VI.

BANKING
2. Distinction of banks from quasi-banks
TOPIC OUTLINE UNDER THE SYLLABUS: and trust entities
3. Bank powers and liabilities
VI. BANKING a. Corporate powers
A. THE NEW CENTRAL BANK ACT b. Banking and incidental powers
1. State Policies 4. Diligence required of banks in view of
2. Creation of the Bangko Sentral ng fiduciary nature of banking
Pilipinas 5. Nature of bank funds and bank
3. Responsibility and primary objective deposits
4. Corporate powers 6. Grant of loans and security
5. Operations of the Bangko Sentral ng requirements
Pilipinas a. Ratio of new worth to total risk
a. Authority to obtain data and assets
information b. Single borrower’s limit
b. Supervision and examination c. Restrictions on bank exposure
c. Bank deposits and investments to directors, officers,
d. Prohibitions stockholders, and their related
e. Examination and fees interests
6. Monetary Board; powers and d. Prohibited acts of borrowers
functions e. Floating interest rates and
7. How the Bangko Sentral ng Pilipinas escalation clauses
handles banks in distress 7. Penalties for violations
a. Conservatorship a. Fine, imprisonment
b. Closure b. Suspension or removal of
c. Receivership director or officer
d. Liquidation c. Dissolution of bank
8. Administrative sanctions on
supervised entities D. PHILIPPINE DEPOSIT INSURANCE
9. Rules on bank deposits and CORPORATION ACT
investments by directors, officers, 1. Basic Policy
stockholders and their related 2. Powers and functions of the Philippine
interests Deposit Insurance Corporation;
10. Supervision and regulation of bank prohibitions
operations 3. Concept of insured deposits
a. Loans and other credit 4. Liability to depositors
accommodations a. Deposit liabilities required to be
b. Selective regulation insured with Philippine Deposit
i. Margin requirements Insurance Corporation
against letters of credit b. Commencement of liability
ii. Required security against c. Deposit accounts not entitled to
bank loans payment
iii. Portfolio ceilings d. Extent of liability
iv. Minimum capital ratios e. Determination of insured
11. Rate of exchange deposits
f. Calculation of liability
B. LAW ON SECRECY OF BANK i. Per depositor, per capacity
DEPOSITS rule
1. Purpose ii. Joint accounts
2. Prohibited acts iii. Mode of payment
3. Deposits covered iv. Effect of payment of
4. Exceptions insured deposits
5. Garnishment of deposits, including v. Payment of insured
foreign deposits deposits as preferred credit
6. Penalties for violation vi. Failure to settle claim of
insured depositor
C. GENERAL BANKING ACT vii. Failure of depositor to claim
1. Definition and classification of banks insured deposits
(a) Examination of banks
and deposit accounts

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 (b) Prohibition against
A. THE NEW CENTRAL BANK ACT
splitting of deposits
(c) Prohibition against 1. STATE POLICIES
issuances of
temporary restraining The State shall maintain a central monetary
orders authority that shall function and operate as an
5. Concept of bank resolution independent and accountable body corporate in
6. Role of the Philippine Deposit the discharge of its mandated responsibilities
Insurance Corporation in relation to concerning money, banking, and credit. In line
banks in distress with this policy, and considering its unique
a. Closure and takeover functions and responsibilities, the central
b. Conservatorship monetary authority established under this Act,
c. Receivership while being a government-owned corporation,
d. Liquidation shall enjoy fiscal and administrative autonomy.
(New Central Bank Act [hereinafter “NCBA”], Sec
1)

2. CREATION OF THE BANGKO SENTRAL

NG PILIPINAS (BSP)

There is hereby established an independent

central monetary authority, which shall be a body
corporate known as the BSP. (NCBA, Sec. 2)

The BSP is a Constitutionally mandated (not

created) authority. (1987 Constitution, Article XII,
Sec. 20)

The State’s central monetary authority is charged

with the responsibility of administering the
monetary, banking, and credit system of the
country and is granted the power of supervision
and examination over bank and non-bank
financial institutions performing quasi-banking
functions, including savings and loan
associations. (Busuego v. Court of Appeals [CA],
G.R. No. 95326, 1999)

3. RESPONSIBILITY AND PRIMARY

OBJECTIVE

Responsibilities of the BSP

a. Banker of Government. The
government’s political subdivisions and
instrumentalities (Sec. 110), and their
cash balances should be deposited with
the BSP, with only minimum working
balances to be held by government-
owned banks, and such other banks
incorporated in the Philippines as the
Monetary Board may designate. (Sec.
113)
b. Representation with the International
Monetary Board. The BSP shall
represent the government in all dealings,

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 4. CORPORATE POWERS
negotiations, and transactions with the
IMF, and shall carry such accounts as
Corporate powers of the BSP
may result from the Philippine
a. To adopt, alter, and use a corporate seal
membership in, or operations with IMF.
which shall be judicially noticed;
(Sec. 111)
b. To enter into contracts;
c. Representation with other financial
c. To own, lease, sell or dispose real and
institutions. The BSP may represent the
personal property;
government in dealings, negotiations, or d. To sue and be sued;
transactions with the World Bank andwith
e. To acquire and hold assets and incur
other foreign or international financial
liabilities essential to the proper conduct
institutions or agencies. (Sec. 112) of its operations;
d. Fiscal operations. The BSP shall open f. To compromise, condone, or release any
a general cash account for the Treasurer claim or settled liability to the BSP
of the Philippines, in which the liquid regardless of the amount, and
funds of the Government shall be g. To do and perform such other necessary
deposited, and the transfer of funds from or proper powers to carry out the
this account to be made only upon the purposes of the Act. (Sec. 5)
order of the Philippine Treasurer. (Sec.
114)
5. OPERATIONS OF THE BANGKO
Primary Objectives of the BSP SENTRAL NG PILIPINAS
a. To provide policy directions in areas of
money, banking, and credit, with A. Authority to obtain data and information
supervision over operations of banks, and
with regulatory and examination powers BSP’s has power to require any data:
over money service businesses, credit a. Collective or aggregate data may be
granting businesses, and payment system released to any interested person
operators. (Sec. 3) b. Disaggregated data (i.e. data of individuals
b. To maintain price stability conducive to a and firms).
balanced and sustainable growth of the 1. Subject to confidentiality laws;
economy and employment (Id.) 2. Cannot be made available to the
c. To promote and maintain the monetary public except upon court order or
stability and convertibility of the peso. directive of the Monetary Board;
(Id.) 3. Data on banks are secured
pursuant to BSP’s banking
Monetary stability pertains to supervision powers and are
preservation of the international value of confidential. Its release is subject
the Philippine currency. (Commissioner to conditions imposed by the
of Customs v. Eastern Sea Trading, GR Monetary Board, government
No. L-14279, 1961) agencies authorized by law, orders
of the court, or Congress. (Sec. 27)
Note: Promotion of financial stability is a 4. Can be secured from any person or
shared mandate with the National entity, including government
Government i.e., DOF, SEC, IC, and entities.
PDIC. 5. Limited for statistical and policy
development purposes.
d. To promote broad and convenient access
to high quality financial services. (Sec. 3) BSP has the power to issue subpoena for the
e. To oversee the payments and settlement production of books and records, and refusalshall
systems. (R.A. No. 11127 - National be subject to punishment for contemptunder the
Payment Systems Act, Sec. 3) Rules of Court. (Sec. 23)

B. Supervision and examination

Supervision is a broad term, which includes

examination and investigation. Supervision also

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 Prohibition on issuance of injunction
includes issuance of rules of conduct and
No restraining order or injunction shall be issued
standards, overseeing that laws and regulations
by the court enjoining the BSP from examining
are complied with and enforcing prompt
any institution subject to its supervision or
corrective actions. (General Banking Law
examination powers except when the action of
[hereinafter “GBL”], Sec. 4)
the BSP is plainly arbitrary and made in bad faith.
(Id.)
Supervision includes audit. The Commission on
Audit (COA) and the BSP have concurrent C. Authority to approve transfer of shares
jurisdiction to audit government banks. (DBP v.
COA, GR. No. 88435, 2002) Transfers or acquisitions, or a series thereof, of at
least ten percent (10%) of the voting shares in
Coverage of BSP’s supervision and banks or quasi-banks shall require the prior
examination powers approval of the BSP. The BSP shall consider the
a. Banks fitness of the incoming stockholders as may be
b. Quasi-banks indicated in their integrity, reputation, and
c. Subsidiaries (ownership of more than financial capacity. (Sec. 25-A)
50% of the voting stock) and affiliates
(ownership of 50% or less) of banks and Effect of lack of BSP approval
quasi-banks engaged in allied activities. The transfer or acquisition shall have no legal
effect and cannot be recognized in the books of
Note: BSP is also granted the authority to the institution or by any government agency. The
conduct examination of a wholly or transferor-stockholders shall remain accountable
majority owned or controlled enterprise and responsible. (Sec. 25-A)
by a bank, not necessarily engaged in
allied activities. (GBL, Sec. 7) Transfer of actual control or management shall
make the transferor, the transferee, and any
d. Other institutions performing similar person responsible liable. (Id.)
functions as provided for by special laws
i.e., non-stock savings and loan D. Prohibitions
association (R.A. No. 8367), pawnshops
(P.D. No. 114), stand-alone trust entities Personnel of the BSP are hereby prohibited from:
(GBL, Sec. 79). a. Being an officer, director, lawyer or
e. Money service businesses i.e., foreign agent, employee, consultant, or
exchange dealers, money changers and stockholder, directly or indirectly, of any
remittance agents institution subject to supervision or
f. Credit granting businesses examination by the BSP; (Sec. 27[a])
g. Payment system operators (Sec. 25) b. Directly or indirectly requesting or
h. Trust entities (GBL, Sec.4, 79) receiving any gift, present or pecuniary or
i. Pawnshops (PD 114, Sec. 17) material benefit for himself or another,
j. Non-stock savings and loan associations from any institution subject to supervision
(R.A. No. 8367, Sec. 22) or examination by the BSP; (Sec. 27 [b])
c. Revealing, in any manner, information
Resolution of examination issues relating to the condition or business of
BSP is required to establish a mechanism for any such institution unless:
resolving issues pertaining to bank examination. 1. Under orders of the court, the
The resolution “body” shall be independent and Congress or any government
report directly to the Monetary Board. (Sec. 25) office or agency authorized by
law, or under such conditions as
Authority of bank examiners may be prescribed by the
BSP bank examiners are authorized to administer Monetary Board; and
oaths and compel the presentation of documents 2. The information is to be given to
of institutions under examination. This authority is the Monetary Board or the
subject to the confidentiality of bank deposits and Governor of the BSP, or to any
government debt securities. (Id.) person authorized by either of

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 them, in writing, to receive such
information. (Sec. 27 [c]) While Sec. 6(a) of the NCBA requires that the
d. Borrowing from any institution subject to Governor be subject to confirmation by the
supervision or examination bythe Commission on Appointments, he is not among
BSP unless: government officials expressly mentioned in Sec.
1. It is transacted on an arm's 16, Article VII of the Constitution who should be
length basis; confirmed. (Tarrosa vs. Singson, G.R. No.
2. It is fully disclosed to the 111243, 1994)
Monetary Board; and
3. It shall be subject to such rules Vacancies
and regulations as the Monetary Any vacancy in the Monetary Board created by
Board may prescribe. (Sec. the death, resignation, or removal of any member
27[d]) shall be filled by the appointment of a new
member to complete the unexpired period of the
E. Examination and Fees term of the member concerned. (Sec. 7)

Banks, quasi-banks, and other BSP-supervised Qualifications

entities shall be examined by BSP examiners in a. Natural-born citizens of the Philippines;
accordance with guidelines, taking into b. At least 35 years of age; (except the
consideration sound and prudent practices. Governor, who should be at least 40years
a. There shall be an interval of at least of age)
twelve (12) months between regular bank c. Of good moral character;
examinations. It is no longer annual. d. Of unquestionable integrity;
b. Special examinations need at least five e. Of known probity and patriotism; and
(5) votes of the members of the Monetary f. With recognized competence in social
Board. and economic disciplines (Sec. 8)
c. The supervised institution shall affordBSP
examiners full opportunity to examine its Disqualifications
books and records, assets, and general a. Disqualifications imposed by R.A. No.
condition, and review its systems and 6713 – Code of Conduct and Ethical
procedures. Standards for Public Officials;
d. Reports and papers are confidential and b. Disqualified from being a director, officer,
not open to the public, except when employee, consultant, lawyer, agent or
incidental to examination proceedings stockholder of any bank, quasi-bank or
and when necessary for the prosecution any other institution which is subject to
of violations. supervision or examination by the BSP;
e. There is an annual supervision fee based c. Members coming from the private sector
on cost of supervision. (Sec. 28) shall not hold any other public office or
public employment during their tenure.
1. MONETARY BOARD, POWERS AND d. Person who has been connected directly
FUNCTIONS with any multilateral banking or financial
institution or has a substantial interest in
The Monetary Board is a seven (7) man body any private bank in the Philippines, within
appointed by the President through which the 1 year prior to his appointment;
powers and functions of the BSP are exercised. e. No member shall be employed in any
Its members shall serve a term of six (6) years, such institution within 2 years after the
and no member shall be reappointed more than expiration of his term except when he
once. (Sec. 6) serves as an official representative of the
Philippine Government to such
Composition institution; and
a. Chairman who is the BSP Governor; f. Person who has substantial interest in
b. A cabinet member to be designated by any private bank in the Philippines, within
the President of the Philippines; 1 year prior to his appointment. (Sec. 9)
c. 5 Members who shall come from the
private sector, all of whom shall serve full
time (Id.)

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 b. Direct the management, operations, and
Degree of Diligence
administration of the BSP;
The degree of diligence required of Monetary
c. Establish a human resourcemanagement
Board Members, BSP Officials, and Employees,
system;
is now aligned with that required of public officers
d. Adopt its annual budget and authorize
under Sec. 38 and 39 of Chapter 9, Book I of the
expenditures;
Revised Administrative Code of 1987. They
e. Indemnify its members and other officials
cannot be liable for acts done in the performance
of the BSP against all costs and expenses
of their official duties “unless there is a clear
reasonably incurred by such persons by
showing of bad faith, malice or gross negligence.”
reason of the performance of their
(Sec. 16) The former requirement of
functions or duties in accordance with the
extraordinary diligence was already amended.
free and harmless, and indemnification
clause. (Secs. 15 and 16)
General Rule:
Free and Harmless
Myriad of functions
BSP, members of the Monetary Board, and its
BSP is an administrative agency which exercises
other personnel, are held free and harmless to the
"powers and/or functions which may be
fullest extent permitted by law from any liability.
characterized as administrative, investigatory,
(Sec. 16)
regulatory, quasi-legislative, or quasi-judicial.”
(Bank of Commerce v. Planter’s Development
Indemnification
Bank, G.R. Nos. 154470-71 and 154589-90,
They shall be indemnified for any and all
2012)
liabilities, losses, claims, demands, damages,
deficiencies, costs and expenses of whatsoever
The BSP Monetary Board is a quasi-judicial
kind and nature that may arise in connection with
agency exercising quasi-judicial powers or
the exercise of their powers and performance of
functions. It has the power to issue subpoena, to
their duties and functions. (Id.)
sue for contempt those refusing to obey the
subpoena without justifiable reason, or administer
Exception: Their actions or omissions are finally
oaths and compel presentation of books, records,
adjudged to be in willful violation of this Act,
and others, needed in its examination, to impose
performed in evident bad faith, or with gross
fines and other sanctions and to issue cease and
negligence. (Id.)
desist order. The BSP Monetary Board can
exercise discretion in determining whether
The legal obligations of diligence and good faith
administrative sanctions should be imposed on
that BSP officials owe to the public start with the
banks and quasi-banks. (UCPB v. Ganzon, G.R.
official acts of the Monetary Board which, rightly
No. 168859, 2009; NCBA, Sec. 37)
or wrongly, are the cause of loss or injury to third
parties, not any preparatory report or Decisions appealable to the Court of Appeals
recommendation. (Borlongan v. Reyes, G.R. No. Any petition for certiorari against an act or
161726, 2005)
omission of BSP, when it acts through the
Monetary Board, must be filed with the Court of
Removal of Members of the Monetary Board
Appeals. (Vivas vs. Monetary Board, G.R. No.
The President may remove any member of the
191424, 2013).
Monetary Board for any of the following reasons:
a. The member no longer possesses the Note: This is a petition for review on certiorari
qualifications under NCBA, Sec. 8; over decisions of quasi-judicial bodies (Monetary
b. The member is guilty of acts or operations Board) under Rule 45 of the Rules of Court. This
which are fraudulent or illegal; is different from a special petition for certiorari for
c. The member is physically, or mentally bank closures under Sec. 30 of the NCBA.
incapacitated and such incapacity lasted
for more than 6 months;
d. The member is subsequently disqualified
under NCBA, Sec. 9. (Sec. 10)

Powers and Functions of the Monetary Board

a. Issue rules and regulations;

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 2. HOW THE BANGKO SENTRAL NG
PILIPINAS HANDLES BANKS IN DISTRESS Appointment of Conservator
A conservator is appointed based on a report
Methods submitted to the Monetary Board by the
Conservatorship, Receivership, and Liquidation appropriate supervising or examining department
showing that the bank or quasi-bank is in a state
A bank placed under conservatorship remains of illiquidity which is not adequate to protect the
open but under the management and control of interest of depositors and creditors. (Id.)
the conservator. On the other hand, when a bank
is ordered closed by the Monetary Board, it is Qualifications of a Conservator
taken over by the PDIC as statutory “receiver”, The conservator should be competent and
and the PDIC is directed to proceed with the knowledgeable in bank operations and
liquidation. (Sec. 30(d); New PDIC Charter, Sec. management. (Id.)
12)
The Monetary Board has exclusive power to
Before the amendments to the PDIC Charter and designate the conservator. (Koruga v. Arcenas,
NCBA by Sec. 12 of R.A. No. 10846 (2016), there G.R. Nos. 168332, 2009)
was a 90-day period of receivership after closure
and before a final order of liquidation by the Duration of Conservatorship
Monetary Board to determine whether the bank Shall not exceed 1 year. (Sec. 29)
can still be rehabilitated. This period was
removed by the amendment. PDIC now takes Powers of a Conservator:
over the assets of the closed bank for purposes a. To take charge of the assets, liabilities,
of liquidation and thereafter files a petition for and the management thereof;
court assisted liquidation. (A.M. No. 19-12-02-SC b. Reorganize the management;
Rules on Liquidation of Closed Banks, February c. Collect all monies and debts due said
18, 2020) institution;
d. Exercise all powers necessary to restore
Liquidity its viability;
Ability to pay off obligations when they fall due. e. Report and be responsible to the
Monetary Board; and
An institution which fails to pay its matured f. Where necessary, overrule or revoke the
obligations or meet the normal demands of actions of the previous management and
withdrawals for deposits due to insufficient cash, board of directors of the bank or quasi-
or resorts to intermittent/staggered payments or bank. (Id.)
withdrawals may be considered as suffering from
liquidity problems. A bank conservator appointed by the BSP has no
power to unilaterally rescind contracts entered
Insolvency into by the previous management. The power to
There are two tests for insolvency: revoke cannot extend to post-facto repudiation of
a. Balance sheet test. It is where the perfected transactions otherwise they would
realizable assets of the bank is infringe against the non-impairment clause of the
insufficient to meet its liabilities Constitution. The law merely gives the
(Sec.30[b]) conservator the power to file court actions to
b. Equity test. The bank’s inability to pay its revoke contracts that are defective – void,
liabilities as they become due in the voidable, unenforceable, or rescissible.
ordinary course of business (Sec. 30[a]) (Producers Bank v. NLRC, G.R. No. 118069,
1998; First Philippine International Bank v. CA,
Either is sufficient ground to close a bank. G.R. No. 115849, 1996)

A. Conservatorship Remuneration of a Conservator

A tool in restoring the viability of a bank or quasi- General Rule: The conservator shall receive
bank through measures to address its state of remuneration in an amount not to exceed 2/3 of
illiquidity. For this purpose, the Monetary Board the salary of the president of the institution (i.e.
may appoint a conservator. (Sec. 29)

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 C. Receivership
the bank under conservatorship) in 1 year,
payable in 12 equal monthly payments.
The PDIC manages the affairs of the closed bank
and preserves its assets for the benefit of
Exception: A conservator connected with the
creditors. (New PDIC Charter, Sec. 10[a][b])
BSP, in which case said conservator shall not be
entitled to receive any remuneration or
Note: The receiver also has the duty to continue
emolument. (Sec. 29)
with the liquidation; thus, PDIC as receiver is also
the liquidator. (Id., Sec. 4[c])
Note: If at any time within one-year period, the
conservatorship is terminated on the ground that
The appointment of a receiver operates to
the institution can operate on its own, the
suspend the authority of the bank and of its
conservator shall receive the balance of the
directors and officers over its property and
remuneration which he would have received up to
effects. (Villanueva v. CA, G.R. No. 114870,
the end of the year; but if the conservatorship is
1995)
terminated on other grounds, the conservator
shall not be entitled to such remaining balance.
Requisites for Placement of a Bank under
(Id.)
Receivership
1. Report of the head of the supervising
Expenses
department involving the bank;
The expenses attendant to the conservatorship
2. Finding of the Monetary Board of the
shall be borne by the bank or quasi-bank
existence of any of the grounds for
concerned. (Id.)
receivership;
3. Decision of the Monetary Board to forbid
Termination of Conservatorship
the institution from doing business which
a. When the Monetary Board is satisfiedthat
decision may be done summarily and
the institution can continue to operate on
without need of prior hearing; and
its own and the conservatorship is no
4. Notice in writing to the Board of Directors
longer necessary;
informing the institution of the Order of
b. When the Monetary Board determines
the Monetary Board.
that the continuance in business of the
institution would involve probable loss to
Grounds for Receivership
its depositors or creditors, in which case,
When the Monetary Board finds that a bank or
proceedings for receivership and
quasi-bank:
liquidation shall be pursued. (Id.)
a. Notified the BSP or publicly announced
B. Closure a unilateral closure; (Sec. 30[a])
b. Has been dormant for at least sixty (60)
For banks, the Monetary Board may summarily days; (Id.)
and without need for prior hearing forbid the c. Suspended the payment of its deposit or
institution from doing business in the Philippines deposit substitute liabilities continuously
and designate the PDIC as receiver. The PDIC is for more than 30 days; (GBL, Sec 53)
directed to proceed with the liquidation of the d. Is unable to pay its liabilities as they
closed bank. become due in the ordinary course of
business (“Equity test”)
The Monetary Board shall notify in writing,
through the PDIC, the board of directors of the Exception: Inability to pay caused by
extraordinary demands induced by
closed bank of its decision. (Sec. 30)
financial panic in the banking community
Note: Formerly, there was a 90-day period to (bank run). (Sec. 30[a])
determine whether the bank can still be
rehabilitated. e. Has insufficient realizable assets to
meet its liabilities (“Balance SheetTest”);
(Sec. 30[b])
f. Cannot continue business without
involving probable losses to its
depositors and creditors; (Sec. 30[c])

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 b. Involuntary Liquidation (Sec. 30)
g. Has willfully violated a cease-and-desist
order under NCBA, Sec. 37
Modes of Liquidation
(Administrative Sanctions) that has
a. Conventional liquidation.
become final and involves acts or
b. Purchase of Assets and/or Assumption of
transactions which amount to fraud or a
Liabilities
dissipation of assets; (Sec. 30[d])
h. If a bank persists in conducting its
Note: This shall be further discussed under the
business in an unsafe or unsound
topic on PDIC.
manner. (GBL, Sec. 56)

Close Now-Hear Later Doctrine Judicial Remedy from the decision of the
Monetary Board of BSP placing a bank under
Due process does not necessarily require prior
conservatorship, receivership, or liquidation
hearing; a hearing or an opportunity to be heard
may be subsequent to closure. One can just
Final and Executory. The action of the Monetary
imagine the dire consequences of a prior hearing;
Board in placing a bank under conservatorship or
bank runs would be the order of the day, resulting
placing it under receivership or liquidation shall
in panic and hysteria. In the process, fortunes
be final and executory and, as a general rule, may
may be wiped out and disillusionment will run the
not be restrained or set aside by the court.
gamut of the entire banking community. (Rural
Bank of Buhi, Inc. vs. CA, G.R. No. L-61689,
Nature of Action
1988)
A petition for certiorari on the ground that the
action taken was in excess of jurisdiction or with
The purpose is to prevent unwarranted
such grave abuse of discretion as to amount to
dissipation of the bank’s assets and as a valid
lack or excess of jurisdiction.
exercise of the police power to protect the
depositors, creditors, stockholders, and the
Petitioner
general public. (Central Bank of the Philippines v.
Petition is filed by the stockholders of record
CA, G.R. No. 72200, 1993)
representing the majority of the capital stock
D. Liquidation within ten (10) days from receipt by the board of
directors of the institution of the order directing
The recovery and conversion of assets into cash receivership, liquidation, or conservatorship.(Sec.
for distribution to all creditors in accordance with 30)
the rules on concurrence and preference of
credits. PDIC is the receiver and liquidator (AM Court of Appeals
No. 19-12-02-SC, Sec. 1 (m), Rule 2). The petition for certiorari must be filed with the
CA, not the SC, in accordance with Rule 65, since
Note: With the removal of the 90-day the Monetary Board is a quasi-judicial agency.
receivership to determine if the bank can still be (Vivas, et al. v. Monetary Board, G.R. No.
rehabilitated, a bank placed under receivership is 191424, 2013)
considered also as under liquidation.
Note: Other decisions of the Monetary Board
Types of Liquidation acting as a quasi-judicial body can be elevated to
a. Voluntary liquidation the Court of Appeals by way of a petition for
In case of the voluntary liquidation of any review under Rule 45.
bank organized under the laws of the
Philippines, or of any branch or office in Involuntary dissolution and liquidation
the Philippines of a foreign bank, written CORPORATION NCBA (MONETARY
notice of such liquidation shall be sent to CODE (SEC) BOARD, PDIC)
the Monetary Board before such Filing of Complaint
liquidation is undertaken, and the Requires filing of a Monetary Board may
Monetary Board shall have the right to verified complaint and summarily and without
intervene and take such steps as may be proper notice and need for prior hearing,
necessary to protect the interests of hearing forbid the bank from
creditors. (GBL, Sec. 68) doing business

Page 213 of 393

 Prior to dissolution 8. ADMINISTRATIVE SANCTIONS ON
Requires a BIR Tax PDIC shall SUPERVISED ENTITIES
Clearance; SEC shall immediately gather
issue final order of and take charge of all The imposition of administrative sanctions shall
dissolution after its assets and liabilities be fair, consistent, and reasonable. (Sec. 37)
submission of tax
clearance Supervised entities
Authority of the corporation in the dissolution The Monetary Board may impose administrative
Corporation is allowed Bank is not given the sanctions upon: (1) its supervised entities i.e.,
to undertake its own option to undertake its those covered by BSPs supervision and
liquidation or at any own liquidation examination powers, and (2) their directors,
time during 3 years officers, or employees. (Sec. 37)
after its dissolution
Acts subject to administrative sanction
(In re: Petition for Assistance in the Liquidation of a. Willful violation of its charter or by-laws;
the Rural Bank of Bokod Benguet, Inc., PDIC v. b. Willful delay in the submission of reports
BIR, G.R. No. 158261, 2006) or publications thereof as required by
law, rules and regulations;
Exclusive jurisdiction of the Liquidation Court c. Refusal to permit examination into the
Liquidation court is a court where the PDIC as affairs of the institution;
receiver files a petition for assistance in the d. Willful making of a false or misleading
liquidation (judicial liquidation). statement to the Board or the appropriate
supervising and examining department or
General Rule: In a judicial liquidation of an its examiners;
insolvent bank, all claims against the bank should e. Willful failure or refusal to comply with, or
be filed in the liquidation proceeding. (In re: violation of, any banking law or any order,
Petition for Assistance in the Liquidation of the instruction or regulation issued by the
Rural Bank of Bokod Benguet, Inc., PDIC v. BIR, Monetary Board, or any order, instruction
G.R. No. 158261, 2006) or ruling by the Governor; or
f. Commission of irregularities, and/or
Exceptions: conducting business in an unsafe or
a. When re-filing and re-litigating the case unsound manner as may be determined
before the liquidation court would be an by the Monetary Board. (Sec. 37)
exercise in futility in view of the number
of years the case has been on trial and Administrative sanctions
additional expenses to the party who is Both the Monetary Board and the Governor
living in poverty. (Valenzuela v. CA, G.R. have administrative disciplinary jurisdiction and
No. L-56168, 1988) authority to impose sanctions.
b. When more inconveniences would be
caused to the parties, entailing waste of Monetary Board
more money and precious time a. Fines
(Carandang v. CA, G.R. No. L-44932, 1. Not to exceed P1,000,000 for each
1988); and transactional violation, or
c. When the issue is the validity of contracts 2. P100,000 per calendar day for
upon which a claim is based. violations of a continuing nature
3. Disgorgement. In case profit is
Note: Even if the case falls within the exceptions, gained or loss is avoided as a result
the claimant should still file the adjudicated claim of the violation, a fine no more than
with the liquidator or liquidation court for three (3) times the profit gained, or
processing of claims to determine the proper loss avoided. (Sec. 37(a))
concurrence and preference of credit among the
different creditors of the bank. (Cudiamat v. b. Suspension of:
Batangas Savings Bank, G.R. No. 182403, 2010) 1. Rediscounting privileges or access
to BSP credit facilities; (Sec. 37(b))

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 2. Lending or foreign exchange the commission of the prohibited practices or
operations or authority toaccept violations. (Sec. 37)
new deposits or make new
investments; (Sec. 37(c)) Procedure on CDO
3. Interbank clearing privileges; This is in the nature of a reconsideration of the
and/or (Sec. 37(d)) order. The respondents shall be afforded an
4. Quasi-banking or other special opportunity to defend their action in a hearing
licenses, including its before the Monetary Board or any committee
revocation. (Sec. 37(e)) chaired by any Monetary Board member created
for the purpose, upon request made by the
Governor respondents within five (5) days from their receipt
Authorized to impose fines not in excess of of the order. Otherwise, the CDO shall become
P100,000 for each transactional violation or final. (Id.)
P30,000 per calendar day for violations of a
continuing nature. The imposition is final and Injunctions and/or restraining orders
executory until reversed, modified, or lifted by the No court, other than the Court of Appeals and the
Monetary Board on appeal. (Sec. 37) Supreme Court, shall issue any temporary
restraining order, preliminary injunction, or
Resignation or termination from office shall not preliminary mandatory injunction against the BSP
exempt such director, officer, or employee from for any action under the NCBA.
administrative or criminal sanctions. (Id.)
Any restraining order or injunction issued in
Administrative Due Process violation of this section is void and of no force and
The Monetary Board, as an administrativeagency, effect. (Sec. 38-a)
is legally bound to observe due process, although
they are free from the rigidity of procedural 9. SUPERVISION AND REGULATION OF
requirements. The essence of dueprocess is to be BANK OPERATIONS
afforded a reasonable opportunity to be heard
and to submit any evidence. Petitioners having A. Loans and other credit accommodations
availed of their opportunity to present their
position by letters- explanation were not denied As the “lender of last resort” (LOL), the BSP is
due process. (Busuego, et al vs. CA, G.R. No. authorized to extend rediscounts, discounts,
95326, 1999) loans and advances to banking institutions
only. The purpose is limited to influencing the
Preventive suspension
volume of credit consistent with the objective of
The Monetary Board has authority to issue price stability and maintenance of financial
preventive suspension orders for up to 120 days stability. (Sec. 81)
for bank officers, directors, and employees. After
the lapse of the said period, they can be Types of Credit Operations
reinstated unless delay is due to their fault.
Normal credit operations
When suspension is only preventive in nature, no a. Commercial Credits. With maturities of
notice or hearing is necessary. Until such time not more than 180 days related to:
that suspended directors have proved their 1. Importation, exportation, purchase
innocence, they may be preventively suspended or sale of readily saleable goods
from holding office so as not to influence the and products, or their
conduct of investigation, and to prevent the transportation within the
commission of further irregularities. (Busuego, et Philippines; or
al v. CA, G.R. No. 95326, 1999) 2. Storing of non-perishable goods
and products which are duly
Cease and desist order (CDO)
insured and deposited in
A CDO, which is immediately executory, can be authorized bonded warehouses or
issued by the Monetary Board if the institution in other places approved by the
and/or the directors, officers or employees Monetary Board. (Sec. 82[a])
concerned continue with or otherwise persist in

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 e. Disbursed in 2 tranches:
b. Production Credits. With maturities of
1. 1st tranche (25% of total deposits
not more than 360 days related to the
secured by first class collaterals
production or processing of agricultural,
(government securities, secured
animal, mineral, or industrial products.
government guarantees and other
(Sec. 82(b))
acceptable collaterals)
c. Other Credit. Special credit instruments
2. Subsequent tranches (vote of at
not otherwise re-discountable for
least 5 members, the Monetary
commercial and production credits. (Sec.
Board with indemnity undertaking
82(c))
and adequate security (Id.)
d. Advances. The BSP may grant
advances, not to exceed 80% of the B. Selective regulation
current market value, against the
following collaterals for fixed periods: Guiding principles of the Monetary Board
1. Gold coins or bullion
a. The supply, availability, and cost of
2. Securities issued by BSP andother
money are in accord with the needs of the
recognized solvent domestic
Philippine economy
institutions; b. Bank credit is not granted for speculative
3. Commercial and production credit purposes prejudicial to the national
instruments (maximum 180 days); interests, and,
4. Utilized portions of advances in c. Regulations shall be applied to all banks
overdraft commercial and of the same category uniformly and
production credit instruments; without discrimination. (Sec. 104)
5. Government securities and
Negotiable bonds with maturity of i. Margin requirement against letters of credit
3 and 10 years, respectively. (Sec.
82(d))
Margin is a deposit of money made by the
purchaser or seller of goods. A lower margin
Special Credit Operations
means the importer will only deposit a small
Non collateralized but with maturity not to exceed amount to enable him to access bank credit.
7 days and limited to the purpose of providing Higher margin means the importer will carry a
liquidity to the banking system in times of need. higher financing burden of the importation.
(Sec. 83)
The Monetary Board may at any time prescribe
Emergency Credit Operations
minimum cash margins (as a percentage) for the
This is granted only to banks under the following opening of letters of credit and may relate the size
circumstances:
of the required margin to the nature of the
a. In periods of national and/or local
transaction to be financed. (Sec. 105)
emergency or of imminent financial panic
– when these directly threaten monetary
ii. Required security against bank loans
and financial stability; and
b. During normal periods - To assist a bank To promote liquidity and solvency of the banking
in a precarious financial condition or system, BSP may issue regulations on the
under serious financial pressures brought following:
by unforeseen events, or events which, a. Maximum permissible maturities of loans
though foreseeable, could not be and investments (short, medium, or long
prevented by the bank concerned. (Sec. term, but BSP issuances are guidelines,
84)
not fixed limits).
b. Kind and amount of security (real estate,
Subject to compliance with the following
chattels, intangibles) to be required
conditions:
against the various credit operations of
a. Bank is not insolvent
banks. (Sec. 106)
b. Secured by first class or acceptable
collaterals
c. Limited to equivalent of 50% of deposits
d. Upon an affirmative vote of at least five
(5) Monetary Board members, and

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 B. LAWS ON SECRECY OF BANK
iii. Portfolio ceilings
DEPOSITS
To prevent or check an expansion of bank credit
(to prevent excessive credit risks concentration 1. PURPOSE
and diversify risks), an upper limit may be placed
on the following: R.A. No. 1405 (Bank Secrecy Law) covers
a. Amount of loans and investments which deposits in Peso while R.A. No. 6426 (Foreign
the banks may hold; or Currency Deposits Act) covers deposits in foreign
b. Rate of increase of such assets within currency. Its purpose is as follows:
specified periods of time. (Sec. 107) a. To give encouragement to the people to
deposit their money in banking
Note: Uniform application to all banks or specific institutions; and
categories without discrimination (NCBA, Sec. b. To discourage private hoarding so that
85, 84,96, 104 and 107). There is no retroactivity the same may be properly utilized by
– it can only be applied on the date of notification. banks in authorized loans to assist the
(Id.) economic development of the country.
(RA 1405, Sec. 1)
iv. Minimum capital ratios
State Policy
Monetary Board may (1) prescribe minimum risk- It is hereby declared the policy of the state to
based capital adequacy ratios based on protect and preserve the integrity and
internationally accepted standards and may alter confidentiality of bank accounts. (AMLA, Sec. 2)
said ratios whenever it deems necessary, and (2)
may require banks to hold capital beyond the Construction of confidentiality
minimum requirements commensurate to their If there are doubts in upholding the absolutely
risk profile. (Sec. 108) confidential nature of bank deposits against
affirming the authority to inquire into such
10. RATE OF EXCHANGE accounts, such doubt must be resolved in favor of
confidentiality. (Republic v. Eugenio, G.R. No.
Exchange rate. It is the price of a unit of foreign 174629, 2008)
exchange in terms of domestic currency (e.g., 1
US$ = Php 53). 2. PROHIBITED ACTS

The Monetary Board shall determine the Peso Deposits

exchange rate policy of the country. (Sec. 74). All deposits of whatever nature with the banks in
The present policy is a floating rate system, which the Philippines, including investments in the
is market driven. government bonds are considered absolutely
confidential and may not be examined, inquired,
or looked into by any person except as allowed
by law. (RA 1405, Sec. 2)

The following are liable under RA No. 1405:

a. Any person or government official who
examines, inquires, or looks into bank
deposits or government bond
investments in any instance not allowed
by law.
b. Any official or employee of the banking
institution who makes a disclosure
concerning bank deposits to another in
any instance not allowed by law (Id., Sec.
3); and
c. Any person who commits a violation of
any provision of this law. (Id., Sec. 5)

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 Note: Other funds or properties in the bank which
Foreign Currency Deposits
are not in the nature of deposits are still
All foreign currency deposits are absolutely
confidential. No director, officer, employee, or
confidential and cannot be examined, inquired, or
agent of any bank shall, without order of a court
looked into by any person, government official,
of competent jurisdiction, disclose to any
bureau, or office, whether judicial or
unauthorized person any information relative to
administrative or legislative, or any other private
the funds or properties in the custody of the bank
or public entity. (RA No. 6426, Sec. 8)
belonging to private individuals, corporations, or
any other entities. (GBL, Sec. 55(1)(b))
The following are liable under RA No. 6426:
a. Any person or government official who
examines, inquires, or looks into foreign 4. EXCEPTIONS
currency deposits without written
permission of the depositor. (Id., Sec. 8) Grounds to allow examination of a bank
b. Anyone who shall attach, garnish, or account under Section 2 of RA No. 1405:
subject the foreign currency deposit to a. Where the depositor consents in
any other order or process of any court, writing.
legislative body, or other administrative
body. (Id.) Note: A waiver of rights (RA 1405) must
c. Any official or employee of the banking be voluntary, knowingly, intelligently, and
institution who makes a disclosure with sufficient awareness of the relevant
concerning bank deposits to another in circumstances and likely consequences.
any instance not allowed by law. (Id., There must be evidence to show an
Sec. 10) actual intention to relinquish the right.
d. Any person who commits a violation of Mere silence on the part of the holder of
any provision of this law as well as the right should not be construed as a
regulation of the Monetary Board surrender thereof. (Doña Adela Export
pursuant to this law. (Id.) International, Inc. v. TIDCORP, G.R. No.
201931, 2015)
3. DEPOSITS COVERED Examples of waiver: Waiver in case of
DOSRI loans (NCBA, Sec. 26) and
Peso Deposits. All (peso) deposits of whatever
waiver of a taxpayer in case of
nature with banks or banking institutions in the
compromise of tax liability. (Tax Code,
Philippines including trust accounts. (Ejercito v.
Sec. 6[f])
Sandiganbayan, G.R. No. 157294-95, 2006)
b. Impeachment Cases. It is necessary
Deposits refer to money or funds placed in a
that there be an order issued by the
bank which can be withdrawn on depositor’sorder
impeachment court or by its authorized
or demand. It is characterized as being in the
officer to allow examination.
nature of a simple loan and creates a creditor-
debtor relationship between the depositor and the
It is limited to Peso deposits, as it is not
bank. (NCC, Art. 1980) While trust funds are
an exemption to the absolute
different, by jurisprudence, this is included in the
confidentiality of foreign currency
broad category of deposits under RA 1405.
deposits under RA 6426. (Philippine
Savings Bank v. Senate, G.R. No.
Investment in bonds issued by the Government
200238, 2012)
of the Philippines, its political subdivisions, and its
instrumentalities. (RA 1405, Sec. 2) c. By Court Order in cases of;
1. Bribery
Foreign currency deposits (RA No. 6426) and
2. Dereliction of duty of public
deposits in offshore banking units (PD No. 1246,
officials
Sec. 8) are considered as absolutely confidential.
RA No. 6426 only provided for written permission
d. Money invested or deposited is
of the depositor as an exception. However, other
subject of litigation (RA 1405 – An Act
exceptions evolved by jurisprudence and
Prohibiting Disclosure of or Inquiry into
statutes.

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 3. A taxpayer, information on whose
Deposits with any Banking Institution,
account is requested by a foreign
Sec. 2).
tax authority. (NIRC, Sec. 6(f))
Fishing for information as to the amount of
c. Unclaimed balances. Disclosure to the
damages it can recover does not fall within the
Treasurer of the Philippines for dormant
exception. Since the subject matter of the dispute
deposits for at least 10 years. (Act 3936,
is not the money deposited in the drawer's
Sec. 2)
account, it does not, by itself, warrant the
examination of the bank deposits. (Union Bank d. BSP periodic or special examination.
vs. CA, GR No. 134699, 1999)
To ensure compliance of the covered
institution with the Anti Money
The subject matter of the action is to be Laundering Act. (NCBA, Sec. 25; RA
determined from the indictment that charges 9160 – Anti-Money Laundering Act
respondent with the offense, and not from the (AMLA), Sec. 11)
evidence sought. The information charges
qualified theft. There was no mention of the Annual testing solely limited to the
supposed bank account in which the funds determination of the existence and true
represented by the checks have allegedly been identity of the owners of the accounts.
kept to allow testimony on the bank account. (AMLA, Sec. 9[a])
(BSB Group vs. Go, GR No. 168644, 2010)
e. Human Security Act (RA 9372). After
Inquiry into the whereabouts of the amount determining existence of probable cause,
converted necessarily extends to whatever is the Court of Appeals may authorize
concealed (being in the name of persons other examination of and gathering of
than the one responsible for the illegal information on deposits, placements,
acquisition) inasmuch as the case is aimed at trust accounts, assets, and records in a
recovering the amount converted. (Mellon Bank bank or financial institution; (RA 9372,
v. Magsino, G.R. No. 71479, 1990) Sec. 27) of the following:
1. A person charged with or
Additional exceptions to the Secrecy of Bank suspected of the crime of terrorism
Deposits Act or conspiracy to commit terrorism;
a. Violations of Anti-Graft and Corrupt 2. Any judicially declared and
Practices Act. Section 8 of RA 3019 outlawed terrorist organizations,
directs that bank deposits shall be taken associations, or group of persons;
into consideration in its enforcement, or
notwithstanding any provision of the law 3. Any member of such organization,
to the contrary. (PNB v. Gancayco, GR. association, or group of persons in
No. L-18343, 1965) a bank or financial institution and
the gathering of any relevant
The Courts are authorized to examine information about the same from
bank deposits of spouses and unmarried said bank or financial institution.
children of government officials found to (RA 9372, Sec. 28)
have unexplained wealth under RA 3019
– Anti-Graft and Corrupt Practices Act. f. Anti-Money Laundering Act (AMLA).
(RA 3019, Sec. 8) Upon order of a competent court in cases
of violation of the AMLA where there is
b. Commissioner of Internal Revenue probable cause of money laundering,
(CIR). The CIR can inquire into the bank except that no court order is required in
accounts of the following taxpayers: cases of:
1. A decedent to determine his gross 1. Kidnapping for ransom
estate; 2. Drug trafficking
2. Any taxpayer who has filed an 3. Hijacking, destructive arson, and
application for compromise of his murder including thoseperpetrated
tax liability on the ground of by terrorists against
financial incapacity; and

Page 219 of 393

 and their subsidiaries and affiliates
non-combatants and similar
concerning:
targets. (AMLA, Sec. 11)
1. Any property or funds that are in
any way related to financing of
g. Plunder. Sec. 1(d) and 4 of the Plunder
terrorism or acts of terrorism; or
Law (RA 7080).
2. Any property or funds of any
person or persons in relation to
Plunder (RA 7080, Sec. 2), which is
whom there is probable cause to
amassing or accumulating ill-gotten
believe that such person or
wealth by series of overt or criminal acts,
persons are committing or
is also analogous to bribery. Therefore,
attempting or conspiring to commit
the exception to R.A. 1405 applicable in or participating in or facilitating the
cases of bribery must also apply to cases financing of terrorism or acts of
of plunder. (Ejercito v. Sandiganbayan, terrorism. (RA 10168, Sec. 10)
G.R. Nos. 157294-95, 2006)
k. Bank Resolution. When there is a failure
h. Unsafe and unsound banking
of Prompt Corrective Action as declared
practices. BSP and PDIC may inquire
by the Monetary Board due to capital
into bank deposits (both Peso and
deficiency, the PDIC or its duly authorized
Foreign Currency Deposits) and all
officers or employers may examine,
information related thereto if there is a
inquire, or look at the deposit records of
finding of unsafe or unsound banking
the bank. (New PDIC Charter,Sec. 11[c])
practice. (New PDIC Charter, Sec. 9)
The information cannot be shared by
i. In-Camera Inspection. The
PDIC to other persons, including the
Ombudsman is granted the express
BSP.
powers to examine and have access to
bank accounts and records. (RA 6770 –
Ombudsman Act, Sec. 15)
l. Presidential Commission on Good
Governance (PCGG). Investigation by
Requisites: the PCGG to recover ill-gotten wealth(EO
1, Sec. 3[e])
1. Pending case before a court of
competent jurisdiction;
2. Account must be clearly identified; m. Commission on Audit (COA). Audit on
government deposits by the COA. (1987
3. The inspection is limited to the
Constitution, Art. IX (D), Sec. 2[1])
subject matter of the pending case;
4. The bank personnel and the
Grounds for Disclosure of Foreign Currency
account holder must be notified to
Deposits.
be present during the inspection,
a. Upon written permission of depositor
and such inspection may cover
b. Under Other Laws (as discussed)
only the account identified in the
1. CIR. (NIRC, Sec. 6[f])
pending case. (Marquez v.
2. AMLC – with our without a court
Desierto, G.R. 135882, 2001)
order under the AMLA and
Terrorism Financing Prevention
Note: An investigation by the Office of the
and Suppression Act. (AMLA,
Ombudsman is not a pending litigation to
Sec. 11; RA 10168, Sec. 10)
allow examination of a bank account.
3. BSP in limited examination to
(Marquez v. Desierto, G.R. No. 135882,
ensure compliance of supervised
2001)
institutions to AMLA. (AMLA,
Sec. 11)
j. Terrorism Financing Prevention and
4. PDIC in banking resolution when
Suppression Act (RA 10168). The Anti-
there is failure of PCA. (New
Money Laundering Council (AMLC),
PDIC Charter, Sec. 11[c])
without a court order, is authorized to
inquire into or examine bank deposits and
investments with any banking institution
or non-bank financial institution

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 6. PENALTIES FOR VIOLATION
5. BSP and PDIC when there is a
finding of unsafe or unsound
Bank Secrecy Law
banking practice. (Id., Sec. 8)
Imprisonment of not more than five (5) years, or
6. COA and PCGG. (1987
a fine of not more than twenty thousand pesos
Constitution, Art. IX (D), Sec.
(Php 20,000), or both, at the discretion of the
2(1); EO 1, Sec. 3[e])
court. (RA 1405, Sec. 5)
c. Jurisprudence (equity). The following
Foreign Currency Deposits Act
exceptions are provided on grounds of
Imprisonment of not less than one (1) year but not
equity.
more than five (5) years, or fine not less than five
1. Account of non-resident alien
thousand pesos (Php 5000) but not more than
found guilty of raping a minor
twenty five thousand pesos (Php 20,000.) or both.
was allowed on the basis of
(RA 6426, Sec. 10)
equity. (Salvacion v. Central
Bank of the Philippines, G.R.
94723, 1997)
2. A co-payee of a check who filed
a suit for recovery of a sum of
money was considered as a
depositor because of the
distinctive circumstances of the
case. (China Banking
Corporation v. Court of Appeals,
G.R. 14068, 2006)

5. GARNISHMENT OF DEPOSITS,
INCLUDING FOREIGN DEPOSITS

Peso deposits
RA 1405 does not preclude deposits from being
garnished to ensure satisfaction of a judgment.
There is no real inquiry in such a case, and if the
existence of the deposit is disclosed, the
disclosure is purely incidental to the execution
process. (China Bank v. Ortega, G.R. L-34964,
1973)

Foreign currency deposits

Anyone who shall attach, garnish, or subject this
to order or process of any court, legislative body,
government agency or other administrative body
shall be held liable. (RA 6426, Sec. 8)

Note: Jurisprudence created 2 exceptions on

ground of equity as discussed earlier.

Note: Deposits maintained by banks with the BSP

as part of their reserve requirements shall be
exempt from attachment, garnishments, or any
other order or process of any court, government
agency, or any other administrative body issued
to satisfy the claim of a party other than the
Government, or its political subdivisions, or
instrumentalities. (NCBA, Sec. 103)

Page 221 of 393

 b. Discounting and negotiating promissory
C. GENERAL BANKING ACT notes, drafts, bills of exchange, and other
evidence of debt;
1. DEFINITION AND CLASSIFICATION OF c. Accepting or creating demand deposits;
BANKS d. Receiving other types of deposits and
deposit substitutes;
Banks e. Buying and selling foreign exchange and
Entities engaged in the lending of funds obtained gold or silver bullion;
in the form of deposits. (GBL, Sec. 3.1) f. Acquiring marketable bonds and other
debt securities; and
Note: Banks have a primary franchise from the g. Extending credit, subject to such rules as
Securities and Exchange Commission (SEC) and the Monetary Board may promulgate.
a secondary banking franchise from the BSP. Its (Sec. 29)
corporate powers are exercised within its banking
license. Unlike Universal Banks, Commercial Banks can
invest only in allied enterprises (bank-related
Elements activities), which may be financial or non-
a. Engaged in lending of funds financial. (Secs. 30, 31, and 32)
b. Obtained in the form of deposits
c. From the public, which shall mean 20 or Thrift Banks
more persons They are organized for the purpose of, among
other things, accumulating savings of depositors
How Banks are Structured and investing them with capital loans, financing
General Rule: Banks are corporations. (Sec. homebuilding, providing short term capital,
8[a]) However, cooperative banks may also be medium and long term financing for small and
formed under the Cooperative Code, but it has to medium enterprises and individuals engaged in
secure a secondary franchise from the BSP to agriculture, services, industry and housing. (RA
engage in banking. (RA 9520, Sec. 23[i]) 7906 - Thrift Banks Act, Sec. 3[a][1])

Classification of Banks They include savings and mortgage banks,

private development banks, and stock savings
Universal Banks and loans associations organized under existing
In addition to the powers authorized for a laws. (Id.)
commercial bank in Section 29, they shall have
the authority to exercise the powers of an Rural Banks
investment house as provided in existing laws and Banks which are designed to make needed credit
the power to invest in non-allied enterprises as available and readily accessible in the rural areas
provided in this Act. (Sec. 23) on reasonable terms. (RA No. 7353 - Rural Act,
Sec. 2)
Investment House
It is an intermediary between security issuers and Cooperative Banks
investors. It engages in underwriting of securities, Once organized, the majority shares of which is
among other things. (PD 129, Sec. 2) owned and controlled by cooperatives, primarily
to provide financial and credit services to
Non-allied enterprises cooperatives and their members. (RA 9520 –
They are non-bank related activities (e.g., Philippine Cooperative Code, Art. 2)
agriculture, mining, manufacturing, public utilities,
etc.). (MORB – Manual of Regulations for Banks, Islamic Banks
Appendix 19) Created by Congress to promote and accelerate
socio-economic development of the Autonomous
Commercial Banks Region by performing banking, financing, and
They shall have, in addition to the general powers investment operations and to establish and
incident to corporations: participate in agricultural, commercial, and
a. All such powers as may be necessary to industrial ventures based on the Islamic concept
carry on the business of commercial of banking. (RA 6848 – Charter of the Al-Amanah
banking such as accepting drafts and
issuing letters of credit;

Page 222 of 393

 for the borrower's own account, for the purpose
Islamic Investment Bank of the Philippines, Sec.
of relending or purchasing of receivables and
3)
other obligations. (NCBA, Sec. 95)
Islamic banking is based on the Islamic concept
The phrase “obtaining funds from the public”
of banking: risk sharing rather than speculation.
shall mean borrowing from twenty (20) or more
Essentially, this is based on basic principles and lenders at any one time. (Id.)
rulings of Sharia, or Islamic law. interest (riba) is
prohibited. (RA 11439 – An Act Providing for the For this purpose, “lenders” shall refer to
Regulation and Organization of Islamic Banks, individuals and corporate entities that are not
Sec. 2[a][4])
acting as financial intermediaries, subject to
the safeguards and regulations issued by the
Note: There are two existing laws on Islamic
Monetary Board. (Id.)
Banks, (1) RA No. 6848, and (2) R.A. No. 11439.
The latter law is a legal framework which allows
Note: The definition of deposit substitutes in the
the creation of Islamic banks in the Philippines.
banking laws was brought about by an
observation that banks and non-bank financial
Foreign Banks
intermediaries have increasingly resorted to
A foreign bank is a banking corporation formed,
issuing a variety of debt instruments, other than
organized or existing under any law other than
bank deposits, to obtain funds from the public.
those of the Republic of the Philippines. (RA
(BDO v. RCBC, G.R. No. 198756, 2016)
11232 – Revised Corporation Code, Sec. 140)
Under the NIRC, deposit substitutes include not
Foreign banks are allowed to enter the Philippine
only the issuances and sales of banks and quasi-
banking system under any of the following
banks for relending or purchasing receivables and
modes:
other similar obligations, but also debt
a. Acquiring, purchasing, or owning up to
instruments issued by commercial, industrial, and
100% of the voting stock of an existing
other non-financial companies to finance their
bank;
own needs or the needs of their agents or
b. Investing in up to 100% of the voting
dealers. (Id.)
stock of a new banking subsidiary
To determine whether the financial assets are
incorporated under the laws of the
deposit substitutes, the “20 or more individual or
Philippines; or
corporate lenders” rule must apply. (Id.)
c. Establishing branches with full banking
authority. (RA 10641 – An Act Allowing
When the Government Securities Eligible Dealer
the Full Entry of Foreign Banks in the
(GSED) sells the government securities to 20 or
Philippines, Sec. 2)
more investors, the government securities are
deemed to be in the nature of a deposit substitute.
Other Classification of Banks as determined
(BDO v. Republic, G.R. No. 198756, 2016)
by the Monetary Board (Sec. 3)
Trust Entities
2. DISTINCTION OF BANKS FROM QUASI- A stock corporation, or a person duly authorized
BANKS AND TRUST ENTITIES by the Monetary Board to engage in trust
business, and act as a trustee, administer any
Quasi-Banks trust or hold property in trust or on deposit, for
Refer to entities engaged in the borrowing of use, benefit or behoof of another (GBL. Sec. 79)
funds through the issuance, endorsement, or
assignment with recourse or acceptance of Bank, Quasi-Bank, and Trust Entity
deposit substitutes as defined in NCBA, Sec. 95 BANK QUASI-BANK TRUST
for purposes of relending or purchasing of ENTITY
receivables and other receivables. (Sec. 4[3]) Entities Entities Entities
engaged in engaged in the engaged in
Deposit Substitutes the lending of borrowing of trust,
An alternative form of obtaining funds from the funds funds through investment
public, other than deposits, through the issuance, obtained in the issuance or management,
endorsement, or acceptance of debt instruments acceptance of and fiduciary

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 the form of deposit business in aid of any political party or candidate or
deposits. substitutes for methodology. for purposes of partisan political activity;
the purpose of j. To establish pension, retirement, and
relending or other plans for the benefit of its directors,
purchasing trustees, officers, and employees; and
receivables or k. To exercise such other powers as may be
other essential or necessary to carry out its
obligations. purpose or purposes as stated in the
articles of incorporation. (RA 11232, Sec.
35)
3. BANK POWERS AND LIABILITIES
B. Banking and incidental powers
A. Corporate powers
Operations and activities of banks shall be subject
As banks are required to organize as stock to BSP supervision, which shall include:
corporations, they shall have the powers a. Issuance of rules of conduct or the
enumerated under Sec. 35 of the Revised establishment of standards of operation
Corporation Code: for uniform application to all institutions or
a. To sue and be sued in its corporatename; functions covered;
b. To have perpetual existence unless the b. Conduct of examination to determine
certificate of incorporation provides compliance with laws and regulations;
otherwise; c. Oversee compliance with laws and
c. To adopt and use a corporate seal; regulations;
d. To amend its articles of incorporation in d. Regular investigation (not oftener than
accordance with the provisions of this once a year) to determine whether it is
Code; conducting its business on safe or sound
e. To adopt by-laws, not contrary to law, basis;
morals, or public policy, and to amend or e. Inquire into solvency and liquidity of the
repeal the same in accordance with this institution; or
Code; f. Enforce prompt corrective action. (Sec.
f. In case of stock corporations, to issue or 4)
sell sticks to subscribers and to sell
treasury stocks in accordance with the Examination by BSP
provisions of this Code; and to admit When examining a bank, BSP shall have the
members to the corporation if it be a non- authority to examine an enterprise that is wholly
stock corporation; or majority-owned or controlled by the bank. (Sec.
g. To purchase, receive, take or grant, hold, 7)
convey, sell, lease, pledge, mortgage
and otherwise deal with such real and BSP Authority Over Quasi-Banks and Trust
personal property, including securities Entities
and bonds of other corporations, as the The BSP shall also have supervision over the
transaction of the lawful business of the operations of and exercise regulatory powersover
corporation may reasonably and quasi-banks, trust entities and other financial
necessarily require, subject to the institutions which under special laws are subject
limitations prescribed by law and the to BSP supervision. (Sec. 4)
Constitution;
h. To enter into partnership, joint venture, BSP Powers Policy Direction; Ratios,
merger, consolidation, or any other Ceilings, and Limitations
commercial agreement with natural and The BSP shall provide policy direction in theareas
juridical persons; of money, banking, and credit. Thus, the
i. To make reasonable donations, including Monetary Board may do the following:
those for the public welfare or for hospital, a. Prescribe ratios, ceilings, limitations, or
charitable, cultural, scientific, civic, or other forms of regulation on the different
similar purposes: Provided, That no types of accounts and practices of banks
foreign corporation shall give donations and quasi-banks which shall, to the extent
feasible, conform to internationally

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 5. NATURE OF BANK FUNDS AND BANK
accepted standards, including those of
the BIS; and DEPOSITS
b. Exempt particular categories of
transactions from such ratios, ceilingsand By the nature of its business, banks derive its
limitations, but not limited toexceptional funds principally from its deposit taking or quasi-
cases or to enable a bank or quasi-bank banking operations. It also gets funds from the
under rehabilitation or during a merger or public when it acts as a trust entity under Chapter
consolidation to continue in business with IX of the GBL.
safety to its creditors, depositors and the
Nature of Bank Funds
general public. (Sec. 5)
The bank can make use as its own, the money
deposited. (Tan Tiong Tick v. American
4. DILIGENCE REQUIRED OF BANKS IN Apothecaries, G.R. No. L-43682, 1938)
VIEW OF FIDUCIARY NATURE OF
BANKING Nature of Bank Deposits
Bank deposits are in the nature of irregular
Highest Degree of Diligence deposits. Fixed, savings, and current deposits of
The fiduciary nature of banking requires high money in banks and similar institutions shall be
standards of integrity and performance. (Sec. 2) governed by the provisions concerning simple
loans. (NCC, Art. 1980)
Fiduciary relationship
The bank’s obligation to observe high standards The fiduciary relationship does not "convert the
of integrity and performance is deemed written contract between the bank and its depositors
into every deposit agreement between a bank from a simple loan to a trust agreement, whether
and its depositor. (Philippine Banking Corp. v. express or implied." It simply means that the bank
CA, G.R. No. 127469, 2004) is obliged to observe "high standards of integrity
and performance" in complying with its
Banking is vested with public interest obligations under the contract of simple loan.
As a business affected with public interest and (Goyanko, Jr. v. UCPB, G.R. No. 179096, 2013)
because of the nature of its functions, the bank is
under obligation to treat the accounts of its Bank Deposit as a simple loan
depositors with meticulous care, always having in Bank acquires ownership of money deposited;
mind the fiduciary nature of their relationship. obligation to pay the amount, but no obligation to
(Simex International (Manila) Inc. v CA, G.R. No. return the same money. (Guingona, Jr. v. City
88013, 1990) Fiscal of Manila, G.R. No. L-60033, 1984)

Banks are expected to exercise the highest Payment to proper party-depositor (Fultron Iron
degree of diligence in the selection and Works Co. v. China Banking Corp., G.R. No.
supervision of their employees. By the very 32576, 1930)
nature of their work, the degree of responsibility,
care and trustworthiness expected of their Deposits are not preferred credits. (Central Bank
employees and officials is far greater than those v. Morfe, G.R. No. L-38427, 1975)
of ordinary clerks and employees. (Philippine
Commercial and International Bank v. CA, G.R. Bank has the right to set-off or compensation.
No. 121413, 2001) (Gullas v. Philippine National Bank, G.R. No.
4391, 1935)
Banking business is impressed with public
interest, of paramount importance thereto is the Kinds of Deposits
trust and confidence of the public in general, the a. Savings Deposits. They are interest
highest degree of diligence is expected, and high bearing deposits without a stated
standards of integrity and performance are even maturity.
required of it. (Bank of the Philippine Islands v. b. Negotiable Order of Withdrawal
Casa Montessori Internationale, G.R. No. (NOW). They are interest bearing deposit
149454, 2004) accounts that combine the payable on
demand feature and investment feature
of savings accounts.

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 c. Time Deposits. They are issued for a
specific period of time (Sec. 216, MORB), In the exercise of this authority, the Monetary
and generally cannot legally be Board shall, to the extent feasible, conform to
withdrawn before maturity or within a internationally accepted standards, including
specified number of days. (BPI Family those of the Bank for International Settlements
Savings v. First Metro Investment, G.R. (BIS). (Sec. 34)
132390, 2004)
d. Demand Deposits. They are those B. Single borrower’s limit (SBL)
liabilities of the BSP and of other banks,
which are denominated in Philippine General Rule: The total amount of loans, credit
currency and are subject to payment in accommodations and guarantees that may be
legal tender upon demand by the extended by a bank to any person, partnership,
presentation of checks. Only banks duly association, corporation, or other entity shall not
authorized by the BSP may issue demand exceed 20% of the net worth of such bank. The
deposits. (NCBA, Sec. 59) basis for determining compliance with single
borrower limit is the total credit commitment of
Checks representing demand deposits do not the bank to the borrower. (Sec. 35.1)
have legal tender power and their acceptance in
the payment of debts, both public and private, is Exception: The SBL may be increased by an
at the option of the creditor. However, a check additional 10% of Net Worth of such bank
which has been cleared and credited to the provided the additional liabilities of any borrower
account of the creditor shall be equivalent to a are adequately secured by trust receipts, shipping
delivery to the creditor of cash in an amount equal documents, warehouse receipts, or other similar
to the amount credited to his account. (NCBA, documents transferring or securing title covering
Sec. 60) readily marketable, non-perishable goods which
must be fully covered by insurance. It shall
6. GRANT OF LOANS AND SECURITY include:
REQUIREMENTS a. Direct liability of the maker or acceptor of
paper discounted with or sold to such
bank and the liability of a general
A. Ratio of net worth to total risk assets
endorser, drawer or guarantor who
obtains a loan or other credit
The Monetary Board shall prescribe the minimum
accommodation from or discounts paper
ratio which the net worth of a bank and its
with or sells papers to such bank;
subsidiaries must bear to its total risk assets
b. In the case of an individual who owns or
which may include contingent accounts. (Sec. 34)
controls a majority interest in a
Risk-based Capital corporation, partnership, association or
any other entity, the liabilities of said
It is expressed as the percentage of qualifying
entities to such bank;
capital to risk-weighted assets.
c. In the case of a corporation, all liabilities
Risk-weighted Assets to such bank of all subsidiaries in which
such corporation owns or controls a
These are assets of the bank weighted according
majority interest; and
to risks (e.g., cash is zero risk, while non-
performing loan is given a risk of 120%). d. In the case of a partnership, association,
or other entity, the liabilities of the
Capital members thereof to such bank. (Sec.
----------- = Ratio (CAR) 35.2)
Assets
Note: The Monetary Board has set the SBL at
25% (Sec. 303, MORB, but temporarily increased
Note: The existing Capital Adequacy Ratio (CAR)
to 30% for 6 months effective March 2020) of the
requirement is 10%. It is an indicator of a bank’s
net worth.
ability to absorb a reasonable amount of loss. The
minimum CAR requirement is a means to protect
bank’s depositors and promote stability in the
banking system at the same time.

