Document Text Contents
Page 1
LETTERS OF CREDIT
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II
VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA
VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE
VICE CHAIRS FOR LAY‐OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
1U N I V E R S I T Y O F S A N T O T O M A S F a c u l t a d d e D e r e c h o C i v i l
LETTERS OF CREDIT
I. DEFINITION/CONCEPT
Q: What is Letter of Credit (LC)?
A: It is any arrangement, however named or
described, whereby a bank (issuing bank), acting
at the request and on the instructions of a
customer (applicant) or on its own behalf, binds
itself to:
1. Pay to the order of, or accept and pay
drafts drawn by a third party
(Beneficiary), or
2. Authorize another bank to pay or to
accept and pay such drafts, or
3. Authorizes another bank to negotiate,
against stipulated document(s),
Provided, the terms and conditions of the credit
are complied with. (Art. 2, Uniform Customs &
Practice for Documentary Credits.)
Note: They are in effect absolute undertakings to
pay the money advanced or for the amount for
which the credit is given on the faith of the
instrument.
Q: What is the duration of LC?
A:
1. Upon the period fixed by the parties; or
2. If none is fixed:
a. 6 months from its date if used in
the Philippines;
b. 12 months if used abroad (Art
572, ibid).
Q: What are the kinds of LC?
A:
COMMERCIAL LETTERS
OF CREDIT
STANDBY LETTERS OF
CREDIT
Involve contracts of sale.
Involve non‐sale
transactions.
Payable upon
presentation by the
seller‐beneficiary of
documents that show he
has performed his
contract.
Payable upon
certification by the
beneficiary of the
applicant’s NON‐
performance of the
agreement. (Transfield v.
Luzon Hydro Corp., G.R.
No. 146717, Nov. 22,
2004)
Q: Is irrevocable letter of credit and confirmed
letter of credit synonymous?
A: An irrevocable letter of credit is not
synonymous with a confirmed letter of credit. In
an irrevocable letter of credit, the issuing bank
may not, without the consent of the beneficiary
and the applicant, revoke its undertaking under
the letter, whereas, in a confirmed letter of
credit, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake
the issuing bank’s obligation as its own according
to the terms and condition of the credit.
(Prudential Bank and Trust Company v. IAC, G.R.
No. 74886, Dec. 8, 1992)
Q: Can a court order the release to the applicant
the proceeds of an irrevocable letter of credit
without the consent of the beneficiary?
A: No, such order violates the irrevocable nature
of the letter of credit. The terms of an irrevocable
letter of credit cannot be changed without the
consent of the parties, particularly the beneficiary
thereof. (Phil. Virginia Tobacco Administration v.
De Los Angeles, G.R. No. L‐27829, Aug. 19, 1988)
II. GOVERNING LAW
Q: What is the law governing letter of credit
(LC)?
A: It is the Uniform Customs and Practice (UCP)
for documentary Credits for International
Chamber of Commerce governs the Letters of
credit (Metropolitan Waterworks vs. Daway, G.R.
No. 160723, July 21, 2004).
Articles 567 to 572 of the Code of Commerce on
Letters of Credit are obsolete. However, in the
absence of any provision in the Code of
Commerce, commercial transaction shall be
governed by the usages and customs generally
observed. (Sec. 2, Code of Commerce)
III. NATURE OF LETTER OF CREDIT
Q: What is the nature and purpose of LC?
A: To ensure certainty of payment. The seller is
assured of payment because the bank intervenes
and makes the commitment to pay. This
addresses problems arising from seller’s refusal to
part with his goods before being paid and the
buyer’s refusal to part with his money before
acquiring the goods, thus, facilitating commercial
transactions.
Page 2
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM:
ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN;
ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO,
ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA,
RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES
2
Q: What are the essential conditions of LC?
A:
1. Issued in favor of a definite person and
not to order.
Note: The Uniform Commercial Practice for
Documentary Credits allows letters of credit to
be payable to order
2. Limited to a fixed or specified amount,
or to one or more amounts, but with a
maximum stated limit. (Article 568, Ibid)
Note: If any of these essential conditions is not
present, the instrument is merely considered as
a letter of recommendation.
Q: In case the buyer was not able to pay its
obligation under the letter of credit, can the
bank take possession over the goods covered by
the said letter of credit?
