Commercial+Law+Power+Point

8/13/2019 Commercial+Law+Power+Point

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COMMERCIALLAW


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What is a corporation and what are itsattributes?


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A corporation is an artificial being createdby operation of law, having the right ofsuccession and the powers, attributes and

properties especially authorized by law orincident to its existence. (Sec. 2,Corporation Code).

The definition of a corporation contains itsattributes.


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In a civil action, the certificate of non-forum shopping was signed by an officerof petitioner corporation with the authority

of its board of directors. It wasquestioned by the respondents on theground that it was not signed by the

corporation. Was the objection to thecertificate of non-forum shopping valid?


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The objection was not valid. Physical acts likesigning of documents can be performed only bynatural persons duly authorized for the purpose

by corporate by-laws or by a specific act of theboard of directors. Since the one who signed forand in behalf of the corporation had theauthority of the board of directors, it was a valid

act of the corporation. (Cebu Bionic BuildersSupply, Inc. vs. DBP, 635 SCRA 13, Nov. 17,2010).


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What is the meaning

of the doctrine of legal

entity of corporations?


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It means that a corporation is ajuridical person with a personality

separate and distinct from that of

each shareholder. It also means thatthe stockholders of a corporation

are different from the corporation

itself.[1]

(1) Section 2; Seaoil Petroleum Corp. vs. Autocorp Group, 569 SCRA387, Oct. 17, 2008; SEC Opinions, Jan. 18, 1993 and June 18, 1993.


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What are the consequences ofthe doctrine of legal entity?


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1. The stockholders are not personally

liable for the debts of the corporation

and vice-versa.(1) The stockholders arenot liable for corporate acts unless

otherwise provided by law.(2)

[1] 13A Fletcher, Sec. 6213.

[2] Wise and Co. vs. Man Sun Lung, 40 O. G. 50


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2. The stockholders are not

the owners of corporateproperties and assets.[1]

[1] Berman Environmental Dev. Corp. vs. CA 167 SCRA, 540.


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3. The stockholders cannot sell or maintainactions in their own name in connectionwith corporation affairs, business orproperty. Neither do stockholders have

the right to recover possession ofcorporation property or to recoverdamages for injury to properties

belonging to the corporation, and vice-versa.[1]

[1] Sulo ng Bayan, Inc. vs. Araneta, Inc. 72 SCRA 347.


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4. The property belonging to thecorporation cannot be attachedto satisfy the debt of a

stockholder and vice versa, thelatter having only an indirectinterest in the assets and

business of the former.[1]

[1]Delima vs. Gois, 554 SCRA 731, June 17, 2008; Mandaue Dinghow DimsumHouse, Inc. vs. NLRC, 547 SCRA 402, March 3, 2008.


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The Labor Arbiter rendered judgment in favorof Delima for illegal dismissal against his employer,Golden Union Aquamarine Corporation (Golden).The judgment became final. Pursuant to a writ of

execution, the sheriff attached an Isuzu Jeepregistered in the name of Gois who filed a third-party claim over the said vehicle. The Labor Arbiterdenied the third-party claim on the ground thatGois was one of the respondents in the case andan incorporator/officer of Golden. May the propertyof Gois be attached to satisfy the judgment claimagainst Golden on the ground that she is anincorporator/officer of said corporation?


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The subject vehicle belonging to Gois cannot be

attached to answer for the liabilities of a corporationof which she was an incorporator/officer. A

corporation has a personality distinct and separate

from its individual stockholders or members and

from that of its officers who manage and run itsaffairs. The rule is that obligations incurred by the

corporation, acting through its directors, officers

and employees, are its sole liabilities. Thus, property

belonging to a corporation cannot be attached tosatisfy the debt of a stockholder and vice versa, the

latter having only an indirect interest in the assets

and business of the former.[1]

[1]Delima vs. Gois, 554 SCRA 737, June 17, 2008.


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Explain the doctrine ofpiercing the veil of corporatefiction.


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Piercing the veil of corporate fiction means that while a

corporation can not generally be made liable for acts or liabilities

of its stockholders or members, and vice versa because a

corporation has a personality separate and distinct from its

stockholdersor members, however, the corporate existence is

disregarded under this doctrine where the corporation is formed

or used for illegitimate purposes or justify wrong or evade a just

and valid obligation. In such case, the corporation and thestockholders shall be considered as one and the same.[1]

[1] Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005; Federationof Labor Union vs. Ople, 143 SCRA 124; Telephone Engineering & Service Co., Inc. vs. WorkmensCompensation Commission, 104 SCRA 354; Asked, 1985 and 1991 Bar Exams.; No. III, 2004 Bar Exams.;

No. I (1), 2006 Bar Exams.


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The doctrine of piercing the corporate veil applies only inthree (3) basic instances, namely: a) when the separate and distinctcorporate personality defeats public convenience, as when thecorporate fiction is used as a vehicle for the evasion of an existingobligation; (b) in fraud cases, or when the corporate entity is usedto justify a wrong, protect a fraud, or defend a crime; or (c) is used

in alter ego cases, i.e., where a corporation is essentially a farce,since it is a mere alter ego or business conduit of a person, orwhere the corporation is so organized and controlled and its affairsare so conducted as to make it merely an instrumentality, agency,conduit, or adjunct of another corporation. 1]

1]Prisma Construction & Dev. Corp. vs. Menchaves, 614 SCRA 590, March 9, 2010; Asked, 1962 and1985 Bar Exams.; Asked, No. I (2), 2006 Bar Exams.


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However, the application of the doctrine of piercingthe corporate veil should be done with caution. A court

should be mindful of the milieu where it is to be applied.It must be certain that the corporate fiction was

misused to such an extent that injustice, fraud, or crime

was committed against another, in disregard of its

rights. The wrongdoing must be clearly and

convincingly established; it cannot be presumed.Otherwise, an injustice that was never intended may

result from an erroneous application.[1] Bad faith orwrongdoing of a corporate officer must be established

clearly and convincinglybad faith is never presumed. .[2]

[1] Philippine National Bank vs. Andrada Electric & Engineering Company, 381 SCRA145, April 17, 2002

2 Seaoil Petroleum Corp. vs. Autocorp Group, 569 SCRA 387, Oct. 17, 2008.


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VMSC is a family-owned corporation of which Avelinowas president. He offered to sell a car to his cousins, the

Violago spouses. It turned out that he previously sold the saidcar to another cousin. Violago spouses signed the deed ofsale, paid a down payment and executed a promissory note

for the balance. The said promissory note was endorsed to BAFinance. When the car was not delivered to Violago spouses,they did not pay the installments. BA Finance sued the

Violago spouses for replevin to recover the car or the amountof the promissory note with damages. Violago spouses filed a

third-party complaint against Avelino without impleadingVMSC. Avelino claimed that VMSC should have been includedin the complaint and its non-inclusion bars an action againsthim. Decide with reasons.


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The fact that VSMC was not included as defendant does notpreclude recovery by Violago spouses against Avelino; neither wouldsuch non-inclusion constitute a bar to the application of the piercing-of-the-corporate veil doctrine. Avelino, knowing fully well that thevehicle was already sold, and with abuse of his relationship with the

spouses still proceeded with the sale and collected the downpayment. His actions were the proximate cause of the Violagospouses loss. He cannot now hide behind the separate corporatepersonality of VMSC to escape from liability. For all legal intents andpurposes defendant and the corporation are one and the same. The

fiction of separate juridical personality conferred upon the corporationshould be disregarded. [1]

[1]Violago vs. BA Finance Corporation, 559 SCRA 69.


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The employees of Prince Transport, Inc. (PTI)were holding meetings to form a union. PTIcaused the transfer of all union members andsympathizers to Lubas Transport, a single

proprietorship belonging to the majoritystockholder of PTI. Despite the transfer, theschedule of drivers and conductors were madeby PTI. When the employees made a claim forwages against PTI, the latter denied the claim

on the ground that they were no longer itsemployees since they have been transferred toLubas. May PTI and Lubas be treated as oneand the same?