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 use the assets of the bank for their benefit. (Go v.
Exclusion from computation – non risk assets
BSP, G.R. No. 178429, 2009)
For purposes of SBL coverage, loans, and other
credit accommodations and guarantees shall
General Prohibition: No director or officer of
exclude those which are:
any bank shall, directly or indirectly, for himself
a. Secured by obligations of the BSP or
or as the representative or agent of others:
Philippine Government;
a. Borrow from such bank;
b. Fully guaranteed by the Government as
b. Become a guarantor, endorser, or surety
to the payment of principal and interest;
for loans from such bank to others; or
c. Covered by assignment of deposits
c. Be an obligor or incur any contractual
maintained in the lending bank and held
liability to the bank. (Sec. 36)
in the Philippines;
d. Under letters of credit, to the extent
A stockholder to fall under this provision should
covered by margin deposits;
own at least 1% of the subscribed capital of the
e. Those which the Monetary Board may,
bank. (MORB, Sec. 341[c])
from time to time, specify as non-risk
items. (Sec. 35.5.)
An indirect borrowing includes one that is made
by a third party, but the DOSRI has a stake in the
Inclusion of Parent Corporation
transaction; a case where the DOSRI acted for his
Even if a parent corporation, partnership,
own benefit, using the name of an unsuspecting
association, entity, or an individual who owns or
person and using dummies to circumvent the
controls a majority interest in such entities has no
requirements of the law. (Soriano v. BSP, G.R.
liability to the bank, the Monetary Board may
No. 162336, 2010)
prescribe the combination of the liabilities of
subsidiary corporations or members of the
Related Interest is considered as indirect
partnership, association, entity or such individual
borrowing or the Directors, Officers and
under certain circumstances, including but not
Stockholders.
limited to any of the following situations:
a. Spouse or relative within the first degree
a. Parent corporation, partnership,
(including adoption)
association, entity, or individual
b. Partnership where the spouse or relative
guarantees the repayment of the
is a general partner
liabilities;
c. Co-ownership of the property mortgaged
b. Liabilities were incurred for the
to secure the loan or other credit
accommodation of the parent corporation
accommodations
or another subsidiary or of the
d. Interlocking directorship or officership
partnership, association, or entity or such
between the bank and the borrower
individual; or
e. Corporation at least 20% of the capital
c. Subsidiaries though separate entities
stock or equity is owned by DOS of the
operate merely as departments or
lending bank. (MORB, Sec. 341[e])
divisions of a single entity. (Sec. 35.4)

C. Restrictions on bank exposure to Exception: The director or officer may do so,

provided the following requirements are complied
directors, officers, stockholders, and their with:
related interests a. Written approval of the majority of all the
directors of the bank, excluding the
Principles director borrowing and recorded in the
The Monetary Board is granted the authority to books of the bank. (Sec. 36)
regulate the amount of loans and credit b. The reportorial requirement where
accommodations extended to DOSRI. (Sec. 36) such approval should be entered upon
the records of the corporation, and a copy
The prohibition on DOSRI loans is intended as a of the entry be transmitted to the
protection against over-borrowing of bank funds appropriate supervising department of
by bank’s DOSRI, as such over-borrowings may the BSP. (Id.; Go v. BSP, GR No. 178429,
lead to bank failures. (Soriano v. BSP, G.R. No. 2009)
162336, 2010) Banks are not created for the c. Ceiling requirement. The limit on the
benefit of their directors and officers, they cannot amount of loans and credit

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 The violation consists in the failure to observe and
accommodations that can be extended to
comply with procedural, reportorial, or ceiling
the bank’s DOSRI is equivalent to their
requirements prescribed by law in the grant of a
respective unencumbered deposits and
loan to a director, officer, stockholder and other
book value of their paid-in capital
related interests in the bank. The elements of
contribution in the bank, excluding the
abuse of confidence, deceit, fraud or false
following:
pretenses, and damage, which are essential to
1. Secured by assets considered as
the prosecution for estafa, are not elements of a
non-risk by the Monetary Board;
2. In the form of fringe benefits; or DOSRI violation. (Soriano vs BSP, G.R. Nos.
159517-18, 2009)
3. Extended by a cooperative bank to
its cooperative shareholders. (Id.)
Thus, a person be held liable both for estafa
through falsification of commercial documents
d. Terms. Not less favorable to the bank and violation of Sec. 83 of the GBL (DOSRI) for a
than those offered to others. (Id.)
single transaction.
e. Waiver of Secrecy. DOSRI loans are
also subject to the waiver of secrecy of
Administrative: removal. After due notice to the
bank deposits. (NCBA, Sec. 26)
board of directors of the bank, the office of any
bank director or officer who violates theprovisions
Requisites of a DOSRI loan:
of this Section may be declared vacant.
a. Borrower is a director, officer or
stockholder of a bank; D. Prohibited acts of borrowers
b. He contracts any loan or financial
accommodation; No borrower of a bank shall engage in these
c. Loan or financial accommodation is from: prohibited transactions:
1. his bank or a. Fraudulently overvalue property offered
2. a bank that is a subsidiary of a as security for a loan or other credit
bank holding company of which accommodation from the bank;
both his bank and the lending bank b. Furnish false, make misrepresentation,or
are subsidiaries or suppress material facts in the loan
3. a bank in which a controlling application for the purpose of obtaining,
proportion of the shares is owned renewing, or increasing a loan or other
by the same interest that owns a credit accommodation or extending its
controlling proportion of the shares period;
of his bank; and c. Attempt to defraud the bank in the event
d. The loan or financial accommodation of of a court action to recover a loan or other
the director, officer or stockholder, singly credit accommodation; or
or with that of his related interest, is in d. Offer any director, officer, employee, or
excess of 5% of the capital and surplus of agent of a bank any gift, fee, commission,
the lending bank or in the maximum or any other form of compensation in
amount permitted by law (Sec. 36), order to influence them in approving a
whichever is lower. loan or other credit accommodation.
(Sec. 55.2
Waiver of Secrecy of Bank Deposits
If the loan is a DOSRI loan, the lending bank shall E. Floating interest rates and escalation
require the director, officer, or stockholder to clauses
waive the secrecy or confidentiality of his
deposits of whatever nature in all banks in the Floating Rate of Interest
Philippines (NCBA, Sec. 26) While it may be acceptable, for practical reasons
given the fluctuating economic conditions, for
Offenses banks to stipulate that interest rates on a loan not
Criminal. Failure to comply with each be fixed and instead be made dependent upon
requirement is already a violation of DOSRI Rules prevailing market conditions, there should always
(prosecution of 3 offenses), and violation of each be a reference rate upon which to peg such
requirement is an offense in itself. (Go v. BSP, variable interest rates. (Consolidated Bank and
GR No. 178429, 2009)

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 False statement
Trust Corporation (Solid Bank) v. CA, G.R. No.
The willful making of a false or misleading
114286, 2001)
statement on a material fact to the Monetary
Board or to the examiners of the BSP shall be
Note: Benchmark interest rates are the reference
punished by a fine of not less than P100,000 nor
rate to peg the rate (e.g. Interbank Call Loan
more than P2,000,000 or by imprisonment of not
Rate, BSP rates, Government securities rates,
more than five (5) years, or both, at the discretion
treasury rate benchmark, PHP BVAL rates).
of the court. (NCBA, Sec. 35)
Escalation Clause
Violation of the NCBA and other banking laws,
It refers to stipulations allowing an increase in the
rules, regulations, orders, or instructions
interest rate agreed upon by the contracting
parties. They are valid stipulations in commercial
The persons responsible for the following
contracts to maintain fiscal stability and to retain
violations shall be punished by a fine of not less
the value of money in long term contracts.
than P50,000 nor more than P200,000 or by
imprisonment of not less than two (2) years nor
It has to comply with the principles on mutuality of
more than ten (10) years, or both, at the discretion
contracts. The contract must bind both
of the court:
contracting parties; its validity or compliance
a. When a bank or quasi-bank, including
cannot be left to the will of one of them. (NCC,
their subsidiaries and affiliates, engages
Art. 1308)
in allied activities or other entity which
under this Act or special laws is subject
The bank cannot be given an unbridled right to
to BSP supervision; or
adjust the interest independently and upwardly.
b. When any person or entity willfully
Such would negate the mutuality of contracts.
violates this Act or other pertinent
(Floirendo v. Metropolitan Bank, G.R. No.
banking laws being enforced or
148325, 2007)
implemented by the BSP or any order,
instruction, rule, or regulation issued by
If a provision neither states an increase nor a
the Monetary Board. (NCBA, Sec. 36)
decrease in interest rate, but said clause simply
states that the interest rate should be based on B. Suspension or removal of director or
the prevailing market rate, it violates the mutuality
of contracts. (Polotan Sr. v. Court of Appeals,
officer
G.R. No. 119379, 1998)
If the offender is a director or officer of a bank,
quasi-bank, or trust entity, the Monetary Board
7. PENALTIES FOR VIOLATIONS may also suspend or remove such director or
officer who violated the provisions of the GBL.
A. Fine, imprisonment (Sec. 66)
Refusal to make reports or permit C. Dissolution of bank
examination
The willful refusal to file the required report or If the violation is committed by a corporation, such
permit any lawful examination into the affairs of corporation may be dissolved by quo warranto
such institution, as required in writing by the proceedings instituted by the Solicitor General
Monetary Board or the head of the supervising (Id.)
and examining department, shall subject its
officer, owner, agent, manager, director, or
officer-in-charge to a fine not less than P50,000
nor more than P2,000,000 or by imprisonment of
not less than one (1) year nor more than five (5)
years, or both, at the court’s discretion. (NCBA,
Sec. 34)

Note: This applies to affiliate companies whose

transactions are subject to examination under this
Act.

Page 229 of 393

 the privileges granted to it by law may be
D. PHILIPPINE DEPOSIT INSURANCE exercised and enjoyed;
CORPORATION ACT g. To exercise all powers specifically
granted by the provisions of this Act, and
1. BASIC POLICY such incidental powers as shall be
necessary to carry on the powers so
The Philippine Deposit Insurance Corporation granted;
(PDIC) shall promote and safeguard the interests h. To conduct examination of banks with
of the depositing public by providing insurance prior approval of the Monetary Board;
coverage on all insured deposits and helping i. To act as receiver;
maintain a sound and stable banking system. j. To prescribe such rules and regulations
(New PDIC Charter, Sec. 1) as it may deem necessary to carry out the
provisions of this Act;
2. POWERS AND FUNCTIONS OF THE k. The PDIC may establish its own provident
PHILIPPINE DEPOSIT INSURANCE fund which shall consist of contributions
CORPORATION; PROHIBITIONS made by both by PDIC and by its officers
and employees to a common fund for the
PDIC Board of Directors payment of benefits to such officers or
The powers and functions of the PDIC shall be employees or their heirs;
vested in and exercised by a Board of Directors l. To compromise, condone, or release, in
which shall be composed of 7 members. (Sec. 3) whole or in part, any claim or settled
liability to the PDIC, regardless of the
Composition amount involved, under such terms and
7 members, appointed by the President of the conditions as may be imposed by the
Philippines, for a term of 6 years with 1 Board of Directors to protect the interest
reappointment: of PDIC, and to write off PDIC’s
a. Ex officio Chairman: Secretary of receivables and assets which are no
Finance longer recoverable or receivable;
b. Ex officio Member: BSP Governor m. To determine qualified interested
c. President and Vice Chairman: Appointed acquirers or investors for any of the
by the President of the Philippines, to modes of resolution or liquidation of
serve a full-time basis. banks;
d. 4 Members from the private sector to be n. To determine the appropriate resolution
appointed by the President of the method and to implement the same for a
Philippines. (Id.) bank subject of resolution; and
o. To determine the appropriate mode of
Powers of PDIC liquidation of a closed bank and to
The PDIC as a corporate body shall have the implement the same. (Sec. 9)
following powers:
a. To adopt and use a corporate seal; Prohibitions
b. To have succession until dissolved by an Personnel of the PDIC are prohibited from:
Act of Congress; a. Being an officer, director, consultant,
c. To make contracts; employee or stockholder, directly or
d. To sue and be sued, complain, and indirectly, of any bank or banking
defend, in any court of law in the institution except as otherwise provided
Philippines; in this Act;
e. To appoint such officers and employees b. Receiving any gift or thing of value from
as are not otherwise provided for in this any officer, director or employee thereof:
Act, to define their duties, fix their c. Revealing in any manner, except under
compensation, require bonds, and fix order of the court or authorized herein in
penalty thereof, and to dismiss them for such condition or business of any such
cause; institution. The prohibition shall not be
f. To prescribe by-laws consistent with law, held to apply to the giving of information
regulating the manner in which its to the Board of Directors or to any person
general business may be conducted, and

Page 230 of 393

 C. Deposit accounts not entitled to
authorized by either of them in writing to
receive such information. (Sec. 10[e]) payment

Borrowing from any bank or banking institution by PDIC shall not pay deposit insurance for the
examiners and other personnel of the following accounts or transactions, whether
examination departments of PDIC shall be denominated, documented, recorded, or booked
prohibited only with respect to the particular as deposit by the bank:
institution in which they are assigned or are a. Investment products such as bonds and
conducting an examination. (Sec. 9) securities, trust accounts, and other
similar instruments;
Borrowing from any bank or banking institution by b. Deposit accounts or transactions which
personnel of other departments, offices, or units are unfunded, fictitious or fraudulent;
of the PDIC shall be prohibited during the period c. Deposit accounts or transactions
that a transaction of such institution with the PDIC constituting, and/or emanating from,
is being evaluated, processed, or acted upon by unsafe and unsound banking practice/s,
such personnel. (Sec. 9) as determined by PDIC, in consultation
with the BSP, after due notice and
hearing, and publication of a cease and
3. CONCEPT OF INSURED DEPOSITS desist order issued by PDIC against such
deposit accounts or transactions; and
Insured deposit
d. Deposits that are determined to be the
It is the amount due to any bona fide depositor for
proceeds of an unlawful activity as
legitimate deposits in an insured bank as of the
defined under AMLA. (Sec.5[g])
date of closure but not to exceed P500,000. (Sec.
5[j])
if such recognition would increase the aggregate
amount of the insured deposits in such closed
Note: This amount may be increased if there are
bank, neither PDIC nor such other insured bank
conditions which threaten the monetary and
shall be required to recognize any person as the
financial stability of the banking system that may
owner of any portion of a deposit whose name or
have systemic consequences. There has to be a
interest is not disclosed on the records of the
unanimous approval by the Board of Directors,
closed bank. (Sec. 21[c])
chaired by the Secretary of Finance, and
approved by the President of the Philippines. (Id.)
Pending the determination and payment of the
depositor’s liability as a stockholder of the closed
4. LIABILITY TO DEPOSITORS bank, or of any liability to said bank or its receiver
which is not offset against a claim due from the
A. Deposit liabilities required to be insured bank, PDIC may withhold payment of a portion of
with Philippine Deposit Insurance the insured deposit due to it as payment of such
Corporation liability. (Sec. 16[e])

The deposit liabilities of any bank, which is D. Extent of liability

engaged in the business of receiving deposits or
which thereafter may engage in the business of The maximum deposit insurance coverage is
receiving deposits, shall be insured with the PDIC. P500,000.00 per depositor, per bank. (Sec. 3)
(Sec. 6)
E. Determination of insured deposits
B. Commencement of liability
In determining such amount due to any depositor,
The PDIC shall commence the determination of there shall be added together all deposits in the
insured deposits due the depositors of a closed bank maintained in the same right and capacity
bank upon its actual takeover of the closed bank. for his or her benefit either in his or her own name
It shall give notice to the depositors of the closed or in the name of others. (Sec. 5[j])
bank of the insured deposits due them by
whatever means deemed appropriate by the
Board of Directors. (Sec. 21[a])

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 National Government in the order of preference
F. Calculation of liability under Article 2244 of the NCC. (Id.)
i. Per depositor, per capacity rule vi. Failure to settle claim of insured depositor
All deposit accounts by a depositor in a closed
If there is failure to settle the claim for insured
bank maintained in the same right and capacity
deposit within six (6) months from the date of filing
shall be added together. (Id.)
and such failure was due to grave abuse of
discretion, gross negligence, bad faith, or malice,
ii. Joint accounts
the responsible PDIC directors, officers, or
employees shall, upon conviction, be subject to
A joint account, regardless of whether the
imprisonment from six (6) months to one (1) year.
conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be
(Sec. 19)
insured separately from any individually-owned
deposit account. (Id.) Note: The period shall not apply if the validity of
the claim requires the resolution of issues of facts
If the account is held jointly by two or more natural and or law by another office, body, or agency, or
persons, or by two or more juridical persons or by the PDIC together with such office, body, or
entities, the maximum insured deposit shall be agency. (Id.)
divided into as many equal shares as there are
individuals, juridical persons or entities, unless a vii. Failure of depositor to claim insured
different sharing is stipulated in the document of deposits
deposit.
Unless otherwise waived by PDIC, if thedepositor
If the account is held by a juridical person or entity of the closed bank shall fail to claim his insured
jointly with one or more natural persons, the deposits within two (2) years from actualtakeover
maximum insured shall be presumed to belong of the closed bank by the receiver or does not
entirely to such juridical person or entity. (Id.) enforce his claim within two (2) years, all rights
with respect to the insured deposit shall bebarred.
Note: The aggregate of the interest of each co- (Sec. 21[e])
owner over several joint accounts, whether
owned by the same or different combinations of
(a) Examination of banks and deposit
individuals, juridical persons, or entities, shall accounts
likewise be subject to the maximum insured
deposit of P500,000. (Id.)
The PDIC as a body corporate shall have the
power to conduct examination of banks with prior
iii. Mode of payment approval of the Monetary Board. (Sec. 9.8)
It shall be paid either (1) by cash or (2) by making Note: No examination can be conducted within
available to each depositor a transferred deposit twelve (12) months from the last examination
in another insured bank. (Sec. 19)
date.
iv. Effect of payment of insured deposits The PDIC may, in coordination with the BSP,
conduct a special examination as the Board of
The PDIC, upon payment of any depositor, shall Directors, by an affirmative vote of a majority of
be subrogated to all the rights of the depositor all of its members, if there is a threatened or
against the closed bank to the extent of such impending closure of a bank. (Id.)
payment. (Sec. 20)
Notwithstanding the provisions of RA 1405, as
v. Payment of insured deposits as preferred amended, RA 6426, as amended, RA 8791, and
credit
other laws, the PDIC and/or the BSP, may inquire
into or examine deposit accounts and all
All payments by the PDIC of insured deposits in
information related thereto in case there is a
closed banks partake of the nature of public
finding of unsafe or unsound banking practice.
funds, and as such, must be considered a (Id.)
preferred credit similar to taxes due to the

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 5. CONCEPT OF BANK RESOLUTION
To avoid overlapping of efforts, the examination
Resolution
shall maximize the efficient use of the relevant
Resolution refers to the actions undertaken by the
reports, information, and findings of the BSP,
PDIC to:
which it shall make available to the Corporation.
a. Protect depositors, creditors, and the
(Id.)
Deposit Insurance Fund;
b. Safeguard the continuity of essential
(b) Prohibition against splitting of deposits
banking services or maintain financial
stability; and
Splitting of deposits occurs whenever a deposit
c. Prevent deterioration or dissipation of
account with an outstanding balance of more than
bank assets. (Sec. 5[s])
the statutory maximum amount of insured deposit
maintained under the name of natural or juridical
Grounds for Resolution
persons is broken down and transferred into 2 or
The PDIC, in coordination with the BSP, may
more accounts in the name/s of natural or juridical
commence the resolution of a bank upon:
persons or entities who have no beneficial
a. Failure of Prompt Corrective Action(PCA)
ownership on transferred deposits in their names
as declared by the Monetary Board; or
within 120 days immediately preceding or during
b. Request by a bank to be placed under
a bank-declared bank holiday, or immediately
resolution. (Sec. 11[a][1][2])
preceding a closure order issued by the Monetary
Board. It is for the purpose of availing the The PDIC shall inform the bank of its eligibility for
maximum deposit insurance coverage. (Sec. entry into resolution. (Sec. 11)
26[e])
Obligations of stockholders, directors,
(c) Prohibition against issuances of
officers, or employees of the bank
temporary restraining orders
a. Ensure bank compliance with the terms
and conditions prescribed by the PDIC for
No court, except the Court of Appeals, shall issue
resolution of the bank;
any temporary restraining order, preliminary
b. With PDIC’s consent, engage an
injunction, or preliminary mandatory injunction
independent appraiser or auditor to
against the PDIC for any action under the PDIC
determine the valuation of the bank
Charter. (Sec. 27)
consistent with generally accepted
valuation standards;
This prohibition shall apply in all cases, disputes
c. Ensure prudent management and
or controversies instituted by a private party, the
administration of the bank’s assets,
insured bank, or any shareholder of the insured
liabilities, and records; and
bank. (Id.)
d. Cooperate with the PDIC in the conduct
Supreme Court or exercise of any or all its authorities
under this Act and honor in good faith its
The Supreme Court may issue a restraining order
commitment or undertaking with the
or injunction when the matter is of extreme
PDIC on the resolution of the bank. (Sec.
urgency involving a constitutional issue, such that
11[d])
unless a temporary restraining order is issued,
grave injustice and irreparable injury will arise.
Within a period of 180 days from a bank’s entry
The applicant shall file a bond in an amount to be
into resolution, the PDIC, through the affirmative
fixed by the Supreme Court and such bond shall
vote of at least 5 members of the board, shall
accrue in favor of the PDIC if the court should
determine whether the bank may be resolved
finally decide that the applicant was not entitled to
through (1) purchase of all its assets and
the relief sought. (Id.)
assumption of all its liabilities, (2) merger or
consolidation with, or (3) acquisition, by a
Any restraining order or injunction issued in
qualified investor. (Sec. 11[e])
violation of this Section is void and of no force and
effect and any judge who has issued the same
Upon a determination by the PDIC that the bank
shall suffer the penalty of suspension of at least
may not be resolved, the Monetary Board may act
60 days without pay. (Id.)

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in accordance with the receivership and bank in their possession, custody,
liquidation proceedings under NCBA, Sec. 30. administration, or management. (Id.)

6. ROLE OF THE PHILIPPINE DEPOSIT d. When the circumstances so warrant, the

INSURANCE CORPORATION IN RELATION local government unit and law
enforcement agencies concerned shall,
TO BANKS IN DISTRESS
upon request, immediately provide
assistance to the receiver during the
A. Closure and takeover service of notice of closure and actual
takeover operations to ensure the orderly
Whenever a bank is ordered closed by the
conduct thereof. (Sec. 14[d])
Monetary Board, the PDIC shall be designated as
receiver and it shall proceed with the takeover B. Conservatorship
and liquidation of the closed bank in accordance
with the PDIC Charter. (Sec. 12[a]) A conservator is appointed by the Monetary Board
based on competence and knowledge in bank
Notice of Closure and Takeover Activities operations and management. (NCBA, Sec. 29)
a. Upon the designation of the PDIC as There is no express provision providing for the
receiver, it shall serve a notice of closure appointment of PDIC as conservator.
to the highest-ranking officer of the bank
present in the bank premise, or in the Banks closed by the Monetary Board shall no
absence of such officer, post the notice longer be rehabilitated. The PDIC, as receiver,
of closure in the bank premises of on its shall immediately proceed with the takeover and
main entrance. (New PDIC Charter, Sec. liquidation. (NCBA, Sec. 39; New PDIC Charter,
14[a]) Sec. 12[a])
Note: The closure of the bank shall be C. Receivership
deemed effective upon the service of the
notice of closure. Thereafter, the receiver Authorities of a Receiver
shall take over the bank and exercise the In addition to its powers as receiver under existing
powers of the receiver. (Sec. 14[a]) laws, the PDIC is also empowered to do the
following:
b. The receiver shall have authority to use a. Represent and act for and on behalf of
reasonable force, including the authority the closed bank;
to force open the premises of the bank,
and exercise such acts necessary to take A closed bank under receivership canonly
actual physical possession and custody sue or be sued through its receiver, the
of the bank and all its assets, records, Philippine Deposit Insurance Corporation
documents, and take charge of its affairs (PDIC). Thus, a bank under receivership
upon the service of the notice of closure. cannot file a case without PDIC’s
(Sec. 14[b]) authority. (Banco Filipino Savings and
Mortgage Bank v. BSP, G.R. No.
c. Directors, officers, employees, or agents 200678, 2018)
of a bank hold money and other assets of
the bank in trust or under administration b. Gather and take charge of all the assets,
or management by them for the bank in records, and affairs of the closed bank,
their fiduciary capacity. (Sec. 14[c]) and administer the same for the benefit
of the creditors;
Upon service of notice of closure to the c. Convert the assets of the closed bank to
bank, all directors, officers, employees, cash or other forms of liquid assets, as
or agents of the closed bank shall have far as practicable;
the duty to immediately account for, d. Bring suits to enforce liabilities of the
surrender, and turn over to the receiver, directors, officers, employees, agents of
and provide information relative to the the closed bank and other entities related
assets, records, and affairs of the closed or connected to the closed bank or to
collect, recover, and preserve all assets,

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 including assets over which the bank has
equitable interest; Note: Payment of these fees, including
e. Appoint or hire persons or entities of any unpaid advances under the
recognized competence in banking, immediately preceding paragraph, shall
finance, asset management, or remedial be subject to approval by the liquidation
management, as its deputies, assistant, court.
or agents;
f. Appoint or hire persons or entities of n. Distribute the available assets of the
recognized competence in forensic and closed bank, in cash or in kind, to its
fraud investigations; creditors in accordance with the Rules on
g. Pay accrued utilities, rentals, and Concurrence and Preference of Credits
salaries of personnel of the closed bank under the NCC or other laws;
for a period not exceeding three (3) o. Dispose records of the closed bank that
months, from available funds of the are no longer needed in the liquidation in
closed bank; accordance with the guidelines set by the
h. Collect loans and other claims of the PDIC, notwithstanding the laws on
closed bank and modify, compromise, or archival period and disposal of records;
restructure the terms and conditions of and
such loans or claims as may be deemed p. Exercise inherent and necessary powers
advantageous to the interests of the for the effective discharge of its duties as
creditors of the closed bank; receiver. (Sec. 13[b])
i. Hire or retain private counsel;
j. Borrow or obtain a loan, or mortgage, Surplus Dividends
pledge, or encumber any asset of the After the payment of all liabilities and claims
closed bank, when necessary to (1) against the closed bank, the receiver shall pay
preserve or prevent dissipation of its surplus, if any, dividends at the legal rate of
assets, (2) redeem its foreclosed assets, interest from date of takeover to date of
or (3) minimize losses to its depositors distribution to creditors and claimants of the
and creditors; closed bank in accordance with the Rules on
k. If the stipulated interest rate on deposits Concurrence and Preference of Credits under the
is unusually high compared with Civil Code or other laws before distribution to the
prevailing applicable interest rates, the shareholders of the closed bank. (Sec. 13[c])
receiver may reduce the rate to a
reasonable rate; D. Liquidation

Note: Any modifications or reductions The PDIC, as receiver is also liquidator. PDIC is
shall apply only to earned or unpaid authorized to adopt and implement without need
interest. of consent of the stockholders, BOD, creditors,
and depositors of the closed bank, any or a
l. Utilize available funds of the bank, combination of the following modes of liquidation:
including funds generated by the receiver a. Conventional liquidation; and
from the conversion of assets to pay for b. Purchase of assets and/or liabilities (Sec.
reasonable costs and expenses incurred 13[a])
for the preservation of the assets and
liquidation of the closed bank, without Modes of liquidation under the New PDIC
need for approval of the liquidation court; Charter
a. Conventional Liquidation. The assets
Note: For banks with insufficient funds, gathered by the receiver shall be
the PDIC is authorized to advance the evaluated and verified as to their
foregoing costs and expenses, andcollect existence, ownership, condition, and
payments, as and when funds become other factors to determine their realizable
available. value. (Sec. 16)

m. Charge reasonable fees for the b. Purchase of Assets and/or

liquidation of the bank from the assets of Assumption of Liabilities. The receiver
the bank; shall have the authority to facilitate and

Page 235 of 393

 The powers, voting rights, functions, and
implement the purchase of the assets of
duties, as well as the allowances,
the closed bank and the assumption of its
remuneration and perquisites of the
liabilities by another insured bank,
directors, officers, or stockholders (DOS)
without need for approval of the
of such bank are terminated upon its
liquidation court. It shall be exercised in
closure.
accordance with the Rules on
Concurrence and Preference of Credits
DOS shall be barred from interfering in
under the NCC or other laws, subject to
any way with the assets, records, and
such terms and conditions as the PDIC
affairs of the bank. (Sec. 13[e][2])
may prescribe. (Sec. 15)
Note: The receiver shall exercise all
The disposition of the branch licenses
authorities as may be required tofacilitate
and other bank licenses of the closed
the liquidation of the closedbank for the
bank shall be subject to the approval of
benefit of all its creditors. (Id.)
the BSP. (Id.)
c. On the assets. Upon service of closure,
Note: Such action of the receiver to
all the assets of the closed bank shall be
determine whether a bank may be
deemed in custodia legis in the hands of
subject of a purchase of assets and
the receiver, and as such, these assets
assumption of liabilities transactions shall
may not be subject to attachment,
be final and executory and may not be set
garnishment, execution, levy or any other
aside by any court.
court processes.
Effects of Bank Liquidation
A judge, officer of the court or any person
The placement of a bank under liquidation shall
who shall issue, order, process or cause
have the following effects:
the issuance or implementation of the
a. On the corporate franchise or
garnishment order, levy, attachment, or
existence. Upon placement by the
execution, shall be liable
Monetary Board of a bank under
liquidation, it shall continue as a body
Provided: collaterals securing the loans
corporate until the termination of the
and advances granted by the BSP shall
winding up period. (Sec. 13[e][1])
not be included in the assets of the closed
bank for distribution to other creditors
Note: Winding up period is 6 months from
the date of publication of notice of the
Provided, further: the proceeds in excess
approval by the court of the final asset
of the amount secured shall be returned
distribution plan of the closed bank. (Sec.
by the BSP to the receiver. (Sec. 13[e][3])
1[c])
Note: Any preliminary attachment or
Such continuation as a body corporate
garnishment on any of the assets of the
shall only be for the purpose of
closed bank existing at the time of closure
liquidating, settling, and closing itsassets.
shall not give any preference to the
attaching or garnishing party. Upon
The receiver shall represent the closed
motion of the receiver, the preliminary
bank in all cases by or against the closed
attachment or garnishment shall be lifted
bank and prosecute and defend suits by
and/or discharged.
or against it. (Sec. 13[e][1])
d. On labor relations. The employer-
Note: In no case shall the bank be
employee relationship between the
reopened and permitted to resumebaking
closed bank and its employees shall be
business after being placed under
deemed terminated upon service of the
liquidation. (Sec. 13[e][1])
notice of closure of the bank.
b. On the Powers and Functions of its
directors, officers, and stockholders.

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 Payment of separation pay, or benefits
provided for by law shall be made from i. On actions pending for or against the
available assets of the bank inaccordance closed bank
with the Rules on Concurrence and
Preference of Credits under the Civil Code General Rule: Actions pending for or
or other laws. (Sec.13[e][4]) against the closed bank in any court or
quasi-judicial body shall, upon motion of
e. On contractual obligations. Receiver the receiver, be suspended for a period
may cancel, terminate, rescind, or not exceeding 180 days and referred to
repudiate any contract of the closed bank mandatory mediation.
that is not necessary for the orderly
liquidation of the bank, or is grossly Exception: Actions pending before the
disadvantageous to the closed bank, or Supreme Court. (Sec. 13[e][9])
for any ground provided by law. (Sec.
13[e][5]) j. On final decisions against the closed
bank. Execution and enforcement of a
f. On interest payments. The liability of a final decision of a court other than the
bank to pay interest on deposits and all liquidation court against the assets of a
other obligations as of closure shall closed bank shall be stayed.
cease upon its closure without prejudice
to NCBA, Sec. 85. Prevailing party shall file the finaldecision
as a claim with the liquidation court and
Provided: The receiver shall have the settle in accordance with the Rules on
authority, without need for approval of Concurrence and Preference of Credits
the liquidation court, to assign, as under the Civil Code or otherlaws. (Sec.
payment to secured creditors, the bank 13[e][10])
assets serving as collaterals to their
respective loans up to the extent of the k. On docket and other court fees.
outstanding obligations including Payment of docket and other court fees
interests as of date of closure (valuation relating to all cases or actions filed by the
based on the prevailing market value of receiver with any judicial or quasi- judicial
the collaterals). (Sec. 13([e][6]) bodies shall be deferred until the action is
terminated with finality
Note: The BSP shall collect interest and
other appropriate charges on all loans Any such fees shall constitute as a first
and advances it extends, the closure, lien on any judgment in favor of the
receivership, or liquidation of the debtor- closed bank or in case of unfavorable
institution notwithstanding. (NCBA, Sec. judgment, such fees shall be paid in
85) liquidation costs and expenses during the
distribution of the assets. (Sec. 13[e][11])
g. On liability for penalties and
surcharges for later payment and non- l. On assets, records, and documents of
payment of taxes. From the time of the bank. All assets, records, and
closure, the closed bank shall not beliable documents in the possession of the
for the payment of penalties and closed bank at the time of its closure are
surcharges arising from the late payment presumed held by the bank in the concept
or non-payment of real property tax, of an owner. (Sec. 13[e][12])
capital gains tax, transfer tax and similar
charges. (Sec. 13[e][7]) Assets and documents of the closed bank
shall retain their private nature even if
h. On bank charges and fees on administered by the receiver. (Sec.
services. Receiver may impose charges 13[e][14])
and fees for services rendered after bank
closure such as the execution of pertinent ————- end of topic ————-
deeds and certifications. (Sec. 13[e][8])

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INTELLECTUAL
PROPERTY
Commercial Law
ATENEO CENTRAL
BAR OPERATIONS 2020/21 COMMERCIAL LAW
a. Dominancy Test
VII. INTELLECTUAL PROPERTY b. Holistic Test
c. Idem Sonans
TOPIC OUTLINE UNDER THE SYLLABUS: 7. Well-Known Marks
8. Rights Conferred by Registration
VII. INTELLECTUAL PROPERTY 9. Use by Third Parties of Names, Etc.
A. INTELLECTUAL PROPERTY RIGHTS IN Similar to Registered Mark
GENERAL 10. Infringement and Remedies
1. Intellectual Property Rights a. Trademark Infringement
2. Differences Between Copyright, b. Damages
Trademarks, and Patents c. Requirement of Notice
3. Technology Transfer Arrangement d. Penalties
11. Unfair Competition
B. PATENTS 12. Registration of Marks Under the
1. Patentable Invention Madrid Protocol
2. Non-Patentable Invention a. Coverage
3. Ownership of a Patent b. Rights Conferred
a. Right to a Patent c. Requirements for Registration
b. First-to-File Rule d. Term of Protection
c. Invention Created Pursuant to
a Commission D. COPYRIGHT
d. Right of Priority 1. Basic Principles
4. Grounds for Cancellation of a Patent 2. Copyrightable Works
5. Remedy of the True and Actual a. Original Works
Inventor b. Derivative Works
6. Rights Conferred by a Patent 3. Non-copyrightable works
7. Limitations of Patent Rights 4. Rights of copyright owner
a. Prior User 5. Rules on ownership of copyright
b. Use by the Government 6. Limitations on copyright
8. Patent Infringement a. Fair use
a. Tests in Patent Infringement 7. Copyright infringement
i. Literal Infringement a. Remedies
ii. Doctrine of b. Criminal penalties
Equivalents
b. Civil and Criminal Action
c. Prescriptive Period
d. Defenses in Action for
Infringement
9. Licensing
a. Voluntary
b. Compulsory
10. Assignment and Transmission of
Rights

C. TRADEMARKS
1. Definition of Marks, Collective Marks,
and Trade Names
2. Acquisition of Ownership of Mark
3. Acquisition of Ownership of Trade
Name
4. Non-Registrable Marks
5. Prior Use of Mark as a Requirement
6. Tests to Determine Confusing
Similarity Between Marks

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ATENEO CENTRAL
BAR OPERATIONS 2020/21 COMMERCIAL LAW

A. Intellectual Property RIGHTS IN 2. To guarantee that those

GENERAL articles come up to a
certain standard of quality
1. INTELLECTUAL PROPERTY RIGHTS 3. To advertise the articles
which they symbolize
The State recognizes that an effective intellectual
1. To foster and reward
and industrial property system is vital to the
invention;
development of domestic and creative activity,
2. To promote disclosures of
facilitates transfer of technology, attracts foreign
inventions to stimulate
investments, and ensures market access for our
Patents further innovation
products. The use of intellectual property bears
3. To ensure that ideas in the
a social function. To this end, the State shall
public domain remain there
promote the diffusion of knowledge and
for the free use of the
information for the promotion of national
public
development and progress and the common
SUBJECT MATTER
good. (Sec. 2, IP Code)
Original intellectual creations in
Copyright the literary and artistic domain
All agreements concerning industrial property are
(literary and artistic works)
intimately connected with economicdevelopment.
Any visible sign capable of
Industrial property encourages investments in Trademarks
distinguishing the goods
new ideas and inventions and
A product, process or any
stimulates creative efforts for the satisfaction of
Patents improvement thereof which is a
human needs. They speed up transfer of
technical solution of a problem
technology and industrialization, and thereby
bring about social and economic progress. ELEMENTS
(Mirpuri v. Court of Appeals, G.R. No. 114508, 1. Literary or artistic work
1999). 2. Independently created
Copyright (originality)
Intellectual property protection is merely a means 3. Involves minimal or a
towards the end of making society benefit from modicum of creativity
the creation of its men and women of talent and 1. Visible sign
genius. This is the essence of intellectual property 2. Capable of distinguishing
Trademarks
laws, and it explains why certain products of [distinctive] the goods or
ingenuity that are concealed from the public are services of an enterprise
outside the pale of protection afforded by the law. 1. Technical solution of a
It also explains why the author or the creator problem in a field of human
enjoys no more rights than are consistent with activity
public welfare. (ABS-CBN Broadcasting Corp. v. Patents 2. Must be new (novelty)
Philippine Multi-Media System, Inc., G.R. Nos. 3. Involves an inventive step;
175769-70, 2009). (non-obvious)
4. Industrially applicable
2. DIFFERENCES BETWEEN COPYRIGHT, WHEN PROTECTION BEGINS
TRADEMARKS, AND PATENTS Upon creation (but registration
needed only to recover
Copyright
RATIONALE damages in cases of
1. To promote creativity infringement)
Copyright 2. To encourage creation of Upon grant of trademark
Trademarks
works registration
1. To indicate origin or Patents Upon grant of patent
Trademarks ownership of the articles to TERM OF PROTECTION
which they are attached

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ATENEO CENTRAL
BAR OPERATIONS 2020/21 COMMERCIAL LAW
inventive step and is (c) industrially applicable
Generally, during the life of the
shall be patentable. It may be, or may relate to, a
Copyright author and for 50 years after
product, or process, or an improvement of any of
his death [life + 50]
the foregoing. (Sec. 21, IP Code)
10 years, renewable for periods
of 10 years after the expiration A. Novelty
Trademarks
of the original term (perpetual
protection as long as renewed) An invention shall not be considered new if it
Patents 20 years from grant forms part of a prior art. (Sec. 23, IP Code).
Novelty is an essential requisite of patentability of
3. TECHNOLOGY TRANSFER an invention or discovery. An invention is not new
ARRANGEMENT if it has been disclosed or used in public, or sold
in the market before the patent application for the
Contracts or agreements involving the transfer of invention is filed. (Manzano v. Court of Appeals,
systematic knowledge for the manufacture of a G.R. No. 113388, 1997).
product, the application of a process, or rendering
of a service including management contracts; and Prior Art – It consists of:
the transfer, assignment or licensing of all forms a. Everything which has been made available to
of intellectual property rights, including licensing the public anywhere in the world, before the
of computer software except computer software filing date or the priority date of the
developed for mass market. (Sec. 4, IP Code) application claiming the invention; and
b. The whole contents of an application for a
B. PATENTS patent, utility model, or industrial design

registration, published in accordance withthis

A patent is a grant issued by the Intellectual
Act, filed or effective in the Philippines, with
Property Office of the Philippines (IPOPHL).
a filing or priority date that is earlier thanthe
Through the patent, a patent holder is given the
filing or priority date of the application:
exclusive right to exclude others from making, Provided
using, importing, and selling the patented
i. An application which has validly
innovation for a limited period of time.
claimed the filing date of an earlier
application shall be prior art with
The validity of the patent issued by the Philippines
effect as of the filing date of such
Patent Office and the question over the
earlier application;
inventiveness, novelty, and usefulness of the
ii. The applicant or the inventor
improved process therein specified and described
identified in both applications are not
are matters which are better determined by the
one and the same. (Sec. 24, IP
Philippines Patent Office. Thetechnical staff of the Code)
Philippines Patent Office, composed of experts in
their field, have, by the issuance of the patent in B. Inventive Step
question, accepted the thinness of the private
respondent's new tiles as a discovery. There is a An invention involves an inventive step if, having
presumption that the Philippines Patent Office regard to prior art, it is not obvious to a person
has correctly determined the patentability of the skilled in the art at the time of the filing date or
improvement by the private respondent of the priority date of the application claiming the
process in question. (Aguas v. De Leon, G.R. No. invention. (Sec. 26.1, IP Code)
L-32160, 1982)
Person Skilled in the Art (POSITA)
1. PATENTABLE INVENTION A hypothetical person presumed to be an ordinary
practitioner aware of what was commongeneral
Any technical solution of a problem in any field of knowledge in the art at the relevant date.He or she
human activity which is (a) new, involves an (b) is also presumed to have:

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ATENEO CENTRAL
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1. knowledge of all references that are considered to be the same substance, unless
sufficiently related to one another and to the they differ significantly in properties with
pertinent art; regard to efficacy;
2. knowledge of all arts reasonably pertinent to
the particular problems with which the For drugs and medicines, the following are
inventor was involved; and unpatentable:
3. normal means and capacity for routine work
and experimentation at his or her disposal. a. Discovery of a new form or new
property of a known substance UNLESS
In the case of drugs and medicines, there is no it results in the enhancement of the
inventive step if the invention results from: substance’s efficacy;
1. the mere discovery of a new form or new b. Discovery of any new property or use
property of a known substance which does of a known substance; and
not result in the enhancement of the known c. Mere use of a known process UNLESS
efficacy of that substance, such process results in a new product
2. the mere discovery of any new property or that employs at least one new reactant.
new use for a known substance, or
3. the mere use of a known process unless such 2. Schemes, rules and methods of performing
known process results in a new product that mental acts, playing games or doing
employs at least one new reactant. (Sec. business, and programs for computers;
26.2, IP Code)
General Rule: Computer programs are
C. Industrial Applicability subjects of copyright.

An invention that can be produced and used in Exceptions: The computer program is still
any industry shall be industrially applicable. (Sec. subject of copyright protection; in addition,
27, IP Code). Industrial applicability refers to an the machine or article described below may
invention’s real-life benefit and practical use. be patentable if the computer program:
(1) is implemented by a particular machine in
2. NON-PATENTABLE INVENTIONS a non-conventional and non-trivial
manner, or
The following shall be excluded from patent (2) transforms an article from one state to
protection: another, then it may be patentable.

1. Discoveries, scientific theories and 3. Methods for treatment of the human or animal
mathematical methods, and in the case of body by surgery or therapy and diagnostic
drugs and medicines, the mere discovery of methods practiced on the human or animal
a new form or new property of a known body;
substance which does not result in the
enhancement of the known efficacy of that Note: This prohibition, however, does not
substance, or the mere discovery of any new apply to products and compositions for use in
property or new use for a known substance, any of these methods.
or the mere use of a known process unless
such known process results in a new product 4. Plant varieties or animal breeds or essentially
that employs at least one new reactant. biological process for the production of plants
or animals;
For the purpose of this clause, salts, esters,
ethers, polymorphs, metabolites, pure form, Note: This provision shall not apply to micro-
particle size, isomers, mixtures of isomers, organisms and non-biological and
complexes, combinations, and other microbiological processes. Further,
derivatives of a known substance shall be Congress may enact a law providing sui

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employee’s regular duties UNLESS there
generis protection of plant varieties and
is an agreement to the contrary.
animal breeds and a system of community
intellectual rights protection.
Right of Priority
An application for patent filed by any person who
Note: Congress has already enacted the Plan
has previously applied for the same invention in
Variety Protection Act which grants a
another country which by treaty, convention, or
Certificate of Plant Variety Protection for
law affords similar privileges to Filipino citizens,
varieties that are: (a) new, (b) distinct, (c)
shall be considered as filed as of the date of filing
uniform, and (d) stable. (Sec. 4, Plant
the foreign application, provided that:
Variety Protection Act)
5. Aesthetic creations; and 1. The local application expressly claims
6. Anything which is contrary to public order or priority;
2. It is filed within twelve (12) months from
morality. (Sec. 22, IP Code)
the date the earliest foreign application
was filed; and
3. OWNERSHIP OF A PATENT 3. A certified copy of the foreign application
Term of Patent together with an English translation is
filed within six (6) months from the date
The term of a patent shall be 20 years from the
filing date of the application. (Sec. 54, IP Code) of filing in the Philippines.

Right to a Patent 4. GROUNDS FOR CANCELLATION OF A

The right to a patent belongs to the inventor, his PATENT
heirs, or assigns. When two (2) or more persons
have jointly made an invention, the right to a Any interested person may, upon payment of the
patent shall belong to them jointly. (Sec. 28, IP required fee, petition to cancel the patent or any
Code) claim thereof, or parts of the claim, on any of the
following grounds:
First-to-File Rule 1. That what is claimed as the invention is
If two (2) or more persons have made the not new or patentable;
invention separately and independently of each 2. That the patent does not disclose the
other, the right to the patent shall belong to the invention in a manner sufficiently clear
person who filed an application for such and complete for it to be carried out by
invention, or where two or more applications are any person skilled in the art; or
filed for the same invention, to the applicant who 3. That the patent is contrary to public order
has the earliest filing date or the earliest priority or morality.
date. (Sec. 29, IP Code)
Note: Where the grounds for cancellation relate
Invention Created Pursuant to a Commission to some of the claims or parts of the claim,
The person who commissions the work shall own cancellation may be effected to such extent only.
the patent, unless otherwise provided in the
contract. (Sec. 30, IP Code) 5. REMEDY OF THE TRUE AND ACTUAL
INVENTOR
If an employee made the invention in the course
of his regular employment, the patent shall If a person, who was deprived of the patent
belong to: without his consent or through fraud, is declared
1. The employee, the inventive activity is by final court order or decision to be the true and
not part of his regular duties (even if the actual inventor, the court shall order for his
employee uses the time, facilities, and substitution as patentee, or at the option of the
materials of the employer); true inventor, cancel the patent, and award actual
2. The employer, if the invention is the and other damages in his favor if warranted by
result of the performance of the the circumstances. (Sec. 68, IP Code)

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without proportionally dividing proceeds
therewith. (Sec. 107, IP Code)
The remedies of the true and actual inventor are:
(a) Substitution as patentee, and
(b) Cancellation of the patent. 7. LIMITATIONS OF PATENT RIGHTS
In both remedies, damages may be awarded.
The patentee has no right to prevent third parties
in the following circumstances:
Note: There must first be a final court order
1. Using a patented product which has been put
declaring that he is the true and actual inventor.
on the market in the Philippines by the owner
of the product, or with his express consent,
Patent Application by Persons Not Having the
insofar as such use is performed after that
Right to a Patent
product has been so put on the said market.
If a person other than the applicant is declared by
final court order or decision as having the right to
Note: With regard to drugs and medicines,
the patent, such person may, within three (3)
the limitation on patent rights shall apply after
months after the decision has become final:
a drug or medicine has been introduced in the
(a) Prosecute the application as his own
Philippines or anywhere else in the world.
application in place of the applicant;
The right to import the drugs and medicines
(b) File a new patent application in respect
shall be available to any government agency
of the same invention;
or any private third party.
(c) Request that the application be refused;
or (d) Seek cancellation of the patent, if
2. Where the act is done privately and on a non-
one has already been issued. (Sec. 67,
commercial scale or for a non-commercial
IP Code)
purpose, and the economic interests of the
patentee are not significantly prejudiced;
6. RIGHTS CONFERRED BY A PATENT 3. Where the act consists of making or using
exclusively for experimental use of the
A patent shall confer on its owner the following
invention for scientific purposes or
exclusive rights:
educational purposes and such other
1. Where the subject matter of a patent is a
activities directly related to such scientific or
product, to restrain, prohibit and prevent
educational experimental use;
any unauthorized person or entity from
4. In the case of drugs and medicines, where
making, using, offering for sale, selling or
the act includes testing, using, making or
importing that product;
selling the invention including any data
2. Where the subject matter of a patent is a
process, to restrain, prevent or prohibit related thereto, solely for purposes
reasonably related to the development and
any unauthorized person or entity from
submission of information and issuance of
using the process, and from
approvals by government regulatory
manufacturing, dealing in, using, selling
agencies required under any law of the
or offering for sale, or importing any
Philippines or of another country that
product obtained directly or indirectly
regulates the manufacture, construction, use
from such process.
or sale of any product;
Rights of Joint Owners 5. Where the act consists of the preparation for
If two or more persons own patent and invention individual cases, in a pharmacy or by a
medical professional, of a medicine in
covered thereby, each of the joint owners shall be
accordance with a medical prescription or
entitled to personally make, use, sell or import the
invention for his own profit. Provided, neither of acts concerning the medicine so prepared;
and
joint owners shall be entitled to grant licenses or
6. Where the invention is used in any ship,
to assign his right, title or interest or part thereof
without consent of other owner or owners, or vessel, aircraft, or land vehicle of any other

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country entering the territory of the 8. PATENT INFRINGEMENT

Philippines temporarily or accidentally.
Consists of the following acts:
Note: Such invention must be used (1) making, using, offering for sale, selling,
exclusively for the needs of the ship, vessel, or importing a patented product or a
aircraft, or land vehicle and not used for the product obtained directly or indirectly
manufacturing of anything to be sold within from a patented process; or
the Philippines. (2) use of a patented process without the
authorization of the patentee constitutes
A. Prior User patent infringement.

Prior User Notes:

Any prior user, who, in good faith was using the To be able to effectively and legally preclude
invention or has undertaken serious preparations others from copying and profiting from the
to use the invention in his enterprise or business, invention, a patent is a primordial requirement.
before the filing date or priority date of the No patent, no protection. (Pearl & Dean (Phil.) v.
application on which a patent is granted, shall Shoemart, G.R. No. 148222, 2003)
have the right to continue the use thereof within
the territory where the patent produces its effect. There can be no infringement of a patent until a
The right of prior user may only be transferred or patent has been issued, since whatever right one
assigned together with enterprise or business, or has to the invention covered by the patent arises
with the part of his enterprise or business in which alone from the grant of patent. (Creser Precision
use or preparations for use have been made. Systems, Inc. v. Court of Appeals, G.R. No.
118708, 1998)
B. Use by the Government
In order to infringe a patent, a machine or device
A Government agency or third person authorized
must perform the same function, or accomplish
by the Government may exploit the invention
the same result by identical or substantially
even without agreement of the patent owner
identical means and the principle or mode of
where:
operation must be substantially the same. (Del
1. The public interest, in particular, national
Rosario v. Court of Appeals, G.R. No. 115106,
security, nutrition, health or the development
1996)
of other sectors, as determined by the
appropriate agency of the government, so
However: The exclusive right of a patentee to
require; or
make, use and sell a patented product, article or
2. A judicial or administrative body has
process exists only during the term of the patent.
determined that the manner of exploitation,
(Phil Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
by the owner of the patent or his licensee, is
167715, 2010)
anti- competitive; or
3. In the case of drugs and medicines, there is A. Tests in Patent Infringement
a national emergency or other circumstance
of extreme urgency requiring the use of the 1. Literal Infringement
invention; or Resort must be had to the words of the claim. If
4. In the case of drugs and medicines, there is accused matter clearly falls within the claim, then
a public non- commercial use of the patent by there is literal infringement.
the patentee, without satisfactory reason; or
5. In the case of drugs and medicines, the To determine whether the particular item falls
demand for the patented article in the within the literal meaning of the patent claims, the
Philippines is not being met to an adequate Court
extent and on reasonable terms, as a. Compares the claims of the patent and
determined by the Secretary of the the accused product within the overall
Department of Health.

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context of the claims and specifications,

and Note: This criminal action is without prejudice to
b. Determines whether there is exact the institution of a civil action for damages,
identity of all material elements. (Godines
v. Court of Appeals, G.R. No. 97343, The criminal action herein provided shall
1993) prescribe in three (3) years from date of the
commission of the crime. (Sec. 84, IP Code)
2. Doctrine of Equivalents
Infringement also occurs when a device The burden of proof to substantiate a charge for
appropriates a prior invention by incorporating its patent infringement rests on the plaintiff. (Smith
innovative concept and, albeit with some Kline Beckman Corp. v. Court of Appeals, G.R.
modification and change, performs substantially No. 126627, 2003)
the same function in substantially the same way
to achieve substantially the same result. (Smith Infringement Action by a Foreign National
Kline Beckman Corp. v. Court of Appeals, G.R. Any foreign national or juridical entity who meets
No. 126627, 2003) the requirements of Section 3 (Rule on
Reciprocity) and not engaged in business in the
Under the doctrine of equivalents, there is still Philippines, to which a patent has been granted
patent infringement when: or assigned under this Act, may bring an action
a. There is an appropriation of the inventive for infringement of patent, whether or not it is
step of a prior invention; licensed to do business in the Philippines under
b. The subsequent invention has been existing law. (Sec. 77, IP Code).
modified or changed; and
c. Despite such changes, the subsequent 1. Civil Action
invention performs substantially the Any patentee, or anyone possessing any right,
same function in substantially the same title or interest in and to the patented invention,
way to achieve substantially the same whose rights have been infringed, may bring a
result. civil action before a court of competent
jurisdiction, to recover from the infringer such
Rationale: Such imitation would leave room for damages sustained thereby, plus attorney’s fees
the unscrupulous copyist to make unimportant and other expenses of litigation, and to secure an
and insubstantial changes and substitutions in the injunction for the protection of his rights. (Sec. 76,
patent which, though adding nothing, would be IP Code).
enough to take the copied matter outside the
claim, and hence outside the reach of the law. Civil remedies for infringement:
(Godines v. Court of Appeals, G.R. No. 97343, (1) recovery of damages, attorney’s fees,
1993) and litigation costs; and
(2) injunction.
B. Civil and Criminal Action
Rules on Civil Remedies
Criminal Action for Repetition of Infringement 1. If the damages are inadequate or cannot
If infringement is repeated by the infringer or by be readily ascertained with reasonable
anyone in connivance with him after finality of the certainty, the court may award by way of
judgment of the court against the infringer, the damages a sum equivalent to reasonable
offenders shall be criminally liable therefor and, royalty.
upon conviction, shall suffer imprisonment for the 2. The court may award damages in a sum
period of not less than six (6) months but not more above the amount found as actual
than three (3) years and/or a fine of not less than damages sustained.
One hundred thousand pesos (P100,000) but not
more than Three hundred thousand pesos Note: The amount may award an amount
(P300,000), at the discretion of the court. more than the actual damages but must

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from date of the commission of the crime.
not exceed three (3) times the amount of
(Sec. 84, IP Code)
actual damages.
D. Defenses in Action for Infringement
3. The court may order that the infringing
goods, materials and implements In an action for infringement, the defendant may
predominantly used in the infringement show the invalidity of the patent, or any claim
be destroyed without compensation. thereof, on any of the following grounds:
4. Damages cannot be recovered for acts of a. That what is claimed as the invention is
infringement committed before the not new or patentable;
infringer had known, or had reasonable b. That the patent does not disclose the
grounds to know of the patent. invention in a manner sufficiently
clear and complete for it to be carried
Note: It is presumed that the infringer out by any person skilled in the art; or
had known of the patent if the words c. That the patent is contrary to public
“Philippine Patent” and the number of the order or morality.
patent appear on the patented product or
on the container or package or the Note: These are the same grounds for the
advertising material of the patented cancellation of a patent.
product or process.
9. LICENSING
Contributory Infringer – jointly and severally
liable with the infringer if he: A. Voluntary Licensing
a. actively induces the infringement of a
patent; or To encourage the transfer and dissemination of
b. provides the infringer with a component technology, prevent or control practices and
of a patented product or of a product conditions that may constitute an abuse of
produced by a patented process knowing intellectual property rights having an adverse
it to be used for infringing the patented effect on competition and trade.
invention.
All technology transfer arrangements must
2. Criminal Action comply with the provisions of the IP Code.
If infringement is repeated by the infringer or by
anyone in connivance with him after finality of the Prohibited Clauses
judgment against the infringer, the offenders The following provisions shall be deemed prima
shall, without prejudice to the institution of a civil facie to have an adverse effect on competition
action for damages, be criminally liable. Upon and trade:
conviction, the offenders shall suffer: 1. Those which impose upon the licensee the
a. imprisonment for the period of not less obligation to acquire from a specific source
than six months but not more than three capital goods, intermediate products, raw
years, and/or materials, and other technologies, or of
b. a fine of not less than P100,000 but not permanently employing personnel indicated
more than P300,000. by the licensor;
2. Those pursuant to which the licenseereserves
C. Prescriptive Period the right to fix the sale or resale prices of the
products manufactured on the basis of the
1. No damages can be recovered for acts of
license;
infringement committed more than four (4)
3. Those that contain restrictions regarding the
years before the institution of the action for
volume and structure of production;
infringement. (Sec. 79, IP Code)
2. The criminal action for repetition of
infringement shall prescribe in three (3) years

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4. Those that prohibit the use of competitive

technologies in a non-exclusive technology Mandatory Provisions
transfer arrangement; The following provisions shall be included in all
5. Those that establish full or partial purchase voluntary license contracts:
option in favor of the licensor; 1. That the laws of the Philippines shall govern
6. Those that obligate the licensee to transfer the interpretation of the agreement and in the
for free to the licensor the inventions or event of litigation, the venue shall be the
improvements that may be obtained through proper court in the place where the licensee
the use of the licensed technology; has its principal office;
7. Those that require payment of royalties to the 2. That continued access to improvements in
owners of patents for patents which are not techniques and processes related to the
used; technology shall be made available during the
8. Those that prohibit the licensee to export the period of the technology transfer
licensed product unless justified for the arrangement;
protection of the legitimate interest of the 3. That, in the event the technology transfer
licensor such as exports to countries where arrangement shall provide for arbitration, the
exclusive licenses to manufacture and/or Procedure of Arbitration of the Arbitration
distribute the licensed product(s) have Law of the Philippines or the Arbitration Law
already been granted; of the United Nations Commission on
9. Those which restrict the use of the technology International Trade Law (UNCITRAL) or the
supplied after the expiration of the technology Rules of Conciliation and Arbitration of the
transfer arrangement, except in cases of International Chamber of Commerce shall
early termination of the technology transfer apply and the venue of arbitration shall be the
arrangement due to reason(s) attributable to Philippines or any neutral country; and
the licensee; 4. That the Philippine taxes on all payments
10. Those which require payments for patents relating to the technology transfer
and other industrial property rights after their arrangement shall be borne by the licensor.
expiration or termination of the technology
transfer arrangement; Rights of Licensor
11. Those which require that the technology Absent a contrary provision in technology transfer
recipient shall not contest the validity of any arrangement, the grant of a license shall not
of the patents of the technology supplier; prevent the licensor from granting further licenses
12. Those which restrict the research and to third persons nor from exploiting the subject
development activities of the licensee matter of the technology transfer arrangement
designed to absorb and adapt the transferred himself.
technology to local conditions or to initiate
research and development programs in Rights of Licensee
connection with new products, processes or The licensee shall be entitled to exploit the
equipment; subject matter of the technology transfer
13. Those which prevent the licensee from arrangement during the whole term of the
adapting the imported technology to local technology transfer arrangement.
conditions, or introducing innovation to it, as
long as it does not impair the standards Non-Registration
prescribed by the licensor; and Technology transfer arrangements that conform
14. Those which exempt the licensor from liability with the previous requirements need not be
for non-fulfillment of his responsibilities under registered with the Documentation, Information
the technology transfer arrangement and/or and Technology Transfer Bureau (DITTB). Non-
liability arising from third party suits brought conformance, however, shall automatically
about by the use of the licensed product or render the technology transfer arrangement
the licensed technology. unenforceable, unless the technology transfer
15. Other clauses with equivalent effects. agreement is considered as an exceptional case.

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Use of Invention by Government
A Government agency or third person authorized
Exceptional Cases
by the Government may exploit the invention
Non-conformance with the requirements in a
even without agreement of the patent owner
voluntary licensing contract may be allowed
where:
where, after evaluation by the DITTB, substantial
a) The public interest, in particular, national
benefits will accrue to the economy such as in the
security, nutrition, health or the
following exceptional or meritorious cases:
development of other sectors, as
1. High technology content,
determined by the appropriate agency of
2. Increase in foreign exchange earnings,
the government, so requires; or
3. Employment generation,
b) A judicial or administrative body has
4. Regional dispersal of industries and/or,
determined that the manner of
5. Substitution with or use of local raw
exploitation, by the owner of the patent or
materials, or
his licensee is anti-competitive; or
6. Registered companies with pioneer
c) In the case of drugs and medicines, there
status.
is a national emergency or other
B. Compulsory Licensing circumstance of extreme urgency
requiring the use of the invention; or
The Director of Legal Affairs may grant license to d) In the case of drugs and medicines, there
exploit patented invention, even without is public non-commercial use of the
agreement of patent owner, in favor of any person patent by the patentee, without
who has shown his capability to exploit invention, satisfactory reason; or
under any of the following circumstances: e) In the case of drugs and medicines, the
1. National emergency or other demand for the patented article in the
circumstances of extreme urgency; or Philippines is not being met to an
2. Where public interest, in particular, adequate extent and on reasonable
national security, nutrition, health or terms, as determined by the Secretary of
development of other vital sectors of the Department of Health. (Sec. 74.1, IP
national economy as determined by the Code)
appropriate agency of the Government,
so requires; or Terms and Conditions of the Compulsory
3. Where a judicial or administrative body License
has determined that manner of 1. The scope and duration of such license
exploitation by patent owner or his shall be limited to the purpose for which
licensee is anti-competitive; or it was authorized;
4. In case of public non-commercial use of 2. The license shall be non-exclusive;
patent by patentee, without satisfactory 3. The license shall be non-assignable,
reason; or except with that part of the enterprise or
5. If patented invention is not being worked business with which the invention is
in Philippines on commercial scale, being exploited;
although not capable of being worked, 4. Use of the subject matter of the license
without satisfactory reason: Provided, shall be devoted predominantly for the
that importation of patented article shall supply of the Philippine market;
constitute working or using the patent; or
6. Where the demand for patented drugs Note: This shall not apply where the
and medicines is not being met to an grant of the license is based on the
adequate extent and on reasonable ground that the patentee’s manner of
terms, as determined by the Secretary of exploiting the patent is determined by
the Department of Health. (Sec. 96, IP judicial or administrative process to be
Code) anti-competitive.

