BUSINESS ORGANIZATION 2

NILTantay
III-Manresa
Case Digests
TITLE I
GENERAL PROVISIONS
Definitions and Classifications

(3) the control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of these elements prevents piercing the corporate veil. The
evidence on record fails to show that these elements are present,
especially given the fact that plaintiffs complaint had pleaded that CLC
is a corporation duly organized and existing under the laws of the
Philippines.

Section 1
Title of the Code. - This Code shall be known as "The Corporation
Code of the Philippines".

ABS-CBN Vs. CA (310 SCRA 572)

Section 2
Corporation defined. A corporation is an artificial being created by
operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its
existence.

ABS-CBN and Viva executed a Film Exhibition Agreement whereby

Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
Sometime in December 1991, in accordance with paragraph 2.4 of said
agreement stating that:

A. Artificial Being
Child Learning Center Vs. Tagorio (476 SCRA 236)
Facts:
Timothy was a Grade IV student at Marymount School, an academic
institution operated and maintained by Child Learning Center, Inc.
(CLC). In the afternoon of March 5, 1991, between 1 and 2 p.m.,
Timothy entered the boys comfort room at the third floor of the
Marymount building to answer the call of nature. He, however, found
himself locked inside and unable to get out. Timothy started to panic
and so he banged and kicked the door and yelled several times for
help. When no help arrived he decided to open the window to call for
help. In the process of opening the window, Timothy went right
through and fell down three stories. Timothy was hospitalized and
given medical treatment for serious multiple physical injuries.
An action under Article 2176 of the Civil Code was filed by respondents
against the CLC, the members of its Board of Directors, namely
Spouses Edgardo and Sylvia Limon, Alfonso Cruz, Carmelo Narciso
and Luningning Salvador, and the Administrative Officer of
Marymount School, Ricardo Pilao.
The court a quo found in favor of respondents and ordered petitioners
CLC and Spouses Limon to pay respondents, jointly and severally,
P200,253.12 as actual and compensatory damages, P200,000 as moral
damages, P50,000 as exemplary damages, P100,000 as attorneys fees
and the costs of the suit.
The trial court disregarded the corporate fiction of CLC and held the
Spouses Limon personally liable because they were the ones who
actually managed the affairs of the CLC.
Issue:
W/N there is basis for piercing the veil of corporate entity in
resolving the issue of alleged personal liability of petitioners Edgardo
L. Limon and Sylvia S. Limon
Ruling:
There was no basis to pierce CLCs separate corporate personality. To
disregard the corporate existence, the plaintiff must prove:
(1) Control by the individual owners, not mere majority or complete
stock ownership, resulting in complete domination not only of finances
but of policy and business practice in respect to a transaction so that
the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
(2) such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and unjust act in contravention of the
plaintiffs legal right; and

Facts:

2.4 ABS-CBN shall have the right of first refusal to

the next twenty-four (24) Viva films for TV telecast
under such terms as may be agreed upon by the
parties hereto, provided, however, that such right
shall be exercised by ABS-CBN from the actual
offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its
vice-president Charo Santos-Concio, a list of three (3) film packages
(36 title) from which ABS-CBN may exercise its right of first refusal
under the afore-said agreement. ABS-CBN, however through Mrs.
Concio, "can tick off only ten (10) titles" (from the list) "we can
purchase" and therefore did not accept said list. The titles ticked off by
Mrs. Concio are not the subject of the case at bar except the film
''Maging Sino Ka Man."
Del Rosario approached ABS-CBN's Ms. Concio, with a list consisting
of 52 original movie titles including the 14 titles subject of the present
case, as well as 104 re-runs from which ABS-CBN may choose another
52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing
rights over this package of 52 originals and 52 re-runs for
P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots.
Also, Del Rosario and ABS-CBN general manager, Eugenio Lopez III,
met to discuss the package proposal of Viva. What transpired in that
lunch meeting is the subject of conflicting versions. Mr. Lopez testified
that he and Mr. Del Rosario allegedly agreed that ABS-CRN was
granted exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this agreement as to
the price and number of films in a "napkin'' and signed it and gave it to
Mr. Del Rosario. On the other hand, Del Rosario denied having made
any agreement with Lopez regarding the 14 Viva films; denied the
existence of a napkin in which Lopez wrote something; and insisted
that what he and Lopez discussed at the lunch meeting was Viva's film
package offer of 104 films (52 originals and 52 re-runs) for a total price
of P60 million. Mr. Lopez promising [sic]to make a counter proposal
which came in the form of a proposal contract.
Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for
Finance discussed the terms and conditions of Viva's offer to sell the
104 films, after the rejection of the same package by ABS-CBN.
After the rejection of ABS-CBN and following several negotiations and
meetings Del Rosario and Viva's President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement granting
RBS the exclusive right to air 104 Viva-produced and/or acquired films
including the fourteen (14) films subject of the present case.
Thus, ABS-CBN filed a complaint for specific performance with a
prayer for a writ of preliminary injunction and/or temporary
restraining order against Republic Broadcasting Corporation, Viva
Production, and Vicente Del Rosario.

RTC issued a temporary restraining order enjoining RBS from

proceeding with the airing, broadcasting, and televising of the fourteen
VIVA films subject of the controversy, starting with the film Maging
Sino Ka Man, which was scheduled to be shown on private
respondents RBS' channel 7 at seven o'clock in the evening of said date.
Issue:
W/N RBS as a corporation is entitled to moral damages
Ruling:
Article 2217 of the NCC defines what are included in moral damages,
while Article 2219 enumerates the cases where they may be recovered,
Article 2220 provides that moral damages may be recovered in
breaches of contract where the defendant acted fraudulently or in bad
faith. RBS's claim for moral damages could possibly fall only under
item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to compensate
the claimant for actual injury suffered and not to impose a penalty on
the wrongdoer. The award is not meant to enrich the complainant at
the expense of the defendant, but to enable the injured party to obtain
means, diversion, or amusements that will serve to obviate then moral
suffering he has undergone. It is aimed at the restoration, within the
limits of the possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted. Trial courts must then guard
against the award of exorbitant damages; they should exercise
balanced restrained and measured objectivity to avoid suspicion that it
was due to passion, prejudice, or corruption on the part of the trial
court.
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence
only in legal contemplation, it has no feelings, no emotions, no senses,
It cannot, therefore, experience physical suffering and mental anguish,
which call be experienced only by one having a nervous system. The
statement in People v. Manero and Mambulao Lumber Co. v. PNB that
a corporation may recover moral damages if it "has a good reputation
that is debased, resulting in social humiliation" is an obiter dictum. On
this score alone the award for damages must be set aside, since RBS is
a corporation.

MERALCO Vs. TEAM Electronics (540 SCRA 62)

Facts:
T.E.A.M. Electronics Corporation (TEC) was formerly known as NS
Electronics (Philippines), Inc. before 1982 and National SemiConductors (Phils.) before 1988. TEC is wholly owned by Technology
Electronics Assembly and Management Pacific Corporation (TPC). On
the other hand, Manila Electric Company (Meralco) is a utility
company supplying electricity in the Metro Manila area.
Meralco and NS Electronics (Philippines), Inc., the predecessor-ininterest of TEC, were parties to two separate contracts denominated as
Agreements for the Sale of Electric Energy. Under the aforesaid
agreements, Meralco undertook to supply TECs building known as
Dyna Craft International Manila (DCIM). Another contract was
entered into for the supply of electric power to TECs NS Building.
In September 1986, TEC, under its former name National SemiConductors (Phils.) entered into a Contract of Lease with Ultra
Electronics Industries, Inc. (Ultra) for the use of the formers DCIM
building for a period of five years or until September 1991. Ultra was,
however, ejected from the premises on February 12, 1988 by virtue of a
court order, for repeated violation of the terms and conditions of the
lease contract.

On September 28, 1987, a team of Meralcos inspectors conducted a

surprise inspection of the electric meters installed at the DCIM
building, witnessed by Ultras representative, Mr. Willie Abangan. The
two meters were found to be allegedly tampered with and did not
register the actual power consumption in the building. The results of
the inspection were reflected in the Service Inspection Reports
prepared by the team.
Meralco informed TEC of the results of the inspection and demanded
from the latter the payment of P7,040,401.01 representing its
unregistered consumption from February 10, 1986 until September 28,
1987, as a result of the alleged tampering of the meters. TEC received
the letters on January 7, 1988. Since Ultra was in possession of the
subject building during the covered period, TECs Managing Director,
Mr. Bobby Tan, referred the demand letter to Ultra which, in turn,
informed TEC that its Executive Vice-President had met with
petitioners representative. Ultra further intimated that assuming that
there was tampering of the meters, petitioners assessment was
excessive. For failure of TEC to pay the differential billing, petitioner
disconnected the electricity supply to the DCIM building on April 29,
1988.
TEC demanded from petitioner the reconnection of electrical service,
claiming that it had nothing to do with the alleged tampering but the
latter refused to heed the demand. Hence, TEC filed a complaint on
May 27, 1988 before the Energy Regulatory Board (ERB) praying that
electric power be restored to the DCIM building. The ERB immediately
ordered the reconnection of the service but petitioner complied with it
only on October 12, 1988 after TEC paid P1,000,000.00, under protest.
The complaint before the ERB was later withdrawn as the parties
deemed it best to have the issues threshed out in the regular courts.
Prior to the reconnection, or on June 7, 1988, petitioner conducted a
scheduled inspection of the questioned meters and found them to have
been tampered anew.
Meanwhile, on April 25, 1988, petitioner conducted another
inspection, this time, in TECs NS Building. The inspection allegedly
revealed that the electric meters were not registering the correct power
consumption. Petitioner, thus, sent a letter dated June 18, 1988
demanding payment of P280,813.72 representing the differential
billing. TEC denied petitioners allegations and claim in a letter dated
June 29, 1988. Petitioner, thus, sent TEC another letter demanding
payment of the aforesaid amount, with a warning that the electric
service would be disconnected in case of continued refusal to pay the
differential billing. To avert the impending disconnection of electrical
service, TEC paid the above amount, under protest.
On January 13, 1989, TEC and TPC filed a complaint for damages
against petitioner and Ultra before the Regional Trial Court (RTC) of
Pasig. The trial court rendered a Decision in favor of TEC and TPC,
and against Ultra and Meralco declaring the latter jointly and severally
liable.
Issue:
W/N a corporation is entitled to moral damages
Ruling:
TECs claim was premised allegedly on the damage to its goodwill and
reputation.
As a rule, a corporation is not entitled to moral damages because, not
being a natural person, it cannot experience physical suffering or
sentiments like wounded feelings, serious anxiety, mental anguish and
moral shock. The only exception to this rule is when the corporation
has a reputation that is debased, resulting in its humiliation in the
business realm. But in such a case, it is imperative for the claimant to
present proof to justify the award. It is essential to prove the existence
of the factual basis of the damage and its causal relation to petitioners
acts. In the present case, the records are bereft of any evidence that the
name or reputation of TEC/TPC has been debased as a result of
petitioners acts.

Nisce Vs. Equitable Bank (516 SCRA 231)

Facts:
Sometime in 1984, Natividad opened an account in PCI Bank Paseo
de Roxas branch to cater her needs for easy access to foreign
exchange. Thereafter, Natividad deposited $20,500 as was issued a
passbook. Upon her request, the bank transferred $20,000 to PCI
Capital Asia Ltd. in Hong Kong via cable order.
PCI owns almost all of the shares of PCI Capital.

corporation; or when the corporation is used as a cloak or cover for

fraud or illegality; or to work injustice; or where necessary to achieve
equity or for the protection of the creditors. In those cases where valid
grounds exist for piercing the veil of corporate entity, the corporation
will be considered as a mere association of persons. The liability will
directly attach to them.
In applying the instrumentality or alter ego doctrine, the courts are
concerned with reality and not form, with how the corporation
operated and the individual defendants relationship to that operation.
Petitioners failed to adduce sufficient evidence to justify the piercing of
the veil of corporate entity and render respondent Bank liable for the
US$20,000.00 deposit of petitioner Natividad Nisce as debtor.

In 1994, Equitable and PCI bank merged.

In 1996, the spouses Nisce secured a P20,000,000 loan from the Bank.
To secure the payment of the loan, they mortgaged 2 real estate
properties located in Makati. Another loan was also covered by a real
estate mortgage. They were able to pay partial payments to the loan.
However, they defaulted in their payments thereafter. The spouses
offered their dollar account to setoff the indebtedness. However, the
bank made no response on the offer.
Equitable PCI bank filed a petition for extrajudicial foreclosure before
the Regional Trial Court (RTC). The spouses, on the other hand, filed a
complaint for Nullity of the Suretyship agreement, damages and legal
compensation, with a prayer for injunctive relief against the bank and
the Sheriff.

Manacop Vs. Equitable-PCI (468 SCRA 256)

Facts:
Lavine Loungewear Manufacturing, Inc. insured its buildings and
supplies against fire with Philippine Fire and Marine Insurance
Corporation, Rizal Surety and Insurance Company, Tabacalera
Insurance Company, First Lepanto-Taisho Insurance Corporation,
Equitable Insurance Corporation and Reliance Insurance Corporation.
Except for Policy issued by First Lepanto, all the insurance policies
provide that the loss, if any, shall be payable to Equitable Banking
Corporation-Greenhills Branch, as their interest may appear.

The RTC granted the injunctive relief. The Court of Appeals reversed
the trial courts decision. Hence this petition.

On August 1, 1998, a fire gutted Lavines buildings and their contents

thus claims were made against the policies.

The petitioners maintain that the $20,000 dollar deposit should be

setoff against their loan account with Equitable claiming that the bank
is their debtor insofar as their deposit is concerned.

Certain insurance companies released the proceeds directly to

Equitable Bank despite Chandrus request that payments be made first
to Lavine who shall thereafter pay Equitable Bank.

Issue:

In behalf of Lavine, a Petition for the Issuance of a Writ of Preliminary

Injunction with Prayer for Temporary Restraining Order was filed
against Philfire, Rizal Surety, TICO, First Lepanto and Equitable Bank.

W/N PCI Capital and Equitable Bank be treated as one entity so as to

permit compensation between Equitable and the spouses?
Ruling:
No, they cannot be treated as one entity. Therefore, there cannot be
compensation between them. Under the Article 1278, for compensation
to take place, the petitioners were burdened to establish, among others,
that each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other.
When Natividad Nisce deposited her US$20,500.00 with the PCIB,
PCIB became the debtor of petitioner.
However, when upon
petitioners request, the amount of US$20,000.00 was transferred to
PCI Capital (which forthwith issued Certificate of Deposit No. 01612),
PCI Capital, in turn, became the debtor of Natividad Nisce.
Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then,
PCI Capital [PCI Express Padala (HK) Ltd.] has an independent and
separate juridical personality from that of the respondent Bank, its
parent company; hence, any claim against the subsidiary is not a claim
against the parent company and vice versa.
The fact that a corporation owns all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated
as one entity. If used to perform legitimate functions, a subsidiarys
separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary shall be confined to those arising
in their respective business. A corporation has a separate personality
distinct from its stockholders and from other corporations to which it
may be conducted. This separate and distinct personality of a
corporation is a fiction created by law for convenience and to prevent
injustice.
The veil of separate corporate personality may be lifted when, inter
alia, the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation or where the corporation is so
organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another

The Trial Court rendered a decision ordering the defendant Bank to

refund the plaintiff the overpayment made to the Bank and the
defendant Insurance companies to pay plaintiff the unpaid insurance
proceeds, among others.
On April 3, 2002, the intervenors filed a Motion for Execution Pending
Appeal on the following grounds: (a) TICO was on the brink of
insolvency; (b) Lavine was in imminent danger of extinction; and (c)
any appeal from the trial courts judgment would be merely dilatory.
Judge Lavina granted the motion for execution pending appeal and
issued a writ of execution on May 20, 2002, which was implemented
the following day.
The Court of Appeals, however, voided the writ of execution pending
appeal.
Issue:
W/N the Court of Appeals committed an error in voiding the writ of
execution pending appeal.
Ruling:
No. The issuance of the execution pending appeal was not justified
under the circumstances of the case. The Court of Appeals correctly
reversed the order.
The general rule is that only judgments, which have become final and
executory, may be executed. Since the execution of a judgment pending
appeal is an exception to the general rule, the existence of good reason
is essential.
Petitioners assert that Lavines financial distress is sufficient reason to
order execution pending appeal. Citing Borja v. Court of Appeals, they
claim that execution pending appeal may be granted if the prevailing

party is already of advanced age and in danger of extinction.

Borja is not applicable to the case at bar because its factual milieu is
different. In Borja, the prevailing party was a natural person who, at
76 years of age, may no longer enjoy the fruit of the judgment before
he finally passes away. Lavine, on the other hand, is a juridical entity
whose existence cannot be likened to a natural person. Its precarious
financial condition is not by itself a compelling circumstance
warranting immediate execution and does not outweigh the longstanding general policy of enforcing only final and executory
judgments.

they were the only ones who became incorporators of FGT. They
transferred the assets of TVI to FGT.
Thus, the petitioners had acted in bad faith to defraud the bank since
they succeeded in hiding the chattels preventing the sheriff to foreclose
the mortgage. Therefore, they are the ones personally liable to the bank
for the payment of the loan and not TVI.
Petron Vs. NLRC (505 SCRA 596)
Facts:

Mendoza Vs. Banco Real (470 SCRA 68)

Facts:
Edgardo Yatoko and Manuel Mendoza are Preseident and General
Manager of Technical Video Inc., respectively. They were authorized by
the Board of Directors of TVI through a Resolution to apply for and
secure a loan from the Pasay City Banco Real Development Bank now
LBC Bank.
The bank extended a loan of P500,000.00 to TVI, and in turn
Mendoza, in his capacity as General Manager, executed a promissory
note and chattel mortgage over 195 units of Beta video machines and
their equipment and accessories belonging to TVI in favor of the bank.
Subsequently, TVI and two other video firms, Fox Video and Galactica
Video, organized a new corporation named FGT Video Network Inc.
and was registered with the SEC. Mendoza was the concurrent
President of FGT and Operating General Manager of TVI. Thus, the
office of TVI had to be transferred to the building of FGT for easier
monitoring of the distribution and marketing aspects of the business.
For TVIs failure to pay its loan upon maturity, the bank filed a petition
for Extra Judicial Foreclosure and Sale of Chattel Mortgage. However
the Sheriffs Report/Return shows that TVI is no longer doing business
at its given address; that its General Manager, Mendoza, is presently
employed with FGT; that Mr. Mendoza denied any knowledge of the
whereabouts of the mortgaged video machines.
Meanwhile, in another case, where FGT and Mendoza were defendants,
the RTC issued a search warrant. The agents of the NBI confiscated at
the offices of FGT 638 machines and equipment including the 195 Beta
machines mortgaged with the bank. The machines and equipment were
left in the custody of NBI until the petition for certiorari in that case
has been resolved with finality.
Thereafter the bank filed a complaint for collection of a sum of money
against TVI, FGT and petitioners. Petitioners specifically denied that
the loan is purely a corporate indebtedness.
Issue:
W/N Mendoza and Yatoko are personally liable for TVIs indebtedness
with the bank
Ruling:
Yes, they are personally liable.
The general rule is that obligations incurred by a corporation, acting
through its directors, officers or employees, are its sole liabilities.
However, the veil with which the law covers and isolates the
corporation from its directors, officers or employees will be lifted when
the corporation is used by any of them as a cloak or cover for fraud or
illegality or injustice.
In the case at bar, the fraud was committed by Mendoza and Yatoko to
the prejudice of the bank. They transferred the Beta video machines
from TVI to FGT without the consent of the bank. Also, upon inquiry of
the sheriff, Mendoza declined knowledge of the whereabouts of the
mortgaged video machines.
Further, the TVI is petitioners mere alter ego or business conduit.
They control the affairs of TVI. Among its stockholders or directors,

Petron Corporation, a corporation duly organized and existing under

the laws of the Philippines, is engaged in the refining, sale and
distribution of petroleum and other related products, while its copetitioner Peter C. Maligro was the former Visayas Operations
Assistant Manager of Petrons Visayas-Mindanao District Office at
Lahug, Cebu City.
Petron, through its Cebu District Office, hired Chito S. Mantos, an
Industrial Engineer, as a managerial, professional and technical
employee with initial designation as a Bulk Plant Engineering Trainee.
He attained regular employment status on November 15, 1990 and was
later on designated as a Bulk Plant Relief Supervisor, remaining as
such for the next five years while being assigned to the different plants
and offices of Petron within the Visayas area.
It was while assigned at Petrons Cebu District Office with Peter
Maligro as his immediate superior, when Mantos, thru a Notice of
Disciplinary Action was received by him that he was suspended for
30 days for violating company rules and regulations regarding Absence
Without Leave (AWOL), not having reported for work during the
period August 5 to 27, 1996.
Subsequently, in a notice Termination of Services bearing date
November 20, 1996 and received by him on November 25, 1996,
Mantos services were altogether terminated effective December 1,
1996, by reason of his continued absences from August 28, 1996
onwards, as well as for Insubordination/Discourtesy for making false
accusations against his superior.
Mantos filed with the National Labor Relations Commission, Regional
Arbitration Branch (NLRC-RAB), Cebu City, a complaint for illegal
dismissal and other monetary claims against Petron and/or Peter C.
Maligro.
For their part, Petron and Maligro averred that Mantos was dismissed
for just and valid causes.
The Labor Arbiter declared Mantos to have been constructively
dismissed but ruled that only Petron could be held liable to him for
separation pay in lieu of reinstatement and the cash equivalent of his
certificate of stocks, less his personal accountabilities.
The NLRC reversed the findings of the Labor Arbiter regarding
Mantos constructive dismissal as of November 1, 1996 and considered
him to have been illegally dismissed only on December 1, 1996. In the
same decision, the NLRC adjudged Maligro solidarily liable with
Petron.
Issue:
W/N Maligro is liable for the dismissal of Mantos
Ruling:
Settled is the rule in this jurisdiction that a corporation is invested by
law with a legal personality separate and distinct from those acting for
and in its behalf and, in general, from the people comprising it. Thus,
obligations incurred by corporate officers acting as corporate agents

are not theirs but the direct accountabilities of the corporation they
represent. True, solidary liabilities may at times be incurred by
corporate officers, but only when exceptional circumstances so
warrant. For instance, in labor cases, corporate directors and officers
may be held solidarily liable with the corporation for the termination of
employment if done with malice or in bad faith.
In the present case, the apparent basis for the NLRC in holding
petitioner Maligro solidarily liable with Petron were its findings that (1)
the Investigation Committee was created a day after the summons in
NLRC RAB-VII Case was received, with Maligro no less being the
chairman thereof; and (2) the basis for the charge of insubordination
was the private respondents alleged making of false accusations
against Maligro.
Those findings, however, cannot justify a finding of personal liability
on the part of Maligro inasmuch as said findings do not point to
Maligros extreme personal hatred and animosity with the respondent.
It cannot, therefore, be said that Maligro was motivated by malice and
bad faith in connection with private respondents dismissal from the
service.
If at all, what said findings show are the illegality itself of private
respondents dismissal, the lack of just cause therefor and the nonobservance of procedural due process. Verily, the creation of the
investigation committee and said committees consideration of the
insubordination charge against the private respondent, were merely
aimed to cover up the illegal dismissal or to give it a semblance of
legality.

he desire to do so, provided, the value of such machines is deducted

from his and Wako's capital contributions, which will be paid to him.
Yamamoto was requested to inform Atty Doce of his comments on the
letter.
On the basis of such letter, Yamamoto attempted to recover the
machineries and equipment which were, by Yamamoto's admission,
part of his investment in the corporation,but he was frustrated by
respondents, drawing Yamamoto to file before the Regional Trial Court
(RTC) of Makati a complaint against them for replevin.
RTC issued a writ of replevin.
In their Answer with Counterclaim, respondents claimed that the
machineries and equipment subject of replevin form part of
Yamamoto's capital contributions in consideration of his equity in NLII
and should thus be treated as corporate property; and that the abovesaid letter of Atty. Doce to Yamamoto was merely a proposal,
"conditioned on [Yamamoto's] sell-out to . . . Nishino of his entire
equity," which proposal was yet to be authorized by the stockholders
and Board of Directors of NLII.
The trial court decided the case in favor of Yamamoto
On appeal, the Court of Appeals reversed the RTC decision and
dismissed the complaint.
The Court of Appeals having denied his Motion for Reconsideration,
Yamamoto filed the present petition.
Issue:

Besides, the fact that Maligro himself was the committee chairman is
not itself sufficient to impute bad faith on his part or attribute bias
against him. It is undisputed that Maligro was private respondents
superior, being Petrons Operations Assistant Manager for Visayas and
Mindanao. It is thus logical for him to be part of the committee that
will investigate private respondents alleged infractions of company
rules and regulations. As well, the committee was composed of three
other Petron officers as members, and nowhere is there any showing
that Maligro, as committee chairman, influenced the other committee
members to side against the private respondent.
In any event, it must be stressed that private respondents allegation of
bad faith on the part of Maligro was not established in this case.
Yamamoto Vs. Nishino Leather (551 SCRA 447)
Facts:
Ryuichi Yamamoto (Yamamoto), a Japanese national, organized under
Philippine laws Wako Enterprises Manila, Incorporated (WAKO), a
corporation engaged principally in leather tanning, now known as
Nishino Leather Industries, Inc. (NLII), one of herein respondents.
In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino),
also a Japanese national, forged a Memorandum of Agreement under
which they agreed to enter into a joint venture wherein Nishino would
acquire such number of shares of stock equivalent to 70% of the
authorized capital stock of WAKO.
Eventually, Nishino and his brother Yoshinobu Nishino (Yoshinobu)
acquired more than 70% of the authorized capital stock of WAKO,
reducing Yamamoto's investment therein to, by his claim, 10% less
than 10% according to Nishino.
The corporate name of WAKO was later changed to, as reflected earlier,
its current name NLII.
Negotiations subsequently ensued in light of a planned takeover of
NLII by Nishino who would buy-out the shares of stock of Yamamoto.
In the course of the negotiations, Yoshinobu and Nishino's counsel
Atty. Emmanuel G. Doce (Atty. Doce) advised Yamamoto by letter
dated October 30, 1991, which stated that he (Yamamoto) may take
out the machineries (his contributions) for his own use and sale should

W/N the advice in the letter of Atty. Doce that Yamamoto may retrieve
the machineries and equipment, which admittedly was part of his
investment, bound the corporation.
Ruling:
The Court holds in the negative.
Without a Board Resolution authorizing respondent Nishino to act for
and in behalf of the corporation, he cannot bind the latter. Under the
Corporation Law, unless otherwise provided, corporate powers are
exercised by the Board of Directors.
Urging this Court to pierce the veil of corporate fiction, Yamamoto
argues that Ikuo, Yoshinobu, and Yamamoto were the owners thereof,
the presence of other stockholders being only for the purpose of
complying with the minimum requirements of the law. What course of
action the Company decides to do or not to do depends not on the
"other members of the Board of Directors". It depends on what Ikuo
and Yoshinobu decide. The Company is but a mere instrumentality of
Ikuo [and] Yoshinobu.
While the veil of separate corporate personality may be pierced when
the corporation is merely an adjunct, a business conduit, or alter ego of
a person, the mere ownership by a single stockholder of even all or
nearly all of the capital stocks of a corporation is not by itself a
sufficient ground to disregard the separate corporate personality.
The elements determinative of the applicability of the doctrine of
piercing the veil of corporate fiction follow:
"1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of
its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of the
plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.

The absence of any one of these elements prevents "piercing the

corporate veil." In applying the `instrumentality' or `alter ego'
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's
relationship to that operation."
In relation to the second element, to disregard the separate juridical
personality of a corporation, the wrongdoing or unjust act in
contravention of a plaintiff's legal rights must be clearly and
convincingly established; it cannot be presumed. Without a
demonstration that any of the evils sought to be prevented by the
doctrine is present, it does not apply.
In the case at bar, there is no showing that Nishino used the separate
personality of NLII to unjustly act or do wrong to Yamamoto in
contravention of his legal rights.
Yamamoto argues, that promissory estoppel lies against respondents,
thus: Under the doctrine of promissory estoppel.estoppel may arise
from the making of a promise, even though without consideration, if it
was intended that the promise should be relied upon and in fact it was
relied upon, and if a refusal to enforce it would be virtually to sanction
the perpetration of fraud or would result in other injustice.
In paragraph twelve (12) of the Letter, Yamamoto was expressly
advised that he could take out the Machinery if he wanted to so,
provided that the value of said machines would be deducted from his
capital contribution
To sanction respondents' attempt to evade their obligation would be to
sanction the perpetration of fraud and injustice against petitioner. It
bears noting, however, that the aforementioned paragraph 12 of the
letter is followed by a request for Yamamoto to give his "comments on
all the above, soonest
What was thus proffered to Yamamoto was not a promise, but a mere
offer, subject to his acceptance. Without acceptance, a mere offer
produces no obligation
It is settled that the property of a corporation is not the property of its
stockholders or members. Under the trust fund doctrine, the capital
stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors which are
preferred over the stockholders in the distribution of corporate assets.
The distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the stockholders, officers, or
directors of the corporation unless the indispensable conditions and
procedures for the protection of corporate creditors are followed.
JG Summit Vs. CA (450 SCRA 169)
Facts:

National Investment and Development Corporation (NIDC) entered

into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries,
Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and
management of the Philippine Shipyard and Engineering Corporation
(PHILSECO).
Under the JVA, the NIDC and KAWASAKI will contribute for the
capitalization of PHILSECO in the proportion of 60%-40%
respectively. Moreover, the parties were granted the right of first
refusal should either of them decide to sell, assign or transfer its
interest in the joint venture.

After a series of negotiations between the APT and KAWASAKI, they

agreed that the latter's right of first refusal be "exchanged" for the right
to top by 5% the highest bid for the said shares. It was also agreed that
Philyards Holdings, Inc. (PHI) would exercise KAWASAKIs right to
top.
At the public bidding, J.G. Summit Holdings, Inc. submitted a bid and
was declared the highest bidder. PHI then exercised its right to top.
However, J.G. Summit opposed the offer of PHI to top its bid
contending that since PHILSECO is a landholding company,
KAWASAKI could exercise its right of first refusal only up to 40% of
the shares of PHILSECO due to the constitutional prohibition on
landholding by corporations with more than 40% foreign-owned
equity.
It further argues that since KAWASAKI already held at least 40%
equity in PHILSECO, the right of first refusal was inutile and could not
subsequently be converted into the right to top.
Issue:
W/N KAWASAKI had a valid right of first refusal over PHILSECO
shares under the JVA considering that PHILSECO owned land until the
time of the bidding and KAWASAKI already held 40% of PHILSECOs
equity.
Ruling:
The Supreme Court upholds the validity of the mutual rights of first
refusal under the JVA between KAWASAKI and NIDC.
The right of first refusal is a property right of PHILSECO shareholders,
KAWASAKI and NIDC, under the terms of their JVA. This right allows
them to purchase the shares of their co-shareholder before they are
offered to a third party.
The agreement of co-shareholders to mutually grant this right to each
other does not constitute a violation of the provisions of the
Constitution limiting land ownership to Filipinos and Filipino
corporations.
If the foreign shareholdings of a landholding corporation exceeds 40%,
it is not the foreign stockholders ownership of the shares which is
adversely affected but the capacity of the corporation to own land - that
is, the corporation becomes disqualified to own land.
This finds support under the basic corporate law principle that the
corporation and its stockholders are separate juridical entities. The
right of first refusal over shares pertains to the shareholders whereas
the capacity to own land pertains to the corporation.
Hence, the fact that PHILSECO owns land cannot deprive stockholders
of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will
exceed the allowed foreign equity, what the law disqualifies is the
corporation from owning land.
Tupaz Vs. CA (465 SCRA 398)
Facts:

NIDC transferred all its rights, title and interest in PHILSECO to the
National Government. Thereafter, the Asset Privatization Trust (APT)
was named the trustee of the National Government's share in
PHILSECO.
The APT deemed it best to sell the National Government's share in
PHILSECO to private entities.

Jose C. Tupaz IV and Petronila C. Tupaz was Vice-President for

Operations and Vice-President/Treasurer, respectively, of El Oro
Engraver Corporation (El Oro Corporation). El Oro Corporation had
a contract with the Philippine Army to supply the latter with survival
bolos.

To finance the purchase of the raw materials for the survival bolos,
petitioners, on behalf of El Oro Corporation, applied with respondent
Bank of the Philippine Islands (respondent bank) for two commercial
letters of credit. The letters of credit were in favor of El Oro
Corporations suppliers, Tanchaoco Manufacturing Incorporated
(Tanchaoco Incorporated) and Maresco Rubber and Retreading
Corporation (Maresco Corporation). Respondent bank granted
petitioners application and issued Letter of Credit No. 2-00896-3 for
P564,871.05 to Tanchaoco Incorporated and Letter of Credit No. 200914-5 for P294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit, petitioners
signed trust receipts in favor of respondent bank. Jose C. Tupaz
IV signed, in his personal capacity, a trust receipt corresponding to
Letter of Credit to Tanchaoco. He bound himself to sell the goods
covered by the letter of credit and to remit the proceeds to respondent
bank, if sold, or to return the goods, if not sold, on or before 29
December 1981. Likewise, the petitioners signed, in their capacities as
officers of El Oro Corporation, a trust receipt corresponding to Letter
of Credit to Maresco. They bound themselves to sell the goods covered
by that letter of credit and to remit the proceeds to respondent bank, if
sold, or to return the goods, if not sold, on or before 8 December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the
raw materials to El Oro Corporation, respondent bank paid the former
P564,871.05 and P294,000, respectively.
Petitioners did not comply with their undertaking under the trust
receipts. Respondent bank made several demands for payments but El
Oro Corporation made partial payments only. On 27 June 1983 and 28
June 1983, respondent banks counsel and its representative
respectively sent final demand letters to El Oro Corporation. El Oro
Corporation replied that it could not fully pay its debt because the
Armed Forces of the Philippines had delayed paying for the survival
bolos.
Respondent bank charged petitioners with estafa.
The trial court rendered judgment acquitting petitioners of estafa on
reasonable doubt. However, the trial court found petitioners solidarily
liable with El Oro Corporation for the balance of El Oro Corporations
principal debt under the trust receipts.
Issue:
W/N the Tupazs were liable for the debt of the Corporation under the
trust receipts
Ruling:
A corporation, being a juridical entity, may act only through its
directors, officers, and employees. Debts incurred by these individuals,
acting as such corporate agents, are not theirs but the direct liability of
the corporation they represent. As an exception, directors or officers
are personally liable for the corporations debts only if they so
contractually agree or stipulate.
In the trust receipt dated 9 October 1981, petitioners signed below this
clause as officers of El Oro Corporation. Thus, under petitioner
Petronila Tupazs signature are the words Vice-PresTreasurer and
under petitioner Jose Tupazs signature are the words Vice-Pres
Operations. By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporations obligation.
Hence, for the trust receipt dated 9 October 1981, we sustain
petitioners claim that they are not personally liable for El Oro
Corporations obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of
which petitioner Jose Tupaz signed alone, we find that he did so in his
personal capacity. Petitioner Jose Tupaz did not indicate that he was
signing as El Oro Corporations Vice-President for Operations. Hence,

petitioner Jose Tupaz bound himself personally liable for El Oro

Corporations debts. Not being a party to the trust receipt dated 30
September 1981, petitioner Petronila Tupaz is not liable under such
trust receipt.
However, respondent banks suit against petitioner Jose Tupaz stands
despite the Courts finding that he is liable as guarantor only. First,
excussion is not a pre-requisite to secure judgment against a guarantor.
The guarantor can still demand deferment of the execution of the
judgment against him until after the assets of the principal debtor shall
have been exhausted. Second, the benefit of excussion may be waived.
Under the trust receipt dated 30 September 1981, petitioner Jose
Tupaz waived excussion when he agreed that his liability in the
guaranty shall be DIRECT AND IMMEDIATE, without any need
whatsoever on the part of respondent bank to take any steps or exhaust
any legal remedies. The clear import of this stipulation is that
petitioner Jose Tupaz waived the benefit of excussion under his
guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations
principal debt and other accessory liabilities as stipulated in the trust
receipt and as provided by law under the trust receipt dated 30
September 1981.
Woodchild Holdings Vs. Roxas (436 SCRA 235)
Facts:
The respondent Roxas Electric and Construction Company, Inc.
(RECCI) was the owner of two parcels of land, identified as Lot 1 (Lot
No. 491-A-3-B-1 ) Lot 2 (Lot No. 491-A-3-B-2). A portion of Lot No.
491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road
accessing to the Sumulong Highway, Antipolo, Rizal.
At a special meeting, the RECCI's Board of Directors approved a
resolution authorizing the corporation, through its president, Roberto
B. Roxas, to sell Lot 2 at a price and under such terms and conditions
which he deemed most reasonable and advantageous to the
corporation; and to execute, sign and deliver the pertinent sales
documents and receive the proceeds of the sale for and on behalf of the
company.
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot 2 on
which it planned to construct its warehouse building, and a portion of
the adjoining lot, Lot 1, so that its 45-foot container van would be able
to readily enter or leave the property. One of the terms incorporated in
Jonathan Dy's (WHI President) offer included: a.) that the area of
7,213 square meters of the subject property already includes the area
on which the right of way traverses from the main lot (area) towards
the exit to the Sumulong Highway as shown in the location plan ; b.) in
the event that the right of way is insufficient for the buyer's purposes,
the seller agrees to sell additional square meter from his current
adjacent property to allow the buyer to full access and full use of the
property.
Roxas indicated his acceptance of the offer. A Deed of Absolute Sale
was executed in favor of WHI, under the conditions that RECCI agrees
to give WHI the beneficial use of and a right of way from Sumulong
Highway to the property herein conveyed and an additional 25 square
meters in the corner of Lot 1, as turning and/or maneuvering area for
Vendee's vehicles. RECCI agrees that in the event that the right of way
is insufficient for WHIs use, it will sell additional square meters from
its current adjacent property to give WHI full access and full use of the
property.
In the meantime, WHI complained to Roberto Roxas that the vehicles
of RECCI were parked on a portion of the property over which WHI
had been granted a right of way. Roxas promised to look into the
matter. Dy and Roxas discussed the need of the WHI to buy a 500square-meter portion of Lot 1 as provided for in the deed of absolute
sale. However, Roxas died soon thereafter. WHI demanded that RECCI
sell a portion of Lot 1 for its beneficial use but RECCI rejected the
demand of WHI.

