and purpose. (Sec. 2, P.D. No. 49a)
SEC. 175. Unprotected Subject MatterNotwithstanding the
provisions of SEC 172 and 173, no protection shall extend, under
this law, to any idea, procedure, system method or operation,
concept, principle, discovery or mere data as such, even if they are
expressed, explained, illustrated or embodied in a work; news of
the day and other miscellaneous facts having the character of
mere items of press information; or any official text of a legislative,
administrative or legal nature, as well as any official translation
thereof. (n)
SEC. 181. Copyright and Material ObjectThe copyright is
distinct from the property in the material object subject to it.
Consequently, the transfer or assignment of the copyright shall not
itself constitute a transfer of the material object. Nor shall a transfer
or assignment of the sole copy or of one or several copies of the
work imply transfer or assignment of the copyright. (Sec. 16, P.D.
No. 49)
Notes:
- PRINCIPLE OF AUTOMATICE PROTECTION- The
Berne Convention provides that the enjoyment and exercise of
copyright, including moral rights, shall not be subject of any
formality
Cases:
- Format of a show not copyrightable
Joaquin Jr., et al. vs. Drilon, et al. (1999)
(as discussed in the textbook)
FACTS: BJ Productions Inc. (BJPI) is the holder of a Certificate of
copyright issued by the National Laibrary for the TV dating game
show called Rhoda and me. While watching television, petitioner
Francisco Joaquin Jr. president of BJPI, saw on RPN Channel 9
an episode of Its a Date, which was produced by IXL Productions,
Inc. He wrote a letter to private respondent Gabriel Zosa that BJPI
had a copyright to Rhoda and Me and demanding that it
discontinue airing Its a Date.
HELD: The format of a show is not copyrightable. IN enumerating
what are subject to copyright, the law refers to finished works and
not concepts.
The format or mechanics of a TV show is not copyrightable as
copyright does not extend to ideas, procedures, processes,
systems, methods of operation, concepts, principles or discoveries
regardless of the form in which they are described, explained,
illustrated or embodied. Moreover, the format of a television show
is not included in the list of protected works and for this reason, the
protection afforded by law cannot be extended to cover the same.
Finally, the subject matter of BJ Productions copyright is
audiovisual recordings of each episode of Rhoda and Me which
falls under the category of cinematographic works and works
produced by a process analogous to cinematography or any
processes for making audio-visual recordings.
COMMENTS: The list provided in the law is not intended to be
exhaustive. At the end of the provision there is a catch all clause
other literary, scholarly, scientific and artistic works. In other
words, the copyrightability of a work is not dependent on its being
mentioned in the list of works as it may fall in the catchall category.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
- Name and container of beauty cream product not proper
subjects of copyright and patent
Kho vs. CA (2002)
FACTS: Elidad Kho is doing business under the name and style of
KEC Cosmetics and was the registered owner of the copyrights
Chin Chun Cu and Oval Facial Cream Container/Case. She also
has patent rights for medicated cream. Respondent Summerville
advertised and sold petitioners cream products under the brand
Chin Chun Su in similar containers allegedly misleading the public.
Respondents argue that they are the exclusive and authorized
importer of the products manufactured from Taiwan.
ISSUE: WON the copyright and patent over the name and
container of a beauty cream product would entitle the registrant to
the use and ownership over the same to the exclusion of others.
HELD: NO.
Trademark, copyright and patents are different intellectual property
rights that cannot be interchanged with one another. A trademark
is any visible sign capable of distinguishing the goods (trademark)
or services (service mark) of an enterprise and shall include a
stamped or marked container of goods. In relation thereto, a trade
name means the name or designation identifying or distinguishing
an enterprise. Meanwhile, the scope of a copyright is confined to
literary and artistic works which are original intellectual creations in
the literary and artistic domain protected from the moment of their
creation. Patentable inventions, on the other hand, refer to any
technical solution of a problem in any field of human activity which
is new, involves an inventive step and is industrially applicable.
Petitioner has no right to support her claim for the exclusive use of
the subject trade name and its container. The name and container
of a beauty cream product are proper subjects of a trademark
inasmuch as the same falls squarely within its definition. In order to
be entitled to exclusively use the same in the sale of the beauty
cream product, the user must sufficiently prove that she registered
or used it before anybody else did. The petitioner's copyright and
patent registration of the name and container would not guarantee
her the right to the exclusive use of the same for the reason that
they are not appropriate subjects of the said intellectual rights.
Copyrightable works
Original works
SEC. 172. Literary and Artistic Works
172.1 Literary and artistic works, hereinafter referred to as "works",
are original intellectual creations in the literary and artistic domain
protected from the moment of their creation and shall include in
particular:
(a) Books, pamphlets, articles and other writings;
(b) Periodicals and newspapers;
(c) Lectures, sermons, addresses, dissertations prepared
for oral delivery, whether or not reduced in writing or other material
form;
(d) Letters;
(e) Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb shows;
(f) Musical compositions, with or without words;
(g) Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or designs for
works of art;
135 of 143
(h) Original ornamental designs or models for articles of
manufacture, whether or not registrable as an industrial design,
and other works of applied art;
(i) Illustrations, maps, plans, sketches, charts and three-
dimensional works relative to geography, topography, architecture
or science;
(j) Drawings or plastic works of a scientific or technical
character;
(k) Photographic works including works produced by a
process analogous to photography; lantern slides;
(l) Audiovisual works and cinematographic works and
works produced by a process analogous to cinematography or any
process for making audio-visual recordings;
(m) Pictorial illustrations and advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific and artistic works.
Cases:
- Meaning of originality of copyrighted material; proof of
copying; no copyright protection for works of applied art or
industrial design.
Jessie G. Ching vs. William Salinas, et. al., (2005)
FACTS: Jessie Ching is the owner and general manager of
Jeschicris Manufacturing Co., the maker and manufacturer of a
Utility Model, described as Leaf Spring Eye Bushing for
Automobile made up of plastic.
