1. BAR OPERATIONS 2014
MERCANTILE LAW
UNIVERSITY OF THE CORDILLERAS
COLLEGE OF LAW

2. PRIVATE
CORPORATIONS

3. How are corporations classified?
 Corporations are generally classified as stock or non-stock.
 A stock corporation is one which has capital stock
divided into shares and is authorized to distribute to
the holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held.
 A non stock corporation is one where no part of its
income is distributable as dividends to its members,
trustees or officers, and when any profit is obtained as
an incident if its operations shall, whenever necessary
or proper be used for the furtherance of the purpose/s
for which the corporation was organized.

4. What is the doctrine of separate legal
personality?
 This doctrine holds that a corporation has a
personality separate and distinct from its individual
stockholders or members.
 This affects liability for acts or contracts, right to
bring actions, acquisition of property, and changes
in the identity of stockholders or members.
 Insofar as moral damages, the general rule is that
it is not entitled to it. Recognized exceptions are
when the claim for it is based on Article 2219 (7)
of the Civil Code in an action for libel or
defamation or it claims that its reputation has been
besmirched.

5. Corporate tort liability
 Tort liability can be imposed on a corporation
because generally speaking, the rules
governing liability of a principal or master for a
tort committed by an agent or servant are the
same whether the principal or master be a
natural person or a corporation. Hence, when
a tortuous act is committed by an officer or
agent of a corporation under express direction
or authority of the corporation, it would be
liable.

6. What is the effect of piercing the
veil of corporate fiction?
 The effect is to make stockholders or
members liable for a corporate obligation.
 The “fraud test” applies when corporate fiction
is used to justify a wrong, protect fraud or
defend a crime.
 The other tests to determine applicability are:
(a) control test (b) alter-ego or instrumentality
test, or (c) equity test

7. How is the nationality of a
corporation determined?
 As a general rule, nationality is determined by
place of incorporation.
 The “control test” as a means of determining
nationality looks at the nationality of the
stockholders or members of the corporation.
 The “grandfather test” as a means of determining
nationality looks at the percentage of foreign
holdings in a corporation which is a stockholder in
a Filipino corporation to determine whether or not
the percentage requirement of Filipino ownership
has been met.

8. What is the doctrine of relation?
 This refers to the retroactivity of the filing of
the amendment to extend the corporate term
to the date of the passage of the appropriate
resolutions to extend the term in instances
when the failure to file the amended articles is
due to the neglect of the officer with whom it is
required to be filed or a wrongful refusal to
receive it.
 This is also known as the “relating back
doctrine.”

9. How are shares classified?
 Shares may be classified as common, holders of
which are entitled to a pro-rata division of profits, or
preferred, holders of which are entitled to some priority
on distribution of profits and assets over common
shareholders.
 They can also be classified as with par value, referring
to a fixed minimum issue price stated in the articles
and the certificate, or with no par value, referring to the
absence of any stated value in the articles and the
certificate.
 Banks, trust companies, insurance companies, public
utilities and building and loan associations cannot
issue no par value shares.

10. What is a redeemable share?
 These are shares of stocks issued by a
corporation which said corporation can
purchase or take up from their holders upon
expiry of the period stated in certificates of
stock representing said shares.
 After a redemption, it is required that the
corporation should have sufficient assets in its
books to cover debts and liabilities, inclusive
of capital stock. Redemption, therefore, may
not be made where the corporation is
insolvent or if such redemption will cause
insolvency or inability of the corporation to

11. What is a treasury share?
 A treasury share is a share that has been
issued and paid for but subsequently
reacquired by purchase, redemption, donation
or any other lawful means.
 It may again be disposed of for a reasonable
price as determined by the board.
 Note that its acquisition must be always be
funded by surplus profits, otherwise it violates
the Trust Fund Doctrine as capital is impaired.

12. What are the rules on non-voting
shares?
 Preferred shares may be deprived of voting rights,
together with redeemable shares but if so, there
must be a class/series which shall have full voting
rights.
 Nevertheless, even if voting rights are not
enjoyed, holders of such shares shall still vote in
the following instances: (1) amendment of articles
(2) adoption or amendment of by laws (3) sale,
lease, exchange, pledge or other disposition of all
or substantially all of corporate property (4)
increase/decrease of corporate bonded
indebtedness (5) increase/decrease of capital
stock (6) merger/consolidation (7) investment in
another corporation or business, and (8)
dissolution

13. What is the effect of Gamboa v.
Teves?
 The ruling in Gamboa v. Teves (652 SCRA
690, June 28, 2011) prescribes that in
determining the meaning of the term “capital”
as prescribed in Section 11, Article XII,
National Economy and Patrimony of the
Constitution it is deemed to refer to shares of
stock that can vote in the election of directors
of the corporation.

14. What is a subscription contract?
 It is a contract for the acquisition of unissued
shares in an existing corporation or one that is to
be formed regardless of the way the contract is
denominated.
 They can be either be a pre-incorporation or post
incorporation subscription contract.
 A pre-incorporation subscription contract is
irrevocable for a period of 6 months from date of
subscription unless all other subscribers consent
or the corporation fails to materialize within the
period. However, it becomes absolutely
irrevocable if the articles have been filed with the
SEC.

15. Who is a promoter?
 A promoter is one who brings about the
formation and organization of a corporation.
 He has joint personal liability for a corporation
that was never formed.
 When the corporation has been formed, upon
ratification by the board of his contracts, he
becomes an agent of the corporation. Liability
then is borne by the corporation in its capacity
as principal.

16. What are the non-amendable parts of the Articles
of Incorporation?
 The following items cannot be amended: (a)
Names of incorporators; (b) Names of original
subscribers to the capital stock of the
corporation and their subscribed and paid up
capital; (c) Names of the original directors; (d)
Treasurer elected by the original subscribers;
(e) Members who contributed to the initial
capital of the non-stock corporation; and (e)
Witnesses to and acknowledgement of the
articles.

17. When does a corporation
commence to have existence?
 A corporation commences to have existence from
the issuance by the SEC of a certificate of
incorporation under its official seal. The effect of
which is to constitute its stockholders or members
and their successors as a Body Politic and
Corporate under the name and for the term stated
in the Articles.
 It is said to have been given de jure existence or
can be said to be incorporated.
 The exception is a Corporation Sole, which is
deemed incorporated upon filing of its Articles.

18. What must a corporation do after incorporation?
 A corporation has to formally organize and
commence transaction of business within 2
years from date of incorporation.
 If it fails to do so, its corporate powers cease
and it is deemed dissolved.
 If it commences, but becomes continuously
inoperative for 5 years, the same is ground for
suspension or revocation of the certificate.

19. What are By-Laws? What are its
elements?
 By-laws are: the rules of action adopted by a
corporation for its internal government and for the
government of its stockholders or members and
those having the direction, management and
control of its affairs in relation to the corporation
and among themselves.
 The elements of valid by-laws are: (a) they must
not be contrary to the code, it is void if contrary to
the code (b) not be contrary to moral or public
policy (c) must not impair obligations of contract –
as a general rule (d) they must be general and
uniform in application (e) they must be consistent
with the Charter / Articles (f) they must be
reasonable or capable of compliance.

20. General Capacity v. Specific
Capacity
 The general capacity theory maintains that a
corporation is said to hold such powers as are
not prohibited or withheld from it by general
law.
 The specific capacity theory maintains that the
corporation cannot exercise powers except
those expressly/impliedly given.

21. What is the doctrine of individuality of
subscription? What is the doctrine of equality of
shares?
 The doctrine of individuality of subscription
holds that a subscription is one entire and
indivisible whole contract. It cannot be divided
into portions.
 The doctrine of equality of shares holds that
where the articles of incorporation do not
provide for any distinction of the shares of
stock, all shares issued by the corporation are
presumed to be equal and enjoy the same
rights and privileges and are also subject to
the same liabilities.

22. What are pre-emptive rights?
 Pre-emptive rights referring to the right to subscribe to all issues or
disposition of shares in proportion to a stockholder’s shareholdings
may be denied.
 As a general rule, pre-emptive rights exist but may be restricted or
denied by the Articles or an amendment thereto. It will not exist
when (a) the shares are issued in compliance with laws requiring
stock offerings or minimum stock ownership (b) the shares are
issued in good faith with approval of stockholders representing 2/3
of the outstanding capital stock in exchange for property needed for
corporate purposes or in payment of a previously contracted debt.
 If restricted by an amendment, a stockholder may exercise his
appraisal right.

23. How can corporate assets be
disposed of?
 A corporation can freely dispose of its assets.
 However, any sale, lease, exchange,
mortgage, pledge or other disposition of all or
substantially all of corporate assets will be
required to be undertaken upon a majority
vote of the Board and 2/3 vote of stockholders
or members, written notice having been given
when the contemplated disposition will
rendered it incapable of continuing the
business or accomplishing its purpose.

24. When can the corporation acquire
its own shares?
 The power to acquire its own shares can only be
undertaken if it is for legitimate corporate
purpose/s provided that it has unrestricted
retained earnings.
 The legitimate corporate purposes for acquisition
are (a) elimination of fractional shares or those
less than 1 share (b) to collect or compromise an
indebtedness to the corporation arising out of an
unpaid subscription in a delinquency sale and to
purchase delinquent shares at the auction (c) to
pay dissenting or withdrawing stockholders
entitled to the payment of their shares.

