RA 8799 - The Securities and Regulation Code (Updated With 2015 SRC Irr)

USC Law - Commercial Law Review (Allied Commercial Law) 2015-2016
MARCH 11, 2016

RA 8799 – THE SECURITIES AND REGULATION CODE (UPDATED WITH 2015 SRC
IRR)
 SRC is the law that regulates the sale of securities in the PHILIPPINES
HISTORY:
 This law was passed sometime in August 2000
 Prior to the SRC, we had the Revised Securities Act, BP No. 178 which was passed in 1982
 Before that, you had the Securities Act, Commonwealth Act No. 83 which was passed 1936
 The very first investment protection law in the Philippines is Act No. 2581, known as ―Blue Sky Law‖.
o It was called as such based on old jurisprudence, saying that these laws were passed in order to protect the
public against speculative investments which have no basis other than clean field of blue sky, in other words,
no basis other than air.
o Now, the blue sky laws are the generic terms used to describe the investment protection laws. The blue sky
law was passed in 1916. It was the first investment protection law in the Philippines. But at that point, it solely
provided for regulations with respect to issuance of securities, but it did not require registration for those
securities.
 But when the Securities Act came in 1936, securities were now classified into speculative and non-speculative securities.
o Speculative Securities – required to be registered.
o Non-speculative Securities – not required to be registered.
 1986  revised securites act was passed
o it required the registration of all securites in the philippines
 This practice was carried over until the Revised Securities Act until finally we have the Securities Regulation Code
 The SRC provides that ALL securities that will be sold to the public within the Philippines will have to be registered with
the Securities and Exchange Commission. In fact this requirement of registration is the most basic requirement of the
SRC which is aimed to protect the investing public.
PURPOSE OF THE SRC: STATE POLICIES OF THE SRC LAW

2. Declaration of State Policy. – The State shall establish a socially conscious, free market that regulates itself,
encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote the
development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally
eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free
market. To achieve these ends, this Securities Regulation Code is hereby enacted.
1. To establish a socially conscious, free market that regulates itself.

a. How:
 SRC provides for the establishment and regulation for what we call the self-regulatory organization
(SRO) and PSE is one such SRO.
 It will establish a market for stocks and securities. The market is the Philippine Stock Exchange. The
relationship between the PSE and SRC is that although PSE is a private corporation, it was
established by law
 The PSE is an SRO which is established pursuant to the SRC and it is also regulated based on the
provisions of the SRC. Technically, PSE is a private enterprise, a free market, and an SRO
because this market regulates itself, free from interference from the government.
 So the first state policy here is achieved by virtue of Chapter X of the SRC which provides for the
establishment and regulations of the SROs which is the market for securities. In the Philippines, we
only have one SRO, which is PSE.
2. To encourage the widest participation of ownership in enterprises, so as to Enhance the democratization of
wealth
 How:
o Every time an issuer wants to do an initial public offering, a portion of that issuance is required to be
given to the LSI ( Local Small Investors). LSI are entities or small investors are those who would
want to invest in shares.
o SEC requires when a corporation conducts a public offering, a certain percentage of the shares to be
offered to the public is granted to certain classifications. So only a certain percentage will go to the
qualified buyers and certain percentage will go to the ordinary investors. To make sure that the
public, the ordinary investors, will get to own shares in certain enterprises and not just the big
investors.
3. Promote the development of the capital market, protect investors, ensure full and fair disclosure about
securities.
 The meat and bone of the entire SRC is section 8:
o SEC. 8. Requirement of Registration of Securities. – 8.1. Securities shall not be sold or offered for
sale or distribution within the Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the securities, in such form and with
such substance as the Commission may prescribe, shall be made available to each prospective
purchaser.
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 The aim of the law is through registration the public will be inform of the capital market and when they make
good investments they will continue to be educated and to participate more in the market.
4. To minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices
which create distortions in the free market.
That is embodied under the Chapter 7 of the SRC. So when you take a look at Chapter 7, there are provisions on
fraud, etc.
POWERS & FUNCTIONS OF THE SEC
The agency that is tasked with the job of interpreting and implementing the SRC is the Securities and Exchange Commission.
Section 5. Powers and Functions of the Commission.– 5.1. The commission shall act with transparency and shall have
the powers and functions provided by this code, Presidential Decree No. 902-A, the Corporation Code, the Investment
Houses law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:
 One power is to (c) Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;
o SEC vs UNIVERSAL RIGHTFIELD(UR) G.R. No. 181381, July 20, 2015
 Facts:
 UR did not comply with its reportorial requirements under the SRC, under the SRC all registered
companies will have to make periodic reporting to the SEC. Any act which can affect the investing
public are required to be reported.
 The problem is UR had been undergoing rehabilitation, so it failed to submit its annual financial
statements report and several of its quarterly report. So SEC sent letters to explain why UR where
not submitting its reportorial requirements. The president of UR went to SEC and explained that they
were in financial trouble and the auditors could not complete the financial statements. So the SEC
gave an additional time to comply which they were not able to comply. So they paid a penalty. After
payment, SEC said you still need to submit the requirements. Payment of penalty will not excuse
from submitting the form.
 So SEC suspended their registration. If there registration is suspended they cannot sell their shares
and they cannot trade their shares in the stock exchange. After failure to still submit there registration
was revoked.
 ISSUE: So UR filed a case saying that the revocation of the registration and permit to sell was a
quasi-judicial act undertaken by the SEC. being a quasi-judicial act, they are required to give notice
and hearing, due process.
 SC RULING:
 No. UR is Wrong. Act of revoking the registration of securities and the permit to sell is not an
exercise of a quasi-judicial power but rather the exercise of the SEC of its REGULATORY
POWER.
 SEC has two powers:
 Regulatory  issue whether there is compliance with the laws being administered by the
SEC
 Quasi-Judicial  SEC will determine rights
 In this case, the issue is as to failure of compliance to reportorial requirement therefore no notice
and hearing is required. Strict notice and hearing is not important. What is important is the
opportunity to be heard when the company was asked to explain.
o SEC vs SUBIC BAY Country CLUB (SB)G.R. No. 179047, March 11, 2015
 FACTS:
 SB had registered securities with the SEC but was not listed in the PSE, but they were selling
participation certificate to allow users to use the facilities of the country club.
 Two of the buyers complained to the SEC that the golf course was not completed and several of the
amenities were not yet completed. So they complained with the SEC that the deliverer was not able
to comply with his promise. They requested the issuer for a refund. The SEC after investigation,
ruled in favor of the complainants, they found out that the golf course was not really completed and
other amenities. SEC required SB to amend its prospectus to put in a new timeline for the delivery of
the facilities. SB did not comply. So SEC the registration, which prompted SB to refund the
investment of the investors.
 ISSUE: did the SEC have the right to do all those stated? Was there an intra corporate dispute? Do
the corporation need to refund?
 SC RULING:
 For a dispute to be "intra-corporate," it must satisfy:
o the relationship test
o nature of controversy tests.
 The relationship test requires that the dispute be between:
o a corporation/partnership/association and the public;
o a corporation/partnership/association and the state regarding the entity's franchise,
permit, or license to operate;
o a corporation/partnership/association and its stockholders, partners, members, or
officers; and among stockholders, partners, or associates of the
entity.70cralawrednad
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 The controversy test requires that the action involves the enforcement of corporate rights
and obligations.
o Does not mean that the party are corporation and SH that it is automatically ang intra
corporate dispute, look at the issue. If rights are to be adjucted then it its an INTRA
CORPORATE DISPUTE.
 Its is important to know whether it is an Intra Corporate dispute because of JURISDICTION:
 INTRA CORPORATE  RTC
 Not  SEC
 On the first issue: is whether the SEC can revoke?
 the SC said YES SEC had jurisdiction to revoke.
 On the second issue whether the company is required to make a refund to the investor?
 The SC said the SEC has no power to compel the issuer to return investment to the investor.
When it comes to rights to adjudicate between SH and the company, this is not within the
powers of the SEC.
 Securities and Exchange Commission's regulatory power pertains to the approval and rejection, and
suspension or revocation, of applications for registration of securities79 for, among others, violations
of the law, fraud, and misrepresentationn.
However, the Securities and Exchange Commission's regulatory power does not include the
authority to order the refund of the purchase price of Villareal's and Filart's shares in the golf club.
The issue of refund is intra-corporate or civil in nature. Similar to issues such as the existence or
inexistence of appraisal rights, pre-emptive rights, and the right to inspect books and corporate
records, the issue of refund is an intra-corporate dispute that requires the court to determine and
adjudicate the parties' rights based on law or contract. Injuries, rights, and obligations involved in
intra-corporate disputes are specific to the parties involved. They do not affect the Securities and
Exchange Commission or the public directly.
REGISTRATION REQUIREMENT
What is required before Securities can be sold? SRC requires that it must be registered.
CHAPTER III
REGISTRATION OF SECURITIES
Section 8. Requirement of Registration of Securities.– 8.1. Securities shall not be sold or offered for sale or distribution
within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such
sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be
made available to each prospective purchaser.
STAGES BEFORE THE SECURITIES ARE SOLD TO THE PUBLIC IN THE PHILIPPINES:
1. Pre-Filing Stage –
 Before you file your registration with the SEC.
 RIGHTS OF AN ISSUER:
o you cannot sell securities in the Philippines;
o you cannot disseminate information about your shares in the Philippines.
 This is a very long process. The issuer will need to find an underwriter, a legal team, a finance team.The
legal team will prepare the registration statement and preliminary prospectus and the finance team to check
them under due diligence.They will make some necessary corrections and the legal team will make final
corrections.
2. Filing Stage
 Under Section 8 of the SRC, before you can sell your securities, you need to file a registration statement and
get the approval by the SEC of that registration statement.
 You need to file your application.
 The documents required to be submitted to the SRC are the registration statement together with the
preliminary prospectus.
3. Pre-Offering Stage
 This stage, the moment that AFTER you file your registration statement and your preliminary prospectus with
the SEC, it is what we call, Pre-Offering Stage.
 Section 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Commission. Prior to such sale, information on
the securities, in such form and with such substance as the Commission may prescribe, shall be made
available to each prospective purchaser.
 RIGHTS OF ISSUER
 cannot sell yet in this stage because they must also comply with the requirement of filing AND
approval of the registration statement by the SEC.
 allowed to disseminate your preliminary prospectus to the public.
 This preliminary prospectus is also known as red-herring prospectus. Preliminary prospectus was
actually required to be written in a red ink. And red-herring fishes are used to mislead the hounds. It is a false
trail red-herring.
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 Filed but that prospectus has not yet been approved by the SEC so that prospectus is a false trail.
 Take note under 8.1 the preliminary prospectus filed with the SEC will be circulated to potential investors
prior to the effectiveness of the registration statement. You can already disseminate your preliminary
prospectus provided that it contains a statement that the registration and the prospectus has not yet been
declared effective. You have to put it in bold print in your prospectus.
 Rule 8.1.d. Allows the dissemination of the preliminary prospectus during the pre-offering period.
 SRC Rule 8.3 also provides for certain written communications which are not deemed offers for sale.
These written communications can be disseminated during this stage. These are actually
advertisements, notice, circulars,letters,etcpublished or transmitted to any person after the
registration statement has been filed and contains any of the following information required. At this
point, not yet approved.
 You can only disseminate your preliminary prospectus and disseminate your advertisements.
 These advertisements are also known as tombstone advertisements because you are just advertising but
you are not allowed to sell but this has not yet been approved by the SEC. Mura siya’gpatay. Walaygamit.
 These are advertisements which are allowed to be circulated after a registration statement has already been
filed with the SEC but not yet been approved.
3.1 Payment of Filing Fees - Section 12.5. (a) Upon filing of the registration statement, the issuer shall pay to the
Commission a fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at
which such securities are proposed to be offered.
3.2 Publication –Section 12.5 (b)Notice of the filing of the registration statement shall be immediately published by
the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a week for
two (2) consecutive weeks, or in such other manner as the Commission by rule shall prescribe, reciting that a
registration statement for the sale of such security has been filed, and that the aforesaid registration statement,
as well as the papers attached thereto are open to inspection at the Commission during business hours, and
copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the
Commission may prescribe.
3.3 Approval or Denial - The moment that the SEC will approve your shares, the SEC will issue an order declaring
the registration statement either effective or rejected. Or the SEC can allow you to amend your registration
statement.
Section 12.6. Within forty-five (45) days after the date of filing of the registration statement, or by such later date
to which the issuer has consented, the Commission shall declare the registration statement effective or rejected,
unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof. The
Commission shall enter an order declaring the registration statement to be effective if it finds that the registration
statement together with all the other papers and documents attached thereto, is on its face complete and that the
requirements have been complied with.
3.4 Oath from the Issuer - Section 12.7 Upon effectivity of the registration statement, the issuer shall state under
oath in every prospectus that all registration requirements have been met and that all information are true and
correct as represented by the issuer or the one making the statement.
4. Offering Period –this is AFTER approval, You can now sell your securities because you already filed your
registration statement and it has already been approved or made effective by the SEC.
 The preliminary or red-herring prospectus becomes a FINAL prospectus.
 RIGHTS OF AN ISSUER:
 Here you are allowed to sell.
 Take note that the SEC‘s approval is not a stamp of merit of the security. It is just a statement that you have
fully and fairly disclosed all material information about the issuer and about the security. And it is still up to
the investing public whether or not they are going to invest. The SEC does not assure or guarantee returns or
profits on the investment.
5. Notice of Completion
 The period of offering is only for a limited period of time. SRC Rule 8.1 paragraph d provides that a written
notification of completion or termination of the offering shall be filed with the SEC within in three business
days from such completion or termination indicating therein the number of securities sold. What you have
there is a notice of offering completion.
SECURITES REQUIRED TO BE REGISTERED

 When are you required to registered:
o Public Offering in the philippines
 There is a public offering when (NEW 2015 SRC IRR):
 3.1.17. Public offering is any offering of securities to the public or to anyone, whether solicited or
unsolicited. Any solicitation or presentation of securities for sale through any of the following modes
shall be presumed to be a public offering:
 Publication in any newspaper, magazine or printed reading material which is distributed
within the Philippines;
 Presentation in any public or commercial place;
 Advertisement or announcement on radio, television, telephone, electronic
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communications, information communication technology or any other forms of
communication;
o this is new. The old rule only allows until telephone of the enumeration. The new
includes , “electronic communications, information communication technology
or any other forms of communication”
o meaning if you sell by TEXT or EMAIL it is now considered as being a public offering
 Distribution and/or making available flyers, brochures or any offering material in a public or
commercial place or to prospective purchasers through the postal system, information
communication technology and other means of information distribution.
 If it is not a public offering or not within the philippines then there is no need for registration
 What are you required to register:
o The securities.
o When a corporation is created you are requires to register which is your primary franchise that gives you your
life as a corporation but your are not allowed to sell to the public securities this requires another registration
or franchise
TYPES OF SECURITIES
What are securities?
Section 3. Definition of Terms. - 3.1.
"Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture
and evidenced by a certificate, contract, instruments, whether written or electronic in character.
It includes:
(a) Shares of stocks, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a
future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission.
Two major types of securities are:

1. Equity Securities
2. Debt Securities
1. Shares of Stocks are equity securities representing ownership in an enterprise

 Bonds, debentures, notes, evidences of indebtedness are debt securities.
 The difference between the bonds, debentures, notes, etc is with respect to the term and as to the collateral
because bonds are of the longest term.
 Bonds are generally backed by a real estate mortgage. Debentures are short-term and not collaterlized.
 Notes which are shorter term debt securities.
2. ASSET-BACKED SECURITIES:
 Asset-Backed Securities issued by an SPE (Special Purpose Entity), the repayment of which shall be derived from the
cash flow of the assets in accordance with the Plan. SPEs will buy receivables or bonds, basically debt securities. These
debt securities have very large face amount, in millions. Ordinary investors cannot really buy them. In turn, the SPE will
turn around and issue securities. These securities issued by SPEs are Asset Back Securities.
 Why do you call them as Asset Back Securities?
They are backed up by these debt securities which are recognized as assets of these SPEs. Since these are debt
securities, whatever earnings from these debt securities like interests, discounting, these are the income which flows
down to the holders the Asset Back Securities. These debt securities are normally have very big face amounts so the
ordinary investing public cannot buy them but when the SPEs buy them in bulk, then, it will in turn create its own
securities and distribute it to the public. These are smaller denomination securities.
 These debt instruments are assets of the SPE and they are the basis of the SPE in issuing the Asset Back Securities. For
example they will buy debt securities worth 20m pesos, in turn, this is one debt securities, the SPE then in turn divide this
into several securities which would be easily accessible or made more affordable to the investing public.
3. DEPOSITS FOR FUTURE SUBSCRIPTION:
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 This is when a company solicits investments and they do not have shares yet, the investment is marked as a
deposit for future subscription.
4. INVESTMENT CONTRACTS:
SRC Rule 3.1-1 - Definition of Investment Contract and Derivative

1. An investment contract means a contract, transaction or scheme (collectively ―contract‖) whereby a person invests his
money in a common enterprise and is led to expect profits primarily from the efforts of others.
a. A presumption that a contract is an investment contract arises whenever a person seeks to use the money of others
on the promise of profits.
b. When two or more investors ―pool‖ their resources, there is a common enterprise, even if the promoter does not do
more than receive a broker‘s commission.
 What is the test that is used to determine WON it is an investment contract? Howey Test
o Howey Co. Test: that, for an investment contract to exist, the following elements, referred to as
the Howey test must concur:
o (1) a contract, transaction, or scheme for an investment of money;
o (2) investment is made in a common enterprise;
 common enterprise is when two or more investors pooling their interests
o (3) expectation of profits; and
o (4) profits arising primarily from the efforts of others.
 If all is present then you must register it with the SEC.
CASE: SEC vs Prosperity.com Incorporated

Facts:
There is this company which sells websites without providing internet service. At the same time, by referring to PCI
his own down-line buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and in the
United States, and insurance coverage worth P50,000.00. To benefit from this scheme, a PCI buyer must enlist and sponsor
at least two other buyers as his own down-lines. These second tier of buyers could in turn build up their own down-lines. For
each pair of down-lines, the buyer-sponsor received a US$92.00 commission. The SEC, through its Compliance and
Enforcement unit, issued a Cease and Desist Order against PCI. The SEC ruled that PCI's scheme constitutes an Investment
contract and, following the Securities Regulations Code, 2 it should have first registered such contract or securities with the
SEC.
Issue:
Whether or not PCI‘s scheme constitutes an investment contract.
Ruling:
There was no investment contract. The Securities Regulation Code treats investment contracts as "securities" that
have to be registered with the SEC before they can be distributed and sold. An investment contract is a contract, transaction,
or scheme where a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of
others.
The United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co. that, for an investment
contract to exist, the following elements, referred to as the Howey test must concur: (1) a contract, transaction, or scheme; (2)
an investment of money; (3) investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising
primarily from the efforts of others. Thus, to sustain the SEC position in this case, PCI's scheme or contract with its buyers
must have all these elements.
An example that comes to mind would be the long-term commercial papers that large companies, like San Miguel
Corporation (SMC), offer to the public for raising funds that it needs for expansion. When an investor buys these papers or
securities, he invests his money, together with others, in SMC with an expectation of profits arising from the efforts of those
who manage and operate that company. SMC has to register these commercial papers with the SEC before offering them to
investors.
Here, PCI's clients do not make such investments. They buy a product of some value to them: an Internet website of
a 15-MB capacity. The client can use this website to enable people to have internet access to what he has to offer to them,
say, some skin cream. The buyers of the website do not invest money in PCI that it could use for running some business that
would generate profits for the investors. The price of US$234.00 is what the buyer pays for the use of the website, a tangible
asset that PCI creates, using its computer facilities and technical skills. Actually, PCI appears to be engaged in network
marketing.
Discussion:
 There was no investment because you are selling products and you are raising money through your own
effort and not through the effort of other.
5. FRACTIONAL UNDIVIDED INTERESTS IN OIL, GAS OR OTHER MINERAL RIGHTS:
6. DERIVATIVES LIKE OPTION AND WARRANTS
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Derivatives under the SRC Rules
Derivative with respect to equity securities, means a financial instrument, including options and warrants, whose value
depends on the interest in or performance of an underlying security, but which does not require any investment of
principal in the underlying security.
Kinds of Derivatives:
a. Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a
predetermined price, called the exercise or strike price, on or before a predetermined date, called the expiry date, which
can only be extended in accordance with Exchange rules.
Can be buy or sell.
b. Call options are rights to buy and put options are rights to sell.
c. Warrants are rights to subscribe or purchase new shares or existing shares in a company, on or before a
predetermined date, called the expiry date, which can only be extended in accordance with Exchange rules. Warrants
generally have a longer exercise period than options.
 NOTE:
o Warrants are only rights to buy
o Warrants generally have a longer exercise period than options and are evidenced by warrant certificates.
 Why avail of such derivates?
o For example, you have a warrant which allows you to purchase a certain security at 100 per share not later
than February 15, 2015. On February 15, 2015, let‘s say the shares are selling at 200 per share. Can I sell
you the warrant? Are you willing to buy the warrant for 50 pesos?
 Yes because it will allow me to buy the shares at a 50 pesos discount because I will pay 50 pesos for the warrant and
I will pay 100 pesos for the share. I gain the difference of 50 pesos from my cost of 150 minus the 200 actual cost of
the shares in the market.
 I will sell it to you for 80 pesos, will you buy it? Yes. Because that is still a gain of 20 pesos. The actual cost of the
warrant is 80 pesos and the cost of the share is 100 pesos, so you have 180 but if I buy the shares without the
warrant, I will be paying 200 pesos.
 The value of the warrant fluctuates depending on the value of the underlying security. That is why it is called a
derivative because its value is derived from the value of the underlying security. Warrant itself is a security. It has to
be registered. Derivatives are also classified as securities.
 Kinds of Options:
o Call Option  option to BUY (for recall: letter C near to B so Buy)
o Put Option  Option to SELL (for recall: letter P near to S so Sell)
 Kinds of Warrants:
1. ―Detachable Warrant‖ – means a Warrant that may be sold, transferred or assigned to any person by the
Warrantholder separate from, and independent of, the corresponding Beneficiary Securities ( a security that benefits
from a warrant)
2. ―Nondetachable Warrant‖ – means a Warrant that may not be sold, transferred or assigned to any person by the
warrantholder separate from, and independent of, the Beneficiary Securities.
o Summary:
o Beneficiary Security paired with the Warrant:
 If detachable  warrant sold separate from the secruity
 If you exercise the warrant, you buy the underlying security
 If not detacahble  sell the security inorder to sell the warrant
 If you exercise the warrant, you buy the underlying security
o Basically in warrants there are two securites:
 The beneficial secutiry
 Underlying security
o Example:
 Here is a deal, you buy our security or shares and to sweeten up the deal there are warrants
on(meaning it is accompanied by warrants) so this security issued together with the warrants is a
beneficiary security.
 Then the warrants will allow you to get more shares which is now the underlying security.
7. CERTIFICATES OF ASSIGNMENTS, CERTIFICATES OF PARTICIPATION, TRUST CERTIFICATES, VOTING

TRUST CERTIFICATES OR SIMILAR INSTRUMENTS:
o What is the difference between the certificates of assignments and certificates of participation?
 Recalling the laws on sales, when you sell incorporeal rights, you don‘t do a contract of sale, you
execute a deed of assignment.
o Certificates of assignments and certificates of participation are sales of incorporeal rights particularly debts,
credit. If you sell the whole credit, what you can have as a security is in the form of a certificate of
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assignment. If you sell a portion of the credit, is a certificate of participation. Both embody a credit. Trust
certificates are actually deposit certificates.
o Voting Trust Certificates is when you give the person a right to vote their shares. This allows a third person to
vote the shares. This is also a security. Just the right to vote.
8. PROPRIETARY OR NONPROPRIETARY MEMBERSHIP CERTIFICATES IN CORPORATIONS:

o Usually in sports clubs or country clubs
 Non-proprietary share or certificate allowed to use facilities w/o dividends.
 Proprietary share or certificate allowed to use facilities w/ dividends
9. Other instruments as may in the future be determined by the Commission
AFTER APPROVAL OF REGISTRATION PROCEDURE:

 Once approved, how soon do you have to sell?
o NEW IRR 2015:
o 8.1.1.5. The sale of the securities subject of the registration statement shall commence within ten (10)
business days from the date of the effectivity of the registration statement I and shall continue until the
end of the offering period or until the sale is terminated by the Issuer. If the sale is not commenced within ten
(10) business days, the RS shall be cancelled and all fees paid thereon forfeited.
 Before this used to 2 days from the time of the effectivity of the registration. Now the offering period
is within a 10 day period. After such, you are no longer allowed to sell.
 As to shares not sold during the offer period
o Before you can resell this share by updating your registration statement. This is no longer applicable.
o Under the new IRR:
 You can sell your securites by tranches(by batch) BUT YOU have to ask permission with the SEC it
must be pre-approved by the SEC.
 Shares not sold are called shelf registered shares.
o SHELF REGISTRATION (NEW IRR 2015)
 8.1.2.Delayed and Continuous Offering and Sale of Securities (Shelf Registration)
 Securities, which are intended to be issued in tranches at more than one instance after the
registration statement has been rendered effective by the Commission, may be registered for an
offering to be made on a continuous or delayed basis in the future, for a period not exceeding
three (3) years from the effective date of the registration statement under which they are
being offered and sold.
 So if asked to define, Shelf Registration is
 An offering done in tranches or more than one instance but not exceeding 3 yrs from
effectivity of the registration which must be pre-approved by SEC.
 If after the 3 yrs, you can sell again by registering again. Not like before you can just update your
registration.
 So what happens of you did not sell all your shares?
o Ordinarily, you have a contract with the bank, because when you list securities you cannot just go directly
with SEC, you must get an underwriter and the underwriter is the person who required buy your shares
without recourse basis. So normally the underwriter will do his best to sell all the shares because if they do
not they have to pay for everything.
EXEMPT SECURITIES
CODAL (SRC) REASON
Section 9. Exempt Securities 9.1 The
requirement of registration under Subsection
8.1 shall not as a general rule apply to any of
the following classes of securities:
(a) Any security issued or guaranteed by the In (a), the securities issued by the Government are non-risk because it
Government of the Philippines, or by any can never go bankrupt. Because if it needs more money, it will just tax
political subdivision or agency thereof, or by you more.
any person controlled or supervised by, and
acting as an instrumentality of said
Government.
(b) Any security issued or guaranteed by In (b), based on the Comity of States. The same way you treat your
the government of any country with which the own government, so should you treat the government of other countries.
Philippines maintains diplomatic relations, or And of course, ordinarily no private individual will really buy securities of
by any state, province or political subdivision a different government because these are issued in such big amounts.
thereof on the basis of reciprocity: Provided, Ordinarily, only another government will buy the securities of a foreign
that the Commission may require compliance government. The purchase of securities from a foreign government is
with the form and content for disclosures the considered a political decision and not subject to registration
Commission may prescribe. requirement.
(c) Certificates issued by a receiver or by a In (c), the reason is that before you sell, it has already been approved
trustee in bankruptcy duly approved by the by the proper adjudicatory body which is normally the courts.
proper adjudicating body. RTC have jurisdiction as to rehabilitation and foreclosre proceedings
(d) Any security or its derivatives the sale or In (d), the contracts issued by the IC or Insurance Commission include
8
transfer of which, by law, is under the insurance policies which need not be registered. Even if the insurance
supervision and regulation of the Office of the have an investment portion- or a ―variable insurance policy‖ (investment
Insurance Commisssion, Housing and Land you got there is more than the coverage), you need NOT register it. So
Use Rule Regulatory Board, or the Bureau of ALL types of policies issued by insurance companies even if they have
Internal Revenue. investment aspects, are not subject to registration because insurance
companies are already supervised by the IC.
Pre-need plans (which are not issued by insurance companies and so

NOT supervised by the Insurance Commission i.e. CAP, Prudential, etc.)
are subject to registration requirement.
(e) Any security issued by a bank except its In (e), the securities here that are subject to the exemption are ONLY
own shares of stock. the debt securities issued by the banks (Remember that there are 2
types of securities in general the equity securities and debt securities).
So equity securities and shares of stock issued by banks are NOT
covered by the exemption.
Ex. Bonds or Promissory Notes
IRR: broader in coverage
The debt securities or evidence of indebtedness issued by quasi-banks
are covered by the exemption since quasi-banks are under the
supervision of the BSP and because of SRC rule 9.2 par.1
SRC Rule 9.2 – Exempt Securities 1. Any evidence of

indebtedness issued by a financial institution itself that has
been duly licensed by the Bangko Sentral ng Pilipinas to
engage in banking/quasi-banking activity shall be exempt
from registration under Section 8.1 of the Code; provided that
the purchase and sale of such security shall not be considered
exempt from the coverage of the provisions of the Code on
antifraud, civil liability or others.
NEW IRR 2015:
9.1.2. The registration requirements shall not likewise apply to the
following:
9.1.2.1. Evidence of indebtedness issued to the BSP under its open

market and/or rediscounting operations;
9.1.2.3. Any security issued or guaranteed by multilateral financial

entities
9.1.2.4. The registration requirements shall not likewise apply to

evidence of indebtedness, e.g., commercial papers, that meet the
following conditions: (PRIVATE PLACEMENTS)
o 9.1.2.4.1. Issued to not more than nineteen (19) non-institutional

lenders;
o Payable to a specific person;
o 9.1.2.4.3. Neither negotiable nor assignable and held on to

maturity; and
o 9.1.2.4.4. In an amount not exceeding One Hundred Fifty Million

Pesos (PhP 150,000,000.00) or such higher amount as the
Commission may prescribe.
TAKE NOTE: this are securities EXEMPT from registration, this does not mean that they are exempt from other provisions
of the SRC.
o A bank issues bonds are exempt from registration because these are debt insturments, BUT they are still required to
comply with the reportorial requirements of the SRC
EXEMPT TRANSACTIONS
CODALS (SRC) REASON
SEC. 10. Exempt Transactions. - 10.1. The
requirement of registration under Subsection
8.1. shall not apply to the sale of any security in
9
any of the following transactions: JUDICAL SALE
In (a), these generally require court orders and the law presumes that
(a) At any judicial sale, or sale by an executor, the court will not order the sale of it will not redound to the public good.
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder FORECLOSURE SALE
selling or offering for sale or delivery in the In (b), same basis as the previous number- you get the supervision of
ordinary course of business and not for the the court (judicial- court; extrajudicial- clerk of court)
purpose of avoiding the provisions of this Code,
to liquidate a bona fide debt, a security pledged
in good faith as security for such debt.
(c) An isolated transaction in which any security ISOLATED TRANSACTION NOT IN THE ORDINARY COURSE OF
is sold, offered for sale, subscription or delivery BUSINESS by THE OWNER(not the ISSUER). SECONDARY SALE
by the owner thereof, or by his representative not an issuance sale.
for the owner‘s account, such sale or offer for In (c), if for example I am the issuer and I sell it to you in a one-time
sale, subscription or delivery not being made in transaction, can I be exempt under this paragraph? No. My ordinary
the course of repeated and successive business is manufacturing and I am not regularly engaged in selling
transactions of a like character by such owner, securities- I am not a finance company, etc. and then I issue shares, and
or on his account by such representative and I sell it to you. Am I exempt? Who should be the seller? Can the issuer
such owner or representative not being the be considered the owner of the security? NO.
underwriter of such security.
So a corporation issuing stocks is the owner of the stocks? If you‘re the
owner, how will you record it? It records it as an asset. So does a
corporation record its shares as an asset? NO. It is considered as a
capital.
So the issuer is NOT considered the owner of the securities. The issuer
is merely the originator, maker or creator of these securities. So this
paragraph does not apply to an issuer of the security itself. The seller in
this case has to be the owner of the security- meaning he has
already purchased the security from the issuer and then he will sell it
in an isolated transaction not in the ordinary course of his business. The
sale will be exempt. But if I, the issuer will sell to you shares from my
authorized capital, I cannot use this section to be exempt. Because I am
not the owner of my own shares. It does not mean though that I cannot
be exempt, I can be exempt basing from another paragraph, but just not
this paragraph (c).
(d) The distribution by a corporation, actively STOCK OR PROPERTY DIVIDENDS
engaged in the business authorized by its In (d), the paragraph doesn‘t talk about cash. When you own securities
articles of incorporation, of securities to its as an investment, as an asset, you use that to distribute to your
stockholders or other security holders as a shareholders in a form of a property dividend. So stock dividends,
stock dividend or other distribution out of exempt. Property dividends in the form of securities- also exempt.
surplus.
(e) The sale of capital stock of a corporation to SALE OF UNISSUED SHARES TO SH
its own stockholders exclusively, where no In (e), when a corporation sells stocks to its stockholders- exclusively
commission or other remuneration is paid or meaning no 3rd person buying the securities, it is exempt because the
given directly or indirectly in connection with the guiding principle in requiring the registration of securities is ―full and fair
sale of such capital stock. disclosure‖ – to make sure that before the public buys your securities,
you have all the material and pertinent information about that particular
security or that particular issue. With that as basis for registration, the
Stockholders are presumed to know about the corporation with
whom they are already stockholders. If they buy additional shares, it
is now on their own lookout. Unlike a 3rd party who knows nothing about
the issuer.
What if for example, you have here a corporation and you want to
increase your shares by 10 million pesos. Increase will be subscribed by
the existing SHs- so 25% subscription. This particular issuance of
stocks- purchase by virtue of an increase, does this qualify as an
exemption under this paragraph (e)? NO. Paragraph (e) only pertains to
an issuance of stock from its authorized but unsubscribed or unissued
shares. The example given gives a situation where it‘s not yet
authorized- no ACS yet. And thus, does not fall under the exemption
under (e). So again, this paragraph (e) only covers AUTHORIZED and
unissued shares.
(f) The issuance of bonds or notes secured by SECURED BONDS or NOTES in a SINGLE SALE to a SINGLE
mortgage upon real estate or tangible personal PURCHASER
property, where the entire mortgage together In (f), this is a sale to a single purchaser thus NOT making it a sale to the
with all the bonds or notes secured thereby are public. Does this pertain to a scenario where I offer the bond to
sold to a single purchaser at a single sale. everyone, so I advertise and only 1 bought? Can I claim that my
10
transaction is exempt? NO.
The important thing here is that before you issue the security, you
already have that buyer in mind. And you issue the security
particularly for that buyer alone, and not just anyone.
(g) The issue and delivery of any security in CONVERSION of an ORGINAL CONVERTIBLE SHARES/ DEBT
exchange for any other security of the same SECURITIES
issuer pursuant to a right of conversion entitling
the holder of the security surrendered in So what do you call the securities with a right of conversion?
exchange to make such conversion: Provided, Convertibles shares so (g) talks about convertible shares. So you
That the security so surrendered has been convert these shares to some other type of stock provided that the
registered under this Code or was, when sold, conditions under (g) are met then your conversion is exempt- but only
exempt from the provisions of this Code, and the converted share is exempt.
that the security issued and delivered in
exchange, if sold at the conversion price, would Such as when you sell the converted share subsequently, that will NOT
at the time of such conversion fall within the be covered with this particular provision anymore.
class of securities entitled to registration under
this Code. Upon such conversion the par value REQUIREMENT:
of the security surrendered in such exchange o The convertible shares have already been registered.
shall be deemed the price at which the
securities issued and delivered in such o That the FIRST security is a convertibel security.
exchange are sold.
o Exempt convertible shares are exempt when converted
(h) Broker‘s transactions, executed upon SCRIPTLESS or BOOK ENTRY TRADING/ SECONDARY SALE of an
customer‘s orders, on any registered Exchange originally registered sec in the exchange.
or other trading market.
The kind of transaction in (h) is involving listed shares. When you say
listed shares, it means it‘s being traded in the exchange, being listed in
the Stock Exchange.
So what‘s the difference between a registered securities and listed

securities? So ALL listed securities are registered. BUT not all registered
securities are listed because even if you don‘t list as long as you sell it
randomly to the public, you are required to be registered- any mode.
Here, listed securities are always required to be registered because
when you list, you are selling randomly to the public. The listing of your
securities is basically having a forum where you can sell your shares.
And the forum or the market is what we call the stock exchange or the
PSE- market place people buy and sell market securities.
When you have an issuer, and he wants to list its shares in the PSE
obviously wanting to sell it to the public- he has to register under Sec
8.2. Then people will buy- this is the PRIMARY trading (you bought it
directly from the issuer/issuing entity). So these people who own shares
will have their own brokers- the stocks in the PSE aren‘t kept but traded.
So now, the security holders are selling the shares that they bought
through the brokers- this is SECONDARY trading. So this SECONDARY
TRADING is EXEMPT.
However, you‘re still offering these shares to the public- which means
there‘s supposed to be a need to register. BUT why is this exempt?
Because if you require secondary trading to be registered, no one will
use the stock exchange anymore since the purpose of stock exchange is
to facilitate, hasten the buying and selling.
But take note that if it‘s a sale, an off-market transaction, it is not covered
by this exemption because securities need to be registered in an
exchange. For example: If I advertise to the public- so this one needs to
be registered. If subsequently, I advertise to sell what I just purchased
from the advertisement- this 2nd transaction needs to be registered.
Scriptless Trading or book entry trading  is a mode of trading in the

stock exchange where the transactions are done by book entry without
need of exchanging the certificates.
(i) Subscriptions for shares of the capital stock PRE-INCORPORATION SUBSCRIPTION & INCREASE IN
of a corporation prior to the incorporation AUTHORIZED CAPITAL STOCK BUT ONLY TO THE EXTENT OF
thereof or in pursuance of an increase in its THE MINIMUM REQURIEMENT FOR CAPITALIZATION OR
authorized capital stock under the Corporation INCREASE which is 25% of the ACS subscribed and 25% paid up.
Code, when no expense is incurred, or no
commission, compensation or remuneration is In (i), when you subscribe during incorporation or in an increase, it is
paid or given in connection with the sale or still exempt. The situation when you subscribe to an increase is NOT
11
disposition of such securities, and only when exempt under par (e) but it is EXEMPT under par (i). It maybe that you‘re
the purpose for soliciting, giving or taking of not exempt on this paragraph, but you may be exempt on another.
such subscriptions is to comply with the
requirements of such law as to the percentage When do you increase your ACS:
of the capital stock of a corporation which o Subscribtion is more than your unsubscribed shares.
should be subscribed before it can be registered
and duly incorporated, or its authorized capital NOTE: if it goes beyond the 25% or an increase in unissued subscrbtion
increased. but not as to the authorized share, you are not exempt under letter I of
section 10, you are still exempt under section (e) of section 10.
(j) The exchange of securities by the issuer with EXCHANGE OF SECURITIES BY ISSUER WITH ITS HOLDERS
its existing security holders exclusively, where
no commission or other remuneration is paid or In (j) this is different from conversion in (g) because in conversion there
given directly or indirectly for soliciting such is a convertible share- a built in conversion mechanism. For this one, it is
exchange. simply an exchange.
Exhanging a secutiry which is NOT convertible with another security

(k) The sale of securities by an issuer to fewer PRIVATE PLACEMENT (19 or less persons in a 12 month period)
than twenty (20) persons in the Philippines
during any twelve-month period. In (k), the sale of fewer than 20 is called private placement. So this is
the issuer equivalent of an isolated transaction- in the situation where
the issuer would sell directly to one person, can he fall under par. (c)? It
cannot. Issuer is not the owner. But can it call under par. (k)? YES.
Does this exemption apply where I advertise in the newspaper but only
15 bought? Does this situation fall under this paragraph?
o NO. By the mere act of offering to the public indiscriminately,
you are already required to register no matter that only 15 or 1
bought. So when we talk about private placement, before you
actually issue the security, you already have the 15 buyers in
mind- or 19 or less persons. It‘s not an indiscriminate offer, but
you already know who your buyers are.
What happens if I sell to 19 perons then one of the buyer A turns around
and sells it to 2 persons. Am I still exempt under letter k?
o The rules says that: (NEW IRR 2015)
o 10.1.2.2. XXXX
o If the original purchaser/s shall resell said secunties resulting in

more than nineteen (19) holders, Sections 8 and 12 of the SRC
shall apply, notwithstanding the exemption of their issuances,
unless such succeeding sale shall qualifY as an exempt
transaction.
o It will not fall under the exemption anymore. The holder

themselves are not allowed to sell UNLESS the sale will fall
under some other transcation like: isolated transsaction by the
owner. (question) what will be subject to registration the
original or the subsequent?
(l) The sale of securities to any number of the Qualified buyers are those persons who are determined by the law to
following qualified buyers: already have knowledge, know-how and experience regarding
o Bank; investments so they do not need to be protected.
o Registered investment house;
o Insurance company; NEW IRR 2015:
o Pension fund or retirement plan Qualified Buyers
maintained by the Government of the 10.1.10.1. For purposes of Section lO of the Code, a natural person
Philippines or any political subdivision shall be considered a qualified individual buyer if:
thereof or managed by a bank or other o he has registered with the registrar of qualified buyers
persons authorized by the Bangko
Sentral to engage in trust functions; o A natural person has:
o Investment company; or
o Such other person as the Commission  an annual gross income of at least Ten Million Pesos
may by rule determine as qualified (phplO,OOO,OOO.OO) at least two (2) years prior to
buyers, on the basis of such factors as registration, or
financial sophistication, net worth,
knowledge, and experience in financial  a total portfolio investment in securities registered with the
and business matters, or amount of
12
assets under management. Commission of at least Ten Million (Php 10,000,000.00), or
 a personal net worth of not less than Thirty Million Pesos

(php30,000,000.00); and
o experience:
 Has been engaged in securities trading personally or

through a fund manager for a minimum period of one
(I) year, OR
 has held for at least two (2) years a position of

responsibility in any professional business entity that
requires knowledge or expertise in securities trading,
such as, legal consultant, financial adviser, sales person,
or associated person of a broker-dealer, bank finance or
treasury officer, trust officer or other similar executive
officers.
NOTICE OF EXEMPTION
 Do you need to secure approval from the SEC before you undertake an exempt transaction?
o NO, you can issue your securities right away but it can always be questioned by anyone. So if anyone questions and
it‘s proven, you may be subject to liabilities under SRC including criminal liability.
o You are required to notify the SEC, file a NOTICE OF EXEMPTION. But only notification.
 10.1.7. Burden of Proof on the Availability of Exemption

Unless a confirmation of exemption is issued under this Rule, any person claiming exemption under Section 10 of the Code
has the burden of proof, if challenged, of showing that it is entitled to the exemption. The Commission may challenge such
exemption any time.
CONFIRMATION OF EXEMPTION
o BUT IF YOU REALLY WANT SEC TO CONFIRM THE EXEMPTION
 ask SEC for a CONFRIMATION OF EXEMPTION: here there is a filing fee and the SEC will issue
you a certifcate of exemption
 Advantage of getting this certificate:
 This will make a CONCLUSIVE PRESUMPTION that your securities are exempt. No one
can dispute your exemption.
 What do you do to ensure that your transaction is really exempt?

