Nego:

G.R. Obligations be paid in Philippine Currency and no person can be compelled to accept a Negotiable
Instrument, like check, as payment of obligation because Negotiable Instruments do not have legal tender
power, but only as substitute for money, But Negotiable Instrument is valid to exercise a right to redeem
- it suspends the prescriptive period.

Accommodation party - signs as maker, drawer, acceptor, indorser, without receiving value for his
signature, merely lends his name, as surety. Payment by Accommodation party does not discharge the
Negotiable Instruments unless the Accommodated Party, if principal/primarily liable, pays.

Forgery - VIP Rules: G.R. - when a signature is forged or even if genuine, if made without his consent,
that signature is wholly inoperative, and holder has no right to retain, discharge, enforce the Negotiable
Instrument against the forged signature.

Forgery applies only to signatures. Forgery is a real/absolute defense of person whose signature is forged
because he did not give his consent. While Alteration is the change of material particulars of Negotiable
Instrument, amount, date, interest but not the serial number of check.

In forgery, cut-off rule applicable if Negotiable Instrument is pay to order - because the last Holder/Payee
did not acquire valid title from the original Payee - that original Payees Indorsement is necessary to
transfer the instrument to the next payee. However, when Negotiable Instrument is payable to bearer,
and the signature of Maker/Drawer is genuine - not forged, but signature of original Payee is forged, the
last holder/payee can enforce the negotiable instrument against the Maker/Drawer because indorsement
is not necessary in a Negotiable Instrument payable to bearer.

G.R. - Holder of Negotiable Instrument is presumed as Holder In Due Course (holder in good faith/for
value, complete/regular on its face, not overdue, not aware of defect/infirmity) Personal defense (like
lack of consideration) can be interposed by party liable, like Maker/Drawer against Holder Not In Due
Course. But real defense, like forgery,c an be interposed only by the forged signatory against any party.

BP22 - anti-bouncing checks law: Law punishes mere issuance of bad/worthless checks.

Elements of BP22 -
1. Making/Drawing of check issued for “account or for value’
2. Drawer had knowledge of insufficient funds
3. Check was dishonored (Dishonored against insufficiency of funds, closed account or stop payment)

Requirements - BP22
1. Check be issued to apply on account or for value
2. Notice of Dishonor in writing/received by Drawer required (SC) to give him sufficient time to
pay/settle check within 5 days to establish “knowledge”

Estafa/Swindling in bouncing checks - RPC, Art 315, 2d -

Elements - Deceit and Damage
1. Offended party suffered damage
2. Drawer postdated/issued check prior or simultaneous with the fraudulent act

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3. The false pretense of Drawer induced Payee to part with his money/property. Drawer’s failure to
pay/settle bounced check within 3 days from Notice of Dishonour, establishes Deceit/ or “knowledge
of insufficiency of funds”

Venue - BP22/Estafa on bounced checks - city/municipality where offense was in part committed.

Banking laws and Negotiable Instrument law:

1. the appointment of receiver of banks is vested exclusively with monetary board. CA has appellate
jurisdiction over final judgments, orders, resolutions, awards of the BSP in administrative cases
involving directors, officers of banks quasi banks as affirmed by BSP circular
2. a certificate of deposit is an interest-bearing time deposit due at a future time a written
acknowledgment of bank of receipt of money for deposit which bank promises to pay to deposit or his
order
3. A managers check stands on same footing as certified check
4. SC reiterated the fiduciary duty of banks, to exercise extra-ordinary diligence to protect
depositors/creditors
5. where drawee bank pays a person other than the person named therein, it cannot charge the drawers
acct the effect of crossing a check serves as warning that it could not be converted to cash but only for
deposit otherwise he is holder not in due course
6. Collecting bank is an indorser which suffers the loss because it has duty to ascertain genuineness of
prior indorsements - it assumes the warranty of the indorser.
7. The BSP even without notice and hearing or the “close now and hear later” rule is to prevent
unwarranted dissipation of bank assets as exercise of police power for protection of public interest
8. when maker dishonors the instrument, holder has right of recourse against secondarily liable persons,
like indorser, for recovery - the relation between payee and the collecting bank is one of agencym not
debtor/creditor relationship.
9. if instrument is payable to 2 or more payees/indorsers, not partners, all must indorse, except
authorized.
10. if signatures are genuine, bank has duty to pay
11. material alteration only applies to changes in date, sum, time, place; currency - but not the serial
number of a check.

NEGOTIABLE INSTRUMENTS LAW

Elements of Negotiable Instruments:

1. Signed;
2. unconditional promise/order to pay sum certain in money;
3. payable on demand, FDFT;
4. payable to order or to bearer;
5. drawee be named with reasonable certainty.

General Classification of Negotiable instrument:

1. Negotiable Promissory Note- 2 parties (maker-payee)
2. Negotiable Bill of exchange- 3 parties (drawer-drawee-payee)

Brief Liability of parties: (memorize)

1. Drawer - admits existence of payee/ capacity to indorse.
2. Drawee/Acceptor - admits genuineness of drawer’s signature.
3. Indorser warrants prior indorsements etc.
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4. Maker - engages to pay promissory note.
5. Accommodation Party - signs as maker, drawer, acceptor, indorser without receiving value for his
signature, merely lends his name-surety.

NCC provides that obligations shall be paid in Philippine currency and no person can be compelled to
accept a check (Negotiable Instrument) as payment of obligation because checks/Negotiable Instrument
do not have legal tender power, but only as substitute for money but negotiable instrument is valid to
exercise a right to redeem. SC said that the tender of a check (even a personal check) to exercise right
to redeem is valid because the check was not issued to pay an obligation but to exercise a right under the
law (right to redeem) suspends prescriptive period.

When is Negotiable Instrument payable to bearer?

1. When expressed as payable to bearer;
2. When payable to a fictitious, nonexistent person (tarzan);
3. Payee does not purport to be the name of a person (pay to cash);
4. When the only or last indorsement is an indorsement in blank.
5. Here, indorsement is not necessary, unlike order instrument.

When Negotiable Instrument is PAYABLE OUT OF A PARTICULAR FUND: It is not unconditional,

therefore not negotiable. But when REIMBURSABLE out of a particular fund-it is unconditional;
considered as a Negotiable Instrument.

Negotiable Instrument be issued for a valuable consideration:

Consideration is presumed. Lack of consideration; illegal consideration; insufficient consideration are
personal defenses of party liable (not to pay) against a holder not in due course. An Accommodation
Party (signs as Maker, Drawer, Indorser without receiving value therefore but to lend his name to
somebody) is liable to a holder for value despite knowledge of being an Accommodation Party.

Date of Negotiable Instrument is not essential because Holder may insert true date of issue/ deemed
payable on demand. Date is important only to determine whether Negotiable instrument is overdue or
not. Ante/post dating allowed.

Forgery: When a signature is FORGED or even if genuine if made without consent that signature is
WHOLLY INOPERATIVE, and the holder has no right to retain; discharge, enforce, unless forged
signatory is precluded from setting up defense of forgery/want of authority/estoppel/gross
negligence/waiver. This rule in forgery apply only to signature as against any holder, Holder in Due
Course/Holder Not in Due Course, as real defense of forged signatory.

However, the rule in alteration applies to other material particulars of the Negotiable Instrument, like
amount/interest/dates which changes the effect of the Negotiable Instrument. If the alteration is material,
it is avoided as against the party who did not consent to the alteration is not liable as a personal defense.
But if the ALTERED NEGOTIABLE INSTRUMENT is in the hands of a Holder in Due Course, he may
enforce it in accordance with its original tenor. This rule in alteration does not apply to the alteration of
serial number of a check (SC).

Effect of Forgery: When a Negotiable Instrument is payable to ORDER and signature of maker/drawer
is forged, the last holder/payee, cannot enforce the negotiable instrument against the maker/drawer
because that signature is wholly inoperative or null/void against maker/drawer.

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Also, if the signature of maker/drawer is genuine but the signature of the original payee (if payable to
order) was forged by indorser and subsequently indorsed further, the last holder/payee cannot enforce
the negotiable instrument against the maker/drawer and the original payee, as prior parties, even if their
signatures are genuine because indorsement is necessary, applying the CUT-OFF RULE. That the last
holder/payee did not have the right to retain, enforce, discharge the negotiable instrument and did not
acquire a valid title from the original payee whose signature was forged because indorsement is
necessary, hence, the signature of original payee of negotiable instrument that is payable to order was
forged. Also, it is void/wholly inoperative as real defense of any party prior to the forgery. The remedy
of the last holder/payee is to proceed against his immediate indorser/s or parties subsequent to the forged
indorsement.