25. What kind of dividends can be declared and when
are they given?
 Generally dividends may be given in cash or in
stock.
 The right of a stockholder to the dividend is
immediate if it is a cash dividend. The corporation
becomes a debtor of the stockholder. If it is a
stock dividend, it is subject to a stockholder vote
and an increase of capital stock, if it comes from a
new issuance.
 However, that any cash dividend due on
delinquent stock shall first be applied to the unpaid
balance, costs, and expenses or if it be a stock
dividend, it is withheld until the unpaid subscription
is paid.

26. When and how can dividends be
declared?
 The Board may declare dividends out of
unrestricted retained earnings or total assets
less liabilities and legal capital, they must be
accumulated from normal and continuous
operations not allocated for any managerial,
contractual or legal purpose and which are
free for distribution to stockholders as
dividends payable in cash, in property or in
stock to all stockholders on the basis of
outstanding stock held by them.

27. Can a declaration of dividends be
compelled?
 Dividend declaration is generally discretionary but
becomes mandatory when its surplus profits are in
excess of 100% of paid in capital stock. However,
the mandatory character shall not obtain: (a) when
justified by definite corporate expansion projects
or programs approved by the Board (b) when it is
prohibited by a loan agreement with any financial
institution or creditor from declaring dividends
without its consent and the consent is not yet
obtained (c) when it can be shown that such
retention is necessary under special
circumstances obtaining in the corporation, as
there is a need for a special reserve for probable
contingencies.

28. What are management contracts? How can they
be entered into?
 It is any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of
another corporation is a management contract even if called a
service or operating contract.
 It can be undertaken with the approval by a majority vote of
the Board and majority vote of the stockholders or members
of both the managed and the managing corporation. Provided
that, if the stockholder/s representing the same interest of
both the managing and managed corporations own or control
more than 1/3 of the outstanding capital stock entitled to vote
of the managing corporation or a majority of the Board of the
managing corporation likewise constitute a majority of the
board of the managed corporation, the contract must be
approved by 2/3 vote of the outstanding capital stock or of the
members of the managed corporation.

29. What are ultra vires acts?
 Ultra Vires acts are acts that are in violation of the Code as it
provides that: no corporation shall possess or exercise corporate
powers except those conferred by the code, its Articles and except
as such are necessary or incidental to the exercise of the powers so
conferred.
 A ratification is possible provided the act is not illegal.
 If ultra vires in part only and if separable, it is valid as to the part not
ultra vires, invalid as to the other part.

30. What is the trust fund doctrine?
 The subscribed capital stock of the corporation
is a trust fund for the payment of the debts of
the corporation which the creditors have the
right to look up to satisfy their credits, and
which the corporation may not dissipate.
 The exceptions are: (a) Reduction of the
authorized capital stock; (b) Purchase of
redeemable shares; (c) Dissolution and
eventual liquidation.

31. What are the management rights of
a stockholder?
 (a) To attend and vote in person or by proxy at
a stockholder’s meetings; (b) To elect and
remove directors; (c) To approve certain
corporate acts; (d) To compel the calling of the
meetings; (e) To have the corporation
voluntarily dissolved; (f) To enter into a voting
trust agreement; and (g) To
adopt/amend/appeal the by-laws or adopt new
by-laws.

32. What are the proprietary rights of a
stockholder?
 (a) To transfer stock in the corporate book; (b)
To receive dividends when declared; (c) To
the issuance of certificate of stock or other
evidence of stock ownership; (d) To participate
in the distribution of corporate assets upon
dissolution; and (e) To pre-emption in the
issue of shares.

33. What are the remedial rights of a
stockholder?
 (a) To inspect corporate books; (b) To recover
stock unlawfully sold for delinquency; (c) To
demand payment in the exercise of appraisal
right; (d) To be furnished recent financial
statements or reports of the corporation’s
operation; and (e) To bring suits (derivative
suit, individual suit, and representative suit).

34. What is a derivative suit? An individual suit? A
representative suit?
 A derivative suit is one brought by one or more
stockholders or members in the name and on
behalf of the corporation to redress wrongs
committed against it or to protect or vindicate
corporate rights, whenever the officials of the
corporation refuse to sue or are the ones to be
sued or hold control of the corporation.
 An individual suit is one brought by a stockholder
against the corporation for direct violation of his
contractual rights.
 A representative suit is one brought by a person in
his own behalf and on behalf of all similarly
situated.

35. What are the requisites of a
derivative suit?
 In the case of Hi-Yield Realty, Inc. v. Court of Appeals,
590 SCRA 548 and reiterated in Lisam Enterprises Inc.
v. Banco De Oro Unibank, Inc., 670 SCRA 310, it was
held that the requisites of a derivative suit are: (a) the
party bringing the suit should be a shareholder as of the
time of the act or transaction complained of, the number
of his shares not being material, (b) he has tried to
exhaust intra-corporate remedies, and (c) the cause of
action actually devolves on the corporation, the
wrongdoing or harm having been caused the
corporation, and not the particular stockholder bringing
the suit.

36. What are the primary obligations of a stockholder?
 Stockholders have the following obligations:
(a) Obligation to pay the corporation the
consideration for his subscription, including
interest when required; (b) Obligation to pay
the creditors of the corporation to the extent of
their subscription, or beyond, in case the
doctrine of piercing the veil of corporate fiction
is applicable.

37. What is a proxy?
 Proxy is a written authorization, empowering
another person (proxy) to represent a
shareholder and vote in his stead in the
stockholder’s meeting.

38. What is a voting trust
agreement?
 It is an agreement whereby one or more
stockholders transfer their shares of stocks to
a trustee, who thereby acquires for a period of
time the voting rights (and/or any other
specific rights) over such shares; and in
return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.

39. What powers are reserved only for stockholders
or members?
 The powers that are expressly reserved by law
to stockholders or members are:(a) removal of
directors or trustees (b) granting of
compensation, other than per diems, to
directors (c) ratification of acts of self dealing
director or trustee, interlocking director/s,
disloyal director/s (d) delegation of power to
amend by-laws (e) calling of a meeting, upon
good cause, when no person is authorized to
call it (f) when management of a close
corporation is vested in the stockholders.

40. What are the percentage voting requirements when
stockholders or members act?
 The required vote is usually 2/3 of the outstanding
capital stock.
 In the following, it is a majority: (a) election of
members of the Board (b) removal of directors or
trustees (c) approval of management contracts
(d) adoption of by laws/ its amendment or repeal
and to revoke power of amendment delegated to
the Board (e) fix issue price of no par value
shares (f) fixing compensation of directors.


41. Why is the board the repository of corporate
powers?
 The law provides that all corporate powers of
all corporations formed under it shall be
exercised, all business conducted and all
property held by a Board of Directors or
Trustees.
 It is the board which determines corporate
policy and prescribes the manner of general
management of its business activities.
 This is so for the purpose of efficiency in
exchange for profits.

42. How does one become a member
of the board?
 One must possess the following qualifications:
(1)He must own at least 1 share or at least it
should be listed in his name as owner, if it is a non
stock corporation, he must be a member; (2)
Every director/trustee must continuously own at
least a share during his term or be a member; (3)
A majority must be residents of the Philippines; (4)
He must not have been convicted by final
judgment of an offense punishable by a period in
excess of 6 years or a violation of the code,
committed within a period of 5 years prior to the
date of election; (5) Be a Filipino citizen in the
instances required by law; (6) Such other
qualifications as may be prescribed in the By-laws.

43. What is meant by independent director?
 An Independent Director is a person who,
apart from his fees and shareholdings, is
independent of management and free from
any business or other relationship which
could, or could reasonably be perceived to,
materially interfere with his exercise of
independent judgment in carrying out his
responsibilities as a director.

44. How is the power of removal
exercised?
 The removal of directors or trustees require that
(a) it must take place at a regular meeting of the
corporation or a special meeting called for that
purpose (b) there must be previous notice to
stockholders or members of the intention to
propose such removal. The notice must be
specific and in writing, by publication or sending of
a copy the notice (c) the removal is effected by
2/3 vote of capital stock /members entitled to vote
except that a director elected by cumulative voting
cannot be removed as its effect is to deprive
minority stockholders or members of their
representation.

45. How are vacancies filled?
 Vacancies are filled by the stockholders or
members if the cause is: (a) removal; (b)
expiration; (c) other causes when the remaining
members of the board do not constitute a quorum
or leaves the filling up of the vacancy to them; (d)
when there is an increase in the number of
directors/trustees.
 A vacancy can also be filled by the board if the
cause of the vacancy is not removal or expiration
and the remaining members still constitute a
quorum. This can only be exercised by the board
if they acting within their term.

46. When is a board member
considered as disloyal?
 A director is disloyal if by virtue of his office, he acquires for himself
a business opportunity which should belong to the corporation,
thereby obtaining profit, he must account for it by refunding the
same to the corporation, even if the director risked his own funds in
the venture, unless, his act is ratified by a vote of the stockholders
owning or representing 2/3 of outstanding capital stock. This is also
known as the Doctrine of Corporate Opportunity. The provision does
not apply if: (a) he acts in good faith, or, (b) the corporation is
unable to undertake the opportunity or the same is not essential to
the corporation.
 The duty of loyalty of a director precludes the director from
acquiring an opportunity that is open to the corporation because that
is in effect competing with the corporation, oftentimes with the
advantage of inside information thus depriving it of the profits that it
would have otherwise earned.