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Lubas is a mere agent, conduit or adjunct ofPTI. It is true that Lubas is a singleproprietorship and not a corporation, however

PTIs attempt to isolate itself from and hidebehind the supposed separate and distinctpersonality of Lubas so as to evade its liabilitiesis precisely what the classical doctrine of

piercing the veil of corporate entity seeks toprevent and remedy. (Prince Transport, Inc. vs.Garcia, 639 SCRA 312, Jan. 12, 2011).


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What is meant by the

alter ego doctrine orinstrumentality rule?


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Where one corporation is so organized andcontrolled and its affairs are conducted so thatit is, in fact, a mere instrumentality or adjunct ofthe other, the fiction of the corporate entity ofthe 'instrumentality' may be disregarded. The

control necessary to invoke the rule is notmajority or even complete stock control butsuch domination of finances, policies andpractices that the controlled corporation has,

so to speak, no separate mind, will or existenceof its own, and is but a conduit for itsprincipal.[1]

[1] Lipat vs. Pacific Banking Corporation 402 SCRA 339, April 30, 2003.


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How may a corporation be

established as a mere alter ego ofanother corporation or person?


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The question of whether a

corporation is a mere alter ego is

one of fact. Piercing the vei l ofco rpo rat ion f ic t ion may be al lowed only i f

the fo l low ing elements concur:


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(1) cont ro l not mere stock control, butcomplete domination- not only of finances,

but of policy and business practice in

respect to the transaction attacked, must

have been such that the corporate entity as

to this transaction had at the time no

separate mind, will or existence of its own;


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(2) such control must have been used

by the defendant to commit fraud or

a wrong doing to perpetuate the

violation of a statutory or other

positive legal duty, or a dishonest

and an unjust act in contravention of

the plaintiffs legal right;


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(3) the said control and breach of

duty must have proximately

caused the injury or unjust losscomplained of.[1]

[1] R & E Transport, Inc. vs. Latag, 422 SCRA 698, 707; Heirs of Ramon

Durano, Sr. vs. Uy, 344 SCRA 238.


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Is mere ownership by a single

stockholder of nearly all or even

all of the capital stock of a

corporation sufficient ground to

disregard the separate

corporation personality?


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While the veil of separate corporatepersonality may be pierced when the

corporation is merely an adjunct, a business

conduit, or alter ego of a person, the mereownership by a single stockholder of nearly all

or even all of the capital stock of a corporation

is not be itself a sufficient ground to disregardthe separate corporate personality.[1].

(1)Yamamoto vs. Nishino Leather Industries, Inc., 551 SCRA 447, April 16, 2008;Kukan International Corporation vs. Reyes, 631 SCRA 596, Sept. 29, 2010.


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Is the mere fact that a single

person owns or controls one or

more corporation or substantialidentity of incorporators of two

corporations, sufficient to disregard

the separate personalities of thecorporations?


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Mere ownership by a single stockholder or by another

corporation of all or nearly all of the capital stocks of a corporation

is not by itself a sufficient ground to disregard the separate

corporate personality.[1]

The substantial identity of the incorporators

of two or more corporations does not imply that there was fraud so

as to justify the piercing of the writ of corporate fiction. To disregard

the said separate juridical personality, the wrong doing must be

proven clearly and convincingly.[2]

(1] Secosa vs. Heirs of Erwin Suarez Francisco, 433 SCRA 273, June 29, 2004.

[2] Martinez vs. Court of Appeals, 438 SCRA 130, September 10, 2004.


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It is lawful to obtain a corporate

charter, even with a single substantialstockholder, to engage in specific activity

and such activity may co-exist with the

other private activities of the stockholder.If the corporation is a substantial one,

conducted lawfully and without fraud on

another, its separate identity is respected.[1]

[1] Lidell & Co., Inc. vs. Collector of Internal Revenue, 2 SCRA 632; Wise & Co., Inc. vs. ManSun Lung, 69 Phil. 308; Asked, 1970 Bar Exams.; Kukai International Corporation vs. Reyes, 631SCRA 596, Sept. 29, 2010.


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Respondent Equitable Savings Bank (ESB) was asubsidiary of Equitable PCI Bank (EPCIB) which later

merged with Banco de Oro and thence known as Banco

de Oro (BDO). Petitioners were client-depositors of

EPCIB for more than 12 years. Petitioners obtained a loanamounting to P4,000,000 from EPCIB and to secure the

loan, they mortgaged their land in Quezon City.

Petitioners were able to draw from the loan the sum of

P3,600,000. They demanded from EPCIB copies of theloan agreement which refused to give them the copies on

the ground that as a matter of practice, they give copies

only after the entire loan has been withdrawn.


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Petitioners then did not continue payment of the

amortization after paying a total of P500,000. Respondent,

through counsel wrote a letter to the petitioner

demanding payment of the entire loan released with

interest thereon. Finally, petitioners got copy of the loan

documents and they were surprised to find out that the

lender was the respondent instead of EPCIB. When

petitioners failed to pay the loan, respondent sought to

extrajudicially foreclose the mortgage. Petitioners

filed a case for injunction and claimed that respondent

was not the real party in interest to foreclose the

mortgage. May foreclose the mortgage made by the

petitioners to secure a loan obtained from EPCIB?


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An extrajudicial foreclosure instituted by athird party to the Loan Agreement and the real

estate mortgage (REM) would be in violation ofthe petitionersrights over their property. Thus,respondent cannot exercise the right offoreclosure not being a party to the REM.Respondent, although a wholly-ownedsubsidiary of EPCIB, has an independent andseparate juridical personality from its parentcompany. The fact that the corporation owns allof the stocks of another corporation, taken

alone, is not sufficient to justify their beingtreated as one entity. If used to performlegitimate functions, a subsidiarys separateexistence shall be respected. [1]

[1]Borromeo vs. Court of Appeals, 550 SCRA 269, March 28, 2008.


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When are officers of a corporation

solidarily liable with the corporation?


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The general rule is that obligations incurred by the corporation,

acting through its directors, officers, and employees, are its soleliabilities. However, solidary liability may be incurred, but only underthe following exceptional circumstances: 1) When directors andtrustees or, in appropriate cases, the officers of a corporation: (a)vote for or assent to patently unlawful acts of the corporation; (b) act

in bad faith or with gross negligence in directing the corporate affairs;(c) are guilty of conflict of interest to the prejudice of the corporation,its stockholders or members, and other persons; 2) When a directoror officer has consented to the issuance of watered stocks or who,having knowledge thereof, did not forthwith file with the corporate

secretary his written objection thereto; 3) When a director, trustee orofficers has contractually agreed or stipulated to hold himselfpersonally and solidarily liable with the corporation; 4) When adirector, trustee or officer is made, by specific provision of law,personally liable for his personal action.1]

1] Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1, Dec. 7, 2009.


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Lau was the president of Queensland, a corporationengaged in trading of commodity futures. Twounlicensed salesman convinced George to invest inQueensland. On behalf of Queensland, Collado who also

an unlicensed salesman signed with George aCustomers Agreement. SEC issued a cease and desistorder against Queensland. Alarmed by the said order,George demanded the return of his investment fromQueensland. When he failed to obtain a return of his

investment, he sued Queensland, Lau and Collado. Maythe Lau and Collado as corporate officers be heldsolidarily liable with Queensland?


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Both Lau and Collado may be held liable solidarily withQueensland. The presence of unlicensed salesmen, andCollados participation in the unlawful execution oforders under the customers account clearly established

the fact that the management of Queensland failed toimplement the rules and regulations against the hiringof, and associating with, unlicensed consultants ortraders. How these unlicensed personnel been able topursue their unlawful activities is a reflection of how

negligent the management was. (Queensland-TokyoCommodities, Inc. vs. George, 630 SCRA 304, Sept. 8,2010).


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When is a corporate officer guilty of badfaith in terminating employees and what isthe consequence thereof?


