Kwin Transcripts Special Commercial Laws

Special Commercial Laws
Kwin
November 13, 2010 Then that is when your trust receipts will come in. we will
discuss that later on.
Buyers bank
|
So normally these are the parties in letters of credit; the
Seller------------------------------buyer
Exporter Importer buyer, the seller and the bank.
The purpose of letters of credit is that for his bank to

facilitate payment to the seller. So that it is only when the Another example wherein we have a correspondent bank.
issuing bank/buyers bank would open a letter of credit and Because in this case, we will just give an example of a local
inform the seller that there is already a letter of credit; the bank. What if the seller is located in another country?
effect of issuing a letter of credit is that he bank guarantees
payment.
USA-Bank of America Buyers bank - BDO
Such that the moment the bank informs the seller that there
| |
is a letter of credit issued in his favor, it means that the Seller--------------------------------------buyer
seller is assured of payment. Exporter Importer
So when the seller already has that assurance that he will
receive payment then he is now willing to ship the goods.
So lets say that the seller is located in USA and the buyer is
The seller now will ship the goods and when he ships the located in Cebu. The buyer wants to purchase certain
goods, there are shipping documents or documents of title. merchandise but he does not have the facility wherein he
What are these documents? can transmit the payment because the payment is in dollars.
Commercial invoice, bill of lading, packing list. Lets say that under the contract of sale, the payment for the
goods is $100k.
The letters of credit will specify what are those documents What the buyer will do is contract the local bank, BDO and
that must be presented by the seller to the bank in order to ask it to open a letter of credit on his account is favor if the
get payment. seller. But since the seller is located in the USA, and there is
Because the requirement of the seller to obtain payment for no BDO in US, then BDO will contact its correspondent bank.
the goods that he shipped is that you must present the
shipping documents and the required document mentioned What is a correspondent bank?
in the letters of credit. An agent bank. Normally a correspondent bank is the bank
within the locality of the seller or sometimes it is the sellers
And the seller will issue a draft. bank.
What is a draft?
It is a negotiable instrument. Bill of exchange. For example, the correspondent bank of the seller in USA is
Bank of America.
The seller will issue a draft or draw a draft to the order of
himself ex. in the amount of 100k, equal to the value of the Between BDOP and Bank of America, there is an element of
goods being shipped. The drawee of the draft normally is the TRUST. The correspondence between them is based on a
bank. mutual arrangement wherein BDO can ask BOA to pay the
seller.
So under the letters of credit, the seller now would issue Why would BOA pay the seller $100k?
draft. Together with the daft, you will present the shipping Because it trusts BDO.
documents. That will be the time the bank will pay the
seller. In the same way, if the situation is different, it is the person in
Cebu who sells the goods, then it will be BOA who will
On the part of buyer, the shipping documents will not be request BDO to pay the buyer in Cebu. Why? Because
forwarded to the buyer but it will be forwarded to the bank. between them, there is an element of trust. Meaning the
The bank will retain possession of the shipping documents credit of BDO with BOA is good and vice versa.
until it receives payment from the buyer.
So now, where does the letter of credit come in?
The buyer obtains possession of the goods or documents of The buyer will ask BDO to open a letter of credit. BDO will
title the moment he makes the reimbursement. call BOA, its correspondent bank. Once BDO will issue a
letter of credit, it will inform BOA that there is a letter of
credit issued in favor of the seller. And BOA this time will
What if the buyer cannot pay? inform the seller that there is a letter of credit issued in his
Kwin transcripts Page 1

PDF Created with deskPDF TS PDF Writer - DEMO :: http://www.docudesk.com
Kwin
favor. And the value of the letter of credit is to the extent of Aside from the irreconcilable difference na puro sila duha
$100k. And once the seller knows that there is already a sigurista, particularly in an international sales transaction
letter of credit, the seller now would be willing to ship the wherein a significant interval of time from the time you
goods. order the goods and the receipt of goods and payment.
And the moment you ship the goods, then he will be issued During the interval of time, a lot of things could happen.
shipping documents. And for the seller to obtain payment he There could be increase of price or devaluation in the value
will execute a draft drawn against BOA and BOA is now of the currency. There is also the time value of money
considered a paying bank. purchasing power of money.
So when he presents a draft and shipping documents to BOA, Aside form that, from the POV of the seller, at the time the
then BOA will pay the seller. goods get to the buyer, the buyer might change his mind
and reject the goods and this would cause undue hardships
After that BOA will forward the documents to BDO. BDO will to the seller. So for this reason, the seller wants prompt
retain possession of the title of goods, the shipping payment and security of payment.
documents. It will only relinquish the shipping documents or He wants prompt payment so that he could use the money
the documents of title to the buyer as soon as the buyer na.
reimburses BDO. Letters of credit assures the seller promptness and certainty
of payment
So what is the arrangement between BOA and BDO?
When it pays the seller, it normally deducts the account of
BDO. Who are the parties?
Buyer/ importer/applicant
BOA will benefit more not based on interest but on based on Seller/exporter/beneficiary
foreign exchange rate. When BOA pays the seller, it is based Issuing bank/opening bank
on foreign currency. But when BDO receives payment from Confirming bank
the buyer, it is in pesos. When BDO settles his obligation to Advising bank/notifying bank
BOA, it pays in dollars. So between them there is what we Negotiating bank
call FORWARD EXCHANGE. So they agree on the exchange Paying bank
rate.
Why called a beneficiary?
What does BOA get out of being a correspondent bank? Does Because it is in his favor why the LC is opened. It is him to
he receive anything from the seller? whom the proceeds of the LC will be paid. He is the one who
It receives commission fee or advising fee if he acts as the draws the draft and gets paid by the bank. He obtains the
notifying bank. proceeds of the LC as payment for the goods he disposed.
Who pays these fees? Who is the issuing bank?

Any fees imposed by BOA will be charged to the buyer. It is normally the buyers bank. It is the one who issues or
opens the LC.
Does BDO get anything from opening a letter of credit?
Yes. It charged the applicant or the buyer certain fees. Take note, the selection of the issuing or opening bank is
Commission fees or commitment fees. important. Because normally, you have to select an issuing
bank which is well known because small back will not issue
So any charges related to the opening of the letters of credit, LC. And even if they issue one, they will not be recognized
will be charged to the applicant or the buyer. Because it is in specially if you deal with international sales transactions.
his favor why the letters of credit is opened. So if the bank is not so well known so the purpose of LC is not
accomplished.
Normally the fees are a certain percentage of the value of the
transaction or the amount shipped.
But there are instances where even if the issuing bank is well
So who are the parties involved here? known but is not known to the seller, we use the confirming
The seller, the buyer, BDO issuing bank/opening bank, BOA bank.
correspondent bank/notifying bank. The purpose of a confirming bank is that it lends credit to the
LC issued by a lesser known bank.
Basically this is how a commercial letters of credit works. Take note, the confirming bank confirms the authenticity and

Kwin
validity of LC issued by the issuing bank. A confirming bank So we are talking here of a commercial LC. It works the same
assumes the same obligation of the issuing bank. way as a stand by LC. Only that on standby LC. The
The obligation of the issuing bank is that it undertakes that it underlying transaction is not a contract of sale. It could be
will pay the LC. So will the confirming bank. service agreement or a performance obligation. Instead of
putting up a performance bind, you are required to put up
Why do we need a confirming bank? an LC.
Normally, it is required by the seller.
How does a letter of credit look like?
And then we also have the advising bank or the notifying Prior to an LC, there would be an application of LC just like in
bank. a bank loan.
A notifying banks only obligation is to notify, to advise or
inform the seller that there is a letter of credit issued in his Date
favor. It does not confirm nor does not guaranty payment. It Irrevocable LC number
does not undertake the obligation of the issuing bank. His Beneficiarys name XYZ Corporation
obligation is limited only to notify and advice. This letter will be issued to the beneficiary.
We hereby open an ILC in your favor in the amount of $500.
We also have negotiating bank. And we have the paying bank. This is valid for a term of certain number of days.
Truly yours, bank.
What is a negotiating bank?
For example the LC provides that the draft should be drawn So this LC will be forwarded to the corresponding bank.
against XYZ bank located in New York. The sellers locality is But aside from the LC, when it forwards to the Bank of
in LA. So if XYZ is the drawee, he becomes the paying bank. America, it will of course inform BOA of the opening of the
The seller has to g to New York to get paid. But instead of LC through a wire or cable.
going to New York to get paid, he can negotiate the draft
with a negotiating bank. So a cable will usually look like this: sender, BDO and receiver,
BOA. The message will simply contain the details of the LC.
Can a draft be negotiated? number, date, currency, amount, beneficiary, applicant, Etc.
Yes, because it is a negotiable instrument.
Then BOA will then inform the seller that there is now an LC
From the drawer, I indorse it to the negotiating bank. And the and it is now safe to ship the goods.
negotiating bank pays me and it will present the draft again
to the paying bank as the drawee. Kinds of LC
Irrevocable
This is a negotiable instrument. I negotiate it. I discount it. Revocable
And of course we have the paying bank. It is the one Its called irrevocable in a sense that it cannot be changed,
indicated in the LC wherein the draft is to be drawn. It is the cancelled or amended without the consent of all the parties,
drawee particularly the beneficiary.
A confirming bank could also be at the same time the paying It is revocable if of course it can be changed or amended.
bank. It could also be an advising bank. Or it can be both
notifying bank and a paying bank. If I am the seller, of course I will require an irrevocable LC.
But you have to take note the responsibility of a paying bank.
It is different from a mere advising bank. My question:
Under in INDEPENDENCE PRINCIPLE, an LC is different from
the underlying transaction of the contract of sale. It has
nothing to do with the contract of sale. In fact the perfection
of the contract of sale does not depend upon the opening of
the LC. So regarding the transfer of risk and the transfer of
ownership, it will be governed by the terms and the contract
of sale. There, the risk and ownership will transfer upon
delivery.

Kwin
But then again, although LC is very popular amongst applied to the debt.
merchants, with the modern means of doing banking
transactions, the bank has also evolved and innovated. A trust receipt is a way for importers to make importation
There are other means of remitting payment. even if they do not have money. Its more of a loan. If you
misapply the proceeds, you will be liable for estafa.
But this will only address the promptness of payment but not
the assurance on the part of the buyer. Kens question:
There are different contracts involved.
LC deals with documents. It does not deal with goods. So the We have a contract between the buyer and the seller.
bank makes payment only upon presentation of genuine We have a contract between the issuing bank and the
documents. If the documents are genuine and it ties up with applicant. They are governed by the application of the LC.
what is required in the LC then there is no further obligation They have a separate agreement.
of the bank than to pay. The bank is not required to look We have the letter of credit proper. It governs the issuing
beyond or to look further from what appears on the bank and the beneficiary.
document. It is not expected to check whether the shipping
document tally exactly with the goods that it shipped. O, if
you require the bank to check whether the documents tally
with the goods that you shipped no bank will issue the
instrument knowing the risks.
The documents required in the LC may be different from the

documents covering the sale of goods.
Plus, there would no longer be promptness of payment

because for bank to pay, it has to check the goods.
Plus, the law also says that what ever breach committed
under the underlying contract of sale, the law affords them
remedy. Its between only the seller and the buyer. The bank
is not a party.
Raymonds question:
Is there are differences in the document, we have under LC,
RULE ON STRICT COMPLIANCE. Under this rule, the paying
bank must comply strictly with the instruction s of the
letters of credit. If there are discrepancies in the document
or the BOL, the bank may withhold payment even if the only
terminologies are different but in substance they are the
same it has the right to withhold payment. OW the bank is
paying at his own risk.
My question:
The paying bank must go to the issuing bank and may not go
after the buyer because between them there is no privity of
contract
These are independent contracts.
If the buyer cannot pay the bank. Then the bank will hold the
document of title. That is when we have trust receipts.
Under a trust receipts, it effect it simply says that the bank

acquires ownership of the goods but it is willing to relinquish
possession of the gods to the buyer and the buyer holds the
goods in trust for the bank. Meaning the bank authorizes the
buyer to dispose the goods and the proceeds will the

Kwin
November 19, 2010 Case: Prudential bank
Last meeting we started discussing letters of credit and the Phil Rayon--------------------------------Nissho
Buyer Seller
parties involved in LC.
| |
Prudential -------------------------------Bank of Tokyo
Who are the parties again? Issuing bank correspondent bank
1. buyer/applicant
2. seller/beneficiary Nissho is selling textile machineries to Rayon. Between them,
3. issuing bank there is a contract of sale. So in order for the buyer to pay
4. notifying bank/advising bank the seller, Philippine Rayon applied for a LC with prudential
5. confirming bank (assume greater responsibility) bank (issuing bank). Under the LC in order for Nissho to get
6. paying bank paid, he must draw a draft. And the drafts were paid by
7. negotiating bank (makes payment) Bank of Tokyo (correspondent-paying bank).
Bank of Tokyo was a paying bank. In fact drafts that were
Three independent contract involving LC, and the parties drawn by the seller together with the shipping documents
whose relationship are being governed: were presented by the seller.
1. contract of sale buyer and seller
2. application for LC buyer and issuing bank You know how it works. Once the LC is opened, Nissho will
3. LC proper seller and issuing bank ship the documents in order to recover payments, he will
issue drafts drawn against Bank of Tokyo. The drafts
Issuing bank is the bank of the buyer. it is the one that issues together with the shipping documents will be presented to
the LC. And the moment the LC is issued, the issuing bank the Bank of Tokyo in order for Nissho to get payment.
notifies the seller. But if the seller is located abroad, then it
would either give the copy to the LC to the notifying bank or The drafts issued by Nissho were accepted by Rayon. But the
the advising bank. other drafts were not accepted.
The notifying bank or the advising bank has the obligation to But Prudential bank did not get reimbursement from
notify the seller about the existence of the LC. Philippine Rayon.
But a confirming back confirms the LC. By confirming, it The shipping documents were shipped to Prudential and in
undertakes or gives credit to the LC and confirms that the LC order for it to get payment, he will give it to Rayon upon
is valid. And more importantly, but confirming the LOC it reimbursement. But in this case, there is o reimbursement
undertakes to pay and assumes the obligation of the issuing because Rayon had no money. But the goods were released
bank. in the form of trust receipts.
The paying bank merely pays the LC. It my or may not be a Rayon ceased business operation and the obligation
confirming bank. remained unpaid and the machineries covered in the trust
receipts were sold to another entity without paying the
So take note of their responsibility. bank.
Seller------------------------Negotiating bank---------------------Issuing bank Issue: WON Philippine Rayon is liable to Prudential bank
Draft
Because of the letters of credit.
Bill of exchange
Drawer Indorser Drawee
According to Philippine rayon, he is not liable because he did
A negotiating bank of the draft is drawn in another bank not accept the two drafts.
and it is located far away from the place of the seller.
Instead of going to the place of the paying bank, he simply So we have to resolve the issue on WON in the letters of
negotiates the draft to the negotiating bank. So in effect, if credit, is the acceptance of drafts by the buyer necessary in
you are to relate this to a negotiable instrument, the seller, order for him to be liable.
in order to get paid issues a draft which is a form of a bill of
exchange. The seller becomes the drawer. And if he Answer is in the negative.
negotiates it to the negotiation bank, the negotiating bank
will negotiate it to the issuing bank, who ultimately By the nature of LC, by issuing LC, the issuing bank
undertakes to pay. So the negotiating bank in turn will undertakes to pay. In effect, under the LC, it is the issuing
become an indorser. bank who is the drawee and not Philippine Rayon.

Kwin
The point is, whether they require acceptance or not, it is not Case: Bank of America
Philippine Rayon who should accept these drafts. But it General chemicals------------------------Inter-resin
Buyer Seller
should be the bank.
|
Bank of Ayudhya--------------------------Bank of America
Who undertakes to pay under the LC? Issuing bank Correspondent bank
It is the issuing bank.
Bank of America (correspondent bank) received LC from Bank
And by paying, the seller through the Bank of Tokyo upon of Ayudhya (issuing bank) for the account of General
receipt of documents, and upon payment of Prudential Chemicals (buyer). The LC was in favor of Inter resin (seller)
bank, Philippine Rayon becomes liable under letters of credit for the sale of ropes.
Therefore, prudential bank has the right to go after Philippine Pursuant to the LC, Inter resin availed of the LC by issuing
Rayon for its liability under letters of credit. drafts and presenting shipping documents. Bank of America
redeemed the drafts and issued managers checks. it paid
And acceptance is not necessary. OW it will require Inter resin.
If under the LC, you require the buyer to accept first, then the
issuing bank and the seller would be at the mercy of the In the normal order of things, the recourse of Bank of
buyer. So it defeats the purpose of LC which is to insure America will be on Bank of Ayudhya.
certainty and promptness of payment.
When bank of America sought payment from the issuing
By opening an LC, it is the issuing bank who undertakes to bank, the issuing bank disclaims. According to it, it did not
pay. And once the issuing bank makes payment, then the issue such LC. Much more, General chemicals did not apply
liability of the applicant accrues under the LC. Di na for one. So there was an investigation made by the NBI. In
kinahanglan ang imong acceptance. fact, there was a case filed. And later on there was an issue
that the goods that were delivered were not ropes but were
And also here, aside from his liability under the letter of waste papers.
credit, he is also liable under the trust receipts.
So the issue now deals on what is the obligation of Bank of
So just an over view. America.
What are the trust receipts? To determine the obligation of Bank of America, you need to
It is an arrangement where the Philippine importer cannot determine the participation of bank of America. Was he a
yet pay. Under the trust receipts, he obtains possession of notifying bank or the confirming bank?
the goods but undertakes to hold the goods and the Because as we have said, if you are just a notifying bank,
proceeds of the goods in trust for the banks. what is your obligation?
Merely to notify.
Such that if the goods are sold, he will apply the proceeds in Now if there is something wrong with the LC, does it guaranty
payment of the debt. And under the trust receipts law, if you the validity or the authenticity of the LC?
misappropriate the proceeds, or does not return the goods if No. It doesnt incur such obligation if it is just a notifying
not sold, he is liable for estatfa. bank.
Is Philippine Rayon here liable for estafa? But if you are a confirming bank, you are liable. By confirming
Yes. Because he sold the goods to another and did not turn you are confirming that the LC is genuine and valid and you
over the proceeds. He did not settle his liability under the undertake to pay.
trust receipts and under the LC.
So Bank of America here was merely an advising bank.
So under this case, the issuing bank acts as the drawee. How was it established that is was an advising bank?
In the letter it was only stated that he was just an advising
bank.
In fact he received paying for advising fee.
What about the fact that Bank of America accepted the

shipping documents and in fact paid Inter resin. Did that
make bank of America a confirming bank?
No.

