Law on Sales
Contract of Sale
It is the contract in which one party (seller)
obligates himself to:
1. transfer the ownership
2. deliver a determinate thing
to another party (buyer) who, in return, pays a
price certain in money or its equivalent.
Characteristics of a Contract of Sale
1. Consensual - A contract of sale is
perfected by mere consent or meeting of
the minds with regards to the object of
sale and the price to pay.
2. Bilateral - In a contract of sale, both
parties are mutually bound to each other.
3. Onerous - In a contract of sale, one party
performs his obligation with the
expectation that, in return, the other shall
do his.
4. Commutative - The thing sold is
considered the equivalent of the price paid
and vice versa.
5. Principal - The existence and validity of a
contract of sale is not dependent on
another contract.
6. Nominate - The Civil Code expressly
provides a special designation to contracts
of sale.
Elements of a Contract of Sale
Essential Elements:
1. Consent - There must be a meeting of the
minds or a mutual agreement between the
parties to transfer and deliver an object
(seller) and to pay a price (buyer). When
one of the parties refuses to accept an
offer presented by the other, there is no
consent. The parties must have the legal
capacity to give consent. Otherwise, the
contract is inefficacious.
2. Object/Subject Matter - This pertains to
the determinate thing which is the object of
the contract.
3. Cause or Consideration - This is the
price certain in money or its equivalent
which is promised by the buyer to the
seller in return for the determinate thing
sold.
Other Elements:
1. Natural Elements - These are elements
which are presumed by law to exist and
which do not need to be expressly stated
in the contract.
2. Accidental Elements - These are
elements which may be present or absent
in the contract, depending on the
stipulation of the parties.
What may be an Object of Sale
A thing which may be an object of sale must
be:
1. Licit, with the vendor having a right to
transfer the ownership of said thing
2. Determinate or determinable
3. Existing, future or contingent
Licit
For a thing/right to be considered licit, it must
be:
 within the commerce of men (thing)
- An object is within the commerce of
men when it is capable of being
owned, possessed, acquired and
transferred from one person to
another.
 not intransmissible (right)
When the object of a contract of sale is illicit,
sale is void.
Right of Vendor to Transfer Ownership
 General rule: The vendor must be the
owner of the thing or at least, vendor
must be authorized by the owner to
sell the thing.
 Exception: If the right to transfer
ownership is acquired by the vendor
only at the time of delivery, the sale is
also valid.
Determinate or Determinable
 determinate - A determinate thing is
that which is physically segregated or
particularly designated from all others
of the same class.
  determinable - A thing is EFFECT ON SALE IF PRICE IS UNCERTAIN
determinable when it is capable of
being made determinate at the time
the contract is perfected, without the
need to enter into a new contract. Article 1474 states that if price cannot be
determined with regards to Article 1469* and

Existing, Future or Contingent 1472**, the contract is inefficacious. But, if the

A thing which may be the object of sale may

thing, or part of the thing, is delivered and is
be: appropriated by the buyer, he must pay a
 existing goods owned or possessed by reasonable price. The reasonable price is
the owner
 future goods or goods to be dependent of the circumstances of each
manufactured, raised or acquired by
the seller particular case.
 a thing whose acquisition depends
upon a contingency which may or may
not happen 1. The contract is executory. If the price
 a thing which has a potential
existence, provided that its potential is uncertain or when no price agreed or
existence is not based on vain hope
cannot be determined in accordance with Art.
1469 and 1472, or in any other manner, the
Earnest Money Distinguished from Option
Money contract is without effect. There is no

Earnest Money obligation on both parties (vendor – to

 This is the sum of money given by a

deliver; vendee – to pay).
prospective buyer to the seller with the
intention of binding the bargain.
2. When delivery has been made. If the
Option Money
thing, or any part, has been delivered and
 This is a distinct consideration given
by the buyer in case of an option appropriated by the buyer, he must pay a
contract.
reasonable price.
OPTION MONEY EARNEST MONEY
Reasonable price – in general,
Separate and distinct Part of the purchase
consideration from the price
the market price at the time and place of
purchase price delivery as fixed by the contract or by law.
Given when a sale is Given only when
not perfected yet sale is already
perfected *Art. 1469: the price is certain if:
a) amount fixed/agreed by the parties;
When given, the Once given, the
prospective buyer buyer is bound to b) certain with reference to another thing
retains the option not pay the rest of the certain;
to buy the thing purchase price

Article 1474 states that if price cannot

be determined with regards to Article 1469*
and 1472**, the contract is inefficacious. But, if
the thing, or part of the thing, is delivered and
is appropriated by the buyer, he must pay a
reasonable price. The reasonable price is
dependent of the circumstances of each
particular case.
EFFECT WHEN PRICE IS SIMULATED
Article 1471 states that when the price
is simulated, the sale is void, but the act may
be shown in reality as a donation, or some
other act or contract.

1. The contract is executory. If the 1) If the price is simulated or false, and

price is uncertain or when no price agreed the vendor intends to transfer the thing
or cannot be determined in accordance with gratuitously,
Art. 1469 and 1472, or in any other manner,  sale is void;
the contract is without effect. There is no  contract is valid, deemed as
obligation on both parties (vendor – to donation.
deliver; vendee – to pay).
2) If the contract is not a donation, or
2. When delivery has been made. If any other contract transferring ownership
the thing, or any part, has been delivered and because the parties do not want to be
appropriated by the buyer, he must pay a bound at all, the contract is void and
reasonable price. inexistent.
Reasonable price – in
general, the market price at the time and place Types of Simulation
of delivery as fixed by the contract or by law.
Absolute Relative

*Art. 1469: the price is certain if: No real transaction is Real transaction is
a) amount fixed/agreed by the intended. hidden.
parties;
b) certain with reference to Fictitious contract. Disguised contract.
another thing certain;
Void. Bound as to hidden
c) amount fixed by a third
agreement, as long as
person/s specified by the parties.
it does not prejudice a
**Art.1472: the price of securities, grain liquids,
third person and is not
and other things shall also be considered
contrary to law,
certain, when the price fixed is that which the
morals, good
thing sold would have on a definite day, or in a
customs, public order
particular exchange/market, or when an
or public policy.
amount is fixed above or below the price on
such day or in such exchange/market,
provided said amount be certain.

REQUISITES TO TRANSFER LAND

OWNERSHIP
  Under Statute of Frauds (Art. 1403),
the contract of sale of real property
must be in writing, otherwise the
contract cannot be enforced in a court
litigation.
 The sale of a piece of land or interest
therein when made through an agent
is void unless the agent’s authority
is in writing (Art. 1483).
 To be effective against third persons,
the sale of real property must be
registered in the Registry of Deeds
(or Property) of the province or city
where the property is located.
 The sale must be in
instrument or document such that it
is acknowledged before a notary
public / any official authorized by law
to administer oath. Otherwise, the
registration will be refused.
 The sale of land in a private
instrument is valid between the
parties. However, it cannot
registered to bind or affect third
persons.
EFFECT ON SALE IF PRICE IS
UNCERTAIN
Article 1474 states that if price cannot
be determined with regards to Article 1469*
and 1472**, the contract is inefficacious. But, if
the thing, or part of the thing, is delivered and
is appropriated by the buyer, he must pay a
reasonable price. The reasonable price is
dependent of the circumstances of each
particular case.
1. The contract is executory. If the
price is uncertain or when no price agreed
or cannot be determined in accordance with
Art. 1469 and 1472, or in any other manner,
the contract is without effect. There is no
obligation on both parties (vendor – to
deliver; vendee – to pay).
2. When delivery has been made. If
the thing, or any part, has been delivered and
appropriated by the buyer, he must pay a
reasonable price.
Reasonable price – in
general, the market price at the time and place
of delivery as fixed by the contract or by law.
*Art. 1469: the price is certain if:
public
a) amount fixed/agreed by the
parties;
b) certain with reference to
another thing certain;
c) amount fixed by a third
person/s specified by the parties.
**Art.1472: the price of securities, grain liquids,
and other things shall also be considered
certain, when the price fixed is that which the
be
thing sold would have on a definite day, or in a
particular exchange/market, or when an
amount is fixed above or below the price on
such day or in such exchange/market,
provided said amount be certain.
EFFECT WHEN PRICE IS SIMULATED
Article 1471 states that when the price
is simulated, the sale is void, but the act may
be shown in reality as a donation, or some
other act or contract.
 1) If the price is simulated or false, and
the vendor intends to transfer the thing
gratuitously,
 sale is void;
 contract is valid, deemed as
donation.
 The sale of a piece of land or interest
therein when made through an agent
is void unless the agent’s authority
is in writing (Art. 1483).
 To be effective against third persons,
the sale of real property must be

2) If the contract is not a donation, or registered in the Registry of Deeds

any other contract transferring ownership (or Property) of the province or city

because the parties do not want to be where the property is located.

bound at all, the contract is void and

 The sale must be in public
inexistent.
instrument or document such that it
is acknowledged before a notary
Types of Simulation
public / any official authorized by law
Absolute Relative
to administer oath. Otherwise, the
registration will be refused.
No real transaction is Real transaction is
intended. hidden.
 The sale of land in a private
instrument is valid between the
Fictitious contract. Disguised contract.
parties. However, it cannot be

Void. Bound as to hidden registered to bind or affect third

agreement, as long as persons.