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Corporate directors and officers are solidarilyliable with the corporation for termination ofemployment of corporate employees done withmalice or in bad faith. Bad faith is never

presumed. Bad faith does not simply connotebad judgment or negligenceit imports adishonest purpose or some moral obliquity andconscious doing of wrong. It means a breach ofa known duty through some motive or interest

or ill-will that partakes of the nature of fraud.(SHS Perforated Materials, Inc. vs. Diaz, 633SCRA 258, Oct. 13, 2010; Solidbank Corporationvs. Gamier, 634 SCRA 554, Nov. 15, 2010).


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May an officer of the corporation whoacted in his official capacity be heldsolidarily liable with the corporation for

the illegal dismissal of an employee?


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As a general rule, a corporate officer cannot be heldliable for acts done in his official capacity because acorporation, by legal fiction, has a personality separateand distinct from its officers, stockholders, and members.(Solidbank Corporation vs. Gamier, 364 SCRA 554. Nov.

15, 2010).

To pierce this fictional veil, it must be shown that thecorporate personality was used to perpetuate fraud or anillegal act, or to evade an existing obligation, or to

confuse a legitimate issue. In illegal dismissal cases,corporate officers may be held solidarily liable with thecorporation if the termination was done with malice orbad faith. (Culili vs. Eastern TelecommunicationsPhilippines, Inc., 642 SCRA 338.)


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In general, when may a personor officer of the corporation bindthe corporation?


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The general rule is that, in the absence ofauthority from the board of directors, noperson, not even its officers, can validly bind a

corporation. The power and responsibility todecide whether the corporation should enterinto a contract that will bind the corporation islodged in the board of directors. 1]

[1]Associated Bank vs. Pronstroller, 558 SCRA 113.


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What are kinds of authority of anindividual to bind a corporation?


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The authority of a corporate officer or agent indealing with third persons may be actual orapparent. Actual authority is either express orimplied. The extent of an agents express

authority is to be measured by the powerdelegated to him by the corporation, while theextent of his implied authority is measured byhis prior acts which have been ratified orapproved, or their benefits accepted by his

principal. (Banate vs. Philippine CountrysideRural Bank (Liloan, Cebu), Inc., 625 SCRA 21,July 13, 2010).


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From what may apparentauthority of an officer to bindthe corporation be derived?


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Apparent authority is derived not merely frompractice. Its existence may be ascertainedthrough: (1) the general manner in which thecorporation holds out an officer or agent as having

the power to act, or in other words, the apparentauthority to act in general, with which it clotheshim, or (2) the acquiescence in his acts of aparticular nature with actual or constructive

knowledge thereof, within or beyond the scope ofhis ordinary powers.[1]

[1]Associated Bank vs. Pronstroller, 558 SCRA 113; Banate vs. Philippine Countryside Rural Bank (Liloan,

Cebu),Inc. 625 SCRA 21, July 13, 2010.


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May the by-laws of a corporation

provide for additional qualificationsof directors?


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The by-laws may provide for thequalifications of directors or trustees[1]

provided they are not inconsistent with

the Constitution, law or charter of thecorporation and they are reasonable.

The minimum qualification required by

the Corporation Code must however, be

met.[2]

[1] Section 47, par. 5.

[2] SEC Opinion, Dec. 8, 1988.


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The by-laws provide that only

members in good standing for at

least five (5) years shall be qualified

to be elected as director. Is such

add i t ional quali ficat ion of directo rs

val id?


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Yes, it is valid because the bylawsmay prescribe the qualifications of

directors. Thus, one who was elected

despite the fact that his membership inthe corporation has not reached five (5)

years is in violation of the by-laws and

hence, his election is null and void.[1]

[1] Garcia vs. Diapo, SEC Case No. 2169, July 30, 1990.


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Who are disqualified from being

elected as directors?


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The fol lowing are disq ual i f ied from being elected as directors:

(a) those convicted by final judgment of anoffense punishable by imprisonment fora period exceeding six (6) years;

(b) those convicted by final judgment of aviolation of the Corporation Codecommitted within five (5) years prior tothe date of his election;[1](Sec. 27); and

(c) those disqualified by the by-laws.[2]

[1] Section 27.

[2] Gokongwei vs. SEC, 89 SCRA 336.


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The by-laws of San Miguel Corporation(SMC) disqualified from being elected asdirector those who were directors of

another corporation whose business was incompetition with or was antagonistic withSMC. Gokongwei was a director of othercorporations whose lines of business were

in direct competition with some of thebusiness activities of SMC. MayGokongwei be elected as d irecto r of SMC?


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Gokongwei was disqualified from

being elected as director of SMC. Theprovision of the by-laws of SMCdisqualifying a competitors director from

being elected as director of SMC was valid.Sound principles of corporatemanagement counsel against sharingsensitive information with a director whose

fiduciary duty of loyalty may well requirethat he disclose this information to acompetitive rival.[1]

[1]Gokongwei vs. SEC, 89 SCRA336; Asked, 1998 Bar Exams.; No. VIII (a), 2000 Bar Exams.; No. XI, 2001 Bar Exams.


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Are members of the board of directorsentitled to compensation? If so, is thereany limitation thereto?


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The directors of a corporation shall not receive anycompensation for being members of the board ofdirectors except for reasonableper diems.The twoinstances where the directors are to be entitled tocompensation shall be when it is fixed by the

corporations by-laws or when the stockholders,representing at least a majority of the outstanding capitalstock, vote to grant the same at a regular or specialstockholders meeting, subject to the qualification that, inany of the situations, the total yearly compensation ofdirectors, as such directors, shall in no case exceed 10%

of the net income before income tax of the corporationduring the preceding year. (Singson vs. Commission on

Audit, 627 SCRA 36, August 9, 2010).


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As a general rule, are

directors/trustees and officers of acorporation liable personally fortheir acts as such?


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Officers of a corporation who

act as such within the scope of theirauthority have no personal liabilityfor such acts unless it is shown thatthey have acted negligently or in badfaith. They are mere agents of thecorporation who cannot be madeliable if they acted within the scope

of their authority.[1]

[1] Mindanao Motor Line, Inc. vs. Court of Industrial Relations, 6 SCRA 710; Asked, 1968 and 1999Bar Exams.


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For as long as the corporate officers acted

within the scope of their authority and in goodfaith, they cannot be held personally liable for

the consequences of their acts. The separate

corporate personality is a shield against thepersonal liability of corporate officers, whose

acts are property attributed to the

corporation.[1]

[1] Solidbank Corporation vs. Mindanao Ferroalloy Corporation, et al., 464 SCRA 409, July 28, 2005.


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Likewise, officers of a corporationare not personally liable for their acts as

such officers unless it is shown that they

have exceeded their authority. Thecorporation has a personality separate

and distinct from its officers.[1]

[1] Prudential Bank vs. Alviar, 464 SCRA 353.


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SSS filed an action against Impact Corporation and

its directors for non-remittance of SSS premium

contributions withheld by said corporation from its

employees. Impact became insolvent and all directors

died except director Garcia. Garcia claimed that only

directors who participate in unlawful acts or are guilty of

gross negligence and bad faith shall be personally liable,

and that being a mere stockholder of the corporation,

she could not be made liable. Is Garcia liable?


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Among the exceptions when a director is

liable for the obligations of the corporation iswhen a director, trustee or officer is made, byspecific provision of law, personally liable forhis corporate action. The situation of Garcia

falls exactly under the aforesaid situationbecause Section 28 (f) of the Social Security Lawimposes a civil liability upon its managing head,directors or partners for any act or omission

pertaining to the violation of the Social SecurityLaw when committed by a corporation,partnership or association.[1]

(1) Garcia vs. Social Security System Commission Legal and Collection, 540 SCRA 459, 475, Dec.17, 2007


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What are the requisites of a

derivative suit?


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The requisites of a derivative suit are:

(a) The party bringing suit should be a shareholder during the time

the act or transaction complained of, the number of shares not being

material;

(b) The party has tried to exhaust intra-corporate remedies i.e., has

made a demand on the board of directors for the appropriate relief, but

the latter has failed or refused to heed his pleas; and

The cause of action actually devolves on the corporation; the

wrongdoing or harm having been caused to the corporation and not

the particular stockholder bringing the suit. 1]

1] Reyes vs. RTC of Makati, 561 SCRA 593, Aug. 11, 2008.