10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the
exemption relied upon on such form and at such time as the Commission by rule may prescribe and with such notice
shall pay to the Commission a fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or
issued value of the securities (SRC)
 10.3 of the SRC says that you can actually ask the commission for a confirmation. Once SEC issues this
confirmation, no one can question the exemption of your securities from registration. But it‘s not a requirement
that you should get a confirmation. If you‘d rather risk being questioned than paying the 1/10th of 1%, then by all
means you may do that,
 but EXCEPT for (k) and (l) which requires notice of exemption (Rule 10.1) which is different from a
confirmation. A notice of exemption only requires a minimal fee and you need to have a letter notifying the
purchaser that such transaction is exempt under (k) or (l) of Sec. 10, SRC.
SRC Rule 10.1 – Exempt Transactions

4. Application for Confirmation or Declaration of Exemption
B. In cases which involve distribution of securities by way of stock dividend, the Commission shall determine the
sufficiency of the retained earnings of the issuer company prior to issuing a confirmation thereto.
 It looks like a harmless provision but SEC determined or interpreted this to mean that if you‘re doing a stock
dividend, you need to get a confirmation.
th
 When you report stock dividend to the SEC, you need to pay the 1/10 of the 1% fee which is weird because of
st
all the transactions in section 10, stock dividend is the safest since in the 1 place, there‘s no sale, the issuer is
nd
not receiving money, in the 2 place, it‘s given only to the existing SHs but now this is the one which the SEC in
practice requires confirmation.
13
NEW SRC IRR 2015: MANDATORY TENDER OFFER
WHAT IS A TENDER OFFER:
19.1.8. "Tender offer" means a publicly announced intention by a person acting alone or in concert with other persons
(hereinafter referred to as "person") to acquire outstanding equity securities:
 of a public company as defined in SRC Rule 3, or

 outstanding equity securities of an associate or related company of such public company which controls the
said public company. (new pharse: this came from the CEMCO CASE)
Note: the old rules limited the requirement of tender offer to public company, here came CEMCO CASE which ruled that even
if you are indirectly acquiring control of a public company by acquiring control over the corporations which control the public
company you are still required to make a tender offer.
THEREFORE, Any person or group of persons acting in concert, intends to shares or securities in a public company or intend
to acquire shares of a company which is controlling a public company those persons are required to do a TENDER OFFER.
WHAT IS A PUBLIC COMPANY:
Public Company means any corporation

 with a class of equity securities listed on an Exchange or
 with assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more
holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of its
equity securities (SRC Rule 3 M).
o VETERANS BANK CASE: vetrans bank did not want to submit reportorial requirements under the SRC
because they argued they are not public companies because they are not listed in the stock exchange
and holdings limited to veterans. But SRC penalized them for failure to comply with reportorial
requirement.
o SC: using this definition ruled the bank as a public company because they fell under the second
definition which is :
 assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or
more holders, at least two hundred (200) of which are holding at least one hundred (100)
shares of a class of its equity securities (SRC Rule 3 M).
PURPOSE OF A TENDER OFFER:
 to prevent a situation where a new SH coming in with control of the company and the minority SH are stuck with
that person, so if they want to get out they will be forced to sell at low prices. So in order to allow the minority SH to
exit the company at the same price as the majority SH exiting, the law provides the MANDATORY TENDER OFFER
rule
 Wherein if a person wants to buy the controlling shares, will have to offer to all SH at the same prices.
 CASE: CEMCO Holdings, Inc. VS National Life Insurance Company of the Philippines
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. It is in place to protect minority shareholders against any scheme that dilutes
the share value of their investments. It gives minority shareholders the chance to exit the company under
reasonable terms, giving them opportunity to sell their shares at the same price as those of the majority
shareholders. Respondent CEMCO is hereby mandated to make a tender offer for UCC shares to complainant and
other holders of UCC shares similar to the class held by respondent UCHC, at the highest price it paid for the beneficial
ownership in respondent UCC, strictlyin accordance with SRC Rule 19, Section 9(e).
2015 RULES ON MANDATORY TENDER OFFER:
 in the NEW rules, there are two requirement:

o Disclosure requirement
o Mandatory tender offer requirement
 When are these triggered:

o 19.2.1. Any person or group of persons acting in concert, who intends to acquire fifteen percent (15 %) of
equity securities in a public company in one or more transactions within a period of twelve (12) months, shall
file a declaration to that effect with the Commission.
 OLD IRR: if you are acquiring 15% but less than 35%  not required to do anything
 NEW IRR: 15% or more EQUITY SECURITES in a period of 12 months creeping or single you
are required to make a DISCLOSURE with the SEC. ONLY DISCLOSE. No tender offer.
 Difference from 19. 2.2
 Rate: : 15% or more
 Type of shares: ALL TYPES of EQUITY SECURITIES whether VOTING OR NON VOTING
will trigger disclosure not debt securities.
o 19.2.2. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%)
of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control
of the board in a public company in one or more transactions within a period of twelve (12) months,
14
shall disclose such intention and contemporaneously make a tender offer for the percentage sought
to all holders of such securities within the said period.
If the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close
of such tender offer shall be proportionately distributed across selling shareholders ""ith whom the
acquirer may have been in private negotiations and other shareholders. For purposes of SRC Rule 19.2.2,
the last sale that meets the threshold shall not be consummated until the closing and completion of the
tender offer.)
 Difference from the 19.2.1:

 Trigger: 35% or even if not 35% but sufficient to gain control of the board over a period of 12
months
 Type of sec: ONLY OUTSTANDING VOTING SHARES
 Required to buy: be proportionately distributed across selling shareholders with whom
the acquirer may have been in private negotiations and other shareholders Required to do a
TENDER OFFER during the transaction where you breach the threshold
o
19.2.4. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) of
the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of the
board in a public company directly from one or more stockholders shall be required to make a tender offer
for all the outstanding voting shares. The sale of shares pursuant to the private transaction or block sale
shall not be completed prior to the closing and completion of the tender offer.
 Difference from 19.2.2:
 Rate: same
 Type of share: same
 Acquisition: Direct not creeping
 Offer: required to make a tender offer for all the outstanding voting shares
o 19.2.5. If any acquisition that would result in ownership of over fifty percent (50%) of the total outstanding
equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule
for all the outstanding equity securities to all remaining stockholders of the said company at a price supported
by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in
such a tender offer shall be required to accept all securities tendered.
 over fifty percent (50%) of the total outstanding equity securities of a public company, the
acquirer shall be required to make a tender offer under this Rule for all the outstanding equity
securities
 Note: total outstanding equity not just voting shares
SUMMARY OF DIFFERENCE OF NEW RULES #maximumeffort
Obligations Rates Type of Type of Requirement to TENDER OFFER
Securities Acquisition
19.2.1 Disclosure acquire fifteen percent (15 Total Direct or NONE

%) of equity securities in a OUTSTANDING Creeping
public company in one or EQUITY
more transactions within a SECURITES
period of twelve (12)
months
19.2.2 Disclosure & 35% or even if not 35% but Total outstanding Creeping If the tender offer is
Tender Offer sufficient to gain control of VOTING oversubscribed, the aggregate
the board over a period of SECURITIES amount of securities to be
12 months acquired at the close of such
tender offer shall be
proportionately distributed
across selling shareholders
""ith whom the acquirer may have
been in private negotiations and
other shareholders
19.2.4 Disclosure & 35% or even if not 35% but Total outstanding Direct be required to make a tender
Tender Offer sufficient to gain control of VOTING offer for all the outstanding
the board over a period of SECURITIES voting shares
12 months
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19.2.5 Disclosure & over fifty percent (50%) Total Direct or required to make a tender offer
Tender Offer of the total outstanding OUTSTANDING Creeping under this Rule for all the
equity securities of a public EQUITY outstanding equity securities
company SECURITES
EXCEPTION TO MANDATORY TENDER OFFER:

1. 19.2.3. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) of the
outstanding voting shares or such outstanding voting shares that are sufficient to gain control of the board in a public
company through the Exchange trading system shall not be required to make a tender offer even if such person or
group of persons acting in concert acquire the remainder through a block sale if, after acquisition through the
Exchange trading system, they fail to acquire their target of thirty five percent (35%) or such outstanding
voting shares that is sufficient to gain control of the board.4 (ORIGINAL PURCHASE FROM STOCK
EXCHANGE)
o Here you started to buy at the exchange but later they completed the 35% acquisition through a private sale.
2. 19.3.1.1. Any purchase of securities from the unissued capital stock; Provided, the acquisition will not result to a fifty
percent (50%) or more ownership of securities by the purchaser or such percentage that is sufficient to gain control
ofthe board; (PURCHASE OF NEW ISSUED SHARES)
o meaning you buy here from the authorized which will not lead to ownership of 50% or more. ( sale of new shares)
3. 19.3.1.2. Any purchase of securities from an increase in authorized capital stock; (INCREASE IN ACS)
o here this is exempt because you need stockholders approval, which requires an amendment of articles
4. 19.3.1.3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security
arrangement where the acquisition is made by the debtor or creditor;
5. 19.3.1.4. Purchases in connection with a privatization undertaken by the government of the Philippines;
6. 19.3.1.5. Purchases in connection with corporate rehabilitation under court supervision;
7. 19.3.1.6. Purchases in the open market at the prevailing market price; and
8. 19.3.1.7. Merger or consolidation.
NOTE: 19.3.2 Purchasers of securities in the foregoing transactions shall, however, comply with the disclosure and
other obligations under SRC Rules 18.1 and 23.
HOW TO TENDER OFFER:
19.5. Any person making a tender offer shall:
o
make an announcement of its intention in a national newspaper of general circulation within five (5) business
days from either the company's board approval authorizing negotiations relative to the purchase of shares that
may result to a mandatory tender offer or thirty (30) business days prior to the commencement of the offer;
Provided, that such announcement shall not be made until the Offeror has the resources to implement the offer in
full.
o A copy of the said notice shall be submitted to the SEC on the date of its publication.
INCASE OF INCREASE OF TENDER OFFER:
SRC Sec. 19 (e) Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration
thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased
consideration to each security holder whose securities are taken up and paid for whether or not such securities have been
taken up by such person before the variation of the tender offer or request or invitation.
CEMCO CASE: (Gr. No. 171815)
CEMCO Holdings vs National Life Insurance
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Facts: Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders — UCHC, a non-listed
company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHC's stocks were owned by
BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.
CEMCO thereafter acquired the shares of BCI (21.31%) and ACC (29.69%) in UCHC.
 So total shares of CEMCO in UCHC = 60%. UCHC owns 60% of UCC.

 Thus, indirect ownership of CEMCO in UCC = 36%
 Direct ownership of CEMCO in UCC = 17%
 Total ownership of CEMCO in UCC = 53%
Issue:
Whether or not 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?
Ruling:
Yes. 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".
The legislative intent of Section 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 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.
Discussion:
 SC explained in this case the reason behind the tender offer requirement:
 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.
 When this comes out in the exam, which it will, what I want you to answer, don‘t just say that because the supreme court
said that indirect acquisition are covered by the tender offer rule, you have to state also why the tender offer rule is
triggered. And it is triggered because the thresholds were reached.
 So in the case, the indirect acquisition triggered the mandatory offer threshold. So the issue is, there is a trigger, and this
trigger is reached, but it is an indirect acquisition, so is this covered by the mandatory tender offer rule? So SC said yes, it
is covered by the mandatory tender offer rule.
 TIP from Atty G.: So, be very careful when you‘re answering the exam. Make sure you answer properly and that all the
elements are there. Answer questions properly, as if we never discussed the case. Give the complete answer. Don‘t just
assume.
MANIPULATIVE PRACTICE:
24.1.1. It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly:
24.1.1.1. To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading
market (hereafter referred to purposes of this Chapter as "Exchange")
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o HOW: (WASH SALE) By effecting any transaction in such security which involves no change in the
beneficial ownership thereof 
o creating an image of buying and selling but in reality the buyer and the seller is the same person. So
no change in beneficial ownership.
o 24.1.1.1.2. (IMPROPER MATCHED ORDERS) By entering an order or orders for the purchase or sale
of such security with the knowledge that a simultaneous order or orders of substantially the same
size, time and price, for the sale or purchase of any such security, has or will be entered by or for
the same or different parties; or
o here there is a change in beneficial ownership, but this persons have colluded making it appear that
there is a sale and purchase.
24.1.1.1.3. By performing similar act where there is no change In beneficial ownership.
b) To effect, alone or with others, a series of transactions in securities that:

(i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer
or of a controlling, controlled, or commonly controlled company by others;
(ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the same issuer
or of a controlling, controlled, or commonly controlled company by others; or
(iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close,
painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices.
1. Marking the Close

SRC Rule 24.1 (IRR)
Buying and selling securities at the close of the market in an effort to alter the closing price of the security. (marking
the close)
 If you notice in the business news, they flash the prices of the shares. What they publish are the closing prices of
each shares. So if you want to manipulate the published price of the securities, you do your transactions towards the
end of the closing date in order to affect the price of the shares.
2. Painting the Tape

Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price
movement in a security. (Painting the tape)
 So basically painting an illusion about the securities in order to give an impression that these securities are being
actively traded and to influence the price.
3. Hype and Dump

Engaging in buying activity at increasingly higher prices and then selling securities in the market at higher prices
(hype and dump) or vice versa (i.e. selling activity at lower prices and then buying at such lower prices)
 For example: I will buy now at Php 5 per share 100 shares, 30 minutes after I will buy at Php 5.50 per share, then
another 3 minutes at Php 6 per share. So you increase the price, you hype up the price of the shares. Such that
people become interested because they can see that the price of the shares are increasing. They will think that these
shares are good investments so they will also tend to buy more of the shares at the higher price. Then at Php 10 you
lump it all. So this is what you call hype and dump. So you can just imagine the gain there because you‘ve been
buying it at lower prices, so when you sell it at Php 10, you have a gain.
 You can also do it in the reverse class, if you want to acquire shares at lower prices, you start selling your shares at
successively low prices, so Php 5, 4.50, 3, 2.50. People will be scared why are these shares being sold at
successively low prices. Something must be going on. So people will panic and they will sell their investments. And
then you come in at 1 peso per share and get it and buy it all. So hype and dump. It can be done to increase or
decrease the price.
4. Squeezing the Float

Taking advantage of the shortage of the securities in the market by controlling the demand side and exploiting market
congestion during such shortages in a way as to create artificial prices
 You know that no one is selling but you keep on making demand, demand, demand. So if there is demand and there
is no supply, the prices will go up.
5. Boiler Room Operations

 So this is basically a fraudulent device used by unscrupulous people. What they will do is they will rent out an
apartment, they will get internet, they will get landline, they will use the internet, the phone to call people to induce
then to buy securities which are inexistent or not registered with the SEC.
 Why do you call it Boiler Room Operations? Because their tactics are pressure tactics. They keep calling every two
hours for example until such person being called will be induced to buy. But take note that such shares being sold are
not existing or are not registered with the SEC.
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OTHER MANIPULATIVE DEVICES
c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or
fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or
depressing the price of the security for the purpose of inducing the purchase or sale of such security.
d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground
to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded
in an Exchange.
e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in
an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by
this Code or by rules of the Commission.
SHORT SALE, STOP LOSS ORDER
24.2. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or
deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in
connection with the purchase or sale of any security except in accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors
SHORT SALE - It is a sale of securities which you do not own.
LONG SALE  sale of securities which you own (NEW SRC IRR)
 Short sale HOW done:

 Normally when you anticipate that the prices of the securities will go down. You don‘t own the share but you sell it now,
with the intention of buying it back later when the price gets lower.
 Let‘s say at Php 120 per share. But you don‘t own it yet. Sure enough a few days after, the price went down to Php 100
per share. That‘s the time you bought the share and delivered it to the buyer. So in effect you gained Php 20 in the
transaction of the security, which you did not own when you sold it.
 It‘s not prohibited but regulated. The law says in accordance with such rules and regulations as the Commission may
prescribe. The SRC allows it under Rule 24.2-2. So there is a regulation there.
General Rule: Short sales are allowed.

Exception: When it is done by the directors, officers, and principal stockholders of the issuing company.
Par.6 (SRC Rule 24.2-2)

No director, officer, or principal stockholder of a corporation shall make a short sale in securities of the corporation
in which he is a director, officer, or principal stockholder.
STOP LOSS ORDER → also not prohibited

 It is basically when you instruct your broker that if the price now is Php 200 per share, if it goes down to Php 180, you sell
because I want to stop my loss at Php 20.
FRAUDULENT TRANSACTIONS
SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or indirectly, in connection with the
purchase or sale of any securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material
fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not
misleading; or
26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or
deceit upon any person.
NOTE: Sec. 24 & 26 are CRIMINAL OFFENSES
INSIDER TRADING
WHO IS AN INSDER:
3.8. ―Insider‖ means:
(a) the issuer;
(b) a director or officer (or person performing similar functions) of, or a person controlling the issuer;
(c) a person whose relationship or former relationship to the issuer gives or gave him access to material information
about the issuer or the security that is not generally available to the public;
(d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization
who has access to material information about an issuer or a security that is not generally available to the public; or
(e) a person who learns such information by a communication from any of the foregoing insiders.
 NOTE: you do not commit an offense by being just an insider. It becomes criminal when an insider will buy or sell
securities while being an insider. So what is punished is INSIDER TRADING and NOT BEING JUST AN INSIDER.
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 So even if you‘re not any of the four, you‘re not an officer, not the issuer, not a government employee, you‘re not an
officer of an exchange, but you have been tipped by an insider that there is a particular material information, so you
become a tippee because you were tipped by the insider. So in that case, you also become an insider. So you are
covered by the prohibition under Section 27.
WHAT IS MATERIAL INFORMATION:
 Material information that makes you an insider:

SRC Rule 3
Material Information means any fact or information that could:
o result in a change in the market price or value of any of the issuer‘s securities, or
o would potentially affect the investment decision of an investor.
 Does this mean that an insider is forever barred to trade with these securities?
o NO. it only means that when the information is still non public you cannot trade. But when it becomes public
then you can trade.
o NOTE: you need to give the market enough time to ABSORB THE INFORMATION, ANALYZE IT AND SEE
HOW IT WOULD AFFECT THE SHARES.
o Normally, when you are a listed company you are required by the SRC to have:
 An annual reporting of financial results within 105 days after the end of the calendar year
 A quarterly financial reporting within 45 days after the end of each quarter
 A TEN MINUTE REPORTING, it is when there is a MATERIAL EVENT happening within the
company that would immediately affect the price you are required to report it to the PSE within 10
min of its happening
 EXAMPLE OF MATERIAL MATTERS NEED TO BE REPORTED within 10 MIN:
o Declaration of Dividends once approved by the board
o When your senior mangers or directors will resign from the company
o Buying or Selling assets which is 10% or more of your total assets
 Here it must be at the actual sale, no need to report during negotiation stage
 NOTE if after a minute from the 10min you immediately buy or sell shares you are still
engage in insider trading because this is still not sufficient time for the market to ABSORB
the news. The law says REASONABLE TIME. Such is not REASONABLE. Since the law
does not provide what is reasonable. So the PSE made a rule.
 PSE RULES provide that you are not allowed to do any trading within 2 trading days from
the time of the disclosure. NOTE: you are prohibited if you are an INSIDER.

 Possible defenses or EXEMPTION to insider trading: under Sec. 27:

1. If the insider proves that the information was not gained from such relationship
 So if he proves that he did not get the information because he was an insider, then that is a possible acquittal
under Sec. 27.
2. Or he can prove that he disclosed the information to the other party or
3. that he had reason to believe that the other party already knew or was in possession of the information.
 Example: finance officer sells to president. No insider trading because the buyer is an insider who is presumed to
have knowledge of such material non-public information. Insider to insider sale allowed.
27.3. It shall be unlawful for any insider to communicate material non-public information about the issuer or the
security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8,
where the insider communicating the information knows or has reason to believe that such person will likely
buy or sell a security of the issuer while in possession of such information.
 NOTE: besides trading, an insider is not also allowed to tell other people of the material non-public information when he
knows that the person he is gossiping to will transact with the shares.
 So if the insider tells a person of the information, and that person uses the information to buy or sell the shares. Then:
o The person who was informed becomes an INSIDER and is liable for INSIDER TRADING for selling or
buying the shares
o The original INSIDER will be liable for communicating under 27.3
 TAKE NOTE: the rules on INSIDER INFORMATION will also apply in TENDER OFFER. If you know somebody will
make a tender offer of the shares for 10 pesos, so you buy them now at 8 pesos, you are using insider information,
which will make you liable for insider trading.
SEC. 23. Transactions of Directors, Officers and Principal Stockholders. –
23.1. Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of any class of any
equity security which satisfies the requirements of Subsection 17.2, or who is a director or an officer of the issuer of such
20
security, shall file, at the time either such requirement is first satisfied or within ten days after he becomes such a beneficial
owner, director, or officer, a statement with the Commission and, if such security is listed for trading on an Exchange, also
with the Exchange, of the amount of all equity securities of such issuer of which he is the beneficial owner, and within ten (10)
days after the close of each calendar month thereafter, if there has been a change in such ownership during such month,
shall file with the Commission, and if such security is listed for trading on an Exchange, shall also file with the Exchange, a
statement indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred
during such calendar month.
 Direct ownership  under your name

 Indirect beneficial ownership  not under your name but you have control over the shares
When is there beneficial ownership:
Beneficial owner or beneficial ownership means any person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares: voting power, which includes the power to vote, or to direct the voting
of, such security; and/or investment returns or power, which includes the power to dispose of, or to direct, the disposition of
such security; provided, however, that a person shall be deemed to have an indirect beneficial ownership interest in any
security which is:
 held by members of his immediate family sharing the same household;  

 held by acquisition of partnership in which the director, officer or SH is a general partner;  
 held by a corporation of controlled by such director, officer or SH; or  
 or any voting agreement or other means agreement controlling the shares
o so these shares must be reported although they do not belong to you

o it is not prohibited. So your wife is allowed to buy shares, the important thing to remember is you must
disclose the moment you buy.
UNLAWFUL ACTS OF DIRECTOR, OFFICER, SH:
1. SHORT SWING PROFITS:
23.2. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner,
director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any
sale and purchase, of any equity security of such issuer within any period of less than six (6) months, NOTE: unless
such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be
recoverable by the issuer, irrespective of any intention of holding the security purchased or of not repurchasing the security
sold for a period exceeding six (6) months. Suit to recover such profit may be instituted before the Regional Trial Court by the
issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to
bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same thereafter, but no such suit
shall be brought more than two (2) years after the date such profit was realized. This subsection shall not be construed to
cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and
purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may
exempt as not comprehended within the purpose of this subsection.

NOTE this is not illegal BUT you do not get the profits from the short swing transactions. The profit goes to
the issuer not the director, officer or SH. This will prevent the use of information that the Director, officer or
SH is privy to.
 EXEMPTION: unless such security was acquired in good faith in connection with a debt previously
contracted,
2. SHORT SALE
23.3. It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of
such issuer if the person selling the security or his principal:
(a) Does not own the security sold; or
(b) If owning the security, does not deliver it against such sale within twenty (20) days thereafter, or does not within five (5)
days after such sale deposit it in the mails or other usual channels of transportation;
but no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise of good faith he
was unable to make such delivery or deposit within such time, or that to do so would cause undue inconvenience or expense.
 General Rule: Short sales are allowed. Subject to regualtion

 Exception: When it is done by the directors, officers, and principal stockholders or beneficial owners of the issuing
company.
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MARCH 12, 2016
RA 7042 (AS AMENDED) FOREIGN INVESTMENTS ACT
 FIA has not been present in the BAR exams until recently because of the Gamboa and Bayantel Cases
 Situation: where foreign client comes to you saying that they have been advised they needed 60-40 in their corporation
and since they did not know any other Filipino, they gave their 60% to their, driver, gardener, etc. You ask what‘s their
business?And the business under the FIA does not even require a 60-40 ownership, and now they don‘t know where
their gardener or driver has gone taking with them their 60% ownership certificate. So you see it‘s really a big problem
because the perception of most lawyers that when foreigners invest in the Philippines automatically that foreigner can
only invest up to 40% and whatever corporation that foreigner will put up will have to be owned by Filipinos up to 60%,
that is the most common understanding of most lawyers. But that is not the case.
WHO ARE CONSIDERED PHILIPPINE NATIONALS

 The definition of a Philippine national is used to determine whether or not an entity is qualified to invest in the
Philippines.
 Foreign Investment - FIA : Foreigners non-filipino nationals can make any investment, in any enterprise provided that
that enterprise is not among those indicated in the Foreign Investment Negative List (FINL).
 If the Investee is listed in the FINL then you have to make sure that the investee meets the nationality requirement.
 GR : Only Philippine Nationals can invest in FINL investees.
 Who are Philippine Nationals :
1. Filipino citizens (natural person)

2. partnerships or associations wholly owned by Filipino citizens
3. domestic corporation where at least 60% of the outstanding capital stock entitled to vote is owned by Filipino citizens
4. foreign corporations wholly owned by Filipino citizens
5. trustee of funds for pension or other employee retirement benefits where the trustee is a Phil. National and at least
60% of the fund will accrue to the benefit of Phil. Nationals
6. Corporate Layering - where one corporation owns the shares of another corporation provided that :
A. at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both the investor and investee
corporation is owned and held by Philippine nationals; and
B. at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of the
Philippines, in order that the corporations shall be considered a Philippine national. (see discussion on
corporate layering below)
Section 3. Definitions.- As used in this Act:
a) The term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association
wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital
stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must
be citizens of the Philippines, in order that the corporations shall be considered a Philippine national.
The importance of knowing who are Philippine nationals

1. It is important to know the entities who are considered as Philippine nationals because there are activities under the
Constitution, under the law, under administrative regulations which are only reserved for Philippine nationals and we call
these types of activities as nationalized activities.
2. Any activity where there is a limitation in the allowable shareholding of a foreign company or foreign entity, or foreigner
are what we call as nationalized activities.
Difference between enumeration 3 (domestic corporation where at least 60% of the outstanding capital stock entitled to vote
is owned by Filipino citizens) and 4 (foreign corporations wholly owned by Filipino citizens) :
 The former pertains to domestic corporations. A domestic corporation is one formed and organized under the
Corporation Code of the Philippines.
 The latter is foreign corporation, one that is registered under the laws outside of the Philippines.
 But it does not mean that just because you are a foreign corporation, you are not considered as a Philippine National
anymore. Under the FIA, a foreign corporation wholly owned by Filipino Citizens becomes a Philippine National.
 You can also have a domestic corporation which is not a Philippine National - Registered here in the Philippines but
owned 100% by foreigners. It is domestic, but not a Philippine National.
NATIONALIZED ACTIVITIES
These are found in the Foreign Investment Negative List. (FINL)

 The latest is No. 10, issued last 2015. Reissued every 2-3 years.
 Description of the contents of the FINL:
 There are two kinds of lists in the FINL. List A and List B.
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 List A provides for nationalized activities provided for in the constitution and specific statutes or laws.
 List B contains defense-related activities, those which will have implications on public health and morals
 In sum: It is important to know who are Philippine nationals because there are certain activities where foreign
participation is limited and the complete list of these nationalized activities you can find it in the FINL. FINL is issued
pursuant to the FIA.
 As stated in Sec. 8 of the FIA, FINL contains 2 lists. List A which describes or outlines the activities limited under the
constitution and special laws. And you also have List B which are defense or moral or public policy related activities.
Section 8. List of Investment Areas Reserved to Philippine Nationals (Foreign Investment Negative List).- The
Foreign Investment Negative List shall have three (2) component lists: A and B:
a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and
specific laws.
b) List B shall contain the areas of activities and enterprises regulated pursuant to law:
1) Which are defense-related activities, requiring prior clearance and authorization from Department of National Defense
(DND) to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition,
lethal weapons, military ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair
activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of
National Defense; or
2) Which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all
forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and steambath houses and massage clinics.
 In general, the types of businesses which a foreigner can own 100% are those relating to any activity which is not in the
FINL
 Under the FIA there are generally 2 KINDS OF ENTERPRISES
1. EXPORT MARKET ENTERPRISE
Section 3. Definitions.- As used in this Act: (e) The term "export enterprise‖ shall mean an enterprise wherein a
manufacturer, processor or service (including tourism) enterprise exports sixty percent (60%) or more of its output,
or wherein a trader purchases products domestically and exports sixty percent (60%) or more of such purchases
 Take note that this is any type of enterprise including service, tourism oriented enterprise which exports at least
60% of its output.
2. DOMESTIC MARKET ENTERPRISE