In this petition, WHI contends that when RECCI sold Lot 2, it was well
aware of its obligation to provide the petitioner with a means of ingress
to or egress from the property to the Sumulong Highway, since the
latter had no adequate outlet to the public highway. WHI further
asserts that it agreed to buy the property because of the grant by the
respondent of a right of way and an option in its favor to buy a portion
of the adjacent property; that the RECCI never objected to Roxas'
acceptance of its offer to purchase the property and the terms and
conditions therein; the respondent even allowed Roxas to execute the
deed of absolute sale in its behalf; that WHI dealt with RECCI in good
faith.
Issue:
W/N RECCI is bound by the provisions in the deed of absolute sale
which was entered into by its president, Roberto Roxas with Woodchild
Holdings
Ruling:
RECCI was not bound by such agreement. RECCI did not authorize
Roxas to grant a right of way over a portion of Lot 1 in favor of the
petitioner, and an option for the respondent to buy a portion of the said
property. Hence, the respondent was not bound by such provisions
contained in the deed of absolute sale.
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the corporation
is not the property of its stockholders or members and may not be sold
by the stockholders or members without express authorization from
the corporation's board of directors. Section 23 of BP 68, otherwise
known as the Corporation Code of the Philippines, provides:
"SEC. 23. The Board of Directors or Trustees. Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year and until their successors are
elected and qualified."
A corporation may act only through its board of directors or, when
authorized either by its by-laws or by its board resolution, through its
officers or agents in the normal course of business. The general
principles of agency govern the relation between the corporation and
its officers or agents, subject to the articles of incorporation, by-laws,
or relevant provisions of law. Generally, the acts of the corporate
officers within the scope of their authority are binding on the
corporation. However, acts done by such officers beyond the scope of
their authority cannot bind the corporation unless it has ratified such
acts expressly or tacitly, or is estopped from denying them:
The Supreme Court rejected WHIs submission that, in allowing Roxas
to execute the contract to sell and the deed of absolute sale and failing
to reject or disapprove the same, the respondent thereby gave him
apparent authority to grant a right of way and an option for the
respondent to sell a portion thereof to the petitioner. Absent estoppel
or ratification, apparent authority cannot remedy the lack of the
written power required.
It bears stressing that apparent authority is based on estoppel and can
arise from two instances: 1.) the principal may knowingly permit the
agent to so hold himself out as having such authority, and in this way,
the principal becomes estopped to claim that the agent does not have
such authority; 2.) the principal may so clothe the agent with the
indicia of authority as to lead a reasonably prudent person to believe
that he actually has such authority. There can be no apparent authority
of an agent without acts or conduct on the part of the principal and
such acts or conduct of the principal must have been known and relied
upon in good faith and as a result of the exercise of reasonable
prudence by a third person as claimant and such must have produced a
change of position to its detriment. The apparent power of an agent is
to be determined by the acts of the principal and not by the acts of the
agent.

Toh Vs. Solid Bank (408 SCRA 544)

Facts:
SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus
line" credit facility worth P10 million in favor of respondent First
Business Paper Corporation (FBPC). The terms and conditions of the
agreement as well as the checklist of documents necessary to open the
credit line were stipulated in a "letter-advise" of the Bank dated 16 May
1993 addressed to FBPC and to its President, Kenneth Ng Li. The
"letter-advise" was effective upon "compliance with the documentary
requirements."
The documents essential for the credit facility and submitted for this
purpose were the (a) Board Resolution or excerpts of the Board of
Directors Meeting, duly ratified by a Notary Public, authorizing the
loan and security arrangement as well as designating the officers to
negotiate and sign for FBPC specifically stating authority to mortgage,
pledge and/or assign the properties of the corporation; (b) agreement
to purchase Domestic Bills; and, (c) Continuing Guaranty for any and
all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh,
and respondent-spouses Kenneth and Ma. Victoria Ng Li. The spouses
Luis Toh and Vicky Tan Toh were then Chairman of the Board and
Vice-President, respectively, of FBPC, while respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li was President and General
Manager, respectively, of the same corporation.
On 10 May 1993, more than thirty (30) days from date of the "letteradvise," petitioner-spouses Luis Toh and Vicky Tan Toh and
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the
required Continuing Guaranty, which was embodied in a public
document prepared solely by respondent Bank. The Continuing
Guaranty set forth no maximum limit on the indebtedness that
respondent FBPC may incur and for which the sureties may be liable,
stating that the credit facility "covers any and all existing indebtedness
of, and such other loans and credit facilities which may hereafter be
granted to FIRST BUSINESS PAPER CORPORATION."
The effectivity of the Continuing Guaranty was not contingent upon
any event or cause other than the written revocation thereof with
notice to the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility
and procure letters of credit. On 17 November 1993 FBPC opened
thirteen (13) letters of credit and obtained loans totaling
P15,227,510.00. As the letters of credit were secured, FBPC through its
officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as
signatories executed a series of trust receipts over the goods allegedly
purchased from the proceeds of the loans.
On 14 January 1994 the Bank served a demand letter upon FBPC and
Luis Toh invoking the acceleration clause in the trust receipts of FBPC
and claimed payment for P10,539,758.68 as unpaid overdue accounts
on the letters of credit plus interests and penalties within twenty-four
(24) hours from receipt thereof. The Bank also invoked the Continuing
Guaranty executed by petitioner-spouses Luis Toh and Vicky Tan Toh
who were the only parties known to be within national jurisdiction to
answer as sureties for the credit facility of FBPC.
Petitioners asserted, it was impossible and absurd for them to have
freely and consciously executed the surety on 10 May 1993, the date
appearing on its face since beginning March of that year they had
already divested their shares in FBPC and assigned them in favor of
Kenneth Ng Li although the deeds of assignment were notarized only
on 14 June 1993. Petitioners also contended that through FBPC Board
Resolution dated 12 May 1993 petitioner Luis Toh was removed as an
authorized signatory for FBPC and replaced by Kenneth Ng Li, Ma.
Victoria Ng Li and Redentor Padilla for all the transactions of FBPC
with respondent Bank. They even resigned from their respective
positions in FBPC as reflected in the 12 June 1993 Secretary's
Certificate submitted to the Securities and Exchange Commission as
Luis Toh was succeeded as Chairman by respondent Ma. Victoria Ng

Li, while one Mylene C. Padilla took the place of petitioner Vicky Tan
Toh as Vice-President.
The trial court described the Continuing Guaranty as effective only
while petitioner-spouses were stockholders and officers of FBPC since
respondent Bank compelled petitioners to underwrite FBPC's
indebtedness as sureties without the requisite investigation of their
personal solvency and capability to undertake such risk. The lower
court also believed that the Bank knew of petitioners' divestment of
their shares in FBPC and their subsequent resignation as officers
thereof as these facts were obvious from the numerous public
documents that detailed the changes and substitutions in the list of
authorized signatories for transactions between FBPC and the Bank,
including the many trust receipts being signed by persons other than
petitioners, as well as the designation of new FBPC officers which came
to the notice of the Bank's Vice-President Jose Chan Jr. and other
officers.
Issue:
W/N the petitioners are personally liable to the bank
Ruling:
The Continuing Guaranty is a valid and binding contract of petitionerspouses as it is a public document that enjoys the presumption of
authenticity and due execution. Luis Toh and Vicky Tan Toh
"voluntarily affixed their signatures" on the surety agreement and were
thus "at some given point in time willing to be liable under those
forms." In the absence of clear, convincing and more than
preponderant evidence to the contrary, our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility
thereon so long as they were corporate officers and stockholders of
FBPC. Nothing in the Continuing Guaranty restricts their contractual
undertaking to such condition or eventuality. In fact the obligations
assumed by them therein subsist "upon the undersigned, the heirs,
executors, administrators, successors and assigns of the undersigned,
and shall inure to the benefit of, and be enforceable by you, your
successors, transferees and assigns," and that their commitment "shall
remain in full force and effect until written notice shall have been
received by the Bank that it has been revoked by the undersigned."
Verily, if petitioners intended not to be charged as sureties after their
withdrawal from FBPC, they could have simply terminated the
agreement by serving the required notice of revocation upon the Bank
as expressly allowed therein.
In Garcia v. Court of Appeals we ruled Regarding the
petitioner's claim that he is liable only as a corporate officer
of WMC, the surety agreement shows that he signed the
same not in representation of WMC or as its president but in
his personal capacity. He is therefore personally bound.
There is no law that prohibits a corporate officer from
binding himself personally to answer for a corporate debt.
While the limited liability doctrine is intended to protect the
stockholder by immunizing him from personal liability for
the corporate debts, he may nevertheless divest himself of
this protection by voluntarily binding himself to the payment
of the corporate debts. The petitioner cannot therefore take
refuge in this doctrine that he has by his own acts effectively
waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety
agreement they signed so must we also hold respondent Bank to its
representations in the "letter-advise" of 16 May 1993. Particularly, as to
the extension of the due dates of the letters of credit, we cannot exclude
from the Continuing Guaranty the preconditions of the Bank that were
plainly stipulated in the "letter-advise." Fairness and justice dictate our
doing so, for the Bank itself liberally applies the provisions of cognate
agreements whenever convenient to enforce its contractual rights, such
as, when it harnessed a provision in the trust receipts executed by
respondent FBPC to declare its entire indebtedness as due and
demandable and thereafter to exact payment thereof from petitioners

as sureties. In the same manner, we cannot disregard the provisions of

the "letter-advise" in sizing up the panoply of commercial obligations
between the parties herein.
The grace period granted by respondent Bank represents
unceremonious abandonment and forfeiture of the fifteen percent
(15%) marginal deposit and the twenty-five percent (25%) partial
payment as fixed in the "letter-advise." These payments are
unmistakably additional securities intended to protect both respondent
Bank and the sureties in the event that the principal debtor FBPC
becomes insolvent during the extension period. Compliance with these
requisites was not waived by petitioners in the Continuing Guaranty.
For this unwarranted exercise of discretion, respondent Bank bears the
loss; due to its unauthorized extensions to pay granted to FBPC,
petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as
sureties under the Continuing Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in
failing to safe-keep the security provided by the marginal deposit and
the twenty-five percent (25%) requirement results in the material
alteration of the principal contract, i.e., the "letter-advise," and
consequently releases the surety. This inference was admitted by the
Bank through the testimony of its lone witness that "[w]henever this
obligation becomes due and demandable, except when you roll it over,
(so) there is novation there on the original obligations." As has been
said, "if the suretyship contract was made upon the condition that the
principal shall furnish the creditor additional security, and the security
being furnished under these conditions is afterwards released by the
creditor, the surety is wholly discharged, without regard to the value of
the securities released, for such a transaction amounts to an alteration
of the main contract."
B. Piecing the Veil of Corporate Entity
Heirs of Pajarillo Vs. CA (537 SCRA 96)
Facts:
Panfilo Pajarillo was the owner and operator of several buses plying
certain routes in Metro Manila. He used the name PVP Liner in his
buses. Private respondents were employed as drivers, conductors and
conductresses by Panfilo.
During their employment, private respondents worked at least four
times a week and allegedly, they were not given emergency cost of
living allowance (ECOLA), 13th month pay and legal holiday pay and
service incentive pay.
Thereafter, private respondents and several co-employees formed a
union called Samahan ng mga Manggagawa ng Panfilo V. Pajarillo.
At the same time, upon learning of the said union, Panfilo and his
children and relatives also formed a company union where they acted
as its directors and officers.
In August 1997, respondent union filed a Complaint for unfair labor
practices and illegal deduction before the Labor Arbiter with Panfilo V
Pajarillo Liner as private respondent. Notifications and summons were
sent to Panfilo V Pajarillo, President/Manager, Panfilo V . Pajarillo
Liner.
Another Complaint was later filed for violation of labor standards laws
and private respondents this time were PVP Liner Inc. and Panfilo V
Pajarillo, as its General Manager. The Registry Return Receipt was
addressed to PVP Liner Inc and was signed by a certain Irene G.
Pajarillo.
Panfilo denied the charges in the complaints. He died during the
course of the proceedings.
The two cases were consolidated and when it reached the NLRC, it
ordered the reinstatement of and payment of backwages, ECOLA, 13 th
month pay, legal holiday pay and service incentive leave pay to private
respondents. This was later on upheld by the Court of Appeals.

Issue:
1.
2.

W/N PVP Liner Inc was improperly impleaded because it is a

non-existing corporation;
W/N CA misapplied in piercing the veil of Corporate Entity
of PVP Pajarillo Liner, Inc.

Ruling:
The Supreme Court held that Panfilo V Pajarillo Liner and PVP Liner
are one and the same entity belonging to one and the same person,
Panfilo. When PVP Liner Inc and Panfilo V Pajarillo Liner were
impleaded as party-respondents, it was Panfilo, through counsel, who
answered the complaint and filed the position papers, motions for
reconsiderations and appeals. It was Panfilo, through counsel, who
participated in the hearings and proceedings.
The Supreme Court also found that Panfilo started his transportation
business as the sole owner and operator of passenger buses utilizing
the name PVP Liner for his buses. After being charged by respondent
union of unfair labor practices, illegal deductions, illegal dismissal and
violation of labor standard laws, Panfilo transformed his
transportation business into a family corporation namely PV Pajarillo
Liner. He and petitioners were the incorporators, stockholders and
officers therein. PV Pajarillo Inc and the sole proprietorship of Panfilo
have the same business address and also used the name PVP Liner in
its buses. Further, the license to operate or franchise of the sole
proprietorship was merely transferred to PV Pajarillo Liner, Inc.
Thus, the doctrine of Piercing the Veil of Corporate Entity was properly
applied in this case. It is a fundamental principle of corporation law
that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be
connected. However, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to
promote justice. Hence, when it is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to
defeat labor laws, this separate personality of the corporation may be
disregarded or the veil of the corporate fiction pierced.
Ching Vs. Secretary Of Justice (481 SCRA 609)
Facts:
Alfredo Ching was the Senior Vice-President of Philippine Blooming
Mills, Inc. (PBMI). Sometime in September to October 1980, PBMI,
through petitioner, applied with the Rizal Commercial Banking
Corporation for the issuance of commercial letters of credit to finance
its importation of assorted goods.3
Respondent bank approved the application, and irrevocable letters of
credit were issued in favor of petitioner. The goods were purchased and
delivered in trust to PBMI. Petitioner signed 13 trust receipts as surety,
acknowledging delivery of the goods.
Under the receipts, petitioner agreed to hold the goods in trust for the
said bank, with authority to sell but not by way of conditional sale,
pledge or otherwise; and in case such goods were sold, to turn over the
proceeds thereof as soon as received, to apply against the relative
acceptances and payment of other indebtedness to respondent bank. In
case the goods remained unsold within the specified period, the goods
were to be returned to respondent bank without any need of demand.
Thus, said "goods, manufactured products or proceeds thereof,
whether in the form of money or bills, receivables, or accounts separate
and capable of identification" were respondent banks property.
When the trust receipts matured, petitioner failed to return the goods
to respondent bank, or to return their value amounting to
P6,940,280.66 despite demands. Thus, the bank filed a criminal
complaint for estafa against petitioner in the Office of the City
Prosecutor of Manila.

The Motion to Quash the Informations filed by petitioner on the

ground that the material allegations therein did not amount to estafa
was granted.
In the meantime, the Court rendered judgment in Allied Banking
Corporation v. Ordoez, holding that the penal provision of P.D. No.
115 encompasses any act violative of an obligation covered by the trust
receipt; it is not limited to transactions involving goods which are to be
sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold. The Court also ruled that "the non-payment of
the amount covered by a trust receipt is an act violative of the
obligation of the entrustee to pay."
On February 27, 1995, respondent bank re-filed the criminal complaint
for estafa against petitioner before the Office of the City Prosecutor of
Manila which ruled that there was no probable cause to charge
petitioner with violating P.D. No. 115, as petitioners liability was only
civil, not criminal, having signed the trust receipts as surety.
Respondent bank appealed the resolution to the Department of Justice
(DOJ) via petition for review.
The Secretary of Justice issued Resolution No. 250 granting the
petition and reversing the assailed resolution of the City Prosecutor.
According to the Justice Secretary, the petitioner, as Senior VicePresident of PBMI, executed the 13 trust receipts and as such, was the
one responsible for the offense. Thus, the execution of said receipts is
enough to indict the petitioner as the official responsible for violation
of P.D. No. 115. The Justice Secretary also declared that petitioner
could not contend that P.D. No. 115 covers only goods ultimately
destined for sale, as this issue had already been settled in Allied
Banking Corporation v. Ordoez.
The Justice Secretary further stated that the respondent bound himself
under the terms of the trust receipts not only as a corporate official of
PBMI but also as its surety; hence, he could be proceeded against in
two (2) ways: first, as surety and second, as the corporate official
responsible for the offense under P.D. No. 115, via criminal
prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of
corporate officers "without prejudice to the civil liabilities arising from
the criminal offense." Thus, according to the Justice Secretary, the civil
liability imposed is clearly separate and distinct from the criminal
liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City
Prosecutor filed 13 Informations against petitioner for violation of P.D.
No. 115 before the RTC of Manila. The cases were docketed as Criminal
Cases No. 99-178596 to 99-178608 and consolidated for trial before
Branch 52 of said court. Petitioner filed a motion for reconsideration,
which the Secretary of Justice denied in a Resolution dated January 17,
2000.
Petitioner then filed a petition for certiorari, prohibition and
mandamus with the CA, assailing the resolutions of the Secretary of
Justice.
The CA upheld the assailed resolutions of the Secretary of Justice for
the following reasons: (a) petitioner, being the Senior Vice-President of
PBMI and the signatory to the trust receipts, is criminally liable for
violation of P.D. No. 115; (b) the issue raised by the petitioner, on
whether he violated P.D. No. 115 by his actuations, had already been
resolved and laid to rest in Allied Bank Corporation v. Ordoez; and (c)
petitioner was estopped from raising the City Prosecutors delay in the
final disposition of the preliminary investigation because he failed to
do so in the DOJ.
Thus, petitioner filed the instant petition.
Issue:
W/N Ching is criminally liable for violation of P.D. No. 115

10

Ruling:
Section 13 of PD 115 which states in part, viz:
xxx If the violation or offense is committed by a corporation,
partnership, association or other judicial entities, the penalty provided
for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the
criminal offense.
There is no dispute that it was the respondent, who as senior vicepresident of PBM, executed the thirteen (13) trust receipts. As such, the
law points to him as the official responsible for the offense. Since a
corporation cannot be proceeded against criminally because it cannot
commit crime in which personal violence or malicious intent is
required, criminal action is limited to the corporate agents guilty of an
act amounting to a crime and never against the corporation itself.
Thus, the execution by respondent of said receipts is enough to indict
him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115
covers only goods which are ultimately destined for sale and not goods,
like those imported by PBM, for use in manufacture. This issue has
already been settled in the Allied Banking Corporation case, supra,
where he was also a party, when the Supreme Court ruled that PD 115
is not limited to transactions in goods which are to be sold (retailed),
reshipped, stored or processed as a component or a product ultimately
sold but covers failure to turn over the proceeds of the sale of entrusted
goods, or to return said goods if unsold or disposed of in accordance
with the terms of the trust receipts.
The respondent bound himself under the terms of the trust receipts not
only as a corporate official of PBM but also as its surety. It is evident
that these are two (2) capacities which do not exclude the other.
Logically, he can be proceeded against in two (2) ways: first, as surety
and, secondly, as the corporate official responsible for the offense
under PD 115, the present case is an appropriate remedy under our
penal law.
Petitioner asserts that the appellate courts ruling is erroneous because
(a) the transaction between PBMI and respondent bank is not a trust
receipt transaction; (b) he entered into the transaction and was sued in
his capacity as PBMI Senior Vice-President; (c) he never received the
goods as an entrustee for PBMI, hence, could not have committed any
dishonesty or abused the confidence of respondent bank; and (d) PBMI
acquired the goods and used the same in operating its machineries and
equipment and not for resale.
In the case at bar, the transaction between petitioner and respondent
bank falls under the trust receipt transactions envisaged in P.D. No.
115. Respondent bank imported the goods and entrusted the same to
PBMI under the trust receipts signed by petitioner, as entrustee, with
the bank as entruster.
Although petitioner signed the trust receipts merely as Senior VicePresident of PBMI and had no physical possession of the goods, he
cannot avoid prosecution for violation of P.D. No. 115.
Though the entrustee is a corporation, nevertheless, the law specifically
makes the officers, employees or other officers or persons responsible
for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility
to devise means necessary to ensure compliance with the law and, if
they fail to do so, are held criminally accountable; thus, they have a
responsible share in the violations of the law.
If the crime is committed by a corporation or other juridical entity, the
directors, officers, employees or other officers thereof responsible for
the offense shall be charged and penalized for the crime, precisely

because of the nature of the crime and the penalty therefor. A

corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment. However, a
corporation may be charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if
found guilty, may be fined.
When a criminal statute designates an act of a corporation or a crime
and prescribes punishment therefor, it creates a criminal offense
which, otherwise, would not exist and such can be committed only by
the corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may
be punished. On the other hand, if the State, by statute, defines a crime
that may be committed by a corporation but prescribes the penalty
therefor to be suffered by the officers, directors, or employees of such
corporation or other persons responsible for the offense, only such
individuals will suffer such penalty. Corporate officers or employees,
through whose act, default or omission the corporation commits a
crime, are themselves individually guilty of the crime.
The principle applies whether or not the crime requires the
consciousness of wrongdoing. It applies to those corporate agents who
themselves commit the crime and to those, who, by virtue of their
managerial positions or other similar relation to the corporation, could
be deemed responsible for its commission, if by virtue of their
relationship to the corporation, they had the power to prevent the act.
Moreover, all parties active in promoting a crime, whether agents or
not, are principals. Whether such officers or employees are benefited
by their delictual acts is not a touchstone of their criminal liability.
Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot,
thus, hide behind the cloak of the separate corporate personality of
PBMI. In the words of Chief Justice Earl Warren, a corporate officer
cannot protect himself behind a corporation where he is the actual,
present and efficient actor.
Hi-Cement Vs. Insular Bank (534 SCRA 269)
Facts:
Enrique Tan and Lilia Tan (spouses Tan) were the controlling
stockholders of E.T. Henry & Co., Inc. (E.T. Henry), a company
engaged in the business of processing and distributing bunker fuel.
Among E.T. Henry's customers were Hi-Cement Corporation (HiCement), Riverside Mills Corporation (Riverside) and Kanebo
Cosmetics Philippines, Inc. (Kanebo). For their purchases, these
corporations issued postdated checks to E.T. Henry.
E.T. Henry and Insular Bank were into re-discounting of checks.
From 1979 to 1981, E.T. Henry was able to re-discount its clients'
checks (with deeds of assignment) with respondent. However, in
February 1981, 20 checks of Hi-Cement (which were crossed and which
bore the restriction deposit to payees account only) were dishonored.
So were the checks of Riverside and Kanebo.
Respondent filed a complaint for sum of money in the then Court of
First Instance of Rizal against E.T. Henry, the spouses Tan, Hi-Cement
(including its general manager and its treasurer as signatories of the
postdated crossed checks), Riverside and Kanebo.
Hi-Cement filed its answer alleging, among others, that: (1) its general
manager and treasurer were not authorized to issue the postdated
crossed checks in E.T. Henry's favor; (2) the deed of assignment
purportedly executed by Hi-Cement assigning them to respondent only
bore the conformity of its treasurer and (3) respondent was not a
holder in due course as it should not have discounted them for being
crossed checks.

11

In their answer (with counterclaim against respondent and crossclaims against Hi-Cement, Riverside and Kanebo), E.T. Henry and the
spouses Tan claimed that: (1) the drawers of the postdated checks
failed to honor them due to the adverse economic conditions prevailing
at the time respondent presented them for payment; (2) the extrajudicial sale of the mortgaged Sucat property was void due to gross
inadequacy of the bid price and (3) their loans were subjected to a
usurious interest rate of 21% p.a.
On June 30, 1989, the trial court rendered a decision which ordered
E.T. Henry, Spouses Tan, Hi-Cement, Riverside and Kanebo to pay the
face value of the post dated checks.

Fraud is an allegation of fact that

evidence. It is never presumed.

demands

clear

and

convincing

Second, the mere ownership by a single stockholder or by another

corporation of all or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the separate corporate
personality. For this ground to stand in this case, there must be proof
that the spouses Tan: (1) had control or complete domination of E.T.
Henrys finances and that the latter had no separate existence with
respect to the act complained of; (2) used such control to commit fraud
or wrong and (3) the control was the proximate cause of the loss or
injury complained of by respondent. The records of this case do not
show that these elements were present.

Riverside and Kanebo did not appeal the decision to the CA which
affirmed it in toto. Hence, these petitions.
On the other hand, E.T. Henry and the spouses Tan essentially contend
that the lower courts erred in: (1) applying the doctrine of piercing the
veil of the corporate entity to make the spouses Tan solidarily liable
with E.T. Henry; (2) not ruling on their cross-claims and
counterclaims, and (3) not declaring the foreclosure of E.T. Henry's
Sucat property as void.
In their petition, E.T. Henry and the spouses Tan argue that the lower
courts erred in applying the piercing the veil of corporate entity
doctrine to their case. They claim that both the trial and appellate
courts failed to cite the reasons why the doctrine was relevant to them.
Issue:
W/N the Trial Court and the Court of Appeals erred in applying the
piercing the veil of Corporate entity and holding the spouses Tan
personally liable for the face value of the postdated checks
Ruling:
The Supreme Court agreed with petitioners E.T. Henry and the spouses
Tan in this respect.
If any general rule can be laid down, it is that the corporation will be
looked upon as a legal entity until sufficient reasons to the contrary
appear. It is only when the fiction or notion of legal entity is used to
defeat public convenience, justify wrong, perpetuate fraud or defend
crime that the law will shred the corporate legal veil and regard it as a
mere association of persons. This is referred to as the doctrine of
piercing the veil of corporate entity.
E.T. Henry's corporate veil should not have been pierced at all.
First, the trial court failed to provide a clear ground why the doctrine
was used. It merely stated that it agreed with respondents arguments
but did not explain why the doctrine was relevant to petitioner E.T.
Henry's and the spouses Tans case. On the other hand, the CA held:
It appears that spouses Tan are controlling
stockholders of E.T. Henry & Co., Inc. as well as its
authorized signatories. The business of the
corporation was conducted solely for the benefit of
the spouses Tan who colluded with Hi-Cement in
defrauding respondent. As the lower court cited
It is a settled law in this and other jurisdictions
that when the corporation is a mere alter ego of a
person, same being true when the corporation is
controlled, and its affairs are so conducted to make
it merely an instrumentality, agency or conduit of
another.
Similarly, the CA left a gaping hole by failing to provide the basis for its
ruling that E.T. Henry and the spouses Tan defrauded respondent. It
did
not
also
state
what
act
constituted the fraud.

General Credit Corp. Vs. Alsons (513 SCRA 225)

Facts:
General Credit Corporation, then known as Commercial Credit
Corporation (CCC), established CCC franchise companies in different
urban centers of the country. In furtherance of its business, GCC had,
as early as 1974, applied for and was able to secure license from the
then Central Bank of the Philippines and the Securities and Exchange
Commission to engage also in quasi-banking activities.
On the other hand, respondent CCC Equity Corporation (EQUITY, for
brevity) was organized in November 1994 by GCC for the purpose of,
among other things, taking over the operations and management of the
various franchise companies. At a time material hereto, Alsons
Development and Investment Corporation and Conrado, Nicasio,
Editha and Ladislawa, all surnamed Alcantara, and Alfredo de Borja
(hereinafter the Alcantara family, for convenience), each owned, just
like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC
Davao and CCC Cebu.
In December 1980, ALSONS and the Alcantara family, for a
consideration of Two Million (P2,000,000.00) Pesos, sold their
shareholdings a total of 101,953 shares, more or less in the CCC
franchise companies to EQUITY. On January 2, 1981, EQUITY issued
ALSONS et al., a bearer promissory note for P2,000,000.00 with a
one-year maturity date, at 18% interest per annum, with provisions for
damages and litigation costs in case of default.
Some four years later, the Alcantara family assigned its rights and
interests over the bearer note to ALSONS which thenceforth became
the holder thereof. But even before the execution of the assignment
deal aforestated, letters of demand for interest payment were already
sent to EQUITY, through its President, Wilfredo Labayen, who pleaded
inability to pay the stipulated interest, EQUITY no longer then having
assets or property to settle its obligation nor being extended financial
support by GCC.
ALSONS, having failed to collect on the bearer note aforementioned,
filed a complaint for a sum of money against EQUITY and GCC. GCC is
being impleaded as party-defendant for any judgment ALSONS might
secure against EQUITY and, under the doctrine of piercing the veil of
corporate fiction, against GCC, EQUITY having been organized as a
tool and mere conduit of GCC.
Answering with a cross-claim against GCC, EQUITY stated by way of
special and affirmative defenses that it (EQUITY): a) was purposely
organized by GCC for the latter to avoid CB Rules and Regulations on
DOSRI (Directors, Officers, Stockholders and Related Interest)
limitations, and that it acted merely as intermediary or bridge for loan
transactions and other dealings of GCC to its franchises and the
investing public; and b) is solely dependent upon GCC for its funding
requirements, to settle, among others, equity purchases made by
investors on the franchises; hence, GCC is solely and directly liable to
ALSONS, the former having failed to provide EQUITY the necessary
funds to meet its obligations to ALSONS.

12

GCC stressed that it is a distinct and separate entity from EQUITY and
alleging, in essence that the business relationships with each other
were always at arms length.
The trial court, finds that EQUITY was but an instrumentality or
adjunct of GCC and declaring them as jointly and severally liable to
Alsons.
Issue:
W/N there is basis of piercing the veil of corporate fiction
Ruling:
A corporation is an artificial being vested by law with a personality
distinct and separate from those of the persons composing it as well as
from that of any other entity to which it may be related. The first
consequence of the doctrine of legal entity of the separate personality
of the corporation is that a corporation may not be made to answer for
acts and liabilities of its stockholders or those of legal entities to which
it may be connected or vice versa.
The notion of separate personality, however, may be disregarded
under the doctrine piercing the veil of corporate fiction as in fact
the court will often look at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine is
that when two (2) business enterprises are owned, conducted and
controlled by the same parties,
both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as
identical or one and the same.
Whether the separate personality of the corporation should be pierced,
hinges on obtaining facts appropriately pleaded or proved. However,
any piercing of the corporate veil has to be done with caution, albeit the
Court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. After all, the
concept of corporate entity was not meant to promote unfair objectives.
Authorities are agreed on at least three (3) basic areas where piercing
the veil, with which the law covers and isolates the corporation from
any other legal entity to which it may be related, is allowed. These are:
1) defeat of public convenience, as when the corporate fiction is used as
vehicle for the evasion of an existing obligation; 2) fraud cases or when
the corporate entity is used to justify a wrong, protect fraud, or defend
a crime; or 3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.
The CA found valid grounds to pierce the corporate veil of petitioner
GCC, there being justifiable basis for such action. When the appellate
court spoke of a justifying factor, the reference was to what the trial
court said in its decision, namely: the existence of certain
circumstances [which], taken together, gave rise to the ineluctable
conclusion that [respondent] EQUITY is but an instrumentality or
adjunct of [petitioner] GCC.
Foremost of what referred to as certain circumstances are the
commonality of directors, officers and stockholders and even sharing
of office between petitioner GCC and respondent EQUITY; certain
financing and management arrangements between the two, allowing
the petitioner to handle the funds of the latter; the virtual domination
if not control wielded by the petitioner over the finances, business
policies and practices of respondent EQUITY; and the establishment of
respondent EQUITY by the petitioner to circumvent CB rules.
It bears to stress at this point that the facts and the inferences drawn
therefrom, upon which the two (2) courts below applied the piercing
doctrine, stand, for the most part, undisputed. Among these is, to
reiterate, the matter of EQUITY having been incorporated to serve, as

it did serve, as an instrumentality or adjunct of GCC. With the view we

take of this case, GCC did not adduce any evidence, let alone rebut the
testimonies and documents presented by ALSONS, to establish the
prevailing circumstances adverted to that provided the justifying
occasion to pierce the veil of corporate fiction between GCC and
EQUITY. ALSONS) maybe (sic) without sufficient property with which
to settle its obligations. For, after all, GCC was the entity which
initiated and benefited immensely from the fraudulent scheme
perpetrated in violation of the law.
Given the foregoing considerations, it behooves the petitioner, as a
matter of law and equity, to assume the legitimate financial obligation
of a cash-strapped subsidiary corporation which it virtually controlled
to such a degree that the latter became its instrument or agent. The
facts, as found by the courts a quo, and the applicable law call for this
kind of disposition. Or else, the Court would be allowing the wrong use
of the fiction of corporate veil.
Aratea Vs. Suico (518 SCRA 501)
Facts:
Petitioners Aratea and Canonigo are the controlling stockholders of
Samar Mining Development Corporation (SAMDECO), a domestic
corporation engaged in mining operations in San Isidro, Wright,
Western Samar. On the other hand, private respondent Suico is a
businessman engaged in export and general merchandise.
Sometime in 1989, Suico entered into a Memorandum of
Agreement (MOA) with SAMDECO. Armed with the proper board
resolution, Aratea and Canonigo signed the MOA as the duly
authorized representatives of the corporation. Under the MOA, Suico
would extend loans and cash advances to SAMDECO in exchange
for the grant of the exclusive right to market fifty percent (50%) of
the total coal extracted by SAMDECO from its mining sites in San
Isidro, Wright, Western Samar.
Pursuant to the MOA, Suico started releasing loans and cash advances
to SAMDECO, still through Aratea and Suico. SAMDECO started
operations in its mining sites to gather the coal. As agreed in the MOA,
fifty percent (50%) of the coals produced were offered by Suico to
different buyers. However, SAMDECO, again through Aratea and
Canonigo, prevented the full implementation of the marketing
arrangement by not accepting the prices offered by Suicos coal buyers
even though such prices were competitive and fair enough, giving no
other explanation for such refusal other than saying that the price was
too low. Aratea and Canonigo did not also set any criterion or standard
with which any price offer would be measured against. Because he
failed to close any sale of his 50% share of the coal-produce and gain
profits therefrom, Suico could not realize payment of the loans and
advances he extended to SAMDECO.
SAMDECO, on the other hand, successfully disposed of its 50% share
of the coal-produce. Even with said coal sales, however, SAMDECO
absolutely made no payment of its loan obligations to Suico, despite
demands.
Aratea and Canonigo eventually sold the mining rights and passed on
the operations of SAMDECO to Southeast Pacific Marketing, Inc.
(SPMI). They also sold their shares in SAMDECO to SPMIs President,
Arturo E. Dy without notice to, or consent of Suico, in violation of the
MOA.
Hence, in the RTC of Cebu City, Suico filed a complaint for a Sum of
Money and Damages against SAMDECO, Aratea, Canonigo, and Seiko
Philippines, Inc. (SEIKO, which was later substituted by SPMI and
Arturo E. Dy).
On 5 January 1998, the trial court came out with its decision rendering
judgment for Suico and orders all the defendants SAMDECO, SPMI,
Dy, SEIKO, Benito Aratea, Ponciana Canonigo to solidarily pay the
Suico the principal obligation of P3.5 million plus 5% interest per

13

month reckoned from March 1989 until fully paid; while defendants
Aratea & Canonigo should solidarily pay plaintiff the balance on the
principal amounting to P978,440.00 plus 5% interest per month
reckoned from March 1989 until fully paid. In addition all defendants
are hereby ordered solidarily to pay damages.