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When will merger or consolidation of twocorporations take effect?


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The merger or consolidation does not become effective upon themere agreement of the constituent corporations. Since a merger orconsolidation includes fundamental changes in the corporation, aswell as in the rights of the stockholders and creditors, there must becompliance with the steps provided for by law such as: (a) Theboard of each corporation draws up a plan of merger or

consolidation; (b) submission of the plan to stockholders ormembers for approval; execution of the formal agreementreferred to as articles of merger or consolidation by the corporateofficers of each constituent corporation; (d) submission of saidarticles of merger or consolidation to the SEC for approval; (e) ifnecessary, SEC shall set the same for hearing; (f) issuance ofcertificate of merger or consolidation.

The merger or consolidation takes effect upon the issuance by theSEC of the certificate of merger or consolidation. (Mindanao Savingsand Loan Association vs. Wilkom, 634 SCRA 392, Oct. 20, 2010).


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What are the effects of failure to obtainthe certificate of merger?

On the other hand, what are theconsequences of merger?


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When the certificate of merger is not obtained, there isno merger and hence, the two corporations shall not beconsidered as one but two separate corporations, andbeing separate entities, the property of one cannot beconsidered as property of the other.

On the other hand, when merger takes effect, theabsorbed corporation ceases to exist and its rights,liabilities and properties shall be taken and deemed

transferred to and vested in the surviving corporation.(Mindanao Savings and Loan Association, Inc. vs.Wilkom, 634 SCRA 392, Oct. 20, 2010).


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Does the merger of two corporations carrywith it the absorption of the employees ofnon-surviving corporation by the surviving

corporation?


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While it is true that in case of an approvedmerger, all the assets and liabilities of thedissolved corporation are transferred to thesurviving corporation, however the employeesare not automatically transferred to thesurviving corporation. Human beings are notincluded in the terms, assets and liabilities.The Corporation Code does not mandate theabsorption of the employees of the non-

surviving corporation by the survivingcorporation in the case of merger. (Bank of thePhilippine Islands vs. BPI Employees Union, 627SCRA 590, August 10, 2010).


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What right does a dissenting stockholder havewhen there is a fundamental change in thearticles of incorporation which substantiallyprejudice the rights of the stockholders?


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A stockholder who dissents from certaincorporate actions such as amendment of thearticles of incorporation which prejudice hisinterest has the right to demand payment ofthe fair value of his shares. This right isknown as the appraisal right. (Turner vs.Lorenzo Shipping Corp., 636 SCRA 13, Nov.

24, 2010).


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Petitioners were stockholders of respondentcorporation. Said corporation amended itsarticles of incorporation by removing thestockholders pre-emptive rights to newlyissued shares of stock. Petitioners votedagainst the amendment and demandedpayment of the value of their shares. May the

petitioners exercise appraisal rights?


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The petitioners may exercise their appraisalright since there was a fundamental change inthe charter or articles of incorporationsubstantially prejudicing the rights of thestockholders. It serves the purpose ofenabling the dissenting stockholder to havehis interest purchased and to retire from the

corporation. (Turner vs. Lorenzo ShippingCorporation, 636 SCRA 13, Nov. 24, 2010).


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Is there any limitation on the right ofappraisal of a dissenting stockholder?


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Yes, there is a limitation on the right ofappraisal of a stockholder. No payment shallbe made to any dissenting stockholder unlessthe corporation has unrestricted retainedearnings in its books to cover the payment. Incase the corporation has no availableunrestricted retained earnings in its books,Section 83 of the Corporation Code providesthat if the dissenting stockholder is not paid

the value of his shares within 30 days afterthe award, his voting and dividend rights shallimmediately be restored.

(continued at next slide)


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The trust fund doctrinesupports the requirement ofunrestricted retained earnings to fund the payment ofthe shares of stocks of the withdrawing stockholders.Under this doctrine, the capital stock, property, andother assets of a corporation are regarded as equity

in trust for the payment of corporate creditors who arepreferred in the distribution of corporate assets. Thecreditors of the corporation have the right to assumethat the board of directors will not use the assets ofthe corporation to purchase its own stock for as longas the corporation has outstanding debts andliabilities. (Turner vs. Lorenzo Shipping Corp., 636SCRA 13, Nov. 24, 2010).


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What may be the source of

payment of dividends?


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A corporation cannot lawfully declare dividends

out of its capital stock, and thereby reduce the same, or

out of assets which are needed to pay the corporate

debts. They can be declared only out of surplus

profits.[1] The reason for the rule is that it would be a

fraud upon the creditors of a corporation who extend

credit to it on the faith of its capital stock, to permit it tobe diverted by a distribution among the stockholders as

dividends. Moreover, each stockholder is entitled to

have the capital stock preserved unimpaired for the

purpose of carrying out the object for which thecorporation is formed.[2]

[1]11 Fletcher Cyc. Corp. Sec. 5319, 611; Steinberg vs. Velasco, 52 Phil. 953; Asked, No. V, a,

2005 Bar Exams.

[2] 14 C. J. Sec. 1210; Asked, 1953 and 1957 Bar Exams.; No. V c, 2005 Bar Exams.


86/333

Distinguish a corporation sole from acorporation aggregate.


87/333

A corporation sole is one formed by the chiefarchbishop, bishop, priest, minister, rabbi orother presiding elder of a religiousdenomination, sect, or church, for the purpose

of administering or managing, as trustee theaffairs, properties and temporalities of suchreligious denomination, sect or church.

A corporation aggregate formed for the same

purpose, on the other hand consists of two ormore persons. (IEMELIF vs. Lazaro, 624 SCRA224, July 6, 2010).


88/333

May a corporation sole be converted into acorporation aggregate by merelyamending its articles of incorporation or

should the corporation sole be dissolvedfirst and a corporation aggregate becreated later?


89/333

There is no point to dissolving the corporation sole ofone member to enable the corporation aggregate toemerge from it. The conversion may be done by merelyamending the articles of incorporation of the corporationsole.

If the amendment mechanism of a non-stock corporationshall be made to operate in a corporation sole, its onemember in whom all the powers of the corporationtechnically belongs, needs to get the concurrence of two-

thirds of its membership. Thus, the one member with theconcurrence of two-thirds of the membership of theorganization for whom he acts as trustee, can self-willthe amendment. He can, with the membershipconcurrence, increase the technical number of themembers of the corporation from sole or one to the

greater number authorized by its amended articles.


90/333

May a dissolved corporation still sue or besued?


91/333

Under Section 122 of the Corporation Code, a dissolvedcorporation shall nevertheless continue as a bodycorporate for three (3) years for the purpose prosecutingand defending suits by or against it and enabling it tosettle and close its affairs, to dispose and convey its

property and to distribute its assts, but not the purposeof continuing the business for which it was established.Within those three (3) years, the corporation mayappoint a trustee or receiver who shall carry out the saidpurposes beyond the three year winding-up period.Thus, a trustee of a dissolved corporation may

commence a suit which can proceed to final judgmenteven beyond the three (3) year period of liquidation.(Metropolitan Bank & Trust Co., Inc. vs. Board ofTrustees of RMCPRF, 630 SCRA 350, Sept. 8, 2010).


92/333

Is a foreign corporation notlicensed to do business in thePhilippines absolutely incapacitated

from filing a suit in local courts?


93/333

When a foreign corporation does business in thePhilippines without the proper license, it cannot maintainany action of proceeding before Philippine Courts. Doingbusiness implies a continuity of commercial dealings or

arrangement which involve profit-making. Solicitingpurchaseshas been deleted from the enumeration of actsor activities which constitutedoingbusiness. Thus, wherea foreign company merely imports goods from a Philippineexporter, without opening an office or appointing an agent

in the Philippines, is not doing business in the Philippinesand hence, not barred from bringing action in Philippinecourts. .[1]

.[1] Cargill, Inc. vs. Intra Strata Assurance Corporation, 615 SCRA 304, March 15, 2010.