The term ―Domestic Market Enterprise‖ shall mean an enterprise which produces goods for sale, or renders
services to the domestic market entirely or if exporting a portion of its output fails to consistency export at least sixty
percent (60%) thereof
 Services to the domestic market entirely or exports less than 60% of its output
 GENERAL RULE: For both types of enterprises (Export Market Enterprise and Domestic Market Enterprise) foreign
ownership is allowed up to 100% unless the activity it wants to engage in is considered a nationalized activity
Section 7. Foreign Investments in Domestic Market Enterprises. - Non-Philippine nationals may own up to
one hundred percent (100%) of domestic market enterprises unless foreign ownership therein is prohibited or
limited by the Constitution and existing law or the Foreign Investment Negative List under Section 8 hereof. (As
amended by Republic Act No. 8179)
 EXCEPTION: If it is a Small and Medium sized Domestic Enterprise
a. Small or Medium sized Domestic Enterprise
 If it has a paid in capital of less than two hundred thousand dollars ($200 000) → can only be owned by
Philippine nationals
 So foreigners can only undertake domestic market enterprise if it is not a small and medium domestic market
enterprise
 Only Large Scale Domestic Market Enterprise can be allowed 100% foreign ownership
b. Large scale domestic market enterprise?
 If the paid in capital is two hundred thousand US dollars or more
 EXCEPTION TO THE EXCEPTION:
 Small and Medium Domestic Market Enterprise that:
1. Involve advanced technology as determined by the Department of Science and Technology
2. Employ at least 50 direct employees
(1 &2 above) With a paid in capital of one hundred thousand US dollars ($100 000) → shall be allowed to non-
Philippine nationals
Sec.8. par.6. Small and medium-sized domestic market enterprise with paid in equity capital less than the
equivalent of two hundred thousand US dollars (US $ 200 000) are reserved to Philippine nationals: Provided,
That if: (1) they involve advanced technology as determined by the Department of Science and Technology; or (2)
they employ at least fifty (50) direct employees, then a minimum paid in capital of one hundred thousand US
Dollars (US $ 100 000) shall be allowed to non-Philippine nationals.
 Simpler version: if it‘s an export market enterprise, as long as it is not under the FINL, 100 % foreign ownership is ok.
 For domestic market enterprise you have to ask is it large or small or medium. How much is the paid in capital?
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 If the paid in capital is 200 000 US dollars or more, 100% foreign ownership is allowed.
 If the paid in capital is less than 200 000 USD then it has to be a Philippine national.
 Exception is if that small and medium domestic enterprise makes investment in advanced technology or has at least
50 direct employees, then it can have a paid up capital of 100 000 USD and still be 100% foreign owned
 Situation: Foreigner approaches you and asks if he can own a business here in the Philippines 100%, what will you say?
Atty: What business do you intend to go into?
Client: Manufacturing Business
Atty: Manufacturing of what? Because certain manufacturing areas are covered by nationalized activities.
Client: Manufacturing of buttons
Atty: What is your market? Is it export or domestic?
Client: Export
Atty: Then yes, you are allowed to own 100% of your business.
Atty: If client says the market is domestic, the next question is how much do you intend to pay up?
Client: Php 50 000 Paid Up capital
Atty: If you are going into wholesale you can own up to 40 % because that is considered a domestic market enterprise.
And a domestic market enterprise requires Philippine nationals. And Philippine nationals only require 60% Filipino
ownership. The 40 % can be owned by foreigners.
Client: If I go into retail can I still own a portion of my business?
Atty: Nothing at all because Retail Trade Law provides 100% Filipino ownership unless your paid in capital is 2.5 Million
USD. That is in the FINL.
(FINL) No Foreign Equity No. 3 Retail Trade Enterprises with paid up capital of less than US $ 2 500 000.
 Service Export-100% foreign ownership is allowed. If domestic market enterprise that is the time you ask how much is
your paid up capital?
 For Button manufacturing example for domestic market enterprise, then let‘s say I put in US$ 500 000 but I want to
engage in retail, still the foreigner cannot own because for retail the paid in capital is US $ 2.5 Million. So those are the
things you have to take note, what is the activity, is it export or domestic, how much is the paid up capital?
 GENERAL RULE : Non-Philippine Nationals can invest in any enterprise in the Philippines :
 If Investor invests in Export enterprises : GR : No limitations; XPN : FINL
 If they do domestic enterprises : GR : No limitation; XPN: 1. FINL 2. FIA requirement on the paid up capital of
$200,000.
 You just always have to take note of what is listed in the FINL. If it is not in the FINL it can be 100% Filipino owned. If it is
listed in the FINL, it is considered as a nationalized activity then you have to follow the minimum Philippine ownership
requirement.
DETERMINATION OF NATIONALITY IN CORPORATE LAYERING STRUCTURE
 If you have here X corporation, 60% of which is owned by Filipino citizens (FC), and the other 40 % is owned by foreign
or alien nationals (A). In this case class, obviously, X corporation is a Philippine national.
 But what if X corporation is also a shareholder of A corporation? X corporation is a Philippine national. But how would
you classify A corporation? When would it be considered a Philippine national? Or a non-Philippine national?
 The basis is still in the Foreign Investments Act specifically in the definition of what is a Philippine National
because the 2nd paragraph of such definition outlines what we call as corporate layering.
Corporate layering is when a corporation owns shares in another corporation. So you have layers of
corporations. And how much is the ownership of a Philippine national in another corporation for that other
investee corporation to be considered as a Philippine national? It should be at least 60% of the stocks
outstanding and entitled to vote. So if in this case, X corporation owns 60% or more of A corporation then the
latter will be considered as a Philippine national. And A corporation can still be owned by 40% aliens and will
still be considered as a Philippine national.
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 What do you call that test embodied in the 2nd paragraph under the definition of a Philippine national? Section 3(i) of
the FIA?
It is the Control test which says that if the corporation is at least 60% Filipino owned, then it is considered to
be 100% Philippine national. The alien ownership disappears. Such that the 60% ownership of X corporation
in A corporation shall be considered as the share of a 100% Philippine national.
We call it the control test because we only look at the controlling stockholders. Control- by definition of the
FIA, is 60% of the outstanding capital stock entitled to vote. So 60% of the outstanding capital stock of X
corporation is owned by Filipinos, and 40% by aliens. X corporation owns 60% of A corporation, and by
definition to be considered a Philippine national, 60% of the outstanding capital stock has to be held by a
Philippine national also. So X corporation is considered a Philippine national by virtue of having 60% of
Filipino citizens. This Philippine nationality of X corporation is considered as 100% Philippine national without
distinction that its capital is 40% owned by aliens. This total shareholding is actually considered as holdings
of a Filipino citizen or Philippine national. SO the alien shareholdings basically disappears, you only consider
the 60% outstanding capital entitled to vote.
The important thing to remember here, that under the control test normally the test will only be required if you
undergo corporate layering. Because if there‘s no layering, if these are owned by individuals, no problem at
all. Only when there is corporate layering- when one corporation owns another corporation.
 How do you determine that nationality of the investee corporation?
You only take a look at the controlling shareholdings of the investor corporation. If the investor corporation is
owned by 60% Filipino citizens, then this shareholding of the investor corporation is considered as
shareholding of a Filipino citizen such that the investee corporation if it is 60% owned by Filipino citizen, is
also a Philippine national.
So the fact that there is alien ownership does not matter if the shareholding of the alien is not the controlling
shareholding. X corporation is 100% Filipino citizen.
 But there is also this other test- the grandfather rule. What does this mean?
The grandfather rule is in order to determine the nationality of the investee corporation, you NOT ONLY
take a look at the nationality of the investor corporation, but also the shareholders of that investor
corporation. So you ‗grandfathered‘ it. Three layers- you consider the layers.
Under this rule, you trace back the nationality of an investee corporation up to the nationality of the
shareholders of the investor corporation. So in this case, your investor corporation has 40% foreign
shareholdings, now this 40% alien shareholdings owns 60% of A corporation, so alien shareholders owns
40% of 60% = (0.4 x 0.6) = 24%. So basically and indirectly, the alien shareholdings own 24% of A
corporation. So if it‘s 24% INDIRECT alien shareholding, PLUS 40% DIRECT alien shareholdings, is A
corporation a Philippine national? NO, because more than 40% of its shares are owned by aliens.
So you see class, under the CONTROL TEST, the layer disappears completely- you DON‘T look at the
shareholdings of the investor, you only take a look at the investor if it is controlled by Filipinos then it is
already considered as 100% Filipino owned, so that a 60% is complete Filipino ownership.
But under the GRANDFATHER RULE, you TAKE A LOOK at the citizenship of the grandfather, which is
the investor of the investor corporation and you take that into account in determining the nationality.
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 The FIA uses the CONTROL TEST. So does this mean that the grandfather rule is NO longer applicable?
NO. As stated in the case of Narra Nickel Mining and Dev. Corp. vs Redmont
CASE: NARRA NICKEL MINING AND DEV. CORP. vs REDMONT (April 21, 2014)
Facts:
Respondent Redmont took interest in mining and exploring areas in Palawan and after inquiring, it learned that areas
were already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro &
McArther. Petitioner McArthur through its predecessor-in-interest Sara Marie Mining, Inc (SMMI) applied and was issued
MPSA & Exploration Permit (EP). These were later on transferred to Madridejos Mining Corp (MMC) and assigned to
McArthur. Petitioner Narra acquired its MPSA from Alpha Resources & Devt Corp and PLMDC which previously filed an
application. Subsequently, PLMDC assigned its rights and interests over the MPSA application in favour of Narra. Another
application of SMMI was filed and assigned such to Tesoro.
Thereafter, Redmont filed before POA 3 separate petitions for denial of applications alleging that at least 60% of the
capital stock of McArthur, Narra & Tesoro are owned by MBMI- a 100% Canadian corporation. Thus, they were disqualified
from engaging in mining through MPSAs which are reserved only for Filipinos. For the petitioners, they averred that they were
qualified pursuant to RA 7942 (Philippine Mining Act of 1995). Respondent Redmont invoked the grandfather rule while the
petioners Narra, Tesoro & McArthur invoked the control test.
Ruling:
The "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development
and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt, based on the
attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule. Petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering petitioners‘ corporate
owners, namely: MMI, SMMI and PLMDC.
Discussion:
 The owner of 60% of McArthur was MMC = 5,997 shares; paid up P 825, 000
 The owner of 40% of McArthur was MBMI = 3,998 shares; paid up P1,878,000
 The owner of 40% of MMC was MBMI = 3,331 shares ;paid up P2,803,000
 The owner of 60% of MMC was Olympic =6,663 shares; zero paid up
 Mc Arthur, the holder of MPSA which under the law needs to be a Philippine national or 60% of the capital stock must
belong to Philippine nationals also. So owner of 40% of McArthur (MBMI) has a greater paid-up of P1,878,000
compared to the 60% (MMC) with paid up paid up of P825, 000.
 In turn, MMC (Filipino) was owned by 60% Olympic Mines- another Filipino corporation with zero paid-up and 40%
MBMI with paid up of P2,803,000. So basically, the paid up of MMC came also from MBMI since Olympic did not
contribute anything. And this is the structure of McArthur which basically has the same structure as Narra & Tesoro.
 Redmont wants to nullify because the 3 corporations were disqualified and since it (Redmont) wants to get the
MPSAs for itself.
 The defense of Narra, Tesoro and McArthur was based on the Control Test which only looks at the shareholding – if
their shareholding is owned by 60% Philippine national. So the shareholding of Olympic mines is 60%, thus should
consider MMC as 100% Philippine national. Since MMC is a Philippine national, and it has 60% of McArthur then
McArthur as well is a Philippine national. So take a look at our shareholdings- all 60%, the corporate layering is 60%
and that is allowed by FIA. Further, they said that with FIA advocating the Control test, the grandfather rule is no
longer applicable.
 The rulings previous to this –there was no SC ruling on what test to use. It was only SEC and DOJ opinion which
mostly states that use the control test unless there is ‗doubt‘ in the equity ownership of Filipinos in which case use the
grandfather rule. Now, when can there be ―doubt‖? The 3 corporations allege that the ‗doubt‘ happens when the
Filipino shareholding is less than 60% so in this case, and according to the 3 corporations (Narra, Tesoro and
McArthur), there is no doubt.
 But the Supreme Court said that the interpretation given by the 3 is absurd. Because, the moment the Filipino‘s
shareholding goes below 60% , automatically you are NOT allowed to engage in a nationalized activity. There is NO
doubt at all in that situation because you are disallowed. It‘s black and white. So there can only be ‗doubt‘ if you
have 60% but there are facts and circumstances which tend to show that even if Filipinos own 60%, it is still
the foreigners controlling the legal and the beneficial ownership of the Philippine corporation.
 There‘s a doubt when there is an intention to circumvent the 60-40 ownership.
 Doubt does not mean below 60%. Doubt can exist even if you meet the 60-40 requirement.
 What are the circumstances which put the compliance of the 60-40 requirement in doubt : In this case, one of the
circumstances is that their common investor, the 100% Canadian corporation- MBMI funded them. The Filipinos have
no financial contribution.
 According to the SC, the foreigners owned more than 60% -specifically 64% because we grandfathered. 40%
DIRECT Foreign ownership and 24% INDIRECT Foreign ownership.
 There is also an old DOJ case (because as mentioned there is just this SEC & DOJ ruling), wherein the shares were
divided to high par and low par. Same rights, it is only that the foreigners have high par shares because they really
26
have the financial resources to put up a corporation. But the DOJ said that you violated the Anti-Dummy law since the
greater financing from the foreigner shows that there is doubt in the 60% shareholding of the Filipinos. So you see,
even to the extent of using high par and low par. But again, this is just a DOJ ruling. While the present case is more
concrete- there‘s total funding by the foreigners.
 The grandfather rule will only be applied if you pass the control test but there is doubt. If you failed the control test, or
when you complied with the requirement by using the control test and no doubt exists, don’t apply the grandfather
rule anymore.
CASE: NARRA NICKEL MINING AND DEV. CORP. vs REDMONT (January 28, 2015)
 Petitioners : the Court’s application of the Grandfather Rule to determine their nationality is erroneous and allegedly
without basis in the Constitution, the FIA, the Philippine Mining Act of 1995, and the Rules issued by the SEC. These
laws and rules supposedly espouse the application of the Control Test in verifying the Philippine nationality of corporate
entities for purposes of determining compliance with Sec. 2, Art. XII of the Constitution that only ―corporations or
associations at least sixty per centum of whose capital is owned by such [Filipino] citizens‖ may enjoy certain rights and
privileges, like the exploration and development of natural resources.
 Ruling : The application of the Grandfather rule in the present case does not eschew the Control Test. Clearly,
petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21, 2014 Decision. Nowhere in
that disposition did the Court foreclose the application of the Control Test in determining which corporations may be
considered as Philippine nationals. Instead, to borrow Justice Leonen’s term, the Court used the Grandfather Rule as a
―supplement‖ to the Control Test so that the intent underlying the averted Sec.2, Art. XII of the Constitution be given
effect.
 Grandfather Rule is ―the method by which the percentage of Filipino equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is
computed, in cases where corporate shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate shareholder.‖4 Thus, to arrive at the actual
Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are
determined.
 As to the application of the Grandfather rule with the control test. The court said:
―the Control Test can be, as it has been, applied jointly with the Grandfather Rule to determine the observance of
foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather Rule are not,
as it were, incompatible ownership-determinant methods that can only be applied alternative to each other.
Rather, these methods can, if appropriate, be used cumulatively in the determination of the ownership and
control of corporations engaged in fully or partly nationalized activities, as the mining operation involved in this
case or the operation of public utilities as in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a
corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly
nationalized activities. Hence, it is only when the Control Test is first complied with that the Grandfather Rule may
be applied. Put in another manner, if the subject corporation’s Filipino equity falls below the threshold 60%, the
corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule
disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of
the corporation. In that instance, there is no need fora dissection or further inquiry on the ownership of the corporate
shareholders in both the investing and investee corporation or the application of the Grandfather Rule. As a corollary
rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to
the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control.” In
this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of the
corporate shareholders in both the investing and investee corporations is necessary.‖
 “doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact
reside in Filipino shareholders but in foreign stakeholders. The indicators of doubt are as follows :
1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino
businessmen and their foreign partner; chanrobl eslaw
2. That the foreign investors undertake to provide practically all the technological support for the joint venture; chanroblesl aw
3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability
studies.
 The SC made and example of an SEC Ruling of a Japanese Company where the Japanese nationals had lesser number
of shares, the Filipinos had more number of shares. But the Shares held by the Japanese nationals had greater par
value than the Filipinos’. It came out that the Japanese contributed more to the company than the Filipinos and such that
the beneficial ownership because they had higher par value then they were enjoying the same benefits as the Filipinos.
So in that case the SEC said that this company has to be investigated further. Because there is doubt as to the
legitimacy of the 60-40 Filipino ownership.
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Now, we have been talking about capital. Capital owned by 60% Filipino citizens. But then what is the meaning of capital?
This is then the subject in the case of Gamboa vs Teves.
CASE: GAMBOA vs TEVES

Facts:
Facts according to Gamboa

The Philippine Legislature granted PLDT the franchise and right to engage in telecommunications business. The
American company, General Telephone Electronics Corporation (GTE) which is a major stockholder of PLDT, sold 26% of its
common shares to Philippine Telecommunications Investment Corporation (PTIC). Prime Holdings, Inc. (PHI) became the
owner of 111,415 shares of stock of PTIC. In turn, such 111,415 shares of PTIC held by PHI were sequestered by the PCGG
which represent 46.125% of the outstanding capital stock of PTIC that were later declared to be owned by the Republic of the
Philippines. First Pacific which is a Bermuda-registered & HK-based firm acquired the remaining 54% of PTIC. Subsequently,
Interagency Privatization Council announced selling the 111,415 shares or 46.125% of PTIC through a public bidding.
Parallax won the bid. Thereafter, First Pacific as PTIC stockholder announced to match the bid of Parallax to buy the 111,415
shares. However, it failed to do so. Through its subsidiary MPAH, First Pacific entered into a Conditional Sale & Purchase
Agreement with the government. With the completed sale, First Pacific common shareholdings in PLDT increased to 37%,
thereby increasing the shares of foreigners to about 81.47% and thus violating the constitutional limitation of foreign
ownership of the capital of a public utility.
Facts according to Teves
PTIC held 13.847% of PLDT‘s outstanding common shares. PHI on the other hand, became the owner of 111,415 or
46.125% of the outstanding capital stock of PTIC. PTIC shares held by PHI were sequestered by the PCGG. The government
decided to sell the 111,415 PTIC shares and Parallax emerged as the highest bidder. First Pacific announced its intention to
match the bid. The HR Committee on Good Government conducted a public hearing of the impending sale and concluded
that First Pacific‘s intended acquisition of the government‘s 111,415 PTIC shares resulting in First Pacific‘s 100% ownership
of PTIC will not violate the constitutional limit since PTIC holds only 13.847% of the total outstanding common shares of
PLDT.
Petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale of
111,415 shares and averred that the sale would result in an increase in First Pacific‘s common shareholdings in PLDT and
this, combined with Japanese NTT DoCoMo‘s common shareholdings in PLDT would result to 51.56% foreign shareholdings
which is over the 40% constitutional limit.
Ruling:
We PARTLY GRANT the petition and rule that the term ―capital‖ in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case
ONLY to common shares, and NOT to the total outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the SEC is directed to apply this definition of the term ―capital‖ in determining the extent of
allowable foreign ownership in respondent PLDT Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.
Discussion:
 This is a case interpreting the meaning of Section 11 Article 12 of the Constitution. ―No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital
is owned by such citizens x x x‖
 So that is what the Constitution says : Citizens or Corporations or Associations at least 60% of the capital must be
owned by Citizens of the Philippines.
 What do we mean when we say ―capital‖?
 The case was brought about because of the sale of the PTIC shares to First Pacific. In this case there was no direct
acquisition of PLDT shares. First Pacific was not acquiring PLDT shares. It only acquired PTIC shares. PTIC owned
26M PLDT Common Shares. When the Philippine Government was selling PTIC shares, First Pacific being the owner
of the remainder of PTIC shares, exercised its right of first refusal.
 Right of First Refusal - right granted under the Articles of Incorporation (It has to be explicitly granted in the AOI)
that any stockholder in case of sale of the shares of the corporation has the right to be offered first before the
shares are sold to an outsider.
 The PTIC shares were bidded out, someone else won, but First Pacific exercised its right of first refusal. According to
the proponents of the case, with the acquisition of First Pacific (FP) of the remainder of the PTIC shares, FP now
owned a total of 37% of PLDT. This also increased the total shareholdings of foreigners in PLDT to 81.47% since
now PTIC is 100% foreign.
 ISSUE 1 : What is the meaning of Capital? Should it only refer to the Voting Shares or the Total Outstanding Shares?
 ISSUE 2: Was the acquisition of FP of PTIC shares valid?
 We take a look at the PLDT equity structure. PLDT shares were divided into two : Common Voting Shares
and Preferred Non-voting Shares. Of the total outstanding shares (OS) of PLDT Common Voting Shares is only
22.15%. Preferred is 77.85%. So if you think about it depending on what you mean by ―capital‖ under the
Constitution, even if all the CS are owned by foreigners, it would only mean that they own only 22.15% of the
total OS of PLDT. So that since the Constitution requires 40% maximum foreign ownership, you are still within
the limit. This is the contention of FP.
 The contention Gamboa is that you don’t take a look at the total OS, you only have to look at the Voting
Shares because it is the that which controls the Corporation. So by looking at the voting shares only, you can see
that it is already 80% owned by foreigners which is beyond the 40% limitation set by the Constitution.
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 RULING : 2011 : Capital = refers only to the shares of stock that can vote during the election of Directors, meaning
voting shares. So FP lost the case. They filed an MR contending that it is bad for the economy if you limit foreign
shareholdings, etc.
 The dispositive portion, under the wherefore (see ruling above), do you agree with this ruling? (Nathan: NO. Because
the law does not distinguish. So technically speaking, there‘s no violation)
 However, as stated by Mr Garcia, not everyone agreed. PLDT, the Government officials, the Secretary, the President
of the PSE including their lawyers, ACCRA (lawyers for PLDT) defended that it should be based on the total
outstanding capital because, as Mr Garcia said, the constitution only said outstanding capital without distinction. So
they filed a motion for reconsideration.
 A year later, the decision came out. So now, in the motion for reconsideration, not only did the SC say ―No, you‘re
wrong. It‘s still NOT total outstanding capital stock, It IS BASED ON CAPITAL OUTSTANDING AND ENTITLED
TO VOTE BUT THIS TIME, THEY TOOK OUT THE TERM ‗IN THE ELECTION OF DIRECTORS‘.‖
 2012 : Clarified that in its 2011 decision, they did not mean 60% of the voting capital. It meant 60% of each class of
capital because under the Corporation Code even non-voting shares are entitled to vote in certain instances and
these instances will show you the ultimate control of the Corporation such as Amendment of the AOI, Sale of all or
substantially all of the assets of the Corporation, Merger and Consolidation, issuance of Bonds, etc. The 60-40
requirement does not pertain to the total outstanding but TO EACH CLASS OF SHARES INDIVIDUALLY. Meaning if
you have Common Voting - 60-40; Preferred - 60-40;
 So under Philippine law, no share of stock is COMPLETELY a nonvoting stock. You cannot deprive any stock
completely with the right to vote. You can only deprive a stock of its right to vote in the election of directors. But in
other matters, even non-voting stocks are required to vote.
 When we say capital, we are talking about total outstanding capital stocks without regard to the kind of stock.
 Take note in this case that the SC did not really rule on the validity of the sale, it did not even rule on whether the
structure or the stockholding of PLDT was in violation of the law. It just made a discussion on what capital is and
remanded the case back to the SEC.
 So with the MR you dont just apply the 60-40 to the Total OS or only to the Voting, you apply it to each class of
shares individually.
 If the corporation has a common stock of Class A, Class B, and Class C, it has to be 60-40 in EACH CLASS. In other
words, Class A must be 60-40, Class B must be 60-40, Class C must be 60-40, etc. Because TOTAL Outstanding
can be easily manipulated. So this is a stricter requirement.
 Query : If you fall short in one class, are you still considered as a Philippine National?
 For purposes of the Constitutional definition of the word ―capital‖ you no longer meet the requirement. WON
you are still considered as a Philippine National it is a different matter entirely. Because under the FIA, it says
―total outstanding and entitled to vote‖. Strictly speaking, the determination in the Gamboa case is only for
determining the Constitutional limitation.
BAYANTEL : The court went back to its ruling that ―capital‖ is TOTAL SHARES ENTITLED TO VOTE
 For BAR purposes, if you are asked, you have to state your basis.
 If you ever remember any SCL case, please REMEMBER these 2 cases because these are the landmark cases and
such landmark cases normally come out in the bar
 By the way, you learned in you Corporation code that if a foreign corporation will do business in the Philippines it needs
to be licensed. But the corporation code does not define what ‗doing business‘ is. The definition of doing business is in
the FIA
Section 3. Definitions. - As used in this Act:
d) The phase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison"
offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other
act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the
phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director
or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account;
 How do you license a foreign corporation that wants to do business in the Philippines? What license?
A foreign corporation has 3 modes of doing business in the Philippines
1. You can incorporate a Subsidiary
So you do a domestic corporation. You register your own corporation here. If your activity is NOT in the
FINL, you can be 100% foreign-owned subject to the requirement that there must be at least 5 natural
persons who will act as your incorporators and directors. But they don‘t need to own 60% of your total
shares, they only need to own 1 share each (because that‘s how other people would interpret wrongly that
the 5 would divide the 60% but in truth, they only need 1 each).
2. You can do a Branch office
If you want to earn income and you want to get license to do business here, and you don‘t want to put up
another corporation, put up a branch office. So get a license to do business in the Philippines by
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applying a license to put up a branch office so this office is a foreign corporation doing business in
the Philippines since the branch is considered part of the principal which is foreign.
3. Representative office
The problem with this is you are NOT allowed to earn income in the Philippines. So if your activity does
NOT involve earning income in the Philippines, merely logistics or you‘re doing studies for your for principal,
you can do a representative office. You will be considered doing business in the Philippines
LETTERS OF CREDIT
Purpose of a Letter of Credit
 Letter of Credit is a financial device developed as a convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests 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; IOW it is a financial devise used to facilitate or consummate the
transaction between the buyer and the seller.
 Ordinarily in cross-boarder transactions when the buyer and the seller is not residing in the same jurisdiction, the seller
will not let go of his goods or deliver, unless he gets paid. And the buyer will also not pay until he gets the goods.
Because it is difficult to enforce actions if you are going to sue each other if you are living in different jurisdictions.
 Imagine a situation where you have buyer and a seller who are in the same place, there is no problem there. The buyer
will only be required to pay upon the delivery of the goods and the seller is also only required to deliver upon the payment
of the goods. And since they are in the same place, they can do that simultaneously.
 If the buyer and the seller are not within the same country. The buyer is in Cebu and the seller is in China. What if the
goods are not the kind that was agreed by the parties or the buyer refuses to pay? Will they have recourse against each
other? It would be difficult because they are not under the same jurisdiction. So there will be an issue on enforcing the
agreement. Ordinarily, it is recognized that the interest of the buyer and the seller are so conflicting, such that in an
ordinary situation, the seller does not want to deliver the goods unless he gets the money at the same time the buyer
does not want to pay until he actually sees the goods or the goods are there. How is this situation addressed? That is
why we have here a LETTER OF CREDIT.
 How does it work : In a Letter of Credit (LC), what we have here is that the buyer will go to a bank contract with such
bank and ask the bank to issue a letter of credit in favor of a seller so that by virtue of the LC the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their presentment simultaneous with the tender of
documents required by the LC. The bank will honor the draft drawn by the seller. In effect, the bank will pay the draft.
 So, the seller ships the goods upon knowing that there is a LC in his favor. It will collect the documents agreed upon
the LC, present those documents to the issuing bank and also present the draft.
 So upon doing that, the issuing bank will now pay the seller. Then, the issuing bank turns around, tells the buyer,
―Hey, buyer! I have your shipping documents, warehouse documents, bill of lading in other words the documents of
title, with me. (I think this pertains to documents of title ->) Allow me whoever is holding that document, the right to
possess or to own the goods covered by those documents of title.‖
 Now, the issuing bank will present the documents of title to the buyer and upon seeing that the documents are in
order, the buyer will now reimburse the issuing bank. The buyer will receive the goods because the bank will now
release the documents of title to the buyer and so the buyer can now collect the goods from the shipper.
 Upon payment by the buyer with the issuing bank, that terminates the LC transaction.
 There is no direct payment by the buyer to the seller. Everything is done through an issuing bank. So the bank is the
intermediary, the bridge between the conflicting interests of the seller and the buyer.
 Ordinarily also, the buyer has no money to buy the goods. What will happen is that, the issuing bank will just require the
buyer to sign a trust receipt, basically saying that the bank as the trustor is releasing the goods to the buyer as the
entrustee in trust for the bank. In order to the following things:
 Normally, to sell the goods and upon sale, to remit to the bank the proceeds covered by the trust receipts.
 Letters of Credit and Trust Receipts Transactions are inter-connected.
3 CONTRACTS IN AN LC TRANSACTION
1. Contract of Sale between the buyer and the seller.
2. Contract between the issuing bank and the buyer
 It is an undertaking by the buyer to reimburse the issuing bank for the amount paid by it to the seller.
3. Letter of Credit Proper
 It is the contract between the seller and the issuing bank. It is an undertaking by the issuing bank to pay the
seller upon presentation of all the required documents and presentation of the draft.
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3RD CONTRACT Seller 1ST CONTRACT

 Documents agreed
 Draft
Bank
2ND CONTRACT Buyer (Receives the goods)
The most fundamental principle in a LC transaction is that each of these contracts is independent of each other; such that a
defect in one contract will not affect the others. A defect in one contract cannot be raised as a ground not to comply with the
other terms or other contracts in a LC transaction.
PRUDENTIAL BANK vs IAC:
Facts:
 This involves a contract of sale between a domestic corporation, Phil. Rayon Mills (buyer) and foreign corp based in
Japan, Nissho Co. (seller). Rayon Mills purchased textile machineries and executed a LC through Prudential Bank
and the latter paid Nissho because the machines arrived.
 The buyer refused to pay the bank according to Rayon Mills the drafts should have been presented for payment but
the bank did not present it for payment.
Issue No. 1: Whether or not acceptance is necessary or indispensable to make the buyer liable to pay the bank.
 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 the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon.
 Atty’s discussion: The issuing bank substitutes its own promise to pay with the promise to pay of the seller. The
issuing bank undertakes the obligation of the buyer to the seller.
 Not necessary. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of
the Negotiable Instruments Law (NIL).
SECTION 143.When presentment for acceptance must be made. — Presentment for acceptance must be made:
(a)Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order
to fix the maturity of the instrument; or
(b)Where the bill expressly stipulates that it shall be presented for acceptance; or
(c)Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill liable."
The issuing bank is considered to be the drawee because it is the one who undertook to pay. Because a LC is an
undertaking by the issuing bank to pay on behalf of the buyer. It substitutes its promise to pay with the promise to pay
of the buyer, so now the issuing bank actually becomes a drawee of the draft.
 A draft is a bill of exchange. In a bill of exchange, the drawer would be the seller; it drew on the issuing bank because
it is the issuing bank that has the obligation to pay and under the NIL, SC said that you will only present the draft or
bill of exchange to the drawee. In this case, the drawee is the bank. The buyer is not a party to the instrument
because the indorsement was made by the bank to the seller. That‘s why presentment was not necessary.
 Atty’s discussion: The buyer is not a party to the draft because the draft was issued through to a LC and in a LC it is
the contract between the issuing bank and the seller. So the draft is the undertaking by the issuing bank to pay the
seller such that it stops with the issuing bank as the drawee and now the obligation of the buyer to pay the issuing
bank is a primary obligation which is separate from the transaction between the issuing bank and the seller. There is
no more need to present. The buyer whether or not presentment was made is required to reimburse the issuing bank
for whatever that is has paid to the seller.
 Atty’s discussion: The important thing in this case is that the issuing bank in a LC would substitute its promise to pay
such that when the seller issues a bill of exchange or a draft, it is the issuing bank that is the drawee in a bill of
exchange.
Provisions on LC are found in Code of Commerce which has no substance, because of this, the SC has recognized that the
LC transactions are also governed by Uniform Custom and Practice (UCP).
PARTIES TO AN LC TRANSACTION
The indispensable parties to an LC transaction are the following :
1. Buyer - who procures the LC and obliges himself to reimburse the issuing bank upon receipt of the documents of title.
(Contract of Loan between the bank and the buyer because the bank advances the purchase price and the buyer will just
repay it)
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2. Issuing Bank - who undertakes to pay the seller upon receipt of the draft and proper documents of title and to surrender the
documents to the buyer upon reimbursement. (Letter of Credit between the seller and the issuing bank because the LC is
issued in favor of the seller.)
3. Seller - the person who in compliance with the contract of sale ships the goods to the buyer and deliver the documents of
title and the draft to the issuing bank to recover payment. (Pursuant to the contract of sale between the buyer and seller)
Other parties who are not indispensable to the LC - they may or may not be in the transaction : (definitions discussed below)
1. Advising
2. Negotiating bank
3. Confirming bank
4. Paying bank
BANK OF AMERICA vs. CA, Inter-Resin Industrial Corp
Facts:
 Bank of America received an irrevocable letter of credit allegedly issued by Bank of Ayudhya for the account of
General Chemicals of Thailand for the purchase of plastic ropes and agricultural files with the petitioner as advising
bank and Inter-Resin as the beneficiary.
 Buyer – Gen Chem; Seller – Inter Resin; Issuing Bank – Bank of Ayudhya;
 After being informed of the LC, Inter Resin sent Atty. Tanay to the Bank of America for confirmation of the LC but the
person in charge of the LC of Bank of America said that there was no need for confirmation because the LC would
not have been transmitted if it were not genuine. After that, Inter Resin delivered the goods to Gen Chem and then
presented the proof of deliveries, bill of lading to the Bank of America for partial payment because of partial
compliance.
 For the first partial compliance, the Bank of America being satisfied with the documents presented by Inter Resin,
paid Inter Resin. Bank of America paid the first draft to Inter Resin.
 After receiving the payment, Bank of America asked for reimbursement from Bank of Ayudhya. In the meantime, Inter
Resin wanted to fulfill or to complete the delivery of the goods, however Bank of America received information that
Bank of Ayudhya the LCs are fraudulent. Because actually, Bank of Ayudhya did not send a mail about the LC to
Bank of America. The LC was a forgery.
 Bank of America then issued a stop payment order to the second draft filed by Inter Resin and sued Inter Resin for
the reimbursement of the amount paid on the first draft.
 Sensing that there was a fraud, Bank of America sought help from NBA and with the Help of Ph Embassy at
Bangkok, and then discovered that the vans exported by Inter Resin did not contain the goods agreed to be delivered
by the Inter Resin but instead it contained waste materials. Bank of America wanted reimbursement for payments it
made to Inter Resin.
 On the second draft, there is a claim that Bank of America should pay because they were made to know that Bank of
America confirmed the LC, meaning Bank of America is a confirming bank therefore making the Bank liable also to
the second draft.
Gen Chem
(Buyer)
Correspondent Bank: Issuing Bank:

Inter Resin (Seller)
Bank of America Bank Ayudyha
Bank of America
Same Jurisdiction with Inter Resin

ISSUES :
1. Was the Bank of America liable? Was it liable to pay on the second shipment?
2. Does Inter Resin have the obligation to refund?
Ruling:
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 Atty’s Discussion: Ordinarily in a LC, there are three indispensable parties. (abovementioned) But there are situations
as in this case, where the issuing bank will be in the same jurisdiction as the buyer. So, how can it honor the draft
presented by the seller? What normally happens there is that the bank, will take the services of correspondent banks.
You have the issuing bank and then issuing bank will have a correspondent bank. Such as the Bank of America, it is
a bank which is located in the same jurisdiction as the seller.
The obligations of a corresponding bank will depend on the role that it undertakes to play in the transaction.
 The number of the parties, not infrequently and almost invariably in international trade practice, may be increased.
Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit;
or, of a confirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of
a paying bank which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of
the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to have the
draft discounted.
 Types of correspondent banks or Four Roles of Correspondent Banks (They are not indispensable parties to
the LC transaction however their obligations depend on the role that it undertakes to play.):
1. Confirming Bank – to confirm the LC; incurs a liability because it confirms a LC; it basically undertakes to pay
on the LC in place of the issuing bank. Confirming bank is normally required when the issuing bank is a lesser
known bank. When the seller does not trust the issuing bank so much, it will normally require a confirming bank
that will undertake the obligation of the issuing bank. It lends credence to the LC issued by a lesser known
issuing bank. The confirming bank then become directly liable to the seller beneficiary. The moment that the bank
undertakes an obligation to pay it becomes a confirming bank.
2. Advising Bank – relay the information that there is a LC opened by an issuing bank. The obligation is just to
inform so there is no liability. It just notifies the seller as to the availability of the LC.
3. Negotiating Bank – is an independent bank, from the LC. The negotiating bank comes into play when the seller
will negotiate the bill of exchange or the draft; will have the draft discounted and the negotiating bank accepts it.
This bank is a bank to which the draft has been negotiated to. Prior to the discounting, there is no relationship
between the negotiating bank and the seller. Meaning you cannot compel the bank to become a negotiating
bank. But the bank that it consents to accept your draft then it becomes a negotiating bank. The negotiating bank
has no obligation to pay it did not undertake to pay but the moment the goods are presented he receives the
drafts, discounts it and pays it. So the liability of the negotiating bank is only upon presentment of the drafts, he
does not undertake to pay in advance unlike the confirming bank and the paying bank.
4. Paying Bank – It has the obligation from the issuing bank to make payments to the seller. They undertake to
encash the draft drawn by the exporter or the seller.
Difference between the Confirming Bank and the Paying Bank:

 The paying bank is the bank that has been requested by the issuing bank to make the payment to the seller. The
confirming bank will acknowledge the liability of its own volition. The liability of confirming bank is voluntary on its part
while the paying bank is required by the issuing bank to make the payment.
 The confirming bank goes beyond payment of the purchase price because it confirms the validity of the LC. So it also
acts basically like a guarantor or surety saying that ―hey this LC is valid and it exists.‖ It gives a warranty the the LC is
valid and existing, such that if it is not, the confirming bank aside from his liability on the LC may also be held liable
for damages. While the paying bank only pays upon presentment of the required documents; it undertakes to pay.
Procedure of a LC Transaction (Atty, ―Read these two paragraphs from the Bank of America case.‖ Here in an enumerated
form):
1. 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 interests 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.
2. 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 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.
3. 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.
4. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required
shipping documents or documents of title.
5. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank.
6. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller
conform with what the letter of credit requires.
7. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the documents entitling him to the goods.
8. 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 and control over the goods only after reimbursing the bank.
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Back to Bank of America Case discussed by Atty:
 In the first draft, Bank of America paid. It did not know yet of the fraudulent transaction. When it went back to Bank of
Ayudhya for payment, the latter refused to pay because the LC was a forged. After that, when Inter Resin presented the
second draft, Bank of America refused to pay because of the knowledge of the forge LCs. So there are two drafts in
question in this case. The first draft, Bank of America wanted reimbursement. Inter Resin that it is not liable because it
presented the correct documents. Second draft, Inter Resin wanted to be paid but Inter Resin refused claiming that it is
not liable.
 The liability of the bank depends on what obligation it undertook under a LC. When the Bank of America received notice
of the LC, it informed Inter Resin that there was an existing LC. Inter Resin asked the bank to validate, but the Bank
refused to do so but it paid when Inter Resin presented the first shipping document. So what is the personality of the
Bank of America in the first shipment?
 Going back to the parties to an LC, if a bank is a confirming bank because it lends credence to the validity of the
LC, if the LC is found to be false, you sitll have to pay because you confirmed it. If the bank is just a paying bank or a
negotiating bank, you did not give credence to the LC, you just paid it, so you have no warranties. If the bank will just
advise no payment yet, then it is not required to pay. Payment is not part of the obligations of an advising bank.
 First Shipment - Bank of America is a Paying or Negotiating bank because it discounted the note on the first shipment.
 For the first draft which is paid, the SC said, the draft was only negotiated to the Bank of America, it only acted as a
negotiating bank. Therefore it had a right as an endorsee of a negotiable instrument which it went to the drawee
which did not honor the LC then it had to go back to the person who sold the draft, in which in this case, is the Inter
Resin. It had a right of recourse. Inter Resin here can be made to reimburse.
 As to liability for reimbursement : As a negotiating bank, their relationships are governed by the Negotiable
Instruments Law. The drawer is the Inter Resin. The drawee bank is the issuing bank - the one who is ultimately
liable. The Bank of America is the endorser or the holder of that negotiable instrument. The right of the holder is the
right to paid from the drawee. The Bank of America‘s right to get the payment from the drawee from issuing bank,
Bank of Ayudhya but the latter did not pay because the LC was a forgery. The drawee refused payment. As an
ordinary endorsee or a holder of a negotiable instrument, your recourse if the drawee refuses to pay is to go back to
the person who negotiated the draft to you and in this case, the one who negotiated the draft is the drawer, Inter
Resin.
 For the draft that was accepted and paid by the Bank of America, the Bank can still get reimbursement from Inter
Resin because the role of Bank of America in this case is merely a negotiating bank. It purchased the draft. As the
purchaser of the draft, if the drawee refuses to pay, it has a right of recourse against the person who sold the draft to
it. In which case, the person who sold the draft was the drawer, Inter Resin. Inter Resin can be made to reimburse
Bank of America for the first draft.
o SC said that the Bank of America acted independently as a negotiating bank. As a negotiating bank, the bank
of America has a right of recourse against the issuer bank, the latter being the drawee. Inter Resin as the
drawer of the draft continues to assume a contingent liability thereon. Since the issuing bank, the drawee, did
not pay, the drawer becomes liable. Between the seller and the negotiating bank, there is a relationship
between a drawer and purchaser of draft. Unless drafts drawn in pursuance of the credit are indicated to be
without recourse, the negotiating bank has ordinary right of recourse against the seller in the event of
dishonor by the issuing bank. The fact that the correspondent and the negotiating bank may be one and the
same, does not affect its rights and obligations in either capacity although a special agreement is always a
possibility.
 Second Shipment - the Bank of America merely advised.
 On the second draft, the contention is that the Bank of America already confirmed the LC because its officers
confirmed Inter Resin that those LCs were genuine. The SC chose to believe contention of the Bank of America
where it expressly said that it will not confirm and as result, the Bank of America cannot be a confirming bank. It is
only an advising or notifying bank and the role of an advising bank is merely to let the seller know that there is this
LC. It does not mean that the advising bank undertakes to pay the LC. Its obligation is just to inform. The Bank of
America cannot be held liable on the second draft because when it informed Inter Resin about the existence of the
draft, there was no corresponding undertaking on its part to pay the LC.
 For the second draft, Inter Resin is claiming, ―Hey you, Bank of America pay me now because I presented all the
correct documents!‖ Bank of America is not liable to the second draft because the Bank of America is considered
as an advising bank. In fact when Inter Resin expressly asked the bank to confirm, it refused; it sent a letter refusing
to confirm the LC. The SC said clearly, it did not want to act as a confirming bank. Rather, it is only a notifying or
advising bank. A notifying or advising bank does not an obligation to the seller. Inter Resin cannot proceed against
Bank of America in relation to the second draft.
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SUMMARY :
 First issue - WON the Bank of America is liable to pay on the second shipment ? It was not because it was only an
advising bank, not confirming bank. No obligation to pay.
 Second Issue - WON the Bank of America is entitled to reimbursement? Yes. As a purchaser of credit, being a
negotiating bank, it has a right of recourse against the drawer in case the person ultimately liable to pay which is the
drawee, fails to pay the credit.
PRINCIPLES IN AN LC TRANSACTION
1. DOCTRINE OF INDEPENDENCE - there are 3 contracts in a LC : (1) The Contract of Sale between the buyer and the
seller; (2) The contract of Loan between the buyer and the issuing bank; and (3) the Letter of Credit between the Seller and
the Issuing Bank. Under the doctrine of independence, each of these contracts are to be maintained in a state of perpetual
separation. Such that a breach in one of the contracts will not affect the other contracts. Because of these is a separate and
independent contract.
BPI vs DE RENY FABRIC INDUSTRIES

