Salazar vs JY Brothers Marketing Corporation 634 SCRA 95. October 20, 2010

Facts:

                J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar,  rice  and  other  commodities.  On October  15,  1996,  Anamer  Salazar,  a  freelance  sales  agent,  was approached  by  Isagani  Calleja  and Jess  Kallos.Salazar  with  Calleja  and  Kallos  procured from  J.  Y.  Bros.  300  cavans  of  rice  worth P214,000.00.  As  payment,  Salazar  negotiated  and  indorsed  to J.Y. Bros. Prudential Bank Check No. 067481 dated October 15, 1996 issued by Nena Jaucian Timario in the  amount  of P214,000.00  with  the  assurance  that  the  check  is  good  as  cash.  On that assurance,  J.Y. Bros.  parted with  300  cavans  of  rice  to  Salazar.  However, upon presentment,  the  check  was  dishonored due to closed account.

 

 Informed  of  the  dishonor  of  the  check,  Calleja,  Kallos  and  Salazar  delivered  to  J.Y.  Bros.  a replacement cross Solid Bank Check No. PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of P214,000.00 but which, just the same, bounced due to insufficient funds. When despite the demand letter dated February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter  charged  Salazar  and  Timario  with  the  crime  of  estafa  before  the RTC.

Issue:

1.       Whether or not there is novation

2.       Whether or not petitioner is liable as an accommodation indorser for the payment of the dishonored Prudential Bank Check

Ruling:

1.       No.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 119. Instrument; how discharged. A negotiable instrument is discharged:

                                (a)    By payment in due course by or on behalf of the principal debtor;

(b)   By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation;

(c)    By the intentional cancellation thereof by the holder;

(d)   By any other act which will discharge a simple contract for the payment of money;

(e)    When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

There are only two ways which indicate the presence of novation and thereby produce the effect of  extinguishing  an  obligation  by  another  which  substitutes  the  same.  First,  novation  must  be  explicitly stated  and  declared  in  unequivocal  terms  as  novation  is  never  presumed.  Secondly, the  old  and  the  new obligations  must  be  incompatible  on  every  point.  The  test  of  incompatibility  is  whether  or  not  the  two obligations  can  stand  together,  each  one  having  its  independent  existence.  If  they  cannot,  they  are incompatible  and  the  latter  obligation  novates  the  first. 

                In  this  case,  respondents  acceptance  of  the  Solid  Bank  check,  which  replaced  the  dishonored  Prudential  Bank check,  did  not  result  to  novation  as  there  was  no  express  agreement  to  establish  that  petitioner  was  already  discharged from his liability to pay respondent the amount of P214,000.00 as payment for the 300 bags of rice. As we said, novation is  never  presumed,  there  must  be  an  express  intention  to  novate.  In  fact,  when  the  Solid  Bank  check  was  delivered  to respondent,  the  same  was  also  indorsed  by  petitioner  which  shows  petitioners  recognition  of  the  existing  obligation  to respondent to pay P214,000.00 subject of the replaced Prudential Bank check. Moreover,  respondents  acceptance  of  the  Solid  Bank  check  did  not  result  to  any  incompatibility,  since  the  two checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount of P214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, there was no substantial change in the object or principal condition of the obligation of petitioner as the indorser of the check to pay the amount of P214,000.00. It would appear that respondent accepted the Solid Bank check to give petitioner the chance to pay her obligation.

2.       Yes.

Among the different types of checks issued  by a drawer is the crossed check. The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce makes reference to such instruments. We have taken judicial  cognizance  of  the  practice  that  a  check  with  two  parallel lines  in  the  upper  left  hand  corner  means  that  it  could only  be  deposited  and  could  not  be  converted  into  cash.  Thus,  the  effect  of  crossing  a  check  relates  to  the  mode  of payment,  meaning that  the  drawer  had  intended  the  check  for  deposit  only  by  the rightful  person, i.e.,  the  payee  named therein. The change in the mode of paying the obligation was not a change in any of the objects or principal condition of the contract for novation to take place. Considering  that  when  the  Solid  Bank  check,  which  replaced  the  Prudential  Bank  check,  was  presented  for payment,  the  same  was  again  dishonored;  thus,  the  obligation  which  was  secured  by  the  Prudential  Bank  check  was  not extinguished and the Prudential Bank check was not discharged. Thus, the court held petitioner liable as an accommodation indorser for the payment of the dishonored Prudential Bank check.