Effect of forgery continued: However, if the negotiable instrument is payable to bearer (When is
Negotiable Instrument payable to bearer? When expressed as payable to bearer; When payable to a
fictitious, nonexistent person (tarzan); Payee does not purport to be the name of the name of a person
(pay to cash); When the only or last indorsement is an indorsement in blank. Here, indorsement is not
necessary, unlike order instrument. Refer also to sec. 9), genuinely signed by maker/drawer but the
signature of payee as bearer is forged the last holder/payee can enforce the negotiable instrument against
the maker/drawer because indorsement is not necessary in bearer negotiable instrument.

Rules in Forgery:
1. Applies only to signatures. Forgery is a real/absolute defense of person whose signature is forged
because he did not give his consent. While alteration is the change of material particulars of negotiable
instrument, amount, date, interest but not for the serial number of check.
2. CUT OFF RULE because the last holder/payee did not acquire a valid title from the original payee
because his indorsement is necessary to transfer the instrument to the next payee.
3. When a negotiable instrument is payable to bearer and the signature of maker/drawer is genuine not
forged, but signature of original payee is forged, the last holder/payee can enforce the negotiable
instrument against the maker/drawer because indorsement is not necessary in a negotiable instrument
payable to bearer.

Cashier’s/Manager’s checks are good as cash (SC). If a check is certified it is equity to acceptance
because the bank issuing it continue? its total resources and not the account of the depositor as PN of
bank.

Negotiation - is the transfer of the Negotiable Instrument from one person to another. If payable to bearer,
negotiation is by delivery; if payable to order, negotiation is by indorsement completed by delivery.
Indorsement be written on the negotiable indorsement or upon allonge/attached paper. Kinds: special,
blank, restrictive, qualified and conditional.

General Rule: Holder of negotiable instrument is presumed as Holder in Due Course (holder in good
faith and for value, complete/regular on its face, not overdue, not aware of defect/infirmity). A personal
defense (like lack of consideration) can be interposed by the party liable, like maker, if the holder is not
a holder in due course. However, real defenses (like forgery) can be invoked against ANY PARTY
whether holder in due course or not.

Presentment for payment (sec. 70), for acceptance (sec. 143).

Presentment for payment is made by holder of negotiable instrument necessary to charge Drawer and
Indorsers as persons secondarily liable whether or not negotiable instrument is dishonoured by principal

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for non-payment. Holder has right of recourse against all parties secondarily liable, such as
Drawer/Indorsers provided Notice of Dishonor is given= with exceptions.

Discharge of Negotiable Instrument:

1. By payment of principal;
2. Payment of accommodated party, if principal;
3. Intentional cancellation by holder;
4. Any other act;
5. Novation;
6. Prescription;
7. Principal becomes holder;
8. Renunciation.
But payment by a party secondarily liable, like indorser, does not discharge the negotiable instrument.

Bill of Exchange (not an assignment of funds in the hands of drawee) Payee has no right against drawee
unless accepted/cleared. Bill of exchange may be treated as Negotiable Promissory Note if drawer and
drawee are the same or drawee is fictitious. Checks are special ___.

When presentment for acceptance of Bill of Exchange required:

1. When bill of exchange payable after sight/ fix maturity;
2. When presentment for acceptance expressed;
3. When bill of exchange drawn payable elsewhere (sec. 43)

Protest same as Notice of Dishonor, made by notary, respectable resident of place of dishonour.
Acceptance for honor, payment for honor, bills in a set- discuss.

BP 22, anti-money laundering checks law - not unconstitutional because what the law punishes is not the
non-payment of debts but the mere issuance of worthless/bad checks.

BP 22 elements:
1. Check issued to apply on account/for value;
2. Knowledge of insufficiency of funds and check bounced for DAIF, closed account;
3. Stop payment without valid reason
4. Fails to maintain funds for 90days.

BP 22 requirements:
1. That the check is issued to apply on account or for value;
2. Written Notice of dishonour is required in order to give the drawer sufficient time to pay/ settle check
within 5days, otherwise, “knowledge of insufficiency of funds” is established

(EXCEPTIONS, estoppel/did not receive notice of dishonour/ check was issued to comply with
warranty/ guaranty requirement/ that check was issued only to show drawers commitment of partners
share in a partnership agreement/ check was merely issued to facilitate collection in a consignment,
business etc.)

In short, these checks were not issued for value or a/c. Here, the drawer of bounced check is not liable
under BP 22 but is still civilly liable. Deceit is not an element in BP 22.

Estafa/Swindling in bouncing checks, PRC, Art. 315, 2d, elements:

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1. Fraud/deceit, and damage by postdating/issuing of check prior or simultaneous with the false pretence
or fraudulent knowledge of insufficient funds to cover check. Failure to pay/ settle bounced check
within 3days from notice of dishonour establishes DECEIT/or knowledge of insufficient funds.

Crime of Estafa under RPC, 315,2d, is committed by the Drawer/Issuer who deceives the offender
party/payee into parting with his property/cash by flashing his check that the efficient cause of the
defraudation is the issuance of the bad check that the payee/offended party was induced to part with his
property/cash because of the check, which bounced later. The element of deceit to constitute estafa must
be the efficient cause of the defraudation. There is no estafa if check was issued in payment of a pre-
existing obligation. If a crime of estafa is established. Offender can be prosecuted also under BP 22 - No
jeopardy.

Venue: Shall be instituted and tried in the city/municipality where offense was in part committed, a
transitory or continuing crime.

Credit card, letter of credit, Bill of Lading, PMO are not negotiable instrument.

Letter of credit - financial engagement by bank to pay seller under it conditions for the seller present Bill
of Lading/Warehouse Receipt to the bank. Letter of credit is independent from the contract of sale
between buyer and seller following the independence rule (where the contract of sale is separate and
distinct from the letter of credit).

Bill of Lading - contract and receipt of goods issued by common carrier.

Characteristics of Negotiable Instrument:

1. Accumulation (indorsement) of contracts;
2. Substitute for money, not legal tender.

SOME IMPORTANT SC RULINGS TO REMEMBER:

Gonzales vs. PCIB, 644 scra: Accommodation Party - is one who signs the negotiable instrument as
maker, drawer, acceptor, indorser without solidary liable.

Dinovs. Judal-Loot, 618 scra and PCIB vs. Balmaceda, 658 scra: Crossed Checks- are negotiable
instruments with 2 parallel lines across its corner. Effects: it may not be encashed but deposited, may be
negotiated once to one who has act? with bank, it serves as warning to the holder that the check is issued
for a definite purpose. Payee must inquire if he received the check pursuant to that purpose, otherwise,
he is a holder not in due course.

Mitra vs. People, 623 scra: Check is a negotiable instrument that serves as a substitute for money and as
a convenient form of payment in financial transactions.

Equitable Bank vs. Tan, 628 scra: The purpose for the issuance of check has no legal connection with
the date of the check.

Cayanan, 658 scra: In fact a check is presumed issued for a valuable consideration (right, interest, profit,
benefit)

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SMC vs. Puzon, 631 scra: Delivery of a check to a party entitled to it is for the purpose of giving effect
thereto and non-delivery does not render the check as non-negotiable.

Pantaleon vs. American Express, 629 scra: Credit cards are not negotiable instruments because it is only
a device to obtain credit. It involves 3 contracts: sales contract; loan agreement; promise to pay to a
specific person.

In Firaza vs. People, 518 scra: SC said that in case of Estafa on bounced checks,
payment/settlement/compromise on the bounced check does not acquit/obliterate the criminal liability
(6yrs. to 30yrs. imprisonment) but merely extinguishes the civil liability.

Metrobank vs. Cablizo, 510 scra: This is a clear case of MATERIAL ALTERATION. The Drawer, issued
payable to CASH, was deposited for payment to Westmont Bank, as Collecting Bank. The amount was
altered to P91,000.00 and date was altered to Nov. 24. Metrobank cleared the amount of P91, 000. 00
and deducted the amount of P90, 000. 00 but bank refused alleging that Westmont Bank, the collecting
bank-indorser should bear the loss as indorser. SC reiterated the duty of banks to exercise the highest
degree of fidelity/ UTMOST DILIGENCE to its clients/depositor and ordered Metrobank to credit the
amount of P90,000.00 without prejudice to an action by Metrobank against Westmont Bank, the
collecting bank, as the last indorser that when the instrument materially altered and in hands of holder in
due course, it may enforce payment according to ORIGINAL TENOR. That payment made under a
materially altered instrument is not payment done in accordance with the drawers order.