it does not prejudice a
third person and is not
contrary to law,
morals, good
customs, public order
or public policy.
REQUISITES TO TRANSFER LAND
OWNERSHIP
 Under Statute of Frauds (Art. 1403),
the contract of sale of real property
must be in writing, otherwise the
contract cannot be enforced in a court
litigation.
EXTINGUISHMENT OF GUARANTY (ART.
2076 – 2081)
1. Obligation of Guarantor is
extinguished once the obligation of the
debtor has been extinguished in any
manner provided by the Civil Code
(2076). But because it is only an
accessory and subsidiary contract, it
does not always carry with it the
extinguishment of the principal
obligation.
2. Payment other than in money, if
accepted by the creditor, is considered
valid and therefore releases Guarantor
(2077). In the case of Dacion en
pago, obligation will be extinguished
even if the creditor is subsequently
evicted from the property.
3. If one of the Guarantors is released
without the consent of the others,
remaining guarantors will benefit to the
extent of the proportionate share of
the guarantor released (2078).
 4. Guarantor will be released when the
creditor grants an extension to the
debtor for the principal obligation,
without the consent of the guarantor.
(2079) Extension is based on a new
agreement. Failure to demand
payment on the part of the creditor
does not constitute an extension of
time.
5. Release of the Guarantor’s obligations
will be done if, through the fault of the
creditor, there can be no subrogation
to the creditor’s rights. (2080) All
defenses which pertain to the principal
debtor and are inherent in the debt are
available to Guarantor against the
Creditor except those which are purely
personal to the Debtor. (2081)
PLEDGE
A contract by virtue of which the debtor
delivers to the creditor or to a third person a
movable or document evidencing incorporeal
rights for the purpose of securing the fulfillment
of a principal obligation with the understanding
that when the obligation is fulfilled, the thing
delivered shall be returned with all its fruits and
accessions. (Art.2085 in rel to 2093)
KINDS
1. Voluntary or Conventional – Created
by agreement of parties.
2. Legal – Created by operation of law.
CHARACTERISTICS [RAUS]
1. Real – perfected by delivery of the
thing pledged.
2. Accessory – no independent
existence.
3. Unilateral – creates an obligation
solely on the part of the creditor to
return the thing pledged upon
fulfillment of the principal obligation.
4. Subsidiary – obligation of the creditor
does not arise until fulfilment of the
principal obligation.
MORTGAGE
Contract whereby the debtor secures to the
creditor the fulfillment of a principal obligation,
immediately making immovable property or
real rights over immovable property
answerable to the principal obligation in case it
is not complied with at the time stipulated.
OBJECTS (ART. 2124)
1. Immovables
2. Alienable real rights over immovables
Future Property cannot be subject to
mortgage. Stipulations subjecting to
Mortgage Improvements which may be
subsequently acquired, installed, or used
by the mortgagor is valid.
General Rule: Possession of property
mortgaged is retained by mortgagor.
KINDS [VEL]
1. Voluntary – Agreed between parties or
constituted by the will of the owner of
property
2. Legal – Required by law to be
executed in favor of certain persons
3. Equitable – Lacks proper formalities of
mortgage but shows the intention of
the parties to make the property as a
security for a debt.
CHARACTERISTICS [RAS]
1. Real
2. Accessory
3. Unilateral
4. Subsidiary
ANTICHRESIS (ART. 2132)
Contract whereby the creditor acquires the
right to receive the fruits of an immovable of
the debtor, with the obligation to apply then to
the payment of the interest, if owing, and
thereafter to the principal of the credit.
CHARACTERISTICS
1. Accessory – secures performance of a
principal obligation
2. Formal – must be in a specified form
to be valid
No need to transfer possession. What is
essential is the grant of the use of the
fruits.
FORM OF CONTRACT
- Amount of principal and interest must
be specified in writing unless, void.
- Art. 2127. The mortgage extends to
the natural accessions, to the
improvements, growing fruits, and
the rents or income not yet received
when the obligation becomes due, and
to the amount of the indemnity granted
or owing to the proprietor from the
insurers of the property mortgaged, or
in virtue of expropriation for public
use, with the declarations,
amplifications and limitations
established by law, whether the
estate remains in the possession of
the mortgagor, or it passes into the
hands of a third person. (1877)
-
-
- Extent of Mortgage
- > A REM constituted on an immovable
property is not limited to the property
itself but also extends to all its
accessions, improvements, growing
fruits, and rents
- > To exclude them, it is necessary that
there be an express stipulation to that
effect
- legal formalities. But registration of the
- assignment only serves to bind third
- What is the effect of a mortgage?
- The mortgage directly and
immediately subjects the property
upon which it is imposed, whoever the
possessor may be, to the fulfillment of
the obligation for whose security it was
constituted. (Note that this is a
significant concept, even in the
treatment of mortgage under
provisions on Concurrence and
Preference of Credits.)
- and with the formalities which the
- Effect of Mortgage, continued
- By mortgage, property is thus
identified or set apart from the mass of
the property of the debtor mortgagor
as security for the payment of money
or fulfillment of an obligation, to
answer the amount of indebtedness in
case of non-payment. (Note further,
this is the basic rationale for
availability of deficiency to the
creditor/mortgagee, unlike in the case
of pledge.)
-
- Is there transfer of ownership from
mortgagor to mortgagee? NO.
-
- Must there be delivery, actual or
constructive, to constitute a
mortgage? NO.
-
- Does this mean that the mortgaged
property may be further alienated?
Yes. A stipulation forbidding the owner
from alienating the immovable
mortgaged shall be void. (Art.
- 2130)
-
- Article 2128. The mortgage credit
may be alienated or assigned to a
third person, in whole or in part, with
the formalities required by law. (1878)
-
-
- Mortgage Credit (the right of the
mortgagee) is a real right owned by
the mortgagee, and he may assign or
alienate this right to another person,
provided that they comply with the
parties, and is not required for validity.
Hence, an unregistered transfer is
binding between the parties.
-
- Art. 2129. The creditor may claim
from a third person in possession
of the mortgaged property, the
payment of the part of the credit
secured by the property which said
third person possesses, in the terms
law establishes. (1879)
-
-
- Right of Creditor Against
Transferee of Mortgaged
Property
- > The fact that the mortgagor has
transferred the mortgaged property to
a third person doesn't relieve him
 from his obligation to pay the debt to Stipulation forbidding
the mortgage creditor in the absence sale is void
of Novation
- Stipulation requiring
- > A recorded REM is merely an mortgagee’s
accessory contract
-
-
- > The creditor may only demand from
- Stipulation Forbidding Alienation of
any possessor the payment only of the
Mortgaged Property
part of the credit secured by said
-
property
- > Such stipulation would be
-
contrary to public good inasmuch
- > Necessary that there be prior
as the transmission of property should
demand for payment be made on the
not be unduly impeded
debtor and the latter failed to pay
-
-
- If the mortgagor alienates the
- > Does not really apply to all third
property, the transferee is bound to
persons in possession of the property
respect the encumbrance because
- being a real right, the property subject
- > It only applies to those in possession to fulfillment of the obligation for
of the mortgaged property in the whose guaranty it was constituted. (art
concept of owner. If the possession by 2126)
a third person is only as lessee, the -
creditor may not collect the credit from
- Can Mortgagee Prohibit
that third person.
Encumbrances Without Prior
- Consent?
- Registration creates a real right - > Yes, regulation is not the same as
binding upon third persons. prohibition
- - > The mortgagee may even add a
- Ownership of property after standard. This is for good measure on
creation the part of the mortgagee which is
- of mortgage allowed by law.
- - FORECLOSURE
- Art. 2130. A stipulation forbidding
- > Remedy
the owner from alienating the
immovable mortgaged shall be void. available to the mortgagee by whic
(n) h he subjects the mortgaged property
-
to the satisfaction of the obligation to
Rules on ownership
secure which the mortgage was given
As to transfer of No transfer of > Denotes a procedure adopted by the
ownership ownership occurs
mortgagee to terminate the rights of
Thing remains in the mortgagor on the property and
As to possession mortgagor’s
includes the sale itself
possession -
- JUDICIAL FORECLOSURE
Mortgagor may sell
the - (Rule 68, Rules of Court)
As to sale of thing
mortgaged property
- Section 1. Complaint in action for
foreclosure.
- In an action for the foreclosure of a
mortgage or other encumbrance upon
real estate, the complaint shall set
forth the date and due execution of the
mortgage; its assignments, if any; the
names and residences of the
mortgagor and the mortgagee; a
description of the mortgaged property;
a statement of the date of the note or
other documentary evidence of the
obligation secured by the mortgage,
the amount claimed to be unpaid
thereon; and the names and
residences of all persons having or
claiming an interest in the property
subordinate in right to that of the
holder of the mortgage, all of whom
shall be made defendants in the
action.
- Sec. 2. Judgment on foreclosure for
payment or sale.
- If upon the trial in such action the court
shall find the facts set forth in the
complaint to be true, it shall ascertain
the amount due to the plaintiff upon
the mortgage debt or obligation,
including interest and other charges as
approved by the court, and costs, and
shall render judgment for the sum so
found due and order that the same be
paid to the court or to the judgment
obligee within a period of not less than
ninety (90) days nor more than one
hundred twenty (120) days from the
entry of judgment, and that in default
of such payment the property shall be
sold at public auction to satisfy the
judgment.
- Sec. 3. Sale of mortgaged property;
effect.
- When the defendant, after being
directed to do so as provided in the
next preceding section, fails to pay the
amount of the judgment within the
period specified therein, the court,
upon motion, shall order the property
to be sold in the manner and under the
provisions of Rule 39 and other
regulations governing sales of real
estate under execution. Such sale
shall not affect the rights of persons
holding prior encumbrances upon the
property or a part thereof, and when
confirmed by an order of the court,
also upon motion, it shall operate to
divest the rights in the property of all
the parties to the action and to vest
their rights in the purchaser, subject to
such rights of redemption as may be
allowed by law.
- Upon the finality of the order of
confirmation or upon the expiration of
the period of redemption when allowed
by law, the purchaser at the auction
sale or last redemptioner, if any, shall
be entitled to the possession of the
property unless a third party is actually
holding the same adversely to the
judgment obligor. The said purchaser
or last redemptioner may secure a writ
of possession, upon motion, from the
court which ordered the foreclosure.
- Sec. 4. Disposition of proceeds of
sale.
- The amount realized from the
foreclosure sale of the mortgaged
property shall, after deducting the
costs of the sale, be paid to the person
foreclosing the mortgage, and when
there shall be any balance or residue,
after paying off the mortgage debt
due, the same shall be paid to junior
encumbrancers in the order of their
priority, to be ascertained by the court,
or if there be no such encumbrancers
or there be a balance or residue after
payment to them, then to the
mortgagor or his duly authorized
agent, or to the person entitled to it.
- Sec. 5. How sale to proceed in case
the debt is not all due.
- If the debt for which the mortgage or
encumbrance was held is not all due
as provided in the judgment, as soon
as a sufficient portion of the property
has been sold to pay the total amount
and the costs due, the sale shall
terminate; and afterwards, as often as
more becomes due for principal or
interest and other valid charges, the
court may, on motion, order more to
be sold. But if the property cannot be
sold in portions without prejudice to
the parties, the whole shall be ordered
to be sold in the first instance, and the
entire debt and costs shall be paid, if
the proceeds of the sale be sufficient
therefor, there being a rebate of
interest where such rebate is proper.
- Sec. 6. Deficiency judgment.
- If upon the sale of any real property as
provided in the next preceding section
there be a balance due to the plaintiff
after applying the proceeds of the
sale, the court, upon motion, shall
render judgment against the defendant
for any such balance for which, by the
record of the case, he may be
personally liable to the plaintiff, upon
which execution may issue
immediately if the balance is all due at
the time of the rendition of the
judgment; otherwise, the plaintiff shall
be entitled to execution at such time
as the balance remaining becomes
due under the terms of the original
contract, which time shall be stated in
the judgment.
- Sec. 7. Registration.
- A certified copy of the final order of the
court confirming the sale shall be
registered in the registry of deeds. If
no right of redemption exists, the
certificate of title in the name of the
mortgagor shall be cancelled, and a
new one issued in the name of the
purchaser.
- Where a right of redemption exists, the
certificate of title in the name of the
mortgagor shall not be cancelled, but
the certificate of sale and the order
confirming the sale shall be registered
and a brief memorandum thereof
made by the registrar of deeds upon
the certificate of title. In the event the
property is redeemed, the deed of
 redemption shall be registered with the
registry of deeds, and a brief
memorandum thereof shall be made
by the registrar of deeds on said
certificate of title.
- If the property is not redeemed, the
final deed of sale executed by the
sheriff in favor of the purchaser at the
foreclosure sale shall be registered
with the registry of deeds; whereupon
the certificate of title in the name of the
mortgagor shall be cancelled and a
new one issued in the name of the
purchaser.
- Sec. 8. Applicability of other
provisions.
- The provisions of sections 31, 32 and
34 of Rule 39 shall be applicable to
the judicial foreclosure of real estate
mortgages under this Rule insofar as
the former are not inconsistent with or
may serve to supplement the
provisions of the latter.
- Officio Sheriff.
- EXTRA-JUDICIAL FORECLOSURE
- Procedure in Extra-Judicial
Foreclosure of Mortgage (A.M.
No. 99-10-05-0)
- In line with the responsibility of an
Executive Judge under Administrative
Order No. 6, dated June 30, 1975, for
the management of courts within his
administrative area, included in which
is the task of supervising directly the
work of the Clerk of Court, who is also
the Ex-Office Sheriff, and his staff, and
the issuance of commissions to
notaries public and enforcement of
their duties under the law, the
following procedures are hereby
prescribed in extrajudicial foreclosure
of mortgages:
- 1. All applications for extra-judicial
foreclosure of mortgage whether
under the direction of the sheriff or a
notary public, pursuant to Act 3135,
as amended by Act 4118, and Act
1508, as amended, shall be filed with
the Executive Judge, through the
Clerk of court who is also the Ex-
- 2. Upon receipt of an application for
extra-judicial foreclosure of mortgage,
it shall be the duty of the Clerk of
Court to:
- a) receive and docket said application
and to stamp thereon the
corresponding file number, date and
time of filing;
- b) collect the filing fees therefore
pursuant to rule 141, Section 7(c), as
amended by A.M. No. 00-2-01-SC,
 and issue the corresponding official
receipt;
- c) examine, in case of real estate
mortgage foreclosure, whether the
applicant has complied with all the
requirements before the public auction
is conducted under the direction of the
sheriff or a notary public, pursuant to
Sec. 4 of Act 3135, as amended;
- d) sign and issue the certificate of
sale, subject to the approval of the
Executive Judge, or in his absence,
the Vice-Executive Judge. No
certificate of sale shall be issued in
favor of the highest bidder until all fees
provided for in the aforementioned
sections and in Rule 141, Section 9(1),
as amended by A.M. No. 00-2-01-SC,
shall have been paid; Provided, that in
no case shall the amount payable
under Rule 141, Section 9(1), as
amended, exceed P100,000.00;
- e) after the certificate of sale has been
issued to the highest bidder, keep the
complete records, while awaiting any
redemption within a period of one (1)
year from date of registration of the
certificate of sale with the Register of
Deeds concerned, after which, the
records shall be archived.
Notwithstanding the foregoing
provision, juridical persons whose
property is sold pursuant to an extra-
judicial foreclosure, shall have the
right to redeem the property until, but
not after, the registration of the
certificate of foreclosure sale which in
no case shall be more than three (3)
months after foreclosure, whichever is
earlier, as provided in Section 47 of
Republic Act No. 8791 (as amended,
Res. Of August 7, 2001).
- Where the application concerns the
extrajudicial foreclosure of mortgages
of real estates and/or chattels in
different locations covering one
indebtedness, only one filing fee
corresponding to such indebtedness
shall be collected. The collecting Clerk
of Court shall, apart from the official
receipt of the fees, issue a certificate
of payment indicating the amount of
indebtedness, the filing fees collected,
the mortgages sought to be
foreclosed, the real estates and/or
chattels mortgaged and their
respective locations, which certificate
shall serve the purpose of having the
application docketed with the Clerks of
Court of the places where the other
properties are located and of allowing
the extrajudicial foreclosures to
proceed thereat.
- 3. The notices of auction sale in
extrajudicial foreclosure for publication
by the sheriff or by a notary public
shall be published in a newspaper of
general circulation pursuant to Section
1, Presidential Decree No. 1079,
dated January 2, 1977, and non-
compliance therewith shall constitute a
violation of Section 6 thereof.
- 4. The Executive Judge shall, with the
assistance of the Clerk of Court, raffle
applications for extrajudicial
foreclosure of mortgage under the
direction of the sheriff among all
sheriffs, including those assigned to
the Office of the Clerk of Court and
Sheriffs IV assigned in the branches.
- 5. The name/s of the bidder/s shall be
reported by the sheriff or the notary
public who conducted the sale to the
Clerk of Court before the issuance of
the certificate of sale.
- This Resolution amends or modifies
accordingly Administrative Order No. 3
issued by then Chief Justice Enrique
M. Fernando on 19 October 1984 and
Administrative Circular No. 3-98
issued by the Chief Justice Andres R.
Narvasa on 5 February 1998.
- The Court Administrator may issue the
necessary guidelines for the effective
enforcement of this Resolution.
- The Clerk of Court shall cause the
publication of this Resolution in a
newspaper of general circulation not
later than August 14, 2001 and furnish
copies thereof to the Integrated Bar of
the Philippinnes
- RTC, having territorial jurisdiction
- over mortgaged property to sell it in
- public auction (when expressly
- JUDICIAL, NO RIGHT OF
REDEMPTION BUT ONLY EQUITY
OF REDEMPTION WITHIN 120 DAYS
FROM FINALITY OF JUDGEMENT
- IN JUDICIAL FORECLOSURE OF
MORTGAGE:
- General Rule: Under Rule 68 of the
Rules of Court, there is no right of
redemption in a judicial foreclosure of
mortgage. There is only here an
Equity of Redemption which is
exercisable within the period stipulated
in the mortgage deed and subsists
after the sale and before it is
confirmed by the court. This means
that after the foreclosure sale but
before its confirmation, the mortgagor
may exercise his right to pay the
proceeds of the sale and prevent the
confirmation of the sale.
- Exception (Here, there is Right of
Redemption): When the judicial
foreclosure of mortgage is in favor of a
banking institution (as mortgagees), in
which case they shall be given a
period of “one year after the sale of
the real estate”. Such period, however,
has been construed to be “one year
from the sate of registration of the
certificate of sale in the Registry of
Property”.
-
- EXTRAJUDICIAL ,by filing a verified
petition before the Office of the
Clerk of Court Ex-Officio Sheriff,
stipulated in the Mortgage
Contract). Mortgagee has one (1)
year to redeem the property from
the registration of the Certificate of
Sale with the Office of Registry of
Deeds where the property is
located.
- ACT NO. 3135 – AN ACT TO
REGULATE THE SALE OF
PROPERTY UNDER SPECIAL
POWERS INSERTED IN OR
ANNEXED TO REAL-ESTATE
MORTGAGES
-
- SECTION 1. When a sale is made
under a special power inserted in or
attached to any real-estate mortgage
hereafter made as security for the
payment of money or the fulfillment of
any other obligation, the provisions of
the following election shall govern as
to the manner in which the sale and
redemption shall be effected, whether
or not provision for the same is made
in the power.
- the bidding and purchase under the
- SECTION 2. Said sale cannot be
made legally outside of the province in
which the property sold is situated;
and in case the place within said
province in which the sale is to be
made is subject to stipulation, such
sale shall be made in said place or in
the municipal building of the
municipality in which the property or
part thereof is situated.
- or any judicial creditor or judgment
- SECTION 3. Notice shall be given by
posting notices of the sale for not less
than twenty days in at least three
public places of the municipality or city
where the property is situated, and if
such property is worth more than four
hundred pesos, such notice shall also
be published once a week for at least
three consecutive weeks in
newspaper of general circulation in the
municipality or city.
- Procedure, in so far as these are not
- SECTION 4. The sale shall be made
at public auction, between the hours or
nine in the morning and four in the
afternoon; and shall be under the
direction of the sheriff of the province,
the justice or auxiliary justice of the
peace of the municipality in which
such sale has to be made, or a notary
public of said municipality, who shall
be entitled to collect a fee of five
pesos each day of actual work
performed, in addition to his expenses.
-
- SECTION 5. At any sale, the creditor,
trustee, or other persons authorized to
act for the creditor, may participate in
same conditions as any other bidder,
unless the contrary has been
expressly provided in the mortgage or
trust deed under which the sale is
made.
-
- SECTION 6. In all cases in which an
extrajudicial sale is made under the
special power hereinbefore referred to,
the debtor, his successors in interest
creditor of said debtor, or any person
having a lien on the property
subsequent to the mortgage or deed
of trust under which the property is
sold, may redeem the same at any
time within the term of one year from
and after the date of the sale; and
such redemption shall be governed by
a the provisions of sections four hundred
and sixty-four to four hundred and
sixty-six, inclusive, of the Code of Civil
inconsistent with the provisions of this
Act.
-
- SECTION 7. In any sale made under
the provisions of this Act, the
 purchaser may petition the Court of
First Instance of the province or place
where the property or any part thereof
is situated, to give him possession
thereof during the redemption period,
furnishing bond in an amount
equivalent to the use of the property
for a period of twelve months, to
indemnify the debtor in case it be
shown that the sale was made without
violating the mortgage or without
complying with the requirements of
this Act. Such petition shall be made
under oath and filed in form of an ex
parte motion in the registration or
cadastral proceedings if the property is
registered, or in special proceedings in
the case of property registered under
the Mortgage Law or under section
one hundred and ninety-four of the
Administrative Code, or of any other
real property encumbered with a
mortgage duly registered in the office
of any register of deeds in accordance
with any existing law, and in each
case the clerk of the court shall, upon
the filing of such petition, collect the
fees specified in paragraph eleven of
section one hundred and fourteen of
Act Numbered Four hundred and
ninety-six, as amended by Act
Numbered Twenty-eight hundred and
sixty-six, and the court shall, upon
approval of the bond, order that a writ
of possession issue, addressed to the
sheriff of the province in which the
property is situated, who shall execute
said order immediately.
- gainfully, it being rural property, the
- SECTION 8. The debtor may, in the
proceedings in which possession was
requested, but not later than thirty
days after the purchaser was given
possession, petition that the sale be
set aside and the writ of possession
cancelled, specifying the damages
suffered by him, because the
mortgage was not violated or the sale
was not made in accordance with the
provisions hereof, and the court shall
take cognizance of this petition in
accordance with the summary
procedure provided for in section one
hundred and twelve of Act Numbered
Four hundred and ninety-six; and if it
finds the complaint of the debtor
justified, it shall dispose in his favor of
all or part of the bond furnished by the
person who obtained possession.
Either of the parties may appeal from
the order of the judge in accordance
with section fourteen of Act Numbered
Four hundred and ninety-six; but the
order of possession shall continue in
effect during the pendency of the
appeal.
-
- SECTION 9. When the property is
redeemed after the purchaser has
been given possession, the redeemer
shall be entitled to deduct from the
price of redemption any rentals that
said purchaser may have collected in
case the property or any part thereof
was rented; if the purchaser occupied
the property as his own dwelling, it
being town property, or used it
redeemer may deduct from the price
 the interest of one per centum per
month provided for in section four
hundred and sixty-five of the Code of
Civil Procedure.
- funds. - The making, drawing and issuance of
- SECTION 10. This Act shall take
effect on its approval
BATAS PAMBANSA BLG. 22
THE ANTI-BOUNCING CHEQUE LAW
AN ACT PENALIZING THE MAKING OR
DRAWING AND ISSUANCE OF A CHECK
WITHOUT SUFFICIENT FUNDS OR CREDIT
AND FOR OTHER PURPOSES.
Section 1. Checks without sufficient funds. -
Any person who makes or draws and issues
any check to apply on account or for value,
knowing at the time of issue that he does not
have sufficient funds in or credit with the
drawee bank for the payment of such check in
full upon its presentment, which check is
subsequently dishonored by the drawee bank
for insufficiency of funds or credit or would
have been dishonored for the same reason
had not the drawer, without any valid reason,
ordered the bank to stop payment, shall be
punished by imprisonment of not less than
thirty days but not more than one (1) year or
by a fine of not less than but not more than
double the amount of the check which fine
shall in no case exceed Two Hundred
Thousand Pesos, or both such fine and
imprisonment at the discretion of the court.
The same penalty shall be imposed upon any
person who, having sufficient funds in or credit
with the drawee bank when he makes or
draws and issues a check, shall fail to keep
sufficient funds or to maintain a credit to cover
the full amount of the check if presented within
a period of ninety (90) days from the date
appearing thereon, for which reason it is
dishonored by the drawee bank.
Where the check is drawn by a corporation,
company or entity, the person or persons who
actually signed the check in behalf of such
drawer shall be liable under this Act.
Sec. 2. Evidence of knowledge of insufficient
a check payment of which is refused by the
drawee because of insufficient funds in or
credit with such bank, when presented within
ninety (90) days from the date of the check,
shall be prima facie evidence of knowledge of
such insufficiency of funds or credit unless
such maker or drawer pays the holder thereof
the amount due thereon, or makes
arrangements for payment in full by the
drawee of such check within (5) banking days
after receiving notice that such check has not
been paid by the drawee.
Sec. 3. Duty of drawee; rules of evidence. - It
shall be the duty of the drawee of any check,
when refusing to pay the same to the holder
thereof upon presentment, to cause to be
written, printed, or stamped in plain language
thereon, or attached thereto, the reason for
drawee's dishonor or refusal to pay the
same: Provided, That where there are no
sufficient funds in or credit with such drawee
bank, such fact shall always be explicitly
stated in the notice of dishonor or refusal. In
all prosecutions under this Act, the introduction
in evidence of any unpaid and dishonored
check, having the drawee's refusal to pay
stamped or written thereon or attached
thereto, with the reason therefor as aforesaid,
shall be prima facie evidence of the making or
issuance of said check, and the due
presentment to the drawee for payment and
the dishonor thereof, and that the same was
properly dishonored for the reason written,
stamped or attached by the drawee on such
dishonored check.
Notwithstanding receipt of an order to stop
payment, the drawee shall state in the notice
that there were no sufficient funds in or credit
with such bank for the payment in full of such
check, if such be the fact.
Sec. 4. Credit construed. - The
word "credit" as used herein shall be
construed to mean an arrangement or
understanding with the bank for the payment
of such check.
Sec. 5. Liability under the Revised Penal
Code. - Prosecution under this Act shall be
without prejudice to any liability for violation of
any provision of the Revised Penal Code.
Sec. 6. Separability clause. - If any separable
provision of this Act be declared
unconstitutional, the remaining provisions shall
continue to be in force.
Sec. 7. Effectivity. - This Act shall take effect
fifteen days after publication in the Official
Gazette.
NEGOTIABLE INSTRUMENTS - GENERAL
PRINCIPLES
Negotiable Instruments - General
Principles
PURPOSE OF CODIFICATION
 Chief purpose was to produce unifor
mity in the laws of the different
states upon this important subject, so tha
t the citizens of each state
might know the rules which would be ap
plied to their notes, checks, and other
negotiable paper in every other state in
which the law was
enacted, since it is an absolute impossibil
ity for the commercial purchaser
 Second purpose was to preserve the
law as nearly as possible as it then
existed
COMMON FORMS OF NEGOTIABLE
INSTRUMENTS
1. Promissory notes
2. Bills of exchange
3. Checks, which are also bills of
exchange, but of a special kind
PROMISSORY NOTE, SECTION 184
 “A negotiable promissory note, within
the meaning of this act, is an
unconditional promise in writing by one
person to another, signed by the maker
(1), engaging to pay on demand or at a
fixed or determinable future time
(2), a sum certain in money
(3) to order or to bearer
(4). Where a note is drawn to the maker’s
own order, it is not complete until indorsed by
them.”
 Essentially a promise in writing to pay a
sum certain in money
 The promise is to pay on demand or on
a fixed or determinable future time
 General characteristics: amount; plac
e where contract to pay is
executed; due date; absolute promise to
pay something; payable to order/bearer;
payee; maker of the note
BILL OF EXCHANGE, SECTION 126
• “A bill of exchange is an uncondition
al order in writing addressed by one
person to another signed by the person
giving it
(1), requiring the
person to whom it is addressed to pay o
n demand or at a fixed or determinable PARTIES TO A PROMISSORY NOTE
future time
1. Maker—the person who executes the
(2) a sum certain in money written promise to pay

(3) to order or to bearer” 2. Payee, if the instrument is payable to

order—the person in whose favor the
• General characteristics: the order or
promissory note is made payable
command to pay; drawer/maker; drawee
3. Bearer, if the instrument is payable to
bearer

CHECK

 A bill of exchange drawn on a bank PARTIES TO A BILL OF EXCHANGE

payable on demand
1. Drawer—the person who executes the

TO WHOM INSTRUMENTS MAY BE written order to pay

PAYABLE 2. Payee, if the instrument is payable to

order—the person in whose favor a bill of
1. Bearer
exchange is drawn payable
2. Order
3. Bearer, if the instrument is payable to
3. To a specified person
bearer
4. Acceptor—

WHEN IS IT PAYABLE TO BEARER? the drawee who signifies his assent to th

e order of the drawer. It is only when he
1. When it is expressed to be so payable
accepts the bill that he becomes a party
2. When it is payable to a person named
thereto and liable thereon.
therein or bearer

OTHER PARTIES TO NEGOTIATED

WHEN IS IT PAYABLE TO ORDER? INSTRUMENTS

1. When it is expressed to be payable to 1. Indorser and

the order of a specified person 2. Indorsee, in the case of instruments

2. To a specified person or his order payable to order

3. Persons negotiating by mere delivery
4. Persons to whom the instrument is
WHEN IS IT PAYABLE TO A SPECIFIED
negotiated by delivery
PERSON?