Arceo Jr. vs People of the Philippines 495 SCRA 204. July 17, 2006

Facts:

                Pacifico Arceo obtained a loan amounting to P100,000 from private complainant Josefino Cenizal. Several weeks thereafter, he obtained an additional loan of P50,000 then issued in favor of Cenizal, BPI Check, postdated August 4, 1991, for P150,000. When August 4 came, Cenizal did not deposit the check immediately because Arceo promised that he would replace the check with cash. Such promise was made verbally seven times. When his patience ran out, Cenizal brought the check to the bank for encashment, however, the check bounced because of insufficient funds.

                Thereafter, Cenizal went to the house of Arceo but found out that he had left the place. So Cenizal referred the matter to a lawyer who wrote a letter giving Arceo three days from receipt thereof to pay the amount of check. Arceo still failed to make good the amount of the check. As a consequence, Cenizal executed on January 20, 1992 his affidavit and submitted documents in support of his complaint for estafa and violation of BP 22 agaisnt Arceo. The check in question and the return slip were however lost by Ceniza as a result of a fire that occurred near his residence. He executed an Affidavit of Loss.

                After trial, petitioner was found guilty as charged. The Court of Appeals affirmed the trial court’s decision in toto.

Issue:

1.       Whether or not petitioner should not be held for the dishonor of the check.

2.       Whether or not petitioner was deprived of the period of five banking days from receipt of notice of dishonor within which to pay the amount of check.

3.       Whether or not the presentation of the check in evidence is a condition is a condition for conviction under BP 22.

Ruling:

1.       No.

The Court ruled that the 90-day period provided in the law is not an element of the offense. Neither does it discharge petitioner from his duty to maintain sufficient funds in the account within a reasonable time from the date indicated  in  the  check.  According  to  current  banking  practice,  the  reasonable  period  within  which  to present a check to the drawee bank is six months. Thereafter, the check becomes stale and the drawer is discharged from liability thereon to the extent of the loss caused by the delay.

                Thus, Cenizals presentment of the check to the drawee bank 120 days (four months) after its issue was still within the allowable period.  Petitioner  was  freed  neither  from  the  obligation  to  keep  sufficient  funds  in  his  account  nor  from liability resulting from the dishonor of the check.

2.       No.

Petitioner cannot claim that he was deprived of the period of five banking days from receipt of notice of dishonor within which to pay the amount of the check. While petitioner may have been given only three days to pay the value of the check, the trial court found that the amount due thereon remained unpaid even after five banking days from his receipt of the notice of dishonor.  This  negated  his  claim  that  he  had  already  paid Cenizal and  should  therefore  be  relieved  of  any liability.

Moreover,  petitioners  claim  of  payment  was  nothing  more  than  a  mere  allegation.  He presented no proof to support it. If indeed there was payment, petitioner should have redeemed or taken the check back in the ordinary course of business. Instead,  the  check  remained  in  the  possession  of  the  payee  who  demanded  the  satisfaction  of  petitioners obligation when the check became due as well as when the check was dishonored by the drawee bank. 

3.       No.

Petitioner’s insistence on the presentation of the check in evidence as a condition sine qua non for conviction under BP 22 is wrong. Rule 130, Section 3, of the Rules of Court, otherwise known as the best evidence rule, applies only where the content of the document is the subject of the inquiry. Where the issue is the execution or existence of the document or the circumstances surrounding its execution, the best evidence rule does not apply and testimonial evidence is admissible.

The fact in issue is the act of drawing and issuing a worthless check. Hence, the subject of the inquiry is the fact of issuance or execution of the check, not its content. Although the check and the return slip were among the documents lost, Cenizal was nevertheless able to adequately establish the due execution, existence and loss of the check and the return slip in an affidavit of loss as well as in his testimony during the trial of the case.

Moreover, Arceo himself admitted that he issued the check. He never denied that the check was presented for payment to the drawee bank and was dishonored for having been drawn against insufficient funds.

BPI vs Roxas 536 SCRA 168. October 15, 2016

Facts:

                Gregorio C. Roxas, respondent, is a trader. He delivered stocks of vegetable oil to spouses Rodrigo and Marissa Cawili. As payment therefor, spouses Cawili issued a personal check in the amount of P348,805.50. However, when respondent tried to encash the check, it was dishonored by the drawee bank. Spouses Cawili then assured him that they would replace the bounced check with a cashier’s check from the Bank of the Philippine Islands (BPI), petitioner.

