pointers for review in commercial law

8/12/2019 Pointers for Review in Commercial Law

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COMMERCIAL LAW

2010 POINTERS FOR REVIEW

INSURANCE

Q. How may a contract of insurance be perfected?

A. A contract of insurance, like other contracts, must be assented to by bothparties either in person or by their agents. So long as an application for insurance has notbeen either accepted or rejected, it is merely an offer or proposal to make a contract.There can be no contract of insurance unless the minds of the parties have met inagreement. Hence, it is only when the insurer accepts the application and communicatesthe same to the applicant that the contract of insurance is perfected.1 If the offer andacceptance are made by correspondence, the acceptance shall not be binding until it hasbeen made known to the one making the offer.2 Aside from meeting of the minds of the

parties, premium on the policy must be paid before the contract can be valid andbinding.3

Q. Perez applied for life insurance coverage with the BF Lineman Insurance

Corporation and immediately paid part of the premium. The application was

forwarded to the office of BF Lineman at Gumaca, Quezon for transmittal to its

head office in Manila. Perez died before his application was brought to the Manila

Office of BF Lineman. Without knowing of his death, BF Lineman approved the

application and issued the corresponding policy. The beneficiary filed a claim with

the insurer which refused to pay on the ground that the contract was not perfected.

Was the insurance contract perfected?

A. The contract was not perfected. It is only when the insurer accepts theapplication and communicates the same to the applicant and the latter pays the premiumwhile he is in good health that the contract of insurance is perfected. The insurersacceptance is manifested when it issues a corresponding policy to the applicant. Perezdied before his application was brought to the head office of BF Lineman in Manila.There was absolutely no way the acceptance of the application could have beencommunicated to the applicant inasmuch as the applicant was already dead at that time.There can be no contract of insurance unless the minds of the parties have met inagreement.4

Q. How should insurance contracts be interpreted?

A. In case there is no doubt as to the terms of an insurance contract, the provisionsmust be construed in their plain, ordinary and popular sense. However, when the terms ofthe policy are ambiguous, uncertain or doubtful, they should be interpreted strictly

1Perez vs. Court of Appeals, G. R. No. 112329, January 28, 2000.2Enriquez vs. Sun Life Insurance of Canada, 41 Phil. 269.3Section 77.4Perez vs. Court of Appeals, G. R. No. 112329, January 28, 2000.


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against the insurer and liberally in favor of the insured, because the insured has no voicein the selection of the words used, and the language of the contract is selected by legaladvisers of the insurance company.5 In such case, ambiguous provisions are construedstri ctissimi juri s or of strictest terms6against the insurer.

An insurance contract, being a contract of adhesion, should be interpreted as tocarry out the purpose for which the parties entered into the contract which is to insureagainst risks of loss or damage to the goods. Limitations of liability should be regardedwith extreme jealousy and must be construed in such a way as to preclude the insurerfrom noncompliance with its obligations.7

Q. Are contracts of insurance entered into by the insurer and insured on

equal footing?

A. To characterize the insurer and the insured as contracting parties on equalfooting is inaccurate at best. Insurance contracts are wholly prepared by the insurer withvast amounts of experience in the industry purposefully used to its advantage. More often

than not, insurance contracts are contracts of adhesion containing technical terms andconditions of the industry confusing if at all understandable to lay persons, that areimposed on those who wish to avail of insurance. As such, insurance contracts areimbued with public interest that must be considered whenever the rights and obligationsof the insurer and the insured are to be delineated. Hence, in order to protect the interestof insurance applicants, insurance companies must be obligated to act with haste uponinsurance applications, to either deny or approve the same, or otherwise be bound tohonor the application as a valid, binding and effective insurance contract.8

Q. Why are insurance contracts called contracts by adhesion or adherence?

A. Insurance contracts are prepared only by the insurer and imposed upon partiesdealing with it which may not be changed, the latters participation in the agreementbeing reduced to the alternative to take it or leave it, in contrast to those entered into byparties bargaining on an equal footing and, therefore, any ambiguity thereon must beresolved against the insurer, the party preparing the contract.9

Q. Philamlife and Eternal Gardens entered into a Group Life Policy under

which the clients of Eternal who purchased burial lots from it on installment would

5Calanoc vs. Court of Appeals, 52 O. G. 191; Qua Chee Gan vs. Law Union Rock Ins. Co., Ltd., 52 O. G.

1982.

6Mc Cullough & Co. vs. Taylor, 25 Phil. 113; Asked, No. V (2), 2003 Bar Exams.7 DBP Pool of Accredited Insurance Companies vs. Radio Mindanao Network, Inc., 480 SCRA 314 315,January 27, 2006.8Eternal Gardens Memorial Park Corporation vs. The Phil. American Life Insurance Co., G. R. No.166245, April 9, 2008.9(Qua Chee Gan vs. Law Union Rock Ins. Co., Ltd., 52 O. G. 1982).


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be insured by Philamlife. Eternal was required under the policy to submit a list of

new lot purchasers , together with a copy of the application of each purchasers and

the amounts of the respective unpaid balances of all insured lot purchasers. Eternal

sent a letter dated December 29, 1982, containing a list of insurable balances of its

lot buyers. On of those included in the list was John Chuang. Philamlife did not

reply to the said letter. On August 2, 1984 Chuang died. Eternal demanded paymentfrom Philamlife of the insurance claim for Chuangs death. Philamlife denied the

claim on the ground that no application for Group Insurance was submitted to

Philamlife prior to Chuangs death. The contact between Philamlife and Eternal

stated that the insurance of any eligible Lot Purchaser shall be effective on the date

he contracts a loan with the Assured (Eternal). It was further stated that there

shall be no insurance if the application of the Lot Purchaser is not approved by the

Company (Philamlife). Was there a valid contract of insurance covering Chuangs

life considering the conflicting provisions of the policy?

A. The seemingly conflicting provisions must be harmonized to mean that upon a

partys purchase of a memorial lot on installment basis from Eternal, an insurancecontract covering the lot purchaser is created and the same is effective, valid and bindinguntil terminated by Philamlife by disapproving the insurance application. Insurance is acontract by adhesion which must be construed liberally in favor of the insured and strictlyagainst the insurer.10

Q. How should ambiguities in a Health Care Agreement be interpreted?

A. Health Care Agreement is in the nature of a non-life insurance which isprimarily a contract of indemnity11 and hence, it is a contract of adhesion the terms ofwhich must be interpreted and enforced stringently against the insurer which prepared thecontract.12

Q. Who may be a beneficiary in life insurance?

A. Any person may be designated as beneficiary in a life insurance contract even

though he is a stranger and has no insurable interest in the life insured,13except those

who are forbidden by law to receive donations from the insured14such as:

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

time of the donation;

10Eternal Gardens Memorial Park Corp. vs. Philamlife, G. R. 166245, April 9, 2008.11Philamcare Health Systems, Inc. vs. CA, 379 SCRA 356 (2002).12Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580, 586, February 12, 2008.13 4 Couch 2d, 504; Asked, 1946 (Aug.) and 1969 Bar Exams.; No. IV, 1987 Bar Exams. 14Art. 2012, Civil Code; Asked, 1955 & 1962 Bar Exams.; No. 4, 1981 Bar Exams., No. 13, 1985 Bar Exams.; No. X,1998 Bar Exams.


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(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 and ascendants, by

reason of his office.15

In essence, a life insurance policy is no different from a civil donation insofar as

designation of beneficiary is concerned. Both are founded upon the same consideration:

liberality. A beneficiary is like a donee, because from the premiums of the policy which

the insured 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 should

equally operate in life insurance contracts. Any person who cannot receive a donation

cannot be named as beneficiary in the life insurance policy of the person who cannot

make the donation.16

Q. Must the beneficiary have insurable interest in life insured?

A. A person procuring insurance on his own life may name anyone he chooses as

beneficiary thereof, even though he is stranger and has no insurable interest in the life

insured.17 However, a person who cannot receive donation from the insured under Article

739 of the Civil Code cannot be designated as beneficiary.18

Q. May the wife who abandoned her husband be a beneficiary of Social

Security Benefits?

15Article 739 Civil Code.

16 Insular Life Assurance Co., Ltd., vs. Ebrado, 80 SCRA 181; Asked, No. 4, 1981 Bar Exams.; No. 13, 1985 Bar

Exams.; No. X, 1998 Bar Exams.

17 4 Couch 2d. 504; In re Saymanakis Estate, 167 A. 420, 109 Pa. Super, 555; Asked 1949 Bar Exams.; No.IV, 1987 Bar Exams.18See discussions under Section 11.