A: No. The opening of a Letter of Credit did not
vest ownership of the goods in the bank in the
absence of a trust receipt agreement. A letter of
credit is a mere financial device developed by
merchants as a convenient and relatively safe
mode of dealing with the sales of goods to satisfy
the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of
the goods before paying. (Transfield Philippines,
Inc. v. Luzon Hydro Corporation, G.R. No. 146717,
Nov. 22, 2004)
IV. PARTIES TO A LETTER OF CREDIT
Q: Who are the parties to a Letter of Credit
transaction?
A:
1. Applicant/Buyer/Importer – procures
the letter of credit, purchases the goods
and obliges himself to reimburse the
issuing bank upon receipt of the
documents title.
2. Issuing Bank – One which, whether a
paying bank or not, Issues the letter of
credit and undertakes to pay the seller
upon receipt of the draft and proper
documents of title from the seller and
to surrender them to the buyer upon
reimbursement.
3. Beneficiary/Seller/Exporter – In whose
favor the instrument is executed. One
who delivers the documents of title and
draft to the issuing bank to recover
payment.
The number of parties may be increased.
Modern letters of credit usually involve
bank‐to‐bank transactions. The following
additional parties may be:
1. Advising/notifying bank – The
correspondent bank (agent) of the
issuing bank through which it advises
the beneficiary of the LC.
2. Confirming bank – bank which, upon
the request of the beneficiary, confirms
the LC issued.
3. Paying bank – bank on which the drafts
are to be drawn, which may be the
issuing bank or another bank not in the
city of the beneficiary.
4. Negotiating bank – bank in the city of
the beneficiary which buys or discounts
the drafts contemplated by the LC, if
such draft is to be drawn on the
opening bank not in the city of the
beneficiary.
Q: What are the stages of LC?
A:
1. Contract of sale between the buyer and
seller
2. Application for LC by the buyer with the
bank
3. Issuance of LC by the bank
4. Shipping of goods by the seller
5. Execution of draft and tender of
documents by the seller
6. Redemption of draft (payment) and
obtaining of documents by the issuing
bank
7. Reimbursement to the bank and
obtaining of documents by the buyer
A. RIGHTS AND OBLIGATIONS OF PARTIES
Q: Explain the three (3) distinct but intertwined
contract relationships that are indispensable in a
letter of credit transaction.
A:
1. Between the applicant/buyer/importer
and the beneficiary/seller/exporter – The
applicant/buyer/importer is the one who
procures the letter of credit while the
beneficiary/seller/exporter is the one
Page 131
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II
VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA
VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE
VICE CHAIRS FOR LAY‐OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
131
Q: What are the instances where corporation
may acquire its own shares?
A:
1. To eliminate fractional shares out of
stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising
out of unpaid subscription, in a
delinquency sale and to purchase
delinquent shares sold during said sale;
3. To pay dissenting or withdrawing
stockholders (in the exercise of the
stockholder’s appraisal right);
4. To acquire treasury shares;
5. Redeemable shares regardless of
existence of retained earnings;
6. To effect a decrease of capital stock;
7. In close corporations, when there is a
deadlock in the management of the
business.
(g) INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS FOR OTHER
PURPOSE OTHER THAN PRIMARY PURPOSE
Q: What are the requirements?
A:
1. Approval by the majority vote of the
BOD or BOT
2. Ratification by stockholders
representing at least 2/3 of the
outstanding capital stock or by at least
2/3 of the members in case of non‐
stock corporation
3. Ratification must be made at a meeting
duly called for the purposes, and
4. Prior written notice of the proposed
investment and the time and place of
the meeting shall be made addressed to
each stockholder or member by mail or
by personal service.
Note: Investment of a corporation in a business
which is in line with its primary purpose requires
only the approval of the board.
Any dissenting stockholder shall have appraisal right.
(f) POWER TO DECLARE DIVIDENDS OUT OF
UNRESTRICTED RETAINED EARNINGS (URE)
Q: What are the requirements?
A:
1. Existence of unrestricted retained
earnings
2. Resolution of the board
3. In case of stock dividend, resolution of
the board with the concurrence of votes
representing 2/3 of outstanding capital.
Q: What are unrestricted retained earnings?
A: These are retained earnings which have not
been reserved or set aside by the board of
directors for some corporate purpose.