Kwin
Do not confuse a paying bank from a confirming bank. It does the account of General chemicals when in the first place
not necessarily mean that if you pay, you become a there was no contract of sale? So clearly he was in bad faith.
confirming bank. You can be a mere paying or negotiating Despite that, he still availed of the letters of credit. Only
bank. that, unfortunately the case against them was dismissed.
So here the court said the fact that he accepted the shipping In fact in this case, the court discussed about INDEPENDENCE
document and paid inter resin did not convert Bank of PRINCIPLE.
America from an advising/notifying bank to a confirming But its not for bank of America to determine if it was genuine
bank. or not. The obligation of Bank of America is to check
whether the shipping documents were genuine. Only that
And since bank of America was only a notifying bank, its only the goods that were actually shipped were not really ropes.
obligation is simply to notify. It does not guaranty But its not the obligation anymore of Bank of America.
authenticity and validity of the LC, nor did he undertake to Under the INDEPENDENCE RULE, the bank merely looks at the
make the payment. documents required under the letters of credit.
If the shipping documents are genuine and it tallies with what
But why did it pay here? is required with the letters of credit, then the banks
He just acted as a negotiating bank. obligation is to pay. It is precluded from looking beyond the
Because here the drafts were drawn against a bank in shipping documents. It is not his obligation to determine
Thailand. And to save Inetrresin from the travel and whether the underlying transaction was accomplished.
hardship from going to Thailand, Bank of America accepted
the drafts as a form of negotiation. In fact here, there was an issue raised whether the ropes
were actually delivered. But the courts said that thats
By accepting the drafts negotiated to it, what is the role of beyond the issue. We are only discussing on the liabilities
Bank of America now? under the LC. Whether the ropes were actually delivered or
It is just a mere indorser. not is besides the point.
And therefore on the issue on WON he guaranteed on the It was only stated from the facts that he only received the LC
authenticity of the documents, he did not. But only apparent from a registered mail it did not even state that the LC was
authenticity. from Bank of Ayudhya. In fact it denied having issued or
opened LC.
So since bank of America is not a confirming bank, it is not
liable under the LC.
Case: MWSS vs Daway
But since it made payment as a negotiating or paying bank,
can it go after Inter resin for the amount that he paid? MWSS-------------------------------------Maynilad
Obligee Obligor
Yes.
|
Applying the principle negotiable instrument, normally, the Citicorp
indorser will go after the drawee. But since the drawee Issuing bank
denied receiving and the making of the LC, then the
recourse of the indorser is to go after the parties secondarily We are usually talking of a commercial LC, but this time it
liable which is the drawer. In this case, it is Inter resin. involve a STAND BY LETTER OF CREDIT. In a stand by LC, it is
a non sale transaction.
But what if bank of America was a confirming bank, do you
think do you think he can recover from inter resin? Concessioners agreement between MWSS and Maynilad. Its
No. because by confirming, it assumes the obligation of the more of a service agreement for 20 years. Maynilad is
issuing bank. And it also warrants the authenticity and obliged to put up a performance bond to guaranty
genuineness of the LC. performance of the agreement. But in lieu of the
performance bond or as a performance bond, Maynilad
But since he in not a confirming bank but merely a notifying opened up an irrevocable stand by LC. And the stand by LC
bank, he has the right to go after Inter resin. was issued by foreign banks. The issuing bank was Citicorp.
And the beneficiary was MWSS.
And also the Court pointed out that
Clearly Inter resin was in bad faith. The contract was in dollars. Due to the fluctuations of the
Before the LC, what precedes it, a contract of sale. Wouldnt exchange rate, Maynilad issued a notice of force majeure,
inter resin wonder why an LC was issued under his favor on and suspended its payment of concessioners fee.

Kwin
then that is a different story. That is already between the
So there was a memorandum agreement where they made issuing bank and the applicant. But as far as third parties are
amendment to their contract where it provided a concerned, under the LC, he goes after the issuing bank.
mechanism for Maynilad to recover for its loss.
But despite that, MWSS still failed to comply with obligations.
So that resulted for Maynilad issued a notice of event of
termination. Meaning, the concessioners agreement is
terminated. And because such notice, in effect it is as if
Maynilad is in default of its obligation in the agreement.
And since there was a default in the obligation, MWSS went
after the letters of credit and demanded payment in the
amount of 98m.
But when MWSS availed of the LC, Maynilad filed for a
petition for rehabilitation. And he effect of corporate
rehabilitation, the rehabilitation court will issue a STAY
ORDER. And one of the things covered in the stay order is to
prevent claims against the company under the
rehabilitation; claims against the debtor and claims against
the guarantors who are not solidarily liable to the debtor,
Maynilad.
So the issue now is if the LC is covered by the stay order. So

that if it is covered, then MWSS can no longer avail of the
stand by LC.
So therefore, we need to determine what is the nature of LC.
Is the liability of the Citicorp, the issuing bank, a solidary
liability or not? Because if it is not a solidary debtor, then it
is covered under the stay order. If its a solidary debtor, then
it is not covered under the stay order.
So what is the liability of the issuing bank?
So here in this case, the court made a distinction between a
contract of guarantee and LC.
In a contract of guaranty, the obligation of the guarantor is

only secondary. It only comes in upon the default of the
party primarily liable. It is entitled to benefit of exhaustion.
But in the LC, the liability of the issuing bank is PRIMARY,

DIRECT, ABSOLUTE, DEFINITE UNDERTAKING TO PAY. Os his
liability arises WON there is still the applicant of the LC.
And since the liability of the issuing bank is primary and

direct, meaning it is solidary. Therefore, it is not covered by
the rehabilitation court.
Because this case is decided under the old interim rules of

procedure, under the amended rules which took effect
under 2009, it is very clear under sec 7 that the stay order of
a rehabilitation court does not include letters of credit.
Because letters of credit, the liability of the issuing bank is
solidary or primary.
If you talk about the LC, the creditor does not go after the
applicant, it goes after the issuing bank. If the LC is already
availed of and you say that the applicant still has obligations,

Kwin
November 20, 2010 LC itself.
What are the stages in the letters of credit? Because the problem in this case was that there was a
-There must be a contract of sale between the buyer and difference between the quantities of the goods as against
seller. the quantity stated in the bill of lading.
-After that, there is an application for an LC by the buyer. And Keng Hua was made to pay the demurrage and
-If it is accepted, then the issuing bank will now issue the LC. surcharges based on the bill of lading.
-Once the LC is established and the seller is aware of that, So which would prevail? Is Keng Hua liable for the quantity
then the seller will now ship the goods. stated in the bill of lading or the quantity actually shipped?
-In order to obtain payment, the seller will now issue drafts Based on the quantity in the bill of lading.
and together with these drafts, the seller will submit Still apply the independence principle. Similar to the letters
shipping documents to the issuing/confirming/ paying/ of credit. The BoL is separate from that involving the contact
notifying bank. of transportation. In the same was that the letters of credit
-Then the bank will pay the seller. is independent from the contract of sale.
-Issuing bank will go back to the buyer.
-Buyer will reimburse the bank and obtain the documents of
title. Case: Transfield Phil. Vs Luzon Hyrdo Corp
Transfield was the contractor. So he was the obligor and the
In those stages, when is the LC considered perfected? obligee is Hydro. Under their agreement, there was a
Case: Belman vs Central bank requirement that the obligor is required to put up a
The LC is perfected the moment the seller/beneficiary is paid performance bond to secure the performance of the
by the bank. obligation. Transfield was required to put up a stand by
letter of credit to guarantee Transfields performance of
Is the opening or issuance of the letters of credit necessary obligation to Luzon Hydro.
for the perfection of the contract of sale/ underlying The target completion date was very important.
transaction? It asked for extension of time but it was denied by Luzon
No. Hydro. And the denial resulted to a series of suits. Because
according to Luzon Hydro, the extension of time was not
Why not? justified/reasonable.
Because the LC is only a mode of payment the opening of Transfield gave a notice to the bank. Because it anticipated
the LC is not among the requisites for the perfection of the that because of the dispute over the extension of time, it
contract of sale. These are independent contract. foresees that the obligee/beneficiary of the LC would now
avail of the standby LC. In anticipation of that, it informed
When is sale perfected? the bank not to release LC. And if released, the bank will be
The moment there is meeting of minds. Since sale is a liable for liquidation damages. So that was like a warnig to
consensual contract. the issuing bank.
But on the part of Luzon Hydro, it availed of the LC despite of
We have already discussed the independent contracts the notice and the bank released notwithstanding the notice
involved in LC. of Transfield.
Case: Keng Hua Paper products vs CA So the issue now is the applicability of INDEPENDENCE
Basically this case talks about bill of lading. But under this PINCIPLE. Why did this principle come up? According to
case, this mentions of the three independent contracts Transfield, why is it not appropriate for Luzon Hydro to avail
involved in the LC. of the LC?
1. contract of sale Because according to Luzon hydro, there was still a pending
2. application for LC dispute. So you cannot really say that Transfield is already in
3. LC proper. default.
This case simply means that these contracts are independent But according to Luzon Hydro, it involves the independence
and these should be maintained in PERPETUAL SEPARATION. principle.
Similarly, a BILL OF LADING, aside from the contract of sale of Independence principle means that the LC is independent
LC. And aside from the Bill of Lading, we also have the from the contact of underlying transaction, which in this
CONTRACT FOR THE TRANSPORTATION OF GOODS. Both are case is the turn key contract. So even if there is a dispute,
independent and separate from the contract of sale and the we need not resolve it.

Kwin
But the contention of Transfield is that the party who has the Fraud exception rule apply in a sense that if the issuing bank
right to invoke independence principle is only the issuing has determined that the documents submitted by the
bank and not Luzon Hyrdo. beneficiary is fraudulent then it has the right not to pay the
beneficiary as an exception to the independence principle.
How did the court resolve that? Does Luzon Hydro have the
right to invoke the independence principle? Or is it only the Going back to the case, which principle was applied by the
bank? court? The independence principle or the fraud exception
So independence principle can be invoked not only by the rule?
issuing bank but also by the beneficiary. The independence principle. For us to determine whether
OW, if he cannot invoke it, then that would defeat the there was fraud or not, we have to resolve the issue on the
purpose of the LC. dispute. The issue on fraud is intertwined on whether there
was really default. And since it was not established that
Also in this case, the court made a distinction between a there was fraud committed, then the court applied the
commercial LC and a stand by LC. independence principle.
In the commercial LC, the underlying transaction is the
contract of sale. While the standby LCs underlying What is the remedy available under fraud exception rule?
transaction is any contract that is non sale. It could be a Injunction.
service agreement or the performance of a non sale
transaction. But is injunction applicable here (availed by Transfield to
In a commercial LC, for the beneficiary to obtain payment, he enjoin the issuing bank from issuing the LC)?
must present together with the drafts, the shipping Injunction cannot be availed of because there are
documents or the documents of title. While in a standby LC, requirements for you to avail of injunction; establish a right,
the document to be shown with the draft, any document or that such right was violated, there is irreparable damage,
certification showing that the applicant or the obligor has etc. these requirements were not complied with by
not performed, (beneficiary can avail the moment there is Transfield.
non performance or the obligor fails to perform). So
probably in this case, he could show the extension of time The fraud exception rule applies particularly to the seller
that the target completion date was this but up to now, the availing of the LC.
progress report says that the project has not yet been
accomplished. So bottom line, the court therefore in this case said, the bank,
In a commercial LC, the beneficiary/seller has to prove that applying the independence principle, it has no obligation to
he has complied with the contract or that he has performed determine whether Luzon Hydro certification of default is
the underlying obligation. Whereas in a standby LC, the true or not. Neither were they bound by Transfields
beneficiary has to prove that the obligor has not performed. declaration that Luzon Hydros call on the LC was wrongful.
So the banks obligation was simply to pay once the required
So going back to the case, is the resolution of the dispute documents was presented by the beneficiary. And since
necessary before Luzon Hydro can avail of the LC? here, Luzon Hydro was able to present the documents, then
No. Applying the independence principle. the obligation of the issuing bank was simply to pay.
But there is an exception in the case, as an exception o the You cannot go after the issuing bank and fault it for paying
independence principle. What is that? the LC. Because based on this case, issuing bank has the
FRAUD EXCEPTION RULE right to release the LC. Or Luzon has the right to call on the
LC. So when the dust settles and you determine that there is
What is the fraud exception rule? no default, the right of Hydro is to go after Luzon Hydro. But
Basically it means that when the BENEFICIARY in availing of not after issuing bank.
the credit or for purposes of drawing on the credit
fraudulently presents to the confirming bank documents Take note in this case that Transfield even sent notice to the
which contains material misrepresentation. bank with a warning that the bank will be liable for
liquidated damages. But do you think that the bank will be
Like for example in this case, if Luzon Hydro presented held liable? No. it was just merely performing his obligation
documents to show that Transfield has defaulted when in fat under the LC.
it has not, so the fraud exception rule would apply. If the
fraud exception rule is established, then the beneficiary In fact, if the bank refused to pay, it might be held liable by
cannot avail of the LC. Luzon Hydro.

Kwin
Case: Feati bank vs CA It provides absolute assurance to the beneficiary that it will
Axle was the buyer. Villaluz was the seller. There was a pay or it will undertake the issuing banks obligation.
contract of sale of lots. The issuing bank is Security Pacific
National Bank. The Correspondent bank was Feati Bank. In this case, was the LC confirmed?
The LC specifically requires that aside from the shipping No. it was only an irrevocable LC but not a confirmed LC.
documents, there must be a certification coming from
Christiansen that the logs shipped were as required. So therefore, Feati did not incur the obligation of a
So when Villaluz now submitted the documents to Feati, the confirming bank. At most, it is only a notifying or advising
correspondent bank refused payment because not all the bank.
documents required under the LC wee presented. There is
no certification from Christiansen. But the court went on further and said, even if assuming that
assuming that Feati was a confirming bank, is Feati obliged
So issue now is whether Feati, for refusing to pay the to pay the LC?
seller/beneficiary can be held liable. Can the bank be held No. because the documents presented were not complete,
liable? and applying the strict compliance rule, Feati was not bound
No. to or has the right to refuse payment.
Why not?
STRICT COMPLIANCE RULE If he pays, he does at his own risk.
What does this rule mean?

Under the strict compliance rule, it is required that the
documents submitted must strictly conform to the terms of
the LC. Therefore all the documents required must be
submitted. And a corresponding bank which departs from
the terms or from what is stipulated in LC, or accepts a
faulty tender, does it at its own risk. Therefore, he may not
be able to recover from the buyer or the issuing bank.
If Feati accepted he faulty tender, he is doing it at its own

risk. Later on, it cannot go to the issuing bank for
reimbursement and similarly the issuing bank cannot also go
after the buyer for payment. Thus the strict compliance rule.
To the letter gyud.
So therefore here, Feati is justified in refusing payment.
What about the contention that this is already an irrevocable

LC and therefore Feati has no right to refuse?
The court here made a distinction between an IRREVOCABLE
LC and a CONFIRMED LC. Is there a difference?
An LC can be irrevocable and at the same time confirmed.
Or it could be irrevocable but not confirmed.
Or it could be revocable and confirmed.
What do you mean by IRREVOCABLE LC?

An irrevocable LC is irrevocable in a sense that it cannot be
changed or amended or cancelled without the consent of all
parties especially of the beneficiary..
What is a CONFIRMED LC?

If the LC is confirmed, that means that we have a confirming
bank.
So if the LC is already confirmed, then that means that a
certain bank or a corresponding bank assumes the obligation
of that of the issuing bank.

Kwin
November 26, 2010
We have discussed before; what is the nature of the banks
Case: BPI vs de Reny obligation under the LC? Is it similar to that of a guaranty?
Is the bank under obligation? No it is not.
No.
Because in a guaranty, there is benefit of exhaustion. You are
So applying the independence principle, so long as the only liable if the party primarily liable is unable to pay. Thats
documents required under the LC are genuine and the nature of guaranty
complete, it is now the obligatin of the bank to make
payment to the supplier/seller of the goods. And it does not But the nature of LC is not similar to a guaranty. It is a
matter later on that it turned out that the goods shipped primary, direct, absolute and solidary obligation of the
does not tally with that what is indicated in the LC. It is issuing bank. Being such, the payments the payments made
something to be dealt with between the buyer and the by the Mendozas on its loan to Philam will not have the
seller. But the bank has nothing to do with it. The buyer as effect of reducing the issuing banks liability.
the applicant of the LC has no right to refuse payment on As you said, a liability under the LC is a separate and
that basis. independent agreement. So meaning the issuing bank
So we apply here the independence principle. cannot claim set off or compensation.
Case: Insular bank of vs IAC Although the effect in totality, if Mendoza has paid, Philam
So the issuing bank this one now involves a STAND BY LC to has no right to call on the LC.
guaranty performance by spouses Mendoza on its loan to
Philam Life. So the issuing bank here is bank of Asia and But in this case it was determined upon recomputation that
America. there was still a liability. So therefore Philam still has a right
to call on the LC.
loan So in short the obligation of the issuing bank as far as the
Spouses Mendoza------------------>PhilAm
beneficiary is concerned is still up to 600k. You dont deduct
| stand by LC
IBAA payments.
They had a loan with Philam. And there are sureties here. So Case: Phil Virginia Tobacco vs de los Angeles.
to guaranty the performance of the spouses obligation to It simply states that in an irrevocable LC, it cannot be
Philam, there were stand by LC. cancelled or modified even by court order without the
The Mendozas already made partial payments of 290k to permission of the parties involved, specifically of the
Philam. The total amount of the loan was 600k. beneficiary.
When they failed to continue paying the amortization, Phiam
now called on the stand by LC, equivalent to the unpaid KINDS OF LC
amortization. So lets discuss now the kind of LC.
So they have a balance of 310k. When Philam called on the COMMERCIAL LC
stand by Lc, of course it issued drafts. It demended now STAND BY LC
from the issuing bank the balance.
But according to the issuing bank, they are no longer liable REVOCABLE LC
because according to insular bank, they summed up all the -can be amended, cancelled anytime
payments made by spouses Mendoza under the loan; they IRREVOCABLE LC
have already fully paid. In fact according to IB, they -cannot be amended or changed
overpaid. Since the Mendozas have already overpaid the
loan, there is no reason for Philam to call upon the LC. CONFIRMED LC
So the issue now here is WON the partial payments made by -We have a confirming bank. In that case, the confirming
Mendoza of its loan to Philam would have the effect of bank guarantees the payment. It provides absolute
reducing the liability of the issuing bank under the LC to the assurance to the beneficiarythat it will undertake the
Philam, the beneficiary of the LC. issuing banks obligation.
Therefore, we have no more liability. Is that correct? UNCONFIRMED LC
No. -just like an ordinary LC
Take note that an LC be irrevocable but unconfirmed.

It can also be irrevocable or confirmed.
Irrevocability and being confirmed are two different things.

Kwin
REVOLVING LC II. TRUST RECEIPTS LAW PD 115
-means that it is valid for several transaction. A. DEFINITION AND PURPOSE
-Like for example, there is a limit of LC up to 1m. So it could What is a trust receipt?
cover several imporatations and purchases or it could Take note, while TR is related to LC, its not always in all
guaranty several importations cases that if there is LC, there is TR. As you have read in the
NONREVOLVING LC cases, there could be TR even if there are no importation,
-covers only 1 transaction without necessarily involve an applicationof LC.
BACK-TO-BACK LC Unlike an LC where it involves strictly bank to bank

-Parang exchange of goods. Both parties are buyers and transaction, a TR need not always involve a bank. A bank
sellers of each other. Here, there are 2 LCs. all are may come in when there is an LC. But sometimes trust
independent from each other. receipt applies to transactions between merchants lang,
without necessarily involving a bank.
Why did they invent trust receipt? Does it have noble

purpose?
To aid those who does not have sufficient funds to finance
the importation or purchase of goods.
So imagine that you are an importer or a business man. You

like to acquire or purchase goods. Normally you would open
an LC, because it is a form of credit extension wherein the
bank will give you credit. But assuming you cannot obtain an
LC because no bank will issue you one. It presupposes that if
you are able to apply an LC, you already have an existing
relationship with the bank. The bank already trusts you. You
have a good credit standing. You cannot easily avail of LC.
The bank requires you to put up a marginal deposit. What if
you do not have that fund? So luoy kayoo.
So thats why they develop trust receipt. Because through

trust receipts, a businessmen who does not have the funds
yet, is able to import or purchase the goods. He could use
the same goods as collateral.
So f I were the bank, and you are would issue a trust receipt,
then I would be more willing to accommodate you to
finance the importation of the goods, knowing that the
goods will be collateral.
And because TR has gained popular acceptance in
international and domestic transaction, the state has found
it necessary to regulate the use of TR. And therefore, we
have PD 115.
The purpose is declared in the policy of the law?