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A. In the case of Social Security System, et al., vs. Gloria de los Santos 19 the

Supreme Court ruled that a wife who left her husband and lived with another man is no

longer entitled to receive Social Security benefits upon the death of the husband because

she was no longer dependent upon him for her support.

Q. Less than a year after the marriage of Antonio de los Santos and Gloria de

los Santos, the latter left Antonio and contracted another marriage with Domingo

Talens in 1965. In 1969, Gloria went back to Antonio and lived with him until 1983

when she again left Antonio and went to the United States where she obtained a

divorce from Antonio. In the meantime, Antonio married Cirila de los Santos and

amended his SSS records by changing his beneficiary from Gloria to Cirila. Antonio

died and Gloria claimed the SSS insurance benefits. The Court of Appeals ruled

that the marriage between Antonio and Gloria still subsisted and the subsequent

marriages contracted by them were void. Thus, the Court of Appeals ruled thatGloria was still the legal wife of Antonio and hence entitled to the SSS benefits. Should Gloria be entitled to the SSS benefits?

A. The divorce obtained by Gloria against Antonio was not binding in thisjurisdiction. Under Philippine law, only aliens may obtain divorces abroad provided theyare valid according to their national law. The divorce was obtained by Gloria while shewas still a Filipino citizen, hence it did not sever her marriage with Antonio. However,although Gloria was the legal spouse, she is still disqualified to be his primarybeneficiary under the SSS law. A wife who left her family until her husband died andlived with other men was not dependent upon her husband for support, financial orotherwise, during the same period. Gloria left the conjugal abode and lived with twodifferent men. These facts remove her from qualifying as a primary beneficiary of herdeceased husband.20

Q. What is the meaning of incontestable clause?

A. An incontestable clause in a life insurance policy is an agreement by which theinsurance company limits the period of time within which it will interpose objections tothe validity of the policy or set up any defense.21

After a policy of life insurance made payable on the death of the insured shallhave been in force during the lifetime of the insured for a period of two years from thedate of its issue or its last reinstatement, the insurer cannot prove that the policy is void

19G. R. No. 164790, August 29, 2008.20Social Security System, et al., vs. Gloria de los Santos, August 29, 2008, Third Division, Supreme Court.2145 C. J. S. 758.


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ab initio or is rescindable by reason of the fraudulent concealment or misrepresentationsof the insured or his agent.22

Q. What are the requisites of incontestability?

A. To become incontestable, a policy must have the following requisites:

1. It must be a life insurance policy;2. It must be payable on the death of the insured; and3. It must have been in force during the lifetime of the insured for a period of two

years.23

Q. What are the effects of incontestability?

A. Whenever all the requisites of incontestability are present, the insurer can nolonger escape liability under the policy nor be allowed to prove that the policy is void ab

initio or rescindable by reason of concealment or misrepresentation of the insured or hisagent. In other words, the insurer is precluded from contesting the policy on anyground.24

Q. When may a third person sue the insurer?

A. If the insurance contract was intended to benefit third persons, the latter maydirectly claim from the insurer. Thus,

If the insurance contract should contain some stipulation in favor of a thirdperson, the latter although not a party to the contract may enforce the stipulation in hisfavor before it is revoked by the contracting parties, 25or where the insurance contractprovides for indemnity against liability to third persons, then third persons to whom theinsured is liable, can sue the insurer.26

Q. The insurer issued a common carrier accident insurance policy to Manila

Yellow Taxicab wherein it was stipulated that the insurer will indemnify any

authorized driver who was driving the motor vehicle insured. A taxicab of the

insured, driven by Coquia met a vehicular accident which caused the death of

Coquia. May the heirs of Coquia hold the insurer liable?

22Section 48, par. 2.23Section 48, par. 2.2445 C. J. S. 780; Asked, Bar Exams. : 1947, 1953 & 1966; Asked, No. XII, 1998Bar Exams.

25 Coquia vs. Fieldmens Ins.Co., 26 SCRA 179, 181.26Guingon vs. del Monte, et al., 20 SCRA 1043.


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A. The policy under consideration is typical of contracts pour autrui andtherefore, the enforcement thereof may be demanded by a third party for whose benefit itwas made, although not a party to the contract.27

Q. Aguilar insured his jeepneys against accidents and third-party liability.

In the policy, the insurer agreed to indemnify the insured against all sums whichthe insured shall become legally liable to pay in respect of death of or bodily injury

to any person. One of the jeepneys insured bumped Guingon who had just alighted

from another jeepney. Guingon died. Can the insurer be made directly liable for

the death of Guingon who was not a party to the insurance contract?

A. The insurance taken was one for indemnity for liability to third persons and,therefore, such third person is entitled to sue the insurer.28

Q. What are the statutory exceptions to the rule that the insurer is entitled to

the payment of premium as soon as the thing insured is exposed to the peril insured

against?

A. Notwithstanding any agreement to the contrary, no policy or contract ofinsurance is valid and binding unless and until the premium thereof has been paid.29

The statutory exceptions wherein the policy shall be binding notwithstanding thenon-payment of premiums are:

1. In case of life or industrial life insurance whenever the grace period applies;30

2. When the insurer makes a written acknowledgment of the receipt of premium,such acknowledgment is a conclusive evidence of payment of premium to make thepolicy binding;31

3. Where the obligee has accepted the bond or suretyship contract in which casesuch bond or suretyship becomes valid and enforceable irrespective of whether or not thepremium has been paid by the obligor to the surety.32

Q. Aside from the statutory exceptions mentioned above wherein the policy is

valid and binding notwithstanding the non-payment of premiums, what are the

other exceptions that evolved from cases decided by the Supreme Court:

27Coquia vs. Fieldmens Ins. Co., Inc., 26 SCRA 179.

28Guingon vs. del Monte, 20 SCRA 1043.

29Section 77, 2ndsentence.30Section 77, 2ndsentence.31Section 78.32Section 177.


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A. Aside from the statutory exceptions, the following are the instances when theSupreme Court ruled that the policy is valid and binding notwithstanding the non-payment of premiums:

1. In case of cover notes which are binding even if premiums are not paid thereonbecause no premium could be fixed on the cover note until all the particulars of theinsurance are known. Cover notes should be integrated to the regular policies so that thepremiums on the regular policies include the consideration for the cover notes.33

2. When the parties agreed to have the premiums paid by installments or paymentby installments is an established practice by the parties, acceptance of the payment ofpremium by installments would suffice to make the policy binding.34

3. When the insurer has granted the insured a credit term for the payment ofpremium, the insurer is barred by estoppel from claiming forfeiture of the policy due tonon-payment of premium within the credit term.35

Q. Olivares obtained a health care coverage from Blue Cross Health Care,Inc.. In the health care agreement of the parties, ailments due to pre-existing

conditions wereexcluded from the coverage. Barely 38 days from the effectivity of

her health care coverage, Olivares suffered a stroke and was admitted at the

Medical City hospital. She was treated by Dr. Saniel, her attending physician. She

asked Blue Cross to pay her medical expenses but the latter suspended payment

pending submission of a certification from her attending physician that the stroke

she suffered was not caused by a pre-existing condition. After being discharged

from the hospital, Olivares again claimed payment from Blue Cross but the latter

insisted on Dr. Saniels report. Blue Cross asked for a report from Dr. Saniel which

was refused on the ground that Olivares invoked the patient-physician

confidentiality. During the trial, Blue Cross never presented any evidence to provethat Olivares stroke was due to a pre-existing condition. It merely speculated that

Dr. Saniels report would be adverse to Olivares, based on her invocation of the

doctor-patient privilege. Should Blue Cross be exempted from liability?

A. The rule that evidence willfully suppressed would be adverse if produceddoes not apply if the suppression is an exercise of a privilege.The refusal of Olivareswas justified. It was privileged communication between physician and patient.Furthermore, limitations of liability on the part of the insurer or health care provider mustbe construed in such a way as to preclude it from evading its obligations. Since BlueCross had the burden of proving exception to liability, it should have made its ownassessment of whether Olivares had a pre-existing condition when it failed to obtain the

33Pacific Timber and Export Corporation vs. Court of Appeals, 112 SCRA 199.34Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462; Asked, No. V, 2006 BarExams.35UCPB vs. Masagana Telamart, Inc., 356 SCRA 307. There are however, strong dissenting opinions inthis case.


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attending physicians report. It could not just passively wait for Dr. Saniels report to bailit out.36

Q. In an insurance suit, what is the actionable document, the policy or a

memorandum thereof or a Marine Risk Note?