94/333

Only when a foreign corporation is transacting ordoing business in the Philippines will a license benecessary before it can institute suits. It may however,bring suits on isolated business transactions, which isnot prohibited under Philippine Law. Thus, a foreign

insurance company may sue in Philippine courts forsubrogation arising out of marine insurance policiesissued by it abroad to cover international-bound cargoesshipped by a Philippine carrier, even if it has no license

to do business in the country. It is the act of engaging inbusiness without the prescribed license, and not the lackof license per se which bars a foreign corporation fromaccess to our courts..[1]

[1] Aboitiz Shipping Corporation vs. Insurance Company of North America, 561 SCRA 262.


95/333

When may an unlicensed foreigncorporation doing business in thePhilippines sue in Philippine Courts?


96/333

The exception to the rule that an unlicensed foreign corporationdoing business in the Philippines cannot sue in Philippine courts iswhen the principle of estoppel applies.

Thus, a foreign corporation doing business in the Philippines withoutlicense may sue in Philippine courts a Filipino citizen or a Philippine

entity that had contracted with and benefited from it. A party isestopped from challenging the personality of a corporation afterhaving acknowledged the same by entering into a contract with it.The principle is applied to prevent a person contracting with foreigncorporation from later taking advantage of its non-compliance withthe statutes where such person has received benefits from suchcontract. (Global Business Holdings, Inc. vs. Surecomp Software, B.

V., 633 SCRA 94, Oct. 13, 2010).


97/333

The Securities Regulation Code


98/333

Questions:

What are exempt securities?

What are exempt transactions?


99/333

What is a tender offer? What

is its purpose?


100/333

A tender offer is a publicly announcedintention by a person acting alone or in concert

with other persons to acquire equity securities

of a public company i. e., one listed on an stockexchange. It is also defined as an offer by the

acquiring person to stockholders of a public

company for them to tender their shares therein

on the terms specified in the offer.[1]

[1]Osmena III vs Social Security System of the Philippines, 533 SCRA, Sept. 13,2007.


101/333

Tender offer is in place to protect

the interests of minority stockholders ofa target company against any schemethat dilutes the share value of theirinvestments. It affords such minority

shareholders the opportunity towithdraw or exit from the company underreasonable terms, a change to sell theirshares at the same price as those of the

majority stockholders.[2]

[2]Ibid.


102/333

When must tender offer be

made to shareholders?


103/333

Any person or group of persons acting in

concert who intends to acquire at least fifteen percent(15%) of any class of any equity security of a listed

corporation or of any class of any equity security of a

corporation with assets of at least Fifty million pesos

(P50,000,000.00) and having two hundred (22) or more

stockholders with at least one hundred (100) shares

each or who intends to acquire at least thirty percent

(30%) of such equity over a period of twelve (12)

months shall make a tender offer to stockholders by

filing with the Commission a declaration to that effect;and furnish the issuer, a statement containing such of

the information required in Section 17 of this Code as

the Commission may prescribe.

S h f h ll


104/333

Such person or group of persons shallpublish all requests or invitations for tender, or

materials making a tender offer or requesting orinviting letters of such a security. Copies of anyadditional material soliciting or requesting suchtender offers subsequent to the initial solicitation

or request shall contain such information as theCommission may prescribe, and shall be filedwith the Commission and sent to the issuer notlater than the time copies of such materials are

first published or sent or given to securityholders.[1]

[1] Section 19.1; Asked, No. VI, 2002 Bar Exams.


105/333

What is the meaning of Swiss

Challenge?


106/333

Under the SwissChallenge format, one

of the bidders is given the option or

preferential right to match the winning bid.[1]

[1]Osmena III vs. Social Security System of the Philippines, 533 SCRA 313, 321,

September 13, 2007.


107/333

PRESIDENTIAL DECREE

NO. 902-A(As amended by Securities Regulation Code)


108/333

Which court has jurisdiction

over cases previously cognizable by

the SEC?


109/333

The court designated by the Supreme Courtas Special Commercial Court is vested with

jurisdiction over cases previously cognizable by

the Securities and Exchange Commission. When

a case is erroneously filed in the regularRegional Trial Court, such court does not have

the authority or power to order the transfer of

cases erroneously filed with it to another branch

of the Regional Trial Courtthe only action thatit could take on the matter is to dismiss the

petition for lack of jurisdiction.


110/333

What is an intra-corporate controversy?


111/333

An intra-corporate controversy or disputeis a suit arising from intra-corporaterelations or between or among

stockholders or between any or all ofthem and the corporation. (Strategic

Alliance Dev. Corp. vs. Star Infrastructure

Dev. Corp., 635 SCRA 380, Nov. 17,2010).


112/333

Are all conflicts between stockholders andthe corporation considered as intra-corporate controversies so as to fall within

the jurisdiction of SEC (Now Regional TrialCourt)?


113/333

Not all conflicts between the stockholders and the corporation areclassified as intra-corporate so as to fall within the jurisdiction of theSEC (Now the Regional Trial Court).

The better policy to be followed in determining jurisdiction over acase should be to consider concurrent factors such as the status or

relationship of the parties or the nature of the question that is thesubject of their controversy. (Strategic Alliance Dev. Corp. vs. StarInfrastructure Dev. Corp., 635 SCRA 380, Nov. 17, 2010).

Under the nature of the controversy test, the incidents of thatrelationship must also be considered for the purpose of ascertaining

whether the controversy itself is intra-corporate. If the relationshipand its incidents are merely incidental to the controversy or if therewill still be conflict even if the relationship does not exist, then nointra-corporate controversy exists. (Real vs. Sangu Phils., Inc., 640SCRA 67, Jan. 19, 2011).


114/333

Real was a stockholder, director andmanager of respondent corporation. Hewas dismissed by the Board for variousreasons. Claiming illegal dismissal, he fileda case with the NLRC. Respondent claimsthat NLRC did not have jurisdictionbecause the case was an intra-corporate

controversy over which the SEC (nowRegional Trial Court) has jurisdiction. Wasthe case intra-corporate issue?


115/333

The case was not intra-corporate controversy.The case arose from the alleged illegal dismissalof the petitioner as an employee and not byreason of his capacity as a stockholder ordirector. He is not trying to recover a seat in theboard of directors or to any appointive orelective corporate position which has beendeclared vacant by the board. This case is oneof termination of employment which is a labor

controversy and not an intra-corporate dispute.(Real vs. Sangu Phil., Inc., 640 SCRA 67, Jan.19, 2011).


116/333

Is the dismissal of a vice-president anintra-corporate controversy so as to fall

under the jurisdiction of SEC (NowRegional Trial Court)?


117/333

If the vice-president is a corporate officer, his dismissal falls

under the jurisdiction of the court, otherwise it falls under thejurisdiction of the National Labor Relations Commission.

The vice-president is a corporate officer if his position isprovided for in the Corporation Code or in the by-lawsotherwise, he is not a corporate officer.

To be a corporate officer, it is essential that his position is oneof those expressly mentioned in the Corporation Code or inthe companys by-laws. Thus, the creation of an officepursuant to or under a by-law provision is not enough to makea position a corporate office.

The corporate officers mentioned by the Corporation Code arethe President, Treasurer, Secretary and such other officers asmay be provided for in the by-laws. (Matling Industrial andCommercial Corporation vs. Ricardo Coros, G.R. 157802; 633SCRA 12, Oct. 13, 2010.)


118/333

What is the nature of all orders anddecisions under the Interim Rules onIntra-corporate controversies?


119/333

All decisions and orders issued under the InterimRules of Procedure Governing Intra-corporateControversies shall immediately be executory.No appeal or petition taken therefrom shall stay

the enforcement or implementation of thedecision or order, unless restrained by anappellate court. Interlocutory orders shall not be

subject to appeal. (Dee Ping Wee vs. Lee HiongWee, 629 SCRA 145, August 25, 2010).


120/333

Who may file a petition for

rehabilitation of a corporation?


121/333

The petitioner in a Petition forRehabilitation of the corporation must

either be: (1) an actual insolvent debtor;(2) a technically insolvent debtor; or (3) acreditor or stockholder of the debtor.


122/333

What is technical insolvency?What is the remedy of the corporate

debtor with technical insolvency.