Gonzales vs. RCBC, 508 scra: This is a case of IRREGULAR INDORSEMENT of a check, wherein the
SC ruled that RCBC as irregular indorser and collecting bank, by making annotation as qualified
indorsement should bear the loss because RCBC by indorsing the check to the US Bank warrants all prior
indorsement (sect. 66). Also, RCBC as indorser which caused the defect cannot have a recourse against
prior indorsers/Gonzales in good faith RCBC’s recourse should be against the drawee bank.

In Allied Bank vs. CA, 494 scra: SC ruled that while indorsers are secondarily liable, indorser becomes
primarily liable in case Drawer fails to pay/dishonors negotiable instrument. In a similar case, Tuason
vs. Heirs of Ramos, 463 scra, the SC reiterated that if a check issued by drawer was indorsed by the
original payee, Tuason, as indorser to Ramos as indorsee, if check is dishonoured, the holder/indorsee
can sue the indorser Tuason even without impleading the drawer Santos, as a prerequisite.

In Citibank vs. Sabeninno, 504 scra and in Equitable PCI vs. Ong, 502 scra: The SC emphasized that
managers checks are drawn by the bank Manager upon the funds of the bank itself and regarded as cash.
Also, a crossed check cannot be presented to the drawee bank for payment in cash because it is only
intended for deposit which in turn will be paid by the drawee bank.

In Nuguid vs. Nicdao, 502 scra: SC reiterated that the gravamen of BP 22 is the act of making, drawing,
issuing a worthless check or one dishonoured for non-payment and drawer failed to satisfy or make
arrangements for its payment within 5days from date of Notice of Dishonor.

In International Corporation Bank vs. CA, 501 scra: The SC reiterated an earlier ruling that alteration in
the serial number of various checks issued by the DepEd in the total amount of Php1, 447M, does not
constitute material alteration and therefore drawee bank PNB had no right to dishonour the checks or
return them to them to the collecting bank. International Corp. Bank, which had already paid the payees.
Material alteration alters the effect of the instrument or an unauthorized change which modifies the

7
obligation of a party. Also, CB circular 580, provides that dishonoured checks must be returned by the
drawee bank to the collecting bank within 24hrs. otherwise it is considered as cleared.

In Miranda vs. PDIC, 501 scra: Where 2 cashiers’ checks worth Php5.5M were issued by an insolvent
Bank to a depositor, is in bad faith because the bank is fully aware that it was already insolvent. Therefore
the 2 cashiers’ check of Php5.5M did not constitute an assignment of funds on favor of the payee because
bank had no funds at the time of its issue. If the bank was not insolvent at that time the drawing of the
cashiers’ checks is equity to assignment of funds of the bank in favor of a payee/depositor.

In Tan vs. People, 500 scra: The SC emphasized the elements of BP 22 and for the presumption to arise,
the prosecution must prove the following:
1. Check is presented within 90days from date of check;
2. Drawer receives notice of dishonour;
3. Drawer fails to pay/arrange payment within 5 banking days after receipt of notice of dishonour.

However, the basic elements to prove that there is a prima facie case, are:
1. A person makes/draws a check to apply on account or for value with knowledge of insufficiency funds;
2. Check is dishonoured for insufficient funds;
3. Ordered “stop payment” without valid reason; or
4. Having sufficient funds or credit but fails to maintain funds/credit within 90days from date and
dishonoured by the bank.

Alferez vs. People, 641 scra: SC emphasized the elements of BP 22 as

1. Making, drawing, issuance of a check TO APPLY ON ACCOUNT or FOR VALUE;
2. Knowledge of insufficiency of funds;
3. Subsequent dishonour of check by drawee for DAIF or for “stop payment”.

That Notice of Dishonor is important to establish “knowledge” receipts for registered letters and return
receipts do not by themselves prove receipt of Notice of Dishonor, they must be authenticated to serve
as proof of receipt of Notice of Dishonor. If acquitted, drawer still civilly liable.

People vs. Moutaner, 656 scra: Whereas, in ESTAFA for bouncing checks under art. 315, 2d of the RPC,
elements are:
1. Postdating/issuance of check in payment of obligation contracted at the time check was issued;
2. Insufficiency of funds to cover check;
3. Damage to the payee.

Failure to settle bounced check within 3 days from receipt of Notice of Dishonor gives rise to a prima
facie evidence of deceit, which is an element of estafa constituting false pretense or fraudulent act.

In Oriel Magno vs. CA, 210 scra: It was proven that the check was merely issued as a WARRANTY
DEPOSIT for the lease of EQUIPMENTS - therefore, the BP 22 case was dismissed for lack of an
important element of

To apply on account or for value. Also, in the case of IDOS vs. CA, 296 scra, where check was issued
as an assurance for a share in the partnership business which failed, the SC said that the check was not
issued for value or for an account but as an assurance for a share or interest in the partnership agreement
- drawer acquitted.
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Villanueva vs. Nite, 496 scra: A payee-holder of a check cannot sue the drawee bank if it dishonours a
check. No privity. Instead the payee should sue the drawer-maker of the check.

In Arceo vs. People, 495 scra and in Wong vs. CA, 351: SC said that the 90 days period is not a necessary
element of BP22, if it was proven that at the time that the check was drawn there was no sufficient funds
of the drawer in the bank. Also, the notice of the lawyer to make good the check within 3 days (instead
of 5 days) is not fatal because the drawer was given more than sufficient time (drawer asked the payee,
7 times, not to deposit the check) to settle/arrange payment. Also SC said that loss of the check is not
material. Refer also to Ting vs. CA, 344 scra.

In Saguigit vs. People, 494 scra and in Domagsang vs. CA, 347 scra: SC said that the BP 22 requires that
for the act to be punished, the accused be notified in writing of the fact of dishonour of the check in order
to give him time to pay/settle the check within 5 days from notice of dishonour.

Chua vs. People, 484 scra and also in People vs. Hernando, 317 scra:
There is ESTAFA, art. 315, 2d, in this case. The SC said that the defense of accused that said checks
were merely issued as collateral and for accommodation was not considered because the following
elements of estafa are present –
1. the offender postdated or issued a check in payment of an obligation contracted at the time of issuance
meaning the efficient cause of defraudation should be PRIOR OR SIMULTANEOUS with the act of
fraud;
2. That at the time of issuance of the check, offender had no funds/insufficient funds/closed accounts;
3. Payee was defrauded.

The facts show that the case issued by accused were intended as payments for items obtained from
complainant - that complainant could not have parted with her goods in exchange for bum checks.

In another case, Ongson vs. People, 466 scra: The SC reiterated the elements of BP 22 and the
presumption of consideration in the issuance of checks. That there is prima facie presumption of
knowledge of insufficiency of funds if notice of dishonour was given and the drawer did not pay or
arrange payment within 5 days from notice of dishonour. Further, the SC said courts are vested with the
discretion to impose the penalty.

In Villaluz vs. Ligon, 468 scra: The SC said that what is punished under BP 22 is not the failure to pay
an obligation but the issuance of bum checks or checks dishonoured for insufficiency of funds.

Roco vs. Contreras, 462 scra: That the gravamen of the offense under BP 22 is the act of issuing a
worthless check that is dishonoured and is payment within 5 days from date of dishonour, is a valid
defense.

In the case of Maregomen vs. People, 459 scra: The SC said that a written Notice of Dishonor should be
given to the drawer, Maregomen, who was authorized by the corporation to issue and sign checks in the
name of the corporation. When the checks bounced, Maregomen was charged for violation of BP 22. Her
defense was, she did not receive a notice of dishonour and that she is a mere employee of the corporation
and did not have sufficient knowledge on funds of the corporation. SC said that a mere oral notice of
dishonour is insufficient for conviction under the law. The law provides that where there are no sufficient
funds with drawee bank, such fact shall always be explicitly stated in the notice of dishonour that the
drawer should be notified in writing of the fact of dishonour. Willy Sia vs. People, 426 scra. Also the SC
9
reiterated the importance of notice of dishonour. Even if a notice of dishonour was sent by registered
mail if it was not proven that the drawer recorded the registered notice of dishonour the returned
registered receipts do not prove by itself.