A. In an insurance suit, the actionable document is the policy which must be

attached to the complaint pursuant to Section 7, Rule 9 of the Rules of Court. However,

there is no specific provision in the Rules of Court which prohibits the admission in

evidence of an actionable document in the event a party fails to comply with the

requirement of the rule on actionable document under Section 7, Rule 9. But what must

be presented as evidence is the policy itself and not a mere Marine Risk Note.37

Q. 120 pieces of motors were air shipped from the US to ABB Koppel, Inc. in

Manila. At the NAIA, the cargo was discharged and forwarded to the warehouse of

Paircargo for temporary storage pending release by the Bureau of Customs. Later,

Regis Brokerage withdrew the cargo and delivered it to ABB Koppel. However, it

was discovered that only 65 of the 120 pieces of motors were actually delivered and

the remaining 55 motors could not be accounted for. Paircargo and Regis both

refused to pay the value of the missing motors. Thus, Malayan Insurance with which

ABB Koppel insured the cargo paid ABB Koppel the insurance claim. Claiming

subrogation to the right of ABB Koppel, Malayan Insurance filed an action against

Paircargo and Regis at the MeTC of Manila where it presented Marine Risk Note asproof that Malayan Insurance insured the cargo. The complaint was dismissed on

the ground that the Marine Risk Note presented as proof that the cargo was insured

was invalid. (a) Was the Marine Risk Note sufficient to prove the existence of the

insurance contract? (b) Was Malayan Insurance subrogated to the rights of ABB

Koppel against the party responsible for the loss of the shipment?

A. (a) The Marine Risk Note was not the insurance contract itself, but merely acomplementary or supplementary document to the contract of insurance that may haveexisted between Malayan and ABB Koppel. (b) Since Malayan failed to introduce inevidence the Marine Insurance Policy itself as the main insurance contract, or even advert

to said document in the complaint, it failed to establish its cause of action for restitutionas a subrogee of ABB Koppel. Malayans right to recovery is derived from contractualsubrogation as an incident to an insurance relationship, and not from any proximateinjury to it inflicted by the defendants. It is critical that Malayan establish the legal basisof such right to subrogation by presenting the contract constitutive of the insurance

36Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580, February 12, 2008.37Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, G. R. No. 172156, Nov. 23, 2007.


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relationship between it and ABB Koppel. Without such legal basis, its cause of actioncannot survive. The dismissal of the complaint is correct.38

Q. When may abandonment be made?

A. Abandonment may be made in any of the following cases:39

(a) If more than of the value of the thing insured is actually lost;

(b) If more than of the value of the thing insured would have to be expended torecover it from the peril;40

(c) If it is injured to such an extent as to reduce its value by more than ;

(d) If the thing insured is a ship and the contemplated voyage cannot be lawfullyperformed without an expense to the insured of more than of the value of the thingabandoned;

(e) If the thing insured is a ship and the contemplated voyage cannot be lawfullyperformed without incurring risk which a prudent man would not take under thecircumstances;

(f) If the thing insured, being cargo or freightage, and the voyage cannot beperformed nor another ship procured by the master within a reasonable time and withreasonable diligence, to forward the cargo without incurring an expense of more than of the value of the thing41or without incurring a risk which a prudent man would notunder take under the circumstances.

Q. What may be recovered by the insured when abandonment is properly

made?

A. When abandonment is properly made, the insured may recover a total loss, andthe insurer acquires all the interests of the insured in the thing insured with all chances ofrecovery and indemnity. But if the insured omits to abandon, he may recover only hisactual loss.42

Q. WG& A, as owner of Superferry 3 entered into a contract for dry docking

and repairs of said vessel with Keppel. It was insured by WG&A with Pioneer

Insurance for its total value of P360 million. In Clause 20 of the Ship Repair

Agreement between WG& A and Keppel, it was agreed that in case of damage to the

vessel, Keppel shall be liable only for P50 million . Due to the negligence of Keppels

38Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, supra.39Section 139; Asked, X (b), 2005 Bar Exams.40 Asked, 1971 Bar Exams.41 Asked, No. 5, 1982 Bar Exams.

42Sections. 146 and 155; Asked, No. 5, 1982 Bar Exams.


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A. An insurer may be held liable under the no fault indemnity provisionwithout the necessity of proving fault or negligence of any kind provided the followingrequisites are present:48

(a)The claim is for death or injury to any passenger or third party;(b)The total indemnity in respect of any one person does not exceed P5,000; and

(c) The necessary proof of loss under oath to substantiate the claim must besubmitted.

Q. Which insurer is liable under the no fault indemnity provision?

A. A claim under the no fault indemnity provision may be made against theinsurer of one motor vehicle only. Such claim may be made directly by the injured partyagainst the insurer as follows:

(a) In case of an occupant of a vehicle, claim shall lie against the insurer of thevehicle in which the occupant is riding, mounting or dismounting from.

(b) In any other case, claim shall lie against the insurer of the directly offending

vehicle.49

NEGOTIABLE INSTRUMENTS

Q. Who is an accommodation party? What is the liability of an

accommodation party?50

A. An accommodation party is one who has signed the instrument as maker,drawer, acceptor, or indorser, without receiving value therefor, and for the purpose oflending his name to some other person. Such person is liable on the instrument to a

holder for value, notwithstanding such holder at the time of taking the instrument knewhim to be only an accommodation party.51

Q. What is the relation between the accommodation party and the party

accommodated?

48 Section 378; Asked, 1977 Bar Exams.; No. 6, 1983 Bar Exams.; No. III (1), 1989 Bar Exams.; No. 1(1), 1994 Bar Exams.

49 Section 378; Asked, No. III (1), 1989 Bar Exams; No. 1 (1), 1994 Bar Exams.

50Asked: 1952, 1963, 1964, 1973, 1974, 1975, 1976, 1982, 1985 and 1986 Bar Exams.; No. III (a), 1993Bar Exams.; No. IX (1), 2003 Bar Exams.

51 Section 29; Ang vs. Associated Bank, 532 SCRA 244, September 5, 2007.


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A. The accommodated party is the principal while the accommodation party is thesurety. It is a settled rule that as surety, the accommodation party is bound equally andabsolutely with the principal and is deemed an original promissor and debtor from thebeginning. The liability of the accommodation party is immediate and direct.52

The relation between an accommodation party and the accommodated party is oneof principal and suretythe accommodated party is one of principal and surety theaccommodated party being the surety. As such, he deemed to an original promissor anddebtor from the beginning; he is considered in law as the same party as the debtor inrelation to whatever is adjudged touching the obligation of the latter since their liabilitiesare interwoven as to be inseperable.53

Q. Are the liabilities and defenses of an accommodation party under the

Negotiable Instruments Law available in case the instrument is non-negotiable?

A. In case the instrument is non-negotiable, it is covered by the provisions of theCivil Code and not by the Negotiable Instruments Law. A non-negotiable note is merelya simple contract in writing and is evidence of such intangible rights as may have beencreated by the assent of the parties. Hence, where the note was made payable to a specificperson rather than to bearer or to order a requisite of the Negotiable Instruments Law,the parties cannot avail of the provisions of the Negotiable Instruments Law on theliabilities and defenses of an accommodation party.54

Q. What are the requisites in order that a party may be considered as an

accommodation party?

A. The following are the requisites in order that a party may be considered as anaccommodation party:

(a)He must have signed the instrument as maker, drawer, acceptor or indorser;

(b)He signed without receiving value therefor;

(c)He signed for the purpose of lending his name to some other person.55

52 Garcia vs. Llamas, 417 SCRA 292.53Ang vs. Associated Bank, 532 SCRA 244.54 Garcia vs. Llamas, supra.55 Section 29; Asked, No. IX (c), 2003 Bar Exams.


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Q. What is the effect of an extension of time to pay the obligation given by a

holder for value to the accommodated party? Will it release the accommodation

party of his liability?

A. Even if the accommodated party receives an extension of the period forpayment without the consent of the accommodation party, the latter is still liable for thewhole obligation and such extension does not release him because as far as the holder forvalue is concerned, he is a solidary co-debtor. The liability of an accommodation party isnot only primary but also unconditional to a holder for value.56

Q. What constitutes a holder in due course?57

A. A holder in due course is a holder who has taken the instrument under thefollowing conditions:

(a)That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice thatit had been previously dishonored, if such was the fact;

That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity inthe instrument or defect in the title of the person negotiating it.58

Q. Who is deemed a holder in due course?

A. Every holder is deemedprima facie to be a holder in due course; but when it isshown that the title of any person who has negotiated the instrument was defective, theburden is on the holder to prove that he or some person under whom he claims acquiredthe title as holder in due course. But the last mentioned rule does not apply in favor of aparty who became bound on the instrument prior to the acquisition of such defectivetitle.59

Under the above provision, every holder is presumedprima facieto be a holder indue course. One who claims otherwise has the onus probandito prove that one or moreof the conditions required to constitute a holder in due course are lacking.60

Q. Roxas sold to Rodrigo and Marissa Cawili vegetable oil. As paymenttherefore, spouses Cawili issued a personal check in the amount of P348,805.50.