Facts:
 The issuing bank is BPI and the seller, JB Distributing Company and the buyer is the De Reny Fabric. On four (4)
different occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation through its co-defendants-
appellants, Aurora Carcereny, alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the
corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the
corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from its American
supplier, the J.B. Distributing Company.
 The Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with
uniform instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that they have been
authorized to negotiate the latter's sight drafts up to the amounts mentioned therein, respectively, if accompanied, upon
presentation, by a full set of negotiable clean "on board" ocean bills of lading, covering the merchandise appearing in the
L/Cs, that is, dyestuffs of various colors. Consequently, the J.B. Distributing Company drew upon, presented to and
negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it,
together with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs as
above indicated. These correspondent banks then debited the account of the Bank of the Philippine Islands with them up
to the full value of the drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter,
endorsed and forwarded all documents to the Bank of the Philippine Islands.
 De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90, 000. Further
payments were, however, subsequently discontinued by the corporation when it became established, as a result of a
chemical test conducted by the National Science Development Board, that the goods that arrived in Manila were colored
chalks instead of dyestuffs.
 It is the submission of De Reny Fabric that it was the duty of the foreign correspondent banks of the Bank of the
Philippine Islands to take the necessary precaution to insure that the goods shipped under the covering L/Cs
conformed with the item appearing therein, and, that the foregoing banks having failed to perform this duty, no
claim for recoupment against them, arising from the losses incurred for the non-delivery or defective delivery of the
articles ordered, could accrue. (The goods sent must be in accordance with the agreed goods to be delivered in the
contract of sale and the items listed in the shipping documents.)
Ruling:
 Banks, in providing financing in international business transactions such as those entered into by the appellants, do not
deal with the property to be exported or shipped to the importer, but deal only with documents. The Bank introduced in
evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary Credits Fixed for the
Thirteenth Congress of International Chamber of Commerce," to which the Philippines is a signatory nation. Article 10
thereof provides: "In documentary credit operations, all parties concerned deal in documents and not in goods.—
Payment, negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a
Bank authorized to do so binds the party giving the authorization to take up the documents and reimburse the Bank
making the payment, negotiation or acceptance."
 The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify
whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was
loaded aboard ship, having been positively proven as a fact, the appellants are bound by this established usage. They
were, after all, the ones who tapped the facilities afforded by the Bank in order to engage in international business.
 Atty’s discussion: This rule, ―dealing with documents only‖ is what we call STRICT COMPLIANCE RULE. If a LC will list
down the documents required in order for the seller get paid. The issuing bank will have to strictly comply with all of those
documents required because the issuing bank and the seller deal only with documents. They will not concern themselves
with the goods. This rule is an off shoot of the INDEPENDENCE PRINCIPLE. Under the independence principle, the
issuing bank is actually not concerned with the contract of sale between the buyer and the seller. It is independent of
contract of sale between the buyer and the seller. So that if there is any breach in that contract of sale, the obligation of
35
the bank is not affected as long as the seller can present can present the correct documents, the issuing bank
will have to pay. And if the issuing bank paid in accordance with the instructions of the buyer, then the buyer will have to
reimburse the issuing bank regardless of any defect or violation or breach committed in the actual contract sale between
the buyer and
the seller.
 The SC said that the bank has no obligation to inspect the goods because the banks only deal with documents. As
long as the documents are in order, the bank has to pay.
 As for the allegation of the buyer that there was a breach, it does not matter because under the independence principle,
the bank is not affected by the breach. The buyer has to reimburse the bank for the payments it made to the seller.
2. STRICT COMPLIANCE RULE - the documents tendered must strictly conform to the terms of the LC. The tender of
documents by the beneficiary must include all the documents required by the letter. A correspondent bank which departs from
what has been stipulated under the LC or accepts faulty tender acts on its own risk and it 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.
FEATI BANK vs. CA

Facts:
Villaluz agreed to sell to Christiansen lauan logs. Security Pacific National Bank of Los Angeles issued
irrevocable letter of credit in favor of Villaluz for the lauan logs. The LC was mailed to Feati Bank with the instruction that it
―forward the enclosed letter of credit to the beneficiary‖. The logs were then shipped for Christiansento Korea however, the
latter refused to issue the certification as required by the LC. Because of the absence of the certification, Feati Bank refused
to advance the payment. While the case was pending, Christiansen left the Philippines without informing the Court. Thus,
VIllaluz filed an amended complaint to make Feati Bank solidarily liable with Christiansen.
Issue 1: Was it justified in refusing the payment?
The bank was justified in not paying Villaluz. The bank may only negotiate, accept or pay, if the documents tendered
to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent
bank, like the petitioner, principally deals only with documents, the absence of any document required in the documentary
credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its
obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the
beneficiary.
Discussion:
 Under the rule of STRICT COMPLIANCE, Feati Bank has to strictly comply with the documents required under the LC. In
fact, the essence of an LC is the seller gets paid upon presentation of documents stated in the LC together with
presentation of the draft
 In this case, the buyer refused to issue the certification that he approved the goods. Because of this missing certification,
the bank refused to pay. SC said it was justified because we follow the rule of strict compliance. It has to make sure it
strictly conforms with the terms of the LC in respect to the documents to be presented.
Issue 2: Tender of documents, what did the SC say about the documents to be presented?
Ruling:
It is a 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 (seller) 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, as the case may be, 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. The mere fact that the document was specified therein readily means that the
document is of vital importance to the buyer.
Discussion:
 It‘s a rule of strict compliance that the tender of documents by the seller/beneficiary must include all the documents
required in the LC. if the correspondent bank deviates from these documents, he bears the risk of not getting paid by the
buyer or by the issuing bank.
 There was no certification issued, the buyer was missing in action. He left the country so the seller was holding the bill
with no one to pay. He went after the bank but the bank said I‘m not liable. SC said it is indeed not liable under the
doctrine of strict compliance, otherwise it bears the risk since banks only deal with documents
 Also, it‘s not up to the bank to determine whether or not this document is needed or not. As long as it is in the list, it is
required
 Reconcile this with BPI vs De Reny. In that case, all the documents were there but the goods were not correct. Was
the bank justified in paying the seller? YES because all the correct documents were there. In this case, the bank refused
to pay the seller. All the goods were correct, but the bank refused to pay. Was it justified? YES because the documents
were incomplete. This is the application of strict compliance
Issue 3: Lower courts ruled, and also according to the seller, the fact that the LC is an irrevocable LC means that the
correspondent bank is already liable
Ruling:
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. An
irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal
relations arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-
versa.
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An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may
not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the
kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to
the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the
credit. Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in
accepting the instructions of the issuing bank has also confirmed the letter of credit.
Discussion:
 An Irrevocable letter of credit is not based on a fixed period. It is based on the consent of the beneficiary. You call it
irrevocable because the bank cannot revoke it unilaterally. As long as the beneficiary does not consent to the revocation
of the credit, the LC will stand. What will terminate it is not the passage of a fixed period of time, but the consent of the
beneficiary. The duration only means that as long as beneficiary has not consented, it is not terminated
 A confirmed letter of credit is one wherein the confirming bank has acknowledged the obligation and undertook to pay
the obligation in lieu of the issuing bank. There is another bank which is willing to pay the obligation under the LC. So you
can have an irrevocable LC which is confirmed; you can also have an irrevocable LC and unconfirmed.
 In this case, it was an irrevocable LC. The issue was whether or not by the fact that it was irrevocable it was also
confirmed. IT IS NOT. Confirming is another act from the irrevocability of the LC
 The role of Feati bank was only a notifying bank, not a confirming bank. Similar to the Bank of America case, a notifying
bank has no obligation at all even if the LC is irrevocable. It only means it cannot be revoked; it doesn‘t mean the
correspondent bank is liable
 Distinguished from a revolving letter of credit: It is open, then you pay it so it closes, then it opens again without you
having to open another LC. It‘s like a revolving door. When you open the revolving LC, the bank will use that to pay your
seller. Then it goes to the buyer, hey pay me the money. The moment you pay it, it is open again. So you can use it for
another supplier. Normally, LC is opened for 1 transaction only.
Atty: Do you understand? Or you don’t care? You look like you don’t care (HEHE). When you’re already lawyers, I hope
you won’t forget these differences.
3. FRAUD EXCEPTION PRINCIPLE - This is the exception to the independence principle. When the beneficiary for purpose
of drawing on the credit, fraudulently presents to the confirming bank, documents that contain expressly or by implication
material representation of fact that to his knowledge are untrue. If you are misrepresenting and there is fraud or bad faith then
it may be that the independence principle will not apply.
TRANSFIELD PHILIPPINES INC. vs. LUZON HYDRO CORP.

Facts:
Transfield and Luzon Hydro Corporation (LHC) entered into a Turnkey contract whereby Transfield as turnkey
contractor undertook to construct hydro-electric power station (the project). To secure the performance of Transfield‘s
obligation, Transfield opened 2 standby letters of credit with ANZ Bank and SBC. Transfield sought various extensions,
which gave rise to a series of legal actions. The issue under arbitration was whether or not Transfield was in breach of its
contract by delay. Transfield, while arbitration was pending, contacted its banks and warned them against paying LHC.
LHC asserted that Transfield was in default and demanded payment of liquidated damages for the delay from the
securities put up by Transfield. It contended that the securities are independent of the main contract between them as shown
by the face of the 2 LC which both provide that the banks have no responsibility to investigate the authenticity or accuracy of
the declarant‘s capacity.
Issue 1: Whether or not LHC can claim under the independence principle
Ruling:
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable,
there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the independence principle liberates the issuing
bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature clearly
suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of
credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argument — that it is only the issuing bank that may invoke the
independence principle on letters of credit — does not impress this Court. To say that the independence principle may only
be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial
transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Discussion:
 Involved here was a TURNKEY CONTRACT which referred to a readily operating power plant so that the principal will
just have to ―turn the key‖ and it will go. It‘s a contract where one is asked to construct something that can be readily
operated so that all the principal has to do is to turn the key and everything goes
 In the other cases, everyone who claimed the independence principle were only the banks. In this case, it was the
beneficiary saying that he has the right to claim under the LC regardless of what happens in the contract because my
claim under the LC is independent of what happens to our arbitration, WON Transfield was really in delay
 SC said it is not only the issuing bank that can recover under the independence principle. The beneficiary is only entitled
Issue 2: Whether the fraudulent exception rule is applicable
Ruling:
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the
Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on
the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract. 55 Indeed, the
Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of
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default.
The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or
fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding
delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore
premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and
CIAC have not ruled with finality on the existence of default.
Discussion:
 So far, we‘ve been discussing commercial letter of credit. Differentiate this with standby letter of credit.
 COMMERCIAL LETTER OF CREDIT - the contract is usually a sales contract. Used for sales or transactions such
as importation and exportation. To prove you are entitled to payment, you prove compliance or present documents
as proof of fulfillment of the obligation.
 STANDBY LETTER OF CREDIT – usually required for contracts of services or to do. It is paid in case the contractor
fails to deliver on his obligation. Serves as a guarantee; To be entitled to payment one must prove non-compliance
with the contract so you can claim under the standby letter of credit.
 Other types of LC :
 REVOCABLE LETTER OF CREDIT - one which can be revoked by the issuing bank at its own instance.
 IRREVOCABLE LETTER OF CREDIT - one which cannot be revoked by issuing bank without the consent of the
beneficiary.
 REVOLVING LETTER OF CREDIT - Ordinarily when you do a transaction you open a LC, you apply with the bank,
you get your goods, you pay the LC, it closes. The next time you have another purchase, you open again, submit all
the requirements again, get your goods, pay and it closes. A revolving LC on the other hand is one that is continuous.
You open your Revolving LC, you get your goods you pay. The moment you have another transaction, you don’t
have to open another LC you get the goods and pay. It is basically one that is open and continuous. There is no need
to reapply.
 Here, what was issued was a standby LC. The proof shown by LHC that there was a violation was that they presented a
certificate of non-compliance by Transfield. They stated that Transfield was already in delay because it failed to complete
the project on time. Transfield said that the certificate was fraudulent because it said we are not yet sure if there is really
a delay because we are still undergoing arbitration. So you, LHC, you lied! You misstated the information in the
certificate. So that is a fraudulent certification
 Under the FRAUD EXCEPTION RULE, if your basis, or the document that you issue to claim under the standby LC is
fraudulent, that is an exception to the independence principle. The courts can enjoin the payment by the issuing banks
because the proof is fraudulent.
 The fraud exception principle is an exception to the independence principle but it is only for the courts to enjoin the
banks from paying. It is not up to the bank to determine the authenticity of the proof given. It is merely a ground to seek
an injunction against the payment under the LC
 SC said that technically, the certificate issued by LHC was not misstated because under the Turnkey contract, you did not
define delay to be after the final determination from arbitration. You just stated a particular date. This is not fraudulent.
MWSS vs. DAWAY

Facts:
MWSS granted Maynilad under a concession agreement a 20-year period to manage and refurbish the existing
MWSS water delivery and sewerage services, for which Maynilad undertook to pay the corresponding concession fees. To
secure the concessionaire‘s performance of its obligations, Maynilad was required to put up securities. It was issued an
irrevocable standby letter of credit in favor or MWSS. Maynilad served upon MWSS a notice of event of termination
claiming that MWSS failed to comply with its obligations.
Prior to the instant case, Maynilad had filed a petition for rehabilitation which resulted in the issuance of a stay order.
Issue:
Did the rehabilitation court act in excess of its authority/jurisdiction when it enjoined MWSS from seeking payment of
the concession fees from the banks that issued the irrevocable standby LC
Ruling:
The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is
on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor.
The participating banks' obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor's assets. These are the same
characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case.
Discussion:
 Under the rehabilitation laws, if a company or corporation is put unde rehabilitation, the Court will also issue a stop
payment order. The corporation will stop paying any of its creditors. It cannot pay anyone.
 The SC said the bank is required to pay under the LC because the obligation under the LC is different from the
Maynilad‘s obligation to pay. The latter‘s obligation is under the stop payment order but not the bank because the bank‘s
obligation is primary and solidary. So you can claim under the standby LC even if the person who asked that the LC be
issued is under rehabilitation
 MWSS can claim under the LC but when the bank seeks reimbursement from Maynilad, it cannot be paid because
Maynilad is under a stop payment order
 Most important here is that the nature of the obligation is primary and solidary
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TRUST RECEIPTS
Whereas clause of PD 115
WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and merchants solve
their financing problems, had gained popular acceptance in international and domestic business practices, particularly in
commercial banking transactions;
Trust Receipt Transaction – Definition in Sec 4
Section 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 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.
 A trust receipt (TR) transaction presupposes an existence of a letter of credit agreement or transaction. It is a
counterpart of an LC transaction.
 How does it work : Ordinarily you have back to back LC and TR transactions. So when the bank gets the shipping
documents from the seller, the bank is supposed to deliver the shipping documents to the buyer and the buyer pays.
There are certain instances however, especially when the goods are merchandise for sale, when the buyer cannot yet
pay until he sells the goods. There is a dillema there, the buyer will not get his income because he cannot get the
goods from the bank and the bank will not release the documents until it gets paid.
 That is when the TR transaction sets in wherein the goods are released to the buyer by the bank under a TR.
 TR transaction under the law, is any transaction by and between a person referred to as the entruster and the person
referred to as the entrustee. Whereby the entrustor (the bank) who owns or holds absolute title or security interest over
certain specified goods, 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.
 The said goods would be released to the entrustee, here the buyer, to be sold and the proceeds of the said goods will
be given to the bank in payment of their obligation. With the maturity of the trust agreement and there is no payment,
then the goods will be returned to the bank and the bank will sell it to the public through a public auction. If the proceeds
of the public auction are insufficient to cover the amounts of the LC and TR or the obligation of the entrustee, the bank
can ask the entrustee to pay the remaining balance. If there are excess amounts from the proceeds of the public
auction, the entrustee is entitled to the excess.
 There is no form required for a Trust Receipt contract.
 In Prundential Bank case, it made a discussion on a TR transaction because after the goods were received by
Prudential Bank, they were turned over to Phil Rayon through a TR transaction. Phil Rayon executed a TR for the
goods. In that case, you will see there a description on how a TR transaction works vis-à-vis a LC (letter of credit)
transaction. The LC is basically that can be done outside the jurisdiction of the issuing bank and the buyer. Once the LC
is fulfilled and the goods arrived, there is now the bank that turns around, tells the buyer, ―Hey, the goods are here. You
pay me the amount that I paid to the seller.‖ If the buyer cannot pay yet, the bank will not hold on to the goods. The bank
will turn over the goods under a TR transaction.
 An important aspect of which is that the bank will retain title or ownership over the goods. So that the buyer will only act
as an entrustee of the bank. Only for the specific purpose to sell. Generally, to sell the goods and turn over the proceeds
of the sale corresponding to the amount covered by the trust receipts.
OBLIGATIONS OF THE ENTRUSTEE

 To deliver to the entruster the price of the sale
 If the merchandise is not sold, to return the merchandise to the entruster.
 More specific obligations from a case: The entrustee is obliged to:
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(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
owed 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 the proceeds therefrom 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 the decree.
 The entrustee bears the risk of loss. Because actually the ownership by the entruster of the goods is just for security
purposes. The beneficial ownership remains with the entrustee, the ultimate owner.
RIGHTS OF AN 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 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.
 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 owed to the entruster or as appears in the trust receipt;
 To the return of the goods, documents or instruments in case of non-sale; and
 To the enforcement of all other rights conferred on him in the trust receipt, provided these are not contrary to the
provisions of the document.
In case of breach of a TR contract:
 The entruster can demand for a return of the goods.
 The entruster can also goods in a public or private sale and apply the proceeds to the amount covered by the TR.
 If the proceeds are still insufficient, the entruster can still demand for the deficiency from the entrustee.
Proceeds of the Sale Application:
The proceeds of the sale will be applied in accordance with Section 7 of PD 115:
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.
 If there is an excess from the sale, the entrustee shall be entitled to the surplus of the sale.
When can the entrustee be liable for Estafa?
 In case of failure of the entrustee to turn over the proceeds of the sale or the documents, or to return the goods if they
remain unsold or disposed of in accordance with the terms of the TR, then the act is punishable as estafa under the
RPC.
 There are only two instances where the entrustee can be held liable for estafa:
 Failure to remit the proceeds of the sale by the entrustee, in case the goods are sold.
 Failure to return the goods to the entruster covered by the TR in case that the goods remain unsold.
 Estafa is not a remedy but a criminal penalty, in case of two specific violations of the entrustee.
 For any other breach of the trust agreement, your recourse is not a case of estafa, rather to cancel the TR
agreement as provided in Section 7 of PD 115.
 Under Section 13, there are only two instances for criminal liability of estafa:
Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise
40
known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association
or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
 Outside of these two instances, there is no liability for estafa.

Purpose of the Trust Receipt Law:
 To aid importers and merchants in purchasing goods, materials for the purpose of selling and manufacturing.
 In other words, to aid importers and retailers in solving their financing problems in case of the procurement of their
supplies and the importation of the goods and supplies.
CASES DISCUSSED
NG VS PEOPLE OF THE PHILIPPINES

Facts:
 Petitioner Anthony Ng, then engaged in the business of building and fabricating telecommunication towers under the
trade name "Capitol Blacksmith and Builders," applied for a credit line of PhP3,000,000 with Asiatrust Development
Bank, Inc. (Asiatrust).
 On May 30, 1997, Asiatrust approved petitioner's loan application. Petitioner was then required to sign several
documents, among which are the Credit Line Agreement, Application and Agreement for Irrevocable L/C, Trust
Receipt Agreements, 4 and Promissory Notes. Though the Promissory Notes matured on September 18, 1997, the
two (2) aforementioned Trust Receipt Agreements did not bear any maturity dates as they were left unfilled or in
blank by Asiatrust.
 As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust. Asiatrust then
conducted a surprise ocular inspection of petitioner's business through Villarva S. Linga, Asiatrust's representative
appraiser. Linga thereafter reported to Asiatrust that he found that approximately 97% of the subject goods of the
Trust Receipts were "sold-out and that only 3% of the goods pertaining to PN No. 1963 remained."
 Ng sourced his goods, locally. Ng is not an importer.
 Ng purchased the goods for the fabrication and construction of cell towers.
 Ng was sued for estafa:
Issue: Whether or not Ng is liable for Estafa.
Ruling:
 The transaction between Ng and Asiatrust is not a TR transaction but one of simple loan. Transactions discussed in
relation to Trust Receipts mainly involved sales. Transactions covered by PD 115 are sales, manufacturing or
processing for the purposes of sale, loading, unloading, shipment or transshipment of goods.
 PD 115 does not apply. It must be remembered that petitioner was transparent to Asiatrust from the very beginning
that the subject goods were not being held for sale but were to be used for the fabrication of steel communication
towers in accordance with his contracts with Islacom, Smart, and Infocom. In these contracts, he was
commissioned to build, out of the materials received, steel communication towers, not to sell them.
 To emphasize, the Trust Receipts Law was created to "to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may
not be able to acquire credit except through utilization, as collateral, of the merchandise imported or
purchased." Since Asiatrust knew that petitioner was neither an importer nor retail dealer, it should have known that
the said agreement could not possibly apply to petitioner.
 Ng is not liable for estafa.
 Goods Were Not Received in Trust. The first element of Estafa under Art. 315, par. 1 (b) of the RPC requires that
the money, goods or other personal property must be received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of, or to return it. But as we already
discussed, the goods received by petitioner were not held in trust. They were also not intended for sale and neither
did petitioner have the duty to return them. They were only intended for use in the fabrication of steel communication
towers.
 No misappropriation of goods or proceeds. Assuming arguendo that the provisions of PD 115 apply, petitioner is
not liable for Estafa because Sec. 13 of PD 115 provides that an entrustee is only liable for Estafa when he fails "to
turn over the proceeds of the sale of the goods . . . covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt . . . in accordance with the terms of the trust receipt."
 Petitioner was only obligated to turn over the proceeds as soon as he received payment. However, the evidence
reveals that petitioner experienced difficulties in collecting payments from his clients for the communication towers.
Thus, absent proof that the proceeds have been actually and fully received by petitioner, his obligation to
turn over the same to Asiatrust never arose. What is more, under the Trust Receipt Agreement itself, no date of
maturity was stipulated.
 Furthermore, Asiatrust was informed at the time of petitioner's application for the loan that the payment for the loan
would be derived from the collectibles of his clients. Petitioner informed Asiatrust that he was having extreme
difficulties in collecting from Islacom the full contracted price of the towers. Thus, the duty of petitioner to remit the
proceeds of the goods has not yet arisen since he has yet to receive proceeds of the goods. Again, petitioner could
not be said to have misappropriated or converted the proceeds of the transaction since he has not yet received the
proceeds from his client, Islacom.
Discussion:
 The SC in this case made a ruling whether or not PD 115 will apply to Ng‘s transaction.
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 Trust Receipts Law (TRL) was created to aid in financing importers and retailers who do not have sufficient funds to
finance the importation or purchase or merchandise and who may not be able to acquire credit except through utilization,
as collateral, of the merchandise imported or purchased. Since Asiatrust knew that Ng was neither importer nor retailer
dealer. It should have known that the said agreement would not possibly be applied to petitioner.
 PD 115 will not apply because Ng was neither an importer nor a dealer. The SC here made a delineation that if you‘re not
an importer or retailer and you execute a TR agreement, in general, the provisions of the TRL will not apply.
 The SC is limiting the application of the TRL to importers and retailers.
 Ng is in the business of construction. The goods here are not held for sale but were used for construction business. No
application of the TRL.
METROPOLITAN BANK & TRUST COMPANY vs HON. SEC. GONZALES

Facts:
Respondents as duly authorized representatives of Visaland Inc. and in order to finance the operations of its sister
company, Titan Ikeda Construction & Devt Corp (TICDC), applied with petitioner MBTC 24 letters of credit with aggregate
amount of P68, 749,487.96. Respondents signed trust receipts simultaneously with the issuance of letters of credit in favour
of petitioner, and have bound themselves to sell good covered by such letters and to remit the proceeds to petitioner, if sold,
or to return the goods, if not sold, on or before their agreed maturity dates.
When the trust receipts matured, respondents failed to return goods to petitioner or return the value despite demand.
Thus, petitioner filed a criminal complaint for estafa. Private respondents denied having entered into trust receipt transactions
and claimed that the contract entered was a Contract of Loan secured by real estate mortgage. The Secretary of Justice, as
well as the appellate court found no probable cause and ruled that the transaction was a contract of loan.
Ruling:
The fact of existence or non-existence of a trust receipt transaction is evidentiary in nature, the veracity of which can
best be passed upon after trial on the merits, for it is virtually impossible to ascertain the real nature of the transaction
involved based solely on the self-serving allegations contained in the opposing parties‘ pleadings. Trust receipt transactions
are governed by the provisions of Presidential Decree No. 115 and the following pieces of evidence adduced from the
affidavits and documents submitted before the Prosecutor are sufficient to establish the existence of probable cause, to wit:
1st, the trust receipts bearing the genuine signatures of private respondents; 2nd, the demand letter of petitioner addressed to
respondents; and 3rd, the initial admission by private respondents of the receipt of the imported goods from petitioner.
Prescinding from the foregoing, we conclude that there is ample evidence on record to warrant a finding that there is a
probable cause. It is highly improbable to mistake trust receipt documents for a contract of loan when the heading thereon
printed in bold and legible letters read: ―Trust Receipts‖.
Discussion:
 One of the contention was that this is not a trust receipt transaction because the goods were not held for sale but rather,
they were only allowed to be used by the sister company of Visaland. Visaland itself did not acquire the goods for sale.
 If you remember the Ng vs Pp case- if the goods are not for sale, then it may not fall under a trust receipt transaction
 So what‘s the difference between the Ng vs Pp and this case? Why did SC apply PD 115 in this MBTC case?
 Remember that under the Ng case, the SC said 2 transactions protected under PD 115 –(1) the importation &(2) the
purchase of merchandise by the retailer dealers.
 Here, this was NOT a purchase of merchandise by a retailer dealer. Here, the goods are not for sale. But it was an
IMPORTATION. And here lies the difference between the 2cases.
 So the MBTC case falls within the purview of PD 115. Because again, there was an importation of goods.
 It is NOT THE FACT of the goods not being held for sale NOR THE FACT that it will just be used in the construction
business but rather, it was also the FACT THAT Ng was NOT AN IMPORTER.
 Here, Visaland may not be a retailer-dealer but IT IS AN IMPORTER that‘s why SC applied PD 115
CASE: METROPOLITAN BANK & TRUST COMPANY vs JIMMY GO

Facts:
Metrobank executed a Credit Line Agreement in favour of its client, BGB Industrial Textile Mills, Inc. in the total
amount of P10,000,000.00. As security, private respondent Benjamin Go (now deceased) executed a Continuing Surety
Agreement in favour of Metrobank. Thereafter, respondent Jimmy Go applied for 11 commercial letters of credit to cover the
shipments to which shipments were delivered to and accepted by BGB. Consequently, 11 trust receipts were executed by
Jimmy & Benjamin thru BGB, as entrustees in favour of Metrobank entruster. BGB agreed by the terms to hold the goods in
trust for Metrobank and, in case of sale of goods, to hand the proceeds to the bank to be applied against the total obligation
object of the trust receipts. On maturity date, they failed to satisfy obligation because the goods remain unsold prompting
Metrobank to file 3 complaints of sum of money and later instituted 11 criminal charges for violation of PD115.
Ruling:
In order that respondents Jimmy and Benjamin Go may be validly prosecuted for estafa under Art 315, par 1(b) of the
RPC, in relation to Sec 13 of the Trust Receipts Law, the following elements must be established: (a) they received the
subject goods in trust or under the obligation to sell the same and to remit the proceeds thereof to Metrobank, or to
return the goods if not sold; (b) they misappropriated or converted the goods and/or the proceeds of the sale; (c) they
performed such acts with abuse of confidence to the damage and prejudice of Metrobank; and (d) demand was made on
them by Metrobank for the remittance of the proceeds or the return of the unsold goods. Prosecution for estafa cannot
prosper because the 2nd (misappropriation/conversion) and 4th (demand) elements of the offense are not present.
The trust receipts subject of this case partake of the nature of contracts of adhesion. Being contracts of adhesion, are
not per se invalid and inefficacious. But should there be ambiguities therein, such ambiguities are to be strictly construed
against Metrobank, the party that prepared them
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Discussion:
 The acts that would make an entrustee liable for estafa under the Trust Receipts law are: 1. Failure to remit the proceeds
of the goods – in here, the SC clarified that if there is NO sale, then there is NO failure to remit
 Second, failure to return the goods covered by the letters of credit – SC said there was no failure to return since they
actually offered to inventory and return it but Metrobank did not listen to their offer because Metrobank contended
that all the goods were sold but infact, the gods are just there in the warehouse and all intact.
 So the SC quoted the prosecutors in saying that there was no violation of PD 115 since there are only 2 violations
namely: (1) when the goods are sold and you fail to remit the proceeds, and (2) failure to return the goods
 What about the contention that a Trust receipt transaction or agreement is a contract of adhesion? Will that serve to
invalidate an agreement? NO.
 There was a contention as to when should the Gos offer to return the goods. When does their obligation arise? Is it on
the date of the maturity of the agreement or is it upon demand by Metrobank? The SC pointed out that the Trust Receipt
Agreement was vague as it does not specify when.
 SC said that this Trust Receipt Agreement is a contract of adhesion but it does NOT mean that the contract is void.
 The effect of a contract of adhesion is that it will be strictly construed against the person who caused the ambiguity which
in this case is the one who prepared the contract- Metrobank.
 So the most onerous provision against Metrobank was made as the interpretation. So it is NOT on the date of the
maturity of the agreement but rather, on the DATE OF DEMAND by the Metrobank for the Gos to return the
goods.
 But remember, Metrobank never demanded because it was always their position that the goods were sold. So even if at
the point when the ruling of the SC was made, the goods were not yet returned the court said that it does not matter
because their obligation to return did not arise because Metrobank did not make a demand.
 For you to be held liable for estafa, you do not turn over the goods. Here, the Gos did not turn it over, they only offered.
But the SC said it does not matter because Metrobank never made a demand. No crime of estafa was committed
LANDL & CO. PHIL. INC. vs. MBTC

Facts:
LANDL is engaged in business of selling imported welding rods and alloys. It opened a commercial letter of credit
with Metrobank. To secure the indebtedness, Metrobank required the execution of a trust receipt on the condition that LANDL
would hold the goods in trust for Metrobank, with the right to sell the goods and the obligation to turn over the proceeds of the
sale, if any. If the goods remained unsold, corporation had to return them.
On the maturity date, LANDL defaulted in the payment of its obligation. The goods were sold at public auction, and
the proceeds were insufficient to completely satisfy the obligation. After LANDL failed to pay the balance, Metrobank
instituted the instant case to collect said deficiency.
Ruling:
Respondent bank‘s repossession of the properties and subsequent sale of the goods were completely in accordance
with its statutory and contractual rights upon default of petitioner corporation.
The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the entruster for any
deficiency after the proceeds of the sale have been applied to the payment of the expenses of the sale, the payment of the
expenses of re-taking, keeping and storing the goods, documents or instruments, and the satisfaction of the entrustee‘s
indebtedness to the entruster.
In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporation‘s
indebtedness to the respondent bank. Respondent bank was thus well within its rights to institute the instant case to collect
the deficiency.
Discussion:
 There are 2 instances under PD 115 where the entruster will take possession of the goods
1. If the goods are unsold, entrustee is liable to return the goods
2. Entruster may cancel the trust and take possession of the goods, sell them at a private or public auction. If there is
deficiency, entrustee is liable to pay the deficiency
 In this case, the repossession was under the first instance. So the contention of the buyer was that it is only in the 2 nd
st
instance where the provision on deficiency will apply. In the 1 instance, it does not apply because I‘m just returning the
goods, you are the owner, so I‘m clean, no need for me to pay. My obligation is extinguished. In the 2nd instance, I‘m in
default, so I will have to pay the deficiency. The entrustee sought to differentiate the two instances. Entrustee argued that
the availment of one remedy is distinct.
 SC said the contention is incorrect. In the 1st instance, it does not mean you are just returning the goods to the owner
because the ownership of the entruster is just a legal fiction. It is just there because the entruster holds a security interst
over the goods. Regardless of the nature, this is really a security arrangement. The fiction is created to protect the
entruster
 Thus, you cannot use the legal fiction to say you will not pay because this is just a security arrangement. As a security
arrangement, the proceeds of the sale not sufficient, pay the deficiency
 In the 2 instances (under sec 7), deficiency judgment can be availed of
 SC cited another case in this case of LANDL, saying: ―Contrary to the allegations of the VINTOLAS, IBAA did not become
the real owner of the goods. It was merely the holder of a security title for the advances it had made to the VINTOLAS.
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The goods the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own
risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor.‖
 So even if it owned the goods under the trust receipt, that is legal fiction than fact
 When you return the goods, bank will sell it because of deficiency, you will still be liable because at the bottom of
it, a trust receipt is just a security agreement
DBP vs PRUDENTIAL BANK

Facts:
Litex opened an irrevocable commercial letter of credit with Prudential Bank in connection with its importation of spindles.
These were released to Litex under trust receipts. Litex installed and used the items in its textile mill in Rizal. DBP granted a
foreign currency loan, and this was secured by mortgages. Among the machineries mortgaged were the articles covered by
the trust receipts.
DBP foreclosed the mortgages and acquired the properties. Prudential Bank wrote a letter asserting its claim. Without
knowledge of Prudential Bank, DBP sold the Litex textile Mill as well as the machineries to Lyon Textile Mills. Prudential Bank
filed a complaint for sum of money with damages against DBP.
Ruling:
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 and that he must have the free disposal of his
property.
Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. 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. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. DBP merely
stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their value or to return them on
Prudential Bank's demand. By its failure to pay or return them despite Prudential Bank's repeated demands and by selling
them to Lyon without Prudential Bank's knowledge and conformity, DBP became a trustee ex maleficio.
Discussion:
 DBP contended that it was not a trust receipt transaction because the articles were not released to Litex to be sold. The
imported articles were released to Litex to be installed in the textile mill and to be used in its business. It follows that the
transaction was not goverened by the Trust Receipts Law.
 SC said, so what if PD 115 does not apply? There is still a valid trust receipt contract. Even if PD 115 does not apply.
It is still valid because it not contrary to law, morals, public policy, good custom, public order. That contract said
Prudential was the owner of the goods, not Litex
 So when it comes to enforcement of criminal provisions under PD 115, the SC is very strict about it. There are only two
instances, only if you are an importer or retailer
 In enforcing the civil aspect, it is more favorable to the entruster. So the thing here is that it may be you have a trust
receipt transaction that is a valid contract but not a trust receipt transaction under PD 115 that will render the entrustee
liable for estafa. If it‘s just a contract between the parties, the liability is only civil in nature. To be held liable under PD
115, the trust receipt has to be one that complies with PD 115.
 In this case, we are talking about the essence of a trust receipt agreement where entruster remains the owner, therefore
you cannot sell it to another person. SC did not say if PD 115 will apply, but they said the trust receipt agreement was
valid. Under that, the owner was Prudential; therefore you Litex, you had no right to mortgage it
 What if I am the lawyer of DBP and I will argue that under Sec 11 of PD 115 ----
―Section 11. Rights of purchaser for value and in good faith. – Any purchaser of goods from an entrustee with right to sell,
or of 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.
--- the buyer (DBP) has better rights than the entruster. Can DBP validly use Sec 11?
 In order to avail of Sec 11, you have to be a purchaser in good faith. SC said in this case that DBP was not
 More importantly, Sec 11 talks about an entrustee who is a retailer who takes the goods with an obligation to sell
them. In this case, Litex was not a retailer for selling the goods. It took the goods so it can use them on the factory.
Sec 11 will not apply
 Thus, Sec 11 only applies when the entrustee will sell the goods in the ordinary course of his business where he
rd
takes the goods in such terms that he is supposed to sell the goods to 3 parties
 This is just a side discussion because it was not taken up in the case
ROSARIO TEXTILE MILLS CORP. vs. HOME BANKERS SAVINGS AND TRUST COMPANY
Facts:
The bank granted RTMC a credit line of 10M. RTMC availed of this by making numerous drawdowns, each being
covered by a separate promissory note and trust receipt. RTMC failed to pay its loans, thus the bank filed a complaint for sum
of money.
Petitioners theorize that when petitioner RTMC imported the raw materials needed for its manufacture, using the
credit line, it was merely acting on behalf of the bank, the true owner of the goods by virtue of the trust receipts. Hence, under
the doctrine of res perit domino, the bank took the risk of the loss of said raw materials when RTMC‘s premises was
destroyed by a fire.
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Ruling:
It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. The Trust
receipts were mere securities. A trust receipt is a security arrangement which secures indebtedness. There can be no such
thing as security interest that secures no obligation. Thus, petitioners cannot be relieved of their obligation to pay their loan in
favor of the bank.
Discussion:
 This case is just a reiteration of the principle that a trust receipt transaction is just a security agreement. Even if the bank
is made the owner, in reality, it is really the buyer who is the beneficial owner. Thus, the buyer bears the risk of loss.
 So even if the goods are lost, the buyer is still liable to pay the loan obligation
 In essence, the ownership of the bank is a mere security interest. It is a legal fiction.
 There is a new motion for reconsideration ruling of the Narra case; Jan. 28, 2015. It‘s the same, no change. It‘s just a
better ruling, more detailed. But it‘s still the same rule: That the 1st test to apply is always the control test. It‘s only when
you pass the control test, and there is still doubt of the control and beneficial ownership of Filipinos, you apply the
grandfather rule. You don‘t apply the grandfather rule separate from the control test. If you pass the control test, then
that‘s okay. If you don‘t pass it, don‘t apply any test because it‘s useless.
MARCH 18, 2016
GENERAL BANKING LAW (RA 8791)

HISTORY OF BANKS IN THE PHILIPPINES in relation to General Banking Law
 1948: It was only much later that the government attempted to put a structure or regulate the banking system. This
was in 1948 where the Charter of the Central Bank of the Philippines was passed. This Charter took effect
January 3, 1949.
 Jan. 3, 1949: Coincidentally, this was also the same day that the General Banking Act (RA 337) was passed. The
General Banking Act attempted to regulate the establishment of domestic banks and entry of foreign banks; also to
determine the powers of domestic banks and their foreign counterparts. This was the first attempt to regulate the
banking industry
 April 12, 2000: General Banking Law was passed. If you see GBL, it means the current law. So currently, the
operations of bank is covered by the GBL.
What are banks?