Petitioners Aratea and Canonigo, despite having separate and distinct

personalities from SAMDECO may be held personally liable for the
loans and advances made by Suico to SAMDECO which they represent
on account of their bad faith in carrying out the business of the
corporation.

Issue:

Petitioners Aratea and Canonigo acted in bad faith when they, as

officers of SAMDECO, unreasonably prevented Suico from selling his
part of the coal-produce of the mining site, in gross violation of their
MOA. This resulted in Suico not being unable to realize profits from
his 50% share of the coal-produce, from which Suico could obtain part
of the payment for the loans and advances he made in favor of
SAMDECO. Moreover, petitioners also acted in bad faith when they
sold, transferred and assigned their proprietary rights over the mining
area in favor of SPMI and Dy, thereby causing SAMDECO to grossly
violate its MOA with Suico. Suico suffered grave injustice because he
was prevented from acquiring the opportunity to obtain payment of his
loans and cash advances, while petitioners Aratea and Canonigo
profited from the sale of their shareholdings in SAMDECO in favor of
SPMI and Dy. These facts duly established Aratea and Canonigos
personal liability as officers/stockholders of SAMDECO and their
solidary liability with SAMDECO for its obligations in favor of Suico for
the loans and cash advances received by the corporation.

W/N Aratea and Canonigo be held personally liable for the loans, cash
advances and capital infusion made to Suico
Ruling:
SAMDECO must generally be treated as separate and distinct entity
from petitioners Aratea and Canonigo unless there are facts and
circumstances that would justify the Court to pierce the veil of
corporate fiction and treat them as one and the same. From the facts,
as found by the trial court and reechoed by the appellate court, the
Court has no reason to doubt that Suico was very well aware that he
was dealing with SAMDECO and that Aratea and Canonigo were mere
authorized representatives acting for and in behalf of the corporation.
In fact, Suico took note that Aratea and Canonigo were duly authorized
by the corresponding board resolution. There were no indications
whatsoever that Suico was misled to believe that the loans and cash
advances were initially intended for the personal benefit of Aratea
and/or Canonigo, and that the corporation was only used thereafter for
the purpose of hiding behind the veil of corporate fiction to evade
personal liability. The evidence sufficiently established that all loans
and cash advances were used for the mining operations of SAMDECO,
and there were neither allegations nor proofs to the contrary. Absent
any proof of fraud or double dealing, therefore, the doctrine on
piercing the veil of corporate entity would not apply.
The general rule is that obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities.
There are times, however, when solidary liabilities may be incurred but
only when exceptional circumstances warrant such as in the following
cases:
1. When directors and trustees or, in appropriate cases, the officers of a
corporation:
(a) vote for or assent to patently unlawful acts of the
corporation;
(b) act in bad faith or with gross negligence in
directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the
corporation, its stockholders or members, and other persons;
2. When a director or officer has consented to the ssuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.
In labor cases, particularly, corporate directors and officers are
solidarily liable with the corporation for the termination of
employment of corporate employees done with malice or in bad faith.

ASJ Corporation Vs. Evangelista (546 SCRA 300)

Facts:
Spouses Efren and Maura Evangelista, under the name and style of
R.M. Sy Chicks, are engaged in the large-scale business of buying
broiler eggs, hatching them, and selling their hatchlings (chicks) and
egg by-products in Bulacan and Nueva Ecija. For the incubation and
hatching of these eggs, respondents availed of the hatchery services of
ASJ Corp., a corporation duly registered in the name of San Juan and
his family.
Sometime in 1991, Evangelista delivered to ASJ various quantities of
eggs, whether successfully hatched or not. Each delivery was reflected
in a Setting Report. Initially, the service fees were paid upon release
of the eggs and by-products to respondents. But as their business went
along, Evangelistas delays on their payments were tolerated by San
Juan, who just carried over the balance, as there may be, into the next
delivery, out of keeping goodwill with respondents.
In February 1993, on several occasions, Evangelista went to the
hatchery to pick up the chicks and by-products, but San Juan refused
to release the same unless respondents fully settle their accounts.
Respondents, thereafter, tendered some amount and believing firmly
that the total value of the eggs delivered was more than sufficient to
cover the outstanding balance, respondents promised to settle their
accounts only upon proper accounting by San Juan. San Juan disliked
the idea and threatened to impound their vehicle and detain them at
the hatchery compound if they should come back unprepared to fully
settle their accounts with him.
Subsequently, respondents directed their errand boy, Allan Blanco, to
pick up the chicks and by-products and also to ascertain if San Juan
was still willing to settle amicably their differences. Unfortunately, San
Juan was firm in his refusal and reiterated his threats on respondents.
Fearing San Juans threats, respondents never went back to the
hatchery.
Respondents filed with the RTC an action for damages based on
petitioners retention of the chicks and by-products covered by Setting
Report Nos. 108 to 113. On July 8, 1996, the RTC ruled in favor of
respondents and disregarded the corporate fiction of ASJ Corp., and
held it and San Juan solidarily liable to respondents.
Both parties appealed to the Court of Appeals but the Court of Appeals
denied both appeals. The Court of Appeals, applying the doctrine of
piercing the veil of corporate fiction, considered ASJ Corp. and San
Juan as one entity, after finding that there was no bona fide intention
to treat the corporation as separate and distinct from San Juan and his
wife Iluminada.

14

Issue:
W/N the Court of Appeals erred when it pierced the veil of corporate
fiction and held ASJ Corpo. and Antonio San Juan as one entity

Ruling:
No. The Court of Appeals is correct. The doctrine of piercing the veil of
corporate fiction finds application in the instant case.
The Supreme Court held that although no hard and fast rule can be
accurately laid down under which the juridical personality of a
corporate entity may be disregarded; the following probative factors of
identity justify the application of the doctrine of piercing the veil of
corporate fiction in this case:
(1) San Juan and his wife own the bulk of sales of ASJ Corp.;
(2) The lot where the hatchery plant is located is owned by the
San Juan spouses;
(3) ASJ Corp. had no other properties or assets, except for the
hatchery plant and the lot where it is located;
(4) San Juan is in complete control of the corporation;
(5) There is no bona fide intention to treat ASJ Corp. as a
different entity from San Juan; and
(6) The corporate fiction of AJ Corp. was used by San Juan to
insulate himself from the legitimate claims of respondents,
defeat public convenience, justify wrong, defend crime, and
evade a corporations subsidiary liability for damages.
Therefore, the decision of the Court of Appeals, after applying the
doctrine of piercing the veil of corporate fiction, holding petitioners
ASJ Corporation and Antonio San Juan solidarily liable to respondents
Efren and Maura Evangelista for the unjustified retention of the chicks
and egg by-products covered by Setting Report Nos. 108 to 113 is
correct.
PCIB Vs. Custodio (545 SCRA 367)
Facts:
Dennis Custodio had a door-to-door dollar remittance business. While
Wilfredo D. Gliane was one of his agents in Saudi Arabia. As agent of
Custodio, Gliane collected dollars from overseas workers in Saudi
Arabia to be remitted to their beneficiaries in the Philippines.
In their transactions, Custodio and Gliane availed of the services of the
Express Padala desk of Philippine Commercial and International Bank
(PCIB), now Banco de Oro-EPCI, Inc., at its affiliate bank, the Al Rahji
Bank in Saudi Arabia. The procedure they adopted in remitting dollars
was to course them through regular clients of PCIB who, having
established a good relationship with the bank, enjoyed special foreign
exchange rates with it. One of those clients was respondent Rolando
Francisco who maintained joint accounts, including those with his wife
and Erlinda Chua.
Francisco and his wife, purportedly on behalf of ROL-ED Traders
Group Corporation (ROL-ED), a company said to be owned and
controlled by Francisco, entered into a Foreign Bills Purchase Line
Agreement (FBPLA) in the amount of P70 Million Pesos with the PCIBGreenhills bank which would purchase checks and demand drafts,
among other things, drawn on U.S. Bank, the proceeds of which
would be advanced to Francisco by the bank without going through the
regular 23-day clearing period. Under the FBPLA, the spouses made
the following undertaking, that If a check is returned/dishonored for
any reason whatsoever, we shall immediately, without need of demand,
pay [the bank] the amount of the check, together with the interest at
the rate of
** percent (%) per annum x x x and penalty at the rate of
twelve percent (12%) per annum, computed from the date of
purchase of the check to the date of full payment.
** - prevailing market rate

The amount of returned and dishonored checks, together with interest,

penalty and other charges, shall be debited from any of our accounts
with any of [the banks] branches, and if the credit balance thereof is
insufficient, we undertake to pay [the bank] the deficiency
immediately. And they authorized the PCIB-Greenhills x x x at [its]
option and without notice, to set-off or apply to the payment of any
dishonored/returned check, interest, penalty and other charges, any
and all monies which may be in [its] hands on deposit or otherwise
belonging to us.
Francisco deposited four dollar checks totaling US$651,000 in his joint
account with Erlinda at the PCIB-Greenhills. The checks were cleared
and paid by Chase Manhattan Bank, but they were subsequently
dishonored for insufficient funds.
Chase Manhattan Bank thus
debited the amount of the dishonored checks from the account of
PCIB-Greenhills which it maintained with it.
Having received notice of the debiting by Chase Manhattan Bank of
US$651,000 from its account, PCIB-Greenhills debited US$85,000
from Francisco and Erlindas joint account as partial payment of the
US$651,000 dishonored checks.
In the meantime or on May 17, 1998, Gliane remitted US$42,300 to the
above-said joint account of Francisco at the PCIB-Greenhills. Before
that, however, Francisco himself had asked Custodio to desist from
remitting dollars to him from Saudi Arabia because PCIB-Greenhills
had imposed a higher exchange rate on him (Francisco).
Having gotten wind of Glianes remittance of dollars to the joint
account of Francisco, Custodio instructed Gliane to request, as the
latter did, for the amendment of the designated beneficiary from
Francisco to Belarmino Cortez and/or Rhodora Cruz who maintained a
joint account in PCIB-Greenhills. PCIBs affiliate bank in Saudi Arabia
transmitted the request to PCIB-Ermita, Manila which in turn
transmitted it to PCIB-Greenhills.
At the time the request
however, PCIB-Greenhills
Gliane against Franciscos
the FBPLA (US$651,000
US$566,000).

for change of beneficiary was received,

had set off the US$42,300 remitted by
remaining balance of his obligation under
minus the US$85,000 earlier debited or

The Area Manager for PCIB-Chinese Banking Group, Marilyn Tan

(Marilyn), to whom Custodio attributed the instruction to set-off the
US$42,300 remittance against Franciscos obligation to PCIBGreenhills, explained to Custodio that the amendment was no longer
feasible as the US$42,300 remitted by Gliane had already been applied
as partial payment of his (Franciscos) outstanding obligation with
PCIB-Greenhills. She thus advised Custodio to take the matter up with
Francisco as she did not know of any arrangement between him and
Francisco.
Custodio and Gliane thereafter filed on July 1, 1998 a complaint against
PCIB, Marilyn and Francisco, for specific performance and damages
before the Regional Trial Court (RTC) of Makati, to recover the
US$42,300, damages and attorneys fees. They alleged that PCIB failed
to perform its obligation to deliver the sum of money they remitted
through it to their beneficiaries, and that Francisco wrongfully
appropriated or consented to the appropriation of the aforesaid
remittance as payment of his loan account with the bank.
By Decision of January 30, 2002, Branch 134 of the Makati RTC,
finding that PCIB was negligent and that Francisco, albeit not
negligent, may not be unjustly enriched, found them jointly and
severally liable to pay Custodio and Gliane damages, attorneys fees
and costs.
The Court of Appeals, by Decision of August 11, 2004, granted the
appeal of PCIB and accordingly reversed the trial courts April 26, 2002
Order-modified decision. It freed PCIB of any liability and held
Francisco solely liable to Custodio and Gliane.
Issue:

15

W/N Franciscos personality is separate from ROL-ED to justify his

freedom from liability
Ruling:
Francisco raised this argument for the first time in his motion for
reconsideration of the appellate courts original Decision.
Points of law, theories, issues and arguments not adequately brought to
the attention of the trial court ordinarily will not be considered by a
reviewing court as they cannot be raised for the first time on appeal
because this would be offensive to the basic rules of fair play, justice,
and due process. It would be unfair to the adverse party who would
have no opportunity to present further evidence material to the new
theory which it could have done had it been aware of it at the time of
the hearing before the trial court.
Furthermore, in his Answer with Compulsory Counterclaim, Francisco
claimed that [h]e never instructed nor authorized the defendant bank
to apply the U.S. dollar remittances to pay his loan obligation with
the said bank.
Francisco thus virtually admitted in these two cited pleadings that the
loan to which the US$42,300 remittance was applied was his. As the
object of pleadings is to draw the lines of battle, so to speak, between
the litigants and to indicate fairly the nature of the claims or defenses
of both parties, a party cannot subsequently take a position contrary to,
or inconsistent, with his pleadings. Unless a party alleges palpable
mistake or denies such admission, judicial admissions cannot be
controverted.
Therefore, as the US$42,300 remittance was applied to, by his own
admission, Franciscos loan, the set-off was valid.
Parenthetically too, while Francisco claims that the loan in question
was that of ROL-ED and not his, he, as earlier stated, deposited the
US$651,000 checks in his joint account with Erlinda and not in the
account of ROL-ED.
At all events, while a corporation is clothed with a personality separate
and distinct from the persons composing it, the veil of separate
corporate personality may be lifted when it is used as a shield to
confuse legitimate issues, or where lifting the veil is necessary to
achieve equity or for the protection of the creditors. In the case at bar,
there can be no mistake that Francisco belatedly invoked the separate
identity of ROL-ED to evade his liability to PCIB.
Mandaue Dinghow Vs. NLRC (547 SCRA 402)
Facts:
Petitioner Henry Uytengsu was the President and the former General
Manager of the Mandaue Dinghow Dimsum House Co., Inc. (Mandaue
Dinghow), a duly organized corporation which used to engage in the
restaurant business. Mandaue Dinghow used to operate the Mandaue
Dinghow Dimsum House (the restaurant) which was located along A.C.
Cortes Avenue, Mandaue City.
In the course of this restaurant business, private respondents Felix
Pacaldo, Imelda Montellano, Luzviminda Cuenca, Anamay
Delarmente, Rema Ramos, Pedro Dayagmil, Serina Casquejo, Ricky
Nano, Erwin Limatog, Leila Rosales, Ranulfo General, Nestor Camia
and Anesia Blanca (private respondents) were employed, on various
dates, by Mandaue Dinghow as food handlers, waiters, helpers and
checkers among others, all with a daily wage of P160.00.
However, due to business losses, the establishment of numerous malls
in Cebu City, the gradual dwindling of the number of customers, the
rising cost of operations, the great increase in rentals and the lack of a
viable alternative location, the restaurant closed down. On August 31,
1998, private respondents were terminated from the service as a result
of this closure. The restaurant filed a Notice of Retrenchment with the
Department of Labor and Employment (DOLE) on September 8, 1998.
Consequently, private respondents filed a case for Illegal Dismissal
before the Labor Arbiter (LA) against Mandaue Dinghow and/or
Uytengsu, praying for the payment of separation pay, medical
allowance, penalty for failure to notify the DOLE and attorneys fees.

In his Decision dated June 10, 1999, the LA absolved Uytengsu from
any liability, holding that the latter did not act in bad faith and in
excess of his authority. Nevertheless, the LA found Mandaue Dinghow
liable, ordering the same to pay private respondents their respective
separation pay in the total amount of P122,720.00. Private respondents
filed their Motion for Reconsideration claiming, among others, that
Mandaue Dinghow was only made to pay without including Uytengsu;
that some of them were not awarded separation pay in the said
decision; and that Mandaue Dinghow and Uytengsu deliberately
intended to dismiss the private respondents. Private respondents
prayed that Mandaue Dinghow and Uytengsu be ordered, jointly and
severally, to pay all the private respondents separation pay, medical
allowance, attorneys fees and the penalty for failure to file notice of
closure. Thus, in an Order dated June 10, 1999, the LA awarded an
additional amount of P104,377.00 as separation pay to the other
private respondents.
On February 9, 2001, the NLRC issued an Entry of Judgment certifying
that the aforementioned decision had become final and executory on
December 4, 2000. On May 28, 2001, a Writ of Execution was issued
by the LA. However, when the said writ could not be executed, as
Mandaue Dinghow could no longer be found and had transferred
elsewhere; invoking the doctrine of piercing the veil of corporate
fiction, private respondents moved that the LA, in the exercise of his
equity jurisdiction, issue an alias writ of execution directing the Sheriff
to execute the judgment against Mandaue Dinghow and Uytengsu.
Thus, on February 18, 2002, the LA issued an Order decreeing that a
writ of execution be issued against the properties of the
officers/stockholders of Mandaue Dinghow. On April 16, 2002, an
Alias Writ of Execution was issued. On April 24, 2002, Mandaue
Dinghow and Uytengsu filed a Motion to Quash the Writ of Execution.
On May 14, 2002, the Sheriff submitted his Report manifesting that the
said Alias Writ was served on Mandaue Dinghow and Uytengsu, and
Notices of Garnishment were served on the banks. Thus, Uytengsus
bank deposits were frozen. On May 20, 2002, the LA denied
Uytengsus Motion to Quash the Writ of Execution. Uytengsu filed a
Motion for Reconsideration and/or Appeal from the said Order before
the NLRC. In its Decision dated March 12, 2003, the NLRC denied the
said appeal, holding that Uytengsu is jointly and severally liable with
Mandaue Dinghow on the ground that he is the President/Chairman of
Mandaue Dinghow and that the latter is no longer existing.
Uytengsu went to the CA via a petition for certiorari under Rule 65 of
the Rules of Civil Procedure, but the CA dismissed the said petition for
certiorari on the following grounds: (1) the petition failed to indicate
the full names of all private respondents and their respective complete
addresses; (2) the certificate of non-forum shopping attached to the
petition was merely signed by Uytengsu without attaching the
appropriate board resolution or secretarys certificate showing his
authority to file the said petition in behalf of Mandaue Dinghow; and
(3) Mandaue Dinghow and Uytengsu failed to file a motion for
reconsideration of the NLRC decision before going to the CA on
certiorari, without justifying the reasons for such failure.
Issue:
W/N the Doctrine of Piercing the Veil of Corporate Fiction was
properly invoked
Ruling:
A corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. Because of this, the
doctrine of piercing the veil of corporate fiction must be exercised with
caution.
In Malayang Samahan ng mga Manggagawa sa M. Greenfield v.
Ramos, this Court reiterated the rule that corporate directors and
officers are solidarily liable with the corporation for the termination of
employees done with malice or bad faith. It has been held that bad
faith does not connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty through some motive or
interest or ill will; it partakes of the nature of fraud.
In this case, it is worth mentioning that the LA in his Decision dated
June 10, 1999, expressly absolved Uytengsu from any liability, holding
that the latter did not act in bad faith and in excess of his authority.
Such finding was not assailed by the private respondents nor did the
NLRC in its Decision dated October 24, 2000 overrule the same. The
liability of Uytengsu was never discussed in the said NLRC decision

16

which, to the detriment of the private respondents, had lapsed into

finality.
Construction & Devt Corp.Vs. Cuenca (466 SCRA 711)
Facts:
Ultra International Trading Corporation (UITC) applied for a surety
bond from Malayan Insurance Co., Inc. (MICI), to guarantee its credits,
indebtedness, obligations and liabilities of any kind to Goodyear Tire
and Rubber Company of the Philippines.
MICI approved the application and issued MICO Bond No. 65734 for
an amount not exceeding P600,000.00. The surety bond was valid for
12 months, and was renewed several times, the last time being on May
15, 1983.
UITC, Edilberto Cuenca, and Rodolfo Cuenca executed an Indemnity
Agreement in favor of MICI to protect the latters interest.
Edilberto was then the President, while Rodolfo was a member of the
Board of Directors of UITC. Edilberto signed the indemnity agreement
in his official and personal capacity, while Rodolfo signed in his
personal capacity only. In the said agreement, UITC, Edilberto and
Rodolfo bound themselves jointly and severally to indemnify MICI of
any payment it would make under the surety bond.
On Feb 18, 1983, Goodyear sent to MICI a letter informing it of the
Default of UITC on its obligation.
After failure of UITC, Edilberto and Rodolfo to settle their obligation
with Goodyear, MICI was constrained to pay Goodyear P600,000.oo.
After demand for reimbursement, UITC, Edilberto and Rodolfo still
failed to pay MICI which prompted the latter to file a complaint for
collection of money against them.
UITC asked MICI to delay the filing of any suit as the CDCP (now
PNCC) had initiated a review of UITCs financial plans to enable it to
pay its creditors. It is given that UITC was a subsidiary of CDCP, with
the latter owning 78% of UITCs shares of stock.
On July 23, 1983, UITC wrote MICI proposing the following:

Immediate payment of P150,000.00.

Balance payable P50,000.00 per month until the obligation

is fully liquidated.

Interest and penalty charges are to be waived

In the mean time, Rodolfo filed a 3 rd party complaint against petitioner
CDCP (now PNCC) alleging that the latter had assumed the liability of
Rodolfo in the indemnity agreement.
CA affirmed in toto the decision of the RTC. The appellate court held
that UITC had impliedly authorized Edilberto and Rodolfo to procure
the surety bond and the indemnity agreement; hence, UITC was liable.
Moreover, UITC was estopped from questioning Edilberto and
Rodolfos authority to enter into the indemnity agreement in its behalf,
considering that it had already partially paid P150,000.00 to MICI.
The appellate court added that Edilberto and Rodolfo, having signed
the indemnity agreement also in their personal capacity, would
ordinarily be personally liable under the said agreement; but because
MICI failed to appeal the decision of the RTC, it had effectively waived
its right to hold them liable on its claim.
The appellate court noted that UITC was a subsidiary company of
CDCP (PNCC) because the latter holds almost 78% of UITCs stocks. As
such, UITC would purchase materials from suppliers such as Goodyear,
in behalf of CDCP.
Petitioner maintains that the mere fact that the materials purchased
from Goodyear were delivered to it does not warrant the piercing of the
corporate veil so as to treat the two corporations as one entity, absent
sufficient and clear showing that it was purposely used as a shield to
defraud creditors.
Issue:

W/N CDCP (PNCC) is jointly and solidarily liable with UITC

Ruling:
No.
We do not agree with the CA ruling that the petitioner is liable under
the indemnity agreement. On this point, the CA ratiocinated that the
petitioner is liable, considering that it is the majority stockholder of
UITC and the materials from Goodyear were purchased by UITC for
and in its behalf.
The petitioner cannot be made directly liable to MICI under the
indemnity agreement on the ground that it is UITCs majority
stockholder. It bears stressing that the petitioner was not a party
defendant in the main action. MICI did not assert any claim against the
petitioner, nor was the petitioner impleaded in the third-party
complaint on the ground of its direct liability to MICI.
Petitioner CDCP (PNCC) was brought into the action by respondent
Rodolfo simply for a remedy over. No cause of action was asserted by
MICI against it. The petitioners liability could only be based on its
alleged assumption of respondent Rodolfos liability under the
indemnity agreement. Since the petitioners liability is grounded on
that of respondent Rodolfos, it is imperative that the latter be first
adjudged liable to MICI before the petitioner may be held liable.
In any case, petitioner CDCP(PNCC), as majority stockholder, may not
be held liable for UITCs obligation. A corporation, upon coming into
existence, is invested by law with a personality separate and distinct
from those persons composing it as well as from any other legal entity
to which it may be related. The veil of corporate fiction may only be
disregarded in cases where the corporate vehicle is being used to defeat
public convenience, justify a wrong, protect fraud, or defend a crime.
Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality.
To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established.
Pamplona Plantation Co Vs. Tinghil (450 SCRA 421)
Facts:
Petitioner Pamplona Plantations Company, Inc. was organized for the
purpose of taking over the operations of the coconut and sugar
plantation of Hacienda Pamplona located in Pamplona, Negros
Oriental.
When the company took over the operation, it did not absorb all the
workers of Hacienda Pamplona. Some, however, were hired by the
company during harvest season as coconut hookers or sakador,
coconut filers, coconut haulers, coconut scoopers or lugiteros, and
charcoal makers.
Sometime in 1995, Pamplona Plantation Leisure Corporation was
established for the purpose of engaging in the business of operating
tourist resorts, hotels, and inns, with complementary facilities, such as
restaurants, bars, boutiques, service shops, entertainment, golf
courses, tennis courts, and other land and aquatic sports and leisure
facilities.
The Pamplona Plantation Labor Independent Union (PAPLIU)
conducted an organizational meeting wherein several respondents who
are either union members or officers participated in said meeting.
Upon learning that some of the respondents attended the said meeting,
Petitioner Jose Luis Bondoc, manager of the company, did not allow
respondents to work anymore in the plantation.
Hereafter, respondents filed their respective complaints with the NLRC
against petitioners for unfair labor practice, illegal dismissal,
underpayment, overtime pay, premium pay for rest day and holidays,
service incentive leave pay, damages, attorneys fees and 13 th month
pay.

17

Respondent Carlito Tinghil amended his complaint to implead

Pamplona Plantation Leisure Corporation.
Labor Arbiter Jose G. Gutierrez rendered a decision finding
respondents, except Rufino Bacubac, Antonio Caolas and Felix Torres
who were complainants in another case, to be entitled to separation
pay.
Petitioner-company & Bondoc appealed the Labor Arbiters decision to
the NLRC. The NLRC reversed the Labor Arbiters ruling that
respondents, except Carlito Tinghil, failed to implead Pamplona
Plantation Leisure Corporation, an indispensable party and that there
exist no employer-employee relation between the parties.
Respondents filed a motion for reconsideration which was denied by
the NLRC.
Respondents elevated the case to the CA. Guided by the fourfold test
for determining the existence of an employer-employee relationship;
the CA held that respondents were employees of petitionercompany. Hence, their dismissal was illegal.
Petitioner-company & Bondoc contended that the CA should have
dismissed the case for the failure of respondents to implead the
Pamplona Plantation Leisure Corporation, an indispensable party, for
being the true and real employer. Allegedly, respondents admitted that
they had been employed by the leisure corporation and/or engaged to
perform activities that pertained to its business.
Further, as the NLRC allegedly noted in their individual complaints,
respondents specifically averred that they had worked in the golf
course and performed related jobs in the recreational facilities of the
leisure corporation. Hence, petitioner-company claim that, as a sugar
and coconut plantation company separate and distinct from the
Pamplona Plantation Leisure Corporation, the petitioner-company is
not the real party in interest.
Issue:
W/N Pamplona Plantation Company, Inc. is separate and distinct from
Pamplona Plantation Leisure Corporation, and that the latter was an
indispensable party that should have been impleaded for being the true
and real employer

may be pierced in any of the instances cited in order to promote

substantial justice.
In the present case, the corporations have basically the same
incorporators and directors and are headed by the same official. Both
use only one office and one payroll and are under one management. In
their individual Affidavits, respondents allege that they worked under
the supervision and control of Petitioner Bondoc -- the common
managing director of both the petitioner-company and the leisure
corporation. Some of the laborers of the plantation also work in the
golf course. Thus, the attempt to make the two corporations appear as
two separate entities, insofar as the workers are concerned, should be
viewed as a devious but obvious means to defeat the ends of the law.
Such a ploy should not be permitted to cloud the truth and perpetrate
an injustice.
In any event, there is no need to implead the leisure corporation
because, insofar as respondents are concerned, the leisure corporation
and petitioner-company are one and the same entity.
Jardine Davis Vs. JRB Realty (463 SCRA 555)
Facts:
In 1979-1980, JRB Realty, Inc. built a nine-storey building, named
Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo
Village, Makati City. An air conditioning system was needed for the
Blanco Law Firm housed at the second floor of the building. On March
13, 1980, the respondents Executive Vice-President, Jose R. Blanco,
accepted the contract quotation of Mr. A.G. Morrison, President of
Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of
Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning
equipment with a net total selling price of P99,586.00. Thereafter, two
(2) brand new packaged air conditioners of 10 tons capacity each to
deliver 30,000 kcal or 120,000 BTUH were installed by Aircon. When
the units with rotary compressors were installed, they could not deliver
the desired cooling temperature. Despite several adjustments and
corrective measures, the respondent conceded that Fedders Air
Conditioning USAs technology for rotary compressors for big capacity
conditioners like those installed at the Blanco Center had not yet been
perfected. The parties thereby agreed to replace the units with
reciprocating/semi-hermetic compressors instead. In a Letter dated
March 26, 1981, Aircon stated that it would be replacing the units
currently installed with new ones using rotary compressors, at the
earliest possible time. Regrettably, however, it could not specify a date
when delivery could be effected.

Ruling:
No.
An examination of the facts reveals that, for both the coconut
plantation and the golf course, there is only one management which
the laborers deal with regarding their work. A portion of the plantation
(also called Hacienda Pamplona) had actually been converted into a
golf course and other recreational facilities. The weekly payrolls issued
by petitioner-company bore the name Pamplona Plantation Co., Inc. It
is also a fact that respondents all received their pay from the same
person, Petitioner Bondoc -- the managing director of the company.
Since the workers were working for a firm known as Pamplona
Plantation Co., Inc., the reason they sued their employer through that
name was natural and understandable.
True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona
Plantation Leisure Corporation appear to be separate corporate
entities. But it is settled that this fiction of law cannot be invoked to
further an end subversive of justice.
The principle requiring the piercing of the corporate veil mandates
courts to see through the protective shroud that distinguishes one
corporation from a seemingly separate one. The corporate mask may
be removed and the corporate veil pierced when a corporation is the
mere alter ego of another. Where badges of fraud exist, where public
convenience is defeated, where a wrong is sought to be justified
thereby, or where a separate corporate identity is used to evade
financial obligations to employees or to third parties, the notion of
separate legal entity should be set aside and the factual truth upheld.
When that happens, the corporate character is not necessarily
abrogated. It continues for other legitimate objectives. However, it

TempControl Systems, Inc. (a subsidiary of Aircon until 1987)

undertook the maintenance of the units, inclusive of parts and
services. In October 1987, the respondent learned, through newspaper
ads, that Maxim Industrial and Merchandising Corporation (Maxim,
for short) was the new and exclusive licensee of Fedders Air
Conditioning USA in the Philippines for the manufacture, distribution,
sale, installation and maintenance of Fedders air conditioners. The
respondent requested that Maxim honor the obligation of Aircon, but
the latter refused. Considering that the ten-year period of prescription
was fast approaching, to expire on March 13, 1990, the respondent then
instituted, on January 29, 1990, an action for specific performance
with damages against Aircon & Refrigeration Industries, Inc., Fedders
Air Conditioning USA, Inc., Maxim Industrial & Merchandising
Corporation and petitioner Jardine Davies, Inc. The latter was
impleaded as defendant, considering that Aircon was a subsidiary of
the petitioner.
On May 17, 1996, the RTC rendered its Decision, ordering the Jardine
Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial
and Merchandising Corporation, jointly and severally:
1. To deliver, install and place into operation the two (2)
brand new units of Fedders unitary packaged airconditioning
units each of 10 tons capacity with rotary compressors to
deliver 30,000 kcal or 120,000 BTUH to the second floor of
the Blanco Center building, or to pay plaintiff the current
price for two such units;

18

2. To reimburse plaintiff the amount of P556,551.55 as and

for the unsaved electricity bills from October 21, 1981 up to
April 30, 1995; and another amount of P185,951.67 as and
for repair costs;
3. To pay plaintiff P50,000.00 as and for attorneys fees;
and
4. Cost of suit.
The petitioner filed its notice of appeal with the CA, alleging that the
trial court erred in holding it liable because it was not a party to the
contract between JRB Realty, Inc. and Aircon, and that it had a
personality separate and distinct from that of Aircon.
On March 23, 2000, the CA affirmed the trial courts ruling in toto;
hence, this petition.
Issue:
W/N the Court of Appeals erred in holding Jardine liable for the
alleged contractual breach of Aircon solely because the latter was
formerly Jardines subsidiary
Ruling:
While it is true that Aircon is a subsidiary of the petitioner, it does not
necessarily follow that Aircons corporate legal existence can just be
disregarded. In Velarde v. Lopez, Inc., the Court categorically held that
a subsidiary has an independent and separate juridical personality,
distinct from that of its parent company; hence, any claim or suit
against the latter does not bind the former, and vice versa. In applying
the doctrine, the following requisites must be established: (1) control,
not merely majority or complete stock control; (2) such control must
have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or
dishonest acts in contravention of plaintiffs legal rights; and (3) the
aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.
The records bear out that Aircon is a subsidiary of the petitioner only
because the latter acquired Aircons majority of capital stock. It,
however, does not exercise complete control over Aircon; nowhere can
it be gathered that the petitioner manages the business affairs of
Aircon. Indeed, no management agreement exists between the
petitioner and Aircon, and the latter is an entirely different entity from
the petitioner.
Jardine Davies, Inc., incorporated as early as June 28, 1946, is
primarily a financial and trading company. Its Articles of Incorporation
states among many others that the purposes for which the said
corporation was formed, are as follows:
(a) To carry on the business of merchants, commission
merchants, brokers, factors, manufacturers, and agents;
(b) Upon complying with the requirements of law applicable
thereto, to act as agents of companies and underwriters
doing and engaging in any and all kinds of insurance
business.
On the other hand, Aircon, incorporated on December 27, 1952, is a
manufacturing firm. Its Articles of Incorporation states that its purpose
is mainly
To carry on the business of manufacturers of commercial
and household appliances and accessories of any form,
particularly to manufacture, purchase, sell or deal in air
conditioning and refrigeration products of every class and
description as well as accessories and parts thereof, or other

kindred articles; and to erect, or buy, lease, manage, or

otherwise acquire manufactories, warehouses, and depots for
manufacturing, assemblage, repair and storing, buying,
selling, and dealing in the aforesaid appliances, accessories
and products.
The existence of interlocking directors, corporate officers and
shareholders, which the respondent court considered, is not enough
justification to pierce the veil of corporate fiction, in the absence of
fraud or other public policy considerations. But even when there is
dominance over the affairs of the subsidiary, the doctrine of piercing
the veil of corporate fiction applies only when such fiction is used to
defeat public convenience, justify wrong, protect fraud or defend
crime. To warrant resort to this extraordinary remedy, there must be
proof that the corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice. Any piercing of the corporate veil has to
be done with caution. The wrongdoing must be clearly and
convincingly established. It cannot just be presumed.
In the instant case, there is no evidence that Aircon was formed or
utilized with the intention of defrauding its creditors or evading
its contracts and obligations. There was nothing fraudulent in the
acts of Aircon in this case. Aircon, as a manufacturing firm of air
conditioners, complied with its obligation of providing two air
conditioning units for the second floor of the Blanco Center in
good faith, pursuant to its contract with the respondent.
Unfortunately, the performance of the air conditioning units did
not satisfy the respondent despite several adjustments and
corrective measures.
We sustain the petitioners separateness from that of Aircon in this
case. It bears stressing that the petitioner was never a party to the
contract. Privity of contracts takes effect only between parties, their
successors-in-interest, heirs and assigns. The petitioner, which has
a separate and distinct legal personality from that of Aircon, cannot,
therefore, be held liable.

MR Dulay Vs. CA (225 SCRA 678)

Facts:
Manuel R. Dulay Enterprises, Inc, a domestic corporation owned a
property covered by TCT No. 17880 and known as Dulay Apartment
consisting of sixteen (16) apartment units on a six hundred eighty-nine
(689) square meters lot, more or less, located at Seventh Street (now
Buendia Extension) and F.B. Harrison Street, Pasay City.
Petitioner Corporation through its president, Manuel Dulay, obtained
various loans for the construction of its hotel project, Dulay
Continental Hotel (now Frederick Hotel). It even had to borrow money
from Virgilio Dulay to be able to continue the hotel project. As a result
of said loan, Virgilio Dulay occupied one of the unit apartments of the
subject property since 1973 while at the same time managing the Dulay
Apartment at his shareholdings in the corporation was subsequently
increased by his father.
Manuel Dulay by virtue of Board Resolution sold the subject property
to spouses Maria Theresa and Castrense Veloso in the amount of
P300,000.00 as evidenced by the Deed of Absolute Sale. Thereafter,
TCT No. 17880 was cancelled and TCT No. 23225 was issued to Maria
Theresa Veloso. Subsequently, Manuel Dulay and spouses Veloso
executed a Memorandum to the Deed of Absolute Sale of December 23,
1976 dated December 9, 1977 giving Manuel Dulay within (2) years or
until December 9, 1979 to repurchase the subject property for
P200,000.00 which was, however, not annotated either in TCT No.
17880 or TCT No. 23225.
On December 24, 1976, Maria Veloso, without the knowledge of
Manuel Dulay, mortgaged the subject property to Manuel A. Torres for
a loan of P250,000.00 which was duly annotated as Entry No. 68139 in
TCT No. 23225.