Respondent and Rodrigo Cawili went to petitioner’s branch at Shaw Boulevard, Mandaluyong City where Elma Capistrano, the branch manager, personally attended to them. Upon Elma’s instructions, Lita Sagun, the bank teller, prepared BPI Cashier’s Check No. 14428 in the amount of P348,805.50, drawn against the account of Marissa Cawili, payable to respondent. Rodrigo then handed the check to respondent in the presence of Elma.

The following day, respondent returned to petitioner’s branch at Shaw Boulevard to encash the cashier’s check but it was dishonored. Elma informed him that Marissa’s account was closed on that date. Despite respondent’s insistence, the bank officers refused to encash the check and tried to retrieve it from respondent. He then called his lawyer who advised him to deposit the check in his (respondent’s) account at Citytrust, Ortigas Avenue. However, the check was dishonored on the ground "Account Closed."

                Respondent filed with the RTC complaint for sum of money against petitioner. The RTC renders judgment ordering BPI to pay Roxas.

                Court of Appeals affirmed the trial court’s judgment.

Issue:

1.       Whether or not respondent is a holder in due course.

2.       Whether or not BPI is liable to respondent for the amount of the cashier’s check.

Ruling:

1.       Yes.

Section 52 of the Negotiable Instruments Law provides:

SEC. 52. What constitutes a holder in due course. – A holder in due course is a holder who has taken the instrument under the following conditions:

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

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

(c) That he took it in good faith and for value;

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

As a general rule, under the above provision, every holder is presumed prima facie to be a holder in due course. One who claims otherwise has the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are lacking. In this case, petitioner contends that the element of "value" is not present, therefore, respondent could not be a holder in due course. Petitioner’s contention lacks merit. Section 25 of the same law states:

SEC. 25. Value, what constitutes. – Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed as such whether the instrument is payable on demand or at a future time. There is no dispute that respondent received Rodrigo Cawili’s cashier’s check as payment for the former’s vegetable oil. The fact that it was Rodrigo who purchased the cashier’s check from petitioner will not affect respondent’s status as a holder for value since the check was delivered to him as payment for the vegetable oil he sold to spouses Cawili. Verily, the Court of Appeals did not err in concluding that respondent is a holder in due course of the cashier’s check.

2.       Yes.

It bears emphasis that the disputed check is a cashier’s check. The Court held that a cashier’s check is really the bank’s own check and may be treated as a promissory note with the bank as the maker. The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. The Court took judicial notice of the "well-known and accepted practice in the business sector that a cashier’s check is deemed as cash." This is because the mere issuance of a cashier’s check is considered acceptance thereof.

In view of the above pronouncements, petitioner bank became liable to respondent from the moment it issued the cashier’s check. Having been accepted by respondent, subject to no condition whatsoever, petitioner should have paid the same upon presentment by the former.

PNB vs Rodriguez 566 SCRA 513. September 26, 2008

Facts:

                Spouses Rodriguez maintained a savings and demand/checking accounts with petitioners Philippines National Bank (PNB). They were engaged in the informal lending business and had a discounting arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees, which likewise maintained current and savings accounts with petitioner bank. PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks. In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account. Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees. This usual irregular procedure is made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch.

                The spouses issued 69 checks, in the total amount of P2,345,804.00, payable to 47 members of PEMSLA. After finding out such fraudulent act, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason “Account Closed.” The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions. Spouses Rodriguez sued PEMSLA and PNB. They contended that because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as depositors. PNB paid the wrong payees; hence, it should bear the loss. Trial court ruled in favor of spouses and ordered PNB to pay. CA affirmed the decision. Hence this petition

Issue:

1.       Whether or not the 69 checks are payable to order.

2.       Whether or not PNB is liable.

Ruling:

1.       Yes.

As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as bearer instrument. A check is a bill of exchange drawn on a bank payable on demand. It is either an order or bearer instrument (Section 8 and 9 of the NIL).

                The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery.

                A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if 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.