Ching and Joseph Yu were issued National Library Certificates of
Copyright Registration and Deposit for the said work. Ching
requested the NBI to investigate and apprehend alleged illegal
manufacturers and distributers of his work. After investigation, NBI
filed applications for search warrants against Salinas and
company, allegedly, for reproducing and distributing the works of
Ching and Yu.
Respondents argued that the works covered by the certificates are
not artistic in nature and are considered automotive spare parts
and pertain to technology. Moreover, they alleged that the models
are not original and as such, are the proper subject of patent and
not of copyright.
HELD: The petition has no merit.
Ownership of copyrighted material is shown by proof of originality
and copyrightability. By originality is meant that the material was
not copied, and evidences at least minimal creativity; that it was
independently created by the author and that it possesses at least
same minimal degree of creativity. Copying is shown by proof of
access to copyrighted material and substantial similarity between
the two works. The applicant must thus demonstrate the existence
and the validity of his copyright because in the absence of
copyright protection, even original creation may be freely copied.
It is worthy to state that the works protected under the Law on
Copyright are: Literary or artistic works and derivative works. The
Leaf Spring Eye Bushing and Vehicle Bearing Cushion fall on
neither classification. Accordingly, if in the first place, the item
subject of the petition is not entitled to be protected by the law on
copyright, how can there be any violation?
A Certificate of Registration creates no rebuttable presumption of
copyright validity where other evidence in the record casts doubt
on the question. In such case, the validity will not be presumed.
Plainly, these are not literary or artistic works. They are not
intellectual creations in the literary and artistic domain, or works of
applied art. They are certainly not ornamental designs or one
having decorative quality or value.
It bears stressing that the focus of copyright is the usefulness of
the artistic design, and not its marketability. The central inquiry is
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
whether the article is a work of art. Works for applied art include all
original pictorials, graphics, and sculptural works that are intended
to be or have been embodied in useful article regardless of factors
such as mass production, commercial exploitation, and the
potential availability of design patent protection. A useful article
may be copyrightable only if and only to the extent that such
design incorporates pictorial, graphic, or sculptural features that
can be identified separately from, and are capable of existing
independently of the utilitarian aspects of the article.
It bears stressing that there is no copyright protection for works of
applied art or industrial design which have aesthetic or artistic
features that cannot be identified separately from the utilitarian
aspects of the article.
Derivative works
SEC. 173. Derivative Works
173.1. The following derivative works shall also be protected by
copyright:
(a) Dramatizations, translations, adaptations, abridgments,
arrangements, and other alterations of literary or artistic works; and
(b) Collections of literary, scholarly or artistic works, and
compilations of data and other materials which are original by
reason of the selection or coordination or arrangement of their
contents. (Sec. 2, [P] and [Q], P.D. No. 49)
173.2. The works referred to in paragraphs (a) and (b) of SubSEC
173.1 shall be protected as a new works: Provided however, That
such new work shall not affect the force of any subsisting copyright
upon the original works employed or any part thereof, or be
construed to imply any right to such use of the original works, or to
secure or extend copyright in such original works. (Sec. 8, P.D. 49;
Art. 10, TRIPS)
Non-Copyrightable works
SEC. 175. Unprotected Subject MatterNotwithstanding the
provisions of SEC 172 and 173, no protection shall extend, under
this law, to any idea, procedure, system method or operation,
concept, principle, discovery or mere data as such, even if they are
expressed, explained, illustrated or embodied in a work; news of
the day and other miscellaneous facts having the character of
mere items of press information; or any official text of a legislative,
administrative or legal nature, as well as any official translation
thereof. (n)
SEC. 176. Works of the Government
176.1. No copyright shall subsist in any work of the Government of
the Philippines. However, prior approval of the government agency
or office wherein the work is created shall be necessary for
exploitation of such work for profit. Such agency or office may,
among other things, impose as a condition the payment of
royalties. No prior approval or conditions shall be required for the
use of any purpose of statutes, rules and regulations, and
speeches, lectures, sermons, addresses, and dissertations,
pronounced, read or rendered in courts of justice, before
administrative agencies, in deliberative assemblies and in
meetings of public character. (Sec. 9, first par., P.D. No. 49)
176.2. The Author of speeches, lectures, sermons, addresses, and
dissertations mentioned in the preceding paragraphs shall have
the exclusive right of making a collection of his works. (n)
136 of 143
176.3. Notwithstanding the foregoing provisions, the Government
is not precluded from receiving and holding copyrights transferred
to it by assignment, bequest or otherwise; nor shall publication or
republication by the government in a public document of any work
in which copy right is subsisting be taken to cause any abridgment
or annulment of the copyright or to authorize any use or
appropriation of such work without the consent of the copyright
owners. (Sec. 9, third par., P.D. No. 49)
Rights of copyright owner
- Generally, the rights of an author are as follows
1. Economic rights
a. to reproduce
b. to create derivative works
c. to first public distribution
d. to rent out
e. to public display
f. to public performance
g. to other communication of the work to the public
2. Moral Rights
a. of attribution or paternity right
b. of alteration or non publication
c. to preservation of integrity
d. not to be identified with work of others or with distorted
work
3. Droit de suite
copyright or economic rights
SEC. 177. Copy or Economic RightsSubject to the provisions
of Chapter VIII, copyright or economic rights shall consist of the
exclusive right to carry out, authorize or prevent the following acts:
177.1. Reproduction of the work or substantial portion of the work;
177.2 Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work;
177.3. The first public distribution of the original and each copy of
the work by sale or other forms of transfer of ownership;
177.4. Rental of the original or a copy of an audiovisual or
cinematographic work, a work embodied in a sound recording, a
computer program, a compilation of data and other materials or a
musical work in graphic form, irrespective of the ownership of the
original or the copy which is the subject of the rental; (n)
177.5. Public display of the original or a copy of the work;
177.6. Public performance of the work; and
177.7. Other communication to the public of the work (Sec. 5, P.D.
No. 49a)
Right to proceeds of subsequent transfers or droite de
suite
SEC. 200. Sale or Lease of WorkIn every sale or lease of an
original work of painting or sculpture or of the original manuscript
of a writer or composer, subsequent to the first disposition thereof
by the author, the author or his heirs shall have an inalienable right
to participate in the gross proceeds of the sale or lease to the
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
extent of five percent (5%). This right shall exist during the lifetime
of the author and for fifty (50) years after his death. (Sec. 31, P.D.