Sec. 2. Declaration of Policy.
It is hereby declared to be the policy of the state:
(a) to encourage and promote the use of trust receipts as an additional and
convenient to commerce and trade;
(b) to provide for the regulation of trust receipts transactions in order to
assure the protection of the rights and enforcement of obligations of the
parties involved therein; and
(c) to declare the misuse and/or misappropriation of goods or proceeds
realized from the sale of goods, documents or instruments released under
trust receipts as a criminal offense punishable under Article Three
Hundred and Fifteen of the Revised Penal Code.

Kwin
1. To promote, to encourage merchants in the use of trust So take note that although, commonly TR are used for
receipts purchase or importation of goods, but it is also used for
2. To provide for regulation, specifically you regulate the acquiring instruments. Like I could issue a stock certificate to
rights and obligations of parties you and you hold it in trust for me. And then we have now a
3. To provide for punishments. It declares the misuse or the trust receipt.
misappropriations of the goods or the proceeds covered I could issue a check to you for purposes of you negotiating
under the trust receipts as criminal offense, punishable the check and you have the obligation to turn over to me
under art 315 as constituting estafa the proceeds and issue a trust receipt.
Or documents. I give o you a bill of lading, a warehouse
This is a very important purpose because this serves as a receipt and you hold it in trust for me.
deterrent to some unscrupulous importers, who after So in a trust receipt transaction, it involves goods, documents
obtaining the goods, cannot be seen anymore. or instruments.
So these would serve to compel the importers to really An entrustee here could normally be the buyer or importer.
settle theire obligation under the trust receipt. He wants to get hold of documents. As we said, he does not
have the necessary funds. So he avails of an entruster.
Number three is a valid exercise of the State of its police The law defines the entruster as someone who owns the
power. Because as we will discuss later on, the goods, documents or instruments or someone who holds
misappropriation or the violation of PD 115, does not only title or someone who has security interest. So an entruster
cause damage or prejudice to 1 particular individuals. But it owns the goods. He holds title to the goods.
costs damage to the public in general. In fact it is Why?
considered as a public nuisance. It affects commercial Because perhaps he is the one who pays for these goods, if
transactions and trade. In fact it is considered not as an you relate that to the importation. It could be the bank who
offense against property but as an offense against public pays the supplier.
order.
Now, by virtue of the trust receipts, the entruster who holds
So those are the three purposes of PD 115 title of these goods releases the same to the possession of
the entrustee.
So what is a trust receipt? And in consideration, the entrustee must in turn execute and
A trust receipt is a written or printed document that deliver to the entruster trust receipts.
evidence the trust receipt transaction, containing the
important terms and conditions required under PD 115. So Take note that while the entruster releases the possession of
trust receipt is the document these goods, documents or instruments to the entrustee,
the entrustee has not yet paid the entruster. But by way of
What is the trust receipt transaction? Who are the security, the entruster is willing to release these goods to
characters? the possession of the entrustee provided that he executes a
Entruster and entrustee. trust receipt.
A trust receipt involves goods, documents or their And under the TR, the entrustee has an undertaking by
instruments. They are defined under the law. making this TR, I hereby:
1. bind to hold the goods, documents or instruments in trust
When we say goods, what do we mean? for the entruster
It would refer to personal and movable property, other than 2. undertake to sell or dispose the goods, documents and
money. instruments.
3. and after selling or disposing, undertake to return the
What do you mean by documents? proceeds of the sale or if unsold, return the goods.
Documents here refer to documents of title. The documents
of title are warehouse receipts, bill of lading, invoice, etc., all So this way, he entrustee can now acquired possession of the
related to the goods goods even if he has not paid cash. And he is able to go on
with the business; he may sell and out of the proceeds, I get
What are instruments? margin, then be able to sell the obligation with the
Any negotiable instrument. So it could cover checks, bill of entruster, even if the funds are low.
exchange and certificates of stocks and bonds. A trust receipt acts as security. In fact a trust receipt
transaction is defined as a security transaction.

Kwin
It secures the what?
The obligation of the entrustee to the entruster under the This is an ordinary sale on credit with no obligation on the
paid of incurring criminal liability apart from the civil liability part of the buyer to dispose the goods and to turnover the
arising from the obligation to pay. proceeds. Thats why they dont execute TR.
SHELDON QUESTIONS: MARK QUESTIONS:

**Violation of PD 115 is just a mode of committing estafa. **it does not necessarily mention that the entrustee needs to
**The fact that you hold it in trust, you have a fiduciary sell. Kutob lang jud sa holding it in trust, like the usula trust
obligation to account for it. agreement; that anytime the rightful owner can get it back
**In the cases that I have assigned to you, here are cases from you.
there where the parties argued that it is not a trust receipt **What makes a trust receipt different from a trust
transaction, but based in the document he had signed the agreement is that he has further obligation to sell and turn
document said IN TRUST FOR. over proceeds and unsold goods.
**What constitutes estafa is that you misappropriate the **It will only be a TR transaction if there is a TR executed
goods that were given to you in trust. There is abuse of delivered by the entrustee to the entruster.
confidence or there is fraud. **It need not be in any particular form so long as the form
**In one case, the court said that it is not a prejudicial substantially contains the following:
question to determine whether there is a trust receipt Description of goods
transaction or whether the TR document is valid for us to Total invoice
prosecute the person liable for estafa. Undertaking to sell and dispose the goods and turnover the
proceeds
ALVIN QUESTIONS: **So if thee is no document, it is not covered under PD115.
**The goods here are owned by the entruster. But in case of There must be a written and printed copy. But he can still be
importation like involving LC, it is the entrustee who initiates held liable for estafa for misappropriating the goods.
to buy the goods. But for the entruster to release the goods
to the entrustee, the entrustee must execute a TR. KEN QUESTIONS:
**A TR need not always be accompanied by LC. You have a **There is no tripartite relationship in TR. It only involves
case involving machines. The entruster really owns the entruster and entrustee.
goods and he turned over possession of the goods to the **The only difference between TR and consignment ois that
entrustee who is actually a commissioned agent for the this is an innovation made by PD 115. Under a TR the
latter to sell. entruster still holds title to the goods. But if ever something
**So the entruster here could be the owner of the goods or happens to the goods, who bears the risk? The entrustee.
the bank who paid for the goods. This is contrary to the principle of res peruit domino; the
owner bears the risk. But in consignment, if the goods are
lost, who bears the loss? The consignor.
Would a consignment be considered already covered under
trust receipt transaction? Like in the department store? GEORGE QUESTIONS:
It depends. If they execute a TR document, then it will be **Sec 4, we read the totality of the paragraph. TR would not
covered as a TR transaction. Because to be considered a TR apply to the ordinary sale of credit. In an ordinary sale of
transaction, the law states that the entrustee executes or credit, the seller still retains title over the goods but it is
delivers a document called a TR. not covered in the TR transaction because perhaps there is
no obligation on the part of the buyer to dispose the goods
What about sale on credit? Like if mangutang og appliances? and turn over the proceeds to the seller later on.
There is a chattel mortgage. Is that a trust receipt **Actually there is a conflicting theory on who owns the
transaction? goods on a TR transaction. The law states that an entrustee
No. Title already passed to the buyer. More so, he is not is someone who holds title or has security interest. but some
required to execute a TR. views would say that the entruster is the owner of the goods
only by legal fiction. But not in fact.
Also the law mentions under sec 4, last par. **Thats another innovation of PD 115. That even if you do
The sale of goods, documents or instruments by a person in the business not own the goods, the moment you sell it, the buyer
of selling goods, documents or instruments for profit who, at the outset acquires title to the goods free of the security interest of the
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 entruster, so long as the buyer is a buyer for value and in
on credit, retaining title or other interest as security for the payment of good faith. Even if the entrustee does not remit the
the purchase price, does not constitute a trust receipt transaction and is proceeds, the entruster cannot anymore go after the buyer
outside the purview and coverage of this Decree.
to recover the goods.

Kwin
November 27, 2010
But take note that even if the goods now are already
Lets discuss the forms and contents of a trust receipt. processed or manufactured, there are other material
As mentioned yesterday, the law does not require that the TR incorporated to it and the overhead, what happens to the
need not be in a particular form. It could be a letter, security interest of the entruster? Does it affect the lien of
notarized or not, provided that the TR contains substantially the entruster?
the three things mentioned in PD 115 No.
So even if the goods that were originally released are now in
Sec. 5. Form of trust receipts; contents. - A trust receipt need not be in any different form, still the entruster retains his security lien. But
particular form, but every such receipt must substantially contain (1) a
description of the goods, documents or instruments subject of the trust
this time, not anymore on the raw materials but on the
receipt; (2) the total invoice value of the goods and the amount of the draft finished items.
to be paid by the entrustee; (3) an undertaking or a commitment of the
entrustee (a) to hold in trust for the entruster the goods, documents or
instruments therein described; (b) to dispose of them in the manner
There were several raw materials that were released under
provided for in the trust receipt; and (c) to turn over the proceeds of the sale different trust receipts. So meaning there are several
of the goods, documents or instruments to the entruster to the extent of the entruster who has claims over the finished goods. This is
amount owing to the entruster or as appears in the trust receipt or to return
the goods, documents or instruments in the event of their non-sale within possible. What happens to the security lien of the entruster?
the period specified therein. It will be on the entire item, in proportion to the value of the
goods released under the TR.
The trust receipt may contain other terms and conditions agreed upon by
the parties in addition to those hereinabove enumerated provided that such The point is, the entrusters security interest is not lost
terms and conditions shall not be contrary to the provisions of this Decree, whether the goods are retained on its original form or the
any existing laws, public policy or morals, public order or good customs.
goods are already processed.
So first, it must contain the description of goods.
You already know the meaning of goods; any movable And in case of instruments, to sell or to dispose would mean
property excluding money. you either sell or procure their exchange like in case of
And the description of goods, which means documents of checks or other negotiable instruments. You either discount
titles. it or collect for its payment and deliver to its principal, or
And also instruments which refer to any negotiable effect the confirmation of the transaction or you effect the
instruments. presentation, collection or renewal.
Because in an instrument you dont sell it. Either you
Number two is very important. There must be an undertaking negotiate it or present it for acceptance or for payment. And
or commitment on the part of the entrustee to perform. whatever proceeds arising from that, you turn it over to the
entruster. If you cant collect, or negotiate, you turn over
So you either turn over the proceeds arising from the sale of the instrument itself.
goods/documents/instruments. Or if these are not sold, you
turn over the goods themselves. Now, can the parties add other terms and conditions otrher
than the 1,2,3 in PD 115?
The law mentions sell or dispose. Yes. So long as they are not contrary to law, morals, good
Sell. This would apply if what you import or purchased are customs, and public policy.
those items that you immediately dispose. Like you import
gasoline and that same gasoline in its same form is sold. What other terms perhaps, could they add?
But it could be possible that we import are raw materials. They add for interest, penalty in case if unpaid on time,
And you have to convert these raw materials to another liquidated damages, or during the term of trust receipts, or
form. So its not the raw materials that you are going to sell. certain level of capitalization.
So it could be that you dispose them. Any terms and conditions.
Dispose could either mean, you sell the goods or procure It is important that the three items in PD 115 is present
their sale or if you dont sell them right away, like in case of
raw material, you either manufacture or process these
goods with the purpose of ultimate sale.
So you manufacture or process these textile to make them
RTWs . Or you import or purchase wood and manufacture
them into furniture.

Kwin
Can we discuss the cases? It only needs knowledge when there is payment.
Case: South city homes vs BA Finance But the bottomline is that it did not extinguish the obligation
South City Homes is a car dealer. CARCO is the car of the sureties.
manufacturer.
There were sureties for the obligation to BA Finance. And the third issue is that WON BA Finance has a valid cause
of action under the TR.
What is the nature of the obligation between CARCO and Does BA finance have a cause of action under the TR? Can it
FMC? Why did CARCO draw side tracks in his favor? go after FMC?
Being a car dealer, you need inventories cars. But FMC Yes.
does not have the necessary funds to fianc the acquisition
of motor vehicles to consist its stocks. So it entered into an But there was a contention raised by BA Finance against FMC.
arrangement with CARCO, the manufacturer. CARCO It demanded for collection. But a contention was raised by
entered into a wholesale financing scheme; wherein CARCO FMC that under the trust receipts, before one can demand
would deliver the vehicles to FMC, the dealer to sell it to the payment of obligation, the entruster must first demand
individuals in retail. for the return of goods.
Is that correct?
FMC agreed because in consideration for CARCO delivering No.
stocks, without FMC having to pay any cash, FMC in turn
agreed to execute and deliver a TR, wherein FMC is obliged Under the law, if you look at the section discussing the rights
to sell and turn over the proceeds to CARCO. of the entruster in sec 7, it is not necessary that the
entruster must first cancel the trust and take possession of
Aside from the trust receipt., CARCO also executed drafts the goods before it can exercise the other rights granted to
payable to CARCO (his own favor). And the drafts were him by PD115.
drawn to FMC. So its a bill of exchange where the payee is In fact as you said, the law only uses the word MAY tin
CARCO and the drawee is FMC. Then later on the drafts granting the entruster the right to cancel. It is the option of
were assigned to BA finance. the entruster whether he would demand first the calculation
of the TR and the return of the possession of the goods. Or
So BA finance is the financing company. After the assignment, without requiring for the cancellation of the TR, can he file a
BA finance would now pay CARCO, as if the cars are sold in civil action against the entrustee for collection of money?
cash. And it is now BA Finance who has the right to collect Yes.
the proceeds from FMC. So the remedies are alternative.
FMC failed to turn over to BA finance the proceeds of the cars So its not always that the entruster would opt for
that were sold. cancellation and return of possession. In fact, even if the
entruster has already demanded the cancellation and return
So BA Finance demanded payment from sureties and it filed a of possession of the items, can he still sue the entrustee for
case for collection. a civil case of collection of sum of money?
Yes.
So the case also discussed several issues. It discussed on As we will discuss later on, the obligation of the entrustee is
WON it is valid to enter into a suretyship agreement even if not extinguished by he mere fact that he returned the
there is no principal obligation. goods.
Is it valid?
Yes. Because a surety agreement could cover future debts. What is extinguished if the entrustee turned over the goods is
his liability under PD 115, the criminal liability. But it does
The second issue is that according to the surety, the not extinguish his civil obligation. He still has to pay. Because
assignment of the drafts and the TR effected a novation on take note, a TR is just a security transaction. So if you return
the obligation with the effect of extinguishing the obligation the goods, you only extinguish the security transaction. But
in the TR. it does not extinguish the loan.
Did it extinguish the obligation?
No. So in this case, it is not necessary that he entruster must first
demand the return of the goods. He can directly,
As what we have discussed in the civil code, assignment of immediately file for an action for the collection of sum of
credit; will it have the effect of extinguishing the obligation? money.
Not necessarily.
In fact the consent of the sureties are not required. 25.25 mins

Kwin
In this case, the entruster here, is the seller and at the same KEN QUESTIONS:
time the owner of the goods. It does not involve the seller as **This is not a contract of sale but more of a contract to sell.
the third party. It does not also involve importation. In fact in one case it was said that the TR is akin to a
conditional sale wherein ownership is transferred to the
ANGELO QUESTIONS: entrustee upon full payment of the entrustee of his
**If FMC would turn over the goods, it would extinguish his obligation. There is no conflict because in contract to sell
obligation under the trust receipts as far as the turning over. there is no transfer of ownership.
He will no longer be liable for misappropriation. But it does
not extinguish his obligation under the contract of sale. But SHELDON QUESTIONS:
that obligation is only civil, for payment of money. **There is always a loan on TR. There can never be a security
without an obligation being secured.
But in this case, if I assign the trust receipts to BA finance; **The loan involved here is not an amount. Your obligation
what if FMC turned over the goods to CARCO; what will consists of the value of the goods released under the trust
happen now? Can BE Finance still go after FMC? receipts. Take note, it does not mean that the entruster let
Yes. Because what is only extinguished is the criminal you borrow money. What are covered in TR are goods,
liability. Not the civil obligation. instruments and documents.
In the same manner, if I didnt assign to BA Finance and ALVIN QUETSIONS:

turned over the goods. Can CARCO still demand payment ** I think the law says that the moment he demands for
from FMC? cancellation, he has to proceed with the sale. If he demands
Yes. Because there is still civil obligation. for the cancellation and the turn over of the proceeds, then
he has to proceed with the sale.
If FMC was able to dispose the car and there are proceeds, he ** What is mentioned by the law as may; it means option
would turn over the proceeds to BA Finance. either he demands for cancellation and take over the
possession and proceed with the sale or to file a civil case.
When CARCO assigned the trust receipts, who is the entruster The option is on the entruster. What the case of BA Finance
now? is saying is that it is not necessary that it demand first for the
BA Finance. cancellation and the turn over of the possession before the
So if there is a violation of the trust receipts the proper party civil case.
to sue would be BA Finance against FMC.
So by virtue of the assignment, FMC has to turn over the

proceeds to BA Finance. And if they cant be sold, it has to
turn over the goods to BA Finance, and not anymore to
CARCO. Because as far as CARCO is concerned, these items
were already sold and paid.
ASUNCION QUESTIONS:
**Assignment is not necessary. This only came in because
CARCO wants to have the money right away.
**Notwithstanding the assignment of LC, BA Finance will be
the new owner of goods. Because as mentioned, when he
assigned the trust receipts and the drafts, he stepped into
the shoes of CARCO, he now becomes the instructor.
**Its not always in all cases that the entruster is a bank. The
bank would only come in if previously there is an LC.
DY QUESTIONS:
**You can oblige the entrustee to return the goods if the
entrustee would default. The reason why I turn over the
goods to you is for you to sell and dispose it. If I will get the
goods for no reason, it defeats the purpose of the TR.
**Who has the option if the entrustee defaults? The option
to either cancel and require possession, or not cancel but to
file civil action is in the entruster.