                US jurisprudence yields that an actual, existing, and living payee may also be fictitious if the maker of the check did not intend for the payee to in fact receive the proceeds of the check and the check is a bearer instrument. The bank, as drawee, was authorized to make payment to the bearer of the check, regardless of whether prior indorsements were genuine or not.

                In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon.

2.       Yes.

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 work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme.

For  the  fictitious-payee  rule  to  be  available  as  a  defense,  PNB  must show  that  the  makers  did  not  intend  for  the named payees to be part of the transaction involving the checks. At most, the banks thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not  tantamount  to  a  lack  of  intention  on  the  part  of  respondents-spouses  that  the  payees  would  not receive  the  checks  proceeds.  Considering that  respondents-spouses  were  transacting  with  PEMSLA  and  not  the individual payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks.

Respondents-spouses were the banks depositors. The checks were drawn against respondents-spouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the genuineness of the signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this burden.

               

Bank  that  has  been  remiss  in  its  duty  must  suffer  the  consequences  of  its  negligence.  Being issued  to  named payees, PNB was duty-bound by law and by banking rules and procedure to require that the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held liable for the amounts of the checks.

Caltex (Philippines), Inc. vs Court of Appeals 212 SCRA 448. August 10, 1992

Facts:

                The defendant, Security Bank and Trust Company, a commercial banking institution issued 280 Certificate of time deposit (CTDs) in favor of Angel Dela Cruz who deposited with the Security Bank the total amount of P1.2 Million. Angel delivered the CTDs to Caltex, in connection with his purchased of fuel products from the latter.

                Subsequently, Angel informed the bank that he lost all the CTDs, and thus executed an affidavit of loss to facilitate the issuance of the replacement CTDs. Angel negotiated and obtained a loan from Security Bank in the amount of P875, 000 and executed a notarized Deed of Assignment of Time Deposit.

                When Caltex presented said CTDs for verification with the bank and formally informed the bank of its decision to pre-terminate the same, the bank rejected Caltex’ claim and demand as Caltex failed to furnish copies of certain requested documents.  In 1983, dela Cruz’ loan matured and the bank set-off and applied the time deposits as payment for the loan. Caltex filed a complaint which was dismissed on the ground that the subject certificates of deposit are non-negotiable.

Issue:

1.       Whether or not the subject CTDs are negotiable.

2.       Whether or not petitioner is a holder in due course of the CTDs.

Ruling:

1.       Yes.

The CTDs in question are negotiable instruments as they meet the requirements of the law for negotiability as provided for in Section 1 of the Negotiable Instruments Law.  The documents provide that the amounts deposited shall be repayable to the depositor. And according to the document, the depositor is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.  However, petitioner cannot recover on the CTDs.   Although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and dela Cruz, as ultimately ascertained, requires both delivery and indorsement.  In this case, there was no indorsement as  the CTDs were delivered not as payment but only as a security for dela Cruz' fuel purchases.

Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

2.       No.

The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products.

Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself.

Corporation Law: Pointers

Corporation

-          It 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. (Sec 2, BP 68)

Components of a Corporation

a.        Incorporators

-          Those mentioned in the articles of incorporation as originally forming and composing the corporation, having signed the articles and acknowledged the same before a notary public.

-          They have no powers beyond those vested in them by the statute.

1.        They must be natural persons;

2.        At least five (5) but not more than fifteen (15)

3.        They must be of legal age

4.        Majority must be residents of the Philippines

5.        Each must own or subscribe to at least one share.

b.        Corporators

-          All the stockholders and members of a corporation including the incorporators who are still stockholders.

c.        Stockholders and members

-          Stockholders are persons who hold or own shares in a stock corporation while members are those who compose the non-stock corporation.

d.        Directors and trustees

-          The Board of Directors is the governing body in a stock corporation.

-          The Board of Trustees is the governing body in a non-stock corporation.

-          They exercise the powers of the corporation.

e.        Corporate officers

-          They are the officers who are identified as such in the Corporation Code, the Articles of Incorporation or the By-laws of the corporation.

f.         Promoter

-          A self constituted organizer who finds an enterprise or venture and helps to attract investors, forms a corporation and launches it in business, all with a view to promotion profits.

-          Liability of promoter

GR:          The promoter binds himself personally and assumes the responsibility of looking to the proposed corporation for reimbursement.

XPN:       

1.        Express or implied agreement to the contrary

2.        Novation, not merely adoption or ratification of the contract.

Doctrine of piercing the veil of corporate entity

-          A corporation is a legal entity distinct from persons composing it.