No. 49)
SEC. 201. Works Not CoveredThe provisions of this Chapter
shall not apply to prints, etchings, engravings, works of applied art,
or works of similar kind wherein the author primarily derives gain
from the proceeds of reproductions. (Sec. 33, P.D. No. 49)
Moral Rights
SEC. 193. Scope of Moral RightsThe author of a work shall,
independently of the economic rights in SEC 177 or the grant of an
assignment or license with respect to such right, have the right:
193.1. To require that the authorship of the works be attributed to
him, in particular, the right that his name, as far as practicable, be
indicated in a prominent way on the copies, and in connection with
the public use of his work;
193.2. To make any alterations of his work prior to, or to withhold it
from publication;
193.3. To object to any distortion, mutilation or other modification
of, or other derogatory action in relation to, his work which would
be prejudicial to his honor or reputation; and
193.4. To restrain the use of his name with respect to any work not
of his own creation or in a distorted version of his work. (Sec. 34,
P.D. No. 49)
SEC. 194. Breach of ContractAn author cannot be compelled
to perform his contract to create a work or for the publication of his
work already in existence. However, he may be held liable for
damages for breach of such contract. (Sec. 35, P.D. No. 49)
SEC. 195. Waiver of Moral RightsAn author may waive his
rights mentioned in SEC 193 by a written instrument, but no such
waiver shall be valid where its effects is to permit another:
195.1. To use the name of the author, or the title of his work, or
otherwise to make use of his reputation with respect to any version
or adaptation of his work which, because of alterations therein,
would substantially tend to injure the literary or artistic reputation of
another author; or
195.2. To use the name of the author with respect to a work he did
not create. (Sec. 36, P.D. No. 49)
SEC. 196. Contribution to Collective WorkWhen an author
contributes to a collective work, his right to have his contribution
attributed to him is deemed waived unless he expressly reserves it.
(Sec. 37. P.D. No. 49)
SEC. 197. Editing, Arranging and Adaptation of WorkIn the
absence of a contrary stipulation at the time an author licenses or
permits another to use his work, the necessary editing, arranging
or adaptation of such work, for publication, broadcast, use in a
motion picture, dramatization, or mechanical or electrical
reproduction in accordance with the reasonable and customary
standards or requirements of the medium in which the work is to
be used, shall not be deemed to contravene the author's rights
secured by this chapter. Nor shall complete destruction of a work
137 of 143
unconditionally tranferred by the author be deemed to violate such
rights. (Sec. 38, P.D. No. 49)
SEC. 198. Term of Moral Rights
198.1. The rights of an author under this chapter shall last during
the lifetime of the author and for fifty (50) years after his death and
shall not be assignable or subject to license. The person or
persons to be charged with the posthumous enforcement of these
rights shall be named in writing to be filed with the National Library.
In default of such person or persons, such enforcement shall
devolve upon either the author's heirs, and in default of the heirs,
the Director of the National Library.
198.2. For purposes of this SEC, "Person" shall mean any
individual, partnership, corporation, association, or society. The
Director of the National Library may prescribe reasonable fees to
be charged for his services in the application of provisions of this
SEC. (Sec. 39, P.D. No. 49)
SEC. 199. Enforcement RemediesViolation of any of the rights
conferred by this Chapter shall entitle those charged with their
enforcement to the same rights and remedies available to a
copyright owner. In addition, damages which may be availed of
under the Civil Code may also be recovered. Any damage
recovered after the creator's death shall be held in trust for and
remitted to his heirs, and in default of the heirs, shall belong to the
government. (Sec. 40, P.D. No. 49)
Notes:
- COPYRIGHT TO A WORK OF ARCHITECTURE- shall
include the right to control the erection of any building which
reproduces the whole or a substantial part of the work but not the
right to control the reconstruction or rehabilitation of the building.
Rules of ownership of copyright
SEC. 178. Rules on Copyright OwnershipCopyright ownership
shall be governed by the following rules:
178.1. Subject to the provisions of this SEC, in the case of original
literary and artistic works, copyright shall belong to the author of
the work;
178.2. In the case of works of joint authorship, the co-authors shall
be the original owners of the copyright and in the absence of
agreement, their rights shall be governed by the rules on co-
ownership. If, however, a work of joint authorship consists of parts
that can be used separately and the author of each part can be
identified, the author of each part shall be the original owner of the
copyright in the part that he has created;
178.3. In the case of work created by an author during and in the
course of his employment, the copyright shall belong to:
(a) The employee, if the creation of the object of copyright
is not a part of his regular duties even if the employee uses the
time, facilities and materials of the employer.
(b) The employer, if the work is the result of the
performance of his regularly-assigned duties, unless there is an
agreement, express or implied, to the contrary.
178.4. In the case of a work-commissioned by a person other than
an employer of the author and who pays for it and the work is
made in pursuance of the commission, the person who so
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
commissioned the work shall have ownership of work, but the
copyright thereto shall remain with the creator, unless there is a
written stipulation to the contrary;
178.5. In the case of audiovisual work, the copyright shall belong
to the producer, the author of the scenario, the composer of the
music, the film director, and the author of the work so adapted.