 When the instrument is payable to a

INDORSER AND INDORSEE
specified person named in the
instrument and no other  When the negotiation is by indorsem
ent completed by delivery, the parties
added are the indorser and indorsee
 Indorser—the one who negotiates the
instrument
 Indorsee—
the one to whom the instrument is n
egotiated by indorsement
WHERE INSTRUMENT IS PAYABLE TO
BEARER
• Where the instrument is payable to b
earer, it can be negotiated by mere
delivery without necessity of indorsement
HOLDER
 The payee or indorsee of a bill or note,
who is in possession of it, or the bearer
thereof
 If the instrument is payable to order, he
who is the payee or indorsee and who is in
possession thereof
 If the instrument is payable to bearer,
he who is in possession thereof
ISSUE
 First delivery of the instrument, com
plete in form to a person who takes it as
a holder
DELIVERY
 Consists principally of placing the tra
nsferee in possession of the instrument,
but it must be accompanied by the intent to
transfer title
 “every contract on a negotiable in
strument is incomplete and
revocable until delivery of the instrument
for the purpose of giving effect thereto”
NEGOTIATION
• Transfer of an instrument from one
person to another as to constitute the
transferee the holder of the instrument
• Mode of transferring an instrument
• Effect is to make the transferee the
holder of the instrument
HOW INSTRUMENT PAYABLE TO
BEARER IS NEGOTIATED
 May be negotiated by mere delivery
HOW INSTRUMENT PAYABLE TO ORDER
IS NEGOTIATED
 Must be negotiated by indorsement
completed by delivery
 Indorsement is necessary to make t
he transferee the indorsee and
delivery is necessary to place the transfer
ee in possession of the instrument
INDORSEMENT
 Legal transaction, effected by the wri
ting of one’s own name on the
back of the instrument or upon a paper
attached thereto, with or
without additional words specifying the pe
rson to whom or to whose order the
instrument is to be payable whereby one not
only transfers
one’s full legal title to the paper transferred
but likewise enters into an implied guaranty  Signification of the drawee of his assent
that the instrument will be duly paid to the order of the drawer

SPECIAL INDORSEMENT DISHONOR BY ACCEPTANCE

 Specifies the person to whom or to  Where the bill is presented for

whose order the instrument is to be payable acceptance, and acceptance is refused
by the drawee, or cannot be obtained, or
where presentment for acceptance is
BLANK INDORSEMENT
excused, and the bill is not accepted
 One that doesn’t specify the person
to whom or to whose order the
PRESENTMENT FOR PAYMENT
instrument is to be payable
 Consists of exhibiting the instrument
to the person primarily liable thereon and
NEGOTIATION, INDORSEMENT,
demanding payment form him on the date of
DELIVERY, COMPARED.
maturity
1. Indorsement is merely the first step in the
process of negotiating an instrument which is
DISHONOR BY NON-PAYMENT
payable to order
 Where the instrument is presented f
2.
or payment and payment is refused or
Where the instrument is payable to order,
cannot be obtained, or where presentment
neither is delivery equivalent to negotiation
for payment is excused and the instrument
3.
is overdue and unpaid
But where the instrument is payable to b
earer, delivery is equivalent to negotiation

NOTICE OF DISHONOR

PRESENTMENT FOR ACCEPTANCE  When an instrument has been disho

 Exhibiting the bill to the drawee and
demanding that he accept it, that is, signify
his assent to the order or command of the
drawer
ACCEPTANCE
nored by non-payment or non-acceptance
DISCHARGE
• An instrument is discharged by payment
in due course by or on behalf of the principal
debtor
PARTIES PRIMARILY AND SECONDARILY  By merely delivering an instrument
LIABLE payable to bearer, without saying anything
more, the person negotiating by mere
• Under the Negotiable Instruments Law,
delivery assumes the liability mentioned in
the person primarily liable on an instrument i
Section 65.
s the
 Under said section, the general tenor of
person who by the terms of the instrument i
liability is similar to that of an indorser
s absolutely required to pay the same
• All other parties are secondarily liable
IN PROMISSORY NOTES

IN BILLS OF EXCHANGE  The maker is primarily liable

 Agreement of the maker is that he will
• The acceptor is the one primarily liable
pay the instrument according to the tenor
• He is absolutely required to pay the
instrument as he engages that he will pay it
according to the tenor of his acceptance FUNCTION OF NEGOTIABLE
INSTRUMENTS

SECONDARY LIABILITY OF DRAWER 1. Substitute for money

2. Increase the purchasing medium in
• By the mere drawing of the instrume
circulation
nt, the drawer assumes the liability stated
in Section 61
• The general tenor of the liability of the PAYMENT BY NEGOTIABLE
drawer is that he will pay the bill if the INSTRUMENTS
drawee doesn’t accept or pay the bill.
 W/N the giving and taking of a
• In other words, he is not absolutely r
promissory note or bill of exchange is
equired to pay the bill—if the
prima facie absolute payment as in the c
drawee pays, then he is not required to
ase of money or merely a prima facie
pay. It is only when the drawee doesn’t
conditional payment?
pay that he will be required to pay.
 The delivery of the promissory notes
payable to order, or bills of
SECONDARY LIABILITY OF INDORSER exchange or other mercantile documents
shall produce the effect of payment only
 He will pay the instrument if the person
when they have been cashed, or when,
primarily liable will not pay.
through the fault of the creditor, they have
been impaired
SECONDARY LIABILITY OF ONE
NEGOTIATING BY DELIVERY

PRINCIPAL FEATURES OF NEGOTIABLE
INSTRUMENTS
1. Negotiability
2. Accumulation of secondary contracts as
they are transferred from one person to
another
NEGOTIABILITY
 Attribute or property whereby a bill,
note or check passes or may pass from hand
to hand similar to money, so as to give the
holder in due course the right to hold the
instrument and collect the sums payable for
himself free from defense.
PRIMARY PURPOSE OF NEGOTIABILITY
 To allow bills and notes the effect
which money, in the form of government
bills or notes, supplies in the commercial
world
ACCUMULATION OF SECONDARY
CONTRACTS
 Most important characteristic of ne
gotiable instruments is the accumulation
of secondary contracts which they pick up
and carry with them as they are negotiated
from one person to another
 Advantage: they improve as they pa
ss from hand to hand, as more debtors
are added
Requisites of negotiability.
A negotiable instrument, briefly stated,
is a contractual obligation to pay money.
However, whether or not an instrument is
negotiable or non-negotiable depends
entirely on its form and content. A valid
instrument is not necessarily negotiable.
In determining the negotiability of an
instrument, the following must be considered:
1. the whole of the instrument;
2. only what appears on the face of the
instrument; and
3. the provisions of the Negotiable Instruments
Law especially Section 1 thereof which fully
define the requirements an instrument must
meet in order to be negotiable.
Kinds of negotiable instruments
1. C o m m o n f o r m s – T h e m o s t
common forms of negotiable
instrum ents in commercial
transactions are the promissory note,
bill of exchange, and bank check.
Actually, the Negotiable Instruments
Law deals only with two kinds or
types of instruments, namely:
a. promissory notes or those in which the
issuer has promised to pay; and
b. bills of exchange or those in which the
issuer has ordered a third person to
pay.
2. Special types – These are, to be
sure, many various forms of
negotiable instruments. An
analysis of the many variations will
reveal, however, that they belong
to one or the other of the types
mentioned.
Other instruments that have been held
negotiable under the Negotiable
Instruments Law are: certificates of
deposits, due bills, bonds, drafts, trade
acceptances, and banker’s acceptances.
The first four are special types of promissory
notes while the others are types of bills of
exchange.
Liability of Parties – Cheque
Negotiable Instrument refers to a promissory
note, bill of exchange or cheque payable either
to order or to bearer. It is a piece of paper which
carries some value and is transferable from one
person to another by mere delivery or by
endorsement and delivery. Here, we will discuss
the liability of parties to negotiable instrument
act.
The Liability of parties is as follows:
1. Liability of Drawer (Section 30)
Drawer means a person who signs a cheque or
a bill of exchange ordering his or her bank to
pay the amount to the payee.
In case of dishonor of cheque or bill of
exchange by the drawee or the acceptor, the
drawer of such cheque or bill of exchange
needs to compensate the holder such amount.
But, the drawer needs to receive due notice of
dishonour.
So, the nature of the drawer’s liability on
drawing a bill is:
(i) On due presentation: - It should be accepted
and paid accordingly.
(ii) In the case of dishonor: - Drawer needs to
compensate the holder such amount, only when
he receives a notice of dishonor by the drawee.
2. Liability of the Drawee of Cheque (Section
31)
The person who draws a cheque i.e drawer
having sufficient funds of the drawer in his
hands properly applicable to the payment of
such cheque must pay the cheque when duly
required to do so and, or in default of such
payment, he shall compensate the drawer for
any loss or damage caused by such default.
The drawee of a cheque will always be a
banker. As a cheque is a bill of exchange, drawn
on a specified banker by the drawer, the banker
is bound to pay the cheque of the drawer, i.e.,
the customer. For the following conditions are
need to be satisfied:
(i) Sufficient amount of funds to the credit of
customer’s account should be there with the
banker.
(ii) Such funds are required to be properly
applied against the payment of such cheque,
e.g., the funds are not under any kind of lien etc.
(iii) The cheque is duly required to be paid,
during banking hours and on or after the date on
which it is made payable.
If the banker unjustifiably refuses to honour the
cheque of its customer, it shall be liable for
damages.
3. Liability of Acceptor of Bill and Maker of
Note (Section 32)
As per section 32
of negotiable instrument act, in the absence of a
contract to the contrary, the maker of
a promissory note and the acceptor before the
maturity of a bill of exchange are under
the liability to pay the amount thereof at maturity.
They need to pay the amount according
to the apparent tenor of the note or acceptance
respectively. The acceptor of a bill of exchange
at or after maturity is liable to pay the amount
thereof to the holder on demand.
The liability of the acceptor of a bill or
the maker of a note is absolute and
unconditional but is subject to a contract to the
contrary and may be excluded or modified by a
collateral agreement.
4. Liability of Endorser (Section 35)
An endorser is the one who endorses
and delivers a negotiable instrument before
maturity. Every endorser has a liability to the
parties that are subsequent to him.
Also, he is bound thereby to every
subsequent holder in case of dishonour of the
instrument by the drawee, acceptor or maker, to
compensate such holder of any loss or damage
caused to him by such dishonour. However, he
is to compensate only after the fulfilment of the
following conditions:
(i) There is no contract to the contrary
(ii) The Endorser has not expressly excluded,
limited or made conditional his own liability
(iii)And, such endorser shall receive due notice
of dishonour
5. Liability of Prior Parties (Section 36)
Until the instrument is duly satisfied, every prior
party to a negotiable instrument has a liability
towards the holder in due course. The prior
parties include the maker or drawer, the
acceptor and all the intervening endorsers. Also,
there liability to a holder in due course is joint
and several. In the case of dishonour,
the holder in due course may declare any or all
prior parties liable for the amount.
6. Liability Inter-se
Every liable party has a different footing or
stand with respect to the nature of liability of
each one of them.
7. Liability of Acceptor when Endorsement is
Forged (Section 41)
An acceptor of a bill of exchange who had
already endorsed the bill is not relieved from
liability even if such endorsement is forged. This
is so even if he knew or had reason to believe
that the endorsement was forged when he
accepted the bill.
8. Acceptor’s Liability when Bill is drawn in a
Fictitious Name
An acceptor of a bill of exchange who draws a
bill in a fictitious name, payable to the
drawer’s order will be liable to pay any holder in
due course. He or she will not be relieved from
such liability by reason that such name is
fictitious.
NEGOTIABLE INSTRUMENTS
Incidents in the life of a negotiable instrument
Promissory Note Bills of Exchange Issue - is the
first delivery of the instrument, complete in form,
to a person who takes it as holder. (Sec. 191)
Negotiation - is the transfer of a negotiable
instrument from one person to another in such a
manner as to constitute the transferee the
holder thereof. (Sec. 30) a. If the instrument is
payable to bearer - It may be negotiated by
mere delivery b. If the instrument is payable to
order - It may be negotiated by indorsement
completed by delivery
Presentment for acceptance - is the act of
exhibiting the bill of exchange to the drawee for
his acceptance. It is required only: a. If the bill is
payable at a fixed period after sight, or in cases
where it is necessary to fix the maturity of the
instrument; or b. When the bill expressly
stipulates that it shall be presented for
acceptance; or c. When the bill of exchange
drawn payable elsewhere than at the residence
or place of business of the drawee. (Sec. 143)
Acceptance - The acceptance of a bill of
exchange is the signification by the drawee of
his assent to the order of the drawer. The
acceptance must be in writing and signed by the
drawee. (Sec. 132)
Dishonor by non-acceptance - A bill of
exchange is dishonored by non-acceptance: a.
When it is duly presented for acceptance and
such acceptance is refused or cannot be
obtained; or b. When presentment for
acceptance is excused and the bill is not
accepted. (Sec. 149) Presentment for payment -
is the production of a promissory note to the
party primarily liable for the payment of the
same, or of a bill of exchange to the drawee or
acceptor for payment Dishonor by non-payment
- An instrument is dishonored by non-payment
when: a. It is duly presented for payment and
payment is refused or cannot be obtained; c.
resentment for payment is excused and the
instrument is overdue and unpaid. (Sec. 83)
Notice of dishonor - means notifying the drawer
and the indorsers that the instrument has not
been accepted by the drawee, or that is has not
been paid by acceptor. in case of bills of
exchange, or by the maker. in case of
promissory notes
NEGOTIABLE INSTRUMENTS
Requisites of negotiable instrument (Sec. 1)
a. It must be in writing and signed by the maker
or drawer. b. It must contain an unconditional
promise or order to pay a sum certain in money.
c. It must be payable on demand or at a fixed of
determinable future time. d. It must be payable
to order or to bearer. e. Where the instrument is To: W
addressed to a drawee, he must be named or
otherwise indicated therein with reason b. I promise to pay to the order of the
certainty. undersigned the sum of P5,000.00

When instrument is payable to order (Sec. 8)

An instrument is payable to order when it is
drawn payable to the order of a specified person
or to him or his order, such as “Pay to the order
of Pabio Patricio. . .” or “Pay to Pablo Patricio or
order...". If the instrument is payable to a
specified person, the instrument is not payable
to order and is rendered non-negotiable, such
as "Pay to Pablo Patricio the P10,000.00" or
"Pay to Pablo Patricio or his agent the sum
P10,000.00".
(Sgd.) M
Under Sec. 184, an instrument payable to the
order of maker (and also to the order the
drawer) is not complete until it is indorsed by
him. "Indorsement" as defined in Sec. 191,
means indorsement completed by delivery.
Hence, no contract is created until the maker (or
drawer) to whose order the instrument is
payable has not only signed the instrument as
indorser, but has also delivered the instrument.

An instrument may be drawn payable to the 3. The drawee. Example:

order of:

1. A payee who is not the maker, drawer or

drawee. Examples: a. Here, the payee is not Pay to the order of yourself the sum of
the maker. I promise to pay Por order the sum of
P5,000.00.
P5,000.00
(Sgd.) M b. In the example that follows, the
payee is neither the drawer nor drawee. Pay to
Por order the sum of P5,000.00. (Sgd.) R

To: W
(Sgd.) R
4. Two or more payees jointly. Example:
To: W

2. The drawer or maker. Examples: a. Pay to

the order of R the sum of P5,000.00. I promise to pay to the order P1, P2 and P3 the
(Sgd.) R sum of P5,000.00

(Sgd.) M
Protest - Protest is a form written statement
signed by notary stating that presented a foreign 5. One or some of several payees Examples:
bill exchange for acceptance or for payment and
that it was refused. Discharge – An instrument is
discharged through any of the following means:
a. By payment in due course by or on behalf of a. Pay to the order of P1, P2 or P3 the sum of
the principal debtor. b. By payment in due P5,000.00..
course by the party accommodated. where the
instrument was made or accepted for his
accommodation. c. by the intentional
(Sgd.) R.
cancellation of the instrument by the holder. d.
By any other act which discharges a simple
contract for the payment of money. e. When the To: w
principal debtor becomes the holder of the
instrument at or after maturity in his own right. b. Pay to the order of P1, P2 and P3 or any two
(Sec. 119) of them the sum of P5,000.00.