47. What is the rule on board
compensation?
 The general rule is board members are not
entitled to receive any compensation except
reasonable per diems.
 Exceptions are: (a) when the by-laws provide
for compensation; (b) when granted by a
majority vote of the stockholders or members
subject to the limit that it should not exceed
10% of the net income before income tax
during the preceding year; (c) when board
members render service as officers.

48. What is the business judgment
rule?
 The business judgment rule holds that courts
will not interfere in the decisions made by the
board as regards the internal affairs of the
corporation, unless such contracts are so
unconscionable and oppressive as to amount
to a wanton destruction of rights of the
minority.

49. When is there solidary liability imposed upon
members of the board?
 Solidary liability is imposed when: (a) He
willfully and knowingly votes for and assents to
a patently unlawful act of the corporation; (b)
There is gross negligence or bad faith in
directing the affairs of the corporation; (c) He
acquires any personal or pecuniary interest in
conflict of duty; (d) He agrees or stipulates in a
contract to hold himself liable with the
corporation; or (e) A specific provision of law
requires it.

50. What is the special fact doctrine? What is inside
information?
 It is a doctrine holding that a corporate officer
with superior knowledge gained by virtue of
being an insider owes a limited fiduciary duty
to a shareholder in transactions involving
transfer of stock.
 Information not known to the public that one
has obtained by virtue of being an insider like
a director.

51. What is the rule on self dealing
directors?
 The general rule is that a contract between a self dealing
director/trustee or officer and the corporation is voidable at the
option of the corporation. Notwithstanding, the contract shall
be valid when: (a) presence of the director/trustee in the
board meeting in which the contract was approved was not
necessary to constitute a quorum (b) his vote is not necessary
to approve the contract (c) that the contract is fair and
reasonable under the circumstances. In the case of an officer,
the contract has previously been approved by the board. If
however, conditions (a) and (b) are absent, the contract may
be ratified by 2/3 vote of the outstanding capital stock in a
meeting duly called for such purpose with full disclosure of the
adverse interest being made at the meeting and that the
contract is nevertheless fair and reasonable.

52. What is the rule on inter-locking
directors?
 The rule that obtains as far as contracts between
corporations with interlocking directors is that the
contract is valid as long as there is no fraud and
the contract is fair and reasonable. However, if a
director’s interest in one corporation is substantial
and his interest in the other corporation/s is
nominal, the contract shall be subject to the rule
on self-dealing directors insofar as the
corporation/s where he has a nominal share as it
is as if the corporation is transacting with a self
dealing director. Shareholdings in excess of 20%
of the outstanding capital stock shall be
considered substantial.

53. What is the rule on abstention during board
meetings?
 An abstention may have the practical effect of
a “no” vote since the motion may fail for lack of
sufficient “yes” votes. Unless a greater number
is called for in the articles or by-laws, a matter
is deemed “approved” by the board if at any
meeting at which a quorum is present at least
a majority of the required quorum of directors
votes in favor of the action.

54. What is a certificate of stock? What is its nature?
What is an uncertificated share?
 A certificate of stock is a paper representation
or tangible evidence of the stock itself and of
various interests therein.
 The nature of a certificate of stock is that it is a
prima facie proof that the stock described
therein is valid and genuine in the absence of
an evidence to the contrary.
 An uncertificated share is a subscription duly
recorded and paid in the corporate books but
has no corresponding certificate of stock yet
issued.

55. What is involuntary dealing?
 It refers to such writ, order or process issued
by a court of record affecting shares of stocks
which by law should be registered to be
effective, and also to such instruments which
are not the willful acts of the registered owner
and which may have been executed even
without his knowledge or against his consent.
 An involuntary dealing is required to be
registered to constitute constructive notice.

56. What is the right of appraisal?
 The right of appraisal is the right of stockholder to demand payment
of the fair value of his shares after dissenting from a proposed
corporate action involving a fundamental change in the corporation
in the cases provided for by law.
 It is available when (a) articles are amended and such has the
effect of changing or restricting the rights of a shareholder or a class
of shares or authorizing preferences in any respect superior to
those outstanding shares of any class (b) extending or shortening
the corporate term (c) in cases of sale, lease, exchange transfer,
mortgage, pledge or disposition of all or substantially all of corporate
assets or property (d) in cases of mergers/consolidations (e)
investment by the corporation in another corporation or business
other than its primary purpose (f) a stockholder in a close
corporation for any reason may compel the said corporation to allow
the exercise of his appraisal right.

57. How is the right of appraisal exercised?
 After voting against the proposed corporate action, a written
demand must be made on the corporation within 30 days after
the date on which the vote was taken for payment of the fair
value of his shares.
 If no demand is made within 30 days, he is deemed to have
waived the exercise of the right.
 The stockholder must submit his certificate of stock within 10
days for notation that such shares are dissenting shares.
 If the certificate is not submitted for notation within 10 days,
the corporation may consider the exercise of the right
terminated at its option.
 Upon a demand, all rights accruing to the share are
suspended including voting rights, only the right to receive the
fair value is not suspended, he is then paid. But , if there is no
payment within 30 days after the award, he is restored to all
his rights.

58. What are the modes of
dissolution?
 Voluntary dissolution referring to: (a) where no
creditors are affected; (b) where creditors are
affected; and (c) by shortening of the
corporate term.
 Involuntary dissolution referring to: (a)
expiration of the corporate term; (b) non-user;
(c) continuous inoperation for a period of at
least 5 years; (d) legislative action; and (e)
SEC action in cases of violation of the Code.

59. What are the modes of
liquidation?
 A corporation may liquidate within the
statutory period through: (a) By the
corporation itself or its board of directors or
trustees; (b) By a trustee to whom the assets
of the corporation had been conveyed; and (c)
By a management committee or rehabilitation
receiver appointed by the SEC.
 A corporation is allowed a 3 year period to
enable it to close its business, collect from
debtors and settle with creditors.

60. Can liquidation continue beyond
the 3 year period?
 Liquidation can continue beyond the 3 year
period.
 Receivers or trustees can act as such beyond the
3 year period.
 Pending suits upon expiration of the 3 year period
may still be prosecuted by the handling lawyer
who will then be constituted as a trustee for such
purpose.

61. What are close corporations?
 It is one whose articles provide that: (a) All the
corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number or
persons not exceeding 20; (b) All the issued
stock of all classes shall be subject to one or
more specified restrictions on transfer; and (c)
The corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class.

62. What are some of the characteristics of a closed
corporation?
 Stockholders may act as directors without
need of election, however, they shall assume
all obligations and liabilities of directors.
 It may have a greater quorum requirement.
 Pre-emptive rights extend to all stock issues,
even treasury shares.
 A stockholder may withdraw and avail of his
right of appraisal.

63. What is a deadlock?
 It is when the directors or stockholders are so
divided respecting the management of the
business and affairs of the corporation that the
votes required for any corporate action cannot
be obtained and as a result, business and
affairs can no longer be conducted to the
advantage of the stockholders.

64. When an unlicensed foreign
corporation has the capacity to sue
 If it is not transacting or doing business in the
Philippines, it can sue under: (a)The isolated
business transaction rule, (b) A cause of action
that is independent of any business transaction,
(c) A cause of action that arises out of a business
transaction that is not entered into in the
Philippines, and (d) A cause of action to protect its
name, reputation or goodwill subject to the rule on
reciprocity under the IPR.

65. What is a foreign corporation and the basis for our
authority over it?
 It is a corporation formed, organized or
existing under any law other than those of the
Philippines, and whose laws allow Filipino
citizens and corporation to do business in its
own country or state.
 The basis of authority over it is: (a) consent
and (b) doing business in the Philippines.

66. What tests may be applied to determine
transacting business in the Philippines?
 (a) Continuity test – doing business implies a
continuity of commercial dealings and
arrangements, and contemplates to some extent
the performance of acts or works or the exercise
of some functions normally incident to and in
progressive prosecution of, the purpose and
object of its organization; (b) Subsequent test – a
foreign corporation is doing business in the
country if it is continuing the body or substance of
the enterprise of business for which it was
organized; and (c) Contract test – whether the
contracts entered into by the foreign corporation,
or by an agent acting under the control and
direction of the foreign corporation, are
consummated in the Philippines.

67. Why is there need for a foreign corporation to obtain a
license to transact business?
 The purpose of the law in requiring that a
foreign corporation doing business in the
Philippines to be licensed is to subject it to the
jurisdiction of the courts. The object is not to
prevent foreign corporation from performing
single acts but to prevent it from acquiring a
domicile for the purpose of business without
taking steps necessary to render it amenable
to suits in local courts.

68. Does a foreign corporation possess the
personality to sue? To be sued?
 As a general rule, only foreign corporations that
have been issued a license to operate a business
in the Philippines have the personality to sue.
 By way of exception, a party is estopped to
challenge the personality of a foreign corporation
to sue, even if it has no license, after having
acknowledged the same by entering to a contract
with it.
 An unlicensed foreign corporation doing business
in the country cannot maintain any action but it
can be sued.

69. What principles govern a foreign corporation’s
right to sue?
 The principles governing a foreign
corporation’s right to sue are: (a) if it does
business without a license, it cannot sue
before Philippine courts (b) if it is not doing
business, it needs no license to sue before
Philippine courts on an isolated business
transaction or on a cause of action entirely
independent of any business transaction or to
protect its name, reputation or goodwill (c) if it
does business with the required license, it can
sue before Philippine courts on any transaction
.