However, subject to contrary or other stipulations among the
creators, the producers shall exercise the copyright to an extent
required for the exhibition of the work in any manner, except for the
right to collect performing license fees for the performance of
musical compositions, with or without words, which are
incorporated into the work; and
178.6. In respect of letters, the copyright shall belong to the writer
subject to the provisions of Article 723 of the Civil Code. (Sec. 6,
P.D. No. 49a)
SEC. 179. Anonymous and Pseudonymous WorksFor
purposes of this Act, the publishers shall be deemed to represent
the authors of articles and other writings published without the
names of the authors or under pseudonyms, unless the contrary
appears, or the pseudonyms or adopted name leaves no doubts as
to the authors identity, or if the author of the anonymous works
discloses his identity. (Sec. 7, P.D. 49)
Notes:
- RULES ON OWNERSHIP: Who owns the copyright in a
piece of work?
o In general, the author (178.1)
o In case of co-authors, both unless there is a contrary
agreement or unless the work constitutes parts which may be
attributed separately
o In case of work created in the course of employment, the
employee or employer (178.3)
o In case of commissioned work, the creator unless there
is contrary stipulation (178.4)
o In case of audio-visual work, all who contributed, with the
producer exercising copyright to the extent necessary to exhibit the
work
o In case of a letter, the writer
o In case of anonymous work the author with the publisher
as representative
Transfer or assignment of copyright
SEC. 180. Rights of Assignee
180.1. The copyright may be assigned in whole or in part. Within
the scope of the assignment, the assignee is entitled to all the
rights and remedies which the assignor had with respect to the
copyright.
180.2. The copyright is not deemed assigned inter vivos in whole
or in part unless there is a written indication of such intention.
180.3. The submission of a literary, photographic or artistic work to
a newspaper, magazine or periodical for publication shall
constitute only a license to make a single publication unless a
greater right is expressly granted. If two (2) or more persons jointly
own a copyright or any part thereof, neither of the owners shall be
entitled to grant licenses without the prior written consent of the
other owner or owners. (Sec. 15, P.D. No. 49a)
138 of 143
SEC. 181. Copyright and Material ObjectThe copyright is
distinct from the property in the material object subject to it.
Consequently, the transfer or assignment of the copyright shall not
itself constitute a transfer of the material object. Nor shall a transfer
or assignment of the sole copy or of one or several copies of the
work imply transfer or assignment of the copyright. (Sec. 16, P.D.
No. 49)
SEC. 182. Filing of Assignment of LicenseAn assignment or
exclusive license may be filed in duplicate with the National Library
upon payment of the prescribed fee for registration in books and
records kept for the purpose. Upon recording, a copy of the
instrument shall be, returned to the sender with a notation of the
fact of record. Notice of the record shall be published in the IPO
Gazette. (Sec. 19, P.D. No. 49a)
SEC 183. Designation of SocietyThe copyright owners or their
heirs may designate a society of artists, writers or composers to
enforce their economic rights and moral rights on their behalf.
(Sec. 32, P.D. No. 49a)
Limitations on copyright
SEC. 184. Limitations on Copyright
184.1. Notwithstanding the provisions of Chapter V, the following
acts shall not constitute infringement of copyright:
(a) the recitation or performance of a work, once it has
been lawfully made accessible to the public, if done privately and
free of charge or if made strictly for a charitable or religious
institution or society; (Sec. 10(1), P.D. No.49)
(b) The making of quotations from a published work if they
are compatible with fair use and only to the extent justified for the
purpose, including quotations from newspaper articles and
periodicals in the form of press summaries: Provided, That the
source and the name of the author, if appearing on the work, are
mentioned; (Sec. 11, third par., P.D. No. 49)
(c) The reproduction or communication to the public by
mass media of articles on current political, social, economic,
scientific or religious topic, lectures, addresses and other works of
the same nature, which are delivered in public if such use is for
information purposes and has not been expressly reserved:
Provided, That the source is clearly indicated; (Sec. 11, P.D. No.
49)
(d) The reproduction and communication to the public of
literary, scientific or artistic works as part of reports of current
events by means of photography, cinematography or broadcasting
to the extent necessary for the purpose; (Sec. 12, P.D. No. 49)
(e) The inclusion of a work in a publication, broadcast, or
other communication to the public, sound recording or film, if such
inclusion is made by way of illustration for teaching purposes and
is compatible with fair use: Provided, That the source and of the
name of the author, if appearing in the work, are mentioned;
(f) The recording made in schools, universities, or
educational institutions of a work included in a broadcast for the
use of such schools, universities or educational institutions:
Provided, That such recording must be deleted within a reasonable
period after they were first broadcast: Provided, further, That such
recording may not be made from audiovisual works which are part
of the general cinema repertoire of feature films except for brief
excerpts of the work;
(g) The making of ephemeral recordings by a broadcasting
organization by means of its own facilities and for use in its own
broadcast;
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
(h) The use made of a work by or under the direction or
control of the Government, by the National Library or by
educational, scientific or professional institutions where such use is
in the public interest and is compatible with fair use;
(i) The public performance or the communication to the
public of a work, in a place where no admission fee is charged in
respect of such public performance or communication, by a club or
institution for charitable or educational purpose only, whose aim is
not profit making, subject to such other limitations as may be
provided in the Regulations; (n)
(j) Public display of the original or a copy of the work not
made by means of a film, slide, television image or otherwise on
screen or by means of any other device or process: Provided, That
either the work has been published, or, that original or the copy
displayed has been sold, given away or otherwise transferred to
another person by the author or his successor in title; and
(k) Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a legal
practitioner.
184.2. The provisions of this SEC shall be interpreted in such a
way as to allow the work to be used in a manner which does not
conflict with the normal exploitation of the work and does not
unreasonably prejudice the right holder's legitimate interest.