NEGOTIABLE INSTRUMENTS

nnnnbvbnvfgbvf(Sgd.) R .
cgbbvvghbbvvgbb To: W
6. To the holder of an office for the time being.
Example: Pay to the order of the President of
ABC Company, the sum of P5,000.00
Hgcgjjbgjjnvykcccfgvbbbbbb (Sgd.) R To: W
Note: Where the instrument is payable to order,
the payee must be named or otherwise
indicated therein with reasonable certainty.
Otherwise, it is useless to consider the
instrument negotiable because no one could
indorse the instrument.
NEGOTIABLE INSTRUMENTS
When instrument payable to bearer (Sec. 9)
1. When it is expressed to be payable to bearer,
such as “Pay to bearer the sum of P5,000.” 2.
When it is expressed to be payable to a person
named therein or bearer, such as “I promise to
pay P or bearer the sum of P5,000.” 3. When it
is payable to the order of a fictitious or non-
existing person, and such fact is known to the
person making it so payable. Thus, instruments
payable to the order of “Prinsipe Abante” or “Si
Malakas at si Maganda,” who are well-known
characters in Philippine mythology, are bearer
instruments because the named payees are
fictitious and nonexistent. However, an actual,
existing and living payee may also be “fictitious”
if such payee was not intended by the maker or
drawer to receive the proceeds the instrument.
This usually occurs when the maker or drawer
places a name of an existing payee on the
check for convenience or to cover up an illegal
activity. (Philippine National Bank vs. Rodriguez,
G.R. No. 170 September 26, 2008, citing
Mueller & Martin vs. Liber Insurance Bank, 187
Ky. 44, 218 SW 465 (1920)). Hence, a check
which says “Pay to the order of President
Barrack Obama the sum of US$10,000.00”, is a
bearer instrument if President Obama was not
the intended recipient of the proceeds of the
check.
(Note: In the same case of PNB vs. Rodriguez,
the Supreme Court, citing US jurisprudence,
held that in a fictitious-payee situation, the
drawee bank is absolved from liability and the
drawer bears the loss. Since the check is
treated as a bearer instrument which can be
negotiated by mere delivery, one cannot expect
a fictitious payee to negotiate the check by
placing his indorsement thereon. And since the
drawer knew of the limitation, he have intended
the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the
drawer of check bears the loss. If the rule were
otherwise, it will be most convenient for the
drawer who desires to escape payment of the
check to always deny the validity of the
indorsement. The rule assigns the loss to the
drawer because he was in a better position to
prevent the loss in the first place. However,
there is a commercial bad faith exception to the
fictitious-payee rule. A showing of commercial
bad faith on the part of the drawee bank, or any
transferee of the check for that matter, will
cause it to bear the loss. Commercial bad faith
is present if the transferee of the check acts
dishonestly, and it is a party to the fraudulent
scheme.)
4. When the name of the payee does not
purport to be the name of any person, such as
"Pay to the order of CASH P10,000.00" or "Pay
to CASH P10,000.00" or "Pay to BILLS
PAYABLE P10,000.00" 5. When the only or last
indorsement is an indorsement in blank.
An indorsement in blank is one that specifies no
indorsee. If the instrument is originally payable
to order, this will make the instrument payable to
bearer. Examples: a. I promise to pay to the
order of Pablo Patricio the sum of P10,000.00
(Sgd.) Mario Manuel
At the back of the instrument, Pablo
Patricio merely signed as follows:
(Sgd.)
Pablo Patricio
NEGOTIABLE INSTRUMENTS
b. In the same promissory note, supposing the
following indorsements appear instead at the
back of the instrument:
Pay to Antonio Arevalo,
(Sgd.) Pablo Patricio
Pay to Benito Buena.
 (Sgd.) Antonio Arevalo Personal Defenses –Those which are
available only against a person not a holder in
Pay to Carmelo Centeno. due course or a subsequent holder who stands
in privity with him. (a.k.a. equitable defenses)
(Sgd.) Benito Buena
a) Ante-dating or Post-dating an
(Sgd.) Carmelo instrument for illegal or fraudulent
Centeno purpose
 The instrument is not
The last indorsement which was invalid for the reason
made by Carmelo Centeno is an indorsement in only that it is ante-
blank. Such indorsement converts the
instrument from an order instrument to a bearer dated or post-dated,
instrument. provided this is not
done for an illegal or
Notes: fraudulent purpose.
The person to whom
1. An instrument payable "to the order of an instrument so
bearer, . " is an order instrument which dated is delivered
needs the indorsement of the payee acquires the title
(the bearer) for its negotiation. 2. An thereto as of the date
instrument payable "to bearer P or "to
of delivery.
P, bearer" is not an instrument payable
to bearer because the word "bearer" is b) Incomplete but Delivered
merely descriptive of P. Accordingly, Instrument
instrument is not negotiable because it  Holder has prima
is payable to a specified person. facie authority to fill up
the instrument.
 The instrument must
Negotiation – the transfer of the instrument
be filled up strictly in
from one person to another so as to constitute
accordance with the
the transferee as holder thereof.
authority given and
Indorsement –Legal transaction effected by within reasonable time
the affixing one's signature at the:  HDC may enforce the
instrument as if filled
a) Back of the instrument or up according to no. 2.
b) Upon a paper (allonge) attached c) Complete but Undelivered
thereto with or without additional Instrument
words specifying the person to  Between immediate
whom or to whose order the parties and those who
instrument is to be payable are similarly situated,
whereby one not only transfers delivery must be
legal title to the paper transferred coupled with the
but likewise enters into an implied intention of
guaranty that the instrument will transferring title to the
be duly paid (Sec. 31) instrument.
GENERAL RULE: Indorsement must  As to HDC, it is
be of the entire instrument. conclusively
EXCEPTION: Where instrument has presumed that there
been paid in part, it may be indorsed was valid delivery;
as to the residue. and
 As against an
Defenses under Negotiable Instruments
immediate party and
Law
remote party who is
 not a HDC, o To enforce payment thereof against
presumption of a valid any party thereto, can be acquired
and intentional through or under such signature
delivery is rebuttable. EXCEPTION: Unless
d) Failure of Consideration the party against
 Personal defense to whom it is sought to
the prejudiced party enforce such right is
and available against precluded from setting
any person not HDC. up the forgery or want
of authority.
Real Defenses –Those that attach to the c) Material Alteration
instrument itself and are available against all  Any change in the
holders, whether in due course or not, but only instrument which
by the parties entitled to raise them. (a.k.a affects or changes the
absolute defenses) liability of the parties
in any way.
a) Incomplete and Undelivered
 Effects:
Instrument
Alteration by a
 If completed and
party – Avoids the
negotiated without
instrument except
authority, not a valid
as against the party
contract against a
who made,
person who has
authorized, or
signed before delivery
assented to the
of the contract even in
alteration and
the hands of HDC but
subsequent
subsequent indorsers
indorsers.
are liable.
 However, if an altered instrument is
b) Forgery or Want of Authority
negotiated to a HDC, he may enforce
 Counterfeit making or
payment thereof according to its original
fraudulent alteration of
tenor regardless of whether the alteration
any writing, which
was innocent or fraudulent.
may consist of:
o Alteration by a stranger (spoliation) –the
o Signing of
effect is the same as where the
another’s
alteration is made by a party which a
name with
HDC can recover on the original tenor of
intent to
the instrument.
defraud; or
 Changes in the following constitute
o Alteration of
material alterations:
an instrument
o Date;
in the name,
o Sum payable, either for principal or
amount, name
interest;
of payee, etc.
o Time or place of payment;
with intent to
o Number or relations of the parties;
defraud.
o Medium or currency in which payment is
GENERAL RULE: When a signature is
to be made;
forged or made without the authority of
o That which adds a place of payment
the person, the signature (not
where no place of payment is specified;
instrument itself and the genuine
and
signatures) is wholly inoperative
o Any other change or addition which
 Legal Effects:
alters the effect of the instrument in any
o No right to retain the instrument
respect.
o To give a discharge therefore
Presumption of Consideration (Sec. 24 of
NIL)
Every negotiable instrument is deemed prima
facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
What Constitutes Value (Sec. 25 of NIL)
Value is any consideration sufficient to support
a simple contract. An antecedent or pre-
existing debt constitutes value; and is deemed
such whether the instrument is payable on
demand or at a future time.
What constitutes holder for value
Where value has at any time been given for
the instrument, the holder is deemed a holder
for value in respect to all parties who become
such prior to that time.
When lien on instrument constitutes holder for
value
Where the holder has a lien on the instrument
arising either from contract or by implication of
law, he is deemed a holder for value to the
extent of his lien.
Sec. 33. Kinds of indorsement. — An
indorsement may be either special or in blank;
and it may also be either restrictive or
qualified, or conditional.
Classification of indorsement.
(1) As to the methods of negotiation:
(a) special (Sec. 34.); or
Special Indorsement – Special
indorsement is a signature and
instruction that limits the instrument to
a particular person. A special
indorsement may limit the indorser’s
potential liability, but is not effective to
prevent further negotiation by the
holder.
Example: Isabelle writes “Pay
Tom” or “Pay to the Order of Tom” on
a note along with her signature.
Remember, however, the the paper
must contain “to order” to remain
negotiable. Also, “Pay to the Order of
Tom” establishes the paper as order
paper, but it does not restrict Tom’s
abilities. Tom can indorse the paper
and negotiate it.
(b) blank, (ibid.)
Blank Indorsement – This
means signing the instrument without
designating any particular payee or
making any other form of limiting
designation. A blank endorsement
turns order paper into bearer paper.
Example: A promissory note is
payable to “Frank or order”. If Frank
signs the promissory note, it is a blank
endorsement that makes the paper
enforceable by any holder.
(2) As to the kind of title transferred:
(a) restrictive; or
Restrictive Indorsement – A
restrictive indorsement includes the
payee’s signature and instructions that
limit the instrument to a particular use.
Generally, a restrictive indorsement is
not effective to prevent further
negotiation of the paper. There are,
however, special rules that apply to
certain restrictive indorsements of
checks.
⁃ Note: A conditional indorsement
including words such as, “pay Tom if
he washes my car” is ineffective. It
does not qualify as a restrictive
indorsement and does not limit
negotiability.
Example: Signing the
instrument and writing “For Deposit
Only” is a restrictive indorsement on a
check.
(b) non-restrictive. (Sec. 36.)
(3) As to scope of liability of indorser:
 (a) qualified; or
Qualified indorsement – A
qualified indorsement is an individual’s
signature including the words, “without
recourse”. The purpose of this form of
indorsement is to limit the potential
liability of the indorser who is
transferring the instrument in the event
the payor ultimately dishonors the
instrument. The idea is that the
indorser is transferring any rights she
has in the instrument, but she is not
warranting that the payor of the
instrument will honor it. While this type
of indorsement may limit the indorser’s
liability to subsequent holders of the
instrument, it does not affect or limit
the ability to further transfer or
negotiate the instrument.
Example: Darla is the payee
on a note. She signs the note and
writes “no recourse”. She then
transfers the note to Dawn. Dawn
cannot sue Darla to enforce or pay the
instrument if the instrument is later
dishonored by the payor at the time of
presentment.
(b) unqualified or general. (Sees.
38,66.) (
4) As to presence or absence of limitations:
(a) conditional; or
Conditional indorsement. -
Where an indorsement is conditional,
the party required to pay the
instrument may disregard the
condition and make payment to the
indorsee or his transferee whether the
condition has been fulfilled or not. But
any person to whom an instrument so
indorsed is negotiated will hold the
same, or the proceeds thereof, subject
to the rights of the person indorsing
conditionally.
(b) unconditional. (Sec. 39.)
(5) The other kinds of indorsements are:
(a) joint (Sec. 41.);
Indorsement where payable
to two or more persons. - Where an
instrument is payable to the order of
two or more payees or indorsees who
are not partners, all must indorse
unless the one indorsing has authority
to indorse for the others.
(b) successive (see Sees. 50,68.);
(c) irregular or anomalous (Sec. 64.);
and
Anomalous indorsement –
This is an indorsement by someone
other than the holder or transferor of
the instrument. It is made to guarantee
or incur surety liability on the
instrument. This can give a transferee
confidence in accepting the
instrument. This type of indorsement is
not necessary for negotiation.
Example: Neo is the payee of
a note. He signs the note and seeks to
transfer it Arthur. Arthur is comfortable
in accepting the instrument. He agrees
to accept the instrument when Mr.
Gates agrees to sign the note. By
indorsing the instrument, Mr. Gates is
stating that the holder can seek
payment of the instrument from him if
it is first dishonored by the payor.
(d) facultative, (see Sec. 111.)
Note that once an instrument as
issued satisfies all the requirements of
negotiability (Sec. 1.), no indorsement, even
restrictive one (Sees. 36-37.), can negate its
negotiable status.
Liability of party indorsing instrument in
blank indorsement or qualified
indorsement
A paper containing a blank
endorsement is one that has the signature of
the payee but no specific endorsee is
designated. A check that is made payable to
the order of X is endorsed in the blank when X
signs it. Once endorsed, it becomes bearer
paper and is negotiable by anyone who
physically holds it. A blank endorsement is
changed into a special endorsement if certain
words are written above the endorsee's
signature, such as "pay to the order of Y."
A qualified endorsement is one
wherein liability is disclaimed by the endorser
through inclusion of a phrase preceding his or
her signature. Ordinarily, an unqualified
endorser's liability may be either secondary,
whereby the endorser is bound to pay if the
individual expected to pay defaults and certain
conditions are met or by WARRANTY, by
which the endorser incurs liability upon
ALTERATION OF THE INSTRUMENT. To
disclaim secondary liability, the endorser can
include the words "without recourse," thereby
relieving himself or herself of any responsibility
to pay it.
In the absence of a contract to the
contrary, whoever endorses and delivers a
negotiable instrument before maturity, without,
in such endorsement, expressly excluding or
making conditional his own liability, is bound
thereby to every subsequent holder, in case of
dishonor by the drawee, acceptor or maker, to
compensate such holder for any loss or
damage caused to him by such dishonor,
provided due notice of dishonor has been
given to, or received by, such endorser as
hereinafter provided.
Every endorser after dishonor is liable
as upon an instrument payable on demand.
Effect of Blank Indorsement to an
instrument payable to order like cashing a
check payable to order from a bank.
The instrument is indorsed in blank by
P by simply writing his name on the back
thereof. The blank indorsement makes the
instrument payable to bearer.
The bill which is payable to the order
of P, is indorsed especially by P to A (see Sec.
34.) and A further indorses it to B who merely
signs his signature on the back without
indorsing the bill to a specified person and
delivers it to C. The instrument becomes also
payable to bearer. C may negotiate the bill by
delivery since the last indorsement is in blank.
But a blank indorsement cannot make
a non-negotiable instrument, it is negotiable as
a bearer instrument payable to a specified
person, otherwise, the person who last signed
his name on the back of the instrument would
be able to change entirely the contract as
entered into between the parties and make the
character of the instrument depend upon the
manner of the indorsement, and not upon the
terms expressed therein. The word
"indorsement/' as used in the law, refers only
to negotiable instruments.
 Instrument payable to bearer is not
affected by any kinds of
indorsements.
DEFINITION of Bearer Instrument
A bearer instrument, or bearer bond, is a
type of fixed-income security in which no
ownership information is recorded and the
security is issued in physical form to the
purchaser. The holder is presumed to be
the owner, and whoever is in possession
of the physical bond is entitled to the
coupon payments.
 Who is an accommodation party
and what is his liability
Sec. 29. Liability of accomodation
party. - An accomodation party is
one who has signed the instrument
as maker, drawer, acceptor, or
indorser, without receiving value
therefor, and for the purpose of
lending his name to some other
person. Such a person is liable on the
instrument to a holder for value,
notwithstanding such holder, at the
time of taking the instrument, knew
him to be only an accomodation party.
ACCOMODATION PARTY:
REQUISITES
 One who has signed the The accomodation party doesn't
instrument as maker, drawer, receive any valuable consideration
indorser, acceptor, without receiving for the instrument he signs but he is
any value therefore and for the liable to a holder for value as if the
purpose of lending his name to some contract wasn't for accommodation.
other person
Requisites:
1. He must be a party to the
instrument, signing as maker,  Who is an general indorser and
acceptor, indorser, or drawer what is his liability
2. He must not receive any value
therefore
3. He must sign for the purpose of
Liability of general indorser - Negotiable
lending his name or credit
Instruments

RIGHTS AND LEGAL POSITION OF Sec. 66. Liability of general indorser. - Every
AN ACCOMODATION PARTY indorser who indorses without qualification,
The accomodation party is warrants to all subsequent holders in due
generally regarded as a surety for course: (holders in good faith)
the party accomodated
When the accomodation parties (a) The matters and things mentioned in
make payment to the holder of the subdivisions (a), (b), and (c) of the next
notes, they have the right to sue preceding section; and
the accomodated party for
reimbursement since the relation (b) That the instrument is, at the time of his
between them is in effect that of a indorsement, valid and subsisting;
principal and sureties, the
And, in addition, he engages that, on due
accomodation parties being the
presentment, it shall be accepted or paid, or
sureties
both, as the case may be, according to its
tenor, and that if it be dishonored and the
ACCOMMODATED PARTY CANNOT
necessary proceedings on dishonor be duly
RECOVER FROM
taken, he will pay the amount thereof to the
ACCOMMODATING PARTY
holder, or to any subsequent indorser who
Absence of consideration is a
may be compelled to pay it.
defense
In fact as between them, the
understanding is that the
accomodated party either is to LIABILITY OF GENERAL INDORSER
1. To reimburse the amount which
the accomodation party may be 1. That the instrument is genuine and in all
obliged to pay respects what it purports to be
2. To pay the instrument directly to
2. That he has a good title to it
the holder
3. That all prior parties had capacity to
LIABILITY OF THE ACCOMODATION contract
PARTY
The accomodation party is liable 4. And that the instrument is, at the time of
on the instrument to a holder in his indorsement, valid and subsisting
value, notwithstanding such holder
at any time of the taking of the
instrument knew him to be only an
THE WARRANTIES OF A GENERAL
accomodation party
INDORSER EXTEND TO THE FOLLOWING
1. Holders in due course
2. Persons who derive their title from holders
in due course
3. Immediate transferees even if they are not
holders in due course
WARRANTIES DON’T EXTEND TO DRAWEE
• The indorser of a check doesn’t
warrant the genuineness of the drawer’s
signature to the drawee who pays it since the
drawee is not a holder in due course
• The warranties provided do not run in
favor of the drawee in respect to the
genuineness of the drawer’s signature but
only in favor of subsequent holders in due
course
OTHER LIABILITY OF GENERAL INDORSER
• He engages that, on due presentment, it
shall be accepted or paid, or both, as the
case may be, according to its tenor, and
that if it be dishonored and the necessary
proceedings of dishonor be duly taken, he will
pay the amount to the holder, or to any
subsequent indorser who may be compelled
to pay it
GENERAL INDORSER IS SECONDARILY
LIABLE
• Secondary liability not confined to the four
warranties
• He is liable if for any reason, the person
primarily liable cannot pay, as distinguished
from the limited secondary liability of the
qualified indorser or of the person negotiating
by mere delivery
• The reason for dishonor need not be
established. As long as there was dishonor,
this is sufficient.
HOLDER
A payee or endorsee of a bill or note
who is in possession of it or the bearer
thereof. (Sec. 191)
RIGHTS OF HOLDERS IN GENERAL
(Sec. 51)
a . May sue thereon in his own name
b. Payment to him in due course
discharges the instrument
The only disadvantage of a holder who
is not a holder in due course is that the
negotiable instrument is subject to
Holder In Due Course (HDC)
A holder who has taken the instrument
under the following conditions: KEY: C O V
I
1. Instrument is complete and regular upon
its face;
2. Became a holder before it was
overdue and without notice that it had been
previously dishonored;
3. For value and in good faith; and
4. At the time he took it, he had no notice
of any infirmity in the instrument or
defect in the title of the person negotiating
it. (Sec. 52)
Rights of a HDC:
1. May sue on the instrument in his own
name;
2. May receive payment and if payment is
in due course, the instrument is discharged;
3. Holds the instrument free from any
defect of title of prior parties and free from
defenses available to parties among
themselves; and
4. May enforce payment of the instrument
for the full amount thereof against all
parties liable thereon. (Secs. 51 and 57)
 Every holder of a negotiable
instrument is deemed prima facie
a holder in due course. However,
this presumption arises only in
favor of a person who is a holder
as defined in Section 191 of the
NIL. The weight of authority
sustains the view that a payee may
be a holder in due course. Hence,
the presumption that he is a prima
facie holder in due course applies
in his favor. (Cely Yang vs. Court
of Appeals, G.R. No. 138074,
August 15, 2003)
Holder Not In Due Course
One who became a holder of an
instrument without any, some or all of the
requisites under Sec. 52 of the NIL.
With respect to demand instruments, if it
is negotiated an unreasonable length of
time after its issue, the holder is deemed
not a holder in due course. (Sec.53)
GENERAL RULE: Failure to make inquiry
is not evidence of bad faith.
EXCEPTIONS:
1. Where a holder’s title is defective or
suspicious that would compel a reasonable
man to investigate, it cannot be stated that
the payee acquired the check without the
knowledge of said defect in the holder’s
title and for this reason the presumption
that it is a holder in due course or that it
acquired the instrument in good faith does
not exist. (De Ocampo vs. Gatchalian, 3
SCRA 596)
2. Holder to whom cashier’s check is not
indorsed in due course and negotiated for
value is not a holder in due course.
(Mesina v. IAC)
Rights of a holder not in due course:
1. It can enforce the instrument and sue
under it in his own name.
2. Prior parties can avail against him any
defense among these prior parties and
prevent the said holder from collecting in
whole or in part the amount stated in the
instrument
Note: If there are no defenses, the
distinction between a HDC and one who is
not a HDC is immaterial. (Notes and
Cases on Banks, Negotiable Instruments
and other Commercial Documents,
Timoteo B. Aquino)
I. Warranties of maker, drawer,
acceptor and endorser
a. Maker (Sec. 60)
 Engages to pay according to
the tenor of the instrument;
and
 Admits the existence of the
payee and his then capacity to
indorse at the time of the
making of the note.
 A person placing his name on
the face of a note is prima
facie a maker and liable as
such; and he is presumed to
have acted with care and to
have signed the instrument
with full knowledge of its
contents
b. Drawer (Sec. 61)
 admits the existence of the
payee and his capacity to
indorse;
 engages that the instrument
will be accepted or paid by the
party primarily liable; and
 engages that if the instrument
is dishonoured and proper
proceedings are brought, he
will pay to the party entitled to
be paid.
c. Acceptor (Sec. 62)
  Engages to pay according to
the tenor of his acceptance; •
 Admits:
1. the existence of the
drawer,
2. the genuineness of his
signature and
3. his capacity and authority
to draw the instrument; and
4. the existence of the payee
and his then capacity to indorse.
Note: the drawee is not liable
until he accepts the instrument
 Where a check is certified by
a bank, it is equivalent to an
acceptance. Since
certification is equivalent to
acceptance, a bank which
has certified a check whether
at the request of the holder or
of a drawer, has the same
liabilities and makes the
same warranties as an
acceptor. It cannot, after
certification, question the
genuineness of the drawer’s
signature. If it discovers that
such signature is forged
subsequent to certification but
prior to payment, it cannot
refuse to pay on the check. If
its discovery comes after it
has paid the check, it cannot
recover back what it paid on
the ground of mistaken
payment unless the holder is
guilty of fraud or negligence.
 If a drawee-bank accepts or
pays a check despite a stop
payment order from the
drawer, through oversight or
otherwise, it cannot refuse to
pay the holder or recover
what has been paid; neither
may it debit the drawer’s
account unless the
acceptance nor payment was
made prior to the receipt of
the order.
d. Endorser (Sec. 66)
General Endorser
 Warrants:
1. genuineness of the instrument;
2. his good title to it;
3. capacity to contract of prior
parties; and
4. instrument is valid and
subsisting.
 engages that the instrument
will be accepted or paid by
the party primarily liable;
and
 engages that if the
instrument is dishonored
and proper proceedings are
taken, he will pay to the
party entitled to be paid.
Irregular Indorser – a person,
not otherwise a party to an instrument,
places his signature thereon in blank
before delivery.
Rules:
 If instrument payable to the
order of a 3rd person, he is
liable to the payee and
subsequent parties.
 If instrument payable to
order of maker or drawer,
he is liable to all parties
subsequent to the maker or
drawer.
 If he signs for
accommodation of the
payee, he is liable to all
parties subsequent to the
payee.
Qualified Indorser warrants that:
 instrument is genuine and in
all respects what it purports
to be;
 he has good title to it;
 all prior parties had capacity
to contract;
 he has no knowledge of any
fact which would impair the
validity of the instrument or
render it valueless.
 Persons Negotiating by
Delivery warrants that:
 warranties same as those of
qualified indorsers; and
 warranties extend to
immediate transferee only.
II. Importance of Notice of
Dishonour
In the case of dishonour of a negotiable
instrument by non-acceptance or non-
payment, a liable holder should notify all the
parties of his liability by issuing a notice of
dishonour.
Upon receiving a notice of dishonour, a party
must issue a notice of dishonour to other
parties rendering them liable to himself, within
a reasonable amount of time.
To point out, the purpose of a notice of
dishonour is to notify a party of his liability.
Further, in case of a drawer, it helps to protect
himself in case of a dishonour occurring at the
end of a drawer or acceptor.
In fact, the notice of dishonour is so important
that an omission to it discharges all parties
other than the maker or acceptor.
Further, a notice of dishonour can be oral or
written. However, it must be formal and should
be issued within a reasonable amount of time.
Notice of Dishonor -notice given by the
holder or his agent to a party or parties
secondarily liable that the instrument was
dishonored by non-acceptance by the drawee
of a bill, or by non-payment by the acceptor of
a bill or by non-payment by a maker of a note.
If such notice is given by a notary public, it is
called PROTEST.
 Effect of failure to give notice:
parties secondarily liable are
discharged
 Requisites:
1. Given by holder or his agent, or by any
party who may be compelled by the
holder to pay;
2. Given to secondary party or his agent;
3. Given within the periods provided by
law;
4. Given at the proper place.
 When notice of dishonor dispensed
with:
1. when party to be notified knows about
the dishonor, actually or constructively;
2. if waived; and
3. when after due diligence, it cannot be
given.
 How given:
1. by bringing verbally or
2. by writing to the knowledge of the
person liable the fact that a specified
instrument, upon proper proceedings
taken, has not been accepted or has not
been paid, and that the party notified is
expected to pay it.
 To whom given:
1. Non-acceptance (bill) – to persons
secondarily liable, namely, the drawer and
indorsers as the case may be.
2. Non-payment (both bill and note) –
indorsers.
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties
are discharged. Notice may be given to
the party himself or to his agent.
 By whom given:
1. the holder
2. another on behalf of the holder
3. any party to the instrument who may
be compelled to pay it to the holder, and
who would have a right of reimbursement
from the party to whom notice is given.
III. Special kinds of Promissory
Notes and Checks
Promissory note
A negotiable promissory note within
the meaning of this Act is an
unconditional promise in writing made
by one person to another, signed by
the maker, engaging to pay on
demand, or at a fixed or determinable
future time, a sum certain in money to
order or to bearer. Where a note is
 drawn to the maker's own order, it is
not complete until indorsed by him.
1. Certificate of deposit
2. Bonds
3. Bank notes
4. Due bills
CERTIFICATE OF DEPOSIT
Written acknowledgment by a bank of the
receipt of money on deposit which the bank
promises to pay to the depositor, bearer, or to
some other person or order
DUE BILLS
an instrument employed for the purpose of
evidencing the transfer of title to any security
or rights pertaining to any security contracted
for or evidencing the obligation of a seller to
deliver such to a subsequent purchaser. A
due-bill shall not be transferable or assignable
by the purchaser.