Kwin
December 3, 2010 be a component of the product that you will manufacture,
or even machinery and equipment that you will use in the
Case: Ching vs CA business where what you will return is the product that you
He applied in allied bank an LC to finance the importation of will manufacture or whatever is the proceeds of the
certain items. And in addition to the LC, there is also a trust business wherein the machinery and equipment are being
receipt in order for Ching to obtain possession of the goods. used.
He executed a trust receipt in favor of allied bank.
So what we learn in this case is that the TR is not just a a side
Basically he did not comply with the obligations of the TR, or additional document. It serves a particular purpose. And
which are either you sell or dispose it and then turn over the that is security transaction. It cannot just be set aside or
proceeds of the sale or return the goods. So Allied Bank sued brushed aside by the parties because by issuing trust receipt
him for estafa. you incur certain obligation.
Because there was an allegation by Ching that the documents It is also not a prejudicial question. The guilt of the accused,
covering trust receipts were null and void. So according to Ching can be determined by other evidence.
him, before the criminal case of estafa would proceed, the
resolution of the civil case on the validity of trust receipt is a Violation of PD 115 is jut a mode of committing estafa.
prejudicial question. So thats the first issue. So is it?
No. it is not. Because for it to be considered a prejudicial And the last one, TR could cover even those goods which are
question, the issues under the civil case must be similarly or not intended for sale but those items which are used in your
intimately related to the civil case and that the resolution of business, like machinery and equipment.
the issue is determinant WON the criminal action would
proceed. And he court said it is not a prejudicial question B. NATURE OF TR TRANSACTION
because the guilt of Ching can be determined by other Case: Nacu vs CA
evidence. We do not need to resolve the trust receipt. In Basically, the point of this case is that first there was a loan
fact he was liable for estafa, not necessarily for violation of and the loan was secured by a real estate mortgage-REM.
PD 115. The court said that violation of PD 115 is only one of And the subsequently they obtained another loan. the
the modes of committing estafa. So his guilt may be security for the second loan is a trust receipt. But the first
established by other evidences. Thats the first issue. loan was already paid. So therefore, the security devise
which is the REM was also cancelled. But the annotation was
The second issue is that Ching raised that the TR was just an not immediately cancelled until such time that they
additional to the principal contract. According to him, what obtained a second loan.
he entered was just a pure simple loan. Is that correct? Now the bank would like to make it appear that the REM
No. it could never be a mere additional or side document. A covers not only the first loan but also the second loan.
TR is evidence of security transaction wherein under the TR, The court said no. Because the purpose of the loan is to
the bank acquires security interest over the goods. And secure the first loan. since you already have a trust receipt,
under the TR, the entrustee has certain obligations that he you do not need a REM. Because what is the purpose of a
must comply. TR? A security transaction. Why would you need a REM if
there is already a trust receipt?
And finally, Ching alleged that there could be no TR. Because
according to him a TR could apply only to goods which are If theres a TR and the TR acts as a security transaction, the
intended for sale. It could not apply to goods not intended bank has to go after the goods covered under the TR.
for sale but for manufacture. Is that correct? Because the goods released under the TR serves as a
No. because under sec 13, the obligation is to return the security. Theres no need for you to go after the REM.
entrusted goods.
What are the entrusted goods? C. COVERAGE OF TR TRANSACTION
These are goods released under the TR. So coverage again of TR transaction are goods destined for
Its not necessary that the goods are intended for sale. As we sale, those necessary for processing or manufacturing, those
will discuss later on the coverage of the TR transaction, are used in the repairs and maintenance of machinery and
goods, documents, instruments intended for sale and those equipment used in the business.
to be processed.
And there was even one case where the court went on Case: Robles vs CA
further by saying that TR could cover also machinery and Robles was charged with estafa for acquiring office
equipment used in the operation of the business. So dili machineries and equipments. Robles was the commission
kinahanglan na and goods are the same ones you sell. It can merchant of PBM- Paramount Business Machines. Meaning

Kwin
he was not just a one time buyer. He was a commercial What if there is no document?
merchant in a sense that PBM entrusted to him certain He will only be liable for estafa. Because this is
office equipments so that Robles could sell them at a misappropriation and abuse of confidence. But this is estafa
commission. would not be under PD 115.
As a security, when PBM entrusted its equipment to Robles,
Robles was required to execute a trust receipt. Under the So what did we learn in this case?
trust receipt, he was obliged to return the proceeds of the That this document is not just a mere formality. So ayaw
sale or the machineries if not sold. lang og basta basta og pirma. You cannot just brush this
He failed to either remit the proceeds or turn over the unsold aside. There are certain obligations and liabilities that you
items and as a result he was charged guilty for violating PD would incur by signing the TR.
115 for estafa.
According to Robles he is not liable for PD 115 because the ALDRIN QUESTIONS:
transaction is not covered under PD 115. He said that the **Although the TR was executed later but PBM could prove
delivery of the TR that he signed in favor of PBM were just that the TR was for purposes of securing the goods that
mere formalities intended as mere evidence of the fact that were released to Robles.
he received the articles. And in fact, according to Robles it is **
not a TR transaction because it was a sale on trial basis. No Case: Colinares vs CA
kun dili mahalin, ako rang ibalik nimo. The liability will just In Colinares case, there was really no intention. There was no
be a civil obligation. Is that allegation correct? need for the bank to require Colinares to execute TR.
No. Because they executed a delivery trust receipt. And that Because Colinares purchased construction materials from a
document specifically states there that this document construction company, CBM. So the owner of the goods was
cannot be considered as just a mere formality or a mere CBM. When they purchased, there was already a delivery.
evidence of receipt of goods. But it specifically states in There was already transfer of ownership. Only that he was
trust for. And by that, it means that it was given to you with not able to pay CBM. So between Colinares and CBM, there
a fiduciary obligation to return either the proceeds or the was a contract of sale. But this was on credit. Did CBM
goods itself. In fact the TR specifically states that there is an require execution of TR?
obligation on my part to return the goods in god order or to No. Pwede unta to but wala man. So it was just an ordinary
purchase the same or to pay the price thereof. So dili gyud sale of credit.
malalis. Its very clear in the instrument executed by Robles Here, since Colinares cannot pay CBM, he applied with the
that it is really a TR transaction. bank for a loan so that this loan will be used to pay for his
debt to CBM.
So since he is a commercial merchant, the court said that But the scheming bank, thinking that if it is just an ordinary
even before you complied with your obligation to pay, there loan, this will only be just a simple/clean loan, without any
was another delivery of another batch of office equipment. security. If he cannot pay, there can only be a civil case.
As commission merchant he was required to execute a TR as So because the bank wanted security, he required Colinares
security of PBM. to execute a TR. But it contradicts the nature of TR. Because
you execute the TR so that you can release the goods and in
For the possession of the goods to be transferred to the return you get the TR as a security transaction.
entrustee, there must be a TR. If you are saying that the TR In this case, the bank was not in possession of the goods. No
was executed after the delivery of the goods, then thats no where was the possession of the goods been transferred to
longer a TR transaction. It contradicts the nature of a TR the bank. Ni diretso man sa Colinares.
transaction wherein you release the goods only upon So the court in that case said, there was really no TR
execution of the TR. Here, dungan mani. Here, Robles did transaction. In fact it was shown later on that the intention
not acquire ownership over the goods. Only the possession of the bank was really just to get payment. Nagkihakiha pa
was transferred. It would have a different effect if the TR siya. Because it was really just a pure simple loan.
was executed after the TR was executed after there was
already a transfer of ownership. That is not a real TR So you see the difference? In TR, we exchange. I release the
transaction. goods to you. In return, you execute a TR. In Colinares, the
bank was not in possession of the goods. It did not own the
So going back to the case, clearly, under the document, he is goods. It was a different entity.
under the obligation to remit the proceeds or to turn over
the goods. And since he failed to do so, then he is liable ANGELO QUESTIONS:
under PD 115. **A TR is not considered as a contract of adhesion because
dili man ingon na ang entruster has more bargaining power
than the entrustee.

Kwin
**In case of Robles, the court says that he is an intelligent 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
man. A college professor. The words of the TR were very purchaser. The proceeds of any such sale, whether public or private, shall be
clear. It does not need further explanation. You cannot say applied (a) to the payment of the expenses thereof; (b) to the payment of the
that you can apply the principle of contract of adhesion expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's indebtedness to the
because he was not deceived. 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
SHELDON QUESTIONS: 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.
**As to intention, we can take the factors like if he is an
ignorant or a man of scant education that you can say that
there was undue influence or that there was a mistake? The entruster has the right
**Of course you can annul contracts, and TR is a contract on 1. to the proceeds of the sale.
the basis of mistake, fraud, undue influence, intimidation. If 2. to the return of the goods, documents or instruments in
you can prove that, then it is annulable. case of non sale
3. to enforce other rights under the TR
D. PARTIES What are these other rights?
35.36 12-03-2010 a. to cancel the TR and take possession of the goods
Who are the parties again? upon default or failure of the trustee
We have the ENTRUSTER. The entruster is the lender or the b. once in possession of the goods, to sell the goods in
financer or the one who holds title. Or he holds a security a public or private sale
interest. PVDD he gives notice to the entrustee
But there is a conflicting view on WON who is the owner of How will the proceeds of the sale be applied?
the goods. Some view would say that based on the First it should be applied to the payment of the expenses of
definition of the entruster, he is the one who holds the title. the sale. Then you deduct payment for the safe keeping and
Another view would also say that he is the owner by only by the storing. If theres a balance, to the satisfaction of the
legal fiction. debt.
Maybe I would say that in this case, PBM is the entruster. He What if there is an excess of the proceeds, to whom will it go?
is really the owner of the goods because the goods really To the entrustee.
belong to him. Kanang dili klaro kung kinsa ang goods is
when there is an LC involved, like when it is the bank who Why the entrustee?
financed the importation and the shipping documents were The entrustee can even be the bidder of the goods (George).
given to the bank; but actually the buyer really is the So when there is a surplus, it goes to the entrustee. In case
entrustee. there is a deficiency, the entruster can recover from the
entrustee. If there is excess, its like its his profit because in
The ENTRUSTEE is the borrower, the buyer or the importer. the first place, he would have sold it, he gets the margin and
He is the first one having or taking possession of the goods. pays the entrustor. The surplus will represent his profit.
But so as not to confuse that, we could say that the
entrustee holds title and security interest over the goods. Lets discuss the rights of the entruster?
The extent of the security interest.
E. RIGHTS AND OBLIGATIONS OF THE PARTIES
So lets discuss first the RIGHTS OF THE ENTRUSTER. That;s What is the extent of the security interest of the entruster?
under sec 7 Against whom can we have this enforced? We understand
what is security interest right? This is like lien over the
Sec. 7. Rights of the entruster. goods. So what is extent of the entruster security interest as
The entruster shall be entitled to the proceeds from the sale of the goods, against innocent purchaser for value? As against creditors of
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 the entrustee?
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 Extent of security interest
trust receipt provided such are not contrary to the provisions of this Decree. .vs innocent purchaser for value not preferred
.vs creditors of entrustee preferred
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 As against the innocent purchaser for value, we have sec 11.
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 Sec. 11. Rights of purchaser for value and in good faith.
the goods, documents or instruments may, on or after default, give notice to Any purchaser of goods from an entrustee with right to sell, or of documents
the entrustee of the intention to sell, and may, not less than five days after or instruments through their customary form of transfer, who buys the

Kwin
goods, documents, or instruments for value and in good faith from the Theres a case which involves X the buyer, obtaining from Y
entrustee, acquires said goods, documents or instruments free from the
entruster's security interest. gasoline. To finance the importation, Y opened an LC with
the bank PNB. So bank paid the supplier and released the
It says that a purchaser for value in good faith, if he acquires gasoline to X because X issued a TR. Under the TR X has to
the goods uncovered by a TR, he acquired it free from the turn over the proceeds to PNB.
entrusters security interest. Pursuant to the TR, X entered into a contract of sale with B, a
3rd party. And under the contract of sale of the gasoline, B is
Meaning, A is the entruster, B is the entrustee and under the to remit the proceeds of the sale directly to PNB.
TR, B sold the goods to C. he was a purchaser for value and Later, a creditor of X, C filed a case against X for collection of
in good faith. Assuming B did not turn over the proceeds of sum of money on a different transaction. He was able to
the sale to A, can A, the entruster go after C and recover obtain a judgment and a writ of execution was issued. Later
back the goods? the sheriff garnished the proceeds in the hands of B
No. Because C holds it free from the entrusters security pertaining to the sale of the gasoline. So PNB filed an action
interest. PVDD he acquired it for value and in good faith. (as to recover these proceeds.
far as he is concerned, this is just an ordinary contract of The issue now is who has better right in terms of the
sale) proceeds? Is it C the judgment creditor or PNB the
entruster?
Why is that? PNB, the entruster.
Because under sec 8, take note that the entruster will not be Why?
liable also top the purchaser either as a principal or a Because the security interest of the entruster is preferred as
vendor. As far C is concerned, the contract of sale is only against the creditors of the entrustee. So the court used the
between him and the entrustee. provisionof PD 115.
Sec. 8. Entruster not responsible on sale by entrustee. In addition to that the court also used as legal basis the
The entruster holding a security interest shall not, merely by virtue of such provision under the civil code. You have in you credit
interest or having given the entrustee liberty of sale or other disposition of
the goods, documents or instruments under the terms of the trust receipt transaction, preference of credit. If you look at art 2241, in
transaction be responsible as principal or as vendor under any sale or the order of preference of credit, the credit of PNB is
contract to sell made by the entrustee. preferred over that of a judgment creditor. Because PNB has
a specific claim over the particular goods while the judgment
Such that if there is a breach of sale like warranty against creditors claim is general to all the properties of the debtor.
hidden defects, can C go after A?
No. Because A as an entruster will not be liable either as a So as against the innocent purchaser, the entruster is not
principal or a vendor. C may go after B. preferred but as against the creditors of the entrustee, he is
In the same way that A cannot go after C. preferred.
What are the OBLIGATIONS OF THE ENTRUSTEE?

ALVIN QUESTIONS: 1. To sell and dispose the goods strictly in accordance with
**They say that one of the innovations of PD 115 is that the terms and conditions of the TR.
although the entrustee does not own the goods, but when 2. To receive the proceeds in trust of the entruster and to
he enters into the contract of sale, he has the right to turn it over.
transfer ownership, such that the 3rd party acquires title, 3. To insure the goods.
free form the entrusters security interest. Why is he obliged to insure the goods?
Because he has insurable interest. His insurable interest
What about the extent of security interest as far as the could arise from the fact that he could be held liable. If
creditors of the entrustee? something happens to the goods, he can be liable to the
This one is not preferred. Legal basis, we have sec 12. entruster.
4. To keep the proceeds of the goods separate and
Sec. 12. Validity of entruster's security interest as against creditors.
The entruster's security interest in goods, documents, or instruments identifiable
pursuant to the written terms of a trust receipt shall be valid as against all 5. To return the unsold goods
creditors of the entrustee for the duration of the trust receipt agreement.
So basically in summary, there are two major obligations of
the entrustee:
Sec 12 states that the TR shall be valid against all the
1. To remit the proceeds - intergala
creditors of entrustee for the duration of the TR agreement.
2. To return the goods - devolvera

Kwin
Who would be liable in case the goods, documents or
instruments are lost?
Entrustee.
Do we follow res peruit domino?
No. this is exception to the rule.
As exception to the res peruit domino, it is the entrustee who

bears the loss. Irrespective of WON it was due to the fault or
negligence of the entrustee. And the loss of the goods shall
not extinguish his obligation
There is a case where the goods were released under a TR.

The goods were stored in the warehouse. A fire gutted the
warehouse and of course the goods were destroyed. The
entrustee failed to remit the proceeds, and he cannot also
turn over. So as a defense when the entruster tried to
collect from the entrustee, he said that the liability were
already extinguished because the goods were already
destroyed.
Is that a valid defense?
No.
Why not?
Because he is still liable for the loss. Thats the reason why
you insure. And your civil liability is not extinguished.
***NEW LAWS***
AMLA-Anti Money Laundering Law
Foreign investment act
*Bulk sales law is no longer covered

Kwin
December 10, 2010 Of course the corporation would also be held for civil
damages.
We have already discussed the liability of an entrustee in case
of loss, that even if he is not the owner, he is liable for the Case: Colinares vs CA
loss. Colinares purchased merchandise from CM Builders. The
purchase of the merchandise went ahead first. The
CURRENCY. merchandise were already delivered to Colinares. In effect
Can it be denominated in foreign currency? there was already transfer of possession and ownership,
Yes. It can either be Philippine currency or foreign currency. only that the sale was unpaid.
But between Colinares and CM, there was no TR executed.
But if it is payable in foreign currency, it has to be settled in But in order to pay off his debt, he applied for a loan with
Philippine currency at the prevailing exchange rate the date PBC.
the proceeds of the sale of the goods or instruments are PBC, thinking that it was only a plain simple loan because
turned over to the entruster or any date specified on the TR. there was no collateral. Colinares did not offer a mortgage
to guaranty the payment of the loan.
F. PENALTY FOR BREACH OF ENTRUSTEE Here the purchase was made on Oct 30. And the day after,
Lets discuss the last topic, the penalty for breach committed they applied for a loan. The bank required Colinares at the
by the entrustee. So there is breach when theres failure to same tome to execute a TR.
turn over the proceeds or turn over the goods itself in case So what was covered in the TR? In the TR there were goods
of non sale. that were released under trust.
Since Colinares defaulted on the payment of the loan, by
Is it necessary to prove that there is damage to the entruster virtue of the TR executed by Colinares, PBC held Colinares
before the entrustee could be held liable under PD115? liable for estafa under PD 115.
No. Because the law is malum prohibitum. The mere failure So the question now is that is Colinares liable under PD 115?
of the entrustee to turn over the proceeds or the goods or Is the transaction a valid TR transaction?
the documents is already a violation of PD115. Because the No. Thorough examination of the facts would reveal that it is
law treats is as not as an offense against property but nothing but a simple loan. It could not be a TR transaction
against public order due to the effect that it could create on because it contradicts what normally is obtained in the TR
commercial transactions. transaction.
Effect of violation or breach of entrustee; it would constitute In a TR, who is in possession of the goods? Who owns the
the crime of estafa. Aside from criminal liability, you would goods? Who has title to the goods?
also incur civil liability for damages pursuant to the provision The entrustor. In this case, it should have been PBC.
of the civil code; those who cost injury to another party in
case of defamation, fraud, or physical injuries would be But what happens here is that the one who has title to the
liable for civil damages. And committing crime of estafa is a goods is CM Builders. In fact they already transferred or
form of fraud. turned over to Colinares. This is contrary to TR where we will
not turn over first the possession of the goods until there is
Now, what did we say if the entrustee is acquitted of criminal execution of TR. The TR came a day after the goods were
liability, does it absolve his civil liability? already delivered to Colinares.
No. because different ang criminal liability from civil liability.
In fact the mere return of the entrustee of the goods to the The purpose why the bank required Colinares to execute a TR
entrustor does not by itself absolve his civil obligation. is to have a security transaction, which as the case
progressed, it shows that the real intention of PBC was to
When is his civil obligation extinguished? demand payment. And later on they executed an affidavit of
Only when the goods are disposed of and the proceeds are desistance after they received payment from Colinares.
applied to the payment of the obligation under the TR.
But the point here is that the transaction between Colinares
What is extinguished is only his possible criminal liability. and PBC cannot qualify as a TR transaction even if they
execute a TR. Pwede pa siguro if between Colinares and CM
What if the offenders is the corporation, who would be held Buiders. But between the bank, its nothing but a simple
criminally liable? loan.
The directors, the officers, the officials or the persons
responsible for the criminal offense.