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entire patent and invention, in which event the
5. The license may be terminated upon
parties become joint owners thereof. An
proper showing that circumstances which
assignment may be limited to a specified territory.
led to its grant have ceased to exist and
(Sec. 104, IP Code)
are unlikely to recur;
6. The patentee shall be paid adequate
Form of Assignment
remuneration taking into account the
The assignment must be in writing,
economic value of the grant or
acknowledged before a notary public or other
authorization. (Sec. 100, IP Code)
officer authorized to administer oath or perform
Amendment, Cancellation, Surrender of notarial acts, and certified under the hand and
Compulsory License official seal of the notary or such other officer.
(Sec. 105, IP Code)
Upon request of patentee, or licensee, Director of
Legal Affairs may amend decision granting
Requirements for Recording of Assignment
compulsory license, upon proper showing of new
a. It must be in writing and accompanied by
facts or circumstances justifying such
an English translation, if it is in a
amendment; or may cancel compulsory license if:
language other than English or Filipino;
1. Ground for grant of compulsory license
b. It must be notarized;
no longer exists and is unlikely to recur;
c. It must be accompanied by an
2. Licensee has neither begun to supply
appointment of a resident agent, if the
domestic market nor made serious
assignee is not residing in thePhilippines;
preparation therefore; or
d. It must identify the letters patent involved
3. Licensee not complied with prescribed
by number and date and give the name
terms of license. (Sec. 101, IP Code)
of the owner of the patent and the title of
the invention. In the case of an
Licensee’s Exemption from Liability
application for a patent, it should state the
Any person who works a patented product,
application number and the filing date of
substance and/or process under a compulsory
the application and give the name of the
license, shall be free from any liability for
applicant and the title of the invention. If
infringement. In case of voluntary licensing, it
the assignment was executed
must be proven that no collusion with licensor
concurrently with or subsequent to the
existed. This is without prejudice to rightful patent
execution of the application but before
owner to recover from licensor whatever he may
the application is filed or before its
receive as royalties under the license. (Sec. 102,
IP Code) application number is ascertained, it
should adequately identify the application
by its date of execution, the name of the
10. ASSIGNMENT AND TRANSMISSION OF
applicant, and the title of the invention.
RIGHTS e. It must be accompanied by the required
fees.
Patent owners shall also have the right to assign,
transfer by succession the patent, and conclude
licensing contracts for the same.

Note: Patents or applications for patents and

invention to which they relate, shall be protected
in the same way as the rights of other property
under the Civil Code. (Sec. 103, IP Code)

Assignment of Inventions
An assignment may be of the entire right, title or
interest in and to the patent and the invention
covered thereby, or of an undivided share of the

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Spectrum of Distinctiveness of Trademark
C. TRADEMARKS
(Zantarain’s Inc. v. Old Grove Smokehouse, 698
F.2d 786, 1983) (from weakest to strongest)
Modern authorities on trademark law view
1. Generic – refers to a particular genus or
trademarks as performing three distinct functions:
(1) they indicate origin or ownership of the articles class of which an individual article or service
to which they are attached; is a member (e.g. escalator, cellophane, etc.)
(2) they guarantee that those articles come up to a. It can never attain trademark
a certain standard of quality; and protection.
(3) they advertise the articles they symbolize. b. If a registered trademark becomes
(Mirpuri v. Court of Appeals, G.R. No. 114508, generic as to a particular product or
1999) service, the mark’s registration is
subject to cancellation.
2. Descriptive – identifies a characteristic or
1. DEFINITIONS OF MARKS, COLLECTIVE
quality of an article or service such as its
MARKS, AND TRADE NAMES color, odor, function, dimensions, or
Mark ingredients
Any visible sign capable of distinguishing the
General Rule: It is not ordinarily protectable
goods (trademark) or services (service mark) of
as a trademark because, like a generic term,
an enterprise and shall include a stamped or
it belongs to the public domain. (Ong Ai Gui
marked container of goods. (Sec. 121.1, IP Code)
v. Director of Patents, G.R. No. L-6235, 1955)
Collective Mark
Exception: When the doctrine of secondary
Any visible sign designated as such in the
meaning applies in such a way that it has
application for registration and capable of
acquired a secondary meaning in the minds
distinguishing the origin or any other common
of the consumers. (Sec. 123.2)
characteristic, including the quality of goods or
services of different enterprises which use the
3. Suggestive – requires the consumer to
sign under the control of the registered owner of
exercise the imagination in order to draw a
the collective mark. (Sec. 121.2, IP Code)
conclusion as to the nature of the goods or
services
Trade Name
4. Arbitrary or Fanciful – bear no relationship
Any name or designation identifying or
to the products or services to which they are
distinguishing an enterprise (Sec. 121.3, IP
applied; protectable without proof of
Code);
secondary meaning (e.g. Adidas, Rolex, etc.)
A name or designation may not be used as a trade
name if, by its nature or the use to which such 2. ACQUISITION OF OWNERSHIP OF A
name or designation may be put: MARK
1. It is contrary to public order or morals;
2. It is liable to deceive trade circles or the The rights in a mark shall be acquired through
public as to the nature of the enterprise registration made validly in accordance with the
identified by that name; or provisions of this law. (Zuneca Pharmaceutical v.
3. It is similar to a mark or a trade name Natrapharm, Inc., G.R. No. 211850, 2020)
owned by another person and its use
would likely mislead the public. Note: Any person who shall procure registration
in the Office of a mark by a false or fraudulent
A trade name refers to the business and its declaration or representation, whether oral or in
goodwill; a trademark refers to the goods. (Canon writing, or by any false means, shall be liable in a
Kabushiki Kaisha v. Court of Appeals, G.R. No. civil action by any person injured thereby for any
120900, 2000) damages sustained in consequence thereof. (Sec.
162, IP Code)

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NOTE: Proof of substantially exclusive
and continuous commercial use in the
The registration of trademark under the law is
Philippines for five (5) years before the
required to give notice to the entire world that a
date on which the claim of distinctiveness
mark has already been registered. The failure to
is made is prima facie evidence of
give notice of registration bars recovery of
distinctiveness. (Sec. 123.2, IP Code)
damages for trademark infringement, without
prejudice to other causes of action based on other
Duration and Renewal
laws. (Cagayan Valley Enterprises, Inc. v. Court
A certificate of registration shall remain in force
of Appeals, G.R. No. 78413, 1989)
for 10 years: Provided, That the registrant shall
file a declaration of actual use and evidence to
The owner of the registered mark shall not be
that effect, or shall show valid reasons based on
entitled to recover profits or damages in any suit
the existence of obstacles to such use, as
for infringement, unless the acts have been
prescribed by the Regulations, within 1 year from
committed with knowledge that such limitation is
the fifth anniversary of the date of the registration
likely to cause confusion, to cause mistake, or to
of the mark. Otherwise, the mark shall be
deceive. Such knowledge is presumed if the
removed from the Register by the Office.
registrant gives notice that his mark is registered
by displaying with the mark the words “Registered
A certificate of registration may be renewed for
Mark” or the letter R within a circle or if the
periods of 10 years at its expiration upon payment
defendant had otherwise actual notice of the
of the prescribed fee and upon filing of a request.
registration. (Sec. 158, IP Code)

Doctrine of Secondary Meaning 3. ACQUISITION OF OWNERSHIP OF

A word or phrase originally incapable of exclusive TRADE NAME
appropriation with reference to an article in the
market (because it is geographically or otherwise Notwithstanding any laws or regulations providing
descriptive) might nevertheless have been used for any obligation to register trade names, such
for so long and so exclusively by one producer names shall be protected, even prior to or without
with reference to his article that, in the trade and registration, against any unlawful act committed
to that branch of the purchasing public, the word by third parties. (Sec. 165.2.a, IP Code)
or phrase has come to mean that the article was
his property. (Pearl & Dean (Phil.) v. Shoemart, In particular, any subsequent use of the trade
G.R. No. 148222, 2003) name by a third party, whether as a trade name
or a mark or collective mark, or any such use of a
Secondary meaning is established when a similar trade name or mark, likely to mislead the
descriptive mark no longer causes the public to public, shall be deemed unlawful. (Sec. 165.2.b,
IP Code)
associate the goods with a particular place but to
associate the goods with a particular source.
Doctrine of Secondary Meaning Applicable to
(Shang Properties Realty Corp. v. St. Francis
Development Corp., G.R. No. 190706, 2014) Trade Names
The doctrine’s application has been extended to
Requirements for a Geographically- corporate names since the right to use a
descriptive Mark to Acquire Secondary corporate name to the exclusion of others is
Meaning based upon the same principle which underlies
1. The secondary meaning must havearisen the right to use a particular trademark or
as a result of substantial commercial use tradename. (Lyceum of the Philippines, Inc. v.
of a mark in thePhilippines; and Court of Appeals, G.R. No. 101897, 1993)
2. Such use must result in the
distinctiveness of the mark insofar as the
goods or the products are concerned.

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considered well-known in accordance
4. NON-REGISTRABLE MARKS
with the preceding paragraph, which is
A mark cannot be registered if it: registered in the Philippines with respect
a. Consists of immoral, deceptive or to goods or services which are not similar
scandalous matter, or matter which may to those with respect to which registration
disparage or falsely suggest a is applied for.
connection with persons, living or dead,
institutions, beliefs, or national symbols, Note: Under this provision, (i) the use of
or bring them into contempt or disrepute; the mark in relation to those goods or
b. Consists of the flag or coat of arms or services must indicate a connection
other insignia of the Philippines or any of between those goods or services, and the
its political subdivisions, or of any foreign owner of the registered mark; and (ii)the
nation, or any simulation thereof; interests of the owner of the registered
c. Consists of a name, portrait or signature mark are likely to be damaged by such
identifying a particular living individual use.
except by his written consent, or the
name, signature, or portrait of a g. Is likely to mislead the public, particularly
deceased President of the Philippines, as to the nature, quality, characteristics
during the life of his widow, if any, except or geographical origin of the goods or
by written consent of the widow; services;
d. Is identical with a registered mark h. Consists exclusively of signs that are
belonging to a different proprietor or a generic for the goods or services that
mark with an earlier filing or priority date, they seek to identify;
in respect of: i. Consists exclusively of signs or of
i. The same goods or services, or indications that have become customary
ii. Closely related goods orservices, or usual to designate the goods or
or services in everyday language or in bona
iii. If it nearly resembles such a fide and established trade practice;
mark as to be likely to deceive or j. Consists exclusively of signs or of
cause confusion; indications that may serve in trade to
e. Is identical with, or confusingly similar to, designate the kind, quality, quantity,
or constitutes a translation of a mark intended purpose, value, geographical
which is considered by the competent origin, time or production of the goods or
authority of the Philippines to be well- rendering of the services, or other
known internationally and in the characteristics of the goods or services;
Philippines, whether or not it is registered k. Consists of shapes that may be
here, as being already the mark of a necessitated by technical factors or by
person other than the applicant for the nature of the goods themselves or
registration, and used for identical or factors that affect their intrinsic value;
similar goods or services; l. Consists of color alone, unless defined
by a given form; or
Note: In determining whether a mark is m. Is contrary to public order or morality.
well-known, account shall be taken of the (Sec. 123.1, IP Code)
knowledge of the relevant sector of the
public, rather than of the public at large, 5. PRIOR USE OF MARK AS
including knowledge in the Philippines REQUIREMENT
which has been obtained as a result of
the promotion of the mark. Under Trademark Law (old rule): The rights to
a trademark were acquired through a “first-to-
f. Is identical with, or confusingly similar to, use” system. (Sec. 5, Republic Act No. 166)
or constitutes a translation of a mark

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Under the IP Code (new rule): The rights in a public or to deceive

mark shall be acquired through registration made consumers.
validly in accordance with the provisions of this (Citigroup v Citystate, G.R. No. 205409, 2018)
law. (Sec. 122, IP Code)
Idem Sonans
Prior use no longer determines the acquisition of Literally “same sound” in Latin; an identity of
ownership of a mark in light of the adoption of the sound in the pronunciation of words or names.
rule that ownership of a mark is acquired through
registration made validly in accordance with the As to the syllabication and sound of the two trade-
provisions of the IP Code. (Zuneca names “Sapolin” and “Lusolin” being used for
Pharmaceutical v. Natrapharm, Inc., G.R. No. paints, it seems plain that whoever hears or sees
211850, 2020) them cannot but think of paints of the same kind
and make. (Sapolin Co., Inc. v. Germann & Co.,
6. TESTS TO DETERMINE CONFUSING Ltd., G.R. No. 45502, 1939).
SIMILARITY BETWEEN MARKS
Two letters of “SALONPAS” are missing in
To aid in determining the similarity and likelihood “LIONPAS”: the first letter a and the letter s. Be
of confusion between marks, our jurisprudence that as it may, when the two words are
has developed two (2) tests: the dominancy test pronounced, the sound effects are confusingly
and the holistic test. similar. And where goods are advertised over the
radio, similarity in sound is of especial. The
Dominancy Test Holistic Test importance of this rule is emphasized by the
Focuses on the Entails a increase of radio advertising in which we are
similarity of the consideration of the deprived of the help of our eyes and must depend
prevalent features of entirety of the marks entirely on the ear. “SALONPAS” and “LIONPAS”,
the competing as applied to the when spoken, sound very much alike. Similarity
trademarks that might products, includingthe of sound is sufficient ground for this Court to rule
cause confusion and labels and that the two marks are confusingly similar when
deception, thus packaging, in applied to merchandise of the same descriptive
constituting determining confusing properties. (Marvex Commericial Co., Inc. v.
infringement. similarity. Petra Hawpia & Co., G.R. No. L-19297, 1966)

If the competing The discerning eye of The determining point in trademark infringement
trademark contains the observer must is a likelihood of confusion. The fact that
the main, essential, focus not only on the CEEGEEFER is idem sonans for CHERIFER is
and dominant predominant words enough to violate respondent's right to protect its
features of another, but also on the other trademark, CHERIFER. (Latest SC decision is
and confusion or features appearing on Prosel v. Tynor, G.R. No. 248021, 2020)
deception is likely to both marks in order
result, infringement that the observer may 7. WELL-KNOWN MARKS
occurs. Exact draw his conclusion
duplication or whether one is The countries of the Union undertake, ex officio if
imitation is not confusingly similar to their legislation so permits, or at the request of an
required. the other. interested party, to refuse or to cancel the
registration, and to prohibit the use, of a
The question is trademark which constitutes a reproduction, an
whether the use of the imitation, or a translation, liable to create
marks involved islikely confusion, of a mark considered by the
to cause confusion or competent authority of the country of registration
mistake or use to be well known in that country as being
in the mind of the

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of Well-Known Marks cited with approval
already the mark of a person entitled to the
in Sehwani v. In-N-Out)
benefits of this Convention and used for identical
or similar goods. These provisions shall also apply
Criteria for determining whether a mark is well-
when the essential part of the mark constitutes a
known:
reproduction of any such well- known mark or an
1. Duration, extent and geographical area
imitation liable to create confusion therewith.
of any use of the mark, in particular, the
(Art. 6bis, Paris Convention)
duration, extent and geographical area of
any promotion of the mark, including
Note: The essential requirement under this
advertising or publicity and the
Article is that the trademark to be protected must
presentation, at fairs or exhibitions, of the
be “well-known” in the country where protection is
goods and/or services to which the mark
sought. The power to determine whether a
applies;
trademark is well-known lies in the “competent
2. Market share, in the Philippines and in
authority of the country of registration or use.”
other countries, of the goods and/or
This competent authority would be either the
services to which the mark applies;
registering authority, if it has the power to decide
3. Degree of the inherent or acquired
this, or the courts of the country in question if the
distinction of the mark;
issue comes before a court. (Sehwani, Inc. v. In-
4. Quality-image or reputation acquired by
N-Out Burger, Inc., G.R. No. 171053, 2007)
the mark;
5. Extent to which the mark has been
The question of whether or not respondent's
registered in the world;
trademarks are considered “well-known” is
6. Exclusivity of registration attained by the
factual in nature, involving as it does the
mark in the world;
appreciation of evidence adduced before the BLA-
7. Extent to which the mark has been used
IPO. The settled rule is that the factualfindings of
in the world;
quasi-judicial agencies, like the IPO, which have
8. Exclusivity of use attained by the mark in
acquired expertise because their jurisdiction is
the world;
confined to specific matters, are generally
9. Commercial value attributed to the mark
accorded not only respect, but, at times, even
in the world;
finality if such findings are supported by
10. Record of successful protection of the
substantial evidence. (Sehwani, Inc. v. In-N-Out
rights in the mark;
Burger, Inc., G.R. No. 171053, 2007)
11. Outcome of litigations dealing with the
issue of whether the mark is a well-known
Factors Which Shall Not be Required in
mark; and
Determining Whether a Mark is a Well-known
12. Presence or absence of identical or
Mark:
similar marks validly registered for or
1. that the mark has been used in, or that
used on identical or similar goods or
the mark has been registered, or that an
services and owned by persons otherthan
application for registration of the mark
the person claiming that his mark is a
has been filed in or in respect of the
well-known mark.
Member State;
2. that the mark is well known in, or that the
(Rule 102, Rules and Regulations On
mark has been registered, or that an
Trademarks, Servicemarks, Tradenames
application for registration of the mark
and Marked or Stamped Containers)
has been filed in or in respect of, any
jurisdiction other than the Member State;
3. that the mark is well known by the public
at large in the Member State. (Part I, Art.
2.3, 1999 Joint Recommendation
Concerning Provisions on the Protection

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9. USE BY THIRD PARTIES OF NAMES,
8. RIGHTS CONFERRED BY
ETC. SIMILAR TO REGISTERED MARK
REGISTRATION
Registration of the mark shall not confer on the
The owner of a registered mark shall have the
registered owner the right to preclude third parties
exclusive right:
from using bona fide their names, addresses,
1. to prevent all third parties not having the
pseudonyms, a geographical name, or exact
owner’s consent
indications concerning the kind, quality, quantity,
2. from using in the course of trade identical
destination, value, place of origin, or time of
or similar signs or containers for goods or
production or of supply, of their goods or services:
services which are identical or similar to
Provided, that such use
those in respect of which the trademark
1. Is confined to the purposes of mere
is registered
identification or information, and
3. where such use would result in a
2. Cannot mislead the public as to the
likelihood of confusion.
source of the goods or services. (Sec.
148, IP Code)
Note: In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed. (Sec. 147.1, IP 10. INFRINGEMENT AND REMEDIES
Code)
A. Trademark Infringement
The exclusive right of the owner of a well-known A person shall be liable for trademark
mark which is registered in the Philippines, shall infringement if, without the consent of the owner
extend to goods and services which are notsimilar of the registered mark, he:
to those in respect of which the mark is i. Uses in commerce any reproduction
registered, Provided:
or colorable imitation of a registered
1. That the use of that mark in relation to mark or the same container or a
those goods or services would indicate a dominant feature thereof in
connection between those goods or connection with the sale, offering for
services and the owner of the registered sale, distribution, advertising of any
mark; and goods or services which is likely to
2. That the interests of the owner of the cause confusion, or to cause mistake,
registered mark are likely to be damaged or to deceive;
by such use. (Sec. 147.2, IP Code)
Note: This includes other preparatory
steps necessary to carry out the sale of
The ownership of a trademark or tradename is a any goods or services.
property right that the owner is entitled to protect.
However, when a trademark is used by a party for ii. Reproduces or colorably imitates a
a product in which the other party does not deal, registered mark or a dominant
the use of the same trademark on the latter's feature thereof and applies such
product cannot be validly objected to. (Canon reproduction or colorable imitation to
Kabushiki Kaisha v. Court of Appeals, G.R. No. signs, packages, or advertisements
120900, 2000)
intended to be used in commerce
upon or in connection with the sale,
offering for sale, distribution, or
advertising of goods or services
which likely to cause confusion, or to
cause mistake, or to deceive.

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The general impression of the ordinary purchaser
Note: It is immaterial that there was no actual
buying under the normally prevalent conditions in
sale of goods or services using the infringing
trade and giving the attention such purchasers
material as long as the acts mentioned were
usually give in buying that class of goods, is the
actually committed. (Sec. 155, IP Code)
touchstone. (Del Monte Corp v. Court of Appeals,
G.R. No. 78325, 1990)
The “likelihood of confusion” is the gravamen of
trademark infringement. But likelihood of
Right of Foreign Corporation to Sue in
confusion is a relative concept, the particular, and
Trademark or Service Mark Enforcement
sometimes peculiar, circumstances of each case
Action
being determinative of its existence. Thus, in
Any foreign national or juridical person who
trademark infringement cases, more than in other
meets the requirements of Section 3 of the IP
kinds of litigation, precedents must be evaluated
Code and does not engage in business in the
in the light of each particular case. (Philip Morris,
Philippines may bring a civil or administrative
Inc. v. Fortune Tobacco Corp., G.R. No. 158589,
2006) action hereunder for opposition, cancellation,
infringement, unfair competition, or false
To establish trademark infringement, the designation of origin and false description,
following elements must be shown: whether or not it is licensed to do business in the
Philippines under existing laws. (Sec. 160, IP
i. The validity of plaintiff’s mark;
Code)
ii. The plaintiff’s ownership of the mark;
and
Limitations to Actions for Infringement
iii. The use of the mark or its colorable
1. A registered mark shall have no effect
imitation by the alleged infringer
against any person who, in good faith,
results in “likelihood of confusion.”
before the filing date or the priority date,
(McDonald's Corp. v. L.C. Big Mak
was using the mark for the purposes of
Burger, Inc., G.R. No. 143993, 2004)
his business or enterprise.
The phrase “colorable imitation” denotes such a
Note: Such right may only be transferred
“close or ingenious imitation as to be calculated
or assigned together with his enterprise
to deceive ordinary persons, or such a
or business or with that part of his
resemblance to the original as to deceive an
enterprise or business in which the mark
ordinary purchaser giving such attention as a
is used.
purchaser usually gives, and to cause him to
purchase the one supposing it to be the other”.
Note: cf. (Zuneca v. Natrapharm, G.R.
(Etepha, A.G. v. Director of Patents, G.R. No. L-
No. 211850, 2020 - wherein the SC held
20635, 1966)
that the first to file rule shall prevail
against a user of a mark in good faith.)
The use of an identical or colorable imitation of a
registered trademark by a person for the same
2. Where an infringer who is engaged solely
goods or services or closely related goods or
in the business of printing the mark or
services of another party constitutes
other infringing materials for others is an
infringement. It is a form of unfair competition
innocent infringer, the owner of the right
because there is an attempt to get a free ride on
infringed shall be entitled as against such
the reputation and selling power of another
infringer only to an injunction against
manufacturer by passing of one’s goods as
future printing.
identical or produced by the same manufacturer
3. Where the infringement complained of is
as those carrying the other mark (brand).
contained in or is part of paid
(Commissioner of Internal Revenue v. SanMiguel
advertisement in a periodical or in an
Corp., G.R. Nos. 205045 & 205723, 2017)
electronic communication, the remedies
of the owner of the right infringed as

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C. Damages; Requirement of Notice
against the publisher or distributor of
periodical or electronic communication In any suit for infringement, the owner of the
shall be limited to an injunction against registered mark shall not be entitled to recover
the presentation of such advertising profits or damages UNLESS the acts have been
matter in future issues. committed with knowledge that such imitation is
likely to cause confusion, or to cause mistake, or
Note: This shall apply only to innocent to deceive. Such knowledge is presumed if:
infringers. 1. The registrant gives notice that his mark
is registered by displaying with the mark
4. There shall be no infringement of the words “Registered Mark” or the letter
trademarks or tradenames of imported or R within a circle, or
sold drugs and medicines as well as 2. The defendant had otherwise actual
imported or sold off-patent drugs and
notice of the registration. (Sec. 158, IP
medicines PROVIDED, the marks Code)
appearing thereon have been registered
marks that have not been tampered or D. Penalties
unlawfully modified.
Independent of the civil and administrative
B. Damages sanctions imposed by law, a criminal penalty of
imprisonment from 2 to 5 years and a fine ranging
The owner of a registered mark may recover from P50,000 to P200,000 shall be imposed on
damages from any person who infringes his any person who is found guilty of committing any
rights. The measure of the damages suffered of the acts of trademark infringement, unfair
shall be either: competition, or false description or
1. The reasonable profit which the representation. (Sec. 170, IP Code)
complaining party would have made had
the defendant not infringed his rights, or Power of Court to Order Infringing Material
2. The profit which the defendant actually Destroyed
made out of the infringement. In any action involving a violation of a right of the
owner of the registered mark, the court may order
If the measure of damages cannot be readily that goods found to be infringing be disposed of
ascertained with reasonable certainty, the court outside the channels of commerce in such a
may award as damages a reasonable percentage manner as to avoid any harm caused to the right
based upon the amount of gross sales of the holder or destroyed without compensation of any
defendant or the value of the services in sort. (Sec. 157.1, IP Code)
connection with which the mark or trade name
was used in the infringement of the rights of the
11. UNFAIR COMPETITION
complaining party. (Sec. 156.1, IP Code)
A person who has identified in the mind of the
Note: Where there was actual intent to mislead public the goods he manufactures or deals in, his
the public or to defraud the complainant, the court business or services from those of others,
may double the amount of damages to be whether or not a registered mark is employed,
awarded. (Sec. 156.3, IP Code) has a property right in the goodwill of the said
goods, business or services so identified, which
On application of the complainant, the court may will be protected in the same manner as other
impound during the pendency of the action, sales property rights. (Sec. 168.1, IP Code)
invoices and other documents evidencing sales.
(Sec. 156.2, IP Code) Any person who shall employ deception or any
other means contrary to good faith by which he
shall pass off the goods manufactured by him or

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the effect is to pass off on the public the goods of
in which he deals, or his business, or services for
one man as the goods of another. It is not
those of the one having established such
necessary that any particular means should be
goodwill, or who shall commit any acts calculated
used to this end. (Mighty Corp. v. E. & J. Gallo
to produce said result, shall be guilty of unfair
Winery, G.R. No. 154342, 2004)
competition. (Sec. 168.2, IP Code)

Trademark Unfair
Any conduct the end and probable effect of which
Infringement Competition
is to deceive the public or pass off the goods or
Passing off of
business of a person as that for another Unauthorized
one’s goods
constitutes actionable unfair competition. Essence use of a
as those of
(Alhambra Cigar vs. Mojica, G.R. No. L-8937, trademark
1914) another
Fraudulent
Unnecessary Essential
Essentially, what the law punishes is the act of Intent
giving one’s goods the general appearance of the Prior Prerequisite
Unnecessary
goods of another, which would likely mislead the Registration to the action
buyer into believing that such goods belong to the
latter. (Manuel C. Espiritu et. al. v. Petron Corp. 12. REGISTRATION OF MARKS UNDER
et. al., G.R. No. 170891, 2009) THE MADRID PROTOCOL

The “true test” of unfair competition is whether the The Madrid Protocol provides a cost-effective and
acts of the defendant have the intent of deceiving efficient way for trademark holders to ensure
or are calculated to deceive the ordinary buyer protection for their marks in multiple countries
making his purchases under the ordinary through the filing of one application with a single
conditions of the particular trade to which the office, in one language, with one set of fees, in
controversy relates. One of the essential one currency. The Philippines acceded to the
requisites in an action to restrain unfair Madrid Protocol with effect on July 25, 2012.
competition is proof of fraud; the intent to deceive,
A. Coverage
actual or probable must be shown before the right
to recover can exist. (Superior Commercial An international application may be filed only by
Enterprises v. Kunnan Enterprises Ltd., et. al., a natural person or a legal entity having an
G.R. No. 169974, 2010)
industrial or commercial establishment in, or
being domiciled in, or a national of, the
Trademark Infringement vs. Unfair
Philippines.
Competition
The law on unfair competition is broader and
An international mark registered under the Madrid
more inclusive than the law on trademark
System can only be protected within theterritories
infringement. Trademark infringement is more
of State parties to the Madrid Union.
limited, but it recognizes a more exclusive right
derived from the trademark adoption and
The protection resulting from any international
registration by the person whose goods or
registration effected under the Madrid Protocol
business is first associated with it. The law on
before the date of entry into force of the
trademarks is a specialized subject distinct from
Philippines cannot be extended to it. International
the law on unfair competition, although the two
registrations with dates prior to July 25, 2012 are
subjects are entwined with each other and are
not allowed.
dealt with together in the IP Code.
B. Rights Conferred
Hence, even if one fails to establish his exclusive
property right to a trademark, he may still obtain From the date of the international registration, the
relief on the ground of his competitor's unfairness protection of the mark in each of the designated
or fraud. Conduct constitutes unfair competition if

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Contracting Parties is the same as if the mark had Minimum requirements to submit an
been the subject of an application for registration international application
filed directly with the Office of that Contracting 1. Name, address, and contact details of the
Party. applicant or the address and contact details
of the applicant’s representative, if any;
An international registration is, therefore, 2. The Designated Contracting Parties;
equivalent to a bundle of national registrations. 3. Reproduction of the mark; and
4. Indication of the goods and services for which
Limitations: registration of the mark is sought.
Although an international registration is a single 5. Payment of the following fees:
registration: a. Basic fee;
1. Protection may be refused by some of the b. Complementary fee in respect of
designated Contracting Parties, or the each designated Contracting Partyfor
protection may be limited or renounced which no individual fee is payable;
with respect to only some of the c. Supplementary fee in respect of each
designated Contracting Parties. class of goods and services beyond
2. It may also be invalidated with respect to the third
one or more of the designated
Contracting Parties. Note: No supplementary fee is payable
3. Any action for infringement of an where all the designations are ones in
international registration must be brought respect of which an individual fee has to
separately in each of the Contracting be paid.
Parties concerned.
D. Term of Protection
C. Requirements for Registration
An international registration is effective for 10
A mark may be the subject of an international years. It may be renewed for further periods of 10
application only if it has already been registered, years on payment of the prescribed fees.
or if its registration has been applied for in the
IPOPHL to be able to file an international The international registration may be renewed in
application. This is called the Basic Registration or respect of all the designated Contracting Parties
Basic Application, as the case may be. or in respect of only some of them.

An international application must be presented to Note: It may not be renewed in respect of only
the International Bureau through the IPOPHL. An some of the goods and services recorded in the
international application which is presented direct International Register. If the holder wishes to
to the International Bureau by the applicant will remove some of the goods and services from the
not be considered as such and will be returned to international registration, he must separately
the sender. request cancellation in respect of those goods
and services.
The Philippines, as an office of origin, has
designated the English language for the filing of The method of registration through the IPOPHL,
international applications and any as laid down by the IP Code, is distinct and
communications for transmittal to the separate from the method of registration through
International Bureau through the IPOPHL. All the WIPO, as set in the Madrid Protocol.
other documents required to be submitted directly Comparing the two methods of registration
to the IPOPHL by the applicant must also be in despite their being governed by two separate
English. systems of registration is thus misplaced. (IPAP
v. Sec. Ochoa, G.R. No. 204605, 2016)

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without copying that selection or arrangement
D. COPYRIGHT
from another work), and that it display some
minimal level of creativity. (Feist Publications, Inc.
1. BASIC PRINCIPLES
v. Rural Telephone Service Co., Inc., 499 U.S.
Copyright is not primarily about providing the 340, 1991)
strongest possible protection for copyright
owners so that they have the highest possible Note: The requisite level of creativity is extremely
incentive to create more works. The control given low; even a slight amount will suffice.
to copyright owners is only a means to an end:
the promotion of knowledge and learning. The Authorship
goal of copyright is to promote creativity and An author is “he to whom anything owes its origin;
encourage creation of works. (ABS-CBN Corp. v. originator; maker; one who completes a work of
Gozon, G.R. No. 195956, 2015) science or literature.” (Burrow-Giles Lithographic
Company v. Sarony, 111 U.S. 53, 1884)
The copyright for a work is acquired by an
intellectual creator from the moment of creation Note: The author must be a natural person. (Sec.
even in the absence of registration and deposit 171.1, IP Code)
(Columbia Pictures v. CA, G.R. No. 110318,
1996) 2. COPYRIGHTABLE WORKS

The focus of copyright is the usefulness of the A. Original Literary or Artistic Works
artistic design, and not its marketability. The
central inquiry is whether the article is a work of These are original intellectual creations in the
art. (Ching v. Salinas Sr., G.R. No. 161295, 2005) literary and artistic domain protected from the
moment of their creation and shall include in
Idea-Expression Dichotomy particular:
Unlike a patent, a copyright gives no exclusive a. Books, pamphlets, articles and other writings;
right to the art disclosed; protection is given only b. Periodicals and newspapers;
to the expression of the idea — not the idea itself. c. Lectures, sermons, addresses, dissertations
(Mazer v. Stein, 347 U.S. 201, 1954) prepared for oral delivery, whether or not
reduced in writing or other material form;
Purely Statutory Right d. Letters;
Copyright is purely a statutory right. Being a e. Dramatic or dramatico-musical compositions;
statutory grant, the rights are only such as the choreographic works or entertainment in
statute confers, and may be obtained and dumb shows;
enjoyed only with respect to the subjects and by f. Musical compositions, with or without words;
the persons, and on terms and conditions g. Works of drawing, painting, architecture,
specified in the statute. (Joaquin, Jr. v. Drilon, sculpture, engraving, lithography or other
G.R. No. 108946, 1999) works of art; models or designs for works of
art;
Originality
Originality is the sine qua non of copyright. If the Work of Architecture
basic design reflected in a work or art does not Copyright in a work of architecture shall
owe its origin to the putative copyright holder, include the right to control the erection of any
then that person must add something original to building which reproduces the whole or a
that design, and then only the original addition substantial part of the work either in its
may be copyrighted. (Meshwerks, Inc. v. Toyota original form or in any form recognizably
Motor Sales U.S.A., 528 F.3d 1258, 2008) derived from the original

Originality requires only that the author make the Note: The copyright in any such work shall
selection or arrangement independently (i.e., not include the right to control the

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B. Derivative Works
reconstruction or rehabilitation in the same
style as the original of a building to which that The following derivative works shall be protected
copyright relates. (Sec. 186, IP Code) by copyright:
1. Dramatizations, translations, adaptations,
h. Original ornamental designs or models for abridgments, arrangements, and other
articles of manufacture, whether or not alterations of literary or artistic works; and
registrable as an industrial design, and other 2. Collections of literary, scholarly or artistic
works of applied art; works, and compilations of data and other
i. Illustrations, maps, plans, sketches, charts materials which are original by reason of the
and three-dimensional works relative to selection or coordination or arrangement of
geography, topography, architecture or their contents. (Sec. 173.1, IP Code)
science;
j. Drawings or plastic works of a scientific or Derivative works shall be protected as new
technical character; works, provided however, that such new work:
k. Photographic works including worksproduced a. Shall not affect the force of any subsisting
by a process analogous to photography; copyright upon the original works employed
lantern slides; or any part thereof, or
l. Audiovisual works and cinematographic b. Be construed to imply any right to such use
works and works produced by a process of the original works, or to secure or extend
analogous to cinematography or any process copyright in such original works.
for making audio-visual recordings;
m. Pictorial illustrations and advertisements; Published Edition of Work
n. Computer programs; and In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall
Computer have a copyright consisting merely of the right of
An electronic or similar device having reproduction of the typographical arrangement of
information-processing capabilities
the published edition of the work. (Sec. 174, IP
Code)
Computer Program
A set of instructions expressed in words,
3. NON-COPYRIGHTABLE WORKS
codes, schemes or in any other form, which
is capable when incorporated in a medium No protection shall extend to any:
that the computer can read, or causing the 1. Idea, procedure, system, method or
computer to perform or achieve a particular operation, concept, principle, discovery
task or result. or mere data [IPSMOC-PDD];
2. News of the day and other miscellaneous
o. Other literary, scholarly, scientific and artistic facts having the character of mere items
works. of press information; or
3. Official text of a legislative, administrative
(Sec. 172.1, IP Code) or legal nature, as well as any official
translation thereof. (Sec. 175, IP Code)
Note: Works are protected by the sole fact of their
creation, irrespective of their mode or form of The expression of an idea is protected by
expression, as well as of their content, quality and copyright, not the idea itself.
purpose. (Sec. 172.2, IP Code) It is axiomatic that copyright protection does not
extend to news "events" or the facts or ideas
which are the subject of news reports. But it is
equally well-settled that copyright protection does
extend to the reports themselves, as
distinguished from the substance of the

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of justice, before administrative
information contained in the reports. Copyright
agencies, in deliberative assemblies, and
protects the manner of expression of news
in meetings of public character.
reports, "the particular form or collocation of
words in which the writer has communicated it."
Note: The author of speeches, lectures,
Such protection extends to electronic news
sermons, addresses, and dissertations
reports as well as written reports.
mentioned in the preceding paragraphs
shall have the exclusive right of making a
The idea/expression dichotomy is a complex
collection of his works.
matter if one is trying to determine whether a
certain material is a copy of another. This
Publication or republication by the government in
dichotomy would be more relevant in
a public document of any copyrighted work shall
determining, for instance, whether a stage play
not be taken to cause any abridgment or
was an infringement of an author’s book involving
annulment of the copyright or to authorize any
the same characters and setting. In this case,
use or appropriation of such work without the
however, respondents admitted that the material
under review — which is the subject of the consent of the copyright owner. (Sec. 176.3, IP
Code)
controversy — is an exact copy of the original.
Respondents did not subject ABS-CBN’s footage
to any editing of their own. The news footage did 4. RIGHTS OF COPYRIGHT OWNER
not undergo any transformation where there is a
Copyright or Economic Rights
need to track elements of the original. (ABS-CBN
Copyright or economic rights shall consist of the
Corp. v. Gozon, G.R. No. 195956, 2015)
exclusive right to carry out, authorize or prevent
the following acts:
Works of the Government
1. Reproduction of the work or substantial
A work of the Government is a work created by
portion of the work;
an officer or employee of the Philippine
Government or any of its subdivisions and
Reproduction
instrumentalities, including government-owned or
Making of 1 or more copies, temporary or
controlled corporations as part of his regularly
permanent, in whole or in part, of a work
prescribed official duties. (Sec. 171.11, IP Code)
or a sound recording in any manner or
form
No copyright shall subsist in any work of the
Government of the Philippines. However, the
2. Dramatization, translation, adaptation,
Government is not precluded from receiving and
abridgment, arrangement or other
holding copyrights transferred to it by
transformation of the work;
assignment, bequest or otherwise.
3. The first public distribution of the original
and each copy of the work by sale or
General Rule: Prior approval of the government
other forms of transfer of ownership;
agency or office wherein the work is created shall
4. Rental of the original or a copy of an
be necessary for exploitation of such work for
audiovisual or cinematographic work, a
profit.
work embodied in a sound recording, a
computer program, a compilation of data
Such agency or office may impose as a condition
and other materials or a musical work in
the payment of royalties.
graphic form, irrespective of the
ownership of the original or the copy
Exception: No prior approval or conditions shall
which is the subject of the rental;
be required for the use of any purpose of:
1. Statutes, rules and regulations, or
Rental
2. Speeches, lectures, sermons,addresses,
Transfer of the possession of the original
and dissertations, pronounced, read or
or a copy of a work or a sound recording
rendered in courts

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5. RULES ON OWNERSHIP OF
for a limited period of time, for profit-
making purposes COPYRIGHT

Rules on Ownership
5. Public display of the original or a copy of
Copyright ownership shall be governed by the
the work;
following rules:
6. Public performance of the work; and
TYPE OF
Definitions of Public Performance OWNERSHIP
WORK
a. For Non-audiovisual work –
Original
reciting, playing, dancing, acting or
Literary and Copyright belongs to the
otherwise performing the work, either
Artistic author of the work.
directly or by means of any device or
Works
process
• Co-authors shall be the
For Audiovisual work – showing of original owners of the
copyright.
its images in sequence and the
making of the sounds accompanying • In the absence of
it audible agreement, rights shall
For Sound recording – making the be governed by the rules
on co-ownership.
recorded sounds audible at a place or
at places where persons outside the Joint
Note: If a work of joint
normal circle of a family and that Authorship
authorship consists of parts
family’s closest social acquaintances
that can be used separately
are or can be present
and the author of each part
can be identified, the author
7. Other communication to the public of the
work, e.g. online/Internet. of each part shall be the
original owner of the
Communication to the public copyright in the part that he
has created.
Any communication to the public, including
broadcasting, rebroadcasting, retransmitting Copyright shall belong to:
by cable, broadcasting, and retransmitting by 1. Employee: creation of
satellite, and includes the making of a work the object of copyright is
available to the public by wire or wireless not a part of his regular
means in such a way that members of the duties even if the
public may access these works from a place employee uses the time,
and time individually chosen by them facilities and materials of
Employee’s
the employer.
Work
2. Employer: work is the
result of the performance
of his regularly-assigned
duties, UNLESS there is
an agreement, expressor
implied, to the
contrary
Ownership of the work
Independent belongs to the person other
Contractor’s than the employer who
Work commissioned the work and
who pays for it.

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Copyright remains with the The purpose and character requirement

creator, unless there is a is important in view of copyright’s goal to
written stipulation to the promote creativity and encourage
contrary. creation of works. Hence, commercialuse
• Copyright belongs to the of the copyrighted work can be weighed
producer, the author of against fair use.
the scenario, the
composer of the music, The “transformative test” is generally
the film director, and the used in reviewing the purpose and
author of the work so character of the usage of the copyrighted
adapted. work. Courts must look into whether the
• The producer shall copy of the work adds “new expression,
exercise the copyright to meaning or message” to transform it into
Audiovisual
an extent required for the something else. (ABS-CBN Corp. v.
Work
exhibition of the work in Gozon, G.R. No. 195956, 2015)
any manner.
2. The nature of the copyrighted work;
Exception: Right to collect
performing license fees for If the nature of the work is more factual
the performance of musical than creative, then fair use will be
compositions, with or without weighed in favor of the user. (ABS-CBN
words, which are Corp. v. Gozon, G.R. No. 195956, 2015)
incorporated into the work
Copyright belongs to the 3. The amount and substantiality of the
writer subject to the portion used in relation to the copyrighted
provisions of Article 723 of work as a whole; and
the Civil Code wherein it
Letters provides that the court may An exact reproduction of a copyrighted
authorize their publication or work, compared to a small portion of it,
dissemination if the public can result in the conclusion that its use is
good or the interest of justice not fair.
so requires.
However, there may also be cases where,
6. LIMITATIONS ON COPYRIGHT though the entirety of the copyrighted
work is used without consent, its purpose
A. Fair Use determines that theusage is still fair. For
example, a parody using a substantial
The fair use of a copyrighted work for criticism, amount of copyrighted work may be
comment, news reporting, teaching including permissible as fair use as opposed to a
limited number of copies for classroom use, copy of a work produced purely for
scholarship, research, and similar purposes is not economic gain. (ABS-CBN Corp. v.
an infringement of copyright. Gozon, G.R. No. 195956, 2015)

In determining whether the use made of a work in 4. The effect of the use upon the potential
any particular case is fair use, the factors to be market for or value of the copyrighted
considered shall include: [PuCha-Nat-Su-E] work. (Sec. 185.1, IP Code)
1. The purpose and character of the use,
including whether such use is of a If a court finds that the use had or will
commercial nature or is for non-profit have a negative impact on the
educational purposes;

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a. Selling, letting for hire, or by way of trade
copyrighted work's market, then the use
offering or exposing for sale, or hire, the
is deemed unfair. (ABS-CBN Corp. v. article
Gozon, G.R. No. 195956, 2015) b. Distributing the article for purpose of
trade, or for any other purpose to an
Note: That a work is unpublished shall not by extent that will prejudice the rights of the
itself bar a finding of fair use if such finding is copyright owner in the work; or
made upon consideration of all the above factors. c. Trade exhibit of the article in public. (Sec.
(Sec. 185.2, IP Code) 217.3, IP Code)

Copyright Infringement
Doctrine of Fair Use
Infringement of a copyright is a trespass on a
Fair use is a privilege to use the copyrighted
private domain owned and occupied by the owner
material in a reasonable manner without the of the copyright, and, therefore, protected by law,
consent of the copyright owner or as copying the and infringement of copyright, or piracy, which is
theme or ideas rather than their expression. Fair a synonymous term in this connection, consists in
use is an exception to the copyright owner’s the doing by any person, without the consent of
monopoly of the use of the work to avoid stifling the owner of the copyright, of anything the sole
the very creativity which that law is designed to right to do which is conferred by statute on the
foster. (ABS-CBN Corp. v. Gozon, G.R. No. owner of the copyright. (Columbia Pictures, Inc.
195956, 2015) v. Court of Appeals, G.R. No. 110318, 1996)

Gravamen of Copyright Infringement

No question of fair or unfair use arises, however,
The gravamen of copyright infringement is not
if no copying is proved to begin with. This is in merely the unauthorized “manufacturing” of
consonance with the principle that there can be intellectual works but rather the unauthorized
no infringement if there was no copying. It is only performance of any of the acts covered by Sec.
where some form of copying has been shown that 177 (economic rights). Hence, any person who
it becomes necessary to determine whether it has performs any of the acts thereunder without
been carried to an “unfair,” that is, illegal, extent. obtaining the copyright owner’s prior consent
(Habana v. Robles, G.R. No. 131522, 1999) renders himself civilly and criminally liable for
copyright infringement. (NBI - Microsoft Corp. v.
Hwang, G.R. No. 147043, 2005)
7. COPYRIGHT INFRINGEMENT
When Committed
Any person infringes a right protected under the By any person who shall use original literary or
IP Code when one: artistic works, or derivative works, without the
a. Directly commits an infringement (direct copyright owner’s consent in such a manner as to
infringement); violate the foregoing copy and economic rights.
b. Benefits from the infringing activity of For a claim of copyright infringement to prevail,
another person who commits an the evidence on record must demonstrate:
infringement if the person benefiting has a. Ownership of a validly copyrighted
been given notice of the infringing activity material by the complainant; and
and has the right and ability to control the b. Infringement of the copyright by the
activities of the other person (vicarious respondent. (Olano v. Eng Co, G.R. No.
infringement); or 195835, 2016)
c. With knowledge of infringing activity,
induces, causes or materially contributes The Intellectual Property Code is malum
to the infringing conduct of another prohibitum and prescribes a strict liability for
(direct infringement). (Sec. 216, IP Code) copyright infringement. Good faith, lack of
knowledge of the copyright, or lack of intent to
Also includes the act of any person who at the infringe is not a defense against copyright
time when copyright subsists in a work has in his infringement. (ABS-CBN Corp. v. Gozon, G.R.
possession an article which he known, or ought No. 195956, 2015)
to know, to be an infringing copy of the work for
the purpose of:

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infringing copies of the work even in the event
A. Remedies of acquittal in a criminal case.
Any person infringing a right protected under the Statutory Damages
IP Code shall be liable:
The copyright owner may elect, at any time before
a. To an injunction restraining such
final judgment is rendered, to recover instead of
infringement.
actual damages and profits, an award of statutory
damages for all infringements involved in an
The court may also order the defendant to action in a sum equivalent to the filing fee of the
desist from an infringement to prevent the infringement action but not less than P50,000.00.
entry into the channels of commerce of
In awarding statutory damages, the court may
imported goods that involve an infringement, consider the following factors:
immediately after customs clearance of such
1. The nature and purpose of the infringing
goods.
act;
2. The flagrancy of the infringement;
b. To pay to the copyright proprietor or his 3. Whether the defendant acted in bad faith;
assigns or heirs such actual damages, 4. The need for deterrence;
including legal costs and other expenses, as
5. Any loss that the plaintiff has suffered or
he may have incurred due to the infringement
is likely to suffer by reason of the
as well as the profits the infringer may have
infringement; and
made due to such infringement.
6. Any benefit shown to have accrued to the
defendant by reason of the infringement.
Note: In proving profits, the plaintiff shall be
(Sec. 216.1, IP Code)
required to prove sales only and the
defendant shall be required to prove every B. Criminal Penalties
element of cost which he claims or, in lieu of
actual damages and profits, such damages The copyright owner can file a criminal, civil or
which, to the court, shall appear to be just and administrative action for copyright infringement.
shall not be regarded as penalty.
Where Filed
The amount of damages to be awarded shall Filed in the court situated in
be doubled against any person who: Criminal Case the place where the violation
1. Circumvents effective technological occurred
measures; or Filed at the Bureau of Legal
2. Having reasonable grounds to know that Administrative Affairs at the Intellectual
it will induce, enable, facilitate or conceal Case Property Office of the
the infringement, remove or alter any Philippines
electronic rights management
Filed in the appropriate court
information from a copy of a work
located at the place where
the defendant resides/is
c. Deliver under oath, for impounding during the Civil Case
located, or where the
pendency of the action, upon such terms and
plaintiff resides/is located, at
conditions as the court may prescribe, sales the option of the plaintiff
invoices and other documents evidencing
sales, all articles and their packaging alleged
to infringe a copyright and implements for
making them.
d. Deliver under oath for destruction without any
compensation all infringing copies or devices,
as well as all plates, molds, or other means
for making such infringing copies as the court
may order.
e. Such other terms and conditions, including
the payment of moral and exemplary
damages, which the court may deem proper,
wise and equitable and the destruction of

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Penalties
Imprisonment of between 1
to 3 years and a fine of
First Offense
between 50,000 to 150,000
pesos
Imprisonment of 3 years and
Second 1 day to six years plus a fine
Offense of between 150,000 to
500,000 pesos
Imprisonment of 6 years and
Third and
1 day to 9 years plus a fine
Subsequent
ranging from 500,000 to
Offenses
1,500,000 pesos

In all cases, subsidiary imprisonment in cases of

insolvency. (Sec. 217.1, IP Code)

In Determining Number of Years of

Imprisonment and Amount of Fine
The court shall consider the value of the infringing
materials that the defendant has produced or
manufactured and the damage that the copyright
owner has suffered by reason of the infringement:
Provided, That the respective maximum penalty
stated in Section 217.1. (a), (b) and (c) herein for
the first, second, third and subsequent offense,
shall be imposed when the infringement is
committed by:
a. The circumvention of effective
technological measures;
b. The removal or alteration of any
electronic rights management
information from a copy of a work, sound
recording, or fixation of a performance,
by a person, knowingly and without
authority; or
c. The distribution, importation for
distribution, broadcast, or communication
to the public of works or copies of works,
by a person without authority, knowing
that electronic rights management
information has been removed or altered
without authority. (Sec. 217.2, IP Code)

————- end of topic ————-

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SPECIAL LAWS
Commercial Law
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c. Obligations Secured
VIII. SPECIAL LAWS d. Surety Distinguished From
Standby Letter of Credit
TOPIC OUTLINE UNDER THE SYLLABUS: e. Surety Distinguished From
Guaranty
VII. SPECIAL LAWS f. Surety Distinguished From
A. SECURED TRANSACTIONS Joint and Solidary Obligations
1. Personal Property Securities Act 5. Letters of Credit
a. Definitions and Scope a. Definition and Purpose
b. Asset-Specific Rules b. Kinds of Letters of Credit
i. Future Property c. Rule of Strict Compliance
ii. Rights to Proceeds and d. Independence Principle
Commingled Funds
iii. Tangible Assets
Commingled in a Mass
iv. Accounts Receivables
c. Perfection of Security
Interests
d. Registration
e. Priority of Security Interests
f. Tangible Assets; Intangible
Assets
g. Enforcement of Security
Interests
h. Prior Interests and the
Transitional Period
2. Real Estate Mortgage Law
a. Definition and Characteristics
i. Obligations Secured by
Real Estate Mortgage
ii. Object of Real Estate
Mortgage
iii. Right to Alienate
Mortgage Credit
iv. Right to Alienate
Collateral
b. Essential Requisites
3. Guaranty
a. Nature and Extent of
Guaranty
i. Obligation Secured by
Guaranty
ii. Parties to a Guaranty
iii. Excussion
iv. Right to Protection
v. Right to Indemnification
vi. Right to Subrogation
vii. Rights of Co-Guarantors
b. Effects of Guaranty
c. Extinguishment of Guaranty
d. Legal and Judicial Bonds
4. Surety
a. Concept
b. Form of Surety

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secured creditor with respect to the security,
A. SECURED TRANSACTIONS
without further consent from the grantor
1. PERSONAL PROPERTY SECURITIES
With respect to rights to deposit account
ACT
It is an agreement in writing among the deposit-
A. DEFINITIONS AND SCOPE taking institution, the grantor, and the secured
creditor where the deposit-taking institution
Note: the PPSA repealed the following laws: agrees to follow the instructions from the
1. The Chattel Mortgage Law secured creditor with respect to the payment
2. Articles 2085-2123 (pledge), 2127 of funds credited to the deposit account
(mortgage extends to accessions), 2140- without further consent from the grantor.
2141 (chattel mortgage), 2241, 2243,and
2246-2247 (preference of credits for With respect to commodity contracts
specific movable property) of the Civil It is an agreement in writing among the grantor,
Code secured creditor, and intermediary, according
3. Sec. 13 of the Financing Company Act of to which the commodity intermediary will
1998 (Registry of Deeds shall maintain a apply any value distributed by the secured
register of financial leases) creditor without further consent by the
4. Sec. 114-116 (recording and fees for commodity customer or grantor
recording of chattel mortgages), and
c. Grantor
partially Sec. 10 (general function of the
Register of Deeds; insofar as
A grantor may be: (BuTTLGG)
inconsistent with the PPSA) of the
(a) A Buyer or other Transferee of a collateral
Property Registration Decree
that acquires it right subject to a security
5. Sec. 5(e) of the Land Transportation and
interest;
Traffic Code (encumbrances of motor
(b) A Transferor in an outright transfer of an
vehicles)
accounts receivable; or
1. TERMS (c) A Lessee of Goods
(d) Grantor of security interest in collateral to
a. Commodity Contact secure its own obligation or of another
person;
A commodity futures contract, an option on a d. Non-intermediated Securities
commodity futures contract, a commodity
option, or another contract if the option is: Such are:
1. Traded on or subject to the rules of a board (a) securities other than those credited to a
of trade that has been designated as a securities account; and
contract market for such a contract; or (b) rights in securities resulting from the
2. Traded on a foreign commodity board of credit of securities to a securities account
trade, exchange, or market, and is carried on
the books of a commodity intermediary for a
e. Notice
commodity customer;
A statement of information that is registered in the
b. Control Agreement Registry relating to a security interest or lien.

With respect to securities The term “notice” includes:

It is an agreement in writing among the issuer or (a) Initial notice;
the intermediary, the grantor, and the secured (b) amendment notice;
creditor, according to which the intermediary (c) termination notice;
agrees to follow the instructions of the

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also provide for the language to be used.
f. Proceeds
(PPSA, Sec. 6)
Proceeds may be:
(a) any property received upon sale, lease The security agreement may provide for the
or other disposition of collateral; or creation of a security interest in a future
(b) whatever is collected on or distributed property, but the security interest in that future
with respect to collateral; property is created only when the grantor
(c) claims arising out of the loss or damage acquires rights in it or the power to encumber
to the collateral; it. (PPSA, Sec. 5(b))
(d) as well as a right to insurance payment
or other compensation for loss ordamage A description of the collateral is sufficient if it
of the collateral reasonably identifies the collateral; a description
such as “all personal property”, “all equipment”,
“all inventory”, or “all personal property within a
g. Purchase Money Security Interest generic category” of the grantor shall be sufficient
A security interest in goods taken by the seller to
secure the price or by a person who gives value
to enable the grantor to acquire the goods to the k. Writing
extent that the credit is used for that purpose For purposes of this act, “writing” includes
electronic records
h. Registry 2. SCOPE
The centralized and nationwide electronic registry
established in the Land Registration Authority GR: Applies to all transactions that secure an
(LRA) where notice of a security interest and a obligation with a movable collateral
lien in personal property may be registered
EXC:
i. Secured Creditor (a) interests in aircrafts subject to the Civil
A person that has a security interest. Aviation Authority Act of 2008; and
For the purposes of registration and priority only: (b) interests in ships subject the Ship
Mortgage Decree of 1978(Sec. 4)
(a) includes a buyer of account receivable and a
lessor of goods under an operating lease for
not less than one (1) year B. ASSET-SPECIFIC RULES

j. Security Interest a. Future Property

A property right in collateral that secures
As to the creation of a security interest
payment or other performance of an obligation,
A security agreement may provide for the creation
regardless of whether the parties have
of a security interest in a future property, but the
denominated it as a security interest, and
security interest in that property is created only
regardless of the type of asset, the status of the
when the grantor acquires rights in it or the
grantor or secured creditor, or the nature of the
power to encumber it.(Sec. 5b)
secured obligation; including the right of a buyer
of accounts receivable and a lessor under an b. Rights to proceeds and comingled funds
operating lease for not less than one (1) year
These are the rules to be followed (Sec. 8):
A security interest is created by a security (a) A security interest in personal property shall
agreement. (PPSA, Sec. 5(a)) extend to its identifiable or traceable proceeds.

A security agreement should be contained in a

written contract signedby the parties. It should

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debtor of the receivable is required to make
(b) Where proceeds in the form of funds credited
payment.
to a deposit account or money are commingled
with other funds or money:
d. Accounts receivable
i. The security interest shall extend to the
commingled money or funds, Section 3.08 Security Interest in Certain
notwithstanding that the proceeds have Accounts Receivable.
ceased to be identifiable to the extent A security interest in an account receivable shall
they remain traceable; be effective notwithstanding any agreement
between the grantor and the account debtor or
ii. The security interest in the commingled any secured creditor limiting in any way the
funds or money shall be limited to the grantor's right to create a security interest;
amount of the proceeds immediately Provided: Nothing in this section affects the right
before they were commingled; and of a buyer to create a security interest over the
account receivable. Provided, further: that any
iii. If at any time after the commingling, the release of information is subject to agreements
balance credited to the deposit account on confidentiality.
or the amount of the commingled money
is less than the amount of the proceeds Nothing in this section shall affect any obligation
immediately before they were or liability of the grantor for breach of the
commingled, the security interest against agreement in subsection (a).
the commingled funds or money shall be
limited to the lowest amount of the Any stipulation limiting the grantor's right to create
commingled funds or money between the a security interest shall be void.
time when the proceeds were
commingled and the time the security This section shall apply only to accounts
interest in the proceeds is claimed. receivable arising from:
i. A contract for the supply or lease of
c. Tangible assets commingled in a mass goods or services other than
financial services;
Section 3.07 of the IRR. Security Interest Over ii. A construction contract or contract
Tangible Assets Commingled in a Mass for the sale or lease of real property;
A security interest in a tangible asset that is and
commingled in a mass extends to the mass. iii. A contract for the sale, lease or
license of intellectual property.
A security interest that extends to a mass is
limited to the same proportion of the mass as the C. PERFECTION OF SECURITY
quantity of the encumbered asset bore to the INTERESTS
quantity of the entire mass immediately after the
commingling. SECTION 11. PERFECTION OF SECURITY
INTEREST.
Section 3.09 of the IRR. Protection of Account
Debtor A security interest shall be perfected when it has
Except as otherwise provided in the PPSA and been created and the secured creditor has taken
these Rules, the creation of a security interest in one of the actions in accordance with Section 12.
a receivable does not, without the consent of the
debtor of the receivable, affect its rights and Hence, to perfect a security interest, it must be
obligations, including the payment terms created then accompanied by either registration,
contained in the contract giving rise to the possession, or control; depending on the
receivable. A payment instruction may change collateral.
the person, address or account to which the

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so requests. A deposit-taking institution or an
On perfection, a security interest becomes
intermediary that has entered into such an
effective against third parties.
agreement shall not be required to confirm the
existence of the agreement to another person
SECTION 12. MEANS OF PERFECTION. unless requested to do so by the grantor.
A SECURITY INTEREST MAY BE
SECTION 14. PERFECTION IN PROCEEDS
PERFECTED THROUGH THE FOLLOWING
MEANS: (RPC)
Upon disposition of collateral, a security
(a) Registration of a notice with the Registry;
interest shall extend to proceeds of the
(b) Possession (actual or constructive) of the
collateral without further act and be
collateral by the secured creditor; and
continuously perfected, if the proceeds are in the
(c) Control of investment property and deposit
form of money, accounts receivable,
account.
negotiable instruments or deposit accounts.
A security interest in any tangible asset may be
Upon disposition, if the proceeds are in a form
perfected by registration or possession. Asecurity
different from money, accounts receivable,
interest in investment property and deposit
negotiable instruments or deposit accounts, the
account may be perfected by registration or
security interest in the proceeds must be
control.
perfected by one of the means applicable to the
relevant type of collateral within fifteen (15) days
Perfection in Tangible v. Intangible Assets
after the grantor receives such proceeds;
TANGIBLE ASSETS INTANGIBLE
otherwise, the security interest in such proceeds
ASSETS
shall not be effective against third parties.
May be perfected May be perfected
through registration through registration
or possession or control.
SECTION 15. CHANGE IN MEANS OF
(Please refer to
PERFECTION
different modes of
perfection for specific A security interest shall remain perfected despite
intangible assets) a change in the means for achieving perfection:
provided, that there was no time when the
security interest was not perfected.
SECTION 13. PERFECTION BY CONTROL

A security interest in a deposit account or

SECTION 16. ASSIGNMENT OF SECURITY
investment property may be perfected by control
through: INTEREST
(a) The creation of the security interest in favor
If a secured creditor assigns a perfected security
of the deposit-taking institution or the
interest, an amendment notice may be registered
intermediary;
to reflect the assignment.
(b) The conclusion of a control agreement; or
(c) For an investment property that is an
electronic security not held with an D. REGISTRATION
intermediary, the notation of the security
interest in the books maintained by or on SECTION 26. ESTABLISHMENT OF
behalf of the issuer for the purpose of ELECTRONIC REGISTRY
recording the name of the holder of the
securities. The Registry shall be established in and
(d) Nothing in this Act shall require a deposit- administered by the LRA.
taking institution or an intermediary to enter
into a control agreement, even if the grantor

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SECTION 29. ONE NOTICE SUFFICIENT
The Registry shall provide electronic means for
registration and searching of notices. FOR SECURITY INTERESTS UNDER
MULTIPLE SECURITY AGREEMENTS

SECTION 27. PUBLIC RECORD The registration of a single notice may relate to
security interests under one or more security
Information contained in a registered notice shall agreements.
be considered as a public record.
SECTION 30. EFFECTIVENESS OF NOTICE
Any person may search notices registered in the
Registry. As to the time of effectivity
A notice shall be effective at the time it is
SECTION 28. SUFFICIENCY OF NOTICE discoverable on the records of the Registry.

An initial notice of security interest shall not be As to its duration

rejected: It is effective for the duration of the term indicated
(a) If it identifies the grantor by an in the notice unless a continuation notice is
identification number, as further prescribed in registered before the term lapses.
the regulations;
(b) If it identifies the secured creditor or an As to substantial compliance
agent of the secured creditor by name; A notice substantially complying with the
(c) If it provides an address for the grantor requirements of the PPSA shall be effective unless
and secured creditor or its agent; it is seriously misleading.
(d) If it describes the collateral: and
(e) If the prescribed fee has been tendered, or A notice that may not be retrieved in a search of
an arrangement has been made for payment the Registry against the correct identifier of the
of fees by other means. grantor shall be ineffective with respect to that
grantor.
If the Registry rejects to register a notice, it shall
promptly communicate the fact of and reason for SECTION 31. SERIOUSLY MISLEADING
its rejection to the person who submitted the NOTICE
notice.
A seriously misleading notice is one that doesn’t
Each grantor must authorize the registration of an provide the grantor’s identification number.
initial notice by signing a security agreement or
otherwise in writing. SECTION 32. AMENDMENT OF NOTICE

A notice may be registered before a security A notice may be amended by the registration of
agreement is concluded. Once a security an amendment notice that:
agreement is concluded, the date of registration (a) Identifies the initial notice by its
of the notice shall be reckoned from the date the registration number; and
notice was registered. (b) Provides the new information.

A notice of lien may be registered by a lien holder Rules on amendment of the notice:
without the consent of the person against whom (a) Adding collateral that is not proceeds
the lien is sought to be enforced. must be authorized by the grantor in
writing.
(b) Adding a grantor must be authorized
by the added grantor in writing.