123/333

Technical insolvency is the inability of acorporation to pay its obligations althoughit has sufficient assets, for a period longer

than one year from filing of the petition.Its remedy is to file a Petition forRehabilitation. [1]

[1]Union Bank of the Philippines vs. ASB Development Corporation, 560 SCRA 578.


124/333

Distinguish actual insolvency from

technical insolvency.


125/333

There is actual insolvency when thecorporations assets are not enough to

cover its liabilities, while technicalinsolvency exists when the corporation hasenough assets but it foresees its inability

to pay its obligations for more than oneyear from the filing of the petition. [1]

[1] PNB vs. Court of Appeals, 576 SCRA 537, January 7, 2009.


126/333

When may a party apply for the

appointment of a management

committee for the corporation,

partnership or association?


127/333

(1) Dissipation, loss, wastage or

destruction or assets or other

properties; and

A party may apply for th e appo intment of a

management commit tee for the corporat ion,

partnership or associat ion when there is imm inent

danger of:


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(2) Paralyzation of its business operations

which may be prejudicial to the interest of

the minority stockholders, parties-litigants

or the general public. [1]

[1] Sy Chim vs. Sy Siy Ho & Sons, Inc., 480 SCRA 465, January 27, 2006, citing

Section 1, Rule 9 of the Interim Rules on Corporate Rehabilitation.


129/333

When may receivers be

appointed for a corporation?


130/333

A. Receivers may be appoin ted whenever:

(1) necessary in order to preserve therights of the parties-litigant, and/or

(2) protect the interest of the investingpublic and creditors.[1]

[1]Section 6 (c), P. D. 902-A, as amended.


131/333

The si tuat ions contemplated inthese instances are serious in nature.

There mus t exist a clear and imm inent

danger of los ing the co rpo rate assets i fa receiver is not appointed.[1]

[1]Pryce Corporation vs. Court of Appeals, 543 SCRA 657, February 4, 2008.


132/333

What is the Serious

Situation Test in corporaterehabilitation cases?


133/333

The Serious Situation Test in a

petition for rehabilitation case means that

there is a clear and imminent danger that

the corporate petitioner will lose its

corporate assets if a receiver is not

appointed.

[1]

[1]Pryce Corporation vs. Court of Appeals, supra.


134/333

What is the effect of the

appointment of a rehabilitation

receiver? What is the purpose

thereof?


135/333

Upon appointment by the SEC (now,RTC Special Commercial Court) of a

rehabilitation receiver, all actions for

claims against the corporation pendingbefore any court, tribunal or board shall

ipso jure be suspended.[1]

[1]Garcia vs. Philippine Air Lines, Inc., 531 SCRA 574.


136/333

When will the suspension of theenforcement of all claims against the

corporation commence?


137/333

The suspension of the enforcement of allclaims against the corporation shall

commence only from the time the

Rehabilitation Receiver is appointed.(Equitable PCI Bank, Inc. vs. DNG

Realty, supra, citing RCBC vs IAC, 320

SCRA 279).


138/333

What are the actions that are

suspended during the process ofrehabilitation?


139/333

The actions that are suspended cover all claimsagainst the corporation whether for damages founded

on a breach of contract of carriage, labor cases,

collection suits or any other claims of a pecuniary

nature. No exception in favor of labor claims is

mentioned in the law.[1] No exception either is made

therein in favor of maritime claims. Thus, since the law doesmake any exemptions or distinctions, neither should we.[2]

[2]Negros Navigation Co., Inc. vs. Court of Appeals, 573 SCRA 434, December 10, 2008.

[1]Philippine Airlines, Inc. vs. Heirs of Bernardin J. Zamora, 538 SCRA 456, November 23, 2007.


140/333

What is the purpose of

suspending the proceedings

initiated by the creditors for thecollection of their credits whenever

a corporation is undergoing

rehabilitation?


141/333

The purpose for the suspension of theproceedings is to prevent a creditor fromobtaining an advantage or preference overanother and to protect and preserve the rights of

party litigants as well as the interest of theinvesting public or creditors. Such suspension isintended to give enough breathing space for themanagement committee or rehabilitation receiverto make the business viable again, without havingto divert attention and resources to litigations invarious fora.

The suspension would enable the


142/333

pmanagement committee or rehabilitation

receiver to effectively exercise its/his powersfree from any judicial or extrajudicialinterference that might unduly hinder or preventthe rescue of the debtor company. To allow

such other action to continue would only add tothe burden of the management committee orrehabilitation receiver, whose time, effort andresources would be wasted in defending claims

against the corporation instead of being directedtoward its restructuring and rehabilitation.[1]

[1]Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company,

Inc.. 554 SCRA 561, June 17, 2008


143/333

What is the consequence if norehabilitation plan is approved by thecourt within 180 days from the date of the

initial hearing?


144/333

Under Section 11, Rule 4 of the Interim Rules ofProcedure in Corporate Rehabilitation, a petitionfor rehabilitation shall be dismissed is norehabilitation plan is approved by the court upon

the lapse of 180 days from the date of initialhearing. The Interim Rules, however allowsextension beyond the 180-day period for

justifiable cause. (De Castro vs. LibertyBroadcasting Network, Inc., 629 SCRA 77, Aug.25, 2010).


145/333

Will the suspension of allproceedings as a consequence of

rehabilitation include suspension ofcriminal prosecution for violation ofBP 22 or Bouncing Check Law?


146/333

Violation of BP 22 is not a claim that can be enjoined within thepurview of P.D. No. 902-A although the conviction of the accused for the

alleged crime could result in the restitution, reparation or indemnificationof the offended party for the damage or injury he sustained by reason ofthe felonious act of the accused because prosecution for violation of B.P.22 is a criminal action. The dominant and primordial objective of thecriminal action is the punishment of the offender. The civil action is merely

incidental to and consequent to the conviction of the accused. Criminalactions are primarily intended to vindicate an outrage against thesovereignty of the state and to impose the appropriate penalty for thevindication of the disturbance to the social order caused by the offender.On the other hand, the action between the private complainant and the

accused is intended solely to indemnify the former.[1]

[1]Rosario vs. Co, 563 SCRA 239, Aug. 26, 2008.


147/333

What is the difference betweenSuspension of Payments under the

Insolvency Law and suspension ofpayments of a corporation undergoing

rehabilitation under Presidential Decree

902-A?


148/333

Unlike the provisions in the InsolvencyLaw which exempts secured creditors fromthe suspensive effect of the order issued bythe court in an ordinary suspension of

payment proceedings, the provisions of P.D.No. 902-A, when it comes to the appointmentof a management committee or arehabilitation receiver, do not contain anexemption for secured creditors.[1]

[1]Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company,

Inc., supra.


149/333

What is the effect of the appointmentof a management committee or

rehabilitation receiver on the right of thesecured creditor to foreclose the

mortgage in its favor?


150/333

The right to foreclose such

mortgage is merely suspended upon theappointment of a management committeeor rehabilitation receiver or upon theissuance of a stay order by the trialcourt. However, the creditor-mortgageemay exercise his right to foreclose themortgage upon the termination of the

rehabilitation proceedings or upon thelifting of the stay order.[1]

[1]Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465.


151/333

What is the consequence if

rehabilitation is no longer feasibleand the assets of the corporation

are finally liquidated?


152/333

Secured creditors shall then enjoypreference over unsecured creditors,subject only to the provisions of the CivilCode on concurrence and preference of

credits. Creditors of secured obligationsmay pursue their security interest onlien, or they may choose to abandon the

preference and prove their credits asordinary claims.[1]

1]Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465, June 26, 2008.


153/333

What is the proper mode of appeal incorporate rehabilitation cases?


154/333

The proper mode of appeal in cases ofcorporate rehabilitation is through apetition for review under Rule 43 of the

Rules of Court to be filed within fifteen(15) days from notice of the decision orfinal order of the Regional Trial Court.(China Banking Corporation vs. CebuPrinting and Packaging Corp., 628 SCRA154, Aug. 11, 2010).


