CORPORATION LAW While the veil of corporate fiction may be pierced under

certain instances, mere ownership of a subsidiary does not justify

Grandfather Rule the imposition of liability on the parent company. It must further
appear that to recognize a parent and a subsidiary as separate
1) Narra Nickel v. Redmont, G.R. No. 195580, April 21, entities would aid in the consummation of a wrong. Thus, a holding
2014 corporation has a separate corporate existence and is to be treated
as a separate entity; unless the facts show that such separate
The Court provides for two tests to determine a corporation’s corporate existence is a mere sham, or has been used as an
nationality – the Control Test and the Grandfather Rule. The instrument for concealing the truth.
Control Test looks solely at the percentage of Filipino ownership of
capital stock entitled to vote. Shares which belong to corporations 5) Espiritu, Jr. v. Petron, G.R. No. 170891, November
having at least 60% Filipino ownership shall be counted as Filipino 24, 2009
owned. For example, if 100,000 shares are registered in the name
of a corporation or partnership that is 60% Filipino-owned, then all In a corporation, the management of its business is generally
the 100,000 shares are considered Filipino-owned. However, vested in its board of directors, not its stockholders. Stockholders
where corporate documents leave doubt as to whether the are basically investors in a corporation who do not have a hand in
corporation satisfies the 60-40 Filipino ownership requirement, the running the day-to-day business operations of the corporation
Grandfather Rule is applied, under which ultimate Filipino unless they are at the same time directors or officers of the
ownership of the shares must be traced to the level of the investing corporation. A corporation is an entity separate and distinct from
corporation. If, upon scrutinization, the corporation is less than 60% the persons of its officers, directors, and stockholders. Before a
Filipino owned, then only the number of shares corresponding to stockholder may be held criminally liable for acts committed by the
such percentage shall be considered as of Philippine nationality. corporation, it must be shown that he had knowledge of the
For example, if the corporation owns 100,000 shares, but only 50% criminal act committed in the name of the corporation and that he
of the capital stock of said corporation is Filipino-owned, then only took part in the same or gave his consent to its commission,
50% of the 100,000 shares it owns shall be considered Philippine whether by action or inaction.
owned.
6) Livesey v. Binswanger, G.R. No. 177493, March 19,
Separate Personality/ Piercing the Veil 2014

2) Geraldo v. The Bill Sender Corp., G.R. No. 222219, A corporation, by legal fiction and convenience, is an entity
October 03, 2018 shielded by a protective mantle and imbued by law with a character
alien to the persons comprising it. Nonetheless, the shield is not at
As a general rule, a corporate officer cannot be held liable for all times impenetrable and cannot be extended to a point beyond
acts done in his official capacity because a corporation, by legal its reason and policy. Circumstances might deny a claim for
fiction, has a personality separate and distinct from its officers, corporate personality under the equitable doctrine of piercing the
stockholders or members. To pierce this fictional veil, it must be veil of corporate fiction especially when such corporate personality
shown that the corporate personality was used to perpetuate fraud is used to evade a just and due obligation, or to justify a wrong, to
or an illegal act, or to evade an existing obligation, or to confuse a shield or perpetrate fraud, or to carry out similar or inequitable
legitimate issue. Hence, to hold a director or officer personally considerations. In which case, the fiction will be disregarded and
liable for corporate obligations, two requisites must concur: (1) the the corporation the individuals composing it will be treated as
complaint must allege that the director or officer assented to the identical.
patently unlawful acts of the corporation, or that the director or
officer was guilty of gross negligence or bad faith; and (2) there Ultra Vires Acts
must be proof that the director or officer acted in bad faith. In
relation thereto, corporate officers, in illegal dismissal cases may 7) Bernas v. Cinco, G.R. Nos. 163356-57, July 01, 2015
be held solidarily liable with the corporation if the termination was
done with malice or bad faith. A distinction should be made between corporate acts or
contracts which are illegal and those which are merely ultra vires.
3) Edsa Shangri-La v. BF Corp., G.R. No. 145842, June The former contemplates the doing of an act which are contrary to
27, 2008 law, morals or public policy or public duty, and are, like similar
transactions between individuals, void. They cannot serve as basis
A corporation, upon coming to existence, is invested by law of a court action nor acquire validity by performance, ratification or
with a personality separate and distinct from those of the persons estoppel. Mere ultra vires acts, on the other hand, or those which
composing it. Ownership by a single or a small group of are not illegal or void ab initio, but are not merely within the scope
stockholders of nearly all of the capital stock of the corporation is of the articles of incorporation, are merely voidable and may
not, without more, sufficient to disregard the fiction of separate become binding and enforceable when ratified by the stockholders.
corporate personality. Thus, obligations incurred by corporate
officers, acting as corporate agents, are not theirs, but direct 8) Magallanes Watercraft v. Auguis, G.R. No. 211485,
accountabilities of the corporation they represent. Solidary liability May 30, 2016
on the part of corporate officers may at times attach, but only under
exceptional circumstances, such as when they act with malice or in Section 45 of the Corporation code provides for the powers of
bad faith. Also, in appropriate cases, the veil of corporate fiction a corporation: (1) express powers, which are bestowed upon by
shall be disregarded when the separate juridical personality of a law or its articles of incorporation; and (2) necessary or incidental
corporation is abused or used to commit fraud and perpetrate a powers to the exercise of those expressly conferred. As general
social injustice, or used as a vehicle to evade obligations. rule, an act which cannot or does not fall under the powers of the
corporation or those “committed outside the object for which a
4) Maricalum Mining v. Florentino, G.R. No. 221813, corporation is created” is considered as one which is ultra vires.
July 23, 2018 The only exception to such rule is when acts are necessary and
incidental to carry out a corporation’s purposes, and to exercise
Under the alter ego theory, piercing the veil of corporate powers conferred by the law and the corporation’s article of
fiction may be allowed only if the following elements concur: (1) incorporation. The test to be applied in determining whether the
control, not mere stock control, but complete domination not only of corporate act is in accordance with its purpose is whether the act is
finances, but of policy and business practice in respect to the in direct and immediate furtherance of the corporation’s business,
transaction attacked, must have been such that the corporate entity fairly incident to the express powers and reasonably necessary to
as to this transaction had at the time no separate mind, will or their exercise.
existence of its own; (2) such control must have been used by the
defendant to commit a fraud or a wrong, to perpetuate the violation Residence of a Corporation
of a statutory or positive legal duty, or a dishonest and an unjust
act in contravention of plaintiffs legal right; and (3) the said control 9) Hyatt Elevators v. Goldstar Elevators, G.R. No.
and breach of duty must have proximately caused the injury or 161026, October 24, 2005
unjust loss complained of.
Residence is the permanent home, the place to which, one,
whenever absent for business or pleasure, intends to return.
Residence is vital when dealing with venue. A corporation, A corporation exercises its corporate powers through its
however, has no residence in the same sense in which this term is board of directors. This power may be validly delegated to its
applied to a natural person. Hence, for practical purposes, the officers, committees, or agencies. The authority of such individuals
residence of a corporation is the place where its principal office is to bind the corporation is generally derived from law, corporate
established as stated in the articles of incorporation. Thus, bylaws or authorization from the board, either expressly or
personal actions by corporations must be filed at the venue where impliedly by habit, custom or acquiescence in the general course of
their principal office is located. Moreover, under Section 14(3) of business. While the authority of the board of directors to delegate
the Corporation Code, the place where the principal office of the its corporate powers may either be: (1) actual; or (2) apparent.
corporation is to be located is one of the required contents of the Actual authority may be express or implied. Express actual
articles of incorporation, which shall be filed with the SEC. authority refers to the corporate powers expressly delegated by the
board of directors. Implied actual authority, on the other hand, can
Claim for Moral Damages be measured by his or her prior acts which have been ratified by
the corporation or whose benefits have been accepted by the
10) ABS-CBN v. CA, G.R. No. 128690, January 21, 1999 corporation.

Moral damages are in the category of an award designed to Moreover, although an officer or agent acts without, or in
compensate the claimant for actual injury suffered and not to excess of, his actual authority, if he acts within the scope of an
impose a penalty on the wrongdoer. The award is not meant to apparent authority with which the corporation has clothed him by
enrich the complainant at the expense of the defendant, but to holding him out or permitting him to appear as having such
enable the injured party to obtain means, diversion, or amusements authority, the corporation is bound thereby in favor of a person who
that will serve to obviate the moral suffering he has undergone. The deals with such officer or agent in good faith in reliance on such
award of moral damages cannot be granted in favor of a apparent authority.
corporation because, being an artificial person and having
existence only in legal contemplation, it has no feelings, no Trust Fund Doctrine
emotions, no senses. It cannot, therefore, experience physical
suffering and mental anguish, which can be experienced only by 14) Halley vs. Printwell, Inc., G.R. No. 157549, May 30,
one having a nervous system. 2011