Kwin
JED QUESTIONS: IV Securities and Regulation Code (8799)
**The bank never owned title to the goods. Pwede unta to na A. Purpose (Sec 2)
while naa pa ang ownership sa CM Builders, PBC paid CM,
and of course he gets possession of the goods. And before Section 2. Declaration of State Policy.
PBC released to Colinares he required Colinares to execute a The State shall establish a socially conscious, free market that regulates itself,
encourage the widest participation of ownership in enterprises, enhance the
TR. Then we now have a TR transaction. democratization of wealth, promote the development of the capital market,
**In fact the court mentioned that no time did title over the protect investors, ensure full and fair disclosure about securities, minimize if
construction materials passes to the bank. But it passed not totally eliminate insider trading and other fraudulent or manipulative
devices and practices which create distortions in the free market. To achieve
directly to Colinares. these ends, this Securities Regulation Code is hereby enacted.
Case: Tiomico vs CA This law is also termed as BLUE SKY because the noble
This is on the constitutionality on the penal provision of PD purpose of the law is to protect the public from
115. unscrupulous individuals who promote business ventures or
undertaking with no legal basis. As a result, they sell shares
Does it violate the constitutional provision that no person and interest and the public purchase the securities and the
shall be imprisoned for non payment of debt? shares of stocks but they are holding only certificates which
No. are worthless because the company is also worthless;
represent nothing but more than a claim to a square in the
Why not? blue sky. Like building castles in the air.
What is prohibited by the constitution is imprisonment for
non payment of debt. Here, you are not even enforcing the Is sure you have heard in the news of the different scams.
payment of the debt. You are punishing him for dishonesty, Specially those retirees who have parted with their hard
fraud or failure to comply with his obligation under the TR. earned money. Here comes someone promoting a
And that is failure to turn over the proceeds or the goods. So corporation and inviting the investors. Gullible as we are, we
theres no constitutional violation of non payment of debts. invest. As they say, a sucker is born every minute. So they
And it is a violation exercise of police power. What is are just holding certificates which are worthless.
punished is the dishonesty and abuse of confidence. it does
not seek enforcement of a loan. therefore, there can be no Another is when there is a pharmaceutical company trying to
violation of a right. sell securities by saying that they have discovered a miracle
drug. But actually, there is no such product.
G. LETTERS OF CREDIT AND TR TRANSACTION Or you must have heard some stories of some pyramiding
In an LC and a TR transaction, the LC part covers the loan scam. Multi level marketing.
aspect while the TR part covers the security.
So these are the noble purposes of the Blue Sky Law;
1. to establish a socially conscious free market that regulates
itself
So it tends to educate the public about the risk
involved in investing. So you are given information.
2. to encourage widest participation of ownership in the
enterprise
So the law tends to encourage that ever Juan would
have a state on the enterprise; that the ownership of the
businesses should not be limited to few individuals. Not
only to Zobels and Ayalas and Dingals .
Every Juan will have a chance to have a business
undertaking. And as a result, it would enhance
democaratization of wealth.
3. to enhance democratization of market
4. to promote the development of capital market
5. to protect investors
By insuring full disclosure of securities. So
transparency
6. to eliminate insider trading, fraudulent and manipulative
devices and practices and create distortion

Kwin
SRCs previous predecessor is the RSA- Revised Securities Act. And they are appointed by the President.
SRC made several improvements from the RSA.
Take note that SRC is self executory. Even if there yet no rules B. Powers and Functions of SEC (sec 5)
and regulations promulgated by SEC, it does not affect the The powers are classified as regulatory and adjudicative. But
executory nature of the SRC. the adjudicative powers are now less as discussed earlier.
Adjudicative powers are those necessary or incidental to the
REGULATORY CONTROLS OF SRC exercise of its regulatory powers.
Basically SRC provides for certain regulatory control to
achieve its objectives. Among the regulatory controls that **note: only the underlined potions are those read by maam
we will discuss later on is the requirement of registration
before you are allowed to offer or distribute securities. It Section 5. Powers and Functions of the Commission.
also requires registration of those who are involved in the 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
sale of the securities like the brokers of stock exchange. And Corporation Code, the Investment Houses law, the Financing Company Act
additionally, by virtue of the SRC, it has expanded the and other existing laws. Pursuant thereto the Commission shall have, among
powers of the SEC. now the SEC is empowered to others, the following powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnership
promulgate rules and regulations to exercise investigatory or associations who are the grantees of primary franchises and/or a license
powers. And by virtue of the SRC, it has transferred some of or a permit issued by the Government;
-We are talking only here of the private corporations or those who are
its adjudicatory powers under PD 902-8.
granted of primary franchise or license or permit issued by the
government. So in short private corporation. This excludes public
Under PD 902-8 the SEC before has jurisdiction over corporations.
intracorporate controversy. The are controversies involving
SH and SH themselves. Before, there is adjudicatory powers (b) Formulate policies and recommendations on issues concerning the
of SEC. but it is now transferred to the regular courts. securities market, advise Congress and other government agencies on all
aspect of the securities market and propose legislation and amendments
thereto;
On election cases where there are problems regarding the -So that they can make recommendations to the congress. Because the
election of the board, the directors; cases like that, thatis are the body who is considered to have the technical expertise and
already transferred to the regular courts. experience regarding securities and markets.
(c) Approve, reject, suspend, revoke or require amendments to

Rehabilitation proceedings, are also already transferred to registration statements, and registration and licensing applications;
the regular courts.
(d) Regulate, investigate or supervise the activities of persons to ensure
compliance;
The reason why this is already taken out from the SEC is so
that SEC can more focus on its regulatory powers. So thats (e) Supervise, monitor, suspend or take over the activities of
one of the improvements of the SRC. exchanges, clearing agencies and other SROs;- self regulatory
organization
SECURITIES AND EXCHANGE COMMISSION (f) Impose sanctions for the violation of laws and rules, regulations and
So the body that is tasked to enforce the SRC is the SEC orders, and issued pursuant thereto;
Securities and Exchange Commission. Its a collegial body (g) Prepare, approve, amend or repeal rules, regulations and orders, and
composed of a chairman and 4 commissioners. issue opinions and provide guidance on and supervise compliance with
such rules, regulation and orders;
The chairman is considered as a CEO. He has the power to (h) Enlist the aid and support of and/or deputized any and all
execute and administer all the policies of the SEC. enforcement agencies of the Government, civil or military as well as any
private institution, corporation, firm, association or person in the
implementation of its powers and function under its Code;
REQUIREMENTS FOR THE APPOINTMENT OF THE
COMMISSIONER OF THE SEC (i) Issue cease and desist orders to prevent fraud or injury to the
1. natural born investing public;
-so they can issue seize and desist order to corporations who are
2. for the chairman, at least 40 years old selling securities without prior registration
3. for the four commissioners, at least 35 years old
4. majority, including the chairman must be (j) Punish for the contempt of the Commission, both direct and indirect,
in accordance with the pertinent provisions of and penalties prescribed by
lawyers/members of the Philippine Bar the Rules of Court;
What is their term? (k) Compel the officers of any registered corporation or association to
call meetings of stockholders or members thereof under its supervision;
7 years.
(l) Issue subpoena duces tecum and summon witnesses to appear in any

Kwin
proceedings of the Commission and in appropriate cases, order the in founding and organizing the business or enterprise of the issuer and
examination, search and seizure of all documents, papers, files and receives consideration therefor.
records, tax returns and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases 3.11. "Prospectus" is the document made by or an behalf of an issuer,
before it, subject to the provisions of existing laws; underwriter or dealer to sell or offer securities for sale to the public through
registration statement filed with the Commission.
(m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnership or associations, upon 3.12. "Registration statement" is the application for the registration of
any of the grounds provided by law; and securities required to be filed with the Commission.
(n) Exercise such other powers as may be provided by law as well as 3.13. "Salesman" is a natural person, employed as such as an agent, by a dealer,
those which may be implied from, or which are necessary or incidental to issuer or broker to buy and sell securities.
the carrying out of, the express powers granted the Commission to achieve
the objectives and purposes of these laws. 3.14. "Uncertificated security" is a security evidenced by electronic or similar
records.
3.15. "Underwriter" is a person who guarantees on a firm commitment and/or

C. Definition of terms (Sec 2) declared best effort basis the distribution and sale of securities of any kind
by another company.
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: D. Registration of Securities ( Sec 8)
(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, Section 8. Requirement of Registration of Securities.
asset-backed securities; 8.1. Securities shall not be sold or offered for sale or distribution within the
(b) Investment contracts, certificates of interest or participation in a profit Philippines, without a registration statement duly filed with and approved
sharing agreement, certifies of deposit for a future subscription; by the Commission. Prior to such sale, information on the securities, in such
(c) Fractional undivided interests in oil, gas or other mineral rights; form and with such substance as the Commission may prescribe, shall be
(d) Derivatives like option and warrants; made available to each prospective purchaser.
(e) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments 8.2. The Commission may conditionally approve the registration statement
(f) Proprietary or nonproprietary membership certificates in corporations; under such terms as it may deem necessary.
and
(g) Other instruments as may in the future be determined by the 8.3. The Commission may specify the terms and conditions under which any
Commission. written communication, including any summary prospectus, shall be
deemed not to constitute an offer for sale under this Section.
3.2. "Issuer" is the originator, maker, obligor, or creator of the security.
8.4. A record of the registration of securities shall be kept in Register
3.3. "Broker" is a person engaged in the business of buying and selling Securities in which shall be recorded orders entered by the Commission
securities for the account of others. with respect such securities. Such register and all documents or information
with the respect to the securities registered therein shall be open to public
3.4. "Dealer" means many person who buys sells securities for his/her own inspection at reasonable hours on business days.
account in the ordinary course of business.
8.5. The Commission may audit the financial statements, assets and other
3.5. "Associated person of a broker or dealer" is an employee therefor whom, information of firm applying for registration of its securities whenever it
directly exercises control of supervisory authority, but does not include a deems the same necessary to insure full disclosure or to protect the interest
salesman, or an agent or a person whose functions are solely clerical or of the investors and the public in general.
ministerial.
3.6. "Clearing Agency" is any person who acts as intermediary in making This is a very important aspect of the SRC. Under the SRC,
deliveries upon payment effect settlement in securities transactions.
before any corporation or any promoter/issuer can sell or
3.7. "Exchange" is an organized market place or facility that brings together even offer to sell or distribute its securities, it must first file a
buyers and sellers and executes trade of securities and/or commodities. registration statement with the SEC. In short it must first
3.8. "Insider" means (a) the issuer; (b) a director or officer (or any person
register the securities. This must be approved by SEC.
performing similar functions) of, or a person controlling the issuer; gives or
gave him access to material information about the issuer or the security that What is the purpose of requiring registration of SEC?
is not generally available to the public; (d) A government employee, director,
or officer of an exchange, clearing agency and/or self-regulatory organization
To give the prospective investors full and accurate
who has access to material information about an issuer or a security that is information or disclosure concerning material facts about
not generally available to the public; or (e) a person who learns such the issuer corporation and securities. So that the investor
information by a communication from any forgoing insiders.
can make a proper judgment on WON he will invest his 10m.
3.9. "Pre-need plans" are contracts which provide for the performance of
future services of or the payment of future monetary considerations at the Because in the process of registration, there are so much
time actual need, for which plan holders pay in cash or installment at stated
prices, with or without interest or insurance coverage and includes life,
requirements and annexes of the corporation. So with those
pension, education, interment, and other plans which the Commission may information, the investor can make proper and sound
from time to time approve. judgment.
3.10. "Promoter" is a person who, acting alone or with others, takes initiative

Kwin
And also the registration is not just about filing a registration profits and the profits comes from the efforts of other
statement. The SEC has to approve these registration person. An example is multilevel marketing.
statement. It gives some assurance to some potential
investor that this is a legitimate corporation, that their What else? Derivatives. These are stock options and
business plans are legitimate. warrants. So options meaning it gives you the right to sell or
buy shares of stocks. Warrants mean the right to purchase
But then again there are always risk. It does not mean that new shares of stocks.
because the corporation filed a registration statement that
you are guaranteed a return of the investment. Its not an So these are all securities. And if the corporation is planning
assurance of success. Its only an assurance that this is a to sell, as a general rule, the requirement is a registration.
legitimate business, not mere promises of blue skies.
So just take not what are considered as security. Because if
So the purpose of requiring registration statement or it is not a security then there is no need for registration.
registration of securities is to give potential investors full
and adequate disclosure concerning the issuer and securities Next meeting: Time shares realty corp vs Lao GR 158941
so that they can make proper judgment. feb 11, 2008 this is still under registration of securities.
i. Definition and kind of securities (Sec 8)

So therefore we have to now what are securities because
what are required by the law for registration are securities.
So what are securities?
These are either shares, participation or any interest in a
corporation or commercial enterprise or profit making
venture. And this has to be evidenced by a certificate or
contract or any instrument whether in writing or electronic
form.
So you have to take note of what are securities because there

are some problems in the Bar they would give you and
example and ask you if it is a security and if registration is
required.
So securities are either classified as either debt instruments.

Under debt instruments, we have bonds, certificate of
indebtedness, notes or promissory notes, asset back
securities.
We also have equity instruments. Under this we have shares

of stocks. What falls under that is certificate of interest or
participation on a profit sharing agreement. So this is still
form of equity. We also have certificate of deposit for future
subscription. So still it will eventually become shares of
stocks. What about you r golf/club shares? Shares in club
ultima? Yes. This falls under proprietary or non proprietary
membership certificates of incorporation.
We also have investment instruments. Under this, we have

investment contracts. Fractional undivided interest in oil,
gas, and other mineral rights.
What is investment contracts?

If you invest money in a common enterprise.
Common enterprise refers to when there is two or more
investors and the purpose of investing is for you to earn

Kwin
December 11, 2010 of $234. As an investor, you are now allowed two recruits
who also had to pay for the application. The original investor
Last night we discussed the requirement of registration for an gets percentage or commission f the application fee that is
issuer or any promoter before an issuer or any promoter can paid by the downlines. This commission will be put in the
offer to sell or distribute security. You must first file a property fund. The property fund will be used later on by
registration in the SEC and that registration must also be the investor of the real estate.
approved.
But power homes is not the owner of the real estate. He is
The purpose of the registration is to give the public full and accredited by the developers. So it has some member
accurate disclosure of the information concerning the developers.
securities so that they can make a better judgment on WON
they are going to invest. So if you look at it its practically multi level marketing. Only
that in this case, you incentive is not money but the
We already know what are considered as securities so just ownership of real property which you are going to acquire
take note of those things. Securities could either be from the members-real developers.
classified as debt instruments, equity instruments,
investment contracts and derivatives, options and warrants. There were two individuals making a complaint to SEC.
Manero said that he was able to attend a seminar conducted
So for example, assuming X plans to establish a corporation and he was suspicious about the nature of the transaction.
or wants to put up in SRP, City by the Sea Country Club Inc. So both of them wrote a letter to SEC asking the SEC to take
That country club will acquire a ten hectare property in SRP. a look at the corporation. So by virtue of the letters
And the project cost is estimated to be around 100m to submitted by the two individuals, the SEC conducted an
finance the construction of sports club facilities. It plans to investigation/conference attended by the incorporators of
raise 50%$ of the capitalization of the project through power homes. They were required to explain the nature of
issuance of membership certificates. Under the membership their business, information and list of members.
certificates, you of course become a member of the club.
But you are not entitled to receive any dividends. You are Because the problem here is that Powerhomes were doing
not also entitled to receive assets of the corporation in case these without securing or registering the activity with SEC.
of liquidation. But you are entitled to use any of the facilities
just like any ordinary membership. And in addition, you have So the first issue here is WON this transaction is a security.
to pay monthly membership dues. So X approached you now And therefore if it is a security, Powerhomes should first
and asked you what must he do before he can offer the register with SEC.
membership certificates. Is there a requirement for him? Is
this membership certificate that he is planning to sell to the This is a security. This one falls under investment contract
public considered a security? you make a contribution /investment to a common
Yes. enterprise and expect to earn profits solely through the
effort of other person.
What kind of securities?
They fall under the equity instruments, particularly Here, there were investments. He expected to have profits in
proprietary or non proprietary membership certificates. the form of commission through the effort of his downlines.
So therefore, this is an investment contract. It is a security. It
So in that case, before X can proceed with the promotion or should be registered with the SEC. and since there is no such
the issuance of the offering of the certificates to the public, registration, their business is illegal, contrary to the
he must first file a registration statement. provisions of SRC.
Case: Powerhomes Unlimited vs SEC As a result SEC in the exercise of its regulatory power issued a
The business of Powerhomes is in to real estate, but he is not seize and desist order enjoining the company from further
a real estate developer. His business is to promote the engaging in this transaction.
market. But the way they do business is that this amounts to
network marketing, they sell real estate through network There was an issue on WON SEC followed due process. This is
marketing. not correct. There was due process because there was
They recruit people and they require people to attend conference and they were required to explain their side. It
seminar. But before you become a member, there is a fee. does not need formal hearing to have due process. This is
You are required to pay an application fee. So they recruit a based on the principle of labor code. Due process does not
potential investor and they require to pay an application fee require formal hearing. It only requires an opportunity to be

Kwin
heard. Here, ample opportunity was given to Powerhomes exempt. But the circumstances under which the securities
to explain his side. After the investigation was conducted by are sold makes the requirement of registration unnecessary.
the SEC then they issued a seize and desist order. Perhaps the risk involved to the public is minimal.
Case: Time Shares Realty Corp vs Lao

Time shares is a realty corporation. Normally those that issue E. Exempt Securities (Sec 9)
time shares are resorts and hotels. If you purchase a time So lets discuss first exempt securities. You have to take not
share, it gives the holder of the time share a right to stay in of this. What are considered as exempt securities?
the hotel for a certain period of time during a certain period Exempt securities has something to do with the nature of
of the year for free. So its like prepaid accommodation. Its the issuer. The issuer are considered as exempt because for
also a form of investment. the law, the issuer is already a trusted entity, so theres no
So here, Time share realty corporation was selling time shares need for registration. Or the issuer is monitored by other
for Laguna de Boracay. Perhaps this is a resort. government entity who performs the same function as that
The sale of the time shares took place on October 1996. of the SEC as far as protecting the investor. So more of the
qualification of the issuer.
Are time shares securities?
Yes. They fall under equity instruments. So its like
membership instruments. Time shares are securities. **underlined are those read by maam
They are not investment contracts because you dont get Section 9. Exempt Securities.
9.1. The requirement of registration under Subsection 8.1 shall not as a general
profits from that. rule apply to any of the following classes of securities:
(a) Any security issued or guaranteed by the Government of the
The time shares here were registered but the effectivity of Philippines, or by any political subdivision or agency thereof, or by any
person controlled or supervised by, and acting as an instrumentality of
the registration was only at February 11, 1998. But 2 years said Government.
before that, they already sold time shares. So theres an
issue now on whether the sale was valid or if the registration (b) Any security issued or guaranteed by the government of any country
issued in 1998 have a retroactive effect making the sale with which the Philippines maintains diplomatic relations, or by any
valid. state, province or political subdivision thereof on the basis of reciprocity:
Provided, That the Commission may require compliance with the form and
content for disclosures the Commission may prescribe.
The purchasers availed of the option to unilaterally rescind **take note that this must be based on the PRINCIPLE OF
the contract and demand a refund. RECIPROCITY
**PVDD that although they are exempt from registration, they must
comply with the requirements on disclosure.
SC said that the registration has no retroactive effect. It is
very clear on the provision of SRC that before you offer to (c) Certificates issued by a receiver or by a trustee in bankruptcy duly
sell the securities, you must first file a registration approved by the proper adjudicatory body.
**is the issuer here trusted? Because it is under the control of an
statement. adjudicatory body, probably the court/bank/BSP
So in short, any sale made prior to the approval of the