CHECK
BONDS
a bill of exchange drawn on a bank payable on
demand.
 A promise, under seal to pay money
 More formal in character
 Runs for a longer period of time
 Issued under different legal
circumstances
Kinds of checks:

1. Manager’s / Cashier’s Check – drawn

CLASSES OF BONDS
by a bank on itself and therefore, it is a
primary obligation of the bank.
1. Mortgage bonds
 It is accepted in advance by the act
2. Equipment bonds of its issuance and is not subject to
countermand by the payor after
3. Collateral trust bonds indorsement.
 The bank’s manager signs
4. Guaranteed bonds manager’s check while cashier’s
check is signed by the bank cashier.
5. Debentures
2. Certified Check – one drawn by a
6. Income bonds depositor upon funds to his credit in a
bank which a proper officer of the
7. Convertible
bank certifies will be paid when duly
presented for payment
8. Redeemable

9. Registered bonds 3. Stale check – one which has not been

10. Coupon bonds
4. Crossed check – when 2 parallel lines
BANK NOTES
also called paper money or bills, is a form of
bearer promissory note issued by a bank and
payable on request. Banknotes are legal
tender and can be used to settle any and all
debts.
presented for payment within a
reasonable time after its issue
are drawn across its face or across a
corner thereof. If the name of a bank
appears between the parallel lines, the
check is said to be specially crossed,
and payment should be made only if
presented by the named bank. If no
name appears between the parallel
lines, the check is said to be generally
crossed, and payment should be
 made only upon presentment by some
bank.
Effects of crossing a check:
a. That the check may not be
encashed but only be deposited in the bank;
b. That the check may be negotiated
only once to one who has an account
with a bank; and c. That the act of
crossing the check serves as a
warning to the holder that the check
has been issued for a definite purpose
so that he must inquire if he has
received the check pursuant to that
purpose.
5. Memorandum Check – it is like an ordinary
check except that the word “memorandum,”
“mem” or “memo” is written upon the face of
the check, signifying that the drawer engages
to pay the bona fide holder absolutely, and not
upon a condition to pay upon presentment at
maturity and if due notice of the presentment
and non-payment should be given.
6. Traveler’s check – one upon which the
holder’s signature must appear twice, one to
be affixed by him at the time it is issued and
the second o counter-signature, to be affixed
by him in the presence of the payee before it is
paid, otherwise it is incomplete
Iron Clad Rule: Prohibits the countermanding
of payment of certified checks. (Republic of the
Philippines v. PNB. GR No. 16106. December
1, 1961)
BATAS PAMBANSA BLG. 22
AN ACT PENALIZING THE MAKING OR
DRAWING AND ISSUANCE OF A CHECK
WITHOUT SUFFICIENT FUNDS OR CREDIT
AND FOR OTHER PURPOSES.
Section 1. Checks without sufficient funds. -
Any person who makes or draws and issues
any check to apply on account or for value,
knowing at the time of issue that he does
not have sufficient funds in or credit with
the drawee bank for the payment of such
check in full upon its presentment, which
check is subsequently dishonored by the
drawee bank for insufficiency of funds or credit
or would have been dishonored for the same
reason had not the drawer, without any valid
reason, ordered the bank to stop payment,
shall be punished by imprisonment of not
less than thirty days but not more than one
(1) year or by a fine of not less than but not
more than double the amount of the check
which fine shall in no case exceed Two
Hundred Thousand Pesos, or both such fine
and imprisonment at the discretion of the
court.
The same penalty shall be imposed upon any
person who, having sufficient funds in or credit
with the drawee bank when he makes or
draws and issues a check, shall fail to keep
sufficient funds or to maintain a credit to
cover the full amount of the check if
presented within a period of ninety (90) days
from the date appearing thereon, for which
reason it is dishonored by the drawee bank.
Where the check is drawn by a corporation,
company or entity, the person or persons
who actually signed the check in behalf of
such drawer shall be liable under this Act.
Section 2. Evidence of knowledge of
insufficient funds. - The making, drawing and
issuance of a check payment of which is
refused by the drawee because of insufficient
funds in or credit with such bank, when
presented within ninety (90) days from the
date of the check, shall be prima facie
evidence of knowledge of such insufficiency of
funds or credit unless such maker or drawer
pays the holder thereof the amount due
thereon, or makes arrangements for payment
in full by the drawee of such check within (5)
banking days after receiving notice that such
check has not been paid by the drawee.
Section 3. Duty of drawee; rules of evidence. -
It shall be the duty of the drawee of any check,
when refusing to pay the same to the holder
thereof upon presentment, to cause to be
written, printed, or stamped in plain language
thereon, or attached thereto, the reason for
drawee's dishonor or refusal to pay the same:
Provided, That where there are no sufficient
funds in or credit with such drawee bank, such
fact shall always be explicitly stated in the
notice of dishonor or refusal. In all
prosecutions under this Act, the introduction in
evidence of any unpaid and dishonored check,
having the drawee's refusal to pay stamped or
written thereon or attached thereto, with the
reason therefor as aforesaid, shall be prima
facie evidence of the making or issuance of
said check, and the due presentment to the
drawee for payment and the dishonor thereof,
and that the same was properly dishonored for
the reason written, stamped or attached by the
drawee on such dishonored check.
Not with standing receipt of an order to stop
payment, the drawee shall state in the notice
that there were no sufficient funds in or credit
with such bank for the payment in full of such
check, if such be the fact.
Section 4. Credit construed. - The word
"credit" as used herein shall be construed to
mean an arrangement or understanding with
the bank for the payment of such check.
Section 5. Liability under the Revised Penal
Code. - Prosecution under this Act shall be
without prejudice to any liability for violation of
any provision of the Revised Penal Code.
Section 6. Separability clause. - If any
separable provision of this Act be declared
unconstitutional, the remaining provisions shall
continue to be in force.
Section 7. Effectivity. - This Act shall take
effect fifteen days after publication in the
Official Gazette
NOTICE OF DISHONOR
A Notice of Dishonor is a letter used
to inform a person who has issued a check
(the "drawer") that the same has
been dishonored by the bank. A Notice of
Dishonor is required before a person can be
convicted for a violation of Batas Pambansa
22 ("BP 22" or the "Bouncing Check Law").
As explained in Chua vs. People of the
Philippines (G.R. No. 196853), BP is violated
when the following elements are present:
 the making, drawing, and issuance of
any check to apply for account or for
value;
 the knowledge of the maker, drawer,
or issuer that at the time of issue, he
does not have sufficient funds in or
credit with the drawee bank for the
payment of the check in full upon its
presentment; and
 the subsequent dishonor of the
check by the drawee bank for
insufficiency of funds or credit or
dishonor for the same reason had
not the drawer, without any valid
cause, ordered the bank to stop
payment.
A Notice of Dishonor creates a
presumption that the drawer knew of the
insufficiency of funds if the drawer received the
Notice of Dishonor and fails to pay or make
arrangements for payments within Five (5)
Days from their receipt of the Notice. Thus it is
important that the Notice of Dishonor can be
proved to have been received by the drawee.
This letter can be used if the check was
dishonored for:
 insufficient funds;
 unjustified stop payment order but
the check would have still been
dishonored for insufficient funds if
there was no stop payment order; or
 closed account.
How to use this document?
This document can be used by any
person to inform a drawer of a dishonored
check that the same has been dishonored.