11) Filipinas Broadcasting v. Ago Medical, G.R. No. Under the trust fund doctrine, the property of a corporation is,
141994, January 17, 2005 by analogy or metaphor, a trust fund for the payment of creditors.
As between the corporation itself and its creditors, it is a simple
Generally, a juridical person is not entitled to moral damages debtor, and as between its creditors and stockholders, its assets
because, unlike a natural person, it cannot experience physical are in equity a fund for the payment of its debts. Subscriptions to
suffering or such sentiments including wounded feelings, serious the capital of a corporation shall also constitute a fund to which
anxiety, mental anguish, or moral shock. An exception to such rule creditors have a right to look for satisfaction of their claims and that
is when the claim for moral damages is based on item 7 of Article the assignee in insolvency can maintain an action upon any unpaid
2219 of the Civil Code. Such provision authorizes the recovery of stock subscription in order to realize assets for the payment of its
moral damages in cases of libel, slander or any other form of debts. The doctrine is not limited to reaching the stockholder's
defamation. Article 2219(7) does not qualify whether the plaintiff is unpaid subscriptions. Its scope encompasses not only the capital
a natural or juridical person. Therefore, a juridical person such as a stock, but also other property and assets generally regarded in
corporation can validly complain for libel or any other form of equity as a trust fund for the payment of corporate debts. All
defamation and claim for moral damages. corporate assets and properties held in trust for the benefit of
creditors that were distributed or in the possession of the
Doctrine of Apparent Authority stockholders, regardless of full payment of their subscriptions, may
be reached by the creditor in satisfaction of its claim.
12) Advance Paper Corp. v. Arma Traders Corp., G.R.
No.176897, December 11, 2013 Moreover, under the doctrine, a corporation has no legal
capacity to release an original subscriber to its capital stock from
A corporate officer or agent may represent and bind the the obligation of paying for his shares, in whole or in part, without a
corporation in transactions with third persons to the extent that the valuable consideration, or fraudulently, to the prejudice of creditors.
authority to do so has been conferred upon him, and this includes The creditor is allowed to maintain an action upon any unpaid
powers as, in the usual course of the particular business, are subscriptions and thereby steps into the shoes of the corporation
incidental to, or may be implied from, the powers intentionally for the satisfaction of its debt.
conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent Board of Directors/Power of the BOD
powers as the corporation has caused person dealing with the
officer or agent to believe that it has conferred. 15) Valle Verde v. Africa, G.R. No. 151969, September
4, 2009
Apparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in The BOD is only a creation of the stockholders and it derives
which the corporation holds out an officer or agent as having the its power to control and direct the business and affairs of the
power to act; or (2) the acquiescence in his acts of a particular corporation from the latter. For this reason, the BOD occupies a
nature, with actual or constructive knowledge thereof, within or position of trusteeship in relation to the stockholders, in the sense
beyond the scope of his ordinary powers. It requires presentation of that the board should exercise not only care and diligence, but
evidence of similar act/s executed either in its favor or in favor of utmost good faith in the management of corporate affairs.
other parties. It is not the quantity of similar acts which establishes Moreover, it is only through election of BOD members by the
apparent authority, but the vesting of a corporate officer with the stockholders on an annual basis that such members’ continued
power to bind the corporation. accountability to the latter, and the legitimacy of their decisions that
bind the stockholders, be assured. The shareholder vote is critical
The doctrine of apparent authority provides that a corporation to the theory that it legitimizes the exercise of power by the
will be estopped from denying the agent’s authority if it knowingly directors or officers over properties that they do not own.
permits one of its officers or any other agent to act within the scope
of an apparent authority, and it holds him out to the public as A vacancy in the BOD due to expiration of term of office must
possessing the power to do those acts. The doctrine of apparent be filled by the stockholders in a regular or special meeting called
authority does not apply if the principal did not commit any acts or for the purpose. However, in case of a vacancy due to causes
conduct which a third party knew and relied upon in good faith as a other than expiration of term of office, the law has authorized the
result of the exercise of reasonable prudence. Moreover, the remaining members of the board to fill in the same only in specified
agent’s acts or conduct must have produced a change of position instances, so as not to impair the corporation’s operations.
to the third party’s detriment. However, in recognition of the stockholders’ right to elect the
members of the board, it limited the period during which the
13) Terp Construction v. Banco Filipino, G.R. No. successor shall serve only to the unexpired term of his predecessor
221771, September 18, 2019 in office.
 Term is defined as the time during which the officer may claim the BOD and could not be delegated to subordinate officers or
to hold the office as of right, and fixes the interval after which the agents.
several incumbents shall succeed one another. Term is
distinguished from tenure which represents the period of time 19) Okol v. Slimmers World, G.R. No. 160146,
during which the incumbent actually holds office. It may be shorter December 11, 2009
or, in case of holdover, longer than the term for reasons within or
beyond the power of the incumbent. With that being said, the An “office” is created by the charter of the corporation and the
holdover period is not part of nor affects the term of office of an officer is elected by the directors or stockholders. On the other
BOD member. The holdover period refers to that time from the hand, an “employee” usually occupies no office and generally is
lapse of one year from a member’s election to the BOD and until employed not by action of the directors or stockholders but by the
his successor’s election and qualification. It is not part of the BOD managing officer of the corporation who also determines the
member’s original term of office, nor is it a new term, however, it compensation to be paid to such employee.
constitutes part of his tenure. The term is fixed by statute and it A corporate officer’s dismissal is always a corporate act, or an
does not change simply because the office may have become intra-corporate controversy which arises between a stockholder
vacant, nor because the incumbent holds over in office beyond the and a corporation. The determination of the rights of a director and
end of his term due to the fact that a successor has not been corporate officer dismissed from his employment as well as the
elected and has failed to qualify. corresponding liability of a corporation, if any, is an intra-corporate
dispute subject to the jurisdiction of the regular courts and not
16) Filipinas Port Services v. Go, G.R. No. 161886, within the jurisdiction of labor tribunals.
March 16, 2007
20) Gomez v. PDMC, G.R. No. 174044, November 27,
Section 23 of the Corporation Code explicitly provides that, 2009
unless otherwise provided therein, the corporate powers of all
corporations formed under the Code shall be exercised, all Ordinary company employees are generally employed not by
business conducted, and all properties of the corporation shall be action of the directors and stockholders but by that of the managing
controlled and held by a BOD. Thus, with the exception only of officer of the corporation who also determines the compensation to
some powers expressly granted by law to stockholders, the BOD be paid such employees. Corporate officers, on the other hand, are
has the sole authority to determine policies, enter into contracts, elected or appointed by the directors or stockholders, and are
and conduct the ordinary business of the corporation within the those who are given that character either by the Corporation Code
scope of its character, i.e., its articles of incorporation, by-laws and or by the corporation’s by-laws.
relevant provisions of law.
The relationship of a person to a corporation, whether as
The determination of the necessity for creation of additional officer or agent or employee, is not determined by the nature of the
corporate offices and/or positions even if not provided for under the services he performs but by the incidents of his relationship with
corporate by-laws and the grant of salary increases in favor of the corporation as they actually exist.
corporate officers are within the domain of management
prerogative that belongs to the BOD as the corporation’s governing A corporation is not prohibited from hiring a corporate officer
body which courts would not review in the absence of any proof to perform services under circumstances which will make him an
that such prerogative was exercised in bad faith or with malice. employee.

17) AGO Realty v. Dr. Angelita F. Ago, G.R. No. 210906, 21) Laborte v. Pagsanjan Tourism, G.R. No. 183860,
October 16, 2019 Jan. 15, 2014

While corporations are subjected to the State's broad As a general rule the officer cannot be held personally liable
regulatory powers, it is their directors and officers who are tasked with the corporation, whether civilly or otherwise, for the
with addressing questions of internal policy and management. Also, consequences of his acts, if acted for and in behalf of the
the business of a corporation is conducted by its board of directors, corporation, within the scope of his authority and in good faith.
and so long as the board acts in good faith, the State, through the
courts, may not interfere with its management decisions. Furthermore, while it is true that the exercise of management
prerogative is a recognized right of a corporate entity, it cannot be
Grounded on equity, the derivative suit has proven to be an gainsaid that the exercise of such right must be tempered with
effective tool for the protection of minority shareholders. Such justice, honesty, good faith and a careful regard of other party's
actions have for their object the vindication of a corporate injury, rights.
even though they are not brought by the corporation, but by its
stockholders. That said, derivative suits remain an exception. As a 22) Harpoon Marine v. Francisco, G.R. No. 167751,
general rule, corporate litigation must be commenced by the March 2, 2011
corporation itself, with the sanction of the board of directors, which,
pursuant to the law, wields the power to sue. Therefore, since the Obligations incurred by corporate officers, acting as such
derivative suit is a remedy of last resort, it must be shown that the corporate agents, are not theirs but the direct accountabilities of the
board, to the detriment of the corporation and without a valid corporation they represent. As such, they should not be generally
business consideration, refuses to remedy a corporate wrong. A held jointly and solidarily liable with the corporation. Such being the
derivative suit may only be instituted after such an omission. general rule is grounded on the theory that a corporation has a
Simply put, derivative suits take a back seat to board-sanctioned legal personality separate and distinct from the persons comprising
litigation whenever the corporation is willing and able to sue in its it. To warrant the piercing of the veil of corporate fiction, the
own name. officer’s bad faith or wrongdoing must be established clearly and
convincingly as bad faith is never presumed.
Corporate Officer / Liability of Corporate Officer
23) Mirant v. Caro, G.R. No. 181490, April 23, 2014
18) Matling v. Coros, G.R. No. 157802, October 13, 2010
A corporation has a personality separate and distinct from its
Section 25 of the Corporation code plainly states that the officers and board of directors who may only be held personally
corporate officers are the President, Secretary, Treasurer and such liable for damages if it is proven that they acted with malice or bad
other officers as may be provided for in the By-Laws. Stated faith in the dismissal of an employee. Absent any evidence on
otherwise, in order for one to be considered as a corporate office, it record that a corporate officer acted maliciously or in bad faith in
must be expressly given such character by the Corporation Code effecting the termination of an employee, plus the apparent lack of
or must be expressly provided in the corporate By-Laws. Thus, the allegation in the pleadings of the latter that such officer acted in
creation of an office pursuant to or under a By-Law enabling such manner, the doctrine of corporate fiction dictates that only the
provision is not enough to make a position a corporate office. Thus, corporation should be held liable for the illegal dismissal of the
such other corporate officers could be considered only as employee.
employees or subordinate officials. Moreover, in light of Section 25,
the BOD could not validly delegate the power to create a corporate 24) Queensland-Tokyo Commodities v. George, G.R.
office to the President since as provided under same section, the No. 172727, September 8, 2010
law vests the discretionary power to elect the corporate officers in
 A corporation is invested by law with a personality separate Moreover, although the Corporation Code requires the filing of
and distinct from those of the persons composing it, such that, save by-laws, it does not expressly provide for the consequences of the
for certain exceptions, corporate officers who entered into contracts non-filing of the same. However, such omission has been rectified
in behalf of the corporation cannot be held personally liable for the by P.D. No. 902-A which provides, among others, that the SEC has
liabilities of the latter. Personal liability of a corporate director, the power to suspend, or revoke, after proper notice and hearing,
trustee, or officer, along (although not necessarily) with the the franchise or certificate of registration of corporations upon
corporation, may validly attach, as a rule, only when – (1) he failure to file by-laws within the required period. But, even under the
assents to a patently unlawful act of the corporation, or when he is foregoing grant of power, there can be no automatic corporate
guilty of bad faith or gross negligence in directing its affairs, or dissolution simply because the incorporators failed to file by-laws
when there is a conflict of interest resulting in damages to the within the required period. The incorporators, in observance of due
corporation, its stockholders, or other persons; (2) he consents to process, still has the chance to explain their neglect or omission
the issuance of watered down stocks or who, having knowledge and remedy the same.
thereof, does not forthwith file with the corporate secretary his
written objection thereto; (3) he agrees to hold himself personally 29) Valley Golf & Country Club v. Vda. De Caram, G.R.
and solidarily liable with the corporation; or (4) he is made by a No. 158805, April 16, 2009
specific provision of law personally answerable for his corporate
action. Under Section 91 of the Corporation Code, membership in a
non-stock corporation shall be terminated in the manner and for the
25) MARC II Marketing v. Joson, G.R. No. 171993, causes provided in the articles of incorporation or the by-laws.
December 12, 2011 Termination of membership shall have the effect of extinguishing all
rights of a member in the corporation or in its property, unless
As a rule, corporation has a personality separate and distinct otherwise provided in the articles of incorporation or the by-laws.
from its officers, stockholders and members such that corporate Hence, termination of membership in a non-stock corporation may
officers are not personally liable for their official acts unless it is be established through the by-laws alone and need not be set forth
shown that they have exceeded their authority. However, this in the articles of incorporation.
corporate veil can be pierced when the notion of the legal entity is
used as a means to perpetrate fraud, an illegal act, as a vehicle for A distinction should be made between the provision under
the evasion of an existing obligation, and to confuse legitimate Section 6(1) and Section 91 of the Corporation Code. In the former,
issues. Under the Labor Code, for instance, when a corporation it refers to ‘restrictions’ on the shares of stock which should be
violates a provision declared to be penal in nature, the penalty shall stated in the articles of incorporation. It contemplates a recourse of
be imposed upon the guilty officer or officers of the corporation. a stock corporation such as auction sale of shares with delinquent
subscriptions. While in the latter, it refers to a creation of a lien on a
Stockholders member’s share to ensure payment of dues, charges and other
assessments on such member which may be established through
26) Joselito Puno v. Puno Enterprises, G.R. No. the by-laws alone and need not be set forth in the articles of
177066, September 11, 2009 incorporation. Moreover, In the latter, the member has fully paid for
his membership share, while in the former, the stockholder has not
Upon the death of a shareholder, the heirs do not yet fully paid for his shares of stock he subscribed to, thereby
automatically become stockholders of the corporation and acquire authorizing the stock corporation to call on the unpaid subscription,
the rights and privileges of the deceased as shareholder of the declare the same delinquent and subject them to a sale at public
corporation. The stocks must be distributed first to the heirs in auction.
estate proceedings, and the transfer of the stocks must be
recorded in the books of the corporation. However, the Court noted in the case that in order that the
action of a corporation in expelling a member for cause may be
Section 63 of the Corporation Code provides that no transfer valid, it is essential, in the absence of a waiver, that there shall be a
shall be valid, except as between the parties, until the transfer is hearing or trial of the charge against him, with reasonable notice to
recorded in the books of the corporation. During such interim him and a fair opportunity to be heard in his defense. If the method
period, the heirs stand as the equitable owners of the stocks, the of trial is not regulated by the by-laws of the association, it should
executor or administrator duly appointed by the court being vested at least permit substantial justice. The hearing must be conducted
with the legal title to the stock. Until a settlement and division of the fairly and openly and the body of persons before whom it is heard
estate is effected, the stocks of the decedent are held by the or who are to decide the case must be unprejudiced.
administrator or executor. Consequently, during such time, it is the
administrator or executor who is entitled to exercise the rights of Derivative Suit
the deceased as stockholder.
30) Legaspi Towers 300, Inc. v. Muer, G.R. No. 170783,
27) David and Jose Lao v. Dionisio Lao, G.R. No. June 18, 2012
170585, October 6, 2008
Suits by stockholders or members of a corporation based on
A certificate of stock is the evidence of a holder’s interest and wrongful or fraudulent acts of directors or other persons may be
status in a corporation. It is a written instrument signed by the classified into individual suits, class suits, and derivative suits.
proper officer of a corporation stating or acknowledging that the Where a wrong was personally done to a stockholder or member
person named in the document is the owner of a designated such as denial of his right of inspection, his suit would be
number of shares of its stock. It is prima facie evidence that the “individual.” Where the wrong is done to a group of stockholders,
holder is a shareholder of a corporation. The mere inclusion as as where preferred stockholders' rights are violated, a “class or
shareholder of a person in the General Information Sheet (GIS) of representative suit” will be proper for the protection of all
the corporation is insufficient proof that he or she is a shareholder stockholders belonging to the same group. But where the acts
of such corporation. The information in the GIS will still have to be complained of constitute a wrong to the corporation itself, the
correlated with the corporate books of. As between the GIS and the cause of action belongs to the corporation and not to the individual
corporate books, it is the latter that is controlling. stockholder or member. Although in most every case of wrong to
the corporation, each stockholder is necessarily affected because
By-Laws the value of his interest therein would be impaired, this fact of itself
is not sufficient to give him an individual cause of action since the
28) Loyola Grand Villas v. CA, G.R. No. 117188, August corporation is a person distinct and separate from him, and can
7, 1997 and should itself sue the wrongdoer. Otherwise, not only would the
theory of separate entity be violated, but there would be multiplicity
The failure of the corporation to file the by-laws within one of suits as well as a violation of the priority rights of creditors.
month after receipt of official notice of the issuance of its certificate Furthermore, there is the difficulty of determining the amount of
of incorporation by the SEC does not imply the automatic damages that should be paid to each individual stockholder.
dissolution of the corporation. By-laws may be necessary for the
government of the corporation but these are subordinate to the However, in cases of mismanagement where the wrongful
articles of incorporation as well as to the Corporation Code and acts are committed by the directors or trustees themselves, a
related statutes. stockholder or member may find that he has no redress because
the former are vested by law with the right to decide whether or not
the corporation should sue, and they will never be willing to sue specifically to unpaid subscriptions to capital stock, the sale of
themselves. The corporation would thus be helpless to seek which is governed by the preceding Section 68.
remedy. Because of the frequent occurrence of such a situation,
the common law gradually recognized the right of a stockholder to However, said provisions do not apply in a situation where the
sue on behalf of a corporation in what eventually became known as subscription price for the share of stock had already been fully paid
a "derivative suit." Thus, an individual stockholder is permitted to and the shareholder no longer had any outstanding obligation to
institute a derivative suit on behalf of the corporation wherein he deprive him of full title to his share. In case of non-payment of
holds stock in order to protect or vindicate corporate rights, monthly dues by a member in a non-stock corporation, the
whenever officials of the corporation refuse to sue or are the ones applicable provision is Section 91 of the Corporation Code. Under
to be sued or hold the control of the corporation. In such actions, said section, membership in a non-stock corporation shall be
the suing stockholder is regarded as the nominal party, with the terminated in the manner and for the causes provided in the
corporation as the party-in- interest. Since it is the corporation that articles of incorporation or the by-laws. A non-stock corporation, by
is the real party-in-interest in a derivative suit, then the reliefs virtue of Section 91, may establish a lien on the member’s share by
prayed for must be for the benefit or interest of the corporation. explicitly providing in its By-Laws as security for payment of
When the reliefs prayed for do not pertain to the corporation, then it member’s debts to the corporation.
is an improper derivative suit. Quorum