19

Upon the failure of Maria Veloso to pay Torres, the subject property
was sold on April 5, 1978 to Torres as the highest bidder in an
extrajudicial foreclosure sale as evidenced by the Certificate of Sheriff's
Sale issued on April 20, 1978.
On July 20, 1978, Maria Veloso executed a Deed of Absolute
Assignment of the Right to Redeem in favor of Manuel Dulay assigning
her right to repurchase the subject property from Torres as a result of
the extra sale held on April 25, 1978.
As neither Maria Veloso nor her assignee Manuel Dulay was able to
redeem the subject property within the one year statutory period for
redemption, Torres filed an Affidavit of Consolidation of Ownership
with the Registry of Deeds of Pasay City and TCT No. 24799 was
subsequently issued to Manuel Torres on April 23, 1979.
On October 1, 1979, Torres filed a petition for the issuance of a writ of
possession against spouses Veloso and Manuel Dulay. However, when
Virgilio Dulay was never authorized by the Corporation to sell or
mortgage the subject property, the trial court ordered private
respondent Torres to implead the Corporation as an indispensable
party but the latter moved for the dismissal of his petition which was
granted in an Order dated April 8, 1980.
Issue:
W/N the sale of the subject property between private respondents
spouses Veloso and Manuel Dulay has no binding effect on petitioner
corporation as Board Resolution No. 18 which authorized the sale of
the subject property was resolved without the approval of all the
members of the board of directors and said Board Resolution was
prepared by a person not designated by the corporation to be its
secretary
Ruling:
Section 101 of the Corporation Code of the Philippines provides:
Unless the by-laws provide otherwise, any action by the directors of a
close corporation without a meeting shall nevertheless be deemed valid
if:
1. Before or after such action is taken, written consent
thereto is signed by all the directors, or
2. All the stockholders have actual or implied knowledge of
the action and make no prompt objection thereto in writing;
or
3. The directors are accustomed to take informal action with
the express or implied acquiesce of all the stockholders, or
4. All the directors have express or implied knowledge of the
action in question and none of them makes prompt objection
thereto in writing.
If a directors' meeting is held without call or notice, an action taken
therein within the corporate powers is deemed ratified by a director
who failed to attend, unless he promptly files his written objection with
the secretary of the corporation after having knowledge thereof.
In the instant case, Petitioner Corporation is classified as a close
corporation and consequently a board resolution authorizing the sale
or mortgage of the subject property is not necessary to bind the
corporation for the action of its president. At any rate, corporate action
taken at a board meeting without proper call or notice in a close
corporation is deemed ratified by the absent director unless the latter
promptly files his written objection with the secretary of the
corporation after having knowledge of the meeting which, in his case,
Virgilio Dulay failed to do.

It is relevant to note that although a corporation is an entity which has

a personality distinct and separate from its individual stockholders or
members, the veil of corporate fiction may be pierced when it is used to
defeat public convenience justify wrong, protect fraud or defend crime.
The privilege of being treated as an entity distinct and separate from its
stockholder or members is therefore confined to its legitimate uses and
is subject to certain limitations to prevent the commission of fraud or
other illegal or unfair act. When the corporation is used merely as an
alter ego or business conduit of a person, the law will regard the
corporation as the act of that person. The Supreme Court had
repeatedly disregarded the separate personality of the corporation
where the corporate entity was used to annul a valid contract executed
by one of its members.
Petitioners' claim that the sale of the subject property by its president,
Manuel Dulay, to spouses Veloso is null and void as the alleged Board
Resolution was passed without the knowledge and consent of the other
members of the board of directors cannot be sustained. Appellant
Virgilio E. Dulay's protestations of complete innocence to the effect
that he never participated nor was even aware of any meeting or
resolution authorizing the mortgage or sale of the subject premises is
difficult to believe. On the contrary, he is very much privy to the
transactions involved. To begin with, he is an incorporator and one of
the board of directors designated at the time of the organization of
Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said entity
is loosely referred to as a "family corporation". The nomenclature, if
imprecise, however, fairly reflects the cohesiveness of a group and the
parochial instincts of the individual members of such an aggrupation of
which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its
incorporators being close relatives namely, three (3) children and their
father whose name identifies their corporation.
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975
executed an affidavit that he was a signatory witness to the execution of
the post-dated Deed of Absolute Sale of the subject property in favor of
Torres indicates that he was aware of the transaction executed between
his father and private respondents and had, therefore, adequate
knowledge about the sale of the subject property to private
respondents.
Consequently, Petitioner Corporation is liable for the act of Manuel
Dulay and the sale of the subject property to private respondents by
Manuel Dulay is valid and binding.
Section 3
Classes of corporations. Corporation formed or organized under
this Code may be stock or non-stock corporations. Corporations which
have capital stock divided into shares and are authorized to distribute
to the holders of such shares dividends or allotments of the surplus
profits on the basis of the shares held are stock corporations. All other
corporations are non-stock corporations.

CIR Vs. Club Filipino (5 SCRA 321)

Facts:
The "Club Filipino, Inc. de Cebu,", is a civic corporation organized
under the laws of the Philippines with an original authorized capital
stock of P22,000.00, which was subsequently increased to
P200,000.00. Neither in the articles or by-laws are there a provision
relative to dividends and their distribution, although it is covenanted
that upon its dissolution, the Club's remaining assets, after paying
debts, shall be donated to a charitable Philippine Institution in Cebu.
The Club owns and operates a club house, a bowling alley, a golf course
(on a lot leased from the government), and a bar-restaurant where it
sells wines and liquors, soft drinks, meals and short orders to its
members and their guests. The bar-restaurant was a necessary
incident to the operation of the club and its golf-course. The club is
operated mainly with funds derived from membership fees and dues.

20

Whatever profits it had, were used to defray its overhead expenses and
to improve its golf-course. In1951 as a result of a capital surplus,
arising from the re-valuation of its real properties, the value or price of
which increased, the Club declared stock dividends; but no actual cash
dividends were distributed to the stockholders.
In 1952, a BIR agent discovered that the Club has never paid
percentage tax on the gross receipts of its bar and restaurant, although
it secured licenses. The Collector of Internal Revenue assessed against
and demanded from the Club, the following sums:
As percentage tax on its gross receipts during the tax years
1946 to 1951 P9,599.07
Surcharge therein 2,399.77

operation. From the extrinsic evidence adduced, the Tax Court

concluded that the Club is not engaged in the business as a barkeeper
and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be
complied with, to wit: (1) a capital stock divided into shares and (2) an
authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the shares held. In the
case at bar, nowhere in its articles of incorporation or by-laws could be
found an authority for the distribution of its dividends or surplus
profits. Strictly speaking, it cannot, therefore, be considered a stock
corporation, within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon
fraternal, civic, non-profit, nonstock organizations, unless the intent to
the contrary is manifest and patent" (Collector v. BPOE Elks Club, et
al., supra ), which is not the case in the present appeal.

As fixed tax for the years 1946 to 1952 70.00

Compromise penalty 500.00
The Club wrote the Collector, requesting for the cancellation of the
assessment. The request having been denied, the Club filed the instant
petition for review.
Issue:
W/N the Club is liable for the taxes assessed by the CIR
Ruling:
Section 182, of the Tax Code states, "Unless otherwise provided, every
person engaging in a business on which the percentage tax is imposed
shall pay in full a fixed annual tax of ten pesos for each calendar year or
fraction thereof in which such person shall engage in said business."
Section 183 provides in general that "the percentage taxes on business
shall be payable at the end of each calendar quarter in the amount
lawfully due on the business transacted during each quarter; etc."
Section 191, same Tax Code, provides "Percentage tax . . . Keepers of
restaurants, refreshment parlors and other eating places shall pay a tax
three per centum , and keepers of bar and cafes where wines or liquors
are served five per centum of their gross receipts . . .". It has been held
that the liability for fixed and percentage taxes, as provided by these
sections, does not ipso facto attach by mere reason of the operation of a
bar and restaurant. For the liability to attach, the operator thereof must
be engaged in the business as a barkeeper and restaurateur. The plain
and ordinary meaning of business is restricted to activities or affairs
where profit is the purpose or livelihood is the motive, and the term
business when used without qualification, should be construed in its
plain and ordinary meaning, restricted to activities for profit or
livelihood.
It is conceded that the Club derived profit from the operation of its bar
and restaurant, but such fact does not necessarily convert it into a
profit-making enterprise. The bar and restaurant are necessary
adjuncts of the Club to foster its purposes and the profits derived
therefrom are necessarily incidental to the primary object of
developing and cultivating sports for the healthful recreation and
entertainment of the stockholders and members. That a Club makes
some profit, does not make it a profit-making Club. As has been
remarked a club should always strive, whenever possible, to have
surplus.
The facts that the capital stock of the respondent Club is divided into
shares, does not detract from the finding of the trial court that it is not
engaged in the business of operator of bar and restaurant. What is
determinative of whether or not the Club is engaged in such business is
its object or purpose, as stated in its articles and by-laws. It is a familiar
rule that the actual purpose is not controlled by the corporate form or
by the commercial aspect of the business prosecuted, but may be
shown by extrinsic evidence, including the by-laws and the method of

Having arrived at the conclusion that respondent Club is not engaged

in the business as an operator of a bar and restaurant, and therefore,
not liable for fixed and percentage taxes, it follows that it is not liable
for any penalty, much less of a compromise penalty.
Section 4
Corporations created by special laws or charters. Corporations
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code, insofar as they are
applicable.
Cuenca Vs. Atas (535 SCRA 48)
Facts:
Cuenca was an incorporator, President, and Chief Executive Officer of
the then Construction Development Corporation of the Philippines
(CDCP), now PNCC, from its incorporation in 1966 until 1983.
Sometime in 1977, CDCP was granted a franchise under Presidential
Decree No. 1113 to construct, operate, and maintain toll facilities of the
North and South Luzon Expressway. In the course of its operations, it
incurred substantial credit obligations from both private and
government sources.
However, its unpaid obligations ballooned so much that by 1983, it
became impossible for it to settle its maturing and overdue accounts
with various GFIs, namely, the Philippine National Bank (PNB),
Development Bank of the Philippines (DBP), National Development
Company (NDC), Government Service Insurance System (GSIS), Land
Bank of the Philippines (LBP), and PhilippinG Export and Foreign
Loan Guarantee Corporation (PEFLGC), now known as the Trade and
Investment Development Corporation of the Philippines.
On February 23, 1983, then President Ferdinand E. Marcos issued
Letter of Instruction No. (LOI) 1295, directing the creditor GFIs to
convert into CDCPs shares of stock the following: (1) all of the direct
obligations of CDCP and those of its wholly-owned subsidiaries,
including, but not limited to loans, credits, accrued interests, fees and
advances in any currency outstanding as of December 31, 1982; (2) the
direct obligations of CDCP maturing in 1983; and (3) obligations
maturing in 1983 which were guaranteed by the GFIs.
On April 25, 1983, a special stockholders meeting, presided by
petitioner, was held whereby stockholders representing more than twothirds (2/3) of the outstanding capital stock of CDCP approved the
increase of its authorized capital stock from PhP 1.6 to 2.7 billion in
accordance with LOI 1295. Thus, the CDCP, pursuant to said letter,
converted some of its obligations to GFIs into equity.

21

The total subscription of the above issuance of shares of stock pursuant

to LOI 1295 amounted to PhP 1,405,202,000 or 1.4 billion.
Thus, with the implementation of LOI 1295, respondents-GFIs became
the majority stockholders of CDCP to the extent of 70% of the
authorized capital stocks. The change in the corporations ownership
was made public through various announcements. CDCP was later
renamed to PNCC to reflect the Philippine Government stockholding,
and became a government-acquired asset corporation. Consequently,
the various GFIs were given seats in the Board of Directors of PNCC
and participated in the management of the company.
Meanwhile, sometime in 1988, pursuant to Administrative Order Nos.
14 and 64, DBP, PNB, PEFLGC, and NDC transferred their interests in
PNCC to the Republic of the Philippines which in turn conveyed them
to the Asset Privatization Trust (APT), now the Privatization and
Management Office, for disposition to the private sector pursuant to
the governments privatization program.

acquired asset corporation removed it from the category of a GOCC.

Thus, while the SEC has no jurisdiction over GOCCs with original
charter or created by special law primarily because they are governed
by their charters, it retains jurisdiction over government-acquired asset
corporations. Therefore, the SEC may compel PNCC to hold a
stockholders meeting for the purpose of electing members of the
latters board of directors.
HDMF Vs. COA (432 SCRA 126)
Facts:
Republic Act No. 6971, An Act to Encourage Productivity and
Maintain Industrial Peace by Providing Incentives to Both Labor and
Capital, was approved on November 22, 1990, and took effect on
December 9, 1990.
Section 3 of said Act states:

On May 31, 1996, more than a decade after LOI 1295 was implemented,
petitioner filed a complaint before the SEC SICD docketed as SEC Case
No. 05-96-5357 entitled Rodolfo M. Cuenca v. PNCC, et al., for the
SEC to determine and declare whether the GFIs were registered
stockholders of PNCC and the number of shares held by each of them
and to compel PNCC to call and hold regular stockholders meetings
and election of directors every year.
Petitioner averred that while PNCC issued the above specified
certificates of stock to the GFIs pursuant to LOI 1295, the GFIs
however refused to cancel and never did cancel the loans in their books
as payment for the shares issued in their names by PNCC as they
considered it to be a diminution of the value of their investments.
Thus, petitioner claimed that some of the GFIs refused to accept
delivery of the stock certificates from PNCC while others were not even
aware of the issuance of the certificates of stock in their names.
Consequently, respondents-GFIs continued to charge and receive
payments for their loan and interest charges from PNCC though these
loans were supposed to have been converted into common stock in
1983 pursuant to LOI 1295.
Issue:
W/N the GFIs have actually cancelled PNCCs loan in their books and
W/N PNCC is a GOCC
Ruling:
Yes.
First, it is undisputed that shares of stock were issued to the GFIs
converting part of their outstanding loan credit to equity with PNCC.
The certificates of stock issued attest to this fact. Moreover, the
administrative body below had duly debunked any irregularity in the
face of these certificates of stock. Second, the records and accounts of
PNCC duly reflected such debt-to-equity conversion as attested to by
the independent auditors from Carlos J. Valdes & Co., Certified Public
Accountants, in the comparative Financial Statements covering the
years 1982 and 1983. Third, the due issuance of the shares of stock in
the names of the GFIs was corroborated by PNCCs stock transfer
agent, Caval Securities Registry, Inc. Fourth, the Deed of Confirmation
and its Supplement erased any doubt as to the implementation of LOI
1295. Thus, based on these reasons, there can be no doubt as to the
implementation of LOI 1295. Corollarily, the shares of stock subject of
the instant case issued to the GFIs were for value and thus cannot be
considered as void or watered stocks.
Finally, it has been settled in Philippine National Construction
Corporation v. Pabion that PNCC is an acquired asset corporation and
not a government-owned and/or controlled corporation (GOCC). In
said case, we held that PNCC did not lose its status as a private
corporation upon acquisition by the government through GFIs of the
majority of its shares of stock. Our determination that PNCC is an

Sec. 3. Coverage.-- This Act shall apply to all business

enterprises with or without existing and duly recognized or
certified labor organizations, including government-owned
and controlled corporations performing proprietary
functions. It shall cover all employees and workers including
casual, regular, supervisory and managerial employees.
The Secretary of Labor and Employment and the Secretary of Finance
promulgated the Rules Implementing Republic Act No. 6971 on June 4,
1991. Rule II of said implementing rules provides:
Section 1. Coverage. These Rules shall apply to:
(a)

All business enterprises with or without existing

duly recognized or certified labor organizations,
including government-owned and controlled
corporations performing proprietary functions;

(b)

All employees and workers including casual,

regular, rank-and-file, supervisory and managerial
employees.

On November 21, 1991, petitioner HDMF granted Productivity

Incentive Bonus equivalent to one month salary plus allowance to all
its personnel pursuant to Republic Act No. 6971, and its Implementing
Rules.
The HDMF granted said bonus despite the advice on August 26, 1991 of
Undersecretary Salvador Enriquez of the Department of Budget and
Management (DBM) to all government-owned and controlled
corporations (GOCCs) and government financial institutions (GFIs)
with original charters performing proprietary functions to defer
payment of the productivity incentive bonus to their employees,
pending the issuance of a definite ruling by the Office of the President
on the matter.
On December 27, 1991, the Department of Labor and Employment and
the Department of Finance issued the Supplemental Rules
Implementing Republic Act No. 6971, which provides, thus:
Section 1.Paragraph (a) Section 1, Rule II of the Rules
Implementing RA 6971, shall be amended to read as follows:
Coverage. These Rules shall apply to:
(a)
All business enterprises with or without existing
duly certified labor organizations including governmentowned and controlled corporations performing proprietary
functions which are established solely for business or profit
or gain and accordingly excluding those created,

22

maintained or acquired in pursuance of a policy of

the state, enunciated in the constitution or by law,
and those whose officers and employees are
covered by the Civil Service.
Thus, the grant of productivity incentive bonus to the HDMF personnel
in the total amount of P5,136,710.91 was disallowed in audit under
Notice of Disallowance No. 96-006-101 (91). The disallowance was
based on COA Decision No. 96-288, dated June 4, 1996, stating that
Republic Act No. 6971 does not apply to government-owned or
controlled corporations or to government financial institutions with
original charters performing proprietary functions, such as the HDMF.
HDMF, through its President and Chief Executive Officer, Zorayda
Amelia C. Alonzo, requested for the lifting of the disallowance. Alonzo
argued that Republic Act No. 6971 applies to the employees of HDMF
since the coverage of the said law includes government-owned and
controlled corporations performing proprietary functions, and the
supplemental rules excluding it from coverage was issued after the
HDMF had already granted the productivity incentive bonus to its
employees.
The Commission on Audit affirmed the audit disallowance.
Issue:
W/N HDMF is a GOCC with original charter performing proprietary
functions and is therefore excluded from the coverage of RA 6971
Ruling:
The provisions of RA 6971, taken together, reveal the legislative intent
to include only government-owned and controlled corporations
performing proprietary functions within its coverage.
Petitioner is a government-owned and controlled corporation
performing proprietary functions with original charter or created by
special law, specifically Presidential Decree (PD) No. 1752, amending
PD No. 1530. As such, petitioner HDMF is covered by the Civil Service
pursuant to Article IX, Section 2(1) of the 1987 Constitution, and,
therefore, excluded from the coverage of Republic Act No. 6971.
Since Republic Act No. 6971 intended to cover only government-owned
and controlled corporations incorporated under the general
corporation law, the power of administrative officials to promulgate
rules in the implementation of the statute is necessarily limited to what
is intended and provided for in the legislative enactment. Hence, the
Supplemental Rules clarified that government-owned and controlled
corporations performing proprietary functions which are created,
maintained or acquired in pursuance of a policy of the state,
enunciated in the constitution or by law, and those whose officers and
employees are covered by the Civil Service are excluded from the
coverage of Republic Act No. 6971.
Therefore, even if petitioner HDMF granted the Productivity Incentive
Bonus before the Supplemental Rules were issued clarifying that
petitioner was excluded from the coverage of Republic Act No. 6971,
the employees of HDMF did not acquire a vested right over said bonus
because they were not entitled to it under Republic Act No. 6971.
Moreover, the DBM advised petitioner herein, HDMF, on August 26,
1991, to defer payment of the productivity incentive bonus to their
employees, pending the issuance of a definite ruling by the Office of the
President on the matter. Despite said advice, the Board of Trustees of
HDMF opted to grant the said bonus on a voluntary basis as stated in
its Resolution No. 91-549, Series of 1991. It expressed its concern over
the welfare of the officers and employees of the Fund rather than
adhering to the stringent technicality of the law. The Board, therefore,
was aware that possibly HDMF may not be covered by Republic Act
No. 6971. It should have exercised prudence by awaiting the definite
ruling on the coverage to prevent legal problems.

PhilSy Vs. COA (534 SCRA 112)

Facts:
The Philippine Society for the Prevention of Cruelty to Animals was
incorporated as a juridical entity over one hundred years ago by virtue
of Act No. 1285, enacted on January 19, 1905, by the Philippine
Commission. The petitioner, at the time it was created, was composed
of animal aficionados and animal propagandists. The objects of the
petitioner, as stated in Section 2 of its charter, shall be to enforce laws
relating to cruelty inflicted upon animals or the protection of animals
in the Philippine Islands, and generally, to do and perform all things
which may tend in any way to alleviate the suffering of animals and
promote their welfare.
At the time of the enactment of Act No. 1285, the original Corporation
Law, Act No. 1459, was not yet in existence. Act No. 1285 antedated
both the Corporation Law and the constitution of the Securities and
Exchange Commission. Important to note is that the nature of the
petitioner as a corporate entity is distinguished from the sociedad
anonimas under the Spanish Code of Commerce.
For the purpose of enhancing its powers in promoting animal welfare
and enforcing laws for the protection of animals, the petitioner was
initially imbued under its charter with the power to apprehend
violators of animal welfare laws. In addition, the petitioner was to
share one-half (1/2) of the fines imposed and collected through its
efforts for violations of the laws related thereto.
Subsequently, however, the power to make arrests as well as the
privilege to retain a portion of the fines collected for violation of
animal-related laws were recalled by virtue of Commonwealth Act
(C.A.) No. 148.
On December 1, 2003, an audit team from respondent Commission on
Audit (COA) visited the office of the petitioner to conduct an audit
survey pursuant to COA Office Order No. 2003-051 dated November
18, 2003 addressed to the petitioner. The petitioner demurred on the
ground that it was a private entity not under the jurisdiction of COA.

Issue:
W/N the petitioner is a private entity not subject to the jurisdiction of
COA
Ruling:
Yes, the PSPCA is a private entity.
The charter test as it stands today provides:
[T]he test to determine whether a corporation is
government owned or controlled, or private in
nature is simple. Is it created by its own charter
for the exercise of a public function, or by
incorporation under the general corporation
law? Those with special charters are government
corporations subject to its provisions and its
employees are under the jurisdiction of the Civil
Service Commission, and are compulsory
members of the Government Service Insurance
System. xxx
The petitioner is correct in stating that the charter test is predicated, at
best, on the legal regime established by the 1935 Constitution, Section
7, Article XIII, which states:
Sec. 7. The National Assembly shall not,
except by general law, provide for the formation,
organization, or regulation of private corporations,
unless such corporations are owned or controlled
by the Government or any subdivision or
instrumentality thereof.
The foregoing proscription has been carried over to the 1973 and the
1987 Constitutions.
Section 16 of Article XII of the present
Constitution provides:

23

Sec. 16. The Congress shall not, except

by general law, provide for the formation,
organization, or regulation of private corporations.
Government-owned or controlled corporations
may be created or established by special charters
in the interest of the common good and subject to
the test of economic viability.
Section 16 is essentially a re-enactment of Section 7 of Article XVI of
the 1935 Constitution and Section 4 of Article XIV of the 1973
Constitution.
And since the underpinnings of the charter test had been introduced by
the 1935 Constitution and not earlier, it follows that the test cannot
apply to the petitioner, which was incorporated by virtue of Act No.
1285, enacted on January 19, 1905. Settled is the rule that laws in
general have no retroactive effect, unless the contrary is provided. All
statutes are to be construed as having only a prospective operation,
unless the purpose and intention of the legislature to give them a
retrospective effect is expressly declared or is necessarily implied from
the language used. In case of doubt, the doubt must be resolved
against the retrospective effect.
There are a few exceptions. Statutes can be given retroactive effect in
the following cases: (1) when the law itself so expressly provides; (2) in
case of remedial statutes; (3) in case of curative statutes; (4) in case of
laws interpreting others; and (5) in case of laws creating new rights.
None of the exceptions is present in the instant case.
The general principle of prospectivity of the law likewise applies to Act
No. 1459, otherwise known as the Corporation Law, which had been
enacted by virtue of the plenary powers of the Philippine Commission
on March 1, 1906, a little over a year after January 19, 1905, the time
the petitioner emerged as a juridical entity. Even the Corporation Law
respects the rights and powers of juridical entities organized
beforehand.
In a legal regime where the charter test doctrine cannot be applied, the
mere fact that a corporation has been created by virtue of a special law
does not necessarily qualify it as a public corporation.
As stated, at the time the petitioner was formed, the applicable law was
the Philippine Bill of 1902, and, emphatically, as also stated above, no
proscription similar to the charter test can be found therein.
The textual foundation of the charter test, which placed a limitation on
the power of the legislature, first appeared in the 1935 Constitution.
However, the petitioner was incorporated in 1905 by virtue of Act No.
1258, a law antedating the Corporation Law (Act No. 1459) by a year,
and the 1935 Constitution, by thirty years. There being neither a
general law on the formation and organization of private corporations
nor a restriction on the legislature to create private corporations by
direct legislation, the Philippine Commission at that moment in history
was well within its powers in 1905 to constitute the petitioner as a
private juridical entity.
The amendments introduced by C.A. No. 148 made it clear that the
petitioner was a private corporation and not an agency of the
government. This was evident in Executive Order No. 63, issued by
then President of the Philippines Manuel L. Quezon, declaring that the
revocation of the powers of the petitioner to appoint agents with
powers of arrest corrected a serious defect in one of the laws existing
in the statute books.
As a curative statute, and based on the doctrines so far discussed, C.A.
No. 148 has to be given retroactive effect, thereby freeing all doubt as
to which class of corporations the petitioner belongs, that is, it is a
quasi-public corporation, a kind of private domestic corporation, which
the Court will further elaborate on under the fourth point.
Second, a reading of petitioners charter shows that it is not subject to
control or supervision by any agency of the State, unlike governmentowned and -controlled corporations. No government representative
sits on the board of trustees of the petitioner. Like all private
corporations, the successors of its members are determined voluntarily
and solely by the petitioner in accordance with its by-laws, and may

exercise those powers generally accorded to private corporations, such

as the powers to hold property, to sue and be sued, to use a common
seal, and so forth. It may adopt by-laws for its internal operations: the
petitioner shall be managed or operated by its officers in accordance
with its by-laws in force.
Third. The employees of the petitioner are registered and covered by
the Social Security System at the latters initiative, and not through the
Government Service Insurance System, which should be the case if the
employees are considered government employees. This is another
indication of petitioners nature as a private entity.
Fourth. The fact that a certain juridical entity is impressed with public
interest does not, by that circumstance alone, make the entity a public
corporation, inasmuch as a corporation may be private although its
charter contains provisions of a public character, incorporated solely
for the public good. This class of corporations may be considered
quasi-public corporations, which are private corporations that render
public service, supply public wants, or pursue other eleemosynary
objectives. While purposely organized for the gain or benefit of its
members, they are required by law to discharge functions for the public
benefit.
Examples of these corporations are utility, railroad,
warehouse, telegraph, telephone, water supply corporations and
transportation companies. It must be stressed that a quasi-public
corporation is a species of private corporations, but the
qualifying factor is the type of service the former renders to the public:
if it performs a public service, then it becomes a quasi-public
corporation.

The true criterion, therefore, to determine whether a corporation is

public or private is found in the totality of the relation of the
corporation to the State. If the corporation is created by the State as
the latters own agency or instrumentality to help it in carrying out its
governmental functions, then that corporation is considered public;
otherwise, it is private. Applying the above test, provinces, chartered
cities, and barangays can best exemplify public corporations. They are
created by the State as its own device and agency for the
accomplishment of parts of its own public works.
Fifth. The respondents argue that since the charter of the petitioner
requires the latter to render periodic reports to the Civil Governor,
whose functions have been inherited by the President, the petitioner is,
therefore, a government instrumentality. This contention is
inconclusive. By virtue of the fiction that all corporations owe their
very existence and powers to the State, the reportorial requirement is
applicable to all corporations of whatever nature, whether they are
public, quasi-public, or private corporationsas creatures of the State,
there is a reserved right in the legislature to investigate the activities of
a corporation to determine whether it acted within its powers. In other
words, the reportorial requirement is the principal means by which the
State may see to it that its creature acted according to the powers and
functions conferred upon it.

NADECO Vs. PVB (192 SCRA 257)

Facts:
Agrix Marketing, Inc. had executed in favor of Philippine Veterans
Bank a real estate mortgage over three (3) parcels of land situated in
Los Banos, Laguna. During the existence of the mortgage, Agrix went
bankrupt. It was for the expressed purpose of salvaging this and the
other Agrix companies that PD No. 1717 was issued by Pres. Marcos.
PD No. 1717 was ordered to rehabilitate the Agrix Group of Companies
to be administered mainly by National Development Company. The
law outlined the procedure for filing claims against the Agrix
companies and created a Claims Committee to process these claims.
Especially relevant is Section 4 thereof providing that all mortgages
and other liens presently attaching to any of the assets of the dissolved
corporations are hereby extinguished.
Pursuant to PD No. 1717, PVB filed a claim with the Agrix Claim
Committee for the payment of its loan credit. In the meantime, the
New Agrix, Inc. and the NADECO, invoking Section 4 of the enactment,
filed a petition for the cancellation of the mortgage lien in favor of

24

Agrix. The PVB took steps to extrajudicially foreclose the mortgage,

prompting NADECO to file a second case to stop the foreclosure. The
two cases were consolidated.
The RTC annulled not only the challenged provision but the entire PD
No. 1717 on the grounds that the presidential exercise of the legislative
power was a violation of separation of powers, the law impaired the
obligations of contracts, and the decree violated the equal protection
clause.
Issue:

point to emphasize that a private corporation is created for the private

purpose, benefit, aim and end of its members or stockholders.
Necessarily, said members or stockholders should be given a free hand
to choose who will compose the governing body of their corporation.
But this is not the case here and this clearly indicates that petitioners
are not private corporations.
The COA also denied petitioners request for COA to stop charging
auditing fees as well as petitioners request for COA to refund all
auditing fees already paid.

W/N PD No. 1717 is valid

Ruling:

Issue:

PD No. 1717 is an invalid exercise of police power, not being in

conformity with the traditional requirements of a lawful subject and a
lawful method. The extinction of the mortgage and other liens and of
the interest and other charges pertaining to the legitimate creditors of
Agrix constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to the category
of unsecured creditors in violation of the equal protection clause.

Whether a Local Water District (LWD) created under PD 198, as

amended, is a government-owned or controlled corporation subject to
the audit jurisdiction of COA

Moreover, the new corporation is neither owned nor controlled by the

government. The NADECO was merely required to extend a loan of not
more than P10,000,000.00 to New Agrix, Inc. Pending payment
thereof, NDC would undertake the management of the corporation but
with the obligation of making periodic reports to the Agrix board of
directors. After payment of the loan, the said board can then appoint
its management. The stocks of the new corporations are to be issued to
the old investors and stockholders of Agrix upon proof of their claims
against the abolished corporation. They shall then be the owners of the
new corporation. New Agrix is entirely private and should have been
organized under the Corporation Law in accordance with the abovecited constitutional provision.

The Constitution and existing laws mandate COA to audit all

government agencies, including government-owned and controlled
corporations (GOCCs) with original charters. An LWD is a GOCC
with an original charter.

The decree also interferes with purely private agreements without any
demonstrated connection with the public interest; there is likewise an
impairment of the obligation of contract.

Feliciano Vs. COA (419 SCRA 364)

Ruling:

The COAs audit jurisdiction extends not only to government agencies

or instrumentalities, but also to government-owned and controlled
corporations with original charters as well as other governmentowned or controlled corporations without original charters.
Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law,
provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled
corporations may be created or established by special
charters in the interest of the common good and subject to
the test of economic viability.

Facts:
A Special Audit Team from COA Regional Office audited the accounts
of Leyte Metropolitan Water District. Subsequently, LMWD received a
letter from COA requesting payment of auditing fees. As General
Manager of LMWD, Feliciano sent a reply informing COAs Regional
Director that the water district could not pay the auditing fees. The
Regional Director referred petitioners reply to the COA Chairman.
Thereafter, Feliciano wrote COA through the Regional Director asking
for refund of all auditing fees LMWD previously paid to COA.COA
Chairman Celso D. Gangan denied his requests. Petitioner filed a
motion for reconsideration on 31 March 2000, which COA denied on
30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to
the petition were resolutions of the Visayas Association of Water
Districts (VAWD) and the Philippine Association of Water Districts
(PAWD) supporting the petition.
The COA ruled that this Court has already settled COAs audit
jurisdiction over local water districts in Davao City Water District
v. Civil Service Commission and Commission on Audit, as
follows:
The above-quoted provision [referring to Section 3(b) PD 198]
definitely sets to naught petitioners contention that they are private
corporations. It is clear therefrom that the power to appoint the
members who will comprise the members of the Board of Directors
belong to the local executives of the local subdivision unit where such
districts are located. In contrast, the members of the Board of
Directors or the trustees of a private corporation are elected from
among members or stockholders thereof. It would not be amiss at this

The Constitution emphatically prohibits the creation of private

corporations except by a general law applicable to all citizens. The
purpose of this constitutional provision is to ban private corporations
created by special charters, which historically gave certain individuals,
families or groups special privileges denied to other citizens.
In short, Congress cannot enact a law creating a private corporation
with a special charter. Such legislation would be unconstitutional.
Private corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a general law.
Stated differently, only corporations created under a general law can
qualify as private corporations. Under existing laws, that general law is
the Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives.
The Constitution authorizes Congress to create government-owned or
controlled corporations through special charters.
Since private
corporations cannot have special charters, it follows that Congress can
create corporations with special charters only if such corporations are
government-owned or controlled.
Obviously, LWDs are not private corporations because they are not
created under the Corporation Code. LWDs are not registered with the
Securities and Exchange Commission. Section 14 of the Corporation
Code states that All corporations organized under this code shall file
with the Securities and Exchange Commission articles of incorporation
x x x. LWDs have no articles of incorporation, no incorporators and
no stockholders or members. There are no stockholders or members to
elect the board directors of LWDs as in the case of all corporations
registered with the Securities and Exchange Commission. The local
mayor or the provincial governor appoints the directors of LWDs for a
fixed term of office. Significantly, petitioners are not created
under the said code, but on the contrary, they were created

25

pursuant to a special law and are governed primarily by its

provision.
LWDs exist by virtue of PD 198, which constitutes their special charter.
Since under the Constitution only government-owned or controlled
corporations may have special charters, LWDs can validly exist only if
they are government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that their
existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and
power from the Corporation Code, LWDs derive their legal existence
and power from PD 198.
Clearly, LWDs exist as corporations only by virtue of PD 198, which
expressly confers on LWDs corporate powers. Section 6 of PD
198 provides that LWDs shall exercise the powers, rights and
privileges given to private corporations under existing laws. Without
PD 198, LWDs would have no corporate powers. Thus, PD 198
constitutes the special enabling charter of LWDs. The ineluctable
conclusion is that LWDs are government-owned and controlled
corporations with a special charter.
The phrase government-owned and controlled corporations with
original charters means GOCCs created under special laws and not
under the general incorporation law.
Certainly, the government owns and controls LWDs. The government
organizes LWDs in accordance with a specific law, PD 198. There is no
private party involved as co-owner in the creation of an LWD. Just
prior to the creation of LWDs, the national or local government owns
and controls all their assets. The government controls LWDs because
under PD 198 the municipal or city mayor, or the provincial governor,
appoints all the board directors of an LWD for a fixed term of six years.
The board directors of LWDs are not co-owners of the LWDs. LWDs
have no private stockholders or members. The board directors and
other personnel of LWDs are government employees subject to civil
service laws and anti-graft laws.
While Section 8 of PD 198 states that No public official shall serve as
director of an LWD, it only means that the appointees to the board of
directors of LWDs shall come from the private sector. Once such
private sector representatives assume office as directors, they become
public officials governed by the civil service law and anti-graft laws.
Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article
IX-B of the Constitution declaring that the civil service includes
government-owned or controlled corporations with original charters.

Section 6 Classification of shares. - The shares of stock of stock corporations

may be divided into classes or series of shares, or both, any of which
classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided,
That no share may be deprived of voting rights except those classified
and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of
the shares or series of shares may have a par value or have no par value
as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That preferred
shares of stock may be issued only with a stated par value. The board of
directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration
less than the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-par
value shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated
in the certificate of stock, each share shall be equal in all respects to
every other share.
Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:

If LWDs are neither GOCCs with original charters nor GOCCs without
original charters, then they would fall under the term agencies or
instrumentalities of the government and thus still subject to COAs
audit jurisdiction. However, the stark and undeniable fact is that the
government owns LWDs. Section 45 of PD 198 recognizes government
ownership of LWDs when Section 45 states that the board of directors
may dissolve an LWD only on the condition that another public
entity has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto. The implication is clear
that an LWD is a public and not a private entity.