155/333


156/333

INSURANCE


157/333

Q. What laws govern insurance?


158/333

A. The laws governing insurance in their order of priorityare: (a) Insurance Code; (b) in the absence of applicableprovisions in the Insurance Code, the Civil Code, and (c)in the absence of applicable provisions in the Insuranceand the Civil Code, the general principles prevailing on

the subject in the United States, particularly in the Stateof California where our Insurance Code was based.[1]

[1]Constantino vs. Asia Life Ins. Co., 87 Phil. 248;Gercio vs. Sun Life Assur. Of Canada, 48 Phil. 375.


159/333

Q. For purposes of insurance, who is apublic enemy?


160/333

A. Public enemy is a nation at war with thePhilippines and every citizen or subject ofsuch nation. Such term does not includerobbers, thieves and riotous mobs.[1] Apublic enemy cannot be insured because

the purpose of war is to cripple the powerand exhaust the resources of the enemy,and it inconsistent that one country shoulddestroy its enemy and repay in insurancethe value of what has been so destroyed.[1]Blacks L. D., citing State v. Moore, 74 Mo.417, 41 Am. Rep. 322; Asked, VIII (a), 2000Bar Exams.


161/333

Q. Who may insure a mortgaged property? A. Both the mortgagor and the mortgagee

may take out separate policies with the same ordifferent insurance companies. The mortgagor

may insure the property mortgaged to the fullvalue of such property while the mortgagee caninsure the same only to the extent of theamount of his credit.[1]

[1]Cosio vs. Panlilio, 17 SCRA 196; Asked, No.IV (a), 1999 Bar Exams.; 44 C. J. S. 884.


162/333

Q. What are the consequences wherethe mortgagor insures the propertymortgaged in his own name but

makes the loss payable to themortgagee or assigns the policy tothe latter?


163/333

A. The consequences of such insurance[1]are as follows:

1. The insurance is still deemed to be upon the interest of the mortgagor who does not cease tobe a party to the original contract. Hence, if the policy is cancelled, notice of cancellation mustbe given to the mortgagor and not to the mortgagee.[2]

2. Any act of the mortgagor, prior to the loss, which would otherwise avoid the insurance, willhave the same effect although the property is in the hands of the mortgagee. Thus, violation bythe mortgagor of the policy entitles the insurer to rescind and will prevent the beneficiary(mortgagee) from recovering from the insurer.[3]

3. Any act which, under the contract of insurance, is to be performed by the mortgagor, may beperformed by the mortgagee with the same effect as if it has been performed by the mortgagor.

As for example, the policy requires the insured to give notice and proof of loss withoutunnecessary delay. Notice or proof of loss may be given by the mortgagee to whom the loss ismade payable with the same effect as if the same was given by the mortgagor.[4]

4. Upon occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit[5]and the balance, if any, is payable to the mortgagor since such policy is for the benefit of boththe mortgagor and mortgagee.[6]The mortgagee is the proper party to prosecute an action for aloss sustained under a policy of insurance where the loss was made payable to him and suchaction may be brought by the mortgagee even without including the mortgagor as party to theaction.[7]

5. Upon recovery by the mortgagee to the extent of his credit from the insurer, the mortgagor isreleased from his indebtedness.[8]


164/333

Q. What are the effects of insuranceprocured by the mortgagee withoutreference to the right of the

mortgagor?


165/333

1. The mortgagee may collect from the insurer upon the occurrence of the

loss to the extent of his credit.[1] 2. Unless otherwise stated in the policy, the mortgagor has no right to

collect the balance of the proceeds of the policy after payment of theinterest of the mortgagee.[2]

3. The insurer, upon payment to the mortgagee-insured, becomessubrogated to the rights of the mortgagee against the mortgagor and maycollect the debt of the mortgagor to the extent of the amount paid to themortgagee.[3] This principle applies only where the policy obtained by themortgagee covers his interest alone.[4]

4. The mortgagee-insured can no longer collect the mortgagorsindebtedness after receiving full payment of his credit from the insurersince the latter thereby acquires the right to collect from the mortgagor byvirtue of subrogation.[5] However, if the mortgagee-insured is unable tocollect the whole amount of his credit from the insurer, he may still chargethe mortgagor for the deficiency.[6]

5. The mortgagor is not released from his debt by the insurers payment tothe mortgagee-insured.[7]


166/333

Who may be beneficiaries in life insurancecontracts?


167/333

Any person may be designated as beneficiary in a life insurancecontract even

though he is a stranger and has no insurable interest in the lifeinsured, except those

who are forbidden by law to receive donations from the insuredsuch as:

(a) Those made between persons who are guilty of adultery orconcubinage at the

time of the donation; (b) Those made between persons found guilty of the same

criminal offense, in consideration thereof;

(c) Those made to a public officer or his wife, descendants andascendants, by reason of his office.


168/333

In essence, a life insurance policy is no different from acivil donation insofar as designation of beneficiary isconcerned. Both are founded upon the sameconsideration: liberality. A beneficiary is like a donee,because from the premiums of the policy which theinsured pays out of liberality, the beneficiary will receive

the proceeds of the said insurance. As a consequence,the proscription in Article 739 of the Civil Code shouldequally operate in life insurance contracts. Any personwho cannot receive a donation cannot be named asbeneficiary in the life insurance policy of the person who

cannot make the donation. No legal proscriptionexists in naming as beneficiaries the children of illicitrelationships of the insured, and thus they may benamed as beneficiaries.


169/333

Q. Must the beneficiary have insurableinterest in the life insured?

A. A person procuring insurance on his own life

may name anyone he chooses as beneficiarythereof, even though he is stranger and has noinsurable interest in the life insured. However,a person who cannot receive donation from the

insured under Article 739 of the Civil Codecannot be designated as beneficiary.


170/333

Q. May the wife who abandoned herhusband be a beneficiary of Social SecurityBenefits?

A. In the case of Social Security System, etal., vs. Gloria de los Santos, the Supreme Courtruled that a wife who left her husband and livedwith another man is no longer entitled to receive

Social Security benefits upon the death of thehusband because she was no longer dependentupon him for her support.


171/333

Q. Distinguish insurable interest inproperty from insurable interest inlife.


172/333

1. Insurable interest in property is based on pecuniaryinterest [1]while in life, the interest need not necessarilybe strictly and exclusively a pecuniary one, as in case ofconsanguinity or affinity;[2]

2. In property insurance, the interest must exist at thetime the policy takes effect and at the time of the

loss,[3]while in life insurance interest need exist only atthe time the insurance takes effect[4]except insurancetaken by a creditor on the life of the debtor whereininterest must also exist at the time of the loss.

3. Insurable interest in property is limited to the

actual value of the damage the insured may suffer,while in life there is no limit on the amount ofinsurable interest unless it is based on creditor-debtor relationship


173/333

Q. Must the beneficiary in propertyinsurance have insurable interest onthe property insured?


174/333

A. Yes. No contract or policy of insurance onproperty shall be enforceable except for thebenefit of some person having an insurableinterest in the property insured.[1]Thus, thebeneficiary in property insurance must have

insurable in the property insured. A strangerhaving no insurable interest in the propertyinsured could not be made a beneficiary in apolicy covering the said property.[2]Thisprinciple does not apply to life insurance wherein

insurable interest on the part of the beneficiary isnot necessary.


175/333

Q. How is materiality of concealment orrepresentation determined?


176/333

A. Materiality is to be determined not bythe event, but solely by the probable andreasonable influence of the facts upon theparty to whom the communication is due,

in forming his estimate of thedisadvantages of the proposed contract,or in making his inquiries.[1]

[1]Section 31.


177/333

Q. To be material, must there be acausal connection between the factconcealed and the cause of the loss?


178/333

A. Concealment need not, in order to be material, beof facts which bring about, or contribute to, or areconnected with the insureds loss. It is immaterial thatthere is no causal relationship between the factconcealed and the loss sustained. The insured,

therefore, need not die of the very disease he failed toreveal to the insurer. It is sufficient that his non-revelation has misled the insurer in forming itsestimate of the disadvantages of the proposed policyor in making its inquiries in order to entitle the

insurer to avoid the contract.[1]


179/333

Q. When is causal connection between thefact concealed and the case of the lossnecessary?

A. In marine insurance, in the mattersmentioned in Sec. 110.


180/333

Q. In property insurance, after payment to theinsured what is the right of the insurer as againstpersons liable to the insured by reason of thinginsured?