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(c) When the secured creditor has agreed
Instances when a notice must be amended:
to release part of the collateral
a) To continue the effectiveness of thenotice
described in the notice
by filing an amendment notice that identifies
(d) None Existence. When there is no
the original by its registration number.
existing security agreement between the
b) When there is mistake; when the collateral
secured creditor and the grantor.
described in the notice includes an item or
property which is not under the security SECTION 35. REGISTRY DUTIES
agreement. (Sec. 39)
c) When the secured creditor assigns a
The following are the duties of the registry:
perfected security interest. (Sec. 16)
(a) Assign a unique registration number;
(b) Create a record that bears the number
Other Rules
assigned to the initial notice and the date
An amendment notice shall be effective only as
and time of registration; and
to each secured creditor who authorizes it.
(c) Maintain the record for public inspection.
(d) Index notices by the identification
An amendment notice that adds collateral or a
number of the grantor and, for notices
grantor shall be effective as to the added
containing a serial number of a motor
collateral or grantor from the date of its
vehicle, by serial number.
registration.
(e) Provide a copy of the electronic record of
SECTION 33. CONTINUATION OF NOTICE the notice, including the registration
number and the date and time of
registration to the person who submitted
Continuation of notice may be registered only
it.
within six (6) months before the expiration of the
(f) Maintain the capability to retrieve a
effective period of the notice.
record by the identification number of the
SECTION 34. TERMINATION OF grantor, and by serial number of a motor
EFFECTIVENESS OF A NOTICE vehicle.
(g) Maintain records of lapsed notices for a
The effectiveness of a notice may be terminated period of ten (10) years after the lapse.
by registering a termination notice that:
(a) Identifies the initial notice by its The duties of the Registry shall be merely
registration number; and administrative in nature. By registering a notice
(b) Identifies each secured creditor who or refusing to register a notice, the Registry does
authorizes the registration of the not determine the sufficiency, correctness,
termination notice. authenticity, or validity of any information
contained in the notice.
A termination notice terminates effectiveness of
SECTION 36. SEARCH OF REGISTRY
the notice as to each authorizing secured
creditor. RECORDS AND CERTIFIED REPORT.

Instances when a notice may be terminated The Registry shall communicate the following
(Sec. 39): information to any person who requests it:
(a) Whether there are any unlapsed
(a) When the obligation has been paid and
notices in the Registry that indicate
there is no drag net clause
the grantor's identification number or
(b) When the security interest is vehicle serial number that exactly
extinguished in accordance with this matches the relevant criterion
act provided by the searcher;

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in a case of mistake or that was never a
(b) The registration number, and the date
collateral under a security agreement
and time of registration of each
between the secured creditor and the
notice; and
grantor
(c) All of the information contained in
each notice. SECTION 41. PROCEDURE FOR
NONCOMPLIANCE WITH DEMAND
If requested, the Registry shall issue a certified
report of the results of a search that is an official
If the secured creditor fails to comply with the
record of the Registry and shall be admissible into
demand within fifteen working days after its
evidence in judicial proceedings without extrinsic
receipt, the person giving the demand under
evidence of its authenticity.
Section 39 may ask the proper court to issue an
SECTION 37. DISCLOSURE OF order terminating or amending the notice as
appropriate.
INFORMATION.
SECTION 42. COMPULSORY AMENDMENT
The secured creditor must provide to the grantor
OR TERMINATION BY COURT ORDER
at its request:
(a) The current amount of the unpaid
The court may, on application by the grantor,
secured obligation; and
issue an order that the notice be terminated or
(b) A list of assets currently subject to a
amended in accordance with the demand, which
security interest.
order shall be conclusive and binding-on the
LRA
The secured creditor may require payment of a
fee for each request made by the grantor in
Provided, That the secured creditor who
subsection (a) in this section, but the grantor is
disagrees with the order of the court may appeal
entitled to a reply without charge once every
the order.
six (6) months.
The court may make any other order it deems
A security interest in a deposit account shall
proper for the purpose of giving effect to an order
not:
under the previous paragraph.
(a) Affect the rights and obligations of the
deposit-taking institution without its
The LRA shall amend or terminate a notice in
consent; or
accordance with a court order as soon as
(b) Require the deposit-taking institution to
reasonably practicable after receiving the such.
provide any information about the
deposit account to third parties. SECTION 43. NO FEE FOR COMPLIANCE
OF DEMAND
SECTION 40. MATTERS THAT MAY BE
REQUIRED BY DEMAND
A secured creditor shall not charge any fee for
compliance with a demand received under section
Upon receipt of the demand for termination or
39.
amendment notice under Section 39, the secured
creditor must register such within fifteen working
SECTION 44. WHEN REGISTRATION AND
days:
SEARCH CONSTITUTES INTERFERENCE
(a) Terminating the registration in case of
performance of obligation, non-existence WITH PRIVACY OF INDIVIDUAL
of the security agreement, or
A person who submitted a notice for registration
extinguishment of the security interest
under Section 39; or carried out a search of the Registry with a
frivolous, malicious or criminal purpose or
(b) Amending the registration to release
some property that is no longer collateral

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F. TANGIBLE ASSETS; INTANGIBLE
intent shall be subject to civil and criminal
penalties according to the relevant laws. ASSETS

E. PRIORITY OF SECURITY INTERESTS PRIORITY RULES FOR TANGIBLE ASSETS

Priority of interest is based on the date of SECTION 6.03 OF THE IRR - PRIORITY
perfection and not the date of creation. FOR TANGIBLE ASSETS EMBODIED IN
INSTRUMENTS.
PRIORITY OF INTEREST WITH RESPECT
TO SPECIFIC COLLATERAL Security Certificates
Goods Secured Creditor: Anyone
Secured Creditor: Person who provides services Mode of Perfection: Registration or Possession
or materials in the ordinary course of business Preference: Possession over Registration (Sec.
Mode of Perfection: Possession 18(e) of PPSA; Sec. 6.03(a) of IRR)
Preferred over: ALL until payment (Sec. 20)
Instruments or Negotiable Documents
Purchase Money Security Interest (PMSI) in Secured Creditor: Anyone
Equipment or its Proceeds Mode of Perfection: Registration or Possession
Secured Creditor: Unpaid seller Preference: Possession over Registration (Sec.
Mode of Perfection: Registration of notice within 19 of PPSA; Sec. 6.03(b) of IRR)
three business days after grantor obtains
possession Livestock
Preferred over: ALL (Sec. 23(a)) Secured Creditor: Persons who provide food or
medicine for the livestock (ex. Vet)
PMSI in Consumer Goods
Secured Creditor: Unpaid seller Mode of Perfection: Registration or Possession
Mode of Perfection: Registration of notice within PLUS written notice to holders of conflicting
three business days after grantor obtains interest before grantor obtains possession
possession Preferred over: ALL EXCEPT perfected PMSI
Preferred over: ALL (Sec. 23 (b)) over the livestock. (Sec. 24 of PPSA; Sec. 6.03(c)
of IRR)
PMSI in Livestock, Inventory, and Intellectual
Property PRIORITY RULES FOR INTANGIBLE
Secured Creditor: Unpaid seller ASSETS
Mode of Perfection:
a. When the grantor receives possession of
SECTION 6.02 PRIORITY FOR
the inventory or livestock, or acquires the INVESTMENT PROPERTY AND DEPOSIT
rights in the intellectual property ACCOUNTS.
b. Registration or Control PLUS written
notice to holders of conflicting interest Deposit Account
before grantor obtains possession Secured Creditor: Deposit-taking Institution
Preferred over: ALL (Secs. 23(c); 24) (bank)
Mode of Perfection: Control or Possession
Preferred over: ALL(Sec. 13 of PPSA; Sec.
6.02(a) of IRR)

Deposit Account/Investment Account

Secured Creditor: Anyone, except deposit-taking
institution or intermediary
Mode of Perfection: Control

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G. ENFORCEMENT OF SECURITY
Preferred over: Security interests perfected
through registration and control agreements INTERESTS
concluded at a later time. (Sec. 13 of PPSA; Sec.
SECTION 45. RIGHT OF REDEMPTION.
6.02 (b) of IRR)
Any person who is entitled to receive a notification
The order of priority among competing security
of disposition under Sec. 51 is entitled to redeem
interests in a deposit account or investment
the collateral by:
property that were perfected by the conclusion of
(a) Paying; or
control agreements shall be determined on the
(b) Performing the secured obligation in full,
basis of the time of conclusion of the control
including the reasonable cost of enforcement.
agreements. (Sec. 6.02(c) of IRR)
The right of redemption may be exercised,
Any rights to set-off that the deposit-taking
unless:
institution may have against a grantor's right to
(a) The person entitled to redeem has, after the
payment of funds credited to a deposit account
default, waived in writing the right to redeem
shall have priority over a security interest in the
(waiver);
deposit account. (Sec. 6.02(d) of IRR)
(b) The collateral is sold or otherwise disposed of,
acquired or collected by the secured creditor
Electronic Securities not held by
or until the conclusion of an agreement by the
intermediaries
secured creditor for that purpose
Secured Creditor: Anyone
(disposition); and
Mode of Perfection: Notation in the books
(c) The secured creditor has retained the
maintained by or on behalf of the issuer
collateral (retention).
Preferred over: ALL (Sec. 6.02(e) of IRR)
SECTION 46. RIGHT OF HIGHER-RANKING
Electronic Securities not held by SECURED. CREDITOR TO TAKE OVER
intermediaries
ENFORCEMENT.
Secured Creditor: Anyone
Mode of Perfection: Control Even if another secured creditor or a lien holder
Preferred over: Security interests perfected
has commenced enforcement, a secured
through registration and control agreements
creditor whose security-interest has priority
concluded at a later time. (Sec. 6.02(f) of IRR)
over that of the enforcing secured creditor or
lien holder shall be entitled to take over the
Electronic Securities held by intermediaries
enforcement process.
Secured Creditor: Anyone
Mode of Perfection: Control
This right may be invoked before the collateral is
Preferred over: Security interests in the same
sold or otherwise disposed of, or retained by the
securities perfected by any other (Sec. 6.02(g) of
secured creditor or until the conclusion of an
IRR)
agreement by the secured creditor for that
purpose.
The order of priority among competing security
interests in electronic securities not held with an
The right of the higher-ranking secured creditor to
intermediary perfected by the conclusion of
take over shall include the right to enforce the
control agreements is determined on the basis of
rights by any method available to a secured
the time of conclusion of the control agreements.
creditor under this Act.
(Sec. 6.02(h) of IRR)

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4. Breach of the peace shall include
SECTION 47. EXPEDITED REPOSSESSION
entering the private residence of the
OF THE COLLATERAL.
grantor without permission, resorting
to physical violence or intimidation, or
The secured creditor may take possession of the
being accompanied by a law
collateral without judicial process if the security
enforcement officer when taking
agreement so stipulates: Provided, That
possession or confronting the
possession can be taken without a breach of the
grantor.
peace.
SECTION 48. RECOVERY IN SPECIAL
(a) If the collateral is a fixture, the secured CASES.
creditor, if it has priority over all owners and
mortgagees, may remove the fixture from the Upon default, the secured creditor, without
real property to which it is affixed, while judicial process may:
exercising due care. (a) Instruct the account debtor to make payment
(b) If, upon default, the secured creditor cannot to the secured creditor, and apply such to
take possession of collateral without breach of satisfy the obligation secured by the security
the peace, the secured creditor may proceed interest after deducting the secured creditor’s
as follows: reasonable collection expenses.
1. An expedited hearing upon
application for an order granting him On request of the account debtor, the secured
possession of the collateral. creditor shall provide evidence of its security
interest to the account debtor when it delivers
The application shall include a the instruction to the account debtor;
statement by the secured creditor,
under oath, verifying the existence of (b) In a negotiable document that is perfected by
the security agreement and possession, proceed as to the negotiable
identifying at least one event of document or goods covered;
default by the debtor under the
security agreement; (c) In a deposit account maintained by the
secured creditor, apply the balance of the deposit
2. The secured creditor shall provide the account to the obligation secured; and
debtor, grantor, and, if the collateral is
a fixture, any real estate mortgagee, (d) In other cases of security interest in a deposit
a copy of the application, including all account perfected by control, instruct the deposit-
supporting documents and evidence taking institution to pay the balance of the deposit
for the order granting the secured account to the secured creditor’s account.
creditor possession; and
SECTION 49. RIGHT TO DISPOSE OF
3. He will be entitled to an order granting COLLATERAL.
possession of the collateral upon the
court finding that a default has After default, a secured creditor may sell or
occurred and that the secured otherwise dispose of the collateral, publicly or
creditor has a right to take possession privately, in its present condition or following any
of the collateral. commercially reasonable preparation or
processing.
The court may direct the grantor to
take such action as the court deems The secured creditor may buy the collateral but
necessary and appropriate so that the only if the collateral is of a kind that is customarily
secured creditor may take possession sold on a recognized market or the subject of
of the collateral: widely distributed standard price quotations.

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SECTION 52. APPLICATION OF
SECTION 50. COMMERCIAL
PROCEEDS.
REASONABLENESS REQUIRED.
The proceeds of disposition shall be applied in the
In disposing of collateral, the secured creditor
following order:
shall act in a commercially reasonable manner.
(a) The reasonable expenses of taking,
It is commercially reasonable if collateral is
holding, preparing for disposition, and
disposed in conformity with commercial
disposing of the collateral, including
practices among dealers in that type of property.
reasonable attorneys’ fees and legal
expenses incurred by the secured creditor;
A disposition is not commercially unreasonable
(b) The satisfaction of the obligation secured
merely because a better price could have been
by the interest of the enforcing secured
obtained at a different time or by a different
creditor; and
method.
(c) The satisfaction of obligations secured by
any subordinate security interest in the
If a method of disposition has been approved in
collateral if a written demand and proof of the
any legal proceeding, it is conclusively
interest are received before distribution of the
commercially reasonable.
proceeds is completed.
SECTION 51. NOTIFICATION OF
DISPOSITION. The secured creditor shall account any surplus to
the grantor. Unless otherwise agreed, the debtor
Not later than ten days before disposition, the is liable for any deficiency.
secured creditor shall notify:
SECTION 53. RIGHTS OF BUYERS AND
(a) The grantor;
OTHER THIRD PARTIES.
(b) Any other secured creditor or lien holder
who, five days before the notification is sent
If a secured creditor sells the collateral, the buyer
to the grantor, held a security interest or lien
shall acquire the grantor’s right in the asset, free
in the collateral that was perfected by
of the rights of any secured creditor or lien holder.
registration; and
(c) Any other person from whom the secured
If a secured creditor leases or licenses the
creditor received notification of a claim in the
collateral, the lessee or licensee shall be entitled
collateral if the notification was received
to the benefit of the lease or license during its
before the secured creditor gave notification
term.
to the grantor.
If a secured creditor sells, leases or licenses the
The grantor may waive the right to be notified.
collateral in violationof this Chapter, the one who
acquires the collateral is entitled to the rights or
A notification of disposition is sufficient if it
benefits in the two previous paragraphs:Provided,
identifies the grantor and the secured creditor,
that it had no knowledge of a violation of this
describes the collateral, states the method of
Chapter.
intended disposition, and the time and place of a
public disposition or the time after which other SECTION 54. RETENTION OF
disposition is to be made.
COLLATERAL BY SECURED CREDITOR.
Sending a notification is not required if:
After default, the secured creditor may propose to
(a) the collateral is perishable; or
the debtor and grantor to take all or part of the
(b) threatens to decline speedily in value; or
collateral in total or partial satisfaction of the
(c) is of a type customarily sold on a recognized
secured obligation, and shall send a proposal to:
market.

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Transitional period
(a) The debtor and the grantor;
the period from the date of effectivity of the PPSA
(b) Any other secured creditor or lien holder who
until the date when the Registry has been
perfected its security interest or lien by
established and operational.
registration, five days before the proposal is
sent to the debtor and the grantor; and SECTION 56. CREATION OF PRIOR
(c) Any other person with an interest who has
INTEREST.
given a written notification to the secured
creditor before the proposal is sent to the
Creation of prior interest shall be determined by
debtor and the grantor.
prior laws.

The secured creditor may retain the collateral in

A prior interest remains effective between the
the case of:
parties notwithstanding its creation did not
(a) A proposal for the acquisition of the collateral
comply with the creation requirements of the
in full satisfaction of the obligation, unless
PPSA.
the secured creditor receives an objection in
writing from any person entitled to receive SECTION 57. PERFECTION OF PRIOR
such a proposal within twenty (20) days after INTEREST.
the proposal is sent; or
(b) A proposal for the acquisition of the collateral A prior interest that was perfected under prior law
in partial satisfaction of the secured continues to be perfected under the PPSA until
obligation, only if the secured creditor the earlier of:
receives the affirmative consent of each (a) The time the prior interest would cease to
addressee of the proposal in writing within be perfected under prior law; and
twenty (20) days after the proposal is sent. (b) The beginning of full implementation of the
PPSA, which, under Section 10.03 of the
H. PRIOR INTEREST AND THE
IRR, is conditioned upon the Registry being
TRANSITIONAL PERIOD
established and operational.
SECTION 55. INTERPRETATION OF
If the requirements for perfection under the PPSA
TRANSITIONAL PROVISIONS.
are satisfied before the time when theprior
interest ceases to be perfected under prior law,
Existing secured creditor
the prior interest continues to be perfected under
a secured creditor with a prior security interest;
the PPSA from the time when it was perfected
under the prior law.
Prior law
any law that existed or was in force before the
If the requirements for perfection under the PPSA
effectivity of the PPSA
are not satisfied before the time when the prior
interest ceases to be perfected under prior law,
Prior interest
the prior interest is perfected only from the time it
an interest created by an agreement or
is perfected under the PPSA .
transaction that was made or entered into before
the effectivity of the PPSA and that had not been
A written agreement between a grantor and a
terminated before such time.
secured creditor creating a prior interest is
sufficient to constitute authorization by the
It excludes a security interest that is renewed or
grantor of the registration of a notice covering
extended by a security agreement or other
assets described in that agreement under the
transaction made or entered into on or after the
PPSA.
effectivity of the PPSA ;
If a prior interest referred to in subsection (b) of
this section was perfected by the registration of a

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2. REAL ESTATE MORTGAGE LAW
notice under prior law, the time of registration
under the prior law shall be the time to be used A. Definition and Characteristics
for purposes of applying the priority rules of the
PPSA. Real [Estate] Mortgage is a contract whereby
the debtor secures to the creditor the fulfillment of
SECTION 58. PRIORITY OF PRIOR a principal obligation, specially subjecting to such
INTEREST. security immovable property or real rights over
immovable property in case the principal
The priority of a prior interest as against the rights obligation is not complied with at the time
of a competing claimant is determined by the stipulated. (Arts. 2124-2131)
prior law if:
(a) The security interest and the rights of all Kinds of Mortgage:
competing claimant arose before the 1. Voluntary
effectivity of the PPSA; and 2. Legal
(b) The priority status of these rights has 3. Equitable – one which, although it lacks
not changed since the effectivity of the the proper formalities of a mortgage
PPSA. shows the intention of the parties to make
the property as a security for a debt
The priority status of a prior interest has changed (governed by Civil Code, Arts. 1365,
only if: 1450, 1454, 1602, 1603, 1604 and 1607).
(a) It was perfected when the PPSA took
effect, but subsequently ceased to be
i. Obligations Secured by Real Estate
perfected;
Mortgage
(b) It was not perfected under prior law, and
was only perfected under the PPSA.
Necessity of a valid Principal Obligation
SECTION 59. ENFORCEMENT OF PRIOR A Mortgage, a purely accessory contract, like a
INTEREST. guarantee. They cannot exist without a valid
obligation. (Art. 2052 & 2086; Manila Surety &
Fidelity Co. v. Velayo, G.R. No. L-21069)
If any step has been taken to enforce a prior
interest before the effectivity of the PPSA,
enforcement may continue under prior law or Voidable, Unenforceable, Natural Obligations
may proceed under the PPSA. A mortgage may secure the performance of a:
1. Valid Obligation
Subject to previous paragraph, prior law shall 2. Voidable Contract inasmuch as it is
apply to a matter that is the subject of binding, unless it is annulled by a proper
proceedings before a court before the effectivity action in court
of the PPSA. 3. Unenforceable Contract, as such
contract is not void
4. Civil Obligations
5. Pure and Conditional Obligations
(whether suspensive or resolutory)
6. Payment and Performance Obligations
7. Natural Obligation so that the creditor
may proceed against the guarantor
although he has no right of action against
the principal debtor for the reason that
the latter’s obligation is not civilly
enforceable.
a. When the debtor himself offers a
guaranty for his natural

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General rule: Future property cannot be object of
obligation, he impliedly
mortgage. (Dilag v. Heirs of Resurreccion, G.R.
recognizes his liability, thereby
No. 48941)
transforming the obligation from
natural into a civil one.
In order to bring future property within the
coverage of the mortgage, the mortgagor must
Effect of Invalidity of Mortgage on Principal
execute a mortgage supplement after the
Obligation
mortgagor acquires ownership of the properties
1. Principal obligation remains valid.
or after those properties come into existence.
2. Mortgage deed remains as evidence of a
They must be registered with the relevant
personal obligation.
Register of Deeds.
When a bank relied on a forged SPA, it has the
Exception: (After-Acquired Properties) A
burden to prove its authenticity and due execution
stipulation subjecting to the mortgage lien,
as when there is a defect in the notarization of a
improvements which the mortgagor may
document, the clear and convincing evidentiary
subsequently acquire, install, or use inconnection
standard normally attached to a duly-notarized
with the real property already mortgaged
document is dispensed with, and the measure to
belonging to the mortgagor is valid. (People’s
test the validity of such document is
Bank and Trust Co. v. Dahican LumberCo., G.R.
preponderance of evidence.
No. L-17500, 1967)
However, where a mortgage is not valid due to a
Example: X owns a factory. In that factory, he
forged SPA, the principal obligation which it
installed a machine and subsequently mortgaged
guarantees is not thereby rendered null and void.
it. The parties may validly stipulate that if the
What is lost is merely the right to foreclose the
original machine is replaced, the replacement
mortgage as a special remedy for satisfying or
shall be subject to the mortgage. The reason for
settling the indebtedness which is the principal
this is that after-acquired properties are
obligation. In case of nullity, the mortgage deed
understood to be replacements, as the original
remains as evidence or proof of a personal
machine may be subject to wear and tear.
obligation of the debtor and the amount due to the
creditor may be enforced in an ordinary action.
Important Points
The partial invalidity of the subject real estate
1. As a general rule, the mortgagor retains
mortgage brought about by the forged status of
possession of the property. He may
the subject SPA would not, therefore, result into
deliver said property to the mortgagee
the partial invalidation of the loan obligation
without altering the nature of the contract
principally entered into by the parties; thus,
of mortgage.
absent any cogent reason to hold otherwise, the
2. It is not an essential requisite that the
need for the recomputation of said loan obligation
principal of the mortgage credit bears
should be dispensed with. (Rural Bank of
interest, or that the interest as
Cabadbaran, Inc. v. Melecio-Yap, G.R. No.
178451, 2014) compensation for the use of the principal
and the enjoyment of its fruits be in the
ii. Object of Real Estate Mortgage form of a certain percent thereof.

Objects of Real Estate Mortgage: Effect of Mortgage

1. Immovables; and 1. Creates right in rem or real rights.
2. Alienable real rights in accordance with A lien inseparable from the property
the laws, imposed upon immovables. mortgaged, enforceable against the
(Art. 2124) whole world as long as it is registered.
If not registered, the third party must
know of the mortgage.
2. Creates merely an encumbrance.

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past obligation. (Panacan Lumber Co. v.
The law considers void any stipulation
Solidbank Corp., G.R. No. 226272, 2020)
forbidding the owner from alienating the
immovable mortgaged. (Art. 2130)
General rule: There must be a stipulation for the
• The mortgagor’s default does not
inclusion of future advancements.
operate to vest in the mortgagee the
ownership of the encumbered
Mortgage with a dragnet clause enables the
property.
parties to provide continuous dealings, the nature
• His failure to redeem the property
or extent of which may not be known or
does not automatically vest
anticipated at the time. This allows them to avoid
ownership of the property to the
the expense and inconvenience of executing a
mortgagee.
new security on each new transaction.
Extent of Mortgage (I-GRAPE)
A mortgage given to secure future advancements
A real estate mortgage constituted on immovable
is a continuing security and is not discharged by
property is not limited to the property itself but
the repayment of the amount named in the
also extends to its:
mortgage, until the full amount of the all the loans
1. Accessions
or advancements is paid.
2. Improvements
3. Growing fruits
NOTE: A “blanket mortgage clause”, also
4. Rents or income
known as a “dragnet clause” in American
5. Proceeds of insurance should the
jurisprudence, is one which is specifically
property be destroyed.
phrased to subsume all debts of past or future
6. Expropriation value of the property
origins. A mortgage which provides a dragnet
should it be expropriated. (Art. 2127)
clause is in the nature of a continuing guaranty
and constitutes an exception to the rule that an
To exclude them, it is necessary that there be an
action to foreclose a mortgage must be limited to
express stipulation to that effect. But if the
mortgaged estate passes into the hands of a third the amount mentioned in the mortgage contract.
(PCSO vs. New Dagupan Metro Gas Corp., G.R.
person, the mortgage does not extend to any
No. 173171, 2012)
machinery, object, chattel or construction which
he may have brought or placed there and which
As a general rule, a mortgage liability is usually
such third person may remove whenever it is
limited to the amount mentioned in the contract.
convenient for him to do so.
However, the amounts named as consideration in
a contract of mortgage do not limit the amount for
Mortgage to Secure Future Advancements
which the mortgage may stand as security if from
Blanket/Dragnet Clause - one which is
the four corners of the instrument the intent to
specifically phrased to subsume all debts of past
secure future and other indebtedness can be
or future origin. It generally covers only future
gathered.(Ramos vs. PNB, G.R. No. 178218,
obligations, unless the parties expressly provide
2011)
that past obligations are likewise covered.
• In a case where a Foreign Letter of Credit
In the absence of clear and supportive evidence
(FLC) was executed prior to the
of a contrary intention, a mortgage containing a
execution of a Promissory Note (PN)
dragnet clause will not be extended to cover
secured by a Real Estate Mortgage
future advances, unless the document evidencing
(REM), which covers the said PN and all
the subsequent advance refers to the mortgage
other loans or credit accommodations
as providing security therefor.
that may be granted to the debtor, such
REM with a dragnet clause cannot be
Reliance on the Security Test: Applies when
understood to cover the FLC, as no
there is a dragnet clause in a mortgage contract
reference was made to it or to any other
but there is a mortgage constituted on another

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iii. Right to Alienate Mortgage Credit
property to secure a subsequent loan. When the
mortgagor takes another loan for which another
Alienation or Assignment of Mortgage Credit
security was given it could not be inferred that
The mortgage credit is a real right which may be
such loan was made in reliance solely on the
alienated by the mortgagee without need to
original security with the "dragnet clause," but
rather, on the new security given. (See Prudential obtain the consent of the debtor (except if there is
Bank v. Alviar, G.R. No. 150197, 2005) a stipulation against alienation). Alienation of the
mortgage credit is valid even if it is not registered.
Registration is necessary only to affect third
Scenario 1: Prudential Bank v. Alviar, G.R. No.
persons.(Art. 2128)
150197, 2005
3 Promissory Notes were executed in the
NOTE: The sale or transfer of the mortgaged
following order:
property cannot affect or release the mortgage;
1. PN 1 – secured by Real Estate Mortgage
thus, the purchaser or transferee is necessarily
(REM) with a dragnet clause
bound to acknowledge and respect the
2. PN 2 – secured by a foreign currency
deposit account encumbrance. (Garcia vs. Villar, G.R. No.
158891, 2012)
3. PN 3 – (not relevant, since this was not
the petitioners’ obligation) secured by
Laws Governing Mortgage
“Clean Phase out TOD 3923” andentered
1. New Civil Code
into on behalf of a different Corporation
2. P.D. 1529 or The Property Registration
The REM should be construed to cover PN 1 and Decree
3. Revised Administrative Code
any other obligation incurred by the debtor not
4. R.A. 4882, as regards aliens becoming
covered by the security for PN 2. Hence, a
mortgagee
foreclosure is improper on the ground of non-
5. R.A. 8791 General Banking Law
payment of PNs 2 and 3. It is, however, proper to
be seek foreclosure for non-payment of PN 1.
iv. Right to Alienate Collateral
The law considers void any stipulation forbidding
Scenario 2: Philippine National Bank v. Heirs of
the owner from alienating the immovable
Spouses Alonday, G.R. No. 171865, 2016
mortgaged. (Art. 2130)
2 Obligations with similarly worded Dragnet
clauses were entered into in the following order: Stipulation requiring mortgagee’s consent
1. Agricultural loan – secured by parcel of
before alienation of Property vs. Right of First
land in Davao del Sur Refusal.
2. Commercial loan – secured by parcel of
A stipulation prohibiting the mortgagor from
land in Davao City (no reference was
selling his mortgage property without the consent
made to the prior Agricultural loan)
of the mortgagee violates Art. 2130 of the New
Security used for Commercial loan showed the Civil Code, since the mortgagee can simply
intention to treat these loans as distinct from one withhold its consent and thereby, prevent the
another. The non-payment of the Agricultural loan mortgagor from selling the property.
cannot be used as a ground to foreclose on both
the parcels of land, Since the land in Davao City On the other hand, the right of first refusal has
was only intended to secure the Commercialloan. long been recognized as valid in our jurisdiction.
(Litonjua v. L & R Corporation, G.R. No. 130722)

Foreclosure of Mortgage is the remedy

available to the mortgagee by which he subjects
the mortgaged property to the satisfaction of the
obligation to secure which the mortgage was
given.

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NOTE: A foreclosure sale retroacts to the date of In order that the debtor may be in default, it is
registration of the mortgage and that a person necessary that: (a) the obligation be demandable
who takes a mortgage in good faith and for and already liquidated; (b) the debtor delays
valuable consideration, the record showing clear performance; and (c) the creditor requires the
title to the mortgagor, will be protected against performance judicially or extrajudicially, unless
demand is not necessary. Thus, it is only when
equitable claims on the title in favor of third
demand to pay is unnecessary , or when required,
persons of which he had no actual or constructive such demand is made and subsequently refused
notice. (St. Dominic Corp., vs. IAC, G.R. Nos. that the mortgagor can be considered in default
70623 & L-48630, 1987) and the mortgagee obtains the right to file an
action to collect the debt or foreclose the
NOTE: In the case of Phil. Veterans Bank v. mortgage. (Maybank Philippines., Inc. v. Spouses
Monillas, the Supreme Court said that a Tarrosa, G.R. No. 213014, 2015)
mortgagee-bank who receives titles in their favor
as mortgagee, which titles showed neither vice The family home is exempt from execution,
nor infirmity, does not need to make any further forced sale or attachment, except for debts
investigation and may entirely rely on what is secured by mortgages on the premises before or
stated on said titles (Phil. Veterans Bank v. after such constitution. (Art. 155, Family Code;
Monillas, G.R. No. 167098, 2008). However, in Fortaleza vs. Lapitan, G.R. No. 178288, 2012;
the later case of Homeowner Savings and Loan Parcon-Song v Parcon, G.R. No. 199582. July 7,
Bank v. Felonia, the Supreme Court held that a 2020)
mortgagee-bank who was previously in good faith
at the time the mortgage was constituted Under the Rural Banks Act, the foreclosure of
(because at that point in time, there was no mortgages covering loans granted by rural banks
annotated notice of lis pendens on the title) may and executions of judgments thereon involving
not be a buyer in good faith by the time it real properties levied upon by a sheriff shall be
forecloses the property (because by then, a exempt from publication where the total amount
notice of lis pendens had already been of the loan, including interests due and unpaid,
annotated) (Homeowners Savings and Loan does not exceed P10,000.00. (Menzon v. Rural
Bank v. Felonia, G.R. No. 189477, 2014) Bank of Buenavista, Inc., G.R. 178031, 2013)

Mere inadequacy of the price obtained at the Judicial Foreclosure (J-PACE-AC) (Rule 68,
sheriff’s sale will not be sufficient to set aside the Rules of Court):
sale unless “the price is so inadequate as to shock 1. Judicial action for the purpose in the proper
the conscience of the court” taking into court which has jurisdiction over the area
consideration the peculiar circumstances wherein the real property involved or a
attendant thereto. (Sulit vs. CA, G.R. No. 119247, portion thereof is situated.
1997). 2. Court order to mortgagor to Pay mortgage
debt with interest and other charges within a
Absent an adverse claimant or any evidence to period of not less than 90 days nor more than
the contrary, all accessories and accessions 120 days from the entry of judgment; and
accruing or attached to the mortgaged property Sale to the highest bidder at public Auction,
are included in the mortgage contract and may should the mortgagor fail to pay at the time
thus also be foreclosed with the principal property directed.
in the case of nonpayment of the debt secured. 3. Confirmation of sale, which operates to divest
(PNB vs. Maranon, G.R. No. 189316, 2013) the rights of all parties in the action and to
vest their rights to the purchase, subject to
The action to recover a deficiency after the right of redemption allowed by law.
foreclosure prescribes after 10 years from the 4. Execution of judgment
time the right of action accrues (Arts.1142 & 5. Application of proceeds of sale to:
1144) a. Costs of the sale;

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A creditor is not precluded from recovering any
b. Amount due the mortgagee;
unpaid balance on the principal obligation if the
c. Claims of junior encumbrances or
extrajudicial foreclosure sale of the property
persons holding subsequent mortgages
subject of the real estate mortgage results in a
in the order of their priority; and
deficiency. (BPI vs. Reyes, G.R. No. 182769,
d. The balance, if any shall be paid to the
2012)
mortgagor.
6. Sheriff’s Certificate of sale is executed,
The mortgagee-bank has no right to include in the
acknowledged and recorded to complete the
foreclosure of the land the portion of the loan
foreclosure.
separately secured by chattel mortgage. Where
Nature of Judicial Foreclosure Proceedings the bank collected the entire amount of the loan
1. Quasi in rem action; from the proceeds of the foreclosure sale,
2. Foreclosure is only the result or incident of including the portion that was not covered by the
the failure to pay debt; and foreclosure of the real estate mortgage, it must
3. Survives death of mortgagor. return the excess amount. (Rural Bank of Toboso
vs. Agtoto, G.R. Nos. 175697 & 176103, 2011)
Extra-judicial Foreclosure (governed by Act No.
3135, as amended) Procedure for Extra-judicial Foreclosure of
1. Express authority to sell is given to the Real Estate Mortgage (Act No. 3135)(Act No.
mortgagee; 1508, A.M. N0. 99-10-05-0; January 15,
2. Authority is not extinguished by death of 2000)(ARC-DIP-RET)
mortgagor or mortgagee; 1. Filing of Application before the Executive
3. Public sale should be made after proper Judge through the Clerk of Court;
notice (posting and publication); 2. Clerk of Court will examine whether the
4. Surplus proceeds of foreclosure sale belong Requirements of the law have been complied
to the mortgagor or his assigns; with, that is, whether the notice of sale has
5. Debtor has the right to redeem the property been posted for not less than 20 days in at
sold within 1 year from and after the date of least 3 public places of the municipality or city
sale;one year period is to be reckoned from where the property is situated, and if the
the registration of the sheriff's certificate of same is worth more than P400.00, that such
sale. notice has been published once a week for at
6. Remedy of party aggrieved by foreclosure is least 3 consecutive weeks in a newspaper of
a petition to set aside sale and cancellation of general circulation in the city or municipality;
writ of possession; 3. The Certificate of sale must be approved by
7. Republication is necessary for the validity of the Executive Judge;
a postponed foreclosure sale (parties have 4. In extrajudicial foreclosure of real mortgages
no right to waive the publication requirement). in Different locations covering one
indebtedness, only one filing fee
NOTE: Unless the parties stipulate, personal corresponding to such debt shall be collected;
notice to the mortgagor in extrajudicial 5. The Clerk of Court shall Issue certificate of
foreclosure proceedings is not necessary payment indicating the amount of
because Section 31 of Act No. 3135 only requires indebtedness, the filing fees collected, the
posting of the notice of sale in three public places mortgages sought to be foreclosed, the
and the publication of that notice in a newspaper description of the real estates and their
of general circulation. (Ramirez v. TMBC, G.R. respective locations;
No. 198800, 2013) 6. The notice of sale shall be Published in a
newspaper of general circulation;
Extra-judicial foreclosure before a notary public is 7. The application shall be Raffled among all
valid under Act No. 3135. (Tagunicar v. Lorna sheriffs;
Express,G.R. No. 138592, 2006).

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expiration of the said period. (Spouses Gatuslao
8. After the redemption period has Expired, the
v. Yanson, G.R. No. 191540, 2015)
Clerk of Court shall archive the records; and
9. Previously, the rule was that no auction sale
Stipulation of Upset Price or “tipo”
shall be held unless there are at least Two
A stipulation of minimum price at which the
participating bidders, otherwise the sale shall
property shall be sold to become operative in the
be postponed to another date. If on the new
event of a foreclosure sale at public auction is
date there shall not be at least 2 bidders, the
null and void, for the property must be sold to
sale shall then proceed. The names of the
the highest bidder. (de Leon & de Leon, Jr, citing
bidders shall be reported by the Sheriff or the
Banco Espanol Filipino v. Donaldson, 5 Phil. 418)
Notary Public who conducted the sale to the
Clerk of Court before the issuance of the
Effect of inadequacy of price in foreclosure
certificate of sale. On January 30, 2001, the
sale
Supreme Court issued a resolution
1. Where there is right to redeem.
amending paragraph 5 of A.M. 99-10-05-0
General rule: Inadequacy of price is
explicitly dispensing with the "two-bidder
immaterial because the judgment debtor
rule."
may redeem the property.
Right of mortgagee to recover deficiency Exception: The price is so inadequate as to
shock the conscience of the court taking into
1. Mortgagee is entitled to recover deficiency.
consideration the peculiar circumstances.
2. If the deficiency is embodied in a judgment, it
2. Property may be sold for less than its fair
is referred to as deficiency judgment.
market value upon the theory that the lesser
3. Action for recovery of deficiency may be filed
the price the easier for the owner to redeem.
even during redemption period.
4. Action to recover prescribes after 10 years
The value of the mortgaged property has no
from the time the right of action accrues.
bearing on the bid price at the public auction,
provided that the public auction was regularly and
NOTE: It is settled that if the proceeds of the sale
honestly conducted.
are insufficient to cover the debt in an extrajudicial
foreclosure of mortgage, the mortgagee is
Waiver of security by creditor
entitled to claim the deficiency from the debtor.
1. Mortgagee may waive right to foreclose his
While Act. No. 3135 does not discuss the
mortgage and maintain a personal action for
mortgagee’s right to recover the deficiency,
recovery of the indebtedness.
neither does it contain any provision expressly or
2. Remedies are alternative, not cumulative.
impliedly prohibiting recovery. (BPI vs. Avenido,
G.R. No. 175816, 2011) 3. Options of the mortgagee in case the debtor-
mortgagor dies:
a) To waive mortgage and claim entire debt
Nature of power of foreclosure byextrajudicial
from the mortgagor’s estate as an
sale
ordinary claim;
1. Conferred for mortgagee’s protection.
b) To judicially foreclose mortgage and
2. An ancillary stipulation supported by the
prove any deficiency; or
same cause or consideration for the
c) To rely on the mortgage exclusively
mortgage.
without filing a claim for deficiency
3. A prerogative of the mortgagee.

Redemption is a transaction by which the

After the expiration of the redemption period
mortgagor reacquires or buys back the property
without redemption having been made by
which may have passed under the mortgage or
petitioner, respondent became the owner thereof
divests the property of the lien which the
and consolidation of title becomes a right. Being
mortgage may have created.
already then the owner, respondent became
entitled to possession. Petitioner already lost his
possessory right over the property after the

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The doctrine of indivisibility of mortgage does not
Kinds of Redemption
apply once the mortgage is extinguished by a
1. Equity of redemption: Right of the
complete foreclosure thereof. Nothing in the law
mortgagor to redeem the mortgaged property
prohibits the piecemeal redemption of properties
after his default in the performance of the
sold at one foreclosure proceedings.(Id).
conditions of the mortgage but before
confirmation of the sale.
The general rule in redemption is that it is not
a. Applies to judicial foreclosure of real
sufficient that a person offering to redeem
mortgage and chattel mortgage
manifests his desire to do so; The statement of
foreclosure.
intention must be accompanied by an actual and
b. A second mortgagee acquires only the
simultaneous tender of payment; In case of
equity of redemption vested in the
disagreement over the redemption price, the
mortgagor, and his rights are strictly
redemptioner may preserve his right of
subordinate to the superior lien of the first
redemption through judicial action, which in every
mortgagee.
case, must be file within the one-year period of
NOTE: Redemption of property where the redemption. (Torbela vs. Rosario, G.R. Nos.
140528 & 140553, 2011)
mortgagee is a banking institution is allowed
within 1 year from the date of the registration
The right of legal redemption must be exercised
of the confirmation of sale.
within specified time limits. However, the
2. Right of redemption: right of the mortgagor statutory period of redemption can be extended
to redeem the property within a certain by agreement of the parties. (Republic vs.
Marawi-Marantao General Hospital, G.R. No.
period after it was sold for the satisfaction
158920, 2012)
of the debt.
a. Applies only to extrajudicial foreclosure
Period of Redemption
of real mortgage.
1. Extra-judicial (Act No. 3135)
b. EXC: The right of redemption is also
a. Natural person – 1 year from
available in judicial foreclosure, in
registration of the certificate of sale with
cases where the mortgagee is a bank.
Registry of Deeds.
(Section 47 of RA 8791 or the General
b. Juridical person – same rule as natural
Banking Law of 2000).
person
c. Juridical person (mortgagee is bank) –
NOTE: The right of redemption, as long as within
3 months after foreclosure or before
the period prescribed, may be exercised
registration of certificate of foreclosure
irrespective of whether or not the mortgagee has
whichever is earlier (General Banking
subsequently conveyed the property to some
Law, Sec. 47)
other party (Sta. Ignacia Rural Bank, Inc. v. CA,
EXTRAJUDICIAL
G.R. No. 97872, 1994) PERIODS OF
FORECLOSURE
REDEMPTION
The tender of redemption money may be made to Banks Non-Banks
the purchaser of the land or to the sheriff; If made Individual 1 year from 1 year from
debtors / registration registration
to the sheriff, it is his duty to accept the tender
mortgagors of sale of sale
and execute the certificate of redemption. (Yap
Juridical Until 1 year from
vs. Dy, Sr., G.R. Nos. 171868 & 171991, 2011). persons as registration registration
debtors / of certificate of sale
mortgagors of sale or
within 3
months from
sale
whichever is
earlier

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b. Interest at the rate specified in
mortgage;
2. Judicial – before confirmation of the sale by
c. Cost and expenses incurred by bank
the court
PERIODS OF JUDICIAL FORECLOSURE from sale and custody less income
derived
REDEMPTION Banks Non-Banks
Individual 1 year from X [equity of
NOTE: Redemption price in this case is reduced
debtors / registration redemption
by the income received from the property.
mortgagors of sale only]
Juridical 1 year from X [equity of
Junior Mortgagees
persons as registration redemption
1. After the foreclosure sale, there remains in
debtors / of sale only]
the second mortgagee a mere right of
mortgagors
redemption. His remedy is limited to the right
to redeem by paying off the debt secured by
NOTE: The registration of the sale is required
the first mortgage.
only in extra-judicial foreclosure sale because
2. He is entitled to the payment of his credit the
the date of the registration is the reckoning point
excess of the proceeds of the auction sale.
for the exercise of the right of redemption. In

contrast, the registration of the sale is 3. In case the credit of the first mortgagee has
superfluous in judicial foreclosure because only absorbed the entire proceeds of the sale, the
the equity of redemption is granted to the second mortgage is extinguished, since the
mortgagor, except in mortgages with banking mortgage cannot be enforced beyond the
institutions. (Robles v. Yapcinco, G.R. No. total value of the mortgaged property.
169568, 2014)
Mortgagee in Possession – one who has
NOTE: Allowing redemption after the lapse of the lawfully acquired actual or constructive
statutory period when the buyer at the foreclosure possession of the premises mortgaged to him,
sale does not object but even consents to the standing upon his rights as mortgagee and not
redemption, will uphold the policy of the law which claiming under another title, for the purpose of
is to aid rather than defeat the right of redemption enforcing his security upon such property or
(Ramirez v. CA, G.R. No. 98147, 1993). making its income help to pay his debt.

As a rule, the period of redemption is not tolled by NOTE: The rights of the first mortgage creditor or
the filing of a complaint or petition for annulment mortgage over the mortgaged properties are
of the mortgage and the foreclosure sale superior to those of a subsequent attaching
conducted pursuant to the said mortgage. creditor and other junior mortgagees. (Lee vs.
Bangkok Bank Public Company, Ltd. G.R. No.
Amount of the Redemption Price 173349, 2011)
1. Mortgagee is not a bank (Act No. 3135 in
relation to Sec. 28, Rule 39 of Rules of A mortgagor is allowed to take a second or
Court) subsequent mortgage on a property already
a. Purchase price of the property; mortgaged, subject to prior rights of the previous
b. 1% interest per month on the purchase mortgages. (Palada vs. Solidbank Corp., G.R.
price; No. 172227, 2011)
c. Taxes paid and amount of purchaser’s
prior lien, if any, with the same rate of Rights and Obligations of Mortgagee in
interest computed from the date of Possession
registration of sale, up to the time of 1. Similar to an antichresis creditor – entitled to
redemption. retain such possession until the
2. Mortgagee is a bank (Section 47, General indebtedness is satisfied and the property
Banking Act of 2000) redeemed.
a. Amount due under the mortgage deed;
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consolidated in the purchaser’s name, a writ of
2. Without right to reimbursement for useful
possession can be demanded as a matter of right.
expenses
(PBCom v. Yeung, G.R. No. 179691, 2013)
Right of Purchaser to Writ of Possession
“Purchaser at the auction sale concerned whether
Writ of Possession – order whereby the sheriff
in a judicial or extrajudicial foreclosure shall have
is commanded to place in possession of real or
the right to enter upon and take possession of
personal property the person entitled thereto
such property immediately after the date of the
such as when a property is extrajudicially
confirmation of the auction sale and administer
foreclosed.
the same in accordance with law. Anypetition in
• The issuance of the writ of possession in an
court to enjoin or restrain the conduct of
extrajudicial foreclosure is merely a
foreclosure proceedings instituted pursuant tothis
ministerial function.
provision shall be given due course only upon the
• The purchaser at the foreclosure sale is
filing by the petitioner of a bond in an amountfixed
entitled as of right to a writ of possession.
by the court conditioned that he will pay all the
damages which the bank may suffer by the
Before lapse of redemption period – file an ex
enjoining or the restraint of the foreclosure
parte application and file a bond
proceeding.” (The General Banking Law of 2000,
Section 47)
After lapse of redemption period – file an ex
parte application and no need for a bond
If a bank filed the Sheriff’s Provisional Certificate
of Sale before the Registry of Deeds, and entries
NOTE: In an extrajudicial foreclosure of real
thereof were made in the Primary Entry Book, the
property, when the foreclosed property is in the
refusal of the Register to annotate said
possession of a third party holding the same
registration on the titles to the properties should
adversely to the judgment obligor, the issuance
not affect the bank’s right to possess the
by the trial court of a writ of possession in favor of
properties. (Spouses Limso, Davao Sunrise, et.
the purchaser of said real property ceases to be
al. v. PNB, G.R. No. 158622, 2016)
ministerial and may no longer be done ex parte,
but for the exception to apply, the property need
Redemption and repurchase distinguished
not only be possessed by a third party, but also
The right to redeem becomes functus oficio at the
held by the third party adversely to the judgment
end of the redemption period, and its exercise
debtor. (BPI vs. Golden Power Diesel Sales
after the period is not really one of redemption but
Center, G.R. No. 176019, 2011)
a repurchase. Distinction must be made because
redemption is by force of law; the purchaser at
The implementation of a writ of possession issued
public auction is bound to accept redemption.
pursuant to Act No. 3135 at the instance of the
Repurchase however of foreclosed property, after
purchaser at the foreclosure sale of the
redemption period, imposes no such obligation.
mortgaged property in whose name the title has
After expiry, the purchaser may or may not re-sell
been meanwhile consolidated cannot be
the property but no law will compel him to do so.
prevented by the injunctive writ. (UCPB v.
And, he is not bound by the bid price; it is entirely
Spouses Lumbo, G.R. No. 162757, 2013)
within his discretion to set a higher price, for after
all, the property already belongs to him as owner.
The purchaser can demand possession of the
property even during the redemption period for as B. Essential Requisites
long as he files an ex parte motion under oath and
post a bond in accordance with Section 7 of Act. Essential Requisites of Mortgage (FAVFAP):
No. 3135, as amended. Upon filing of the motion 1. Constituted to secure the Fulfillment of a
and the approval of the bond, the law also directs principal obligation;
the court in express terms to issue the order of a 2. Mortgagor be the Absolute owner of the thing
writ of possession. When the redemption period pledged or mortgaged;
has expired and title over the property has been

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the mortgagor, only thereafter to learn that the
• NOTE: Before partition of estate, each
latter’s title was defective, being thus an innocent
heir only has an undivided interest in the
mortgagee for value, his or her right or lien upon
estate and in each specific piece of
the land mortgaged must be respected and
property in the estate. Any mortgage on
protected. (Mahinay vs. Gako, Jr., G.R. Nos.
said property undertaken by an heir is
165338 & 179375, 2011)
valid, but only up the portion that may be
allotted in partition to the heir (Rural Bank
BUT: A bank whose business is impressed with
of Cabadbaran, Inc. v. Melencio-Yap,
public interest is expected to exercise more care
G.R. No. 178451, 2014, reiterated in
and prudence in its dealings than a private
Magsano v. Pangasinan Savings and
individual, even in cases involving registered
Loan Bank, G.R. No. 215038, 2016)
lands. A bank cannot assume that, simply
3. Mortgagor has Free disposal of the property,
because the title offered as security is on its face
and in the absence thereof, that he be legally
free of any encumbrances of lien, it is relieved of
authorized for the purpose;
the responsibility of taking further steps to verify
• NOTE: If the property mortgaged was
the title and inspect the properties to be
subject to a conditional contract to sell at
mortgaged.
the time the mortgage was entered into,
which was annotated, such restrictions
In order for a mortgagee to invoke the doctrine of
do not divest the owner of his ownership
mortgagee in good faith, the impostor must have
right. At most, the restrictions merely
succeeded in obtaining a Torrens title in his name
make the contract voidable by the person
and thereafter in mortgaging the property. Where
in whose favor the restrictions were
the mortgagor is an impostor who only pretended
made. (Vitug v. Abuda, G.R. No. 201264,
to be the registered owner, and acting on such
2106)
pretense, mortgaged the property to another, the
4. Cannot exist without a Valid obligation;
mortgagor evidently did not succeed in having the
5. When the principal obligation becomes due,
property titled in his or her name, and the
the thing in which the mortgage consists may
mortgagee cannot rely on such pretense as what
be Alienated for the payment to the creditor;
appears on the title is not the impostor's name but
and
that of the registered owner. (Ruiz v. Dimailig,
6. Appears in a Public document duly recorded
G.R. No. 204280, 2016)
in the Registry of Property to be [validly
constituted].
BUT: SC has held in a case that while the bank
• If the instrument is not recorded, the
failed to exercise greater care in conducting the
mortgage is nevertheless binding
ocular inspection of the properties offered for
between the parties.
mortgage, its omission did not prejudice any
• NOTE: Under the Doctrine of “Mortgagee
innocent third parties because the cause of the
in Good Faith”, even if the mortgagor is mortgagors' defective title was the simulated sale
not the owner of the mortgaged property, between the buyer/mortgagor and seller (the
the mortgage contract and any
latter questioning the validity of the mortgage).
foreclosure sale arising therefrom are Thus, no amount of diligence in the conduct of the
given effect by reason of public policy; ocular inspection could have led to the discovery
Even if the mortgagor is not the rightful of the complicity between the ostensible
owner of, or does not have a valid title to, mortgagors/buyer and the true owners/seller. In
the mortgaged property, the mortgagee fine, the bank can hardly be deemed negligent.
in good faith is, nonetheless, entitled to Thus, the bank was considered as a mortgagee in
protection. (Torbela vs. Rosario, G.R. good faith (Philippine Banking Corporation v. Dy,
Nos. 140528 &140553, 2011)
G.R. No. 183774, 2012)

When a mortgagee relies upon what appears on ALSO: SC has held that a bank should not
the face of a Torrens title and lends money in all necessarily be made liable if it did not investigate
good faith on the basis of the title in the name of

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Essential Requisites Common to Contracts of
or inspect the property. If the circumstances
Mortgage: (FARVAS)
reveal that an investigation would still not yield a
1. Constituted to Secure the fulfillment of a
discovery of any anomaly, or anything that would
principal obligation;
arouse suspicion, the bank should not be liable.
2. Mortgagor be the Absolute owner of the
Such is the case when the TCT is clean, bearing
thing mortgaged;
no annotations evidencing any trust, lien, or
encumbrance on the property, not forged or fake. 3. The persons constituting the mortgage
There is also no showing that the bank was aware have the Free disposal of their property,
and in the absence thereof, that they be
of any defect or any other conflicting right on the
title when the property was mortgaged to it. In legally authorized for the purpose;
4. Cannot exist without a Valid obligation;
fact, the investigation of the property would still
5. Debtor Retains the ownership of the thing
fail to bring any doubt as to the validity of the TCT
given as a security; and
(i.e., the title owners were in actual possession of
6. When the principal obligation becomes
the property). (Parcon-Song v Parcon, G.R. No.
due, the thing in which the mortgage
199582. July 7, 2020)
consists may be Alienated for the
payment to the creditor.
An entrustee under a trust receipt does not have
a right to mortgage the property held in trust. This
NOTE: Third persons who are not parties to
is because the entrustor, not the entrustee, is the
the principal obligation may secure the latter
owner of the property in trust. A mortgage must
by mortgaging their own property (Art. 2085;
be executed by the absolute owner of the chattels
Chinabank vs. QBRO Fishing Enterprises,
to be valid (DBP vs. Prudential Bank, 2005;Art.
G.R. No. 184556, 2012)
2085 (2)).
Important Points
Real estate mortgage over a conjugal property is 1. Future property cannot be mortgaged.
void if the non-contracting spouse did not give 2. Mortgage executed by one who is not the
consent (PNB v. Venancio Reyes, Jr., G.R. No. owner of the property mortgaged is without
212483, 2016) legal existence and registration cannot
validate it.
Legal Mortgage: The persons in whose favor the 3. Generally, mortgage of a conjugal
law establishes a mortgage have no other right property by one of the spouses without
than to demand the execution and the recording the consent of the other spouse is valid
of the document in which the mortgage is only as to ½ of the entire property.
formalized. 4. In case of property covered by Torrens
title, a mortgagee has the right to relyupon
Incidents of Registration of Mortgage what appears in the certificate of title and
1. Mortgagee entitled to registration of does not have to inquire further. However,
mortgage as a matter of right. a bank whose business isimpressed with
2. Proceedings for registration do not determine public interest is expected to exercise
validity of mortgage or its effect. more care and prudence in its dealings
3. Registration is without prejudice to better than a private individual, even in cases
right of third parties. involving registered lands. A bank cannot
4. Mortgage deed once duly registered forms assume that, simply because the title
part of the records for the registration of the offered as security is on its face free of
property mortgaged. any encumbrances of lien, it is relieved of
5. Mortgage by surviving spouse of his/her the responsibility of taking further steps
undivided share of conjugal property can be to verify the title and inspect the
registered. properties to be mortgaged.
5. Mortgagor must have free disposal of
property.

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6. Thing mortgaged may be alienated by the

mortgagor. Prohibition against Pactum Commissorium
[NOTE: Removal, Sale or Pledge of • Stipulation is null and void - stipulation
Mortgaged Property. — The penalty or where thing mortgaged shall automatically
arresto mayor or a fine amounting to become the property of the creditor in the
twice the value of the property shall be event of nonpayment of the debt within the
imposed upon: term fixed.
i. Any person who shall knowingly • The essence of pactum commissorium is that
remove any personal property ownership of the security will pass to the
mortgaged under the Chattel creditor by the mere default of the debtor.
Mortgage Law to any province or (Spouses Solitarios v. Spouses Jaque, G.R.
city other than the one in which No. 199852, 2014)
it was located at the time of the
execution of the mortgage, Requisites of pactum commissorium:
without the written consent of 1. There should be a mortgage; and
the mortgagee, or his executors, 2. There should be a stipulation for an automatic
administrators or assigns. appropriation by the creditor of the property
ii. Any mortgagor who shall sell or in the event of nonpayment.(Pen v. Julian,
pledge personal property G.R. No. 160208, January 11, 2016)
already pledged, or any part
thereof, under the terms of the Effect on Security Contract: Nullity of the
Chattel Mortgage Law, without stipulation does not affect validity and efficacy of
the consent of the mortgagee the principal contract.
written on the back of the
mortgage and noted on the There is no automatic appropriation of the object
record thereof in the office of the of the contract of mortgage, as it takes the
register of deeds of the province intervention of the court to exact fulfillment of the
where such property is located. obligation. If something more is to be done, like
(Revised Penal Code, Art. 319)] the execution of the deed of assignment, there is
7. Creditor is not required to sue to enforce his no pactum commissorium (Uy Tong v. Court
credit. Appeals, G.R. No. 77465, 1988).
8. Mortgagor may be third person (i.e., not the
The Memorandum of Agreement and the Dacion
principal debtor).
in Payment Agreement contain no provisions for
9. The liability of an accommodation
foreclosure proceedings nor redemption. Under
mortgagor extends only to the property
the MOA, the failure by A to pay his debt within
pledged or mortgaged.
the one-year period gives B the right to enforce
10. Mortgage may be constituted on
the Dacion in Payment transferring to it
immovables only (Art. 2124)
ownership of A’s land. B, in effect, automatically
11. Delivery is not necessary for mortgage
12. The mortgage is not valid against 3rd acquires ownership of the properties upon A’s
persons in good faith if not registered(Art. failure to pay his debt within the stipulated period
(Sps. Ong v. Roban Lending Corporation, G.R.
2125)
No.172592, July 9, 2008).
Right of Creditor Where Debtor Fails to
There is no automatic appropriation of the object
Comply With His Obligation
of the pledge upon maturity of the loan. The
1. Creditor is merely entitled to move for the sale
of the thing mortgaged with the formalities prohibition against pactum commissorium is
required by law in order to collect. intended to protect the debtor, pledgor or
2. Creditor cannot appropriate to himself the mortgagor against being over-reached by the
thing nor can he dispose of the same as creditor who holds a piece of property, the value
owner. of which is more valuable than the amount of the

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misuse the thing, the owner may ask that it
debt. Furthermore, when the security of the debt
be judicially or extra-judicially deposited.
is also money deposited in a bank, the amount of
c. May use the thing if it is necessary for the
which is less than the debt, it is not illegal for the
preservation of the thing (e.g. car has to be
creditor to encash the time deposit certificate to
driven once in a while).
pay the debtor’s obligation (Yau Chu v. Court of
d. May either claim another thing in pledge or
Appeals, G.R. No. 78159,1989).
demand immediate payment of the
Important Points principal obligation if he is deceived on the
substance or quality of the thing.
1. Mortgage is indivisible.
Exceptions:
Legal Pledges
a. Where each one of several
things guarantee determinate 1. Necessary expenses shall be refunded to
portion of credit. every possessor, but only possessor in good
b. Where only portion of loan was faith may retain the thing until he has been
released. reimbursed.
Example: X borrowed 80k from the bank 2. Useful expenses shall be refunded only to the
and he mortgaged his 100 ha. property. possessor in good faith with the same right of
Lender was only able to release 40k due retention, the person who has defeated him
to CB restrictions. The Court held that the in the possession having the option of
bank can only foreclose on 50% of the refunding the amount of the expenses or of
mortgaged land (50 hectares) (Central paying the increase in value which the thing
Bank v. CA, G.R. No. L-45710, 1985). may have acquired and by reason thereof.
c. Where there was failure of (Art. 546)
consideration. 3. He who has executed work upon a movable
2. The rule that real property, consisting of has a right to retain it by way of pledge until
several lots which should be sold separately, he is paid. (Art. 1731)
applies to sales in execution, and not to 4. The agent may retain the things which are the
foreclosure of mortgages. objects of agency until the principal effects
3. [The mere embodiment of a real estate the reimbursement and pays the indemnity.
mortgage and a chattel mortgage in one (Art. 1914)
document does not have the effect of fusing 5. The laborer’s wages shall be a lien on the
both securities into an indivisible whole. goods manufactured or the work done. (Art.
(PBCOM v. Macadaeg, 109 Phil. 981 (1960))] 1707)
4. Contract of mortgage may secure all kinds 6. Special Laws apply to pawnshops and
of obligation, be they pure or subject to a establishments which are engaged in making
suspensive or resolutory condition. loans secured by pledges. Provisions of the
5. A promise to constitute mortgage gives rise Civil Code shall apply subsidiarily.
only to a personal right binding upon the
parties and creates no real right in the After payment of the debt and expenses (after the
property. What exists is only a right of action sale of the property subject of the legal pledge),
to compel the fulfillment of the promise, but the remainder of the price of the sale shall be
there is no mortgage yet. delivered to the obligor. (Art. 2121)

Debtor A thing under a pledge by operation of law may

Owner bears the risk of loss of the property. be sold only after demand of the amount for which
a. May bring the actions which pertain to the the thing is retained. The public auction shall take
owner of the thing in order to recover it from place within one month after such demand. If,
or defend it against a 3rd person. without just grounds, the creditor does not cause
b. Cannot use the thing without the authority the public sale to be held within such period, the
of the owner, and if he should do so, or

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3. GUARANTY
debtor may require the return of the thing.(Art.
2122)
A. Nature and Extent of Guaranty
CONVENTIONAL LEGAL PLEDGE Guaranty – By guaranty, a person called the
PLEDGE
guarantor, binds himself to the creditor, to fulfill
Created by agreement Created by operation of the obligation of the principal debtor in case the
of the parties law latter should fail to do so. It is a contract between
Debtor is not entitled to Debtor is entitled to the
the guarantor and the creditor. (Art. 2047)
the excess of the excess of the proceeds
proceeds of the sale of the sale
i. Obligation Secured by Guaranty
unless it is otherwise
agreed Characteristics of the contract
1. Accessory – dependent for its existence
Creditor is not entitled to Creditor can recover the
upon the principal obligation guaranteed
recover the deficiency in deficiency in the
the proceeds of the sale proceeds of the sale
by it hence if principal contract is void,
then guaranty is also void
The parties agree on the There is no definite
period for the payment period for the payment 2. Subsidiary and Conditional – takes
of the principal of the principal
effect only when the principal debtor fails
obligation. obligation. Thus, the
pledgee must make a
in his obligation subject to limitation
demand for the payment 3. Unilateral –
of the amount due him. a. It gives rise only to a duty on the part
of the guarantor in relation to the
creditor and not vice versa
NOTE: In case of doubt as to whether a b. It may be entered into even without
transaction is one of pledge or dacion en pago, the intervention of the principal
the presumption is that it is a pledge as this debtor.
involved a lesser transmission of rights and
interests. (Union Bank vs. Juniat, G.R. No. 4. Distinct Person– a person cannot be the
171569, 2011)] personal guarantor of himself
• The liability of a guarantor is only
subsidiary, and all the properties of
the principal debtor must first be
exhausted before the guarantor may
be held answerable for the debt.
Thus, the creditor may hold the
guarantor liable only after judgment
has been obtained against the
principal debtor and the latter is
unable to pay. (Aglibot vs. Santia,
G.R. No. 185945, 2012)

Cause of Contract of Guaranty

1. Presence of cause which supports
principal obligation: Cause of the
contract is the same cause which
supports the obligation as to the principal
debtor. The consideration which supports
the obligation as to the principal debtor is

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Examples:
a sufficient consideration to support the
a. To secure the payment of a loan at
obligation of a guarantor or surety.
maturity – guarantee of the punctual
payment of a loan at maturity and all
2. Absence of direct consideration or
other obligations of indebtedness
benefit to guarantor: Guaranty or surety
b. To secure payment of any debt to be
agreement is regarded valid despite the
subsequently incurred –construed as
absence of any direct consideration
continuing when it is evident from the
received by the guarantor or surety, such
terms that the object is to give a standing
consideration need not pass directly to
credit to the principal debtor to be used
the guarantor or surety; a consideration
from time to time either indefinitely or until
moving to the principal will suffice.
a certain period, especially if the right to
Guaranty of Voidable, Unenforceable, And recall the guaranty is expressly reserved.
Natural Obligations(Art. 2052(2))
Guaranty of Conditional Obligations
A guaranty may secure all kinds of obligations, be
A guaranty may secure the performance of:
they pure or subject to a suspensive or resolutory
1. Voidable contract – such contract is
condition.
binding, unless it is annulled by a proper
1. Principal obligation subject to a
court action
suspensive condition – the guarantor is
2. Unenforceable contract – because
liable only after the fulfillment of the
such contract is not void
condition.
3. Natural obligation – the creditor may
2. Principal obligation subject to a
proceed against the guarantor although
resolutory condition – the happening of
he has no right of action against the
the condition extinguishes both the
principal debtor for the reason that the
principal obligation and the guaranty
latter’s obligation is not civilly
enforceable.
Guarantor’s Liability Cannot Exceed Principal
• When the debtor himself offers a
Obligation (Art. 2054)
guaranty for his natural obligation, he
impliedly recognizes his liability,
General rule: Guaranty is a subsidiary and
thereby transforming the obligation
accessory contract – guarantor cannot bind
from a natural into a civil one.
himself for more than the principal debtor, both as
regards the amount and the onerous nature of
Guaranty of Future Debts(Art. 2053)
contract
• If he does, his liability shall be reduced to
Continuing Guaranty or Suretyship:
the limits of that of the debtor.
1. Not limited to a single transaction but
which contemplates a future course of • But the guarantor may bind himself for
dealings, covering a series of less than that of the principal.
transactions generally for an indefinite
time or until revoked. Exceptions:
1. Interest, judicial costs, and attorney’s
2. It is prospective in its operation and is
fees as part of damages may be
generally intended to provide security
recovered – creditors may recover from
with respect to future transactions.
3. Future debts, even if the amount is not the surety as part of their damages the
yet known, may be guaranteed but there abovementioned fees even without
can be no claim against the guarantor stipulation and even if the surety would
until the amount of the debt is thereby become liable to pay more than
ascertained or fixed and demandable. the total amount stipulated in the bond.