SEC. 185. Fair Use of a Copyrighted Work
185.1. The fair use of a copyrighted work for criticism, comment,
news reporting, teaching including multiple copies for classroom
use, scholarship, research, and similar purposes is not an
infringement of copyright. Decompilation, which is understood here
to be the reproduction of the code and translation of the forms of
the computer program to achieve the inter-operability of an
independently created computer program with other programs may
also constitute fair use. In determining whether the use made of a
work in any particular case is fair use, the factors to be considered
shall include:
(a) The purpose and character of the use, including
whether such use is of a commercial nature or is for non-profit
education purposes;
(b) The nature of the copyrighted work;
(c) The amount and substantiality of the portion used in
relation to the copyrighted work as a whole; and
(d) The effect of the use upon the potential market for or
value of the copyrighted work.
185.2 The fact that a work is unpublished shall not by itself bar a
finding of fair use if such finding is made upon consideration of all
the above factors.
SEC. 186. Work of ArchitectureCopyright in a work of
architecture shall include the right to control the erection of any
building which reproduces the whole or a substantial part of the
work either in its original form or in any form recognizably derived
from the original; Provided, That the copyright in any such work
shall not include the right to control the reconstruction or
rehabilitation in the same style as the original of a building to which
the copyright relates. (n)
SEC. 187. Reproduction of Published Work
187.1. Notwithstanding the provision of SEC 177, and subject to
the provisions of SubSEC 187.2, the private reproduction of a
published work in a single copy, where the reproduction is made
by a natural person exclusively for research and private study,
139 of 143
shall be permitted, without the authorization of the owner of
copyright in the work.
187.2. The permission granted under SubSEC 187.1 shall not
extend to the reproduction of:
(a) A work of architecture in form of building or other
construction;
(b) An entire book, or a substantial past thereof, or of a
musical work in which graphics form by reprographic means;
(c) A compilation of data and other materials;
(d) A computer program except as provided in SEC 189;
and
(e) Any work in cases where reproduction would
unreasonably conflict with a normal exploitation of the work or
would otherwise unreasonably prejudice the legitimate interests of
the author.(n)
SEC. 188. Reprographic Reproduction by Libraries
188.1. Notwithstanding the provisions of SubSEC 177.6, any
library or archive whose activities are not for profit may, without the
authorization of the author of copyright owner, make a single copy
of the work by reprographic reproduction:
(a) Where the work by reason of its fragile character or
rarity cannot be lent to user in its original form;
(b) Where the works are isolated articles contained in
composite works or brief portions of other published works and the
reproduction is necessary to supply them; when this is considered
expedient, to person requesting their loan for purposes of research
or study instead of lending the volumes or booklets which contain
them; and
(c) Where the making of such a copy is in order to preserve
and, if necessary in the event that it is lost, destroyed or rendered
unusable, replace a copy, or to replace, in the permanent
collection of another similar library or archive, a copy which has
been lost, destroyed or rendered unusable and copies are not
available with the publisher.
188.2. Notwithstanding the above provisions, it shall not be
permissible to produce a volume of a work published in several
volumes or to produce missing tomes or pages of magazines or
similar works, unless the volume, tome or part is out of stock;
Provided, That every library which, by law, is entitled to receive
copies of a printed work, shall be entitled, when special reasons so
require, to reproduce a copy of a published work which is
considered necessary for the collection of the library but which is
out of stock. (Sec. 13, P.D. 49a)
SEC. 189. Reproduction of Computer Program
189.1. Notwithstanding the provisions of SEC 177, the
reproduction in one (1) back-up copy or adaptation of a computer
program shall be permitted, without the authorization of the author
of, or other owner of copyright in, a computer program, by the
lawful owner of that computer program: Provided, That the copy or
adaptation is necessary for:
(a) The use of the computer program in conjunction with a
computer for the purpose, and to the extent, for which the
computer program has been obtained; and
(b) Archival purposes, and, for the replacement of the
lawfully owned copy of the computer program in the event that the
lawfully obtained copy of the computer program is lost, destroyed
or rendered unusable.
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
189.2. No copy or adaptation mentioned in this SEC shall be used
for any purpose other than the ones determined in this SEC, and
any such copy or adaptation shall be destroyed in the event that
continued possession of the copy of the computer program ceases
to be lawful.
189.3. This provision shall be without prejudice to the application of
SEC 185 whenever appropriate. (n)
SEC. 190. Importation for Personal Purposes
190.1. Notwithstanding the provision of SubSEC 177.6, but subject
to the limitation under the SubSEC 185.2, the importation of a copy
of a work by an individual for his personal purposes shall be
permitted without the authorization of the author of, or other owner
of copyright in, the work under the following circumstances:
(a) When copies of the work are not available in the
Philippines and:
(i) Not more than one (1) copy at one time is imported for
strictly individual use only; or
(ii) The importation is by authority of and for the use of
the Philippine Government; or
(iii) The importation, consisting of not more than three (3)
such copies or likenesses in any one invoice, is not for sale but for
the use only of any religious, charitable, or educational society or
institution duly incorporated or registered, or is for the
encouragement of the fine arts, or for any state school, college,
university, or free public library in the Philippines.
(b) When such copies form parts of libraries and personal
baggage belonging to persons or families arriving from foreign
countries and are not intended for sale: Provided, That such copies
do not exceed three (3).
190.2. Copies imported as allowed by this SEC may not lawfully be
used in any way to violate the rights of owner the copyright or
annul or limit the protection secured by this Act, and such unlawful
use shall be deemed an infringement and shall be punishable as
such without prejudice to the proprietors right of action.
190.3. Subject to the approval of the Secretary of Finance, the
Commissioner of Customs is hereby empowered to make rules
and regulations for preventing the importation of articles the
importation of which is prohibited under this SEC and under
treaties and conventions to which the Philippines may be a party
and for seizing and condemning and disposing of the same in case
they are discovered after they have been imported. (Sec. 30, P.D.