1. Amendment of the articles of incorporation;

Section 5

5. Increase or decrease of capital stock;

Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether as
stockholders or as members. Incorporators are those stockholders or
members mentioned in the articles of incorporation as originally
forming and composing the corporation and who are signatories
thereof.
Corporators in a stock corporation are called stockholders or
shareholders. Corporators in a non-stock corporation are called
members.

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;

6. Merger or consolidation of the corporation with another corporation

or other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.

26

Except as provided in the immediately preceding paragraph, the vote

necessary to approve a particular corporate act as provided in this Code
shall be deemed to refer only to stocks with voting rights.
Republic Planters Vs. Agana (269 SCRA 1)
Facts:
Robes-Francisco Realty and Development Corporation secured a loan
from Republic Planters Bank in the amount of P120,000.00. As part of
the proceeds of the loan, preferred shares of stocks were issued to the
Corporation, through its officers then, Adalia F. Robes and one Carlos
F. Robes. In other words, instead of giving the legal tender totaling to
the full amount of the loan, which is P120,000.00, Republic lent such
amount partially in the form of money and partially in the form of
stock certificates numbered 3204 and 3205, each for 400 shares with a
par value of P10.00 per share, or for P4,000.00 each, for a total of
P8,000.00. Said stock certificates were in the name of Adalia F. Robes
and Carlos F. Robes, who subsequently, however, endorsed his shares
in favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions: The
Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%),
cumulative and participating.
xxx xxx xxx 2. That such preferred shares may be redeemed, by the
system of drawing lots, at any time after two (2) years from the date of
issue at the option of the Corporation. . .
Thereafter, private respondents proceeded against petitioner and filed
a Complaint anchored on private respondents' alleged rights to collect
dividends under the preferred shares in question and to have petitioner
redeem the same under the terms and conditions of the stock
certificates.
The trial court rendered the herein assailed decision in favor of private
respondents. In ordering petitioner to pay private respondents the face
value of the stock certificates as redemption price, plus 1% quarterly
interest thereon until full payment.
Issue:
W/N the Republic Planters may be compelled to redeem its preferred
stocks

financial ruin of a banking institution that would have resulted in

adverse repercussions, not only to its depositors and creditors, but also
to the banking industry as a whole. The directive, in limiting the
exercise of a right granted by law to a corporate entity, may thus be
considered as an exercise of police power. It has, however, been settled
that the Constitutional guaranty of non-impairment of obligations of
contract is limited by the exercise of the police power of the state, the
reason being that public welfare is superior to private rights.
The respondent judge also stated that since the stock certificate
granted the private respondents the right to receive a quarterly
dividend of One Per Centum (1%) cumulative and participating, it
"clearly and unequivocably indicates that the same are "interest
bearing stocks" or stocks issued by a corporation under an agreement
to pay a certain rate of interest thereon. As such, private respondents
become entitled to the payment thereof as a matter of right without
necessity of a prior declaration of dividend." There is no legal basis for
this observation.
Both Sec. 16 of the Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock dividend without
the approval of stockholders, representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. These provisions underscore the fact that
payment of dividends to a stockholder is not a matter of right but a
matter of consensus. Furthermore, "interest bearing stocks", on which
the corporation agrees absolutely to pay interest before dividends are
paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or
surplus only. Clearly, the respondent judge, in compelling the
petitioner to redeem the shares in question and to pay the
corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms
and conditions specified in the stock certificate, as well as the clear
mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of
private respondent is already barred by prescription as well as laches.
Art. 1144 of the New Civil Code provides that a right of action that is
founded upon a written contract prescribes in ten (10) years. The
letter-demand made by the private respondents to the petitioner was
made only on January 5, 1979, or almost eighteen years after receipt of
the written contract in the form of the stock certificate.
Moreover, the claim of the private respondents is also barred by laches.
Laches has been defined as the failure or neglect, for an unreasonable
length of time, to do that which by exercising due diligence could or
should have been done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting a presumption that the
party entitled to assert it either has abandoned it or declined to assert
it.

Ruling:
While the stock certificate does allow redemption, the option to do so
was clearly vested in the petitioner bank. The redemption therefore is
clearly the type known as "optional". Thus, except as otherwise
provided in the stock certificate, the redemption rests entirely with the
corporation and the stockholder is without right to either compel or
refuse the redemption of its stock. Furthermore, the terms and
conditions set forth therein use the word "may". It is a settled doctrine
in statutory construction that the word "may" denotes discretion, and
cannot be construed as having a mandatory effect.
The redemption of said shares cannot be allowed. As pointed out by the
petitioner, the Central Bank made a finding that said petitioner has
been suffering from chronic reserve deficiency, and that such finding
resulted in a directive, issued on January 31, 1973 by then Gov. G.S.
Licaros of the Central Bank, to the President and Acting Chairman of
the Board of the petitioner bank prohibiting the latter from redeeming
any preferred share, on the ground that said redemption would reduce
the assets of the Bank to the prejudice of its depositors and creditors.
Redemption of preferred shares was prohibited for a just and valid
reason. The directive issued by the Central Bank Governor was
obviously meant to preserve the status quo, and to prevent the

Considering that the terms and conditions set forth in the stock
certificate clearly indicate that redemption of the preferred shares may
be made at any time after the lapse of two years from the date of issue,
private respondents should have taken it upon themselves, after the
lapse of the said period, to inquire from the petitioner the reason why
the said shares have not been redeemed. As it is, not only two years had
lapsed, as agreed upon, but an additional sixteen years passed before
the private respondents saw it fit to demand their right. The petitioner,
at the time it issued said preferred shares to the private respondents in
1961, could not have known that it would be suffering from chronic
reserve deficiency twelve years later. Had the private respondents been
vigilant in asserting their rights, the redemption could have been
effected at a time when the petitioner bank was not suffering from any
financial crisis.
Castillo Vs. Balinghasay (440 SCRA 443)
Facts:

27

Castillo and Balinghasay are stockholders of Medical Center

Paranaquq, Inc., with the former holding Class B shares and the
latter owning Class A shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue,
Sucat, Paraaque City. It was organized sometime in September 1977.
At the time of its incorporation, Act No. 1459, the old Corporation Law
was still in force and effect.
The Article VII of MCPIs original Articles of Incorporation, as
approved by the Securities and Exchange Commission (SEC) was
amended twice and the latest amendment provide as follows:
SEVENTH: That the authorized capital stock of the corporation is
THIRTY TWO MILLION PESOS (P32,000,000.00) divided as follows:
CLASS
A
B

NO. OF SHARES
1,000
31,000

PAR VALUE
P1,000.00
1,000.00

Except when otherwise provided by law, only holders of

Class A shares have the right to vote and the right to be
elected as directors or as corporate officers.
The SEC approved the foregoing amendment on September 22, 1993.
On February 9, 2001, the shareholders of MCPI held their annual
stockholders meeting and election for directors. During the course of
the proceedings, respondent Rustico Jimenez, citing Article VII, as
amended, and notwithstanding MCPIs history, declared over the
objections of herein petitioners, that no Class B shareholder was
qualified to run or be voted upon as a director. In the past, MCPI had
seen holders of Class B shares voted for and serve as members of the
corporate board and some Class B share owners were in fact
nominated for election as board members. Nonetheless, Jimenez went
on to announce that the candidates holding Class A shares were the
winners of all seats in the corporate board. The petitioners protested,
claiming that Article VII was null and void for depriving them, as Class
B shareholders, of their right to vote and to be voted upon, in
violation of the Corporation Code, as amended.
On March 22, 2001, after their protest was given short shrift, herein
petitioners filed a Complaint for Injunction, Accounting and Damages,
docketed as Civil Case No. CV-01-0140 before the RTC of Paraaque
City, Branch 258. Said complaint was founded on two (2) principal
causes of action, namely:
a.
Annulment of the declaration of directors of the MCPI made
during the February 9, 2001 Annual Stockholders Meeting, and for the
conduct of an election whereat all stockholders, irrespective of the
classification of the shares they hold, should be afforded their right to
vote and be voted for; and
b.
Stockholders derivative suit challenging the validity of a contract
entered into by the Board of Directors of MCPI for the operation of the
ultrasound unit.
Subsequently, the complaint was amended to implead MCPI as partyplaintiff for purposes only of the second cause of action.
Issue:
W/N holders of Class B shares of the MCPI may be deprived of the
right to vote and be voted for as directors in MCPI
Ruling:
When Article VII of the Articles of Incorporation of MCPI was
amended in 1992, the phrase except when otherwise provided by law

was inserted in the provision governing the grant of voting powers to

Class A shareholders. This particular amendment is relevant for it
speaks of a law providing for exceptions to the exclusive grant of voting
rights to Class A stockholders. Which law was the amendment
referring to? The determination of which law to apply is necessary.
There are two laws being cited and relied upon by the parties in this
case. In this instance, the law in force at the time of the 1992
amendment was the Corporation Code (B.P. Blg. 68), not the
Corporation Law (Act No. 1459), which had been repealed by then.
We find and so hold that the law referred to in the amendment to
Article VII refers to the Corporation Code and no other law. At the
time of the incorporation of MCPI in 1977, the right of a corporation to
classify its shares of stock was sanctioned by Section 5 of Act No. 1459.
The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant
of right of classification of stock shares to corporations, but with a
significant change. Under Section 6 of B.P. Blg. 68, the requirements
and restrictions on voting rights were explicitly provided for, such that
no share may be deprived of voting rights except those classified and
issued as preferred or redeemable shares, unless otherwise
provided in this Code and that there shall always be a class or series
of shares which have complete voting rights. Section 6 of the
Corporation Code being deemed written into Article VII of the Articles
of Incorporation of MCPI, it necessarily follows that unless Class B
shares of MCPI stocks are clearly categorized to be preferred or
redeemable shares, the holders of said Class B shares may not be
deprived of their voting rights. Note that there is nothing in the
Articles of Incorporation nor an iota of evidence on record to show that
Class B shares were categorized as either preferred or redeemable
shares. The only possible conclusion is that Class B shares fall under
neither category and thus, under the law, are allowed to exercise voting
rights.
One of the rights of a stockholder is the right to participate in the
control and management of the corporation that is exercised through
his vote. The right to vote is a right inherent in and incidental to the
ownership of corporate stock, and as such is a property right. The
stockholder cannot be deprived of the right to vote his stock nor may
the right be essentially impaired, either by the legislature or by the
corporation, without his consent, through amending the charter, or the
by-laws.
Neither do we find merit in respondents position that Section 6 of the
Corporation Code cannot apply to MCPI without running afoul of the
non-impairment clause of the Bill of Rights. Section 148 of the
Corporation Code expressly provides that it shall apply to corporations
in existence at the time of the effectivity of the Code. Hence, the nonimpairment clause is inapplicable in this instance. When Article VII of
the Articles of Incorporation of MCPI were amended in 1992, the board
of directors and stockholders must have been aware of Section 6 of the
Corporation Code and intended that Article VII be construed in
harmony with the Code, which was then already in force and effect.
Since Section 6 of the Corporation Code expressly prohibits the
deprivation of voting rights, except as to preferred and redeemable
shares, then Article VII of the Articles of Incorporation cannot be
construed as granting exclusive voting rights to Class A shareholders,
to the prejudice of Class B shareholders, without running afoul of the
letter and spirit of the Corporation Code.
Garcia Vs. Lim Chu Sing (59 Phil 562)
Facts:
The debt which is the subject matter of the complaint was not really an
indebtedness of the Lim Chu Sing but of Lim Cuan Sy, who had an
account with the Mercantile Bank in the form of "trust receipts"
guaranteed by the Lim Chu as surety and with chattel mortgage
securities. The Mercantile Bank, without the knowledge and consent of
Lim Chu, foreclosed the chattel mortgage and privately sold the
property covered thereby. Inasmuch as Lim Cuan Sy failed to comply
with his obligations, the plaintiff required the defendant, as surety, to
sign a promissory note for the sum of P19,105.17 payable in the manner
hereinbefore stated. The defendant had been paying the corresponding
installments until the debt was reduced to the sum of P9,105.17

28

claimed in the complaint. The defendant is the owner of shares of stock

of the plaintiff Mercantile Bank of China amounting to P10,000. The
plaintiff bank is now under liquidation.
The proceeds of the sale of the mortgaged chattels together with other
payments made were applied to the amount of the promissory note in
question, leaving the balance which the plaintiff now seeks to collect.

In view of Reese desire that upon his death, Mantrasco and its own two
subsidiaries, Mantrasco (Guam) Inc. and the Port Motors Inc. would
continue under the management of respondents, a trust agreement on
his and respondents interest in Mantrasco was executed.
Upon Reese death, the projected transfer of his shares in the name of
Mnatrasco could, not, however, be immediately effected for lack of
sufficient funds to cover initial payment on the shares.

Issue:
W/N it is proper to compensate the Lim Chu Sing indebtedness of
P9,105.17, which is claimed in the complaint, with the sum of P10,000
representing the value of his shares of stock with the Mercantile Bank
of China
Ruling:
A share of stock or the certificate thereof is not indebtedness to the
owner nor evidence of indebtedness and, therefore, it is not a credit.
Stockholders, as such, are not creditors of the corporation. It is the
prevailing doctrine of the American courts, repeatedly asserted in the
broadest terms, that the capital stock of a corporation is a trust fund to
be used more particularly for the security of creditors of the
corporation, who presumably deal with it on the credit of its capital
stock. Therefore, the defendant-appellant Lim Chu Sing not being a
creditor of the Mercantile Bank of China, although the latter is a
creditor of the former, there is no sufficient ground to justify
compensation (art. 1195, Civil Code).
Section 7 Founders' shares. - Founders' shares classified as such in the
articles of incorporation may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where the
exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange Commission.
The five-year period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission.
Section 8 Redeemable shares. - Redeemable shares may be issued by the
corporation when expressly so provided in the articles of incorporation.
They may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other
terms and conditions as may be stated in the articles of incorporation,
which terms and conditions must also be stated in the certificate of
stock representing said shares.
Section 9 Treasury shares. - Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption, donation or through
some other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors.
CIR Vs. Manning (66 SCRA 14)
Facts:
Manila Trading and Supply Co. (MANTRASCO) had an authorized
capital stock of P2,500,000 divided into 25,000 common shares;
24,700 of these were owned by Julius Reese and the rest, at 100 shares
each by the three respondents Manning, McDonald and Simmons.

After Mantrasco made a partial payment of Reeses share, the

certificate for the 24,700 shares in Reeses name was cancelled and a
new certificate was issued in the name of Mantrasco. When the entire
purchase of Reeses shares was finally paid in full, the trust agreement
was terminated and the trustees delivered to Mantrasco all the shares
which they were holding in trust.
When the BIR examine the Mantrascos book, it found out that 24,700
shares had been proportionately distributed to the respondents and the
respondents failed to declare the said stock dividends as part of their
taxable income. The BIR concluded that the distribution of Reeses
shares as stock dividends was in effect a distribution of the asset or
property of the corporation as may be gleaned from the payment of
cash for the redemption of said stock and distributing the same as
stock dividends.
Issue:
W/N the 24,700 shares declared as stock dividends were treasury
shares
Ruling:
No.
Treasury shares are stocks issued and fully paid for and reacquired by
the corporation either by purchase, donation, forfeiture or other
means. Treasury shares are therefore issued shares but being in the
treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued, sold again, such share, as
long as it is held by the corporation as a treasury shares, participates
neither in dividends, because dividends cannot be declared by the
corporation to itself, nor in the meetings of the corporation as voting
stock, for otherwise equal distribution of voting powers among the
stockholders will be effectively lost and the directors will be able to
perpetuate their control of the corporation though it still represents a
paid for interest in the property of the corporation.
Under the trust agreement between the parties, it is their manifest
intention to treat the 24,700 shares of Reese as absolutely outstanding
shares of Reeses estate until they were fully paid. Such being the true
nature of the 24, 700 shares, their declaration as treasury stock
dividend in 1958 was a complete nullity and plainly violative of public
policy. A stock dividend being one payable in capital stock, cannot be
declared out of outstanding corporate stock, but only from retained
earnings.
Where corporate earnings are used to purchase outstanding stock
treated as treasury stock as a technical but prohibited device, to avoid
effects of income taxation, distribution of said corporate earnings in
the form of stock dividends will subject stockholders receiving them to
income tax.
SMC Vs. Sandiganbayan (340 SCRA 289)
Facts:
The Coconut Industry Investment Fund Holding Companies sold
33,133,266 shares of the outstanding capital stock of San Miguel

29

Corporation to Andres Soriano III of the SMC Group payable in four

(4) installments.
Andres Soriano III paid the initial P500 million to the UCPB as
administrator of the CIIF. The sale was transacted through the stock
exchange and the shares were registered in the name of AnscorHagedorn Securities, Inc. (AHSI).
The Presidential Commission on Good Government (PCGG) then led
by the former President of the Senate, the Honorable Jovito R.
Salonga, sequestered the shares of stock subject of the sale. Due to the
sequestration, the SMC Group suspended payment of the balance of
the purchase price of the subject stocks. In retaliation, the UCPB Group
rescinded the sale.
Thereafter, the UCPB and CIIF Holding Companies went to court. They
filed a complaint with the Regional Trial Court of Makati against the
petitioners for confirmation of rescission of sale with damages. The
petitioners assailed in this Court the jurisdiction of the Makati RTC on
the ground that primary jurisdiction was vested with the PCGG since
the SMC shares were sequestered shares. On August 10, 1988, we
upheld the petitioners. We ordered, among others, the dismissal of the
rescission case filed in the Makati RTC without prejudice to the
ventilation of the parties' claims before the Sandiganbayan.
The record shows that the petitioners and the UCPB Group were able
to thresh out their dispute extra-judicially. In March 1990, they signed
a Compromise Agreement and Amicable Settlement.
They likewise agreed to pay an "arbitration fee " of 5,500,000 SMC
shares composed of 3,858,831 A shares and 1,641,169 B shares to
the PCGG to be held in trust for the Comprehensive Agrarian Reform
Program.
On March 23, 1990, the petitioners and the UCPB Group filed with the
Sandiganbayan a Joint Petition for Approval of the
Compromise Agreement and Amicable Settlement.
On March 29, 1990, the Sandiganbayan motu proprio directed that
copies of the Joint Petition be furnished to E. Cojuangco, Jr., M.
Lobregat and others who are defendants in Civil Case No. 0033. The
same SMC shares are the subject of Civil Case No. 0033 and alleged as
part of the alleged ill-gotten wealth of former President Marcos and his
"cronies."
The Republic of the Philippines, through the Office of the Solicitor
General (OSG), opposed the Compromise Agreement and Amicable
Settlement. It contended that the involved coco-levy funds are public
funds. As public funds, the coco-levy funds, in any form or
transformation, are beyond or "outside the commerce," and perforce
not within the private disposition of private individuals.
The Sandiganbayan issued Resolution requiring SMC to deliver the
25.45 million SMC treasury shares to the PCGG. On March 18, 1992, it
denied petitioners' Motion for Reconsideration and further ordered
SMC to pay dividends on the said treasury shares and to deliver them
to the PCGG.
Issue:
W/N the Sandiganbayan gravely abused its discretion in ordering SMC
to deliver its treasury shares to PCGG and to pay dividends on said
treasury shares
Ruling:
In the exercise of its discretion, the Sandiganbayan can require a
party-litigant to deliver a sequestered property to the PCGG. We held
in Baseco vs. PCGG that "the power of the PCGG to sequester
property claimed to be 'ill-gotten' means to place or cause to be

placed under its possession or control said property, or any building or

office wherein any such property and any records pertaining thereto
may be found, including 'business enterprises and entities,' - - - for
the purpose of preventing the destruction, concealment or
dissipation of, and otherwise conserving and preserving the
same - - - until it can be determined, through appropriate judicial
proceedings, whether the property was in truth 'ill-gotten,' i.e. acquired
through or as a result of improper or illegal use or the conversion of
funds belonging to the government or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by
taking undue advantage of official position, authority, relationship,
connection or influence, resulting in unjust enrichment of the
ostensible owner and grave damage and prejudice to the State."
The order of the Sandiganbayan regarding the subject treasury shares
is merely preservative in nature. When the petitioners and UCPB
Group filed their Joint Manifestation of Implementation of the
Compromise Agreement and of Withdrawal of Petition, the
Sandiganbayan cautioned that "the PCGG, the UCPB and the SMC
Group shall always act with due regard to the sequestered character
of the shares of stock involved as well as the fruits thereof, more
particularly to prevent the loss or dissipation of their value ."
The caution was wisely given in view of the many contested provisions
of the Compromise Agreement. For one, the Sandiganbayan observed
that the conversion of the SMC shares to treasury shares will result in a
change in the status of the sequestered shares in that:
1. When the SMC converts these common shares to treasury stock, it is
converting those outstanding shares into the corporation's property for
which reason treasury shares do not earn dividends.
2. The retained dividends which would have accrued to those shares
if converted to treasury would go into the corporation and
enhance the corporation as a whole. The enhancement to the specific
sequestered shares, however, would be only to the extent aliquot in
relation to all the other outstanding SMC shares.
3. By converting the 26.45 million shares of stock into treasury shares,
the SMC has altered not only the voting power of those shares of
stock since treasury shares do not vote, but the SMC will have actually
enhanced the voting strength of the other outstanding shares of stock
to the extent that these 26.45 million shares no longer vote.
These significant changes in the character of the SMC shares cannot be
denied. In Commissioner of Internal Revenue vs. Manning., we
explained the limited nature of treasury shares.
For another, the payment to the PCGG of an arbitration fee in the
form of 5,500,000 of SMC shares is denounced as illegal, shocking and
unconscionable. COCOFED, et al. have assailed the legal right of
PCGG to act as arbiter as well as the fairness of its acts as arbiter.
COCOFED, et al. estimate that the value of the SMC shares given to
PCGG as arbitration fee which allegedly is not deserved, can run to
P1,966,635,000.00This is a serious allegation and the
Sandiganbayan cannot be charged with grave abuse of discretion when
it ordered that SMC should be temporarily dispossessed of the
subject treasury shares and that SMC should pay their
dividends while the Compromise Agreement involving them
is still under question.
Petitioners cannot rely on the case of First Phil. Holdings Corp. vs.
Sandiganbayan to justify their insistence that the P500 million
payment made by Soriano III should be validated. They contend that
the rules encouraging amicable settlement in civil cases should apply to
cases involving sequestered properties. In First Phil. Holdings , this
Court gave due course to the petition and ordered the Sandiganbayan
to approve the PCGG Resolution lifting the sequestration of MERALCO
shares. We noted that the Republic of the Philippines has agreed to
settle the controversy and the agreement will not in any way prejudice
the rights of third persons.
In the cases at bar, the record is clear that the Republic of the
Philippines, through the Office of the Solicitor General, vigorously

30

opposed the Compromise Agreement on legal and moral grounds.

COCOFED, et al. also opposed and contend that the conversion of the
SMC shares into treasury shares is highly prejudicial to the interests of
the coconut farmers. It cannot be gainsaid that if it is later proved that
SMC is not the lawful owner of the shares in question, what the
adjudged lawful owner will receive are treasury shares with diminished
value. The impugned order of the Sandiganbayan was issued to avoid
this mischief.
TITLE II
INCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATIONS
Section 10 -

Filipinas Orient Airways should alone be liable for its corporate acts as
duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot
be held personally liable for the compensation claimed by the private
respondent for the services performed by him in the organization of the
corporation. To repeat, the petitioners did not contract such services. It
was only the results of such services that Barretto and Garcia presented
to them and which persuaded them to invest in the proposed airline.
The most that can be said is that they benefited from such services, but
that surely is no justification to hold them personally liable therefor.
Otherwise, all the other stockholders of the corporation, including
those who came in later, and regardless of the amount of their share
holdings, would be equally and personally liable also with the
petitioners for the claims of the private respondent.

Number and qualifications of incorporators. - Any number of

natural persons not less than five (5) but not more than fifteen (15), all
of legal age and a majority of whom are residents of the Philippines,
may form a private corporation for any lawful purpose or purposes.
Each of the incorporators of s Stock Corporation must own or be a
subscriber to at least one (1) share of the capital stock of the
corporation.

Pioneer Insurance Vs. CA ( 175 SCRA 668)

Caram Vs. CA (151 SCRA 372)

Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract for the sale and purchase of two (2) DC-3A Type aircrafts
and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft arrived in
Manila on June 7,1965 while the other aircraft, arrived in Manila on
July 18,1965.

Facts:
The petitioners were not really involved in the initial steps that finally
led to the incorporation of the Filipinas Orient Airways. The project
study was undertaken by the private respondent at the request of
Barretto and Garcia who, upon its completion, presented it to the
petitioners to induce them to invest in the proposed airline. The study
could have been presented to other prospective investors. At any rate,
the airline was eventually organized on the basis of the project study
with the petitioners as major stockholders and, together with Barretto
and Garcia, as principal officers.
RTC ruled that since Barretto was the moving spirit in the preorganization work of corporation based on his experience and
expertise, hence he was logically compensated in the amount of
P200,000.00 shares of stock not as industrial partner but more for his
technical services that brought to fruition the corporation. By the same
token, Arellano should be similarly compensated not only for having
actively participated in the preparation of the project study for several
months and its subsequent revision but also in his having been
involved in the pre-organization of the defendant corporation, in the
preparation of the franchise, in inviting the interest of the financiers
and in the training and screening of personnel. For these special
services of the plaintiff the amount of P50,000.00 as compensation is
reasonable.
Issue:
W/N the petitioners themselves are also and personally liable for such
expenses and, if so, to what extent
Ruling:
The petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by Barretto as
the main promoter. It was he who was putting all the pieces together,
so to speak. The petitioners were merely among the financiers whose
interest was to be invited and who were in fact persuaded, on the
strength of the project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways
was a fictitious corporation and did not have a separate juridical
personality, to justify making the petitioners, as principal stockholders
thereof, responsible for its obligations. As a bona fide corporation, the

Facts:
Jacob S. Lim was engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.

Pioneer Insurance and Surety Corporation as surety executed and

issued its Surety Bond in favor of JDA, in behalf of its principal, Lim,
for the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company,
Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and
Constancio Maglana contributed some funds used in the purchase of
the above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand
his airline business. They executed two (2) separate indemnity
agreements in favor of Pioneer, one signed by Maglana and the other
jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold
and save harmless Pioneer from and against any/all damages, losses,
costs, damages, taxes, penalties, charges and expenses of whatever
kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make
good to Pioneer, its successors and assigns, all sums and amounts of
money which it or its representatives should or may pay or cause to be
paid or become liable to pay on them of whatever kind and nature.
Lim executed in favor of Pioneer as deed of chattel mortgage as
security for the latter's suretyship in favor of the former. It was
stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed was duly registered with the Office of the Register of
Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil
Aeronautics Law, respectively.
Lim defaulted on his subsequent installment payments prompting JDA
to request payments from the surety. Pioneer paid a total sum of
P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said
chattel mortgage before the Sheriff of Davao City. The Cervanteses and
Maglana, however, filed a third party claim alleging that they are coowners of the aircrafts,

31

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an
application for a writ of preliminary attachment against Lim and
respondents, the Cervanteses, Bormaheco and Maglana.

contributions to a proposed corporation which was never formed

because the petitioner reneged on their agreement. Maglana alleged in
his cross-claim:

The trial court rendered a decision holding Lim liable to pay Pioneer
but dismissed Pioneer's complaint against all other defendants.

Applying therefore the principles of law earlier cited to the facts of the
case, necessarily, no de facto partnership was created among the
parties which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows that
the petitioner was acting on his own and not in behalf of his other
would-be incorporators in transacting the sale of the airplanes and
spare parts.

The appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all
other respects the trial court's decision was affirmed.

Section 11
Issue:
What legal rules govern the relationship among co-investors whose
agreement was to do business through the corporate vehicle but who
failed to incorporate the entity in which they had chosen to invest?
How are the losses to be treated in situations where their contributions
to the intended 'corporation' were invested not through the corporate
form?
Ruling:
These questions are premised on the petitioner's theory that as a result
of the failure of respondents Bormaheco, Spouses Cervantes,
Constancio Maglana and petitioner Lim to incorporate, a de facto
partnership among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse
certain amounts given by the respondents to the petitioner as their
contributions to the intended corporation.
While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners, it is ordinarily held
that persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners
inter se. Thus, where persons associate themselves together under
articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corporation
within the statute, they become in legal effect partners inter se, and
their rights as members of the company to the property acquired by the
company will be recognized. So, where certain persons associated
themselves as a corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation, and two of them
contracted to pay a third the difference in the proportionate value of
the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action
between them for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed among them in
proportion to the value of the property contributed by each. However,
such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist, and
it should be implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not become
a partner with other subscribers who engage in business under the
name of the pretended corporation, so as to be liable as such in an
action for settlement of the alleged partnership and contribution. A
partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in the
absence of an agreement, so as to make the former liable to contribute
for payment of debts illegally contracted by the latter
It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them.
This gives credence to the cross-claims of the respondents to the effect
that they were induced and lured by the petitioner to make

Corporate term. - A corporation shall exist for a period not

exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this
Code; Provided, That no extension can be made earlier than five (5)
years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.
Alhambra Vs. SEC (24 SCRA 269)
Alhambra Cigar and Cigarette Manufacturing Company, Inc. was duly
incorporated under Philippine laws on January 15, 1912. By its
corporate articles it was to exist for fifty (50) years from incorporation.
Its term of existence expired on January 15, 1962. On that date, it
ceased transacting business, entered into a state of liquidation.
Thereafter, a new corporation Alhambra Industries, Inc. was
formed to carry on the business of Alhambra. On May 1, 1962,
Alhambra's stockholders, by resolution named Angel S. Gamboa
trustee to take charge of its liquidation.
On June 20, 1963 within Alhambra's three-year statutory period for
liquidation - Republic Act 3531 was enacted into law. It amended
Section 18 of the Corporation Law; it empowered domestic private
corporations to extend their corporate life beyond the period fixed by
the articles of incorporation for a term not to exceed fifty years in any
one instance. Previous to Republic Act 3531, the maximum nonextendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors
resolved to amend paragraph "Fourth" of its articles of incorporation to
extend its corporate life for an additional fifty years, or a total of 100
years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing more than
two-thirds of its subscribed capital stock, voted to approve the
foregoing resolution. The "Fourth" paragraph of Alhambra's articles of
incorporation was thus altered to read:
FOURTH. That the term for which said corporation is to exist is fifty
(50) years from and after the date of incorporation, and for an
additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so
amended certified correct by its president and secretary and a majority
of its board of directors, were filed with respondent Securities and
Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said amended articles
of incorporation to Alhambra's counsel with the ruling that Republic
Act 3531 "which took effect only on June 20, 1963, cannot be availed of
by the said corporation, for the reason that its term of existence had

32

already expired when the said law took effect in short, said law has no
retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of
SEC's ruling aforesaid, refiled the amended articles of incorporation.
SEC, however, issued an order denying the reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the
conclusion below.
Issue:
W/N Alhambra could extend the term of its corporation existence
Ruling:
From July 15 to October 28, 1963, when Alhambra made its attempt to
extend its corporate existence, its original term of fifty years had
already expired (January 15, 1962); it was in the midst of the three-year
grace period statutorily fixed in Section 77 of the Corporation Law,
thus:
SEC. 77. Every corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose corporate existence
for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established.
Plain from the language of the provision is its meaning: continuance of
a "dissolved" corporation as a body corporate for three years has for its
purpose the final closure of its affairs, and no other; the corporation is
specifically enjoined from "continuing the business for which it was
established". The liquidation of the corporation's affairs set forth in
Section 77 became necessary precisely because its life had ended. For
this reason alone, the corporate existence and juridical personality of
that corporation to do business may no longer be extended.
Worth bearing in mind, at this juncture, is the basic development of
corporation law.

The contract of lease provides that the term of the lease is for twenty
years beginning from the date of the contract and "is extendable for
another term of twenty years at the option of the LESSEE should its
term of existence be extended in accordance with law." The contract
also states that the lessee agrees to "use the property as factory site and
for that purpose to construct whatever buildings or improvements may
be necessary or convenient and/or . . . for any purpose it may deem fit;
and before the termination of the lease to remove all such buildings
and improvements"
In accordance with the contract, PBM introduced on the land,
buildings, machineries and other useful improvements. These
constructions and improvements were registered with the Registry of
Deeds of Rizal and annotated at the back of the respondents'
certificates of title.
Subsequently, PBM executed in favor of Philippine National Bank a
deed of assignment, conveying and transferring all its rights and
interests under the contract of lease which it executed with private
respondents. The assignment was for and in consideration of the loans
granted by PNB to PBM. The deed of assignment was registered and
annotated at the back of the private respondents' certificates of title as
On November 6, 1963 and December 23, 1963 respectively, PBM
executed in favor of PNB a real estate mortgage for a loan of
P100,000.00 and an addendum to real estate mortgage for another
loan of P1,590,000.00, covering all the improvements constructed by
PBM on the leased premises. These mortgages were registered and
annotated at the back of respondents' certificates.
PBM filed a petition for registration of improvements in the titles of
real property owned by private respondents.
Private respondents filed a motion in the same proceedings which was
given a different case number to wit, LRC Case No. R-2744, because of
the payment of filing fees for the motion. The motion sought to cancel
the annotations on respondents' certificates of title pertaining to the
assignment by PBM to PNB of the former's leasehold rights, inclusion
of improvements and the real estate mortgages made by PBM in favor
of PNB, on the ground that the contract of lease entered into between
PBM and respondents-movants had already expired by the failure of
PBM and/or its assignee to exercise the option to renew the second 20year lease commencing on March 1, 1974 and also by the failure of PBM
to extend its corporate existence in accordance with law. The motion
also states that since PBM failed to remove its improvements on the
leased premises before the expiration of the contract of lease, such
improvements shall accrue to respondents as owners of the land.

The common law rule, at the beginning, was rigid and inflexible in that
upon its dissolution, a corporation became legally dead for all
purposes. Statutory authorizations had to be provided for its
continuance after dissolution "for limited and specified purposes
incident to complete liquidation of its affairs". Thus, the moment a
corporation's right to exist as an "artificial person" ceases, its corporate
powers are terminated "just as the powers of a natural person to take
part in mundane affairs cease to exist upon his death". There is
nothing left but to conduct, as it were, the settlement of the estate of a
deceased juridical person.

On April 22, 1982, respondent court issued an order directing the

cancellation of the inscriptions on respondents' certificates of title.

PNB Vs. CFI (209 SCRA 294)

Petitioner PNB filed an omnibus motion to set aside the entry of

judgment as ordered by the respondent court on the ground that it has
no prior notice or knowledge of the order of respondent court and that
while there was a certification from the Bureau of Posts that three
registry notices were sent to petitioner's counsel, there was no
allegation or certification whatsoever that said notices were actually
received by the addressee.

Facts:
Private respondents are the registered owners of three parcels of land
in Pasig, Metro Manila covered by OCT No. 853, TCT Nos. 32843 and
32897 of the Registry of Deeds of Rizal.

Petitioner PNB filed a motion for reconsideration of the above order of

the respondent court but the latter denied it. Private respondents filed
a motion for entry of final judgment and issuance of a writ of execution
of the order. The court granted the aforesaid motion for entry of final
judgment and ordered the Register of Deeds of Pasig, Rizal to cancel
the entries on respondents' certificates of title stated in the order.

Issue:
Private respondents entered into a contract of lease with Philippine
Blooming Mills, Co., Inc., whereby the letter shall lease the
aforementioned parcels of land as factory site. PBM was duly organized
and incorporated on January 19, 1952 with a corporate term of twentyfive (25) years. This leasehold right of PBM covering the parcels of land
was duly annotated at the back of the above stated certificates of title.