Q: Who are entitled to receive dividends?
A: The stockholders of record date in so far as the
corporation is concerned; if there is no record
date, the stockholders at the time of declaration
of dividends (not at the time of payment).
Note: In case of transfer, dividends declared before
the transfer of shares belong to the transferor and
those declared after the transfer belongs to the
transferee.
Q: Who are entitled to receive dividends in case
of mortgaged or pledged shares?
A:
GR: The mortgagor or the pledgor has the
right to receive the dividends.
XPN: When the mortage or pledge is
recorded in the books of the corporation, in
such a case then the mortgagee or pledgee is
entitled to receive the dividends.
Q: What are the forms of dividends?
A:
1. Cash
Note: Cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus cost and
expenses.
2. Stock
Note: Stock dividends are withheld from the
delinquent stockholder until his unpaid
subscription is fully paid.
3. Property
Note: Stockholders are entitled to dividends
PRO‐RATA based on the total number of
shares and not on the amount paid on
shares.
Page 132
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM:
ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN;
ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO,
ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA,
RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES
132
Q: When may corporation declare dividends?
A:
GR: Even if there are existing profits, BOD has
discretion to determine whether dividends
are to be declared.
XPN: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
their paid‐in capital stock.
XPN to XPN:
1. Definite corporate expansion projects
approved by the board of directors;
2. Corporation is prohibited under any
loan agreement with any financial
institution or creditor from declaring
dividends without its/his consent and
such consent has not yet been secured;
3. The retention is necessary under special
circumstances obtaining in the
corporation, such as when there is a
need for special reserve for probable
contingencies.
Q: What if there is a wrongful or illegal
declaration of dividends?
A: The Board of Directors is liable. The
stockholders should return the dividends to the
corporation (solutio indebiti).
Q: What are the sources of dividends?
A:
GR: Dividends can only be declared out of
actual and bona fide unrestricted retained
earnings.
XPN: Dividends can be declared out of capital
in the following instances:
1. Dividends from investments wasting
assets corporation;
2. Liquidating dividends
Q: What are the sources of retained earnings? Is
it available for dividends?
A:
SOURCES OF RETAINED
EARNINGS
AVAILABILITY FOR
DIVIDENDS
Paid in surplus – It is the
difference between the
par value and the issued
value or selling price of
the shares
It cannot be declared
as cash dividend but
can be declared only as
stock dividends
Revaluation surplus –
Increase in the value of a
fixed asset as a result of
its appreciation. They are
by nature subject to
fluctuations.
Cannot be declared as
dividends because
there is no actual gain
(gain in paper only).
Reduction surplus – the
surplus arises from the
reduction of the par value
of the issued shares of
stocks.
It cannot be declared
as cash dividend but
can be declared only as
stock dividends
Gain from Sale of Real
Property
Available as dividends
Treasury Shares
Cannot be declared as
stock or cash dividends
but it may be declared
as property dividend
Operational Income
Income
Available as dividends
Q: Distinguish cash and stock dividends.
A:
CASH DIVIDENDS STOCK DIVIDENDS
Part of general fund Part of capital
Results in cash outlay No cash outlay
Not subject to levy by
corporate creditors
Once issued, can be levied
by corporate creditors
because they’re part of
corporate capital
Declared only by the
board of directors at
its discretion
(majority of the
quorum only, not
majority of all the
board)
Declared by the board
with the concurrence of
the stockholders
representing at least 2/3
of the outstanding capital
stock at a regular/special
meeting
Does not increase the
corporate capital
Corporate capital is
increased
Its declaration creates
a debt from the
corporation to each of
its stockholders
No debt is created by its
declaration
If received by
individual: subject to
tax;
If received by
corporation: not
subject to tax
Not subject to tax either
received by individual or a
corporation
Cannot be revoked
after announcement
Can be revoked despite
announcement but before
issuance
Applied to the unpaid
balance of delinquent
shares
Can be withheld until
payment of unpaid
balance of delinquent
shares
Note: For the purposes of this distinction, property
dividends are considered as cash dividends.