(d) Any security or its derivatives the sale or transfer of which, by law, is
registration statement is null and void. under the supervision and regulation of the Office of the Insurance
Commission, Housing and Land Use Rule Regulatory Board, or the
On the issue of subsequent registration; that is not enough. Bureau of Internal Revenue.
**so again these are these are division s of the government or other
Being a corporation is just one of the sop many
regulatory body.
requirements of the filing and the approval of the
registration statement. (e) Any security issued by a bank except its own shares of stock.
**this is because banks are already regulated by BSP.
**take note here that securities sold does not refer to its own shares
of stock. Because a bank is a stock corporation, if it wants to issue
Lets discuss first the two exceptions from registration. GR if shares, then it has first to file a registration statements.
you offer to sell the securities, you must first register it. **what is referred to here as an exempt is when the bank is selling
What are the two exceptions? other form of securities other than its own shares of stock
If the security that you are offering to sell qualifies as an 9.2. The Commission may, by rule or regulation after public hearing, add to
exempt security. Or if the security is not exempt, it falls the foregoing any class of securities if it finds that the enforcement of this
under exempt transactions. Code with respect to such securities is not necessary in the public interest
and for the protection of investors.
Exempt transactions means that the security itself is not

Kwin
So its very to remember what are the exempt entities. You (b) By or for the account of a pledge holder, or mortgagee or any of a
pledge lien holder selling of offering for sale or delivery in the ordinary
have to look at the issuer. If it is a government or any agency course of business and not for the purpose of avoiding the provision of this
of the government or foreign government then it is exempt. Code, to liquidate a bonafide debt, a security pledged in good faith as
security for such debt.
**so if by way of security, you mortgage your shares of stock or your
proprietary membership certificates in club ultima. But take not the
If it is a security issued by BSP, is that exempt? security itself is not exempt, this is an isolated transaction between
Yes. the mortgagee and mortgagor. Perhaps these securities involved in
the mortage were already registered at the time they are issued.
But take note, they specify the office of the commission, (c) An isolated transaction in which any security is sold, offered for
HLURB and BIR. sale, subscription or delivery by the owner therefore, or by his
representative for the owners account, such sale or offer for sale or offer for
sale, subscription or delivery not being made in the course of repeated and
Take note when we say exempt securities, the exemption successive transaction of a like character by such owner, or on his account
provided by the law is as far as registration is concerned. Bu by such representative and such owner or representative not being the
it does not exempt from other requirements under the SRC. underwriter of such security.
**so it is the owner himself who sells
Example, you might have seen an announcement in the (d) The distribution by a corporation actively engaged in the business
newspaper that treasury bonds are being offered as sale. authorized by its articles of incorporation, of securities to its stockholders
or other security holders as a stock dividend or other distribution out of
This doe not need registration. These are securities but they surplus.
do not require registration like treasury bonds because they **if a corporation like aboitiz declared stock dividends, it would
are issued by the government. issue shares. If the board will declare that it will distribute stock
dividends, they do not need to file registration statement
**this qualifies as an exempt transaction because the securities are
But if the bonds are issued by the bank, are they exempt? already registers and it is issuing them not to new subscribers but to
Yes. Because it is not a share of stock. The one not exempt is its existing SH.
the issuance of its own shares of stock. They are regulated
(e) The sale of capital stock of a corporation to its own stockholders
already by BSP. exclusively, where no commission or other remuneration is paid or
given directly or indirectly in connection with the sale of such capital
But if the bank would be increasing its capitalization then that stock.
is a different story. **example, we have a publicly listed company like ABC. And the SH
are A, B, C, D and E. If A would like to purchase additional shares, if
there is additional issuance from authorized capital stock, there is no
need for registration statement. This is an exempt transaction
F. Exempt transactions (Sec 10) because it is a sale by the corporation of its capital stock to its own
SH exclusively PVDD there is no commission or remuneration paid
So lets go na to the exempt transaction. As Ive said, when
except of course of the subscription.
we talk about exempt transaction, the security itself is not **there is no risk because you are selling to your existing SH. And
exempt. It talks about securities which are not exempt but perhaps that security is already part of the securities that were
the circumstances under which they are sold makes the already registered.
registration unnecessary. **take note that you are selling it to your own SH.
**what if you want to sell it to X, a new subscriber? Is there a need
for registration?
Why? Lets take a look at its enumeration. It depends, if the shares are already registered. But if not, then there
should be filing of registration statement. It is not an exempt
Section 10. Exempt Transactions. security. It does not fall as exempt transaction under e.
10.1. The requirement of registration under Subsection 8.1 shall not apply to **what about letter k? pwede, if during the 12 month period, fewer
the sale of any security in any of the following transactions: than 20 persons.
(a) At any judicial sale, or sale by an executor, administrator, guardian
or receiver or trustee in insolvency or bankruptcy. (f) The issuance of bonds or notes secured by mortgage upon real estate
**its like an isolated transaction. Its not really offering the securities to or tangible personal property, when the entire mortgage together with
the general pubic all the bonds or notes secured thereby are sold to a single purchaser at a
**in judicial sale for example, perhaps the debtor by way of securities single sale.
pledged his shares of stocks. So if he cannot pay, the shares would be **if X wants to issue bonds/debt instruments to Y as a single
sold on a public ale pursuant to a judicial sale. purchaser on a single sale. What is Y will sell again to Z, is there a
**another example, a company is going through a bankruptcy. In the need to register?
process of liquidating the assets, one of those are shares of stocks of a The bonds here are secured because these are form of
publicly listed company. If the shares were sold, this is an exempt indebtedness. So when X issued bonds, these are secured by real
transaction. estate mortgage or tangible personal property where the entire
mortgage together with the bond secured thereby are sold to a
single purchaser at a single sale.
So I X will issue a bond secured by a rent or other personal
property to Y, that is an exempt transaction.
What if the following month, Y issues another bond to X secured
by another real estate, doe it still qualify as an exempt transaction as
a single sale for a single purchaser? Yes. The law does not ay that it

Kwin
does not exceed one transaction per year. It just says that it is a **These portions were no longer discussed
single sale to a single purchaser, then it is an exempt transaction. (h) Brokers transaction, executed upon customers orders, on any
So what does not qualify as exempt? If Im selling my bond not to registered Exchange or other trading market.
a single purchaser or not to a single sale. Dinaghan na pagissue og
bands to different purchasers. (i) Subscriptions for shares of the capitals stocks of a corporation prior to
the incorporation thereof or in pursuance of an increase in its authorized
(g) The issue and delivery of any security in exchange for any other capital stocks under the Corporation Code, when no expense is incurred,
security of the same issuer pursuant to a right of conversion entitling or no commission, compensation or remuneration is paid or given in
the holder of the security surrendered in exchange to make such connection with the sale or disposition of such securities, and only when
conversion: Provided, That the security so surrendered has been the purpose for soliciting, giving or taking of such subscription is to
registered under this Code or was, when sold, exempt from the comply with the requirements of such law as to the percentage of the
provision of this Code, and that the security issued and delivered in capital stock of a corporation which should be subscribed before it can be
exchange, if sold at the conversion price, would at the time of such registered and duly incorporated, or its authorized, capital increase.
conversion fall within the class of securities entitled to registration under
this Code. Upon such conversion the par value of the security surrendered (j) The exchange of securities by the issuer with the existing security
in such exchange shall be deemed the price at which the securities issued holders exclusively, where no commission or other remuneration is paid or
and delivered in such exchange are sold. given directly or indirectly for soliciting such exchange.
**were talking here of a share which is convertible
PVDD that the shares that were surrendered were previously
(k) The sale of securities by an issuer to fewer than twenty (20) persons in
registered. And if not registered, they are exempt.
the Philippines during any twelve-month period.
**so if for example in the problem, it would state that X corporation
were allowed during the year, its existing CS holder to exercise the (l) The sale of securities to any number of the following qualified buyers:
right to convert its common shares to preferred shares. Pursuant to (i) Bank;
that, X corporation issued 1m preferred shares to all its common SH, (ii) Registered investment house;
must X corporation file for a registration statement? (iii) Insurance company;
It depends if the CS were previously registered. If it is, there is still (iv) Pension fund or retirement plan maintained by the Government
no need because these are exempt transaction. of the Philippines or any political subdivision thereof or manage by a
**if you look at it there is no risk because they are not offering bank or other persons authorized by the Bangko Sentral to engage in
shares to new SH. Its just a matter of converting the existing trust functions;
registered shares or securities to preferred shares. (v) Investment company or;
(vi) Such other person as the Commission may rule by determine as
qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial
and business matters, or amount of assets under management.
10.2. The Commission may exempt other transactions, if it finds that the
requirements of registration under this Code is not necessary in the public
interest or for the protection of the investors such as by the reason of the
small amount involved or the limited character of the public offering.
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 the rule may prescribe and
with such notice shall pay to the Commission fee equivalent to one-tenth
(1/10) of one percent (1%) of the maximum value aggregate price or issued
value of the securities.

Kwin
January 7, 2010 So basically a prospective issuer or any person whop wants to
issue a security which is not exempt or does not qualify as
G. Procedure of Registration (Sec 12) an exempt transaction would file with the SEC a sworn
Section 12. Procedure of Registration Securities. statement. So there are certain forms.
12.1. All securities required to be registered under Subsection 8. I shall be
registered through the filing by the issuer in the main office of the
Commission, of a sworn registration statement with the respect to such Together with that registration statement is a is a prospectus.
securities, in such form and containing such information and document as Sankatutak na information attachment or annex required by
the Commission prescribe. The registration statement shall include any
prospectus required or permitted to be delivered under Subsections 8.2, 8.3, the SEC. Certain information like the identity of the issuer,
and 8.4. the nature of business, nature of security.
12.2. In promulgating rules governing the content of any registration What is the our purpose of the registration of the security?
statement (including any prospectus made a part thereof or annex thereto), Protection of the public. To give the public full and adequate
the Commission may require the registration statement to contain such
information or documents as it may, by rule, prescribe. It may dispense with disclosure of the security proposed for sale.
any such requirements, or may require additional information or documents,
including written information from an expert, depending on the necessity
thereof or their applicability to the class of securities sought to be registered.
Who are the signatories of the registration statement?
You should take note of this because these are the persons
12.3. The information required for the registration of any kind, and all to be held civilly liable later on if something goes wrong with
securities, shall include, among others, the effect of the securities issue on
ownership, on the mix of ownership, especially foreign and local ownership.
the securities. The CEO- chief executive officer, COO-chief
operating officer, CFO- chief financial officer, controller and
12.4. The registration statement shall be signed by the issuers executive accounting officer, and corporate secretary.
officer, its principal operating officer, its principal financial officer, its
comptroller, its principal accounting officer, its corporate secretary, or
persons performing similar functions accompanied by a duly verified So these are the persons who signed the registration
resolution of the board of directors of the issuer corporation. The written statement and will be held liable later on.
consent of the expert named as having certified any part of the registration
statement or any document used in connection therewith shall also be filed.
Where the registration statement shares to be sold by selling shareholders, a Plus in addition to that, there must be a verified resolution of
written certification by such selling shareholders as to the accuracy of any the board of directors. So of course, kay nipirma man sila,
part of the registration statement contributed to by such selling
shareholders shall be filed. the BOD will also be held liable.
12.5. In addition to that, the SEC will require an expert opinion if it

(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%) is necessary. Like for example, the company is involved in a
of the maximum aggregate price at which such securities are proposed to be technical mining industry. So the SEC may require an expert
offered. The Commission shall prescribe by the rule diminishing fees in opinion. Os in that case, signature of the expert must also be
inverse proportion the value of the aggregate price of the offering.
affixed in the registration statement.
(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 If you file a registration statement, are there fees to be paid?
general circulation in the Philippines, once a week for two (2) consecutive
weeks, or in such other manner as the Commission by the rule shall How much?
prescribe, reciting that a registration statement for the sale of such securities 1/10 of 1% of the aggregate value of price of the securities
has been filed, and that aforesaid registration statement, as well as the offered.
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 After you file a registration statement, must it be published in
may prescribe. a newspaper?
12.6. Within forty-five (45) days after the date of filing of the registration Of course that is very important. You must publish it in two
statement, or by such later date to which the issuer has consented, the newspapers of general circulation. Once a week for two
Commission shall declare the registration statement effective or rejected, executive weeks.
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 How long for the SEC to make a ruling?
registration statement together with all the other papers and documents
attached thereto, is on its face complete and that the requirements have been
Within 45 days.
complied with. The Commission may impose such terms and conditions as
may be necessary or appropriate for the protection of the investors. So they will have to issue an order whether they will reject or
approve the registration statement.
12.7. Upon affectivity of the registration statement, the issuer shall state
under oath in every prospectus that all registration requirements have been Take note that it is only upon the effectivity of the
met and that all information are true and correct as represented by the registration statement, it is only when that SEC issues an
issuer or the one making the statement. Any untrue statement of fact or order approving the registration statement that he issuer
omission to state a material fact required to be stated herein or necessary to
make the statement therein not misleading shall constitute fraud. now would be authorized to sell the securities.

Kwin
Assuming that SEC has already issued an order approving the
We have discussed the various cases, prior to the registration registration statement, can the SEC later on order a
statement, any sale of security will be considered as null and suspension of the sale of the securities?
void. So within 45 days. Yes. Same grounds as those under revocation. Like when SEC
finds out that some statements are misleading. Or after
So you follow the procedure. The filing, payment of fee, approving, one of the officers had been later on convicted of
publication and 45 days for SEC to decide. a crime involving moral turpitude.
So these are just the procedural aspect. 13.4. If the Commission deems its necessary, it may issue an order suspending
the offer and sale of the securities pending any investigation. The order shall
state the grounds for taking such action, but such order of suspension
H. Rejection and Revocation of Registration of Securities (sec although binding upon the persons notified thereof, shall be deemed
13) confidential, and shall not be published. Upon the issuance of the
suspension order, no further offer or sale of such security shall be made until
What are the grounds for SEC to reject the registration? the same is lifted or set aside by the Commission. Otherwise, such sale shall
Section 13. Rejection and Revocation of Registration of Securities. be void.
13.1. The Commission may reject a registration statement and refuse
registration of the security there-under, or revoke the affectivity of a 13.5. Notice of issuance of such order shall be given to the issuer and every
registration statement and the registration of the security there-under after dealer and broker who shall have notified the Commission of an intention to
the due notice and hearing by issuing an order to such effect, setting forth its sell such security.
finding in respect thereto, if it finds that:
13.6. A registration statement may be withdrawn by the issuer only with the
(a) The issuer: (the corporation) consent of the Commission.
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provision of this Code, the rules
promulgate pursuant thereto, or any order of the Commission of which
Can you make amendments with your registration
the issuer has notice in connection with the offering for which a statement?
registration statement has been filed Yes. By all means.
(iii) Has been or is engaged or is about to engage in fraudulent
transactions;
(iv) Has made any false or misleading representation of material facts So that is as far as registration of securities is concerned.
in any prospectus concerning the issuer or its securities;
(v) Has failed to comply with any requirements that the
Commission may impose as a condition for registration of the security
What is important in that topic is we have to distinguish when
for which the registration statement has been filed; or the registration is required, what are the exempt securities
and what are the exempt transactions.
(b) The registration statement is on its face incomplete or inaccurate in
any material respect or includes any untrue statements of a material fact
required to be stated therein or necessary to make the statement therein not Like for example, a company, as one of the benefits for its
misleading; or employees, it has some stock option plans wherein an
(c) The issuer, any officer, director or controlling person performing
employee has an option to purchase the shares and stock of
similar functions, or any under writer has been convicted, by a the company. Now assuming the company offers shares of
competent judicial or administrative body, upon plea of guilty, or otherwise, stock to all its employees pursuant to its stock options plan,
of an offense involving moral turpitude and /or fraud or is enjoined or
restrained by the Commission or other competent or administrative body for is the company required to register its securities?
violations of securities, commodities, and other related laws. No. its neither an exempt securities nor an exempt
**so for example, Angeles is one of the signatory of the registration transaction. Therefore registration is required.
statement or if one of the directors has been convicted of committing
estafa. That is an automatic ground for SEC to reject the application.
First is it an exempt security? No.
For the purposes of this subsection, the term "competent judicial or When is the security exempt? You look at the issuer. it may
administrative body" shall include a foreign court of competent jurisdiction be a government or a foreign government or a bank so its
as provided for under Rules of Court.
not an exempt security.
13.2. The Commission may compel the production of all the books and papers
of such issuer, and may administer oaths to, and examine the officers of such Second, is it an exempt transaction? No.
the issuer or any other person connected therewith as to its business and
affairs. Letter K. Pwede if fewer than 20 persons. Not if you have
500 employees.
13.3. If any issuer shall refuse to permit an examination to be made by the
Commission, its refusal shall be ground for the refusal or revocation of the
registration of its securities. Please remember these, without necessarily memorizing the
exempt transactions and securities.

Kwin
What if after the stock options, and your employees are J. Tender Offer (Sec 19)
already stock holders. Later on the company declares stock Lets go to the more important provisions regarding
dividends. Do I need to register now? protection of shareholders interest. The first topic that we
No. because it is already an exempt transaction have discussed regarding registration of securities, that is
more of protection of potential investor. The law requires
Or what if my stock option offers a convertible share of stock that you first register the securities before you can offer it
from common to preferred. And the employees now who for sale. That is more of the protection for potential
subscribed for the stock option wants to exercise the right to investor.
convert the preferred shares, does it need registration now?
No. because that is already an exempt transaction. The succeeding topic talks more about the protection of the
existing share holders. So protection of the shareholders
I. Registration of Pre-Need Plans (Sec 16) interest.
Section 16. Pre-Need Plans.
No person shall sell or offer for sale to the public any pre-need plan except in
accordance with rules and regulations which the Commission shall So first, we have the
prescribe. Such rules shall regulate the sale of pre-need plans by, among 1. tender offer rule sec 19
other things, requiring the registration of pre-need plans, licensing persons 2. proxy rule sec 20
involved in the sale of pre- need plans, requiring disclosures to prospective
plan holders, prescribing advertising guidelines, providing for uniform 3. disclosure rule sec 21
accounting system, reports and recording keeping with respect to such
plans, imposing capital, bonding and other financial responsibility, and These are all intended to protect an exiting share holder.
establishing trust funds for the payment of benefits under such plans.
What is tender offer?