The letter should be addressed to the
drawer of the check. If a corporation is the
drawer of the check, then it should be
addressed to the person who signed the
check (the "signatory"). The user should
complete the information required by the
document. Once completed, the notice of
dishonor should be sent either by registered
mail or by personal service.
If the letter will be sent by registered
mail, the following documents should be
available in the event that a complaint for a
violation of BP 22 is filed:
 Registry receipt;
 Registry return card which should
be signed legibly by the drawee;
 Affidavit executed by the person
who mailed the notice of
dishonor detailing the
circumstances of the mailing of the
same.
If the letter will be delivered through
personal service, the drawer must legibly sign
a copy of the notice of dishonor and indicate
the date of receipt. The copy should then be
kept so it can be used as a proof of receipt of
the notice of dishonor.
BP 22 Defanged: Originally published in
The Philippine Star (Point of Law column)
by Atty. John Philip C. Siao
Batas Pambansa Blg. 22, otherwise
known as the Bouncing Checks Law (BP 22),
is the law that punishes the making or the
drawing of a check to apply on account or for
value when the maker or drawer knew at the
time of issue that the account against which
the check was drawn had no sufficient funds
in, or enough credit with, the drawee bank for
the payment of such check or when the maker
or drawer of the check issues a stop payment
order on such a check without any valid
reason. In both cases, the check is dishonored
by reason of insufficient funds. It is also a
violation of BP 22 when the maker or drawer of
such a check fails to maintain sufficient funds
in, or enough credit with, the drawee bank to
cover the full amount of the check for a period
of ninety (90) days from the date appearing on
the check and the check is dishonored for
such reason. The penalty for violation of BP 22
is imprisonment for 30 days to one year or a
fine, or both (Section 1, BP 22).
BP 22 was enacted to discourage the
issuance of bouncing checks, to prevent
checks from becoming “useless scraps of
paper,” and to restore respectability to checks.
The law was enacted at a time when the
stability and commercial value of checks,
which are recognized as being virtual
substitutes for currency, were being
threatened by the rampant issuance of checks
that were subsequently dishonored by drawee
banks. Because BP 22 imposes imprisonment
among its penalties, it is now a common
practice for creditors to require their debtors to
issue post-dated checks to cover amortizations
of their loan. Accordingly, BP 22, to a certain
degree, has achieved the purpose for which it
was enacted.
In the past years, however, there have
been two important developments regarding
BP 22. The first is the shift in policy as
announced by the Supreme Court in its
Administrative Circular Nos. 12-2000 and 13-
01 towards the imposition of a fine only, and
not imprisonment, for violations of BP 22. The
second are decisions of the courts holding that
the prosecution in BP 22 must establish that a
written notice of dishonor was actually
received by the maker or drawer of the
dishonored check.
The Supreme Court in its
Administrative Circular No. 12-2000 declared
that, in imposing the penalty for violations of
BP 22, courts should follow the policy of
“redeeming valuable human material and
preventing unnecessary deprivation of
personal liberty and economic usefulness with
due regard to the protection of the social
order.” In that regard, in lieu of imprisonment,
a fine in an amount equal to double the
amount of the check involved has been
deemed an appropriate penalty for a violation
of BP 22. Subsequently, through
Administrative Circular No. 13-01, the
Supreme Court clarified that it did not intend to
remove the penalty of imprisonment but that
courts should reserve imposing imprisonment
as a penalty for serious cases when the
violation of BP 22 was committed in such a
way as would negatively affect the social
order.
With regard to the second
development, failure to establish that a written
notice of dishonor was actually received by the
maker or drawer of the check is a ground for
an acquittal (Rico v. People of the Philippines,
G.R. No. 137191, 18 November 2002). This
second development is a very real problem
faced by lawyers, either as private or public
prosecutors, in BP 22 cases. Oftentimes, the
only, if not strongest, defense raised by an
accused in a BP 22 case is that he/ she never
received any notice of dishonor. Numerous BP
22 cases have been dismissed and/ or have
resulted in the acquittal of the accused on the
ground that the prosecution failed to establish
that the accused had actually received a notice
of dishonor. In order to appreciate the impact
of this development, we must realize how
difficult it really is to prove actual receipt of the
notice of dishonor.
First, the prosecution in a BP 22 case
must establish that (a) notice of dishonor was
sent to the issuer of the dishonored check and
(b) that the same was actually received (Yu Oh
v. Court of Appeals, et al. G.R. No. 125297, 6
June 2003). A notice of dishonor may be sent
to the maker or drawer of the dishonored
check by (1) by personal service upon the
issuer or (2) by registered mail. If the notice of
dishonor is sent by registered mail, the fact of
sending the notice of dishonor is established
by the registry receipt, the registry return card,
and an affidavit executed by the person who
mailed the notice of dishonor detailing the
circumstances of the mailing (Victor Ting
“Teng See”, et al. v. Court of Appeals, et al.,
G.R. No. 140665, 13 November 2000).
As to establishing actual receipt, the
prosecution must also prove that the signature
appearing on the registry return card or notice
of dishonor, in case of personal service,
belongs to that of the issuer of the dishonored
check or, at the very least, to his duly
authorized agent. In the latter case, the
prosecution must establish the capacity and
authority of such person as agent. An illegible
signature, such as when a recipient merely
signs his/ her initials on the registry return card
or notice of dishonor, as the case may be,
does not prove that the issuer actually
received the notice of dishonor (Victor Ting
“Teng See”, et al. v. Court of Appeals, et al.,
G.R. No. 140665, 13 November 2000). It is
also crucial that the registry return card or the
notice of dishonor indicate the date it was
received in order to fix the start of the five (5)
day period within which the maker or drawer of
the check must pay or make arrangements for
the payment of the amount of the check
(Section 1, BP 22)(Danao v. Court of Appeals,
G.R. No. 122353, 6 June 2001).
The notice of dishonor may be sent to
the office of the maker or drawer of the
dishonored check but he must receive the
notice personally or through his authorized
agent. A corporation or an officer of a
corporation that receives a notice of dishonor
addressed to one of its employees has no
obligation to forward the notice to the
employee concerned. Thus, such receipt is not
the receipt contemplated by BP 22 (Lao v.
Court of Appeals, G.R. No. 119178, 20 June
1997). A notice of dishonor may also be sent
to the residence of the maker or drawer of the
dishonored check and received by him/her, the
housemaids or houseboys who are deemed to
have a special power-of-attorney to receive
mail in behalf of the addressee, or any
member of the family of sufficient age or
discretion (Petilla v. Court of Appeals, G.R.
No. 150792, 3 March 2004). Notably, the
notice of dishonor may be sent to, and
received by, the maker or drawer of the
dishonored check wherever he may be found
as long as the fact and date of receipt are
established.
Based on the foregoing, it is easy to
see how, as a practical matter, it is very
difficult to establish actual receipt of the notice
of dishonor. Save for physically forcing the
issuer of the check to receive the notice of
dishonor, obtaining proof of personal receipt
may prove to be a daunting task, if not an
outright impracticable one. Needless to say,
most intended recipients of the notice of
dishonor may even refuse to receive the
notice. With respect to receipt of the notice of
dishonor by a supposed authorized agent, it is
the usual defense to deny knowing the alleged
agent. On the other hand, in the event that it
was the househelp who received the notice of
dishonor, the maker or drawer may
conceivably even resort to sending the
househelp home to the province or to another
employer, then deny that the said househelp
was ever in his/ her employ. There are, for the
most part, no employment records for
househelp. Finally, it may not be realistic to
expect that the registry return card for the
notice of dishonor could clearly state the name
and signature of the recipient, since, in
practice, the postman will accept a simple
initial from the recipient, which in no way gives
any clue as to the identity of the said recipient.
In any event, the postman is not to blame
since he/ she cannot compel anybody to sign
the registry return card against their will. The
question now is, how do you prove that the
maker or drawer of the dishonored check
actually received the notice of dishonor under
any of the above hypothetical circumstances?
RULES ON MANAGEMENT OF THE
BUSINESS OF PARTNERSHIP
(Art. 1784 - 1796)
 A partnership begins from the moment
of the execution of the contract, unless it
is otherwise stipulated.
 When a contract for a fixed term or
particular undertaking is continued after
the termination of such term or particular
undertaking without any express
agreement, the rights and duties of the
partners remains the same as they were
at such termination, so far as is
consistent with a partnership at will.
o Partnership at will is one in
which no term of existence has
been fixed and which may be
terminated at the will of any
partners.
 Every partner is a debtor of the
partnership for whatever he may have
promised to contribute thereto.
o He shall also be bound for
warranty in case of eviction with
regard to specific and
determinate things which he
may have contributed to the
partnership. He shall also be
liable for the fruits thereof from
the time they should have been
delivered, without the need of
any demand.
Obligations of partners to contribute:
1. Shall deliver at the beginning of the
partnership or, if a different date has
been agreed upon, at the stipulated time
the properties he agreed to contribute;
2. Shall answer for eviction, in case the
partnership is deprived of the ownership
of any specific property he contributed;
3. Shall answer to the partnership for the
fruits of the properties whose delivery he
delayed from the date he should have
contributed it up to actual delivery
without necessity of any demand;
4. Shall preserve said properties with the
diligence of a good father of a family
pending their delivery to the partnership;
5. And shall indemnify the partnership for
any damage caused it by the retention of
said properties or by the delay in their
contribution.
Rule when contribution consists goods
Appraisal of value is needed to determine
how much was contributed as prescribed in
the contract. In in the absence of stipulation,
it shall be made by experts chosen by the
partners, and according to current prices,
the subsequent changes thereof being for
the account of the partnership.
 A partner who has undertaken to
contribute a sum of money and fails to do
so becomes a debtor for the interest and
damages from the time he should have
complied with his obligation.
Risk of Specific and determinate things
The risk of specific and determinate things
which are not fungible, like a boat, only the
use of which is contributed, shall be borne
by the partner as the ownership thereof is
not transferred to the partnership. This
follows the general rule that the thing
perished with the owner.
Risk of fungible or perishable things
If the things contributed are fungible or
cannot be kept without deteriorating
(perishable) like wine, oil, etc., even if they
are contributed only for the use of the
partnership, the risk of loss shall be for the
account of the partnership for the latter
cannot make use of them without their
getting consumed or presumed.
Risk of Things contributed to be sold
If the things contributed are to be sold, the
partnership bears the risk of loss, for
obviously the partnership is the intended
owner; otherwise, the firm cannot make the
sale.
Risk of Things brought and appraised in
inventory
The partnership bears the risk of loss of
things brought and appraised in the
inventory as this has the effect of an implied
 sale thus making the partnership the owner
of said things.
Industrial partner barred from engaging in
business
An industrial partner cannot engage in any
business for himself, UNLESS the partnership
expressly permits him to do so; and if he
should do so, the capitalist partners may either
exclude him from the firm or avail themselves
of the benefits which he may have obtained in
violation of this provision, with a right to
damages in either case.
o Industrial partner is one who
contributes his industry or labor in the
partnership.
To prevent any conflict of interest between the
industrial and the partnership, and to insure
faithful compliance by said partner with his
prestation.
 Unless there is a stipulation to the
contrary, the partners shall contribute
equal shares to the capital of the
partnership.
 If there is no agreement to the
contrary, in case of an imminent loss
of the business of the partnership, any
partner who refuses to contribute an
additional share to the capital, except
an industrial partner, to save the
venture, shall be obliged to sell his
interest to the other partners.
Responsibility of the partnership to a
partner
The partnership shall be responsible to every
partner for the amounts he may have
disbursed on behalf of the partnership and for
the corresponding interest, from the time the
expenses are made; it shall also answer to
each partner for the obligations he may have
contracted in good faith in the interest of the
partnership business, and for the risk
inconsequence of its management.
Rule when there are 2 or more managers:
Conditions:
1. 2 or more partners are managers
2. There is no specification of respective
rules
3. There is no stipulation requiring
unanimity
Specific rules:
1. Each may separately execute all acts
of administration, unlimited power to
administer
2. If any managers oppose, majority rule
prevails. In case of a tie, persons
owning controlling interest prevail
provided they are also managers.
a. Right to oppose is not given to non-
managers
b. Opposition should be done before the
acts produce legal effects insofar as
third persons are concerned
When unanimity is required:
1. Concurrence of all shall be necessary
for the validity of the acts
2. Absence or disability of anyone of
them cannot be alleged unless there is
imminent danger of grave or
irreparable injury to the partnership
Rule on duty of third persons
Third persons are not required to inquire as to
whether or not a partner with whom he
transacts has the consent of all managers.
Rule to be observed when the manner of
management has not been agreed upon:
1. All the partners are considered agents.
Whatever any one of them may do
alone shall not bind the partnership.
2. If the acts of one are opposed by the
rest, the majority shall prevail.
3. When a partner acts in his own name,
he does not bind the partnership.
4. Authority to bind the firm does not
apply if somebody else has been
given authority to manage in the
articles of organization or through
some other means.
5. Alterations require unanimity
concerning immovable partnership
property but if the refusal to consent
by the others is prejudicial; to the
interest of the partnership, courts
intervention may be sought.
Rules on associate of partner:
1. Every partner may associate another
person with him in his name.
2. For a partner to have an associate in
his share, consent of all the other
partners is not required.
3. For the associate to become a partner,
all must consent.
Rules on partnership books:
 1. Kept at the principal place of the
business of the partnership.
2. At any reasonable hour, every partner
shall have access to and may inspect
and copy any of them.
Duty of partners to give information and to
account
Good faith not only requires that a partner
should not make any false concealment but he
should abstain from all concealment.
Every partner must account to the partnership:
1. Any benefit acquired
2. Any profits received
3. Any use of partnership property
Right to demand a formal account
Any partner shall have the right to a formal
account as to partnership affairs:
1. If wrongfully excluded from partnership
business
2. If wrongfully excluded from partnership
property by his co-partners
3. If the right exists under the terms of
agreement
4. If the other partner receives other
benefits, profits or uses partnership
property
5. Whenever other circumstances render
it just and reasonable
This right exists as long as the partnership
exists. Prescription begins to run only upon the
dissolution of the partnership when he final
accounting is done.
Property rights of partners
1. Rights in specific partnership
properties
A partner is co-partner with his
partners of specific partnership
property.
a. Has equal rights with his
partners to possess the
property but only for
partnership purposes
b. Cannot assign his right to the
property except if all other
partners assign their rights in
the same property
c. Right to the property is not
subject to attachment or
execution except on a claim
against partnership
d. Right to the property is not
subject to legal support
2. Interests in the partnership
A partner’s interest in the partnership
is his share of the profits and surplus.
a. Assigned
b. Attached
c. Be subject to legal support
3. Right to participate in the management
a. The assignee does not
necessarily become a partner,
thus, he cannot interfere in the
management or administration
of the firm, and cannot
demand information,
accounting and inspection of
partnership books.
DISTRIBUTION OF LOSSES AND
LIABILITIES
(Art. 1797 - 1827)
At a glance:
As a general rule, the liability of partners in a
partnership organization is unlimited in the
sense that the partnership creditors may run
after them for any and all of their assets and
property in payment of the partnership debts.
Should one of the partners defray all liabilities
of the partnership, he is entitled to be
reimbursed by the other partners for their
respective shares therein.
In the case, however, of limited partnerships,
the law allows the limitation of the liability of
certain partners to the extent of the amount
contributed to the partnership.
Rules in profit sharing:
1. The partners share the profits in
accordance with the ratio established
by their contract.
2. If there is no such stipulation in the
partnership contract, then:
a. If all are capitalist partners they
have the profits in proportion to
their capital contributions;
b. If there are capitalist as well as
industrial partners, the industrial
partner get a share each that is
just and equitable while the
capitalist partners divide the
remainder in proportion to their
capital contributions; and
c. If there is a capitalist-industrial
partner, he gets a share in the
profits as an industrial partner
and an additional share in
proportion to his capital
 contribution to be determined as
in (b), above.
Rules in loss sharing:
1. The stipulation in the partnership
agreement regarding loss sharing
must be followed.
2. If there is no such agreement, but the
contract provides for a profit sharing
ration, the profit sharing ratio shall also
be the loss sharing ration.
3. In the absence of loss sharing and
profit sharing stipulations in the
contract, then the loss shall be borne
by the partners in proportion to their
capital contributions; but a purely
industrial partner is exempted from
participation in the loss.
Share of industrial partner in profits and
losses
Unless agreed upon, the industrial partner
shall receive such share in the profits as may
be just and equitable under the circumstances.
As for the losses, the industrial partner is not
liable. If the partnership has a contractual debt
and it cannot pay, the industrial partner equally
with the capitalist partners, can be compelled
by the creditor to pay his pro rata share out of
his own property or assets.
 The designation of profits and losses
cannot be entrusted to one of the
partners. Admittedly, the designation of
profits and losses cannot be entrusted to
one of the partners as the fulfillment of a
contract cannot be left to one of the
contracting parties. It may, however, be
entrusted to a third person by common
interest.
Stipulation to exclude a partner from
profits and losses is void
The law does not allow a provision in the
contract of partnership excluding one or more
partners from sharing in the profits and losses.
The reason is that a partnership is organized
for the common benefit or interest of the
partners.
Reason for exclusion of industrial partner
An industrial partner is not liable for losses
because if the partnership fails to realize any
profits, the industrial partner would have
contributed his labor in vain. Furthermore, the
industrial partner cannot withdraw the work
already done by him for the partnership.
 Every partner is an agent of the
partnership, and entitled to bind the
others by his acts. He may also be liable
for the entire partnership obligations.
 All partners are personally liable for the
debts of the partnership with their
separate property except that limited
partners are not bound beyond the
amount of their investment.
 General partnership: one consisting of
general partners who are liable pro rata
and subsidiary and sometimes solidarily
w/ their separate property for partnership
debts.
 Limited partnership: one formed by two
or more persons having as members
one or more general partners and one or
more limited partners, the latter not
being personally liable for the obligations
of the partnership.
Partner liable for damages caused the
partnership
Every partner is responsible to the partnership
for damages suffered by it through his fault,
and he cannot compensate them with the
profits and benefits which he may have earned
for the partnership by his industry. It follows
the general rule of contracts that where a
person is at fault in the fulfillment of his
obligations he shall be liable for the payment
of damages. The partner’s fault, however,
must be determined in accordance with the
circumstances of person, time and place.
Liquidation necessary to ascertain
damages
It is first necessary that a liquidation of the
business thereof be made to the end that the
profits and losses may be known and the
causes of the latter and the responsibility of
the defendant as well as the damages which
each partner may have suffered, may be
determined.
Partner liable for wrongful act of a partner
The partners are liable for the negligent
operation of a vehicle by a partner, acting in
the course of business, which results in a
traffic accident.
If he is driving a partnership-owned vehicle for
purposes of his own, the acting partner alone
is liable it is not a partnership tort.
Partnership may proceed against negligent
partner
Where a partnership is liable to a third person,
there is a right of indemnity against the partner
whose negligence caused the injuries.
The partnership is bound to make good the
loss:
1. Where one partner acting within the
scope of his apparent authority receives
money or property of a third person and
misapplies it.
2. Where the partnership in the course of
its business receives money or property
of a third person and the money or
property so received is misapplied by
any partner while it is in the custody of
the partnership.
Partnership bound by partner’s breach of
trust
The partnership is liable for the conversion
(misappropriation) of money or property
entrusted to the partnership by a third person.
The effect of solidary liability is the same
whether by the partnership and subsequently
misappropriated by a partner.
Law imposes solidary liability
The law imposes solidary liability upon the
partners and the partnership in cases of torts
and acts of conversion by a partner. It may be
stated that the liability of a partner for a debt of
the partnership depends upon whether the
debts is contractual or it arises from tort or
conversion. If it arises from contract, the
liability is subsidiary and pro rata; if it arises
from tort or conversion, the liability is solidary.
Person bound by his representation
When a person, by words spoken or written or
by conduct, represents himself, or consents to
another representing him to anyone, as a
partner in an existing partnership or with one
or more persons not actual partners, he is
liable to any such persons to whom such
representation has been made, who has, on
the faith of such representation, given credit to
the actual or apparent partnership, and if he
has made such representation or consented to
its being made in a public manner he is liable
to such person, whether the representation
has or has not been made or communicated to
such person so giving credit by or with the
knowledge of the apparent partner making the
representation or consenting to its being
made:
1. When a partnership liability results, he
is liable as though he were an actual
member of the partnership.
2. When no partnership liability results,
he is liable pro rata with the other
persons, if any, so consenting to the
contract or representation as to incur
liability, otherwise separately.
A person who hold himself out as a partner in
a business, or consents to his being so held
out, is liable on contracts made with third
persons who deal with the persons carrying on
the business on the faith of the representation.
He is stopped to deny the apparent agency.
Incoming partner liable for existing
obligations
A newly admitted partner is liable for
obligations of the partnership at the time of his
admission as though he had been a partner
when such obligations were incurred. The
obligation of the incoming partner shall be
satisfied only out of partnership property,
unless there is a stipulation to the contrary. He
has every means of obtaining full knowledge of
protecting himself, because he may insist on
the liquidation or settlement of existing
partnership debts. On the other hand, the
creditors have no means of protecting
themselves.
 The creditors of the partnership shall be
preferred to those of each partner as
regards the partnership property.
Without prejudice to this right, the
private creditors of each partner may
ask the attachment and public sale of
the share of the latter in the partnership
assets.
DISSOLUTION OF PARTNERSHIP
(Art. 1828 - 1842)
At a glance:
Philippine law allows the dissolution of
partnership for any reason, provided such
dissolution does not amount to a breach of
contract or is prejudicial to third parties. The
death of a partner or the unauthorized transfer
of ownership of his share in the partnership [in
case there is a limitation to this effect] results
in the dissolution thereof. In other words, any
change in the composition of the partnership,
unless so allowed, will result in the dissolution
thereof. Consequently, the remaining partners
may form a new partnership with less or more
partners.
Dissolution of the partnership is the change in
the relation of the partners caused by any
partner ceasing to be associated in the
carrying on as distinguished from the winding
up of the business.
Termination is the point in time when all
partnership affairs are wound up.
Winding up is the process of settling
partnership affairs after dissolution.
Rule
The partnership is not terminated but
continues until the winding up of partnership
affairs is completed.
Effect on Obligations
1. A partner cannot evade previous
obligations entered into by the
partnership.
2. It saves the former partners from new
obligations to which they have not
expressly/impliedly consented unless
the same be essential for winding up.
Causes of dissolution
1. Without violation of the agreement
between the partners:
a. By the termination of the definite
term or particular undertaking
specified
b. By the express will of any
partner in good faith
c. By the express will of all the
partners who have not assigned
their interests or suffered them
to be charged for their separate
debts
d. By the expulsion in good faith of
any partner from the business
bona fide
2. In contravention of the agreement
between the partners by the express
will of any partner at any time.
3. By any event which makes it unlawful
for the business of the partnership to
be carried on
4. Loss of the thing promised to be
contributed
a. The specific thing perishes
before the delivery
b. Usufruct is lost except if
ownership had been transferred
to the partnership.
5. By the death of any partner.
6. By the insolvency of any partner or of
the partnership.
7. By the civil interdiction of any partner.
8. By judicial decree of court under the
following article.
a. Partner declared insane in any
judicial proceeding/is shown to
be of unsound mind
b. Partner becomes incapable of
performing his part
c. Partner has been guilty of such
conduct
d. Partners persistent breach of
agreement
e. The business of the partnership
can only be denied on at a loss
f. Other circumstances which
render dissolution equitable
o Even if there is a specified term, one
partner cause its dissolution by
expressly withdrawing even before the
expiration of the period, with or without
justifiable cause. If the cause is not
justified or no cause was given, the
withdrawing partner is liable for
damages but in no case can he be
compelled to remain in the firm.
In case of purchaser of a partner's interest
1. After the termination of the specified
term or particular undertaking.
2. At any time if the partnership was a
‘partnership at will’ when the interest
was assigned or when the charging
order was issued.
Dissolution terminates all authority of any
partner to act for the partnership:
1. With respect to the partners
a. When the dissolution is not by
the act, insolvency or death of a
partner.
If the cause of dissolution is not
by act, death, or insolvency of a
partner, the authority ceases
immediately. Except for the
purposes of winding-up
partnership affairs.
b. When the dissolution is by such
act, insolvency or death of a
partner.
Each partner is liable to his co-
partners for his share of any
liability created by any partner
acting for the partnership as if
the partnership had not been
dissolved unless:
i. The dissolution being by
act of any partner, the
partner acting for the
 partnership had
knowledge of the
dissolution.
ii. The dissolution being by
the death or insolvency
of a partner, the partner
acting for the
partnership had
knowledge or notice of
the death or insolvency.
2. With respect to persons not partners
After dissolution, a partner can bind the
partnership:
1. By any act appropriate for winding up
partnership affairs
2. By completing unfinished transactions
at dissolution
3. By any transaction which would bind
the partnership if dissolution had not
taken place, provided the other party:
a. Had previous creditor and had
no knowledge or notice of the
dissolution.
b. Had not a previous creditor, had
nevertheless known of the
partnership prior to dissolution,
and, having no knowledge or
notice of dissolution, the fact of
dissolution had not been
published.
The partnership is in no case bound by any
act of a partner after dissolution:
1. Where the partnership is dissolved
because it is unlawful to carry on the
business, unless the act is appropriate
for winding up partnership affairs.
2. Where the partner has become
insolvent.
3. Where the partner has no authority to
wind up partnership affairs; except by
a transaction with one who
a. Had previous creditor and had
no knowledge or notice of his
want of authority
b. Had not extended credit to the
partnership prior to dissolution,
and, having no knowledge or
notice of his want of authority,
the fact of his want of authority
has not been advertised in the
manner provided
 Dissolution of a partnership does not
itself discharge the existing liability of
any partner. Except, a partner can be
discharged from any existing liability
upon dissolution of the partnership
provided that there is an agreement
between the partnership creditor and the
person or partners continuing the
business. Individual properties of the
deceased partner shall be liable to all
obligations of the partnership made
while he was a partner.
 The partner designated in the
agreement may wind up partnership
affairs. In absence of agreement, the
partner that did no wrongfully dissolved
the partnership. If all partners died, the
legal representative of the last surviving
partner provided that the partner is not
insolvent.
 Winding up of a dissolved partnership
may be done extra judicially by the
partners themselves or judicially under
the control of a competent court.
Managing partner or winding-up partner
has the right to sell firm property even
after the life of the partnership has
expired.
 When dissolution is caused in any way,