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Corporation

Corporation - artificial being created by operation of law (concession theory) having right of succession
powers, attributes, property, authorized or incident… It has continuity of existence regardless of death
with one of stockholders. The theory of legal fiction applies but if legal corporate fiction is used a shield
to confuse legitimate issues, abused, or used as a cloak or dummy for illegal/wrongful purposes, justify
a wrong or defend a crime, courts may pierce corporate veil, so that corporate officers be made personally
liable for their wrongful acts.

Corporation maybe private or public. Or corporation going public (registration with stock exchange)
Formation/incorporation/organization - Articles of Incorporation signed by 5 to 15 incorporators
(merged/consolidated, up to 21 incorporators) who must be natural persons, except rural banks.

Corporate powers exercised by Board of Directors/Trustees (not the President) to be elected from among
stockholders/members who must hold office for one year (except in non-stock corporation) must own at
least one share which should stand in his name in corporate books and if he ceases to be owner, he ceases
as Board of Directors, or he maybe removed without cause by 2/3 stockholders. In case of death,
resignation, incapacity, vacancy be filled up by Board of Directors. In case of removal and expiration of
term by stockholders vote.

Ultra Vires acts of Board of Directors/Officers ratifiable but ultra vires acts of corporation (outside its
purpose or acting as Corporate beyond its term) amendment of articles of incorporation necessary.
Election of board of directors/trustees - stockholder should own stocks registered in his name in corporate
books, be present or by proxy/Voting Trust Agreement. No delinquent stocks (declared as such by Board
of Directors) be voted. Shares not recorded in corporate books is invalid/inexistent, cannot vote.
Transfers of stocks to be valid, must be
1. delivered indorsed to a specific person or with Special Power of Attorney
2. recorded in corporate books,to bind 3rd persons except uncertificated stocks.

Exceptions to right to vote by others not as owner: Mortgagee, if allowed by Mortgagor; Executor; Voting
Trust Agreement, PCGG, for shares of stocks registered in the name of private persons, but which 1.
have been sequestered by government, PCGG, as a conservator and not as owner, is allowed to vote or
be voted as Board of Directors or as Nominee Director if proven that 1. shares were purchased with coco
levy funds (public funds) affected with public interest, or 2. if shares are ill-gotten, or 3. if there is
imminent danger of dissipation of private corporate assets.

Corporation has power to acquire its own shares as treasury shares for legitimate purpose provided
corporation has unrestricted retained earnings except redeemable shares.

Appraisal right is the right of a stockholder to dissent to Corporate Board action/s and be paid on the
appraised value of his shares. To exercise appraisal right, stockholder be present/proxy to dissent to
corporate actions that require stockholders vote, but not for action that do not require stockholders vote.

Dividends - shares of stockholders from profits of corporation. Declaration of dividends is discretionary

upon Board. However, Corporation must declare/pay dividends if surplus profits exceed 100% of paid
up capital. Cash dividends to delinquent stockholders be applied to unpaid subscriptions.

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Trust Fund Doctrine - that the capital stock, property, subscribed receivables, other assets of the
corporation are regarded as Equity in Trust for payment of corporate creditors - as a fund to which the
creditors have a right to look for the satisfaction of their claims…

The SC said that revocation/rescission of subscription contract results in the unauthorized distributed of
capital assets of corporation which results in the premature liquidation of a corporation without the
benefit of prior dissolution, thereby violating the Trust Fund Doctrine.

Voting Trust Agreement (VTA) - where one or more stockholders create VTA to confer upon the trustee,
right to vote and other rights pertaining to the stocks for a period not exceeding 5 years.

Doctrine of Corporate Opportunity - officers take advantage of business opportunity/commit fraud/gross

negligence.

Foreign Corporation - formed/organized outside Philippines and whose laws allow Filipino to do
business in its own state. For Foreign corporation to do or engage in business, SEC license is required so
that it can maintain or intervene in any action, suit or proceeding before any court/administrative body.

Foreign corporation without license can be sued but cannot sue. But Foreign corporation not doing
business may sue.

Doing business is the continuity of commercial dealings (continuity test) and includes a single act if such
act (like participating in bidding) is in accord with the purpose/object of the Foreign corporation.
Substance Test applied if Foreign corporation continues its business in Philippines.
Exceptions (SC) to the rule rule that Foreign corporations doing business without license, cannot sue are:
Estoppel; know of no license; unfair competition; infringement; isolated transactions; obtained license
later.

Dissolution - termination of corporate existence. It precedes liquidation. Modes - 1. Voluntary 2.

Involuntary 3. Shortening/expiration of term.

Corporate Liquidation - takes place after dissolution/expiration of corporate term - continues for 3 years
as a body corporate for winding up (prosecuting/defending suits) to settle and close its affairs; to
dispose/distribute assets but not for continuing tis business. If 3 years expired, the trustee/lawyer/Board
of Directors may continue liquidate/distribute/suits.

RTC jurisdiction - intra-corporate disputes now transferred from SEC to RTC, such as Petition for
rehabilitation of distressed corporation be approved by Board of Directors/Stockholders; Petition for
suspension of payments; Petition for dissolution; Petition for rehabilitation/appointment of rehabiliation
receiver; Petition to create/appoint management committee; Petition for declaration of insolvency. When
a corporation files a Petition for Rehabilitation the court will suspend all claims against the corporation
provided that the serious situation test is complied (that there is an imminent danger of dissipation of
corporate assets of paralyzation of business operations). Once a corporation files a petition for corporate
rehabilitation with suspension of payments due to technical insolvency, the appointment of interim
receiver is automatic. When RTC appoints a Rehabilitation receiver or management committee, it
suspends all actions/claims against the corporation in order to exercise its powers free from any
judicial/extrajudicial interference so that all assets/property are held in trust/ in custodia legis for the
equal benefit of creditors/stockholders. However, the corporation may foreclose/redeem its property
during receivership/liquidation because such is not a claim or action against the corporation. The purpose
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of appointing receiver is to restore/rescue the corporation. The legal personality of the corporation
continues even during receivership and until liquidation, up to 3 years. After 3 years of winding
up/liquidation. all other actions maybe continued thru a trustee/legal counsel/Board of Directors.

In merger - corporations combine assets/liability and one of the combining corporations continues the
combined business and the other corporations are dissolved. Consolidation, a new corporation is created.
In both cases, the obligations of constituent corporations are absorbed by the surviving corporation or
the new corporation.

Board of Director/Board of Trustee member must be personally present during Board meetings - Quorum
required. But teleconferencing/videoconferencing in Board of Directors/Trustees meeting now allowed
under RA 8792.

Latest SC rulings to remember (Corporation, Revised Securities Act; Insurance, Transportation/Common

Carrier; Banking Laws/ Negotiable Instrument; Intellectual Property

Corporation:
1. Corporate powers exercised by Board of Directors - that Board of Directors not personally liable for
official acts, unless bad faith - gross negligence - illegal - possession of corporate property; - courts
may pierce corporate veil.
2. Petition for rehabilitation or suspension of payments if technically insolvent (corporation has
sufficient assets but foresees impossibility of meeting when due than SEC appoints Interim receiver
and suspends all actions against corporation; prohibiting debtor from making payments, selling
encumbering, transferring - disposing assets, except in normal course of business.
3. RA 8799 transferred jurisdiction of SEC to RTC - intra corporate disputes. If not intracorporate, it
must be referred to SEC with specialized knowledge/expertise on sale of securities, following the
doctrine of primary jurisdiction. If complaint is criminal, SEC should indorse to DOJ for preliminary
investigation. If SEC appointed Management Committee or Rehabilitation Receiver, does not divest
RTC of its exclusive jurisdiction inorder to suspend all actions/claims of pecuniary nature against the
corporation to rescue/restore.
4. Also, where corporation is threatened with bankruptcy, taken over by Rehabilitation Receiver, all
creditors stand on equal footing until liquidation/distribution/winding up. Right of creditors to
foreclose property of corporation mortgaged to creditor shall be made after rehabilitation period during
liquidation. Preferential right of secured creditors shall apply during liquidation. Grounds to appoint
receiver-imminent danger; paralyzation a “stay order” defers all actions/claims against the corporation
seeking rehabilitation from date of issuance until dismissal of petition or termination of rehabilitation
proceedings - the “stay order” includes all claims against the corporation without distinction whether
secured or non-secured.