W/N the Trial Court gravely abused its discretion in issuing an order
directing the cancellation of the inscriptions on respondents'
certificates of title
Ruling:

33

First, on the issue of prior notice and knowledge of the order:

Section 8 of Rule 13 of the Rules of Court, as amended, provides that
service by registered mail is complete upon actual receipt by the
addressee; but if he fails to claim his mail from the post office within
five (5) days from the date of first notice of the postmaster, service shall
take effect at the expiration of such time. The fair and just application
of that exception depends upon the conclusive proof that the first
notice was sent by the postmaster to the addressee. The best evidence
of that fact would be the certification from the postmaster (Barrameda
v. Castillo, L-27211, July 6, 1977, 78 SCRA 1).
In the instant case, the respondent court found that the postmaster's
certification stated that three (3) notices of the registered mail which
contained the order of June 28, 1982 denying the motion for
reconsideration of the order of April 22, 1982, were sent to petitioner
PNB's counsel at Escolta, Manila which is the address stated in the
record of the case. The factual findings of the trial court bear great
weight and are binding upon this Court. Hence, as between the denial
of the petitioners' counsel that he received the notice of the registered
mail and the postmaster's certification that said notices were sent to
him, the postmaster's claim should prevail. The postmaster has the
official duty to send notices of registered mail and the presumption is
that official duty was regularly performed.
Second, on the issue that the court has no jurisdiction to hear the case
but the SEC as it raised as issues the corporate existence of PBM:
Private respondent's motion with the respondent court was for the
cancellation of the entries on their titles on the ground that the
contract of lease executed between them and PBM had expired. This
action is civil in nature and is within the jurisdiction of the respondent
court. The circumstance that PBM as one of the contracting parties is a
corporation whose corporate term had expired and which fact was
made the basis for the termination of the lease is not sufficient to
confer jurisdiction on the Securities and Exchange Commission over
the case. Presidential Decree No. 902-A, as amended, enumerates the
cases over which the SEC has exclusive jurisdiction and authority to
resolve. The case at bar is not covered by the enumeration.
Third, on the issue of whether the cancellation of the entries on
respondent's certificates of title is valid and proper, We find that the
respondent court did not act in excess of its jurisdiction, in ordering
the same.
The contract of lease expressly provides that the term of the lease shall
be twenty years from the execution of the contract but can be extended
for another period of twenty years at the option of the lessee should the
corporate term be extended in accordance with law. Clearly, the option
of the lessee to extend the lease for another period of twenty years can
be exercised only if the lessee as corporation renews or extends its
corporate term of existence in accordance with the Corporation Code
which is the applicable law. Contracts are to be interpreted according
to their literal meaning and should not be interpreted beyond their
obvious intendment. Thus, in the instant case, the initial term of the
contract of lease which commenced on March 1, 1954 ended on March
1, 1974. PBM as lessee continued to occupy the leased premises beyond
that date with the acquiescence and consent of the respondents as
lessor. Records show however, that PBM as a corporation had a
corporate life of only twenty-five (25) years which ended on January
19, 1977. It should be noted however that PBM allowed its corporate
term to expire without complying with the requirements provided by
law for the extension of its corporate term of existence.
Section 11 of Corporation Code provides that a corporation shall exist
for a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is
extended.
Upon the expiration of the period fixed in the articles of incorporation
in the absence of compliance with the legal requisites for the extension
of the period, the corporation ceases to exist and is dissolved ipso
facto. When the period of corporate life expires, the corporation ceases

to be a body corporate for the purpose of continuing the business for

which it was organized. But it shall nevertheless be continued as a body
corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it gradually to settle and close its affairs, to
dispose of and convey its property and to divide its assets (Sec. 122,
Corporation Code). There is no need for the institution of a proceeding
for quo warranto to determine the time or date of the dissolution of a
corporation because the period of corporate existence is provided in
the articles of incorporation. When such period expires and without
any extension having been made pursuant to law, the corporation is
dissolved automatically insofar as the continuation of its business is
concerned. The quo warranto proceeding under Rule 66 of the Rules
of Court, as amended, may be instituted by the Solicitor General only
for the involuntary dissolution of a corporation on the following
grounds: a) when the corporation has offended against a provision of
an Act for its creation or renewal; b) when it has forfeited its privileges
and franchises by non-user; c) when it has committed or omitted an act
which amounts to a surrender of its corporate rights, privileges or
franchises; d) when it has mis-used a right, privilege or franchise
conferred upon it by law, or when it has exercised a right, privilege or
franchise in contravention of law. Hence, there is no need for the SEC
to make an involuntary dissolution of a corporation whose corporate
term had ended because its articles of incorporation had in effect
expired by its own limitation.
Considering the foregoing in relation to the contract of lease between
the parties herein, when PBM's corporate life ended on January 19,
1977 and its 3-year period for winding up and liquidation expired on
January 19, 1980, the option of extending the lease was likewise
terminated on January 19, 1977 because PBM failed to renew or extend
its corporate life in accordance with law. From then on, the
respondents can exercise their right to terminate the lease pursuant to
the stipulations in the contract.
Section 12
Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code shall not be required
to have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions of
the following section.
Section 13 Amount of capital stock to be subscribed and paid for the
purposes of incorporation. - At least twenty-five percent (25%) of
the authorized capital stock as stated in the articles of incorporation
must be subscribed at the time of incorporation, and at least twentyfive (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the absence of a
fixed date or dates, upon call for payment by the board of directors:
Provided, however, That in no case shall the paid-up capital be less
than five Thousand (P5,000.00) pesos.
Section 14 Contents of the articles of incorporation. - All corporations
organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages
duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by
this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose,
the articles of incorporation shall state which is the primary purpose
and which is/are he secondary purpose or purposes: Provided, That a

34

non-stock corporation may not include a purpose which would change

or contradict its nature as such;
3. The place where the principal office of the corporation is to be
located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five
(5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as
directors or trustees until the first regular directors or trustees are duly
elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock
in lawful money of the Philippines, the number of shares into which it
is divided, and in case the share are par value shares, the par value of
each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his
subscription, and if some or all of the shares are without par value,
such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount
contributed by each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles
of incorporation of any stock corporation unless accompanied by a
sworn statement of the Treasurer elected by the subscribers showing
that at least twenty-five (25%) percent of the authorized capital stock of
the corporation has been subscribed, and at least twenty-five (25%) of
the total subscription has been fully paid to him in actual cash and/or
in property the fair valuation of which is equal to at least twenty-five
(25%) percent of the said subscription, such paid-up capital being not
less than five thousand (P5,000.00) pesos.
Section 15 Forms of Articles of Incorporation. - Unless otherwise
prescribed by special law, articles of incorporation of all domestic
corporations shall comply substantially with the following form:

ARTICLES OF INCORPORATION
OF
__________________________
(Name of Corporation)

SECOND: That the purpose or purposes for which such

corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is located
in the City/Municipality of .............................................,
Province of .................................................., Philippines;
FOURTH: That the term for which said corporation is to exist
is ................ years from and after the date of issuance of the
certificate of incorporation;
FIFTH: That the names, nationalities and residences of the
incorporators of the corporation are as follows:
NAME

NATIONALITY

RESIDENCE

....................

.............................

....................................

....................

.............................

....................................

....................

.............................

....................................

....................

.............................

....................................

....................

.............................

....................................

SIXTH: That the number of directors or trustees of the

corporation shall be .............; and the names, nationalities
and residences of the first directors or trustees of the
corporation are as follows:
NAME

NATIONALITY

RESIDENCE

....................

.............................

....................................

....................

.............................

....................................

....................

.............................

....................................

....................

.............................

....................................

....................

.............................

....................................

SEVENTH: That the authorized capital stock of the

corporation
is
.................................................
(P......................) PESOS in lawful money of the Philippines,
divided into ............... shares with the par value
of ................................... (P.......................) Pesos per share.

KNOW ALL MEN BY THESE PRESENTS:

(In case all the share are without par value):
The undersigned incorporators, all of legal age and a
majority of whom are residents of the Philippines, have this
day voluntarily agreed to form a (stock) (non-stock)
corporation under the laws of the Republic of the
Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";

That the capital stock of the corporation is ...........................

shares without par value. (In case some shares have par
value and some are without par value): That the capital stock
of said corporation consists of ........................ shares of
which ....................... shares are of the par value
of .............................. (P.....................) PESOS each, and of
which ................................ shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the
authorized capital stock above stated has been subscribed as
follows:

35

Name of Subscriber Nationality

No of Share

Amount

Subscribed Subscribed
........................ ....................

.................... .....................

........................ ....................

.................... .....................

........................ ....................

.................... .....................

........................ ....................

.................... .....................

........................ ....................

.................... .....................

NINTH: That the above-named subscribers have paid at least

twenty-five (25%) percent of the total subscription as follows:

................................................
................................................

(Names and signatures of the incorporators)

SIGNED IN THE PRESENCE OF:
............................................
.............................................
(Notarial Acknowledgment)

Total Paid-In

TREASURER'S AFFIDAVIT

................................. ................................

.....................

REPUBLIC OF THE PHILIPPINES )

................................. ................................

.....................

CITY/MUNICIPALITY OF ) S.S.

................................. ................................

.....................

PROVINCE OF )

................................. ................................

.....................

I, ...................................., being duly sworn, depose and say:

................................. ................................

.....................

That I have been elected by the subscribers of the

corporation as Treasurer thereof, to act as such until my
successor has been duly elected and qualified in accordance
with the by-laws of the corporation, and that as such
Treasurer, I hereby certify under oath that at least 25% of the
authorized capital stock of the corporation has been
subscribed and at least 25% of the total subscription has been
paid, and received by me, in cash or property, in the amount
of not less than P5,000.00, in accordance with the
Corporation Code.

Name of Subscriber

Amount Subscribed

(Modify Nos. 8 and 9 if shares are with no par value. In case

the corporation is non-stock, Nos. 7, 8 and 9 of the above
articles may be modified accordingly, and it is sufficient if
the articles state the amount of capital or money contributed
or donated by specified persons, stating the names,
nationalities and residences of the contributors or donors
and the respective amount given by each.)
TENTH: That ....................................... has been elected by
the subscribers as Treasurer of the Corporation to act as
such until his successor is duly elected and qualified in
accordance with the by-laws, and that as such Treasurer, he
has been authorized to receive for and in the name and for
the benefit of the corporation, all subscription (or fees) or
contributions or donations paid or given by the subscribers
or members.
ELEVENTH: (Corporations which will engage in any business
or activity reserved for Filipino citizens shall provide the
following):

.......................................
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public,
for and in the City/Municipality of ..................................
Province of .........................................., this ............. day
of ........................., 19 ........; by ............................................
with Res. Cert. No. ..................... issued at .................
on
......................,
19
..........

"No transfer of stock or interest which shall reduce the

ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws
shall be allowed or permitted to recorded in the proper
books of the corporation and this restriction shall be
indicated in all stock certificates issued by the corporation."

NOTARY PUBLIC

IN WITNESS WHEREOF, we have hereunto signed these

Articles
of
Incorporation,
this
...................
day
of .............................., 19 ........... in the City/Municipality
of
........................................,
Province
of
.................................................,
Republic
of
the
Philippines.

Page No. ...............;

................................................

Sec. 16. Amendment of Articles of Incorporation. - Unless

otherwise prescribed by this Code or by special law, and for legitimate

My commission expires on ......................, 19 ........

Doc. No. ...............;

Book No. ..............;

Series of 19..... (7a)

36

purposes, any provision or matter stated in the articles of incorporation

may be amended by a majority vote of the board of directors or trustees
and the vote or written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent of at least twothirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such
articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating
the fact that said amendment or amendments have been duly approved
by the required vote of the stockholders or members, shall be
submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities
and Exchange Commission or from the date of filing with the said
Commission if not acted upon within six (6) months from the date of
filing for a cause not attributable to the corporation.
Sec. 17. Grounds when articles of incorporation or
amendment may be rejected or disapproved. - The Securities
and Exchange Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not in compliance
with the requirements of this Code: Provided, That the Commission
shall give the incorporators a reasonable time within which to correct
or modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by
existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan
associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and
other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
Sec. 18. Corporate name. - No corporate name may be allowed by
the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall issue
an amended certificate of incorporation under the amended name.
Industrial Refractories Vs. CA (390 SCRA 252)
Facts:
Refractories Corporation of the Philippines (RCP) is a corporation duly
organized on October 13, 1976 for the purpose of engaging in the
business of manufacturing, producing, selling, exporting and otherwise
dealing in any and all refractory bricks, its by-products and derivatives.

On June 22, 1977, it registered its corporate and business name with
the Bureau of Domestic Trade.
Industrial Refractories Corporation of the Philippines, on the other
hand, was incorporated on August 23, 1979 originally under the name
"Synclaire Manufacturing Corporation". It amended its Articles of
Incorporation on August 23, 1985 to change its corporate name to
"Industrial Refractories Corp. of the Philippines". It is engaged in the
business of manufacturing all kinds of ceramics and other products,
except paints and zincs.
Both companies are the only local suppliers of monolithic gunning mix.
Discovering that IRCP was using such corporate name, RCP filed on
April 14, 1988 with the Securities and Exchange Commission (SEC) a
petition to compel petitioner to change its corporate name on the
ground that its corporate name is confusingly similar with that of
petitioners such that the public may be confused or deceived into
believing that they are one and the same corporation.
The SEC decided in favor of RCP and against the IRCP declaring the
latters corporate name Industrial Refractories Corporation of the
Philippines as deceptively and confusingly similar to that of RCPs
corporate name Refractories Corporation of the Philippines.
Accordingly, respondent is hereby directed to amend its Articles of
Incorporation by deleting the name Refractories Corporation of the
Philippines in its corporate name within thirty (30) days from finality
of this Decision. Likewise, respondent is hereby ordered to pay the
petitioner the sum of P50,000.00 as attorneys fees."
Petitioner appealed to the SEC En Banc, arguing that it does not have
any jurisdiction over the case, and that respondent RCP has no right to
the exclusive use of its corporate name as it is composed of generic or
common words. The SEC En Banc modified the appealed decision in
that petitioner was ordered to delete or drop from its corporate name
only the word "Refractories".
Petitioner IRCP elevated the decision of the SEC En Banc through a
petition for review on certiorari to the Court of Appeals which then
rendered the herein assailed decision. The appellate court upheld the
jurisdiction of the SEC over the case and ruled that the corporate
names of petitioner IRCP and respondent RCP are confusingly or
deceptively similar, and that respondent RCP has established its prior
right to use the word "Refractories" as its corporate name. The
appellate court also found that the petition was filed beyond the
reglementary period.
Issue:
(1) W/N jurisdiction is vested with the regular courts as the present
case is not one of the instances provided in P.D. 902-A;
(2) W/N respondent RCP is not entitled to use the generic name
"refractories"; and
(3) W/N there is no confusing similarity between their corporate
names
Ruling:
The jurisdiction of the SEC is not merely confined to the adjudicative
functions provided in Section 5 of P.D. 902-A, as amended. By express
mandate, it has absolute jurisdiction, supervision and control over all
corporations. It also exercises regulatory and administrative powers to
implement and enforce the Corporation Code, one of which is Section
18, which provides:
"SEC. 18. Corporate name. -- No corporate name may be allowed by the
Securities and Exchange Commission if the proposed name is identical
or deceptively or confusingly similar to that of any existing corporation

37

or to any other name already protected by law or is patently deceptive,

confusing or contrary to existing laws. When a change in the corporate
name is approved, the Commission shall issue an amended certificate
of incorporation under the amended name."
It is the SECs duty to prevent confusion in the use of corporate names
not only for the protection of the corporations involved but more so for
the protection of the public and it has authority to de-register at all
times and under all circumstances corporate names which in its
estimation are likely to generate confusion. Clearly therefore, the
present case falls within the ambit of the SECs regulatory powers.
Likewise untenable is petitioners argument that there is no confusing
or deceptive similarity between petitioner and respondent RCPs
corporate names. Section 18 of the Corporation Code expressly
prohibits the use of a corporate name which is "identical or deceptively
or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing
or contrary to existing laws". The policy behind the foregoing
prohibition is to avoid fraud upon the public that will have occasion to
deal with the entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of administration and
supervision over corporation.
Pursuant thereto, the Revised Guidelines in the Approval of Corporate
and Partnership Names specifically requires that: (1) a corporate name
shall not be identical, misleading or confusingly similar to one already
registered by another corporation with the Commission; and (2) if the
proposed name is similar to the name of a registered firm, the
proposed name must contain at least one distinctive word different
from the name of the company already registered.
As held in Philips Export B.V. vs. Court of Appeals , to fall within
the prohibition of the law, two requisites must be proven, to wit:
(1) that the complainant corporation acquired a prior right over the use
of such corporate name; and
(2) the proposed name is either: (a) identical, or (b) deceptively or
confusingly similar to that of any existing corporation or to any other
name already protected by law; or (c) patently deceptive, confusing or
contrary to existing law.
As regards the first requisite, it has been held that the right to the
exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption. In this case,
respondent RCP was incorporated on October 13, 1976 and since then
has been using the corporate name "Refractories Corp. of the
Philippines". Meanwhile, IRCP was incorporated on August 23, 1979
originally under the name "Synclaire Manufacturing Corporation". It
only started using the name "Industrial Refractories Corp. of the
Philippines" when it amended its Articles of Incorporation on August
23, 1985, or nine (9) years after respondent RCP started using its
name. Thus, being the prior registrant, respondent RCP has acquired
the right to use the word "Refractories" as part of its corporate name.
Anent the second requisite, in determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such
as to mislead a person using ordinary care and discrimination and the
Court must look to the record as well as the names themselves.
Petitioners corporate name is "Industrial Refractories Corp. of the
Phils.", while respondents is "Refractories Corp. of the Phils."
Obviously, both names contain the identical words "Refractories",
"Corporation" and "Philippines". The only word that distinguishes
petitioner from respondent RCP is the word "Industrial" which merely
identifies a corporations general field of activities or operations. We
need not linger on these two corporate names to conclude that they are
patently similar that even with reasonable care and observation,
confusion might arise. It must be noted that both cater to the same
clientele, i.e. the steel industry. In fact, the SEC found that there were
instances when different steel companies were actually confused
between the two, especially since they also have similar product
packaging. Such findings are accorded not only great respect but even

finality, and are binding upon this Court, unless it is shown that it had
arbitrarily disregarded or misapprehended evidence before it to such
an extent as to compel a contrary conclusion had such evidence been
properly appreciated. And even without such proof of actual confusion
between the two corporate names, it suffices that confusion is probable
or likely to occur.
PC Javier & Sons Vs. CA (462 SCRA 36)
Facts:
P.C. Javier and Sons Services, Inc., Plaintiff Corporation, for short,
applied with First Summa Savings and Mortgage Bank, later on
renamed as PAIC Savings and Mortgage Bank, Defendant Bank, for
short, for a loan accommodation under the Industrial Guarantee Loan
Fund (IGLF) for P1.5 Million. Plaintiff Corporation through Pablo C.
Javier was advised that its loan application was approved and that the
same shall be forwarded to the Central Bank (CB) for processing and
release.
The CB released the loan to Defendant Bank in two (2) tranches of
P750,000 each. The first tranche was released to the Plaintiff
Corporation on May 18, 1981 in the amount of P750,000.00 and the
second tranche was released to Plaintiff Corporation on November 21,
1981 in the amount of P750,000.00. From the second tranche release,
the amount of P250,000.00 was deducted and deposited in the name
of Plaintiff Corporation under a time deposit.
Plaintiffs claim that the loan releases were delayed; that the amount of
P250,000.00 was deducted from the IGLF loan of P1.5 Million and
placed under time deposit; that Plaintiffs were never allowed to
withdraw the proceeds of the time deposit because Defendant Bank
intended this time deposit as automatic payments on the accrued
principal and interest due on the loan. Defendant Bank, however,
claims that only the final proceeds of the loan in the amount of
P750,000.00 was delayed the same having been released to Plaintiff
Corporation only on November 20, 1981, but this was because of the
shortfall in the collateral cover of Plaintiffs loan; that this second
tranche of the loan was precisely released after a firm commitment was
made by Plaintiff Corporation to cover the collateral deficiency through
the opening of a time deposit using a portion of the loan proceeds in
the amount of P250,000.00 for the purpose; that in compliance with
their commitment to submit additional security and open time deposit,
Plaintiff Javier in fact opened a time deposit for P250,000.00 and on
February 15, 1983, executed a chattel mortgage over some machineries
in favor of Defendant Bank; that thereafter, Plaintiff Corporation
defaulted in the payment of its IGLF loan with Defendant Bank hence
Defendant Bank sent a demand letter dated November 22, 1983,
reminding Plaintiff Javier to make payments because their accounts
have been long overdue; that on May 2, 1984, Defendant Bank sent
another demand letter to Plaintiff spouses informing them that since
they have defaulted in paying their obligation, their mortgage will now
be foreclosed; that when Plaintiffs still failed to pay, Defendant Bank
initiated extrajudicial foreclosure of the real estate mortgage executed
by Plaintiff spouses and accordingly the auction sale of the property
was scheduled by the ExOfficio Sheriff on May 9, 1984.
The instant complaint was filed to forestall the extrajudicial
foreclosure sale of a piece of land covered by Transfer Certificate of
Title (TCT) No. 473216 mortgaged by petitioner corporation in favor of
First Summa Savings and Mortgage Bank which bank was later
renamed as PAIC Savings and Mortgage Bank, Inc. It likewise asked for
the nullification of the Real Estate Mortgages it entered into with First
Summa Savings and Mortgage Bank. The supplemental complaint
added several defendants who scheduled for public auction other real
estate properties contained in the same real estate mortgages and
covered by TCTs No. N-5510, No. 426872, No. 506346 and Original
Certificate of Title No. 10146.
Several extrajudicial foreclosures of the mortgaged properties were
scheduled but were temporarily restrained by the RTC notwithstanding
the denial of petitioners prayer for a writ of preliminary injunction. In
an Order dated 10 December 1990, the RTC ordered respondents-

38

sheriffs to maintain the status quo and to desist from further

proceeding with the extrajudicial foreclosure of the mortgaged
properties.
Issue:
W/N Public Respondent Court gravely erred when it sustained the
dismissal of petitioners complaint and in affirming the right of the
respondent bank to collect the IGLF loans in lieu of first summa
savings and mortgage bank which originally granted said loans
Ruling:
Their defense that they should first be formally notified of the change
of corporate name of First Summa Savings and Mortgage Bank to PAIC
Savings and Mortgage Bank, Inc., before they will continue paying their
loan obligations to respondent bank presupposes that there exists
a requirement under a law or regulation ordering a bank that
changes its corporate name to formally notify all its debtors .
After going over the Corporation Code and Banking Laws, as well as
the regulations and circulars of both the SEC and the Bangko Sentral
ng Pilipinas (BSP), we find that there is no such requirement. This
being the case, this Court cannot impose on a bank that changes its
corporate name to notify a debtor of such change absent any law,
circular or regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore, discretionary on the
bank. Unless there is a law, regulation or circular from the SEC or BSP
requiring the formal notification of all debtors of banks of any change
in corporate name, such notification remains to be a mere internal
policy that banks may or may not adopt.
In the case at bar, though there was no evidence showing that
petitioners were furnished copies of official documents showing the
First Summa Savings and Mortgage Banks change of corporate name
to PAIC Savings and Mortgage Bank, Inc., evidence abound that they
had notice or knowledge thereof. Several documents establish this
fact.
First, letter dated 16 July 1983 signed by Raymundo V. Blanco,
Accountant of Petitioner Corporation, addressed to PAIC Savings and
Mortgage Bank, Inc. Part of said letter reads: In connection with your
inquiry as to the utilization of funds we obtained from the former First
Summa Savings and Mortgage Bank . . . Second, Board Resolution of
petitioner corporation signed by Pablo C. Javier, Sr. on 24 August 1983
authorizing him to execute a Chattel Mortgage over certain machinery
in favor of PAIC Savings and Mortgage Bank, Inc. Third, Secretarys
Certificate signed by Fortunato E. Gabriel, Corporate Secretary of
petitioner corporation, on 01 September 1983, certifying that a board
resolution was passed authorizing Mr. Pablo C. Javier, Sr. to execute a
chattel mortgage on the corporations equipment that will serve as
collateral to cover the IGLF loan with PAIC Savings and Mortgage
Bank, Inc. Fourth, undated letter signed by Pablo C. Javier, Sr. and
addressed to PAIC Savings and Mortgage Bank, Inc., authorizing Mr.
Victor F. Javier, General Manager of petitioner corporation, to secure
from PAIC Savings and Mortgage Bank, Inc. certain documents for his
signature.
From the foregoing documents, it cannot be denied that petitioner
corporation was aware of First Summa Savings and Mortgage Banks
change of corporate name to PAIC Savings and Mortgage Bank, Inc.
Knowing fully well of such change, petitioner corporation has no valid
reason not to pay because the IGLF loans were applied with and
obtained from First Summa Savings and Mortgage Bank. First Summa
Savings and Mortgage Bank and PAIC Savings and Mortgage Bank,
Inc., are one and the same bank to which petitioner corporation is
indebted. A change in the corporate name does not make a new
corporation, whether effected by a special act or under a general law. It
has no effect on the identity of the corporation, or on its property,
rights, or liabilities. The corporation, upon such change in its name, is
in no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name, and its
character is in no respect changed.

Philips Export Vs. CA (206 SCRA 457)

Facts:
Petitioner Philips Export B.V. (PEBV), a foreign corporation
organized under the laws of the Netherlands, not engaged in business
here, is the registered owner of the trademarks PHILIPS and PHILIPS
SHIELD EMBLEM under Certificate of Registration Nos. R-1641 and
R-1674, respectively issued by the Philippine Patent Office (now the
Bureau of Patents, Trademarks and Technology Transfer).
Petitioners Philips Electrical Lamps, Inc. and Philips
Industrial Development, Inc., authorized users of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on
August 29 and May 25, 1956, respectively. All petitioner corporations
belong to the PHILIPS Group of Companies.
Private Respondent Standard Philips Corporation, was issued
a Certificate of Registration by respondent Commission on 19 May
1982.
Petitioners filed a letter complaint with the Securities & Exchange
Commission (SEC) asking for the cancellation of the word "PHILIPS"
from Private Respondent's corporate name in view of the prior
registration with the Bureau of Patents of the trademark "PHILIPS"
and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner
PEBV, and the previous registration of Petitioners Philips Electrical
and Philips Industrial with the SEC.
As a result of Private Respondent's refusal to amend its Articles of
Incorporation, petitioners filed with the SEC, a Petition, praying for the
issuance of a Writ of Preliminary Injunction, alleging, that the use of
the word PHILIPS amounts to an infringement and clear violation of
Petitioner's exclusive right to use the same considering that both
parties engage in the same business.
Private Respondent countered that Petitioner PEBBV has no legal
capacity to sue; that its use of its corporate name is not at all similar to
Petitioners' trademark PHILIPS when considered in its entirety; and
that its products consisting of chain rollers, belts, bearings and cutting
saw are grossly different from Petitioners' electrical products.
The SEC Hearing Officer ruled against the issuance of such Writ and
dismissed the Petition for lack of merit. The hearing officer of SEC
declared that it found no sufficient ground for the granting of
injunctive relief on the basis of the testimonial and documentary
evidence presented, it cannot order the removal or cancellation of the
word "PHILIPS" from Private Respondent's corporate name on the
basis of the same evidence adopted in toto during trial on the merits.
Besides, Section 18 of the Corporation Code (infra) is
applicable only when the corporate names in question are
identical. Here, there is no confusing similarity between Petitioners'
and Private Respondent's corporate names as those of the Petitioners
PEBV contain at least two words different from that of the Respondent.
Petitioners' Motion for Reconsideration was likewise denied.
On appeal, the SEC en banc affirmed the dismissal declaring that the
corporate names of Petitioners and Private Respondent hardly breed
confusion inasmuch as each contains at least two different words and
rules out any possibility of confusing one for the other.
The Court of Appeals swept aside Petitioners' claim that following the
ruling in Converse Rubber Corporation v. Universal Converse Rubber
Products, Inc., et al, the word PHILIPS cannot be used as part of
Private Respondent's corporate name as the same constitutes a
dominant part of Petitioners' corporate names. In so holding, the
Appellate Court observed that the Converse case is not four-square
with the present case inasmuch as the contending parties in Converse
are engaged in a similar business, that is, the manufacture of rubber
shoes. Upholding the SEC, the Appellate Court concluded that "private
respondent's products consisting of chain rollers, belts, bearings and
cutting saw are unrelated and non-competing with petitioners'
products i.e. electrical lamps such that consumers would not in any
probability mistake one as the source or origin of the product of the
other."

39

The Appellate Court denied Petitioners' Motion for Reconsideration

hence this Petition which was given due course.
Issue:
W/N Section 18 of the Corporation Code is applicable in the case at
bar?
RULING
Yes.
As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115,
the Court declared that a corporation's right to use its
corporate and trade name is a property right, a right in rem,
which it may assert and protect against the world in the same
manner as it may protect its tangible property, real or
personal, against trespass or conversion. It is regarded, to a
certain extent, as a property right and one which cannot be impaired or
defeated by subsequent appropriation by another corporation in the
same field.
A name is peculiarly important as necessary to the very existence of a
corporation. Its name is one of its attributes, an element of its
existence, and essential to its identity. The general rule as to
corporations is that each corporation must have name by
which it is to sue and be sued and do all legal acts. The name of
a corporation in this respect designates the corporation in the same
manner as the name of an individual designates the person; and the
right to use its corporate name is as much a part of the corporate
franchise as any other privilege granted.
A corporation acquires its name by choice and need not select a name
identical with or similar to one already appropriated by a senior
corporation while an individual's name is thrust upon him. A
corporation can no more use a corporate name in violation
of the rights of others than an individual can use his name
legally acquired so as to mislead the public and injure
another.
Our own Corporation Code, in its Section 18, expressly provides
that:
"No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or
is patently deceptive, confusing or contrary to existing law.
Where a change in the corporate name is approved, the
commission shall issue an amended certificate of
incorporation under the amended name."
To come within its scope of the statutory prohibition, two
requisites must be proven, namely: (1) that the complainant
corporation acquired a prior right over the use of such corporate name;
and (2) the proposed name is either: (a) identical or (b) deceptively or
confusingly similar to that of any existing corporation or to any other
name already protected by law; or (c) patently deceptive, confusing or
contrary to existing law.
The right to the exclusive use of a corporate name with
freedom from infringement by similarity is determined by
priority of adoption. In this regard, there is no doubt with respect to
Petitioners' prior adoption of the name "PHILIPS" as part of its
corporate name. Petitioners Philips Electrical and Philips Industrial
were incorporated on August 29 and May 25, 1956, respectively, while
Respondent Standard Philips was issued a Certificate of Registration
on April 19, 1982, twenty-six (26) years later. Petitioner PEBV has also
used the trademark "PHILIPS" on electrical lamps of all types and their
accessories since September 30, 1922, as evidenced by Certificate of
Registration No. 1651.
The second requisite no less exists in this case. In determining the
existence of confusing similarity in corporate names, the test
is whether the similarity is such as to mislead a person using
ordinary care and discrimination. In so doing, the Court must
look to the record as well as the names themselves. While the corporate
names of Petitioners and Private Respondent are not identical, a

reading of Petitioner's corporate names, to wit: PHILIPS EXPORT

B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude
that "PHILIPS" is, indeed, the dominant word in that all the companies
affiliated or associated with the principal corporation, PEBV, are
known in the Philippines and abroad as the PHILIPS Group of
Companies.
Respondents maintain that Petitioners did not present an iota of proof
of actual confusion or deception of the public much less a single
purchaser or their product who has been deceived or confused or
showed any likelihood of confusion. It is settled, that proof of actual
confusion need not be shown. It suffices that confusion is probably or
likely to occur.
It may be that Private Respondent's products also consist of
chain rollers, belts, bearing and the like while petitioners deal
principally with electrical products. It is significant to note, that even
the Director of Patents had denied Private Respondent's application for
registration of the trademarks "Standard Philips & Device" for chains,
rollers, belts, bearings and cutting saw. That office held that PEBV "had
shipped to its subsidiaries in the Philippines equipment, machines and
their parts which fall under international class where chains, rollers,
belts, bearings and cutting saw, the goods in connection with which
Respondent is seeking to register "STANDARD PHILIPS , also belong.
Furthermore, the records show that among Private Respondent's
primary purposes in its Articles of Incorporation are the following: "To
buy, sell, barter, trade, manufacture, import, export or otherwise
acquire, dispose of, and deal with any kind of goods, wares, and
merchandise such as but not limited to plastics, carbon products, office
stationery and supplies, hardware parts, electrical wiring devices,
electrical component parts and/or complement of industrial,
agricultural or commercial machineries, constructive supplies,
electrical supplies and other merchandise except food, drugs, and
cosmetics and to carry on such business as manufacturer, distributor,
dealer, indentor, factor, manufacturer's representative capacity for
domestic or foreign companies."
For its part, Philips Electrical also includes, among its primary
purposes, the following: "To develop, manufacture and deal in
electrical products, including electronic, mechanical and other similar
products ".
Given Private Respondent's underlined primary purpose,
nothing could prevent it from dealing in the same line of
business of electrical devices, products or supplies which fall
under its primary purposes. Besides, there is showing that Private
Respondent not only manufactured and sold ballasts for fluorescent
lamps with their corporate name printed thereon but also advertised
the same as, Standard Philips. As aptly pointed out by Petitioners,
Private respondent's choice of 'PHILIPS' as part of its corporate name
STANDARD PHILIPS CORPORATION, tends to show said
respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world". The
subsequent appropriator of the name or one confusingly similar
thereto usually seeks an unfair advantage, a free ride on another's
goodwill.
In allowing Private Respondent the continued use to its corporate
name, the SEC maintains that the corporate names of Petitioners
PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC. contain at least two words different from that
of the corporate name of respondent STANDARD PHILIPS
CORPORATION, which words will readily identify Private Respondent
from Petitioners and vice-versa, under the Guidelines in the Approval
of Corporate and Partnership Names formulated by the SEC, the
proposed name "should not be similar to one already used by another
corporation or partnership. If the proposed name contains a word
already used as part of the firm name or style of a registered company,
the proposed name must contain two other words different from the
company already registered".
What is lost sight of is that PHILIPS is a trademark or trade
name which was registered as far back as 1922. Petitioners,
therefore, have the exclusive right to its use which must be
free from any infringement by similarity.

40

A corporation has an exclusive right to the use of its name, which may
be protected by injunction upon a principle similar to that upon which
persons are protected in the use of trademarks and tradenames.
Notably, too, Private Respondents' name actually contains only a single
word, that is, "STANDARD", different from that of Petitioners
inasmuch as the inclusion of the term "Corporation" or "Corp." merely
serves the purpose of distinguishing the corporation from partnerships
and other business organizations.
In support of its application for the registration of its Articles of
Incorporation with the SEC, Private Respondent had submitted an
undertaking "manifesting its willingness to change its corporate name
in the event another person, firm or entity has acquired a prior right to
the use of the said firm name or one deceptively or confusingly similar
to it." Private Respondent must now be held its undertaking.
"As a general rule, parties organizing a corporation must choose a
name at their peril; and the use of a name similar to one adopted by
another corporation, whether a business or a nonbusiness or nonprofit
organization if misleading and likely to injure it in the exercise of its
corporate functions, regardless of intent, may be prevented by the
corporation having the prior right, by a suit for injunction against the
new corporation to prevent the use of the name.

Ang Mga Kaanib Vs. Iglesia (372 SCRA 171)

Facts:
Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan
(Church of God in Christ Jesus, the Pillar and Ground of Truth), is a
non-stock religious society or corporation registered in 1936. Sometime
in 1976, one Eliseo Soriano and several other members of Respondent
Corporation disassociated themselves from the latter and succeeded in
registering on March 30, 1977 a new non-stock religious society or
corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at
Saligan ng Katotohanan
The respondent corporation filed with the SEC a petition to compel the
Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan
to change its corporate name which the SEC rendered judgment in
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus,
Haligi at Saligan ng Katotohanan to change its corporate name to
another name that is not similar or identical to any name already used
by a corporation, partnership or association registered with the
Commission. No appeal was taken from said decision.
It appears that during the pendency of SEC Case Soriano, et al., caused
the registration on April 25, 1980 of petitioner corporation, Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang
Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan ng
Katotohanan.
Again the respondent corporation filed before the SEC a petition
praying that petitioner be compelled to change its corporate name and
be barred from using the same or similar name on the ground that the
same causes confusion among their members as well as the public.
On November 20, 1995, the SEC rendered a decision ordering
petitioner to change its corporate name.
Petitioner appealed to the SEC En Banc which affirmed the above
decision upon a finding that petitioner's corporate name was identical
or confusingly or deceptively similar to that of respondent's corporate
name.
The CA also affirmed the decision of the SEC En Banc upon petitioners
petition for review. Petitioner's motion for reconsideration was denied
by the Court of Appeals.
Issue:

W/N the Honorable Court of Appeals failed to consider and properly

apply the exceptions established by jurisprudence in the application of
section 18 of the corporation code to the instant case
Ruling:
Section 18 of the Corporation Code provides:
Corporate Name. No corporate name may be allowed by the
Securities and Exchange Commission if the proposed name is identical
or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law or is patently deceptive,
confusing or is contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on
Corporate Names states:
(d) If the proposed name contains a word similar to a word already
used as part of the firm name or style of a registered company, the
proposed name must contain two other words different from the name
of the company already registered;
Parties organizing a corporation must choose a name at their peril; and
the use of a name similar to one adopted by another corporation,
whether a business or a nonprofit organization, if misleading or likely
to injure in the exercise of its corporate functions, regardless of intent,
may be prevented by the corporation having a prior right, by a suit for
injunction against the new corporation to prevent the use of the name.
Petitioner claims that it complied with the aforecited SEC guideline by
adding not only two but eight words to their registered name, to wit:
"Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which, petitioner
argues, effectively distinguished it from respondent corporation.
The additional words "Ang Mga Kaanib and " Sa Bansang Pilipinas,
Inc ." in petitioner's name are, as correctly observed by the SEC, merely
descriptive of and also referring to the members, or kaanib, of
respondent who are likewise residing in the Philippines. These words
can hardly serve as an effective differentiating medium necessary to
avoid confusion or difficulty in distinguishing petitioner from
respondent. This is especially so, since both petitioner and respondent
corporations are using the same acronym H.S.K.; not to mention the
fact that both are espousing religious beliefs and operating in the same
place. Parenthetically, it is well to mention that the acronym H.S.K.
used by petitioner stands for " Haligi at Saligan ng Katotohanan ."
Then, too, the records reveal that in holding out their corporate name
to the public, petitioner highlights the dominant words " IGLESIA NG
DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG
KATOTOHANAN," which is strikingly similar to respondent's
corporate name, thus making it even more evident that the additional
words " Ang Mga Kaanib " and " Sa Bansang Pilipinas, Inc.", are
merely descriptive of and pertaining to the members of respondent
corporation.
Significantly, the only difference between the corporate names of
petitioner and respondent are the words SALIGAN and SUHAY. These
words are synonymous both mean ground, foundation or support.
Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc ., where the Court ruled that the corporate
names Universal Mills Corporation and Universal Textile Mills, Inc.,
are undisputedly so similar that even under the test of "reasonable care
and observation" confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's
corporate name cannot find justification under the generic word rule.
We agree with the Court of Appeals' conclusion that a contrary ruling
would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public.