Under the GBl, banks are entities engaged in the lending of funds obtained in the form of deposits. Hence, the basic
activities/operations of a bank are: 1. Deposits and 2. Lending (in the form of loans.)
Deposits are obtained from the public. Lending through loans and loaned out to the public.
 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.
2 ASPECTS RECOGNIZED IN GBL based on the declaration of policy (Sec. 2)

1. Vital role of banks in providing an environment conducive to the sustained development of the national
economy
2. Banks have a fiduciary nature of banking that requires high standards of integrity and performance
1. Vital role of banks in providing an environment conducive to the sustained development of the national
economy
Roles of banks that are vital
a. As payment system
 Through demand deposit accounts – the checks, wire transfers. You don‘t have to carry a lot of cash with
you.
b. Vital role in money supply

 the bank can control the money that goes into circulation. It starts with the printing in BSP. The funds are
given to bank. Bank will lend the money. The banks pool together the money in the form of deposits.
Banks affect the supply of money going around.
 In this same way, if BSP determines there is less money circulating, so BSP will now tell banks to lower
interest rates. Tendency now is for people to cash in on their investments products; to get their money back
from banks, thereby increasing money circulation in public
 The policies of banks can expand or contract circulation of money in the public
45
c. As financial intermediaries
Intermediary – the go between. Links the sources of money and the users.
- Banks bring together the source of the funds as well as the users of such funds. People who
have excess cash will deposit their money with the bank. The Bank will turn around and loan
this out to the users of such funds. Pools fund in the form of deposits and lend it to people who
need it.
2. Fiduciary nature of banking that requires high standards of integrity and performance
NOTE: No longer discussed in detail in review since ma‘am directly discussed the cases. The subsequent
discussion on the fiduciary nature is from last year‘s notes.
So there are 3 things that GBL intends to establish with respect to the banking system:
a. There has to be a stable and efficient banking and financial system (Good corporate governance)
 So how is this done? What kind of regulation? The GBL PROMOTES GOOD CORPORATE
GOVERNANCE
1) The GBL requires that a certain number of people must be independent directors. – at least 2
Independent Directors
the BOD of the bank must include independent directors who have no interest. It means that they
will not benefit regardless of how the bank will perform. Why? These are the people that the law
expects will look out for the benefit of the public rather than the performance of the bank.
2) Limitation on DOSRI transactions or lendings.

DOSRI – means Directors, Officers, Shareholders and Related Interest. The GBL sets limits on
DOSRI lending. Under the GBL, banks can only lend to your DOSRI up to 25% of your total loan
portfolio. Anything in excess of that will be invalid.
3) Fit and proper rule

Under the Corporation Code, when the shareholders will elect their directors and officers, as long as
those persons have already qualified (meaning they already have their 1 share each), they can
already start exercising their functions as directors or officers. But that is NOT the case for banks.
Because if you are elected as such, you have to be approved by the Bangko Sentral.
The Bangko Central have this fit and proper rule. They have to ensure that the persons are fit and
proper for their positions. The moment that you are elected, you have to go through BSP approval,
you CANNOT perform your functions right away. This is also required in the GBL.
b. That which is globally competitive, dynamic and responsive (Market Discipline)

 Through MARKET DISCIPLINE which is established in the GBL and which has two aspects namely:
1) Competitiveness
Through the GBL, the law or the state allows the easier entry of foreign banks into the Philippines,
sets up the mode of how banks can be established. They want to establish and promote competition
among banks.
2) Transparency
The GBL requires that financial statements of banks will have to be published because this allows the
public to judge for themselves whether or not they are willing to put their money on that particular
bank. Financial Records of banks are open to public access.
c. Promote and maintain (supervision and regulation/ external governance)

 So it‘s EXTERNAL GOVERNANCE by the Bangko Sentral. If you look at the law, there are many rules
set out by the Bangko Sentral in order to ensure the supervision and regulation.
CASES ON THE BANKING BUSINESS HAS A FIDUCIARY NATURE BECAUSE IT IS IMBUED WITH PUBLIC
INTEREST
TN: THE RULING IS ALWAYS THAT A BANK IS AFFECTED WITH PUBLIC INTEREST. IT IS UNDER THE
OBLIGATION TO TREAT THE ACCOUNT OF THE DEPOSITORS WITH METICULOUS CARE ALWAYS HAVING IN
MIND THE FIDUCIARY NATURE OF THEIR RELATIONSHIP.
46
CASES DISCUSSED DURING REVIEW:
CASE: EQUITABLE PCI VS TAN

Facts:
Tan had an account with PCI. On May 13, he issued a check postdated May 30 in favor of Sulpicio Lines. The latter
deposited the check and the amount was immediately debited by PCI. PCI read and considered the check to be dated
May 3. Tan thereafter issued 3 checks payable to ASELCO but such were dishonored for lack of sufficient funds. As a
result, the electric supply of the 2 power mills was cut off. Tan sued for payment of losses and damages by PCI.
Contention of the bank was that Tan did not write the date properly.
Ruling:
The Court ruled against the bank. A reading of the check would readily show that it was indeed postdated May 30.
The date written clearly appears 5/30/1992. Therefore, the appellee bank and its personnel erred in debiting the
amount of the check even before the check‘s due date.
The law imposes on banks high standards in view of the fiduciary nature of banking. The court finds that its
negligence is the proximate cause of respondent‘s loss. Payment made before the date specified by the drawer is
clearly against the drawee bank‘s duty to its client. The law allows the grant of exemplary damages to set an example
for the public good. The banking system has become an indispensable institution in the modern world and
plays a vital role in the economic life of every civilized society. Banks have attained an ubiquitous presence
among our people, who have come to regard them with respect and gratitude and most of all, confidence. For this
reason, banks should guard against injury attributable to negligence or bad faith on its part. Since the banking
business is impressed with public interest, of paramount importance thereto is the trust and confidence of the
public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity
and performance are even required of it.
Discussion:
 Post-dated check is one where the date of payment is subsequent to the issuance of the check. In this case, it was
issued May 13 and it was supposed to be paid on May 30. Since the bank immediately debited the account, Tan
was then left with insufficient funds to cover for the 3 subsequent checks he issued. As a result, his power was cut
off. Bank‘s contention was that they debited it immediately because of the way he allegedly wrote the date
―5/3/0/1992‖. SC said it is absurd to write a slant between 3 and 0. We‘ll go with the regular way. Thus, the bank is
liable. The bank should have consulted the client first.
 The bank was also assessed for exemplary damages. This is usually awarded against businesses imbued with
public interest
 There is a recognition here that for the banking business to survive, there has to be the trust and confidence of the
public
 This is the reason why there is the FIDUCIARY NATURE banking nature, because the very survival of banks
depends on whether or not the public is willing to put their money in the bank. The bank needs the trust and
confidence of the public. So that is why the bank should act with the highest standard of integrity and
performance is required
KEY POINTS
 The banking business is fiduciary nature because according to Equitable vs. Tan, the bank operates with PUBLIC
INTEREST. It has a vital role in the economy which can only be fulfilled if the bank has the trust and confidence of
the public. And this is why the banks will have to exercise highest standards of integrity and performance
 This high standard will reflect not only on treatment of accounts of its depositors, but also with hiring and
supervision of employees. This is because banks can only act through them. Even if it is the fault of the employee,
the bank can still be held liable.
CASE: WESTMONT BANK VS. RAMOS

Facts:
Ramos had an account with a bank and got acquainted with Tan, the bank‘s signature verifier. Tan offered her a
special arrangement wherein he would place sufficient funds in her account whenever there would be an overdraft to
make sure the checks she would issue would not be dishonored. To guarantee payment for such funding, Ramos
issued postdated checks. One was a stale guarantee check where the date was altered. This and other checks were
dishonored.
Contention of the bank was that it was not at fault. The arrangement between Ramos and the Bank‘s EE is not
sanctioned by the bank and is not part of the banking operations. Ramos is at fault for agreeing with that arrangement
with the EE.
Ruling:
The SC ruled against the bank. The Fiduciary nature of the bank extends to the Ees such that the bank should
ensure that the EEs maintain the high level of performance for it is only through this that the bank may meet and
comply with the fiduciary duty.
Considering that banks can only act through their officers and employees, the fiduciary obligation necessarily
extends to their employees. Banks must ensure that their employees observe the same high level of integrity and
performance for it is only through this that banks may meet and comply with their own fiduciary duty. A bank‘s liability
47
as an obligor is not merely vicarious, but PRIMARY since they are expected to observe equally high degree of
diligence, not only in the selection, but also in the supervision of employees. Thus, even if it is the employee who
is negligent, the bank‘s responsibility to its client remains paramount making its liability to be a direct one.
Discussion:
 EVEN IF THE DEPOSITOR IS AT FAULT, THE BANK MAY STILL BE HELD LIABLE. THE FIDUCIARY NATURE
EXTENDS TO OPERATIONS, TREATMENT OF THE ACCOUNTS AND ALSO WITH THE HIRING, PROMOTION
AND FIRING OF EES.
 Note that: The arrangement was not sanctioned by the bank. It was a private arrangement between Ramos and
Tan.
 Note that: the check deposited was a stale check. This is one which has not been enchased within 6 months from
its issuance. When a check is stale, the drawee bank is not supposed to accept the check anymore. However, Tan
was able to encash it. He changed the date of the check to make it current. Ramos questioned it because she did
not consent to the change of date.
 The bank said that the arrangement was between Tan and Ramos, the bank had nothing to do with it. This is
actually against the rules of the bank. Tan was guilty of misconduct, but the bank is still responsible.
 The fiduciary nature is also with respect to hiring and supervision of employees, because banks can only act
through its officers and employees. Necessarily, the fiduciary nature extends to them. The bank, then, must
make sure that in the hiring, selection and supervision, it must also exercise a high standard.
CASE: TAN VS CA
Facts:
Tan was travelling to Manila, and to avoid carrying cash, he secured a cashier‘s check from PCIB Puerto
Princesa branch and deposited the check with his account in RCBC Binondo. It was an out-of-town check. When he
deposited it, he used a local check deposit slip, which resulted to the check being sent to the clearing house. It was
misrouted. A local check is one issued and deposited in the same territory. It was returned for being ―missent‖. RCBC
debited the amount from account of Tan without informing him. Believing that the check was deposited since it was a
manager‘s check, he issued 2 checks which were returned for insufficiency of funds. Tan alleged to have suffered
humiliation and loss of face and sued the bank.
Bank said it was not at fault but the depositor‘s for using the wrong deposit slip.
Ruling:
The SC ruled against the bank. The depositors do not pretend to be masters of bank technicalities nor of
clearing procedures. As soon as the deposit is accepted, it‘s already there ready for use. The bank teller should not
have accepted it when it saw that Tan used the wrong deposit slip.
Respondent bank cannot exculpate itself from liability by claiming that the depositor ―impliedly‖ instructed it to
clear his check by filing a local deposit slip. In Citytrust vs. IAC, it was ruled that depositors are not concerned with
banking procedure. That is the responsibility of the bank and its employees. Bank clients are supposed to rely on
the services extended by the bank, including assurance that their deposits will be credited to them as soon as they are
made.
Discussion:
 SC said in the first place, the teller should not have accepted it because your teller is expected to know the internal
rules. The client is not expected to know the same.
 The client was not held at fault and the bank was held liable for damages
 A mistake made by the client does not necessarily mean that the bank can be exempted from liability
 This is still because of the fiduciary nature of banking. They are expected to exercise a high degree of diligence
TN: UNDER FIDUCIARY DUTY, THE BANK IS REQUIRED TO TREAT THE DEPOSITS WITH METICULOUS
CARE. BUT THE FIDUCIARY DUTY DOES NOT ONLY EXTEND TO THE TREATMENT OF THE ACCOUNTS BUT
ALSO THE HIRING, PROMOTION AND FIRING OF THE BANK‘S EES. IT IS REQUIRED TO EXTEND DILIGENCE
MORE THAN THAT OF A GOOD FATHER OF A FAMILY.
EVEN WHEN THE DEPOSITOR IS NEGLIGENT OR AT FAULT, THE BANK WILL STILL BE HELD LIABLE, IF AT
THE FIRST INSTANCE, THE BANK WOULD HAVE THE OPPORTUNITY TO CORRECT THE MISTAKE.
CASE NOT DISCUSSED IN SCL REVIEW BUT COVERED IN 3RD YEAR
CASE: CENTRAL BANK VS. CITYTRUST

Facts:
One of Central Banks‘ tellers, Flores, presented for payment to petitioner‘s senior teller Iluminada 2 Citytrust
checks, payable to Citytrust, both signed and indorsed by Citytrust‘s authorized signatory-drawers. The signatures were
verified against the specimen signatures. Flores signed as ―Cayabyab‖. The cash transfer slip was approved and paid.
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More than a year and 9 months later, CItytrust demanded Central Bank to restore the amounts alleging that the checks
were already cancelled because they were stolen.
Ruling:
Central Bank is the government body mandated to supervise and regulate banking and other financial institutions.
The law imposes on banks high standards in view of the fiduciary nature of banking. The bank is under obligation
to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their
relationship.
This fiduciary relationship means that the bank‘s obligation to observe high standards of integrity and performance
is deemed written into every deposit agreement between a bank and its depositor.
Discussion:
 The SC here cited the case of Simex vs CA, wherein it was ruled that the bank is under obligation to treat the
accounts of its depositors with meticulous care. So even if that person is a long-time contact of the bank, it does
not excuse the bank‘s negligence in making sure he signed under the correct name
 Central Bank said that you can‘t fault us because you authorized this person who‘s worked with you for 5 years. We
already know him. But SC said that does not excuse you. No matter how long you transacted with this person, each
transaction will still have to be meticulously examined. This is under the fiduciary nature of banking.
 So one aspect of fiduciary nature of banking is that the bank will have to observe the highest integrity and
performance with respect to treatment of accounts of its depositors
CLASSIFICATION OF BANKS
SECTION 3. Definition and Classification of Banks. —

3.1. "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits.(2a)
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)
1. UNIVERSAL BANKS
 It is an expanded commercial bank. Why? It performs the functions of a commercial bank PLUS the functions of
an investment house and invest in non-allied enterprises.
 Sundiang: Banks that have authority to exercise, in addition to the powers and functions of commercial banks,
powers of an investment house and the power to invest in non-allied enterprises
 Investment house: an entitiy which undertakes to sell the securities of the issuing companies. What sets it
apart is that it guarantees the sale of these securities. It acts as an underwriter of these securities. They
guarantee that these securities will be sold.
 Banks can invest in allied enterprises, which can be financial or non-financial; or non-allied enterprises.
 Non-allied means that the operation is not related to banking at all, like a real estate company, or construction
 Only universal banks can invest in non-allied enterprises
2. COMMERCIAL BANKS
 Sundiang: Banks that are given all such power necessary to engage in commercial banking in addition to
general corporate powers; commercial banking includes the power to accept drafts, issue letters of credits,
discounting and negotiation of negotiable instruments and evidence of debt, accept and create demand
deposits and the like
 Allowed to do all the activities ordinarily allowed to a bank. They perform ordinary banking functions such as
deposits, loans, accepting drafts, accepting negotiable instruments, discounting nego instruments, opening
accounts, granting letters of credits. Universal banks can also do these.
3. THRIFT BANKS
 Sundiang: Include or classified as savings and mortgage banks, private development banks, and stock savings
and loan associations
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 They are geared towards ordinary Filipino entrepreneurs such as small and medium entrepreneurs- the middle
class. Those who do not need much capital can instead go to a thrift bank instead of universal banks. Provide
credit tailored-fit to their needs.
4. RURAL BANKS
 Banks which are usually found in the provinces for the purpose of promotion of rural development
5. COOPERATIVE BANKS
 Primarily provide financial, banking and credit services to cooperative organizations and their members.
6. ISLAMIC BANKS
 Made in accordance with RA 6848
Classifications are needed to know which bank can provide those tailor-fit to the needs such as lower interest rates or
accommodations. These banks are necessary to make sure that all banking needs of the public are addressed. That is
why there are classifications.
ORGANIZATION OF BANKS
To organize a bank, you need THREE (3) PERMITS FROM THE BSP:
1.AUTHORITY TO ORGANIZE
2.AUTHORITY TO REGISTER
3.AUTHORITY TO OPERATE
An ordinary corporation has 1 franchise from the SEC- the certificate of registration that is basically a document that
proves that it is a juridical person that which is alive. But how many franchise/es does a bank require?
2 franchises
1) Primary –Certificate of registration of SEC
2) Secondary- banking license, Certificate of authority to operate
1. CERTIFICATE OF AUTHORITY TO ORGANIZE / ESTABLISH (Sec. 8 of the GBL)
You apply first to the MONETARY BOARD with the BSP. What is needed before the monetary
board issues this certificate? Applicant must first intend to organize a stock corporation (meaning
the capital is divided into shares and can distribute surplus profits as dividends pursuant to Sec. 3
of the Corporation Code) because at this point, there is no corporation yet. Second, it intends that
its funds are obtained from the public (which shall mean 20 or more persons). Third, the
minimum capital requirement prescribed by the Monetary board for each category of banks are
satisfied (which means the paid-up capital stock). The authorized capital stock is the maximum, the
portion of the authorized capital owned by the stockholders is the subscribed capital stock and the
portion of the subscribed capital which is actually paid is the paid up capital stock.
Aside from these things, the BSP shall also assess the banks‘ ownership structure, directors and
senior management, its operating plan and internal controls as well as its projected financial
condition and capital base. If it finds everything in order, all the requirements under section 8, the
bank will then issue the certificate.
2. CERTIFICATE OF AUTHORITY TO REGISTER (Sec. 14 of the GBL)
In your application, you must submit your organizational documents. These are the AOI, the by-
laws and treasurer‘s affidavit the documents that you need to organize a corporation. This the point
when you can accept payment for subscripitons, deposit for future subscriptions. The BSP through
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the Monetary Board will examine these organizational documents and once it finds that everything
is in order based on Sec.14, it will issue the certificate of authority to register.
CERTIFICATE OF INCORPORATION OR REGISTRATION – PRIMARY FRANCHISE ***
Take note that the SEC is mandated both under the Corporation code and the General Banking
law not to approve the application of an entity which will engage in banking functions without a
certificate of authority to register from the Bangko Sentral. Once the SEC finds that everything is in
order, it will then issue the certificate of incorporation – the primary franchise. It gives life to a
juridical entity but not yet as a bank. After SEC, you have to go back to BSP to get your authority to
operate.
3. CERTIFICATE OF AUTHORITY TO OPERATE – SECONDARY FRANCHISE *** (Sec. 6 of the

GBL) – this is your banking license and it is only upon issuance of this can a bank operate the banking
or quasi-banking functions. It is ILLEGAL to operate as a bank without this authority from the BSP.
The law provides that no entity shall provide banking or quasi-banking functions without the authority
from the BSP.
Who has power to determine whether the entity is engaged in banking or quasi-banking functions?
The MONETARY BOARD (MB). The law provides that the determination whether the entity is engaged
in banking or quasi-banking functions shall be decided by the monetary board. To resolve this issue, the
MB may examine, inspect the books and records of such person or entity if it has received deposits
from MORE THAN 20 PERSONS. In this case, you are already acting as a bank and if without authority
to operate, they can bring a criminal case against you. They can also administer oaths to compel a
person to produce the records or testtify to determine whether the entity is engaged in banking or quasi-
banking functions.
Take note under Sec. 6, the Monetary Board is also authorized to:
 examine, inspect, or investigate the books and records of any such person or entity,
 administer oaths
 compel the presentation and production of books, documents, papers or records
From last year’s notes but not mentioned in review:

 But what happens if a corporation without getting this certificate of authority to operate will
start accepting deposits? Who is authorized to determine WON entity is engaged in
banking functions? Take note that a corporation without a banking license cannot operate
as a bank, but it does not really stop people from acting as banks even without license. So
the monetary board can determine, and if it finds that a certain entity is engage without
license, it can go to court and penalize that person/entity. The power of the monetary
board is ONLY TO DETERMINE whether or not a person/ entity is engaged in banking
functions. If it determines that is a violation of GBL and Central Bank Act for which there
are penalties, of course the Monetary board CANNOT IMPOSE THESE PENALTIES - so
the Monetary board will have to go to COURT to get the sanctions.
SHAREHOLDINGS OF THE BANK
Who are allowed to own stocks in banks?
For foreigner, distinguish if bank or nonbank. Obviously, if individual, non-bank.

Foreign
 Bank – Sec11 does NOT APPLY; RA 10641 applies (Foreign Bank Act)
 Non-Bank- Sec 11 applies
 Individual
 Corporation
SECTION 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)
TN: 40% LIMITATION APPLIES TO VOTING STOCS.
What about Filipinos? Filipinos are also limited to 40% because the law says in Sec. 11 ―This rule shall apply to
Filipinos and domestic NON-bank corporations‖
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Is there a difference between the treatment of foreigners and filipinos? The 40% for FOREIGN INDIVIDUALS AND
NON-BANK COPORATIONS is an INDIVIDUAL AND AGGREGATE CEILING. Meaning, the total shareholdings of
foreign individuals and non-bank corporations in banks are only to limited to 40% individual and aggregate ceiling.
BUT FOR FILIPINOS, the 40% limit is only AN INDIVIDUAL BUT NOT AN AGGREGATE LIMIT. Meaning, a bank can
be owned by Filipino A 40%, another 40% by Filipino B, another 40% by Filipino C. WHEREAS, A AND B are
foreginers, TOGETHER, their stockholdings can only be 40% combined. A, a foreigner, alone 40%, he is allowed. If B
comes in with 1%, he is no longer allowed. This interpretation is found in the MORB.
SUMMARY:
Foreign individual and non-banks – 40% limitation is individual and aggregate
Filipinos and non-bank domestic corporations – 40% limitation is individual NOT aggregate
Filipino
 Bank –Sec 11 does NOT apply; GBL(certain provisions apply)
 Non-Bank- Sec 11 applies
 Individual
 Corporation
What about stockholdings of family groups and related interests? Meaning, you have Filipino A with 40% and his son
owning another 40%. Is that allowed? Yes under sec. 12. It is not prohibited but should be disclosed.
SECTION 12. Stockholdings of Family Groups or Related Interests. — Stockholdings of individuals related to each
other within the fourth degree of consanguinity or affinity, legitimate orcommon-law, shall be considered family groups
or related interests and must be fully disclosed in all transactions by such an individual with the bank.
Same rule with respect to corporations owned and controlled by the same family group. Example: Family group of Yu
owning Corp. A and also owning Corp. B. A and B will have 40% EACH. It is allowed. Not grouped together. But any
transaction MUST BE DISCLOSED.
We said earlier if Corp A is owned by Family Group A and also own Corp. B. Corp A can own up to 40% and also Corp
B even if they have the same owners under Section 13.
SECTION 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.
But what if instead of the same family group owning Corp A and Corp B, it is owned by individual, Mr. A. Can Corp A
own 40%, Mr. A also own 40%? The MORB says NO. An individial and a corporation which are wholly owned or
majority of the voting stocks of which is owned by him may only own up to a COMBINED 40%.
Summary:
If corporation is owned by family group – NO LIMITATION
If corporation is owned by an individual – that corporation and that individual TOGETHER WILL ONLY OWN UP TO
40%. It is aggregated.
It also matters if the investor is a bank or nonbank. The 40% limit applies only to NONBANKS. If banks, Section 25
applies.
SECTION 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.
What about another universal (UB) or commercial bank (KB)? It can own up to 100% PROVIDED that the investor that
the UB is a PUBLICLY LISTED BANK.
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100% of the equity in a thrift bank, a rural bank or a financial allied enterprise but if the investee is another UB or KB,
the UB investor will have to be a PUBLICLY LISTED BANK to own 100%. If not publicly listed bank, it can only own
49% interest – MINORITY.
What about a commercial bank? Same rule. 100% of %) of the equity in a thrift bank, a rural bank or a financial allied
enterprise. But what about another UB or KB, can a KB own another UB or KB? Go back to Sec. 25, it says 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.
So a publicly listed KB can own 100% of the voting stock of another UB or KB. Requirement is publicly listed. If not
publicly listed, can only own 49% minority interest of the other UB or KB.
What about FOREIGN BANKS as investors? In July 15, 2014, RA10641 was passed allowing foreign banks to own
100% of the voting shares of a domestic bank or a subsidiary. It can even establish branches in the Philippines. Before,
it was only up to 60%. Now, 100%.
Summary:
The rules on banks and nonbanking investors are different.
 40% limit on voting stock applies only for nonbanking investors.
o Foreign individual and non-banks – 40% limitation is individual and aggregate
o Filipinos and non-bank domestic corporations – 40% limitation is individual NOT aggregate
 100% (no limit) if investor is a bank
One of the modes of entry is purchashing 100% the equity of an existing bank. What happens if the existing bank is a
landholding bank. Can the foreign bank own 100% of the voting stocks?
―Landholding‖ because banks always foreclose real properties and titles are transferred to name of the bank since land
was not redeemed. Can the foreign bank acquire 100% of the voting stock of the existing bank?
Answer: If that existing bank is a landholding bank, you consider the restrictions on corporations owning land. So the
MOST the foreign bank buy in is NOT even 60%. ONLY 40%.
Actual case: Woori Bank of Korea intend to buy majority (51%) of the voting stocks in Wealth Bank. The problem was
Wealth Bank was a landholding bank. Before BSP will alow the investment of 51%, BSP said get rid of the land first
because a foreign bank, being a foreigner, cannot own more than 40% of a landholding company be it a bank, nonbank
or whatever company. It is a separate requirement.
Query:
Will there be an effect on the mortgages of the bank?
Yes. When a foreign bank established operations in the Philippines, can it accept mortgages? Yes, they are allowed
being an important part of banking operations to secure the loans. They are allowed to enter into real estate mortgages.
Are they allowed to participate in the bidding of the foreclosure sale? Yes, they are allowed BUT THE TITLE WILL NOT
BE TRANSFERRED TO THE NAME OF THE BANKS AND THEY ARE GIVEN 5 YEARS TO GET RID OF THE REAL
PROPERTY.
If a foreign bank comes in, the domestic bank has to get rid of its real property before the foreigned will be allowed
more than 40% participation by a foreign bank.
NB: Subsequent discussion italicized is from last year’s notes reiterated for convenience since Ma’am had a more
detailed discussion then.
What do you mean by a domestic bank?

It is a bank incorporated in the Philippines. It does not say anything that it is Filipino or
Foreign owned. It simply means it is incorporated under Philippine laws.
 For Filipinos, 40%. So for example Mr. A is a foreigner owning 40% of the share of XY Bank, then here
comes Z corporation which is another foreign corporation wanting to own 40%, allowed? BOTH are foreign. Another
example- all Domestic B corporation & P corporation, both each 40% of 123 Bank. Allowed? The basis will now be
Section X126.1 of the Manual of Regulation for Banks (MORB).
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 For foreign Individuals & Nonbank Corporation, each may own or control 40% of a Universal (UB),
Commercial (KB) & Thrift (TB) Banks. Provided that the aggregate shall NOT exceed 40% of the UB/KB & 60% of
TB. For non Filipino citizens, each/in aggregate may own 60% (Sec X126.1a).
 For Filipino individual &domestic nonbank corporation may each own up to 40% of UB, KB or TB and up to
60% of RB. No ceiling on aggregate ownership by such in a domestic bank (Sec X126.1c). So Mr. B can own up to
40% and another Filipino corporation can get to own another 40%. Together, there can be 80% because there is no
limit in their aggregate shareholdings.
 How can you determine that it is a foreign nonbank corporation?

It is important to know WON corporation is foreign or Filipino because if it is foreign, there is an aggregate limit. But
if it is Filipino, it has no aggregate limit. According to Section X126.1 i(2) the citizenship of the corporation, which is
a stockholder of a bank shall follow the citizenship of the controlling stockholders of the corporation,
irrespective of the place of incorporation.
 What do you mean by controlling or how much is controlling?

Section X126.1 i(2) says further that the term controlling stockholders shall refer to stockholders holding more than
50% of the voting stock of the corporate stockholders of the bank. Take note that this is quite peculiar because in
other laws, particularly in the Foreign Investment Act, limit is 60% for a corporation to be considered as Filipino. So
in the MORB, if Filipino ownership is more than 50% let’s say 51%, that will qualify and will not require them to have
an aggregate limit. If foreign shareholding is more than 50%, that corporation will be subject to an aggregate limit.
If Z corporation, take a look at who are the shareholdings of Z, if shareholders of Z is more than 50% foreigners, Z
is a foreign shareholder and subject to the aggregate limit. If P corporation has a shareholding of 51% Filipinos, it is
a Filipino citizen, not a foreign corporation and is not subject to the aggregate limit.
 What about stockholdings within family groups or related interest?

If B is married to C, can B own 40% of a bank? Yes. Can C own another 40% even if they are related to each
other? Yes. According to Section X126.1f, individuals related to each other within the 4th degree of consanguinity
or affinity, whether legitimate, illegitimate or common law, shall be considered family groups or related interests
but may each own up to 40% of the voting stock of a UB, KB or TB and up to 60% of the voting stock of RB.
Provided that said relationship must be fully disclosed in all transactions by such individuals or family groups or
related individuals.
 Situation 1. Corporation X owned by A & B, another Corporation Y, also owned by A & B, can corp X own
40%? Yes. Can corp Y own also 40%?
Pursuant to X126.1g, Two or more corporations owned or controlled by the same family group or same group
of persons shall be considered related interest but may each own up to 40% of the voting stock of a UB, KB or
TB and up to 60% of a RB. Provided that said relationship must be fully disclosed in all transactions by such
corporation or related groups of persons with the bank.
 Situation 2. A owns 40% of a bank, A fully owns X corporation, and X corp wants 40% again of the same
bank. Can this be done?
Pursuant to X126.1d, an individual and a corporation or corporations which are wholly-owned or majority of the
voting stock of which is owned, by him, may own only up to a combined 40% of the voting stock of a UB, KB, or TB,
and up to a combined 60% of the voting stock of a RB.
 What’s the difference between the first situation and the second?
In the 1st situation, corporations are owned by groups of persons although they are considered as related interests,
there is still a group and not just one individual. In the 2 nd situation, we are only talking about 1 individual and a
corporation wholly owned by him. In which case, the law considers them as one, with a combined limit of 40%.
OPERATIONS OF THE BANK
 Banks can only issue PAR value stocks. Cannot issue stocks with no par value. Banks can issue any kind of
stocks authorized by the Monetary Board. The Monetary Board does not set any kind of prohibition. It can be
common, preferred, redeemable, convertible, etc. The only requirement under the GBL is that the stock must be a
par value stock which means that the value of the stock must be stated in the articles of incorporation of the bank.
 Are banks allowed to reacquire their own shares? Create treasury shares?
The general rule is NO, they aren‘t allowed. But they can do it with the authority of the Monetary Board. But if in
fact they do have treasury shares, they must dispose them within 6 months from the time of its purchase or
acquisition, be sold or disposed of at a public or private sale (Section 10 GBL).
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 Directors are at least 5 and a maximum of 15 except when there is a merger or
consolidation in which case, not more than 21. TWO (2) of the Directors must be INDEPENDENT
DIRECTORS. A merger happens when 2 corporations combine or 1 is absorbed by another.
 TN: When a bank elects directors, the election does not take effect until the Monetary Board has
presecribed, passed upon and reviewed the qualifications and disqualifications of the individuals
appointed as bank directors or officers. Unlike in ordinary corporations where the election of directors
become effective right away. In a bank, the election becomes effective only upon approval of the
monetary board (FIT and PROPER RULE).
STOCKS ISSUED BY THE BANK

 Banks can issue any kind of stocks authorized by the Monetary Board. The Monetary Board does not set any
kind of prohibition. It can be common, preferred, redeemable, convertible, etc. The only requirement under the GBL
is that the stock must be a par value stock which means that the value of the stock must be stated in the articles
of incorporation of the bank.
 What are Treasury stocks?
These are stocks that have been issued and fully paid for but then are reacquired by the bank.
 Are banks allowed to reacquire their own shares? Create treasury shares?
The general rule is NO, they aren‘t allowed. But they can do it with the authority of the Monetary Board. But if in
fact they do have treasury shares, they must dispose them within 6 months from the time of its purchase or
acquisition, be sold or disposed of at a public or private sale (Section 10 GBL).
DIRECTORS AND OFFICERS (not discussed in review – From last year‘s notes)
 Under the Corporation law, the directors of a corporation will exercise the powers of the corporation granted
through its articles, they will conduct the business of the corporation, and hold the properties of the corporation.
Basically, a corporation acts through its directors.
 Of the BOD, how many should be independent?

The law says 2, but the MORB says at least 20% but not less than 2. So if the bank has 5 directors, 20% of that
is 1, but the minimum is 2, so there should be 2 independent directors. If the bank has 15 directors, 20% of that is
3, minimum is 2, so there should be 3 independent directors. It can‘t have 2 because the limit is at least 20%. Can
it have 4? Yes, because the 20% is just the minimum.
 When can you consider one as an independent director?

The general rule under Section 15 of the GBL is that it shall mean a person other than an officer or employee of
the bank, its subsidiaries or affiliates, or related interests. However, this is expanded under the MORB, a
person who will be elected as an independent director must not be retained as a professional adviser, consultant,
agent of the bank or of the related companies of the bank (For full definition See X141.2b of the MORB)
Moreover, a shareholder with shares of stock sufficient to elect 1 seat in the board of directors of the institution, or
in any of its related companies or of its majority corporate stockholders shall NOT be qualified to be an independent
director pursuant to X141.2b (3). For example, I am a shareholder of a bank with such number of shares that I can
elect myself to the bank to be a director then I am NOT qualified to be an independent director. In your Corporation
law, you will learn how voting of directors is done, it is through what we call as a cumulative voting which means the
number of shares you have multiplied by the number of seats in the board. So if that number of votes will allow you
to vote yourself at least 1 seat in the BOD, you are not allowed to be a director. Meaning your shareholdings must
NOT qualify you as a director.
 What‘s the term of an independent director?