70. When is a dispute with an intra-corporate
relationship within the jurisdiction of the
NLRC?
 In the case of Cosare v. Broadcom Asia, Inc,
G.R. No. 201298, February 5, 2014, the NLRC
was held to have jurisdiction over the
dismissal of an AVP for Sales, who was also a
stockholder, as he is not a corporate officer
whose dismissal is cognizable by the RTC. A
corporate officer was defined as one who
meets the following: (a) the creation of the
position is under the corporation’s charter or
by-laws; and (b) the election of the officer is by
the directors or the stockholders.

71. What are the kinds of corporate
insolvency?
 There are two kinds of insolvency
contemplated in it: (1) actual insolvency, i.e.,
the corporation’s assets are not enough to
cover its liabilities; and (2) technical insolvency
defined under Sec. 3-12, i.e., the corporation
has enough assets but it foresees its inability
to pay its obligation for more than one year.

72. SEC supervision over
corporations
 In the case of United Church of Christ in the
Philippines, Inc. v. Bradford United Church
of Christ, Inc., 674 SCRA 92, it was held
that the SEC shall have absolute
jurisdiction, supervision and control over all
corporations. Even with their religious
nature, the SEC may exercise jurisdiction
over them in matters that are legal and
corporate.

73. Rehabilitation defined
 In the case of San Jose Timber Corporation
v. SEC, 667 SCRA 13, rehabilitation was
defined as “restoration of the debtor to a
position of successful operation and
solvency.”
 A successful rehabilitation depends on 2
factors: (a) positive change in the business
fortunes of the debtor, and (b) the
willingness of the creditors and
shareholders to arrive at a compromise
agreement on repayment and the extent of
dilution.

74. SECURITIES REGULATION
CODE

75. What are securities?
 In general, securities are evidences of investment
in a common enterprise made with the
expectation of deriving a profit solely from the
efforts of others who acquire control over the
fund invested.
 As defined by law, they are Shares, Participation
or Interest (SPI) in a Corporation or in a
Commercial enterprise or Profit-making venture
(CCP) and evidenced by a Certificate, Contract;
Instrument, whether written or electronic in
character (CCI).

76. What are tender offers?
 A Tender Offer is a public offer to purchase a specified
number of shares from shareholders usually at a
premium in an attempt to gain control of the issuing
company. Note that in some instances, the premium is
payable only if the offeror is able to obtain the required
number of shares.
 A Tender Offer disclosure will be required if a person,
including a partnership, limited partnership, syndicate,
corporation or any other group intends to acquire at
least fifteen percent (15%) or at least thirty percent
(30%) over a period of twelve months any class of
equity security of a listed corporation or any class of
equity security of a corporation with assets of at least
50 million and having 200 or more stockholders with at
least 100 shares each.

77. What are proxy solicitations?
 Proxy Solicitations is an action to secure the right
to vote of so much a number of shares to ensure
the approval of a proposed corporate action/s.
 The principal purpose of regulating proxy
solicitations by requiring the filing of a proxy
statement is to provide shareholders with
appropriate information to permit an intelligent
decision on whether to permit their shares to be
voted as solicited for a particular matter at a
forthcoming stockholders meeting.

78. What is security price
manipulation?
 Security price manipulation is an artificial
control of security prices. It is an attempt to
force securities to sell at prices either above or
below those which would exist as a result of
the normal operations of supply and demand.
The manipulator hopes to profit by creating
fictitious prices at the expense of the general
trading public.

79. What is insider trading?
 Insider Trading occurs when an insider sells or
buys a security of the issuer, while in possession
of material information with respect to the issuer
or the security that is not generally available to
the public.
 Unless: (a) the insider proves that the information
was not gained from such relationship; or (b) If
the other party selling to or buying from the
insider (or his agent) is identified, the insider
proves: (1) that he disclosed the information to
the other party, or (2) that he had reason to
believe that the other party otherwise is also in
possession of the information.

80. INSURANCE

81. What is the concept of
insurance?
 Insurance is a means by which one seeks to
be covered against the consequences of an
event that may cause loss or damage.
 The concept is that the premiums that are
paid are accumulated in a pool from which
payment of claims are to be obtained. As a
basis, it is assumed that the people
contributing premiums are in excess of those
making claims resulting in a larger pool of
money than the amounts being claimed

82. What are pure and speculative
risks?
 The risks that may be insured against are
what are known as pure risks as opposed to
speculative risks.
 A pure risk is whether a person will suffer or
will not suffer a loss from the occurrence of an
event.
 A speculative risk is whether a person will
profit or suffer a loss from the occurrence of
an event.

83. Insurance is risk distributing
 Insurance is a risk distributing device because
when the insurer assumes the risk, it is
distributing potential liability, in part, among
others.
 It is not risk shifting because the entirety of
risk of loss is not shifted to another.

84. What is the nature of a health care
agreement?
 In the case of Fortune Medicare, Inc. v. Amorin,
G.R. No. 195872, March 12, 2014, it was held to
be in the nature of non-life insurance, which is
primarily a contract of indemnity. Once the
member incurs hospital, medical or any other
expense arising from sickness, injury or other
stipulated contingency, the health care provided
must pay for the same to the extent provided
under the contract.
 The Court also interpreted an ambiguity in favor
of the insured allowing him to recover for his
medical expenses incurred while abroad.

85. In marine insurance, what is meant by perils of
the sea and perils of the ship?
 Perils of the sea refers to all kinds of marine casualties
and damages done to the ship or goods at sea by the
violent action of the winds or waves, one that could not
be foreseen and is not attributable to the fault of
anybody.
 Perils of the ship are losses or damages that result from
(a) natural and inevitable action of the sea (b) ordinary
wear and tear of the ship (c) negligent failure of the ship
owner to provide the vessel with the proper equipment
to convey the cargo under ordinary conditions.

86. What matters when concealed, do
not vitiate a marine insurance
policy?
 The concealment of the following matters will
not vitiate the policy but will merely exonerate
the insurer in case of a loss are: (a) the
national character of the insured (b) the
liability of the thing insured to capture and
detention (c) the liability to seizure from
breach of foreign laws of trade (d) the want
of the necessary documents (e) the use of
false/simulated documents.

87. What are the implied warranties in
marine insurance?
 In every contract of marine insurance upon a
ship or freight, freightage or upon anything
which is the subject of marine insurance,
there are implied warranties: (a) that the ship
is seaworthy; (b) It shall carry the requisite
documents to show its nationality or neutrality
and that it shall not carry any document that
will cast reasonable suspicion on the vessel;
(c) That the vessel shall not make any
improper deviation; and (d) That the vessel
does not or will not engage in any illegal
venture.

88. When is the implied warranty of
seaworthiness complied with?
 The implied warranty of seaworthiness is complied with as a
general rule when it is seaworthy at the time of the
commencement of the risk except (a) when the insurance is
made for a specified length of time, it must be seaworthy at
the commencement of every voyage it undertakes at that
time (b) when the insurance is upon cargo, which by the
terms of the policy, description of the voyage, or established
custom of trade, is required to be transshipped at an
immediate port, in which case – each vessel upon which the
cargo is shipped or transshipped must be seaworthy at the
commencement of each particular voyage (c) where
different portions of the voyage contemplated in the policy
differ in respect to the things requisite to make the ship
seaworthy, in which case it must be seaworthy at the
commencement of each portion.

89. When is a deviation proper?
Improper?
 A deviation is proper: (a) When it is caused by
circumstances over which neither the master nor the owner
of the ship has any control. (b) When necessary to comply
with a warranty, or to avoid a peril, whether or not the peril is
insured against. (c) When made in good faith, and upon
reasonable grounds of belief in its necessity to avoid a peril.
(d) When made in good faith, for the purpose of saving
human life or relieving another vessel in distress
 Any deviation that consists of a departure from the course of
the voyage as defined by law or an unreasonable delay in
pursuing the voyage or the commencement of an entirely
different voyage is an improper deviation and the insurer will
not liable for any loss happening to the thing insured
subsequent to it, regardless of whether the risk was
increased or diminished.

90. What constitutes an actual total
loss?
 An actual total loss occurs when there is : (a)
total destruction of the thing insured; (b) an
irretrievable loss of the thing by sinking or by
being broken up; (c) any damage to the thing
which renders it valueless to the owner for the
purpose that he held it; or (d) any other event
which effectively deprives the owner of the
possession, at the port of destination, of the
thing insured.

91. What is a constructive total
loss?
 A constructive total loss occurs when(a) more than ¾ thereof
in value is actually lost or would have to be expended to
recover it from the peril (b) if it is injured to such extent as to
reduce its value by more than ¾ of value (c) if the thing
injured is a ship, and the contemplated voyage cannot
lawfully be performed without incurring either an expense to
the insured of more than ¾ the value of the thing abandoned
or a risk which a prudent man would not take under the
circumstances (d) if the insured is freightage or cargo and
the voyage cannot be performed, nor another ship procured
by the master, within a reasonable with reasonable diligence
to forward the cargo without incurring the like expense or
risk mentioned in item (c) but freightage cannot be
abandoned unless the ship is also abandoned.