That a corporation is technically insolvent to qualify for petition for rehabilitation, if a corporation is
unable to pay its obligations beyond one year. Appointment of Interim Receiver becomes automatic.
Purpose of rehabilitation is to enable the corporation to restore/gain new lease on life and allows creditors
to be paid their claims from its earnings during rehabilitation because rehabilitation contemplates a
continuance of corporate life - that rehabilitation contemplates continuance of corporate life, to restore-
reinstate corporation to former position.

5. Sc reiterated the Doctrine of Corporate Opportunity under sec 31 and holds corporate-officers liable
for gross negligence/bad faith in directing affairs of corporation which resulted in damage/injury to its
stockholders, members, corporation, etc. Unless corporate officers exceeded their authority, corporate
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officers as a general rule are not personally liable for official acts because corporation is by legal fiction
has separate distinct personality from officers.

6. That mere interlocking of directors does not warrant “piercing”, the test is “complete control or
domination” not only of finances but of policy and business practices.

7. Under the doctrine of apparent authority, the principal/corporation is liable only as to 3rd persons if
they were led to believe by the conduct of the principal that such authority exists although none is given.

8. That the stock corporation’s recourse on unpaid subscription is not applicable to non-stock corporation
- the right of non-stock corporation to expel a (deceased) member thru forfeiture of member’s share be
established in the by-laws.

9. In the absence of authority from board of directors, no person not even its officers, can validly bind
the corporation.

10. Dismissal of corporate officers is always a corporate act and an intra-corporate controversy - that
corporate officers are those included in the by-laws - his removal is an intra corporate dispute cognizable
by SEC on its investigatory/regulatory powers. Election of BOD/officers is within jurisdiction of RTC
but exercise of stockholders rights to vote on matters other than election of BOD/officers is SEC
jurisdiction.

11. Corporate officers are those as such in the by-laws are elected/appointed by BOD/stockholders, but
not for ordinary employees who are generally employed by managing officer not by the action of Board
of Directors.

12. Corporate officers tenure is that period during which he actually holds office, which maybe shorter
or longer or in case of holdover. BOD have term of one year. Holdover is not part of his term.

13. Where 60% of capital stock outstanding and entitled to vote are owned by citizens of Philippines,
such corporation is considered as Philippine National.

14. That since PLDT shares were declared in favor of the Republic, it includes all dividends/interests
accruing thereto as owner. Transfer of shares not recorded in books is valid only as to parties although
owner/transferor has right to dividends without prejudice to the right of the transferee.

15. Heirs do not automatically become stockholders - the stocks must first be distributed to the heirs in
estate proceedings and transfer of stocks be recorded in the books. During the interim period, the heirs
stand as equitable owners - the executor/administrator appointed by court is vested with legal title to the
stocks.

16. A corporation that buys the assets of another corporation will not be liable for debts of selling
corporation provided good faith and adequate consideration present - where selling corporation is
incapable of continuing business. However, in case of Merger/Consolidation, all liabilities of dissolved
corporation are assumed by surviving/new corporation.

In merger - one of the corporation survives In consolidation , new corporation formed - both assume all
liabilities/assets.

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17. Stock Certificate - tangible evidence of ownership of shares of stocks - its presence/absence does not
affect right of registered owner to dispose his certificate - delivery of indorsed stock certificate is
sufficient to transfer ownership and absence of DS or DA is not fatal flaw to render transfer invalid. To
bind 3rd person and right to vote/be vote as Board of Directors, transfer be recorded in the corporate
books.

18. Failure to file by laws within prescribed period does not ipso facto lose its corporate powers.

Revised Securities Code - RA 8799 - Blue Sky Law

1. Intracorporate disputes transferred to RTC as special commercial court.Existence of intracorporate
dispute is determined by Relationship test and Nature of Controversy test. An heir not registered as
stockholder fails in the relationship test.
2. Checks are not securities because they cannot be rolled over even if it is a certificate of indebtedness
- not enumerated as a security under RSA.

3. During the receivership period, BP 22 (criminal aspect) is not a claim that can be suspended because
it is not a claim pecuniary in nature against corporation. However, the civil aspect of the bounced check
is suspended, as a claim of pecuniary nature against the corporation.

4. Margin Trading is trading on credit that a bank that engages in securities trading should register with
SEC - failure is criminal in nature - not incorporate - SEC than DOJ

CORPORATION LAW

Corporation -
• artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
• It has continuity of existence regardless of death of stockholders.
• The theory of legal fiction applies that the corporation has separate and distinct personality from its
stockholders/board/officers.
• UNLESS the legal fiction is abused/ used as a cloak for illegal/wrongful purposes, where courts
may PIERCE CORPORATE VEIL. If proven, corp. veil will be pierced by court and corporate
officers shall be made personally liable.

Doctrine of Apparent Authority - the principal is bound by the acts of his agent with the apparent
authority which he knowingly permits the agent to assume, or which he holds to the agent out to the
public as possessing. The question in every case is whether the principal has by his voluntary act placed
the agent with business usages and the nature of the particular business is justified in presuming that
such agent has authority to perform the particular act in question.

Business Judgement Rule - GR: Courts will not interfere in the decisions made by the Board of
Directors as regards the internal affairs of the corporation.

Exception: Unless such contracts are so unconscionable and oppressive as to amount to a wanton
destruction of rights of the minority.

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Doctrine of Corporate Opportunity - a director is made to account to his corporation, gains and
profits from transactions entered into by him/another competing corporation in which he has
substantial interest, which should have been a transaction undertaken by the corporation. This a
breach of fiduciary relationship.

Corporation may be private or public.

• Private, when formed or organized by general law for private purpose.
• Public, when formed or organized for public purpose/interest, created by special law or act of
congress. Substantial ownership or transfer to the government of shares of stock of private corporation
or takeover of a private corporation by the government like PCGG, does not convert the private
corporation into public corporation or vice versa.

Formation/Incorporation/Organization
• 5-15 incorporators who must be natural persons. 50 years max. Php5,000 minimum paid up capital.
• Minimum paid-up capital: 25%. 25% subscribed/paid-up. Except: rural banks, can be formed by
juridical persons.

De jure - requirements complied with.

De facto failed to comply with some provision.
Corporate existence maybe inquired into by the state through quo warranto proceeding.

Corporation by estoppel - act as corporation. Lacks corporate personality.

Non-use of corporate charter

• failure to organize (elect officers) and commence business within 2yrs. from incorporation
automatically dissolves the corporation.
• If it commenced business but is continuously inoperative for 5 continuous years., such is a ground for
suspension/revocation thru quo warranto proceedings.

Corporate powers:
• are exercised by the board of directors/trustees (not the president) to be elected from among
stockholders/members who must hold office for 1 year (except in non-stock corporation).
• Must own at least 1 share which should stand in his name in corporate books and if he ceases as owner,
he ceases as board of director/trustee.
• He may be removed without cause by 2/3 stockholders and vacancy maybe filled up stockholders,
except in case of death, resignation, incapacity, vacancy be filled up by board of directors.
• But expiration of term, removal be filled up by election of stockholders.
• Majority of Board of Directors/Trustee be residents of Phil.
• Acts of the President which were not delegated by the BOD and not ratified by the BOD, are ultra vires
acts of the president makes president personally liable, exempting corporation from any liability arising
from ultra vires acts.
• Ultra vires acts of the BOD/officers are ratifiable but ultra vires acts of the corporation are not ratifiable.

Election of BOD/T
• Stockholders should own stocks in his name in corporate books, be personally present or by proxy.
• No delinquent stocks be voted.
• Right to vote is an inherent/incidental right and cannot be deprived of right to vote whether his shares
are class A, B, C except preferred or redeemable shares.
• Transfer of shares not recorded in corporate of books invalid/inexistent, cannot vote.
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• Transfer of stocks to be valid must be
1. certified be delivered/indorsed to a specific person or with SPA;
2. recorded in corporate books to bind 3rd persons. (But stocks transferred thru the stock exchange
is uncertificated allowed.)

Exceptions: In some cases, the SC held that shareholders of stocks registered in the name of private
persons which have been sequestered by government, PCGG, as a CONSERVATOR and not as OWNER
is allowed to vote or be voted as BOD or as nominee director because they were purchased with coco
levy funds (public funds) affected with public interest or if shares are ill-gotten or if there is imminent
danger of dissipation of private corporate assets sequestration is proper PCGG takeover is proper.