Page 261
INDEX
261
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II
VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA
VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE
VICE CHAIRS FOR LAY‐OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
Non‐competing goods 220
Non‐prejudicial disclosure 205
Parallel importer 211
Patent 204
Patentable Inventions 205
Person of ordinary skill 206
Plagiarism 235
Presumption of authorship 226
Prior art 205
Prior user 210
Priority date 208
Published works 234
Regional exhaustion 211
Related goods principle 218
Reverse reciprocity of foreign law 210
Substantial reproduction 235
Technology transfer arrangement 204
Test of non‐obviousness 206
Totality or holistic test 218
Trademark 215
Trademark infringement 219
Tradename 222
Undisclosed information 204
Unfair competition 221
Unity of invention 208
Utility model 206
Voluntary licensing 213
L. SPECIAL LAWS
After‐acquired properties 236
After‐incurred obligations 236
Covered institutions 243
Domestic market enterprise 247
Export Enterprise 247
Foreign Investment Negative List 248
Money Laundering 244
Non‐Philippine nationals 247
Once a week for three consecutive weeks 240
Philippine nationals 247
Recto Law 237
Suspicious Transactions 243
Page 262
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM:
ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN;
ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO,
ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA,
RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES
262
BIBLIOGRAPHY
Amador, Vicente. Intellectual Property Fundamentals, Quezon City: C & E Pub., 2007.
Aquino, Timoteo. Philippine Corporate Law Compendium. Manila: Rex Bookstore, Inc., 2006.
Correa, Carlos . “Internationalization of the Patent System and New Technologies”.
De Leon, Hector S. Insurance Code Annotated. Manila: Rex Book Store, 2006.
De Leon & De Leon, Jr. The Corporation Code of the Philippines. Manila: Rex Bookstore Inc., 2006.
Divina, Nilo T., Handbook in Philippine Commercial Laws. Quezon City: CIBI Information, Inc., 2010.
Diaz, Noli C., Transportation Laws: Notes and Cases. Manila: Rex Book Store, Inc., 2001.
International Law Journal , Vol. 20. No.3 , 2002.
Insurance Memorandum Circular No. 4‐2006. Issued June 26, 2006.
Perez, Hernando B. The Insurance Code and Insolvency law: with comments and annotations. Manila: Rex
Bookstore Inc., 2006.
Perez, Hernando B. Quizzer and Reviewer on Corporation Code, The Securities Regulation Code and Related
Laws. Manila: Rex Bookstore Inc., 2000.
Pineda, Ernesto L. Credit Transaction and Quasi‐contracts. Quezon City: Central Book Supply. 2006.
Salao, Ernesto C. Essentials of Intellectual Property Law: a Guidebook on Republic Act No. 8293 and Related
Laws, Manila: Rex Book Store, 2008.
Sundiang and Aquino. Commercial Law Reviewer. Manila: Rex Bookstore, Inc., 2009.
Sundiang and Aquino. Reviewer in Commercial Law. Manila: Rex Bookstore, Inc., 2006.
SEC Memorandum Circular no. 6 Series of 2009
Villanueva, Cesar L. Commercial Law Reviewer. Manila: Rex Book Store, 1994.
Villanueva, Cesar L. Commercial Law Reviewer. Manila: Rex Book Store, 2001.
Villanueva, Cesar L. Commercial Law Reviewer. Manila: Rex Book Store, 2009.
http://www.chanrobles.com
http://www.lawphil.net
http://www.sc.judiciary.gov.ph
LETTERS OF CREDIT
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II
VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA
VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE
VICE CHAIRS FOR LAY‐OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
1U N I V E R S I T Y O F S A N T O T O M A S F a c u l t a d d e D e r e c h o C i v i l
LETTERS OF CREDIT
I. DEFINITION/CONCEPT
Q: What is Letter of Credit (LC)?
A: It is any arrangement, however named or
described, whereby a bank (issuing bank), acting
at the request and on the instructions of a
customer (applicant) or on its own behalf, binds
itself to:
1. Pay to the order of, or accept and pay
drafts drawn by a third party
(Beneficiary), or
2. Authorize another bank to pay or to
accept and pay such drafts, or
3. Authorizes another bank to negotiate,
against stipulated document(s),
Provided, the terms and conditions of the credit
are complied with. (Art. 2, Uniform Customs &
Practice for Documentary Credits.)
Note: They are in effect absolute undertakings to
pay the money advanced or for the amount for
which the credit is given on the faith of the
instrument.