except in contravention of the
partnership agreement, each partner, as
against his co-partners and all persons
claiming through them in respect of their
interests in the partnership, unless
otherwise agreed, may have the
partnership property applied to
discharge its liabilities, and the surplus
applied to pay in cash the net amount
owing to the respective partners.
 When dissolution is caused by expulsion
of a partner, bona fide under the
partnership agreement and if the
expelled partner is discharged from all
partnership liabilities, he shall receive in
cash only the net amount due him from
the partnership.
Rights of the partners when dissolution is
caused in contravention of the partnership
agreement:
1. Each partner who has not caused
dissolution wrongfully shall have:
a. All the rights specified in the first
paragraph of this article.
b. The right, as against each
partner who has caused the
dissolution wrongfully, to
damages breach of the
agreement.
 2. The partners who have not caused the
dissolution wrongfully, if they all desire
to continue the business in the same
name either by themselves or jointly with
others, provided they secure the
payment by bond approved by the court,
or pay any partner who has caused the
dissolution wrongfully, the value of his
interest in the partnership at the
dissolution, less any damages
recoverable under No. 1 (b), and in like
manner indemnify him against all
present or future partnership liabilities.
3. A partner who has caused the
dissolution wrongfully shall have:
a. If the business is not continued
under the provisions of No. 2, all
the rights of a partner under the
first paragraph, subject to
liability for damages in the
second paragraph, No. 1 (b)
b. If the business is continued
under No. 2, the right as
against his co-partners and all
claiming through them in respect
of their interests in the
partnership, to have the value of
his interest in the partnership,
less any damage caused to his
co-partners by the dissolution,
ascertained and paid to him in
cash, or the payment secured
by a bond approved by the
court, and to be released from
all existing liabilities of the
partnership; but in ascertaining
the value of the partner's
interest the value of the good-
will of the business shall not be
considered.
Rights of the partners when dissolution is
caused without violation of the agreement:
1. All partners may have the property sold
for payment of partnership liabilities.
2. If there is surplus, after paying the
liabilities of the firm, it shall be given in
cash to the partners.
Rights of the partners when dissolution is
caused in contravention of the agreement:
1. The remaining partners have the right to
sell partnership property to pay the
partnership’s liabilities and the surplus is
distributed to the remaining partners as
well.
2. As against the guilty partner for the
dissolution of the partnership, the
remaining partners have the right to
recover damages for breach.
3. The remaining partners may also
continue the business up to end of the
stipulated term of the partnership.
Rescission of partnership contract on the
ground of the fraud or misrepresentation,
the party entitled to rescind is entitled:
1. To a lien on, or right of retention of,
the surplus of the partnership property
after satisfying the partnership
liabilities to third persons for any sum
of money paid by him for the purchase
of an interest in the partnership and for
any capital or advances contributed by
him.
2. To stand, after all liabilities to third
persons have been satisfied, in the
place of the creditors of the
partnership for any payments made by
him in respect of the partnership
liabilities.
3. To be indemnified by the person guilty
of the fraud or making the
representation against all debts and
liabilities of the partnership.
Right of partner to rescind contract of
partnership
If one is induced by fraud or misrepresentation
to become a partner, the contract is voidable.
If the contract is annulled, the injured party is
entitled to restitution. Here, the fraud or
misrepresentation vitiates consent. However,
until the partnership contract is annulled by a
proper action in court, the partnership relations
exist and the defrauded partner is liable for all
obligations to third persons.
1. Right of injured partner where
partnership contract rescinded
2. Right of retention of partnership
property
3. Right to be subrogated in place of
creditors of partnership
4. Right to be indemnified by the guilty
partner against all liabilities of the
partnership.
Settling accounts between the partners
after dissolution
1. The assets of the partnership are:
a. The partnership property.
b. The contributions of the
partners necessary for the
payment of all the liabilities
specified in No. 2.
 2. The liabilities of the partnership shall
rank in order of payment, as follows:
a. Those owing to creditors other
than partners.
b. Those owing to partners other
than for capital and profits.
c. Those owing to partners in
respect of capital.
d. Those owing to partners in
respect of profits.
3. The assets shall be applied in the
order of their declaration in No. 1 to
the satisfaction of the liabilities.
4. The partners shall contribute the
amount necessary to satisfy the
liabilities.
5. An assignee for the benefit of creditors
or any person appointed by the court
shall have the right to enforce the
contributions specified in the
preceding number.
6. Any partner or his legal representative
shall have the right to enforce the
contributions specified in No. 4, to the
extent of the amount which he has
paid in excess of his share of the
liability.
7. The individual property of a deceased
partner shall be liable for the
contributions specified in No. 4.
8. When partnership property and the
individual properties of the partners
are in possession of a court for
distribution, partnership creditors shall
have priority on partnership property
and separate creditors on individual
property, saving the rights of lien or
secured creditors.
9. Where a partner has become insolvent
or his estate is insolvent, the claims
against his separate property shall
rank in the following order:
a. Those owing to separate
creditors.
b. Those owing to partnership
creditors.
c. Those owing to partners by
way of contribution.
Rules for settling accounts between the
partners
1. The assets of the partnership
Assets of the partnership
a. Partnership property
b. The contributions of the
partners necessary for the
payment of all liabilities
2. Liabilities of the partnership
3. Application of assets
Order of application of the assets
a. Those owing to partnership
creditors
b. Those owing to partners other
than for capital and profits
such as loans given by the
partners or advances for
business expenses
c. Those owing for the return of
the capital contributed by the
partners
d. The share of the profits, if any,
due to each partner
4. Contribution by the partners
Order of application of partner who become
insolvent or his estate his insolvent, the
claims against his separate property
1. Those owing to separate creditors
2. Those owing to partnership creditors
3. Those owing to partners by way of
contribution
 The individual property of a deceased
partner shall be liable for his share of the
contributions necessary to satisfy the
liabilities of the partnership
Creditors of the dissolved partnership are
also creditors of the person or partnership
continuing the business:
1. When any new partner is admitted into
an existing partnership, or when any
partner retires and assigns his rights in
partnership property to two or more of
the partners, or to one or more of the
partners and one or more third
persons, if the business is continued
without liquidation of the partnership
affairs.
2. When all but one partner retire and
assign their rights in partnership
property to the remaining partner, who
continues the business without
liquidation of partnership affairs, either
alone or with others.
3. When any partner retires or dies and
the business of the dissolved
partnership is continued with the
consent of the retired partners or the
representative of the deceased
partner, but without any assignment of
his right in partnership property.
4. When all the partners or their
representatives assign their rights in
partnership property to one or more
third persons who promise to pay the
debts and who continue the business
of the dissolved partnership.
 5. When any partner wrongfully causes a
dissolution and the remaining partners
continue the business either alone or
with others, and without liquidation of
the partnership affairs.
6. When a partner is expelled and the
remaining partners continue the
business either alone or with others
without liquidation of the partnership
affairs.
 When the business of a partnership after
dissolution is continued under any
conditions set forth, the creditors of the
dissolved partnership have a prior right
to any claim of the retired partner or the
representative of the deceased partner
against the person or partnership
continuing the business, on account of
the retired or deceased partner's interest
in the dissolved partnership or any
consideration promised for such interest
or for his right in partnership property.
 The use by the person or partnership
continuing the business of the
partnership name, or the name of a
deceased partner as part thereof, shall
not of itself make the individual property
of the deceased partner liable for any
debts contracted by such person or
partnership.
Causes of dissolution of a partnership by
change of members
1. New partner is admitted
2. Partner retires
3. Partner dies
4. Partner withdraws
5. Partner is expelled from partnership
6. Other partners assign their rights to
sole remaining partner
7. All the partners assign their rights in
partnership property to third persons.
 Any change in membership dissolves a
partnership and creates a new one.
When a business of a dissolved
partnership is continued by former or
without new partners, the old creditors
are creditors of the person or
partnership that is continuing the
business.
 When any partner retires or dies and the
business is continued, without any
settlement of accounts as between him
or his estate, he or his legal
representative may have the value of his
interest at the date of dissolution and
shall receive as an ordinary creditor an
amount equal to the value of his interest
in the dissolved partnership with interest.
At his option, the profits attributable to
the use of his right in the property of the
dissolved partnership. Except, no
liquidation needed when there is
settlement as to what retiring partner
shall receive.
Rights of retiring of properties of deceased
partner when business continued
1. To have the value of the interest of the
retiring partner or deceased partner in
the partnership determined as of the
date of dissolution.
2. To receive thereafter, as an ordinary
creditor, an amount equal to the value
of his share in the dissolved
partnership with interest, or, at his
option, in place of interest, the profits
attributable to the use of his right.
Right to demand an accounting of
partnership affairs must be directed
against
1. Winding-up partners
2. Surviving partners
3. The person the partnership continuing
the business
LEGAL PERSONALITY WITHIN THE WINDIN
G UP PERIOD
Art. 1836. Unless otherwise agreed, the
partners who have not wrongfully dissolved the
partnership or the legal representative of the
last surviving partner, not insolvent, has the
right to wind up the partnership affairs,
provided, however, that any partner, his legal
representative or his assignee, upon cause
shown, may obtain winding up by the court.
Who may wind up Partnership Affairs?
Partner designated in the agreement. In
absence of agreement, the partners that did no
wrongfully dissolved the partnership.
If all partners died, the legal representative of
the last surviving partner provided that the
partner is not insolvent.
REQUIREMENTS ON THE RETIREMENT OF
THE BUSINESS IN THE PHILIPPINES
The process of business closure in the
Philippines depends on the type of the
company to be ceased. For corporations and
partnerships, they should be formally close in
the Securities and Exchange Commission
(SEC) where they are also registered, unlike
sole proprietorship businesses that are not.
There are also businesses that should comply
with the closure requirements of other
government agencies, where they are
specially regulated. For example, pawnshops
are also required to be closed in Bangko
Sentral ng Pilipinas (BSP), where they are also
governed or regulated.
Businesses can also be closed voluntarily or
involuntarily. Voluntary closure generally
means the business owner close the business
in his or her own will, usually complying with
applicable business regulations. On the other
hand, involuntary closure means the business
is closed due to events, such as failure to
comply with the law or regulations and the
government or court has ordered to close the
business. In this article, we assume that the
business owner is voluntarily closing the
business.
Usually a business should be closed in the
following government agencies/offices.
• Department of Trade and Industry (DTI)
office
• The local City/Municipal Office, where the
business is registered
• Department of Labor and Employment
(DOLE) office, if the company has employees
• Bureau of Internal Revenue (BIR) office
• Bangko Sentral ng Pilipinas (BSP), if the
business is registered with the office
• Securities and Exchange Commission (SEC)
for partnership and corporation
• Other agencies or offices where the business
is registered, such as SSS, PHIC and HDMF
To guide you on the formal cessation of your
business, here are some of the basic steps,
procedures and requirements on how to close
a business in the Philippines.
Closing a business at DTI
According to the DTI, we still have to inform
the office when we voluntarily close our
business, and apply for cancellation of our
registered business name (BN).
For Sole Proprietor, the following are the
requirement for Voluntary Cancellation.
• Letter request signed by the owner
• Affidavit of cancellation of the registered BN,
stating the reason/s for the cancellation and
that the registered owner has no outstanding
financial obligation at the time of closure of
establishment
• Original copy of the BN certificate and the
duplicate copy of the application form (affidavit
of loss if either the business name certificate
and/or the duplicate copy of the application
form was lost)
For Corporation and Partners, the following
are the requirements for Voluntary
Cancellation.
If dissolved at the Securities and Exchange
Commission (SEC),
• Letter request signed by the authorized
signatory (Board Resolution for the authorized
signatory)
• Certified photocopy of the SEC certificates of
dissolution of the corporation/partnership
• Original copy of the business name
certificate of registration and the duplicate
copy of the application form. (Affidavit of loss if
either the business name certificate and/or the
duplicate copy of the application form was lost)
If BN Registration Only,
a. Corporate Name:
• Letter request signed by the authorized
signatory (Board Resolution for the authorized
signatory)
• Board resolution/partnership agreement for
the cancellation of the registered business
name stating that the Corporation/Partnership
is retiring from business; surrendering the
business name certificate for cancellation and
that at the time of closure of establishment the
business has no outstanding financial
obligation, or a certified copy of the Certificate
of Dissolution (if applicable)
• Original copy of the business name
certificate and the duplicate copy of the
application form (Affidavit of loss if either the
business name certificate and/or the duplicate
copy of the application form was lost)
b. Adopted Name:
• Letter request signed by the authorized
signatory (Board Resolution for the authorized
signatory)
• Board Resolution/Partnership agreement for
the cancellation of the registered business
name, stating the reason/s for the cancellation
that the corporation/partnership has no
outstanding financial obligation at the time of
closure in connection with the operation of the
said business and if there were creditors copy
of notice to them
• Original copy of the business name
certificate and the duplicate copy of the
application form (Affidavit of loss if either the
business name certificate and/or the duplicate
copy of the application form was lost)
Closing a business at the local City/Municipal
Office
The procedures and requirements on closing a
business may vary among different LGUs
(Local Government Units). This means that the
requirements for business cessation in Makati
City can be different in Manila or Pasay City.
The typical requirements for business closure
at the LGUs are the following:
• Affidavit of Gross (reason for and date of
closure)
• Mayor’s Permit
• Business Plate
• Financial Statement/ ITR
• Sketch
• Latest Payment
• Certificate of Closure from the Barangay
Captain indicating date of closure
For more complete and accurate procedures
and requirements, you may visit and inquire
the City or Municipal Office where your
business is registered.
Closing a business at DOLE
If your business has employees or was
required to be registered with the DOLE, you
also have to ensure that you notify the DOLE
office and comply with the labor requirements
to avoid labor relation liabilities. The following
are the basic requirements in closing a
business and be cleared at the DOLE office:
• Service of a written notice to the employees
and the DOLE at least one (1) month before
the intended date of closure/cessation
• The closure or cessation of business
operations is bona fide in character.
• Payment to the employees of termination pay
amounting to at least one-half (1/2) month pay
for every year of service, or one (1) month pay
whichever is higher, per Philippine Labor Code
mandate.
Closing a business at the BIR
The process of business cessation at the BIR
is perhaps the most tedious one among
others. And if you have unpaid tax liabilities or
delinquencies due to the government, the
process could even get more problematic.
Among the government offices, where your
business is registered, the BIR is the one
which records and monitors your internal
revenue taxes, such as income and business
taxes (Value Added Tax or Percentage Tax).
And to formally close and clear your business
with the BIR, the bureau has to ensure that
you have already paid all your tax obligations.
BIR Form 1905 (Application for Registration
Information Update) is the tax form used in
applying for closure of a business. The
following are the requirements and procedures
for closure of business at the BIR.
Documentary Requirements
1) Letter of request stating reason for
termination of business
2) Original Certificate of Registration
3) Books of Accounts
4) Inventory List of Unused Receipts and
Invoices
5) Unused Receipts and Invoices for
cancellation
6) Board Resolution / Notice of Dissolution (if
Corporation / Partnership)
Additional Requirements in Case of Death of
Individual Taxpayer:
1) Death Certificate
2) Payment of Estate Tax, if any
Procedures
1) Taxpayer applicant files BIR Form 1905,
together with the attachments at the RDO
where they are registered within ten (10) days
from retirement of business.
2) Taxpayer files short period return for income
tax purposes.
3) RDO verifies if taxpayer has open cases
reflected in the Integrated Tax System (ITS). If
YES, ask taxpayer to submit required returns
and pay the corresponding tax due/s and
penalties if any.
4) RDO verifies if taxpayer has delinquent
cases at the Assessment, Collection, and
Legal Divisions of the Region;
5) RDO verifies if taxpayer has delinquent
cases at the Collection Enforcement Division,
BIR National Office
6) RDO requests for Letter of Authority to
investigate internal revenue taxes for all un-
audited taxable years prior to cancellation of
business.
7) Assigned Case officer conducts
investigations for period/s covered in the
issued Letter of Authority.
8) Taxpayer complies with requirements of
audit and pays corresponding deficiency taxes
resulting from audit using Form 0605.
9) RDO issues tax clearance for closure of
business.
10) RDO updates ITS and cancels TIN of
taxpayer (for non-individual taxpayer).
Closing a business at SEC
For corporations and partnerships, they cannot
process closure of business with the SEC if
they are not yet done in securing tax clearance
from the BIR and endorsements or certificate
of registration cancellation from other
government offices, if applicable. Thus, even
though the business is already non-operating,
it still remains as a registered business.
Though, the business owners, partners, or
shareholders can already start the liquidation
process of its assets, subject to applicable
taxes.
For corporations, corporate dissolution can be
voluntary or involuntary. In this discussion, we
assume that we are voluntarily dissolving a
corporation. Moreover, voluntary dissolution of
a corporation may have different procedures,
depending on whether the dissolution will
affect creditors or not. One way to voluntarily
dissolve a corporation with the SEC is by
shortening its corporate term. The following
are the requirements for corporate dissolution
by shortening its term.
1. Directors’ Certificate – A Notarized
document signed by majority of the directors
and corporate secretary certifying the
amendment of the articles of incorporation
shortening the corporate term, the votes of the
directors and stockholders thereto, and the
date and place of the stockholders meeting
2. Amended Articles of Incorporation
3. Audited financial statements as of date of
the stockholders meeting approving dissolution
or any date thereafter
4. List of creditors, if any, and their consent, or
certification as to non- existence of creditors
5. BIR Tax Clearance
6. Publisher’s affidavit of the publication of the
dissolution of the corporation (once a week for
three (3) consecutive weeks)
7. Endorsements/clearances from other
government agencies, if applicable
Take note that if there are creditors and their
consent was not secured, the application
should be in the form of a petition to be filed
with Office of General Counsel of the SEC.
Other notes to remember
When closing a business in the Philippines, we
have to formally close the business in the
government agencies where it is registered.
We have to notify those offices and comply
with their requirements to get a clearance or
certificate of termination (cancellation of
registration) of our business. Thus, a business
owner has to ensure that his or her business is
cleared in every government agency it is
registered aside from the ones discussed
above.
For businesses registered and regulated by
the Bangko Sentral ng Pilipinas (BSP), such
as pawnshops, money changers, banks, and
financing companies, they have to comply with
the closure requirements of the office. For
cooperatives, instead of closure at the SEC, it
should comply with the CDA (Cooperative
Development Authority) Office for cessation or
dissolution.
Furthermore, if your business employs people
and is contributing to SSS (Social Security
System), PHIC (Philippine Health Insurance
Corporation) and HDMF (Home Development
Mutual Fund) for employees as mandated by
our laws, then you also have to apply for
cancellation of your business or employer’s
registration when you close your business to
stop your obligation as a contributing
employer.
CONCEPT OF LIMITED PARTNERSHIP
Art. 1843. A limited partnership is one formed
by two or more persons under the provisions
of the following article, having as members
one or more general partners and one or more
limited partners. The limited partners as such
shall not be bound by the obligations of the
partnership.
Characteristics of limited partnership
1. Must be formed in accordance with the
requirements of the law.
2. There must be one or more general partners
who control the management of the business.
3. There must be one or more limited partners
contributing to the capital and sharing in the
profits but have nothing to do with the
management.
4. Obligations of the partnership must be paid
out of common fund and in the separate
properties of the general partners.
A limited partnership is formed if there has
been substantial compliance in good faith with
the foregoing requirements.
Qualifications of limited partnership
1. The partners must sign and swear to a
certificate of limited partnership
2. Must file for record the certificate in the
office of the Securities and Exchange
Commission
Art. 1845. The contributions of a limited
partner may be cash or property, but not
services.
Limited partners can only contribute money
and property and cannot contribute services to
the partnership to protect persons dealing with
the firms with frauds.
Art. 1846. The surname of a limited partner
shall not appear in the partnership name
unless:
1. It is also the surname of a general partner.
2. Prior to the time when the limited partner
became such, the business has been carried
on under a name in which his surname
appeared.
A limited partner whose surname appears in a
partnership name contrary to the provisions of
the first paragraph is liable as a general
partner to partnership creditors who extend
credit to the partnership without actual
knowledge that he is not a general partner.
ART. 1848. A limited partner shall become
liable as a general partner unless, in addition
to the exercise of his rights and powers as a
limited partner, he takes part in the control of
the business.
Limited partner has no control in business
Law on Business Organizations Reviewer
A limited partner is excluded from any active
voice in the control of the affairs of the firm.
Limited partner cannot perform acts of
administration
Limited partners may not perform any act of
administration with respect to the interests of
the partnership, not even in the capacity of
agents of the managing partners.
ART. 1849. After the formation of a limited
partnership, additional limited partners may be
admitted upon filling an amendment to the
original certificate in accordance with the
requirements of Article 1865.
A limited partner shall have the right to receive
a share of the profit or other compensation by
way of income and to the return of his
contribution as provided in Articles 1856 and
1857.
Rights of limited partner
It has lesser rights than a general partner. It
may exercise rights similar to a general
partner.
ART. 1856. A limited partner may receive from
the partnership the share of the profits or the
compensation by way of income stipulated for
in the certificate; provided, that after such
payment is made, whether from the property of
the partnership or that of a general partner, the
partnership assets are in excess of all liabilities
of the partnership except liabilities to limited
partners on account of their contributions and
to general partners.
Limited partner’s interest assignable
A limited partner’s interest in the partnership is
assignable. The assignee, however, of a
limited partner’s interest does not necessarily
become a substituted limited partner.
NATIONALITY OF CORPORATION
Based on the Corporation Code of the
Philippines, the principal test in determining
the nationality of a corporation is the Place of
Incorporation Test. Section 123 of the Code
states that a corporation will deemed a foreign
corporation if it was “formed, organized or
existing under any laws other than those of the
Philippines.” For the purpose of determining
compliance with nationality restrictions on fully
or partly nationalized activities, however, the
place of incorporation test is not the only test
applicable.
Q: What are the tests in determining the
nationality of corporations?
A:
1. Incorporation test – Determined by the
state of incorporation, regardless of the
nationality of the stockholders.
2. Domiciliary test – Determined by the
principal place of business of the
corporation.
3. Control test – Determined by the
nationality of the controlling stockholders or
members. This test is applied in times of
war.
4. Grandfather rule – Nationality is
attributed to the percentage of equity in the
corporation used in nationalized or partly
nationalized area.
Q: What are the requisites of the control test?
A:
1. Control, not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction
attacked such that the corporate entity as to
this transaction had at that time no
separate mind, will or existence of its own
2. Such control must have been used by
the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest or
unjust act in contravention of plaintiffs legal
right; and
3. The control and breach of duty must
proximately cause the injury or unjust loss
complained of.
Q: Who are considered “Philippine Nationals”
under Foreign Investment Act of 1991 (R.A.
No. 7042)?
A:
1. Corporations organized under Philippine
laws of which 60% of the capital stock
outstanding and entitled to vote is owned
and held by Filipino citizens
2. Corporations organized abroad and
registered as doing business in the
Philippines under the Corporation Code of
which 100% of the capital stock entitled to
vote belong to Filipinos.
Note: However, it provides that where a
corporation and its non‐Filipino stockholders
own stocks in a SEC‐registered enterprise, at
least 60% of the capital stock outstanding and
entitled to vote of both corporations and at
least 60% of the members of the board of
directors of both corporations must be Filipino
citizens (DOUBLE 60% RULE).
Q: What is the nationality of a corporation
organized and incorporated under the laws of
a foreign country, but owned 100% by
Filipinos?
A: Under the control test of corporate
nationality, this foreign corporation is of Filipino
nationality. Where there are grounds for
piercing the veil of corporate entity, that is,
disregarding the fiction, the corporation will
follow the nationality of the controlling
members or stockholders, since the
corporation will then be considered as one and
the same.
Q: How does nationality being determined
under Grandfather rule test?
A: Grandfather rule applies when a
corporation is owned by another corporation
with foreign stockholdings. Under this rule,
nationality is determined by breaking down the
equity structure of the component
corporation(s).
If the percentage of Filipino ownership in the
corporation is less than 60%, only the number
of shares corresponding to such will be
counted as of Philippine nationality. This is
done by multiplying the number of shares in Stock certificate is the written
the corporate shareholder owned by Filipinos acknowledgement by the corporation of the
by the number of shares of that corporate stockholder's interest in the corporation and its
property.
stockholder in the investee company, and then
adding the numbers of shares owned by Distinguished:
Filipinos in the investee company. One must
not stop until the citizenships of the individual Share of stock Stock certificate
or natural stockholders of layer after layer of
1. represents the right 1. The written
investing corporations have been established.
and interest of the evidence of such
shareholder in a right.
Illustration:
corporation.
Corporation Y, whose 60% voting stock is 2. Intangible peraonal 2. Tangible personal
owned by Corporation Z, with the remaining property property.
40% being owned by foreigners. Corporation Z
on the other hand, is 60% owned by Filipino 3. May be issued 3. As a rule, is issued
individuals and 40% by foreign individuals. even if not fully paid, only if the
except shares without subscription is fully
Under the grandfather rule, Corporation Y is
par value which are paid.
not necessarily considered as Filipino national deemed fully paid and
because Corporation Z’s investment (60%) will non-assessable upon
have to be broken down. Therefore, issuance.
Corporation Z’s shareholding in Corporation Y
(60%) multiply by Corporation Z’s shares of
stock actually owned by Filipinos (60%) results Classes of Share of Stock under the
in 36% Filipino ownership. This means that, Corporation Code
Corporation Y is not a Filipino national
because the percentage of shareholding 1. Common stock, the ordinary stock of a
actually held by Filipino citizens is less than corporation which entitles the holder to a pro
rata division of the dividends, without any
60%.
preference or advantage over any other stock
holders.
Q: When should the grandfather rule test
apply? 2. Preferred stock, entitles the holder to
certain preferences over other shareholders.
A: The grandfather rule should be applied
when the shareholders of a corporation are a. Preferred stock as to asset-
also corporations and the voting stock owned entitles the holder to preference in the
by Filipinos in the former is less than 60% of distribution of assets over common stock upon
the liquidation of the corporation.
the voting stock or the 60-40 Filipino equity
ownership is in doubt. Otherwise, where 60% b. Preferred as to dividends-
Filipino ownership is well established, the preference in the distribution of dividends over
grandfather rule will not apply and the control common stock.
test will be applicable.
Kinds of preferred stock as to
dividends-:

1. Cumulative preferred stock-

Share of stock, concept
It is one of the units into which the capital
stock of the corporation is divided. It
represents the intangible interest or right of
which an owner has in the management,
profits, and assets of the corporation. It is
property, subject to conversion.
entitle holder to payment not only of current
dividends but also those in arrears, when
dividends are declared , to the extent
stipulated, before holders of common stock are
paid.
2. Non-cumulative preferred
stock- entitlement to payment of current
dividends only, before holders of common
stoch are paid.
 3. Participating preferred
stock- Entitle to participate with the holders of
common shares in the surplus profits after the
amount stipulated has been paid to the holders
of preffered shares.
4. Non- participating preferred
stock- entitle the holder only to the stipulated
preferred dividend.
3. Par value stock, one which the nominal
value of which apprears on the stock
certificate.
4. No par value stock, one without any
nominal or par value appearing on the stock
certificate.
5. Redeemable shares, those which grabt the
issuing corporation the power to redeem or
purchase them after a certain period.
Rules on redeemable shares:
a. They may be issued by the
corporation only if expressly provided in the
articles of incorporation. (Sec. 8, Corporation
code)
b. They may be deprived of voting
rights. (Sec 6)
c. They may be purchased or taken up
by the corporation upon the expiration of fixed
period, regardless of the existence of
unrestricted retained earnings in the books of
the corporation.
d. The terms and conditions for their
redemption must be stated in the articles of
incorporation and the stock certificate
representing the said shares. (Sec 8)
6. Founder's shares, grants the founder
certain rights and privileges not enjoyed by
other shares.
Rules of founder's shares
a. Founder's shares must be classified
as such in the artocles of incorporation.
b. They may given rights and
priveleges not enjoyed by other shares subject
to the following limitations:
1. If the exclusive right to vote and
be voted in the election of directors is grabted,
it must be for limited period not exceeding 5
years subject to the approval of the SEC.
2. The five-year peruod begind
from the date of the said approval. ( Sec 7)
7. Treasury shares, those which have been
issued and fully paid for, vut subsequently
required by the issuing corporation by
purchase, redemption, donation, or through
some other lawful means. (Sec 9)
Rules of treasury shares:
a. They shall have no voting rights as
long as they remain in the treasury (Sec 57)
b. Although they are part of the
subscribed stock, they are not considered
outstanding shares. (Sec 137)
c Being owned by the corporation,
tbey are not entitle to dividends
d. They may again be disposed of for
a reasonable price fixed by the board of
directors. ( Sec 9)
8. Watered stock, those issued without
consideration or without adequate
consideration.
9. Voting shares, entitled to vote in the
meetings of the corporation.
10? Non- voting shares, those without voting
rights, except in certain cases.
Power of a corporation to classify itw own
shares and limitaions thereto (Sec 6)
1. A corporation may divide its shares into
classes or series of shared, or both. Such
classification may include the following:
a. Voting and non-voting shares.
b. Common and preffered shares.
c. Par value and no par value shares
d. classification to insure compliance
with constitutional or legal requirements.
2. Any of which classes or series of shares
may have such rights, priveleges or
restrictions as may be stated in the articles of
incorporation.
3. Except as otherwise provided in the artocles
of incorporation and stated in the certificate of
stock, each share shall be equal in all aspect
to every other share.
4. Limitations when shares are deprived of the
voting right.
a. only those classified as
"redeemable" or "preferred" shares may be
deprived of the voting right unoess otherwise
provided by the Corporate code.
Thus, when founder's shares are given
the exclusive right to vote and be voted for in
the election of directors for a period of 5 years,
other shares although they are not classified
as redeemable or preferred are deprived of
voting right during such period.
b. There shall always be a series or
class of shares tht have complete voting rights.
Thus, not all the shares may be
deprived of voting right.
c. Non-voting shares may
nevertheless vote in the following matters:
1. Amendment of the articles of
incorporation
2. Adoption and amendment of
by-laws
3. Slae, lease, exchange,
mortgage, pledge, or otger disposition of all or
substantially all of the corporate property.
4. Incurring, creating,
increasing bonded indebtness.
5. Increase or decrease capital
stock
6. Merger or consolidation of the
corporation with another corporation of other
corporation
7. Investment of corporate fund in
another corporation or business.
8. Dissolution of the corporation.
5. Limitations when no-par shares are issued.
a. Subscriptuon to no-par shares shall
be deemed fully paid and non-aasessable and
the holdee of such shares shall not be liable to
the corporation or to its creditors in respct
thereto.
b. Shares without par value may not
be issues for a consideration less than 5.09
per share.
c. The entire consideration received
for no-par shares shall all be treated as caoital
and shall notbe available for distribution as
dividend.
d. Banks, trust companies, insurance
companies, public utilities, and building and
loan associations shall not be permited to
issue no-par value shares of stock.
6. Limitations when preferred shares are
issued
a. Preference such as to assets or
dividends must be stated in the articles of
incorporation.
b. Preferred shares my be issued only
with a stated par value.
c. The board of directors, when
authorized in the articles of incorporation, may
fix the terms and conditions of preferred
shares.
d. Such terms and conditions shall be
effective upon the filling of a certificate thereof
with the SEC .
Essential requirements for organizing a
stock corporation:
or 1. There should be at least 5 but not more than
15 individuals who shall be the incorporators,
all of whom must be at least 18 years old, and
a majority of whom are residents of the
Philippines.
2. Each incorporator must own or be a
subscriber to at least 1 share of stock of the
corporation.
3. A stock corporation shall not be required to
have any minimum authorized capital stock
except as otherwise specifically provided for
by law depending on the purpose or business
of the corporation.
4. At least 25% of the authorized capital stock
must be subscribed by the incorporators (i.e.,
issued to the incorporators) at the time of
incorporation, and at least 25% of this total
stock subscribed by the incorporators must be
paid at the time of incorporation (called the
“paid-up capital”).
Generally, the paid-up capital at the time of
incorporation should not be less than Php
5,000.7 However, higher amounts of paid-up
capital may be required by law. A list of the
industries requiring a higher paid-up capital
may be seen at www.sec.gov.ph.
5. A corporation may be subject to nationality
restrictions imposed by various laws
depending on its purpose or business. For
example, at least 60% of the shares of stock of
a corporation which owns land must be held by
citizens of the Philippines.
Steps in incorporation
1. Verification with the SEC of the name to be
used.
No corporate name shall be allowed if
the proposed name is:
a. Identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name protected by
law.
b. Patently deceptive, confusinh or
contrary to existing law. (Sec 18)
2. Drafting and execution of the articles of
incorporationsigned by the incorporators. The
Treasurer-in-Trust of the proposed corporation
must also execute an affidavit to the effect
that:
a. At least 25% of the authorized
capital stock has been subscribed and that at
least 25% of the subscription has been paid in
money and/or property.
b. If the oayment is in money, that
payment is on deposit with the bank designed
by the corporation. (See sec 14.) In this
regard, a certificate of bank deposit must be
obtained from the bank.
3. Filing of the articles of incorporation with
SEC together with the followinh documents:
a. Verification certificate authorizing
the use by the proposed corporation of the
name stated therein.
b. Treasurer's affidavut.
c. Certificate of bank deposit.
d. Undertakinh to change name if it is
similar to the name of another corporation or
the use of name is prohibited.
e. Other documents that may be
required such as the endorsement of
governmentbagencies in special corporations
(such asbinsurance companies and banks.)
4. Payment of the filing, publication, and other
fees.
5. Issuance of the certifucate of incorporation
by the SEC.
The issuance of the certificate of
incorporation is the operative act that will grant
juridical personality to the corporation. A
corporation commences to have such
personality on the date stated in the certificate
which is the date of issue. (see Sec 19).
Kinds of franchise:
a. Primary franchise- also known as
corporate franchise. It refers to the right and
privilege granted by tgebState to exist as a
corporation. This is vested in the
individualsbwho compose the corporation and
not on the corporation itself. This is conferred
through the issuance of the certificate of
incorporation.
b. Secondary franchise- refers to
different right, privileges, and powers which
are obtained by the corporation, which are not
a prerequisite to corporate existence such
asbthe right to occupy the use public places
for the operation of a system of water, gas
works, electricity lighting plants, railword, etc.
INCORPORATION AND
ORGANIZATION OF PRIVATE
CORPORATIONS
SEC. 10. Number and
Qualifications of
Incorporators. – Any person,
partnership, association or
corporation, singly or jointly
with others but not more than
fifteen (15) in number, may
organize a corporation for any
lawful purpose or purposes:
Provided, That natural
persons who are licensed to
practice a profession, and
partnerships or associations
organized for the purpose of
practicing a profession, shall
not be allowed to organize as
a corporation unless
otherwise provided under
special laws. Incorporators
who are natural persons must
be of legal age.Each
incorporator of a stock
corporation must own or be a
subscriber to at least one (1)
share of the capital stock.
A corporation with a single
stockholder is considered a
One Person Corporation as
described in Title XIII, Chapter
III of this Code.
SEC. 13. Contents of the
Articles of Incorporation. –
All corporations shall file with
the Commission articles of
incorporation in any of the
official languages, duly signed
and acknowledged or
authenticated, in such form
and manner as may be
allowed by the Commission,
containing substantially the
following matters, except as
otherwise prescribed by this
Code or by special law:
(a) The name of the
corporation;
(b) The specific purpose or
purposes for which the
corporation is being formed.
Where a corporation has more
than one stated purpose, the
articles of incorporation shall
indicate the primary purpose
and the secondary purpose or
purposes: Provided, That a
nonstock corporation may not
include a purpose which would
change or contradict its nature
as such;
(c) The place where the
principal office of the
corporation is to be located,
which must be within the
Philippines;
(d) The term for which the
corporation is to exist, if the
corporation has not elected
perpetual existence;
(e) The names, nationalities,
and residence addresses of
the incorporators;
(f) The number of directors,
which shall not be more than
fifteen (15) or the number
oftrustees which may be more
than fifteen (15);
(g) The names, nationalities,
and residence addresses of
persons who shall act as
directors or trustees until the
first regular directors or
trustees are duly elected and
qualified in accordance with
this Code;
(h) If it be a stock corporation,
the amount of its authorized
capital stock, number of
shares into which it is divided,
the par value of each, names,
nationalities, and residence
addresses of the original
subscribers, amount
subscribed and paid by each
on the subscription, and a
statement that some or all of
the shares are without par
value, if applicable;
(i) If it be a nonstock
corporation, the amount of its
capital, the names,
nationalities, and residence
addresses of the contributors,
and amount contributed by
each; and
(j)Such other matters
consistent with law and which
the incorporators may deem
necessary and convenient.
An arbitration agreement may
be provided in the articles of
incorporation pursuant to
Section 181 of this Code.62
BOARD OF
DIRECTORS/TRUSTEES
AND OFFICERS
SEC. 22. The Board of
Directors or Trustees of a
Corporation; Qualification
and Term. – Unless otherwise
provided in this Code, the
board of directors or trustees
shall exercise the corporate
powers, conduct all business,
and control all properties of
the corporation.
Directors shall be elected for a
term of one (1) year from
among the holders of stocks
registered in the corporation’s
books, while trustees shall be
elected for a term not
exceeding three (3) years from
among the members of the
corporation. Each director and
trustee shall hold office until
the successor is elected and
qualified. A director who
ceases to own at least one (1)
share of stock or a trustee who
ceases to be a member of the
corporation shall cease to be
such.
The board of the following
corporations vested with public
interest shall have
independent directors
constituting at least twenty
percent (20%) of such board:
a) Corporations covered by
Section 17.2 of Republic Act
No. 8799, otherwise known as
“The Securities Regulation
Code”, namely those whose
securities are registered with
the Commission, corporations
listed with an exchange or with
assets of at least Fifty million
pesos (P50,000,000.00) and
having two hundred (200) or
more holders of shares, each
holding at least one hundred
(100) shares of a class of its
equity shares;
b) Banks and quasi-banks,
NSSLAs, pawnshops,
corporations engaged in
money service business, pre-
need, trust and insurance
companies, and other financial
intermediaries; and
c) Other corporations engaged
in business vested with public
interest similar to the above,
as may be determined by the
Commission, after taking into
account relevant factors which
are germane to the objective
and purpose of requiring the
election of an independent
director, such as the extent of
minority ownership, type of
financial products or securities
issued or offered to investors,
public interest involved in the
nature of business operations,
and other analogous factors.
An independent director is a
person who, apart from
shareholdings and fees
received from the corporation,
is independent of
management and free from
any business or other
relationship 63
ALLOWING PERPETUAL EXISTENCE AND
REVIVAL OF CORPORATIONS
Under the old rules, the maximum corporate
term is 50 years, unless extended for a
maximum of 50 years (or sooner dissolved).
The RCC, however, now allows companies to
exist in perpetuity, unless majority of the
stockholders elect to retain its specific term
pursuant to the Articles of Incorporation (AoI).
Corporations with expired terms may also be
revived under the RCC. The revival applies to
their corporate existence, all their rights and
privileges under the certificate of incorporation,
and their existing duties and liabilities prior to
the revival.
Certain types of companies, such as banks,
pre-need and insurance, pawnshops and other
financial intermediaries need favorable
recommendation from the appropriate
government agency for the revival.
While the RCC does not provide any exception
to the revival of a corporation whose corporate
life has expired, it appears that the SEC
proposes to exclude the benefit of revival to
corporations whose registration were revoked
for reasons or causes other than the non-filing
of reports.
Based on the draft rules on revival of
corporations that the SEC has circulated, the
regulatory body clarified that the revival
applies only to corporations with expired
terms, not to those whose registrations have
been revoked due to fraud or continuous
inoperation.
SEC. 11. Corporate Term. –
A corporation shall have
perpetual existence unless
its articles of incorporation
provides otherwise.
Corporations with certificates
of incorporation issued prior
to the effectivity of this Code,
and which continue to exist,
shall have perpetual
existence, unless the
corporation, upon a vote of its
stockholders representing a
majority of its outstanding
capital stock, notifies the Commission unless
Commission that it elects to accompanied by a favorable
retain its specific corporate recommendation of the
term pursuant to its articles of appropriate government
incorporation: Provided, agency.
That any change in the
corporate term under this
section is without prejudice to
the appraisal right of
dissenting stockholders in
accordance with the
provisions of this Code.
A corporate term for a specific
period may be extended or
shortened by amending the
articles of incorporation:
Provided, That no extension
may be made earlier than
three (3) years prior to the
original or subsequent expiry
date(s) unless there are
justifiable reasons for an
earlier extension as may be
determined by the THE
Commission: Provided,
further, That such extension CORPORATION CODE
of the corporate term shall
take effect only on the day OF THE
following the original or
subsequent expiry date(s).
A corporation whose term has PHILIPPINES
expired may apply for a
revival of its corporate
existence, together with all
the rights and privileges
Title II
under its certificate of
incorporation and subject to Incorporation and Organization of Private
all of its duties, debts and
Corporations
liabilities existing prior to its
revival. Upon approval by the
Commission, the corporation Distinguishability Rule on Name of
shall be deemed revived and
a certificate of revival of Corporation
corporate existence shall be
issued, giving it perpetual
existence, unless its
application for revival
SEC. 17. Corporate Name. – No corporate
provides otherwise.
No application for revival of name shall be allowed by the Commission if it
certificate of incorporation of
is not distinguishable from that already
banks, banking and
quasibanking institutions, reserved or registered for the use of another
preneed, insurance and trust
corporation, or if such name is already
companies, non-stock
savings and loan associations protected by law, or when its use is contrary to
(NSSLAs), pawnshops,
existing law, rules and regulations.
corporations engaged in
money service business, and
other financial intermediaries A name is not distinguishable even if it
shall be approved by the contains one or more of the following:
(a) The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”, or an
abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations,
different tenses, spacing, or number of the
same word or phrase.
The Commission, upon determination that the
corporate name is: (1) not distinguishable from
a name already reserved or registered for the
use of another corporation; (2) already
protected by law; or (3) contrary to law, rules
and regulations, may summarily order the
corporation to immediately cease and desist
from using such name and require the
corporation to register a new one. The
Commission shall also cause the removal of all
visible signages, marks, advertisements,
labels, prints and other effects bearing such
corporate name. Upon the approval of the new
corporate name, the Commission shall issue a
certificate of incorporation under the amended
name.
If the corporation fails to comply with the
Commission’s order, the Commission may
hold the corporation and its responsible
directors or officers in contempt and/or hold
them administratively, civilly and/or criminally
liable under this Code and other applicable
laws and/or revoke the registration of the
corporation.
No Minimum Authorized and Paid-Up
Capital
Section 12. Minimum Capital Stock Not
Required of Stock Corporations. - Stock
corporations shall not be required to have
minimum capital stock, except as otherwise
specially provided by special law.
MINIMUM CAPITAL STOCK
The Old Code required that at least 25% of the
authorized capital stock must be subscribed,
and at least 25% of the total subscription must
be paid by the stockholders, provided that the
minimum paid-up capital shall not be lower
than Php5,000.00.
The New Code removed the aforementioned
25% subscription, payment and minimum paid-
up capital requirements. The New Code states
that “stock corporations shall not be required
to have a minimum capital stock, except as
otherwise specifically provided by special law.”
No Minimum Subscribed Number of Shares
Subject to Provisions of Special Laws
Stock corporations are still not required to
have a minimum capital stock, unless
specifically provided by special law. Notably, in
the revised form of the Articles of Incorporation
(AOI), it is no longer required that the
capitalization be in “lawful money of the
Philippines” (Sec. 14). Moreover, the RCC
removed the requirement that 25% of the
authorized capital stock be subscribed and
that 25% of the subscribed capital stock be
paid for purposes of incorporation as
previously mandated under Section 13 of the
Corporation Code, which was deleted in its
entirety (Sec. 12). However, the 25%-25%
requirement was retained for any increase in
the authorized capital stock (Sec. 27).
Powers of Corporation
Sec. 2. Corporation defined. - A
corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes and properties
expressly authorized by law or incident to its
existence.
EXPRESS, IMPLIED & INCIDENTAL
 EXPRESSED- expressly granted to it
by law- Corporation Code
Enumerated Powers (Secs. 36)
Sec. 36. Corporate powers and capacity. -
Every corporation incorporated under this
Code has the power and capacity:
1. To sue and be sued in its
corporate name (to sue through its
BOD)
2. Of succession by its corporate
name for the period of time stated in
the articles of incorporation and the
certificate of incorporation
3. To adopt and use a corporate
seal (no longer necessary)
4. To amend its articles of
incorporation in accordance with the
provisions of this Code
5. To adopt by-laws, not contrary
to law, morals, or public policy, and to
amend or repeal the same in
accordance with this Code
6. In case of stock
corporations, to issue or sell stocks to
subscribers and to sell stocks to
subscribers and to sell treasury
stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or
grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal
with such real and personal property,
including securities and bonds of other
corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require,
subject to the limitations prescribed by
law and the Constitution;
8. To enter into merger or
consolidation with other
corporations as provided in this Code;
9. To make reasonable
donations, including those for the
public welfare or for hospital,
charitable, cultural, scientific, civic, or
similar purposes: Provided, That no
corporation, domestic or foreign, shall
give donations in aid of any political
party or candidate or for purposes of
partisan political activity
10. To establish pension,
retirement, and other plans for the
benefit of its directors, trustees,
officers and employees
11. To exercise such other
powers as may be essential or
necessary to carry out its purpose or
purposes as stated in the articles of
incorporation.
Extend or Shorten Corporate Term (Secs. 37
and 81 [1])
 Implied - may be incidental to such
conferred powers and reasonably
necessary to accomplish its purposes.
These implied powers are typically
construed broadly, though some acts
may be beyond the purposes and
powers of the corporation. Limits
on corporate powers may include
statutory or charter restrictions, and
equitable limitations to protect the
public, minority shareholders, or
creditors. For example, in a suit by
a shareholder against
the corporation to enjoin an ultra
vires act.
 Incidental - may be incidental to its
existence
BOARD OF DIRECTORS
QUALIFICATIONS
1. Directors must own at least one
(1) share of the capital stock of the
 corporation. Trustees must be
members.
2. A majority of the directors or
trustees must be residents of the
Philippines.
DISQUALIFICATIONS
1. Conviction by final judgement of
an offense punishable by
imprisonment for a period
exceeding six (6) years, or a
violation of this Code committed
within five (5) years prior to the
date of election or appointment.
2. Other disqualifications under
applicable laws.
ELECTION AND VOTING
 In stock corporations, the
majority of the outstanding
capital stock, in person or by
the representative authorized
to act by written proxy, must
be represented at the election
of directors.
 In non-stock corporations, a
majority of the members
entitled to vote, in person or
by proxy, if allowed in its
articles of incorporation or by-
laws, must be present in the
election
 The election may be
adjourned if, for any reason,
no election is held, or if
required quorum is not
obtained. However, it may not
be adjourned indefinitely.
 The election must be by ballot
if requested by any voting
stockholder or member.
 Candidates receiving highest
number of votes shall be
declared elected.
 In stock corporations,
cumulative voting is a matter
of right.
 In non-stock corporations,
cumulative voting is not
available unless provided for
in the articles of incorporation
or by-laws.i.e., a member may
cast as many votes as there
are trustees to be elected but
may not cast more than one
vote for one candidate.
 In stock corporations, the
stockholder may:
o Vote such number of
shares for as many
persons as there are
directors to be
elected;
o Cumulative said
shares and give one
candidate as many
votes as the number
of the directors to be
elected multiplied by
the number of his
shares equal;
o Distribute them on the
same principle among
as many candidates
as he shall see fit.
 No delinquent stock shall be
voted
 Officers to be elected
o President, who shall
be a director
o Treasurer, who may
or may not be a
director
o Secretary, who shall
be a resident and
citizen of the
Philippines
o Such other officers as
may be provided for in
the by-laws
 Any two (2) or more positions
may be held concurrently by
the same person, except that
no one shall act as president
and secretary or as president
and treasurer at the same
time
 The directors or the officers
shall hold office for one (1)
year until their successors are
elected and qualified.
LIABILITY OF THE CORPORATE OFFICERS
 The general rule is that unless
the law specifically provides, a
corporate officer or agent is
not civilly or criminally liable
for acts done by him as such
officer or agent.
 Personal liability of a
corporate director, trustee or
officer along with the
corporation may validly attach,
as a rule, only when:
o He assents (a) to a
patently unlawful act
of the corporation, or
 (b) for bad faith, gross
negligence in directing
its affairs, or (c) for
conflict of interest,
resulting in damages
to the corporation, its
stockholders or other
persons;
o He consents to the
issuance of watered
stocks or who, having
knowledge thereof,
does not forthwith file
with the corporate
secretary his written
objective thereto;
o He agrees to hold
himself personally and
solidarily liable with
the corporation; or
o He is made, by
specific provision of
law, to personally
answer for his
corporate action.
 Where a check is drawn by a
corporation, company or
entity, the person or persons
who actually signed the check
in behalf of such drawer shall
be liable under this
Act. (Sec. 1, BP22)
 In labor cases, corporate
directors and officers are
solidarily liable with the
corporation for the termination
of employment of corporate
employees done with malice
or in bad faith.