They shall only serve for ONE term. The term of an independent director is 1 year, you have to be elected again
for another year. But an independent director can be elected for 5 consecutive years. If he has been elected for 5
consecutive years, he CANNOT be elected on the 6th year, or 7th year. On the 8th year he CAN after what we call
the 2 years cooling off period, and can serve for another 5 years, so a total of 10 years of service. However, to be
allowed another 5 years, you must not have done something during the 2 year cooling off period that would
disqualify you from being an independent director.
For example, after you have served full 5 years, you have acted as an adviser to the bank during the cooling off
period, you will no longer be qualified for the next 5 years. Moreover, if an independent director has elected and
served for only 1 year, then after that he has not been elected the 2 nd year, then in the 3rd he CAN be elected
subsequently or thereafter. There‘s no prohibition. Since what the law requires is when an independent director has
served for 5 consecutive years, then there‘s the cooling off period. If you serve for every other year, the cooling off
period will NOT be required. But you can only serve a total of 10 years but no cooling off period.
 The fit and proper rule as discussed earlier is part of the corporate governance requirements for banks
under the GBL. The Monetary Board is given the power to prescribe, pass upon and review the
qualifications and disqualifications of individuals elected or appointed as bank directors or officers. And
disqualify those found unfit. As mentioned before, in an ordinary corporation, once you elect your directors and
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officers- that‘s it. No other act is required. But for banks, once elected they have to submit their bio data and
resume of all their elected directors to the Bangko Sentral who will say whether or not such are qualified are
disqualified. So without approval of the Monetary Board, the directors or officers cannot start their duties as such.
 The QUALIFICATIONS of the director as found in X141.2a include:

o At least 25 years of age at time of election or appointment
o At least a college graduate or have at least 5 years of experience in business
o Have attended a special seminar on corporate governance
o Must be fit and proper
 DISQUALIFICATIONS
o Permanent- Basically, grounds are the same as the temporary. Permanent is if the
conviction or if found guilty by final judgment.
o Temporary- If there‘s a pending appeal.
o If there‘s a criminal case for estafa filed against Mr. A, he CAN be qualified as a director
because there is NO JUDGMENT yet. But the moment he is found guilty, he becomes
temporarily disqualified. If he appeals during the duration of his appeal, his disqualification
will remain. If the ruling is affirmed by the appellate court, once the ruling becomes final
because it‘s affirmed, his disqualification becomes permanent. But if he is acquitted, then his
disqualification is removed. So the mere filing of a criminal case will not disqualify.
 Take note that public officials are NOT allowed to become directors or officers of the bank except
as stated in section 19- where such service is incident to financial assistance given by the
government.
BANK BRANCHES
WHAT YOU NEED TO REMEMBER IS THE ONE UNIT RULE (SEC. 20)
SECTION 20. Bank Branches. — Universal or commercial banks may open branches or other offices within or outside
the Philippines upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the
presentation and/or sale of the financial products of its allied undertaking or of its investment house units.
A bank authorized to establish branches or other offices shall be responsible for all business conducted in such
branches and offices to the same extent and in the same manner as though such business had all been conducted in
the head office. A bank and its branches and offices shall be treated as one unit.
The liability of a branch is considered as the liabiity of the head office. One unit rule.
Further, section 20 provides : ―bank may, subject to prior approval of the Monetary Board, use any or all of its branches
as outlets for the presentation and/or sale of the financial products of its allied undertaking or of its investment house
units.‖ In connection, you have the new Insurance Code that allows bancassurance. If there‘s an Insurance Co. and it‘s
an affiliate of the bank, it can sell its product within bank premises. If the insurance company is a third person, not
related to the bank, it CAN sell pursuant to Sec. 375 of the Insurance Code (R. A. 10607).
Section 375. The term bancassurance shall mean the presentation and sale to bank customers
by an insurance company of its insurance products within the premises of the head office of such
bank duly licensed by the Bangko Sentral ng Pilipinas or any of its branches under such rules and
regulations which the Commissioner and the Bangko Sentral ng Pilipinas may promulgate. To
engage in bancassurance arrangement, a bank is not required to have equity ownership of the
insurance company. No insurance company shall enter into a bancassurance arrangement unless it
possesses all the requirements as may be prescribed by the Commissioner and the Bangko Sentral
ng Pilipinas.
"No insurance product under this section, whether life or non-life, shall be issued or delivered unless
in the form previously approved by the Commissioner.
 If there‘s an Insurance Co. and it‘s an affiliate of the bank, it can sell its product
within bank premises. If the insurance company is a third
 Take note that under this rule, it states ‗any insurance company‘ so an
insurance company is allowed even if it‘s not an allied enterprise or undertaking.
 But of course, subject to the rules and regulations which the
Commissioner and the Bangko Sentral ng Pilipinas may promulgate but no such rule has
been promulgated yet. So this provision is not yet in effect. But technically, this Section 375
amends Section 20 of the General Banking Law. But we don‘t know yet the rules that will be
set by the Commissioner and the Bangko Sentral.
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 Cross-Selling is the process of selling or presenting the financial products within the banking
premises. It‘s when you present the products of the allied undertaking or investment house within
bank premises.
 Bancassurance if presenting insurance products.
 Pursuant to Section 20, Bank branches are allowed to be used as outlets for the presentation or sale of the
financial products of its allied undertaking or of its investment house units.
 Allied Undertakings are those enterprises which are related to the operations of the bank such as
credit card companies, insurance companies, lending institutions and finance companies.
 The rule is that these allied enterprises or allied undertaking of banks can present their products within the
banking premises or within the bank office. It has to be an allied undertaking – an affiliate or subsidiary of the bank.
 For example, X bank. Can it sell the products of its affiliate finance company of car loans? Can car loans be
presented in X bank offices? Yes, because it is a product of an allied undertaking of the bank. The finance company
is related to the bank, an affiliate of the bank.
 What if the finance company is not related or is a third person in relation to the bank, can it sell its product
within bank premises? No.
Basic Functions of a Bank
1. Deposit functions
- Deposit (definition is not found in the GBL but in the PDIC charter, paragraph F)
The term ―deposit‖ means the unpaid balance of money or its equivalent received by a bank in the usual course of business
and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account, or issued in
accordance with Bangko Sentral rules and regulations and other applicable laws, together with such other obligations of a
bank, which, consistent with the banking usage and practices, the Board of Directors shall determine and prescribe by
regulations to be deposit liabilities of the bank; Provided, that any obligation of a bank which is payable at the office of the
bank located outside of the Philippines shall not be a deposit for purposes of this act or included as part of the total deposits
or of insured deposit: Provided, further, that 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.
- So nature of deposits, if you remember the definition of a deposit in the Civil Code is different from deposit
under the banking laws. Deposit, as defined in the Civil Code, is when you give something to another for the
purpose of safekeeping it and the obligation to return the same thing. This is not the definition of deposit under
the General Banking Law (GBL), because in reality, the deposit under the GBL is actually mutuum under the
Civil Code. It is considered as SIMPLE LOAN, that‘s why in case of:
- GUINGONA vs CITY FISCAL of MANILA:
- Guingona, Martin and Santos were charged with estafa and violation of central bank circular and other related
regulations regarding foreign exchange transactions
- Will the case of estafa prosper?
- NO. When private respondent invested his money with the bank, the contract that was perfected was a contract
of simple loan or mutuum and not a contract of deposit. The ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its
banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the
obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money
that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through
misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to
civil liability over which the public respondents have no jurisdiction.
(Atty: so in the same nature of a loan, when you loan something, mutuum, the ownership of that amount goes to
the borrower and the borrower will use it in whatever means it sees fit. You can burn it, bury it. Whatever. But,
eventually, the borrower will have to return something of equivalent value, not the same thing. So as long as he
was able to pay back his loan, it doesn’t have to be that same currency, same serial number of the money. You
just return the equivalent value. Okay? So, failure of the bank to return the amount deposited will not constitute
estafa but will only give rise to civil liability over which the public respondents have no jurisdiction. Public
respondents here is the prosecutor, the fiscal because he is only concern with the criminal case but not with the
civil case)
CONSOLIDATED BANK vs CA
- The case of Diaz accounting firm. Remember this case, the messenger went to the bank, left the passbook,
upon return, it was not there anymore because somebody else got the passbook, withdrew the money.
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- The Supreme Court mentioned that the fiduciary nature of a bank-depositor relationship does not convert the
contract between the bank and its depositors from a simple loan to a trust agreement, whether express or
implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. The
law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations
under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple
loan.
- Atty: So the fiduciary nature of banking, one of the aspects recognized in the GBL does not convert a deposit
from a loan to a trust. Failure to pay deposit is not a breach of trust which will constitute estafa. It is a mere
failure to pay a simple loan. However, in this case, the bank was held liable for damages for negligence but
there is no criminal case (atty said this just an Obiter).
WESTMONT BANK vs TAN
-This is a case where Tan made a deposit in the bank and the bank informed him that the check was already
credited to his account so he withdrew the amount. But apparently, the check bounced. So what the bank did, it
automatically deducted the amount from Tan‘s account. Tan thinking that he has money, he started issuing checks
but the checks bounced because deductions were already made in his account. One of the issues in this case is
WON the bank has authority to deduct the amount.
- The SC said YES because the deposit is a LOAN and when the check bounced, Tan became a debtor of the
bank. Tan was a creditor with respect to his deposit but when the check bounced he also became a debtor of the
bank. So there now exists a relationship of being creditor and debtor of each other. So can there be compensation?
YES because the relationship between a depositor and a bank is creditor- debtor. But the bank was held liable for
damages because of the manner which it did the set-off. It did not inform Tan. But ordinarily, set-off is allowed.
What was penalized in this case was the manner on how it was done-- without informing Tan.
CENTRAL BANK vs MORFE
- This is the one where the bank is under liquidation but before it can file the couples sued the bank and obtained
a judgment thereby making their deposits preferred credits. Can they do that?
- Atty:The Supreme Court said they cannot do that because deposits in the first place are just ordinary
credit/simple loans. They are not preferred and you cannot just make it preferred by bringing a case when the
bank is about to undergo liquidation.
- The Supreme Court held that considering that the deposits in question, in their inception, were not preferred
credits, it does not seem logical and just that they should be raised to the category of preferred credits simply
because the depositors, taking advantage of the long interval between the declaration of insolvency and the
filing of the petition for judicial assistance and supervision, were able to secure judgments for the payment of
their time deposits.
Who can be a depositor?

1. Natural Persons
2. Corporate entities
3. Minors can become depositors but not with respect to demand deposits. They can only be depositors with
respect to savings deposits
TYPES OF DEPOSITS
1. Demand deposits---Checking accounts where the deposits are demandable any time by issuing a check.
2. Savings deposits--- interest bearing; most common type usually evidenced by a passbook
3. Negotiable order of withdrawal accounts--- a combination of both demand and savings deposit. It is interest
bearing that combine the payable on demand feature of checks and investment feature of savings account
4. Time deposits--- an account with a fixed term
Survivorship agreement in case of Joint accounts—it is an aleatory contract supported by lawful consideration
whereby depositors permit either of them to withdrew deposit during their lifetime and transferring the balance to
the survivor upon the death of one of them. Is it valid? No ruling yet but banks do not allow it. Other jurisdictions
allow it.
Insured deposits--- refers to the amount deposited in the bank which upon insolvency of the bank which the
deposit was made, the depositor may recover up to 500,000. SO the maximum insured deposit is 500,000 for the
whole bank including its branches.
If Joint deposit--- the max insured deposit is divided into as many equal shares as there are individuals. The
aggregate interests of each co-owner are subject to a maximum of 500,000.
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SECRECY OF BANK DEPOSITS
There are two (2) basic laws:

1. The bank secrecy law (1405)
2. Foreign currency deposit act (6426)
Which one do you apply? Jurisprudence: if peso deposits--- apply 1405, but if it‘s foreign currency deposit—
apply 6426. Why will this matter? It is because of the exceptions. Under 1405, there are four (4) exceptions: (a)
written permission of the depositor; (b) cases of impeachment; (c) upon order of a competent court in cases of
bribery or dereliction of duty of public officials or (d) cases where the money deposited or invested is the subject
matter of the litigation. On the other hand, there is only one exception under 6426 and that is the written permission
of the depositor. SO it matters which type of law covers your deposit.
Take note, these are the two (2) laws covering the secrecy of bank accounts but there are several laws giving you
the exceptions to the secrecy. So what are these?
1. AMLA (Sec 9c). --- in cases of covered or suspicious transactions and the bank officer reports you. The
bank officer will not be liable for violation of the bank secrecy of bank deposits the AMLA exception covers
both foreign and peso accounts.
2. AMLA (Sec 11)--- in cases where the AMLC will inquire into or examine particular investments including
related accounts. In which case, they are also exempt from 1405 and 6426
3. Human Security Act--- in cases (1) a person charged with or suspected of the crime of terrorism or,
conspiracy to commit terrorism, (2) of judicially declared and outlawed terrorist organization, association, or
group of persons; and (3) of a member of such judicially declared and outlawed terrorist organization,
association, or group of persons. Take note, the exemption is only for 1405. If it is foreign currency deposit
account, you cannot examine the bank deposits under this RA 9372. You can only use this exemption for
peso accounts (1405 only)
4. ANTI- Terrorism Prevention and Suppression Act--- the exemption is for both, 1405 and 6426. The
AMLC is hereby authorized to inquire into or examine deposits or investments with any banking institution
or non-bank financial institution and their subsidiaries and affiliates without a court order.
5. NIRC, under the amendment of RA 10021--- the exception here applies to both 1045 and 6426. The
Commissioner is hereby authorized to inquire into the bank deposits of (1) a decedent to determine his
gross estate; and (2) any taxpayer who has filed an application for compromise of his tax liability under Sec.
204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability (3) in case of a request for
the supply of tax information from a foreign tax authority
6. PDIC Charter—exempts both the peso and foreign currency deposits (1405 and 6426). The PDIC has the
authority to conduct an examination of bank accounts in cases of threatened or impending closure of banks.
PNB vs Gancayco
- The case was filed for unexplained wealth and the prosecution would like to take a look at his deposit accounts.
The defense said the unexplained wealth is not among the exemptions under the bank secrecy law
- The SC said cases of unexplained wealth are similar to cases of bribery and dereliction of duty and no reason is
seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential.
BSB vs GO
- This one is on the meaning of the term ―subject matter of litigation‖

- The contention of the prosecution was that they need to examine the bank account because the checks were
embezzled through that bank account.
- The SC explained that it‘s true that if you are the subject matter of the litigation, then you are exempt. But what
does subject matter of litigation mean? The SC said you have to take a look at the charges alleged in the
information or complaint. It must be premise on the fact that the money deposited in the account is the subject
of the action. The subject matter of the action in the case at bar is to be determined from the indictment that
charges Sally Go with the offense, and not from the evidence sought by the prosecution to be admitted into the
records. In the information, the prosecution only charges the respondent with qualified theft by abusing
petitioner‘s trust and confidence and stealing 1.5 million in cash. There is no factual allegation that the checks
subject of testimony and documentary evidence sought to be suppressed. Neither do the allegation in the said
information make mention of the supposed bank accounts in which the funds represented by the checks are
allegedly kept.
ESTRADA vs SANDIGANBAYAN
- They were trying to examine two (2) accounts, savings account and trust account in connection with the plunder
charges against Estrada. The contention of the defense is the bank secrecy law. The prosecution opposed and
said that trust account is not covered by the bank secrecy law because it is not a deposit.
- The SC said the trust account is covered by the bank secrecy law, ―all deposits of whatever nature…… money
deposit or invested‖. So the trust account is covered by the rule on bank secrecy. Since the case filed against
Estrada was plunder, the SC allowed the examination of the account, same ruling as Gancayco, SC said that
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plunder is analogous to bribery and dereliction of duty. Therefore, it falls under the exceptions, the prosecution
had the authority to look into the bank account.
2. Loan function
 The banks are required to follow general guidelines in granting loans and other credit accommodations.
The banks are required to take a look at the purpose of the loan because banks can only grant loans
and other credit accommodations in amounts and for the periods of time essential for the effective
completion of the operations to be financed. Such grant of loans and other credit accommodations shall
be consistent with the safe and sound banking practices and must ensure that the borrower, co-maker,
endorser are financially capable of fulfilling the commitments to the bank. So you don‘t let a person
borrow money unless you‘re sure that he has money to pay the loan.
 Banks strictly monitor the use of the loan proceeds because if you use it other than the purpose stated
in the application, it can terminate the loan and require you to pay the full amount.
LOAN LIMITS
- How much can a bank let a person borrow?
- 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. There is an additional 10% borrowing allowed
in case the borrowings are secured by trust receipts, shipping documents, warehouse receipts or other similar
documents transferring or securing title covering marketable, non-perishable goods which must be fully covered
by insurance.
DOSRI (Directors, Officers, Stockholders and Related Interests)

-Are banks prohibited from granting loans to its DOSRI? NO, because the premise is that the bank will not know
any other borrower as intimately as it knows its DOSRI. So the bank will know for sure WON the DOSRI is
capable of paying the loans. To ensure that the dealings are not abused by the parties involved, there are
certain rules required. They are not prohibited but must be an arms-length transaction. The law requires certain
steps in case of DOSRI borrowings. First, there must be an approval by the majority of all members of the
board, then once that approval is made, which must be in writing, it must be reported to the BSP and the
DOSRI borrowings must have to comply with the ceiling requirements. SO, approval, reporting requirement,
ceiling requirement.
- What is the ceiling requirement? It is the total of the unencumbered deposits of the DOSRI plus the BV of the
paid in capital contribution. This is the individual ceiling. So if the director wants to borrow from the bank has a
deposit of 1million pesos and his capital in the bank is 2million pesos. How much can he borrow? 1 million
deposit + 2 million paid in capital--- limitation. But of course, it should not exceed 15% of the total loan portfolio
of the bank or 100% net worth of the bank whichever is lower. That applies to the aggregate DOSRI
borrowings. Take note of this Sec 26 NCBA--- that if a DOSRI borrows from his bank, he is required to waive
the secrecy of his deposits of whatever nature in all banks in the Philippines.
MARCH 19, 2016

Q: Is the single borrowers limit still 25%?
A: Based on the new MORB, it is still 25%, but under the law it is 20%
Security for loans can be real estate or chattel, under the GBL
Q: How much money can you borrow against these collaterals?
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.
• Any loans against real estate shall not exceed 75% of the appraised value of the respective real estate security plus 60%
of the appraised value of the insured improvements
• so the total loanable amount is subject only to a limit of 75% of the appraised value of the real estate serving as your
collateral
Q: Can you have several mortgages for one property?

A: Yes. Provided that you do not exceed the limit of 75%
Blanket Mortgage Clause/ Dragnet Clause

• It is a provision under a mortgage contract making the collateral not just a security for the present obligation but also for
future obligations
Q: Are these clauses valid?

60
A: Yes. It is valid. It can be validly enforced
• So your real estate will cover not only the present obligation but all future obligations that you may have with the bank
Q: Why enter into this dragnet clause?

A: It is a matter of convenience on the part of the borrower. It operates as a convenience and accommodation to the
borrowers as it makes additional funds available without their having to execute additional security documents thereby
saving time, travel, loan closing costs, cost of extra legal services, recording fees, etc.
• If you are going to apply for another loan, you do not have to execute another mortgage. Your old mortgage will simply
cover your current mortgage
•
• But always with the caveat, that the total aggregate loanable amount must not exceed 75% of the value of the real estate.
• So even if a blanket mortgage clause is valid, the amount that you can borrow against the collateral cannot exceed 75% of
the value of the property.
Reliance on Security Test

• When the mortgagor takes another loan for which another security was given. It could be inferred that such loan was made
in reliance solely not on the original security but rather on the new security given.
• IOW, since you have a blanket mortgage, the blanket mortgage is considered a continuing offer by the borrow for the bank
to use the same collateral. So there is a continuing offer. So it is basically the borrower saying that you can still use the
property as a security for the next loan. But if the bank will require the borrow to constitute another security, that means
that the bank did not rely on your first collateral.
Q:What is the effect of the reliance on security test on the coverage of the blanket mortgage clause?
A: The amount of the succeeding loan covered by the second security is not covered by the blanket mortgage clause.
Q: Does that mean that the full amount of the second borrowing is not covered by the blanket mortgage clause?
A: It will still be covered to the extent that the loaned amount will exceed the second security.
Example:
If you have a loan of 1million and you have a security worth 3million. Then you made another borrowing of another 1million,
but this is subject to another collateral worth 700,000. So this 700,000 covered by the second security, but will not be covered
by the blanket mortgage clause. But the excess of the loaned amount of 1million over the amount covered by the second
security which is 300,000 will be covered by the blanket mortgage clause. So that will be subject by the first security of the
collateral.
• The difference between the value of the second security and the loaned amount, the excess of the loaned amount over the
value of the second security is covered by the blanket mortgage clause, meaning you can subject it to the first collateral.
Chattels and other Intangible Properties

• The value of the chattels and other intangible properties is 75%.
• But take note that this one must not be encumbered.
• It will not allow for junior encumbrances.
Foreclosure of real estate mortgage
If the creditor is a bank, you do not apply the real estate mortgage law, rather you apply the GBL
Sec. 47 (GBL). Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extra-judicially, of any
mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose
real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of
the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate
specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said
property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or
extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of
the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or
restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the
filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank
may suffer by the enjoining or the restraint of the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have
the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of
foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure,
whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain
their redemption rights until their expiration.
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DEBTOR IS A NATURAL PERSON

• In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any
loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or
partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property
• So if the creditor is a bank, the debtor is natural person, whether the foreclosure is made extrajudicially or
judicially, the debtor will always have 1 year to redeem
• One year to redeem will be counted from the time the sale is registered in the registry of sale (not from the
issuance)
• ordinarily if the creditor is not a bank, if it is extrajudicial, there is no right of redemption, you only have
equity of redemption which is 90 days
DEBTOR IS A JURIDICAL PERSON

• juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to
redeem the property in accordance with this provision until, but not after, the registration of the certificate of
foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier.
• no right of redemption,
• the mortgagor can only redeem the property before the foreclosure is registered with the registry of
deeds but not more than 3 months from the time of foreclosure.
• The time of the foreclosure is counted from the issuance of the certificate of sale
• Remember the BIR case, when does the 3 months start to run, it is upon the issuance of the
certificate of sale. So from the time of the issuance of certificate of sale, you count 3 months, that is
your deadline
• So after issuance of the certificate of sale and you registered it the next day, can you still use the 3
months? No more. Because it is 3 months or the registration of the certification of sale whichever is
earlier.
RECAP:
if the creditor is a bank use GBL
Determine who the debtor is:
1. natural person
• extrajudicial or judicial, one year to redeem counted from the registration of the certificate of sale
2. juridical entity
• extrajudicial foreclosure -no one year,
• until the registration of certificate of sale with the registry of deeds or 3 months from the time of foreclosure.
• and the foreclosure is the time of the issuance of the certificate of sale, whichever is earlier
• if judicial, one year to redeem
Q: What is another difference between GBL and other mortgage laws

A: The redemption price.
Rules of Court
-Redemption price is only the purchase price during the public auction
GBL
-redemption price includes the amount due under the mortgage deed, the interest thereon at the rates specified in the
mortgage, and all the costs and expenses incurred by the bank from the sale and custody of the property, less the income
derived therefrom
CASE:
When the mortgagor attempted to redeem the property, the bank computed the redemption price, it included the penalty of
3% per month. The mortgagor questioned the inclusion of the penalty. And the basis of the mortgagor is that you should only
include the purchase price during the public auction. The bank, was saying that you do not apply the Rules of Court, but the
GBL.
SC: Bank was partly correct that you apply the GBL, but there is no basis for your imposition of the 3% because that is not
included in the mortgage deed. You just include in the redemption price and there is nothing in the GBL which allow for the
imposition of the penalty. What is more, the penalty of 3% a month is unconscionable. So the SC disallowed the imposition of
the penalty. As it is not part of the redemption price.
You can include the amount due the mortgage, the interest, the cost and expenses and nothing else.
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Prohibited Transaction
1. Banks are not allowed to act as insurers

• But they are allowed undertake banks assurance. they can sell the insurance products in bank premises. But the
banks itself are not allowed to act as insurers
2. conducting business in an unsafe and unsound manner
2. prohibition on dividend declaration

• There are certain restriction that the bank will have to meet or qualify before it can declare dividends
Prohibitions against outsourcing
§ X162.2 (2008 - X169.1)
Prohibition against outsourcing of inherent banking functions. No bank shall outsource inherent banking functions such as:
a Services normally associated with placement of deposits and withdrawals including the
recognition based on recording of movements in the deposit accounts;
b. Granting of loans and extension of other credit exposures;
c. Position-taking and market risk-taking activities;
d. Managing of risk exposures; and
e. Strategic decision-making.
• Because these are considered as inherent functions of a bank, so it cannot be outsourced.
Investment on Real Estate

GR: the amount that may be invested by a bank on real estate is subject to a limit of not more than 50% of the combined
capital accounts
exc: section 52.
For those real properties which are acquired by the banks through these 3 instances:
3. those mortgaged to it in good faith by way of security for debts

4. those which conveyed to it in satisfaction of debts previously contracted in the course of its dealings
• dacion en pago
5. those purchased under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchases to secure
debts due it
Those properties which are mortgaged to the bank as part of collator or security, once they are acquired by the bank or
properties which are given to the bank as payment for the obligations, these are exempt from the 50% limit
Q: But are they exempt forever?

A:No. They are only exempt for 5 years.
SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. —

Notwithstanding the limitations of the preceding Section, 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 Section.
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 It does not mean that after the lapse of 5 years, whatever you acquired by mortgage, it is considered as illegal. It only
means that after 5 years, that will be counted as in the 50% limitation.
 Sec 52 says that when a bank acquires property that was mortgaged to it, or transferred to it in dacion, or acquired by it
st
in a judicial sale, these properties for the 1 five years are not included in determining whether or not the bank has
reached its limit. It does not mean these properties will be excluded from the limit because the limit is not based on the
value of the investments, it is based on your combined capital accounts.
 Example. The 50% of your combined capital accounts is 800M. You have real property that you use in business is 500M.
You are within the limit here.
 Ex 2. In addition to the 500M, you also acquired properties that were mortgaged to you by 400M. This is still within the
limit because you don‘t include this amount in the 500M for comparing with the limit of the 50%. You don‘t really include
the value of the real property in determining the limit. In determining the limit, you only use the combined capital
accounts. But in comparing whether or not you have exceeded the limit, you exclude the 400M but only for the first 5
years from the time that these properties were acquired by the bank.
 After 5 years, if you still have not gotten rid of these properties, they will now be included in determining whether or not
you have reached the limit
 Ex. 3. What is now your total investment? 900M. You have now reached the limit because your limit remains at 800M and
now your investment is 900M. So you don‘t use the value of investment to determine the limit but use it to determine if
you have complied with the limit. Again, the limit is not based on your investment but on the combined capital
accounts.
CASE: UNION BANK vs. SPS. TIU

Facts:
The spouses loaned from the bank and had an agreement for dacion en pago of the properties. When they were
unable to pay, the bank foreclosed the properties and entered into lease agreements for 2 years using the porperties. The
sps argue that the bank violated Sec. 52 since the bank has to dispose the property within 5 years. Is the bank liable to return
the rentals because the lease contract is a violation of Sec. 52?
Ruling:
The SC held that during the 5 years, the bank is given complete control of the property and can do whatever they
want. It is only after the lapse of 5 years is the bank is required to dispose the property. OW, it will be included in the 50%
limitation. The SC ruled that the lease contract is valid and the bank is NOT liable nor required to return the rentals to the
spouses.
Section 52.2 contemplates a dacion en pago. Thus, Section 52 undeniably gives banks five years to dispose of
properties conveyed to them in satisfaction of debts previously contracted in the course of its dealings, unless another
period is prescribed by the Monetary Board. Furthermore, there appears to be no legal impediment for a bank to lease the
real properties it has received in satisfaction of debts, within the five-year period that such bank is allowed to hold the
acquired realty.
Banks should not be allowed to hold on to the properties contemplated in Section 52 beyond the five-year period
unless such bank has exerted its best efforts to dispose of the property in good faith but failed. However, inquiries as to
whether the banks exerted best efforts to dispose of the property can only be done if said banks fail to dispose of
the same within the period provided. Such inquiry is furthermore irrelevant to the issues in the case at bar.
Discussion:
 Within 5 years, you don‘t look at the intention of the bank. In can do whatever it wants provided after 5 years it has to
dispose, and must show it exerted best efforts. Here, the lease contract is valid because it is only for 2 years
COMMERCIAL BANKS (KB)

 that are given all such power necessary to engage in commercial banking in addition to general corporate powers;
commercial banking includes the power to accept drafts, issue letters of credits, discounting and negotiation of
negotiable instruments and evidence of debt, accept and create demand deposits and the like.
 They are inherently allowed to undertake demand deposits unlike thrift and rural banks and all the powers under
Section 29.
SECTION 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.
 What a bank can do, a commercial bank can do.
INVESTMENT LIMITS OF KB
 KB can only invest in allied enterprises, divided into:
a. financial allied enterprises and
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b. non-financial allied enterprises
 So a KB cannot invest in a mining company, agriculture or manufacturing company; only to related enterprises
LIMITATIONS (ONLY ALLIED ENTERPRISES)

1. Investor Limitation (w/ respect to the KB)
a. Aggregate investment: total investment in equities of allied enterprises shall not exceed 35% of the net worth of the
bank
b. If individual or Single enterprise: not exceed 25% of the total net worth of the bank
2. Investee Limitation (w/ respect on the allied enterprise itself)

a. Financial Allied Enterprise(FAE)
i. Thrift bank (TB) or rural bank (RB)acquired: 100% of the equity
ii. Other financial allied enterprise: KB can only be 49% of the equity minority interest (MORB, 378)
 So this is different from the limit in UB because TB, RB and other FAE have the same limit for UB
iii. Another UB/KB
 Publicly-listed: 100% of the voting stock
 Not publicly-listed: 49% minority interest
b. Non-financial Allied Enterprise

 KB can own up to 100% of the equity in a nonfinancial allied enterprise (sec 32)
Memory aid:
IF ALLIED - either 100% or 49%.
49% if UB with respect to another UB/KB if it‘s NOT publicly-listed. All the rest, 100.
49% if KBwith respect to another UB/KB if it‘s NOT publicy-listed. Same rule as UB.
49% with respect to other FAE which are not TB or RB.
UNIVERSAL BANKS (UB)
 UB is an expanded commercial bank. It performs the functions of a commercial bank PLUS the functions of an
investment house and invest in non-allied enterprises.
 Non-allied (NAE) means that the operation is not related to banking at all, like a real estate company, or construction
 Only universal banks can invest in non-allied enterprises
 How much can a UB invest?
LIMITATIONS
1. Investor Limitation (w/ respect to the UB being the investor)
– when you base it on the net worth of the bank, that is an investor limitation because that is based on the investor itself,
the bank
a. Aggregate investment: Total investment in AE and NAE does not exceed 50% of the net worth of the bank
b. Single enterprise AE or NAE: not exceed 25% of net worth of the bank
 Basis: sec 24.1 and sec 24.2
2. Investee Limitation (w/ respect on the allied enterprise itself)

b. Allied enterprise
i. Financial allied enterprise
 100% of the equity in a thrift bank, a rural bank or other financial allied enterprise (FAE) (sec 25)
Compare with KB where KB can only invest 49% minority in FAE.
 Another UB/KB
1. Publicly-listed: 100% of the voting stock
2. Not publicly-listed: 49% minority interest
ii. Non-financial allied enterprise - 100% of the equity (sec 26)
c. Non-allied enterprise
 Not exceeding 35% of the total equity in that enterprise nor shall it exceed 35% of the voting stock in that
enterprise
 Equity is different from voting stock. Equity is the total capital which can be voting or non-voting
 BOTH LIMITATIONS OCCUR TOGETHER.
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QUASI BANKING FUNCTIONS
Section 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.
 "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 Section 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act") for purposes of re-lending or purchasing of receivables and other obligations
 How is a deposit substitute different from a deposit? When you do an ordinary deposit with the bank, you don‘t have to
issue a negotiable instrument for it. A dep. Subsitute, you can only transact thru the help of nego instrument such as
Prom. Note or bill of exchange. That is the business of a quasi-banks, it buy and sell the negotiable instruments. Take
note, the negotiation is always WITH RECOURSE, meaning, you can go back to the person issuing the instrument and
make him liable in case the person primarily liable fails to pay.
 For to be a valid quasi-judicial activity, it should be negotiated with recourse.
 No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko
Sentral. Except: Universal Banks and Commercial Banks – they are NOT required because once you have a UB or KB
license, that automatically includes quasi-banking license. HOWEVER, UB & KB can either directly or indirectly engage in
quasi-banking functions. Directly by themselves, and indirectly by investing in the equity of a quasi-bank. So if it is done
indirectly, that quasi-bank entity will have to secure a license because this is a separate entity from the universal or
commercial bank and they are not covered by the UB or KB‘s license. They will have to secure its own license pursuant
to Section 6.
 They can exercise it indirectly through equity investment. Pursuant to Section 25, a quasi-bank is considered a financial
allied enterprise, so a UB can invest up to 100% and a KB can invest up to 49% this time pursuant to Section 31 because
it says 100% but as to allied enterprise, they will only be minority so 49%. Is there another limitation? MORB Section 28.
40%. Rule also applies to Commercial Bank.
ESSENTIAL ELEMENTS WHEN ENGAGED IN QUASI-BANKING FUNCTION

1. Borrow money for BORROWER‘S OWN ACCOUNT
This means under your own name and not acting as a representative or an agent of another person.
2. Borrow from the public

Public means 20 or more persons (whereas if you borrow money from 19 or less people it‘s considered private
placement).
3. The mode of borrowing is through issuances, endorsement or assignment with recourse or acceptance of deposit
substitutes.
Deposit substitutes are mere debt instruments and what makes it a deposit substitute is that the debt instrument has to
be with recourse -which means in case of dishonor of the instrument, the holder can go back to the seller. It has a
recourse against the seller. The seller guarantees the performance of the instrument. If the issuance is without recourse,
then it falls out of the definition of quasi-banking function. But if the instrument is silent, it is presumed to be with
recourse.
4. For purposes of re-lending or purchasing of receivables and other obligations.

There‘s a corporation who wants to get more capital for the purpose of expanding, it issues promissory notes borrowing
money from 20 persons. Can that be considered a quasi-banking function? NO because it is only for the purpose of
financing their own, it is for a private purpose and not for re-lending. Section 95 last paragraph of the NCBA says that
deposit substitutes of commercial, industrial and other non-financial companies for the limited purpose of financing their
own needs or the needs of their agents or dealers shall NOT be covered by the provisions of Section 94 of this Act.
 ALL four elements must exist before there can be a quasi-banking function.
PRINCIPLES GOVERNING OPERATIONS OF FOREIGN BANKS

Ma‘am only wants us to take note of 2 important items for foreign banks:
1. ONE UNIT rule (Section 74 of GBL)

Section 74. Local Branches of Foreign Banks. - In the case of a foreign bank which has more than one (1) branch in the
Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the
Philippine branches of foreign banks shall be held to refer to such units.
For domestic banks, under Section 20, the head office and the branches of the head office are considered as one – the
One unit rule for domestic banks. For Foreign banks, ONLY branches WITHIN the Philippines are considered as one.
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2. HEAD OFFICE GUARANTEE (Section 75 of GBL)

Section 75. Head Office Guarantee. - In order to provide effective protection of the interests of the depositors and other
creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt
payment of all liabilities of its Philippine branch. (69) Residents and citizens of the Philippines who are creditors of a
branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance
with the existing laws.
For effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the
head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.
TAKE NOTE: when we talk of foreign banks, we only refer to the foreign banks here in the Philippines. If the bank is
incorporated in the Philippines, even if it is 100% foreign owned, it is still considered a domestic bank. Same principle as
in the Corp. Code. When you say foreign bank operating in the Philippines, It simply means the branches of the foreign
bank in the Philippines.
If the head office in another country has creditors, and it has become insolvent, can the creditors proceed against the
assets of the branch? NOT until all the depositors or creditors in the Philippines have been paid. They have a preference
with respect to the branch assets.
NB: No case discussed but this is from last year. Included for your convenience and further reference just in case 
CASE: CITYBANK vs SABENIANO

Facts:
Respondent Sabeniano was a client of petitioners. She had several deposits and market placements with petitioners,
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among which were her savings account with the local branch of petitioner Citibank (Citibank-Manila ); money market
placements with petitioner FNCB Finance; and dollar accounts with the Geneva branch of petitioner Citibank (Citibank-
Geneva). Respondent filed a complaint against petitioners claiming to have substantial deposits, the proceeds of which were
supposedly deposited automatically and directly to respondent‘s account with the petitioner Citibank and that allegedly
petitioner refused to despite repeated demands. Petitioner alleged that respondent obtained several loans from the former
and in default, Citibank exercised its right to set-off respondent‘s outstanding loans with her deposits and money. RTC
declared the act illegal, null and void and ordered the petitioner to refund the amount plus interest, ordering Sabeniano, on
the other hand to pay Citibank her indebtedness. CA affirmed the decision entirely in favor of the respondent.
Ruling:
Section 20 applies to a universal or commercial bank, duly established and organized as a Philippine
corporation in accordance with Section 8 of the same statute, and authorized to establish branches within or outside the
Philippines. Moreover, what Section 74 of the said law provides is that in case of a foreign bank with several branches
in the country, all such branches shall be treated as one unit. As to the relations between the local branches of a foreign
bank and its head office, Section 75 of the General Banking Law of 2000 and Section 5 of the Foreign Banks Liberalization
Law provide for a "Home Office Guarantee," in which the head office of the foreign bank shall guarantee prompt payment of
all liabilities of its Philippine branches. While the Home Office Guarantee is in accord with the principle that these local
branches, together with its head office, constitute but one legal entity, it does not necessarily support the view that said
principle is true and applicable in all circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for the protection of the interests of the
depositors and other creditors of the local branches of a foreign bank. If a client obtains a loan from the foreign bank‘s
Philippine branch, it does NOT absolutely and automatically make the client a debtor, not just of the Philippine branch,
but also of the head office and all other branches of the foreign bank around the world.
Discussion:
 SC said that with respect to Section 20, you cannot use it since it only refers to a domestic bank, refers to the head office
and the branches of a domestic bank-a universal or commercial bank established in the Philippines.
 With respect to Section 74, SC said that it is also not applicable because you are talking about the branch outside the
Philippines- the Geneva branch. This only applies to branches of the Foreign bank within the Philippines.
 Citybank was saying, hey SC look at Section 75, this is one example or one embodiment that we are one unit with our
head office with all the branches around the world because it provides that we require head office to guarantee all our
branches here in the Philippines. However, with respect to Section 75, SC said that the Home Office Guarantee only
applies for the protection of the depositors in the Philippines. In case of a foreign bank, the head office is located outside
our jurisdiction, outside the Philippines. So we needed Section 75 in order to make the head office liable here and to hold
them answerable. It is for the purpose of protecting the depositors in the Philippines, you CANNOT use it in
reverse, that is not what the law contemplates. You cannot use it to make the depositor liable for something outside
of the Philippines.
 Citybank was not allowed to compensate because the other branch in Geneva is not considered as one unit with the local
branch.
 In the loan-you are the debtor and Citybank is the creditor, while in the deposit- you are the creditor and Citybank Manila
is the debtor.
 An essential element for legal compensation is that the parties must be mutually creditors and debtors to each other. In
this case, they are not. So you and Citybank Manila are not mutually creditors and debtors of each other.
THE NEW CENTRAL BANK ACT (RA 7653)
GENERAL RESPONSIBILITY
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The Bangko Sentral shall provide policy directions in the areas of money, banking, and credit. It shall have supervision over
the operations of banks and exercise such regulatory powers as provided in this Act and other pertinent laws over the
operations of finance companies and non-bank financial institutions performing quasi-banking functions, hereafter referred to
as quasibanks, and institutions performing similar functions.
PRIMARY OBJECTIVE
The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth
of the economy. It shall also promote and maintain monetary stability and the convertibility of the peso.
THE MONETARY BOARD

The Monetary Board runs the BSP. It is composed of 7 members:
 1 of whom is the Governor of BSP who acts as the chairman of the Monetary Board,
 another is a member of the Cabinet (which does not exactly say who but normally, the Secretary of Finance but law
does not specifically state it should be the SOF),
 5 members of private sector which must serve full time so as to avoid conflict of interest.
They can be reappointed but not more than once.
The Monetary Board (MB) consists of 7 members appointed by the President of the Philippines for a term of six (6) years.
1. Governor of the Bangko Sentral ng Pilipinas – will also serve as Chairman of the Monetary Board
2. Member of the Cabinet designated by the President of the Philippines
3. Five members from the Private Sector – all of them have to serve full-time
The members may be re-appointed but not more than once.
For a valid action by the MB, the following are required:
1. There must be a meeting where at least 4 members are present and the Governor or his duly-designated alternate
should be among the 4
2. Votes of 4 members. Thus, if only 4 attended the meeting, the 4 should vote unanimously.
Exception: In cases of emergency, the Governor of the Bangko Sentral with the concurrence of 2 other members may take
immediate action. (Section 19)
3 Deputy Governors (1 from each sector):
1. Monetary Stability Sector