Thus, the requisites for a derivative suit are: (a) the party 35) Paul Lee Tan v. Paul Sycip, August 17, 2006
bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being Section 52 of the Corporation Code provides that a quorum,
material; (b) he has tried to exhaust intra-corporate remedies, i.e., unless otherwise provided for in the Code or in the by-laws, shall
has made a demand on the board of directors for the appropriate consist of the stockholders representing a majority of the
relief but the latter has failed or refused to heed his plea; and (c) outstanding capital stock or a majority of the members in the case
the cause of action actually devolves on the corporation, the of non-stock corporations.
wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the suit. In stock corporations, the right to vote is inherent in the
ownership of corporate stocks. However, unissued stocks may not
31) Maj. Stockholders of Ruby Industrial v. Lim, G.R. considered in determining whether a quorum is present in a
No. 165887, June 6, 2011 stockholders’ meeting, or whether a requisite proportion of the
stock of the corporation is voted to adopt a certain measure or act.
A derivative action is a suit by a shareholder to enforce a Only stock actually issued and outstanding may be voted. In
corporate cause of action. It is a remedy designed by equity and nonstock corporations, the voting rights attach to membership.
has been the principal defense of the minority shareholders against Members vote as persons, in accordance with the law and the by-
abuses by the majority. For this purpose, it is enough that a laws of the corporation. Each member shall be entitled to one vote
member or a minority of stockholders file a derivative suit for and in unless so limited, broadened, or denied in the articles of
behalf of a corporation. An individual stockholder is permitted to incorporation or bylaws. Moreover, when the principle for
institute a derivative suit on behalf of the corporation wherein he determining the quorum for stock corporations is applied by
holds stock in order to protect or vindicate corporate rights, analogy to nonstock corporations, only those who are actual
whenever officials of the corporation refuse to sue or are the ones members with voting rights should be counted.
to be sued or hold the control of the corporation. In such actions,
the suing stockholder is regarded as the nominal party, with the In determining the effect of the death of the a member or a
corporation as the party in interest. stockholder in the ascertaining the existence of a quorum, there
must be a distinction to be made. In stock corporations,
Transfer of Stock Ownership shareholders may generally transfer their shares. Thus, on the
death of a shareholder, the executor or administrator duly
32) Simny G. Guy v. Calo, G.R. No. 189486, September appointed by the Court is vested with the legal title to the stock and
5, 2012 entitled to vote it. Until a settlement and division of the estate is
effected, the stocks of the decedent are held by the administrator
When a stock certificate is endorsed in blank by the owner or executor. While in nonstock corporations, membership in and all
thereof, it constitutes what is termed as "street certificate," so that rights arising from a nonstock corporation are personal and non-
upon its face, the holder is entitled to demand its transfer his name transferable, unless the articles of incorporation or the bylaws of
from the issuing corporation. Such certificate is deemed quasi- the corporation provide otherwise. In other words, the
negotiable, and as such the transferee thereof is justified in determination of whether or not "dead members" are entitled to
believing that it belongs to the holder and transferor. As an exercise their voting rights (through their executor or administrator),
exception to such rule, where stock certificates endorsed in blank depends on those articles of incorporation or bylaws.
were stolen from the possession of the beneficial owners thereof,
the transfer void for lack of delivery and want of value. However, In sum, for stock corporations, the "quorum" referred to in
such an exception will not apply when the beneficial owners were Section 52 of the Corporation Code is based on the number of
actually in an undisturbed possession of said stock certificates and outstanding voting stocks. While for nonstock corporations,
who themselves caused the transfer in their names. generally, only those who are actual, living members with voting
rights shall be counted in determining the existence of a quorum
33) Fil-Estate Gold v. Vertex Sales, G.R. No. 202079, during members’ meetings. Whether or not "dead members" are
June 10, 2013 entitled to exercise their voting rights depends on the provision of
the articles of incorporation or bylaws.
The Corporation Code provides that physical delivery is
necessary to transfer ownership of stocks. Moreover, the Code As regards the filling of vacancies in the board of directors or
also provides that no transfer, however, shall be valid, except as trustees, under Section 29, directors or trustees may fill vacancies
between the parties, until the transfer is recorded in the books of in the board, provided that those remaining still constitute a
the corporation showing the names of the parties to the transaction, quorum. The phrase "may be filled" shows that the filling of
the date of the transfer, the number of the certificate or certificates, vacancies in the board by the remaining directors or trustees
and the number of shares transferred. Also, no shares of stock constituting a quorum is merely permissive, not mandatory.
against which the corporation holds any unpaid claim shall be Corporations, therefore, may choose how vacancies in their
transferable in the books of the corporation. respective boards may be filled up either by the remaining directors
constituting a quorum, or by the stockholders or members in a
Sale of delinquent Stocks regular or special meeting called for the purpose.