What are pre need plans? What comes to mind? Section 19. Tender Offers.
CAP, educational plans, or life, pension, accident and death Any person or group of persons acting in concert who intends to acquire at
plans, interment plans. least 15% of any class of any equity security of a listed corporation of any
class of any equity security of a corporation with assets of at least fifty
million pesos (50,000,000.00) and having two hundred(200) or more
Pre need plans are contracts which offer performance of stockholders at least one hundred shares each or who intends to acquire at
future service or future payment of certain amount of least thirty percent(30%) of such equity over a period of twelve months(12)
shall make a tender offer to stockholders by filling with the Commission a
money. declaration to that effect; and furnish the issuer, a statement containing
such of the information required in Section 17 of this Code as the
So in the past or recently you have heard the news of pre Commission may prescribe. Such person or group of persons shall publish
all request or invitations or tender offer or requesting such tender offers
need plans going down. Classic example is CAP. Because subsequent to the initial solicitation or request shall contain such
they were not able to foresee the increase in tuition fees. information as the Commission may prescribe, and shall be filed with the
Because before, they do not offer to pay any specific Commission and sent to the issuer not alter than the time copies of such
materials are first published or sent or given to security holders.
amount of money, you can enroll in any course. And they did
not anticipate the hike up of the tuition fees. So naturally,
(a) Any solicitation or recommendation to the holders of such a security to
they became bankrupt. Now, they only offer a specific accept or reject a tender offer or request or invitation for tenders shall be
amount of money. That way, they can compute with made in accordance with such rules and regulations as may be prescribe.
certainty their liability. (b) Securities deposited pursuant to a tender offer or request or invitation for
tenders may be withdrawn by or on behalf of the depositor at any time
So pre need plans are also subject o regulation by the SEC. So throughout the period that tender offer remains open and if the securities
deposited have not been previously accepted for payment, and at any time
before you can put up a preneed plan company, it must be after sixty (60) days from the date of the original tender offer to request or
registered. The person selling the preneed plan must be invitation, except as the Commission may otherwise prescribe.
licensed. Even their advertisement must also follow the
(c) Where the securities offered exceed that which person or group of
regulation of the SEC. persons is bound or willing to take up and pay for, the securities that are
subject of the tender offers shall be taken up us nearly as may be pro data,
And more importantly, pre need companies have certain disregarding fractions, according to the number of securities deposited to
each depositor. The provision of this subject shall also apply to securities
requirement as to capitalization. They must maintain certain deposited within ten (10) days after notice of increase in the consideration
ratios. For example, current assets must be this ratio. offered to security holders, as described in paragraph (e) of this subsection,
is first published or sent or given to security holders.
Plus there is also a requirement that you must put up a trust (d) Where any person varies the terms of a tender offer or request or
fund. 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
So unless you comply with those things, you cannot register. 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.
19.2. It shall be lawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to make the

Kwin
statements made in the light of the circumstances under which they are Example. Aboitiz Transport Group is planning to sell its
made, not mis-leading, or to engaged to any fraudulent, deceptive or
manipulative acts or practices, in connection with any tender offer or transport business to Negros Navigation. Aboitiz is a public
request or invitation for tenders, or any solicitation for any security holders company. It has its own major SH. Lets say it has 200 SH.
in opposition to or in favor of any such favor of any such offer, request, or Only 5 SH holds the control of the majority shares 30%. And
invitation. The Commission shall, for the purposes of this subsection, define
and prescribe means reasonably designed to prevent, such acts and practices the rest of the 70% is owned by the minority SH.
as are fraudulent, deceptive and manipulative.
If NN wants to acquire control of the shares of a publicly
You have heard this in news paper. It is a publicly announced listed company, the law requires that he must make a
intention to acquire equity securities of a public company. tender offer. Meaning, he must not enter into private
negotiations with the majority SH. But he must make his
When we discuss securities, there are many kinds; bonds, offer to purchase known to all SH.
investment contract. In tender offer, we only talk about
equity securities. What is the effect if there is no such rule?
If I am NN and I am interested in acquiring control of Aboitiz,
Equity security talks about ownership. It talks about shares of I will just approach the majority SH. In fact I will offer them
stocks. premium to offer their shares to me. Once I have got their
shares, I already have control.
The tender offer rule requires that any person or group of
person who wants to acquire equity securities of public What happens to the stocks of the minority SH? Practically
companies must make his intention to purchase, public. He the value would decrease because no body would be willing
must announce his intention publicly. to buy because they will not be able to gain control.
What is considered as a public company? So the effect is that the value of the minority shares would
Shares of stocks are listed in the stock exchange. Shares may go down. Or in short, you deprive them the equal
not be listed in the stock exchange, but the assets owned opportunity to sell their shares.
are more than 50m and having 200 or more SH and each SH
must own at least 100 shares. So in short, the law says that if you want to acquire shares,
you must make the offer to all SH. Equally, for the same
Example. The first one is not a problem. If the shares are price as that you offered to the majority SH.
listed in the stock exchange. How would you know this? You
look at the stock exchange. How is it done? Lets say NN only wants to acquire 70%
Of course that would be distributed prorate.
Second, you look at your financial statements, if you have
assets of 20m and you have 200 or more SH, and each of In short, the effect is that, all of the SH, no matter how little
them must own at least 100 shares. shares you have, you have the opportunity to sell your
shares for the same price that you offered to the majority
So if I have 300 SH and each of them only 5 shares, am I a SH.
public company?
No. So that is the requirement of tender offer payment. There
should be no private negotiations.
So even if I have 500 SH but they only own a maximum of ten
shares, I am not a public company. When is tender payment mandatory? When am I required to
make tender offer? If I want to acquire 100 shares, do I need
So if you are a public company or you plan to acquire shares tender offer?
of a public company, then you are subject by the tender The law mentions of 15% and 30%.
offer rule. 15% for single transactions. Like kausa raka mupalit.
30% for creeping acquisition within a period of 12 months.
What is the purpose of the tender offer rule? But this percentage has already been amended under the
The purpose of the law is to protect the interest of the implementing rules of the SRC.
minority SH against any transaction which would have the
effect of diluting the value of their shares by giving them So under the implementing rules, we have it uniformed to
equal opportunity to shares same as that of the majority SH 35%.
for the same price.

Kwin
So if you plan to acquire 35% of the shares of a public Why is there no need to make tender offer?
company whether you buy it once or within a period of 12 Because the evil sought to be protected by the law is not
months, you must make a tender offer. present. Because you are not acquiring it from existing SH
but from new issuance of shares. So long lang that the
Theres another one. Even if it is less than 35% but it will acquisition should not be sold to you holding 50 or more
result to you acquiring to more than 51%. ownership. Each stock holder has a pre emptive right. They
have the right of first refusal. But assuming that they waive
Like in this case. What if NN is already an existing SH. He preemptive right, you require the tender if you have 50% or
owns 20% already. He plans to purchase additional 32% of more of the stock ownership.
shares of stock of Aboitiz. Is he required to make a tender
offer? So in this case, is there a need for tender offer?
Yes. It depends if the acquisition of the 50% of the unissued
Although what is acquired is less than 35%, but as a result, I shares will result to 50% ownership.
have acquire, 32%. The effect is 52%, my ownership will be
more than 51%. What is the second exception from tender offer?
Purchase form the increase of capital stock.
So tender offer is also mandatory.
Take not that in an increasing capital stock, it had no
So the result of the acquisition is you hold more than 51%. qualification as to the number of percentage of ownership.
So if Aboitiz would increase its capital stock from 100m to
When you say control, you have more than 50% but the 200m and it is acquired all by NN, must NN make a tender
implementing law says more than 51%. Maybe the law does offer?
not want just borderline control. No. again, that is a presumption that there is a waiver of pre
emptive right.
So there are two instances:

i. Exemption from mandatory tender offer requirements 1. unsissued, so long as not increase to 50% or more
2. increase in capital stock
ii. How tender offer is made
How do you make a tender offer? PURCHASE IN CONNECTION WITH THE FORECLOSURE
You file with the SEC. theres a particular form for a PROCEEDINGS
particular offer. You furnish the issuer, like Aboitiz if Aboitiz Same as exempt transaction.
is the issuer.
Or if the government would purchase the shares. Like the
Must your tender offer be published? government would like to privatize PAL and acquire all the
Yes. There is a publication for all tender offers. It must be shares of Lucio Tan. Must the government make a tender
published in a newspaper of general circulation for 2 offer?
consecutive days. No.
What transactions are exempt from the tender offer? Or purchases in connection with rehabilitation.
Say for example, Aboitiz. What if it wants to issue its Or purchase thru an open market at the prevailing market
remaining shares of 80m shares. And NN would like to price.
acquire and like to purchase 50% of the unissued shares,
should there be a tender offer? Or in the case of merger or consolidation.
It depends. Why? What is the effect of merger and consolidation?
The difference from before is that I acquired it from existing Theres no change in SH. There are no third party brought in.
SH. Here, I acquire from new issuance of shares. So there is a but theres no danger to the minority SH.
new issuance of shares of 80m.
The law says that it is exempt from tender offer any

purchase of shares from unissued capital stock provided that
the acquisition will not result to 50% or more ownership of
shares by the purchaser.

Kwin
Case: Cemco Holdings Inc. v National Life Insurance Co. January 8, 2010
This is an application of the tender offer rule. K. Proxy Rules on Publicly Listed Corporation (Sec 20)
There is UCHC, Cemco and ACC as the SHs. The ownership of Section 20. Proxy solicitations.
20.1. Proxies must be issued and proxy solicitation must be made in
UCHC is 60.51%. The ownership of ACC is 20.69%. and accordance with rules and regulations to be issued by the Commission;
Cemco is 17.03% (minority SH)
UCHC is owned by ACI and ACC and Cemco, for 29.31%, 20.2. Proxies must be in writing, signed by the stockholder or his duly
29.69% and 9% respectively. authorized representative and file before the scheduled meeting with the
So there is now a plan that ACC would sell its UCHC shares to corporate secretary.
Cemco. 20.3. Unless otherwise provided in the proxy, it shall be valid only for the
meeting for which it is intended. No proxy shall be valid only for the
What is the nature of UCHC? meting for which it is intended. No proxy shall be valid and effective for a
period longer than five (5) years at one time.
This is non public company.
20.4. No broker or dealer shall give any proxy, consent or any
So as a result of the acquisition by Cemco, ACI and BCI shares, authorization, in respect of any security carried for the account of the
customer , to a person other than the customer, without written
the shareholdings of ACC will now be 60%. So from 9% it authorization of such customer.
goes up to 60%.
20.5. A broker or dealer who holds or acquire the proxy for at least ten
percent (10%) or such percentage as the commission may prescribe of the
So Cemco now is a 60% shareholder of UCC, which is a outstanding share of such issuer , shall submit a report identifying the
publicly listed company. beneficial owner of ten days after such acquisition, for its own account or
customer, to the issuer of security, to the exchange where the security is
traded and to the Commission.
So here comes a minority shareholder of UCC complaining to
the SEC that Cemco should make a tender offer when it
If you solicit a proxy is there a fee?
purchased the shares.
1/10 of 1%.
Is tender offer mandatory in this case?
Yes. Tender offer applies to all parts regardless of the
So again, this would apply only on the SH meeting of a public
method of acquisition, whether direct or indirect.
company. Just take note of the form of the proxy and the
validity.
Here, what is the effect when Cemco acquired 60% of UCHC
shares?
DISCLOSURE RULE
It has become 53%. Section 23. Transactions of Directors officers and Principal Stockholders.
Exiting interest is 17.03% 23.1. Every person who is directly or indirectly the beneficial owner of more
Using the grandfather rule, you get additional 36%. 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 security, shall file, at the time either such requirement is first
So this is covered in the tender offer rule either because satisfied or after ten days after he becomes such a beneficial owner, director,
there is acquisition of more than 51%. or officer, a statement form the Commission and, if such security is listed for
trading on an exchange, also with the exchange of the amount of all the
As a result of the acquisition of shares of UCC, a publicly listed equity security of such issuer of which he is the beneficial owner, and within
company, resulted to more than 51%. ten days after the close of each calendar month thereafter, if there has been a
change in such ownership at the close of the calendar month and such
changes in his ownership as have occurred during such calendar month.
Another issue is WON SEC has jurisdiction to rule on this
issue.
-This applies when you become a director or officer. So the moment you
Yes. It is within the administrative power of SEC become a director or officer or officer or you hold the beneficial ownership
of more than 10%, you are required to disclose that to SEC by filing a
Another issue is WON SEC is bound by the decision of the statement. Or within 10 days after the close of each calendar month if there
is a change in such ownership. So what the law requires is disclosure lang.
previous director.
-Just take note of the two instances, director/officer or acquire ownership
No. Not estopped. of more than 10%
-But even in ordinary corporation, you are wtill required to tell SEC. more so
if you are public.

Kwin
UNLAWFUL ACTS/ACTS WHICH ARE PROHIBITED BY SEC the purchase and/or sale of any security traded in an Exchange for
the purpose of pegging, fixing or stabilizing the price of such
We have sec 24,25,26,27 security; unless otherwise allowed by this Code or by rules of the
Commission.
Section 24. Manipulation of Security Prices; Devices and Practices. 24.2. No person shall use or employ, in connection with the purchase or sale
-when you say manipulation it has the effect of either you increase or of any security any manipulative or deceptive device or contrivance. Neither
decrease the prices shall any short sale be effected nor any stop-loss order be executed in
24.1 It shall be unlawful for any person acting for himself or through a dealer connection with the purchase or sale of any security except in accordance
or broker, directly or indirectly: with such rules and regulations as the Commission may prescribe as
(a) To create a false or misleading appearance of active trading in necessary or appropriate in the public interest for the protection of investors.
any listed security traded in an Exchange of any other trading 24.3. The foregoing provisions notwithstanding, the Commission, having due
market (hereafter referred to purposes of this Chapter as regard to the public interest and the protection of investors, may, by rules and
"Exchange"): regulations, allow certain acts or transactions that may otherwise be
prohibited under this Section.
-you call this WASHED SALES when you create an appearance of
active trading when there is really no beneficial ownership
Section 25. Regulation of Option Trading.
transferred. Ex. A would sell shares to B but A and B are the same No member of an Exchange shall, directly or indirectly endorse or guarantee
parties. B is just representing B. In effect you can manipulate the the performance of any put, call, straddle, option or privilege in relation to any
prices because active stocks indicates that this is a good security. security registered on a securities exchange. The terms "put", "call",
It may increase or decrease the price. "straddle", "option", or "privilege" shall not include any registered warrant,
-MARKING THE CLOSE this happens when you buy and sell right or convertible security.
securities close of the market in an effort to alter the closing -PUT it is an option to sell
price. So for example during the day, it is inactive but towards the -CALL it is an option to buy
end of the day, kali tang daghan sale. It will have an effect of -STRADLE it is both an option to buy and an option to sell.
either increasing or decreasing the price, which will have an effect -OPTION TRADING Why is it not allowed? So for example A gives B an
on the following day. option to buy shares and the option is for 30 days. For consideration of
-PAINTING THE TAIL you engage in a series of transaction to give option, B gives A premium of 10k. So we have two contracts here. An option
an impression of activity or price movement. So its like washed contract and a possible sales contract. So within a period of 30 days, can A
sales. You create an appearance of active trading. Only that dispose the shares to other persons? No. because there is an option money
theres really a transfer of ownership. given. So within the period of 30 days, B the person whom the option is given
-SQUEEZING THE FLOW you apply the principle of supply and might abuse his right by playing with the shares within 30 days. He will not
demand. So you take advantage of the shortage of supply of the decide if he will buy it or not. So he can manipulate the market, specially if it
security. The purpose is that you create a shortage in the supply. is a large number of shares.
You capitalize to create a hype to increase the price.
-HYPE AND DUMP you create a hype. You buy securities at a
higher price. And once you maintain that price, you dump it and Section 26. Fraudulent Transactions.
sell them. It manipulates the price because you were able to sell it It shall be unlawful for any person, directly or indirectly, in connection with
at a higher price. the purchase or sale of any securities to:
-BOILER ROOM OPERATION boiler room, pressure. There are 26.1. Employ any device, scheme, or artifice to defraud;
several salesmen who are in the phone using high pressure sales 26.2. Obtain money or property by means of any untrue statement of a
talk to lure investors to purchase particular security. material fact of any omission to state a material fact necessary in order to
-IMPROPER MATCH ORDERS 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
(i) By effecting any transaction in such security which
operates or would operate as a fraud or deceit upon any person.
involves no change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or -this is basically anything that involves fraud
sale of such security with the knowledge that a
simultaneous order or orders of substantially the same Section 27. Insiders Duty to Disclose When Trading.
size, time and price, for the sale or purchase of any such -INSIDER TRADING when you either buy or sell while you are in possession
security, has or will be entered by or for the same or of material information and that information is not generally available to
different parties; or the public. (material non public information)
(iii) By performing similar act where there is no change -Who is an INSIDER? If you are the issuer, director, officer, person controlling
in beneficial ownership. or controlled or under common control of the issuer. Or you are a person
whose relationship or former relationship (former employee) to the issuer
(b) To affect, alone or with others, a securities or transactions in which gives you access to facts of special significance. Or you are a
securities that: (I) Raises their price to induce the purchase of a government employee, director or officer of any exchange or clearing
security, whether of the same or a different class of the same issuer agency which has access to material information. Or if a person learns that
or of controlling, controlled, or commonly controlled company by knowledge from a person and he knows that that person is an insider.
others; or (iii) Creates active trading to induce such a purchase or -What is MATERIAL INFORMATION or FACT OF SPECIAL SIGNIFICANCE? It is
sale through manipulative devices such as marking the close,
something that is not disclosed to the public and that information would
painting the tape, squeezing the float, hype and dump, boiler room
likely affect the market price. After the same is being disseminated and the
operations and such other similar devices.
(c) To circulate or disseminate information that the price of any lapse of reasonable time for the market to absorb the information.
security listed in an Exchange will or is likely to rise or fall because -It is not enough that it is disclosed to the public. There must be enough time
of manipulative market operations of any one or more persons also from the time it was disclosed that has lapsed in order for the market
conducted for the purpose of raising or depressing the price of the to absorb the information.
security for the purpose of inducing the purpose of sale of such -It is also considered a MATERIAL INFORMATION if that information would
security. have a decision to buy or sell.
(d) To make false or misleading statement with respect to any -There is a PRESUMPTION by law that when you are an insider, and you
material fact, which he knew or had reasonable ground to believe purchase or sell the shares after acquiring the information but before the
was so false or misleading, for the purpose of inducing the information is made public, it is presumed to be insider trading.
purchase or sale of any security listed or traded in an Exchange. -Assuming A B and C are all directors of ABC company. On august 1 2010,
(e) To effect, either alone or others, any series of transactions for

Kwin
they all acquired 1k shares each of ABC company. On Aug 30, 2010 B left for (b) For purposes of this subsection the term "securities of the issuer sought or
abroad. On Dec 1, 2010, during a BOD meeting where A ad C were present, to be sought by such tender offer" shall include any securities convertible or
it was disclosed that they have discovered a gold mine. On Jan 1, 2011, the exchangeable into such securities or any options or rights in any of the
prices of ABC securities started to rise. On Jan 15, A and C sold their foregoing securities.
securities. On Jan 3, B came back o Philippines and decided also to sell
securities. Is A B and C liable for insider trading?
ABC are not guilty of insider trading. Because there is no material non
public information. At the time they purchased their share, there was none.
But on Jan 2, A and C are guilty of insider trading because they are director
and officer and they have knowledge of the material non public
information. B is not because he had no knowledge.
-this may not apply if the insider could prove that they acquired the
information somewhere else or they could prove that the other party was
aware of the information. Because what he law is trying to protect is taking
undue advantage over the information.
-If we change the facts and on Jan 1, ABC announced in newspaper that they
have perfected a mining claim, and three weeks later they sold the
securities. Is that an insider trading?
No. because it is no longer non public information.
27.1. It shall be unlawful for an insider to sell or buy a security of the issuer,
while in possession of material information with respect to the issuer or the
security that is not generally available to the public, unless: (a) The insider
proves that the information was not gained from such relationship; or (b) If
the other party selling to or buying from the insider (or his agent) is
identified, the insider proves: (I) that he disclosed the information to the
other party, or (ii) that he had reason to believe that the other party
otherwise is also in possession of the information. A purchase or sale of a
security of the issuer made by an insider defined in Subsection 3.8, or such
insiders spouse or relatives by affinity or consanguinity within the second
degree, legitimate or common-law, shall be presumed to have been effected
while in possession of material nonpublic information if transacted after such
information came into existence but prior to dissemination of such
information to the public and the lapse of a reasonable time for market to
absorb such information: Provided, however, That this presumption shall be
rebutted upon a showing by the purchaser or seller that he was aware of the
material nonpublic information at the time of the purchase or sale.
27.2. For purposes of this Section, information is "material nonpublic" if: (a) It
has not been generally disclosed to the public and would likely affect the
market price of the security after being disseminated to the public and the
lapse of a reasonable time for the market to absorb the information; or (b)
would be considered by a reasonable person important under the
circumstances in determining his course of action whether to buy, sell or hold
a security.
27.3. It shall be unlawful for any insider to communicate material nonpublic

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 whole in
possession of such information.
27.4. (a) It shall be unlawful where a tender offer has commenced or is about
to commence for:
(i) Any person (other than the tender offeror) who is in possession
of material nonpublic information relating to such tender offer, to
buy or sell the securities of the issuer that are sought or to be
sought by such tender offer if such person knows or has reason to
believe that the information is nonpublic and has been acquired
directly or indirectly from the tender offeror, those acting on its
behalf, the issuer of the securities sought or to be sought by such
tender offer, or any insider of such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, and any
insider of such issuer to communicate material nonpublic
information relating to the tender offer to any other person where
such communication is likely to result in a violation of Subsection
27.4 (a)(I).