92. When does co-insurance exist?
 Co-insurance exists when the subject matter is
insured for an amount less than it value. In this
case, the insured is considered as a co-insurer
for the portion not covered by insurance.
 This will apply only if the loss is partial.
 This is also known as the “average clause.”

93. What is the rule on liability for an
average?
 As a rule, when it has been agreed that an
insurance upon a particular thing or class of
things shall be free from a particular average,
a marine insurer is not liable for a particular
average loss not depriving the insured at the
port of destination, of the whole such thing, or
class of things, even though it becomes
entirely worthless, but such insurer is liable
for his proportion of all general average loss
assessed upon the thing insured.

94. What is fire insurance?
 Is insurance against loss by through a hostile
fire.
 A fire is hostile when it: (a) burns at a place
where it is not intended to burn (b) is friendly
but becomes hostile because it escapes from
the place where it is intended to burn and
becomes uncontrollable (c) is a friendly fire
which becomes hostile because of the
unsuitable material used to light it and it
becomes inherently dangerous and
uncontrollable.

95. What is an alteration?
 An alteration is a change 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 insurer, by means within the
control of the insured, and increasing the risk,
which entitles the insurer to rescind the
contract of insurance.

96. What is casualty insurance?
 Generally, it is one that covers loss or liability
arising from an accident or mishap, excluding
those that fall exclusively within other types of
insurance like fire or marine insurance.
 It includes employer’s liability, workmen’s
compensation, public liability, motor vehicle
liability, plate glass liability, burglary and
theft ,personal accident and health insurance
as written by non-life companies, and other
substantially similar insurance.

97. Can a CBA provision be interpreted as
an insurance contract?
 In the case of Mitsubishi Motors Philippines Salaried
Employees Union v. Mitsubishi Motors Philippines
Corporation, G.R. No. 175773, June 17, 2013, a CBA
provision providing for an MMPC obligation to pay for
the medical expenses of MMPSEU dependents was
considered as a non- life insurance contract and
interpreted as a contract of indemnity.
 This interpretation barred the application of the
“collateral source rule,” which disallows a wrongdoer
from claiming a benefit arising from a contract which the
injured party may have with third persons to lessen his
liability. In this case, MMPC is not the wrongdoer, rather,
it is a no-fault insurer.

98. What is suretyship?
 Suretyship is an agreement whereby a party called the surety
guarantees the performance by another party called the
principal or obligor of an obligation or undertaking in favor of
a 3rd party called the obligee.
 It is deemed to be an insurance contract when made by a
surety who or which, as such, is doing an insurance business
as provided by the Insurance Code.
 The liability of the surety is solidary with the obligor but limited
to the amount of the bond and determined strictly by the terms
of the contract in relation to the principal contract between
obligor and obligee.

99. What is life insurance?
 It is insurance on human lives and insurance
appertaining thereto or connected therewith. It
is payable on: (a) death of the person, unless
excepted or (b) surviving a specified period, or
(c) contingently on the continuance or
cessation of life.
 Suicide is generally not compensable unless
committed after the policy has been in force
for a period of two years from date of issue or
last reinstatement or a shorter period if
provided, or if committed in a state of insanity.

100. What is covered by compulsory
third party motor vehicle liability
insurance?
 It provides protection or coverage to answer
for bodily injury or property damage that may
be sustained by another arising from the use
of a motor vehicle.
 It is an insurance policy that directly insures
against liability. The insurer’s liability accrues
immediately upon the occurrence of the injury
upon which liability depends, and does not
depend on the recovery of judgment by the
injured party against the insured.

101. What is a “no fault indemnity
claim”?
 A no fault indemnity claim is a claim for payment for death or
injury to a passenger or third party without necessity of
proving fault or negligence.
 This is payable by the insurer provided (a) indemnity in
respect of one person shall not exceed PHP 15,000.00, and
(b) the necessary proof of loss under oath to substantiate
the claim are submitted.
 A claim under the no fault indemnity clause may be made
against one motor vehicle insurer only as follows: (a) in case
of an occupant of a vehicle- against the insurer of the vehicle
in which the occupant is riding, mounting or dismounting
from (b) in any other case, from the insurer of the directly
offending vehicle (c) in all cases, the right of the party paying
the claim to recover against the owner of the vehicle
responsible for the accident shall be maintained.

102. How is the “authorized driver”
defined?
 The authorized driver clause is interpreted to
refer to the insured or any person driving on the
order of the insured or with his permission
provided, such person is permitted to operate a
motor vehicle in accordance with our licensing
laws or regulations and who is not otherwise
disqualified.
 When the insured is the one driving the vehicle, a
license is not necessary. He has a right to
recover the damage even if he has no driver’s
license or that the same had expired at the time
of the accident.

103. How can the theft clause be
interpreted?
 In the case of Paramount Insurance Corporation v. Spouses
Yves and Maria Teresa Remondeulaz, G.R. No. 173773,
November 28, 2012 the respondents entrusted possession of
their vehicle only to the extent that Sales will introduce repairs
and improvements thereon and not to permanently deprive
them of possession thereof. Since theft can also be
committed by misappropriation, the fact that Sales failed to
return the subject vehicle to the respondents constitutes
Qualified Theft. Hence, since the respondents’ car is
undeniably covered by a Comprehensive Motor Vehicle
Insurance Policy that allows for recovery in cases of theft,
petitioner is liable under the policy for the loss of respondents’
vehicle under the "theft clause.”

104. When is there insurable
interest?
 Insurable interest will exist when the insured
has such a relation or connection with, or
concern in, such subject matter that he will
derive pecuniary benefit or advantage from its
preservation or will suffer pecuniary loss or
damage from its destruction, termination, or
injury by the happening of the event insured
against.

105. What differentiates insurable
interest in life from that in property?
 Insurable interest in life can be based on consanguinity,
affinity, contract or a pecuniary interest, while insurable
interest in property is based on pecuniary interest.
 Insurable interest in life must exist only at the effectivity of
the contract except that taken by a creditor on the life of the
debtor while insurable interest in property must exist at the
time of effectivity of the contract and when loss occurs,
although it may not exist in the meantime.
 The value of insurable interest in life is not limited unless
taken by a creditor on the life of the debtor while insurable
interest in property is limited to the actual value of the
interest in the property.

106. Who has insurable interest in
life?
 Himself, his spouse and of his children.
 Any person on whom he depends wholly or in
part for education or support, or in whom he
has a pecuniary interest.
 Any person under a legal obligation to him for
the payment of money, respecting property or
services, of which death or illness might delay
or prevent performance.
 Any person upon whose life, any estate or
interest vested in him depends.

107. What does insurable interest in
property consist of?
 An existing interest.
 An inchoate interest founded on an existing
interest.
 An expectancy, coupled with an existing
interest in that out of which the expectancy
arises.
 A carrier or depository of any kind has
insurable interest in the thing held by him as
such to the extent of his liability but not to
exceed the value thereof.

108. What can and cannot be insured
against?
 Any unknown or contingent event, whether
past or future, which may damnify a person
having insurable interest or create a liability
against him may be insured against.
 Insurance for or against the drawing of any
lottery or for or against any chance or ticket in
a lottery drawing a prize cannot be acquired.

109. Who will qualify as an insured?
 Anyone except a public enemy or a nation at
war with the Philippines and every citizen or
subject of such nation may be insured.

110. Who will qualify as a
beneficiary?
 In life insurance, anyone, except those who
are prohibited by law to receive donations
from the insured.
 In property insurance, only the insured with
insurable interest will qualify as a beneficiary.
 In insurance against liability, the party in
whose favor liability exists is the beneficiary.

111. When is there multiple insurable
interest?
 Multiple insurable interest exists when more
than one insurable interest may exist in the
same property.
 Examples are that of: (a) mortgagor and
mortgagee (b) a trustor and trustee (c) a
lessor and a lessee

112. What is double insurance? Over
insurance?
 Double insurance exists where the same
person is insured by several insurers
separately in respect to same subject and
interest.
 Its requisites are: (a) same person is insured
(b) there are several insurers (c) subject
insured is the same (d) interest insured is the
same (e) risk or peril insured against is the
same.
 Over insurance occurs when property is
insured for an amount in excess of its value.

113. When is an insurance contract
perfected?
 It is perfected when the assent or consent is
manifested by the meeting of the minds of the
offer and acceptance upon the thing and the
cause which are to constitute the contract.

114. How is an offer and acceptance
made in life or health insurance?
 If the premium is not paid when the insurance is
applied for, it is an invitation to the insurer to
make an offer which the insured must accept. If a
premium is paid with the application, it is
considered an offer.
 Acceptance occurs when a policy is issued
strictly in accordance with the offer. If otherwise,
the insurer is making an offer, which the insured
can accept or reject.
 Unreasonable delay in the return of the premium
raises a presumption that the offer has been
accepted.

115. How is an offer and acceptance
made in property and liability
insurance?
 When the insured applies for the insurance, he
is already making an offer to the insurer, who
may now, accept, reject or make a counter-offer.
 Acceptance occurs in the same manner as in
life and health insurance.

116. What is meant by the premium and
why must it be paid?
 The premium is the agreed price for assuming
and carrying the risk which the insurer is entitled
to the payment of a premium as soon as the
thing insured is exposed to the peril insured
against.
 The payment of a premium is essential to the
validity of an insurance policy is known as the
“cash and carry basis” or “no premium payment
no policy” rule.