However, when Roxas tried to encash the check, it was dishonored by the drawee

56Ang vs. Associated Bank, 532 SCRA 244, September 5, 2007.57Asked: 1962, 1963, 1966, 1980 and 1987 Bar Exams.; No. I (b), 1992 and No. I (c). 1996 Bar Exams.58 Section 52.59 Section 59.60Bank of the Philippine Islands vs. Roxas, 536 SCRA 168, October 15, 2007.


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bank. Spouses Cawili assured him that they would replace the bounced check with a

cashiers check from BPI. Rodrigo Cawili and Roxas went to BPI branch in

Mandaluyong and upon instructions of the Branch Manager, BPI Cashiers Check

in the amount of P348,805.50 was issued, drawn against the account of Marissa

Cawili, payable to Roxas. Rodrigo then handed the cashiers check to Roxas. The

following day, Roxas returned to BPIs branch in Mandaluyong to encash thecashiers check but it was dishonored on the ground that Marissas account was

closed on that date. Upon being sued, BPI claimed that Roxas was not a holder in

due course because the latter was not a holder for value. (a) Was Roxas a holder for

value and hence, a holder in due course? (b) May BPI be relieved of its liability

under the cashiers check it issued?

A. (a) Roxas was a holder for value and a holder in due course. Roxas receivedthe cashiers check as payment for the vegetable oil he sold to Cawili. The fact thatRodrigo was the one who purchased the cashiers check from BPI will not affect Roxasstatus as a holder for value since the check was delivered to him as payment for thevegetable oil he sold to spouses Cawili. Roxas is presumed to be a holder in due course

and the one who claims otherwise must prove that one or more of the conditions requiredto constitute a holder in due course are lacking. BPI failed to prove that Roxas was not aholder for value. 61

(b) BPI cannot be relived of its liability under the cashiers check it issued. Acashiers check is really the banks own check and may be treated as a promissory notewith the bank as maker. The check becomes the primary obligation of the bank whichissues it and constitutes a written promise to pay upon demand. It is of judicial notice thata cashiers check is deemed as cash. This is because the mere issuance of a cashierscheck is considered acceptance thereof. Hence, a bank becomes liable to the payee themoment it issued the cashiers check.62

Q. What are crossed checks? What are the kinds of crossed checks?

A. A crossed check is one with two parallel lines diagonally written on the left topportion of the check.63 The crossing is special where the name of a bank or a businessinstitution in written between the two parallel lines, which means the drawee should payonly with the intervention of that company. The crossing is general where the wordswritten between the two parallel lines are and Co. or for payees account only,64ornothing is written between the parallel lines. This means that the drawee bank should notencash the check but merely accept it for deposit.65

61Ibid.62Ibid.63 Asked, No. III (b), 2004 Bar Exams.; No. II 2 (a), 2005 Bar Exams.64 Associated Bank vs. Court of Appeals, 208 SCRA 495.65 Associated Bank vs. Court of Appeals, supra; Asked, No. VI, 1995 Bar Exams.


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Q. What are the effects of crossing a check?66

A. The effects of crossing a check are:

(1)The check may not be encashed but deposited only in a bank;

(2)The check may be negotiated only once; and

(3) The act of crossing a check serves as a warning to the holder that the checkhas been issued for a definite purpose so that he must inquire if he has received the checkpursuant to that purpose.67

However, issuing a crossed check imposes no legal obligation on the drawee notto honor such a check. It is more of a warning to the holder that the check cannot bepresented to the drawee bank for payment in such case. Instead, the check can only bedeposited with the payees bank which in turn must present it for payment with thedrawee bank in the course of normal banking transactions between banks. The crossedchecks cannot be presented for payment but it can only be deposited and the drawee bank

may only pay to another bank in the payees or indorsers account.68

Q. E. T. Henry sold bunker fuel to Hi-Cement. In payment of the purchases,

it issued post-dated checks payable to E. T. Henry. The checks were crossed and

bore the restriction deposit to payees account only. E. T. Henry discounted the

checks with Insular Bank of Asia and America (Insular). The said checks were

dishonored. Insular sued Hi-Cement which claimed that the former was not a

holder in due course as it should not have discounted the post-dated checks being

crossed checks. (a) Insular hold Hi-Cement liable? (b) If not, who may be held liable

by Insular?

A. (a) Insular cannot hold Hi-Cement liable as the former was not a holder in duecourse. The last two elements of Section 52 have not been met by Insular. Insular did notact in good faith since it was grossly negligent. Insular knew that the checks were crossedand bore restrictions that they were for deposit for payees account only; hence, theycould not be further negotiated to it. Crossing of checks should put the holder on inquiryand upon him devolves the duty to ascertain the indorsers title to the check or the natureof his possession.

(b) Insular may hold the party who endorsed/encashed the checks. It was E. T.Henry that re-discounted the checks and received their value from Insular hence, it shouldpay the latter.69

66 Asked, No. III (1), 1994 and No. I (d), 1996 Bar Exams.; No. II 2 (a), 2005 Bar Exams.67 State Investment House vs. IAC, 175 SCRA 310; Associated Bank vs. Court of Appeals, 208 SCRA465; Traders Royal Bank vs. Radio Phil. Network, Inc., 390 SCRA 608.68 Gempesaw vs. Court of Appeals, G.R. No. 92244, Feb. 9, 1993.

69Hi-Cement Corporation vs. Insular Bank of Asia and America, 534 SCRA 269, September 28, 2007.


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CORPORATION LAW

Q. What is the meaning of the doctrine of legal entity of corporations?

A. It means that a corporation is a juridical person with a personality separate anddistinct from that of each shareholder. It also means that the stockholders of a corporationare different from the corporation itself.70

Q. What are the consequences of the doctrine of legal entity?

A. The consequences of the doctrine of legal entity regarding the separate identityof the corporation and its stockholders are as follows:

1. The stockholders are not personally liable for the debts of the corporation andvice-versa.71 The stockholders are not liable for corporate acts unless otherwise provided

by law.

72

2. The stockholders are not the owners of corporate properties and assets.73

3. The stockholders cannot sell or maintain actions in their own name inconnection with corporation affairs, business or property. Neither do stockholders havethe right to recover possession of corporation property or to recover damages for injury toproperties belonging to the corporation, and vice-versa.74

4. The property belonging to the corporation cannot be attached to satisfy the debtof a stockholder and vice versa, the latter having only an indirect interest in the assets andbusiness of the former.75

Q. The Labor Arbiter rendered judgment in favor of 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 Jeep registered in the name of Gois who filed a third-party claim over the said

vehicle. The Labor Arbiter denied the third-party claim on the ground that Gois

was one of the respondents in the case and an incorporator/officer of Golden. May

the property of Gois be attached to satisfy the judgment claim against Golden on the

ground that she is an incorporator/officer of said corporation?

70 Section 2; SEC Opinions, Jan. 18, 1993 and June 18, 1993.71 13A Fletcher, Sec. 6213.72 Wise and Co. vs. Man Sun Lung, 40 O. G. 50.

73 Berman Environmental Dev. Corp. vs. CA 167 SCRA, 540.

74 Sulo ng Bayan, Inc. vs. Araneta, Inc. 72 SCRA 347.

75Delima vs. Gois, 554 SCRA 731, June 17, 2008; Mandaue Dinghow Dimsum House, Inc. vs. NLRC, 547SCRA 402, March 3, 2008.


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just and valid obligation. In such case, the corporation and the stockholders shall beconsidered as one and the same.79

However, the application of the doctrine of piercing the corporate veil should bedone 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, orcrime was committed against another, in disregard of its rights. The wrongdoing must beclearly and convincingly established; it cannot be presumed. Otherwise, an injustice thatwas never intended may result from an erroneous application.80

Q. Give additional examples when the veil of corporate fiction may be

pierced?81

A. When the corporate entity is used to defeat public convenience, justify wrong,protect fraud, or defend crime, the law will regard the corporation as the same as thestockholders and members composing it.82

The veil of corporate fiction may likewise be pierced when the corporation is amere alter ego, or business conduit of a person or an instrumentality, agency or adjunct ofanother corporation.83 To establish the alter ego doctrine it must be shown that thestockholders disregard of the corporate entity made it a mere instrumentality for thetransaction of their own affairs, that there is such unity of interest and ownership that theseparate personalities of the corporation and the owners no longer exist, and to adhere tothe doctrine of corporate entity would promote injustice or protect fraud.84

Also, the separate personality of the corporation may be disregarded when thecorporation is used as a cloak or cover for fraud or illegality, or to work injustice, 85orwhen necessary for the protection of the creditors,86or when the notion of separate entityis used as a vehicle for the evasion of an existing obligation or to confuse legitimateissues,87or to perpetrate a social injustice.88

79 Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005;

Federation of Labor Union vs. Ople, 143 SCRA 124; Telephone Engineering & Service Co., Inc. vs.Workmens Compensation Commission, 104 SCRA 354; Asked, 1985 and 1991 Bar Exams.; No. III, 2004Bar Exams.; No. I (1), 2006 Bar Exams.