Q: What is the duration of LC?
A:
1. Upon the period fixed by the parties; or
2. If none is fixed:
a. 6 months from its date if used in
the Philippines;
b. 12 months if used abroad (Art
572, ibid).
Q: What are the kinds of LC?
A:
COMMERCIAL LETTERS
OF CREDIT
STANDBY LETTERS OF
CREDIT
Involve contracts of sale.
Involve non‐sale
transactions.
Payable upon
presentation by the
seller‐beneficiary of
documents that show he
has performed his
contract.
Payable upon
certification by the
beneficiary of the
applicant’s NON‐
performance of the
agreement. (Transfield v.
Luzon Hydro Corp., G.R.
No. 146717, Nov. 22,
2004)
Q: Is irrevocable letter of credit and confirmed
letter of credit synonymous?
A: An irrevocable letter of credit is not
synonymous with a confirmed letter of credit. In
an irrevocable letter of credit, the issuing bank
may not, without the consent of the beneficiary
and the applicant, revoke its undertaking under
the letter, whereas, in a confirmed letter of
credit, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake
the issuing bank’s obligation as its own according
to the terms and condition of the credit.
(Prudential Bank and Trust Company v. IAC, G.R.
No. 74886, Dec. 8, 1992)
Q: Can a court order the release to the applicant
the proceeds of an irrevocable letter of credit
without the consent of the beneficiary?
A: No, such order violates the irrevocable nature
of the letter of credit. The terms of an irrevocable
letter of credit cannot be changed without the
consent of the parties, particularly the beneficiary
thereof. (Phil. Virginia Tobacco Administration v.
De Los Angeles, G.R. No. L‐27829, Aug. 19, 1988)
II. GOVERNING LAW
Q: What is the law governing letter of credit
(LC)?
A: It is the Uniform Customs and Practice (UCP)
for documentary Credits for International
Chamber of Commerce governs the Letters of
credit (Metropolitan Waterworks vs. Daway, G.R.
No. 160723, July 21, 2004).
Articles 567 to 572 of the Code of Commerce on
Letters of Credit are obsolete. However, in the
absence of any provision in the Code of
Commerce, commercial transaction shall be
governed by the usages and customs generally
observed. (Sec. 2, Code of Commerce)
III. NATURE OF LETTER OF CREDIT
Q: What is the nature and purpose of LC?
A: To ensure certainty of payment. The seller is
assured of payment because the bank intervenes
and makes the commitment to pay. This
addresses problems arising from seller’s refusal to
part with his goods before being paid and the
buyer’s refusal to part with his money before
acquiring the goods, thus, facilitating commercial
transactions.
Page 2
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM:
ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN;
ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO,
ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA,
RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES
2
Q: What are the essential conditions of LC?
A:
1. Issued in favor of a definite person and
not to order.
Note: The Uniform Commercial Practice for
Documentary Credits allows letters of credit to
be payable to order
2. Limited to a fixed or specified amount,
or to one or more amounts, but with a
maximum stated limit. (Article 568, Ibid)
Note: If any of these essential conditions is not
present, the instrument is merely considered as
a letter of recommendation.
Q: In case the buyer was not able to pay its
obligation under the letter of credit, can the
bank take possession over the goods covered by
the said letter of credit?
A: No. The opening of a Letter of Credit did not
vest ownership of the goods in the bank in the
absence of a trust receipt agreement. A letter of
credit is a mere financial device developed by
merchants as a convenient and relatively safe
mode of dealing with the sales of goods to satisfy
the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of
the goods before paying. (Transfield Philippines,
Inc. v. Luzon Hydro Corporation, G.R. No. 146717,
Nov. 22, 2004)
IV. PARTIES TO A LETTER OF CREDIT
Q: Who are the parties to a Letter of Credit
transaction?
A:
1. Applicant/Buyer/Importer – procures
the letter of credit, purchases the goods
and obliges himself to reimburse the
issuing bank upon receipt of the
documents title.
2. Issuing Bank – One which, whether a
paying bank or not, Issues the letter of
credit and undertakes to pay the seller
upon receipt of the draft and proper
documents of title from the seller and
to surrender them to the buyer upon
reimbursement.
3. Beneficiary/Seller/Exporter – In whose
favor the instrument is executed. One
who delivers the documents of title and
draft to the issuing bank to recover
payment.