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agreement should be resolved in favor of the
Reason: Surety is made to pay, not by
guarantor or surety.
reason of the contract, but by reason of
1. Liability for obligation stipulated –
his failure to pay when demanded and
guarantor is not liable for obligations
for having compelled the creditor to
assumed previous to the execution of
resort to the courts to obtain payment.
the guaranty unless an intent to be so
Interest runs from (demand):
liable is clearly indicated.
a. Filing of the complaint (upon judicial
2. Liability of surety limited to a fixed
demand); or
period – the surety must only be bound
b. The time demand was made upon
in the manner and to the extent, and
the surety until the principal
under the circumstances which are set
obligation is fully paid (upon extra-
forth or which may be inferred from the
judicial demand)
contract of guaranty or suretyship, and
2. Penalty may be provided – surety may no further.
3. Liability of surety to expire on
be held liable for the penalty provided for
in a bond for violation of the condition maturity of principal obligation – such
therein. stipulation is unfair and unreasonable for
it practically nullifies the nature of the
Principal’s Liability May Exceed Guarantor’s undertaking it had assumed.
Obligations
Remedy of surety: Foreclose the counter-bond
The amount specified in a surety bond as the
put up by the principal debtor (if there is any)
surety’s obligation does not limit the extent of the
damages that may be recovered from the
Securing non-performance In a case where a
principal, the latter’s liability being governed by
performance bond, which includes the face
the obligations he assumed under his contract.
amount to be paid in case of non-performance,
was entered into by the parties, such surety bond
Guaranty Not Presumed (Art. 2055)
is determined strictly in accordance with the
The assumption of guaranty must be expressed.
particular terms and conditions set out in this
It cannot extend to more than what is stipulated
bond. Hence, the face amount is not a maximum
therein.
potential liability, which may cover actual
damages and costs for the non-completion of the
Guaranty Covered by the Statute Of Frauds
obligation. Rather, the entire face amount is
• Guaranty must not only be expressed but
meant to be paid upon such non-performance.
must so be reduced into writing.
(FGU Insurance vs Roxas, G.R. No. 189526 and
• Hence, it shall be unenforceable by
189656, August 9, 2017)
action, unless the same or some note or
memorandum thereof be in writing, and ii. Parties to a Guaranty
subscribed by the party charged, or by
his agent; evidence, therefore, of the Parties:
agreement cannot be received without 1. Creditor
the writing, or a secondary evidence of its 2. Guarantor
contents. (Macondray& Co., Inc. v. 3. Principal Debtor (sometimes)
Piñon, G.R. No. L-13817, 1961)
• It need not appear in a public document. Qualifications of an Individual Guarantor
(Arts.2056-2057) (CSI)
Guaranty Strictly Construed 1. He possesses Integrity
Strictly construed against the creditor in favor of 2. He has the Capacity to bind himself
the guarantor and is not to be extended beyond 3. He has Sufficient property to answer for
its terms or specified limits. Doubt in the terms the obligation which he guarantees
and conditions of the guaranty or suretyship

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because he considered the guarantor to
Exception: When the creditor waives the
have the qualifications for the purpose.
requirements.
iii. Excussion
Effect of Subsequent Loss of Required
Qualifications Right of Guarantor to Benefit Of Excussion Or
The qualifications need only be present at the
Exhaustion(Art. 2058)
time of the perfection of the contract. The 1. Guarantor only secondarily liable –
subsequent loss of the qualifications would not
guarantor binds himself to pay only in
extinguish the liability of the guarantor, nor will it
case the principal debtor should fail to do
extinguish the contract of guaranty.
so. If the principal debtor fulfills the
obligation guaranteed, the guarantor is
Remedy of creditor: Demand another guarantor
discharged from any responsibility.
with the proper qualifications.
2. All legal remedies against the debtor
Exception: Creditor may waive it if he chooses
to be first exhausted – to warrant
and hold the guarantor to his bargain.
recourse against the guarantor for
payment, it may not be sufficient that the
Guarantor Convicted of a Crime Involving
debtor appears insolvent. Such
Dishonesty or Became Insolvent (Art. 2057):
insolvency may be simulated.
1. Requires conviction in the first instance
of a crime involving dishonesty to have
NOTE: Art. 2058 is not applicable to a contract of
the right to demand another.
suretyship.
2. Judicial declaration of insolvency is not
necessary in order for the creditor to have Right of Creditor to secure Judgment against
a right to demand another guarantor. Guarantor prior to exhaustion
General rule: An ordinary personal guarantor
The supervening incapacity of a guarantor does
(NOT a pledgor or mortgagor), may demand
not terminate the guaranty for it merely gives the
exhaustion of all the property of the debtor before
creditor the option to demand another guarantor.
he can be compelled to pay.
He is not bound to substitute the guarantor.
(Estate of Hemady v. Luzon Surety, G.R. No. L- Exception: The creditor may secure a judgment
8437, 1956)
against the guarantor, who shall be entitled to a
deferment of the execution of said judgment
Selection of Guarantor
against him, until after the properties of the
1. Specified person stipulated as
principal debtor shall have been exhausted, to
guarantor: Substitution of guarantor may
satisfy the latter’s obligation.
not be demanded
Reason: The selection of the guarantor
Exceptions to the Benefit of Excussion(Art.
is:
2059) (JAWS-IS-FUN)
a. A term of the agreement;
1. If the guarantor has expressly Waived it.
b. As a party, the creditor is,
• Waiver is valid but it must be made in
therefore, bound thereby.
express terms.
2. Guarantor selected by the principal
2. If he has bound himself Solidarily with the
debtor: Debtor answers for the integrity,
debtor – liability assumed that of a surety
capacity, and solvency of the guarantor.
Guarantor becomes primarily liable
as a solidary co-debtor. In effect, he
3. Guarantor personally designated by
renounces in the contract itself the
the creditor: Responsibility for the
benefit of exhaustion.
selection should fall upon the creditor

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7. If he is a Judicial bondsman and sub-
3. In case of Insolvency of the debtor –
surety(Art. 2084)– because he is
guarantor guarantees the solvency of the
solidarily liable.
debtor
If the debtor becomes insolvent, the
8. Where he has given a pledge ormortgage
liability of the guarantor as the debtor
as a Special security.
cannot fulfill his obligation

NOTE: Article 2062 of the Civil Code provides that

4. When he (debtor) has Absconded, or
in every action by the creditor, which must be
cannot be sued within the Philippines –
against the principal debtor alone, except in the
the creditor is not required to go after a
cases mentioned in article 2059, the former shall
debtor who is hiding or cannot be sued in
ask the court to notify the guarantor of the action.
our courts
The guarantor may appear so that he may, if he
so desire, set up such defenses as are granted
Exception: Debtor has left a
him by law. The benefit of excussion mentioned
manager or representative
in article 2058 shall always be unimpaired, even
if judgment should be rendered against the
5. If it may be presumed that a judicial
principal debtor and the guarantor in case of
action including execution on the
appearance by the latter.
property of the principal debtor would not
result in the satisfaction of the obligation
Duty of Creditor to Make Prior Demand For
– if such is the case, the guarantor can
Payment From Guarantor(Art. 2060)
no longer require the creditor to resort to
1. When demand to be made – only after
all such remedies against the debtor as
judgment on the debt for obviously the
the same would be but a Useless
exhaustion of the principal’s property
formality. It is not necessary that the
cannot even begin to take place before
debtor be judicially declared insolvent.
judgment has been obtained.
6. If he does Not comply with Art. 2060: In
2. Actual demand to be made – joining the
order that the guarantor may make use of
guarantor in the suit against the principal
the benefit of excussion, he must:
debtor is not the demand intended by
a. Set it up against the creditor upon the
law. There must be an actual demand
latter’s demand for payment from
and not judicial demand.
him;
b. Point out to the creditor:
Duty of The Guarantor To Set Up Benefit Of
i. Available property of the debtor –
Excussion (Art. 2060)
the guarantor should facilitate
As soon as he is required to pay, guarantor must
the realization of the excussion
also point out to the creditor available property
since he is the most interested in
(not in litigation or encumbered) of the debtor
its benefit.
within the Philippines.
ii. Within the Philippine territory –
excussion of property located
Duty of The Creditor To Resort To All Legal
abroad would be a lengthy and
Remedies (Art. 2061)
extremely difficult proceeding
• After the guarantor has fulfilled the
and would not conform with the
conditions required for making use of the
purpose of the guaranty to
benefit of exhaustion, it becomes theduty
provide the creditor with the
of the creditor to exhaust all the property
means of obtaining the fulfillment
of the debtor pointed out by theguarantor
of the obligation.
• If he fails to do so, he shall suffer the loss
Sufficient to cover the amount of
but only to the extent of the value of the
the debt.

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said property, for the insolvency of the

debtor. Effects of Compromise (Art. 2063)
• Resort to all legal remedies includes
accion pauliana and accion subrogatoria, Compromise – a contract whereby the parties,
among others. by making reciprocal concessions, avoid a
litigation or put an end to one already
Joinder of Guarantor and Principal As Parties commenced.
Defendant 1. Compromise between creditor and
principal debtor benefits the guarantor
General rule: The guarantor, not being a joint but does not prejudice him.
contractor with his principal, cannot be sued 2. Compromise between guarantor and the
with his principal. creditor benefits but does not prejudice
the principal debtor.
Exception: Where it would serve merely to
delay the ultimate accounting of the guarantor or Reason: A compromise binds only the parties
if no different result would be attained if the thereto and not third persons. Thus, it cannot
plaintiff were forced to institute separate actions prejudice the guarantor or debtor who was not
against the principal and the guarantors. party to the compromise. But if it benefits a third
person, then the compromise may bind that third
Procedure When Creditor Sues(Art. 2062) person.
1. Sent against the principal – The
guarantor cannot be sued with his Sub-Guarantor’s Right To Excussion (Art.
principal, much less alone, except in the 2064)
cases mentioned in Art. 2059 where the Sub-guarantor enjoys the benefit of excussion
guarantor is not entitled to the benefit of with respect to:
excussion. 1. Principal debtor; and
2. Guarantor
2. Notice to guarantor of the action –
guarantor must be notified so that he may Reason: He stands with respect to the guarantor
appear, if he so desires, and set up on the same footing as the latter does with
defenses he may want to offer respect to the principal debtor.
a. Guarantor appears – voluntary
appearance does not constitute a Benefit of Division Among Several
renunciation of his right to excussion. Guarantors (Art. 2065)
b. Guarantor does not appear – 1. In whose favor applicable - should there be
i. He cannot set up the defenses several guarantors of only one debtor and for the
which, by appearing are allowed same debt, the obligation to answer for the same
to him by law; and is divided among all.
ii. It may no longer be possible for
him to question the validity of the 2. Cannot be availed of if there are:
judgment rendered against the a. Two or more debtors of one debt, even if
debtor they be bound solidarily, each with
iii. But he may still invoke the different guarantors; or
benefit of excussion b. Two or more guarantors of the same
debtor but for different debts
3. Hearing before execution can be c. If any of the circumstances enumerated
issued against the guarantor – a in Art. 2059 should take place, as would
guarantor is entitled to be heard before the benefit of exhaustion of the debtor’s
an execution can be issued against him property.
where he is not a party in the case
involving his principal.

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Exception: The guarantor cannot demand
3. Extent of liability of several guarantors –
joint obligation for reimbursement for litigation expenses,
when such expenses are due to its failure to
General rule: The obligation to answer for the fulfill its obligation to pay upon demand.
debt is divided among all of them. The (Tuason v. Machuca, G.R. No. L-22177,
1924)
guarantors are not liable to the creditor beyond
the shares which they are respectively bound to
4. Damages, if they are due.
pay.
Exceptions to Right to Indemnity or
Exception: Solidarity has been expressly
Reimbursement
stipulated.
1. Where the guaranty is constituted without
the knowledge or against the will of the
Benefit of Division among Several
principal debtor, the guarantor can recover
Guarantors:
only insofar as the payment had been
In order that the guarantor may be entitled to the
beneficial to the debtor
benefit of division, it is not required that he point
out the property of his co-guarantors.
2. Payment by a third person who does not
intend to be reimbursed by the debtor is
deemed to be a donation, which, however,
Reason: Obligation of the guarantor with respect
requires the debtor’s consent. But the
to his co-guarantors is not subsidiary but direct
payment is in any case valid as to the creditor
and does not depend as to its origin on the
who has accepted it (Art. 1238)
solvency or insolvency of the latter.
3. Waiver
v. Right to Indemnification
ART. 2066 ART. 2071
Right to Indemnity or Reimbursement (Art. (RIGHT OF (RIGHT OF
2066) (DELT) GUARANTOR TO GUARANTOR TO
1. Total amount of the debt - The guarantor has REIMBURSEMENT PROCEED
no right to demand reimbursement until he AFTER PAYMENT) AGAINST DEBTOR
has actually paid the debt, unless by the EVEN BEFORE
terms of the contract, he is given the right PAYMENT)
before making payment. Provides for the Provides for the
enforcement of the protection before he
2. Legal interest - It is immaterial that the debt rights of the has paid but after he
did not earn interest for the creditor, because guarantor against the has become liable –
the guarantor’s right to legal interest is debtor after he has gives a protective
granted by law by virtue of the payment he paid the debt – gives remedy before
a right of action after payment
has made, and is independent of the
payment
creditor’s right to claim interest which was
necessarily regulated by the stipulations Substantive right Preliminary remedy
between him and the debtor. Gives a right of Remedy given seeks
action, which, without to obtain from the
3. Expenses incurred by the guarantor - The the provisions of the debtor “release from
expenses referred to are only those that the other might be the guaranty or to
guarantor has to satisfy in accordance with worthless demand a security
law as a consequence of the guaranty. These that shall protect him
expenses are limited to those incurred by the from any proceedings
guarantor after having notified the debtor that by the creditor and
from the danger of
payment has been demanded of him by the
insolvency of the
creditor. debtor.”

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Effect of Payment by Guarantor before
vi. Right to Subrogation
maturity(Art. 2069)
Guarantor’s Right to Subrogation(Art. 2067)
Debtor’s obligation with a period –
Subrogation transfers to the person subrogated,
demandable only when the day fixed comes.
the credit with all the rights thereto appertaining
1. The guarantor who pays before maturity
either against the debtor or against third persons,
is not entitled to reimbursement since
be they guarantors or possessors of mortgages,
there is no necessity for accelerating
subject to stipulation in conventional subrogation.
payment.
1. Accrual, basis, and nature of right –
2. A contract of guaranty being subsidiary
right of subrogation is necessary to
in character, the guarantor is not liable
enable the guarantor to enforce the
for the debt before it becomes due.
indemnity given in Art. 2066
Exception: The debtor will be liable if the
a. Arises by operation of law upon
payment was made:
payment by the guarantor
a. With his consent; or
b. It is not a contractual right
b. Subsequently ratified (express or
c. The guarantor is subrogated, by
implied) by him
virtue of the payment, to the right of
the creditor, not those of the debtor.
Effect of Repeat Payment by the Debtor(Art.
2070)
2. When right not available – since
subrogation is the means of effectuating
General rule: Before the guarantor pays the
the right of the guarantor to be
creditor, he must first notify the debtor.
reimbursed, it cannot therefore be
• If he fails to give notice and the debtor
invoked in those cases where the
repeats payment, the guarantor’s remedy
guarantor has no right to be
is to collect from the creditor
reimbursed.
• No cause of action against the debtor for
the return of the amount paid by him.
Effect of Payment by Guarantor Without
Notice to Debtor(Art. 2068)
Exception: The guarantor may still claim
• When the guarantor pays the creditor,
reimbursement from the debtor in spite of lack of
but the debtor has already paid the latter,
notice if the following conditions are present:
then the debtor can set up against the
a. The creditor becomes insolvent
guarantor the defense of previous
b. That guarantor was prevented by a
extinguishments of the obligation by
fortuitous event to advise the debtor of
payment.
the payment
• Hence, guarantor must notify the debtor
c. The guaranty is gratuitous
before making payment.
Right of Guarantor to Proceed Against Debtor
Reason: The guarantor cannot be allowed,
Before Payment(Art. 2071)
through his own fault or negligence to prejudice
or impair the rights or interests of the debtor.
General rule: Guarantor has no cause of action
against the debtor until after the former has paid
NOTE: In case of an unenforceable contract, if
the obligation.
the debtor consents to the guarantor paying, the
guarantor can seek reimbursement from the
Exceptions: Art. 2071 enumerates instances
debtor. If the debtor did not consent to the
when the guarantor may proceed against the
guarantor paying, the guarantor cannot seek
debtor even before the payment (ITS-PAID):
reimbursement from the guarantor.
1. When he is Sued for the payment;

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vii. Rights of Co-Guarantors
2. In case of Insolvency of the principal
debtor;
Between Co-Guarantors Right to Contribution
3. When the debtor has bound himself to
of Guarantor Who Pays(Art. 2073)
relieve him from the guaranty within a
Presumption of joint liability of several
specified period, and this Period has
guarantors when there are:
expired;
1. Two or more guarantors
4. When the debt has become
2. Same debtor
Demandable, by reason of the expiration
3. Same debt
of the period for payment;
5. After the lapse of Ten (10) years, when
Effect: Each is bound to pay only his
the principal obligation has no fixed
proportionate share.
period for its maturity, unless it be of such
nature that it cannot be extinguished
Art. 2073 is applicable:
except within a period longer than ten
1. When one guarantor has paid the debt to
years;
the creditor;
6. If there are reasonable grounds to fear
2. Payment by such guarantor must have
that the principal debtor intends to
been made:
Abscond;
a. By virtue of a judicial demand
7. If the principal debtor is in imminent
(benefit of division must have
danger of becoming Insolvent.
ceased); or
b. Because the principal debtor is
Purpose: To enable the guarantor to take
insolvent;
measures for the protection of his interest in view
3. Guarantor who paid is seeking
of the probability that he would be called upon to
reimbursement from each of his co-
pay the debt.
guarantors the share which is
proportionately owing him.
Remedies Available:
1. To obtain release from the guaranty; or
Effect of Insolvency of any Guarantor
2. To demand security that shall protect
Follow the rule on solidary obligations: The
him from:
share of the insolvent guarantor shall be borne by
a. Any proceedings by the creditor; and
the others including the paying guarantor in the
b. Against the insolvency of the debtor.
same joint proportion.
NOTE: Guarantor’s remedies are alternative. He
Accrual and Basis of Right:
has the right to choose which action to bring.
The right of reimbursement is acquired ipso jure
without need of any prior cession from the creditor
Suit by Guarantor against Creditor Before
by the guarantor.
Payment
The guarantor’s or surety’s action for release can
Defenses Available to Co-Guarantors(Art.
only be exercised against the principal debtor and
2074)
not against the creditor.
General rule: All defenses which the debtor
would have interposed against the creditor (i.e.
Reason: The creditor cannot be compelled to
fraud, prescription, remission, illegality, etc.).
release the guarantor before payment of his
credit. Release of the guarantor imports an
Exception: Those which cannot be transmitted
extinction of his obligation to the creditor,
for being purely personal to the debtor.
connoting remission or a novation by subrogation
which requires the creditor’s assent.

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Liability of Sub-Guarantor in case of 1. The person who requested him to be a

Insolvency of Guarantor(Art. 2075) guarantor;
Sub-guarantor is liable to the co-guarantors in the 2. The debtor
same manner as the guarantor whom he
guaranteed in case of the insolvency of the Rights of the Guarantor against The Debtor
guarantor for whom he bound himself as sub- (SICS)
guarantor. 1. Indemnification
2. Benefit of Subrogation
B. Effects of Guaranty 3. Benefit of Compromise
4. Right to obtain or demand a Security under
Married woman as Guarantor (Art. 2049) (Art. 2071)
General rule: Married woman binds only her
separate property C. Extinguishment of Guaranty

Exceptions: Causes of Extinguishment of Guaranty (PaNo-

CoCo-LoCo-FRAP) (Art. 2076)
1. With her husband’s consent, binds the
community or conjugal partnership General rule: Guaranty being accessory, it is
property extinguished when principal obligation is
2. Without husband’s consent, in cases extinguished, the causes of which are:
provided by law, such as when the
1. Payment or performance;
guaranty has redounded to the benefit of
2. Loss of the thing due;
the family
3. Condonation or remission of the debt;
4. Confusion or merger of the rights of the
Guaranty Undertaken Without Knowledge of
creditor and debtor;
Debtor (Art. 2050)
5. Compensation; and
Rights of third persons who pay: 6. Novation
7. Other causes:
1. Payment without the knowledge or
a. Annulment;
against the will of the debtor:
b. Rescission;
a. Guarantor can recover only insofar as the
c. Fulfillment of a resolutory condition;
payment has been beneficial to the
d. Prescription
debtor (Art. 1236)
b. Guarantor cannot compel the creditor to
Exception: The guaranty itself may be directly
subrogate him in his rights (Art. 1237)
extinguished although the principal obligation still
2. Payment with knowledge or consent
remains such as in the case of the release of the
of the debtor: Subrogated to all the
guarantor made by the creditor.
rights which the creditor had against the
debtor (Art. 2067) Material Alteration of Principal Contract
Any agreement between the creditor and the
Double or Sub-Guaranty (Art. 2051(2))
principal debtor which essentially varies the terms
One constituted to guarantee the obligation of a of the principal contract without the consent of the
guarantor. It should not be confounded with surety, will release the surety from liability.
guaranty wherein several guarantors concur.
Such material alteration would constitute a
Guarantor of a Third Person at Request of novation or change of the principal contract,
Another (Art. 2072) which is consequently extinguished. Upon such
extinguishments, the accessory contract to
The guarantor who guarantees the debt of an
guaranty is also terminated and the guarantor
absentee at the request of another has a right to
cannot be held liable on the new contract to which
claim reimbursement, after satisfying the debt
he has not given his consent.
from:

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The liabilities of an insurer under the surety bond Release by Extension of Term Granted by
are not extinguished when the modifications in Creditor to Debtor (Art. 2079)
the principal contract do not substantially or
Release Without Consent of Guarantor:
materially alter the principal's obligations. The
Creditor grants an extension of time to the debtor
surety is jointly and severally liable with its
without the consent of the guarantor.
principal when the latter defaults from its
obligations under the principal contract (People's Effect: Guarantor is discharged from his
Trans-East Asia Insurance Corporation v. undertaking.
Doctors of New Millennium Holdings, Inc., G.R.
Reason: To avoid prejudice to the guarantor. The
No. 172404, 2014)
debtor may become insolvent during the
extension, thus depriving the guarantor of his
When Alteration Material
right to reimbursement.
Where such change will have the effect of making
It doesn’t matter if the extension is:
the obligation more onerous.
a. Prejudicial or not; or
1. Imposes a new obligation or added burden
b. For a long or short period of time.
on the party promising; or
2. Takes away some obligation already
imposed, changing the legal effect of NOTE: Consent of the Guarantor is a must.
the original contract and not merely the Extension must be based on some new
form thereof. agreement between the creditor and the principal
debtor by virtue of which the creditor deprives him
Release by Conveyance of Property (Art. 2077) of his claim.
General rule: Payment is made in money. 1. Where obligation payable in installments:
Exception: Any substitute paid in lieu of money Where a guarantor is liable for different
which is accepted by the creditor extinguishes payments.
the obligation and in consequence, the guaranty. General rule: An extension of time to one or
more will not affect the liability of the surety
• If the creditor accepts property in payment of for the others.
a debt from the debtor, the guarantor is
relieved from responsibility. This is also true Exception: When the unpaid balance has
even in case the creditor is subsequently become automatically due by virtue of an
evicted from the property. acceleration clause for failure to pay an
installment.
In case of eviction: Eviction revives the principal Effect of exception: The act of the creditor
obligation but not the guaranty. extending the payment of said installment,
Reason: The creditor’s action against the debtor without the guarantor’s consent, discharges
is for eviction and this is different from what the the guarantor.
guarantor guaranteed. Reason: The extension constitutes an
Release of Guarantor without Consent of extension of the payment of the whole
Others (Art. 2078) amount of the indebtedness

Effect: The release benefits all to the extent of 2. Where consent to an extension is waived
the share of the guarantor released. in advance by the guarantor or surety:
Such waiver is not contrary to law, nor to
Reason: A release made by the creditor in favor
public policy
of one of the guarantors without the consent of
the others may prejudice the others should a Effect: Amounts to the guarantor’s or
guarantor become insolvent. surety’s consent to all the extensions
granted.

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NOTE: The mere failure or neglect on the part of Release when Guarantor cannot be
the creditor to enforce payment or to bring an Subrogated (Art. 2080)
action upon a credit, as soon as the same or any
• If there can be no subrogation because of the
part of it matures, does not constitute an
fault of the creditor, the guarantors are
extension of the term of the obligation, and
thereby released, even if the guarantors are
therefore, the liability of the guarantor is not
solidary.
extinguished
• If the creditor has acquired a lien upon the
property of a principal debtor, the creditor
In order to constitute an extension discharging
at once becomes charged with the duty of
a surety, it should appear that the extension was:
retaining such security, or maintaining such
(DEW)
1. For a Definite period lien in the interest of the surety, and any
release or impairment of this security as a
2. Pursuant to an Enforceable agreement
primary resource of payment of a debt, will
between the principal and the creditor
discharge the surety to the extent of the value
3. Made Without the consent of the surety or
of the property or lien released for there
with a reservation of rights with respect to
immediately arises a trust relation between
him.
the parties, and the creditor as trustee is
• The contract must be one which precludes
bound to account to the surety for the value
the creditor from, or at least hinders him in,
of the security in his hands.
enforcing the principal contract within the
period during which he could otherwise have
Reason: The act of one cannot prejudice
enforced it, and precludes the surety from
another. It also avoids collusion between the
paying the debt.
creditor and the debtor or a third person.
• The law does not even grant the surety the
right to sue the creditor for delay, as Defenses Available to Guarantor against
protection against the risks of possible Creditor (Art. 2081)
insolvency of the debtor; but in view of the General rule: All defenses, which pertain to the
efficacy of the action on the contract against
principal debtor and are inherent in the debt.
the surety, beginning with the date the
obligation becomes due, his vigilance must Exception: Those which are purely personal to
be exercised rather against the principal the debtor.
debtor.
D. Legal and Judicial Bonds
That an extension granted to the debtor by the
A judicial bondsman is a surety offered in virtue
creditor without the consent of the guarantor
of a provision of law or a judicial order, and he
extinguishes the guaranty, also applies to
must have the qualifications of a guarantor. (Art.
suretyship. The theory behind Art. 2079 is that an
2082).
extension of time given to the debtor by the
creditor without the surety’s consent would
deprive the surety of his right to pay the creditor If a person required to give a bond or surety is
and to be immediately subrogated to the unable to do so, he may give a mortgage
creditor’s remedies against the debtor upon the instead. (Art. 2083)
maturity date. The surety is entitled to protect
himself against the debtor’s insolvency during the Note that a bondsman is a surety and cannot
extension. However, it must be stressed that Art. avail of the benefit of excussion. (Art. 2084)
2079 will apply only if the extension is granted by
the creditor in favor of the debtor without the
guarantor’s/surety’s consent. (TIDC v. APC,
2014)

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– such agreement is enforceable and not
4. SURETY
violative of any public policy
A. Concept a. Indemnity against loss – indemnitor will
not be liable until the person to be
A relation which exists where one person indemnified makes payment or sustains
(principal or obligor) has undertaken an loss
obligation and another person (surety) is also b. Indemnity against liability –
under a direct and primary obligation or other indemnitor’s liability arises as soon as the
duty to a third person (obligee), who is entitled liability of the person to be indemnified
to but one performance, and as between the two has arisen without regard to whether or
who are bound, the one rather than the other
not he has suffered actual loss
should perform (De Leon, 2016, citing Agro
Conglomerates v. CA, 348 SCRA 450 (2000)) c. Such agreement valid - A stipulation in
an indemnity agreement providing that
the indemnitor shall pay the surety as
It is a contractual relation resulting from an soon as the latter becomes liable to make
agreement whereby one person (the surety)
payment to the creditor under the terms
engages to be answerable to a third person (the
obligee/creditor) for the debt, default, or of the bond, regardless of whether the
miscarriage of another (the principal or surety has made payment actually or
obligor/debtor). It involves 2 relationships; the not, is valid and enforceable, and in
principal relationship between the obligee and accordance therewith, the surety may
the obligor, and the accessory relationship demand from the indemnitor even before
between the principal (obligor) and the surety the creditor has paid.
(De Leon, 2016, citing Garcia v. CA, 191 SCRA
493 (1990) and Visayan Surety v. CA, 364
SCRA 631 (2001)) Where the principal debtors are
simultaneously the same persons who
B. Form of Surety executed the indemnity agreement, the
position occupied by them is that of a
A contract of guaranty must be in writing to be principal debtor and indemnitor at the
enforceable, since it is a “special promise to same, and their liability being joint and
answer for the debt, default or miscarriage of several.
another.” (De Leon, 2016, at 320)

If the obligation is collateral to another If a corporation is being rehabilitated and a

agreement, and therefore the obligor is a surety, judicial stay order is issued enjoining the filing of
the promise must be in writing. (Sta. Maria, claims against the corporation, the corporation’s
Obligations and Contracts, 2017 ed., at 651, creditors can proceed against the sureties. The
citing Reiss v. Memije) judicial stay order does not cover claims against
sureties who are solidarily liable with the
However, a contract of guaranty (or surety) does corporation under rehabilitation. Actions against
not need to appear in a public document to be the sureties may proceed independently. (JAPRL
valid and enforceable. (De Leon, 2016, at 320) v. SBC,G.R. No. 190107, 2011)

C. Obligations Secured D. Surety Distinguished From Standby

Letter of Credit
Recovery of Surety Against Indemnitor (i.e.,
principal debtor) Even Before Payment Standby letters of credit (SBLCs) are primary and
not accessory obligations, while sureties are
1. Indemnity agreement is for the benefit accessory obligations that require a valid principal
of surety – not for the benefit of the obligation. In a situation involving aSBLC, the
creditor payments made by the “principal debtor” cannot
2. Indemnity agreement may be against act to discharge the issuer of the
actual loss as well as potential liability

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SBLC from its own obligation to pay, even if the creditor proceeds
total payments would amount to more than the against him.
principal obligation. (Insular Bank of Asia & Not bound to take Held to know every
America v. IAC, 167 SCRA 450) notice of the non- default of the
performance of the principal.
E. Surety Distinguished From Guaranty principle
GUARANTY SURETYSHIP
F. Surety Distinguished From Joint and
Liability depends Assumes liability as a Solidary Obligations
upon an independent regular party to the
agreement to pay the undertaking In the case of joint and solidary debtors, Article
obligation if the 1217 makes plain that the solidary debtor who
principal debtor fails
effected the payment to the creditor “may claim
to do so
from his co-debtors only the share which
Engagement is a Charged as an corresponds to each, with the interest for the
collateral undertaking original promisor payment already made.” Such solidary debtor will
Secondarily liable – Primarily liable – not be able to recover from the co-debtors the full
he contracts to pay if, undertakes directly for amount already paid to the creditor, because the
by the use of due the payment without right to recovery extends only to the proportionate
diligence, the debt reference to the share of the other co-debtors, and not as to the
cannot be paid solvency of the particular proportional share of the solidary
principal, and is so debtor who has already paid. In contrast, even as
responsible at once the surety is solidarily bound with the principal
the latter makes
debtor to the creditor, the surety who does pay
default, without any
the creditor has the right to recover the full
demand by the
creditor upon the amount paid, and not just any proportional share,
principal whatsoever from the principal debtor or debtors. Such right to
or any notice of full reimbursement falls within the other rights,
default actions, and benefits which pertain to the surety
by reason of the subsidiary obligation assumed by
Only binds himself to Undertakes to pay if
pay if the principal the principal does not the surety. (Escaño v. Ortigas, Jr., 526 SCRA26,
cannot or is unable to pay, without regard to G.R. No. 151953, 29 June 2007)
pay his ability to do so
Insurer of the Insurer of the debt
solvency of the
debtor
Does not contract Pay the creditor
that the principal will without qualification
pay, but simply that if the principal debtor
he is able to do so does not pay. Hence,
the responsibility or
obligation assumedby
the surety isgreater or
more onerous than
that of aguarantor

Guarantor can avail of Surety cannot avail

the benefit of the benefit of
excussion and excussion and
division in case the division.

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5. LETTERS OF CREDIT whether the main contract is actually

accomplished or not. (Annotation, 228 SCRA
A. Definition and Purpose 378 (1993))

A letter from a merchant or a bank or banker in

one place, addressed to another, in another place Purpose of Letters of credit:
or country, requesting the other bank to pay a. As to the SELLER
money or deliver goods to a third party named • Insures to a seller payment of a
therein, the opening bank under taking to provide
definite amount upon
him the money for the goods or to repay him.
presentation of documents
• Enables the seller to release his
It is a letter requesting one person to make
inventory or stock in trade
advances to a third person on the credit of the
without seeking credit facilities
writer who assumes responsibility for payment of from his own bank for the buyer
the debt therefor to the addressee
b. As to the BUYER
“A letter of credit is a financial device developed Gives the buyer the opportunity
by merchants as a convenient and relatively to levy goods even without
safe mode of dealing with sales of goods to money but on his credit
satisfy the seemingly irreconcilable interests of standing with the opening bank
a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to Parties to a Letter of Credit
have control of the goods before paying.”
Buyer (Applicant)
(Annotation, 228 SCRA 378 (1993), citing Bank
Procures the letter of credit and obliges
of America v. CA, 228 SCRA 357)
himself to reimburse the issuing bank
upon receipt of the document of title.
The buyer contacts a bank to issue a letter of
credit (LC) in favor of the seller so that, by virtue Issuing Bank
of the LC, the bank authorizes the seller to draw Undertakes to pay the seller upon receipt
drafts and engages to pay them upon of the draft and proper documents of titles
presentment with simultaneous tender of and to surrender the documents to the
documents required by the LC. Once the LC is buyer upon reimbursement. Issuing
established, the seller ships the goods to the bank’s obligation is solidary with that of
buyer and in the process secures shipping the buyer (Insular Bank v. IAC, G.R. No.
documents. To get paid, the seller executes a 74834, 1988).
draft and presents it together with the shipping
documents to the issuing bank. The issuing Note: Usually the issuing bank merely
bank redeems the draft and pays the seller if it substitutes its own promise to pay for that
finds that the documents submitted by the seller of its customer, who in turn promises to
conform with the LC. The bank then obtains pay the bank the amount of the credit and
possession of the documents. The transaction is the fees mutually agreed upon. “Once the
completed when the buyer reimburses the bank issuing bank shall have paid the
and acquires the documents entitling him to the beneficiary after the latter’s compliance
goods. The bank engages to pay the seller once with the terms of the letters of credit, the
the draft and appropriate shipping documents issuing bank is entitled to reimbursement
are presented; this arrangement assures the for the amount it paid under the letter of
seller of being paid, independently of any credit.” (Galvez and Guy v. CA and Asia
breach of the main sales contract. By this, the United Bank, G.R. No. 187919, 2012).
bank determines compliance with the LC only by
examining the shipping documents presented; Seller (Beneficiary)
it is precluded from determining Who in compliance with the contract of

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paid (Code of Commerce, Art.
sale ships the goods to the buyer and
569, par. 1)
delivers the documents of title and draft
to the issuing bank to recover payment. • In case of revocation, he must
inform the bearer and the
The Number of Parties May Include: person to whom it is
1. Advising (Notifying) Bank addressed (Code of
Commerce, Art. 570)
May be utilized to convey to the
2. BEARER of letter of credit
seller the existence of the credit, but
does not assure that the issuing • Pay the amount received
bank will pay and may refuse to without delay (Code of
accept the drafts without being Commerce, Art. 571, par. 1)
3. NOTIFYING BANK
liable (Bank of America v. CA, G.R.
No. 105395, 1993) • To notify and/or transmit the
2. Confirming Bank documentary of credit to the
Which will lend credence to the seller-beneficiary
letter of credit issued by a lesser • Assumes no liability
known issuing bank; the confirming 4. NEGOTIATING BANK
bank is directly liable to pay the • Buys/discounts a draft under
seller-beneficiary the letter of credit
3. Paying Bank • Liability depends upon the
Which undertakes to encash the negotiation
drafts drawn by the exporter/seller o Before negotiation, it has no
4. Negotiating Bank liability with respect to the
Instead of going to the place of the seller
issuing bank to claim payment, the o After negotiation, there is a
buyer may approach the negotiating contractual relationship
bank to have the draft discounted; prevailing between the
Its liability is dependent upon the negotiating and the seller
stage of the negotiation – if before 5. CONFIRMING BANK
negotiation, no liability (Charles Lee • Assumes a direct obligation to
v. CA, G.R. No. 117913, 2002). the seller

Rights and Obligations of the Parties Nature or Legal Relations Arising From
Letters of Credit:
Rights of the Parties It may be made conditional, but for purposes of
• The person paying shall have the protecting the banking and mercantile
right to demand proof of identity of community, all conditions must be complied with,
the person in whose favor the letter however onerous. It is unaffected by any breach
of credit was issued (Code of of contract on the part of the seller or the buyer or
Commerce, Art. 569(3)) by any controversy which may arise between the
• In case of non-payment, person to buyer and seller or by any other transactions
whom the letter of credit is between the buyer and the seller (NAMARCO v.
addressed may institute an action Atlas Trading, G.R. No. 21911, 1967).
involving execution (Code of
Commerce, Art. 571(2)). When Letter of Credit Considered
Consummated Contract:
Obligations of the Parties It is the date of payment if the amount of the
1. DRAWER of the letter of credit foreign currency to the creditor in his country by
• Liable to the person on whom the agent or correspondent bank in the country of
it was issued for the amount the debtor that turns from executory to executed

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opening of the letter of credit and the
or consummated contract. It is not the date of
beneficiary must be obtained before
payment by the debtor to the bank in his country
it may be revoked. This gives the
of the amount of foreign exchange sold that
seller certainty of payment.
makes the contract executed or consummated,
because the bank may grant the debtor extension
Issuing bank may not, without the
of time to pay such debt (BelmanCompania v. CB
of the Philippines, G.R. No. L-10195, 1958). consent of the beneficiary (seller)and
the applicant (buyer), revoke his
B. Kinds of Letters of Credit undertaking under the letter

Commercial Letter of Credit 3. According to Obligation

An instrument by which a bank, for the account of b) Unconfirmed Letter of Credit
the buyer, gives formal evidence to a seller, of its The notifying bank is requested
willingness to permit him, the seller, to draw bills merely to act as the medium through
against it, on certain terms, and stipulates in legal which the opening bank’s obligation
form that all such bills will be honored. is transmitted to the beneficiary. Its
letter of advice shall guarantee the
1. According to Methods of Transmission authenticity of the message it is
a) Circular Letter of Credit transmitting on behalf of the opening
It is addressed to persons in general bank.
in which the opening bank
undertakes to honor the beneficiary’s c) Confirmed Letter of Credit
drafts under certain stipulated The notifying bank gives an absolute
conditions. This may either be mailed assurance that the opening bank’s
or by the issuing bank to the obligation will be performed.
beneficiary or delivered by the
issuing bank to the accredited buyer, Irrevocable v. Confirmed Letters of Credit
to be mailed by him to the IRREVOCABLE CONFIRMED
beneficiary. LETTERS OF LETTERS OF
CREDIT CREDIT
b) Specially Advised Letter of Credit Refers to the duration Refers to the kind of
It is transmitted to the beneficiary by of the letter of credit obligation assumed by
the opening bank through the the correspondent
medium of its correspondent in the bank
vicinity of the beneficiary. The issuing bank The correspondent
made no reservation bank gives anabsolute
of his right to revoke. assurance that it will
2. According to Duration
Hence, it cannot do undertake the issuing
a) Revocable Letter of Credit so without the bank’sobligation as its
The opening bank leaves the consent of the own according to the
duration of the credit open for beneficiary. terms
subsequent consideration and thus and conditions of the
reserves the right to withdraw from credit
the transaction by stating that it is
“good as cancelled” or good until a 4. According to Method of Payment
stipulated date “unless sooner a) Negotiation
revoked”. The beneficiary is to draw his drafts
in a foreign currency either in the
c) Irrevocable Letter of Credit opening foreign bank or in another
The issuing bank does not reserve its opening foreign bank, which drafts so
right to revoke the credit. The drawn the beneficiary may sell to the
consent of the party who sought the notifying bank or any other bank in

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b) Reimbursement
his locality. The beneficiary
Occasionally, the opening bank
negotiates his foreign currency drafts
doesn’t have an account with the
drawn under the credit to the bank in
correspondent it chooses as a paying
his locality offering him the best rate.
bank or, having an account, may
prefer not to have it debited. In the
b) Straight
latter case, the paying bank will draw
The beneficiary is paid by a bank
a draft for the amount of its payment,
local to him and designated by the
with commission and interest for the
opening bank. The drafts are usually
period elapsing until reimbursement,
drawn in the currency of the
either on the opening bank or the
beneficiary.
correspondent with which the
Sight and Acceptance Letter of opening bank carries an account.
Credit
6. According to Provision for Renewal
Under a sight credit, the
a) Revolving Credits
beneficiary’s drafts are drawn
The opening bank who may be
payable at sight. Once paid, the
willing to finance aggregate
drafts serve simply as receipts for
shipments which will exceed the
payment and are without value for
amount of credit is willing to have
any other purpose.
outstanding at one time for the
accredited buyer.
In an acceptance credit, it is
stipulated that the drafts be drawn at
A single commercial letter of credit
time, for acceptance, upon some
may be given a life sufficient to cover
well-reputed bank in a center of
the period of time necessary to
international finance. This is used if
complete the transaction, with the
the accredited buyer and the opening
restriction that the amount shall not
bank want to use the drafts as a
exceed the limit set.
means by which to obtain funds for
financing the transaction in a
There should be a proviso that, upon
discount market. The draft is
notice from the opening bank that
discounted after acceptance and the
any draft which the beneficiary has
beneficiary is placed in funds. The
drawn within that limit has been paid
accredited buyer need not furnish
and retired by the accredited buyer,
funds to pay the draft until its
the like sum becomes available to the
maturity.
beneficiary.
5. According to Method of Reimbursement
b) Cumulative
a) Simple
Amounts not used in one month are
A letter of credit where an opening
available in succeeding months.
bank instructing a correspondent to
act as the paying bank carries an
c) Non-Cumulative
account in the currency to be paid
Amounts unused during the month
with the paying bank. The amount of
lapses.
payment made to the beneficiary and
the paying bank’s commission for the
7. According to Source of Payment
service performed is debited to his
a) Local Currency
account.
A credit that stipulates that drafts are
to be drawn in the currency of the
domicile of the beneficiary.

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undetermined amounts, but within a
maximum of limits of which has to be
a) Foreign Currency
stated exactly
A credit which stipulates that drafts
are to be drawn in a foreign currency,
Contents of Letters of Credit (SAINTS-SCOE)
whether that of the accredited buyer
a. Signature of the writer
or not.
b. Name of the individual or concern for
whose account it is issued
Commercial v. Standby Letters of Credit
COMMERCIAL STANDBY LETTERS c. The approximate value of the goods
LETTERS OF CREDIT OF CREDIT to be shipped and the general nature
NATURE of the goods
A payment mechanism A security mechanism d. The issuance of the drafts which the
– payable upon – it is payable to seller seller must draw and the name of the
presentation by seller- upon certification of a bank on which the drafts are to be
beneficiary of party’s non- drawn
documents showing performance of an e. The terms of sale
that he has complied agreement.
f. A statement as to whether the drafts
with sales agreement.
DOCUMENTATION are to be drawn for 100% of the cost
of the merchandise or for a lesser
Seller-beneficiary must Seller-beneficiary must
show documents that show that applicant has percentage
he has performed his NOT performed his g. The shipping route
contract contract. h. The exact shipping and other
CERTIFICATION documents which must be attached
Seller-beneficiary need Seller-beneficiary must to the drafts of the seller
not make any certify obligor has not i. The outside date of the shipment and
certification. performed his contract. the outside date by which the seller
is to negotiate his drafts to which the
Traveler’s Letter of Credit specified documents are attached
A letter from a bank addressed to one or more j. Clear indication upon the part of the
of its correspondents stating that drafts up to issuing bank that the seller’s drafts
a certain sum drawn by the beneficiary will be will be duly honored
honored by the bank.
C. Rule of Strict Compliance
Note:
“It is a settled rule in commercial transactions
• The purpose of a traveler’s letter of credit involving letters of credit that the documents
is to provide the traveler with funds en tendered must strictly conform to the terms of
route the letter of credit. The tender of documents by
• OR just bring a credit card. the beneficiary (seller) must include all documents
required by the letter. A correspondent bank which
Specially Advised Letter of Credit departs from what has been stipulated under the
It is addressed to only one bank. letter of credit, as when it accept a faulty tender,
acts on its own risks and it may not thereafter be
Circular Letter of Credit able to recover from the buyer or the issuing bank,
It is addressed to a number of as the case may be, the money thus paid to the
correspondents. beneficiary. Thus the rule of strict compliance…
Under the foregoing provisions of the U.C.P., the
Essential Conditions (Art. 568) bank may only negotiate, accept or pay, if the
a. To be issued in favor of a definite documents tendered to it are on their face in
accordance with the terms and conditions of the
person
documentary credit. And since a correspondent
b. To be limited to a fixed and specified
bank, like the petitioner, principally deals only with
amount, or to one or more

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Independent Nature of a Letter of Credit May
documents, the absence of any document
Be:
required in the documentary credit justifies the
refusal by the correspondent bank to negotiate, a. In toto where the credit is independent
accept or pay the beneficiary, as it is not its from the justification aspect and is a
obligation to look beyond the documents. It merely separate obligation from the underlying
has to rely on the completeness of the documents agreement like for instance a typical
tendered by the beneficiary.” (Feati Bank v. CA, standby; or
196 SCRA 576 (1991)) b. Only as to the justification aspect like in
commercial letter of credit or repayment
D. Independence Principle standby, which is identical with the
obligations under the underlying
In a letter of credit, transaction means that a bank, agreement (Transfield Philippines v.
in determining compliance with the terms of a Luzon Hydro Corp., GR No. 146717,
letter of credit, is required to examine only the 2004).
shipping documents presented by the seller and
is precluded from determining whether or not the
In letters of credit transactions, fraud is an
main contract is actually accomplished or not.
exception to the independent Principle. Fraud
can also justify the issuance of an injunction
“What characterizes letters of credit, as against payment.
distinguished from other accessory contracts, is
the engagement of the issuing bank to pay the
seller once the draft and the required shipping The requirements for such injunction to the
documents are presented to it. In turn, this issue are the following: (PAI)
arrangement assures the seller of prompt 1. there is clear Proof of fraud;
payment, independent of any breach of the main 2. the fraud constitutes fraudulent Abuse of
sales contract. By this so-called “independence the independent purpose of the letter of
principle,” the bank determines compliance with credit and not only fraud under the main
the letter of credit only by examining the shipping agreement; and
documents presented; it is precluded from 3. Irreparable Injury might follow if
determining whether the main contract is actually injunction is not granted or the recovery
accomplished or not.” (Bank of America v. CA, 228 of damages would be seriously damaged
SCRA 357 (1993)) (Transfield Philippines v. Luzon Hydro
Corp., G.R. No. 146717, 2004).
The independence principle is for the benefit of
both the issuing bank and the beneficiary. Upon --------end of topic --------
submission of the required documents for the
drawing down of the letter of credit, it is
“ministerial” on the bank to honor the credit.
(Transfield Phils. v. Luzon Hydro, 443 SCRA 307
(2004)

Three Distinct and Independent Contracts in a

Letter of Credit
a. Sale between the seller and the buyer;
b. Contract of buyer with issuing bank; and
c. The letter of credit itself, wherein the
bank promises to pay pursuant to the
terms and conditions of the letters of
credit. This assures seller of prompt
payment, independent of any breach of
the main sales contract.

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B. TRUTH IN LENDING ACT
VII. SPECIAL LAWS
B. TRUTH IN LENDING ACT
1. Purpose 1. PURPOSE
2. Obligation of Creditors to Person to
“It is hereby declared to be the policy of the State
Whom Credit is Extended
to protect the citizens from a lack of awareness of
3. Covered and Excluded Transactions
4. Consequences of Non-Compliance the cost of credit to the user by assuring a full
With Obligation disclosure of such costs with a view of preventing
the uninformed cost of credit to the detriment of
the national economy.” (Sec. 2, RA 3765)

In short, protect citizens from uninformed use of

credit by requiring disclosure by the lenders of all
finance charges in relation to said credit(including
not only interest, but also fees, service charges,
discounts, and other charges as may beprescribed
by the Monetary Board).

2. OBLIGATION OF CREDITORS TO
PERSON TO WHOM CREDIT IS EXTENDED

Prior to the consummation of the transaction,

the creditor must furnish a disclosure statement
to the person to whom credit is extended, which
contains the following information:
1. The cash price or delivered price to the
property or service to be acquired;
2. The amounts, if any, to be credited as
down payment and/or trade-in;
3. The difference between the amounts
set forth under clauses (1) and (2);
4. The charges, individually itemized,
which are paid or to be paid by such
person in connection with the
transaction but which are not incident to
the extension of credit;
5. The total amount to be financed;
6. The finance charge expressed in terms of
pesos and centavos; and
7. The percentage that the finance bears to
the total amount to be financed
expressed as a simple annual rate on the
outstanding unpaid balance of the
obligation (Sec. 2, RA 3765)

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installment buyer.” (International
3. COVERED AND EXCLUDED
Harvester Macleod, Inc. v. Medina, Jr., 183
TRANSACTIONS
SCRA 485 (1990))
Covered transactions:
1. Any loan, mortgage, deed of trust, Banks and non-bank financial
advance, or discount; intermediaries authorized to engage in
2. Any conditional sales contract; quasi-banking functions are required to
strictly adhere to the Truth in Lending Act.
3. Any contract to sell, or sale or contract of
(Consolidated Bank v. CA, 246 SCRA 193
sale of property or services, either for (1995))
present or future delivery, under which
part or all of the price is payable
subsequent to the making of such sale or 4. CONSEQUENCES OF NON-
contract; COMPLIANCE WITH OBLIGATION
4. Any rental-purchase contract;
Civil liability: P100 or an amount equal to twice
5. Any contract or arrangement for the hire, the finance charge required by the creditor,
bailment, or leasing of property; whichever is higher, except that the liability
6. Any option, demand, lien, pledge, or should not exceed P2,000. The action to
other claim against, or for the delivery of, recover this penalty may be brought within 1
property or money; year from the transaction. The creditor shall
7. Any purchase, or other acquisition of, or also be liable for reasonable attorney’s fees
any credit upon the security of, any and court costs, as determined by the court
obligation of claim arising out of any of
the foregoing; Criminal liability: fine of P1,000 to P5,000, or
8. Any transaction or series of transactions imprisonment of 6 months to 1 year, or both.
having a similar purpose or effect (Sec. (Sec. 6, RA 3765)
3(2), RA 3765)

Done by:
--------end of topic --------
Any person engaged in the business of
extending credit (including any person
who as a regular business practice makes
loans or sells or rents property or services
on a time, credit, or instalment basis, either
as principal or as agent) who requires as
an incident to the extension of credit, the
payment of a finance charge (Sec. 3(3),
RA 3765)

“In a financing transaction under RA 3765,

there are 3 parties involved, namely: (1)
the installment buyer, (2) the seller, and (3)
the financing company. The buyer
executes a note or notes for the unpaid
balance of the price of the thing purchased
by him on installment. The seller assigns
the notes or discounts them with a
financing company which is subrogated in
the place of the seller, as creditor of the

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C. ANTI-MONEY LAUNDERING ACT
VIII. SPECIAL LAWS
C. ANTI-MONEY LAUNDERING ACT
1. POLICY
1. Policy
2. Covered institutions and their
The law declares that it is the policy of the State
obligations to:
3. Covered and suspicious transactions 1. Protect and preserve the integrity and
4. Money laundering; how committed;
confidentiality of bank accounts;
unlawful practices or predicate crimes
2. Ensure that the Philippines shall not be used
5. Anti-Money Laundering Council;
functions as a money laundering site for the proceeds
6. Safe harbor provision of any unlawful activity; and
7. Application for freeze orders 3. Extent cooperation in transnational
a. Who may apply investigations and prosecutions of persons
b. Effectivity involved in money laundering acts wherever
c. Duties of covered institutions committed. (R.A. No. 9160, Section 2)
8. Authority to inquire into bank deposits
a. Forfeiture provisions 2. COVERED INSTITUTIONS AND
b. Mutual assistance among states OBLIGATIONS

COVERED INSTITUTIONS

1. Supervised or regulated by the Bangko

Sentral ng Pilipinas Banks, non-banks,
quasi-banks, trust entities, foreign exchange
dealers, pawnshops, money changers,
remittance, and transfer companies and
other similar entities and all other persons
and their subsidiaries and affiliates
2. Supervised or regulated by the Insurance
Commission: Insurance companies, pre-
need companies, and all other person (e.g.,
insurance agents and brokers, professional
reinsurers, reinsurance brokers, holding
companies and systems, mutual benefit
associations and their subsidiaries and
affiliates);
3. Supervised or regulated by the Securities
and Exchange Commission
a. Securities dealers, brokers,
salesmen, investment houses, and
other similar persons managing
securities or rendering services as
investment agent, advisor, or
consultant;
b. Mutual funds, close-end investment
companies, common trust funds, and
other similar persons; and
c. Other entities administering or
otherwise dealing in currency,
commodities, or other financial

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a. They are acting as independent
derivatives based thereon, valuable
legal professionals
objects, cash substitutes, and other
b. Authorized to practice in the
similar monetary instruments or
Philippines; and
property
c. They are subject to the
4. Jewelry dealers who deal with precious
provisions of their respective
metals, and precious stones for transactions
codes of conduct and/or
in excess of One Million Pesos
professional responsibility or any
(P1,000,000.00);
of its amendments. (R.A. No.
5. Company service providers which, as a
9160, Section 3[a], as amended
business, provide any of the following services
by R.A. No. 10365)
to third parties:
a. Acting as a formation agent of
They shall be excluded from the coverage of the
juridical persons; Anti-Money Laundering Act in relation to
b. Acting as (or arranging for another information concerning their clients or where the
person to act as) a director or disclosure of information would compromise
corporate secretary of a company, a client confidences or the attorney-client
partner of a partnership, or a similar relationship.
position in relation to other juridical
7. Casinos, including internet and ship-based
persons;
casinos with respect to their casino cash
c. Providing a registered office,
transactions related to their gaming
business address or
operations. (Sec. 3[a][8], RA No. 9160, as
accommodation, correspondence or
amended)
administrative address for a
company, a partnership or any other OBLIGATIONS OF COVERED PERSONS
legal person or arrangement; and
d. Acting as (or arranging for another Persons and institutions covered by the Anti-
person to act as) a nominee Money Laundering Act are subject to the
shareholder for another person; and following obligations:
6. Persons who provide for any of the following
a. Customer Identification (“Know Your
services:
Client”) - covered and institutions shall:
a. Managing of client money, securities,
or other assets; ● Establish and record the true identity
b. Management of bank, savings, or of its clients based on official
securities account; documents;
● Maintain a system of verifying the
c. Organization or contribution for the
true identity of their clients
creation, operation, or management
● For corporate clients, require a
of companies; and
system of verifying their legal
d. Creation, operation or management
of juridical persons or arrangements, existence and organizational
structure, as well as authority and
and buying and selling business
entities. (R.A. No. 9160, Section 3[a], identification of all persons
purporting to act on their behalf;
as amended by R.A. No. 10365)
● Absolutely prohibit anonymous
Lawyers and accountants are not considered as accounts, accounts under fictitious
covered persons if they render services under names, and all other similaraccounts;
item 6 provided the following requisites are ● Allow peso and foreign currency
present. non-checking numbered
accounts.