No. 49)
Doctrine of Fair Use (see Sec. 185)
Cases:
- Copyright infringement
Habana, et al. vs. Robles, et al., (1999)
(As discussed in the textbook)
Facts: Habana, Cinco, and Fernando are the authors of a book
entitled College English for Today, while Robles is the author of a
book on the same subject entitled Developing English Proficiency.
In the course of revising their book, Habana came upon the book
of Robles and Found that it was strikingly similar to their own book.
Habana thereafter filed a complaint for infringement and/or unfair
competition, with damages, against Robles and her publisher
Goodwill Trading Co., Inc.
140 of 143
The lower court dismissed the complaint of Habana on the ground
that there was no infringement of copyright committed by Robles.
Upon appeal the CA affirmed the decision of the lower court.
HELD: The decision of the CA is reversed.
A perusal of the records yields several pages of the book DEP that
are similar if not identical with the text of CET.
A pirate cannot claim that copied portions of copyrighted book are
also found in foreign books and other grammar books and that the
similarity between styled and that of other authors cannot be
avoided since they come from the same background and
orientation.
Under SEC 184 of RA 8293, the making of quotations from a
published work if they are compatible with fair use and only to the
extent justified for the purpose, must provide for the source and
name of the author. A copy of a piracy is an infringement of the
original and it is no defense that a pirate, in such cases, did not
know whether or not he was infringing any copyright; he at least
knew that what he was copying was not his, and he copied at his
peril.
To determine whether there is a substantial reproduction of a book,
it does not necessarily require that the entire copyrighted work, or
even a large portion of it, be copied. If so much is taken that the
value of the original work is substantially diminished, there is an
infringement of copyright and to an injurious extent, the work is
appropriated.
The amount of matter copied from the copyrighted work is an
important consideration. It is not necessary that the whole or even
a large portion shall have been copied. Copying alone is not what
is prohibited. The copying must likewise produce an injurious
effect. Here, the injury consists in that respondent Robles lifted
from petitioners book materials that were the result of the latters
research work and compilation and misrepresented them as her
own. Hence, there is a clear case of appropriation of copyrighted
work for her benefit.
COMMENTS: Sir takes exception to the fact that the Court did not
provide a justification for overturning the findings of fact of both the
RTC and the CA. Moreover, he agrees with Justice Davide that
there was no copying and therefore, no question of fair or unfair
use arises.
Notes:
- Factors considered
a. PURPOSE and CHARACTER of the use- whether
commercial, educational, non-profit, etc.
b. NATURE OF THE COPYRIGHTED WORK- implies that
certain types of copyrighted material are more amenable to fair use
than others
c. AMOUNT or SUBSTANTIALITY of the portion used- In
general, the bigger or more important the greater the adverse
effect. Note the DE MINIMIS RULEevery copying of copyrighted
material is not necessarily an infringement if what was copied was
trivial or negligible.
d. EFFECT OF THE USE upon the potential market for or
value of the copyrighted work
- DECOMPILATION- reproduction of the code and
translation of the forms of the computer program to achieve the
inter-operability of an independently created program with other
programs (Sec. 185)
Notice of copyright
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
SEC. 192. Notice of CopyrightEach copy of a work published or
offered for sale may contain a notice bearing the name of the
copyright owner, and the year of its first publication, and, in copies
produced after the creators death, the year of such death. (Sec.
27, P.D. No. 49a)
Neighboring or related rights
SEC. 202. DefinitionsFor the purpose of this Act, the following
terms shall have the following meanings:
202.1. "Performers" are actors, singers, musicians, dancers, and
other persons who act, sing, declaim, play in, interpret, or
otherwise perform literary and artistic work;
202.2. "Sound recording" means the fixation of the sounds of a
performance or of other sounds, or representation of sound, other
than in the form of a fixation incorporated in a cinematographic or
other audiovisual work;
202.3. An "audiovisual work or fixation" is a work that consists of a
series of related images which impart the impression of motion,
with or without accompanying sounds, susceptible of being made
visible and, where accompanied by sounds, susceptible of being
made audible;
202.4. "Fixation" means the embodiment of sounds, or of the
representations thereof, from which they can be perceived,
reproduced or communicated through a device;
202.5. "Producer of a sound recording" means the person, or the
legal entity, who or which takes the initiative and has the
responsibility for the first fixation of the sounds of a performance or
other sounds, or the representation of sounds;
202.6. "Publication of a fixed performance or a sound recording"
means the offering of copies of the fixed performance or the sound
recording to the public, with the consent of the right holder:
Provided, That copies are offered to the public in reasonable
quality;
202.7. "Broadcasting" means the transmission by wireless means
for the public reception of sounds or of images or of
representations thereof; such transmission by satellite is also
"broadcasting" where the means for decrypting are provided to the
public by the broadcasting organization or with its consent;
202.8. "Broadcasting organization" shall include a natural person
or a juridical entity duly authorized to engage in broadcasting; and
202.9. "Communication to the public of a performance or a sound
recording" means the transmission to the public, by any medium,
otherwise than by broadcasting, of sounds of a performance or the
representations of sounds fixed in a sound recording. For purposes
of SEC 209, "communication to the public" includes making the
sounds or representations of sounds fixed in a sound recording
audible to the public.
SEC. 203. Scope of Performers' RightsSubject to the
provisions of SEC 212, performers shall enjoy the following
exclusive rights:
203.1. As regards their performances, the right of authorizing:
(a) The broadcasting and other communication to the
public of their performance; and
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(b) The fixation of their unfixed performance.