117. When is insurance effective
despite non-payment of the
premium?
 This occurs: (a) in case of life or industrial life
where the premium is payable monthly or
oftener, whenever the grace period applies; (b)
when the insurer makes a written
acknowledgment of the receipt of premium, such
is conclusive evidence of the payment of the
premium to make it binding notwithstanding any
stipulation therein that it shall not be binding until
the premium is paid; and (c) where the obligee
has accepted the bond or suretyship contract.
 It also occurs when the insurer is estopped from
claiming otherwise.

118. What are the non-default options in
life insurance?
 The non-default options are: (a) grace period
(b) cash surrender value (c) paid up insurance
(d) automatic loan clause, and (e)
reinstatement

119. How is reinstatement of the policy
effected?
 Reinstatement can be permitted within 3
years, or a stipulated longer period, from the
date of default.
 This is not an absolute right as it is
conditioned on insurability of the insured or
evidence of good health and the payment of
all overdue premiums and indebtedness, if
any.

120. What is concealment and its
requisites?
 Concealment is a neglect to communicate that
which a party knows and ought to communicate.
 Its requisites are: (a) such facts that must be
within his knowledge as concealment requires
knowledge of the fact concealed by the party
charged with concealment (b) fact/s must be
material to the contract as it must be of such
nature that had the insurer known of it, it would
not have accepted the risk or demanded a higher
premium (c) that the other party had no means of
ascertaining such fact/s (d) that the party with a
duty to communicate makes no warranty.

121. When is there a waiver of
information?
 A waiver takes place either, by the terms of
the insurance or by the neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated.

122. What is the effect of concealment
and when must it take place?
 Whether intentional or not, it entitles the injured party to
rescind the contract of insurance.
 Generally, concealment requires a party to have knowledge
of the fact concealed prior to or at the effectivity of the policy.
 Information acquired after effectivity is not concealment and
does not constitute ground to rescind the policy, as after the
policy is issued, information subsequently acquired is no
longer material as it will not affect or influence the party to
enter into contract. However, in case of the reinstatement of
a lapsed policy, facts known after effectivity but before
reinstatement must be disclosed.

123. What are representations? What
are the kinds of representations?
 A representation is an oral or written
statement of a fact or a condition affecting the
risk made by the insured to the insurance
company, tending to induce the insurer to
take the risk.
 Representations may be oral or written.
 They can be affirmative when it is an
affirmation of a fact existing when the contract
begins or promissory when it is a statement
by the insured concerning what is to happen
during the term of the insurance.

124. Is a representation part of the
insurance contract?
 A representation does not form part of the
contract as an express provision thereof as it
is a collateral inducement to the same.
 While it does not form part of the contract, it
may qualify an implied warranty.

125. To what date does a
representation refer to?
 It presumed to refer to the date on which the
contract goes into effect.
 There is no false representation if it is true at
the time the contract takes effect although
false at the time it is made.
 There is a false representation, if it is true at
the time it is made but false at the time the
contract takes effect.

126. When is a representation false and
what is its effect?
 A representation is said to be false when the facts fail
to correspond with its assertions or stipulations.
 If it is false on a material point, whether affirmative or
promissory, the injured party is entitled to rescind the
contract from the time the representation becomes
false.
 However, the right to rescind is considered waived by
the acceptance of premium payments despite
knowledge of the ground to rescind.
 There is no waiver, if the insurer had no knowledge
of the ground at the time of the acceptance of the
premium.

127. How is concealment distinguished
from misrepresentation?
 Concealment is the neglect of one party to
communicate to the other material facts. The
information he gives in compliance with his
duty to reveal information is representation.

128. What is the incontestability
clause ?
 It is a clause in a life insurance policy that is
(a)payable on the death of the insured, and
(b) which has been in force during the lifetime
of the insured for a period of 2 years from the
date of issue or its last reinstatement that
would prevent the insurer from proving that
the policy is void ab initio or is subject to
rescission by reason of a fraudulent
concealment or misrepresentation of the
insured or his agent.

129. What is a warranty? What are the
kinds of warranties?
 It is a statement or promise stated in the policy or
incorporated therein by reference, whereby the insured,
expressly or impliedly contracts as to the past, present or
future existence of certain facts conditions or circumstances,
the literal truth of which is essential to the validity of the
contract.
 Warranties can be affirmative when they refer to to matters
that exist at or before the issuance of the policy or
promissory when they refer to promises or undertaking of
the insured that certain matters shall exist or will be done or
will be omitted after the policy takes effect.
 They can also be express when provided for in the policy or
implied when they are inferred from the nature of the
insurance.

130. What is the effect of a violation of a
warranty?
 The violation of a material warranty, or other
material provision of the policy, on the part of
either party thereto, entitles the other to
rescind.
 However, a breach of a warranty without
fraud, merely exonerates an insurer from the
time it occurs, or where it is broken at its
inception, prevents the policy from attaching
to the risk.

131. When is the non-performance of a
warranty excused?
 The non-performance of a promissory
warranty is excused if before the arrival of the
time for performance: (a) the loss insured
against happens;(b) the performance
becomes unlawful at the place of the contract;
or (c) the performance becomes impossible.

132. What are the rules on losses?
 Loss of which a peril insured against is the proximate
cause, although a peril not contemplated by the contract
may have been a remote cause but the insurer is not liable
for a loss of which the peril insured against was only a
remote cause.
 Loss caused by efforts to rescue the thing insured from a
peril insured against that would otherwise have caused a
loss, if in the course of such rescue, the thing is exposed
to peril not insured against, which permanently deprives
the insured of its possession, in whole or in part, or where
a loss is caused by efforts to rescue the thing insured from
a peril insured against.
 An insurer is not liable for a loss caused by the willful act
or through the connivance of the insured; but he is not
exonerated by the negligence of the insured, or of the
insured’s agent or others.

133. What is a notice of loss, who and
when should it be given?
 A notice of loss is the formal notice given by
the insured or some person entitled to the
benefit of the insurance without unnecessary
delay informing the insurer of the occurrence
of the loss insured against.

134. What is meant by proof of loss?
 It refers to the evidence given by the insured
to the insurer upon the occurrence of the loss
by insured against, stating the particulars and
the necessary data to enable the insurer to
determine its liability and the extent thereof.

135. What is claim settlement?
 This refers to the indemnification of the loss
suffered by the insured.
 The claimants entitled to the indemnification
may be the insured, the reinsured, the insurer
entitled to subrogation, or a third party in an
insurance policy providing indemnity against
liability.

136. What is unfair claim settlement?
 Knowingly misrepresenting facts or policy
provisions.
 Failing to acknowledge pertinent communications
with reasonable promptness.
 Failing to adopt and implement reasonable
standards for prompt investigation of claims.
 Not attempting to effectuate prompt, fair and
equitable settlement of claims in cases where
liability is reasonably clear.
 Compelling policy holders to file suit by offering
amounts substantially less than that which they
are entitled to.

137. What is the effect of a fraudulent
claim?
 In the case of United Merchants Corporation v. Country Bankers
Insurance Corporation, G.R. No, 198588, July 11 2012, the
Supreme Court held that: Where a fire insurance policy provides
that “if the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the insured or anyone
acting in his behalf to obtain any benefit under the policy” and
the evidence is conclusive that the proof of the claim which the
insured submitted was false and fraudulent as both as to kind,
qualify and amount of the goods and their value destroyed by
fire, such proof of claim is a bar against the insured from
recovering on the policy even for the amount of his actual loss. It
has long been settled that a false and material statement made
with intent to deceive or defraud voids on insurance policy, In Yu
Cua v. South British Insurance Co., the claim was fourteen times
bigger than the real loss; In Go Lu v. Yorkshire Insurance Co.,
eight times; and in Tuason v. North China Insurance Co., six
times. In the present case, the claim is twenty five times the
actual claim proved.

138. What is the prescriptive period for
the commencement of an action?
 The parties can agree on a period provided it is
not less than 1 year from the time the cause of
action accrues.
 If the period prescribed void because it is less
than 1 year or there is no period, the insured can
bring the action within 10 years from the time the
cause of action accrues.
 In a comprehensive motor liability insurance
claim, a written notice of claim must be filed
within 6 months from the date of accident,
otherwise, the claim is waived, even if an action
is subsequently brought within 1 year from
rejection of the claim.

139. When does subrogation take
place?
 Subrogation inures to the insurer without need
of assignment or express stipulation upon
payment made to the insured. The act of
payment makes the insurer a subrogee in
equity.
 However, subrogation occurs only in property
insurance.

140. What is the concept behind
subrogation?
 In the case of Malayan Insurance Co., Inc. vs Rodelio Alberto and
Enrico Alberto Reyes, GR No. 194320, February 1, 2012 it was held that
subrogation is the substitution of one person by another with reference
to a lawful claim or right, so that he who is substituted succeeds to the
rights of the other in relation to a debt or claim, including its remedies or
securities. The payment by the insurer to the insured operates as an
equitable assignment to the insurer of all the remedies that the insured
may have against the third party whose negligence or wrongful act
caused the loss.
 The right of subrogation is not dependent upon, nor does if grow out of,
any privity of contract. It accrues simply upon payment by the insurance
company of the insurance claim.
 It is intended to make the person who caused the loss legally
responsible for it, prevents the insured from recovering twice, and
upholds public policy by preventing tortfeasors from being absolved from
liability.