-          It is a theory introduced for the purposes of convenience and to serve the ends of justice.

-          When can be disregarded:

a.        When it is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong or defend crime.

b.        When used to shield blatant violation of the prohibition against forum shopping.

Different kinds of Corporation

Stock Corporation

-          Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of shares held.

-          Organized or profit

Non-Stock Corporation

-          All other corporations are non-stock corporations.

-          One where no part of the income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution.

Public Corporation

-          One formed or organized for the government of a portion of the state.

-          Its purpose is for the general good and welfare.

Private Corporation

-          One formed for some public purpose, benefit, aim or end.

-          It may be stock or non-stock, government-owned or controlled or quasi-public.

Close Corporation

-          One whose articles of incorporation provide that:

1.        All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number o persons, not exceeding twenty (20);

2.        All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and

3.        The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

-          Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.

Educational Corporation

-          One organized for educational purposes.

Religious Corporations

-          One organized for religious purposes

Corporation sole

-          It is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church.

Corporation aggregate

-          It is a religious corporation incorporated by more than one person.

Eleemosynary Corporation

-          One organized for a charitable purpose.

Domestic Corporation

-          On formed, organized, or existing under the laws of the Philippines.

Foreign Corporation

-          One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state.

Corporation created by special laws or charter

-          Corporations which are governed primarily by the provisions of the special law or charter creating them.

Subsidiary Corporation

-          One in which control, usually in form of ownership of majority of its shares, is in another corporation.

Parent Corporation

-          Its control lies in its power, directly or indirectly, to elect the subsidiary’s directors thus controlling its management policies.

Corporation De Jure

-          A corporation organized in accordance with the requirements of the law.

De Facto Corporation

-          The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec 20)

-          A corporation where there exists a flaw in its incorporation.

-          Requisites:

1.        Organized under a valid law.

2.        Bona fide compliance with formalities of law.

3.        User of corporate powers.

4.        SEC issuance of certificate of incorporation.

Corporation by estoppel

-          All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof.

-          Where a group of persons misrepresent themselves as a corporation, they are subsequently stopped from claiming lack of corporate life in order to avoid liability.

Different Kind of Shares

Common shares

-          The most common type of shares, which enjoy no preference but the owners thereof are entitled to management of the corporation and to equal pro-rata division of profits after preference. It represents a residual ownership interest in the corporation.

Preferred Shares

-          Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which do not violate the Corporation Code. (Sec. 6)

Par Value Shares

-          These shares are with a stated value set out in the AOI.

-          Par Value is minimum issue price of such share in the AOI which must be stated in the certificate.

No-par Value Shares

-          These are shares without a stated value.

Founder’s share

-          These are shares, classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks.

Redeemable shares

-          These are shares which permit the issuing corporation to redeem or purchase its shares.

Treasury Shares

-          These are shares which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation, or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD.

Convertible shares

-          A type of preferred stock that the holder can exchange for a predetermined number of common shares at a specified time.

Non-Voting shares

GR:          Non-Voting Shares are not entitled to vote.

XPN:

1.        Amendment of the AOI

2.        Adoption and amendment of by-laws

3.        Sale, lease, exchange, other disposition of all or substantially all of the corporate property

4.        Incurring, creating or increasing bonded indebtedness

5.        Increase or decrease of capital stock

6.        Merger or consolidation

7.        Investment of corporate funds in another corporation or business

8.        Dissolution of the corporation.

	Corporation	Partnership
Governing Law	Corporation Code	Civil Code
Manner of creation	By law	By mere agreement
Number of incorporators	5 to 15 incorporators XPN: Corporation sole	2 or more persons
Commencement of juridical personality	Date of issuance of the certificate of incorporation by SEC	Moment of execution of the contract
Powers	Only powers expressly granted by law	Any power authorized by partners
Management	Board of Directors/ Board of Trustees	agent
Effect of mismanagement	Suit must be in the name of the corporation	Partner can sue a co-partner
Right of succession	Have the right of succession	No right
Transferability of interest	Without consent	Consent
Extent of liability to third persons	Extent of the shares	Personally and subsidiarily XPN: Limited
Term of existence	50 years Extendible for 50 years	Any period (stipulation)

Forms of Stock

Authorized Capital Stock

-          The amount fixed in the AOI to be subscribed and paid by the stockholders of the corporation.