Other exceptions on right to vote other than as Registered Owner.

• Pledgees /mortgagees, assignee, proxy, if authorized by pledgor/mortgagor/owner
• Trustees in VTA, may vote stocks owned by trustor/owner or be voted as BOD
• Executors, receivers, administrators without need of proxy - appointed by court

Compensation of BOD/T/Officers - reasonable per diems only - except by 2/3 vote of stockholders,
yearly compensation shall not exceed 10% of net income (NI) before income tax.

Liability of BOD/T/Officers - jointly-severally liable for unlawful acts/or negligence.

Minority stockholder/BOD or even a single stockholder may sue for and in behalf of corporation in a
derivative suit and a real party in interest is the corporation and not the stockholder or minority

Contracts between corporation with interlocking directors shall be valid if fair/reasonable, except in cases
of fraud. If interest of interlocking director is only NOMINAL (20% or less) valid if fair/reasonable.

SC reiterated that corporate powers be exercised by the BOD unless delegated in the bylaws to an
EXECUTIVE COMMITTEE (3 members of BOD) who cannot act as BOD on the following:
• On filling up vacancies in the BOD (death, resignation, incapacity)
• Amendment/repeal of AOI/BL or Board resolution
• Distribution of dividends
• Approval of any action which requires stockholders approval

If not denied in the AOI, stockholders enjoy PRE-EMPTIVE rights to subscribe to all issues of
corporation

Corporation has power to acquire its own shares for legitimate purpose provided corporation has
UNRESTRICTED RETAINED EARNINGS to pay dissenting stockholders who exercise right of
appraisal

Treasury shares (no right to dividends/vote) not retired, maybe re-issued, resold to stockholders

Investing corporate funds in another corporation even outside its primary purpose if approved by BOD
and ratified by stockholders, is valid, provided that ANY DISSENTING STOCKHOLDER is entitled to
exercise right of appraisal. However, (if investment is reasonably necessary to accomplish its primary
purpose, approval/ratified by 2/3 vote of stockholders not required-only the BOD approval required.)

Corporations are prohibited from retaining surplus profits in excess of 100% paid up except:
17
1. When justified by corporate expansion;
2. When retention is necessary for contingencies;
3. Loan agreement.

Any surplus profits in excess of 100% should be declared as dividends to stockholders.

Dividends are shares of stockholders from profits of corporation.

Rule: Corporations shall declare/pay dividends if surplus profits exceed 100% of paid up capital. Cash
dividends to delinquent stockholders shall be applied to unpaid subscription. Cash dividend declaration
require BOD approval only. But stock dividend declaration need approval of BOD and 2/3 vote of
stockholders.

Stock dividends are not subject to income tax because they are not income realized until redeemed by
corporation.

By laws (BL) be submitted to SEC within 1month from receipt of Certificate of Incorporation (COI) or
be submitted simultaneously with AOI. BL is a code to govern the corporate contract between
corporation and stockholders/officers.

Contents; meetings; quorum; proxies; qualify/duties BOD/Officers; election of officers; stock certificate

Voting Trust Agreement: where one or more stockholders create a voting trust to confer upon the trustee
right to vote and other rights pertaining to the stocks for a period not exceeding 5yrs.

The certificate of stock covered by the VTA shall be noted in corporate books and new certificate be
issued in the name of TRUSTEE, who can be voted as BOD. While effects is same as proxy, a proxy
cannot be voted as BOD.

Gen. Rule: To vote/be voted as BOD, he must own and stand in his name at least 1 share of stock.
Except:
• Shares sequestered by government/PCGG because public funds were used to acquire same which
landed in private persons;
• By virtue of a VTA;
• Pledgee/Mortgagee, if allowed;
• Nominee director

Rescission/revocation of subscription contract results in the unauthorized distribution of capital assets of

the corporation which results in the premature liquidation of a corporation without the benefit of prior
dissolution, thereby violating the Trust Fund Doctrine, Rescission/Revocation is not one of the 3 grounds
to distribute assets of the corporation
1. amendment of articles of incorporation to reduce/dissolution and eventual liquidation;
2. purchase of redeemable shares even without unrestricted retained earnings)

Certificate of stocks (must be fully paid) are evidence of ownership of stocks in the corporations personal
property transferable by special indorsement with Deed of Assignment or SPA and record in the stock/
transfer books - SC said that the corporate secretary cannot be compelled by mandamus to
transfer/register/ issue new stock certificate to the transferee/ buyer if said stocks were not recorded in
the corporate books. Only registered owner of share of stocks can exercise to vote, right to be voted as
18
board of directors. Right to dividends if not declared is delinquent, right of appraisal and pre-emptive
right (to all issues-in proportion) if not denied in the articles of incorporation.

Subscribed stocks not yet fully paid and not declared as delinquent are still considered as stockholders
and entitled to all risk as stockholders such as right to vote, dividends etc.

Non-stock corporation - one where no part of its income is distributable as dividends. That any profit
obtained as an incident to its operations shall be used for furtherance of its purpose/s such as religious,
charitable, cultural, professional, scientific, etc.

Membership in a non-stock corporation is personal, cannot be transferred. Board of Trustees (exercise

corporate power) are elected by members.

Board of Trustees be at least 5 not more than 15.

Special Corporations
1) Educational ( if public schools are established by special law but private schools shall be established
as non-stock in accordance with CCP, except family-administered pre-schools;

2) Religious Corporation
a. Corporation sole ( consist of only one person ( bishop, archbishop, minister, rabbi, presiding elder of
a religious sect) and
b. Religious societies;

3) Close Corporation whose articles of incorporation provide that stocks be held by specific number not
to exceed 20; stocks be subject to restrictions; shall not list in any stock exchange. Close corporation are
usually family corporation, who manage/operate business affairs - are personally liable for corporate
torts.

Board of directors meetings are informal which may not be personally attended unlike meetings of Board
of Directors of stock corporation.

Foreign corporation - to do business or to transact business. LICENSE from the SEC is required so that
it will be permitted to MAINTAIN or INTERVENE in any action, suit or proceeding before any
court/administrative body.

Foreign corporation without license can be sued but cannot sue.

Transacting business - continuity of commercial dealings and includes a single act (like participating in
a bidding) is in accord with the purpose/objective of the foreign corporation.

Exceptions to the rule that Foreign Corporation without license cannot sue are:
a.) Foreign corporation may sue the local corporation which obtained benefits from its dealings with the
foreign corporation - ESTOPPEL;
b.) If complainant KNEW that said foreign corporation had no license and still transacted with the foreign
corporation;
c.) If foreign corporation was a mere assignee of machine/equipments unaccompanied by active
use/operation;

19
d.) Cases of violation of intellectual property rights - infringement of trademark/copyright; unfair
competition
e.) When a license was obtained later to cure the defect;
f.) Isolated transaction, outside of the object/purpose/s of the foreign corporation.

Doing business - soliciting orders; service contract: accepting representative/distributors for a/c of
foreign corporation; any which imply a continuity of commercial dealings and prosecution of commercial
gain EXCEPT:
a. Mere investment of foreign corporation as stockholder in a domestic corporation;
b. Foreign corporation having a nominee director/officer to represent its interests in a domestic
corporation;
c. Appointing a representative/distributor which transacts business in its own and for its own account.

A LICENSE (from SEC) which was obtained later CURES the defect of "no license business" (SC)

Methods of dissolution:
1) Voluntary - no creditors affected - 2/3 vote of stockholders/Board of directors;
2) Involuntary - filing of complaint by creditors/stockholders- RTC
3) amendment of articles of incorporation

Corporate liquidation - takes place after dissolution/expiration of corporate term and continues for 3 years
as a body corporate for winding up (prosecuting/defending suits) to settle and close its affairs; to
dispose/distribute assets BUT NOT FOR CONTINUING ITS BUSINESS. If 3 years has expired the
TRUSTEE/LAWYER/BOD may continue to complete the liquidation/distribution of assets;

RTC jurisdiction - Petition for rehabilitation of a distressed corporation be approved by board of

directors/stockholders; petition for suspension of payments; dissolution; appointment of rehabilitation
receiver; appointment of management committee; petition for declaration of insolvency; fraudulent
schemes.