2. Supervision and Examination Sector
3. Resource Management Sector
Basic Functions of the BSP:
1. It provides policy direction in the areas of money, credit, and banking.
Sec. 5. The MB provides ratios, ceilings, limitations and other forms of regulations on the different types of accounts
and practices of banks and quasi-banks.
Example: If the MB will decrease interest rates, that will mean money will go from banks. One would rather invest the
money somewhere else if the interest rates are low. Conversely, an increase in interest rates would see more money being
invested with the banks.
Thus, if the MB sees an imminent threat of high inflation, it will then increase interest rates to lessen the money in
circulation. Or if it sees that there is not much spending, it can lower the interest rates to make people to take their money
from the banks and start spending.
2. It controls and supervises the operations of banks.
 Issuing rules of conduct

 Examine and oversee operations of the banks
 Regular investigations
 Inquire into the solvency and liquidity of banks
 Enforce prompt corrective action
In one case, the BSP determined that a bank had very high DOSRI borrowings. Thus, the BSP made used of its
power to enforce prompt corrective action by forcing the bank to terminate the loans and get the money back from the
DOSRIs.
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3. It regulates the operations of finance companies, non-bank financial institutions performing quasi-banking functions.
- Only for regulation not supervision
4. It has the sole power and authority to issue currency within the territory of the Republic of the Philippines.
5. It can engage in foreign exchange transactions in order to maintain price stability.
- Buy and sell foreign notes and coins
If the BSP sees that the peso to dollar rate is rising, it can sell and infuse dollars in the market in order to bring the price
down. Or conversely, if the peso value is low, it can buy dollars in order to lessen the supply of dollars. The exchange rate
matters to exporters and importers. They need a stable peso to foreign currency exchange rate.
6. Making rediscount, discounts, loans, and advances to banking and other financial institutions to influence the volume of
credit consistent with the objective price stability.
- BSP is the ultimate financer.
3 types of loans BSP can give banks:
i. For Normal Credit Operations – day-to-day transactions between BSP and banks
ii. For Special Credit Operations – When a bank is facing liquidity problems, the BSP can give a loan without requiring
collateral for a period of seven days to prevent a bank run.
iii. For Emergency Credit Operations – loans by BSP to banks in cases of national emergencies
Special Credit Operations-- this is when a bank is facing liquidity problems, the BSP can lend them money without collateral
for a period of 7 days to prevent a bank run.
Emergency Credit Operations—in cases of national emergencies, the BSP can lend money to banks
The BSP can only lend money to banks, not to other persons.
Engaged in open market operations in accordance with objective of its price stability. The BSP can issue bonds and notes
It acts as the banker for the government and the financial adviser of the government.
BANK OF COMMERCE VS PLANTERS BANK
Facts:
7 Central Bank bills was owned by RCBC and subsequently, sold these to Bank of Commerce. The latter delivered
Detached Assignments to the PDB and in turn, PDB sold BOC treasury bills. Instead of delivering treasury bills, it delivered
the CB bills to BOC. Nevertheless, PDB retained possession of the Detached Assignments. There was the motion to
interplead. BOC prayed for it to be declared the rightful owner and to deliver sales transactions. Since it was filed in the RTC,
there was the issue of WON RTC has jurisdiction over the case.
Ruling:
As aptly observed by the CA, the BSP Monetary Board is an independent central monetary authority and a body
corporate with fiscal and administrative autonomy, mandated to provide policy directions in the areas of money, banking and
credit. It has power to issue subpoena, to sue for contempt those refusing to obey the subpoena without justifiable
reason, to administer oaths, and compel presentation of books, records and others, needed in its examination, to
impose fines and other sanctions and to issue cease and desist order. Section 37 of R.A. 7653, in particular explicitly
provides that BSP Monetary Board shall exercise its discretion in determining whether administrative sanctions
should be imposed on banks and quasi banks, which necessarily implies that the BSP Monetary Board must conduct some
form of investigation or hearing regarding the same. Moreover, the grant of quasi-judicial authority to the BSP cannot possibly
extend to situations which do not call for the exercise of its supervisory or regulatory functions over entities within its
jurisdiction.
Atty: This is a 2012 case—it contains an enumeration of the powers and functions of the BSP. This is the one where the
issue was who owned the bond previously issued by the BSP. It was first sold to RCBC then it went to Planters Bank, then
the bank of commerce bought it then the loan matured. There was an issue of ownership because the transfer was defective.
They brought the case to the BSP and the latter made a decision. You should read the case class because it gives a very
good explanation of the powers of the BSP and it gives a very good explanation of the open market activity of the BSP. But
the gist of this case is actually this one, the BSP has quasi-judicial power but such power will only extend to the exercise of its
supervisory or regulatory functions over entities within its jurisdiction. So if the issue is not connected to the supervisory or
regulatory powers of the bank, such as in this case (issue on who owns the notes or bonds), the SC said the BSP does not
have jurisdiction. Just because the parties involve are banks, it doesn’t mean that it triggers the quasi-judicial power of the
BSP. The quasi-judicial power of the BSP can only be triggered in the exercise of its regulatory or supervisory function.
CLOSURE OF BANKS
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CONSERVATORSHIP
The closure of banks is not found in the GBL but there‘s a reference to it lang in section 67 on Conservatorship but the actual
is found in section 29 of the NCBA.
So when can the monetary board appoint a conservator to a bank or place the bank in conservatorship?
Requirements:
1. There must be a report submitted by the appropriate supervising or examining department of the BSP. The basis of
placing the bank under conservatorship is a report. This is required under Section 29 of the NCBA.
2. Based on that report, there has to be a finding by the Monetary Board 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
 Liquidity--- ability to pay debts as they become due. We are talking about current assets or cash assets or
near cash assets. So current assets must be sufficient to pay your current liabilities.
 If the bank continues to disregard their liquidity issues, then there is a ground for placing that bank under
conservatorships
3. The MB must inform the BODs in writing about the order directing the conservatorship. This last requisite is found in
sec 30 NCBA last paragraph
POWERS AND DUTIES OF THE CONSERVATOR
- It will take charge of the assets, liabilities and management of the bank
- Reorganize the management
- Collect all monies and debts due said institution
- Exercise all powers necessary to restore its viability
- Power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank
These powers are exercise for restoring the viability of the bank. That is the main purpose of conservatorship.
PERIOD OF CONSERVATORSHIP
- Not to exceed one (1) year but it can be terminated before 1 year under section 29.
PRE-TERMINATION
1. If there is a finding of the conservator as approved by the MB that the bank can continue its operations on its own
and that conservatorship is no longer necessary
 Bank can now continue its normal operations free from the conservator and BSP
2. If there is a finding of the inability of the bank to continue its operations without probable loss to its depositors and
creditors
 Sec 29: ―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 Section 30 shall
apply.‖
 Receivership now will take place and sec 30 will be applied
 If conservatorship is terminated based on the 2nd ground, we now go to status of receivership
FIRST PHILIPPIN INT‘L BANK vs CA
Facts: Demetria and Janolo negotiated with Rivera for the sale of land. River approved the sale when the bank was under
conservatorship. When a new conservator took over, he revoked the power of Rivera to make a binding offer.
Ruling: 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. 44 If the legislature itself cannot revoke an existing valid contract, how can it delegate
such non-existent powers to the conservator under Section 28-A of said law?
Obviously, therefore, Section 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 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 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.
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Atty: the power to revoke of the conservator will only apply in cases of defective contracts. If the contract is valid, the SC
explained that even Congress cannot impair valid contracts, how much more the conservator. Congress cannot give the
conservator powers that it itself does not possess. The SC said 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 come to be considered unfavorable to the Bank. So here, the SC made clear that the power to
revoke does not apply to valid contracts. It can only be applied to defective contracts such as void, voidable, unenforceable or
rescissible contracts.
RECEIVERSHIP and LIQUIDATION (Sec 30 NCBA)
Requisites (Receivership)
1. Report from the SED of the BSP
2. There must be a finding of the MB of the existence of the grounds for receivership
 GROUNDS for receivership:
1. Unable to pay its liabilities as they become due in the ordinary course of business. Meaning they are
failing the position of liquidity. So pwede d.i class na if you failed to maintain position of liquidity, you
don‘t opt for conservatorship but go to receivership directly. Does it matter? Yes because they have
different purposes. This is also called the EQUITY TEST OF RECEIVERSHIP.
2. Insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities. This talks
about SOLVENCY— total liabilities are greater than your total assets. This is called the BALANCE
SHEET TEST. It is simply a matter of looking at you balance sheet. If your liabilities are greater than your
assets, you are no longer solvent. It‘s a simple mathematics.
3. The bank cannot continue in business without involving probable losses to its depositors or creditors
4. Willfully violated the 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
5. 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 section and the
administrative sanctions provided in Section 37 of this Act, take action under Section 30 of this Act.(Sec
36 NCBA)
6. 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. (Sec 53 GBL)--- close now
hear later
3. After finding that grounds exist, the MB may summarily, without need for prior hearing, forbid the banking institution
from doing business in the Philippines and designate the PDIC as receiver of the banking institution.
Once there is a report from the ceb? And the MB makes a finding that the grounds for the declaration exists, the MB can
summarily and without need of prior hearing, forbid the institution from doing business. So immediately, the MB can close the
institution and designate the PDIC as receiver of the banking institution.
What happens next?

 Receiver will then gather and take charge of all the assets and liabilities of the institution
o For what purpose?
 For conservator – restore the viability of the bank or quasi bank
 For receiver – to administer and protect the assets for the benefit of the creditors of the bank
 But TN that under this provision, the receiver cannot pay or commit any act which will transfer or dispose of the
assets of the institution.
 So the receiver only has powers of administration but has no power to dispose of the assets of the bank.
How long will receivership last

 Conservator – 1 year
 Receiver – 90 days in order to determine whether the institution can be rehabilitated or made to resume its business;
o If receiver determines that the institution cannot be rehabilitated, then there‘s no choice but for the receiver to
ask for the liquidation of the bank.
o Within 90 days, the receiver must decide whether to rehabilitate or to liquidate the bank.
Requisites to put a bank under receivership:

1. Report
2. Finding of the grounds
3. Decision to forbid the institution from doing the business
 You close the bank
4. You inform the board of directors of the decision
 The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital
stock within 10 days from the receipt of the bod‘s of the institution of the order directing receivership, liquidation,
or conservatorship.
 This is the third requisite for conservatorship that there must be notice in writing to the bod of the conservatorship
and this is the fourth requisite for receivership.
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 Purpose: to allow stockholders to question the validity of the order of putting the bank under receivership or
liquidation or conservatorship.
How do you distinguish a conservator and receiver?

 As to grounds
o Conservatorship – only has one ground (unwillingness or inability to maintain a position of liquidity)
o Receivership – 6 grounds (section 30)
 Equity test
 Liquidity test
 Balance sheet
 Insolvency
 Cannot continue business without involving probable losses to its depositors or creditors; or
 Has willfully violated a cease and desist order under section 37 that has become final
 Bank holiday
 failure to pay deposit liabilities within 30 calendar days
 banking in an unsafe and unsound manner
 Purpose
o Conservatorship – to restore the viability of the bank
o Receivership – administer the assets of the bank for the benfit of the creditors
 Period
o Conservatorship – 1 year
o Receivership – 90 days
RURAL BANK OF SAN MIGUEL VS MONETARY BOARD

 This was the case where the mb executed prompt and corrective action but still the bank refused to follow the mb. So
on the basis of report, mb declared the bank under receivership
 Bank questioned and said: you did not even examine the bank before you declared the bank under receivership. You
only relied on the report.
 Is contention of bank valid?
o Sc: it is not. Because under the ncba (unlike in the old central bank law where it says ―after examination and
report‖) only says ―based on a report‖. So congress took out the word examination.
o ―From the words used in Section 30, it is clear that RA 7653 no longer requires that an examination be made
before the MB can issue a closure order. We cannot make it a requirement in the absence of legal basis.xxx
The purpose of the law is to make the closure of a bank summary and expeditious in order to protect public
interest. This is also why prior notice and hearing are no longer required before a bank can be closed.‖
o This is the ruling of the sc where it interpreted for the first time the new ncba under section 30 where it only
said report. On principles of statutory requirement, we cannot add to the law where it does not include that
requirement. So examination is no longer required.
o So, the bank can be placed under receivership solely on the basis of a report.
RURAL BANK OF BUHI VS CA

 This was based on the old law but the issue was won the mb is required to give the bank notice and opportunity to be
heard before they can close the bank.
o Sc: no.
o Notice and hearing is not required.
o It is sufficient that there is prior hearing subsequent to the closure because ―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.‖
o Because you can just imagine that if the mb is required to have a hearing before they can close a bank and
the hearing will take 3 years and the bank will continue in operation. So the moment the public will hear that
the bank is in litigation to close it, you don‘t just wait for the decision. The first thing you do is you get your
money from the bank. So there will be bank runs. So that is the reason why prior notice and hearing is not
required.
o The Bank can be summarily closed by the mb.
VILLANUEVA VS CA
 This is the case where the bank had a property, and Ong wanted to purchase that property. So Ong made a
resolution to the bank. The bank issued a resolution accepted his offer. But problem is ong left for abroad. In the
meantime, while he is abroad, the bank was put under receivership. So when Ong came bank and learned the
acceptance of the bank, he wanted to enforce his purchase of the property. But can the bank still sell the property to
Ong?
o According to section 30, the moment the bank is put under receivership, the assets of the bank is deemed to
be under custodia legis in the hands of the receivership. And from that moment that institution is placed
under receivership or liquidation, be exempt from any order of garnishment or levy or attachment or
execution.
SECTION 30: xxx 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.
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o So can Ong still compel the bank to sell to him the property?
 Difference of this case and the one for conservatorship (Philippine International Bank)? Why in the
latter case, the sc said that you have to honor the contract. You have to sell the property because
you already agreed. But how come in this case, the sc is saying that no the property is already in
custodia legis thus you cannot say it anymore?
 In this case, the contract was not yet perfected because before ong learned of the acceptance of
the bank, the bank was placed under receivership. So the contract was never perfected. Whereas in
the first Philippine case, the contract was perfected before the bank was placed under receivership.
So in that case, the sc said that you cannot repudiate an already valid contract.
 In Villanueva case, the contract was never perfected so that the land never belonged to Ong. There
was no transfer of ownership. So when bank was placed under receivership, those assets including
the land was transferred to administration of the receiver. So they became custodia legis and being
custodia legis, the receiver or bod or officer of the bank can never have power to dispose of the
property.
ABACUS VS MANILA BANKING CORPORATION

 This case involved a building owned by the bank and then bank was put under receivership. The building was leased
with an exclusive option to purchase. The exclusive option to purchase was approved by the receiver, Atty. Renan
Santos. So the buyer wanted to enforce the option to purchase
 One of the contentions of the buyer: receiver approved this option to purchase
 Is the contention valid?
o Sc: no. receiver only has powers of administration and no power to dispose of the property. It can only
administer the property as we saw earlier in section 30, it cannot dispose.
o So receiver had no power to ratify the exclusive option to purchase so the bank cannot be compelled to sell
the land.
CENTRAL BANK VS CA GR76118

 Issue: who can bring a case to question the validity of order of receivership?
 The bod of the bank brought a case to question validity of receivership.
 Contention of central bank: you no longer have power to bring any case because your power as bod has been
transfereed to the receiver. So any receiver can bring the case to court.
 Contention of bod: that‘s absurd because when will the receiver bring a case to question his own authority
o Sc: none of them were right. Of course it‘s not the receiver because they will not bring a case to question
authority. But bod does not have power to question the authority. Section 30 holds that it is the stockholders
who has the power to question by petition for certiorari the validity of putting the bank under receivership,
liquidation or conservatorship.
o Why not the bod? In section 30, cb is supposed to notify the body and 10 days after, the stockholders is to
bring a petition for certiorari questioning the same‖. . . . in requiring that only the stockholders of record
representing the majority of the capital stock may bring the action to set aside a resolution to place a bank
under conservatorship is to ensure that it be not frustrated or defeated by the incumbent Board of Directors
or officers who may immediately resort to court action to prevent its implementation or enforcement. It is
presumed that such a resolution is directed principally against acts of said Directors and officers which place
the bank in a state of continuing inability to maintain a condition of liquidity adequate to protect the interest of
depositors and creditors.
o So the sc is basically saying that bod you cannot bring the case because it is a conflict of interest on your
part because if the bank is put under receivership, that is essentially a question of capability to run the bank.
It was your actions which put the bank under receivership. So prevent conflict of interest, it is not the bod to
question the mb but the stockholders of the bank.
At the end of receivership period, the receiver will determine if it can be rehabilitated and if it can then the bank can be
opened and resume its operations. But if the bank determines that it cannot be rehabilitated and it cant be permitted to
resume business. The receiver will have to inform the mb and the mb will then start the process of liquidation and direct the
receiver to stop the process of liquidation of the bank.
LIQUIDATION
 So how do you commence liquidation
o First, you file an ex parte petition for assistance in the liquidation of the bank or quasi bank. So you file a
case in court.
o What will the court do? (section 30)
Section 30: 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.
o After the court has approved the liquidation plan, the receiver will then start liquidating the assets of the
institution to money and start paying off the creditors in accordance with the approved plan of liquidation.
 So they are now winding up the operations of the bank.
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PHILIPPINE VETARNS BANK VS VEGA
 The bank was supposedly placed under liquidation but congress came up with the law to rehabilitate the bank. But
while bank was undergoing rehabilitation, the case filed in the regular courts for the liquidation continued.
o Sc: no you cannot continue liquidation when you have already started rehabilitation of the bank. ―concept of
liquidation is diametrically opposed or contrary to the concept of rehabilitation, such that both cannot be
undertaken at the same time. To allow the liquidation proceedings to continue would seriously hinder the
rehabilitation of the subject bank.‖
o They are so opposed to each other that you cannot do both at the same time. Either do a rehabilitation or you
do a liquidation.
Atty: everything that we discussed and everything that sc said in the cases, they can be found in SECTIONS 29 AND 30 OF
THE NCBA. So you read those provisions carefully.
ANTI MONEY LAUNDERING ACT

Money Laundering
- is the process by which money that originates from an illegal source is converted or ―cleaned‖ to make it appear it
comes from a legitimate source
- an act or series or combination of acts whereby proceeds of an unlawful activity whether in cash, property or other
assets are converted, concealed or disguised so that they appear to have originated from legitimate sources.
One of the ways to launder money is through the financial system

1. First you place the money in the financial system by investing it or placing it in a bank, send it through remittance or
foreign exchange
2. Second, you undertake a series of transactions to separate the money from its source, so you do layering by using
shell corporations and money transfers in order to separate or distance the money from its source
3. Lastly, once the money is clean you integrate it for use, you get the money back as if it now came from legitimate
sources
Sec 9. Prevention of Money Laundering; Customer Identification Requirements and Record Keeping
a) Customer Identification – Covered institutions shall establish and record the true identity of its clients based on
official documents. They shall maintain a system of verifying the true identity of their clients, and in case of corporate
clients, require a system of verifying their legal existence and organizational structure, as well as the authority and
identification of all persons purporting to act on their behalf. The provisions of existing laws to the contrary
notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign currency checking non-checking numbered accounts shall be allowed. The
BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of
such accounts.
b) Record Keeping — All records of all transactions of covered institutions shall be maintained and safely stored for
five (5) years from the dates of transactions. With respect to closed accounts, the records on customer identification,
account files and business correspondence, shall be preserved and safely stored for at least five (5) years from the
dates when they were closed.|||
c) Amended by RA 9194
Reporting of Covered and Suspicious Transactions — Covered institutions shall report to the AMLC all covered
transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the
Supervising Authority prescribes a longer period not exceeding ten (10) working days.
Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution
shall be required to report the same as a suspicious transaction.
When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees
shall not be deemed to have violated Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic
Act No. 8791 and other similar laws, but are prohibited from communicating, directly or indirectly, in any manner or by
any means, to any person, the fact that a covered or suspicious transaction report was made, the contents thereof, or any
other information in relation thereto. In case of violation thereof, the concerned officer and employee of the covered
institution shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any
person for having made a covered or suspicious transaction report in the regular performance of his duties in
good faith, whether or not such reporting results in any criminal prosecution under this Act or any other law.
When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees
are prohibited from communicating directly or indirectly, in any manner or by any means, to any person or entity, the
media, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information
in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic
mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered institution
and media shall be held criminally liable."
1. Customer Identification
 This is to ensure that customers are properly identified
 The covered person must develop certain procedures so that its customers are identified and known
 Banks have a KYC system: Know Your Client – including your name, you salary (filled up when you apply)
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 Stricter when the customer is a corporation
2. Record-keeping
3. Reporting of covered and suspicious transactions

a. Covered Transaction
(b) 'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total
amount in excess of Five hundred thousand pesos (P500,000.00) within one (1) banking day.
 Regardless of the circumstance of the deposit, the covered person is required to report it to the AMLC. It is a
ministerial duty the moment you reach the threshold amount
 It is IN EXCESS of Php500,000 within 1 banking day
b. Suspicious Transaction
(b-1) 'Suspicious transaction' are transactions with covered institutions, regardless of the amounts involved,
where any of the following circumstances exist:
1. There is no underlying legal or trade obligation, purpose or economic justification;

 Example: You opened an account in the bank. Someone deposited 400k in your account. The bank is
not required to report it since it is not a covered transaction.
The following week, somebody deposited another 400k. Still not required.
Next week, another 400k, and so on. It depends now because when the bank sees that there was no
basis for anyone to deposit in your account 4ook every week because you had no contract with that
person transferring money, the bank can actually inquire what the basis is. Is there a contract or sale?
 If the bank is satisfied, there is no suspicious transaction. If the bank is not satisfied with your reason, the
bank can report you. You just receive money out of the blue. Bank senses something fishy going on.
2. The client is not properly identified;
3. The amount involved is not commensurate with the business or financial capacity of the client;
 Bank will ask you what the source of your income is when you open an account. If you put there your
compensation is 20k every month, then 1 day you deposit 450k, and the next day another 450k and so
on, it is not commensurate with your financial capacity
 Again, if the bank is not satisfied with your explanation, the bank can report you to the AMLC for
suspicious transaction
4. Taking into account all known circumstances, it may be perceived that the client's transaction is structured in
order to avoid being the subject of reporting requirements under the Act;
 When it is a covered transaction, the bank is required to report it. Example you deposited 450k today and
another 450k tomorrow, that is a suspicious transaction because you might have received 900k and it
would then have been subject to reporting requirement but you deposited them in two to avoid being
considered a covered transaction
 So it is not covered but as a mode to avoid, you did it. This could be a suspicious transaction.
5. Any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or
the client's past transactions with the covered institution;
 So if you deposit 20k per day the suddenly you‘re depositing 300k, or 400k, that is a deviation so the
bank will ask you why you are depositing suddenly a different account
 Banks are strict with this. They will really ask you.
6. The transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is
being or has been committed; or SEIDAC
7. Any transaction that is similar or analogous to any of the foregoing.
 If a transaction is a covered or suspicious transaction, it does not mean you are already violating the AMLA. There is
nothing wrong being reported because the reporting requirement is automatic when you transact with more than 500k.
However, the AMLC will not automatically charge you with violation of the AMLA.
 Since they are not violations, they are only circumstances which would require a covered person to make a report to the
AMLC. These transactions will trigger an obligation on the part of the covered person.
 We said before that lawyers and accountants acting in their independent capacity do not fall under the term covered
person. However, the actual interpretation of the BSP is this:
―Lawyers and accountants acting in an independent capacity are considered covered persons as far as the first 2
obligations are concerned.‖
 So they are still required to set up a system to identify the clients and to retain records of the transaction but they are
not required to report covered or suspicious transactions.
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COVERED PERSONS
(a)'Covered persons', natural or juridical, refer to:

(1) Banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops, money changers, remittance
and transfer companies and other similar entities and all other persons and their subsidiaries and affiliates supervised
or regulated by the Bangko Sentral ng Pilipinas (BSP);
(2) Insurance companies, pre-need companies and all other persons supervised or regulated by the Insurance
Commission (IC);
(3) (i) securities dealers, brokers, salesmen, investment houses and other similar persons managing securities or
rendering services as investment agent, advisor, or consultant, (ii) mutual funds, close-end investment companies,
common trust funds, and other similar persons, and (iii) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary
instruments or property supervised or regulated by the Securities and Exchange Commission (SEC);
 Under number 3, these are not your ordinary corporations. Just because you‘re a corporation registered with the
SEC does not automatically subject you to the AMLA.
 It has to be a financial institution. Those under number 3 are entities holding a secondary license. The primary
license is your certificate of incorporation. The secondary franchise allows you to engage in specific activities. An
ordinary corporation only has 1 franchise. Banks require a secondary franchise. Others such as investment
companies also require secondary license from the SEC
(4) Jewelry dealers in precious metals, who, as a business, trade in precious metals, for transactions in excess of One
million pesos (P1,000,000.00);
(5) Jewelry dealers in precious stones, who, as a business, trade in precious stones, for transactions in excess of One
million pesos (P1,000,000.00);
(6) Company service providers which, as a business, provide any of the following services to third parties: (i) acting as a
formation agent of juridical persons; (ii) acting as (or arranging for another person to act as) a director or corporate
secretary of a company, a partner of a partnership, or a similar position in relation to other juridical persons; (iii) providing
a registered office, business address or accommodation, correspondence or administrative address for a company, a
partnership or any other legal person or arrangement; and (iv) acting as (or arranging for another person to act as) a
nominee shareholder for another person; and
 Formation agents also refer to the promoters who incorporate companies. They are covered persons
(7) Persons who provide any of the following services:

(i) managing of client money, securities or other assets;
(ii) management of bank, savings or securities accounts;
(iii) organization of contributions for the creation, operation or management of companies; and
(iv) creation, operation or management of juridical persons or arrangements, and buying and selling business
entities.
"Notwithstanding the foregoing, the term 'covered persons' shall exclude lawyers and accountants acting as
independent legal professionals in relation to information concerning their clients or where disclosure of information
would compromise client confidences or the attorney-client relationship: Provided, That these lawyers and accountants
are authorized to practice in the Philippines and shall continue to be subject to the provisions of their respective codes of
conduct and/or professional responsibility or any of its amendments."
 Example. Me as a lawyer is asked by a client to provide corporate secretarial services. Am I now a covered person?
 Not covered if acting as independent legal professional
 However, if you are employed by the company as an internal counsel, you cannot be considered as independent
legal professional. So if you are acting as corporate secretary, or director, you may be considered as covered person
 Significance of being included in the term ―covered person‖

 AMLA has required certain obligations from a covered person
 You are required to observe AMLA procedures
 Section 3B-1 says when the transaction is in any way related to an unlawful activity or offense under this Act that is
about to be, is being or has been committed, it is required to be reported as suspicious transaction
(From RA 10365) NOTE: Those numbers with specific offenses under them, and laws in BOLD are the ones Atty G.
emphasized
UNLAWFUL ACTIVITIES
Section 3(i) of the same Act is further amended to read as follows:
(i) 'Unlawful activity' refers to any act or omission or series or combination thereof involving or having direct relation to
the following:
(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended;
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(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive
Dangerous Drugs Act of 2002;
a. Sec 4 – Importation of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals|||
b. Sec 5 - Sale, Trading, Administration, Dispensation, Delivery, Distribution and Transportation of Dangerous Drugs
and/or Controlled Precursors and Essential Chemicals|||
c. Sec 6 - Maintenance of a Den, Dive or Resort|||
d. Sec 8 - Manufacture of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals|||
e. Sec 9 - Illegal Chemical Diversion of Controlled Precursors and Essential Chemicals||
f. Sec 10 - Manufacture or Delivery of Equipment, Instrument, Apparatus, and Other Paraphernalia for Dangerous
Drugs and/or Controlled Precursors and Essential Chemicals
g. Sec 12 - Possession of Equipment, Instrument, Apparatus and Other Paraphernalia for Dangerous Drugs|||
h. Sec 13 - Possession of Dangerous Drugs During Parties, Social Gatherings or Meetings|||
i. Sec 14 - Possession of Equipment, Instrument, Apparatus and Other Paraphernalia for Dangerous Drugs During
Parties, Social Gatherings or Meetings|||
j. Sec 15 - Use of Dangerous Drugs|||
k. Sec 16 - Cultivation or Culture of Plants Classified as Dangerous Drugs or are Sources Thereof
 So not all offenses under the Dangerous Drugs Act are considered unlawful activities. Only those specified
(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and
Corrupt Practices Act;
a. Par B - Directly or indirectly requesting or receiving any gift, present, share, percentage, or benefit, for himself or for
any other person, in connection with any contract or transaction between the Government and any other party,
wherein the public officer in his official capacity has to intervene under the law.|||
b. Par C - Directly or indirectly requesting or receiving any gift, present or other pecuniary or material benefit, for himself
or for another, from any person for whom the public officer, in any manner or capacity, has secured or obtained, or
will secure or obtain, any Government permit or license, in consideration for the help given or to be given, without
prejudice to Section thirteen of this Act|
||
c. Par E - Causing any undue injury to any party, including the Government, or giving any private party any unwarranted
benefits, advantage or preference in the discharge of his official administrative or judicial functions through manifest
partiality, evident bad faith or gross inexcusable negligence. This provision shall apply to officers and employees of
offices or government corporations charged with the grant of licenses or permits or other concessions
d. Par G - Entering, on behalf of the Government, into any contract or transaction manifestly and grossly
disadvantageous to the same, whether or not the public officer profited or will profit thereby
e. Par H - Director or indirectly having financing or pecuniary interest in any business, contract or transaction in
connection with which he intervenes or takes part in his official capacity, or in which he is prohibited by the
Constitution or by any law from having any interest
f. Par I - Directly or indirectly becoming interested, for personal gain, or having a material interest in any transaction or
act requiring the approval of a board, panel or group of which he is a member, and which exercises discretion in such
approval, even if he votes against the same or does not participate in the action of the board, committee, panel or
group
(4) Plunder under Republic Act No. 7080, as amended;
(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended;
 297 and 298 are not included, which refer to attempted robbery. Only consummated robbery are included because
if it‘s just attempted, there is nothing to launder there
a. Art 294 - Robbery with Violence Against or Intimidation of Persons|
b. Art 295 - Robbery with Physical Injuries, Committed in an Uninhabited Place and by a Band
c. Art 296 - Definition of a Band and Penalty Incurred by the Members Thereof
d. Art 299 - Robbery in an Inhabited House or Public Building or Edifice Devoted to Worship|||
e. Art 300 - Robbery in an Uninhabited Place and by a Band|||
f. Art 301 - What is an Inhabited House, Public Building or Building Dedicated to Religious Worship and Their
Dependencies
g. Art 302 - Robbery in an Uninhabited Place or in a Private Building|||
(6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;
(7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532;
(8) Qualified theft under Article 310 of the Revised Penal Code, as amended;
(9) Swindling under Article 315 of the Revised Penal Code, as amended;
 RP vs Glasgow Credit: The crime here was estafa, so that is included under unlawful activities
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(10) Smuggling under Republic Act Nos. 455 and 1937; SEID
a. RA 455- Revised Administrative Code
b. RA 1937 – Tariff and Customs Code
(11) Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000;
 All violations of E-Commerce Act are unlawful activities
(12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised
Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets;
(13) Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3 and 4 of Republic Act No. 9372
or The Human Security Act
(14) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of Republic Act No. 10168,
otherwise known as the Terrorism Financing Prevention and Suppression Act of 2012:
(15) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and Corruption of Public Officers
under Article 212 of the Revised Penal Code, as amended;
(16) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the Revised Penal Code, as
amended;
(17) Malversation of Public Funds and Property under Articles 217 and 222 of the Revised Penal Code, as amended;
(18) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Revised Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise known as the Revised Forestry
Code of the Philippines, as amended;
a. Section 78 – Unlawful occupation or destruction of forest or grazing lands
b. Section 79 – Pasturing livestock
 If you pasture livestock land considered as forest land, that is violation of sec 79. Any money that you profit from
such act if you attempt to launder it is a violation of the AMLA
(21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise known as the Philippine Fisheries
Code of 1998;
a. SECTION 86. Unauthorized Fishing or Engaging in Other Unauthorized Fisheries Activities
b. SECTION 87. Poaching in Philippine Waters|||
c. SECTION 88. Fishing Through Explosives, Noxious or Poisonous Substance, and/or Electricity|||
d. SECTION 89. Use of Fine Mesh Net||
e. SECTION 90. Use of Active Gear in the Municipal Waters and Bays and Other Fishery Management Areas|||
f. SECTION 91. Ban on Coral Exploitation and Exportation
g. SECTION 92. Ban on Muro-Ami Other Methods and Gear Destructive to Coral Reefs and Other Marine Habitat
h. SECTION 93. Illegal Use of Superlights
i. SECTION 94. Conversion of Mangroves
j. SECTION 95. Fishing in Overfished Area and During Closed Season|||
k. SECTION 96. Fishing in Fishery Reserves, Refuge and Sanctuaries|||
l. SECTION 97. Fishing Or Taking of Rare, Threatened or Endangered Species
m. SECTION 98. Capture of Sabalo and Other Breeders/Spawners|||
n. SECTION 99. Exportation of Breeders, Spawners, Eggs or Fry|||
o. SECTION 100. Importation or Exportation of Fish or Fishery Species
p. SECTION 101. Violation of Catch Ceilings||
q. SECTION 102. Aquatic Pollution
r. SECTION 103. Other Violations: failure to comply with minimum safety standards; failure to conduct yearly report on
fishponds; gathering and marketing shell fishes; obstruction to navigation or flow and ebb of tide in any stream, river,
lake or bay; construction and operation of fish corrals/traps, fish pens and fish cages
s. SECTION 104. Commercial Fishing Vessel Operators Employing Unlicensed Fisherfolk or Fishworker or Crew|||
t. SECTION 105. Obstruction of Defined Migration Paths
u. SECTION 106. Obstruction to Fishery Law Enforcement Officer
(22) Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known as the Philippine Mining Act of
1995;
a. SECTION 101. False Statements|||
b. SECTION 102. Illegal Exploration
c. SECTION 103. Theft of Minerals|||
d. SECTION 104. Destruction of Mining Structures|||
e. SECTION 105. Mines Arson|||
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f. SECTION 106. Willful Damage to a Mine
g. SECTION 107. Illegal Obstruction to Permittees or Contractors|||
h. SECTION 110. Other Violations. — Any other violation of this Act and its implementing rules and regulations
(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise known as the Wildlife Resources
Conservation and Protection Act;
(24) Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National Caves and Cave Resources
Management Protection Act;
 Sec 7b - Gathering, collecting, possessing, consuming, selling, bartering or exchanging or offering for sale without
authority any cave resource
(25) Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of 2002, as amended;
(26) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, otherwise known as the decree
Codifying the Laws on Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or Disposition of Firearms,
Ammunition or Explosives;
(27) Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law;
(28) Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant Workers and Overseas Filipinos Act
of 1995, as amended by Republic Act No. 10022;
 Sec 6 – Illegal recruitment
(29) Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines;
 All violations
(30) Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo and Video Voyeurism Act of 2009;
 Sec 4 – take photo or video coverage; copy or reproduce; sell or distribute; publish or broadcast persons performing
sexual acts
(31) Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child Pornography Act of 2009;
 Sec 4 – Unlawful or prohibited acts (e.g. hire a child to perform pornography; produce or direct; publish or offer;
possess; provide a venue; to lure a child; to conspire to commit any of the unlawful acts)
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No. 7610, otherwise known as the
Special Protection of Children Against Abuse, Exploitation and Discrimination;
a. SECTION 5. Child Prostitution and Other Sexual Abuse
b. SECTION 7. Child Trafficking
c. SECTION 8. Attempt to Commit Child Trafficking|||
d. SECTION 9. Obscene Publications and Indecent Shows|||
e. SECTION 10(c). Any person who shall induce, deliver or offer a minor to any one prohibited by this Act to keep or
have in his company a minor|||
f. SECTION 10(D). Any person, owner, manager or one entrusted with the operation of any public or private place of
accommodation, whether for occupancy, food, drink or otherwise, including residential places, who allows any person
to take along with him to such place or places any minor herein described
g. SECTION 10(E). Any person who shall use, coerce, force or intimidate a street child or any other child to: beg or
use begging for a living; act as conduit or middlemen in drug trafficking or pushing; conduct any illegal activities
h. SECTION 11. Sanctions for Establishments or Enterprises which Promote, Facilitate, or Conduct Activities
Constituting Child Prostitution and Other Sexual Abuse, Child Trafficking, Obscene Publications and Indecent Shows,
and Other Acts of Abuse|||
i. SECTION 12. Employment of Children|||
j. SECTION 14. Prohibition on the Employment of Children in Certain Advertisements|||
(33) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation
Code of 2000; and
(34) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries.‖
 If the covered person can determine that the transaction REGARDLESS of amount is related to these unlawful
activities, that will be a suspicious transaction and automatically reported to the AMLA
REMEDIES AVAILABLE TO THE AMLC
1. Freezing of Monetary Instrument or Property

SEC. 10. Freezing of Monetary Instrument or Property. – Upon a verified ex parte petition by the AMLC and after
determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful
activity as defined in Section 3(i) hereof, the Court of Appeals may issue a freeze order which shall be effective
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immediately, and which shall not exceed six (6) months depending upon the circumstances of the case: Provided, That
if there is no case filed against a person whose account has been frozen within the period determined by the court, the
freeze order shall be deemed ipso facto lifted: Provided, further, That this new rule shall not apply to pending cases in the
courts. In any case, the court should act on the petition to freeze within twenty-four (24) hours from filing of the petition. If
the application is filed a day before a nonworking day, the computation of the twenty-four (24)-hour period shall exclude
the nonworking days.
―A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion
before the expiration of the freeze order.
―No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme
Court.‖
 STEPS:
a. AMLC will file an ex parte petition for issuance of freeze order with the CA
 Account holder need not be notified
b. If CA finds there is probable cause that the money subject of the petition is related to an unlawful activity, then the CA
will issue the freeze order
 Effect: You cannot withdraw since the account is ―frozen‖
2. Inquire into Bank Deposits