203.2. The right of authorizing the direct or indirect reproduction of
their performances fixed in sound recordings, in any manner or
form;
203.3. Subject to the provisions of SEC 206, the right of
authorizing the first public distribution of the original and copies of
their performance fixed in the sound recording through sale or
rental or other forms of transfer of ownership;
203.4. The right of authorizing the commercial rental to the public
of the original and copies of their performances fixed in sound
recordings, even after distribution of them by, or pursuant to the
authorization by the performer; and
203.5. The right of authorizing the making available to the public of
their performances fixed in sound recordings, by wire or wireless
means, in such a way that members of the public may access
them from a place and time individually chosen by them. (Sec. 42,
P.D. No. 49a)
SEC. 204. Moral Rights of Performers
204.1. Independently of a performer's economic rights, the
performer, shall, as regards his live aural performances or
performances fixed in sound recordings, have the right to claim to
be identified as the performer of his performances, except where
the omission is dictated by the manner of the use of the
performance, and to object to any distortion, mutilation or other
modification of his performances that would be prejudicial to his
reputation.
204.2. The rights granted to a performer in accordance with
SubSEC 203.1 shall be maintained and exercised fifty (50) years
after his death, by his heirs, and in default of heirs, the
government, where protection is claimed. (Sec. 43, P.D. no. 49)
SEC. 205. Limitation on Right
205.1. Subject to the provisions of SEC 206, once the performer
has authorized the broadcasting or fixation of his performance, the
provisions of SECs 203 shall have no further application.
205.2. The provisions of SEC 184 and SEC 185 shall apply mutatis
mutandis to performers. (n)
SEC. 206. Additional Remuneration for Subsequent
Communications or BroadcastsUnless otherwise provided in
the contract, in every communication to the public or broadcast of
a performance subsequent to the first communication or broadcast
thereof by the broadcasting organization, the performer shall be
entitled to an additional remuneration equivalent to at least five
percent (5%) of the original compensation he or she received for
the first communication or broadcast. (n)
SEC. 207. Contract TermsNothing in this Chapter shall be
construed to deprive performers of the right to agree by contracts
on terms and conditions more favorable for them in respect of any
use of their performance. (n)
SEC. 208. Scope of RightSubject to the provisions of SEC 212,
producers of sound recordings shall enjoy the following exclusive
rights:
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
208.1. The right to authorize the direct or indirect reproduction of
their sound recordings, in any manner or form; the placing of these
reproductions in the market and the right of rental or lending;
208.2. The right to authorize the first public distribution of the
original and copies of their sound recordings through sale or rental
or other forms of transferring ownership; and
208.3. The right to authorize the commercial rental to the public of
the original and copies of their sound recordings, even after
distribution by them by or pursuant to authorization by the
producer. (Sec. 46, P.D. No. 49a)
SEC. 209. Communication to the PublicIf a sound recording
published for commercial purposes, or a reproduction of such
sound recording, is used directly for broadcasting or for other
communication to the public, or is publicly performed with the
intention of making and enhancing profit, a single equitable
remuneration for the performer or performers, and the producer of
the sound recording shall be paid by the user to both the
performers and the producer, who, in the absence of any
agreement shall share equally. (Sec. 47, P.D. No. 49a)
SEC. 210. Limitation of RightSECs 184 and 185 shall apply
mutatis mutandis to the producer of sound recordings. (Sec. 48,
P.D. No. 49a)
SEC. 211. Scope of RightSubject to the provisions of SEC 212,
broadcasting organizations shall enjoy the exclusive right to carry
out, authorize or prevent any of the following acts:
211.1. The rebroadcasting of their broadcasts;
211.2. The recording in any manner, including the making of films
or the use of video tape, of their broadcasts for the purpose of
communication to the public of television broadcasts of the same;
and
211.3. The use of such records for fresh transmissions or for fresh
recording. (Sec. 52, P.D. No. 49)
Sec. 212. Limitations on RightsSECs 203, 208 and 209 shall not
apply where the acts referred to in those SECs are related to:
212.1. The use by a natural person exclusively for his own
personal purposes;
212.2. Using short excerpts for reporting current events;
212.3. Use solely for the purpose of teaching or for scientific
research; and
212.4. Fair use of the broadcast subject to the conditions under
SEC 185. (Sec. 44, P.D. no. 49a)
Term
SEC. 213. Term of Protection
213.1. Subject to the provisions of SubSECs 213.2 to 213.5, the
copyright in works under SECs 172 and 173 shall be protected
during the life of the author and for fifty (50 years after his death.
This rule also applies to posthumous works. (Sec. 21, first
sentence, P.D. No. 49a)
142 of 143
213.2. In case of works of joint authorship, the economic rights
shall be protected during the life of the last surviving author and for
fifty (50) years after his death. (Sec. 21, second sentence, P.D. no.
49)
213.3. In case of anonymous or pseudonymous works, the
copyright shall be protected for fifty (50) years from the date on
which the work was first lawfully published: Provided, That where,
before the expiration of the said period, the author's identity is
revealed or is no longer in doubt, the provisions of SubSECs 213.1
and 213.2 shall apply, as the case may be: Provided, further, That
such works if not published before shall be protected for fifty (50)
years counted from the making of the work. (Sec. 23, P.D. No. 49)
213.4. In case of works of applied art the protection shall be for a
period of twenty-five (25) years from the date of making. (Sec.
24(B), P.D. No. 49a)
213.5. In case of photographic works, the protection shall be for
fifty (50) years from publication of the work and, if unpublished, fifty
(50) years from the making. (Sec. 24(C), P.D. 49a)
213.6. In case of audio-visual works including those produced by
process analogous to photography or any process for making
audio-visual recordings, the term shall be fifty (50) years from date
of publication and, if unpublished, from the date of making. (Sec.