Kwin
January 14, 2010 there is the limitation.
We will now discuss 48.1 still under unlawful activities or Section 48. Margin Requirements.
prohibited activities of the SEC. this talks about the USE OF 48.1. For the purpose of preventing the excessive use of credit for the purchase
or carrying of securities, the Commission, in accordance with the credit and
EXCESSIVE CREDITS or MARGIN TRADING. monetary policies that may be promulgated from time to time by the
Monetary Board of the Bangko Sentral ng Pilipinas, shall prescribed rules and
Sec 48.1 talks about the use of excessive credits and this regulations with respect to the amount of credit that may be extended on any
security. For the extension of credit, such rules and regulations shall be based
would happen in cases of margin trading. upon the following standard:
An amount not greater than the whichever is the higher of
What do you understand about margin trading? (a) Sixty-five per centum (65%) of the current market price of the
security, or
its margin trading when the credit is not extended by the (b) One hundred per centum (100%) of the lowest market price of
issuer but the broker of the securities to or on behalf of the the security during the preceding thirty-six (36) calendar months,
purchaser or investors equivalent to a certain percentage or but not more than seventy-five per centum (75%) of the current
market price.
part of the purchase price. And as a security, he gets the However, the Monetary Board may increase or decrease the above
security as collateral. So part of the purchase price or the percentages, in order to achieve the objectives of the Government with due
regard for promotion of the economy and prevention of the use of excessive
money in paying the purchase price is being advanced by the
credit.
broker. Such rules and regulations may make appropriate provision with respect to
the carrying of undermargined accounts for limited periods and under
specified conditions; the withdrawal of funds or securities; the transfer of
So for example the purchase price of the securities is 100 per accounts from one lender to another; special or different margin requirements
share, the broker would advance 40 and 60 is being paid by for delayed deliveries, short sales, arbitrage transactions, and securities to
the purchaser. 40 is the credit extended by the broker to the which letter (b) of the second paragraph of this subsection does not apply;
the methods to be used in calculating loans, and margins and market prices;
purchaser. The 60 is what you call the margin. This and similar administrative adjustments and details.
transaction is what you call as margin trading. So it is the
broker who extends the credit to the purchaser to enable
Case: Abacus Securities v Ampil
the purchaser to purchase the securities. And as a collateral,
This involves margin trading. Abacus is the broker and Ampil
the broker would keep the securities.
is the purchaser or the investor. Ampil opened an account
with Abacus for purposes of margin trading for a series of
How could he recover the credit?
several transactions, it was Abacus who advances the
From the sale of the securities, he gets the profit an applies
payment of the purchase price. And for several transactions,
it to the credit.
ni balloon iyang credit such that he was not able to settle his
account. Perhaps the market was not able to do well.
This transaction is regulated by SEC so as not to have an
Abacus sought to recover the outstanding amount against
excessive credit. There is a limit provided by the SEC.
Ampil in the amount of 6m. After the sale of the securities, it
How much can the broker extend out of the purchase price?
was lowered down to 3m. So there is still a remaining
An amount not greater than the whichever is the higher of
(a) Sixty-five per centum (65%) of the current market price of the security, or account.
(b) One hundred per centum (100%) of the lowest market price of the security during the So Abacus filed an action against Ampil to recover the
preceding thirty-six (36) calendar months, but not more than seventy-five per centum obligation.
(75%) of the current market price.
According to Ampil, both are in pari delicto. The effect of pari
delicto is status quo. Leave them as they are.
So what is the purpose of the law? Is pari delicto rule applicable in this case? Why was Abacus
Economic stability. Because of this limitation, the use of considered in pari delicto?
excessive credit is prevented. In a way it protects small Because there is a requirement previously in the revised
investor by regulating their credits. If there were no limit,
securities act that if you are in to margin trading, there is a
they would borrow all the time. It also protects the broker
certain period within which you must settle and liquidate
because if there was no limitation, he may not be able to
the account. Within 4 days or 3 days from the transaction,
recover.
that account must already be settled. Again the purpose is
But most importantly, it protects the credit through to regulate the credit. Dapat bayaran nimo before ka
speculation. You speculate on the market hoping that the magpautang again.
market would be ok, or favorable to you. The broker may be
able to recover the credit when the shares are sold and But what happened here was that Abacus, despite Ampil not
there is a profit. But if the market goes down, he wont be
being able to settle his account, sig era gihapon siyag extend
able to recover.
og credit.
And it will have an adverse effect on the stock market and
the economy in general. So what you need to remember

Kwin
Why would he do that? Is it favorable to him? CIVIL LIABILITY
Yes. The more credits he lends, the bigger the debt of Ampil. The last topic in the outline is the cease and desist order. But
At the same time, every time there is a transaction, he earns in addition to that, please take note of who will be held
a commission. civilly liable for the violation of SRC.
We have sec 51, liability of controlled person. Controlled
So thats why the court said that Abacus is guilty of violating person is equally liable as that of the controlling person.
the provisions of RSA (now revised securities code)
Section 51. Liabilities of Controlling Persons, Aider and Abettor and
What about Ampil? Is he guilty also? Other Secondary Liability.
51.1. Every person who, by or through stock ownership, agency, or otherwise,
Yes. Because despite that he failed to pay the previous or in connection with an agreement or understanding with one or more other
debts, he still continued into margin trading. He was also persons, controls any person liable under this Code or the rules or regulations
violating the provisions of the revised securities act. Perhaps of the Commission thereunder, shall also be liable jointly and severally with
and to the same extent as such controlled persons to any person to whom
he was already exceeded the percentage provided under the such controlled person is liable, unless the controlling person proves that,
law and the requirement of t4 and t3. So both of them are despite the exercise of due diligence on his part, he has no knowledge of the
existence of the facts by reason of which the liability of the controlled person
equally guilty.
is alleged to exist.
But although they are both in pari delicto, that would apply 51.2. It shall be unlawful for any person, directly, or indirectly, to do any act or
thing which it would be unlawful for such person to do under the provisions
only to the subsequent transactions or those transactions of this Code or any rule or regulation thereunder.
which occurred when both of them have already violated
the SRC. 51.2. It shall be unlawful for any director or officer of, or any owner of any
securities issued by, any issuer required to file any document, report or other
information under this Code or any rule or regulation of the Commission
But it will not apply to those debts which were incurred at the thereunder, without just cause, to hinder, delay or obstruct the making or
time that neither of them have violated the SRC or the RSA. filing of any such document, report, or information.
So meaning the pari delicto rule applies only to subsequent 51.3. It shall be unlawful for any person to aid, abet, counsel, command,
transactions but not to the earlier transactions. induce or procure any violation of this Code, or any rule, regulation or order
of the Commission thereunder.
But the bottom line is margin trading is allowed but there are 52.4. Every person who substantially assists the act or omission of any person
certain limitations like the percentage and on the period primarily liable under Sections 57, 58, 59 and 60 of this Code, with knowledge
within which you must settle your obligation. It becomes or in reckless disregard that such act or omission is wrongful, shall be jointly
and severally liable as an aider and abettor for damages resulting from the
unlawful only when the credit extended becomes excessive. conduct of the person primarily liable: Provided, however, That an aider and
abettor shall be liable only to the extent of his relative contribution in causing
such damages in comparison to that of the person primarily liable, or the
extent to which the aider and abettor was unjustly enriched thereby,
Case: Baviera v Pangaliwan whichever is greater.
The problem here with standard bank is that they are into
global third party mutual funds without registering with SEC.
there is a criminal case of Syndicated Estafa.
Sec 56 is on civil liabilities on account of false registration. If
SC said that it is not syndicated estafa because there is no
the registration statement that was filed is erroneous and
fraud. inaccurate, who would be held liable?
Applying the principle of primary jurisdiction, the controversy This refers to the signatories of the registration statement.
involves something which is within the knowledge and The issuer, director, the auditing firm, or expert who issued
expertise of an administrative agency, then it must be first
an opinion, under writer or every person who signed the
referred to that administrative agency.
registration statement, may be held civilly liable if it turned
The issue in this case regarding unregistered securities falls
out to be false or inaccurate.
within the primary jurisdiction of SEC in the exercise of its
surpervisory powers (previous topics on registration of Section 56. Civil Liabilities on Account of False Registration Statement.
securities). 56.1. Any person acquiring a security, the registration statement of which or
So Baviera should have filed the case first before the SEC and any part thereof contains on its effectivity an untrue statement of a material
fact or omits to state a material fact required to be stated therein or necessary
it is for the SEC to make the ruling and endorsement to the to make such statements not misleading, and who suffers damage, may sue
DOJ. and recover damages from the following enumerated persons, unless it is
proved that at the time of such acquisition he knew of such untrue statement
or omission:
(a) The issuer and every person who signed the registration statement:
(b) Every person who was a director of, or any other person performing
similar functions, or a partner in, the issuer at the time of the filing of the
registration statement or any part, supplement or amendment thereof with
respect to which his liability is asserted;
(c) Every person who is named in the registration statement as being or about

Kwin
to become a director of, or a person performing similar functions, or a partner other provision of this Code unless brought within two (20 years after the
in, the issuer and whose written consent thereto is filed with the registration discovery of the facts constituting the cause of action and within five (5)
statement; years after such cause of action accrued.
(d) Every auditor or auditing firm named as having certified any financial
statements used in connection with the registration statement or prospectus. Section 63. Amount of Damages to be Awarded.
(e) Every person who, with his written consent, which shall be filed with the 63.1. All suits to recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61
registration statement, has been named as having prepared or certified any shall be brought before the Regional Trial Court, which shall have exclusive
part of the registration statement, or as having prepared or certified any jurisdiction to hear and decide such suits. The Court is hereby authorized to
report or valuation which is used in connection with the registration award damages in an amount not exceeding triple the amount of the
statement, with respect to the statement, report, or valuation, which purports transaction plus actual damages.
to have been prepared or certified by him. Exemplary damages may also be awarded in cases of bad faith, fraud,
(f) Every selling shareholder who contributed to and certified as to the malevolence or wantonness in the violation of this Code or the rules and
accuracy of a portion of the registration statement, with respect to that regulations promulgated thereunder.
portion of the registration statement which purports to have been The Court is also authorized to award attorneys fees not exceeding thirty
contributed by him. percentum (30%) of the award.
(g) Every underwriter with respect to such security. 63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be
jointly and severally liable for the payment of damages. However, any person
who becomes liable for the payment of such damages may recover
Take note also of sec 57, 58, 59, 60 and 61. This all talks about contribution from any other person who, if sued separately, would have
civil liability. been liable to make the same payment, unless the former was guilty of
fraudulent representation and the latter was not.
Sec 61 specifically talks about the civil liability in case of 63.3. Notwithstanding any provision of law to the contrary, all persons,
insider trading. So who would be held civilly liable? including the issuer, held liable under the provisions of Sections 56, 57, 58,
Of course the insider. 59, 60 and 61 shall contribute equally to the total liability adjudged herein.
In no case shall the principal stockholders, directors and other officers of the
issuer or persons occupying similar positions therein, recover their
Sec 62 is on limitation on action. contribution to the liability from the issuer. However, the right of the issuer
Within how many years must you file a claim for the violation to recover from the guilty parties the amount it has contributed under this
Section shall not be prejudiced.
of SRC?
In case of untrue statement, 2 years from date of discovery. M. Cease and Desist Order (Sec 64)
In case of violation, 2 years from the time violation was Section 64. Cease and Desist Order.
committed. 64.1. The Commission, after proper investigation or verification, motu proprio
or upon verified complaint by any aggrieved party, may issue a cease and
But in no case more than 5 years. desist order without the necessity of a prior hearing if in its judgment the
act or practice, unless restrained, will operate as a fraud on investors or is
Sec 63 talks about the amounts of damages to be awarded. otherwise likely to cause grave or irreparable injury or prejudice to the
investing public.
So in case of violation of SRC, the RTC could award damages 64.2. Until the Commission issue a cease and desist order, the fact that an
for an amount not exceeding triple the amount of the investigation has been initiated or that a complaint has been filed, including
transaction plus actual damages. the contents of the complaint, shall be confidential. Upon issuance of a cease
and desist order, the Commission shall make public such order and a copy
thereof shall be immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may,
Section 61. Civil Liability on Account of Insider Trading. within five (5) days from receipt of the order, file a formal request for a
61.1. Any insider who violates Subsection 27.1 and any person in the case of a lifting thereof. Said request shall be set for hearing by the Commission not
tender offer who violates Subsection 27.4 (a)(I), or any rule or regulation later than fifteen (15) days from its filing and the resolution thereof shall be
thereunder, by purchasing or selling a security while in possession of made not later than ten (10) days from the termination of the hearing. If the
material information not generally available to the public, shall be liable in a Commission fails to resolve the request within the time herein prescribed,
suit brought by any investor who, contemporaneously with the purchase or the cease and desist order shall automatically be lifted.
sale of securities that is the subject of the violation, purchased or sold
securities of the same class unless such insider, or such person in the case of
a tender offer, proves that such investor knew the information or would
Finally we have the cease and desist order. This is pursuant to
have purchased or sold at the same price regardless of disclosure of the the regulatory power of SEC. the SEC motu proprio may
information to him. issue a cease and desist order.
61.2. An insider who violates Subsection 27.3 or any person in the case of a
tender offer who violates Subsection 27.4 (a), or any rule or regulation
thereunder, by communicating material nonpublic information, shall be So for purposes of the midterms exams, the coverage is only
jointly and severally liable under Subsection 61.1 with, and to the same up to SRC.
extent as, the insider, or person in the case of a tender offer, to whom the
communication was directed and who is liable under Subsection 61.1 by
reason of his purchase or sale of a security. LAST TIME 30 MINS 01-14-11
Section 62. Limitation of Actions.
62.1. No action shall be maintained to enforce any liability created under
Section 56 or 57 of this Code unless brought within two (2) years after the
discovery of the untrue statement or the omission, or, if the action is to
enforce a liability created under Subsection 57.1 (a), unless, brought within
two (2) yeas after the violation upon which it is based. In no event shall an
such action be brought to enforce a liability created under Section 56 or
Subsection 57.1 (a) more than five (5) years after the security was bona fide
offered to the public, or under Subsection 57.1 (b0 more than five (5) years
after the sale.
62.2. No action shall be maintained to enforce any liability created under any

Kwin


Kwin Transcripts Special Commercial Laws

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Kwin Transcripts Special Commercial Laws

Hochgeladen von

Copyright:

Verfügbare Formate

Special Commercial Laws

The purpose of letters of credit is that for his bank to

Kwin transcripts Page 1

Who pays these fees? Who is the issuing bank?

Kwin transcripts Page 2

Kwin transcripts Page 3

The documents required in the LC may be different from the

Plus, there would no longer be promptness of payment

Under a trust receipts, it effect it simply says that the bank

Kwin transcripts Page 4

Kwin transcripts Page 5

What about the fact that Bank of America accepted the

Kwin transcripts Page 6

Kwin transcripts Page 7

So the issue now is if the LC is covered by the stay order. So

In a contract of guaranty, the obligation of the guarantor is

But in the LC, the liability of the issuing bank is PRIMARY,

And since the liability of the issuing bank is primary and

Because this case is decided under the old interim rules of

Kwin transcripts Page 8

Kwin transcripts Page 9

Kwin transcripts Page 10

What does this rule mean?

If Feati accepted he faulty tender, he is doing it at its own

So therefore here, Feati is justified in refusing payment.

What about the contention that this is already an irrevocable

What do you mean by IRREVOCABLE LC?

What is a CONFIRMED LC?

Kwin transcripts Page 11

Take note that an LC be irrevocable but unconfirmed.

Kwin transcripts Page 12

BACK-TO-BACK LC Unlike an LC where it involves strictly bank to bank

Why did they invent trust receipt? Does it have noble

So imagine that you are an importer or a business man. You

So thats why they develop trust receipt. Because through

The purpose is declared in the policy of the law?

Kwin transcripts Page 13

Kwin transcripts Page 14

SHELDON QUESTIONS: MARK QUESTIONS:

Kwin transcripts Page 15

Kwin transcripts Page 16

Kwin transcripts Page 17

In the same manner, if I didnt assign to BA Finance and ALVIN QUETSIONS:

So by virtue of the assignment, FMC has to turn over the

Kwin transcripts Page 18

Kwin transcripts Page 19

Kwin transcripts Page 20

Kwin transcripts Page 21

What are the OBLIGATIONS OF THE ENTRUSTEE?

Kwin transcripts Page 22

As exception to the res peruit domino, it is the entrustee who

There is a case where the goods were released under a TR.

*Bulk sales law is no longer covered

Kwin transcripts Page 23

Kwin transcripts Page 24

Kwin transcripts Page 25

(c) Approve, reject, suspend, revoke or require amendments to

Kwin transcripts Page 26

3.15. "Underwriter" is a person who guarantees on a firm commitment and/or

Section 3. Definition of Terms.

Kwin transcripts Page 27

i. Definition and kind of securities (Sec 8)

So you have to take note of what are securities because there

So securities are either classified as either debt instruments.