SEC. 11. Authority to Inquire into Bank Deposits. – Notwithstanding the provisions of Republic Act No. 1405, as
amended; Republic Act No. 6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or
examine any particular deposit or investment, including related accounts, with any banking institution or non-bank
financial institution upon order of any competent court based on an ex parte application in cases of violations of
this Act, when it has been established that there is probable cause that the deposits or investments, including related
accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense
under Section 4 hereof; except that no court order shall be required in cases involving activities defined in Section
3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and
(12), which are Punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism
as defined and penalized under Republic Act No. 9372.
The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any
banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application.
To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may, in the course of a periodic or special
examination, check the compliance of a Covered institution with the requirements of the AMLA and its implementing
rules and regulations.
For purposes of this section, ‗related accounts‘ shall refer to accounts, the funds and sources of which originated from
and/or are materially linked to the monetary instrument(s) or property(ies) subject of the freeze order(s).
A court order ex parte must first be obtained before the AMLC can inquire into these related Accounts: Provided,That
the procedure for the ex parte application of the ex parte court order for the principal account shall be the same with
that of the related accounts."
The authority to inquire into or examine the main account and the related accounts shall comply with the requirements
of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference.
CASE: RP vs EUGENIO
Facts:
A series of investigations concerning the award of NAIA 3 contracts to PIATCO were undertaken by the
Ombudsman and AMLC. AMLC issued resolution authorizing the Executive Director of AMLC to sign and verify
an application to inquire into and/or examine the deposits or investments of Alvarez, etc. (the persons
involved). AMLC then applied to inquire into the investments of Alvarez before the RTC which granted it being
satisfied of existence of probable cause that the deposits were related to the offense of violation of Anti-Graft
and Corrupt Practices Act.
Ruling:
Still, even if the bank inquiry order may be availed of without need of a pre-existing case under the AMLA,
it does not follow that such order may be availed of ex parte. (This has now been changed by the subsequent
amendment of the law)
Discussion:
 The issue here was that they filed an ex parte application but the SC said that is not allowed because the
law does not provide it. It even compared this with the Freeze
 After the Eugenio case, Congress amended it. Now, ex parte is now allowed with the Court of Appeals.
 Probable cause is required that the money is related to an unlawful activity
 AMLA does not require a court order at all times:
a. Kidnapping for ransom
b. Offenses under Dangerous Drugs Act
c. Hijacking
 If the AMLC suspects that the money is related to these, they can look into the accounts by
themselves. For the rest of the unlawful activities, they need a court order and can get it through a
verified ex parte petition through the CA
3. Civil Forfeiture
Section 12 of the same Act is hereby amended to read as follows:
(a) Civil Forfeiture. – Upon determination by the AMLC that probable cause exists that any monetary instrument or
property is in any way related to an unlawful activity as defined in Section 3(i) or a money laundering offense under
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Section 4 hereof, the AMLC shall file with the appropriate court through the Office of the Solicitor General, a verified ex
parte petition for forfeiture, and the Rules of Court on Civil Forfeiture shall apply.
The forfeiture shall include those other monetary instrument or property having an equivalent value to that of the
monetary instrument or property found to be related in any way to an unlawful activity or a money laundering offense,
when with due diligence, the former cannot be located, or it has been substantially altered, destroyed, diminished in
value or otherwise rendered worthless by any act or omission, or it has been concealed, removed, converted, or
otherwise transferred, or it is located outside the Philippines or has been placed or brought outside the jurisdiction of
the court, or it has been commingled with other monetary instrument or property belonging to either the offender
himself or a third person or entity, thereby rendering the same difficult to identify or be segregated for purposes of
forfeiture.
(b) Claim on Forfeited Assets. – Where the court has issued an order of forfeiture of the monetary instrument or
property in a criminal prosecution for any money laundering offense defined under Section 4 of this Act, the offender or
any other person claiming an interest therein may apply, by verified petition, for a declaration that the same legitimately
belongs to him and for segregation or exclusion of the monetary instrument or property corresponding thereto. The
verified petition shall be filed with the court which rendered the judgment of forfeiture, within fifteen (15) days from the
date of the finality of the order of forfeiture, in default of which the said order shall become final and executor. This
provision shall apply in both civil and criminal forfeiture.
(c) Payment in Lieu of Forfeiture. – Where the court has issued an order of forfeiture of the monetary instrument or
property subject of a money laundering offense defined under Section 4, and said order cannot be enforced because
any particular monetary instrument or property cannot, with due diligence, be located, or it has been substantially
altered, destroyed, diminished in value or otherwise rendered worthless by any act or omission, directly or indirectly,
attributable to the offender, or it has been concealed, removed, converted, or otherwise transferred to prevent the same
from being found or to avoid forfeiture thereof, or it is located outside the Philippines or has been placed or brought
outside the jurisdiction of the court, or it has been commingled with other monetary instruments or property belonging to
either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be segregated
for purposes of forfeiture, the court may, instead of enforcing the order of forfeiture of the monetary instrument or
property or part thereof or interest therein, accordingly order the convicted offender to pay an amount equal to the value
of said monetary instrument or property. This provision shall apply in both civil and criminal forfeiture.‖
 Money will be forfeited in favor of the government if there is probable cause that the money is related to an unlawful
activity
CASE: RP vs. GLASGOW

Facts:
Republic filed a complaint in the RTC for civil forfeiture of assets against the bank deposits in the account maintained
by Glasgow. It opposed the motion to dismiss of Glasgow and asserted prior conviction for unlawful activity is not a
precondition to the filing of a civil forfeiture case.
Ruling:
The Court agrees with the Republic. Whether or not there is truth in the allegation that account no. CA-005-10-
000121-5 contains the proceeds of unlawful activities is an evidentiary matter that may be proven during trial. The
complaint, however, did not even have to show or allege that Glasgow had been implicated in a conviction for, or the
commission of, the unlawful activities of estafa and violation of the Securities Regulation Code.
A criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil forfeiture
proceeding. Stated otherwise, a finding of guilt for an unlawful activity is not an essential element of civil forfeiture.
Discussion:
 Conviction is not necessary for there to be forfeiture. It is actually a penalty but the SC said no need for
conviction
 If you recall discussion on Bank Secrecy Law, when a covered institution makes a report under Sec 9, it is
exempt from the Bank Secrecy Law and the Foreign Currency Deposit Act. When AMLC makes an inquiry
under Sec 11, it is again exempt.
 Take note also that even if it is not a breach of the Bank Secrecy Law, the covered person cannot
disclose the fact that he has made a report to any other person because such disclosure is a breach of
confidentiality which is penalized under Sec 14 of AMLA. If you make a malicious report, just to harass
somebody, that is penalized under Sec 14
(a) Penalties for the Crime of Money Laundering. The penalty of imprisonment ranging from seven (7) to fourteen
(14) years and a fine of not less than Three million Philippine pesos (Php3,000,000.00) but not more than twice
the value of the monetary instrument or property involved in the offense, shall be imposed upon a person
convicted under Section 4(a), (b), (c) and (d) of this Act.
The penalty of imprisonment from four (4) to seven (7) years and a fine of not less than One million five hundred
thousand Philippine pesos (Php1,500,000.00) but not more than Three million Philippine pesos
(Php3,000,000.00), shall be imposed upon a person convicted under Section 4(e) and (f) of this Act.
The penalty of imprisonment from six (6) months to four (4) years or a fine of not less than One hundred
thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos
(Php500,000.00), or both, shall be imposed on a person convicted under the last paragraph of Section 4 of this
Act.
(b) Penalties for Failure to Keep Records. The penalty of imprisonment from six (6) months to one (1) year or a
fine of not less than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred
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thousand Philippine pesos (Php500,000.00), or both, shall be imposed on a person convicted under Section 9(b)
of this Act.|||
(c) 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 of
six (6) months to four (4) years imprisonment and a fine of not less than One hundred thousand Philippine pesos
(Php 100,000.00) but not more than Five hundred thousand Philippine pesos (Php 500,000.00), at the discretion
of the court: Provided, That the offender is not entitled to avail the benefits of the Probation Law.
If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed
upon the responsible officers, as the case may be, who participated in, or allowed by their gross negligence, the
commission of the crime. If the offender is a juridical person, the court may suspend or revoke its license. If the
offender is an alien, he shall, in addition to the penalties herein prescribed, be deported without further
proceedings after serving the penalties herein prescribed. If the offender is a public official or employee, he shall,
in addition to the penalties prescribed herein, suffer perpetual or temporary absolute disqualification from office,
as the case may be. SIcTAC
Any public official or employee who is called upon to testify and refuses to do the same or purposely fails to
testify shall suffer the same penalties prescribed herein.
(d) Breach of Confidentiality. The punishment of imprisonment ranging from three (3) to eight (8) years and a
fine of not less than Five hundred thousand Philippine pesos (Php 500,000.00) but not more than One million
Philippine pesos (Php 1,000,000.00) shall be imposed on a person convicted for a violation under Section 9(c). 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 under this Act."
(e) The penalty of imprisonment ranging from four (4) to seven (7) years and a fine corresponding to not more
than two hundred percent (200%) of the value of the monetary instrument or property laundered shall be imposed
upon the covered person, its directors, officers or pesonnel who knowingly participated in the commission of the
crime of money laundering.
(f) Imposition of Administrative Sanctions. The imposition of the administrative sanctions shall be without
prejudice to the filing of criminal charges against the persons responsible for the violation.
After due notice and hearing, the AMLC shall, at its discretion, impose sanctions, including monetary penalties,
warning or reprimand, upon any covered person, its directors, officers, employees or any other person for the
violation of this Act, its implementing rules and regulations, or for failure or refusal to comply with AMLC orders,
resolutions and other issuances. Such monetary penalties shall be in amounts as may be determined by the
AMLC to be appropriate, which shall not be more than Five hundred thousand Philippine pesos (P500,000.00)
per violation.
The AMLC may promulgate rules on fines and penalties taking into consideration the attendant circumstances,
such as the nature and gravity of the violation or irregularity.
(g) The provision of this law shall not be construed or implemented in a manner that will discriminate against
certain customer types, such as politically-exposed persons, as well as their relatives, or against a certain
religion, race or ethnic origin, or such other attributes or profiles when used as the only basis to deny these
persons access to the services provided by the covered persons. Whenever a bank, or quasi-bank, financial
institution or whenever any person or entity commits said discriminatory act, the person or persons responsible
for such violation shall be subject to sanctions as may be deemed appropriate by their respective regulators.
 But the most interesting part is Sec 16

SECTION 16. Prohibitions Against Political Harassment. — This Act shall not be used for political persecution 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.
 So remember the unlawful activities are plunder, bribery, malversation, violation of Anti-Graft and
Corrupt Practices Act, etc.
 BUT during election season, you cannot file a case. AMLC is helpless against people running for office.
So there‘s always a backdoor for politicians.
MONEY LAUNDERING OFFENSES

SEC. 4. Money Laundering Offense. – Money laundering is committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the proceeds of any unlawful activity:
(a) transacts said monetary instrument or property;
(b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property;
(c) conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to
said monetary instrument or property;
(d) attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b)
or (c) above; and
(f) performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in
paragraphs (a), (b) or (c) above.
Money laundering is also committed by any covered person who, knowing that a covered or suspicious
transaction is required under this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do
so.
 Take note that your transaction even if it is a covered or suspicious transaction, that is not an offense. It is only a
money laundering offense if there is KNOWLEDGE that the money is related to an unlawful activity and you attempt to
transact it, convert it, etc.
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 Also, a covered person who knows of a covered or suspicious transaction but does not do his duty to report it is also an
offense
 The covered or suspicious transaction by itself is not a violation. The violation is when there is an unlawful activity and
there are proceeds and you attempt to transact, convert, or possess them (etc.)
Inquire into Bank Deposits

SEC. 11. Authority to Inquire into Bank Deposits. – Notwithstanding the provisions of Republic Act No. 1405, as
amended; Republic Act No. 6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or
examine any particular deposit or investment, including related accounts, with any banking institution or non-bank
financial institution upon order of any competent court based on an ex parte application in cases of violations of
this Act, when it has been established that there is probable cause that the deposits or investments, including related
accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense
under Section 4 hereof; except that no court order shall be required in cases involving activities defined in Section
3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and
(12), which are Punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism
as defined and penalized under Republic Act No. 9372.
The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any
banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application.
To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may, in the course of a periodic or special
examination, check the compliance of a Covered institution with the requirements of the AMLA and its implementing
rules and regulations.
For purposes of this section, ‗related accounts‘ shall refer to accounts, the funds and sources of which originated from
and/or are materially linked to the monetary instrument(s) or property(ies) subject of the freeze order(s).
A court order ex parte must first be obtained before the AMLC can inquire into these related Accounts: Provided, That
the procedure for the ex parte application of the ex parte court order for the principal account shall be the same with
that of the related accounts."
The authority to inquire into or examine the main account and the related accounts shall comply with the requirements
of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference.
 Take note class that this is an amendment. Before, only the freeze order can be done ex-parte but
now, even the INQUIRY can be done ex-parte.
 Section 3. Definitions. For purposes of this Act, the following terms are hereby defined as follows:
o (i) "Unlawful activity" refers to any act or omission or series or combination thereof involving
or having relation to the following:
 (1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised
Penal Code, as amended;
 (2) Sections 3, 4, 5, 7, 8 and 9 of Article Two of Republic Act No. 6425, as amended, otherwise
known as the Dangerous Drugs Act of 1972;
 (12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder,
as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists
against non-combatant persons and similar targets
 ―or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and (12), which are
Punishable under the penal laws of other countries‖
o So even if the crime‘s committed in other countries, similar as those mentioned, the AMLA can
inquire into the deposit without need of a court order.
The Crime of Money Laundering
SEC. 4. Money Laundering Offense. – Money laundering is committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the proceeds of any unlawful activity:
(a) transacts said monetary instrument or property;
(b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property;
(c) conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to
said monetary instrument or property;
(d) attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b)
or (c) above; and
(f) performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in
paragraphs (a), (b) or (c) above.
Money laundering is also committed by any covered person who, knowing that a covered or suspicious
transaction is required under this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do
so.
 Again as mentioned, being a covered transaction or suspicious transaction is not a money laundering
offense.
 It may be that you reported a covered or suspicious transaction, it does not mean that you are free
from liability. Because if you did the other acts as mentioned above, knowing that it is from an unlawful
activity, then you will be liable for money laundering.
 Take note that any person may be charged and be convicted of BOTH the unlawful activities and the
money laundering. Your conviction in one, does not bar your conviction for the other (i.e. if you‘re
convicted for money laundering through kidnapping, you can also be convicted for kidnapping). Both
are separate and different so you don‘t need to wait for the conviction of any crime before prosecuting
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for the other (even if you are not yet convicted for the unlawful activity, you may already be and it is
possible for you to be convicted for money laundering).
Powers:
SEC. 7. – xxx
The AMLC shall act unanimously in the discharge of its functions as defined hereunder:
(1) to require and receive covered or suspicious transaction reports from covered institutions;
(2) to issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true
identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious
transaction report or request for assistance from a foreign State, or believed by the Council, on the basis of
substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to, directly or
indirectly, in any manner or by any means, the proceeds of an unlawful activity.
(3) to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General;
(4) to cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money
laundering offenses;
(5) to investigate suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC,
money laundering activities, and other violations of this Act;
(6) to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be
laundered, proceeds from, or instrumentalities used in or intended for use in any unlawful activity as defined in
Section 3(i) hereof
(7) to implement such measures as may be necessary and justified under this Act to counteract money laundering;
(8) to receive and take action in respect of, any request from foreign states for assistance in their own anti-money
laundering operations provided in this Act;
(9) to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in
money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and
punishing offenders;
(10) to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government,
including government-owned and -controlled corporations, in undertaking any and all anti-money laundering
operations, which may include the use of its personnel, facilities and resources for the more resolute prevention,
detection and investigation of money laundering offenses and prosecution of offenders; and SEIDAC
(11) to impose administrative sanctions for the violation of laws, rules, regulations and orders and resolutions issued
pursuant thereto.
(12) to require the Land Registration Authority and all its Registries of Deeds to submit to the AMLC, reports on all real
estate transactions involving an amount in excess of Five hundred thousand pesos (P500,000.00) within fifteen (15)
days from the date of registration of the transaction, in a form to be prescribed by the AMLC. The AMLC may also
require the Land Registration Authority and all its Registries of Deeds to submit copies of relevant documents of all
real estate transactions.
 Number 12 is the latest development. Take note that even if the Registry of Deeds is not a covered person, AMLC now
requires them to report any transaction of 500k. Of course if you buy a house, it exceeds 500k. So any transaction now
with the Registry of Deeds is reported to the AMLC. Supposedly Registry of Deeds is not a covered person. They are
only private persons. However, they are still required to report. Registration process now is more stringent since the
Registry of Deeds will now look at the basis of the transfer.
INTELLECTUAL PROPERTY LAW (RA 8293 as amended by RA 10372)
SEC. 3. International Conventions and Reciprocity – Any person who is a national or who is domiciled or has a real and
effective industrial establishment in a country which is a party to any convention, treaty or agreement relating to intellectual
property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to
nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such
convention, treaty or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise
entitled by this Act. (n)
 Reciprocity, any person who is a national or domiciled in a foreign country which gives rights to Philippine Nationals
shall also be entitled to the benefits to the extent necessary to give effect to any provision of such convention, treaty or
reciprocal law. If in a foreign country it gives certain rights or intellectual rights to Philippine National the nationals of
that foreign country will be accorded the same treatment here in the Philippines. That is the reciprocity rule.
But, there is also what we call as the REVERSE RECIROCITY RULE.
SEC. 232. Reverse Reciprocity of Foreign Laws. – Any condition, restriction, limitation, diminution, requirement, penalty or
any similar burden imposed by the law of a foreign country on a Philippine national seeking protection of intellectual property
rights in that country, shall reciprocally be enforceable upon nationals of said country, within Philippine jurisdiction. (n)
 Take note the reciprocity rule pertains to benefits, but this reverse reciprocity pertains to limitations or
restriction. So, any limitation, restrictions, burdens or conditions imposed by a foreign country on a Philippine
national will also be imposed on the said country‘s nationals in the Philippines.
 Another principle is the MOST FAVORED NATION TREATMENT (not found in the IPL). It means that each
member shall accord to the nationals of other members‘ treatment no less favourable than that it accords to
its own nationals with regard to the protection of intellectual property. So, if you grant an advantage to one
member you also grant the same advantage to other members of the WTO.
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What are the different kinds of Intellectual Property Rights?
 The term "intellectual property rights" consists of: a. Copyright and Related Rights; b. Trademarks and Service
Marks; c. Geographic Indications; d. Industrial Designs; e. Patents; f. Layout-Designs (Topographies) of
Integrated Circuits; and g. Protection of Undisclosed Information.
Section 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 may be, or may relate to, a product, or process,
or an improvement of any of the foregoing.
What are Patents?
Requisites:
1. It must involve a technical solution of a problem in any field of human activity (it must involve a process a
procedure that constitutes a solution of a problem in any field of human activity);
2. It must be new, involves an inventive step (the product is new if it does not form part of a prior art); and
3. Industrially applicable
 If the product forms part of a prior art it is not new, thus it cannot be validly registered as a patent.
Section 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 Section 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)
 If the information or the solution is already out in the open or published, that cannot be considered as a new
solution or if somebody has already filed for that patent or product procedure in which case it is also not new
and cannot qualify for patent application.
Section 25. Non-Prejudicial Disclosure. . - 25.1. The disclosure of information contained in the application during the
twelve (12) months preceding the filing date or the priority date of the application shall not prejudice the applicant on the
ground of lack of novelty if such disclosure was made by:
(a) The inventor;
(b) A patent office and the information was contained (a) in another application filed by the inventor and should not
have been disclosed by the office, or (b) in an application filed without the knowledge or consent of the inventor by a
third party which obtained the information directly or indirectly from the inventor; or
(c) A third party which obtained the information directly or indirectly from the inventor.
25.2. For the purposes of Subsection 25.1, "inventor" also means any person who, at the filing date of application, had the
right to the patent. (n)
 If the information is already available to the public it becomes a prior art so it‘s not new, but if the disclosure
was made within the 12 months preceding the application it will not prejudice the application so long as the
disclosure was made by the inventor himself, the patent office or a third party which obtained the invention
directly or indirectly from the inventor. It is considered as non-prejudicial disclosure.
Section 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)
 One of the requirements for a valid patent application is that it must involve an 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. It must not be immediately
recognizable or knowable and it requires a thought process or thinking.
Section 27. Industrial Applicability. - An invention that can be produced and used in any industry shall be industrially
applicable. (n)
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 It can be used and produced in any industry, meaning it is not impractical. For example, a solution to make
your warehouse clean but it involves a cost of 1 Million that is not industrially applicable, your patent application
might be denied.
What are the inventions in which you cannot apply for a patent?
Section 22. Non-Patentable Inventions. - The following shall be excluded from patent protection:
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 subsection 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.
 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. Take note, it does not apply to the products, the medicine; it does not apply to the composition or
materials to be used in any of these methods. It is just the process that is not patentable
 Aesthetic creations, it has no practical use it is just used to beautify.
Who has the right to a patent?
Section 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)
Section 30. Inventions Created Pursuant to a Commission. - 30.1. The person who commissions the work shall own the
patent, unless otherwise provided in the contract.
30.2. In case the employee made the invention in the course of his employment contract, the patent shall belong to:
(a) The employee, if the inventive activity 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 invention is the result of the performance of his regularly-assigned duties, unless there is an
agreement, express or implied, to the contrary.
 General Rule: the right to a patent belongs to the inventor, his heirs, or assigns.
 Exception:
1. if the work has been commissioned in which case the patent would belong to the person who
commissioned the work; or
2. if the inventor was employed at that time and that invention was part of his regular duties the patent
belongs to the employer, if it was not part of his regular duties the patent belongs to the employee.
Section 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.
 So, the first to file gets the patent or if one filed but the other did not then the person who filed gets the patent.
 If both persons filed an application, the right belongs to the person with an earliest filing date. In other words if
you did not file you are not protected.
 The said rule is subject to exception, meaning if the person did not file in the Philippines but he filed in another
foreign country, and if that country accords the same treatment to Philippine nationals or citizens of the
Philippines, that filing date will be considered as the filing date of his application in the Philippines. This is the
principle of Right of Priority under Section 31.
Section 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
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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.
What are the rights conferred by a patent application?
Section 46. Rights Conferred by a Patent Application After Publication. - The applicant shall have all the rights of a
patentee under Section 76 against any person who, without his authorization, exercised any of the rights conferred under
Section 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:
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.
Section 71. Rights Conferred by Patent. - 71.1. A patent shall confer on its owner the following exclusive rights:
(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.
Section 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.
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)
 Section 71 pertains to the rights of a patent holder; the moment that an application is filed even if it has not
yet approved he is already protected because you already have the rights conferred under Section 71 in
relation to the invention claimed in the published patent application.
 The rights conferred to a patent holder are the same right accorded to a patent applicant.
 Economic Rights: Patent owners shall also have the right to assign, or transfer by succession the patent,
and to conclude licensing contracts for the same.
Section 73. Prior User. - 73.1. Notwithstanding Section 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.
 Section 73 is an exception to Section 71, it excludes from any liability a prior user of a product for which a
patent application has been made. In this case, if somebody was already using that process but he did not
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apply for it he shall have the right to continue the use thereof as envisaged in such preparations within the
territory where the patent produces its effect as long as the prior user was in good faith.
Q: What can the holder of a patent do?

A: He can bring an action for infringement.
In infringement there is what we call an exactness rule. The item is exactly similar to the patent claimed, in which case that
is obviously considered as an infringement.
Or even if the item is not exactly similar because the other party included other elements into the item but the basic invention
is still there. That is still considered as infringement.
In cases of literal infringement, you can always bring an action under section 76.
Doctrine of equivalents- the same as that covered by the patent only that there were some modifications or changes in the
item but still the item performs substantially the same function in the same manner with the same result. So even if the
product is not exactly the same (so not literal infringement) but it performs substantially the same function in the same
manner with the same result, there is infringement still under the doctrine of equivalents.
Section 77
A foreign national or a juridical entity who meets the requirements in section 3 and not engaged in business in the Philippines
to which a patent has been granted or assigned under this act, may bring an action for infringement of patent whether or not it
is licensed to do business in the Philippines under existing law.
General rule: if you are not licensed to do business in the PH, you cannot bring any suit.
Exception: bringing an action for infringement.
One of the rights of a patent holder is to license out his patent. It is voluntary (if the patent holder does not want, then no one
can use the patent).
But there are instances wherein the licensing may be compulsory. The patent holder has no choice but to license out his
patent because it is demanded by the government.
 In cases of national emergency;
 In cases where public interest requires;
 In cases of anti competitive use or exploitation as determined by a judicial or administrative body;
Ex. If you‘re using your product to monopolize the market to the detriment of the economy, the government can
compel you to license out your patent over your product.
How long will the patent last?

-Only for 20 years from the filing date. (If the 20 years will lapse, the patent will be open to the public)
Will the protection over the patent be limited in the country?

-No, because of reciprocity. We grant the national of other countries; such countries would grant the nationals of our
country the same rights.
Intellectual Property Laws breaches international barriers. If you are a national of the US, you can compel a person in
the PH to stop using you products.
Trademarks and Tradenames
"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;
"Trade name" means the name or designation identifying or distinguishing an enterprise;
Trademarks and tradenames will confer different rights.
What are the requisites for trademark application?

It must be a visible sign capable of distinguishing the goods or service of an enterprise.
How is trademark protection acquired?

By registration.
Take note:
 if you‘re suing for infringement, registration is necessary for trademarks;
 If you‘re suing for unfair competition or false designation of origin, registration is Not necessary (so whether
or not you‘re trademark is registered, you can sue! Bad faith rai required)
Q: Who has a priority right?
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A: If you previously filed in a foreign country and you haven‘t filed in the PH, your right will commence on the day the first
application was filed.
But if you already filed in a foreign country, you cannot register here in the PH until your application in that foreign country
has been granted. (so your application in that foreign country must first be approved before it can be registered here in the
PH. BUT you are considered to have filed on the date you first filed whether in the PH or in a foreign country).
We also have the same rule with regard to prior use. You cannot compel a person, who has been using that Mark before it
was registered, to stop the use.
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;( different from “f” in that this involves an internationally well-known
mark and the protection covers only similar goods)
(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; (different from “e” in that this
involves an internationally well-known mark that is registered in PH and the protection covers similar and even
nonsimilar goods)
(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.
Exception to those under generic signs or customary signs: the doctrine of secondary meaning. A generic or
descriptive mark even if ordinarily they are not registrable, they may later acquire the characteristics of distinctiveness and
can later on acquire a meaning which is different from its ordinary connotation.
Ex.
When you say ―Apple‖, it‘s something generic but because you use it for something that is distinctive it acquires a secondary
meaning.
Section. 147. Rights Conferred.
1. The owner of a registered mark shall have the exclusive right to prevent all third parties not having the owner‘s consent
from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to
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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.
2. The exclusive right of the owner of a well-known mark defined in Subsection 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.
Take note: trademarks are only protected if it relates to similar goods or services. If it is of a different nature, other people can
use it even if it‘s registered. BUT if there‘s a chance that the holder of the trademark will venture into that particular area
because it‘s related, you can still protect your trademark if you can prove that the use by others will likely damage the
business interest of the first venturer.
Trademark vs Trade name
 TRADEMARK – protected from the moment of registration

 TRADENAME – protected from the moment it is created, it is protected even without registration
INFRINGEMENT
Section 155. Remedies; Infringement. - Any person who shall, without the consent of the owner of the registered mark:
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 Subsection 155.1 or this subsection are committed
regardless of whether there is actual sale of goods or services using the infringing material.
Elements of Infringement
1. The trademark is registered with the Intellectual Property Office
2. The trademark or trade name is reproduced, counterfeited, copied or colorably imitated
3. The trademark is used commercially
4. The use of the infringing mark or name is likely to cause confusion or to deceive purchasers
5. The use is without the consent of the owner of the trademark or trade name
SKECHERS, USA vs TRENDWORKS INTERNATIONAL CORPORATION

GR 164321
Ruling: Relative to the question on confusion of marks and trade names, jurisprudence has noted two (2) types of confusion,
viz.: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser would be induced to purchase
one product in the belief that he was purchasing the other; and (2) confusion of business (source or origin confusion),
where, although the goods of the parties are different, the product, the mark of which registration is applied for by one party,
is such as might reasonably be assumed to originate with the registrant of an earlier product, and the public would then be
deceived either into that belief or into the belief that there is some connection between the two parties, though inexistent
While respondent‘s shoes contain some dissimilarities with petitioner‘s shoes, this Court cannot close its eye to the fact that
for all intents and purpose, respondent had deliberately attempted to copy petitioner‘s mark and overall design and features
of the shoes. Let it be remembered, that defendants in cases of infringement do not normally copy but only make colorable
changes.The most successful form of copying is to employ enough points of similarity to confuse the public, with enough
points of difference to confuse the courts.
Test to determine confusion

1. DOMINANCY TEST
- focuses on the similarity of the prevalent or dominant features of the competing trademarks that might cause
confusion, mistake, and deception in the mind of the purchasing public. Duplication or imitation is not necessary;
neither is it required that the mark sought to be registered suggests an effort to imitate.
- The competing trademark contains the main or dominant feature of another and confusion or deception is likely
to result.
2. HOLISTIC TEST
- necessitates a consideration of the entirety of the marks as applied to the products, including the labels and
packaging, in determining confusing similarity. The discerning eye of the observer must focus not only on the
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predominant words, but also on the other features appearing on both labels so that the observer may draw
conclusion on whether one is confusingly similar to the other
- Comparison of words is not the only determining factor. The trademark in its entirety as they appear in their
respective labels or tags must also be considered in relation to the goods to which they are attached
UNFAIR COMPETITION
Section 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.
Who are liable for unfair competition?
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 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 Sections 156, 157 and 161 shall apply mutatis mutandis.
 So unfair completion is not only with respect to the manufacturers but also in the dealers and any person selling the
goods
 If you make it appear that a product is manufactured by another person so that people will think that they have the
same manufacturer, that is unfair competition. You just don‘t confuse but you try to make them think that it is the
same or the original product.
 Not limited to products but also services
Infringement vs Unfair Competition
Infringement Unfair Competition

- While you try to create a confusion the mind of the - You copy everything including the name because
public, you still distinguish your product as separate you are trying to pass of your product as the product
from the original of the other manufacturer
- Trademark must be registered because in - The trademark need not be registered
infringement, there is a distinction between your
product and the product of the other person. It‘s just
that they are confusingly similar.
Additional Distinctions from Sundiang Reviewer
- There is unauthorized use of trademark - Involves the passing off of one‘s goods the
- Not necessary to establish fraudulent intent appearance of that of another
- Necessary to establish fraudulent intent
- Unfair competition is broader as it includes cases
that are covered not only by the IPC but also by
Article 27 of the NCC
FALSE DESIGNATION OF ORIGIN
Section 169. False Designations of Origin; False Description or Representation. - 169.1. Any person who, on or in
connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or
device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or
misleading representation of fact, which:
91
(a) Is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such
person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial
activities by another person; or
(b) In commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or
her or another person's goods, services, or commercial activities, shall be liable to a civil action for damages and injunction
provided in Sections 156 and 157 of this Act by any person who believes that he or she is or is likely to be damaged by such
act.
169.2. Any goods marked or labelled in contravention of the provisions of this Section 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 section 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.
 Example: We had this one case before, our client was making tequila. They received a letter from the embassy of
Mexico because apparently you cannot use the word tequila unless your product comes from Mexico.That is a false
designation of origin. They had to stop using that name because their product did not come from Mexico.
Right of a foreign corporation to sue in trademark or service mark enforcement action
Section 160. Right of Foreign Corporation to Sue in Trademark or Service Mark Enforcement Action. - Any foreign
national or juridical person who meets the requirements of Section 3 of this Act and does not engage in business in the
Philippines may bring a civil or administrative action hereunder for opposition, cancellation, infringement, unfair competition,
or false designation of origin and false description, whether or not it is licensed to do business in the Philippines under
existing laws
 It is the same as in patent. A foreign corporation, even if not registered to do business in the Philippines, can sue
for trademark infringement
Duration of Trademark
Section 145. Duration. - A 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.
Section 146. Renewal. - 146.1. A certificate of registration may be renewed for periods of ten (10) years at its expiration
upon payment of the prescribed fee and upon filing of a request.
COPYRIGHT
 Subjects of copyright: 1. Original Works and 2. Derivative works
ORIGINAL WORKS
Section 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;
(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.
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.
92
DERIVATIVE WORKS
Section 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.
173.2. The works referred to in paragraphs (a) and (b) of Subsection 173.1 shall be protected as 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.
Section 174. Published Edition of Work. - In addition to the right to publish granted by the author, his heirs, or assigns, the
publisher shall have a copyright consisting merely of the right of reproduction of the typographical arrangement of the
published edition of the work.
When does copyright protection commence?

 From the moment of creation. No need for registration
 If you remember in the old IP code, you can reproduce literary works but it is limited to 3 copies only. This has
been amended and now there are no limits as to the number of copies. The only limitation is that it must be for personal
use. If you start selling it, you are infringing the copyrights of the author or creator.
 For example, you buy a CD then you upload the song to your computer and then you put it in your ipod. You are
basically reproducing the work. Is that ok? Yes as long as you don‘t start copying and selling it. It is no longer limited to
three copies but the same limitation that you have to use it for personal purposes only not for commercial purposes.
Term of the protection
Section 213. Term of Protection. - 213.1. Subject to the provisions of Subsections 213.2 to 213.5, the copyright in works
under Sections 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.
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.
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 Subsections 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.
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.
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.
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.
Who owns the copyright?

 The author of the work, his heirs or assigns
 If created in the course of employment:
o It belongs to the EMPLOYEE if done in the course of employment but not part of his regular duties
o It belongs to the EMPLOYER if part of the regular duties
 For commissioned work, the work itself belongs to the person who commissioned it but the copyright belongs to
the artist or creator
o Example: You ask someone to paint your portrait. The painting belongs to you as the person who
commissioned it but the copyright to it belongs to the artist. You cannot reproduce and sell the painting. You
only get the actual painting if there is no agreement because you can always agree otherwise.
―Cast all your cares on the Lord and He will sustain you.‖
Psalms 55:22
FERNANDEZ J, QUIBOD, YAP, COROMINAS, HONCULADA, YNTIG, MOMONGAN, CURAN,
DEVERATURDA, EROJO, ABEJO, GAVIOLA, OTERO
93

RA 8799 - The Securities and Regulation Code (Updated With 2015 SRC Irr)

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RA 8799 - The Securities and Regulation Code (Updated With 2015 SRC Irr)

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USC Law - Commercial Law Review (Allied Commercial Law) 2015-2016

MARCH 11, 2016

PURPOSE OF THE SRC: STATE POLICIES OF THE SRC LAW

1. To establish a socially conscious, free market that regulates itself.

SECURITES REQUIRED TO BE REGISTERED

Two major types of securities are:

1. Shares of Stocks are equity securities representing ownership in an enterprise

3. DEPOSITS FOR FUTURE SUBSCRIPTION:

SRC Rule 3.1-1 - Definition of Investment Contract and Derivative

CASE: SEC vs Prosperity.com Incorporated

5. FRACTIONAL UNDIVIDED INTERESTS IN OIL, GAS OR OTHER MINERAL RIGHTS:

6. DERIVATIVES LIKE OPTION AND WARRANTS

7. CERTIFICATES OF ASSIGNMENTS, CERTIFICATES OF PARTICIPATION, TRUST CERTIFICATES, VOTING

8. PROPRIETARY OR NONPROPRIETARY MEMBERSHIP CERTIFICATES IN CORPORATIONS:

9. Other instruments as may in the future be determined by the Commission

AFTER APPROVAL OF REGISTRATION PROCEDURE:

Pre-need plans (which are not issued by insurance companies and so

SRC Rule 9.2 – Exempt Securities 1. Any evidence of

9.1.2.1. Evidence of indebtedness issued to the BSP under its open

9.1.2.3. Any security issued or guaranteed by multilateral financial

9.1.2.4. The registration requirements shall not likewise apply to

o 9.1.2.4.1. Issued to not more than nineteen (19) non-institutional

o Payable to a specific person;

o 9.1.2.4.3. Neither negotiable nor assignable and held on to

o 9.1.2.4.4. In an amount not exceeding One Hundred Fifty Million

So what‘s the difference between a registered securities and listed

Scriptless Trading or book entry trading  is a mode of trading in the

Exhanging a secutiry which is NOT convertible with another security

o If the original purchaser/s shall resell said secunties resulting in

o It will not fall under the exemption anymore. The holder

 a personal net worth of not less than Thirty Million Pesos

 Has been engaged in securities trading personally or

 has held for at least two (2) years a position of

 10.1.7. Burden of Proof on the Availability of Exemption

 What do you do to ensure that your transaction is really exempt?

SRC Rule 10.1 – Exempt Transactions

WHAT IS A TENDER OFFER:

 of a public company as defined in SRC Rule 3, or

Public Company means any corporation

 in the NEW rules, there are two requirement:

 When are these triggered:

 Difference from the 19.2.1:

19.2.1 Disclosure acquire fifteen percent (15 Total Direct or NONE

EXCEPTION TO MANDATORY TENDER OFFER:

HOW TO TENDER OFFER:

19.5. Any person making a tender offer shall:

CEMCO CASE: (Gr. No. 171815)

CEMCO Holdings vs National Life Insurance

 So total shares of CEMCO in UCHC = 60%. UCHC owns 60% of UCC.

24.1.1.1.3. By performing similar act where there is no change In beneficial ownership.

b) To effect, alone or with others, a series of transactions in securities that:

1. Marking the Close

2. Painting the Tape

3. Hype and Dump

4. Squeezing the Float

5. Boiler Room Operations

SHORT SALE - It is a sale of securities which you do not own.

 Short sale HOW done:

General Rule: Short sales are allowed.

Par.6 (SRC Rule 24.2-2)

STOP LOSS ORDER → also not prohibited

26.1. Employ any device, scheme, or artifice to defraud;

NOTE: Sec. 24 & 26 are CRIMINAL OFFENSES

 held by members of his immediate family sharing the same household;  