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The BSP may conduct annual testing solely ● For closed accounts, covered
limited to the determination of the existence and institutions and persons shall
true identity of the owners of such accounts. (R.A. preserve and store the records on
No. 9160, Section 9[a])
customer identification, account files,
b. Reporting of Covered and Suspicious and business correspondence for at
Transactions least five (5) years from the dates
when they were closed. (R.A. No.
● Covered institutions and persons
9160, Section 9[b])
shall report to the Anti-Money
Laundering Council (AMLC) all
3. COVERED AND SUSPICIOUS
covered transactions and
TRANSACTIONS
suspicious transactions within five
(5) working days from occurrence “Transaction” Refers to any act establishing any
thereof, unless the AMLC prescribes right or obligation or giving rise to any contractual
a different period not exceeding or legal relationship between the parties. It also
fifteen (15) working days (R.A. No. includes any movement of funds by any means
9160, Section 9[c], as amended by with a covered person.
R.A. No. 10365);
“Covered Transactions” are transactions in
● A transaction should be reported as cash or other equivalent monetary instrument
a suspicious transaction if the involving a total amount in excess of Five
transaction in question is determined Hundred Thousand Pesos (P500,000.00) within
to be both a covered and suspicious one (1) banking day. (R.A. No. 9160, Section 3[b],
transaction (R.A. No. 9160, Section 9 as amended by R.A. No. 9194)
[c], as amended by R.A. No. 9194);
“Suspicious Transactions” are transactions
Confidentiality and liability with covered institutions, regardless of the
amount involved, where any of the following
When reporting covered or suspicious
transactions, covered institutions and personsare circumstances exist:
prohibited from communicating, directly or 1. There is no underlying legal or trade
indirectly, in any manner or by any other means, obligation;
to any person or entity, or the media, the fact that 2. The client is not properly identified;
a covered or suspicious transaction report has 3. The amount involved is not commensurate
been or about to be reported, the contents with the business or financial capacity of the
thereof, or any other information in relation client;
thereto. (R.A. No. 9160, Section 9 [c], as
4. Taking into account all known circumstances,
amended by R.A. No. 9194)
it may be perceived that the client’s
Neither may such reporting be published or aired transaction is structured in order to avoid
in any manner or form by the mass media, being the subject of reporting requirements
electronic mail, or other similar devices. (R.A. No. under the Anti-Money Laundering Act;
9160, Section 9[c], as amended by R.A. No. 5. Any circumstance relating to the transaction
10365) which is observed to deviate from the profile
of the client and/or the client’s past
In case of violation, the concerned officer and
employee and media shall be held criminally transactions with the covered institution;
liable. (R.A. No. 9160, Section 9 [c], as amended 6. The transaction is in any way related to an
by R.A. No. 9194 and R.A. No. 10365) unlawful activity or offense under the Anti-
Money Laundering Act that is about to be, is
c. Record Keeping being, or has been committed; or
● Covered institutions and persons 7. Any transaction that is similar or analogous to
shall maintain and safely store all any of the foregoing. (R.A. No. 9160, Section
records of transactions for five (5) 3[b-1], as amended by R.A. No. 9194)
years from the dates of transactions;

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Failing to file a report as a Money Laundering

4. MONEY LAUNDERING; HOW Offense.
Any covered institution or person who, knowing
COMMITTED; UNLAWFUL PRACTICES OR
that a covered or suspicious transaction is
PREDICATE CRIMES required under the Anti-Money Laundering Act to
be reported to the Anti-Money Laundering
Money Laundering is a crime whereby the Council, fails to do so. (R.A. No. 9160, Section 4,
proceeds of an unlawful activity are transacted, as amended by R.A. No. 9194 and R.A. No.
thereby making them appear to have originated 10365)
from legitimate sources. (R.A. No. 9160, Section
4) “Monetary Instrument” refers to proceeds of, or
instruments related to an unlawful activity. This
Persons liable for Money Laundering: may refer to any of the following:
1. Any person; or 1. Coins or currency of legal tender of the
2. Any person employed with a covered Philippines, or of any other country;
institution 2. Drafts, checks, and notes;
3. Securities or negotiable instruments, bonds,
Elements:
commercial papers, deposit certificates, trust
1. The monetary instrument or property
certificates, custodial receipts, or deposit
represents, involves or relates to the
substitute instruments, trading orders,
proceeds of any unlawful activity;
transaction tickets and confirmations of sale
2. Knowledge of the offender that the
or investments and money market
monetary instrument or property
instruments; and
represents, involves or relates to the
4. Other similar instruments where title thereto
proceeds of the unlawful activity;
passes to another by endorsement,
3. The offender commits any of the
assignment, or delivery. (R.A. No. 9160,
following:
Section 3[c])
(a) Transacts said monetary instrument or
“Unlawful Activity” refers to any act, omission,
property;
or series or combination thereof involving or
(b) Converts, transfers, disposes of, moves, having any direct relation to the following:
acquires, possesses or uses said 1. Kidnapping under ransom;
monetary instrument or property; 2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and
(c) Conceals or disguises the true nature, 16 of the Comprehensive Dangerous Drugs
source, location, disposition, movement, Act;
or ownership of or rights with respect to 3. Section 3, paragraphs B, C, E, G, H, and I of
said monetary instrument or property; the Anti-Graft and Corrupt Practices Act;
(d) Attempts or conspires to commit money 4. Plunder;
laundering offenses referred to in 5. Robbery and Extortion;
paragraphs (a), (b), and (c); 6. Jueteng and Masiao punished as Illegal
(e) Aids, abets, assists in or counsels the Gambling;
commission of the money laundering 7. Piracy on the high seas;
offenses referred to in paragraphs (a), 8. Qualified Theft;
(b), and (c) above; and 9. Swindling and Other Forms of Swindling;
(f) Performs or fails to perform any act as a 10. Smuggling;
result of which he/she facilitates the 11. Violations of the Electronic Commerce Act;
offense of money laundering referred to 12. Hijacking and other violations of the Anti-
in paragraphs (a), (b), and (c) above. Hijacking Law and Destructive Arson and
(R.A. No. 9160, Section 4, as amended Murder;
by R.A. No. 9194 and R.A. No. 10365) 13. Terrorism and Conspiracy to Commit
Terrorism

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14. Financing of Terrorism and offenses 5. ANTI-MONEY LAUNDERING COUNCIL;

punishable under the Terrorism Financing FUNCTIONS
Prevention and Suppression Act;
15. Bribery and Corruption of Public Officers; The Anti-Money Laundering Act created the entity
known as the Anti-Money Laundering Council
16. Frauds and Illegal Exactions and
(AMLC). The AMLC is composed of:
Transactions;
1. Governor of Bangko Sentral ng Pilipinas as
17. Malversation of Public Funds and Property;
its Chairman;
18. Forgeries and Counterfeiting;
2. The Commissioner of the Insurance
19. Violations of the Anti-Trafficking in Persons
Commission as a member;
Act; 3. The Chairman of the Securities and
20. Violations of the Revised Forestry Code of
Exchange Commission as a member. (R.A.
the Philippines; No. 9160, Section 7, as amended by R.A. No.
21. Violations of the Philippine Fisheries Code; 9194 and R.A. No. 10365)
22. Violations of the Philippine Mining Act;
23. Violations of the Wildlife Resources The AMLC has the following functions:
Conservation and Protection Act; 1. Require and receive covered or suspicious
24. Violations of the National Caves and Cave transaction reports from covered institutions
Resources Management Protection Act; and persons (R.A. No. 9160, Section 7, as
25. Violations of the Anti-Carnapping Act; amended by R.A. No. 9194);
26. Violations of the Decree Codifying the Laws 2. Issue orders addressed to the appropriate
on Illegal/Unlawful Possession, Manufacture, Supervising Authority or the covered
Dealing in, Acquisition or Disposition of institution to determine the true identity of the
Firearms, Ammunition or Explosives; owner of any monetary instrument or property
27. Violations of the Anti-Fencing Law; subject to a covered transaction or suspicious
28. Violations of the Migrant and Overseas transaction report or request for assistance
Workers Filipinos Act; from a foreign State, or believed by theAMLC,
29. Violations of the Intellectual Property Code; on the basis of substantial evidence, to be, in
30. Violations of the Anti-Photo and Video whole or in part, wherever located,
Voyeurism Act; representing, involving, or related to, directly
31. Violations of the Anti-Child Pornography Act; or indirectly, in any manner or by any means,
32. Violations of the Special Protection ofChildren the proceeds from an unlawful activity R.A.
Against Abuse, Exploitation, and No. 9160, Section 7, as amended by R.A. No.
Discrimination; 9194;
33. Fraudulent practices and other violations of 3. Institute civil forfeiture proceedings and all
the Securities Regulation Code; other remedial proceedings through the
34. Felonies and offenses of a similar nature that Office of the Solicitor General (R.A. No. 9160,
are punishable under the penal laws of other Section 7);
countries. (R.A. No. 9160, Section 3[i], as 4. Cause the filing of complaints with the
amended by R.A. No. 9194 and R.A. No. Department of Justice or the Ombudsman for
10365) the prosecution of money laundering
offenses;
5. Investigate suspicious transactions and
covered transactions deemed suspiciousafter
an investigation by the AMLC, money
laundering activities, and other violations of
the AMLA (R.A. No. 9160, Section 7, as
amended by R.A. No. 9194);
6. Apply before the Court of Appeals, ex parte
for the freezing of any monetary instrument or

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6. SAFE HARBOR PROVISION
property alleged to be laundered, proceeds
from, or instrumentalities used or intended to No administrative, criminal, or civil proceedings
be used in any unlawful activity (R.A. No. shall lie against any person for having made a
9160, Section 7, as amended by R.A. No. covered transaction report or suspicious
10365); transaction report in the regular performance of
7. Implement such measures as may be his/her duties in good faith, whether or not such
reporting results in any criminal prosecution
necessary and justified under the AMLA to
under the Anti-Money Laundering Act or anyother
counteract money laundering (R.A. No. 9160, law. (Revised IRR of R.A. No. 9194, Rule 9.c.5)
Section 7);
8. Receive and take action in respect of, any Exemption from Bank Secrecy Laws. When
request from foreign states for assistance in reporting covered or suspicious transactions to
their own anti-money laundering operations the AMLC, covered persons and their officers and
(R.A. No. 9160, Section 7); employees shall not be deemed to have violated
RA No. 1405 (Secrecy of Bank Deposits), as
9. Develop educational programs on the
amended, RA No. 6426 (Foreign Currency
pernicious effects of money laundering, the Deposits Act) and RA No. 8791 (General Banking
methods and techniques used in money Law), and other similar laws, provided that
laundering, the viable means of preventing confidentiality is observed. (Sec. 9[c], RA No.
money laundering and the effective ways of 9160, as amended)
prosecuting and punishing offenders (R.A.
No. 9160, Section 7); 7. APPLICATION FOR FREEZE ORDERS
10. Enlist the assistance of any branch,
department, bureau, office, agency, or Definition and Purpose. A freeze order is an
extra-ordinary and interim relief issued by the
instrumentality of the government, including
Court of Appeals to prevent the dissipation,
government-owned and controlled removal, or disposal of properties that are
corporations, in undertaking any and all anti- suspected to be the proceeds of, or related to,
money laundering operations, which may unlawful activities as defined in the AMLA. Its
include the use of its personnel, facilities and primary purpose is to temporarily preserve
resources for the more resolute prevention, monetary instruments or money that are in any
way related to an unlawful activity or money
detection, and investigation of money
laundering, by preventing the owner from using
laundering offenses and prosecution of them during the duration of the freeze order. The
offenders (R.A. No. 9160, Section 7); relief is preemptive in character, meant to
11. Impose administrative sanctions for the prevent the owner from disposing his property
violation of laws, rules, regulations and and thwarting the State’s effort in building its case
orders, and resolutions issued pursuant and eventually filing civil forfeiture proceedings
thereto R.A. No. 9160, Section 7, as and/or prosecuting the owner (Ret. Lt. Gen.
Jacinto C. Ligot et. Al. vs. Republic of the
amended by R.A. No. 9194);
Philippines, GR No. 176944, March 6, 2013).
12. Require the Land Registration Authority and Exception. The AMLC has authority to issue an
all its Registries of Deeds to submit to the ex parte freeze order, either under its own
AMLC reports on all real estate transactions initiative or of the Anti-Terrorism Council, property
involving an amount in excess of Five or funds related to financing of terrorism or
Hundred Thousand Pesos (P500,000.00) terrorist acts or property or funds of any person,
within fifteen (15) days from the date of the terrorist organization or association of group of
persons. (Sec. 11, RA No. 10168 [2012])
registration of the transaction, in a form to be
prescribed by the AMLC. The AMLC mayalso a. Requisites
require the Land Registration Authority and
all its Registries of Deeds to submitcopies of 1. Upon a verified ex parte petition filed by the
relevant documents of all real estate AMLC with the CA; and
transactions. (R.A. No. 9160, Section 7, as
amended by R.A. No. 10365)

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c. Duties of covered institutions
2. Determination that probable cause exists that
any monetary instrument or property is in any In relation to Freeze Orders, the covered
way related to an unlawful activity. (R.A. No. institutions and persons have the following duties:
9160, Section 10, as amended by R.A. No. 1. Implement freeze order. Upon receipt the
9194, R.A. No. 10167, and R.A. No. 10365). covered institution shall immediately freeze
⮚ Probable cause is the sufficiency of the the monetary instrument or property and
relation between the unlawful activity and desist from and not allow any transaction,
the property or monetary instrument withdrawal, transfer, removal, conversion,
(Subido Law Offices vs. Court of other movement, or concealment thereof.
Appeals, GR 216914, December 6, 2016) 2. Freeze and report related accounts.
It's different from the probable cause for 3. Furnish copy of freeze order to owner or
the institution of criminal action. holder.
⮚ No prior criminal charge, pendency of a 4. Submit the written detailed return. To the
case, or conviction for an unlawful activity Court of Appeals and AMLC, within twenty-
is necessary for the commencement or four (24) hours from receipt of the freeze
the resolution of a petition for freeze order, a detailed written return which shall
order. (Rule 10 [Section 1(2), 2018 AMLA include:
IRR) a. Account numbers and/or description
of the monetary instruments,
b. Effectivity property or proceeds involved;
b. Names of the account owners or
● The Freeze Order shall be effective
holders;
immediately for a period of 20 days. The CA
c. The value of the monetary
shall conduct a summary hearing within the
instrument, property, or related
period to determine whether to modify, lift or
accounts as of the time they were
extend the period. The total period of the
frozen;
Freeze Order shall not exceed six (6) months.
d. All relevant information as to the
● Once the six months has lapsed, the freeze
nature of the monetary instrument,
order is deemed ipso facto lifted.
property or instruments;
Exceptions: e. Any information on the related
⮚ When a money laundering complaint has accounts pertaining to the monetary
already been filed against the person whose instrument or property subject of the
monetary instrument or property was frozen, freeze order; and
or f. The date and the time when the
⮚ A petition for civil forfeiture against the frozen freeze order was served;
monetary instrument or property was filed 5. Freeze all related accounts upon the receipt
(Rule 10, Sec. 2.10[a], 2018 AMLA IRR). of the freeze orders and upon the verification
⮚ If an asset preservation order is issued by the of the covered institution that these are
RTC having jurisdiction over these cases, the accounts related to the monetary instrument
freeze order shall remain effective until the or property subject of the freeze order. (Rule
money laundering case is terminated or an 10, Sec. 4, 2018 AMLA IRR).
asset preservation order is issued,
respectively (R.A. No. 9160, Section 10, as
amended by R.A. No. 9194, R.A. No. 10167,
and R.A. No. 10365)

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To ensure compliance with the AMLA, the Bangko
8. AUTHORITY TO INQUIRE INTO BANK
Sentral ng Pilipinas may, in the course of a
DEPOSITS periodic or special examination, check the
compliance of a covered institution with the
The Anti-Money Laundering Council may inquire requirements of the AMLA and its implementing
into or examine any particular deposit or rules and regulations. (R.A. No. 9160, Section 11,
investment, including related accounts, with any as amended by R.A. No. 9194 and R.A. No.
banking institution or non-bank financial 10167)
institution upon order of any competent court.
(R.A. No. 9160, Section 11, as amended by R.A. a. Forfeiture Provisions
No. 9194 and R.A. No. 10167)
(a) Civil Forfeiture
The term “related accounts” shall refer to
accounts, the funds and sources of which
Any monetary instrument or property can be the
originated from and/or materially linked to the
subject of a civil forfeiture. This forfeiture can only
monetary instrument(s) or property(ies) subject of
be availed upon:
the freeze order(s). (R.A. No. 9160, Section 11,
1. The determination by the Anti-Money
as amended by R.A. No. 9194 and R.A. No.
10167) Laundering Council that probable cause
exists that any monetary instrument or
The order of the competent court must be based property is in any way related to an unlawful
on: activity or a money laundering offense; and
1. An ex parte application in cases of violations 2. A verified ex parte petition for forfeiture filed
of the Anti-Money Laundering Act; and through the Office of the Solicitor General.
2. Probable cause that the deposits or
investments, including related accounts The Rules of Court on Civil Forfeiture shall apply.
involved, are related to an unlawful activity.
(R.A. No. 9160, Section 11, as amended by The forfeiture shall include those monetary
instrument or property having an equivalent value
R.A. No. 9194 and R.A. No. 10167)
to that of the monetary instrument or property
found to be related in any way to the unlawful
No court order shall be required in the following activity or money laundering offense, when the
cases: latter:
1. Kidnapping for ransom;
1. Cannot be located despite the exercise of due
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and
diligence;
16 of the Comprehensive Dangerous Drugs
2. Has been substantially altered, destroyed,
Act;
diminished in value, or otherwise rendered
3. Hijacking and other violations of the Anti-
worthless by any act or omission;
Hijacking Law and Destructive Arson and
3. Has been concealed, removed, converted, or
Murder;
otherwise transferred;
4. Felonies similar to those previously
4. Is located outside the Philippines or has been
mentioned which are punishable in other
placed or brought outside the jurisdiction of
countries;
the court;
5. Terrorism and conspiracy to commit terrorism 5. Has been commingled with other monetary
(R.A. No. 9160, Section 11, as amended by
instrument or property belonging to either the
R.A. No. 9194 and R.A. No. 10167)
offender himself or a third person or entity,
thereby rendering the same difficult to identify
The Court of Appeals shall act on the application
to inquire into or examine any depositor or or be segregated for purposes of forfeiture.
investment with any banking institution or non- (R.A. No. 9160, Section 12[a], as amended
bank financial institution within twenty-four (24) by R.A. No. 10365)
hours from the filing of the application. (R.A. No.
9160, Section 11, as amended by R.A. No. 9194
and R.A. No. 10167)

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(b) Claim on Forfeited Assets The principles of mutuality and reciprocity shall,
for this purpose, be at all times recognized. (R.A.
When the court has issued an order of forfeiture No. 9160, Section 13[a])
of the monetary instrument or property in a
criminal prosecution for any money laundering (b) Powers of the AMLC to Act on a Request for
offense, the offender or any other interested Assistance from a Foreign State
person may apply for a declaration that the
instrument or property legitimately belongs to The AMLC may execute a request for assistance
him/her and for the segregation or exclusion of from a foreign State by:
the instrument or property. The claim on forfeited 1. Tracking down, freezing, restraining and
assets should be: seizing assets alleged to be proceeds of any
1. Instituted through a verified petition;
unlawful activity under the procedures laid
2. Filed with the court which rendered the
down by the Anti-Money Laundering Act;
judgement of forfeiture;
2. Giving information needed by the foreign
3. Filed within fifteen (15) days from the date of
State within the procedures laid down in Anti-
the finality of the order of forfeiture.
Money Laundering Act; and
3. Apply for an order of forfeiture of any
The order of forfeiture shall become final and
executory if a petition for the claim of forfeited monetary instrument or property in the court.
assets is not filed within fifteen days.
The court shall not issue an order of forfeiture
This rule shall apply in both civil and criminal unless the application is accompanied by:
forfeitures. (R.A. No. 9160, Section 12[b], as 1. An authenticated copy of the order in the
amended by R.A. No. 10365) court of the requesting State ordering the
forfeiture of said monetary instrument or
(c) Payment in Lieu of Forfeiture property of a person who has been convicted
of a money laundering offense in the
If the court has issued an order of forfeiture of the requesting State; and
monetary instrument or property subject to a
2. A certification or affidavit of a competent
money laundering offense AND said order cannot
be enforced due to the same circumstances that officer of the requesting State stating that the
allow the forfeiture of related monetary conviction and the order of forfeiture are final
instruments and property, the court may order the and that no further appeal lies in respect of
convicted offender to pay an amount equal to the either. (R.A. No. 9160, Section 13[b])
value of the said monetary instrument or property.
(c) Obtaining Assistance from Foreign States
This also applies in both criminal and civil
forfeitures. (R.A. No. 9160, Section 12[c], as The AMLC may make a request to any foreign
amended by R.A. No. 10365) State for assistance in:
1. Tracking down, freezing, restraining, and
b. Mutual assistance among States
seizing assets alleged to be proceeds of any
(a) Request for assistance from a Foreign State unlawful activity;
2. Obtaining information that it needs relating to
Where a foreign State makes a request for any covered transaction, money laundering
assistance in the investigation and prosecution of offense, or any other matter directly or
a money laundering offense, the Anti-Money indirectly related thereto;
Laundering Council may: 3. To the extent allowed by the law of the foreign
1. May execute the request; or
State, applying with the proper court therein
2. Refuse to execute the same and inform the for an order to enter any premises belonging
foreign State of any valid reason for not to or in the possession or control of, any or all
executing the request or for delaying the of the persons named in said request, and/or
execution thereof. search any or all such persons named therein

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information, document, material, or object
and/or remove any document, material, or
which may be of assistance to the
object named in such request. The
investigation or prosecution;
documents accompanying the request in
5. Ask from the covered institution concerned
support of the application have to be duly
any information, document, material, or
authenticated in accordance with the
object which may be of assistance to the
applicable law or regulation of the foreign
investigation or prosecution;
State;
6. Specify the manner in which and to whom
4. Applying for an order of forfeiture of any
said information, document, material, or
monetary instrument or property in the proper
object obtained pursuant to said request, is to
court in the foreign State. The application is
be produced;
accompanied by an authenticated order of
7. Give all particulars necessary for the
the trial court ordering the forfeiture of said
issuance by the court in the requested State
monetary instrument or property of a
of the writs, orders, and processes needed by
convicted offender and an affidavit of a clerk
the requesting State; and
of court stating that the conviction and the
order of forfeiture are final and that no further 8. Contain such other information as may assist
in the execution of the request. (R.A. No.
appeal lies in respect of either. (R.A. No.
9160, Section 13[e])
9160, Section 13[c])
(f) Authentication of Documents
(d) Limitations on Request for Mutual Assistance
A document is authenticated if the same is:
The AMLC may refuse to comply with any request
1. Signed or certified by a judge, magistrate, or
for assistance where the action sought by the
contract: equivalent officer in or of, the requesting
1. Contravenes any provision of the State; and
Constitution; or 2. Authenticated by the oath of affirmation of a
2. The execution of a request is likely to witness or sealed with an official or public
prejudice the national interest of the seal of a minister, Secretary of State, or
Philippines unless there is a treaty between officer in or of, the government of the
the Philippines and the requesting State requesting State, or of the person
relating to the provision of assistance in administering the government or a
relation to money laundering offenses. (R.A. department of the requesting territory,
No. 9160, Section 13[d]) protectorate, or colony.

(e) Requirements for Requests for Mutual The certificate of authentication may also be
Assistance from Foreign States made by the secretary of the embassy or legation,
consul general, consul, vice consul, consular
agent, or any officer in the foreign service of the
A request for mutual assistance from a foreign
Philippines stationed in the foreign State in which
State must:
the record is kept, and authenticated by the seal
1. Confirm that an investigation or prosecution
of his office. (R.A. No. 9160, Section 13[f])
is being conducted in respect of a money
launderer named therein or he/she has been (g) Extradition
convicted of any money laundering offense;
2. State the grounds on which any person is The Philippines shall negotiate for the inclusion of
being investigated or prosecuted for money money laundering offenses among extraditable
laundering or the details of his/her conviction; offenses in all future treaties. (R.A. No. 9160,
3. Give sufficient particulars as to the identity of Section 13[g])
said person;
4. Give particulars sufficient to identify any
covered institution believed to have any

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D. FOREIGN INVESTMENTS ACT
VIII. SPECIAL LAWS
D. FOREIGN INVESTMENTS ACT
1. POLICY OF THE LAW
1. Policy of the law
2. Definition of terms It is the policy of the State to attract, promote and
a. Foreign investment welcome productive investments from foreign
b. "Doing business" in the Philippines individuals, partnerships, corporations and
c. Export enterprise governments, including their political subdivisions
d. Domestic market enterprise in activities which significantly contribute to
3. Registration of investments of non- national industrialization and socioeconomic
Philippine nationals development to the extent that foreign investment
4. Foreign investments in export is allowed in such activity by the Constitution and
enterprises relevant laws. (Sec. 1)9
5. Foreign investments in domestic
market enterprises 2. DEFINITION OF TERMS
6. Foreign Investment Negative List
A. Foreign Investment

"Foreign Investment" shall mean as equity

investment made by a non- Philippine national in
the form of foreign exchange and/or other assets
actually transferred to the Philippines and duly
registered with the Central Bank which shall
assess and appraise the value of such assets
other than foreign exchange (Sec. 3[c])

Provided, however, that for purposes of

determining foreign ownership, peso investments
made by non-Philippine nationals shall be
considered;

Provided, further, that only foreign investments in

the form of foreign exchange and/or other assets
actually transferred to the Philippines and duly
registered with the Central Bank (CB) and profits
derived therefrom can be repatriated;
(Implementing Rules and Regulations of RA 7042
[as amended by RA 8179 July 9, 1996] Rule 1 §1
[g])

“Foreign Corporation”
1. A corporation formed, organized or
existing under any law other than those
of the Philippines, and
2. whose laws allow Filipino citizens and
corporations to do business in its own
country or state – reciprocity clause.
(Revised Corporation Code, Sec. 140)

Note: The Reciprocity clause does not affect the

status of the foreign corporation. It merely
emphasizes the policy of granting access to

9For Investments Act of 1991 (RA 9042) as amended by RA

purposes of this part of the reviewer, unless 8179 (hereinafter FIA)
otherwise specified, all references refer to the Foreign

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5. Marketing control and sales
foreign corporations whose home state also
promotion;
grants access to Filipino citizens and
6. Training and personnel
corporations.
management;
7. Logistics services;
Branch office 8. Research and development
- Carries out the business activities of the services, and product
head office and derives income from the development;
9. Technical support and
host country. (Implementing Rules and
Regulations of RA 7042, Rule 1 §1 [c]). maintenance;
10. Data processing and
Representative or liaison office communication;
- It deals directly with the clients of the 11. Business development.
parent company but does not derive
income from the host country and is fully Taxation of Income: General Rules
subsidized by its head office. Domestic Branch Regional
- It undertakes activities such as but not Subsidiary Office HQ
limited to information dissemination and
promotion of the company’s products as Taxed on Only Philippine Not allowed
well as quality control of products. worldwide source income to generate
(Implementing Rules and Regulations of income is taxed income
RA 7042, Rule 1 §1 [c]). Dividends Branch profit Not subject
paid are remittances to local
taxed are taxed taxes and
Regional or Area Headquarters (RHQ) VAT
- An office whose purpose is to act as an
administrative branch of a multinational
company engaged in international trade “Philippine National” refers to:
which principally serves as a supervision,
communications and coordination center 1. A citizen of the Philippines, or
for its subsidiaries, branches or affiliates 2. A domestic partnership or association
in the Asia-Pacific Region and other wholly owned by citizens of the
foreign markets (R.A. 8756 §2 [2]) Philippines; or
- It does not earn or derive income in the 3. A corporation
Philippines; (R.A. 8756 §2 [2] ; National a. organized under the laws of
Internal Revenue Code, §22 [D]) the Philippines
b. of which at least sixty percent
Regional Operating Headquarters (ROHQ) (60%) of the capital stock
- A foreign business entity which is allowed outstanding and entitled to
to derive income in the Philippines by vote is owned and held by
performing qualifying services to its citizens of the Philippines or
affiliates, subsidiaries or branches in the 4. A corporation
Philippines, in the Asia-Pacific Region a. organized abroad and
and in other foreign markets. (R.A. 8756 b. registered as doing business
§2 [3]) in the Philippines under the
- ROHQs will be allowed to derive income Corporation Code
by performing the following qualifying c. of which one hundred percent
services: (100%) of the capital stock
1. General administration and outstanding and entitled to
planning; vote is wholly owned by
2. Business planning and Filipinos (mere legal title is not
coordination; enough, there should be
3. Sourcing/procurement of raw beneficial ownership)
materials and components; 5. A trustee of funds for pension or other
4. Corporate finance advisory employee retirement or separation
services; benefits,

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longer necessary to conduct any
a. trustee must be a Philippine
further inquiry as to the ownership of
national and
the shareholders of the investing
b. at least sixty percent (60%) of corporation since the entire company
the fund will accrue to the at least 60% Filipino owned is already
benefit of Philippine nationals. considered a Filipino entity.
(Sec. 3[a]) ● However, a Filipino entity (60% Filipino-
owned) is not qualified to invest in or
Three rules in Determining the Nationality of enter into a joint venture agreement with
Corporations with Foreign Equity: corporations or partnerships, the capital
Incorporation Test and Control Test: or ownership of which, under the
Constitution or special laws, are limited
Incorporation Test – the nationality of a exclusively to Filipino citizens.
corporation depends on the state under which ● The shares of former Filipino citizenswho
laws it is incorporated. This is regardless of the became citizens of foreign countries but
nationality of its stockholders who reacquired Philippine citizenship
under the RA 9225 (Citizenship
Control Test •– the nationality of the corporation Retention and Reacquisition Act of 2003”
depends upon the nationality of the controlling are considered as Filipino Investments.
stockholders
In order to determine the nationality of a
While the incorporation test serves as the primary corporation, the following steps should apply:
test under Philippine jurisdiction, the “control
test” and, in appropriate cases, the “grandfather 1st Step: The nationality of a corporation is
rule” is applied to determine compliance with determined by the country under whose laws it is
the Constitution and other laws on nationality incorporated (Place of Incorporation Test).
requirements.
2nd Step: If the corporation is applying for a (2nd)
Grandfather Rule – the combined totals in the franchise for public utility and etc. which requires
investing corporation and the investee a certain percentage of control of stock, the Test
corporation must be traced (i.e. “grandfathered”) of Controlling Ownership would be applied.
to determine the total percentage of Filipino
ownership. 3rd step: If there is doubt as to the domestic
control of the percentage of stock in a corporation
All covered corporations shall, at all times, with corporate stockholders, Grandfather test
observe the constitutional or statutory ownership would be applied (Narra Nickel Mining and
requirement. For purposes of determining Development Corp. v. Redmont Consolidated
compliance therewith, the required percentage of Mines Corp.,722 SCRA 382 [2014]).
Filipino ownership shall be applied to BOTH (a)
the total number of outstanding shares of stock The issue in the case of Gamboa v. Teves is the
entitled to vote in the election of directors AND (b) proper interpretation of the word “capital” in
the total number of outstanding shares of stock, Section 11, Article 12 of the 1987 Constitution.
whether or not entitled to vote in the election of For a corporation to be granted authority to
directors. (Section 2, SEC Memorandum Circular operate a public utility, at least sixty percent
No. 08-13 dated May 20, 2013) (60%) of the capital must be Filipino. The Court
holds that the term capital must be interpreted to
Basis of Computation of 60-40 percentage refer to shares of stock entitled to vote in the
requirement election of directors. Sixty percent (60%) of
capital must assume a controlling interest over
● Under existing laws, the basis is the total the company.(Gamboa v. Finance Secretary
number of outstanding capital stock, Margarito Teves, 652 SCRA 690 [2011], .G.R.
irrespective of the amount of the par No. 176579, June 28, 2011)
value of the shares.
● Under the Control Test, once it is The 60-40 ownership requirement applies not
established that the corporation is at only to voting control, but also to beneficial control
least 60% owned by Filipinos, it is no

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the Constitution. The right to the dividends, jus
of the corporation. Both the Voting Control Test
and the Beneficial Ownership Test must be fruendi—a right emanating from ownership of that
applied to determine whether a corporation is “specific stock” necessary accrues to its Filipino
Filipino.(Gamboa v. Finance Secretary Margarito “beneficial owner.” (Roy III v. Herbosa, G.R. No.
Teves 682 SCRA 397 [October 9,2012]) 207246 (Resolution), 18 April 2017.)

All covered corporations shall, at all times, The Anti-Dummy Law confines the number of
observe the constitutional or statutory ownership foreign directors in the board in proportion to their
requirement. For purposes of determining allowable participation or share in the capital.
compliance therewith, the required percentage of (SEC-OGC Opinion No. 24-18 dated December
Filipino ownership shall be applied to BOTH (a) 20, 2018)
the total number of outstanding shares of stock
entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of 1987 Constitution
stock, whether or not entitled to vote in the ● Filipino First Policy - In the grant of rights
election of directors. (Section 2, SEC and concessions covering the national
Memorandum Circular No. 08-13 dated May 20, economy and patrimony, the State shall
2013) give preference to qualified Filipinos (Art.
XII, Sec 10, 1987 Constitution)
● The control and administration of
Petitioners in Roy v. Herbosa alleged that SEC- educational institutions shall be vested in
MC No. 8 is in violation of the Supreme Court’s citizens of the Philippines. (Art. XIV. Sec.
ruling in Gamboa v. Teves. The Court upheld the 4, [2], 1987 Constitution)
validity of SEC-MC No. 8. The Gamboa decision ● Educational institutions, shall be
held that what the Constitution requires is that full owned solely by citizens of the
and legal beneficial ownership of 60% of Philippines or corporations or
outstanding capital stock, coupled with 60% of associations at least sixty per centum of
voting rights, must rest in the hands of Filipinos, the capital of which is owned by such
which is precisely what SEC-MC No. 8 requires. In citizens.
constructing beneficial ownership, the IRR of the o exce: those established by
FIA and the IRR of the Securities and Regulation religious groups and mission
Code both provide that such requires voting boards,
rights. If a Filipino has voting power, or o The Congress may, however,
investment power (can dispose), or both, he is require increased Filipino equity
considered the beneficial owner. (Roy III v. participation in all educational
Herbosa, G.R. No. 207246, November 22, 2016) institutions. (Art. XIV. Sec. 4, [2],
1987 Constitution)
The definition of “beneficial owner or beneficial ● Mass Media - The ownership and
ownership in the SRC-IRR, which is in management shall be limited to citizens
of the Philippines, or to corporations,
consonance with the concept of “full beneficial
cooperatives or associations, wholly-
ownership” in the FIA-IRR, is relevant in resolving
owned and managed by such citizens.
only the question of who is the beneficial owner (Article XVI Section 11 [1], 1987
or has beneficial ownership of each “specific Constitution)
stock” of the public utility whose stocks are under ● Public utility- Any form of authorization
review. If the Filipino has the voting power of the for the operation of a shall be granted
“specific stock”, i.e., he can vote the stock or only to citizens of the Philippines or to
direct another to vote for him, or the Filipino has corporations or associations organized
the investment power over the “specific stock”, under the laws of the Philippines, at least
i.e., he can dispose of that “specific stock” or sixty per centum of whose capital is
direct another to vote or dispose it for him, then owned by such citizens. (Article XII,
such Filipino is the “beneficial owner” of that Section 11, 1987 Constitution)
o The right to operate a public
“specific stock.” Being considered Filipino, that
utility may exist independently
“specific stock” is then to be counted as part of and separately from the
the 60% Filipino ownership requirement under

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ownership of the facilities G.R. Nos. 89095 &

thereof. Operation of public utility 89555 November 6,
must be granted only to 1989)
Philippine citizens but ownership
of the structure may not B. Doing Business in the Philippines
necessarily be limited to Filipinos
(Tatad v. Garcia, G.R. No. “Doing business” shall include:
114222, April 6, 1995) 1. soliciting orders, service contracts,
● Natural Resources - The exploration, opening offices, whether called “liaison”
development, and utilization of natural offices or branches;
resources shall be under the full control 2. appointing representatives or distributors
and supervision of the State. The State who are:
may directly undertake such activities, or a. domiciled in the Philippines or
it may enter into co-production, joint b. Staying in the country for a
venture, or production-sharing period totaling 180 days or more
agreements with Filipino citizens, or in a calendar year
corporations or associations at least 60 3. participating in the management,
per centum of whose capital is owned by supervision or control of any domestic
such citizens. The foreign investor is business, firm, entity or corporation in the
limited to passive participation. Philippines; and
o The President may enter into 4. any other act or acts that imply a
agreements with foreign-owned continuity of commercial dealings (Sec. 3
corporations involving either [d])
technical or financial assistance
for large-scale exploration,
development, and utilization of “Doing business” shall NOT include:
minerals, petroleum, and other 1. Mere investment as a shareholder in
mineral oils. Foreign investors, domestic corporations
through (Financial/Technical 2. Exercise of rights of such investor
Assistance Agreements) FTAAs, (shareholder)
are limited only to providing: 3. Having a nominee director or officer to
▪ Technical assistance for represent the foreign investor's interest in
highly technical the domestic corporation
enterprises 4. Appointing a distributor domiciled in the
▪ Financial assistance for Philippines which transacts business in
large-scale enterprises its own name and account
(La Bugal Bl’aan Tribal 5. Publication of a general advertisement
Association Inc. v. 6. Maintaining a stock of goods in the
Ramos, G.R. No. Philippines solely for the purpose of
127882, December 1, having the same processed by another
2004) entity in the Philippines
● Practice of Professions - Foreigners 7. Consignment by a foreign entity of
practicing professions in the Philippines – equipment with a local company to be
a regulated activity. used in the processing of products for
o But mere investment in a export
corporation (eg: foreign doctors 8. Collecting information in the Philippines
investing in a domestic hospital 9. Performing services auxiliary to an
corporation) is not deemed to be existing isolated contract of sale which
a practice of profession. are NOT on a continuing basis
▪ Nonetheless, public (Implementing Rules and Regulations of
hospitals are considered RA 7042, Rule 1 §1 [f]).
public utilities thus
ownership is still
regulated. (Crisostomo
v. Securities and
Exchange Commission,

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business in the Philippines, it needs no
Test to determine if a corporation is doing
license to sue before Philippine courts
business in the Philippines is expressed in the
including on an isolated transaction
leading case of Mentholatum Co. v. Mangaliman
3. If a foreign corporation does business in
which is sometimes referred to as the “Twin
the Philippines without a license, a
Characterization Test”
Philippine citizen which has contracted
● Twin Characterization Test – doing with said corporation may be estopped
business implies a continuity of from challenging the foreign
commercial dealings and arrangements corporation's capacity to sue.
and contemplates to that extent the NOTE: The estoppel doctrine is an
performance of acts or works or he exception to the general rule but is
exercise of some of the functions relevant only when a foreign corporation
normally incident to, and in progressive is the plaintiff.
prosecution of, the purpose and object of 4. If a foreign corporation does business in
its organization. the Philippines with the required license,
● This test includes “Substance Test” and it can sue before Philippine courts on any
“Continuity Test” transaction.
● GR: The acts of the foreign corporation
doing business should be distinguished Note: Subsequent acquisition of the license will
from a single or isolated business cure the lack of capacity at the time of the
transactions or occasional, incidental, execution of the contract. The requirement of a
and casual transactions that do not come license is not meant to put foreign corporations at
within the meaning of the law. a disadvantage. Rather, the doctrine of lack of
o XPN: Where a single transaction capacity to sue is based on considerations of
is NOT merely incidental or sound public policy (Eriks PTE Ltd. v. Court of
casual but indicates the foreign Appeals, G.R. No. 118843, February 6, 1997)
corporation’s intent to do
business in the Philippines, said To constitute “doing business”, the activity to be
single transaction constitutes undertaken is one that is for profit-making.
“doing” business in the (Agilent v. Integrated Silicon, G.R. No. 154618,
Philippines. April 14, 2004)
● No general rule or governing principles
can be laid down as to what constitutes For purposes of having summons served on a
“doing business” (case to case basis) foreign corporation, it is sufficient that it be
● A foreign corporation is “doing business” alleged that the foreign corporation is doing
when it has entered the State by its business in the Philippines. (Alfred Hahn v. Court
agents and is there engaged in carrying of Appeals, G.R. No. 113074 January 22, 1997)
on and transacting through them some
substantial part of its ordinary or The mere act of exporting from one's own country
customary business, usually continuous without doing any specific commercial acts within
in the sense that it may be distinguished the territory of the importing country cannot be
from merely casual, sporadic or deemed as doing business in the importing
occasional transactions and isolated country (B Van Zuiden v GTVL Manufacturing
acts. Industries. G.R. No. 147905, May 28, 2007)
● The element of continuity is important
for a foreign corporation to be deemed A series of separate deliveries for one singleorder
doing business in the Philippines. is considered as an isolated transaction. However,
● Actual Transaction of Business a series of commercial dealings (unique and
Required. independent from one another) signifies an
intent to do business in thePhilippines. A grant
License and Capacity to Sue of a 90-day credit term is proof of an intention to
1. If a foreign corporation does business in continue transacting with the domestic client.
the Philippines without a license, it (Eriks PTE Ltd. v. Court of Appeals, G.R. No.
cannot sue before Philippine courts and 118843. February 6, 1997)
administrative agencies. (Revised
Corporation Code, Sec. 150) A foreign corporation doing business in the
2. If a foreign corporation is NOT doing

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Philippines without a license may sue in Philippine

courts a Philippine citizen or entity that had
May Sue May be Sued
contracted with and benefited from it. (European
Resources and Technologies Inc. and Delfin J. Doing No No License:
Wenceslao v. Ingenieuburo Birkhahn + Nolte, Business License: YES
G.R. No. 159586, July 26, 2004) NO
With License:
A foreign entity bringing an action to protect a With YES
trademark right needs no license to do business License:
in order to access the domestic courts because it YES
does not seek to enforce any contractual right Isolated YES GR: NO – no
arising from any business transaction. (General Transaction jurisdiction
Garments Corporation v. Director of Patents, over foreign
G.R. No. L-24295 September 30, 1971) corp.

EXC: consent
Where a single act or transaction of a foreign through a
corporation is not merely incidental or casual but contractual
is of such character as distinctly to indicate a stipulation
purpose on the part of the foreign corporation to
do other business in the state, such act will be C. Export enterprise
considered as constituting doing business. (Litton
Mills v. Court of Appeals, G.R. No. 94980. May “Export enterprise” shall mean:
15, 1996) 1. an enterprise wherein a manufacturer,
processor or service (including tourism)
Capacity to sue is a personal qualification, thus if enterprise exports sixty percent (60%) or
successor in interest of the disqualified entity is more of its output, or
qualified to sue, then the restriction does not 2. Wherein a trader purchases products
apply (Lorenz Shipping v. Chubb & Sons, G.R. domestically and exports sixty percent
No. 147724 June 8, 2004) (60%) or more of such purchases. (Sec.
3[e], Implementing Rules and
Regulations of RA 7042 as amended]
A letter of intent to enter a bid is not an act Rule 1 §1 (g)]
sufficient enough to constitute an intent to do
business. A bidder must win the bid first before D. Domestic Market Enterprise
acquiring a license. (Steelcase Inc v Design
International Selections, G.R. No. 171995, April “Domestic Market Enterprise” shall mean:
18, 2012)
1. an enterprise which produces goods for
sale, or renders services to the domestic
A foreign entity may bring an action in Philippine market entirely or
courts to enforce an insurance policy, executed 2. if exporting a portion of its output fails to
abroad, even if it has no license to do business consistently export at least sixty percent
since such insurance contract did not arise from (60%) thereof; (Sec 3[f])
a business transaction done here in the
Philippines. (Universal Shipping Lines, Inc. v IAC A domestic market enterprise may change its
) status to export enterprise if over a three (3) year
period it consistently exports in each year thereof
sixty per cent (60%) or more of its output.

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b. Applications for clearances from
3. REGISTRATION OF INVESTMENTS OF
the Department of National
NON-PHILIPPINE NATIONALS Defense (DND) or Philippine
National Police (PNP) for
A Non-Philippine national may do business or defense-related activities, or the
invest in a domestic enterprise up to one hundred DOST for investments involving
percent (100%) of its capital, provided: advanced technology shall be
1. It is investing in a domestic market decided upon by said agencies
enterprise in areas outside the FINL; within fifteen (15) working days.
2. It is investing in an export enterprise (Implementing Rules and
whose products and services do not fall Regulations of R.A. 7042, IRR of
within Lists A and B (except for defense- RA 7042, [1991])
related activities, which may be approved 3. Approval. Within fifteen (15) working
pursuant to Section 8(b)(1) of the Act) of days from official acceptance of an
the FINL. application, the SEC or BTRCP shall act
3. As required by laws, the existing country on the same. Otherwise, the application
or state of the applicant must also allow shall be considered as automatically
Filipino citizens and corporations to do approved if it is not acted upon within said
business therein. (Rule VI, Implementing period for a cause not attributable to the
Rules and Regulations of R.A. 7042, IRR applicant. (Implementing Rules and
of RA 7042, [1991]) Regulations of R.A. 7042, IRR of RA
7042, [1991])
STEPS IN THE REGISTRATION OF
INVESTMENTS OF NON-PHILIPPINE STEP 2. Registration with the SEC.
NATIONALS An application form together with the following
documents shall be submitted to the SEC.
STEP 1. Application 1. New domestic corporation or a
1. Filing of Application. partnership:
a. Foreign corporation, domestic a. Articles of
corporations or partnerships Incorporation/Partnership
which are non-Philippine b. Name Verification Slip
nationals.- applications for c. Bank Certificate of Deposit
registration shall be filed with the d. ACR/ICR, SIRV (Special
SEC. Investors Resident Visa), Visa
b. Single proprietorships, #13 of the alien subscribers
applications for Metro Manila e. Proof of Inward Remittance (for
shall be filed with the BTRCP or non-resident aliens)
the DTI-National Capital 2. Foreign corporation
Region. a. Name verification slip
c. In the provinces, applications b. Board Resolution authorizing the
may be filed with the extension establishment of an office in the
offices of the SEC for Philippines;
corporations/partnerships and c. Financial statements for the
the provincial offices of the DTI immediately preceding year at
for sole proprietorships. the time of filing of the
2. Pre-Processing of Documents - Pre- application, certified by an
processing of documents shall be independent Certified Public
undertaken to assist the investor in Accountant of the home country.
determining the completeness of his d. Certified copies of the Articles of
documents. Incorporation/Partnership with
a. All applications are considered an English translation thereof if
officially accepted only upon in a foreign language.
submission of complete e. Proof of inward remittance such
documents to either the SEC or as bank certificate of inward
BTRCP. remittance or credit advices.
(Implementing Rules and

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Regulations of RA 7042 (as amended by RA 8179
Regulations of R.A. 7042, IRR of
July 9, 1996) Rule VI §1)
RA 7042, [1991])
3. Additional requirements to be submitted
to the : SEC STEPS IN THE REGISTRATION OF EXPORT
ENTERPRISES
a. Clearance from the DND or PNP
(for enterprises wishing to
engage in defense-related STEP 1. Export enterprises which are non-
activities) Philippine nationals shall register with BOI and
b. Certificate from the DOST that submit the reports that may be required to ensure
the investment involves continuing compliance of the export enterprise
advanced technology shall be with its export requirement. (Sec 6)
submitted (for small and
medium-sized domestic market STEP 2. BOI shall advise SEC or BTRCP, as the
enterprises with paid-in equity case may be, of any export enterprise that fails to
capital less than the equivalent meet the export ratio requirement. (Sec 6)
of US$500,000) (Implementing
Rules and Regulations of R.A. STEP 3. The SEC or BTRCP shall thereupon order
7042, IRR of RA 7042, [1991]) the non-complying export enterprise toreduce its
4. Application Fee sales to the domestic market to not more than
forty percent (40%) of its total production; failure
STEP 3. Registration with the BTRCP Bureau to comply with such SEC or BTRCP order, without
of Trade Regulation and Consumer Protection justifiable reason, shallsubject the enterprise to
Department of Trade and Industry (BTRCP- cancellation of SEC or BTRCP registration, and/or
DTI) the penaltiesprovided in Section 14 hereof. (Sec
1. As required by existing laws and 6)
regulations, BTRCP Form No. 17 and
accompanying documents shall be 5. FOREIGN INVESTMENTS IN DOMESTIC
submitted to BTRCP. MARKET ENTERPRISES
2. All documents executed abroad should
be authenticated by the Philippine
Embassy or Consular Office. Non-Philippine nationals may own up to one
3. Application Fee. A reasonable application hundred percent (100%) of domestic market
fee to be determined by BTRCP shall be enterprises unless foreign ownership therein is
collected from each applicant. prohibited or limited by existing law or the Foreign
4. Upon fulfilment of all BTRCP-DTI Investment Negative List under Section 8 hereof.
requirements and favorable evaluationby
DTI, the Certificate of Registration for A domestic market enterprise may change its
Sole Proprietorship shall be issued byDTI. status to export enterprise if over a three (3) year
In case of disapproval, DTI shall also period it consistently exports in each year thereof
inform the applicant in writing of the sixty per cent (60%) or more of its output. (Sec.
reasons for the disapproval of the 7)
registration. (Implementing Rules and
Regulations of R.A. 7042, IRR of RA At its option, a domestic market enterprise may
7042, [1991]) change its status to an export enterprise if, over
the last three (3) years, it consistently exported in
4. FOREIGN INVESTMENTS IN EXPORT each year thereof sixty percent (60%) or more of
its output. (Implementing Rules and Regulations
ENTERPRISES
of R.A. 7042, IRR of RA 7042, [1991])
Foreign equity participation in export
enterprises shall be allowed up to one hundred
percent (100%) provided that the products and
services of such enterprises do not fall within Lists
A and B of the FINL. (Implementing Rules and

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the Department of Science and
6. FOREIGN INVESTMENT NEGATIVE LIST Technology; or
b. they employ at least fifty (50)
“Foreign Investments Negative List” or direct employees (Sec.8)
“Negative List” shall mean a list of areas of
economic activity whose foreign ownership is Advanced technology should be:
limited to a maximum of forty percent (40%) of the 1. Necessary for the development
equity capital of the enterprises engaged therein. of certain industries;
(Sec 3[g]) 2. Subject to guidelines of the
Department of Science and
The Foreign Investment Negative List shall have Technology; and
two (2) components lists; A, and B. 3. Appropriate and adaptable to
a) List A shall enumerate the areas of activities local conditions, such that it can
reserved to Philippine nationals by mandate of be eventually be transferred and
the Constitution and specific laws. applied to available indigenous
b) List B shall contain the areas of activities and technology. (Implementing Rules
enterprises regulated pursuant to law: and Regulations of RA 7042 [as
amended by RA 8179 July 9,
1. Defense-related activities, requiring 1996] Rule 1 §1 [o])
prior clearance and authorization from
Department of National Defense (DND) Steps to Amend List B [R-E-A-P]:
to engage in such activity, such as the 1.) Recommendation of the
manufacture, repair, storage and/or - Secretary of National Defense, or the
distribution of firearms, ammunition, - Secretary of Health, or the
lethal weapons, military ordinance, - Secretary of Education, Culture and
explosives, pyrotechnics and similar Sports,
materials; unless such manufacturing or 2.) Endorsement by the NEDA,
repair activity is specifically authorized, 3.) Approval by the President, and
with a substantial export component, to a 4.) Promulgation by a Presidential Proclamation.
non-Philippine national by the Secretary (Sec.8)
of National Defense; or
Foreign Investment Negative Lists shall become
2. Activities that have implications on
effective fifteen (15) days after publication in a
public health and morals, such as the:
newspaper of general circulation in the
a. manufacture and distribution of Philippines: Provided, however, That each
dangerous drugs; Foreign Investment Negative List shall be
prospective in operation and shall in no way affect
b. all forms of gambling; nightclubs, foreign investment existing on the date of its
bars, beerhouses, dance halls; publication. (Sec.8)
c. sauna and steam bathhouses
and massage clinics. Amendments to List B after promulgation and
publication of the first Regular Foreign
3. GR: Small and medium-sizeddomestic Investment Negative List at the end of the
market enterprises, with paid-in equity transitory period shall not be made more often
capital less than the equivalent two than once every two (2) years. (Sec.8)
hundred thousand US dollars
(US$200,000) are reserved to Philippine
nationals. ----end of topic----
Exception: A small and medium-sized
domestic market enterprise with paid-in
equity capital less than the equivalentone
hundred thousand US dollars
(US$100,000) shall be allowed to non-
Philippine nationals if:
a. it involves advanced
technology* as determined by

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E. INSOLVENCY LAWS
VII. SPECIAL LAWS
E. INSOLVENCY LAWS
1. Concurrence and Preference of 1. CONCURRENCE AND PREFERENCE OF
Credits CREDITS
a. Meaning of Concurrence and
Preference A. Meaning of Concurrence and Preference
b. Exempt Properties
c. Classification of Credits Concurrence of Credit implies possession by
d. Order of Preference of two or more creditors of equal rights or privileges
Credits over the same property or all of the property of a
2. Financial Rehabilitation and
Insolvency Act of 2010 debtor.
a. Definition of Insolvency
b. Suspension of Payments Preference of Credit is the right held by a
c. Rehabilitation creditor to be preferred in the payment of his
i. Types claim above others out of the debtor’s assets.
ii. Commencement
• Preference creates no interest or lien on the
Order
iii. Stay or Suspension property, but merely a preference to the
Order application of the proceeds.
iv. Rehabilitation • The right of preference can be made effective
Receiver only by being asserted and maintained.
v. Management Otherwise, it is lost.
Committee
vi. Rehabilitation Plan
vii. Cram Down Effect General Provisions
d. Liquidation 1. The debtor is liable with all his property,
i. Types present and future, for the fulfillment of his
ii. Conversion of obligations, subjects to exemptions provided
Rehabilitation to by law.
Liquidation
Proceedings B. Exempt Properties
iii. Liquidation Order
iv. Rights of Secured 1. Types of Property
Creditors
v. Liquidator a. Present property
vi. Determination of i. Family home (Arts. 152, 153 & 155)
Claims ii. Right to receive support as well as
vii. Liquidation of Plan money or property obtained by such
support shall not be levied upon on
attachment or execution (Art. 205)
iii. Sec. 13, Rule 39, Rules of Court
(Ordinary tools, lettered
gravestones, necessary clothing,
etc.);
iv. Conveyance and encumbrancemade
by persons belonging to the so-called
“non-Christian tribes,” when proper,
shall not be valid unless duly
approved by the Director of the
Bureau of non-Christian tribes. (Sec.
118, the Public Land Act, (C.A. No.
141, as amended))

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b. Property in custodia legis and of public upon the immovable own, when approved by
domain. sold;

2. Insolvency shall be governed by the Financial (3) Claims of laborers, (2) Credits for services
Rehabilitation and Insolvency Act (RA No. masons, mechanics rendered the insolvent by
and other workmen, as employees, laborers, or
10142). The FRIA repealed the Insolvency
well as of architects, household helpers for one
Act (Section 148, FRIA)
engineers and year preceding the
contractors, engaged commencement of
3. Exemption of conjugal property or absolute in the construction, proceedings in
community or property provided that: reconstruction or insolvency;
a. Partnership or community subsists; repair of buildings,
b. Obligations of the insolvent spouse canals or other works, (3) Expenses during the
have not redounded to the benefit of upon said buildings, last illness of the debtor or
the family; canals or other works; of his or her spouse and
children under his or her
4. If there is co-ownership, and one of the co- (4) Claims of parental authority, if they
owners is the insolvent debtor, his undivided furnishers of materials have no property of their
used in the own;
share or interest in the property shall be
construction,
possessed by the assignee in insolvency reconstruction, or (4) Compensation due the
proceedings because it is part of his assets. repair of buildings, laborers or their
canals or other works, dependents under laws
5. Property held by the insolvent debtor as a upon said buildings, providing for indemnity for
trustee of an express or implied trust, shall be canals or other works; damages in cases of labor
excluded from the insolvency proceedings. accident, or illness
Mortgage credits resulting from the nature
C. Classification of Credits recorded in the of the employment;
Registry of Property,
1. Special preferred credits (Arts. 2241 and upon the real estate (5) Credits and
2242) mortgaged; advancements made to
a. Considered as mortgages or pledges of the debtor for support of
real or personal property or liens within Expenses for the himself or herself, and
the purview of legal provisions governing preservation or family, during the last year
insolvency. improvement of real preceding the insolvency;
b. Taxes due to the State shall first be property when the law
authorizes Support during the
satisfied.
reimbursement, upon insolvency proceedings,
the immovable and for three months
2. Ordinary preferred credits (Art. 2242) - preserved or thereafter;
preferred in the order given by law improved;
civil
Credits annotated indemnification arising
3. Common credits (Art. 2245) - credits of any in the Registry of from a criminal offense;
other kind or class, or by any other right or Property, in virtue of a
title not comprised in Arts. 2241-2244 shall judicial order, by
(8) Legal expenses, and
enjoy no preference attachments or
expenses incurred in the
executions, upon the administration of the
ARTICLE 2242 ARTICLE 2244 property affected, and insolvent's estate for the
(1) Taxes due upon the (1) Proper funeral only as to later credits; common interest of the
land or building; expenses for the debtor, creditors, when properly
or children under his or (8) Claims of co-heirs authorized and approved
(2) For the unpaid price her parental authority who for warranty in the by the court;
have no property of their partition of an
of real property sold,
immovable among

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them, upon the real (9) Taxes and 2. If there are 2 or more credits with respect to
property thus divided; assessments due the the same specific movable property, they
national government, shall be satisfied pro rata, after the payment
(9) Claims of donors or other than those of duties, taxes and fees due the State or any
real property for mentioned in articles
subdivision thereof
pecuniary charges or 2241, No. 1, and 2242,
other conditions No. 1;
imposed upon the 3. Those credits which enjoy preference in
donee, upon the (10) Taxes and relation to specific real property or real
immovable donated; assessments due any rights, exclude all others to the extent of the
province, other than those value of the immovable or real right to which
Credits of referred to in articles
(10) the preference refers.
insurers, upon the 2241, No. 1, and 2242,
property insured, for No. 1;
the insurance premium 4. If there are 2 or more credits with respect to
for two years. (11) Taxes and the same specific real property or real
assessments due any city rights, they shall be satisfied pro rata, after
or municipality, other than the payment of the taxes and assessment of
those indicated in articles
2241, No. 1, and 2242, the taxes and assessments upon the
immovable property or real right.
No. 1;

(12) Damages for death or 5. The excess, if any, after the payment of the
personal injuries caused credits which enjoy preference with respect to
by a quasi-delict; specific property, real or personal, shall be
added to the free property which the debtor
(13) Gifts due to public may have, for the payment of other credits.
and private institutions of
charity or beneficence;
6. Those credits which do not enjoy any
(14) Credits, which, preference with respect to specific property,
without special privilege, and those which enjoy preference, as to the
appear in (a) a public amount not paid, shall be satisfied according
instrument; or (b) in a final to the following rules:
judgment, if they have
• Order established by Art. 2244;
been the subject of
litigation. These credits
o Credits for services rendered by
employees or laborers to the debtor
shall have preference
among themselves in the shall enjoy first preference under
order of priority of the Article 2244. (FRIA, Section 133)
dates of the instruments • Common credits referred to in Art. 2245
and of the judgments, shall be paid pro rata regardless of dates.
respectively.

NOTE: Preference of mortgage credits is

determined by the priority of registration,
D. Order of Preference of Credits following the maxim “prior tempore potior jure”
(He who is first in time is preferred in right).
1. Credits which enjoy preference with respect
to specific movables, exclude all others to
the extent of the value of the personal The preference under Article 110 of the Labor
property to which the preference refers. Code when not falling under Articles 2241 and
2242 of the Civil Code and not attached to any
specific property is an ordinary preferred credit
although its impact is to move it from the second

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2. FINANCIAL REHABILITATION AND
priority to first priority in the order of preference
established by Article 2244 (DBP v. NLRC, G.R.
INSOLVENCY ACT OF 2010
No. 86932 June 27, 1990).
Nature of FRIA Proceedings:

The “complementary-contracts-construed 1. In Rem – Jurisdiction over all persons

together” doctrine means that an accessory affected by the proceedings shall be
contract must be read together with the principal considered as acquired upon publication of
agreement. (PBC vs. Lim,G.R. No. 158138, the notice of the commencement of the
2005) proceedings in any newspaper of general
circulation in the Philippines as prescribed
Pertinent Rules under the FRIA under the Supreme Court rules of
Under the FRIA, the assets of an insolvent debtor procedure
are divided among its creditors by following the 2. Summary
following rules: 3. Non-adversarial (Sec. 3, RA 10142)
General Rule: The assets of the insolvent debtor
shall be divided among the creditors in Note: the principle of res judicata applies to
accordance with the Liquidation Plan submitted rehabilitation proceedings. The element of
by the Liquidator and approved by the Court. The identity of parties only requires substantial
rules on concurrence and preference of credits identity of parties. Thus, if there was already a
under the NCC and other relevant laws shall be previous decision involving one creditor and one
observed in the Liquidation Plan. debtor which was decided with finality, andthere
Exception: Unless a preferred creditor voluntarily is another claim involving a different creditor
waives his preferred right. (R.A. No. 10142, Sec. litigating the same matter as the previous
133). decision, the previous decision is res judicata
and should apply to the second claim. (Pryce
Corp. v. Chinabank, G.R. No. 172302, 18 Feb.
2014)

Debtors
The term “debtor” shall refer to (PICS):
a. Partnership duly registered with the SEC;
b. Individual debtor who has become insolvent;
c. Corporation duly organized and existing
under Philippine laws; or
d. Sole Proprietorship registered with the DTI
(FRIA, Sec. 4[k])

Note: An individual debtor shall refer to a natural

person who is a resident and citizen of the
Philippines that has become insolvent (FRIA, Sec.
4[o])

Note: A debtor may file for rehabilitation despite

having already defaulted on its obligations to its
creditor. If thepetition for rehabilitation is sufficient
and the rehabilitation plan feasible, rehabilitation
should proceed. (Metrobank v. Liberty
Corrugated, G.R. No. 184317, 25 Jan. 2017)

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Proceedings Covered By FRIA
Coverage:
DEBTOR PROCEEDING
Included:
Sole Voluntary Rehabilitation
1. Juridical and natural persons who are Proprietorship (FRIA, Sec. 12);
debtors (Sec. 4(k), RA 10142)
Partnership Involuntary Rehabilitation
2. Government FIs and GOCCs (last Corporation (FRIA, Sec. 13);
paragraph of Sec. 5, RA 10142) Pre-Negotiated Rehabilitation
3. Foreign corporations undergoing rehab (FRIA, Sec. 76);
proceedings abroad but also doingbusiness Voluntary Liquidation (FRIA,
in the country (Sec. 139-142, RA 10142) Sec. 90);
Involuntary Liquidation (FRIA,
Excluded (Sec. 5, RA 10142): Sec. 91)
1. Banks Individual Suspension of Payment
2. Insurance companies Debtor (FRIA, Sec. 94)
3. Pre-need companies Voluntary Liquidation (FRIA,
Sec. 103)
4. National and local government agencies
and units Involuntary Liquidation (FRIA,
Sec. 105)

Creditors and Claims Covered By FRIA A. Definition of Insolvency

Creditor Insolvent shall refer to the financial condition of

A natural or juridical person which has a claim a debtor that is generally unable to pay its or his
against the debtor that arose on or before the liabilities as they fall due in the ordinary course
commencement date (FRIA, Sec. 4[h]) of business or has liabilities that are greater
than its or his assets. (Sec. 4(p), RA 10142)
Claim
All claims or demands of whatever nature or
Ground: An individual debtor possessessufficient
character against the debtor or its property, property to cover all his debts butforesees the
whether for money or otherwise, liquidated or impossibility of meeting them when they
unliquidated, fixed or contingent, matured or respectively fall due (Sec. 94, RA 10142)
unmatured, disputed or undisputed, including,
but not limited to: B. Suspension of Payments

(1) All claims of the government, whether A Stay or Suspension Order has the following
national or local, including taxes, tariffs and effects:
customs duties; and a. Suspend all actions or proceedings, in court
or otherwise, for the enforcement of claims
(2) Claims against directors and officers of the against the debtor;
debtor arising from acts done in the b. Suspend all actions to enforce any judgment,
discharge of their functions falling within the attachment or other provisional remedies
scope of their authority. This inclusion does against the debtor;
not prohibit the creditors or third parties from c. Prohibit the debtor from selling, encumbering,
filing cases against the directors and officers transferring or disposing in any manner any
acting in their personal capacities of its properties except in the ordinary course
of business; and
d. Prohibit the debtor from making any payment
of its liabilities outstanding as of the
commencement date except as may be
provided herein. (FR Rules, Rule 1, Sec. 5[r])

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meeting of the creditors, all the rights which the
The issuance of the Commencement Order and
creditors had against the individual debtor before
the Suspension or Stay Order, and any other
the agreement shall revest in them, and the
provision of the Act, shall not in any way diminish
individual debtor may be subject to insolvency
or impair the security or lien of a secured creditor,
proceedings. (Sec. 102, RA 10142)
or the value of his lien or security, except that his
right to enforce the security or lien may be
The Stay or Suspension Order does not apply
suspended during the term of the Stay Order. The
in the following cases:
court may allow the enforcement of the security
a. Cases already pending appeal in the
or lien if the property is not necessary for the
Supreme Court as of commencement date
rehabilitation of the debtor. (FR Rules, Rule 2,
Provided, That any final and executory
Sec. 59)
judgment arising from such appeal shall be
referred to the court for appropriate action;
Procedure in suspension of payment:
b. Subject to the discretion of the court, to cases
An individual debtor who, possessing sufficient
pending or filed at a specialized court or
property to cover all his debts but foreseeing the
quasi-judicial agency which, upon
impossibility of meeting them when they
determination by the court is capable of
respectively fall due, may file a verified petition
resolving the claim more quickly, fairly and
that he be declared in the state of suspension of
efficiently than the court: Provided, That any
payments by the court of the province or city in
final and executory judgment of such court or
which he has resided for six (6) months prior to
agency shall be referred to the court and shall
the filing of his petition. He shall attach to his
be treated as a non-disputed claim;
petition, as a minimum:
a. a schedule of debts and liabilities; c. Enforcement of claims against sureties and
other persons solidarily liable with the debtor,
b. an inventory of assets; and
and third party or accommodation
c. a proposed agreement with his
creditors. (Sec. 94, RA 10142) mortgagors as well as issuers of letters of
credit, unless the property subject of the third
party or accommodation mortgage is
The manner of approval of the proposed
necessary for the rehabilitation of the debtor
agreement is as follows:
as determined by the court upon
1. The presence of creditors holding claims
amounting to at least three-fifths (3/5) of the recommendation by the rehabilitation
liabilities shall be necessary for holding a meeting receiver;
(Sec. 96, RA 10142). d. Any form of action of customers or clients of
2. To form a majority, it is necessary: a securities market participant to recover or
a. that two-thirds (2/3) of the creditors otherwise claim moneys and securities
voting unite upon the same proposition; entrusted to the latter in the ordinary course
and of the latter's business as well as any action
b. that the claims represented by said of such securities market participant or the
majority vote amount to at least three- appropriate regulatory agency or self-
fifths (3/5) of the total liabilities of the regulatory organization to pay or settle such
debtor mentioned in the petition; (Sec. 97 claims or liabilities;
(d), RA 10142). e. Actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a
The suspension order shall lapse when three (3) securities pledge or margin agreement for the
months shall have passed without the proposed settlement of securities transactions in
agreement being accepted by the creditors or as accordance with the provisions of the
soon as such agreement is denied. (Sec. 96, RA Securities Regulation Code and its
10142) implementing rules and regulations;
f. Clearing and settlement of financial
If the individual debtor fails, wholly or in part, to transactions through the facilities of aclearing
perform the agreement decided upon at the agency or similar entities duly

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St. Michael Medical Center, G.R. No. 205469,
authorized, registered and/or recognized by
2015)
the appropriate regulatory agency like the
Bangko Sentral ng Pilipinas (BSP) and the i. Types
SEC as well as any form of actions of such
agencies or entities to reimburse themselves 1. Court-supervised rehabilitation
for any transactions settled for the debtor;
and a. Voluntary (aka debtor-initiated)
g. Any criminal action against individual debtor (Sec. 12, RA 10142)
or owner, partner, director or officer of a
debtor shall not be affected by any Filed by:
proceeding commend under this Act. (FR • If sole proprietorship, owner
Rules, Rule 2, Sec. 10) • If partnership, majority of
partners
Note: there is no need for a hearing before the • If corporation, majority of
directors/trustees, authorized by
issuance of a stay order. The Interim Rules only
2/3 of stockholders/members
require an initial hearing before the court will give
due course to or dismiss a petition. Nevertheless, Ground: insolvent and may be
neither do the Interim Rules prohibit the holding rehabilitated
of a hearing before the issuance of a stay order.
Thus, the trial court has ample discretion to call a Note: the venue for a petition for
hearing prior to the issuance of a stay order, so voluntary insolvency proceeding is
long as said hearing is held within the 5-day the CFI of the province or city where
period from the filing of the petition. (Pryce Corp. the insolvent debtor resides, as
v. Chinabank, G.R. No. 172302, 18 Feb. 2014) stated in the Articles of
Incorporation. However, when it is
C. Rehabilitation uncontroverted that the insolvent
corporation abandoned the old
Rehabilitation shall refer to the restoration of principal office, the corporation is
the debtor to a condition of successful considered a resident of the city
where its actual principal office is
operation and solvency, if it is shown that its
currently found. (Pilipinas Shell
continuance of operation is economically Petroleum Corp. v. Royal Ferry
feasible and its creditors can recover by way of Services, Inc., G.R. No. 188146, 1
the present value of payments projected in the Feb. 2017)
plan, more if the debtor continues as a going
concern than if it is immediately liquidated. Initiation of Voluntary Proceedings
(Sec. 4(gg), RA 10142)
Who may Petition for Voluntary Rehabilitation
1. The owner in case of a sole proprietorship, or
Rehabilitation contemplates a continuance of
2. A majority of the partners in case of a
corporate life and activities in an effort to restore
partnership, or
and reinstate the corporation to its former position
3. A majority vote of the board of directors or
of successful operation and solvency (Wonder
trustees and authorized by the vote of the
Book Corporation v. Phil. Bank of
stockholders representing at least two-thirds
Communications, G.R. No. 187316, 2012)
(2/3) of the outstanding capital stock, in stock
corporations, or of the members, in case of
The basic issues in rehabilitation proceedings
non-stock corporation
concern the viability and desirability of continuing
the business operations of distressed
An insolvent debtor may initiate voluntary
corporations, all with a view of effectively
proceedings under this Act by filing a petition for
restoring to a state of solvency or to its former
rehabilitation with the court and on the grounds
healthy financial condition through the adoption of
hereinafter specifically provided.
a rehabilitation plan (BPI Family Savings Bank v.