The number of parties may be increased.
Modern letters of credit usually involve
bank‐to‐bank transactions. The following
additional parties may be:
1. Advising/notifying bank – The
correspondent bank (agent) of the
issuing bank through which it advises
the beneficiary of the LC.
2. Confirming bank – bank which, upon
the request of the beneficiary, confirms
the LC issued.
3. Paying bank – bank on which the drafts
are to be drawn, which may be the
issuing bank or another bank not in the
city of the beneficiary.
4. Negotiating bank – bank in the city of
the beneficiary which buys or discounts
the drafts contemplated by the LC, if
such draft is to be drawn on the
opening bank not in the city of the
beneficiary.
Q: What are the stages of LC?
A:
1. Contract of sale between the buyer and
seller
2. Application for LC by the buyer with the
bank
3. Issuance of LC by the bank
4. Shipping of goods by the seller
5. Execution of draft and tender of
documents by the seller
6. Redemption of draft (payment) and
obtaining of documents by the issuing
bank
7. Reimbursement to the bank and
obtaining of documents by the buyer
A. RIGHTS AND OBLIGATIONS OF PARTIES
Q: Explain the three (3) distinct but intertwined
contract relationships that are indispensable in a
letter of credit transaction.
A:
1. Between the applicant/buyer/importer
and the beneficiary/seller/exporter – The
applicant/buyer/importer is the one who
procures the letter of credit while the
beneficiary/seller/exporter is the one
Page 131
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II
VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA
VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE
VICE CHAIRS FOR LAY‐OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
131
Q: What are the instances where corporation
may acquire its own shares?
A:
1. To eliminate fractional shares out of
stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising
out of unpaid subscription, in a
delinquency sale and to purchase
delinquent shares sold during said sale;
3. To pay dissenting or withdrawing
stockholders (in the exercise of the
stockholder’s appraisal right);
4. To acquire treasury shares;
5. Redeemable shares regardless of
existence of retained earnings;
6. To effect a decrease of capital stock;
7. In close corporations, when there is a
deadlock in the management of the
business.
(g) INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS FOR OTHER
PURPOSE OTHER THAN PRIMARY PURPOSE
Q: What are the requirements?
A:
1. Approval by the majority vote of the
BOD or BOT
2. Ratification by stockholders
representing at least 2/3 of the
outstanding capital stock or by at least
2/3 of the members in case of non‐
stock corporation
3. Ratification must be made at a meeting
duly called for the purposes, and
4. Prior written notice of the proposed
investment and the time and place of
the meeting shall be made addressed to
each stockholder or member by mail or
by personal service.
Note: Investment of a corporation in a business
which is in line with its primary purpose requires
only the approval of the board.
Any dissenting stockholder shall have appraisal right.
(f) POWER TO DECLARE DIVIDENDS OUT OF
UNRESTRICTED RETAINED EARNINGS (URE)
Q: What are the requirements?
A:
1. Existence of unrestricted retained
earnings
2. Resolution of the board
3. In case of stock dividend, resolution of
the board with the concurrence of votes
representing 2/3 of outstanding capital.
Q: What are unrestricted retained earnings?
A: These are retained earnings which have not
been reserved or set aside by the board of
directors for some corporate purpose.
Q: Who are entitled to receive dividends?
A: The stockholders of record date in so far as the
corporation is concerned; if there is no record
date, the stockholders at the time of declaration
of dividends (not at the time of payment).
Note: In case of transfer, dividends declared before
the transfer of shares belong to the transferor and
those declared after the transfer belongs to the
transferee.
Q: Who are entitled to receive dividends in case
of mortgaged or pledged shares?
A:
GR: The mortgagor or the pledgor has the
right to receive the dividends.
XPN: When the mortage or pledge is
recorded in the books of the corporation, in
such a case then the mortgagee or pledgee is
entitled to receive the dividends.
Q: What are the forms of dividends?
A:
1. Cash
Note: Cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus cost and
expenses.
2. Stock
Note: Stock dividends are withheld from the
delinquent stockholder until his unpaid
subscription is fully paid.
3. Property
Note: Stockholders are entitled to dividends
PRO‐RATA based on the total number of
shares and not on the amount paid on
shares.