80 Philippine National Bank vs. Andrada Electric & Engineering Company, 381 SCRA 145, April 17,2002.81 Asked, 1962 and 1985 Bar Exams.; Asked, No. I (2), 2006 Bar Exams.82

Fletcher, Vol. I, 166.

83 Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005; San JuanStructural and Steel Fabrication, Inc. vs. Court of Appeals, 296 SCRA 631.84 1 Fletcher Cyc. Corp., p. 171; Asked, 1991 and 1996 Bar Exams.

85 Gala vs. Ellice Agro-Industrial Corporation, 418 SCRA 431, December 11, 2003.86 Luxuria Homes, Inc. vs. Court of Appeals, 302 SCRA 315.87 Pabalan vs. NLRC 184 SCRA 495.88 Azcor Mfg., Inc. vs. NLRC, 303 SCRA 26.


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Q: What is meant by the alter ego doctrine or instrumentality rule?

A: Where one corporation is so organized and controlled and its affairs areconducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction

of the corporate entity of the 'instrumentality' may be disregarded. The control necessaryto invoke the rule is not majority or even complete stock control but such domination offinances, policies and practices that the controlled corporation has, so to speak, noseparate mind, will or existence of its own, and is but a conduit for its principal.89

Q. How may a corporation be established as a mere alter ego of another

corporation or person?

A. The question of whether a corporation is a mere alter ego is one of fact.Piercing the veil of corporation fiction may be allowed only if the following elementsconcur:

(1) control not mere stock control, but complete domination- not only offinances, 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 timeno separate mind, will or existence of its own;

(2) such control must have been used by the defendant to commit fraud or awrong 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;

(3) the said control and breach of duty must have proximately caused the injury orunjust loss complained of.90

Q. 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?

A. While the veil of separate corporate personality may be pierced when thecorporation 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 acorporation is not be itself a sufficient ground to disregard the separate corporatepersonality.91

89 Lipat vs. Pacific Banking Corporation 402 SCRA 339, April 30, 2003.

90 R & E Transport, Inc. vs. Latag, 422 SCRA 698, 707; Heirs of Ramon Durano, Sr. vs. Uy, 344 SCRA238.91Yamamoto vs. Nishino Leather Industries, Inc., 551 SCRA 447, April 16, 2008; Edsa Shangri-la Hoteland Resort, Inc. vs. BF Corp., 556 SCRA 25, June 27, 2008.


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Q. Is the mere fact that a single person owns or controls one or more

corporation or substantial identity of incorporators of two corporations, sufficient

to disregard the separate personalities of the corporations?

A. Mere ownership by a single stockholder or by another corporation of all ornearly all of the capital stocks of a corporation is not by itself a sufficient ground to

disregard the separate corporate personality.92 The substantial identity of theincorporators of two or more corporations does not imply that there was fraud so as tojustify the piercing of the writ of corporate fiction. To disregard the said separate juridicalpersonality, the wrong doing must be proven clearly and convincingly.93

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 otherprivate activities of the stockholder. If the corporation is a substantial one, conductedlawfully and without fraud on another, its separate identity is respected.94

However, the separate identity of the corporation may be disregarded where itserves but as a shield for tax evasion and treat the person who actually may take the

benefits of the transactions as the person taxable.95

Q. De Guzman was the President and controlling stockholder of EPG

Construction Co., Inc. Said corporation entered into a contract with the University

of the Philippines for the construction of its law library. Claiming defects in the air-

conditioning installed by EPG, UP filed an action against EPG and its President, de

Guzman. Should de Guzman be made liable?

A. De Guzman should not be made liable. Mere ownership by a single

stockholder or by another corporation of all or nearly all of the capital stock of acorporation is not of itself sufficient ground for disregarding the separate corporatepersonality. The president or general manager of a corporation therefore, should not bemade personally answerable for the payment of the obligations of the corporation unlesshe had acted maliciously or in bad faith. That exception is not applicable to de Guzmanbecause it was not proved that he acted maliciously or in bad faith when, as President ofEPG, he sought to protect its interests and resisted UPs claims. Whatever damage was

92 Secosa vs. Heirs of Erwin Suarez Francisco, 433 SCRA 273, June 29, 2004.93

Martinez vs. Court of Appeals, 438 SCRA 130, September 10, 2004.94 Lidell & Co., Inc. vs. Collector of Internal Revenue, 2 SCRA 632; Wise & Co., Inc. vs. Man Sun Lung,

69 Phil. 308; Asked, 1970 Bar Exams.

95 Lidell & Co., Inc. vs. Collector of Internal Revenue, supra.


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caused to UP as a result of his acts is the sole responsibility of EPG even though deGuzman was its principal officer and controlling stockholder.96

Q. Emmanuel C. Onate owned the majority of the shares in ECO

Management Corporation (ECO). Land Bank of the Philippines (LBP) extended aseries of credit accommodations to ECO. The proceeds of the credit

accommodations were received on behalf of ECO by Onate. ECO failed to pay the

loans. LBP filed a complaint for collection of sum of money against ECO and Onate.

LBP claimed that ECO and Onate should be treated as one person so Onate can be

made liable for the loans obtained by ECO from LBP. Furthermore, LBP claimed,

Onate owns the majority shares in ECO; ECO stands for the initials of Emmanuel

C. Onate; Onate personally paid P1 Million from his own trust account; Onate

controlled the corporation by holding two corporate positions such as Chairman

and treasurer; and no meeting of the stockholders or directors had been held.

Should the Onate and ECO be treated as one so as to hold Onate liable for ECOs

debts?

A. Onate and ECO cannot be treated as one person so as to make Onate liable forECOs debts. In the absence of any malice or bad faith, a stockholder or an officer of acorporation cannot be made personally liable for corporate liabilities. The mere fact thatOnate owned the majority of the shares of ECO is not a ground to conclude that Onateand ECO is one and the same. Mere ownership by a single stockholder of all or nearly allof the capital stock of a corporation is not by itself sufficient reason for disregarding thefiction of separate corporate personalities. Neither is the fact that the name ECOrepresents the first three letters of Onates name sufficient reason to pierce the veil. Evenif it did, it does not mean that the said corporation is merely a dummy of Onate. A

corporation may assume any name provided it is lawful. There is nothing illegal in acorporation acquiring the name or as in this case, the initials of one of its stockholders. Ithas not been shown that ECO was used as a mere alter ego of Onate to obtain the loans.Bad faith or fraud on the part of ECO and Onate was not also shown. Payment of P1Million out of the trust account of Onate and other investors merely showed that ashareholder wants to held his corporation. The evidence presented does not suffice tohold Onate personally liable for ECOs loans.97

Q. Aircon and Refrigeration Industries, Inc. supplied JRB Realty, Inc. with

air-conditioning units. After the units were installed, they could not provide the

desired cooling temperature. Aircon undertook to replace the units with new ones

but this was never done. JRB Realty, Inc. filed an action not only against Airconand Refrigeration Industries, Inc. but also against Jardine Davies, Inc. on the

ground that Aircon was a subsidiary of Jardine. Can Jardine be made liable?

96 EPG Construction Co., Inc. vs. Court of Appeal, 210 SCRA 230; Asked, 1996 Bar Exams.

97 Onate vs. Land Bank of the Philippines, 364 SCRA 375, 383-384.


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A. Jardine can not be made liable. While it is true that Aircon is a subsidiary ofJarine, it does not necessarily follow that Aircons corporate legal existence can just bedisregarded. A subsidiary has an independent and separate juridical personality, distinctfrom that of its parent company, hence, any claim or suit against the latter does not bindthe former, and vice versa. Before the separate personality of the subsidiary may be

disregarded the following requisites must be established: (1) control, not merely majorityor complete stock control; (2) such control must have been used by the defendant tocommit fraud or wrong, to perpetuate the violation of a statutory or other positive legalduty, or dishonest acts in contravention of plaintiffs legal rights; and (3) the aforesaidcontrol and breach of duty must proximately cause the injury or unjust loss complainedof.98

Aircon is a subsidiary of Jardine only because the latter acquired the majority ofAircons capital stock. It however, does not exercise complete control over Aircon;nowhere can it be gathered that the petitioner manages the business affairs of Aircon.Indeed, no management agreement exists between Jardine and Aircon and the latter is an

entirely different entity from the Jardine.