41

The fact that there are other non-stock religious societies or

corporations using the names Church of the Living God, Inc., Church of
God Jesus Christ the Son of God the Head, Church of God in Christ &
By the Holy Spirit, and other similar names, is of no consequence. It
does not authorize the use by petitioner of the essential and
distinguishing feature of respondent's registered and protected
corporate name.
Certainly, ordering petitioner to change its corporate name is not a
violation of its constitutionally guaranteed right to religious freedom.
In so doing, the SEC merely compelled petitioner to abide by one of the
SEC guidelines in the approval of partnership and corporate names,
namely its undertaking to manifest its willingness to change its
corporate name in the event another person, firm, or entity has
acquired a prior right to the use of the said firm name or one
deceptively or confusingly similar to it.
Section 19
Commencement of corporate existence. - A private corporation
formed or organized under this Code commences to have corporate
existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said
period is extended or the corporation is sooner dissolved in accordance
with law.
MR Holdings Vs. Bajar (380 SCRA 617)
Facts:
Asian Development Bank (ADB) agreed to extend to Marcopper Mining
Corporation (Marcopper) a loan under a Principal Loan Agreement
and Complementary Loan Agreement. ADB and Placer Dome, Inc.
(Placer Dome), a foreign corporation which owns 40% of Marcopper,
executed a Support and Standby Credit agreement, where Placer
agreed to provide Marcopper with cash flow support for the payment of
its obligations to ADB. To secure the loan, Marcoper executed in favor
of ADB a Deed of Real Estate and Chattel Mortgage.
Marcopper defaulted in the payment of its loan. Placer Dome, in
fulfillment of its undertaking under the Support and Standby Credit
Agreement, agreed to have its subsidiary corporation, petitioner MR
Holding, Ltd. (MR Holding), assumed Marcoppers obligation to ADB.
Consequently, in a deed of assignment, ADB assigned to MR holding
all its rights, interests and obligation under the loan agreements.
Marcopper likewise executed a Deed of Assignment in favor of MR
Holding consisting of several machineries and real properties.
Meanwhile, Solidbank obtained a partial judgment against Marcopper
from the RTC. Upon Solidbanks motion, the RTC of Manila issued a
writ of execution pending appeal against Marcopper. The sheriff issued
notices of levy on Marcoppers personal and real properties including
those properties subject of the assignments above-mentioned.
MR Holding served a Third-Party Claim upon the sheriffs. It was
denied. Because of that MR holding commenced with the RTC a
complaint for reinvidication of properties with prayer for preliminary
injunction with temporary restraining order against the respondents.
The application was denied by the RTC on the ground that MR Holding
has no legal capacity to sue, it being a foreign corporation doing
business in the Philippines without license. Its decision was affirmed
by the Court of Appeals.
Issue:
W/N MR Holdings is doing business in the Philippines
Ruling:

MR Holdings is not doing business in the Philippines within the

meaning of the law.
A review of the ruling of the court does not pose much complexity as
the principles governing a foreign corporations right to sue in local
courts have long been settled by our Corporation Law. These principles
may be condensed in three statements:
1.
2.

3.

If a foreign corporation does business in the Philippines

without a license, it cannot sue before the Philippine courts;
If a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action
entirely independent of any business transaction; and,
If a foreign corporation does business in the Philippines with
the required license, it can sue before Philippine courts on
any transaction.

The Corporation Code is silent as to what constitutes doing or

transacting business in the Philippines. But jurisprudence held that
the term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incident
to, and in progressive prosecution of, the purpose and object for which
the corporation was organized.
The test to determine whether a corporation is doing business, is
whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organize, or whether it has
substantially retired fro it and turned it over to another. There are
other statutes defining the term doing business and as may be
observed, one common denominator among them all is the concept of
continuity.
In this case, the CA categorized as doing business MR holdings
participation under the Assignment agreements. This is untenable. The
expression doing business should not be given such a strict and literal
construction as to make it apply to any corporate dealing. The purpose
or business for which petitioner was organized is not discernible in the
records. No effort was exerted by the CA to establish the nexus between
petitioners business and the acts supposed to constitute doing
business. Thus, whether the assignment contracts were incidental to
petitioners business or were continuation thereof is beyond
determination.
Also, the CAs ruling that MR Holdings has the intention to continue
Marcoppers business is based purely on conjectures and speculation.
There was no showing that there are overt acts of the petitioner that
would raise the conclusion that indeed, it had the intention of
continuing Marcoppers business.
In sum, MR Holdings was engaged only in isolated acts or transactions.
Single or isolated acts or transactions of foreign corporations are not
regarded as a doing or carrying on of business.
Silverio Vs. Filipino Business Consultants (466 SCRA 584)
Facts:
Ricardo S. Silverio, Jr., Esses Development Corporation and Tri-Star
Farms, Inc., petitioners, and Filipino Business Consultants, Inc.
(FBCI), respondent, are wrangling over possession of a 62 hectares
land in Calatagan, Batangas (Calatagan Property). Silverio, Jr. is the
President of Esses and Tri-Star. Esses and Tri-Star were in possession
of the Calatagan Property and registered in the names of Esses and TriStar.
Esses and Tri-Star executed a Deed of Sale with Assumption of
Mortgage in favor of FBCI. However, Esses and Tri-Star failed to
redeem the Calatagan Property.
Thus, FBCI filed a Petition for Consolidation of Title of the Calatagan
Property with the RTC Balayan. Subsequently, the Calatagan Property
in the names of Esses and Tri-Star was cancelled and a new TCT was

42

issued in FBCIs name. Thereafter, a writ of possession was issued in

FBCIs name. FBCI then entered the Calatagan Property.
Silverio, Jr., Esses and Tri-Star consequently filed a petition for relief
from judgment and the recall of the writ of possession alleging that the
judgment by default is void because the RTC Balayan did not acquire
jurisdiction over them.
The RTC Balayan nullified and set aside the judgment by default and
the writ of possession. The RTC Balayan also issued an Order to restore
possession of the Calatagan Property to Silverio, Jr., Esses and TriStar. On May 8, 2000, a writ of possession was issued in favor of
petitioners.
On May 23, 2000, FBCI filed with the RTC Balayan an Urgent ExParte Motion to Suspend Enforcement of Writ of Possession on the
ground of supervening event. FBCI pointed out that it is now the new
owner of Esses and Tri-Star having purchased the substantial and
controlling shares of stocks of the two corporations.
Issue:
W/N the acquisition of Esses and Tri-Star by FBCI is a supervening
event, which is a sufficient ground to stay the execution of a writ of
possession.
Ruling:
No. The acquisition of Esses and Tri-Star by FBCI cannot be
considered as a supervening event, which is a sufficient ground to stay
execution.
The court may stay immediate execution of a judgment when
supervening events, occurring subsequent to the judgment, bring about
a material change in the situation of the parties. To justify the stay of
immediate execution, the supervening events must have a direct effect
on the matter already litigated and settled. Or, the supervening events
must create a substantial change in the rights or relation of the parties,
which would render execution of a final judgment unjust, impossible or
inequitable making it imperative to stay immediate execution in the
interest of justice.
FBCIs acquisiton of the substantial and controlling shares of stocks
of Esses and Tri-Star does not create a subtantial change in the rights
or relations of the parties that would entitle FBCI to possession of the
Calatagan Property, a corporate property of Esses and Tri-Star. Esses
and Tri-Star, just like FBCI, are corporations. A Corporation has a
personality distinct from its stockholders.
FBCIs alleged controlling shareholdings in Esses and Tri-Star merely
represents a proportionate or aliquot interest in the properties of the
two corporations. Such controlling shareholdings do not vest FBCI
with any legal right or title to any of Esses and Tri-Stars corporate
properties. Even assuming that FBCI is the controlling shareholder of
Esses and Tri-Star does not legally make it the owner of the Calatagan
Property, which is legally owned by Esses and Tri-Star as distinct
juridical persons. As such, FBCI is not entitled to the possession of any
definite portion of the Calatagan Property or any of Esses and Tri-Stars
properties or assets. FBCI is not a co-owner or tenant in common of the
Calatagan Property or any of Esses and Tri-Stars corporate properties.
Possession of the Calatagan Property must be restored to Esses and
Tri-Star to their representative, Silverio, Jr.
Lim Vs. CA (323 SCRA 102)
Facts:
Rufina Luy Lim is the surviving spouse of late Pastor Y. Lim whose
estate is the subject of probate proceedings in Special Proceedings "In
Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim, represented by
George Luy, Petitioner".

Private respondents Auto Truck Corporation, Alliance Marketing

Corporation, Speed Distributing, Inc., Active Distributing, Inc. and
Action Company are corporations formed, organized and existing
under Philippine laws and which owned real properties covered under
the Torrens system.
When Pastor Y. Lim died intestate herein petitioner, as surviving
spouse and duly represented by her nephew George Luy, filed a joint
petition for the administration of the estate of Pastor Y. Lim before the
Regional Trial Court of Quezon City.
Private respondent corporations, whose properties were included in
the inventory of the estate of Pastor Y. Lim, then filed a motion for the
lifting of lis pendens and motion for exclusion of certain properties
from the estate of the decedent.
The Regional Trial Court sitting as a probate court granted the private
respondents' twin motions ordering the Register of Deeds of Quezon
City to lift, expunge or delete the annotation of lis pendens on 5
Transfer Certificates of Title and it is hereby further ordered that the
properties covered by the same titles as well as those properties by
Transfer Certificate of Title Nos. 613494, 363123, 236236 and 263236
are excluded from these proceedings.
Subsequently, Rufina Luy Lim filed a verified amended petition which
contained the following averments: that the late Pastor Y. Lim
personally owned during his lifetime the certain business entities
including private respondents; that although the above business
entities dealt and engaged in business with the public as corporations,
all their capital, assets and equity were however, personally owned by
the late Pastor Y Lim. Hence the alleged stockholders and officers
appearing in the respective articles of incorporation of the above
business entities were mere dummies of Pastor Y. Lim, and they were
listed therein only for purposes of registration with the Securities and
Exchange Commission; that Pastor Lim, likewise, had Time, Savings
and Current Deposits with the following banks: (a) Metrobank, Grace
Park, Caloocan City and Quezon Avenue, Quezon City Branches and (b)
First Intestate Bank (formerly Producers Bank), Rizal Commercial
Banking Corporation and in other banks whose identities are yet to be
determined; that the some real properties, although registered in the
name of the above entities, were actually acquired by Pastor Y. Lim
during his marriage with petitioner; that the aforementioned
properties and/or real interests left by the late Pastor Y. Lim, are all
conjugal in nature, having been acquired by him during the existence
of his marriage with petitioner and that there are other real and
personal properties owned by Pastor Y. Lim which petitioner could not
as yet identify.
The Regional Trial Court acting on petitioner's motion issued an order
ordering the Registry of Deeds of Quezon City to reinstate the
annotation of lis pendens in case said annotation had already been
deleted and/or cancelled said on the TCTs.
On 04 September 1995, the probate court appointed Rufina Lim as
special administrator and Miguel Lim and Lawyer Donald Lee, as cospecial administrators of the estate of Pastor Y. Lim, after which letters
of administration were accordingly issued.
Private respondent filed a special civil action for certiorari, with an
urgent prayer for a restraining order or writ of preliminary injunction,
before the Court of Appeals questioning the orders of the Regional
Trial Court, sitting as a probate court.
The Court of Appeals granted the instant special civil action for
certiorari. The impugned orders issued by respondent court on July 4,
1995 and September 12, 1995 are hereby nullified and set aside. The
impugned order issued by respondent on September 15, 1995 is
nullified insofar as petitioner corporations" bank accounts and records
are concerned.
Issue:

43

W/N the properties of private respondent corporations are properly

part of the decedent's estate including the private respondent
corporations themselves
Ruling:
No.
It is settled that a corporation is clothed with personality separate and
distinct from that of the persons composing it. It may not generally be
held liable for that of the persons composing it. It may not be held
liable for the personal indebtedness of its stockholders or those of the
entities connected with it.
Rudimentary is the rule that a corporation is invested by law with a
personality distinct and separate from its stockholders or members. In
the same vein, a corporation by legal fiction and convenience is an
entity shielded by a protective mantle and imbued by law with a
character alien to the persons comprising it.
Nonetheless, the shield is not at all times invincible. Thus, in FIRST
PHILIPPINE INTERNATIONAL BANK vs . COURT OF APPEALS, We
enunciated:
. . . When the fiction is urged as a means of perpetrating a fraud or an
illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals. . .
Piercing the veil of corporate entity requires the court to see through
the protective shroud which exempts its stockholders from liabilities
that ordinarily, they could be subject to, or distinguishes one
corporation from a seemingly separate one, were it not for the existing
corporate fiction.
The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of
another corporation. Where badges of fraud exist, where public
convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should come
to naught.
Further, the test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows: 1) Control, not mere
majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own; (2) Such
control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiffs legal
right; and (3) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. The absence
of any of these elements prevents "piercing the corporate veil".
Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself a
sufficient reason for disregarding the fiction of separate corporate
personalities.
Moreover, to disregard the separate juridical personality of a
corporation, the wrong-doing must be clearly and convincingly
established. It cannot be presumed.
Granting arguendo that the Regional Trial Court in this case was not
merely acting in a limited capacity as a probate court, petitioner
nonetheless failed to adduce competent evidence that would have
justified the court to impale the veil of corporate fiction. Truly, the

reliance reposed by petitioner on the affidavits executed by Teresa Lim

and Lani Wenceslao is unavailing considering that the aforementioned
documents possess no weighty probative value pursuant to the hearsay
rule. Besides it is imperative for us to stress that such affidavits are
inadmissible in evidence inasmuch as the affiants were not at all
presented during the course of the proceedings in the lower court. To
put it differently, for this Court to uphold the admissibility of said
documents would be to relegate from Our duty to apply such basic rule
of evidence in a manner consistent with the law and jurisprudence.
Our pronouncement in PEOPLE BANK AND TRUST COMPANY vs .
LEONIDAS finds pertinence:
Affidavits are classified as hearsay evidence since they are not generally
prepared by the affiant but by another who uses his own language in
writing the affiant's statements, which may thus be either omitted or
misunderstood by the one writing them. Moreover, the adverse party is
deprived of the opportunity to cross-examine the affiants. For this
reason, affidavits are generally rejected for being hearsay, unless the
affiant themselves are placed on the witness stand to testify thereon.
As to the order of the lower court, dated 15 September 1995, the Court
of Appeals correctly observed that the Regional Trial Court, Branch 93
acted without jurisdiction in issuing said order; The probate court had
no authority to demand the production of bank accounts in the name of
the private respondent corporations.
Reynoso Vs. CA (345 SCRA 335)
Sometime in the early 1960s, the Commercial Credit Corporation, a
financing and investment firm, decided to organize franchise
companies in different parts of the country, wherein it shall hold thirty
percent (30%) equity. Employees of the CCC were designated as
resident managers of the franchise companies. Petitioner Bibiano O.
Reynoso, IV was designated as the resident manager of the franchise
company in Quezon City, known as the Commercial Credit Corporation
of Quezon City.
CCC-QC entered into an exclusive management contract with CCC
whereby the latter was granted the management and full control of the
business activities of the former. Under the contract, CCC-QC shall sell,
discount and/or assign its receivables to CCC. Subsequently, however,
this discounting arrangement was discontinued pursuant to the socalled DOSRI Rule, prohibiting the lending of funds by corporations
to its directors, officers, stockholders and other persons with related
interests therein.
On account of the new restrictions imposed by the Central Bank policy
by virtue of the DOSRI Rule, CCC decided to form CCC Equity
Corporation, (hereinafter, CCC-Equity), a wholly-owned subsidiary,
to which CCC transferred its thirty (30%) percent equity in CCC-QC,
together with two seats in the latters Board of Directors.
Under the new set-up, several officials of Commercial Credit
Corporation, including petitioner Reynoso, became employees of CCCEquity. While petitioner continued to be the Resident Manager of CCCQC, he drew his salaries and allowances from CCC-Equity.
Furthermore, although an employee of CCC-Equity, petitioner, as well
as all employees of CCC-QC, became qualified members of the
Commercial Credit Corporation Employees Pension Plan.
As Resident Manager of CCC-QC, petitioner, in order to boost the
business activities of CCC-QC, deposited his personal funds in the
company. In return, CCC-QC issued to him its interest-bearing
promissory notes.
A complaint for sum of money with preliminary attachment was
instituted by CCC-QC against petitioner, who had in the meantime
been dismissed from his employment by CCC-Equity. The complaint
was subsequently amended in order to include Hidelita Nuval,
petitioners wife, as a party defendant. The complaint alleged that
petitioner embezzled the funds of CCC-QC amounting to P1,300,593.11.

44

Petitioner denied having unlawfully used funds of CCC-QC and

asserted that the sum of P1,300,593.11 represented his money
placements in CCC-QC, as shown by twenty-three (23) checks which he
issued to the said company.
The Court finds the complaint without merit. Accordingly, said
complaint is hereby DISMISSED. By reason of said complaint,
defendant Bibiano Reynoso IV suffered degradation, humiliation and
mental anguish. Thus, the Court declared CCC liable to Reynoso.
Both parties appealed to the then Intermediate Appellate Court. The
appeal of Commercial Credit Corporation of Quezon City was
dismissed for failure to pay docket fees. Petitioner, on the other hand,
withdrew his appeal.
Hence, the decision became final and, accordingly a Writ of Execution
was issued. However, the judgment remained unsatisfied. CCC-QC
alleged that the possession of its premises and records had been taken
over by CCC.
Meanwhile, in 1983, CCC became known as the General Credit
Corporation.
The Regional Trial Court of Quezon City issued an Order directing
General Credit Corporation to file its comment on petitioners motion
for alias writ of execution. General Credit Corporation filed a Special
Appearance and Opposition alleging that it was not a party to the case,
and therefore petitioner should direct his claim against CCC-QC and
not General Credit Corporation. Petitioner filed his reply, stating that
the CCC-QC is an adjunct instrumentality, conduit and agency of CCC.
Furthermore, petitioner invoked the decision of the Securities and
Exchange Commission in SEC Case No. 2581, entitled, Avelina G.
Ramoso, et al., Petitioner versus General Credit Corp., et al.,
Respondents, where it was declared that General Credit Corporation,
CCC-Equity and other franchised companies including CCC-QC were
declared as one corporation.
Thus, the Regional Trial Court of Quezon City ordered the issuance of
an alias writ of execution. General Credit Corporation filed an Omnibus
Motion, alleging that SEC Case No. 2581 was still pending appeal, and
maintaining that the levy on properties of the General Credit
Corporation by the deputy sheriff of the court was erroneous.
Petitioner insisted that General Credit Corporation is just the new
name of Commercial Credit Corporation; hence, General Credit
Corporation and Commercial Credit Corporation should be treated as
one and the same entity.
The Regional Trial Court of Quezon City denied the Omnibus Motion
and issued an Order directing the issuance of an alias writ of execution.
The Court of Appeals rendered a decision that the respondent court's
refusal to issue a restraining order as having been rendered moot by
our Resolution of 7 April 1992 which, by way of injunctive relief,
provided that "the respondents and their representatives are hereby
enjoined from conducting an auction sale (on execution) of petitioner's
properties as well as initiating similar acts of levying (upon) and selling
on execution other properties of said petitioner". The injunction thus
granted, as modified by the words in parenthesis, shall remain in force
until Civil Case No. 61777 shall have been finally terminated.
In SP No. 27683, we grant the petition for certiorari and accordingly
NULLIFY and SET ASIDE, for having been issued in excess of
jurisdiction, the Order of 13 February 1992 in Civil Case No. Q-30583
as well as any other order or process through which the petitioner is
made liable under the judgment in said Civil Case No. Q-30583.
Issue:

Ruling:
It is the contention of GCC that it is a corporation separate and distinct
from CCC-QC and, therefore, its properties may not be levied upon to
satisfy the monetary judgment in favor of petitioner. In short,
respondent raises corporate fiction as its defense. Hence, we are
necessarily called upon to apply the doctrine of piercing the veil of
corporate entity in order to determine if General Credit Corporation,
formerly CCC, may be held liable for the obligations of CCC-QC.
The defense of separateness will be disregarded where the business
affairs of a subsidiary corporation are so controlled by the mother
corporation to the extent that it becomes an instrument or agent of its
parent. But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies
only when such fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime.
It is obvious that the use by CCC-QC of the same name of Commercial
Credit Corporation was intended to publicly identify it as a component
of the CCC group of companies engaged in one and the same business,
i.e. , investment and financing. Aside from CCC-Quezon City, other
franchise companies were organized such as CCC-North Manila and
CCC-Cagayan Valley. The organization of subsidiary corporations as
what was done here is usually resorted to for the aggrupation of capital,
the ability to cover more territory and population, the decentralization
of activities best decentralized, and the securing of other legitimate
advantages. But when the mother corporation and its subsidiary cease
to act in good faith and honest business judgment, when the corporate
device is used by the parent to avoid its liability for legitimate
obligations of the subsidiary, and when the corporate fiction is used to
perpetrate fraud or promote injustice, the law steps in to remedy the
problem. When that happens, the corporate character is not necessarily
abrogated. It continues for legitimate objectives. However, it is pierced
in order to remedy injustice, such as that inflicted in this case.
Factually and legally, the CCC had dominant control of the business
operations of CCC-QC. The exclusive management contract insured
that CCC-QC would be managed and controlled by CCC and would not
deviate from the commands of the mother corporation. In addition to
the exclusive management contract, CCC appointed its own employee,
petitioner, as the resident manager of CCC-QC.
Petitioners designation as resident manager implies that he was
placed in CCC-QC by a superior authority. In fact, even after his
assignment to the subsidiary corporation, petitioner continued to
receive his salaries, allowances, and benefits from CCC, which later
became respondent General Credit Corporation. Not only that.
Petitioner and the other permanent employees of CCC-QC were
qualified members and participants of the Employees Pension Plan of
CCC.
There are other indications in the record which attest to the
applicability of the identity rule in this case, namely: the unity of
interests, management, and control; the transfer of funds to suit their
individual corporate conveniences; and the dominance of policy and
practice by the mother corporation insure that CCC-QC was an
instrumentality or agency of CCC.
As petitioner stresses, both CCC and CCC-QC were engaged in the
same principal line of business involving a single transaction process.
Under their discounting arrangements, CCC financed the operations of
CCC-QC. The subsidiary sold, discounted, or assigned its accounts
receivables to CCC.
Faced with the financial obligations which CCC-QC had to satisfy, the
mother firm closed CCC-QC, in obvious fraud of its creditors. CCC-QC,
instead of opposing its closure, cooperated in its own demise.
Conveniently, CCC-QC stated in its opposition to the motion for alias
writ of execution that all its properties and assets had been transferred
and taken over by CCC.

W/N the judgment in favor of petitioner may be executed against

respondent General Credit Corporation

45

Under the foregoing circumstances, the contention of respondent

General Credit Corporation, the new name of CCC, that the corporate
fiction should be appreciated in its favor is without merit.
Paraphrasing the ruling in Claparols v. Court of Industrial Relations,
reiterated in Concept Builders Inc. v. National Labor Relations, it is
very obvious that respondent seeks the protective shield of a corporate
fiction whose veil the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial
obligation of its employees.
If the corporate fiction is sustained, it becomes a handy deception to
avoid a judgment debt and work an injustice. The decision raised to us
for review is an invitation to multiplicity of litigation. As we stated in
Islamic Directorate vs. Court of Appeals, the ends of justice are not
served if further litigation is encouraged when the issue is
determinable based on the records.
A court judgment becomes useless and ineffective if the employer, in
this case CCC as a mother corporation, is placed beyond the legal reach
of the judgment creditor who, after protracted litigation, has been
found entitled to positive relief. Courts have been organized to put an
end to controversy. This purpose should not be negated by an
inapplicable and wrong use of the fiction of the corporate veil.

did not pay. In response to the first demand letter, petitioners

promised to reply within fifteen (15) days, but they did not do so.
Pursuant to the consultancy agreement, respondent claimed a
commission of six percent (6%) of the total contract price, or a total of
P6,000,000.00, or in the alternative, that he be paid the same amount
by way of damages or as the reasonable value of the services he
rendered to petitioners, and further claimed twenty percent (20%) of
the amount recoverable as attorney's fees and the costs of suit.
Petitioners denied the consultancy agreement. Petitioner Ryohei
Kimura did not have the authority to enter into such agreement in
behalf of Marubeni. Only Mr. Morihiko Maruyama, the general
manager, upon issuance of a special power of attorney by the principal
office in Tokyo, Japan, could enter into any contract in behalf of the
corporation. Mr. Maruyama did not discuss with respondent Lirag any
of the matters alleged in the complaint, nor agreed to the payment of
commission. Moreover, Marubeni did not participate in the bidding for
the Bureau of Post project, nor benefited from the supposed project.
Thus, petitioners moved for the dismissal of the complaint.
The trial court promulgated a decision and ruled that respondent is
entitled to a commission. Respondent was led to believe that there
existed an oral consultancy agreement. Hence, he performed his part of
the agreement and helped petitioners get the project.
Issue:

Marubeni Vs. Lirag (362 SCRA 620)

Facts:
Marubeni Corporation is a foreign corporation organized and existing
under the laws of Japan. It was doing business in the Philippines
through its duly licensed, wholly owned subsidiary, Marubeni
Philippines Corporation. Petitioners Ryoichi Tanaka, Ryohei Kimura
and Shoichi One were officers of Marubeni assigned to its Philippine
branch.
Felix Lirag filed with the Regional Trial Court, Makati a complaint for
specific performance and damages claiming that petitioners owed him
the sum of P6,000,000.00 representing commission pursuant to an
oral consultancy agreement with Marubeni. Lirag claimed that Ryohei
Kimura hired his consultancy group for the purpose of obtaining
government contracts of various projects. Kimura authorized him to
work on the following projects: (1) National Telephone Project, (2)
Regional Telecommunications Project; (3) Cargo Handling Equipment;
(4) Maritime Communications; (5) Philippine National Railways
Depot; and (6) Bureau of Posts (Phase II). Petitioners promised to pay
him six percent (6%) consultancy fee based on the total costs of the
projects obtained.

(1) W/N there was a consultancy agreement between petitioners and

respondent; and corollary to this,
(2) W/N respondent is entitled to receive a commission if there was, in
fact, a consultancy agreement
Ruling:
As a general rule, factual findings of the Court of Appeals are
conclusive on the parties and are not reviewed by the Supreme Court
and they carry even more weight when the Court of Appeals affirmed
the factual findings of the trial court. It is not the function of the
Supreme Court to weigh anew the evidence passed upon by the Court
of Appeals. Moreover, only questions of law may be raised before the
Supreme Court in a petition for review under Rule 45 of the Revised
Rules of Court.
However, the rule is subject to exceptions, such as when the conclusion
is grounded on speculation, surmises, or conjectures, as in the instant
case.

The consultancy agreement was not reduced into writing because of the
mutual trust between Marubeni and the Lirag family. Their close
business and personal relationship dates back to 1960, when
respondent's family was engaged in the textile fabric manufacturing
business, in which Marubeni supplied the needed machinery,
equipment, spare parts and raw materials.

An assiduous scrutiny of the testimonial and documentary evidence

extant leads us to the conclusion that the evidence could not support a
solid conclusion that a consultancy agreement, oral or written, was
agreed between petitioners and respondent. Respondent attempted to
fortify his own testimony by presenting several corroborative
witnesses. However, what was apparent in the testimonies of these
witnesses was the fact that they learned about the existence of the
consultancy agreement only because that was what respondent told
them.

In compliance with the agreement, respondent Lirag made

representations with various government officials, arranged for
meetings and conferences, relayed pertinent information as well as
submitted feasibility studies and project proposals, including pertinent
documents required by petitioners. As petitioners had been impressed
with respondent's performance, six (6) additional projects were given
to his group under the same undertaking.

In civil cases, he who alleges a fact has the burden of proving it; a mere
allegation is not evidence. He must establish his cause by a
preponderance of evidence, which respondent failed to establish in the
instant case.

One of the projects handled by respondent Lirag, the Bureau of Post

project, amounting to P100,000,000.00 was awarded to the
"Marubeni-Sanritsu tandem." Despite respondent's repeated formal
verbal demands for payment of the agreed consultancy fee, petitioners

Assuming for the sake of argument that an oral consultancy agreement

has been perfected between the parties, respondent Lirag could not still
claim fees on the project that has not been awarded to Marubeni.
If respondent's contentions were to be taken as truth, he would be
entitled to 6% consulting fee based on the total cost of the projects

46

obtained, or on success basis. However, even respondent admitted that

the Bureau of Post project was not awarded to Marubeni, but to
Sanritsu. Marubeni did not even join the bidding for the Bureau of Post
project.
Respondent could not claim from Sanritsu because of the absence of
any agreement between him and the latter.
Respondent tried to justify his commission of roughly about
P6,000,000.00 in the guise that Marubeni and Sanritsu are sister
corporations, thereby implying the need to pierce the veil of corporate
fiction. Respondent claimed that Marubeni as the supplier and real
contractor of the project hired and sub-contracted the project to
Sanritsu. Not because two foreign companies came from the same
country and closely worked together on certain projects would the
conclusion arise that one was the conduit of the other, thus piercing the
veil of corporate fiction.
To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot be
presumed. The separate personality of the corporation may be
disregarded only when the corporation is used as a cloak or cover for
fraud or illegality, or to work injustice, or where necessary for the
protection of creditors. We could not just rely on respondent's
testimony regarding the existence of the "Marubeni-Sanritsu tandem"
to justify his claim for payment of commission. This conclusion is too
conjectural to be believed.
Aside from the self-serving testimony of respondent regarding the
existence of a close working relationship between Marubeni and
Sanritsu, there was nothing that would support the conclusion that
Sanritsu was an agent of Marubeni.
In the instant case, the parties did not reach the second stage as the
headquarters in Tokyo, Japan did not see it fit to hire a consultant as
they decided not to participate in the bidding. Hence, no consultancy
agreement was perfected, whether oral or written. There was no
absolute acceptance of respondent's offer of consultancy services.
In light of the foregoing, we rule that the preponderance of evidence
established no consultancy agreement between petitioners and
respondent from which the latter could anchor his claim for a six
percent (6%) consultancy fee on a project that was not awarded to
petitioners.
Francisco Motors Vs. CA (309 SCRA 72)
Facts:
Francisco Motors filed a complaint against Spouses Gregorio and
Librada Manuel to recover three thousand four hundred twelve and six
centavos (P3,412.06), representing the balance of the jeep body
purchased by the Manuels from petitioner; an additional sum of twenty
thousand four hundred fifty-four and eighty centavos (P20,454.80)
representing the unpaid balance on the cost of repair of the vehicle;
and six thousand pesos (P6,000.00) for cost of suit and attorney's fees.
To the original balance on the price of jeep body were added the costs
of repair.
Private respondents interposed a counterclaim for unpaid legal
services by Gregorio Manuel in the amount of fifty thousand pesos
(P50,000) which was not paid by the incorporators, directors and
officers of the petitioner.
Private respondent Gregorio Manuel alleged that, while he was
petitioner's Assistant Legal Officer, he represented members of the
Francisco family in the intestate estate proceedings of the late Benita
Trinidad. However, even after the termination of the proceedings, his
services were not paid. Said family members, he said, were also
incorporators, directors and officers of petitioner. Hence to petitioner's

collection suit, he filed a counter permissive counterclaim for the

unpaid attorney's fees.
The trial court ruled in favor of private respondents and found that
Gregorio Manuel indeed rendered legal services to the Francisco family
in Special Proceedings Number 7803 "In the Matter of Intestate
Estate of Benita Trinidad". Said court also found that his legal services
were not compensated despite repeated demands, and thus ordered
petitioner to pay him the amount of fifty thousand (P50,000.00) pesos.
The trial court also decided the case in favor of petitioner in regard to
the petitioner's claim for money, but also allowed the counter-claim of
private respondents. Both parties appealed. On April 15, 1991, the
Court of Appeals sustained the trial court's decision.
Hence, the present petition.
Issue:
W/N the corporation is liable for the attorneys fees owing to the
private respondents
Ruling:
Basic in corporation law is the principle that a corporation has a
separate personality distinct from its stockholders and from other
corporations to which it may be connected. However, under the
doctrine of piercing the veil of corporate entity, the corporation's
separate juridical personality may be disregarded, for example, when
the corporate identity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Also, where the corporation is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation, then its distinct personality may be
ignored. In these circumstances, the courts will treat the corporation as
a mere aggrupation of persons and the liability will directly attach to
them. The legal fiction of a separate corporate personality in those
cited instances, for reasons of public policy and in the interest of
justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case,
the doctrine of piercing the corporate veil has no relevant application
here. Respondent court erred in permitting the trial court's resort to
this doctrine. The rationale behind piercing a corporation's identity in
a given case is to remove the barrier between the corporation from the
persons comprising it to thwart the fraudulent and illegal schemes of
those who use the corporate personality as a shield for undertaking
certain proscribed activities. However, in the case at bar, instead of
holding certain individuals or persons responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal liability
of certain individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned upside down
because of its erroneous invocation. Note that according to private
respondent Gregorio Manuel his services were solicited as counsel for
members of the Francisco family to represent them in the intestate
proceedings over Benita Trinidad's estate. These estate proceedings did
not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain
Francisco family members but also from Petitioner Corporation on the
claims that its management had requested his services and he acceded
thereto as an employee of petitioner from whom it could be deduced he
was also receiving a salary. His move to recover unpaid legal fees
through a counterclaim against Francisco Motors Corporation, to offset
the unpaid balance of the purchase and repair of a jeep body could only
result from an obvious misapprehension that petitioner's corporate
assets could be used to answer for the liabilities of its individual
directors, officers, and incorporators. Such result if permitted could
easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly iniquitous to petitioner.

47

Furthermore, considering the nature of the legal services involved,

whatever obligation said incorporators, directors and officers of the
corporation had incurred, it was incurred in their personal capacity.
When directors and officers of a corporation are unable to compensate
a party for a personal obligation, it is far-fetched to allege that the
corporation is perpetuating fraud or promoting injustice, and be
thereby held liable therefor by piercing its corporate veil. While there
are no hard and fast rules on disregarding separate corporate identity,
we must always be mindful of its function and purpose. A court should
be careful in assessing the milieu where the doctrine of piercing the
corporate veil may be applied. Otherwise an injustice, although
unintended, may result from its erroneous application.

Ellice and Margo filed against Alicia, Guia and Rita with the Securities
and Exchange Commission (SEC) a petition for accounting and
restitution by the directors and officers and prayed that they be allowed
to inspect the corporate books and documents of Ellice. So that, Alicia,
Rita and Guia initiated a complaint against Ellice and Margo praying
for, among others, the nullification of the elections of directors and
officers of both Margo and Ellice; the nullification of all board
resolutions issued by Margo f by Ellice and the return of all titles to real
property in the name of Margo and Ellice, as well as all corporate
papers and records of both Margo and Ellice which are in the
possession and control of the respondents.
These two cases were consolidated.