Page 132
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM:
ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN;
ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO,
ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA,
RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES
132
Q: When may corporation declare dividends?
A:
GR: Even if there are existing profits, BOD has
discretion to determine whether dividends
are to be declared.
XPN: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
their paid‐in capital stock.
XPN to XPN:
1. Definite corporate expansion projects
approved by the board of directors;
2. Corporation is prohibited under any
loan agreement with any financial
institution or creditor from declaring
dividends without its/his consent and
such consent has not yet been secured;
3. The retention is necessary under special
circumstances obtaining in the
corporation, such as when there is a
need for special reserve for probable
contingencies.
Q: What if there is a wrongful or illegal
declaration of dividends?
A: The Board of Directors is liable. The
stockholders should return the dividends to the
corporation (solutio indebiti).
Q: What are the sources of dividends?
A:
GR: Dividends can only be declared out of
actual and bona fide unrestricted retained
earnings.
XPN: Dividends can be declared out of capital
in the following instances:
1. Dividends from investments wasting
assets corporation;
2. Liquidating dividends
Q: What are the sources of retained earnings? Is
it available for dividends?
A:
SOURCES OF RETAINED
EARNINGS
AVAILABILITY FOR
DIVIDENDS
Paid in surplus – It is the
difference between the
par value and the issued
value or selling price of
the shares
It cannot be declared
as cash dividend but
can be declared only as
stock dividends
Revaluation surplus –
Increase in the value of a
fixed asset as a result of
its appreciation. They are
by nature subject to
fluctuations.
Cannot be declared as
dividends because
there is no actual gain
(gain in paper only).
Reduction surplus – the
surplus arises from the
reduction of the par value
of the issued shares of
stocks.
It cannot be declared
as cash dividend but
can be declared only as
stock dividends
Gain from Sale of Real
Property
Available as dividends
Treasury Shares
Cannot be declared as
stock or cash dividends
but it may be declared
as property dividend
Operational Income
Income
Available as dividends
Q: Distinguish cash and stock dividends.
A:
CASH DIVIDENDS STOCK DIVIDENDS
Part of general fund Part of capital
Results in cash outlay No cash outlay
Not subject to levy by
corporate creditors
Once issued, can be levied
by corporate creditors
because they’re part of
corporate capital
Declared only by the
board of directors at
its discretion
(majority of the
quorum only, not
majority of all the
board)
Declared by the board
with the concurrence of
the stockholders
representing at least 2/3
of the outstanding capital
stock at a regular/special
meeting
Does not increase the
corporate capital
Corporate capital is
increased
Its declaration creates
a debt from the
corporation to each of
its stockholders
No debt is created by its
declaration
If received by
individual: subject to
tax;
If received by
corporation: not
subject to tax
Not subject to tax either
received by individual or a
corporation
Cannot be revoked
after announcement
Can be revoked despite
announcement but before
issuance
Applied to the unpaid
balance of delinquent
shares
Can be withheld until
payment of unpaid
balance of delinquent
shares
Note: For the purposes of this distinction, property
dividends are considered as cash dividends.
Page 261
INDEX
261
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II
VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA
VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE
VICE CHAIRS FOR LAY‐OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
Non‐competing goods 220
Non‐prejudicial disclosure 205
Parallel importer 211
Patent 204
Patentable Inventions 205
Person of ordinary skill 206
Plagiarism 235
Presumption of authorship 226
Prior art 205
Prior user 210
Priority date 208
Published works 234
Regional exhaustion 211
Related goods principle 218
Reverse reciprocity of foreign law 210
Substantial reproduction 235
Technology transfer arrangement 204
Test of non‐obviousness 206
Totality or holistic test 218
Trademark 215
Trademark infringement 219
Tradename 222
Undisclosed information 204
Unfair competition 221
Unity of invention 208
Utility model 206
Voluntary licensing 213
L. SPECIAL LAWS
After‐acquired properties 236
After‐incurred obligations 236
Covered institutions 243
Domestic market enterprise 247
Export Enterprise 247
Foreign Investment Negative List 248
Money Laundering 244
Non‐Philippine nationals 247
Once a week for three consecutive weeks 240
Philippine nationals 247
Recto Law 237
Suspicious Transactions 243
Page 262
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM:
ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN;
ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO,
ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA,
RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES
262
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