99

Q. Philippine National Bank (PNB) and Ritratto Group, Inc. are both

domestic corporations. PNB International Finance, Ltd. (PNB-IFL), a wholly-owned

subsidiary company of PNB, organized and doing business in Hong Kong, extended

a letter of credit in favor of the Ritratto group secured by real estate mortgages

constituted over four lots in Makati. When the Ritratto group failed to settle their

obligations, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of

the foreclosure of the mortgaged properties. The Ritratto group filed a complaint

for injunction against PNB. PNB filed a motion to dismiss on the ground of absence

of privity between them. The RTC held that the suit against PNB is a suit against

PNB-IFL. Should the veil of corporate fiction be pierced so that a suit against PNB

may be considered as a suit against PNB-IFL?

A. No, the veil of corporate fiction should not be pierced. The mere fact that acorporation owns all of the stocks of another corporation, taken alone is not sufficient tojustify their being treated as one entity. If used to perform legitimate functions, asubsidiarys separate existence may be respected, and the liability of the parentcorporation as well as the subsidiary will be confined to those arising in their respectivebusiness.

The Ritratto group failed to show any cogent reason why the separate entities ofthe PNB and PNB-IFL should be disregarded. The doctrine of piercing the corporate veilis applicable only when the corporate fiction is used to defeat public convenience, justifywrong, protect fraud or defend crime, or when it is made as a shield to confuse the

98 Jardine Davies, Inc. vs. JRB Realty, Inc. 463 SCRA 555, July 15, 2005, citing Velarde vs. Lopez, Inc.419 SCRA 422, January 14, 2004.99 Jardine Davies, Inc. vs. JRB Realty, Inc., supra.


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legitimate issues, or where a corporation is the mere alter ego or business conduit of aperson or another corporation.100

Q. What are elements to determine the application of the principle of

piercing the veil of corporation fiction?

A. The elements determinative of the applicability of the doctrine of piercing theveil of corporation fiction are as follows:

1. Control, not mere majority or complete stock control, but completedomination, not only of the finances but of policy and business practice in respect to thetransaction attacked so that the corporate entity as to this transaction had at the time noseparate mind, will or existence of its own;

2. Such control must have been used by the corporation to commit fraud orwrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest

and unjust act in contravention of the plaintiffs legal rights;and

3. The aforesaid control and breach of duty must proximately cause the injury ,or unjust loss complained of.

The absence of any one of these elements prevents piercing the corporateveil.101

Q. Yamamoto, a Japanese national organized under Philippine Laws, Wako

Enterprises Manila, Inc., later known as Nishino Leather Industries, Inc. (NLII).

Yamamoto and another Japanese national. Nishino forged a Memorandum of

Agreement under which they agreed to enter into a joint venture under which

Nishino would acquire 70% of the authorized capital stock of Wako. Nishino and

his brother acquired more than 70% of the authorized capital stock thereby

reducing Yamamotos investment to about 10%. Wakos name was changed to

NLII. Yamamoto and Nishino started to negotiate for the buy-out of the shares of

Yamamoto. During the negotiations, Yamamoto claimed the machineries and

equipment which he contributed to pay his shares to the corporation on the ground

that Nishino agreed that he could take out the machineries provided the value of the

said machineries would be deducted from his capital contr ibution. But later, Nishino

frustrated Yamamotos claim by refusing the same. The Court of Appeals ruled that

the machineries claimed by Yamamoto are corporate properties of NLII and cannot

be retrieved by Yamamoto without the authority of NLII board of directors. On the

other hand, Yamamoto claimed that Nishimo cannot hide behind the shield of

corporate fiction because NLII is a mere instrumentality of Nishimo and his

brother. Decide the case with reasons.

100 Philippine National Bank vs. Ritratto Group, Inc., 362 SCRA 216, July 31, 2001.

101Yamamoto vs. Nishino Leather Industries, Inc., supra.


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A. The separate personality of NLII cannot be disregarded since there is noshowing that Nishimo used the separate personality of NLII to unjustly act or do wrongto Yamamoto in contravention of his legal rights. The machineries and equipment, whichcomprised Yamamotos investment in NLII thus remained part ofthe capital property ofthe corporation.102

Q. Respondent Equitable Savings Bank (ESB) was a subsidiary 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 loan amounting 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 fo P3,600,000. They demanded from EPCIB copies of

the loan 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.

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 gotcopy 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 obtained by the petitioners to

secure a loan obtained by EPCIB?

A. An extrajudicial foreclosure instituted by a third party to the Loan Agreementand the real estate mortgage (REM) would be in violation of the petitioners rights overtheir property. Thus, respondent cannot exercise the right of foreclosure not being a partyto the REM. Respondent, although a wholly-owned subsidiary of EPCIB, has anindependent and separate juridical personality from its parent company. The fact that thecorporation owns all of the stocks of another corporation, taken alone, is not sufficient tojustify their being treated as one entity. If used to perform legitimate functions, asubsidiarys separate existence shall be respected. 103

Q. May the by-laws of a corporation provide for additional qualifications of

directors?

A. The by-laws may provide for the qualifications of directors or trustees104provided they are not inconsistent with the Constitution, law or charter of the corporation

and they are reasonable. The minimum qualification required by the Corporation Codemust however, be met.105

102Ibid.103Borromeo vs. Court of Appeals, 550 SCRA 269, March 28, 2008.104 Section 47, par. 5.105 SEC Opinion, Dec. 8, 1988.


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Q. 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 additional qualification

of directors valid?

A. Yes, it is valid because the bylaws may prescribe the qualifications ofdirectors. Thus, one who was elected despite the fact that his membership in thecorporation has not reached five (5) years is in violation of the by-laws and hence, hiselection is null and void.106

Q. Who are disqualified from being elected as directors?

A. The following are disqualified from being elected as directors: (a) thoseconvicted by final judgment of an offense punishable by imprisonment for a period

exceeding six (6) years; (b) those convicted by final judgment of a violation of theCorporation Code committed within five (5) years prior to the date of his election; 107(Sec. 27); and (c) those disqualified by the by-laws.108

Q. The by-laws of San Miguel Corporation (SMC) disqualified from being

elected as director those who were directors of another corporation whose business

was in competition with or was antagonistic with SMC. Gokongwei was a director

of other corporations whose lines of business were in direct competition with some

of the business activities of SMC. May Gokongwei be elected as director of SMC?

A. Gokongwei was disqualified from being elected as director of SMC. Theprovision of the by-laws of SMC disqualifying a competitors director from being elected

as director of SMC was valid. Sound principles of corporate management counsel againstsharing sensitive information with a director whose fiduciary duty of loyalty may wellrequire that he disclose this information to a competitive rival.109

Page 89

Q. As a general rule, are directors/trustees and officers of a corporation

liable personally for their acts as such?

106 Garcia vs. Diapo, SEC Case No. 2169, July 30, 1990.

107 Section 27.

108 Gokongwei vs. SEC, 89 SCRA 336.

109Gokongwei vs. SEC, 89 SCRA 336; Asked, 1998 Bar Exams.; No. VIII (a), 2000 Bar Exams.; No. XI,2001 Bar Exams.


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A. As a general rule, directors/trustees and officers of a corporation who purportto act for and in behalf of the corporation, keep within the lawful scope of their authorityin so acting, and act in good faith, do not become liable, whether civilly or otherwise, forthe consequences of their acts. Those acts, when they are of such a nature and are doneunder such circumstances, are properly attributed to the corporation alone and no

personal liability is incurred by such officers and board members/directors.

110

Officers of a corporation who act as such within the scope of their authority haveno personal liability for such acts unless it is shown that they have acted negligently or inbad faith. They are mere agents of the corporation who cannot be made liable if theyacted within the scope of their authority.111

For as long as the corporate officers acted within the scope of their authority andin good faith, they cannot be held personally liable for the consequences of their acts.The separate corporate personality is a shield against the personal liability of corporateofficers, whose acts are property attributed to the corporation.112

Likewise, officers of a corporation are not personally liable for their acts as suchofficers unless it is shown that they have exceeded their authority. The corporation has apersonality separate and distinct from its officers.113

However, when the legal fiction that a corporation has a personality separate anddistinct from the stockholders and members is disregarded, as when it is used as a meansto perpetrate fraud or an illegal act or as a vehicle for the evasion of an existingobligation, or to confuse legitimate issues, the officers of such corporation shall be liablefor their acts.114

Q. Saludaga was a sophomore law student of Far Eastern University (FEU)

when he was shot by Rosete, one of the security guards on duty at the schoolpremises. Rosete claimed that the shooting was accidental. Saludaga filed an action

for damages against FEU and de Jesus, President of FEU on the ground that FEU

failed to provide students with a safe and secure environment and an atmosphere

conducive to learning. The Trial Court rendered judgment finding FEU and its

President jointly and severally liable for damages. Is the judgment of the court

against FEUs President correct?