34) Calatagan Golf Club v. Clemente, G.R. No. 16544, Appraisal Right
April 16, 2009
36) Turner v. Lorenzo Shipping, G.R. No. 157479, Nov.
Section 69 of the Code provides that an action to recover 24, 2010
delinquent stock sold must be commenced by the filing of a
complaint within 6 months from the date of sale. Said section refers A stockholder who dissents from certain corporate actions
has the right to demand payment of the fair value of his shares.
This right, known as the right of appraisal, is expressly recognized A stockholder's right of inspection of the corporation's books
in Section 81 of the Corporation Code. However, a corporation can and records under Section 74 of the Corporation Code is an
purchase its own shares, provided payment is made out of surplus incident of ownership of the corporate property, whether this
profits and the acquisition is for a legitimate corporate purpose, ownership or interest be termed an equitable ownership, a
pursuant to Section 41 of said code. beneficial ownership, or a quasi-ownership. This right is predicated
upon the necessity of self-protection. However, the inspection has
The Corporation Code defines how the right of appraisal is to be germane to the petitioner's interest as a stockholder, and has
exercised, as well as the implications of said right, as follows: to be proper and lawful in character and not inimical to the interest
1. The appraisal right is exercised by any stockholder who of the corporation. A stockholder’s right to inspect corporate books
has voted against the proposed corporate action by is also not without limitations. It shall be a defense that the person
making a written demand on the corporation for the demanding to examine and copy excerpts from the corporation's
payment of the fair value of his shares within 30 days records and minutes has improperly used any information secured
after the date on which the vote was taken for the through any prior examination of the records or minutes of such
proposed corporate action. Failure to make the demand corporation or of any other corporation, or was not acting in good
within the period is deemed a waiver of the appraisal faith or for a legitimate purpose in making his demand.
right.
2. If the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares within a
period of 60 days from the date the stockholders 38) Yujuico v. Quiambao, G.R. No. 180416, June 2,
approved the corporate action, the fair value shall be 2014
determined and appraised by three disinterested
persons, one of whom shall be named by the A criminal action based on the violation of a stockholder's
stockholder, another by the corporation, and the third by right to examine or inspect the corporate records and the stock and
the two thus chosen. The findings and award of the transfer book of a corporation under the second and fourth
majority of the appraisers shall be final, and the paragraphs of Section 74 of the Corporation Code can only be
corporation shall pay their award within 30 days after the maintained against corporate officers or any other persons acting
award is made. Upon payment by the corporation of the on behalf of such corporation.
agreed or awarded price, the stockholder shall forthwith
transfer his shares to the corporation. However, a criminal action invoking violation of rights under
3. All rights accruing to the withdrawing stockholder’s Section 74 shall not be sustained if filed by the corporate officers
shares, including voting and dividend rights, shall be themselves or any other persons acting on behalf of a corporation
suspended from the time of demand for the payment of against former corporate officers who were allegedly withholding
the fair value of the shares until either the abandonment and refusing to turn over possession of company records. This is
of the corporate action involved or the purchase of the because, contrary to what the law requires for a valid exercise of
shares by the corporation, except the right of such right under Section 74, the petitioners in this scenario are actually
stockholder to receive payment of the fair value of the the ones acting on behalf of the corporation and are merely trying
shares. to recover custody of the contested records. What they are seeking
4. Within 10 days after demanding payment for his shares, to enforce is not the right of inspection of the corporation's books
a dissenting stockholder shall submit to the corporation and records but the proprietary right of the corporation to be in
the certificates of stock representing his shares for possession of such records and book. Such right, though certainly
notation thereon that such shares are dissenting shares. legally enforceable by other means, cannot be enforced by a
Failure to do so shall, at the option of the corporation, criminal prosecution based on a violation of the provisions of
terminate his rights. If shares represented by the Section 74.
certificates bearing such notation are transferred, and
the certificates are consequently canceled, the rights of Merger and consolidation
the transferor as a dissenting stockholder shall cease
and the transferee shall have all the rights of a regular 39) Mindanao Savings v. Edward Willkom, G.R. No.
stockholder; and all dividend distributions that would 178618, Oct. 11, 2010
have accrued on such shares shall be paid to the
transferee. Merger does not become effective upon the mere agreement
5. If the proposed corporate action is implemented or of the constituent corporations. Since a merger or consolidation
effected, the corporation shall pay to such stockholder, involves fundamental changes in the corporation, as well as in the
upon the surrender of the certificates of stock rights of stockholders and creditors, there must be an express
representing his shares, the fair value thereof as of the provision of law authorizing them. The merger shall only be
day prior to the date on which the vote was taken, effective upon the issuance of a certificate of merger by the SEC,
excluding any appreciation or depreciation in subject to its prior determination that the merger is not inconsistent
anticipation of such corporate action. with the Corporation Code or existing laws. Such issuance is
crucial because not only does it bear out SEC’s approval but it also
marks the moment when the consequences of a merger take place.
Notwithstanding the foregoing, no payment shall be made to
By operation of law, upon the effectivity of the merger, the
any dissenting stockholder unless the corporation has unrestricted
absorbed corporation ceases to exist but its rights and properties,
retained earnings in its books to cover the payment. In case the
as well as liabilities, shall be taken and deemed transferred to and
corporation has no available unrestricted retained earnings in its
vested in the surviving corporation.
books, Section 83 provides that if the dissenting stockholder is not
paid the value of his shares within 30 days after the award, his
40) Sumifru v. Baya, G.R. No. 188269, April 17, 2017
voting and dividend rights shall immediately be restored. Such
requirement finds basis in the trust fund doctrine.
Section 80 of the Corporation Code provides, among others,
that the surviving or consolidated corporation shall be responsible
Trust fund doctrine provides that the capital stock, property,
and liable for all the liabilities and obligations of each of the
and other assets of a corporation are regarded as equity in trust for
constituent corporations in the same manner as if such surviving or
the payment of corporate creditors, who are preferred in the
consolidated corporation had itself incurred such liabilities or
distribution of corporate assets. The creditors of a corporation have
obligations; and any pending claim, action or proceeding brought
the right to assume that the board of directors will not use the
by or against any of such constituent corporations may be
assets of the corporation to purchase its own stock for as long as
prosecuted by or against the surviving or consolidated corporation.
the corporation has outstanding debts and liabilities. There can be
The rights of creditors or liens upon the property of any of such
no distribution of assets among the stockholders without first
constituent corporations shall not be impaired by such merger or
paying corporate debts. Thus, any disposition of corporate funds
consolidation.
and assets to the prejudice of creditors is null and void.
Corporate Dissolution
Corporate Books and Right to Inspect
41) Vitaliano N. Aguirre II, v. FQB+, Inc., G.R. No.
37) Ang-Abaya v. Ang, G.R. No. 178511, Dec. 4, 2008
170770, Jan. 9, 2013
 A corporation’s board of directors is not rendered functus corporation, for its own name and its own account, the latter cannot
officio by its dissolution. Section 122 of the Corporation Code be considered to be doing business in the Philippines.
allows a corporation to continue its existence for a limited purpose,
and for this reason, necessarily there must be a board that will 44) Global Business Holdings v. Surecomp, G.R. No.
continue acting for and on behalf of the dissolved corporation for 173463, October 13, 2010
that purpose. In fact, Section 122 authorizes the dissolved
corporation’s board of directors to conduct its liquidation within As a general rule, a corporation has a legal status only within
three years from its dissolution. Jurisprudence has even the state or territory in which it was organized, a corporation
recognized the board’s authority to act as trustee for persons in organized in another country has no personality to file suits in the
interest beyond the said three-year period. Philippines. The exception to such rule is the application of the
doctrine of estoppel. A Filipino citizen or entity is estopped from
Moreover, Section 145 of the Corporation Code protects, challenging the personality of a foreign corporation after having
among others, the rights and remedies of corporate actors against acknowledged the same by entering into a contract with it.
other corporate actors. The statutory provision assures an
aggrieved party that the corporation's dissolution will not impair, 45) Cargill v. Intra Strata Assurance, G.R. No. 168266,
much less remove, his rights or remedies against the corporation, March 15, 2010
its stockholders, directors or officers. Section 145 also states that
corporate dissolution will not extinguish any liability already To be doing or "transacting business in the Philippines" for
incurred by the corporation, its stockholders, directors, or officers. purposes of Section 133 of the Corporation Code, the foreign
In short, Section 145 preserves a corporate actor's cause of action corporation must actually transact business in the Philippines, that
and remedy against another corporate actor. In so doing, Section is, perform specific business transactions within the Philippine
145 also preserves the nature of the controversy between the territory on a continuing basis in its own name and for its own
parties as an intra-corporate dispute. account. Actual transaction of business within the Philippine
territory is an essential requisite for the Philippines to acquire
jurisdiction over a foreign corporation and thus require the foreign
The dissolution of the corporation simply prohibits it from
corporation to secure a Philippine business license. If a foreign
continuing its business. However, despite such dissolution, the
corporation does not transact such kind of business in the
parties involved in the litigation are still corporate actors. The
Philippines, even if it exports its products to the Philippines, the
dissolution does not automatically convert the parties into total
Philippines has no jurisdiction to require such foreign corporation to
strangers or change their intra-corporate relationships. Neither
secure a Philippine business license. In relation thereto, a foreign
does it change or terminate existing causes of action, which arose
company that merely imports goods from a Philippine exporter,
because of the corporate ties between the parties. Thus, a cause of
without opening an office or appointing an agent in the Philippines,
action involving an intra-corporate controversy remains and must
is not doing business in the Philippines.
be filed as an intra-corporate dispute despite the subsequent
dissolution of the corporation.
Corporation Sole
42) Alabang Dev. Corp. v. Alabang Hills, G.R. No.
46) Iglesia Evangelica v. Juane, G.R. Nos. 172447, Sept
187456, June 2, 2014
18, 2009
The time during which the corporation, through its own
A corporation sole is one formed by the chief archbishop,
officers, may conduct the liquidation of its assets and sue and be
bishop, priest, minister, rabbi or other presiding elder of a religious
sued as a corporation is limited to three years from the time the
denomination, sect, or church, for the purpose of administering or
period of dissolution commences. However, there is no time limit
managing, as trustee, the affairs, properties and temporalities of
within which the trustees must complete a liquidation placed in their
such religious denomination, sect or church. A corporation sole
hands. It is provided only that the conveyance to the trustees must
consists of a single member, while a corporation aggregate
be made within the three-year period. It may be found impossible to
consists of two or more persons.
complete the work of liquidation within the three-year period or to
reduce disputed claims to judgment.
Intra-corporate Dispute
A corporation lacks capacity to sue because it no longer
47) Renato Real v. Sangu Philippines, G.R. No. 168757,
possesses juridical capacity by reason of corporate dissolution and
January 19, 2011
lapse of the three-year grace period as provided under Section 122
of the Corporation Code. However, the trustee of a corporation may
continue to prosecute a case commenced by the corporation within
The fact that the controversy is among stockholders or that it
three years from its dissolution until rendition of the final judgment,
is between the stockholders and the corporation does not
even if such judgment is rendered beyond the three-year period
necessarily place the dispute within the ambit of the jurisdiction of
allowed by same section. Thus, it is needless to say that an already
the SEC (now the RTC). Furthermore, it does not necessarily follow
defunct corporation is not allowed to initiate a suit after the lapse of
that every conflict between the corporation and its stockholders
the said three-year period.
would involve such corporate matters as only SEC (now the RTC)
can resolve in the exercise of its adjudicatory or quasi-judicial
Foreign Corporation
powers. The better policy to be followed in determining jurisdiction
over a case should be to consider concurrent factors such as the
43) Steelcase, Inc. v. Design International, G.R. No.
status or relationship of the parties or the nature of the question
171995, April 18, 2012
that is subject of their controversy. In the absence of any one of
these factors, the SEC will not have jurisdiction.
As a general rule, an unlicensed foreign corporation doing
business in the Philippines does not have the capacity to sue
48) Reyes v. RTC of Makati, G.R. No. 165744, August
before the local courts. However, as an exception, it may be
11, 2008
allowed to sue a Filipino citizen or entity who had contracted with
and benefited by said foreign corporation. One who has dealt with
Initially, the main consideration in determining whether a
a corporation of foreign origin as a corporate entity is estopped to
dispute constitutes an intra-corporate controversy was limited to a
deny its corporate existence and capacity. This is to prevent a
consideration of the intra-corporate relationship existing between or
person contracting with a foreign corporation from later taking
among the parties. The types of relationships embraced under
advantage of its noncompliance with the statutes chiefly in cases
Section 5(b) of PD 902-A, as amended, were:
where such person has received the benefits of the contract. Such
a) between the corporation, partnership, or association and
principle is deeply rooted in the time-honored axiom of Commodum
the public;
ex injuria sua non habere debet: no person ought to derive any
b) between the corporation, partnership, or association and
advantage of his own wrong.
its stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and
The determination of whether a foreign corporation is doing
the State as far as its franchise, permit or license to
business in the Philippines must be judged in light of the attendant
operate is concerned; and
circumstances. Thus, if a local distributor is an independent entity
d) among the stockholders, partners, or associates
which buys and distributes products, other than those of the foreign
themselves.
 The existence of any of the above intra-corporate relations
was sufficient to confer jurisdiction to the SEC, regardless of the
subject matter of the dispute. This came to be known as the
relationship test.