24(C), P.D. No. 49a)
SEC. 214. Calculation of TermThe term of protection
subsequent to the death of the author provided in the preceding
SEC shall run from the date of his death or of publication, but such
terms shall always be deemed to begin on the first day of January
of the year following the event which gave rise to them. (Sec. 25,
P.D. No. 49)
SEC. 215. Term of Protection for Performers, Producers and
Broadcasting Organizations
215.1. The rights granted to performers and producers of sound
recordings under this law shall expire:
(a) For performances not incorporated in recordings, fifty (50)
years from the end of the year in which the performance took
place; and
(b) For sound or image and sound recordings and for
performances incorporated therein, fifty (50) years from the end of
the year in which the recording took place.
215.2. In case of broadcasts, the term shall be twenty (20) years
from the date the broadcast took place. The extended term shall
be applied only to old works with subsisting protection under the
prior law. (Sec. 55, P.D. No. 49a)
Notes:
- Terms shall always be deemed to begin on the first day
of January of the year following the event which gave rise to them.
Concept of copying or infringement of copyright
[Insert notes]
Remedies for infringement
SEC. 216. Remedies for Infringement
216.1. Any person infringing a right protected under this law shall
be liable:
 COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop
(a) To an injunction restraining such infringement. The
court may also order the defendant to desist from an infringement,
among others, to prevent the entry into the channels of commerce
of imported goods that involve an infringement, immediately after
customs clearance of such goods.
(b) Pay to the copyright proprietor or his assigns or heirs
such actual damages, including legal costs and other expenses, as
he may have incurred due to the infringement as well as the profits
the infringer may have made due to such infringement, and in
proving profits the plaintiff shall be required to prove sales only and
the defendant shall be required to prove every element of cost
which he claims, or, in lieu of actual damages and profits, such
damages which to the court shall appear to be just and shall not be
regarded as penalty.
(c) Deliver under oath, for impounding during the pendency
of the action, upon such terms and conditions as the court may
prescribe, sales invoices and other documents evidencing sales,
all articles and their packaging alleged to infringe a copyright and
implements for making them.
(d) Deliver under oath for destruction without any
compensation all infringing copies or devices, as well as all plates,
molds, or other means for making such infringing copies as the
court may order.
(e) Such other terms and conditions, including the payment
of moral and exemplary damages, which the court may deem
proper, wise and equitable and the destruction of infringing copies
of the work even in the event of acquittal in a criminal case.
216. 2. In an infringement action, the court shall also have the
power to order the seizure and impounding of any article which
may serve as evidence in the court proceedings. (Sec. 28, P.D.
No. 49a)
SEC. 217. Criminal Penalties
217.1. Any person infringing any right secured by provisions of
Part IV of this Act or aiding or abetting such infringement shall be
guilty of a crime punishable by:
(a) Imprisonment of one (1) year to three (3) years plus a
fine ranging from Fifty thousand pesos (P50,000) to One hundred
fifty thousand pesos (P150,000) for the first offense.
(b) Imprisonment of three (3) years and one (1) day to six
(6) years plus a fine ranging from One hundred fifty thousand
pesos (P150,000) to Five hundred thousand pesos (P500,000) for
the second offense.
(c) Imprisonment of six (6) years and one (1) day to nine
(9) years plus a fine ranging from Five hundred thousand pesos
(P500,000) to One million five hundred thousand pesos
(P1,500,000) for the third and subsequent offenses.
(d) In all cases, subsidiary imprisonment in cases of
insolvency.
217.2. In determining the number of years of imprisonment and the
amount of fine, the court shall consider the value of the infringing
materials that the defendant has produced or manufactured and
the damage that the copyright owner has suffered by reason of the
infringement.
217.3. Any person who at the time when copyright subsists in a
work has in his possession an article which he knows, or ought to
know, to be an infringing copy of the work for the purpose of:
(a) Selling, letting for hire, or by way of trade offering or
exposing for sale, or hire, the article;
143 of 143
(b) Distributing the article for purpose of trade, or for any
other purpose to an extent that will prejudice the rights of the
copyright owner in the work; or
(c) Trade exhibit of the article in public, shall be guilty of an
offense and shall be liable on conviction to imprisonment and fine
as above mentioned. (Sec. 29, P.D. No. 49a)
GEOGRAPHICAL INDICATIONS
Article 22 (TRIPS AGREEMENT)
Protection of Geographical Indications
1. Geographical indications are, for the purposes of this
Agreement, indications which identify a good as originating in the
territory of a Member, or a region or locality in that territory, where
a given quality, reputation or other characteristic of the good is
essentially attributable to its geographical origin.
2. In respect of geographical indications, Members shall provide
the legal means for interested parties to prevent:
(a) the use of any means in the designation or presentation of a
good that indicates or suggests that the good in question originates
in a geographical area other than the true place of origin in a
manner which misleads the public as to the geographical origin of
the good;
(b) any use which constitutes an act of unfair competition within
the meaning of Article 10bis of the Paris Convention (1967).
3. A Member shall, ex officio if its legislation so permits or at the
request of an interested party, refuse or invalidate the registration
of a trademark which contains or consists of a geographical
indication with respect to goods not originating in the territory
indicated, if use of the indication in the trademark for such goods in
that Member is of such a nature as to mislead the public as to the
true place of origin.
4. The protection under paragraphs 1, 2 and 3 shall be applicable
against a geographical indication which, although literally true as to
the territory, region or locality in which the goods originate, falsely
represents to the public that the goods originate in another
territory.
UNDISCLOSED INFORMATION
RULE 1 (o), IPO Rules and Regulations on Voluntary Licensing
o) Undisclosed Information shall mean information
which:
(i) Is secret in the sense that it is not, as a body or in the
precise configuration and assembly of its components,
generally known among or readily accessible to persons within
the circles that normally deal with the kind of information in
question;
(ii) has commercial value because it is secret; and
(iii) has been subject to reasonable steps under the
circumstances to keep it secret, by the person lawfully in control
of the information.