110

Benguet Electric Cooperative, Inc. vs. NLRC, 209 SCRA 55.

111 Mindanao Motor Line, Inc. vs. Court of Industrial Relations, 6 SCRA 710; Asked, 1968 and 1999 BarExams.112 Solidbank Corporation vs. Mindanao Ferroalloy Corporation, et al., 464 SCRA 409, July 28, 2005.113 Prudential Bank vs. Alviar, 464 SCRA 353.

114 Pabalan vs. NLRC, 184 SCRA 495; Asked, 1996 Bar Exams.).


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A. A corporation is invested by law with a personality separate and distinct fromthose of the persons composing it, such that, save for certain exceptions, corporateofficers who entered into contracts in behalf of the corporation cannot be held personallyliable for the liabilities of the latter.

Personal liability of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach, as a rule, only when (1) heassents to a patently unlawful act of the corporation, or when he is guilty of bad faith orgross negligence in directing its affairs, or when there is a conflict of interest resulting indamages to the corporation, its stockholders or other persons; (2) he consents to theissuance of watered down stocks or who, having knowledge thereof, does not forthwithfile with the corporate secretary his written objection thereto; (3) he agrees to holdhimself personally liable with the corporation; or (4) he is made by a specific provision oflaw personally answerable for his corporate action.115

None of the foregoing exceptions was established in this case, hence, FEUPresident de Jesus should not be held solidarily liable with FEU.116

Q. 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?

A. Among the exceptions when a director is liable for the obligations of thecorporation is when a director, trustee or officer is made, by specific provision of law,personally liable for his corporate action. The situation of Garcia falls exactly under the

aforesaid situation because Section 28 (f) of the Social Security Law imposes a civilliability upon its managing head, directors or partners for any act or omission pertainingto the violation of the Social Security Law when committed by a corporation, partnershipor association.117

Q. When are directors/trustees liable for damages suffered by the

corporation, its stockholders/members and other persons?

A. Directors or trustees who (a) willfully and knowingly vote for or assent topatently unlawful acts of the corporation or (b) who are guilty of gross negligence or badfaith in directing the affairs of the corporation or (c) acquire any personal or pecuniary

interest in conflict with their duty as such directors or trustees shall be jointly and

115 Powton Conglomerate Inc. vs. Agcolicol, 400 SCRA 523, April 3, 2003, cited in Saludaga vs. FarEastern University, 553 SCRA 741, 755, April 30, 2008.116Saludaga vs. Far Eastern University, 553 SCRA 741, 755, April 30, 2008.117Garcia vs. Social Security System Commission Legal and Collection, 540 SCRA 459, 475, Dec. 17,2007


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severally liable for all damages resulting therefrom suffered by the corporation, itsstockholders or members and other persons.118

In letter (c) mentioned above, the director, trustee or officer who attempts toacquire or acquires, in violation of his duty, any interest adverse to the corporation inrespect of any matter which has been reposed in him in confidence, shall likewise beliable as a trustee for the corporation and must account for the profits which otherwisewould have accrued to the corporation.119

Consistent with the foregoing provision, it has been held that personal liability ofa corporate director, trustee or offer along (although not necessarily) with the corporationmay so validly attach, as a rule, only when (1) he assents to a patently unlawful act of thecorporation, or when he is guilty of bad faith or gross negligence in directing its affairs,or when there is a conflict of interest resulting in damages to the corporation, itsstockholders or other persons; (2) he consents to the issuance of watered down stocks orwho, having knowledge thereof, does not forthwith file with the corporate secretary his

written objection thereto; (3) he agrees to hold himself personally liable with thecorporation; or (4) he is made by a specific provision of law personally answerable forhis corporate action.120

Q. Petitioner D. M. Wenceslao and Associates, Inc. (WENCESLAO) had a

contract with the Public Estates Authority for the improvement of the main

expressway along the Coastal Road. To fulfill its obligations to the PEA, the

petitioner entered into a contract with the respondent where Readycon Trading and

Construction Corporation (READYCON) agreed to sell to petitioner asphalt

materials valued at P 1.7 M. The contract bore the signature of co-petitioner Dayrit,

the vice-president of the WENCESLAO. It was agreed that WENCESLAO would

pay 20% upon delivery and the remaining balance was to be paid 15 daysthereafter. It was further stipulated that READYCON was to furnish, deliver, lay,

roll the asphalt, and if necessary, make the needed corrections on a prepared base at

the jobsite. READYCON delivered, laid and rolled the asphalt. WENCESLAO

failed to pay the balance contending that it was payable only upon acceptance of the

work by the government. READYCON filed a complaint against WENCESLAO

and Dayrit. Can Dayrit be made personally liable for the corporations failure to

comply with its obligation?

A. Since Dayrit merely acted as representative of Wenceslao, in signing thecontract, he could not be made personally liable for the corporations failure to comply

with its obligation.121

118 Section 31, paragraph 1.

119 Section 31, par. 2; Asked, 1996 and 1997 Bar Exams.

120 Powton Conglomerate Inc. vs. Agcolicol, 400 SCRA 523, April 3, 2003.121 D. M. Wenceslao and Associates, Inc. vs. Readycon Trading and Construction Corp., 433 SCRA 251,June 29, 2004.


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Q. The officers and directors of Crispa, Inc. passed a resolution terminating

several workers on the ground of serious business losses. The dismissed employees

filed an action for illegal dismissal. Crispa was unable to prove its financial losses

and merely presented a Statement of Profit and Losses which did not bear the

signature of a certified public accountant nor audited by an independent auditor.

The NLRC found the officers and directors of Crispa solidarily liable with saidcorporation for the payment of back wages and separation pay. Was such decision

correct?

A. Corporate officers and directors are solidarily liable with the corporation forthe termination of employment of corporate employees done with malice or in bad faith.They were the ones, who as high-ranking officers and directors of Crispa signed theboard resolution retrenching the employees on the feigned ground of serious businesslosses that had no basis apart from an unsigned and unaudited Profit and Loss Statementwhich has no evidentiary value whatsoever. This is indicative of bad faith on the part ofthe officers and directors for which they can be held jointly and severally liable withCrispa for all the money claims of the illegally terminated employees.122

Q. Cuesta sold to Tramat Mercantile, Inc. a tractor. In payment thereof,

David Ong, Tramats president and manager, issued a check. Tramat in turn, sold

the tractor together with a lawn mower fabricated by it to NAWASA. Ong stopped

payment of the check issued to Cuesta on the ground that NAWASA refused to pay

the tractor and lawn mower because of some defects in the mower and that the

engine of the tractor was a reconditioned unit. Cuesta sued Tramat and Ong. Was

Ong liable?

A. Ong was not liable because he acted not in his personal capacity, but as anofficer of Tramat which has a distinct personality. Only the corporation and not the

person acting for and on its behalf could be made liable thereon. Personal liability of acorporate director, trustee or officer along with the corporation (although not necessarily)may so validly attach, as a rule, only when

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faithor gross negligence in directing its affairs, or (c) for conflict of interest, resulting indamages to the corporation, its stockholders or other persons;

2. He consents to the issuance of watered stocks or who, having knowledgethereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation;or

4. He is made, by a specific provision of law, to personally answer for hiscorporate action.123

122Uichico vs. NLRC, 273 SCRA 35.

123 Tramat Mercantile, Inc. vs. Court of Appeals, 238 SCRA 14; Asked, 1995 and 1996 Bar Exams.


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Q. Define dividend.

A. Dividend is that portion of the profits and surplus funds of the corporationwhich has been actually set apart, by a valid act of the corporation, for distribution amongthe stockholders according to their respective interests.124 It is the fund set aside anddeclared by the directors of the corporation and in case of stock dividends, with theapproval (sic) of the stockholders, to be divided or distributed among the stockholdersaccording to their respective interests.125The term is also used to designate the shares ofthe individual stockholders or members in the fund so set apart, and also to designate theassets distributed by a corporation among its stockholders out of capital on reduction ofthe capital stock or dissolution.126

Corporate profits when set apart, declared and ordered by the directors for distributionamong the shareholders are known as dividends.127

Q. Distinguish dividends from profits.

A. Dividends are declared only from profit after they are earned. 128Profits in thecoffers of a corporation do not become a dividend until they have been set apart or atleast declared as a dividend.129

Q. What may be the source of payment of dividends?

A. A corporation cannot lawfully declare dividends out of its capital stock, andthereby reduce the same, or out of assets which are needed to pay the corporate debts.They can be declared only out of surplus profits.130The reason for the rule is that it wouldbe a fraud upon the creditors of a corporation who extend credit to it on the faith of its

capital stock, to permit it to be diverted by a distribution among the stockholders asdividends. Moreover, each stockholder is entitled to have the capital stock preserved

124 14 C. J. Sec. 1207.125 Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 542.