Subsequently, the Court introduce the nature of the

controversy test declaring that it is not the mere existence of an
intra-corporate relationship that gives rise to an intra-corporate
controversy. To rely on the relationship test alone will divest the
regular courts of their jurisdiction for the sole reason that the
dispute involves a corporation, its directors, officers, or
stockholders. Under the nature of the controversy test, the
incidents of that relationship must also be considered for the
purpose of ascertaining whether the controversy itself is intra-
corporate. The controversy must not only be rooted in the
existence of an intra-corporate relationship, but must as well
pertain to the enforcement of the parties’ correlative rights and
obligations under the Corporation Code and the internal and intra-
corporate regulatory rules of the corporation. If the relationship and
its incidents are merely incidental to the controversy or if there will
still be conflict even if the relationship does not exist, then no intra-
corporate controversy exists.

The Court then combined the two tests and declared that
jurisdiction should be determined by considering not only the status
or relationship of the parties, but also the nature of the question
under controversy. This then came to be known as the two-tier test.

49) Cosare v. Broadcom Asia, G.R. No. 201298,

February 5, 2014

There are two circumstances which must concur in order for

an individual to be considered a corporate officer, as against an
ordinary employee or officer, namely: (1) the creation of the
position is under the corporation’s charter or by-laws; and (2) the
election of the officer is by the directors or stockholders. It is only
when the officer claiming to have been illegally dismissed is
classified as such corporate officer that the issue is deemed an
intra-corporate dispute which falls within the jurisdiction of the trial
courts. Thus, the fact that a person claiming to have been illegally
dismissed was a stockholder and an officer of the corporation at
the time the controversy arose does not necessarily make the case
an intra-corporate dispute. This is especially when

50) Belo Medical Group v. Santos, G.R. No. 185894,

August 30, 2017

The Court provides for two tests to determine whether a case

involves an intra-corporate dispute and whether the case requires
the application of the A.M. No. 01-2-04-SC, or the Interim Rules of
Procedure Governing Intra-Corporate Controversies.

The first test is called “relationship test.” In this test, so long

as any of the following intra-corporate relationships exist between
the parties, the controversy would be considered as intra-
corporate: (a) between the corporation, partnership or association
and the public; (b) between the corporation, partnership or
association and its stockholders, partners, members, or officers; (c)
between the corporation, partnership or association and the state in
so far as its franchise, permit or license to operate is concerned;
and (d) among the stockholders, partners or associates
themselves. The second test is the “nature of controversy test.”
The test simply states that not only the relationship of the parties
involved that must be considered but also the conflict between
them. The circumstances of the case and the aims of the parties
must not be taken in isolation from one another. The totality of the
controversy must be taken into account to improve upon the
existing tests.
 the question demands the exercise of sound administrative
discretion requiring the specialized knowledge and expertise of
said administrative tribunal to determine technical and intricate
matters of fact. SRC is a special law. Its enforcement is particularly
vested in the SEC. Hence, all complaints for any violation of the
Code and its implementing rules and regulations should be filed
with the SEC. Where the complaint is criminal in nature, the SEC
shall indorse the complaint to the DOJ for preliminary investigation
and prosecution.

4) SEC vs. Interport, G.R. No. 135808, October 6, 2008

Section 53 of the SRC clearly provides that criminal

complaints for violations of rules and regulations enforced or
administered by the SEC shall be referred to the DOJ for
preliminary investigation, while the SEC nevertheless retains
limited investigatory powers. Additionally, the SEC may still impose
the appropriate administrative sanctions under Section 54 of the
said code. Furthermore, in one case decided by the Court, it was
ruled therein that despite the enactment of the SRC, it did not result
in the dismissal of cases already pending before the Prosecution
and Enforcement Department (PED) of the SEC and before SEC.
Rather, what was ordered was the transfer of one case to the
proper trial court and the SEC to continue with the investigation of
the other case.

SECURITIES REGULATION CODE Insiders are obligated to disclose material information to the
other party or abstain from trading the shares of his corporation.
1) Philippine Veterans Bank v. Callangan, G.R. No. This duty to disclose or abstain is based on two factors: (1) the
191995, August 3, 2011 existence of a relationship giving access to information intended to
be available only for a corporate purpose and not for the personal
A “public company” is “any corporation with a class of equity benefit of anyone; and (2) the inherent unfairness involved when a
securities listed on an Exchange or with assets in excess of party takes advantage of such information knowing it is unavailable
P50,000,000 and having 200 or more holders, at least 200 of which to those with whom he is dealing.
are holding at least 100 shares of a class of its equity securities. It
is clear that a “public company,” as contemplated by the SRC, is Sections 30 and 36 of the RSA were enacted to promote full
not limited to a company whose shares of stock are publicly listed, disclosure in the securities market and prevent unscrupulous
even companies like a bank whose shares are offered only to a individuals, who by their positions obtain non-public information,
specific group of people, are considered a public company, from taking advantage of an uninformed public. Section 30
provided they meet the requirements on the number of assets, prevented the unfair use of non-public information in securities
number of shareholders and of shares. transactions, while Section 36 allowed the SEC to monitor the
transactions entered into by corporate officers and directors as
2) PSE v. CA, G.R. No. 125469, October 27, 1997 regards the securities of their companies.

SEC is the entity with the primary say as to whether or not 5) SEC vs. CA, 246 SCRA 738 (1995)
securities, including shares of stock of a corporation, may be
traded or not in the stock exchange. This is in line with the SEC's A justiciable controversy which can occasion an exercise of
mission to ensure proper compliance with the laws, such as the SEC’s exclusive jurisdiction would require an assertion of a right by
Revised Securities Act and to regulate the sale and disposition of a proper party against another who, in turn, contests it. That
securities in the country. This is not to say, however, that the PSE's controversy must be raised by the party entitled to maintain the
management prerogatives are under the absolute control of the action. A person or entity tasked with the power to adjudicate
SEC. The PSE is, after all, a corporation authorized by its stands neutral and impartial and acts on the basis of the admissible
corporate franchise to engage in its proposed and duly approved representations of the contending parties. Thus, the proper parties
business. One of the PSE's main concerns, as such, is still the that can bring the controversy involving the pilferage of certificates
generation of profit for its stockholders. Moreover, the PSE has all of stock and can cause an exercise by the SEC of its original and
the rights pertaining to corporations, including the right to sue and exclusive jurisdiction over such controversy are the actual owners
be sued, to hold property in its own name, to enter (or not to enter) of such certificates of stock who are adversely affected by the said
into contracts with third persons, and to perform all other legal acts unlawful transfer.
within its allocated express or implied powers.
To constitute a violation of the RSA that can warrant an
As to its corporate and management decisions, therefore, the imposition of a fine under Section 29 (3) in relation to Section 46 of
state will generally not interfere with the same. Questions of policy the said law, fraud or deceit, not mere negligence, on the part of
and of management are left to the honest decision of the officers the offender must be established.
and directors of a corporation, and the courts are without authority
to substitute their judgment for the judgment of the board of 6) SEC vs. Performance Foreign Exchange Corp., G.R.
directors. The board is the business manager of the corporation, No. 154131, July 20, 2006
and so long as it acts in good faith, its orders are not reviewable by
the courts. Under Section 64 of the SRC, there are two essential
requirements that must be complied with by the SEC before it may
Therefore, notwithstanding the regulatory power of the SEC issue a cease and desist order. Firstly, SEC must conduct proper
over the PSE, and the resultant authority to reverse the PSE's investigation or verification. Such investigation and verification, to
decision in matters of application for listing in the market, the SEC be proper, must be conducted before, not after, issuing the cease
may exercise such power only if the PSE's judgment is attended by and desist order. Secondly, there must be a finding that the act or
bad faith. practice, unless restrained, will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or prejudice to
3) Baviera v. Paglinawan, G.R. No. 168380, February 8, the investing public. The second requirement implies that the act to
2007 be restrained has been determined after conducting the proper
investigation or verification.
A criminal charge for violation of the SRC is a specialized
dispute. Hence, it must first be referred to an administrative agency 7) Union Bank of the Philippines vs. SEC, G.R. No.
of special competence, the SEC. Under the doctrine of primary 138949, June 6, 2001
jurisdiction, courts will not determine a controversy involving a
question within the jurisdiction of the administrative tribunal, where
 When a commercial banking corporation is listed in the stock
exchange, it must adhere not only to banking and other allied
special laws, but also to the rules promulgated by SEC. SEC is the
government entity tasked not only with the enforcement of the
RSA, but also with the supervision of all corporations, partnerships
or associations which are grantees of government-issued primary
franchises and/or licenses or permits to operate in the Philippines.
In short, such entity is primarily subject to the control of the BSP as
a bank and likewise under the supervision of the SEC as a
corporation trading its securities in the stock market.

Therefore, a commercial bank such as Union Bank, although

exempted from registering the securities it issues as a banking or
financial institution, it is not exempted, as a listed corporation in the
PSE, from complying with the reportorial requirements as provided
under the implementing rules of RSA to assure full, fair, and
accurate disclosure of information for the protection of investors in
the stock market.

8) Power Homes Unlimited Corp. SEC, 546 SCRA 567

(2008)

In the US case of SEC v. W.J. Howey Co., the Court made

use of the Howey Test to determine whether a transaction fell
within the scope of an investment contract. To be considered an
investment contract, the Howey Test requires a transaction,
contract, or scheme whereby a person (1) makes an investment of
money, (2) in a common enterprise, (3) with the expectation of
profits, (4) to be derived solely from the efforts of others. When a
particular transaction falls within the scope of an investment
contract, it shall be treated as a security and must be registered
with the SEC before its sale or offer for sale or distribution to the
public. Otherwise, the SEC cannot protect the investing public from
fraudulent securities. The strict regulation of securities is founded
on the premise that the capital markets depend on the investing
public’s level of confidence in the system.