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h. A Rehabilitation Plan;
A group of debtors shall refer to:
i. The names of at least 3 nominees to the
(1) corporations that are financially related to one
position of rehabilitation receiver; and
another as parent corporations, subsidiaries
j. Other documents required to be filed with
or affiliates;
the petition pursuant to this Act and the
(2) partnerships that are owned more than fifty
rules of procedure as may be
percent (50%) by the same person; and
promulgated by the Supreme Court.
(3) single proprietorships that are owned by the
same person. When the petition covers a
group of debtors, all reference under these b. Involuntary (aka creditor-initiated)
rules to debtor shall include and apply to the (Sec. 13 & 14, RA 10142)
group of debtors (FRIA, Sec. 4[n])
Filed by: any creditor or group of
Grounds for Voluntary Rehabilitation creditors with a claim of at least
A group of debtors may jointly file for P1,000,000 or at least 25% of
rehabilitation when: subscribed capital stock or
a. One or more of its members foresee the partners’ contributions, whichever
impossibility of meeting debts when they is higher
respectively fall due, and
Ground:
b. The financial distress would likely adversely
• The creditors’ due and
affect the financial condition and/or demandable claims have not
operations of the other members of the group been paid for at least 60 days or
and/or the participation of the other members that the debtor has failed
of the group is essential under the terms and generally to meet its liabilities as
conditions of the proposed Rehabilitation they fall due; or
Plan. (FR Rules, Rule 2, Sec. 1) • A creditor, other than the
petitioners, has initiated
Petition for Voluntary Proceedings foreclosure proceedings against
The petition shall be verified to establish the the debtor that will prevent the
debtor from paying its debts as
insolvency of the debtor and the viability of its
they become due or will render it
rehabilitation, and include, whether as an insolvent
attachment or as part of the body of the petition, • Note: the creditors must
as a minimum the following: establish that the debtor may be
a. Identification of the debtor, its principal rehabilitated
activities and its addresses;
b. Statement of the fact of and the cause of Initiation of Involuntary Proceedings
the debtor's insolvency or inability to pay
its obligations as they become due; Who may petition for involuntary proceedings
c. The specific relief sought pursuant to this 1. Any creditor or group of creditors with a claim
Act; of, or the aggregate of whose claims is, whichever
d. The grounds upon which the petition is of is higher of:
based; a. At least Php1,000,000.00; or
e. Other information that may be required b. At least 25% of the subscribed capital stock or
under this Act depending on the form of partners' contributions (FR Rules, Rule 2, Sec.
relief requested; 4)
f. Schedule of the debtor's debts and
liabilities including a list of creditors with
their addresses, amounts of claims and
collaterals, or securities, if any;
g. An inventory of all its assets including
receivables and claims against third
parties;

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the RTC having jurisdiction over the place in
Circumstances Necessary to Start Involuntary
which the insolvent debtor resides or has its
Proceedings
principal place of business (FR Rules, Rule 4,
These proceedings may be initiated against the
Sec. 8)
debtor by filing a petition for rehabilitation with the
court if:
Action on the Petition
a. There is no genuine issue of fact on law on
1. If the court finds the petition to be substantial
the claim/s of the petitioner/s, and that the
in form and substance, the commencement
due and demandable payments thereon have
order shall be issued within 5 working days
not been made for at least 60 days or that the
from its filing
debtor has failed generally to meet its
liabilities as they fall due; or
2. If found deficient within the same period, the
b. A creditor, other than the petitioner/s, has
court may give 5 working days from receipt of
initiated foreclosure proceedings against the
the notice of order to satisfy the deficiency.
debtor that will prevent the debtor from
paying its debts as they become due or will
3. The court shall dismiss the petition if the
render it insolvent. (FR Rules, Rule 2, Sec. 5)
deficiency is not complied within the extended
5-day period (FR Rules, Rule 2, Sec. 7)
Petition for Involuntary Proceedings
The creditor/s' petition for rehabilitation shall be
2. Pre-negotiated rehabilitation (Sec. 76,
verified to establish the substantial likelihood that RA 10142)
the debtor may be rehabilitated, and include:
a. Identification of the debtor its principal Filed by:
activities and its address; • An insolvent debtor, by itself or jointly
b. The circumstances sufficient to support a with any of its creditors
petition to initiate involuntary rehabilitation
proceedings under Section 13 of this Act; Note: must be approved/endorsed by:
c. The specific relief sought under this Act; • Creditors holding at least 2/3 of total
d. A Rehabilitation Plan; liabilities of the debtor;
e. The names of at least 3 nominees to the • Secured creditors holding more than
position of rehabilitation receiver; 50% of total secured claims; and
f. Other information that may be required under • Unsecured creditors holding more than
this Act depending on the form of relief 50% of total unsecured claims
requested; and
g. Other documents required to be filed with the Pre-Negotiated Rehabilitation Plans, when
petition pursuant to this Act and the rules of approved by the court, have the same legal effect
procedure as may be promulgated by the as confirmation of a judicially supervised plan.
Supreme Court. (Sec. 82, FRIA)

Common Provisions to Voluntary and Pre-Negotiated Rehabilitation Petition

Involuntary Proceedings An insolvent debtor, by itself or jointly with any of
its creditors, may file a verified petition with the
Venue court for the approval of a pre-negotiated
RTC having jurisdiction over the principal office of Rehabilitation Plan which has been endorsed or
the debtor as specified in its articles of approved by creditors holding at least two-thirds
incorporation or partnership or in its registration (2/3) of the total liabilities of the debtor, including
papers with the DTI in cases of sole secured creditors holding more than 50% of the
proprietorship (FR Rules, Rule 1, Sec. 6) total secured claims of the debtor and unsecured
creditors holding more than 50% of the total
Note: The petition for court assistance to execute unsecured claims of the debtor.
or implement either a standstill agreement or out
of court restructuring agreement may be filed with

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Approval of the Pre-Negotiated Plan
The petition shall include as a minimum:
Within 10 days from the date of the second
a. Schedule of the debtor's debts and liabilities;
publication of the Order, the court shall approve
b. Inventory of the debtor's assets;
the Rehabilitation Plan unless a creditor or other
c. The pre-negotiated Rehabilitation Plan,
interested party submits an objection to it in
including the names of at least 3 qualified
accordance with the next succeeding section.
nominees for rehabilitation receiver; and
(Sec. 78, FRIA)
d. Summary of disputed claims against the
debtor and a report on the provisioning of
Objections to the Pre-Negotiated Plan
funds to account for appropriate payments
Any creditor or other interested party may submit
should any such claims be ruled valid or their
to the court a verified objection to the petition or
amounts adjusted. (Sec. 76, FRIA)
the Rehabilitation Plan not later than 8 days from
the date of the second publication of the Order.
If Petition Deemed Sufficient
Within five (5) working days, and after
The grounds for objection are limited to the
determination that the petition is sufficient in form
following:
and substance, the court shall issue an Order
a. Allegations in the petition or the
which shall;
Rehabilitation Plan or the attachments
a. Identify the debtor, its principal business of
thereto are materially false or misleading;
activity/ies and its principal place of business;
b. Majority of any class of creditors do not in fact
b. Declare that the debtor is under rehabilitation;
support the Rehabilitation Plan;
c. Summarize the grounds for the filling of the
c. The Rehabilitation Plan fails to accurately
petition;
account for a claim against the debtor and the
d. Direct the publication of the Order in a
claim in not categorically declared as a
newspaper of general circulation in the
contested claim; or
Philippines once a week for at least 2
d. Support of the creditors, or any of them was
consecutive weeks, with the first publication
induced by fraud.
to be made within 7 days from the time of its
issuance;
Copies of any objection to the petition of the
e. Direct the service by personal delivery of a
Rehabilitation Plan shall be served on the debtor,
copy of the petition on each creditor who is
the rehabilitation receiver (if applicable), the
not a petitioner holding at least 10% of the
secured creditor with the largest claim and who
total liabilities of the debtor, as determined in
supports the Rehabilitation Plan, and the
the schedule attached to the petition, within 3
unsecured creditor with the largest claim and who
days;
supports the Rehabilitation Plan. (Sec. 79, FRIA)
f. State that copies of the petition and the
Rehabilitation Plan are available for
3. Out-of-Court or Informal Restructuring
examination and copying by any interested
Agreements or Rehabilitation Plans
party;
(Sec. 83-89, RA 10142)
g. State that creditors and other interested
parties opposing the petition or Rehabilitation Must be approved by creditors
Plan may file their objections or comments representing at least: (Sec. 84)
thereto within a period of not later than 20 • 85% of total liabilities, secured
days from the second publication of the and unsecured, of the debtor;
Order; • 67% of secured obligations of
h. Appoint a rehabilitation receiver, if provided the debtor; and
for in the Plan; and • 75% of unsecured obligations
i. Include a Suspension or Stay Order as of the debtor; and
described in this Act. (Sec. 77, FRIA) Note: debtor must agree to the
plan

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Standstill period: (Sec. 85) d. State the legal effects of the Commencement
May be agreed upon by the Order;
parties pending negotiation and e. Declare that the debtor is under rehabilitation;
finalization of the plan; f. Direct the publication of the Commencement
Shall cover not only the Order in a newspaper of general circulation in
negotiating parties but also all the Philippines once a week for at least 2
other creditors; consecutive weeks, with the first publication
to be made within 7 days from the time of its
Requirements: issuance;
• Approved by creditors g. If the petitioner is the debtor direct the service
representing more than50% by personal delivery of a copy of the petition
of total liabilities; on each creditor holding at least 10% of the
• Notice is published in a total liabilities of the debtor as determined
newspaper of general
from the schedule attached to the petition
circulation in the Phils. once
within 5 days; if the petitioner/s is/are
a week for 2 consecutive
weeks; and creditor/s, direct the service by personal
Standstill period does not delivery of a copy of the petition on the debtor
exceed 120 days from date of within 5 days;
effectivity h. Appoint a rehabilitation receiver who may or
not be from among the nominees of the
For an out-of-court or informal petitioner/s and who shall exercise such
restructuring/workout agreement or powers and duties defined in this Act as well
Rehabilitation Plan to qualify, it must meet the as the procedural rules that the Supreme
following minimum requirements: Court will promulgate;
a. Debtor must agree to the out-of-court or i. Summarize the requirements and deadlines
informal restructuring/workout for creditors to establish their claims against
agreement or Rehabilitation Plan; the debtor and direct all creditors to their
b. Approved by creditors representing at claims with the court at least 5 days before
least 67% of the secured obligations of the initial hearing;
the debtor; j. Direct Bureau of internal Revenue (BIR) to
c. Approved by creditors represent at least file and serve on the debtor its comment on
75% of the unsecured obligations of the or opposition to the petition or its claim/s
debtor; and against the debtor under such procedures as
d. Approved by creditors holding at least the Supreme Court provide;
85% of the total liabilities, secured and k. Prohibit the debtor's suppliers of goods or
unsecured, of the debtor. (Sec. 84, FRIA) services from withholding the supply of goods
and services in the ordinary course of
ii. Commencement Order business for as long as the debtor makes
payments for the services or goods supplied
Rehabilitation proceedings commence upon the after the issuance of the Commencement
issuance of the Commencement Order. The Order;
Commencement Order contains the following: l. Authorize the payment of administrative
expenses as they become due;
a. Identify the debtor, its principal business or m. Set the case for initial hearing, which shall not
activity/ies and its principal place of business; be more than 40 days from the date of filing
b. Summarize the ground/s for initiating the of the petition for the purpose of determining
proceedings; whether there is substantial likelihood for the
c. State the relief sought under this Act and any debtor to be rehabilitated;
requirement or procedure particular to the n. Make available copies of the petition and
relief sought; rehabilitation plan for examination and
copying by any interested party;

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o. Indicate the location or locations at which Effectivity and Duration of the

documents regarding the debtor and the Commencement Order
proceedings under Act may be reviewed and The Commencement Order shall be effective for
copied; the duration of the rehabilitation proceedings,
p. State that any creditor or debtor who is not unless:
the petitioner, may submit the name or 1. Earlier lifted by the court;
nominate any other qualified person to the 2. The Rehabilitation Plan is seasonably
position of rehabilitation receiver at least 5 confirmed or approved; or
days before the initial hearing; 3. The Rehabilitation proceedings are ordered
q. Include a Stay or Suspension Order. (FRIA, terminated by the court FR Rules, Rule 2,
Sec. 16) Sec. 11)

Effects of the Commencement Order iii. Stay or Suspension Order

a. Vest the rehabilitation with all the powers and
functions provided for this Act, such as the Effects: (Sec. 16(q), RA 10142)
right to review and obtain records to which 1. Suspend all actions or proceedings, in
the debtor's management and directors have court or otherwise, for the enforcement
access, including bank accounts or whatever of claims against the debtor;
nature of the debtor subject to the approval 2. Suspend all actions to enforce any
by the court of the performance bond filed by judgment, attachment or other
the rehabilitation receiver; provisional remedies against thedebtor;
b. Prohibit or otherwise serve as the legal basis
3. Prohibit the debtor from selling,
rendering null and void the results of any
encumbrancing, transferring or
extrajudicial activity or process to seize
disposing in any manner any of its
property, sell encumbered property, or
properties (except in the ordinary
otherwise attempt to collection or enforce a
course of business); and
claim against the debtor after
commencement date unless otherwise 4. Prohibit the debtor from making any
allowed in this Act, subject to the provisions payment of its liabilities outstanding as
of Section 50 hereof; of the commencement date (except as
c. Exempt the debtor from liability for taxes and may be provided in the order)
fees, including penalties, interests, and
charges due to the government; Effect of violation: debtor shall be liable for
d. Serve as the legal basis for rendering null and double the value of the property sold,
void any setoff after the commencement date embezzled, or disposed of or double the
of any debt owed to the debtor by any of the transaction involved (Sec. 10, RA 10142)
debtor's creditors;
e. Serve as the legal basis for rendering null and Exceptions to stay order: (Sec. 18, RA 10142)
void the perfection of any lien against the
1. Cases already pending in the SC as of
debtor's property after the commencement
the commencement date;
date; and
f. Consolidate the resolution of all legal 2. Cases pending or filed at a specialized
proceedings by and against the debtor to the court or quasi-judicial agency;
court; provided, however, that the court may 3. Enforcement actions against:
allow the continuation of cases on othercourts a. sureties and other persons
where the debtor had initiated the suit. (FR solidarily liable with the debtor
Rules, Rule 2, Sec. 9) b. third party or accommodation
mortgagors

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To allow such other actions to continue would
- unless the property subject of
only add to the burden of the management
the third party or
committee or rehabilitation receiver, whose
accommodation mortgagor is
time, effort and resources would be wasted in
necessary for the rehabilitation
defending claims against the corporation
of the debtor, as determined by
instead of being directed toward its restructuring
the court upon
and rehabilitation.”
recommendation of the
rehabilitation receiver iv. Rehabilitation Receiver
c. issuers of letters of credit
4. Any action of customers/clients of a Rehabilitation Receiver
securities market participant to recover The person or persons, natural or juridical,
money/securities entrusted to the latter appointed as such by the court pursuant to this
in the ordinary course of business, and Act and which shall be entrusted with such
any action of such securities market powers and duties as set forth herein. (FR Rules,
participant or the appropriate regulatory Rule 1, Sec. 5[p])
agency/self-regulatory organization to
pay or settle such claims or liabilities; Minimum Qualifications of a Rehabilitation
5. Actions of a licensed broker/dealer to Receiver
sell pledged securities of a debtor,
pursuant to a securities pledge or If the rehabilitation receiver is a natural
margin agreement for the settlement of person:
securities transactions; a. Citizen of the Philippines or a resident of the
Philippines in the 6 months prior to
6. Clearing and settlement of financial
nomination;
transactions through the facilities of a
b. Not been earlier dismissed as a rehabilitation
clearing agency or similar entity duly
receiver;
authorized, registered and/or
c. As far as practicable, has expertise and
recognized by the appropriate acumen to manage and operate a business
regulatory agency (like BSP, SEC, etc.)
similar in size and complexity of that of the
as well as any form of actions of such debtor;
agencies to reimburse themselves for d. Has a general familiarity with the rights of
any transactions settled by the debtor;
creditors subject to suspension of payment or
and rehabilitation and a general understanding of
7. Criminal actions against the individual the duties and obligations of a rehabilitation
debtor or owner, partner, director, or receiver;
officer of the debtor. e. Of good moral character and with
acknowledged integrity, impartiality and
What is the rationale of the Stay Order? (Bar independence;
2006) f. No conflict of interest;
g. Has an operating knowledge in
“The justification for the suspension of actions
management, finance, and rehabilitation of
or claims, without distinction, pending
distressed companies; and
rehabilitation proceedings is to enable the
h. Willing and able to file a bond in such amount
management committee or rehabilitation
as determined by the court FR Rules, Rule 2,
receiver to effectively exercise its/his powers
Sec. 21[A])
free from any judicial or extra-judicial
interference that might unduly hinder or prevent
The conflict of interest requirement may be
the "rescue" of the debtor company.
waived, expressly or impliedly, by a party who
may be prejudiced thereby. (FRIA, Sec. 29[d])

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If the rehabilitation receiver is a juridical

person: Principal Duties of the Rehabilitation Receiver
a. Duly authorized to do business in the a. Preserving and maximizing the value of the
Philippines for at least six (6) years prior to its assets of the debtor during the proceedings;
appointment; b. Determining the viability of the rehabilitation;
b. Good standing as certified by the appropriate c. Preparing and recommending a
regulatory agency/ies; Rehabilitation Plan to the court; and
c. No conflict of interest; Implementing the approved Rehabilitation
d. Not been earlier dismissed as a rehabilitation Plan (FR Rules, Rule 2, Sec. 26)
receiver;
e. Must submit the name of the person Removal of a Rehabilitation Receiver
designated to discharge the responsibilities The rehabilitation receiver may be removed at
and powers of a rehabilitation receiver and any time by the court, either motuproprio or upon
the names of the employees and other motion by any creditor/s holding more than 50%
persons authorized to assist the designated of the total obligations of the debtor (FR Rules,
representative, together with a sworn Rule 2, Sec. 27)
certification that these persons possess the
qualifications and none of the Grounds for Removal
disqualifications required from natural a. Incompetence, gross negligence, failure to
persons; perform or failure to exercise the proper
f. Must submit a sworn undertaking, duly degree of care in the performance of his
approved in accordance with law, binding duties and powers;
itself to be solidarily liable with the persons b. Lack of a particular or specialized
designated by it to discharge the functions competency required by the specific case;
and responsibilities of a rehabilitation c. Illegal acts or conduct in the performance of
receiver; his duties and powers;
g. Willing and able to file a bond in such amount d. Lack of qualification or presence of any
as may be determined by the court; disqualification;
h. Not disqualified to discharge the duties of a e. Conflict of interest that arises after his
rehabilitation receiver under the Constitution appointment;
and other relevant laws (FR Rules, Rule 2, f. Manifest lack of independence that is
Sec. 21) detrimental to the general body of the
stakeholders;
Additional Requirements for Representatives g. Failure, without just cause, to perform any of
of Juridical Persons his powers and functions under these Rules;
a. Duly designated and authorized to act for and or
on behalf of the juridical entity; h. Any of the grounds for removing a trustee
b. Must be a director, officer, stockholder or under the general principles of trusts.
partner of the juridical entity; and
c. Must submit a sworn undertaking that he Cases of Conflict of Interest
shall be solidarily liable with his firm for all the An individual shall be deemed to have a conflict
obligations and responsibilities of a of interest if he is so situated as to be materially
rehabilitation receiver. (FR Rules, Rule 2, influenced in the exercise of his judgment for or
Sec. 21) against any party to the proceedings. Without
limiting the generality of the foregoing, an
Other qualifications and disqualifications of the individual shall be deemed to have a conflict of
rehabilitation receiver shall be set forth in interest if:
procedural rules, taking into consideration the a. He is a creditor, owner, partner or stockholder
nature of the business of the debtor and the need of the debtor;
to protect the interest of all stakeholders b. He is engaged in a line of business which
concerned. competes with that of the debtor;

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(A) Actual or imminent danger of dissipation, loss,
c. He is, or was, within 5 years from the filing of
wastage or destruction of the debtor's assets or
the petition, a director, officer, owner, partner
other properties; or
or employee of the debtor or any of the
(B) Paralyzation of the business operations of the
creditors, or the auditor or accountant of the
debtor; or
debtor;
(C) Gross mismanagement of the debtor, fraud or
d. He is, or was, within 2 years from the filing of
other wrongful conduct on the part of, or gross or
the petition, an underwriter of the outstanding
willful violation of the Act by the existing
securities of the debtor;
management of the debtor or the owner, partner,
e. is related by consanguinity or affinity within
director, officer or representative/s in
the fourth civil degree to any individual
management of the debtor.
creditor, owner/s of a sale proprietorship-
debtor, partners of a partnership-debtor or to
In case the court appoints the rehabilitation
any stockholder, director, officer, employee
receiver to assume the management of the
or underwriter of a corporation-debtor; or
debtor, the court may:
f. He has any other direct or indirect material
interest in the debtor or any of the creditors.
(1) Require the rehabilitation receiver to post an
(FR Rules, Rule 2, Sec. 22)
additional bond;
(2) Authorize him to engage the services or to
Any rehabilitation receiver, member of the
employ persons or entities to assist him in the
management committee or persons employed or
discharge of his managerial functions; and
contracted by them possessing any conflict of
(3) Authorize a commensurate increase in his
interest shall make the appropriate disclosure
compensation.
either to the court or to the creditors in case of
out-of-court rehabilitation proceedings. Any party
Rules and Liability on Conflicting Decisions
to the proceeding adversely affected by the
In case the rehabilitation receiver is a juridical
appointment of any person with a conflict of
person, the acts of its designated representative
interest to any of the positions enumerated above
shall be presumed to be carried out in accordance
may however waive his right to object to such
with the authority vested in him by the juridical
appointment and, if the waiver is unreasonably
entity which he represents.
withheld, the court may disregard the conflict of
In case of conflict, the decision of the governing
interest, taking into account the general interest
body of the juridical entity shall prevail.
of the stakeholders.
However, the rehabilitation receiver and its
Management of Debtor’s Business
representative/s shall remain solidarily liable for
General Rule: The management of the juridical
all obligations and responsibilities, subject to the
debtor shall remain with existing management.
right of withdrawal prior to the implementation of
the disputed decision.
Exception: Displacement of Existing
Management by the Rehabilitation Committee
Note: Upon assumption of management, the
receiver shall exercise the same powers granted
Upon motion of any interested party and within
under Sec. 26 in addition to the powers granted
the soonest possible time, the court may appoint
to the management committee (FR Rules, Rule 2,
and direct the rehabilitation receiver to assume
Sec. 32)
the powers of management of the debtor, or
appoint a management committee that will
undertake the management of the debtor, upon
clear and convincing evidence of any of the
following circumstances:

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necessary to perform its functions and duties
v. Management Committee
as management committee;
e. Report to the court any material adverse
Role of the Management Committee
change in the business of the entity under
1. Take custody of and control all assets owned
management;
or possessed by the debtor;
f. Evaluate the existing equity, capital, assets
2. Take the place of the management and
and liabilities, earnings, and operations of the
governing body of the debtor; and
entity under management;
3. Assume the powers, rights and responsibilities
g. Determine and recommend to the court the
of the debtor (FR Rules, Rule 2, Sec. 33)
best way to salvage and protect the interest
of the creditors, stockholders and the general
Note: A majority of all members shall be
public, including the rehabilitation of the entity
necessary for the management committee to act
under management;
or make a decision (FR Rules, Rule 2, Sec. 35)
h. Prohibit and report to the court any
encumbrance, transfer, or disposition of the
Composition of the Management Committee
debtor’s property outside of the ordinary
The management committee shall be composed
course of business or beyond what is allowed
of three qualified members appointed by the
by the court
court, as follows:
i. Prohibit and report to the court payments
a. Nominated by the debtor;
made outside the ordinary course of
b. Nominated by the creditor/s holding more
business;
than 50% of the total obligations of the
j. Have unlimited access to the employees,
debtor;
premises, books, records and financial
c. A chairman nominated by the first and
documents of the entity under management
second members within 10 days from the
during business hours;
appointment (FR Rules, Rule 2, Sec. 34)
k. Inspect, copy, photocopy or photograph any
document, paper, book, account or letter,
The management committee may overrule or
whether in the possession of the entity or
revoke the actions of the previous management
other persons, that pertain to the business of
or governing body of the debtor (FR Rules, Rule
the debtor;
2, Sec. 33)
l. Gain entry into any property owned by the
entity under management for the purposes of
Powers and Duties of the Committee
inspecting, measuring, surveying, or taking
The specific powers and duties of the
photos or videos of any designated relevant
management committee, whose members shall
also be considered as officers of the court, are the object or operation thereon;
following: m. Bring to the attention of the court any material
change affecting the entity’s ability to meet its
a. Investigate the acts, conduct, properties,
obligations;
liabilities, and financial condition of the
n. Take the appropriate steps to modify, nullify,
corporation, association or partnership under
or revoke transactions coming to its
management;
knowledge which it deems detrimental or
b. Examine under oath the directors and officers
prejudicial to the interest of the entity under
of the entity and any other witnesses that the
management;
committee may deem appropriate;
c. Report to the court any ascertained fact o. Recommend the termination of the
pertaining to the causes of the problems, proceedings and the dissolution of the entity
fraud, misconduct, mismanagement and if it determines that the continuance in
irregularities committed by any other person; business of such entity will no longer work to
d. Use the services of or employ such person or the best interest of the stakeholders and
persons, such as lawyers, accountants, creditors;
auditors, appraisers and staff as are p. Apply to the court for any order or directive
that it may deem necessary or desirable to

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Confirmation of Plan Notwithstanding
aid it in the exercise of its powers and
Rejection
performance of its duties and functions,
Notwithstanding the rejection of the Rehabilitation
including the power to examine parties and
Plan, the court may, motu proprio or upon motion
witnesses under oath; and
of any interested party within ten (10) days from
q. Exercise such other powers as the court may,
notice of the rejection of the Rehabilitation Plan,
from time to time confer upon it.
(FR Rules, Rule 2, Sec. 33) confirm the Plan if all of the following
circumstances are present:
Qualifications of Members of the Management
a. The Rehabilitation Plan complies with the
Committee
requirements specified in the FRIA and the
Same as with rehabilitation receivers (FR Rules,
FR Rules;
Rule 2, Sec. 36)
b. The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
Immunity from Suit
c. The shareholders, owners or partners of the
The rehabilitation receiver, the members of the
juridical debtor lose at least their controlling
management committee, and all persons they
interest as a result of the Rehabilitation Plan;
engage shall not be subject to any action, claim
and
or demand for any act or omission in good faith in
d. The Rehabilitation Plan would likely provide
the exercise of their powers and functions (FR
the objecting class of creditors with
Rules, Rule 2, Sec. 38)
compensation, which has a net present value
vi. Rehabilitation Plan greater than that which they would have
received if the debtor were under liquidation.
Rehabilitation Plan (FR Rules, Rule 2, Sec. 62)
A plan by which the financial well-being and
viability of an insolvent debtor can be restored The rehabilitation receiver shall submit the
using various means including, but not limited to, approved Plan to the court for confirmation.
debt forgiveness, debt rescheduling, Within five (5) days from receipt of the
reorganization or quasi- reorganization, dacion Rehabilitation Plan, the court shall notify the
en pago, debt-equity conversion and sale of the creditors that the Rehabilitation Plan has been
business (or parts of it) as a going concern, or submitted for confirmation. (FR Rules, Rule 2,
setting-up of new business entity, or other similar Sec. 63)
arrangements as may be approved by the court
or creditors. (FRIA, Sec. 4[ii]) Objections by creditors may be filed 20 days from
notice (FR Rules, Rule 2, Sec. 64).
Approval of the Rehabilitation Plan
Within 20 days from notice to creditors and Grounds for Objection on the Rehabilitation
stakeholders, the creditors shall be convened for Plan
purposes of voting on the approval of the a. The creditors' support was induced by
Rehabilitation Plan. The Plan shall be deemed fraud;
rejected unless approved by all classes of b. The documents or data relied upon in the
creditors. (FRIA, Sec. 64) Rehabilitation Plan are materially false or
misleading; or
The Plan is deemed to have been approved by a c. The Rehabilitation Plan is in fact not
class of creditors if members of the said class supported by the voting creditors. (FR
holding more than 50% of the total class vote in Rules, Rule 2, Sec. 64)
favor of the plan (FR Rules, Rule 2, Sec. 62)
Confirmation of the Rehabilitation Plan
The court shall issue an order confirming the
Rehabilitation Plan in any of the following
instances:

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b. Compare the amounts expected to be
a. No objections are filed within the twenty
received by the creditors under the
(20)-day period from receipt of notice
Rehabilitation Plan with those that they will
from the court that a Rehabilitation Plan
receive if liquidation ensues within the next
has been submitted to court;
120 days;
b. The court finds the objections lacking in
c. Contain information sufficient to give the
merit;
various classes of creditors a reasonable
c. The basis for the objection has been
basis for determining whether supporting the
cured; or
Plan is in their financial interest when
d. The debtor has complied with the order
compared to the immediate liquidation of the
to cure the objection.
debtor, including any reduction of principal
interest and penalties payable to the
The court may confirm the Rehabilitation Plan
creditors;
notwithstanding unresolved disputes over claims
d. Establish classes of voting creditors;
if the Rehabilitation Plan has made adequate
e. Establish subclasses of voting creditors ifprior
provisions for paying such claims.
approval has been granted by the court;
f. Indicate how the insolvent debtor will be
If the court finds that there is no substantial
rehabilitated including, but not limited to, debt
likelihood that the debtor can be rehabilitated, it
forgiveness, debt rescheduling,
shall not confirm the Rehabilitation Plan and,
reorganization or quasi- reorganization,
instead, declare a failure of rehabilitation.
dacion en pago, debt-equity conversion and
sale of the business (or parts of it) as a going
The court shall have the power to approve or
concern, or setting-up of a new business
implement the Rehabilitation Plan despite thelack
entity or other similar arrangements as may
of approval, or objection from the owners,
be necessary to restore the financial well-
partners or stockholders of the insolvent debtor:
being and viability of the insolvent debtor;
provided, that the terms thereof are necessary to
g. Specify the treatment of each class or
restore the financial well-being and viability of the
subclass described in subsections (d) and (e);
insolvent debtor.
h. Provide for equal treatment of all claims
within the same class or subclass, unless a
The order confirming the Rehabilitation Plan shall
particular creditor voluntarily agrees to less
specify the portions approved by the court and the
favorable treatment;
portions rejected during consideration or cured by
i. Ensure that the payments made under the
the rehabilitation receiver. (FR Rules, Rule 2,
plan follow the priority established under the
Sec. 66)
provisions of the Civil Code on concurrence
and preference of credits and other
The approval of the Rehabilitation Plan shall not
applicable laws;
affect the rights of creditors to pursue separate
j. Maintain the security interest of secured
actions against general partners of a partnership
creditors and preserve the liquidation value of
to the extent they are liable under relevant
the security unless such has been waived or
legislation for the debts thereof. (FR Rules, Rule
2, Sec. 68) modified voluntarily;
k. Disclose all payments to creditors for pre-
Amounts of any indebtedness or obligations commencement debts made during the
reduced or forgiven in connection with a Plan's proceedings and the justifications thereof;
l. Describe the disputed claims and the
approval shall not be subject to any tax. (FR
Rules, Rule 2, Sec. 69) provisioning of funds to account for
appropriate payments should the claim be
Minimum Contents of a Rehabilitation Plan ruled valid or its amount adjusted;
a. Specify the underlying assumptions, the m. Identify the debtor's role in the
financial goals and the procedures proposed implementation of the Plan;
to accomplish such goals;

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n. State any rehabilitation covenants of the realistic assumptions and goals. (Viva
debtor, the breach of which shall be Shippings Lines v. Keppel Philippines Mining,
considered a material breach of the Plan; G.R. No. 177382, 2016)
o. Identify those responsible for the future
management of the debtor and the Characteristics of a rehabilitation plan that is
supervision and implementation of the Plan, infeasible:
their affiliation with the debtor and their a. The absence of a sound and workable
remuneration; business plan;
p. Address the treatment of claims arising after b. Baseless and unexplained assumptions,
the confirmation of the Rehabilitation Plan; targets and goals;
q. Require the debtor and its counter-parties to c. Speculative capital infusion or complete lack
adhere to the terms of all contracts that the thereof for the execution of the business plan;
debtor has chosen to confirm; d. Cash flow cannot sustain daily operations;
r. Arrange for the payment of all outstanding and
administrative expenses as a condition to the e. Negative net worth and the assets are near
Plan's approval unless such condition has full depreciation or fully depreciated (Viva
been waived in writing by the creditors Shippings Lines v. Keppel Philippines Mining,
concerned; G.R. No. 177382, 2016)
s. Arrange for the payment of all outstanding
vii. Cram Down Effect
taxes and assessments, or an adjusted
amount pursuant to a compromise settlement
Two Aspects of the Cram Down Power of The
with the BlR Or other applicable tax
Rehabilitation Court
authorities;
a. Approval despite opposition; and
t. Include a certified copy of a certificate of tax
b. Binding effect of the approved plan
clearance or evidence of a compromise
settlement with the BIR;
Cram-Down
u. Include a valid and binding resolution of a
The power of the rehabilitation court to approve
meeting of the debtor's stockholders to
and implement a rehabilitation plan
increase the shares by the required amount
notwithstanding the objection of the majority of
in cases where the Plan contemplates an
creditors. The “cram-down” clause is necessary to
additional issuance of shares by the debtor;
curb the majority creditors’ natural tendency to
v. State the compensation and status, if any, of
dictate their own terms and conditions to the
the rehabilitation receiver after the approval
rehabilitation, absent due regard to the greater
of the Plan; and
long-term benefit of all stakeholders. Otherwise
w. Contain provisions for conciliation and/or
stated, it forces the creditors to accept the terms
mediation as a prerequisite to court
and conditions of the rehabilitation plan,
assistance or intervention in the event of any
preferring long-term viability over immediate but
disagreement in the interpretation or
incomplete recovery. (Bank of the Philippine
implementation of the Rehabilitation Plan.
Islands vs. Sarabia Manor Hotel Corporation, GR
Characteristics of an economically feasible No. 175844, 2013)
rehabilitation plan:
a. The debtor has assets that can generate The Court may approve a rehabilitation plan over
more cash if used in its daily operations than the objection of the creditors, if, in its judgment,
if sold; the rehabilitation of the debtors is feasible and the
b. Liquidity issues can be addressed by a opposition of the creditors is manifestly
practicable business plan that will generate unreasonable. The criteria for manifest
enough cash to sustain daily operations; unreasonableness are:
c. The debtor has a definite source of financing
for the proper and full implementation of a
Rehabilitation Plan that is anchored on

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a. The rehabilitation plan complies with the

requirements specified in Section 18 of Rule Party Applicant
3, A.M. No. 00-8-10-SC; An insolvent debtor may apply for liquidation by
b. The rehabilitation plan would provide the filing a petition for liquidation
objecting class of creditors with payments
whose present value projected in the plan Where to file the application
would be greater than that which they would RTC which has jurisdiction over its principal office
have received if the assets of the debtor were as specified in its articles of incorporation or
sold by a liquidator within a six (6)month partnership. Where the principal office of the
period from the date of filing of the petition; corporation or partnership as registered with the
and Securities and Exchange Commission (SEC) is in
c. The rehabilitation receiver has recommended Metro Manila, the petition must be filed in the RTC
approval of the plan. (Victorio-Aquino v. Court of the city or municipality where the head
Pacific Plans, G.R. No. 193108, 2014) office is located.

Effects of Confirmation of Rehabilitation Plan Petition for Voluntary Liquidation

a. The Plan and its provisions shall bind the The petition shall be verified, shall establish the
debtor and all persons who may be affected insolvency of the debtor and shall indicate the
thereby, including the creditors, whether or names of at least 3 nominees to the position of
not such persons have participated in the liquidator.
proceedings or opposed the Plan or whether
or not their claims have been scheduled; It shall include, as minimum attachments, the
b. The debtor shall comply with the provisions of following:
the Plan and shall take all actions necessary a. Certificate attesting to the holding of a
to carry them out; meeting of the Board of Directors of a stock
c. Payments shall be made to the creditors in corporation or the Board of Trustees of a non-
accordance with the provisions of the Plan; stock corporation, as the case may be, called
d. Contracts and other arrangements between for the purpose and the approval during the
the debtor and its creditors shall remain valid meeting of a resolution to file the petition,
and continue to apply to the extent that they signed by the secretary of the meeting and at
do not conflict with the provisions of the Plan; least a majority of the members of the Board
e. Any compromises on amounts or present during the meeting;
rescheduling of timing of payments by the b. Certificate attesting to the holding of a
debtor shall be binding on the creditors meeting of the stockholders, members or
regardless of whether or not the Plan is partners comprising the debtor, as the case
successfully implemented; and may be, called for the purpose and the
f. Claims arising after the approval of the Plan approval during the meeting of a resolution to
that are otherwise not treated by the Plan are file the petition by the stockholders holding at
not subject to any Suspension Order. (FR least two-thirds (2/3) of the outstanding
Rules, Rule 2, Sec. 67) capital stock of the stock corporation, or two-
thirds (2/3) of the members or partners in
case of a non-stock corporation, association
d. Liquidation or partnership, as the case may be, signed by
the chairman and the secretary of the
i. Types meeting
c. Schedule of the debtor's debts and liabilities
a. Kinds of Debtors including a list of creditors with their
addresses, amounts of claims and
i. Juridical Debtors collaterals, or securities, if any;

1. Voluntary Liquidation

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d. Inventory of all its assets including b. There is no substantial likelihood that the
receivables and claims against third parties; debtor may be rehabilitated
and
e. Schedule of current income and expenditures The petition shall also include information to the
within three (3) months prior to the filing of the best knowledge of the petitioners on:
petition; a. The schedule of debts and liabilities,
f. List of all properties acquired by the debtor in including a list of its known creditors with their
the immediately preceding two (2) years; addresses, amounts of claims and
g. List of all properties sold, disposed of, or collaterals, or securities, if any;
donated by the debtor in the immediately b. The debtor's assets, including receivablesand
preceding two (2) years; claims against third parties; and
h. Schedule of the debtor's executory contracts c. Audited financial statements of the debtor for
and unexpired leases; the immediately preceding three (3) years.
i. Audited financial statements of the debtor for (FLSP Rules, Rule 2, Sec. 4)
the immediately preceding three (3) years;
and The petitioners shall post a bond in an amount at
j. Income tax return of the debtor for the least equal in value to the aggregate of their
immediately preceding year claims, conditioned upon payment to the debtor
of all expenses and damages it may incur by
2. Involuntary Liquidation reason of the filing of the petition if the same is
later denied or dismissed by the court, or
Party Applicant to Petition for Liquidation withdrawn by the petitioners without the consent
The applicants must be made up of 3 or more of the debtor. (FLSP Rules, Rule 2, Sec. 5)
creditors whose claim(s) is/are:
a. At least P1,000,000; or ii. Individual Debtors
b. At least 25% of the subscribed capital
stock or partners’ contributions (FLSP 1. Suspension of Payments
Rules, Rule 2, Sec. 4)
Party Applicant
Where to file the Petition An individual debtor who, possessing sufficient
RTC which has jurisdiction over its principal office property to cover all his debts but foreseeing the
as specified in its articles of incorporation or impossibility of meeting them when they
partnership. Where the principal office of the respectively fall due, may file a verified petition
corporation or partnership as registered with the that he be declared in the state of suspension of
Securities and Exchange Commission (SEC) is in payments by the court of the province or city in
Metro Manila, the petition must be filed in the RTC which he has resides for six (6) months prior to
Court of the city or municipality where the head the filing of his petition. (FLSP Rules, Rule 3, Sec.
office is located. 1)

Petition for Involuntary Liquidation Petition for Suspension of Payments

The motion shall be verified, shall indicate the The petition shall indicate the names of at least 3
names of at least 3 nominees to the position of nominees to the position of commissioner and
liquidator, and must show that: shall include, as minimum attachments, the
a. There is no genuine issue of fact or law on following:
the claims/s of the petitioner/s, and that the a. Schedule of debts and liabilities, including a
due and demandable payments thereon have list of creditors with their addresses, amount
not been made for at least one hundred of claims and collaterals, if any;
eighty (180) days or that the debtor has failed b. Inventory of all the debtor's assets, including
generally to meet its liabilities as they fall due; receivables and claims against third parties;
and

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c. Schedule of current income and expenditures the ordinary operations of commerce or of

within three (3) months prior to the filing of the industry in which the petitioning individual
petition; debtor is engaged so long as the proceedings
d. Income tax return of the debtor for the relative to the suspension of payments are
immediately preceding year; pending;
e. List of all properties acquired by the debtor in g. Prohibiting the individual debtor from making
the immediately preceding two (2) years; any payment outside of the necessary or
f. List of all properties sold, disposed of, or legitimate expenses of his business or
donated by the debtor in the immediately industry, so long as the proceedings relative
preceding two (2) years; to the suspension of payments are pending;
g. Schedule of the debtor's executory contracts and
and unexpired leases; and h. Appointing a commissioner to preside over
h. Proposed agreement with the creditors. the creditors' meeting. (FLSP Rules, Rule 3,
(FLSP Rules, Rule 3, Sec. 1) Sec. 2)

Court Action in Suspension of Payments Actions Suspended by a Suspension Order

If the court finds the petition sufficient in form and Upon motion filed by the individual debtor, the
substance, it shall, within 5 working days from the court may issue an order suspending any
filing of the petition, issue a Suspension of pending execution against the individual debtor.
Payments Order: Properties held as security by secured creditors
a. Prohibiting creditors from suing or instituting shall not be the subject of such suspension order.
proceedings for collection against the debtor,
except: (i) creditors having claims for The suspension order shall lapse when three (3)
personal labor, maintenance, expense of last months shall have passed without the proposed
illness and funeral of the wife or children of agreement being accepted by the creditors or as
the debtor incurred within 60 days soon as such agreement is denied. (FLSP Rules,
immediately prior to the filing of the petition; Rule 3, Sec. 3)
and (ii) secured creditors;
b. Calling a meeting of all the creditors named 2. Voluntary Liquidation
in the schedule of debts and liabilities at such
time not less than 15 days nor more than 40 Party Applicant
days from the date of such Order and An individual debtor whose properties are not
designating the date, time and place of the sufficient to cover his liabilities, and owing debts
meeting; exceeding Php500,000.00, may apply to be
c. Directing such creditors to prepare and discharged from his debts and liabilities by filing
present written evidence of their claims a verified petition with the court of the province or
before the scheduled creditors' meeting; city in which he has resided for 6 months prior to
d. Directing the publication of the said order in a the filing of such petition. (FLSP Rules, Rule 3,
newspaper of general circulation published in Sec. 11)
the province or city in which the petition is
filed once a week for 2 consecutive weeks, Petition for Voluntary Liquidation
with the first publication to be made within The petition shall indicate the names of at least 3
seven 7 days from the time of the issuance of nominees to the position of commissioner and
the Order; shall include, as minimum attachments, the
e. Directing the clerk of court to cause the following:
sending of a copy of the Order by registered a. Schedule of debts and liabilities, including a
mail, postage prepaid, to all creditors named list of creditors with their addresses, amount
in the schedule of debts and liabilities; of claims and collaterals, if any;
f. Forbidding the individual debtor from selling, b. Inventory of all the debtor's assets, including
transferring, encumbering or disposing in any receivables and claims against third parties;
manner of his property, except those used in

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c. Schedule of current income and expenditures purpose of hindering or delaying the

within three (3) months prior to the filing of the liquidation or of defrauding his creditors;
petition; f. He has confessed or offered to allow
d. Income tax return of the debtor for the judgment in favor of any creditor or claimant
immediately preceding year; for the purpose of hindering or delaying the
e. List of all properties acquired by the debtor in liquidation or of defrauding any creditors or
the immediately preceding two (2) years; claimant;
f. List of all properties sold, disposed of, or g. He has willfully suffered judgment to be taken
donated by the debtor in the immediately against him by default for the purpose of
preceding two (2) years; and hindering or delaying the liquidation or of
g. Schedule of the debtor's executory contracts defrauding his creditors;
and unexpired leases (FLSP Rules, Rule 3, h. He has suffered or procured his property to
Sec. 11) be taken on legal process with intent to give
a preference to one or more of his creditors
If the court finds the petition sufficient in form and and thereby hinder or delay the liquidation or
substance it shall, within five (5) working days defraud any one of his creditors;
issue the Liquidation Order (FLSP Rules, Rule 3, i. He has made any assignment, gift, sale,
Sec. 12) conveyance or transfer of his estate,
property, rights or credits with intent to hinder
Note: The official copy of the FLSP Rules states or delay the liquidation or defraud his
Rule 3, Sec. 12 as Rule 3, Sec. 3. creditors;
j. He has, in contemplation of insolvency, made
3. Involuntary Liquidation any payment, gift, grant, sale, conveyance or
transfer of his estate, property, rights or
Party Applicant credits;
Any creditor or group of creditors with a claim of, k. Being a merchant or tradesman, he has
or with claims aggregating at leastPhp500,000.00 generally defaulted in the payment of his
may file a verified petition for liquidation with the current obligations for a period of 30 days;
court of the province or city inwhich the individual l. For a period of 30 days, he has failed, after
debtor resides. (FLSP Rules,Rule 3, Sec. 13) demand, to pay any moneys deposited with
him or received by him in a fiduciary; and
Acts of Insolvency m. An execution having been issued against him
The following shall be considered acts of on final judgment for money, he shall have
insolvency, and the petition for liquidation shall been found to be without sufficient property
set forth or allege at least one of such acts: subject to execution to satisfy the judgment.
a. Such person is about to depart or has (FLSP Rules, Rule 3, Sec. 13)
departed from the Republic of the Philippines,
with intent to defraud his creditors; Court Action in Involuntary Liquidation
b. Being absent from the Republic of the The court shall issue an Order requiring the
Philippines, with intent to defraud his individual debtor to show cause, at a time and
creditors, he remains absent; place to be fixed by the said court, why he should
c. He conceals himself to avoid the service of not be adjudged an insolvent. (FLSP Rules, Rule
legal process for the purpose of hindering or 3, Sec. 15)
delaying the liquidation or of defrauding his
creditors; Upon good cause shown, the court may issue an
d. He conceals, or is removing, any of his Order forbidding the individual debtor from
property to avoid its being attached or taken making payments of any of his debts, and
on legal process; transferring any property belonging to him.
e. He has suffered his property to remain under However, nothing contained herein shall affect or
attachment or legal process for 3 days for the impair the rights of a secured creditor to enforce
his lien in accordance with its terms.

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The motion shall be verified & shall contain/set
ii. Conversion of Rehabilitation to
forth the same matters mentioned in the FLSP
Liquidation Proceedings
Rules, Sec. 4. (FLSP Rules, Rule 2, Sec. 6)
During the pendency of court-supervised or pre-
Action on the Petition or Motion
negotiated rehabilitation proceedings, the court
If the petition or motion is sufficient in form and
may order the conversion of rehabilitation
substance, the court shall issue an Order:
proceedings to liquidation proceedings pursuant
• Directing the publication of the petition or
to:
motion in a newspaper of general circulation
a. Section 25(c) of the FRIA which states that
once a week for 2 consecutive weeks;
conversions can be done when the debtor is
• Directing the debtor and all creditors who are
insolvent and there is no substantial
not the petitioners to file their comment on the
likelihood for the debtor to be successfully
petition or motion within 15 days from the
rehabilitated; or
date of last publication; and
b. Section 72 of the FRIA or if no Rehabilitation
• Directing that a copy of the petition or motion
Plan is confirmed within 1 year from the date
be served on the debtor and on all known
of the filing of a petition to confirm the
creditors, unless they exceed 20 in number,
rehabilitation plan, the proceedings may,
in which case, service shall be made on at
upon motion or motuproprio, be converted
least the first 20 largest known creditors of
into one for the liquidation of the debtor; or
the debtor in terms of credits held. However,
c. Section 75 of the FRIA or if termination of
if there are more than 20 known creditors
proceedings is due to failure of rehabilitation
(who are not petitioners) and one or more of
or dismissal of the petition for reasons other
them acquired their credit/s within the 6-
than technical grounds, the proceedings shall
month period immediately preceding the filing
be immediately converted to liquidation; or
of the petition, the number of creditors to be
d. Section 90 of the FRIA or if during the
served copies of the petition shall be
pendency of court-supervised or pre-
increased by the same number.
negotiated rehabilitation proceedings, the
debtor may also initiate liquidation
If, after considering the comments filed, the court
proceedings by filing a motion in the same
determines that the petition or motion is
court where the rehabilitation proceedings
meritorious, it shall issue the Liquidation Order.
are pending to convert the rehabilitation
(FLSP Rules, Rule 2, Sec. 8)
proceedings into liquidation proceedings.
e. At any other time upon the recommendation
After notice and hearing, the court where
of the rehabilitation receiver that the
rehabilitation proceedings are pending may also
rehabilitation of the debtor is not feasible.
order the conversion of rehabilitation proceedings
into liquidation proceedings in those cases
Motion to Convert Rehabilitation Proceedings
authorized by law, or at any other time upon the
Into Liquidated Proceedings
recommendation of the rehabilitation receiver or
At any time during the pendency of or after a
management committee that the rehabilitation of
rehabilitation court-supervised or pre-negotiated
the debtor is no longer feasible. (FLSP Rules,
rehabilitation proceedings, creditors may compel
Rule 2, Sec. 9)
a debtor who is undergoing rehabilitation to
liquidate instead. The following are the requisites:
Thereupon, the court shall issue the Liquidation
Order.
The applicants must be made up of 3 or more
creditors whose claim(s) is/are:
a. At least P1,000,000; or
b. At least 25% of the subscribed capital
stock or partners’ contributions

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the Liquidator for him to accept and settle or
iii. Liquidation Order
contest. If the liquidator contests or disputes
the claim, the court shall allow, hear and
The Liquidation Order shall:
resolve such contest except when the case is
a. Declare the debtor insolvent;
already on appeal. In such a case, the suit
b. Order the liquidation of the debtor and, in the
may proceed to judgment, and any final and
case of a juridical debtor, declare it as
executor judgment therein for a claim against
dissolved;
the debtor shall be filed and allowed in court;
c. Order the sheriff to take possession and
and
control of all the property of the debtor,
e. No foreclosure proceeding shall be allowed
except those that may be exempt from
for a period of 180 days. (FLSP Rules, Rule
execution;
4, Sec. 3)
d. Order the publication of the petition or motion
in a newspaper of general circulation once a iv. Rights of Secured Creditors
week for 2 consecutive weeks;
e. Direct payments of any claims and The Liquidation Order shall not affect the right of
conveyance of any property due the debtor to a secured creditor to enforce his lien in
the liquidator; accordance with the applicable contract or law,
f. Prohibit payments by the debtor and the unless he waives his right. (FLSP Rules, Rule 4,
transfer of any property by the debtor; Sec. 4)
g. Direct all creditors to file their claims with the
liquidator within the period set by the rules of Options available to a secured creditor
procedure A secured creditor may:
h. Authorize the payment of administrative a. Waive his right under the security or lien,
expenses as they become due; prove his claim in the liquidation proceedings
i. State that the debtor and creditors who are and share in the distribution of the assets of
not petitioner/s may submit the names of the debtor; or
other nominees to the position of liquidator; b. Maintain his rights under the security or lien.
and
j. Set the case for hearing for the election and Failure to file a manifestation means that the
appointment of the liquidator, which date secured creditor is deemed to have opted to
shall not be less than 30 days nor more than maintain his right under the security or lien (FLSP
45 days from the date of the last publication. Rules, Rule 4, Sec. 5)
(FLSP Rules, Rule 4, Sec. 2)
Nature of Waiver
Upon issuance of the Liquidation Order: A secured creditor shall not be deemed to have
a. Juridical debtor shall be deemed dissolved waived his right under the security or lien unless
and its corporate or juridical existence the waiver is made in a public document, in
terminated; unequivocal language, and with full knowledge of
b. Legal title to and control of all the assets of the consequences of his action. If a secured
the debtor, except those that may be exempt creditor waives his right, he shall be entitled to
from execution, shall be deemed vested in participate in the liquidation proceedings as an
the liquidator or, pending his election or unsecured creditor. (FLSP Rules, Rule 4, Sec. 6)
appointment, with the court;
c. All contracts of the debtor shall be deemed If the secured creditor maintains his rights
terminated and/or breached, unless the under the security or lien:
liquidator, within 90 days from the date of his a. The value of the property may be fixed in a
assumption of office, declares otherwise and manner agreed upon by the creditor and the
the contracting party agrees; liquidator. When the value of the property is
d. No separate action for the collection of an less than the claim it secures, the liquidator
unsecured claim shall be allowed. Such may convey the property to the secured
actions already pending will be transferred to

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Appointment of a Liquidator
creditor and the latter will be admitted in the
The court may appoint the liquidator if:
liquidation proceedings as a creditor for the
a. On the date set for the election of the
balance. If its value exceeds the claim
liquidator, the creditors do not attend;
secured, the liquidator may convey the
b. Creditors who attend, fail or refuse to
property to the creditor and waive the debtor's
elect a liquidator;
right of redemption upon receiving the excess
c. After being elected, the liquidator fails to
from the creditor;
qualify ; or
b. Liquidator may sell the property and satisfy
d. Vacancy occurs for any reason
the secured creditor's entire claim from the
whatsoever, In any of the cases provided
proceeds of the sale; or
herein, the court may instead set another
c. Secure creditor may enforce the lien or
hearing of the election of the liquidator.
foreclose on the property pursuant to
applicable laws. (FLSP Rules, Rule 4, Sec. 7)
Qualifications of a Liquidator
v. Liquidator The liquidator shall have the same qualifications
as the rehabilitation receiver:
The Liquidator • Citizen of the Philippines or a resident of
The Liquidator is a natural person or juridical the Philippines in the 6months
entity appointed as such by the court and immediately preceding his nomination;
entrusted with such powers and duties. • Good moral character and with
acknowledged integrity, impartiality and
If the liquidator is a juridical entity, it must independence;
designated a natural person who possesses all • Has the requisite knowledge of
the qualifications and none of the disqualifications insolvency and other relevant
as its representative, it being understood that the commercial laws, rules and procedures,
juridical entity and the representative are as well as the relevant training and/or
solidarity liable for all obligations and experience that may be necessary to
responsibilities of the liquidator. (FLSP Rules, enable him to properly discharge the
Rule 4, Sec. 8) duties and obligations of a rehabilitation
receiver; and
Election of a Liquidator • Has no conflict of interest: Provided, That
The creditors entitled to vote will elect the such conflict of interest may be waived,
liquidator in open court. The nominee receiving expressly or impliedly, by a party who
the highest number of votes cast in terms of may be prejudiced thereby. (FLSP Rules,
amount of claims and who is qualified shall be Rule 4, Sec. 8)
appointed as the liquidator.
Powers, Duties and Responsibilities of a
Only creditors who have filed their claims within Liquidator
the period set by the court, and whose claims are The liquidator shall be deemed an officer of the
not barred by the statute of limitations, will be court with the principal duly of preserving and
allowed to vote in the election of the liquidator. maximizing the value and recovering the assets
of the debtor, with the end of liquidating them and
A secured creditor will not be allowed to vote discharging to the extent possible all the claims
unless: against the debtor. The powers, duties and
a. He waives his security or lien; or responsibilities of the liquidator shall include, but
b. Has the value of the property subject of not limited to:
his security or lien fixed by agreement a. Sue and recover all the assets, debts and
with the liquidator, and is admitted for the claims, belonging or due to the debtor;
balance of his claim. (FLSP Rules, Rule b. Take possession of all the property of the
4, Sec. 9) debtor except property exempt by law from
execution;

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f. Conflict of interest, unless, waived, expressly
c. Sell, with the approval of the court, any
or impliedly, by a party who may be
property of the debtor which has come into
prejudiced thereby;
his possession or control;
g. Partiality or lack of independence; or
d. Redeem all mortgages and pledges, and so
h. Any other ground analogous to the foregoing.
satisfy any judgement which may be an
(FLSP Rules, Rule 4, Sec. 13)
encumbrance on any property sold by him;
e. Settle all accounts between the debtor and vi. Determination of Claims
his creditors, subject to the approval of the
court; Registry of Claims
f. Recover any property or its value, Within 20 days from his assumption into office the
fraudulently conveyed by the debtor; liquidator shall prepare a preliminary registry of
g. Recommend to the court the creation of a
claims of secured and unsecured creditors.
creditors' committee which will assist him in
Secured creditors who have waived their security
the discharge of the functions and which shall
or lien, or have fixed the value of the property
have powers as the court deems just,
subject of their security or lien by agreement with
reasonable and necessary; and
the liquidator and is admitted as a creditor for the
h. Upon approval of the court, to engage such
balance, shall be considered as unsecured
professional as may be necessary and
creditors.
reasonable to assist him in the discharge of
his duties.
The liquidator shall make the registry available for
public inspection and provide publication notice to
In addition to the rights and duties of a
creditors, individual debtors owner/s of the sole
rehabilitation receiver, the liquidator, shall have
proprietorship- debtor, the partners of the
the right and duty to take all reasonable steps to
partnership-debtor and shareholders or members
manage and dispose of the debtor's assets with a
of the corporation-debtor, on where and when
view towards maximizing the proceedings
they may inspect it. All claims must be duly
therefrom, to pay creditors and stockholders, and
proven before being paid. (FLSP Rules, Rule 4,
to terminate the debtor's legal existence. Other Sec. 17)
duties of the liquidator in accordance with this
section may be established by procedural rules. Challenging/Opposing Claims
(FLSP Rules, Rule 4, Sec. 12)
Within thirty 30 days from the expiration of the
period for filing of applications for recognition of
Removal of Liquidator
claims:
The liquidator may be removed at any time by the 1. creditors,
court either motu proprio or upon motion by the
2. individual debtors,
debtor or any creditor or creditors on any of the
3. owner/s of the sole proprietorship-debtor,
following grounds:
4. partners of the partnership-debtor and
a. He did not actually receive the highest
5. shareholders or members of the corporation-
number of votes during the election for
debtor and
liquidator;
6. other interested parties
b. Incompetence, gross negligence, failure to
perform or exercise the proper degree of care may submit a challenge to claim or claims to the
in the performance of his duties and powers; court, serving a certified copy on the liquidator
c. Lack of a particular or specialized and the creditor holding the challenged claim.
competency required by the specific case;
d. Illegal acts or conduct in the performance of
Upon the expiration of the 30 day period, the
his duties and powers;
rehabilitation receiver shall submit to the court the
e. Lack of any of the qualifications stated under
registry of claims containing the undisputed
Section 8 of the FLSP Rules or presence of
claims that have not been subject to challenge.
any disqualification;
Such claims shall become final upon the filling of

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the debtor shall enjoy first preference under
the register and may be subsequently set aside
Article 2244 of the Civil Code, unless the claims
only on grounds or fraud, accident, mistake or
constitute legal liens under Article 2241 and 2242
inexcusable neglect. (FLSP Rules, Rule 4, Sec.
thereof. (FLSP Rules, Rule 4, Sec. 25)
19)
Court Action upon Completion of Liquidation
Right of Set-Off
– Removal from Registry of Legal Entries and
If the debtor and creditor are mutually debtor and
Termination of Liquidation Proceeding
creditor of each other, one debt shall be set off
Upon determining that the liquidation has been
against the other and only the balance, if any,
completed, the court shall issue an Order
shall be allowed in the liquidation proceedings.
approving the report and ordering the SEC to
(FLSP Rules, Rule 4, Sec. 18)
remove the debtor from the registry of legal
vii. Liquidation Plan entities.
Within 3 months from his assumption into office,
the Liquidator shall submit a Liquidation Plan to Upon receipt of evidence showing that the debtor
the court. The Liquidation Plan shall, as a has been removed from the registry of legal
minimum enumerate all the assets of the debtor entities at the SEC, the court shall issue an Order
and a schedule of liquidation of the assets and terminating the proceedings. (FLSP Rules, Rule
payment of the claims. (FLSP Rules, Rule 4, Sec. 4, Sec. 29)
23)
--------end of topic --------
Properties Exempt from Liquidation
It shall be the duty of the court, upon petition and
after hearing, to exempt and set apart, for the use
and benefit of the said insolvent, such real and
personal property as is by law exempt from
execution, and also a homestead.

However, no such petition shall be heard as

aforesaid until it is first proved that notice of the
hearing of the application therefor has been duly
given by the clerk, by causing such notice to be
posted it at least 3 public places in the province
or city at least 10 days prior to the time of such
hearing, which notice shall set forth the name of
the said insolvent debtor, and the time and place
appointed for the hearing of such application, and
shall briefly indicate the homestead sought to be
exempted or the property sought to be set aside;
and the decree must show that such proof was
made to the satisfaction of the court, and shall be
conclusive evidence of that fact.

Preference of Credit
The Liquidation Plan and its Implementation shall
ensure that the concurrence and preference of
credits as enumerated in the Civil Code and other
relevant laws shall be observed, unless a
preferred creditor voluntarily waives his preferred
right. For purposes of this chapter, credits for
services rendered by employees or laborers to

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F. DATA PRIVACY ACT OF 2012
VIII. SPECIAL LAWS
F. DATA PRIVACY ACT OF 2012
1. Definitions and scope 1. DEFINITIONS AND SCOPE
2. Extraterritorial application
DEFINITIONS
3. Processing of personal information
a. General principles
b. Sensitive and privileged Informational Privacy
information Right to control the collection, maintenance, use,
c. Subcontracting and dissemination of data about oneself. (Lee v.
d. Rule on privileged communication Ilagan, GR. No. 203254, 2014)
4. Rights of the data subject;
exceptions/non-applicability The individual’s ability to control the flow of
5. Duties and responsibilities of personal information concerning or describing him, which
information controller however must be overbalanced by legitimate
public concerns. To deprive an individual of his
power to control or determine whom to share
information of his personal details would deny
him of his right to his own personhood. (KMU v.
NEDA, GR. No. 167798, 2006, J. Ynares-
Santiago dissenting opinion; Bayan Muna v.
Ermita, GR. No. 167930, 2006)

Consent of the Data subject

Any freely given, specific, informed indication of
will, whereby the data subject agrees to the
collection and processing of personal information
about and/or relating to him or her.

Consent shall be evidenced by written, electronic

or recorded means. It may also be given on behalf
of the data subject by an agent specifically
authorized by the data subject to do so. (Sec.
3(c), Implementing Rules and Regulations,
hereinafter IRR)

Data Subject
An individual whose personal information is
processed. (Sec. 3(d), IRR)

Data Sharing
The disclosure or transfer to a third party of
personal data under the custody of a personal
information controller or personal information
processor. In the case of the latter, such
disclosure or transfer must have been upon the
instructions of the personal information controller
concerned.