141. NEGOTIABLE
INSTRUMENTS

142. When is there an unconditional
order or promise to pay?
 The promise or order is still unconditional
though coupled with:(a)An indication of a
particular fund out of which reimbursement is
to be made or a particular account to be
debited with the amount; or(b) A statement of
the transaction which gives rise to the
instrument.
 The test of negotiability when there is another
stipulation is whether or not the promise would
give rise to a cause of action for breach of
contract if the additional act is not done. If it
does, the instrument is rendered non-negotiable.

143. What is the fictitious payee
rule?
When it is payable to the order of a fictitious or
non-existing person, the instrument’s being
payable to bearer depends on the intention of
the person making it so payable.
 An actual, existing, and living payee may also
be “fictitious” if the drawer did not intend for
the payee in fact to receive the proceeds of the
check. If this is absent, the effect is that the
instrument cannot be considered as payable to
bearer.

144. How are conflicts between words
and numbers resolved?
 In the case of People v. Romero, 306 SCRA
90, the drawer of a check with a balance of
PHP 1,144,760.00 could not be convicted
for estafa because of the dishonor of his
check for lack of funds where the check
indicated the amount of PHP 1,000,200.00
in words and the amount of PHP
1,200,000.00 in figures as the NIL provides
that in resolving this ambiguity the amount
in words should prevail.

145. What is meant by absence of a
consideration ?
 The meaning of absence or want of consideration
means a total lack of any valid consideration for
the contract, in consequence of which the alleged
contract must fall. Consequently, if the Maker
makes a promissory note to the Payee in payment
for a parcel of land which does not exist. As
between the parties, there can be no recovery on
the note as there is absence of consideration. But
if the Payee indorses the note to another, who is a
holder in due course, there can be recovery from
the Maker because absence of consideration is
only a personal defense not available against a
holder in due course.

146. Who is an accommodation
party?
 An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a
person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation
party.
 The requisites to be an accommodation party are: (a)
The party to the instrument signs as maker,
drawer, acceptor or indorser (b) Without receiving
value therefor, and (c) For the purpose of lending his
name to some other person.

147. What are the effects of forgeries?
 The effects of a forgery are: (a) The instrument is
not declared totally void nor are the genuine
signatures thereon rendered inoperative. It is only
the forged signature that is declared inoperative.
Hence: rights still exist and may be enforced by
virtue of the instrument as between parties whose
signatures were not forged, and (b) A forged
instrument just prevents any subsequent party from
acquiring any rights as against any party whose
name appears prior to the forgery. There is no right
to retain the instrument, or to give discharge or to
enforce payment. However, rights will exist and may
be enforced as between subsequent parties but no
one can acquire a right as against parties prior to
the forgery, who also have rights and may enforce
them as against each other.

148. When is the drawer is liable for a
forgery?
 In the case of Security Bank and Trust
Corporation v. Triump Lumber and
Construction Corporation, 301 SCRA 537 it
was held that a drawer who discovered the
loss of his checkbook and did not notify the
bank of the loss should bear the loss caused
by the subsequent payment of the checks in
which the signature of the drawer had been
forged.

149. Is the payee on a check with a forged
endorsement allowed to recover?
 The payee of a negotiable instrument acquires
no interest with respect thereto until its delivery
to him. When a debtor does not deliver the
check to his creditor and a third party was able
to collect the proceeds by forging the
endorsement of the payee, the payee has no
cause of action against anyone on the basis of
the check due to the absence of delivery.
However, in the case of Westmont Bank v. Ong,
375 SCRA 212, the payee of the check can sue
the collecting bank to whom the check was
deposited despite absence of delivery to the
payee in order to avoid circuitry of suits.

150. What is a material alteration?
 A material alteration is any alteration which
changes: (a)The date (b)The sum payable,
either for principal or interest (c) The time or
place of payment (d) The number of the
relations of the parties (e)The medium or
currency in which payment is to be made (f)
Or which adds a place of payment where no
place of payment is specified, or any other
change or addition which alters the effect of the
instrument in any respect.
 Where a negotiable instrument is materially
altered without the assent of all parties liable
thereon, it is avoided, except as against a party
who has himself made, authorized, or assented
to the alteration and subsequent indorsers.

151. What is the effect of an alteration
of the serial number?
 The alteration of the serial number of the
check is not material and does not entitle the
drawee bank which paid it to recover the
payment. The alteration of the serial number
of the check did not change the relations
between the parties nor the effect of the
instrument.
 The drawee bank has no right to dishonor the
check and return it to the collecting bank.

152. Who is an irregular indorser?
 An irregular indorser is one whose signature is out
of place. Instead of the expected signature of a
party to the instrument, the signature of the irregular
indorser is found in its place.
 Where a person, not otherwise a party to an
instrument, places thereon his signature in blank
before delivery, he is liable as an indorser, in
accordance with the following rules: (a)If the
instrument is payable to the order of a third person,
he is liable to the payee and to all subsequent
parties, (b)If the instrument is payable to the order
of the maker or drawer, or is payable to bearer, he
is liable to all parties subsequent to the maker or
drawer, (c) If he signs for the accommodation of the
payee, he is liable to all parties subsequent to the
payee.

153. What is effect of the crossing or
striking out of indorsements?
 When a holder strikes out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck
out, and all indorsers subsequent to him, are thereby relieved
from liability on the instrument.
 An instrument payable to bearer can be negotiated by mere
delivery. Even if a bearer instrument is indorsed specially, the
same continues to be negotiated by mere delivery. Hence, the
special indorsement of a bearer instrument is not necessary to
the title of the holder. Such being the case, the holder may
strike out said indorsement at any time.
 An instrument payable to order can be negotiated by
indorsement completed by delivery. However, if the only or last
indorsement is an indorsement in blank the order instrument is
converted to one which is payable to bearer. All special
indorsements subsequent to the blank indorsements may be
stricken out by the holder because they are not necessary to this
title.
 However, in the case of an instrument payable to order with
special indorsements all the way up to the holder, the later
cannot strike out any of the special indorsements because all of
them are necessary to his title. This is so because the holder
must be able to trace his title to the instrument through an

154. Who is a holder in due course?
 A holder in due course is a holder who has
taken the instrument under the following
conditions:(a)That it is complete and regular
upon its face;(b)That he became the holder
of it before it was overdue, and without
notice that it had been previously
dishonored, if such was the fact; (c) That he
took it in good faith and for value; (d)
That at the time it was negotiated to him he
had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.

155. What is meant by good faith?
 It means that it is required that at the time the
holder purchased the instrument there must
be total absence of knowledge on the part of
the holder regarding any infirmity in the
instrument or defect of title of the person
negotiating it.
 If the instrument was issued for an unlawful
consideration, or the indorser was guilty of an
illegal act or ill-motive in negotiating the
instrument, the holder must not be aware of
any of them at the time he took the instrument.

156. What is meant by defects or
infirmities?
 The title of a person who negotiates an instrument
is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto,
by fraud, duress, or force and fear, or other
unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith, or under
such circumstances as amount to a fraud.
 Infirmity in the instrument means that something is
wrong with the instrument itself like a forgery or
material alteration.

157. How does the prima facie presumption
that one is a holder in due course
apply?
 Every holder of a negotiable instrument is deemed
prima facie a holder in due course.
 The presumption that every holder is deemed
prima facie to be a holder in due course, arises
only in favor of a person who is a holder in the
sense defined in Section 191 of the NIL, that is, a
payee or indorsee who is in possession of the
instrument, or the bearer thereof.
 There is no presumption that a person through
whose hands an instrument has passed was a
holder in due course.

158. What are the rights of a holder in due
course?
 A holder in due course holds the instrument free
from any defect of title of prior parties, and free from
defenses available to prior parties among
themselves, and may enforce payment of the
instrument for the full amount thereof against all
parties liable thereon.
 Specifically: (a) He may sue in his own name (b) He
may receive payment, and payment to him in due
course discharges the instrument (c) He holds the
instrument free from any defect of title of prior
parties and free from defenses available to prior
parties among themselves (d) He may enforce
payment of the instrument for the full amount
thereof against all parties liable thereon.

159. When is an instrument is subject to
original defenses?
 In the hands of any holder other than a holder in
due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable.
However, a holder who derives his title through a
holder in due course, and who is not himself a party
to any fraud or illegality affecting the instrument,
has all the rights of such former holder in respect of
all parties prior to the latter.
 A holder who is not a holder in due course, holds
the instrument subject to the defenses that may be
raised against the person who transferred the
instrument to him. Hence, it is as if the instrument is
non-negotiable because the transferee cannot
acquire rights better than those of the transferor. In
this case, the transferee is a mere assignee of the
rights of the transferor.

160. What are the warranties of the
maker?
 His warranties are: (a)He will pay the promissory note
according to its tenor (b)He admits the existence of the
payee; and (c) He admits that the payee has the capacity
to indorse.
 The maker is the one who executed the promissory note.
He is the person primarily liable thereon. His liability is
absolute and unconditional in accordance with the terms of
the promissory note that he made. He cannot vary its
terms.
 The maker cannot deny the existence of the payee. He
cannot allege that the payee is fictitious person.
 The maker is estopped from contesting the capacity of the
payee to indorse. For instance, he cannot allege that the
payee is a minor, or insane. If the payee is a corporation,
he cannot allege that its indorsement is ultra vires.