9) SEC vs. Prosperity.Com, Inc., G.R. No. 164197,

January 25, 2012

The United States Supreme Court held in the case of SEC v.

W.J. Howey Co. that, for an investment contract to exist, the
following elements, referred to as the Howey test must concur: (1)
a contract, transaction, or scheme; (2) an investment of money; (3)
investment is made in a common enterprise; (4) expectation of
profits; and (5) profits arising primarily from the efforts of others.

A corporation shall not be considered to be in the business of

dealing with investment contracts if it employs a scheme of network
marketing. Under this scheme, the buyer can become a down-line
seller. He then earns commissions from purchases made by new
buyers whom he refers to the person who sold the product to him.
The network goes down the line where the orders to buy come.
Under this scheme, the commissions received by the buyers
themselves resulting from their referrals can hardly be regarded as
profits from investment of money under the Howey Test.

10) SEC vs. Oudine Santos, G.R. No. 195542, March 19,
2014

The elements for violation of Section 28 of the SRC are : (a)

engaging in the business of buying or selling securities in the
Philippines as a broker or dealer; or (b) acting as a salesman; or (c)
acting as an associated person of any broker or dealer, unless
registered as such with the SEC.

When the investor is relatively uninformed and turns over his

money to others, essentially depending upon their representations
and their honesty and skill in managing it, the transaction generally
is considered to be an investment contract. The touchstone is the
presence of an investment in a common venture premised on a
reasonable expectation of profits to be derived from the
entrepreneurial or managerial efforts of others.
 act, unaccompanied by anything unforeseen except the death or
injury. There is no accident when a deliberate act is performed
unless some additional, unexpected, independent, and unforeseen
happening occurs which produces or brings about the result of
injury or death. In other words, where the death or injury is not the
natural or probable result of the insured's voluntary act, or if
something unforeseen occurs in the doing of the act which
produces the injury, the resulting death is within the protection of
policies insuring against death or injury from accident.

Beneficiaries

5) Heirs of Maramag vs. De Guzman, G.R. No. 181132,

June 5, 2009

The only persons entitled to claim the insurance proceeds are

either the insured, if still alive or the beneficiary if the insured is
already deceased upon the maturation of the policy. The exception
to this rule is where the insurance contract was intended to benefit
third persons who are not parties to the same in the form of
favorable stipulations or indemnity.

No legal proscription exists in naming as beneficiaries the

children of illicit relationships by the insured.

It is only in cases where the insured has not designated any

beneficiary, or when the designated beneficiary is disqualified by
law to receive the proceeds, that the insurance policy proceeds
shall redound to the benefit of the estate of the insured.

INSURANCE 6) Insular Life v. Ebrado, G.R. No. L-44059, October 28,

1977
Interpretation
The contract of insurance is governed by special laws.
1) Gaisano Cagayan v. Insurance Co. of North America, Matters not expressly provided for in such special laws shall be
G.R. No. 147839, June 8, 2006 regulated by the Civil Code. When not otherwise specifically
provided for by the Insurance Law, the contract of life insurance is
When the terms of the agreement are clear and explicit that governed by the general rules of the civil law regulating contracts.
they do not justify an attempt to read into it any alleged intention of Thus, Article 2012 of the Civil Code which provides that any person
the parties, the terms are to be understood literally just as they who is forbidden from receiving any donation under Article 739
appear on the face of the contract. cannot be named beneficiary of a life insurance policy by the
person who cannot make a donation to him shall also be taken
2) Malayan Insurance v. CA, G.R. No. 119599, March 20, consideration in determining the validity of the designation of a
1997 beneficiary in a life insurance contract.

An insurance contract should be so interpreted as to carry out In essence, a life insurance policy is no different from a civil
the purpose of the same which is to insure against risks of loss or donation insofar as the beneficiary is concerned. Both are founded
damage to the goods. Such interpretation should result from the upon the same consideration, liberality. A beneficiary is like a
natural and reasonable meaning of language in the policy. Where donee, because from the premiums of the policy which the insured
restrictive provisions are open to two interpretations, that which is pays out of liberality, the beneficiary will receive the proceeds or
most favorable to the insured is adopted. profits of said insurance. As a consequence, the proscription in
Article 739 of the Civil Code should equally operate in life
Indemnity and liability insurance policies are construed in insurance contracts.
accordance with the general rule of resolving any ambiguity in favor
of the insured, where the contract or policy is prepared by the Insurable Interest
insurer. A contract of insurance, being a contract of adhesion,
means that any ambiguity should be resolved against the insurer. 7) Spouses Cha v. CA, G.R. No. 124520, August 18,
1997
3) Gulf Resorts v. Phil. Charter, 485 SCRA 551
Insurable interest in the property insured must exist at the
Provisions of the insurance policy should be examined and time the insurance takes effect and at the time the loss occurs. The
interpreted in consonance with each other. It cannot be construed basis of such requirement of insurable interest in property insured
piecemeal. All its parts are reflective of the true intent of the parties. is based on sound public policy. This is to prevent a person from
Certain stipulations cannot be segregated and then made to taking out an insurance policy on property upon which he has no
control. Neither do particular words or phrases necessarily insurable interest and collecting the proceeds of said policy in case
determine its character. of loss of the property. In such a case, the contract of insurance is
a mere wager which is void under Section 25 of the Insurance
4) De La Cruz v. The Capital Insurance, G.R. No. L- Code, which provides that every stipulation in a policy of Insurance
21574, June 30, 1966 for the payment of loss, whether the person insured has or has not
any interest in the property insured, or that the policy shall be
The terms "accident" and "accidental", as used in insurance received as proof of such interest, and every policy executed by
contracts, have not acquired any technical meaning, and are way of gaming or wagering, is void.
construed by the courts in their ordinary and common acceptation.
Thus, the terms have been taken to mean that which happen by 8) Gaisano Cagayan v. Insurance Co. of North America,
chance or fortuitously, without intention and design, and which is G.R. No. 147839, June 8, 2006
unexpected, unusual, and unforeseen. An accident is an event that
takes place without one's foresight or expectation, an event that An insurable interest in property does not necessarily imply a
proceeds from an unknown cause, or is an unusual effect of a property interest in, or a lien upon, or possession of, the subject
known cause and, therefore, not expected. matter of the insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an insurable interest, it
The generally accepted rule is that a death or injury does not is sufficient that the insured is so situated with reference to the
result from accident or accidental means within the terms of an property that he would be liable to loss should it be injured or
accident-policy if it is the natural result of the insured's voluntary destroyed by the peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit from its 13) Saturnino v. Phil. American Life G.R. No. L-16163,
existence or would suffer loss from its destruction. Indeed, a February 28, 1963
vendor or seller retains an insurable interest in the property sold so
long as he has any interest therein, in other words, so long as he A concealment, whether intentional or unintentional, entitles
would suffer by its destruction, as where he has a vendor's lien. the injured party to rescind the contract of insurance, concealment
being defined as "negligence to communicate that which a party
9) Great Pacific Life v. CA, G.R. No. 113899, October knows and ought to communicate."
13, 1999
The basis of the rule vitiating the contract in cases of
The rationale of a group insurance policy of mortgagors, concealment by the insured is that it misleads or deceives the
otherwise known as the "mortgage redemption insurance," is a insurer into accepting the risk, or accepting it at the rate of premium
device for the protection of both the mortgagee and the mortgagor. agreed upon. The insurer, relying upon the belief that the insured
On the part of the mortgagee, it has to enter into such form of will disclose every material fact within his actual or presumed
contract so that in the event of the unexpected demise of the knowledge, is misled into a belief that the circumstance withheld
mortgagor during the subsistence of the mortgage contract, the does not exist, and he is thereby induced to estimate the risk upon
proceeds from such insurance will be applied to the payment of the a false basis that it does not exist.
mortgage debt, thereby relieving the heirs of the mortgagor from
paying the obligation. In a similar vein, ample protection is given to 14) Florendo vs. Philam Plans, G.R. No. 186983,
the mortgagor under such a concept so that in the event of death, February 22, 2012
the mortgage obligation will be extinguished by the application of
the insurance proceeds to the mortgage indebtedness. In the formation of a life insurance, when the insurer had
waived the medical examination of the prospective insured and had
Consequently, where the mortgagor pays the insurance to rely on the latter stating the truth regarding his health in his
premium under the group insurance policy, making the loss application, the latter has the duty to disclose all material facts
payable to the mortgagee, the insurance is on the mortgagor's regarding his health. For only he knew best of all the facts
interest, and the mortgagor continues to be a party to the contract. regarding his health including his previous health treatments.
In this type of policy insurance, the mortgagee is simply an
appointee of the insurance fund, such loss-payable clause does not However, if there are two or more afflictions that the
make the mortgagee a party to the contract. prospective insured suffers from, and he does not disclose all of
them, there is concealment.
A policy of insurance upon life or health may pass by transfer,
will or succession to any person, whether the latter has an 15) Sun Life of Canada v. Sibya, G.R. No. 211212, June
insurable interest or not, and such person may recover it whatever 08, 2016
the insured might have recovered. Thus, a widow of the insured
may file a suit against the insurer to claim from such insurance Section 48 of the Insurance Code serves a noble purpose, as
policy. it regulates the actions of both the insurer and the insured. Under
the provision, an insurer is given two years from the effectivity of a
10) Ong Lim Sing v. FEB Leasing, G.R. No. 168115, life insurance contract and while the insured is alive to discover or
June 8, 2007 prove that the policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of the insured or
A stipulation in a lease contract involving the lease of motor his agent. After the two-year period lapses, or when the insured
vehicles and equipment that the properties shall be insured at the dies within the period, the insurer must make good on the policy,
cost and expense of the lessee against loss, damage, or even though the policy was obtained by fraud, concealment, or
destruction from fire, theft, accident, or other insurable risk for the misrepresentation. This is not to say that insurance fraud must be
full term of the lease, is a binding and valid stipulation. A lessee rewarded, but that insurers who recklessly and indiscriminately
has an insurable interest in the equipment and motor vehicles solicit and obtain business must be penalized, for such
leased. Section 17 of the Insurance Code provides that the recklessness and lack of discrimination ultimately work to the
measure of an insurable interest in property is the extent to which detriment of bona fide takers of insurance and the public in general.
the insured might be damnified by loss or injury thereof.
Indeed, the intent to defraud on the part of the insured must
Concealment be ascertained to merit rescission of the insurance contract.
Concealment as a defense for the insurer to avoid liability is an
11) Great Pacific Life v. CA, Leuterio, G.R. No. 113899, affirmative defense and the duty to establish such defense by
October 13, 1999 satisfactory and convincing evidence rests upon the insurer.