The term excludes outsourcing, or the disclosure

or transfer of personal data by a personal

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information is collected, or the purpose or extent
information controller to a personal information
of its processing. (Sec. 3(m), IRR)
processor (Section 3(f), IRR)
Personal Information Processor
Personal Data
Any natural or juridical person qualified to act as
• All types of personal information (Section 3(j),
such under this Act to whom a personal
IRR)
information controller may outsource the
• Any information from which the identity of an
processing of personal data pertaining to a data
individual is apparent or any information that
subject. (Sec. 3(n), IRR)
can be put together with other information to
reasonably and directly identify an individual
Privileged Information
• Includes sensitive personal information such
This refers to any and all forms of data which
as your health, education, genetic or sexual
under the Rules of Court and other pertinent laws
life and information that is classified or
constitute privileged communication.
privileged
Processing
Personal Data Breach
Any operation or any set of operations performed
A breach of security leading to the accidental or
upon personal information including, but not
unlawful destruction, loss, alteration,
limited to, the collection, recording, organization,
unauthorized disclosure of, or access to, personal
storage, updating or modification, retrieval,
data transmitted, stored, or otherwise processed
consultation, use, consolidation, blocking,
(Section 3(k), IRR)
erasure or destruction of data. (Sec. 3(o), IRR)
Personal Information
Profiling
Any information whether recorded in a material
Any form of automated processing of personal
form or not, from which the identity of an
data consisting of the use of personal data to
individual is apparent or can be reasonably and
evaluate certain personal aspects relating to a
directly ascertained by the entity holding the
natural person, in particular to analyze or predict
information, or when put together with other
aspects concerning that natural person’s
information would directly and certainly identify
performance at work, economic situation, health,
an individual. (Sec. 3(l), IRR)
personal preferences, interests, reliability,
behavior, location or movements (Section 3(p),
Personal Information Controller
IRR)
A person or organization who controls the
collection, holding, processing or use of personal
Sensitive Personal Information
information, including a person or organization
This refers to personal information:
who instructs another person or organization to
1. About an individual’s race, ethnic origin,
collect, hold, process, use, transfer or disclose
marital status, age, color, and religious,
personal information on his or her behalf.
philosophical or political affiliations;
2. About an individual’s health, education,
The term excludes:
genetic or sexual life of a person, or to
1. A person or organization who performs
any proceeding for any offense
such functions as instructed by another
committed or alleged to have been
person or organization; and
committed by such person, the disposal
2. An individual who collects, holds,
of such proceedings, or the sentence of
processes or uses personal information
any court in such proceedings;
in connection with the individual’s
3. Issued by government agencies peculiar
personal, family or household affairs.
to an individual which includes, but not
limited to, social security numbers,
Note: There is control if the natural or juridical
previous or current health records,
person or any other body decides on what

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employment with the
licenses or its denials, suspension or
revocation, and tax returns; and government.
4. Specifically established by an executive
b. Information about an individual who is or
order or an act of Congress to be kept
classified was performing service under contract
for a government institution that
SCOPE (SECTION 4) relates to the services performed,
including the terms of the contract, and
General Rule: The DPA applies to the processing the name of the individual given in the
of all types of personal information by: course of the performance of those
• any natural and juridical person involved services;
in personal information processing
• personal information controllers and c. Information relating to any discretionary
processors who, although not found or benefit of a financial nature such as the
established in the Philippines, use granting of a license or permit given by
equipment that are located in the the government to an individual,
Philippines, or those who maintain an including the name of the individual and
office, branch or agency in the the exact nature of the benefit;
Philippines (Sec. 4, DPA)
Provided, that they do not include
Limitations: benefits given in the course of an
• The rule on privileged communications ordinary transaction or as a matter of
• The DPA does not amend or repeal RA 53 right
which protects publishers, editors, or Note: (a), (b), (c) considers the right to
duly accredited reporters of any information on matters of public concern
newspaper, magazine, or periodical of
general circulation from being compelled d. Personal information processed for
to reveal the source of published news or journalistic, artistic, literary or
information obtained in confidence. research purposes;
Note: The IRR explains this exemption as
Information Outside the Scope of the DPA limited to that necessary in order to
a. Information about any individual who is or uphold freedom of speech, of expression,
was an officer or employee of a or of the press, subject to requirements
government institution that relates to of other applicable law or regulation. For
the position or functions of the individual, research purpose, research is for a public
including: benefit, where processing is subject to
1. The fact that the individual is or the requirements of applicable laws,
was an officer or employee of the regulations, or ethical standards.
government institution
2. The title, business address and e. Information necessary in order to carry
office telephone number of the out the functions of public authority
individual which includes the processing of personal
data for the performance by the
3. The classification, salary range
independent, central monetary authority
and responsibilities of the
and law enforcement and regulatory
position held by the individual;
agencies of their constitutionally and
and
statutorily mandated functions.
4. The name of the individual on a
document prepared by the Note: the DPA shall not be construed as
individual in the course of to have amended or repealed:

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• Republic Act No. 1405, 2. EXTRATERRITORIAL APPLICATION

otherwise known as the Secrecy
of Bank Deposits Act; The DPA applies to an act done or practice
• Republic Act No. 6426, engaged in and outside of the Philippines by an
otherwise known as the Foreign entity if:
Currency Deposit Act; and 1. The natural or juridical person involved in the
• Republic Act No. 9510, processing of personal data is found or
otherwise known as the Credit established in the Philippines (IRR, Section 4
Information System Act (CISA) (a))
2. The act, practice or processing relates to
Note: Exemption for law enforcement is personal information about a Philippinecitizen
only to extent allowed by Constitution, or a resident;
including right against unreasonable 3. The processing of personal data is being done
search and seizure in the Philippines (IRR, Section 4(c))
4. The entity has a link with the Philippines, and
f. Information necessary for banks and the entity is processing personal information
other financial institutions under the in the Philippines or even if the processing is
jurisdiction of the independent, central outside the Philippines as long as it is about
monetary authority or Bangko Sentral ng Philippine citizens or residents such as, but
Pilipinas to comply with Republic Act No. not limited to, the following:
9510, and Republic Act No. 9160, as • Use of equipment located in the country,
amended, otherwise known as the Anti- or maintains an office, branch, or
Money Laundering Act and other agency in the Philippines for processing
applicable laws; and of personal data (IRR, Section 4(d)(1))
• A contract is entered in the Philippines;
g. Personal information originally collected • A juridical entity unincorporated in the
from residents of foreign jurisdictions Philippines but has central management
in accordance with the laws of those and control in the country; and
foreign jurisdictions, including any • An entity that has a branch, agency,
applicable data privacy laws, which is office or subsidiary in the Philippines
being processed in the Philippines. and the parent or affiliate of the
Philippine entity has access to personal
Note: IRR explains that the burden of information;
proving the law of the foreign jurisdiction 5. The entity has other links in the Philippines
falls on the person or body seeking such as, but not limited to:
exemption. In the absence of proof, the • The entity carries on business in the
applicable law shall be presumed to be Philippines; and
the Act and these Rules. • The personal information was collected
or held by an entity in the Philippines
The non-applicability of the Act or the Rules does (Sec. 6, DPA)
not extend to personal information controllers or
personal information processors, who remain
subject to the requirements of implementing
security measures for personal data protection.

The processing of the information provided in the

preceding paragraphs shall be exempted from the
requirements of the Act only to the minimum
extent necessary to achieve the specific purpose,
function, or activity. (Section 5, IRR)

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as reasonably practicable, after
3. PROCESSING OF PERSONAL
collection.
INFORMATION
• Only personal data that is
A. General principles necessary and compatible with
declared, specified, and
Transparency legitimate purpose shall be
The data subject must be aware of the nature, collected. (Section 19 (a) of the
purpose, and extent of the processing of his or IRR)
her personal data, including the risks and 2. Processed fairly and lawfully
safeguards involved, the identity of personal • Processing shall uphold the rights of the
information controller, his or her rights as a data data subject, including the right to refuse,
subject, and how these can be exercised. Any withdraw consent, or object. It shall
information and communication relating to the likewise be transparent, and allow the
processing of personal data should be easy to data subject sufficient information to
access and understand, using clear and plain know the nature and extent of
language. (Section 18(a), IRR) processing.
• Information provided to a data subject
Legitimate Purpose must always be in clear and plain
The processing of information shall be compatible language to ensure that they are easy to
with a declared and specified purpose which must understand and access.
not be contrary to law, morals, or public policy. • Processing must be in a manner
(Section 18(b), IRR) compatible with declared, specified, and
legitimate purpose (Section 19 (b), IRR-
Proportionality DPA).
The processing of information shall be adequate, 3. Accurate, relevant and, where necessary for
relevant, suitable, necessary, and not excessive purposes for which it is to be used the
in relation to a declared and specified purpose. processing of personal information, kept up to
Personal data shall be processed only if the date; inaccurate or incomplete data must be
purpose of the processing could not reasonably rectified, supplemented, destroyed or their
be fulfilled by other means. (Section 18(c), IRR) further processing restricted.
• Processing should ensure data quality.
The processing of personal information shall be (Section 19 (b), IRR-DPA)
allowed, subject to compliance with the 4. Adequate and not excessive in relation to the
requirements of the DPA and other laws allowing purposes for which they are collected and
disclosure of information to the public and processed.
adherence to the three principles above. 5. Retained only for as long as necessary for the
fulfillment of the purposes for which the data
Processing of Personal information must be: was obtained or for the establishment,
1. Collected for specified and legitimate exercise or defense of legal claims, or for
purposes determined and declared before, or legitimate business purposes, or as provided
as soon as reasonably practicable after by law.
collection, and later processed in a way 6. Kept in a form which permits identification of
compatible with such declared, specified and data subjects for no longer than is necessary
legitimate purposes only. for the purposes for which the data were
• When consent is required, it must collected and processed: Provided, That
be time-bound in relation to the personal information collected for other
declared, specified and purposes may be processed for historical,
legitimate purpose. Consent statistical or scientific purposes, and in cases
given may be withdrawn. laid down in law may be stored for longer
• Purpose should be determined periods: Provided, further, That adequate
and declared before, or as soon

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Example:
safeguards are guaranteed by said laws
Q: Lawyer got the CENOMAR w/o the consent of
authorizing their processing. (Sec. 11, DPA)
the Data Subject but it was legally obtained from
• Personal data shall not be retained in
the PSA (PSA made an error in releasing the
perpetuity in contemplation of a possible
CENOMAR). Can the Lawyer use the CENOMAR?
future use yet to be determined (Section
19(e)(3), IRR)
NPC Ruling: YES. Cannot fault the lawyer for
legally obtaining evidence.
Criteria for Lawful Processing of Personal
Information (Section 12, DPA) (not sensitive)
The processing of personal information shall be
B. Sensitive and privileged information
permitted only if not otherwise prohibited by law,
and when at least one of the following conditions Criteria For Lawful Processing Of Sensitive
exists: Personal Information And Privileged
1. The data subject has given his or her consent Information (Section 13, DPA)
prior to the collection, or as soon as General Rule: The processing of sensitive
practicable and reasonable. personal information and privileged information
2. The processing of personal information is shall be prohibited.
necessary and is related to the fulfillment of a
contract with the data subject or in order to Exceptions:
take steps at the request of the data subject 1. The data subject has given his or her
prior to entering into a contract; consent, specific to the purpose prior to the
3. The processing is necessary for compliance processing, or in the case of privileged
with a legal obligation to which the personal information, all parties to the exchange have
information controller is subject; given their consent prior to processing;
4. The processing is necessary to protect vitally 2. The processing of the same is provided for by
important interests of the data subject, existing laws and regulations;
including life and health; 3. The processing is necessary to protect the life
5. The processing is necessary in order to and health of the data subject or another
respond to national emergency, to comply person, and the data subject is not legally or
with the requirements of public order and physically able to express his or her consent
safety, or to fulfill functions of public authority prior to the processing;
which necessarily includes the processing of 4. The processing is necessary to achieve the
personal data for the fulfillment of its mandate lawful and noncommercial objectives of
or the processing of personal information is public organizations and their associations:
necessary for the fulfillment of the Provided that:
constitutional or statutory mandate of a public • such processing is only confined and
authority (Section 21(f) of the IRR) related to the bona fide members of these
6. The processing is necessary for the purposes organizations or their associations:
of the legitimate interests pursued by the • the sensitive personal information are not
personal information controller or by a third transferred to third parties:
party or parties to whom the data is disclosed,
• consent of the data subject was obtained
except where such interests are overridden prior to processing;
by fundamental rights and freedoms of the 5. The processing is necessary for purposes of
data subject which require protection under medical treatment, Provided, that it is carried
the Philippine Constitution. out by a medical practitioner or a medical
treatment institution, and an adequate level of
protection of personal information is ensured;
or

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shall prove the nature of the communication
6. The processing concerns such personal
in an executive session.
information as is necessary for the protection
2. Should the communication be determined as
of lawful rights and interests of natural or
privileged, it shall be excluded from evidence,
legal persons in court proceedings, or the
and the contents thereof shall not form part of
establishment, exercise or defense of legal
the records of the case
claims, or when provided to government or
3. where the privileged communication itself is
public authority. (Sec. 13, DPA)
the subject of a breach, or a privacy concern
or investigation, it may be disclosed to the
C. Subcontracting Commission but only to the extent necessary
for the purpose of investigation, without
Subcontract of Personal Information including the contents thereof in the records.
A personal information controller may (Sec. 23, IRR)
subcontract the processing of personal
information subject to the following parameters: Applicability of DPA to Surveillance
1. the personal information controller shall be Surveillance of Suspects and Interception of
responsible for ensuring that proper Recording of Communications. Section 7 of
safeguards are in place Republic Act No. 9372, otherwise known as the
2. ensure the confidentiality of the personal “Human Security Act of 2007”, is herebyamended
information processed, to include the condition that the processing of
3. prevent its use for unauthorized purposes, personal data for the purpose of surveillance,
and interception, or recording of communications
4. generally, comply with the requirements of shall comply with the Data Privacy Act, including
adherence to the principles of transparency,
the DPA, other laws for processing of
proportionality, and legitimate purpose. (Sec. 24,
personal information, and issuances of the IRR)
National Privacy Commission (Sec. 43, IRR)

The personal information processor shall comply 4. RIGHTS OF THE DATA SUBJECT;
with the requirements of the Act, these Rules, EXCEPTIONS/NON-APPLICABILITY
other applicable laws, and other issuances of the
Commission, in addition to obligations provided in Rights of the data subject
a contract, or other legal act with a personal 1. Right to Information
information controller. (Sec. 45, IRR) The right to be informed whether personal
information pertaining to him or her shall be,
are being, or have been processed. Including
D. Rule on privileged communication the existence of automated decision-making
and profiling. (Sec. 34(a), IRR)
Personal information controllers may invoke the
principle of privileged communication over 2. Right to Object
privileged information that they lawfully control or The data subject shall have the right to object
process. (Sec. 15, DPA) to and be notified and be given an opportunity
to withhold consent to the processing of his
Inadmissibility of Privileged Information or her personal data, including processing for
Subject to existing laws and regulations, any direct marketing, automated processing or
evidence gathered on privileged information is profiling. (Sec. 34(b), IRR)
inadmissible. (Sec. 15)
3. Right to Access
Rules on the Use of Privileged The Data Subject shall have reasonable
Communication access to, upon demand, the following:
1. When the Commission inquires upon • Contents of his or her personal
communication claimed to be privileged, the information that were processed;
personal information controller concerned

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• Sources from which personal • The personal data is incomplete,

information were obtained; outdated, false, or unlawfully
• Names and addresses of recipients of obtained;
the personal information; • The personal data is being used for
• Manner by which such data were purpose not authorized by the data
processed; subject;
• Reasons for the disclosure of the • The personal data is no longer
personal information to recipients; necessary for the purposes for which
• Information on automated processes they were collected;
where the data will or likely to be made • The data subject withdraws consent
as the sole basis for any decision or objects to the processing, and
significantly affecting or will affect the there is no other legal ground or
data subject; overriding legitimate interest for the
• Date when his or her personal processing;
information concerning the data subject • The personal data concerns private
were last accessed and modified; and information that is prejudicial to data
• The designation, or name or identity and subject, unless justified by freedom
address of the personal information of speech, of expression, or of the
controller. (Sec. 34(c), IRR) press or otherwise authorized;
• The processing is unlawful;
4. Right to Correct/Rectification • The personal information controller
The data subject has the right to: or personal information processor
• dispute the inaccuracy or error in the violated the rights of the data subject.
personal data
• have the personal information controller The personal information controller may
correct it immediately and accordingly, notify third parties who have previously
unless the request is vexatious or received such processed personal
otherwise unreasonable (Sec. 34(d),IRR) information. (Sec. 34(e), IRR)

If the personal information have been 6. Right to Damages

corrected, the personal information controller The Data subject may be indemnified for any
shall ensure the accessibility of both the new damages sustained due to such inaccurate,
and the retracted information and the incomplete, outdated, false, unlawfully
simultaneous receipt of the new and the obtained or unauthorized use of personal
retracted information by recipients thereof. information, taking into account any violation
of his or her rights and freedoms as data
5. Right to Erasure/Blocking subject (Sec. 34(f), IRR)
The data subject shall have the following
rights in relation to his or her personal data in 7. Right to Data Portability
the PIC’s filing system: • Where data is processed by electronic
• suspend means and in a structured and
• withdraw commonly used format
• order the blocking • The data subject may obtain from the
• remove personal information controller a copy of
• destroy data undergoing processing in an
electronic or structured format, which is
This right may be exercised upon discovery commonly used and allows for further
and substantial proof of any of the following: use by the data subject
• This should primarily take into account
the right of data subject to have control

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destruction, alteration and disclosure, as well as
over his or her personal data being
against any other unlawful processing (Sec.
processed based on consent or contract, 20(a), DPA)
for commercial purpose, or through
automated means (Sec. 36, IRR)
Note: The personal information controller should
8. Right to File a Complaint (Sec. 34(f), IRR) implement organizational, physical and technical
security measures to ensure the confidentiality,
Transmissibility of Rights integrity and availability of personal data.

The rights of the data subject may be invoked by Organizational Security Measures
the lawful heirs and assigns of the data subject to 1. Data Protection Officers – Persons
which he or she is an heir or an assignee. This
accountable for ensuring compliance with
may be invoked at any time after the death of the
data subject, or when the data subject is applicable laws and regulations for the
incapacitated or incapable of exercising his or her protection of data privacy and security
rights. (Sec. 17, DPA) 2. Data Protection Policies – Policies that
provide for organization, physical, and
technical security measures.
NON-APPLICABILITY
3. Management of Human Resources –
The provisions on the rights of the data subject Selection and supervision of the processor’s
are not applicable if the processed personal employees, agents, or representatives,
information is: particularly those who will have access to
1. used only for the needs of scientific and personal data.
statistical research and, 4. Records of Processing Activities –
2. on the basis of such, no activities are carried Maintain records that sufficiently describe its
out and no decisions are taken regarding the data processing system, and identify the
data subject. The personal information shall duties and responsibilities of those individuals
be held under strict confidentiality and shall who will have access to personal data.
be used only for the declared purpose. 5. Ensure that its personal information
3. information gathered for the purpose of processors, where applicable, shall also
investigations in relation to any criminal, implement the security measures required by
administrative or tax liabilities of a data the Act and these Rules.
subject. 6. Implement reasonable and appropriate
Note: Any limitations on the rights of the data measures to protect personal information
subject shall only be to the minimum extent against natural and human dangers.
necessary to achieve the purpose of said research 7. Ensure implementation by third-party
or investigation. (Sec. 19, DPA) processors of the security measures required
by this provision (Sec. 20, DPA)
5. DUTIES AND RESPONSIBILITIES OF
Notification for Breach
PERSONAL INFORMATION CONTROLLER
The PIC should promptly notify the Commission
Duties of Personal Information Controller and affected data when:
1. Ensure implementation of personal
information processing principles of the • The personal data involves sensitive
DPA. (Sec. 11, DPA) personal information or any other
2. Uphold rights of data subjects information that may be used to enable
3. Implement reasonable and appropriate identity fraud
a. organizational • There is reasonable belief that that the
b. physical and information may have been acquired by
c. technical measures an unauthorized person (confidentiality
breach); and
These are intended for the protection of personal
information against any accidental or unlawful

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2. Safeguards to protect their computer network
• The personal information controller or
against accidental, unlawful or unauthorized
the Commission believes that such
usage, any interference which will affect data
unauthorized acquisition is likely to give
integrity or hinder the functioning or
rise to a real risk of serious harm to any
availability of the system, and unauthorized
affected data subject.
access through an electronic network;
3. Ensure and maintain the confidentiality,
Note: The National Privacy Commission requires
integrity, availability, and resilience of their
notification of both NPC and data subjects within
processing systems and services;
72 hours from breach or reasonable belief that
4. Restore the availability and access to
personal data breach occurred. (Sec. 38 (a),DPA)
personal data in a timely manner in the event
of a physical or technical incident;
Notification may be delayed only to the extent
5. Regularly test, assess, and evaluate the
necessary to determine the scope of the breach,
effectiveness of security measures;
to prevent further disclosures, or to restore
6. Encrypt personal data during storage and
reasonable integrity to the information and
while in transit, authentication processes,and
communications system. (Sec. 26, IRR)
other technical security measures that control
and limit access. (Sec. 28, IRR)
Physical Security Measures
Where appropriate, personal information
Accountability for Transfer of Personal
controllers and personal information processors
Information
shall comply with the following guidelines for
physical security: Responsibilities of the PIC:
1. Monitor and limit access to and activities in 1. Responsible for personal information under
the room, workstation or facility, and specify its control or custody
the proper use of and access to electronic 2. Shall be responsible for information
media; transferred to a third party for processing
2. Provide privacy to anyone processing a. This includes domestic or international
personal data when designing office space information
and work stations, taking into consideration b. Also subject to cross-borderarrangement
the environment and accessibility to the and cooperation (Sec. 21, DPA)
public;
3. Implement policies and procedures regarding Duties of the PIC:
the transfer, removal, disposal, and re-use of 1. Comply with the requirements of the Data
electronic media, to ensure appropriate Privacy Act
protection of personal data; 2. Use contractual or other reasonable means
4. Prevent the mechanical destruction of files to provide a comparable level of protection
and equipment. The room and workstation while the information are being processed by
used in the processing of personal data shall, a third party (Sec. 21(a), DPA)
as far as practicable, be secured against 3. Designate and individual or individuals who
natural disasters, power disturbances, are accountable for the organization’s
external access, and other similar threats. compliance with the DPA
(Sec. 27, IRR) a. The Data Privacy Officer’s identity may
be known to the data subject upon
Technical Security Measure. request (Sec. 21(b), DPA)
Where appropriate, personal information
controllers and personal information processors
shall adopt and establish the following technical
security measures:
1. A security policy with respect to the
processing of personal data;

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5 PILLARS OF COMPLIANCE OF THE

NATIONAL PRIVACY COMMISSION

1. Designate a Data Protection Officer

2. Conduct Risk Assessment or Privacy
Impact Assessment
3. Have a Privacy Management Program
4. Implement Security Measures
5. Be prepared in case of a Breach

————- end of topic ————-

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G. PHILIPPINE COMPETITION ACT
VIII. SPECIAL LAWS
G. PHILIPPINE COMPETITION ACT
1. Definition and scope of application 1. DEFINITION AND SCOPE OF
2. Powers and functions of the Philippine APPLICATION
Competition Commission
3. Jurisdiction and enforcement a. Definition
4. Determining the relevant market
5. Determining control or dominance of The Philippine Competition Act (PCA) or R.A.
market No. 10667, which took effect on Aug. 8, 2015, is
6. Prohibited acts the primary legislative act which provides for a
a. Prohibited mergers and national competition policy and establishes the
acquisitions
main competition authority in the Philippines, the
b. Anti-competitive agreements
Philippine Competition Commission (PCC).
c. Abuse of dominant position
7. Forbearance by the Philippine
Competition policy broadly refers to all laws,
Competition Commission government policies and regulations aimed at
establishing competition and maintaining the
same. It includes measures intended to promote,
advance and ensure competitive market
conditions by the removal of control, as well as to
redress anti-competitive results of public and
private restrictive practice

Declaration of Principles and Policy

• Efficiency of market competition is an
effective mechanism for allocating goods and
services.
• Equal opportunities for all promotes
entrepreneurial spirit, encourages private
investment, facilitates technology
development and transfer and enhances
resources productivity.
• Competition serves the interest of
consumers by allowing them to exercise their
right of choice over goods and services.
• Pursuant to the constitutional goals for the
national economy under Sec. 1, Art. XII of the
1987 Constitution and to the mandate under
Sec. 19, Art. XII, the State shall:

o Enhance economic efficiency and

promote free and fair competition in
trade, industry and all commercial
economic activities and establish a
National Competition Policy;
o Prevent economic concentration which
will control the production, distribution,
trade, or industry that will unduly stifle
competition, lessen, manipulate or
constrict the discipline of free markets;
o Penalize all forms of anti-competitive
agreements, abuse of dominant
position, and anti-competitive mergers
and acquisitions, with the objective of
protecting consumer welfare and

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arrangements with their employers
advancing domestic and international
trade and economic development. (Sec. when such combinations, activities,
2) agreements, or arrangements are
designed solely to facilitate
b. Scope of Application collective bargaining in respect of
conditions of employment. (Sec. 3,
i. As to who: The Act is enforceable against last par.)
any person or entity engaged in any trade,
industry and commerce. (Sec. 3)
2. Neither does it apply to trade
“Entity” refers to any person, natural or associations. Section 48 provides
juridical, sole proprietorship, partnership, that nothing contained in the Act shall
combination or association in any form, be construed to prohibit the existence
whether incorporated or not, domestic or and operation of trade associations
foreign, including those owned or controlled organized to promote quality standard
by the government, engaged directly or
and safety issues, provided that:
indirectly in any economic activity. (Sec.
a. These associations shall not in
4[h])
any way be used to justify any
violation of the PCA
Single Economic Entity Doctrine
b. It shall not be illegal to use the
An entity that controls, is controlled by, or is
association as a forum to discuss
under common control with another entity or
or promote quality standards,
entities, have common economic interests,
efficiency, safety, security,
and are not otherwise able to decide or act
productivity, competitiveness
independently of each other, shall not be
and other matters of common
considered competitors for purposes of
interest involving the industry
Section 14 (Anti-Competitive Agreements).
*Provided that such is done
(Sec. 14, last par.)
without any anti-competitive
intent or effect.
ii. As to what:
(a) Any trade, industry and commerce
2. POWERS AND FUNCTIONS OF THE
in the Republic of the Philippines
PHILIPPINE COMPETITION COMMISSION
(b) International trade having direct,
substantial, and reasonably Definition
foreseeable effects in trade, The Philippine Competition Commission
industry, or commerce in the (“PCC” or the “Commission”) is an independent
Republic of the Philippines, quasi-judicial body created by the PCA to
including those that result from acts implement the policy, objectives, and purposes of
the Act. It is an attached agency to the Office of
done outside the Philippines. (Sec.
the President. (Sec. 5)
3)
Powers and Functions
Note: The PCA applies to non-profit The Commission shall have original and primary
activities. The term “economic activity” does jurisdiction over the enforcement and
not only cover activities that generate profits implementation of the PCA. The Commission shall
or dividends for shareholders; it may also exercise the following powers and functions:
include activities conducted on a not for-
profit basis. (3.4, PCC Merger Review 1. Conduct inquiry, investigate, and hear
Guidelines) and decide on cases involving any
violation of the PCA and other existing
Exceptions competition laws motu proprio or upon
1. The PCA does not apply to the receipt of a verified complaint, and
combinations or activities of workers institute the appropriate civil or
or employees nor to agreements or criminal proceedings;

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12. Monitor and analyze the practice of
2. Review proposed mergers and
competition in markets that affect the
acquisitions; determine thresholds,
Philippine economy;
requirements, and procedures for
13. Conduct, publish, and disseminate
notification; and upon exercise of its
studies and reports on anti-
powers to review, prohibit mergers and
competitive conduct and agreements
acquisitions that will substantially
to inform and guide the industry and
prevent, restrict, or lessen competition in
consumers;
the relevant market;
3. Monitor and undertake consultation 14. Intervene or participate in
with stakeholders and affected agencies; administrative and regulatory
proceedings requiring consideration of
4. Stop or redress any anti-competitive
agreement; the provisions of this Act that are initiated
5. Conduct administrative proceedings, by government agencies;
impose sanctions, fines or penalties 15. Assist the National Economic and
for any noncompliance with or breach of Development Authority, in consultation
this Act and its implementing rules and with relevant agencies and sectors, in the
regulations (IRR) and punish for preparation and formulation of a national
contempt; competition policy;
6. Issue subpoena duces tecum and 16. Act as the official representative of the
Philippine government in international
subpoena ad testificandum to require
the production of books, records, or other competition matters;
17. Promote capacity building and the
documents or data which relate to any
sharing of best practices with other
matter relevant to the investigation and
competition-related bodies;
personal appearance before the PCC,
summon witnesses, administer oaths, 18. Advocate pro-competitive policies of
and issue interim orders; the government by:
7. Upon order of the court, undertake a. Reviewing economic and
inspections of business premises and administrative regulations,
other offices, land and vehicles, as motu proprio or upon request;
used by the entity; and
8. Issue adjustment or divestiture orders b. Advising the Executive
including orders for corporate Branch on the competitive
reorganization or divestment. Such implications of government
orders, which are structural remedies, actions, policies and programs;
should only be imposed: and
a. Where there is no equally 19. Charging reasonable fees to defray the
effective behavioral remedy; or administrative cost of the services
b. Where any equally effective rendered. (Sec. 12)
behavioral remedy would be
more burdensome for the 3. JURISDICTION AND ENFORCEMENT
enterprise concerned than the
structural remedy; The PCC’s jurisdiction
9. Deputize any and all enforcement The PCC has original and primary jurisdiction over
agencies of the government or enlist the enforcement and implementation of the PCA.
the aid and support of any private (Sec. 12)
institution, corporation, entity or
association, in the implementation of its Relationship with sector regulators
powers and functions; The PCC shall have original and primary
10. Monitor compliance by the person or jurisdiction in the enforcement and regulation of
entities concerned with the cease and all competition-related issues. (Sec. 32)
desist order or consent judgment;
11. Issue advisory opinions and The PCC shall still have jurisdiction if the issue
guidelines on competition mattersand involves both competition and noncompetition
submit annual and special reports to issues, but the concerned sector regulator
Congress, including proposed shall be consulted and afforded reasonable
legislation; opportunity to submit its own opinion and

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(b) Not less than P100M but not more than
recommendation on the matter before the PCC
makes a decision on any case. (Sec. 32) P250M for the second offense (Sec. 29)

Note: This is why the PCC has original and Appeals of PCC Decisions
primary, not exclusive, jurisdiction. Decisions of the PCC shall be appealable to the
Court of Appeals in accordance with the Rules
Preliminary inquiry by the PCC of Court. The appeal does not stay the decision,
The PCC, motu proprio, or upon the filing of a unless directed otherwise by the CA. (Sec. 39)
verified complaint by an interested party or upon b. Criminal proceedings
referral by a regulatory agency, shall have the
sole and exclusive authority to initiate and Jurisdiction
conduct a fact-finding or preliminary inquiry The Regional Trial Court of the city or province
for the enforcement of the PCA based on where the entity or any of the entities whose
reasonable grounds. (Sec. 31) business act or conduct constitutes the subject
matter of a case, conducts its principal place of
The PCC shall terminate said preliminary inquiry business, shall have original and exclusive
by issuing a resolution: jurisdiction, regardless of the penalties and fines
a. Ordering its closure if no violation or herein imposed, of all criminal and civil cases
involving violations of the PCA and other
infringement of the Act is found; or
competition-related laws. (Sec. 44)
b. To proceed, on the basis of reasonable
grounds, to conduct a full administrative DOJ-OFC
investigation. (Sec. 31) The Office for Competition under the DOJ
conducts the preliminary investigation and
If the evidence so warrants, the Commission may prosecution criminal offenses arising from the
file before the DOJ criminal complaints for PCA and other competition-related laws. (Sec.
violations of this Act or relevant laws for 13)
preliminary investigation and prosecution before
the proper court. (Sec. 31) Criminal Penalties
An entity that enters into any anti-competitive
Note: A single violation of the PCA can give rise agreement under Section 14(a) and 14(b) shall,
for each and every violation, be penalized by
to three (3) kinds of liabilities: (a) administrative,
imprisonment from 2-7 years and a fine of not
(b) civil, and (c) criminal.
less than P50M but not more than P250M.
(Sec. 30)
a. Administrative proceedings
Note: Entities can be investigated and fined
Jurisdiction administratively by the PCC and can be
It is within the PCC’s powers and functions to proceeded against separately in the RegionalTrial
conduct administrative proceedings, impose Courts for criminal violations. There is no double
sanctions, fines or penalties for any non- jeopardy as the case before the PCC is
compliance with or breach of the PCA and its IRR administrative in nature.
(Sec. 12[e])
c. Civil proceedings
Administrative Penalties
In any investigation under Sections 14 (Anti- Private Actions
Competitive Agreements), 15 (Abuse of Dominant Any person who suffers direct injury by reason of
Position), 17 (Compulsory Notification), and 20 any violation of the PCA may institute a separate
(Prohibited Mergers and Acquisitions) of the PCA, and independent civil action after the PCC has
after due notice and hearing, the PCC may completed the preliminary inquiry provided under
impose administrative fines on the violating Sec. 31 of the Act. (Sec. 45)
entity, as follows:
(a) Up to P100M for the first offense

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d. Other matters of general application

4. DETERMINING THE RELEVANT
Confidentiality Rules MARKET
1. Confidentiality of Information
General Rule: Confidential business Definition
information submitted by entities, relevant to Market refers to the group of goods or services
any inquiry or investigation being conducted that are sufficiently interchangeable or
pursuant to the PCA as well as any substitutable and the object of competition, and
deliberation in relation thereto, shall not, in the geographic area where said goods or services
any manner, be directly or indirectly are offered.
disclosed, published, transferred, copied, or
disseminated. The PCC shall, to the extent Relevant market refers to the market in which a
possible, keep such information confidential particular good or service is sold and which is a
when it issues notices, bulletins, rulings and combination of the relevant product market and
other documents. (Sec. 34) the relevant geographic market.

“Confidential business information” Note: The relevant market is one considered for
refers to information which concerns or purposes of determining: i) whether or not an
relates to the operations, production, Entity is dominant, and ii) whether or not there will
sales, shipments, purchases, transfers, be a substantial lessening of competition. The act
identification of customers, inventories, of determining the relevant market is known as
or amount or source of any income, “Market Definition”
profits, losses, expenditures. (Sec. 4[e])
a. A relevant product market comprises
Exceptions: The Rule shall not apply if: all those goods and/or services which are
1. The notifying entity consents to the regarded as interchangeable or
disclosure; or substitutable by the consumer or the
2. The document or information is customer, by reason of the goods and/or
mandatorily required to be disclosed by services' characteristics, their prices and
law; or their intended use.
3. The document or information is
mandatorily required to be disclosed by a b. A relevant geographic market
valid order of a court of competent comprises the area in which the entity
jurisdiction or of a government or concerned is involved in the supply and
regulatory agency, including an demand of goods and services, in which
exchange. (Sec. 34) the conditions of competition are
sufficiently homogenous and which can
2. Confidentiality of Identity be distinguished from neighboring areas
General Rule: The identity of the persons because the conditions of competitionare
who provide information to the PCC under different in those areas. (Sec. 4[k])
condition of anonymity, shall remain
confidential. (Sec. 34) c. Market refers to the group of goods or
services that are sufficiently
Exception: When such confidentiality is interchangeable or substitutable and the
expressly waived by these persons. (Sec. 34) object of competition, and the geographic
area where said goods or services are
Statute of Limitations offered.
Any action arising from a violation of any
provision of the PCA shall be forever barredunless Factors to determine the relevant market
commenced within five (5) years from: The following factors, among others, affecting the
a. For criminal actions: the time the substitutability among goods or services
violation is discovered by the offended constituting such market, and the geographicarea
party, the authorities, or their agents; and delineating the boundaries of the market shall be
b. For administrative and civil actions: considered:
the time the cause of action accrues.
(Sec. 46)

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ii. There is power to Direct or
a. The possibilities of substituting the
goods or services in question with govern the financial and
others of domestic or foreign origin, operating policies of the entity
considering the technologicalpossibilities, under a statute or agreement;
the extent to which substitutes are iii. There is power to Appoint or
available to consumers and the time remove the majority of the
required for such substitution; members of the board of directors
b. The cost of distribution of the good or or equivalent governing body;
service, its raw materials, its iv. There is power to Cast the
supplements and substitutes from
majority votes at meetings of
other areas and abroad, considering
freight, insurance, import duties, and the board of directors or
non-tariff restrictions; the restrictions equivalent governing body;
imposed by economic agents or by their v. There exists Ownership over or
associations; and the time required to the right to use all or a significant
supply the market from those areas; part of the assets of the entity;
c. The cost and probability of users or vi. There exist Rights or contracts
consumers seeking other markets; which confer decisive influence
and on the decisions of the entity.
d. National, local or international (Sec. 25)
restrictions which limit the access by
users or consumers to alternate sources Dominance or a Dominant Position refers to a
of supply or the access of suppliers to
position of economic strength that an entity or
alternate consumers. (Sec. 24, PCA and
entities hold which makes it capable of
Rule 5, IRR) controlling the relevant market independently
from any or a combination of the following:
5. DETERMINING CONTROL OR competitors, customers, suppliers, or consumers.
DOMINANCE OF MARKET (Sec. 4[g))

Control refers to the ability to substantially Note: Dominance can exist on the part of one
influence or direct the actions or decisions of an entity (single dominance) or of two or more
entity, whether by contract, agency or otherwise. entities (collective dominance) (Rule 8, Sec. 1
(Sec. 4[f]) of IRR)

Factors to determine control Factors to determine dominance

In determining the control of an entity, the PCC In determining whether an entity has market
may consider the following: dominant position, the Commission shall consider
the following: [SEE-ACCO]
a. Control is presumed to exist when the
parent owns directly or indirectly, through a. The Share of the entity in the relevant
subsidiaries, more than ½ of the voting market and the ability of the entity to
power of an entity, unless in exceptional fix prices unilaterally or to restrict
circumstances, it can clearly be supply in the relevant market;
demonstrated that such ownership does b. The Existence of barriers to entry and
not constitute control. the elements which could foreseeably
alter both the said barriers and the supply
b. Control also exists even when an entity from competitors;
owns one half (½) or less of the voting c. The Existence and power of its
power of another entity when: competitors;
[VADCOR] d. The possibility of Access by its
competitors or other entities to its
i. There is power over more than ½ sources of inputs;
of the Voting rights by virtue of e. The power of its Customers to switch
an agreement with investors; to other goods or services;
f. Its recent Conduct;

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g. Other criteria established by the A. Prohibited Mergers and Acquisitions

regulations of this Act. (Sec. 27)
Definition
Dominance not prohibited Merger refers to the joining of two (2) or more
What is prohibited under Sec. 15 is notdominance entities into an existing entity or to form a new
per se but the abuse of that dominance. entity. (Sec. 4[j])

Note: This is the essence of Sec. 27 which Acquisition refers to the purchase of securities
provides that the Commission shall not consider or assets, through contract or other means, for
the acquiring, maintaining and increasing of the purpose of obtaining control by:
market share through legitimate means not (1) One (1) entity of the whole or part of
substantially preventing, restricting, or another;
lessening competition in the market such as (2) Two (2) or more entities over another; or
but not limited to having superior skills, rendering (3) One (1) or more entities over one (1) or
superior service, producing or distributing quality more entities. (Sec. 4[a])
products, having business acumen, and the
enjoyment and use of protected intellectual Distinction Between Mergers Under the PCA
property rights as violative of the PCA. and Under the Revised Corporation Code

Presumption of dominance Revised Corporation Philippine

There is a rebuttable presumption of market Code (RCC) Competition
dominant position if the market share of an entity Act
in the relevant market is at least fifty percent
(50%), unless a new market share threshold is Two (2) or more Merger refers to the
determined by the Commission for that particular corporations may merge joining of two (2) or
sector. (Sec. 27) into a single corporation more entities into an
which shall be one of existing entity or to
the constituent form a new entity.
6. PROHIBITED ACTS corporations or may [Sec. 4(j)]
consolidate into a new
Prohibited Acts under the PCA [MAD]
single corporation which
a. Anti-competitive Mergers and
shall be the
acquisitions (Sec. 20)
consolidated
b. Anti-competitive agreements (Sec. 14);
corporation. (Sec. 75,
and
RCC)
c. Abuse of Dominant position (Sec. 15);

Substantial Lessening of Competition Test Based on the distinction above, the definitions
(SLC) reveal that a “merger” or “acquisition” as
It is the general standard used by the PCC to contemplated under the PCA does not strictly
determine whether there is a: refer to a merger or consolidation under the RCC.
(1) prohibited merger/acquisition, Rather, it refers to any transaction that serves to
(2) anti-competitive agreement not per se, transfer control of an economic entity to another,
and or the joining of two such entities into a single
(3) an abuse of dominant position. The business entity. Thus, the definition under the
inquiry is whether the conduct or agreement RCC should not be applied to the PCA.
has the object or effect of substantially
preventing, restricting or lessening Note: Joint ventures, for purposes of the PCA, are
competition. (Secs. 14[b] and [c], 15, 20) covered under mergers. (Rule 2 [k] of IRR)

Note: Generally, “object” refers to the intent of The PCC’s Merger Control Power
the entity, while “effect” refers to the actual The Commission shall have the power to review
impact on competition. The existence of either mergers and acquisitions based on factors
satisfies the requirement. deemed relevant by the Commission. (Sec. 16,
PCA)

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Commission in the form and containing the
Compulsory Notification
information specified in the regulations issued by
the Commission. (Sec. 17) However, the
i. Notifying entities
threshold as provided in the PCA has already
been adjusted.
Who must notify the PCC?
The parties to a merger or acquisition that satisfy
Current Threshold
the thresholds for compulsory notification are
Size of Party: The aggregate annual gross
required to notify the Commission before the
execution of the definitive agreements relating to revenues in, into or from the Philippines, or value
the transaction. (Sec. 2[a], Rule 4 of IRR) of the assets in the Philippines of the ultimate
parent entity of at least one of the acquiring or
These parties include: acquired entities, including that of all entities that
(1) All acquiring and acquired pre-acquisition the ultimate parent entity controls, directly or
ultimate parent entities; or indirectly, exceeds Six billion Pesos
(2) Any entity authorized by the ultimate (Php6,000,000,000.00); and
parent entity to file notification on its
behalf (Sec. 2[b], Rule 4 of IRR)
Size of Transaction: The value of the
transaction exceeds Two Billion Four Hundred
Note: In the formation of a joint venture
Million Pesos (Php2,400,000,000.00) (PCC
(other than in connection with a merger
Commission Resolution No. 02-2020, effective 01
or consolidation), the contributing entities
March 2020)
shall be deemed acquiring entities, and
the joint venture shall be deemed the
Note: All mergers or acquisitions the definitive
acquired entity. (Sec. 2[c], Rule 4 of IRR)
agreements of which are executed prior to the
annual adjustment of thresholds contemplated
The parties shall not consummate the transaction
herein are subject to the thresholds for
before the expiration of the relevant periods
notification that are applicable prior to the
provided in this Rule. (Sec. 2[b], Rule 4 of IRR)
adjustment. (PCC Memorandum Circular 18-001)
“Ultimate parent entity” is the juridical entity
iii. PCC Review By Notification
that, directly or indirectly, controls a party to the
transaction, and is not controlled by any other
(1) Phase 1 Review
entity. (Rule 2[m] of IRR)
Parties to the merger or acquisition agreement
Note: It is the Ultimate Parent Entities who must
subject to compulsory notification are prohibited
notify the PCC about the mergers conducted.
from consummating their agreement until thirty
(30) days after providing notification to the PCC.
ii. Covered transactions
(Sec. 17, PCA) Basically, notification must be
PCA Current Threshold given prior to the consummation of the
(2015) (2020) agreement.
Size of Party: The covered entities must notify the PCC before
Covered Exceeds Php 6 Billion
Merger Exceeds the execution of the definitive agreements
and Php 1 Size of Transaction: relating to the transaction. (Sec. 2[a], Rule 4 of
Acquisition Billion Exceeds Php 2.4 IRR)
Billion
Note: A definitive agreement sets out the
Basis of Change: Section 19, PCA complete and final terms and conditions of a
merger or acquisition, including the rights
What must be notified? and obligations between or among
Parties to a merger or acquisition agreement transacting parties.
wherein the value of the transaction exceeds one
billion pesos (P1,000,000,000.00) are prohibited This may be in the form of a share purchase
from consummating their agreement until thirty agreement, asset purchase agreement, joint
(30) days after providing notification to the venture agreement, or the like.

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The inclusion of conditions that must be (b) Effect of notification

fulfilled by a party or the parties to make the If within the relevant periods stipulated in
agreement effective against a party or the Sec. 17, the Commission determines that
parties will not negate the definitive nature of such agreement is prohibited and does
the agreement. (Philippine Competition not qualify for exemption, the
Commission Clarificatory Note No. 16-001) Commission may:
a. Prohibit the implementation of
Note: Phase 1 involves an assessment to the agreement;
determine if the notified merger raises any b. Prohibit the implementation of
competition concerns. (2.7., PCC Rules on the agreement unless and until it
Merger Procedure) The Commission may is modified by changes specified
determine whether the merger or acquisition falls by the Commission;
under the prohibition under Sec. 20, applying the c. Prohibit the implementation of
SLC test. the agreement unless and until
the pertinent party or parties
If, after the conduct of Phase 1, the PCC is unable enter into legally enforceable
to conclude that the merger does not raise agreements specified by the
competition concerns, it will provide the parties a Commission. (Sec. 18)
notice and request for additional information to
commence Phase 2. (2.8., PCC Rules on Merger Note: The PCC shall, from time to time, adopt and
Procedure) publish regulations stipulating exemptions from
the notification requirement. (Sec. 19)
(2) Phase 2 Review
Agreement deemed approved
Should the PCC deem it necessary, it may request When the relevant periods of review have expired
further information that are reasonably necessary and no decision has been promulgated for
and directly relevant to the prohibition under whatever reason, the merger or acquisition shall
Section 20 from the parties to the agreement be deemed approved and the parties may
before the expiration of the thirty (30)- day period. proceed to implement or consummate it. (Sec.
The issuance of such a request has the effect of 17)
extending the period within which the agreement
may not be consummated for anadditional sixty Motu Proprio Review
(60) days, beginning on the day after the request
for information is received by the parties. (Sec. 17) Section 12(a) of the PCA gives to the PCC the
power to conduct inquiry and investigate cases
In no case shall the total period for review by the involving any violation of this Act and other
PCC of the subject agreement exceed ninety (90) existing competition laws motu proprio.
days from initial notification by the parties. (Sec. PCC, motu proprio or upon notification as
17) provided under these Rules, shall have the power
to review mergers and acquisitions having a
Note: Phase 2 is a more detailed and in-depth direct, substantial and reasonably
assessment of the merger. (2.9., PCC Rules on foreseeable effect on trade, industry, or
Merger Procedure) commerce in the Philippines, based on factors
deemed relevant by the Commission. (Sec. 1 of
(3) Consequences of notification IRR)

(a) Effect of non-notification Notwithstanding the notification requirement,

An agreement consummated in violation nothing prevents the PCC from reviewing a
of this requirement to notify the merger on its own initiative if there are
Commission shall be considered void and reasonable grounds to believe that Section 17
subject the parties to an administrative (Compulsory Notification) or Section 20
fine of one percent (1%) to five percent (Prohibited Mergers and Acquisitions) of the PCA
(5%) of the value of the transaction. has been or is likely to be infringed. (3.3., PCC
(Sec. 17) Rules on Merger Procedure)

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• Horizontal Agreements – exist between
Note: The periods for Phases 1 and 2 shall not
firms (suppliers or consumers) at the
apply in cases of motu propio review. (2.10., PCC
same level of the production chain. An
Rules on Merger Procedure)
example of this is when firms agree on a
price. This shows that the combined firms
Summary of the Merger Review Process
have influence over the price.
The merger review process starts:
(a) By notification from the parties; or • Vertical Agreements – exists where
(b) Motu proprio by the PCC firms at different stages of the
production chain collude. Typically, it
happens between suppliers and users.
Standard: Substantial Lessening of Competition
This may relate to price or other matters
(i.e. quotas, exclusive dealings, etc.).
Thresholds: Php5.6B (size of party), Php2.2B
(size of transaction)
i. Per se violations
Overview of the Merger Review Procedure
The following agreements, between or among
Phase 1 Phase 2
competitors, are per se prohibited:
30 calendar days 60 calendar days
(a) Restricting competition as to price, or
Prohibit Prohibit components thereof, or other terms of
trade (Price-fixing) (Sec. 14 [a]);
Notification

Approve Approve (b) Fixing price at an auction or in any form

unconditionally unconditionally of bidding including cover bidding, bid
suppression, bid rotation and market
Approve with Approve with
conditions conditions allocation and other analogous practices
of bid manipulation; (Bid Rigging) (Sec.
Deemed Deemed 14 [a])
approved approved
Note: A per se violation is always illegal. It is
Incontestability of Mergers conclusively presumed to have been done with
General Rule: Merger or acquisition agreements the objective of harming competition, whereas
that have received a favorable ruling from the other violations still allow the introduction of
PCC may not be challenged under the Act. (Sec. evidence to show that these acts were performed
23) with no anti-competitive objectives in mind.

Exception: When such ruling was obtained on Elements of Price-fixing

the basis of fraud or false material 1. There are two or more entities in the same
information. (Sec. 23) horizontal market.
2. Basic element: An “agreement” is reached,
B. Anti-competitive Agreements whether overt or tacit, which implies two or
more businesses must be involved in
Definition restraint.
Agreement refers to any type or form of contract, 3. Intent to “fix” prices by restricting
arrangement, understanding, collective competition as to price.
recommendation, or concerted action, whether
formal or informal, explicit or tacit, written or oral. Example of Price-fixing
(Sec. 4[d]) After several months of competing against each
other, Company A and Company B, the only
Conduct refers to any type or form of sellers of soda drinks in Quezon City, agreed to
undertaking, collective recommendation, set the price of their products to PhP 100.00 per
independent or concerted action or practice, bottle.
whether formal or informal. (Sec. 4[c])
Kinds of Bid Rigging
Note: Forms that Anti-Competitive Agreements a. Cover bidding – A typical example of
may take: this is when bidders submit bids that are
too high to be accepted. In this

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4. The object or effect of the agreement
scenario, there is no intention to secure
substantially prevents, restricts or
the acceptance of the bid but only to
lessen competition.
make it appear as though there was a
genuine competitive bidding.
Note: Violations of Section 14(a) and (b) are
b. Bid suppression – One or more
the only ones in the PCA which carry a penalty
competitors who are expected to bid, or
of imprisonment; such is imposed upon the
who have previously bid, agree to
responsible officers and directors of the entity.
refrain from bidding or withdraw a
(Sec. 30)
previously submitted bid so that the
designated winning competitor's bid will
(2) Agreements other than those specified in (a)
be accepted.
and (b) of Section 14 which have the object
c. Bid rotation - All conspirators submit
or effect of substantially preventing,
bids but take turns on being the low
restricting or lessening competition shall
bidder. The terms of the rotation may
also be prohibited. (Sec. 14[c])
vary and depend on different
circumstances. A strict bid rotation
Exception: Those which contribute to
pattern may suggest that collusion is
improving the production or distribution of
taking place
goods and services or to promoting technical
d. Market allocation - Agreements in which
or economic progress, while allowing
competitors divide markets among
consumers a fair share of the resulting
themselves. In such schemes, competing
benefits, may not necessarily be deemed a
firms allocate specific customers or violation of the PCA. (Sec. 14[c])
types of customers, products, or
territories among themselves. A typical
Rule of Reason Violations
example of which is an allocation based
When a violation is labeled as Rule of Reason,
on geographic areas where competitors
agree to sell only in certain areas and it cannot be said to be immediately illegal.
refuse to sell to, or quote intentionally The reason for this is that such conduct may
high prices to customers in areas possess reasonable commercial
allocated to them. justifications, or otherwisebenefit consumers.
e. Other analogous practices In such cases, the competition commission
must establish the pro or anticompetitive
ii. Not per se violations effects first, usually supported by evidence
adduced by the supposed violator and
(1) The following agreements, between or among
affected parties.
competitors, which have the object or effect
of substantially preventing, restricting or
lessening competition shall be prohibited: The rule of reason violations under the PCA
(a) Setting, limiting, or controlling production, are Sec. 14 (c), because of its justification
markets, technical development, or proviso, and the acts of abuse of dominance
under Section 15, likewise because each
investment;
violation allows presentation of justifying
(b) Dividing or sharing the market, whether evidence.
by volume of sales or purchases,
territory, type of goods or services, Note: Sec. 14 (c) is intended as a catch-all
buyers or sellers or any other means. clause to allow the PCC to investigate all
(Sec. 14[b]) violations no matter their manner of
performance.
Elements of a Sec. 14 (b) Violation
1. There is an agreement; Note: Since Section 14 (a) and (b) requires that
2. The parties are competitors or do not the entities be “competitors,” the entities covered
belong to a single economic entity; by the single economic entity doctrine cannot
3. The subject of the agreement is to either commit any violation under said subsections.
limit production, or divide or share the Section 14(c), however, captures agreements
market; between entities that are not competitors; hence,
it may be violated by single economic entities.

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Note: The standard of proof required to prove
anti-competitive agreements in the PCA is
iii. Determining existence of anti-
Substantial Evidence which is ”that amount of
competitive agreement or conduct
relevant evidence that a reasonable mind might
accept as adequate to support a conclusion”
In determining whether an anti-competitive
agreement or conduct substantially prevents, C. Abuse of Dominant Position
restricts, or lessens competition, the PCC, in
appropriate cases, shall, inter alia: [RAPBA] It shall be prohibited for one or more entities to
abuse their dominant position by engaging in
(a) Define the Relevant market allegedly conduct that would substantially prevent,
affected by the anti-competitive restrict or lessen competition,
agreement or conduct, following the
principles laid out in Section 24 of the Elements of Abuse of Dominant Position
PCA and Rule 5 of the PCA-IRR. 1. The entity must have market power;
(b) Determine if there is actual or 2. The entity commits abusive conduct;
potential Adverse impact on 3. The conduct must have a substantial
competition in the relevant market foreclosure effect on the relevant market;
caused by the alleged agreement or
4. There is no objective justification for the
conduct, and if such impact is conduct.
substantial and outweighs the actual
or potential efficiency gains that result Forms of Abuse of Dominant Position
from the agreement or conduct; (a) Selling goods or services below cost with
(c) Adopt a broad and forward-looking the object of driving competition out of the
Perspective, recognizing future market relevant market (Predatory pricing)
developments, any overriding need to (Sec. 15)
make the goods or services available to
consumers, the requirements of large In other words, monopolizing the market
investments in infrastructure, the by imposing extremely low prices that its
requirements of law, and the need of our competitors won’t be able to compete as
economy to respond to international they would likely not profit anymore.
competition, but also taking account of
past behavior of the parties involved and Note: PCC shall consider whether the
prevailing market conditions; entity or entities have no such object and
(d) Balance the need to ensure that the price established was in good faith to
competition is not prevented or meet or compete with the lower price of a
substantially restricted and the risk competitor in the same market selling the
that competition efficiency, same or comparable product or service of
productivity, innovation, or
like quality.
development of priority areas or
industries in the general interest of the (b) Imposing barriers to entry or committing
country may be deterred by overzealous acts that prevent competitors from
or undue intervention; and growing within the market in an anti-
(e) Assess the totality of evidence on competitive manner (Imposing barriers
whether it is more likely than not that to entry) (Sec. 15)
the entity has engaged in anti-
competitive agreement or conduct
In other words, it prevents the entry of
including whether the entity's conduct
new players in the industry and
was done with a reasonable commercial
gatekeeps the industry only to the
purpose such as but not limited to
dominant firms.
phasing out of a product or closure of a
business, or as a reasonable commercial Exception: Those that develop in the
response to the market entry or conduct market as a result of or arising from a
of a competitor. (Sec. 26, PCA and Rule superior product or process, business
7 of IRR) acumen, or legal rights or laws; (Sec. 15)

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Elements (d) Setting prices or other terms or

1. Entity has a dominant position in conditions that discriminate
the relevant market; unreasonably between customers or
2. It imposes barriers to entry or sellers of the same goods or services,
committing acts that prevent where such customers or sellers are
competitors contemporaneously trading on similar
3. from growing within the relevant terms and conditions, where the effect
market; may be to lessen competition
4. Such conduct must have substantially (Price discrimination)
foreclosure effect on competition; (Sec. 15)
and
5. The barrier to entry is not an In other words, even though they involve
indispensable and natural result of the same products, there is a difference
the entity’s superior product or in the price and the basis of which is not
process, business acumen or legal associated with costs of supply.
rights or laws.
Exception: The following shall be
(c) Making a transaction subject to considered permissible price
acceptance by the other parties of other differentials (SD-CC)
obligations which, by their nature or 1. Socialized pricing for the less
according to commercial usage, have no fortunate sector of the economy;
connection with the transaction (Tying 2. Price differential which reasonably or
and bundling); (Sec. 15) approximately reflect Differences in
the cost of manufacture, sale, or
In other words, the offer to sell of
delivery resulting from differing
Company 1 is accompanied by the
condition that the customer is either methods, technical conditions, or
bound to buy from Company 2 or to not quantities in which the goods or
buy from any of its competitors. services are sold or delivered to the
buyers or sellers;
Elements of Tying 3. Price differential or terms of sale
1. The entity has a dominant position in offered in response to the
the relevant market; Competitive price of payments,
2. It makes a transaction subject to services or changes in the facilities
acceptance of other obligations furnished by a competitor; and
having no connection with the
4. Price changes in response to
transaction;
3. The conduct has foreclosure effect; Changing market conditions,
4. The entity has no objective marketability of goods or services, or
justification for its conduct. volume; (Sec. 15)

Elements of Bundling Elements

1. The entity has a dominant position in 1. The entity has a dominant position in
the relevant market; the relevant market;
2. There must be at least two sets of 2. The entity discriminates between
products; customers or sellers of the same
3. Both products have no direct products;
connection with each other; 3. The discrimination is in the form of
4. The supply of the main product to the difference in price, terms, or
customer is made dependent on the conditions, when such customers or
purchase of the secondary product sellers contemporaneously trade on
by such customer; similar terms and conditions;
5. The conduct has a foreclosure effect 4. There is no justifiable reason for such
on competition. discrimination;
5. The discrimination must have a
reasonable possibility to

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(f) Making supply of particular goods or

substantially prevent, restrict, lessen
services dependent upon the purchase of
competition;
other goods or services from the supplier
6. It does not fall under any of the block which have no direct connection with the
exemptions. main goods or services to be supplied
(Bundling) (Sec. 15)
(e) Imposing restrictions on the lease or
contract for sale or trade of goods or In other words, there is an inclusion of an
services concerning where, to whom, or unrelated product together with the
in what forms goods or services may be purchase of another product.
sold or traded, such as fixing prices,
giving preferential discounts or rebate (g) Directly or indirectly imposing unfairly low
upon such price, or imposing conditions purchase prices for the goods or services
not to deal with competing entities, where of, among others, marginalized
the object or effect of the restrictions is to agricultural producers, fisherfolk, micro-,
prevent, restrict or lessen competition small-, medium-scale enterprises, and
substantially (Exclusive dealing) (Sec. other marginalized service providers and
15) producers (Unfair purchasing pricing)
(Sec. 15)
In other words, there are certain
exclusive stipulations given to customers In other words, there is an imposition of
which then restricts the competitions as an extremely low price where the
other firms won’t be able to offer the competitor might not be able to give as
same. they are marginalized, otherwise they
would not profit from the business.
Note: Nothing in the Act shall prohibit or
render unlawful: (Sec. 15) Elements
1. Permissible franchising, licensing, 1. The entity has a dominant position
exclusive merchandising or in the relevant market;
exclusive distributorship agreements 2. It must directly or indirectly impose
such as those which give each party unfairly low purchase prices for the
the right to unilaterally terminate the goods or services;
agreement; or 3. Its counterparty must be considered
a marginalized supplier;
2. Agreements protecting intellectual
4. The conduct has foreclosure effect.
property rights, confidential
information, or trade secrets. (h) Directly or indirectly imposing unfair
purchase or selling price on their
Elements competitors, customers, suppliers or
1. The entity has a dominant position in consumers (Unfair selling pricing)
the relevant market; (Sec. 15)
2. In a lease or contract of sale, he
entity imposes restrictions In other words, imposing a selling price
concerning where, to whom, or in that other firms cannot compete.
what forms products may be sold or
traded; Exception: Prices that develop in the
3. Such restrictions pertain to prices, market as a result of or due to a superior
giving preferential discounts or product or process, business acumen, or
rebate upin such price; legal rights or laws shall not be
4. Such restrictions have anti- considered unfair prices. (Sec. 15)
competitive effect;
5. The case is not among the block (i) Limiting production, markets or technical
exemptions; development to the prejudice of
6. The entity has no objective consumers (Output restriction) (Sec.
justification for its conduct. 15)

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In other words, the seller lowers the

Tying and Must substantially prevent,
output to drive up the cost of the product.
bundling restrict or lessen competition.
(Sec. 15[c])
Exception: Limitations that develop in
the market as a result of or due to a
superior product or process, business
acumen, or legal rights or laws shall not Price Permissible price differentials:
be a violation of this Act. (Sec. 15) discrimination (a) Socialized pricing for the
less fortunate sector of
Nothing in the PCA shall be construed or the economy;
interpreted as a prohibition on the following, if (b) Price differential which
done through legitimate means that do not reasonably or
substantially prevent, restrict or lessen approximately reflect
competition: Differences in the cost of
a. Having a dominant position in a relevant manufacture, sale, or
market or delivery resulting from
differing methods,
b. Acquiring, maintaining and increasing
technical conditions, or
market share (Sec. 15) quantities in which the
goods or services are sold
The following conducts may not necessarily or delivered to the buyers
be considered an abuse of dominant position: or sellers;
a. Those which contribute to improving (c) Price differential or terms
production or distribution of goods or of sale offered inresponse
services within the relevant market; to theCompetitive price of
b. Those which contribute to promoting payments, services or
technical and economic progress while changes in the facilities
allowing consumers a fair share of the furnished by a competitor;
resulting benefit. (Sec.15) and
(d) Price changes in
Abuse of Dominant Position response to Changing
Summary of Exceptions as Defenses market conditions,
marketability of goods or
ACT DEFENSE
services, or volume; (Sec.
15[d])
Predatory (a) Entity has no object of
pricing driving competition out;
and Exclusive (a) Object or effect of the
dealing restrictions must be to to
(b) The price established was
prevent, restrict or lessen
in good faith to meet or
competition substantially
compete with the lower
(b) Permissible franchising,
price of a competitor in the
licensing, exclusive
same market selling the
merchandising or
same or comparable
exclusive distributorship
product or service of like
agreements; or
quality. (Sec. 15[a])
(c) Agreements protecting IP
Imposing The barriers to entry developed rights, confidential
information, or trade
barriers to in the market as a result of or
secrets; (Sec. 15[e])
entry/competiti arising from a superior product
on growth or process, business acumen,or
hindrance legal rights or laws (Sec. 15[b]) Bundling If the goods have a direct
connection with the main goods
or services to be supplied (Sec.
15[f])

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Unfair Prices must be unfairly low. The Commission’s order

purchasing (Sec. 15[g]) exempting the relevant entity
pricing or group of entities under this
section shall be made public.
Unfair selling Prices that develop in the Conditions may be attached
pricing market as a result of or due to a to the forbearance if the
superior product or process, Commission deems it
business acumen or legal rights appropriate to ensure the
or laws shall not be considered long-term interest of
unfair prices (Sec. 15[h]) consumers. (Sec. 28)

Output Limitations that develop in the In the event that the basis for
restriction market as a result of or due to a the issuance of theexemption
superior product or process, order ceases to be valid, the
business acumen or legal rights order may be withdrawn by
or laws shall not be a violation the Commission. (Sec. 28
(Sec. 15[i]) and Rule 9, Sec. 1 of IRR)

————- end of topic ———

—-

7. FORBEARANCE BY THE PCC

The Commission, motu proprio or upon

forbear from applying the provisions of the PCA,

for a limited time, in whole or in part, in all or
specific cases, on an entity or group of entities, if
in its determination: [NICE]
a. Enforcement is Not necessary to the
attainment of the policy objectives of
the PCA;
b. Forbearance will neither Impede
competition in the market where the
entity or group of entities seeking
exemption operates nor in related
markets;
c. Forbearance is Consistent with public
interest and the benefit and welfare of
the consumers; and
d. Forbearance is justified in Economic
terms. (Sec. 28 and Rule 9, Sec. 1 of
IRR)

Maximum period and extensions

Forbearance will be granted
for a maximum period of
one (1) year. Any extension
to the period will have to be

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expressly approved by the

PCC. Any extension of the
duration of an exemption
shall not be longer than one
year. (Rule 9, Sec. 1 of IRR)

Public hearing
A public hearing shall be held
to assist the Commission in
making this determination.
(Sec. 28)

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