161. What are the warranties of the
drawer?
 His warranties are: (a) He admits the existence of the payee and
his then capacity to indorse. Note that this is the same as the
maker (b) He engages that, on due presentment, the bill will be
accepted or paid, or both, according to its tenor (c) That if it is
dishonored by non-acceptance or non-payment, he will pay to
the holder of the bill or to any subsequent indorser who was
compelled to pay it, provided the necessary proceedings on
dishonor were duly taken.
 To fix the liability of the drawer, the following steps must be
taken: (a)Due presentment of the bill of exchange to the drawee,
the person to whom the bill is addressed. It may be presentment
for acceptance, or presentment for payment; whichever is
necessary under the premises, (b)If dishonored, the necessary
proceedings on dishonor must be taken. Both steps must
concur; otherwise, the drawer will be discharged from liability.
 The drawer may negative or limit his liability to the holder by
inserting a provision to that effect in the instrument; e.g., “In case
of dishonor, I am not liable for the amount of this instrument

162. What are the warranties of the
acceptor?
 The warranties of the acceptor are: (a) He will
pay the bill according to the tenor of his
acceptance; (b)He admits the existence of the
drawer; (c)He admits that the signature of the
drawer is genuine; (d) He admits the capacity of
the drawer; (e) He admits that the drawer has the
authority to draw the instrument; and (f)He admits
the existence of the payee and his then capacity
to indorse.
 The acceptor need not accept according to the
tenor of the instrument. He can vary the terms of
the instrument such that he can become liable
only according to his own terms. However, he is
absolutely required to pay according to the tenor
of his acceptance.

163. What are the warranties of person
negotiating by delivery or qualfied
indorsement?
 Every person negotiating an instrument by
delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all
respects what it purports to be (b) That he has a
good title to it (c) That all prior parties had capacity
to contract (d) That he has no knowledge of any
fact which would impair the validity of the
instrument or render it valueless.
 When the negotiation is by delivery only, the
warranty extends in favor of no holder other than
the immediate transferee. When it is by qualfied
indorsement the liability extends to all parties who
derive title through his indorsement.

164. What are the warranties of a general
indorser?
 A general indorser has the same warranties as a qualified indorser
except that he warrants that the instrument is, at the time of his
indorsement, valid and subsisting.
 In addition, he engages that, on due presentment, it shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it
be dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it.
 A qualified indorser warrants that he is not aware of any fact which will
impair the validity of the instrument or render it valueless; whereas, a
general indorsers warrants that the instrument is valid and subsisting,
meaning that there is no fact which will impair the validity of the
instrument or render it valueless, regardless of whether he is aware of it
or not.
 If the instrument is dishonored, the qualified indorser is not liable if he
did not violate his warranties. In the case of a general indorser, if the
instrument is dishonored, he engages to pay the amount of the
instrument to the holder or to whomsoever may be compelled to pay it,
provided there is due presentment and the necessary proceedings on
dishonor are duly taken; otherwise, the general indorser will be
discharged from liability.

165. When is presentment for
acceptance required?
 Presentment for acceptance must be made by the
holder where: (a) bill is payable after sight or where
presentment is necessary to fix maturity (b) it is
expressly stipulated, or (c) the bill is drawn payable
elsewhere other than the residence or place of
business of the drawee so that the drawee can
make arrangements for payment. In no other case
is presentment for acceptance necessary in order
to render a party to the bill liable.
 Hence, presentment for acceptance is not
necessary for bills: (a) payable on demand (b)
payable at sight (c) payable on a fixed date (d)
payable several days after date (e) payable upon
occurrence of an event, or (f) payable several days
after occurrence of an event. What is required is
simply presentment for payment.

166. When is presentment for
payment required?
 There is need for presentment for payment
upon the proper person as it is necessary to
charge persons secondarily liable on the
instrument. Failure to present the instrument
for payment to the person primarily liable
thereon will discharge the drawer and
indorsers from any liability, unless
presentment is excused or dispensed with
pursuant to the provisions of Sections 79, 80,
81 or 82 of the NIL.

167. When is presentment for payment
dispensed with or excused?
 Presentment is dispensed with when: (a)Presentment for
payment is not required in order to charge the drawer where he
has no right to expect or require that the drawee or acceptor will
pay the instrument,(b) Presentment is not required in order to
charge an indorser where the instrument was made or accepted
for his accommodation and he has no reason to expect that the
instrument will be paid if presented, (c)Delay in making
presentment for payment is excused when the delay is caused
by circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. When the
cause of delay cases to operate, presentment must be made
with reasonable diligence.
 Presentment for payment is excused when: (a) after the exercise
of reasonable diligence, presentment, as required by the NIL
cannot be made (b) Where the drawee is a fictitious person (3)
By waiver of presentment, express or implied.

168. When is notice of dishonor
given?
 When a negotiable instrument has been dishonored by
non-acceptance or non-payment, notice of dishonor must
be given to the drawer and to each indorser, and any
drawer or indorser to whom such notice is not given is
discharged.
 A notice of dishonor is necessary in order to fix the
liabilities of parties secondarily liable on the instrument.
The drawer and the indorser must be given a notice of
dishonor once the instrument is dishonored pursuant to the
warranties they made when they affixed their signatures on
the instrument.
 The parties primarily liable on the instrument need not be
given a notice of dishonor because they were the ones
who dishonored the instrument.
 The drawee need not be given a notice of dishonor
because he is not party to the instrument until he accepts.

169. What are the exceptions to the rule
on failure to give notice of dishonor?
Where there is a waiver of notice of dishonor
which may occur either before the time of
giving notice has arrived or after the
omission to give due notice, and the waiver
may be expressed or implied.
Where it is dispensed with, after the
exercise of reasonable diligence, it cannot
be given to or does not reach the parties
sought to be charged.

170. When is notice of dishonor not
required to be given the drawer?
 Notice of dishonor is not required to be given to the drawer in
either of the following cases: (a)Where the drawer and drawee
are the same person (b)When the drawee is a fictitious person or
a person not having capacity to contract (c) When the drawer
is the person to whom the instrument is presented for payment
(d)Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument (e)Where the
drawer has countermanded payment.
 As a general rule, notice of dishonor need not be given to the
drawer in instances where he knows or ought to know that the
bill of exchange has been dishonored or will be dishonored. To
put it simply, the drawer is not entitled to be notified about
something he already knows.
 Further, if the drawee is a fictitious person or one without
capacity to contract, the holder can treat it as a promissory note.
Thus, the drawer is treated as a maker, who as such, is primarily
liable.

171. When is notice of dishonor not required
to be given to an indorser?
 Notice of dishonor is not required to be given to an
indorser in the following cases: (a) When the drawee
is a fictitious person or not having capacity to
contract, and the indorser was aware of that fact at
the time he indorsed the instrument (b) Where the
indorser is the person to whom the instrument is
presented for payment (c) Where the instrument
was made or accepted for his accommodation.
 The indorser need not be notified where he knows or
ought to know that the instrument will be dishonored.

172. What is the effect of Non-
Acceptance?
 Where due notice of dishonor by non-acceptance has been
given, notice of a subsequent dishonor by non-payment is not
necessary unless in the meantime the instrument has been
accepted.
 This is so because there is no reason to expect that the same bill
will be paid upon its maturity; hence, there is no need to notify
the drawer and indorsers again about the dishonor of the bill by
non-payment.
 However, if before its maturity, the bill is accepted but later
dishonored by non-payment upon its maturity, the drawer and
the indorsers must be given due notice of dishonor by non-payment;
otherwise, they will be discharged from liability. This is
so because the earlier notice of dishonor by non-acceptance
given the drawer and indorsers was rendered ineffectual by the
subsequent acceptance of the bill. Hence, the necessity of the
notice of dishonor by non-payment that must be given to fix the
liability of the drawer and the indorsers.

173. How is a foreign bill distinguished from
an inland bill?
 A bill of exchange may be a foreign bill of
exchange where the drawer and the drawee are
residents of countries foreign to each other or an
inland bill of exchange where the drawer and
drawee are residents of the same country as on its
face it purports to be, both drawn and payable
within the Philippines and unless the contrary
appears on the face of the bill, the holder may
treat it as an inland bill. The distinction is material
insofar as determining whether protest is to be
given in the case of non-acceptance or dishonour
by non-payment as only foreign bills of exchange
is subject to protest.

174. What is the effect of the certification
of a check?
 A check will operate as an assignment of
funds when the bank accepts or certifies the
check.
 Certification of the check is equivalent to
acceptance and when the holder procures it to
be certified, the drawer and all indorsers are
discharged from liability thereon.
 When a bank certifies a check it agrees in
advance to (a) accept the check when it is
presented for payment (b) pay the check out
of the funds set aside for the customer’s
account.

175. What is meant by the discharge of the
negotiable instrument and how does it occur?
 It is the release of all parties, whether primary or
secondary, from their obligation on the instrument.
 It occurs: (a) By payment in due course by or on
behalf of the principal debtor, (b) By payment in due
course by the party accommodated, where the
instrument is made or accepted for his
accommodation, (c) By the intentional cancellation
thereof by the holder, (d) By any other act which will
discharge a simple contract for the payment of money,
and (e) When the principal debtor becomes the holder
of the instrument at or after maturity in his own right.