A. In property insurance, after the insured has

received payment from the insurer of the loss coveredby the policy, the insurance company shall besubrogated to the rights of insured against thewrongdoer or the person who violated the contract.The insurers right to subrogation accrues upon

payment of the insurance claim.[1]


181/333

Q. What are instances when there is no subrogation in favor of the

insurer? A. The insurer will not be subrogated to the rights of the insured in the

following cases:

(1) In life insurance because subrogation exists only when insurance is acontract of indemnity.[1]Subrogation therefore, exists only in propertyinsurance.[2]

(2) When the proximate cause of the damage was the negligence of theinsured himself.[3]

(3) When the insurer pays to the insured a loss not covered by thepolicy.[4]

4. When the insured failed to comply with the legal or stipulated conditionprecedent prior to the filing of an action against the wrongdoer, as when nonotice of loss was given by the insured to the carrier liable for the loss

despite the stipulation to that effect [5] or the notice of claim required by


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Q. Oriental Assurance issued a fire insurancepolicy in favor of Paramount covering itsproperties in Manila. The said properties werepartially burned. It turned out that saidproperties were likewise insured with five other

insurance companies. The insured revealed toOriental Assurance only two of these policies andfailed to declare to the insurer the existence ofthe three other policies despite the requirementin the policy that the insured must declare other

policies on the same property insured. WasOriental Assurance liable?


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A. The insurer was not liable. The insured failedto declare the actual number of other insurancestaken over the subject property. Consequently,the whole foundation of the contract fails, the

risk does not attach and the policy neverbecomes a contract between the parties.[1]


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Q. In multiple insurance covering stocks-in-trade,when is there no violation of the prohibitionagainst double insurance?

A. In case of insurance upon stock-in-trade, there is

no violation of the prohibition against double insurancewhere the policies taken cover less than the entirequantity of the stock-in-trade,[1]or where the totalamount of the policies taken is less than the total valueof the stock in trade.[2]


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Q. Distinguish over-insurance from doubleinsurance. A. The following are the distinctions between

over-insurance and double insurance: 1. In double insurance, there must be two or

more insurers while in over-insurance, oneinsurer is sufficient;

2. In double insurance, the total amount ofthe polices taken need not exceed the value of

insurable interest while in over-insurance, theinsurance taken must always be more than theamount of insurable interest.


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Q. When is reinsurance compulsory?

A. The insurer must obtain reinsurance in the following cases:

(1) When a non-life insurer insures in any one risk or hazardan amount exceeding 20% of its net worth, the insurer needs

reinsurance of the excess over said limit so that the retention ofthe insurer will be reduced to a maximum of 20% of its networth.[1]

(2) When a foreign insurance company withdraws from thePhilippines, it should cause its primary liabilities under

policies insuring residents of the Philippines to be reinsuredand assumed by another insurance company authorized totransact business in the Philippines.[2]


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Q. Distinguish reinsurance from double insurance.

A. Reinsurance may be distinguished from double insurance asfollows:

(1) In double insurance, the insurer remains as insurer while in

reinsurance, the insurer becomes an insured; (2) In double insurance, the subject matter is property, while in

reinsurance, it is the insurers risk or liability;

(3) In double insurance, the same interest and risk are insuredwith another insurer, while in reinsurance, the different risk

and interest is insured.[1]


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Q. Distinguish insurance compact from facultativereinsurance.

A. Facultative reinsurance is one wherein thereinsurer has the right to accept or not to accept

participation in the risk insured.[1]On the other hand,

reinsurance compact is a contract whereby two ormore insurance companies agree in advance that eachwill reinsure a part of any line of insurance taken bythe other, and is a self-executing contract. In suchcase, reinsurance attaches automatically upon theacceptance of a risk by any one of the companies. [2]


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Q. What is the meaning of incontestable clause?

A. An incontestable clause in a life insurance policyis an agreement by which the insurance company limitsthe period of time within which it will interposeobjections to the validity of the policy or set up anydefense. After a policy of life insurance made payableon the death of the insured shall have been in forceduring the lifetime of the insured for a period of twoyears from the date of its issue or its last reinstatement,the insurer cannot prove that the policy is void ab initio

or is rescindable by reason of the fraudulentconcealment or misrepresentations of the insured or hisagent.


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What are the statutoryexceptions to the rule that theinsurer is entitled to the

payment of premium as soonas the thing insured isexposed to the peril insured

against?


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Notwithstanding any agreement to the contrary, no policy orcontract of insurance is valid and binding unless and until the

premium thereof has been paid.[1]

The statutory exceptions wherein the policy shall bebinding notwithstanding the non-payment of premiums are:

1. In case of life or industrial life insurance whenever the graceperiod applies;[2]

2. When the insurer makes a written acknowledgment of thereceipt of premium, such acknowledgment is a conclusiveevidence of payment of premium to make the policy

binding;[3]

3. Where the obligee has accepted the bond or suretyshipcontract in which case such bond or suretyship becomes validand enforceable irrespective of whether or not the premiumhas been paid by the obligor to the surety.[4]

[


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Aside from the statutory exceptionsmentioned above wherein the policy isvalid and binding notwithstanding the

non-payment of premiums, what arethe other exceptions that evolved fromcases decided by the Supreme Court?

A id f h i h f ll i h


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Aside from the statutory exceptions, the following are the

instances when the Supreme Court ruled that the policy is validand binding notwithstanding the non-payment of premiums:

1. In case of cover notes which are binding even ifpremiums are not paid thereon because no premium could befixed on the cover note until all the particulars of the insuranceare known. Cover notes should be integrated to the regular

policies so that the premiums on the regular policies includethe consideration for the cover notes.[1]

2. When the parties agreed to have the premiums paid byinstallments or payment by installments is an establishedpractice by the parties, acceptance of the payment of premiumby installments would suffice to make the policy binding.[2]

3. When the insurer has granted the insured a credit termfor the payment of premium, the insurer is barred by estoppelfrom claiming forfeiture of the policy due to non-payment ofpremium within the credit term.[3]

[1]Pacific Timber and Export Corporation vs. Court of Appeals, 112 SCRA 199.

[2]Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462; Asked, No. V, 2006 Bar Exams. [3]UCPB vs. Masagana Telamart, Inc., 356 SCRA 307. There are however, strong dissenting opinions in this case.


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In case of a continuing bond, is paymentof the premium for the succeeding yearindispensable for the continued validity ofthe bond?

Q Wh i bl ?


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Q. When are premiums not recoverable?

A. In the following cases, the insured cannot recover thepremium paid:

1. If the peril insured against has existed, and the insurer

has been liable for any period, the peril being entire andindivisible.

2. In life insurance.

3. When the insured is guilty of fraud ormisrepresentation.

Q Wh t th l f hi h th i i li bl ?


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Q. What are the losses for which the insurer is liable?

A. The insurer is liable for the following losses:

1. Loss of which a peril insured against was the proximatecause.

2. Loss caused by efforts to rescue the thing insured from aperil insured against.

3. Loss caused by a peril not insured against to which the thinginsured was exposed in the course of rescuing the same fromthe peril insured against.

4. Loss, the immediate cause of which was the peril insuredagainst unless the proximate cause thereof was excepted in thecontract.

5. Loss caused by the negligence of the insured.

Q I th i li bl f l d b


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Q. Is the insurer liable for losses caused bynegligence of the insured?

A. The insurer is not relieved from liability by themere fact that the loss was caused by the negligence

of the insured, or of his agents or others. Accordingly,it is no defense to an action on the policy that thenegligence of the insured caused or contributed to theinjury. However, when the insureds negligence is so

gross that it is tantamount to a willful act, the insureris not liable.

N th ti i b d ill t l b lid f


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No, the continuing bond will not only be valid for oneyear corresponding to the premium paid. In fact, theeffectivity of the bond is not wholly dependent on thep

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