Prior to the appointment of receiver/management committee, it must be shown (by audit) that the
corporation is in danger of dissipation of assets, serious paralyzation, business being diverted.

The appointment of a REHABILITATION RECEIVER or management committee SUSPENDS all

actions/claims against the corporation and all assets/property are held in trust/ in custodia Legis for the
equal benefit of creditor/stockholders.

Corporation may foreclose/redeem property during receivership/liquidation because such is not a claim
or action against the corporation. The purpose of appointing receiver is to restore/rescue the corporation;
secured creditors are given preference only during the liquidation/distribution of assets of the distressed
corporation. The legal personality continues even during receivership until liquidation. After the 3-year
period of winding up, all other actions may be continued through a Trustee/ legal counsel/ Board of
Director.

In merger, 2 or more corporations combine assets/liabilities and one of the combining corporations
continues the combined business and the others are dissolved. In consolidation, a new corporation is
created.

CASES:
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Ever Electrical, 672 - Corporate officers should not be held solidarily liable with the corporation for
separation pays because of the "doctrine of legal fiction". Corporate officers are those elected or
appointed by board of directors and are given that character by the corporation code, Section 25 which
enumerates corporate officers as President, Secretary, Treasurer and other officers provided by the by-
laws.

Park Hotel, 680 - Section 32 of the Corporation Code provides that directors are personally liable for
corporate debs if he willfully and knowingly VOTES for assents to patently unlawful acts of the
corporation are personally liable if guilty of gross negligence or bad faith in directing the affairs of the
corporation.

Sto. Tomas vs. Salac, 685 - Liability of corporate officers is not automatic. It must be proven that they
were remiss in directing the affairs of the corporation, like sponsoring or tolerating illegal activities.

Sarona vs. NLRC, 663; Ramirez vs. Mar, 672 - That the corporate mask may be removed/pierced when
the corporation is used as an alter ego of another corporation, defeat of public convenience, evasion of
obligations/taxes, justify wrong, alter ego cases, that 2 or more corporations are owned, controlled and
conducted by the same parties.

Prince Transport, 639 - The doctrine of piercing the veil is necessary when the 2 business enterprises are
owned, conducted and controlled by the same parties, that those who seek to pierce must clearly establish
the above grounds.

United Coconut Planters Bank, 672 - The corporation is liable to innocent 3rd persons where it permits
its officers to perform acts holding him out to the public as clothed with apparent authority.

Salenga vs. CA, 664; Ellice Corporation, 686; Dizon Copper Silver Mines, 677 - Corporations can only
exercise its powers and transact business through its board of directors or through officers or agents
validly authorized or delegated to him by board of directors or by-laws.

Marc II Marketing, 662; Londonlo vs. BLO Research, 639 - Corporate officers are not personally liable
for officials acts unless shown that they exceeded their authority. Corporate officers are those given that
authority under corporate by-laws. Dismissal of corporate officers, controversies in the election, or
appointment of directors, officers, are intra-corporate disputes.

Barba vs. LCU, 686 - Corporate officers are those mentioned in the by-laws such as chairman, president,
vice, secretary, treasurer and others are mere employees.

Alert Security Agency, 657 - in exceptional cases, the courts can pierce and disregard corporate fiction
to make officers solidarily liable for corporate acts.

Continental Corporation, 659 - Personal liability attaches when the corporate officers are guilty of bad
faith, for gross negligence in directing the affairs of the corporation.

Crisologo, 686 - Debts incurred like entering into a Trust Receipt Agreement by the corporate officers
are not their direct liability but of the corporation.

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Matling Individual Commercial Corporation, 633 -Board of directors has no power to create other
corporate officers without first amending the corporate by-laws so as to include newly - created additional
corporate officers. Dismissal of corporate GM is an intracorporate dispute.

Gulfo vs. Ancheta, 678 - 2 Tests in the determination of intracorporate dispute.

1.) Relationship Test;
2.) Nature of the controversy test

Go vs. Distinction, 671 - An intracorporate dispute pertains to the following:

1. between corporation and public;
2. between corporation and the state, on its franchise, permit or license;
3. between corporation and stockholders, members/officers;
4. among stockholders, members among themselves.

Marquez vs. FEBTC, 639 - A subsidiary and its parent company are separate and distinct persons and
their liabilities are confined to its own business.

Steelcase Inc, 670 - the appointment of a distributor by a foreign corporation is NOT doing business
unless it is under the full control of the foreign corporation which must secure a SEC license "to sue".

Where the foreign corporation is doing business without license, it cannot sue - EXCEPT when the
distributor derived some benefits from their contractual arrangements, it is ESTOPPED from challenging
the personality of the foreign corporation by entering into a contract.

Majority of Stockholders of Ruby Corporation vs. Lim, 650 - Additional issuance of shares from the
unissued capital stock requires only board resolution and not stockholders approval. Pre-emptive right
of minority stockholders be respected even if falling within the exceptions.

Gamboa vs. Teves, 652 - "Capital" refers to shares of stocks entitled to vote in the election of Board of
Directors such as common shares, whether voting or non-voting and preferred shares non voting. To
allow all kinds of shares to elect Board of Directors would result in the object surrender of our telephone;
public utilities to foreigners amounting to a clear abdication of the states constitutional duty to limit
control of public utilities.

Hacienda Luisita, 658 - That farmers who were issued certificate of stock in the Hacienda Luisita
Corporayion do not own the lands but as farmer-beneficiaries, they acquire an equitable interest in the
assets, including the agricultural lands of the corporation.

Juno vs. NLRC, 670 - As a rule, a corporation that buys the assets of another corporation will not be
liable for debts of the selling corporation provided it acted in good faith and paid adequate consideration.
EXCEPT:
1. when buyer agrees to assume the debts;
2. when the transaction amounts to a merger or consolidation;
3. when the buying corporation is merely a continuation of the selling corporation;
4. when the selling corporation enters into a fraudulent transaction to escape liability/obligation.

Cosco Phil, 686 - The power to sue is lodged in the board that exercises corporate powers. Physical acts
like signing of documents shall be performed by natural persons authorized by the board of directors or
by-laws.
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ON CORPORATE REHABILITATION:

FRIA (Financial Rehabilitation & Insolvency Act) provides for special court proceedings for all kinds of
persons.

Phil. Scout Agency, 679 - that the suspension of claims against the distressed corporation is to enable the
corporation to exercise powers free fro judicial/extra judicial interference that might unduly prevent
resources.

Wonder Book Corp, 676 - Rehabilitation contemplates continuance of corporate life. In an effort to
restore/rescue the ailing corporation by preserving a floundering business as going concern-not yet
dissolved.

Town & country, 682; Express Investment 687; Export Development, 687 - Corporate rehabilitation
contemplates continuance of business in the hope of eventual return to solvency.- a stay order or
appointment of receiver/Management Committee is necessary to suspend all claims against distressed
corporation. = all assets held in trust for corporate creditors.

Advent Capital vs. Alcantara, 664 - Rehabilitation proceedings are summary and non-adversarial and do
not contemplate adjudication of claims that must be threshed in ordinary court proceedings.

Under the Rules of Procedure on Corporate Rehabilitation, REHABILITATION means restoration of

the debtor to a position of successful operation and solvency-purpose is to restore-rescue an ailing
corporation - that is continuance is economically feasible so that creditors can recover from the
rehabilitation Plan by conserving and administering the remaining assets of an insolvent corporation.
P.D. 902- as amended by R.A. 8799 (Revised SEC Code) provides that upon the appointment of
management Committee, rehabilitation receiver, board of body, ALL ACTIONS for claims including
pending claims, execution, against the corporation under rehabilitation shall be suspended that all assets
are held in trust for equal benefit of creditors- that petitions for rehabilitation are now transferred to the
RTC.

Panlilio vs. RTC, Manila, 641; Asiatrust Bank, 650; Umale vs. ASB, 652 - Corporate rehabilitation
connotes restoration of the debtor to a successful operation and solvency. Criminal proceedings against
corporate officers should not be suspended because it has no bearing on the pending rehabilitation.
Purpose of rehabilitation is to enable the corporation to have a NEW LEASE on life and allow creditors
to be paid their claims and to benefit debtors creditors, employees and the economy. In general Board of
Directors and corporate officers ARE NOT ipso facto deprived of their control so as to recover its
property from errant lessee - not a claim against the corporation.