Concealment exists where the assured had knowledge of a Warranties

fact material to the risk, and honesty, good faith, and fair dealing
requires that he should communicate it to the assured, but he 16) Qua Chee Gan v. Law Union and Rock Insurance, 98
designedly and intentionally withholds the same. Phil. 85 (1955)

The fraudulent intent on the part of the insured must be Where the insurer, at the time of the issuance of a policy of
established to entitle the insurer to rescind the contract. insurance, has knowledge of existing facts which, if insisted on,
would invalidate the contract from its very inception, such
Misrepresentation as a defense of the insurer to avoid liability knowledge constitutes a waiver of conditions in the contract
is an affirmative defense and the duty to establish such defense by inconsistent with the facts, and the insurer is stopped thereafter
satisfactory and convincing evidence rests upon the insurer. from asserting the breach of such conditions. The reason for the
rule is not difficult to find. To allow a company to accept one's
12) Great Pacific Life vs. CA, Ngo Hing, G.R. No. L- money for a policy of insurance which it then knows to be void and
31845, April 30, 1979 of no effect, though it knows as it must, that the assured believes it
to be valid and binding, is so contrary to the dictates of honesty and
The contract of insurance is one of perfect good faith fair dealing, and so closely related to positive fraud, as to the
(uberrima fides meaning good faith, absolute and perfect candor or abhorrent to fair minded men.
openness and honesty; the absence of any concealment or
demotion, however slight) not for the insured alone but equally so Double Insurance
for the insurer, in fact, it is more so for the latter, since its dominant
bargaining position carries with it stricter responsibility. 17) Geagonia v. CA, 241 SCRA 152, 160 (1995)

Concealment is a neglect to communicate that which a knows A double insurance exists where the same person is insured
and ought to communicate. Whether intentional or unintentional, by several insurers separately in respect of the same subject and
the concealment entitles the injured party to rescind the contract of interest.
insurance.
As to a mortgaged property, the mortgagor and the
mortgagee have each an independent insurable interest therein
and both interests may be covered by one policy, or each may take does not expressly prohibit an agreement granting credit extension
out a separate policy covering his interest, either at the same or at provided that said agreement is not contrary to morals, good
separate times. customs, public order or public policy. So is an understanding to
allow the insured to pay premiums in installments not so
The mortgagor’s insurable interest covers the full value of the prescribed. At the very least, both parties should be deemed in
mortgaged property, even though the mortgage debt is equivalent estoppel to question the arrangement they have voluntarily
to the full value of the property. The mortgagee’s insurable interest accepted.
is to the extent of the debt, since the property is relied upon as
security thereof, and in insuring he is not insuring the property but The following are the exceptions to the general rule provided
his interest or lien thereon. His insurable interest is prima facie the under Section 77 of the Insurance Code:
value mortgaged and extends only to the amount of the debt, not (1) in case of life or industrial life policy, whenever the grace
exceeding the value of the mortgaged property. period provision applies;
(2) where the insurer acknowledged in the policy or contract
Thus, separate insurances covering different insurable of insurance itself the receipt of premium, even if
interests may be obtained by the mortgagor and the mortgagee. premium has not been actually paid;
Moreover, there can be no double insurance in such situation (3) where the parties agreed that premium payment shall be
because there are different persons who procured the insurances in installments and partial payment has been made at
and each insurance pertains to separate insurance interests the time of loss;
although both may cover the same subject matter insured. (4) where the insurer granted the insured a credit term for
the payment of the premium, and loss occurs before the
18) Malayan Insurance v. Phils. First Insurance, G.R. No. expiration of the term; and
184300, July 11, 2012 (5) where the insurer is in estoppel as when it has
consistently granted a 60 to 90-day credit term for the
By the express provision of Section 93 of the Insurance Code, payment of premiums.
double insurance exists where the same person is insured by
several insurers separately in respect to the same subject and When an insurer grants credit extension for the payment of
interest. the premium, it simply means that if the insurer has granted the
insured a credit term for the payment of the premium and loss
The requisites in order for double insurance to arise are as occurs before the expiration of the term, recovery on the policy
follows: (1) the person insured is the same; (2) two or more should be allowed even though the premium is paid after the loss
insurers insuring separately; (3) there is identity of subject matter; but within the credit term.
(4) there is identity of interest insured; and (5) there is identity of
the risk or peril insured. 22) Makati Tuscany v. CA, GR. No. 95546, November 6,
1992
There can be no double insurance if one insurance contract
was obtained in consideration of the legal or equitable interest of Basic principles of equity and fairness would not allow the
one over his own goods insured and the other insurance contract insurer to continue collecting and accepting the premiums,
was obtained in consideration of the other party’s insurable interest although paid on installments, and later deny liability on the lame
over the safety of the same goods which may become the basis of excuse that the premiums were not prepaid in full.
the latter’s liability in case of loss or damage to the said goods.
Moreover, where the risk is entire and the insurance contract
Notice of Loss is indivisible, the insured is not entitled to a refund of the premiums
paid if the insurer was exposed to the risk insured for any period,
19) Philamgen v. Sweet Lines, Inc., 212 SCRA 194, however brief or momentary
August 5, 1992
23) Gaisano v. Development Insurance, G.R. No. 190702,
Where the contract of shipment contains a reasonable February 27, 2017
requirement of giving notice of loss of or injury to the goods, the
giving of such notice is a condition precedent to the action for loss Insurance is a contract whereby one undertakes for a
or injury or the right to enforce the carrier's liability. The consideration to indemnify another against loss, damage or liability
fundamental purpose of such a stipulation is not to relieve the arising from an unknown or contingent event. Just like any other
carrier from just liability, but reasonably to inform it that the contract, it requires a cause or consideration. The consideration is
shipment has been damaged and that it is charged with liability the premium, which must be paid at the time and in the way and
therefor, and to give it an opportunity to examine the nature and manner specified in the policy. If not so paid, the policy will lapse
extent of the injury. This affords the carrier an opportunity to make and be forfeited by its own terms. The law, however, limits the
an investigation of a claim while the matter is fresh and easily parties’ autonomy as to when payment of premium may be made
investigated so as to safeguard itself from false and fraudulent for the contract to take effect. The general rule in insurance laws is
claims. In case of noncompliance with such condition precedent, that unless the premium is paid, the insurance policy is not valid
the carrier is not liable for the loss or damage to goods shipped. and binding.