126 11 Fletcher Cyc. Corp., Sec. 53 18, p. 603; Asked, 1990 Bar Exams.

127 SEC Opinion, January 3, 1983.

128 Indiana Veneer and Lumber Co. vs. Hageman, 57 Ind. App. 668, 105 NE 253.129 Lord v. Territory of Hawaii, 79 F 2d, 761; 11 Fletcher Cyc. Corp., Sec. 5319, p. 609; Asked, No. V, b,2005 Bar Exams.13011 Fletcher Cyc. Corp. Sec. 5319, 611; Steinberg vs. Velasco, 52 Phil. 953; Asked, No. V, a, 2005 BarExams.


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unimpaired for the purpose of carrying out the object for which the corporation isformed.131

Q. What is the effect of declaration of stock dividends?

A. The declaration of stock dividends is akin t5o a forced purchase of stocks. Bydeclaring stock dividends, a corporation ploughs back a portion or its entire unrestrictedretained earnings either to its working capital or for capital asset acquisition orinvestments. When the dividend is distributed, it ceases to be a property of thecorporation as the entire portion or its unrestricted retained is distributed pro rata tocorporate stockholders. When stock dividends are distributed, the amount declared ceasesto belong to the corporation but is distributed among the stockholders. Consequently, theunrestricted retained earnings of the corporation are diminished by the amount of thedeclared dividend while the stockholders equity is increased.132

THE SECURITIES REGULATION CODE

Q. What are the provisions under the Securities Regulation Code intended to

protect the interest of shareholders?

A. The following are the provisions under the Securities Regulation Codeintended to protect the interest of shareholders:

(1) Tender offers to stockholders whenever any person or group of personsintends to acquire 15% of the equity of a listed corporation or one with a capital of atleast P50 million, or 30% of the equity of such corporation over a period of 12 months, as

the case may be.

133

(2) Restrictions on proxy solicitations;134and

(3) Requirements for internal record-keeping and accounting controls.135

Q. What is a tender offer? What is its purpose?

A. A tender offer is a publiclyannounced intention by a person acting alone orin concert with other persons to acquire equity securities of a public company i. e., onelisted on an stock exchange. It is also defined as an offer by the acquiring person to

131 14 C. J. Sec. 1210; Asked, 1953 and 1957 Bar Exams.; No. V c, 2005 Bar Exams.

132PLDT vs. NTC, 539 SCRA 365, December 4, 2007.133 Section 19.1, Asked, No. VI, 2002 Bar Exams.134 Section 20.135 Section 22.


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stockholders of a public company for them to tender their shares therein on the termsspecified in the offer.136

Tender offer is in place to protect the interests of minority stockholders of a targetcompany against any scheme that dilutes the share value of their investments. It affords

such minority shareholders the opportunity to withdraw or exit from the company underreasonable terms, a change to sell their shares at the same price as those of the majoritystockholders.137

Q. When must tender offer be made to shareholders?

A. Any person or group of persons acting in concert who intends to acquire atleast fifteen percent (15%) of any class of any equity security of a listed corporation or ofany 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 onehundred (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 byfiling with the Commission a declaration to that effect; and furnish the issuer, a statementcontaining such of the information required in Section 17 of this Code as the Commissionmay prescribe. Such person or group of persons shall publish all requests or invitationsfor tender, or materials making a tender offer or requesting or inviting letters of such asecurity. Copies of any additional material soliciting or requesting such tender offerssubsequent to the initial solicitation or request shall contain such information as theCommission may prescribe, and shall be filed with the Commission and sent to the issuernot later than the time copies of such materials are first published or sent or given tosecurity holders.138

Q. SSS, a government financial institution took steps to sell its shareholdings

in Equitable PCI Bank (EPCIB). SSS and Banco de Oro and its subsidiary entered

into Share Purchase Agreement (SPA) covering SSSs shares in EPCIB at P43.50

per share which was at a premium of 30% of the then market value in the stock

market where the shares were traded at P34.50 per share. SSS advertised an

invitation to bid its block of shares in EPCIB subject to the right of BDO to match

the highest bid. Petitioners filed the present action for prohibition. In the meantime,

BDO and EPCIB announced its intention to merge. SM Investment Corporation, an

affiliate of BDO commenced a mandatory tender offer of the entire outstanding

capital stock of EPCIB at P92.0 per share. SSS manifested in court that the case is

already moot in view of the tender offer for P92.00 per share. Petitioners claimed

that the tender offer cannot render the case moot and academic unless SSS

withdraws the sale of the shares under its Share Purchase Agreement. Decide with

reasons.

136Osmena III vs/ Social Security System of the Philippines, 533 SCRA, Sept. 13, 2007.137Ibid.138 Section 19.1; Asked, No. VI, 2002 Bar Exams.


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A. The case is already moot and academic. The condition under which the partieshave agreed into a SPA case to exist because of the tender offer at a higher price. Thepricing componentat P43.50 per sharehas ceased to exist.139

Q. What is the meaning of Swiss Challenge?

A. Under the Swiss Challenge format, one of the bidders is given the option orpreferential right to match the winning bid.140

PRESIDENTIAL DECREE NO. 902-A

(As amended by Securities Regulation Code)

Q. Which court has jurisdiction over cases previously cognizable by the

SEC?

A. The court designated by the Supreme Court as Special Commercial Court isvested with jurisdiction over cases previously cognizable by the Securities and ExchangeCommission. When a case is erroneously filed in the regular Regional Trial Court, suchcourt does not have the authority or power to order the transfer of cases erroneously filedwith it to another branch of the Regional Trial Court the only action that it could takeon the matter is to dismiss the petition for lack of jurisdiction.141

Q. When may a party apply for the appointment of a management committee

for the corporation, partnership or association?

A. A party may apply for the appointment of a management committee for thecorporation, partnership or association when there is imminent danger of:

(1) Dissipation, loss, wastage or destruction or assets or other properties; and

(2) Paralyzation of its business operations which may be prejudicial to the interestof the minority stockholders, parties-litigants or the general public. 142

Q. When may receivers be appointed for a corporation?

A. Receivers may be appointed whenever:

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

139Osmena III vs. Social Security System of the Philippines, infra.140Osmena III vs. Social Security System of the Philippines, 533 SCRA 313, 321, September 13, 2007.141 Ibid.142 Sy Chim vs. Sy Siy Ho & Sons, Inc., 480 SCRA 465, January 27, 2006, citing Section 1, Rule 9 of theInterim Rules on Corporate Rehabilitation.


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(2) protect the interest of the investing public and creditors.143

The situations contemplated in these instances are serious in nature. There mustexist a clear and imminent danger of losing the corporate assets if a receiver is notappointed.144

Q. What is the Serious Situation Test in corporate rehabilitation cases?

A. The Serious Situation Test in a petition for rehabilitation case means thatthere is a clear and imminent danger that the corporate petitioner will lose its corporateassets if a receiver is not appointed.145

Q. What is the effect of the appointment of a rehabilitation receiver? What is

the purpose thereof?

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

rehabilitation receiver, all actions for claims against the corporation pending before anycourt, tribunal or board shall ipso jurebe suspended.146

The purpose of the automatic stay of all pending actions for claims is to enablethe rehabilitation receiver to effectively exercise its/his powers free from any judicial orextrajudicial interference that might unduly hinder or prevent the rescue of thecorporation. More importantly, the suspension of all actions for claims against thecorporation embraces all phases of the suit, be it before the trial court or any tribunal orbefore the Supreme Court. No other action may be taken, including the rendition ofjudgment during the state of suspension. It must be stresses that what are automaticallystayed or suspended are the proceedings of a suit and not just the payment of claimsduring the execution stage after the case had become final and executory.147

Q. What are the actions that are suspended during the process of

rehabilitation?

A. The actions that are suspended cover all claims against the corporation whetherfor damages founded on a breach of contract of carriage, labor cases, collection suits orany other claims of a pecuniary nature. No exception in favor of labor claims ismentioned in the law.148

Q. What is the purpose of suspending the proceedings initiated by the

creditors for the collection of their credits whenever a corporation is undergoing

rehabilitation?

143Section 6 (c), P. D. 902-A, as amended.144Pryce Corporation vs. Court of Appeals, 543 SCRA 657, February 4, 2008.145Pryce Corporation vs. Court of Appeals, supra.146Garcia vs.

pointers for review in commercial law

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