BPI Family Savings Bank, 653 - Petition for REHABILITATION is a SPECIAL PROCEEDING,
summary and non adversarial in nature (Motion for Reconsideration and Motion for New Trial prohibited
pleading) the period of appeal is 30 days since a record of appeal is required.

Molina vs. Pacific Plans, 655 - All pending actions including execution of judgment SUSPENDED until
termination of rehabilitation proceedings - the purpose of appointing REHABILITATION RECEIVER
is to protect interest of creditors and investors.

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SECURITIES REGULATIONS CODE (R.A. 8799)

Purpose: to protect the public investors from fraudulent schemes of unscrupulous promoters who sell
worthless certificates which is nothing more than a square of the blue sky.

The administration of R.A. 8799 to protect investing public, is the SEC which regulates trading of
securities by requiring registration of Issuers, brokers, dealers, the securities, registration of margins.

Securities: are investment contracts which should be registered with SEC for protection of investors.

Issuer: the owner, maker or originator, obligor, creator of the security, maybe a corporation or
partnership.

Insider Trading is prohibited: where a person has a relationship with the issuer of the security which
gives him access of facts of special significance which is not generally available. Such “insider”/person
is prohibited to engage in buying/selling/trading such kind of securities.

Tender Offer: is a publicly announced intention of a prospective buyer to acquire substantial amount of
securities of a listed corporation, by making a Tender Offer.

Exchange: an organized marketplace for trading of securities, such as the PSE.

Over the Counter Markets: trading of unregistered/unlisted securities.

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Uncertificated Security: security evidenced by electronic or similar records.

Manipulative & prohibited practices; wash sale/short sale: no change in ownership.

Margin Trading: trading of security on credit. The broker advances/extends credit to the customer for a
fee/interest to buy more securities and complete transaction.

Actions be brought within 2yrs, after the discovery of violation and within 5yrs. after such violation. If
aggrieved by Commissioner’s order, appeal by petition for review with CA.

Intra-corporate disputes transferred to RTC as special commercial court. Existence of intra-corporate is

determined by RELATIONSHIP test and NATURE OF CONTROVERSY test. An heir not registered
as stockholder fails in the relationship test.

Checks are not securities because they cannot be rolled over even if it is a certificate of indebtedness -
not enumerated as a security under RSA.

During the receivership period, BP 22 (criminal aspect) is not a claim that can be suspended because it
is not a claim pecuniary in nature against corporation. However, the civil aspect of the bounced check is
suspended, as a claim of pecuniary nature against the corporation.

Margin trading - is trading on credit that a bank that engages in securities trading should register with
SEC failure is criminal in nature not intra-corporate, SEC then DOJ.

Securities Regulations Code - RA 8799 - also called the blue sky law
Purpose - to protect the public investors from fraudulent schemes of unscrupulous promoters who sell
worthless certificate which is nothing more than a square of the blue sky.

The administration of RA 8799 to protect investing public, is the SEC which regulates trading of
securities by requiring registration of issuers, brokers, dealers, the securities regulation of margins

Securities are investment contracts which should be registered with SEC for protection of investors.

Issuer - the owner, maker or originator, obligor, creator of the security, maybe a corporation, partnership

Insider trading is prohibited - where a person has a relationship with the issuer of the security which
gives him access of facts of special significance which is not generally available. Such “insider”/person
is prohibited to engage in buying/selling/trading such kind of securities.

Tender Offer - is a publicly announced intention of a prospective buyer to acquire substantial amount of
securities of a listed corporation by making a tender offer.

Exchange - an organized marketplace for trading of securities, such as the PSE

Over the counter markets - trading of unregistered/unlisted securities

Uncertificated security - security evidenced by electronic or similar records

Manipulative and prohibited practices - wash sale/short sale - no change in ownership

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Margin trading - trading of security on credit. The broker advances/extends credit to the customer for a
free/interest to buy more securities and complete the transaction.

Actions be brought within 2 years after the discovery of violation and within 5 years after such violation.
If aggrieved by Commission’s order, appeal by petition for review with CA.

Other special/related Mercantile laws and commercial documents not considered as negotiable
instruments (NI)

1. Letter of Credit (LC) - financial engagement by Bank to pay Seller under its conditions for the seller
present B/L/WR to the bank. Letter of Credit is independent from the contract of sale between buyer
and seller following the independence rule (where the contract of sale is separate and distinct from the
Letter of Credit, not a negotiable instrument).
2. Bill of Lading (BL) - contract and receipt of goods issued by Common Carrier, not a Negotiable
Instrument.
3. Others are: Credit cards; Postal Money order; Treasury Warrant; Debit memo; Certificate of stocks;
Trust Receipts; warehouse receipts.

Bulk Sales Law (BSL) covers: transaction/s on 1. sale, transfer, mortgage, assignment of all/substantially
all of the fixtures, equipments, goods/merchandise, materials used in the business of seller which renders
him incapable of continuing his business/trade. Other assets not directly used in the business/trade of
seller is not covered by BSL. Failure to comply with BSL makes the transaction. Fraudulent and Void.
Sanctions for violation of BSL - imprisonment, 6 months to 5 years or fine or both. Buyer, transferee,
mortgagee not criminally liable unless aware by indispensable cooperation or bad faith.

Warehouse Receipts (WR) Law - Act no 2137

The law applies to warehouse receipts issued by a warehouse manager, lawfully engage in business
storing goods in a warehouse - written contracts/acknowledgment by a warehouse manager that he has
received and holds certain goods for deposit, described in warehouse receipt - warehouse manager note
should file claim for interpleader.

General Bonded Warehouse Act - GBWA - Act # 3893 amended by RA 247 - to protect depositors by
giving them direct recourse against the bond.

Chattel Mortgage (CM) Law - Act 1508 - contract where personal property is recorded in Chattel
Mortgage Register where property is located as security and bind 3rd persons - does not include after
incurred obligations. Mortgagor retains possession of property mortgaged, unlike in Pledge, where
pledgee retains possession of personal property. Affld of good faith required for 3rd persons.

No redemption right - only equity of redemption

G.R. there is recovery of deficiency because collateral is not for satisfaction of principal obligation except
when mortgaged chattel is subject of sale on installment - Recto Law.

Real Estate mortgage (REM) - debtor secures to the creditor the fulfillment of principal obligation,
subjecting as security immovable property or real rights which obligation shall be satisfied with the
proceeds of sale.

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Remedies in case of Real Estate Mortgage:
A. If mortgagor is alive
1. Foreclosure/sale or
2. Ordinary action for collection provided Real Estate Mortgage waived

B. If mortgagor died
1. by Judicial foreclosure - here,there is right to claim deficiency from his Estate; or
2. by Extrajudicial foreclosure - just rely on the mortgage and foreclose the same
with no right to claim for deficiency in case proceeds deficient/insufficient. Right to
redeem - real estate mortgage: whether judicial/extrajudicial - one year - 3 months.
A creditor/mortgagee cannot extrajudicially foreclose mortgage unless authority to
foreclose is attached to Deed of Mortgage or a Special Power of Attorney
authorizing extrajudicial foreclosure of real property. A mortgage liability is usually
limited to the amount mentioned in the contract but where parties intended that the
mortgage property shall also answer for future loans, same is valid/binding provided
such intention is stipulated in the Dragnet Clause or Blanket Mortgage Clause (a
clause which is specifically phrased to Subsume all debts, past, present and future,
enabling parties to provide continuous dealings on the property without need of new
security or collateral.

Trust Receipt Agreement (TRA) a commercial document under PD 115 is a security transaction to aid
importers/buyers to finance their business by utilizing as collateral the goods bought/imported. The
financier/Bank, becomes the entrustor/owner of goods while importer/trader/borrower, becomes
entrustee. In case of failure of entrustee to turnover sales proceeds or the goods to the entrustor, estafa is
committed because of dishonesty/abuse of trust. Also, in case of loss of goods, the entrustee bears the
loss, as exception to “res permit domino”. If the goods covered by TRA were not sole but instead,
delivered/transferred to another person, the entrustee still liable (estafa). Entrustee/borrower should not
mortgage/pledge the goods because he is not the absolute owner. But anyone who anyone who acquires
the goods subject of the Trust Receipt Agreement, acquires good title, but the Entrustee is still liable for
Estafa.

The SC ruled that Letters of Credit and Trust Receipts are not Negotiable Instruments although Drafts
Issued with the Letters of Credit are Negotiable Instruments.

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