On November 23, 2017, Yas Ysmael (Ysmael) loaned the amount of PhP 5 million to Yarn & Thread Corporation (YTC), through its President, Ylmas Yektas (Yektas), which loan was evidenced by a Promissory Note (PN), which reads as follows:
Date: _______
Within one year from date hereof, I promise to pay to the order of YAS YSMAEL, the sum of PhP 5 million with interest at 120% per annum.
YARN & THREAD Corporation
By:
(Sgd.)
Ylmas Yektas
Yektas was the controlling stockholder of YTC at the time the PN was issued. As security for the payment of the PN, Yektas issued and delivered to Ysmael a postdated personal check covering the face value of the PN drawn from his account with Yellow Bell Bank and Trust Company. The proceeds of the loan under the PN were used by YTC as working capital.
A year later, Ysmael inserted the date of “November 23, 2017” on the date section of the PN, and made a formal demand upon YTC, through Yektas, to pay the note, but which was refused on the ground that Yektas was no longer the President and controlling shareholder of YTC. By this time, all the shares of YTC had already been sold to a new group of investors. Ysmael deposited the personal check issued by Yektas which was dishonored. He then filed a collection suit against YTC and Yektas including the accrued interest.
The defendants raised the following defenses in the collection suit. Rule on the merits of each defense. (2% each)
(a) A PN issued with a blank date is one that is not payable on demand or on a fixed or determinable future time, and therefore the insertion of the date constituted material alteration that nullified it, so that no cause of action arose.
(b) Yektas cannot be made liable on the PN since he signed in his capacity as President of YTC, which fact was known to Ysmael although not indicated on the PN.
(c) Yektas signed the PN merely as an accommodation to YTC. As he received no consideration for the PN, it is void for lack of consideration.
(d) YTC, now owned by new owners, cannot be held liable on the PN since it was entered into by its former owner and President, which act the new Board of Directors did not ratify.
(e) The PN .is void for being in violation of the Usury Law seeking interest at an unconscionable rate of 120% p.a.
Suggested answer only. Not an official answer and not legal advice.
(a) Invalid. (b) Meritorious for Yektas on note. (c) Invalid. (d) Invalid. (e) Invalid as to principal.
Under Sections 14, 20, and 29 of NIL, inserting the true date is valid, representative signatures exempt agents from note liability, and accommodation parties are liable to holders for value. Ownership changes do not extinguish corporate debts. Unconscionable interest rates are reduced to legal interest without voiding principal debts.
Here, inserting the true date is valid. Yektas is not personally liable on the note signed for YTC, but YTC remains bound despite new owners. Lack of consideration does not discharge accommodation liability. The 120% interest is reduced to legal rate, but the ₱5M principal remains valid.
Therefore, defenses (a), (c), and (d) fail, (b) exempts Yektas on the note, and (e) reduces interest to legal rate.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
Under Section 13 of the Negotiable Instruments Law, what is the effect of inserting the true date in an undated promissory note?
Section 13 authorizes the holder to insert the true date in an undated instrument payable at a fixed period after date.
Under Section 20 of the Negotiable Instruments Law, when is an officer who signs a promissory note on behalf of a corporation exempt from personal liability?
Section 20 exempts a representative from personal liability if he signs for a principal with proper authority.
Does a change in corporate ownership or management extinguish valid debts previously contracted by the corporation?
Corporate obligations persist regardless of shareholding changes because of the corporation's separate personality.
What is the legal effect of stipulating an unconscionable interest rate of one hundred twenty percent per annum in a promissory note?
Excessive interest rates are void for being contrary to morals, but the principal obligation remains binding.
Which statute governs the negotiability of instruments, insertion of dates, and representative signatures in the Philippines?
Act Number 2031 is the Negotiable Instruments Law governing negotiable promissory notes and checks.
Learn more about these topics
1. Date Insertion Authority
Under Section 13 of the Negotiable Instruments Law (Act Number 2031), where an instrument expressed to be payable at a fixed period after date is issued undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of the true date by the holder does not constitute a material alteration and does not avoid the instrument. Instead, it completes the negotiable instrument in accordance with the implied authority granted by law to the holder.
2. Corporate Juridical Personality
Under the Revised Corporation Code of the Philippines (Republic Act Number 11232), a corporation possesses a juridical personality separate and distinct from that of its stockholders, officers, and directors. Contracts legally entered into by authorized corporate officers bind the corporation itself, and such obligations remain fully valid and enforceable against the corporate entity regardless of subsequent changes in ownership, management, or shareholding structure. The acquisition of shares by new investors does not discharge pre-existing corporate liabilities.
3. Unconscionable Interest Rates
Under Article 1306 of the Civil Code of the Philippines (Republic Act Number 386), contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Stipulated interest rates that are iniquitous, exorbitant, or unconscionable—such as one hundred twenty percent per annum—are void for being contrary to morals. However, the nullity of the excessive interest clause does not invalidate the principal loan contract.