Premiums Reinstatement

20) Arce v. Capital Insurance, 117 SCRA 63 (1982) 24) Lalican v. Insular Life, G.R. No. 183526, August 25,
2009
Section 72 of the Insurance Act, as amended by R.A. No.
3540 provides that an insurer is entitled to payment of premium as To reinstate a policy means to restore the same to premium-
soon as the thing insured is exposed to the perils insured against, paying status after it has been permitted to lapse.
unless there is clear agreement to grant credit extension for the
premium due. No policy issued by an insurance company is valid The stipulation in a life insurance policy giving the insured the
and binding unless and until the premium thereof has been paid. privilege to reinstate it upon written application does not give the
Obviously, time is of the essence in respect of the payment of the insured absolute right to such reinstatement by the mere filing of an
insurance premium so that if it is not paid the insurance contract application. The insurer has the right to deny the reinstatement if it
does not take effect unless there is still another stipulation to the is not satisfied as to the insurability of the insured and if the latter
contrary. does not pay all overdue premium and all other indebtedness to the
insurer. After the death of the insured the insurer cannot be
21) UCPB Gen. Insurance v. Masagana, G.R. No. 137172, compelled to entertain an application for reinstatement of the policy
April 4, 2001 because the conditions precedent to reinstatement as provided by
the insurance contract can no longer be determined and satisfied.
As stated under Section 77 of the Insurance Code, full
payment of the premium is necessary to bind the insurer. The Court, in this case, has also clarified that even if the
insured, before his death, managed to file his application for
However, such provision merely precludes the parties from reinstatement of the insurance policy and deposit necessary
stipulating that the policy is valid even if premiums are not paid, but amount for payment of any overdue premiums and interests
thereon with the insurer, the policy could only be considered insurance that may have existed as between the insurer and the
reinstated if the application for reinstatement, pursuant to the insured.
agreement between the parties, had been processed and approved
by the insurer during the insured’s lifetime and good health. 28) Int’l Container Terminal Services vs. FGU Insurance,
G.R. No. 161539, June 27, 2008
Marine Insurance
It must be emphasized that a marine risk note is not an
25) Aboitiz Shipping v. CA, G.R. No. 121833, October 17, insurance policy. It is only an acknowledgment or declaration of the
2008 insurer confirming the specific shipment covered by its marine open
policy, the evaluation of the cargo and the chargeable premium. It
Under the real and hypothecary doctrine in maritime law, the is the marine open policy which is the main insurance contract. In
shipowner or agent’s liability is merely co-extensive with his interest other words, the marine open policy is the blanket insurance to be
in the vessel such that a loss thereof results in its extinction. undertaken by insurer on all goods to be shipped during the
existence of the contract, while the marine risk note specifies the
In our jurisdiction, the limited liability rule is embodied in particular goods/shipment insured on that specific transaction,
Articles 587, 590 and 837 under Book III of the Code of Commerce. including the sum insured, the shipment particulars as well as the
premium paid for such shipment.
These articles precisely intend to limit the liability of the shipowner
or agent to the value of the vessel, its appurtenances and
As a general rule, the marine insurance policy needs to be
freightage earned in the voyage, provided that the owner or agent
presented in evidence in order to prove the existence of the
abandons the vessel. However, when the vessel is totally lost in
contract of marine insurance. In Malayan Insurance v. Regis
which case there is no vessel to abandon, abandonment is not
Brokerage, the Court stated that the presentation of the marine
required. Because of such total loss the liability of the shipowner or
insurance policy was necessary, as the issues raised therein arose
agent for damages is extinguished. However, despite the total loss
from the very existence of an insurance contract between Malayan
of the vessel, its insurance answers for the damages for which a
Insurance and its consignee, ABB Koppel, even prior to the loss of
shipowner or agent may be held liable.
the shipment. In Wallem Philippines Shipping v. Prudential
Guarantee and Assurance, the Court ruled that the insurance
Nonetheless, there are exceptional circumstances wherein
contract must be presented in evidence in order to determine the
the ship agent could still be held answerable despite the
extent of the coverage. This was also the ruling of the Court in
abandonment of the vessel, as where the loss or injury was due to
Home Insurance Corporation v. CA.
the fault of the shipowner and the captain. The international rule is
to the effect that the right of abandonment of vessels, as a legal
However, as in every general rule, there are admitted
limitation of a shipowner’s liability, does not apply to cases where
exceptions. In Delsan Transport v. CA, the Court stated that the
the injury or average was occasioned by the shipowner’s own fault.
presentation of the insurance policy was not fatal because the loss
Likewise, the shipowner may be held liable for injuries to
of the cargo undoubtedly occurred while on board the carrier's
passengers notwithstanding the exclusively real and hypothecary
vessel, unlike in Home Insurance in which the cargo passed
nature of maritime law if fault can be attributed to the shipowner.
through several stages with different parties and it could not be
determined when the damage to the cargo occurred, such that the
To reiterate, as a general rule, a ship owner’s liability is
insurer should be liable for it.
merely co-extensive with his interest in the vessel, except where
actual fault is attributable to the shipowner. Thus, as an exception
Subrogation
to the limited liability doctrine, a shipowner or ship agent may be
held liable for damages when the sinking of the vessel is
29) Keppel Cebu Shipyard v. Pioneer Insurance, G.R.
attributable to the actual fault or negligence of the shipowner or its
Nos. 180880-81, September 25, 2009
failure to ensure the seaworthiness of the vessel.
&
30) Malayan Insurance v. Alberto, G.R. No. 194320,
26) FGU Insurance v. CA, G.R. No. 137775, March 31,
February 1, 2012
2005
Subrogation is the substitution of one person by another with
One of the purposes for taking out insurance is to protect the
reference to a lawful claim or right, so that he who substitutes
insured against the consequences of his own negligence and that
succeeds to the rights of the other in relation to a debt or claim,
of his agents. Thus, it is a basic rule in insurance that the
including its remedies or securities. The principle covers a situation
carelessness and negligence of the insured or his agents constitute
wherein an insurer has paid a loss under an insurance policy and
no defense on the part of the insurer. This rule however
thus entitled to all the rights and remedies belonging to the insured
presupposes that the proximate cause of the loss pertains to those
against a third party with respect to any loss covered by the policy.
which could not have been prevented by the insured, despite the
It contemplates full substitution such that it places the party who
exercise of due diligence.
subrogated in the shoes of the creditor, and he may use all means
that the creditor could employ to enforce payment.
On Presentation of Policies
Payment by the insurer to the insured operates as an
27) Malayan Insurance v. Regis, G.R. No. 172156,
equitable assignment to the insurer of all the remedies that the
November 23, 2007
insured may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is not
Indeed, in the absence of any evidentiary consideration of an
dependent upon, nor does it grow out of, any privity of contract. It
actual marine insurance policy, the substance of the insurer’s right
accrues simply upon payment by the insurance company of the
to recovery as the subrogee of the insured cannot duly confirmed.
insurance claim. The doctrine of subrogation has its roots in equity.
There can be no consideration of the particular terms and
It is designed to promote and to accomplish justice. It is the mode
conditions in the insurance contract that specifically give rise to the
that equity adopts to compel the ultimate payment of a debt by one
insurer’s right to be subrogated to the insured, or to such terms that
who, in justice, equity, and good conscience, ought to pay.
may have absolved the insurer from the duty to pay the insurance
proceeds to the insured. The particular date as to when such
Fire Insurance
insurance contract was constituted cannot be established with
certainty without the contract itself, and that point is crucial since
31) Uy Hu & Co. v. Prudential Assurance, 51, Phil. 231
there can be no insurance on a risk that had already occurred by
(1927)
the time the contract was executed.
Where a fire insurance policy provides that if the claim be in
A marine risk note is an acknowledgment or declaration of the
any respect fraudulent, or if any false declaration be made or used
insurance company confirming the specific shipment covered by its
in support thereof, or if any fraudulent means or devices are used
marine insurance policy, the evaluation of the cargo, and the
by the insured or anyone acting on his behalf to obtain any benefit
chargeable premium. What it bears, as a matter of evidence, is that
under the policy, and the evidence is conclusive that the proof of
it is not apparently the contract of insurance by itself, but merely a
claim which the insured submitted was false and fraudulent both as
complementary or supplementary document to the contract of
to the kind, quality and amount of the goods and their value
destroyed by the fire, such a proof of claim is a bar against the
insured from recovering on the policy even for the amount of his not merely its form. However, as an exception, a surety is not
actual loss. released by a change in the contract which does not have the
effect of making its obligation more onerous (obligation refers to
32) Malayan Insurance v. PAP Ltd., G.R. No. 200784, that of the principal contract).
August 07, 2013
35) First Lepanto v. Chevron Phils, G.R. No. 177839,
The Insurance Code provides, among others, that an January 18, 2012
alteration in the use or condition of a thing insured from that to
which it is limited by the policy made without the consent of the The law is clear that a surety contract should be read and
insurer, by means within the control of the insured, and increasing interpreted together with the principal contract entered into
the risks, entitles an insurer to rescind a contract of fire insurance. between the creditor and the principal (principal debtor). Section
176 of the Insurance Code states that the liability of the surety shall
Accordingly, an insurer can exercise its right to rescind an be joint and several with the obligor and shall be limited to the
insurance contract when the following conditions are present: amount of the bond. It is determined strictly by the terms of the
1) the policy limits the use or condition of the thing insured; contract of suretyship in relation to the principal contract between
2) there is an alteration in said use or condition; the obligor and the oblige.
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insured’s A surety contract is merely a collateral one, its basis is the
control; and principal contract or undertaking which it secures. Necessarily, the
5) the alteration increases the risk of loss stipulations in such principal agreement must at least be
communicated or made known to the surety particularly where the
33) United Merchants v. Country Bankers Insurance, bond specifically makes reference to a written agreement. It is
G.R. No. 198588, July 11, 2012 basic that if the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of
In insurance cases, once an insured makes out a prima facie its stipulation shall control.
case in its favor, the burden of evidence shifts to the insurer to
controvert the insured’s prima facie case. An insurer who seeks to It bears stressing that the contract of suretyship imports entire
defeat a claim because of an exception or limitation in the policy good faith and confidence between the parties in regard to the
has the burden of establishing that the loss comes within the whole transaction, although it has been said that the creditor does
purview of the exception or limitation. not stand as a fiduciary in his relation to the surety. The creditor is
generally held bound to a faithful observance of the rights of the
Where there is a fraudulent claim and the evidence is surety and to the performance of every duty necessary for the
conclusive that the proof of claim which the insured submitted was protection of those rights.
false and fraudulent both as to the kind, quality, and amount of the
goods and their value destroyed by the fire, such a proof of claim is Moreover, being an onerous undertaking, a surety agreement
a bar against the insured from recovering on the policy even for the is strictly construed against the creditor, and every doubt is
amount of his actual loss. resolved in favor of the solidary debtor.

Surety On Motor Vehicle Insurance

34) Stronghold Insurance v. Tokyu Construction, G.R. 36) Perla Compania De Seguros v. CA, G.R. No. 96452,
Nos. 158820-21, June 5, 2009 May 7, 1992

A contract of suretyship is an agreement whereby a party, Where a car is admittedly, as in this case, unlawfully and
called the surety, guarantees the performance by another party, wrongfully taken without the owner's consent or knowledge, such
called the principal or obligor, of an obligation or undertaking in taking constitutes theft, and, therefore, it is the "THEFT"' clause,
favor of another party, called the obligee. By its very nature, under and not the "AUTHORIZED DRIVER" clause that should apply. It is
the laws regulating suretyship, the liability of the surety is joint and worthy to note that there is no causal connection between the
several (solidary) but is limited to the amount of the bond, and its possession of a valid driver's license and the loss of a vehicle. To
terms are determined strictly by the terms of the contract of rule otherwise would render car insurance practically a sham since
suretyship in relation to the principal contract between the obligor an insurance company can easily escape liability by citing
and the obligee. restrictions which are not applicable or germane to the claim,
thereby reducing indemnity to a shadow.
The nature of suretyship involves two types of relationship—
the underlying principal relationship between the creditor and the 37) Paramount Insurance v. Spouses Remondeulaz,
debtor, and the accessory surety relationship between the principal G.R. No. 173773, November 28, 2012
(the debtor) and the surety. The creditor accepts the surety’s
solidary undertaking to pay if the debtor does not pay. Such When one takes the motor vehicle of another without the
acceptance, however, does not change in any material way the latter’s consent even if the motor vehicle is later returned, there is
principal relationship between the creditor and the principal debtor theft, there being intent to gain as the use of the thing unlawfully
nor does it make the surety an active party to the principal taken constitutes gain. Hence, when a policy for a motor vehicle
relationship. In other words, the acceptance of the creditor does not insurance allows recovery in cases of theft, such taking of a vehicle
give the surety the right to intervene in the principal contract. The without the owner’s consent even if the same is later returned is
surety’s role arises only upon the debtor’s default, at which time, it compensable.
can be directly held liable by the creditor for payment as a solidary
obligor. 38) Alpha Insurance v. Castor, G.R. No. 198174,
September 2, 2013
The surety is considered in law as possessed of the identity of
the debtor in relation to whatever is adjudged touching upon the Indemnity and liability insurance policies are construed in
obligation of the latter. Their liabilities are so interwoven as to be accordance with the general rule of resolving any ambiguity therein
inseparable. Although the contract of a surety is, in essence, in favor of the insured, where the contract or policy is prepared by
secondary only to a valid principal obligation, the surety’s liability to the insurer. A contract of insurance, being a contract of adhesion,
the creditor is direct, primary, and absolute; he becomes liable for any ambiguity therein should be resolved against the insurer. In
the debt and duty of another although he possesses no direct or other words, it should be construed liberally in favor of the insured
personal interest over the obligations nor does he receive any and strictly against the insurer. Moreover, limitations of liability
benefit therefrom. should be regarded with extreme jealousy and must be construed
in such a way as to preclude the insurer from non-compliance with
As a general rule, a surety is released from its obligation its obligations.
when there is a material alteration of the principal contract in
connection with which the bond is given. Such alteration, in order to Other Insurance Clause
effect the surety’s release, must impose a new obligation on the
promising party, or takes away some obligation already imposed, 39) Malayan Insurance v. Phils. First Insurance, G.R. No.
or one which changes the legal effect of the original contract and 184300, July 11, 2012
 Section 75 of the Insurance Code provides that a policy may
declare that a violation of specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid the
policy. Such a condition is a provision which invariably appears in
fire insurance policies and is intended to prevent an increase in the
moral hazard. It is commonly known as the additional or "other
insurance" clause and has been upheld as valid and as a warranty
that no other insurance exists. Its violation would thus avoid the
policy. However, in order to constitute a violation, the other
insurance must be upon the same subject matter, the same interest
therein, and the same risk.

Indeed, the rationale behind the incorporation of "other

insurance" clause in fire policies is to prevent over-insurance and
thus avert the perpetration of fraud. When a property owner obtains
insurance from two or more insurers in a total amount that exceeds
the property’s value, the insured may have an inducement to
destroy the property for the purpose of collecting the insurance.
The public as well as the insurer is interested in preventing a
situation in which a fire would be profitable to the insured.

On the Liability of Insurer for Loss Due to Negligence

40) FGU Insurance v. CA, G.R. No. 137775, March 31,

2005

Losses may be recovered by the insured, though remotely

occasioned by the negligence or misconduct of the master or crew,
if proximately caused by the perils insured against, because such
mistakes and negligence are incident to navigation and constitute a
part of the perils which those who engage in such adventures are
obliged to incur. The question now is whether there is a certain
degree of negligence on the part of the insured or his agents that
will deprive him the right to recover under the insurance contract or
that will exonerate the insurer from liability. When evidence show
that the insured’s negligence or recklessness is so gross as to be
sufficient to constitute a willful act, the insurer must be exonerated.