Subscribed Capital

-          25% of the Authorized Capital Stock that is covered by subscription agreements whether fully paid or not.

Paid-Up Capital

-          25% of the Subscribed Capital which has been subscribed and actually paid.

-          It should not be less than P5000.

Outstanding Capital Stock

-          The total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is binding subscription agreement.

Capital

-          Properties and assets of the corporation that are used for its business or operation.

Qualification of Board of Directors

1.        Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of corporation.

Trustees of non-stock corporations must be members thereof.

2.        A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

3.        He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Corporation Code, committed within five (5) years before the date of his election.

4.        He must be of legal age.

5.        He must possess other qualifications as may be prescribed in the by-laws of the corporation.

Election of Directors or Trustees (Sec 24)

1.        Straight voting

Every stockholder may vote such number of shares for as many persons as there are directors to be elected.

2.        Cumulative Voting for one candidate

A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.

3.        Cumulative Voting by distribution

A stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit.

*Cumulative voting is not available in non-stock corporations.

Disqualification of directors, trustees or officers (Sec.27)

1.        No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or

2.        A violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

Section 144. Violation of the Code.

                Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punishable by a fine not less than one thousand (P1000) pesos but not more than ten thousand (P10 000) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same way, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.

Interlocking Director

                There is an interlocking director in a corporation when one (or some or all) of the directors in one corporation is (or are) a director in another corporation.

a.        If the interests of the interlocking director in the corporations are both substantial (stockholdings exceed 20% of Outstanding Capital Stock).

GR:          A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone.

XPN:        If the contract is fraudulent or not fair and reasonable.

Powers of the Corporation

General Powers (Sec 36 CCP)

1.        Sue and be sued in its corporate name;

2.        Succession;

3.        Adopt and use a corporate seal;

4.        Amend Articles of Incorporation;

5.        To adopt, amend or repeal by-laws;

6.        For stock corporations – issue stocks to subscribers and to sell treasury stocks;

For non-stock corporations – admit members;

7.        Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with real and personal property, pursuant to its lawful business;

8.        Enter into merger or consolidation with other corporations;

9.        To make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civil or similar purposes. Prohibited: donations in aid of any political party or candidate for purposes of partisan political activity;

10.     To establish pension, retirement and other plans for the benefit of directors, trustees, officers and employees;

11.     Other powers essential or necessary to carry out its purposes.

Specific Powers

1.        Power to extend or shorten corporate term;

2.        Increase/Decrease Corporate Stock;

3.        Incur, create bonded indebtedness;

4.        To deny pre-emptive right;

5.        Sell, dispose, lease, encumber all or substantially all of corporate assets;

6.        Purchase or acquire own shares;

7.        To invest in another corporation, business other than the primary purpose;

8.        To declare dividends;

9.        To enter into management contract;

10.     To amend the articles of incorporation.

Trust Fund Doctrine

                It means that the capital stock, properties and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. Stated simply, it states that all funds received by the corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of the corporation. Under such doctrine, no fund shall be used to buy back the issued shares of stock except only in instances specifically allowed by the Corporation Code.

Cases where the trust fund doctrine is violated

1.        When the corporation releases or condones payment of the unpaid subscription.

2.        When there is payment of dividends without unrestricted retained earnings.

3.        When properties are transferred in fraud of creditors.

4.        When properties are disposed or undue preference is given to some creditors even if the corporation is insolvent.

Stockholder’s suits and remedies

1.        Individual suit

One brought to assert a right by a stockholder peculiar to himself. Suits brought by a stockholder for the issuance to him a stock certificate, payment of his dividend, payment to him of the book value of his stocks, in those instances where the law allows him the right of appraisal, are individual suit.

2.        Representative Suit

One brought by a stockholder in his own behalf, and in behalf of other stockholders similarly situated, and having a common cause against the corporation.

3.        Derivative Suit

A suit brought by a stockholder, for and in behalf of the corporation and against any person, also a stockholder, director, officer, or third person. The right can be availed of by the stockholder after he has exhausted intra-corporate remedies, by requesting the board to act, and the board does not act at all.

An action brought by minority stockholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.

Requisites:

1.        Cause of action in favor of the corporation;

2.        Refusal of corporation to sue, and;

3.        Party filing the suit is a stockholder.