The personality of the corporation and those of its incorporators,

directors and officers in their personal capacities ought to be kept
separate in this case. The claim for legal fees against the concerned
individual incorporators, officers and directors could not be properly
directed against the corporation without violating basic principles
governing corporations. Moreover, every action including a
counterclaim must be prosecuted or defended in the name of the real
party in interest. It is plainly an error to lay the claim for legal fees of
private respondent Gregorio Manuel at the door of petitioner (FMC)
rather than individual members of the Francisco family.
Section 20
De facto corporations. - The due incorporation of any corporation
claiming in good faith to be a corporation under this Code, and its right
to exercise corporate powers, shall not be inquired into collaterally in
any private suit to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto proceeding.
Gala Vs. Ellice-Agro-Industrial (418 SCRA728)
Facts:
The spouses Manuel and Alicia Gala, their children Guia Domingo,
Ofelia Gala, Raul Gala, and Rita Benson, and their encargados Virgilio
Galeon and Julian Jader formed and organized the Ellice AgroIndustrial Corporation. As payment for their subscriptions, the Gala
spouses transferred several parcels of land located in the provinces of
Quezon and Laguna to Ellice. Manuel Gala, Alicia Gala and Ofelia Gala
subscribed to an additional 3,299 shares, 10,652.5 shares and 286.5
shares, respectively. The spouses Manuel and Alicia also acquired an
additional 550 shares and 281 shares, respectively.
Subsequently, Guia Domingo, Ofelia Gala, Raul Gala, Virgilio Galeon
and Julian Jader incorporated the Margo Management and
Development Corporation (Margo). Manuel Gala sold 13,314 of his
shares in Ellice to Margo. Then, Alicia Gala transferred 1,000 of her
shares in Ellice to a certain Victor de Villa who transferred said shares
to Margo. A few months later, Alicia transferred 854.3 of her shares to
Ofelia Gala, 500 to Guia Domingo and 500 to Raul Gala.

Meanwhile, during the pendency of the SEC cases, the shares of stock
of Alicia and Ofelia Gala in Ellice were levied and sold at public auction
to satisfy a judgment rendered against them in a Civil Case entitled
Regines Condominium v. Ofelia (Gala) Panes and Alicia Gala.
Thereafter, the SEC rendered a Joint Decision in two SEC Cases,
Dismissing the petition in SEC Case against Alicia, Rita and Guia,
enjoining Ellice and Margo to perform corporate acts as directors and
officers thereof, nullifying the election of the new sets of Board of
Directors and Officers of Ellice and Margo, ordering Raul Gala to
return all the titles of real properties in the names of Ellice and Margo
which were unlawfully taken and held by him and directing the Ellice
to return to herein Alicia all corporate papers, records of both Ellice
and Margo which are in their possession and control.
Thus, Ellice and Margo appealed to the SEC En Banc, which reversed
and set aside the decision of the Hearing Officer and a new one hereby
rendered. Accordingly, Alicia Gala and Guia G. Domingo are ordered as
follows:
(1) jointly and solidarily pay ELLICE and/or MARGO the amount of
P700,000.00 representing the consideration for the unauthorized sale
of a parcel of land to Lucky Homes and Development Corporation;
(2) jointly and severally pay ELLICE and MARGO the proceeds of sales
of agricultural products averaging P120,000.00 per month from
February 17, 1988;
(3) jointly and severally indemnify the appellants P90,000.00 as
attorneys fees;
(4) jointly and solidarily pay the costs of suit;
(5) turn over to the individual appellants the corporate records of
ELLICE and MARGO in their possession; and
(6) desist and refrain from interfering with the management of ELLICE
and MARGO.

Years later, Manuel Gala transferred all of his remaining holdings in

Ellice, amounting to 2,164 shares to Raul Gala and Alicia Gala
transferred 10,000 of her shares to Margo.

Petitioners filed a petition for review with the Court of Appeals which
dismissed the petition for review and affirmed the decision of the SEC
En Banc.

In 1990, a special stockholders meeting of Margo was held, where a

new board of directors was elected. The newly-elected board elected a
new set of officers where Raul Gala was elected as chairman, president
and general manager. During the meeting, the board approved several
actions, including the commencement of proceedings to annul certain
dispositions of Margos property made by Alicia Gala. The board also
resolved to change the name of the corporation to MRG Management
and Development Corporation.

Hence, this petition.

Similarly, a special stockholders meeting of Ellice was held to elect a

new board of directors. A new set of corporate officers was elected and
where Raul Gala was also elected as chairman, president and general
manager.

Issue:
I
WHETHER OR NOT THE LOWER COURT ERRED IN NOT
DECLARING AS ILLEGAL AND CONTRARY TO PUBLIC POLICY
THE PURPOSES AND MANNER IN WHICH RESPONDENT
CORPORATIONS WERE ORGANIZED WHICH WERE, E.G. TO (1)
PREVENT THE GALA ESTATE FROM BEING BROUGHT UNDER
THE COVERAGE OF THE COMPREHENSIVE AGRARIAN REFORM

48

PROGRAM (CARP) AND (2) PURPORTEDLY FOR ESTATE

PLANNING.
II
WHETHER OR NOT THE LOWER COURT ERRED (1) IN
SUSPICIOUSLY RESOLVING THE CASE WITHIN TWO (2) DAYS
FROM RECEIPT OF RESPONDENTS COMMENT; AND (2) IN NOT
MAKING A DETERMINATION OF THE ISSUES OF FACTS AND
INSTEAD RITUALLY CITING THE FACTUAL FINDINGS OF THE
COMMISSION A QUO WITHOUT DISCUSSION AND ANALYSIS;
III
WHETHER OR NOT THE LOWER COURT ERRED IN RULING THAT
THE ORGANIZATION OF RESPONDENT CORPORATIONS WAS
NOT ILLEGAL FOR DEPRIVING PETITIONER RITA G. BENSON OF
HER LEGITIME.
IV
WHETHER OR NOT THE LOWER COURT ERRED IN NOT
PIERCING THE VEILS OF CORPORATE FICTION OF
RESPONDENTS CORPORATIONS ELLICE AND MARGO.
Ruling:
1.
The petitioners first contention in support of this theory is that the
purposes for which Ellice and Margo were organized should be
declared as illegal and contrary to public policy. They claim that the
respondents never pursued exemption from land reform coverage in
good faith and instead merely used the corporations as tools to
circumvent land reform laws and to avoid estate taxes. Specifically,
they point out that respondents have not shown that the transfers of
the land in favor of Ellice were executed in compliance with the
requirements of Section 13 of R.A. 3844. Furthermore, they alleged
that respondent corporations were run without any of the conventional
corporate formalities.
At the outset, the Court holds that petitioners contentions impugning
the legality of the purposes for which Ellice and Margo were organized,
amount to collateral attacks which are prohibited in this jurisdiction.
Section 20 of the Corporation Code provides that the due
incorporation of any corporation claiming in good faith to be a
corporation under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit to which such
corporation maybe a party. Such inquiry may be made by the Solicitor
General in a quo warranto proceeding.
The best proof of the purpose of a corporation is its articles of
incorporation and by-laws. The articles of incorporation must state the
primary and secondary purposes of the corporation, while the by-laws
outline the administrative organization of the corporation, which, in
turn, is supposed to insure or facilitate the accomplishment of said
purpose.
In the case at bar, a perusal of the Articles of Incorporation of Ellice
and Margo shows no sign of the allegedly illegal purposes that
petitioners are complaining of. It is well to note that, if a corporations
purpose, as stated in the Articles of Incorporation, is lawful, then the
SEC has no authority to inquire whether the corporation has purposes
other than those stated, and mandamus will lie to compel it to issue the
certificate of incorporation.
Assuming there was even a grain of truth to the petitioners claims
regarding the legality of what are alleged to be the corporations true
purposes, we are still precluded from granting them relief. We cannot
address here their concerns regarding circumvention of land reform

laws, for the doctrine of primary jurisdiction precludes a court from

arrogating unto itself the authority to resolve a controversy the
jurisdiction over which is initially lodged with an administrative body
of special competence. Since primary jurisdiction over any violation of
Section 13 of Republic Act No. 3844 that may have been committed is
vested in the Department of Agrarian Reform Adjudication Board
(DARAB), then it is with said administrative agency that the petitioners
must first plead their case. With regard to their claim that Ellice and
Margo were meant to be used as mere tools for the avoidance of estate
taxes, suffice it say that the legal right of a taxpayer to reduce the
amount of what otherwise could be his taxes or altogether avoid them,
by means which the law permits, cannot be doubted.
The petitioners allegation that Ellice and Margo were run without any
of the typical corporate formalities, even if true, would not merit the
grant of any of the relief set forth in their prayer. We cannot disregard
the corporate entities of Ellice and Margo on this ground. At most, such
allegations, if proven to be true, should be addressed in an
administrative case before the SEC.
Thus, even if Ellice and Margo were organized for the purpose of
exempting the properties of the Gala spouses from the coverage of land
reform legislation and avoiding estate taxes, we cannot disregard their
separate juridical personalities.
2.
Next, petitioners make much of the fact that the Court of Appeals
promulgated its assailed Decision a mere two days from the time the
respondents filed their Comment. They alleged that the appellate court
could not have made a deliberate study of the factual questions in the
case, considering the sheer volume of evidence available. In support of
this allegation, they point out that the Court of Appeals merely adopted
the factual findings of the SEC En Banc verbatim, without deliberation
and analysis.
In People v. Mercado, it was ruled that the speed with which a lower
court disposes of a case cannot thus be attributed to the injudicious
performance of its function. The two-day period between the filing of
petitioners Comment and the promulgation of the decision was
sufficient time to consider their arguments and to incorporate these in
the decision. As long as the lower court does not sacrifice the orderly
administration of justice in favor of a speedy but reckless disposition of
a case, it cannot be taken to task for rendering its decision with due
dispatch.
Furthermore, well-settled is the rule that the factual findings of the
Court of Appeals are conclusive on the parties and are not reviewable
by the Supreme Court. They carry even more weight when the Court of
Appeals affirms the factual findings of a lower fact-finding body.
Likewise, the findings of fact of administrative bodies, such as the SEC,
will not be interfered with by the courts in the absence of grave abuse
of discretion on the part of said agencies, or unless the aforementioned
findings are not supported by substantial evidence.
However, in the interest of equity, this Court has reviewed the factual
findings of the SEC En Banc, which were affirmed in toto by the Court
of Appeals, and has found no cogent reason to disturb the same.
Indeed, we are convinced that the arguments raised by the petitioners
are nothing but unwarranted conclusions of law. Specifically, they
insist that the Gala spouses never meant to part with the ownership of
the shares which are in the names of their children and encargados ,
and that all transfers of property to these individuals are supposedly
void for being absolutely simulated for lack of consideration. However,
as correctly held by the SEC En Banc, the transfers were only relatively
simulated, inasmuch as the evident intention of the Gala spouses was
to donate portions of their property to their children and encargados .
3.
In an attempt to bolster their theory that the organization of the
respondent corporations was illegal, the petitioners aver that the

49

legitime pertaining to petitioners Rita G. Benson and Guia G. Domingo

from the estate of their father had been subject to unwarranted
reductions as a result thereof. In sum, they claim that stockholdings in
Ellice which the late Manuel Gala had assigned to them were
insufficient to cover their legitimes, since Benson was only given two
shares while Domingo received only sixteen shares out of a total
number of 35,000 issued shares.
The reliefs sought by petitioners should have been raised in a
proceeding for settlement of estate, rather than in the present intracorporate controversy. If they are genuinely interested in securing that
part of their late fathers property which has been reserved for them in
their capacity as compulsory heirs, then they should simply exercise
their actio ad supplendam legitimam , or their right of completion of
legitime. Such relief must be sought during the distribution and
partition stage of a case for the settlement of the estate of Manuel Gala,
filed before a court which has taken jurisdiction over the settlement of
said estate.
4.
Finally, the petitioners pray that the veil of corporate fiction that
shroud both Ellice and Margo be pierced, consistent with their earlier
allegation that both corporations were formed for purposes contrary to
law and public policy. In sum, they submit that the respondent
corporations are mere business conduits of the deceased Manuel Gala
and thus may be disregarded to prevent injustice, the distortion or
hiding of the truth or the letting in of a just defense.
However, to warrant resort to the extraordinary remedy of piercing the
veil of corporate fiction, there must be proof that the corporation is
being used as a cloak or cover for fraud or illegality, or to work
injustice. The petitioners have failed to prove that Ellice and Margo
were being used as thus. They have not presented any evidence to show
how the separate juridical entities of Ellice and Margo were used by the
respondents to commit fraudulent, illegal or unjust acts. Hence, this
contention, too, must fail.
Albert Vs. University Publishing (13 SCRA 84)

execution against Jose M. Aruego, as the real defendant , stating,

"plaintiff's counsel and the Sheriff of Manila discovered that there is no
such entity as University Publishing Co., Inc. " Plaintiff annexed to his
petition a certification from the securities and Exchange Commission
dated July 31, 1961, attesting: "The records of this Commission do not
show the registration of UNIVERSITY PUBLISHING CO., INC., either
as a corporation or partnership." "University Publishing Co., Inc."
countered by filing, through counsel (Jose M. Aruego's own law firm), a
"manifestation" stating that "Jose M. Aruego is not a party to this
case," and that, therefore, plaintiff's petition should be denied.
Issue:
W/N University Publishing can be considered a corporation
considering that it is not registered with the SEC
Ruling:
The fact of non-registration of University Publishing Co., Inc. in the
Securities and Exchange Commission has not been disputed.
Defendant would only raise the point that "University Publishing Co.,
Inc.," and not Jose M. Aruego, is the party defendant; thereby
assuming that "University Publishing Co., Inc." is an existing
corporation with an independent juridical personality. Precisely,
however, on account of the non-registration it cannot be considered a
corporation, not even a corporation de facto. It has therefore no
personality separate from Jose M. Aruego; it cannot be sued
independently.
The corporation-by-estoppel doctrine has not been invoked. At any
rate, the same is inapplicable here. Aruego represented a non-existent
entity and induced not only the plaintiff but even the court to believe in
such representation. He signed the contract as "President" of
"University Publishing Co., Inc.," stating that this was "a corporation
duly organized and existing under the laws of the Philippines," and
obviously misled plaintiff (Mariano A. Albert) into believing the same.
One who has induced another to act upon his willful misrepresentation
that a corporation was duly organized and existing under the law,
cannot thereafter set up against his victim the principle of corporation
by estoppel.

Facts:
Mariano A. Albert sued University Publishing Co., Inc. Plaintiff alleged
inter alia that defendant was a corporation duly organized and existing
under the laws of the Philippines. Defendant, through Jose M. Aruego,
its President, entered into a contract with Albert whereby it agreed to
pay plaintiff P30,000.00 for the exclusive right to publish his revised
Commentaries on the Revised Penal Code and for his share in previous
sales of the book's first edition; that defendant had undertaken to pay
in eight quarterly installments of P3,750.00 starting July 15, 1948; that
per contract failure to pay one installment would render the rest due;
and that defendant had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate
existence; admitted the execution and terms of the contract dated July
19, 1948; but alleged that it was plaintiff who breached their contract
by failing to deliver his manuscript. Furthermore, defendant
counterclaimed for damages.
Plaintiff died before trial and Justo R. Albert, his estate's
administrator, was substituted for him. The Court renders judgment in
favor of the plaintiff and against the defendant the University
Publishing Co., Inc., ordering the defendant to pay the administrator
Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest
from the date of the filing of this complaint until the whole amount
shall have been fully paid. The defendant shall also pay the costs. The
counterclaim of the defendant is hereby dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be
executed in full. Thereafter, on July 22, 1961, the court a quo ordered
issuance of an execution writ against University Publishing Co., Inc.
Plaintiff, however, on August 10, 1961, petitioned for a writ of

"University Publishing Co., Inc." purported to come to court, answering

the complaint and litigating upon the merits. But as stated, "University
Publishing Co., Inc." has no independent personality; it is just a name.
Jose M. Aruego was, in reality, the one who answered and litigated,
through his own law firm as counsel. He was in fact, if not, in name, the
defendant.
In Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting
or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed
as such agent." Had Jose M. Aruego been named as party defendant
instead of, or together with, "University Publishing Co., Inc.," there
would be no room for debate as to his personal liability. Since he was
not so named, the matters of "day in court" and "due process" have
arisen.
The evidence is patently clear that Jose M. Aruego, acting as
representative of a non-existent principal, was the real party to the
contract sued upon; that he was the one who reaped the benefits
resulting from it, so much so that partial payments of the consideration
were made by him; that he violated its terms, thereby precipitating the
suit in question; and that in the litigation he was the real defendant.
Perforce, in line with the ends of justice, responsibility under the
judgment falls on him.
We need hardly state that should there be persons who under the law
are liable to Aruego for reimbursement or contribution with respect to
the payment he makes under the judgment in question, he may, of
course, proceed against them through proper remedial measures.

50

Section 21
Corporation by estoppel. - All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or
arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact
no corporation.
Lim Tong Lim Vs. Phil. Fishing (418 SCRA 431)
Facts:
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and
Peter Yao entered into a Contract dated February 7, 1990, for the
purchase of fishing nets of various sizes from the Philippine Fishing
Gear Industries, Inc. (herein respondent). They claimed that they were
engaged in a business venture with Petitioner Lim Tong Lim, who
however was not a signatory to the agreement. The total price of the
nets amounted to P532,045. Four hundred pieces of floats worth
P68,000 were also sold to the Corporation.
The buyers, however, failed to pay for the fishing nets and the floats;
hence, private respondents filed a collection suit against Chua, Yao and
Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities
as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a Certification
from the Securities and Exchange Commission.

need not be cash or fixed assets; it could be an intangible like credit or

industry. That the parties agreed that any loss or profit from the sale
and operation of the boats would be divided equally among them also
shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the
purchase of the boat, but also to that of the nets and the floats. The
fishing nets and the floats, both essential to fishing, were obviously
acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat
but not in the acquisition of the aforesaid equipment, without which
the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner,
Chua and Yao, a partnership engaged in the fishing business. They
purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and
operations thereof would be divided among them.
Verily, petitioner entered into a business agreement with Chua and
Yao, in which debts were undertaken in order to finance the acquisition
and the upgrading of the vessels which would be used in their fishing
business. The sale of the boats, as well as the division among the three
of the balance remaining after the payment of their loans, proves
beyond cavil that F/B Lourdes , though registered in his name, was not
his own property but an asset of the partnership. It is not uncommon
to register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner himself.
After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd for petitioner
to sell his property to pay a debt he did not incur, if the relationship
among the three of them was merely that of lessor-lessee, instead of
partners.
Corporation by Estoppel

On November 18, 1992, the trial court rendered its Decision, ruling that
Philippine Fishing Gear Industries was entitled to the Writ of
Attachment and that Chua, Yao and Lim, as general partners, were
jointly liable to pay respondent.
The trial court ruled that a partnership among Lim, Chua and Yao
existed based (1) on the testimonies of the witnesses presented and (2)
on a Compromise Agreement executed by the three in a Civil Case
which Chua and Yao had brought against Lim in the RTC of Malabon,
for (a) a declaration of nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of ownership of fishing
boats; (d) an injunction and (e) damages.
Lim appealed to the Court of Appeals which affirmed the RTC.
Issue:
W/N by their acts, Lim, Chua and Yao could be deemed to have entered
into a partnership
Ruling:
Art. 1767 By the contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.
Chua, Yao and Lim had decided to engage in a fishing business, which
they started by buying boats worth P3.35 million, financed by a loan
secured from Jesus Lim who was petitioner's brother. In their
Compromise Agreement, they subsequently revealed their intention to
pay the loan with the proceeds of the sale of the boats, and to divide
equally among them the excess or loss. These boats, the purchase and
the repair of which were financed with borrowed money, fell under the
term "common fund" under Article 1767. The contribution to such fund

Petitioner argues that under the doctrine of corporation by estoppel,

liability can be imputed only to Chua and Yao, and not to him. Again,
we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel . All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or
arising as a result thereof: Provided however, That when any such
ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
One, who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact
no corporation.
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate
existence. "The reason behind this doctrine is obvious an
unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes
of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at
their own risk. And as it is an elementary principle of law that a person
who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all
the liabilities of a principal, a person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for contracts
entered into or for other acts performed as such agent.

51

The doctrine of corporation by estoppel may apply to the alleged

corporation and to a third party. In the first instance, an
unincorporated association, which represented it to be a corporation,
will be estopped from denying its corporate capacity in a suit against it
by a third person who relied in good faith on such representation. It
cannot allege lack of personality to be sued to evade its responsibility
for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence in
a suit brought against the alleged corporation. In such case, all those
who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable
for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear
Industries, is entitled to be paid for the nets it sold. The only question
here is whether petitioner should be held jointly liable with Chua and
Yao. Petitioner contests such liability, insisting that only those who
dealt in the name of the ostensible corporation should be held liable.
Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he
cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found
inside F/B Lourdes, the boat which has earlier been proven to be an
asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing
vessel.
Although it was never legally formed for unknown reasons, this fact
alone does not preclude the liabilities of the three as contracting parties
in representation of it. Clearly, under the law on estoppel, those acting
on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract
entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered
by the scope of the doctrine of corporation by estoppel.
Intl Express Vs. CA (343 SCRA 674)

and as President of the Federation and impleaded the Federation as an

alternative defendant. Petitioner sought to hold Henri Kahn liable for
the unpaid balance for the tickets purchased by the Federation on the
ground that Henri Kahn allegedly guaranteed the said obligation.
Henri Kahn filed averred that the petitioner has no cause of action
against him either in his personal capacity or in his official capacity as
president of the Federation. He maintained that he did not guarantee
payment but merely acted as an agent of the Federation which has a
separate and distinct juridical personality.
On the other hand, the Federation failed to file its answer, hence, was
declared in default by the trial court.
In due course, the trial court rendered judgment and ruled in favor of
the petitioner and declared Henri Kahn personally liable for the unpaid
obligation of the Federation.
Only Henri Kahn elevated the above decision to the Court of Appeals
which reversed the trial court.
Issue:
W/N Henri Kahn personally liable for the obligation of the
unincorporated PFF, having negotiated with petitioner and contracted
the obligation in behalf of the PFF, made a partial payment and
assured petitioner of fully settling the obligation
Ruling:
Before an entity may be considered as a national sports association,
such entity must be recognized by the accrediting organization, the
Philippine Amateur Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under P.D. 604. This
fact of recognition, however, Henri Kahn failed to substantiate. In
attempting to prove the juridical existence of the Federation, Henri
Kahn attached to his motion for reconsideration before the trial court a
copy of the constitution and by-laws of the Philippine Football
Federation. Unfortunately, the same does not prove that said
Federation has indeed been recognized and accredited by either the
Philippine Amateur Athletic Federation or the Department of Youth
and Sports Development. Accordingly, we rule that the Philippine
Football Federation is not a national sports association within the
purview of the aforementioned laws and does not have corporate
existence of its own.

Facts:
International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation
(Federation), through its president private respondent Henri Kahn,
wherein the former offered its services as a travel agency to the latter.
The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and
officials of the Federation to the South East Asian Games in Kuala
Lumpur as well as various other trips to the People's Republic of China
and Brisbane. The total cost of the tickets amounted to P449,654.83.
For the tickets received, the Federation made two partial payments,
both in September of 1989, in the total amount of P176,467.50.
On 4 October 1989, petitioner wrote the Federation, through the
private respondent a demand letter requesting for the amount of
P265,894.33. On 30 October 1989, the Federation, through the Project
Gintong Alay, paid the amount of P31,603.00. On 27 December 1989,
Henri Kahn issued a personal check in the amount of P50,000 as
partial payment for the outstanding balance of the Federation.
Thereafter, no further payments were made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial
Court of Manila. Petitioner sued Henri Kahn in his personal capacity

Thus being said, it follows that private respondent Henry Kahn should
be held liable for the unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled principal in corporation
law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and
becomes personally liable for contract entered into or for other acts
performed as such agent. As president of the Federation, Henri Kahn is
presumed to have known about the corporate existence or nonexistence of the Federation. We cannot subscribe to the position taken
by the appellate court that even assuming that the Federation was
defectively incorporated; the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt with
the Federation in such a manner as to recognize and in effect admit its
existence. The doctrine of corporation by estoppel is mistakenly
applied by the respondent court to the petitioner. The application of
the doctrine applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the irrelevant
ground of defective incorporation. In the case at bar, the petitioner is
not trying to escape liability from the contract but rather is the one
claiming from the contract.
Merril Lynch Vs. CA (211 SCRA 824)
Facts:

52

On November 23, 1987, Merrill Lynch Futures, Inc. (hereafter, simply

ML FUTURES) filed a complaint with the Regional Trial Court at
Quezon City against the Spouses Pedro M. Lara and Elisa G. Lara for
the recovery of a debt and interest thereon, damages, and attorney's
fees.
ML FUTURES is a a non-resident foreign corporation, not doing
business in the Philippines, duly organized and existing under and by
virtue of the laws of the state of Delaware, U.S.A.;" as well as b) a
"futures commission merchant" duly licensed to act as such in the
futures markets and exchanges in the United States, . . .essentially
functioning as a broker. . .(executing) orders to buy and sell futures
contracts received from its customers on U.S. futures exchanges.
It also defined a "futures contract" as a "contractual commitment to
buy and sell a standardized quantity of a particular item at a specified
future settlement date and at a price agreed upon, with the purchase or
sale being executed on a regulated futures exchange."
ML FUTURES alleged it entered into a Futures Customer Agreement
with the defendant spouses in virtue of which it agreed to act as the
latter's broker for the purchase and sale of futures contracts in the U.S.
Pursuant to the contract, orders to buy and sell futures contracts were
transmitted to ML FUTURES by the Lara Spouses "through the
facilities of Merrill Lynch Philippines, Inc., a Philippine corporation
and a company servicing plaintiffs customers. The Lara Spouses "knew
and were duly advised that Merrill Lynch Philippines, Inc. was not a
broker in futures contracts," and that it "did not have a license from the
Securities and Exchange Commission to operate as a commodity
trading advisor (i e ., 'an entity which, not being a broker, furnishes
advice on commodity futures to persons who trade in futures
contracts').
The Lara Spouses actively traded in futures contracts, including "stock
index futures" for four years or so, i e ., from 1983 to October, 1987,
there being more or less regular accounting and corresponding
remittances of money (or crediting or debiting) made between the
spouses and ML FUTURES. Because of a loss amounting said spouses
became indebted to ML FUTURES for the ensuing balance of
US$84,836.27, which the latter asked them to pay. However, the Lara
Spouses however refused to pay this balance, "alleging that the
transactions were null and void because Merrill Lynch Philippines,
Inc., the Philippine company servicing accounts of plaintiff, had no
license to operate as a 'commodity and/or financial futures broker.

statute does not provide that the contract shall be void, but merely fixes
a special penalty for violation of the statute. . . ."
The doctrine was adopted by this Court as early as 1924 in Asia
Banking Corporation v. Standard Products Co., in which the following
pronouncement was made:
The general rule that in the absence of fraud of person who has
contracted or otherwise dealt with an association in such a way as to
recognize and in effect admit its legal existence as a corporate body is
thereby estopped to deny its corporate existence in any action leading
out of or involving such contract or dealing, unless its existence is
attacked for causes which have arisen since making the contract or
other dealing relied on as an estoppel and this applies to foreign as
well as domestic corporations .
There would seem to be no question that the Laras received benefits
generated by their business relations with ML FUTURES. Those
business relations, according to the Laras themselves, spanned a period
of seven (7) years; and they evidently found those relations to be of
such profitability as warranted their maintaining them for that not
insignificant period of time; otherwise, it is reasonably certain that they
would have terminated their dealings with ML FUTURES much, much
earlier. In fact, even as regards their last transaction, in which the
Laras allegedly suffered a loss in the sum of US$160,749.69, the Laras
nonetheless still received some monetary advantage, for ML FUTURES
credited them with the amount of US$75,913.42 then due to them, thus
reducing their debt to US$84,836.27. Given these facts, and assuming
that the Lara Spouses were aware from the outset that ML FUTURES
had no license to do business in this country and MLPI, no authority to
act as broker for it, it would appear quite inequitable for the Laras to
evade payment of an otherwise legitimate indebtedness due and owing
to ML FUTURES upon the plea that it should not have done business
in this country in the first place, or that its agent in this country, MLPI,
had no license either to operate as a "commodity and/or financial
futures broker."
Considerations of equity dictate that, at the very least, the issue of
whether the Laras are in truth liable to ML FUTURES and if so in what
amount, and whether they were so far aware of the absence of the
requisite licenses on the part of ML FUTURES and its Philippine
correspondent, MLPI, as to be estopped from alleging that fact as
defense to such liability, should be ventilated and adjudicated on the
merits by the proper trial court.

Issue:

Section 22 -

W/N ML FUTURES may sue in Philippine Courts to establish and

enforce its rights against said spouses, in light of the undeniable fact
that it had transacted business in this country without being licensed to
do so

Effects on non-use of corporate charter and continuous

inoperation of a corporation. - If a corporation does not formally
organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.

Ruling:
If it be true that during all the time that they were transacting with ML
FUTURES, the Laras were fully aware of its lack of license to do
business in the Philippines, and in relation to those transactions had
made payments to, and received money from it for several years, the
question is whether or not the Lara Spouses are now estopped to
impugn ML FUTURES' capacity to sue them in the courts of the forum.
The rule is that a party is estopped to challenge the personality of a
corporation after having acknowledged the same by entering into a
contract with it. And the "doctrine of estoppel to deny corporate
existence applies to foreign as well as to domestic corporations;" "one
who has dealt with a corporation of foreign origin as a corporate entity
is estopped to deny its corporate existence and capacity." The principle
"will be applied to prevent a person contracting with a foreign
corporation from later taking advantage of its noncompliance with the
statutes, chiefly in cases where such person has received the benefits of
the contract, where such person has acted as agent for the corporation
and has violated his fiduciary obligations as such, and where the

This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.

TITLE III
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
Section 23

53

The board of directors or trustees. - Unless otherwise provided in

this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees
to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold
office for one (1) year until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof.
a majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.

to pay a basic fine of P5,000 and a daily fine of P500 for continuing
violations.
Aggrieved, petitioner went to the Court of Appeals on certiorari
contending that the SEC acted with grave abuse of discretion or lack or
excess of jurisdiction in issuing the above orders. The appellate court
issued a temporary restraining order on July 26, 1996, and a writ of
preliminary injunction on August 26, 1996.
On June 17, 1998, the appellate court dismissed the petition. It ruled
that the power to regulate petitioners fees was included in the general
power given to the SEC under Section 40 of The Revised Securities Act
to regulate, supervise, examine, suspend or otherwise discontinue, the
operation of securities-related organizations like petitioner.

Phil. Assn of Stock Transfer Vs. CA (536 SCRA 61)

The appellate court likewise denied

reconsideration. Hence, this appeal.

Facts:

Issue:

Philippine Association of Stock Transfer and Registry Agencies, Inc. is

an association of stock transfer agents principally engaged in the
registration of stock transfers in the stock-and-transfer book of
corporations.

W/N the SEC acted with grave abuse of discretion or lack or excess of
jurisdiction in issuing the controverted Orders of July 8 and 11, 1996

Petitioners Board of Directors unanimously approved a resolution

allowing its members to increase the transfer processing fee they
charge their clients from P45 per certificate to P75 per certificate,
effective July 1, 1996; and eventually to P100 per certificate, effective
October 1, 1996. The resolution also authorized the imposition of a
processing fee for the cancellation of stock certificates at P20 per
certificate effective July 1, 1996. According to petitioner, the rates had
to be increased since it had been over five years since the old rates were
fixed and an increase of its fees was needed to sustain the financial
viability of the association and upgrade facilities and services.

Before its repeal, Section 47 of The Revised Securities Act clearly gave
the SEC the power to enjoin the acts or practices of securities-related
organizations even without first conducting a hearing if, upon proper
investigation or verification, the SEC is of the opinion that there exists
the possibility that the act or practice may cause grave or irreparable
injury to the investing public, if left unrestrained. Section 47 clearly
provided,

Public respondent Securities and Exchange Commission (SEC) allowed

petitioner to impose the P75 per certificate transfer fee and P20 per
certificate cancellation fee effective July 1, 1996. But, approval of the
additional increase of the transfer fees to P100 per certificate effective
October 1, 1996, was withheld until after a public hearing. The SEC
issued a letter-authorization to this effect on June 20, 1996.
Thereafter, on June 24, 1996, the Philippine Association of Securities
Brokers and Dealers, Inc. registered its objection to the measure
advanced by petitioner and requested the SEC to defer its
implementation. The SEC advised petitioner to hold in abeyance the
implementation of the increases until the matter was cleared with all
the parties concerned. Petitioner nonetheless proceeded with the
implementation of the increased fees.
On July 2, 1996, following a complaint from the Philippine Stock
Exchange, the SEC again sent petitioner a second letter strongly urging
petitioner to desist from implementing the new rates in the interest of
all participants in the security market.
Petitioner also argued that the imposition of the processing fee was a
management prerogative, which was beyond the SECs authority to
regulate absent an express rule or regulation.
On July 8, 1996, the SEC issued Order enjoining petitioner from
imposing the new fees.
During the hearing, petitioner admitted that it had started imposing
the fees. It further admitted that aside from the questioned fees, it had
likewise started imposing fees ranging from P50 to P500 for report of
shareholdings or list of certificates; certification of shareholdings or
other stockholder information requested by external auditors and
validation of status of certificates, all without prior approval of the
Commission. Thus, for violating its orders, the SEC ordered petitioner

petitioners

motion

for

Ruling:

SEC. 47. Cease and desist order.The

Commission, after proper investigation or
verification, motu proprio, or upon verified
complaint by any aggrieved party, may issue a
cease and desist order without the necessity of a
prior hearing if in its judgment the act or practice,
unless restrained may cause grave or
irreparable injury or prejudice to the
investing public or may amount to fraud or
violation of the disclosure requirements of this Act
and the rules and regulations of the Commission.
(Emphasis supplied.)
xxxx
Said section enforces the power of general supervision of the SEC
under Section 40 of the then Revised Securities Act.
As a securities-related organization under the jurisdiction and
supervision of the SEC by virtue of Section 40 of The Revised Securities
Act and Section 3 of Presidential Decree No. 902-A, petitioner was
under the obligation to comply with the July 8, 1996 Order. Defiance
of the order was subject to administrative sanctions provided in
Section 46 of The Revised Securities Act.
Petitioner failed to show that the SEC, which undoubtedly possessed
the necessary expertise in matters relating to the regulation of the
securities market, gravely abused its discretion in finding that there
was a possibility that the increase in fees and imposition of cancellation
fees will cause grave or irreparable injury or prejudice to the investing
public. Indeed, petitioner did not advance any argument to counter the
SECs finding. Thus, there appears to be no substantial reason to
nullify the July 8, 1996 Order. This is true, especially considering that,
as pointed out by the OSG, petitioners fee increases have far-reaching
effects on the capital market. Charging exorbitant processing fees
could discourage many small prospective investors and curtail the
infusion of money into the capital market and hamper its growth.

54

In Philippine Stock Exchange, Inc. v. Court of Appeals, the Court held

that the SEC is without authority to substitute its judgment for that of
the corporations board of directors on business matters so long as the
board of directors acts in good faith. This Court notes, however, that
this case involves, not whether petitioners actions pertained to
management prerogatives or whether petitioner acted in good faith.
Rather, this case involves the question of whether the SEC had the
power to enjoin petitioners planned increase in fees after the SEC had
determined that said act if pursued may cause grave or irreparable
injury or prejudice to the investing public. Petitioner was fined for
violating the SECs cease-and-desist order which the SEC had issued to
protect the interest of the investing public, and not simply for
exercising its judgment in the manner it deems appropriate for its
business.
The regulatory and supervisory powers of the Commission under
Section 40 of the then Revised Securities Act, in our view, were broad
enough to include the power to regulate petitioners fees. Indeed,
Section 47 gave the Commission the power to enjoin motu proprio any
act or practice of petitioner which could cause grave or irreparable
injury or prejudice to the investing public. The intentional omission in
the law of any qualification as to what acts or practices are subject to
the control and supervision of the SEC under Section 47 confirms the
broad extent of the SECs regulatory powers over the operations of
securities-related organizations like petitioner.
The SECs authority to issue the cease-and-desist order being
indubitable under Section 47 in relation to Section 40 of the then
Revised Securities Act, and there being no showing that the SEC
committed grave abuse of discretion in finding basis to issue said
order, we rule that the Court of Appeals committed no reversible error
in affirming the assailed orders. For its open and admitted defiance of
a lawful cease-and-desist order, petitioner was held appropriately
liable for the payment of the penalty imposed on it in the SECs July 11,
1996 Order.
Metro Cebu Vs. Adala (526 SCRA 465)
In 2002, Adala (respondent) applied for the issuance of a Certificate of
Public Convenience (CPC) with the National Water Resources Board
(NWRB) to operate and maintain waterworks system in certain parts of
Cebu City.
At the initial hearing, when Adala submitted proof of compliance with
the jurisdictional requirements, the MCWD (petitioner) appeared
through its lawyers to oppose the application.
Petitioner prayed for the denial of the application on the following
grounds:
1. petitioners Board of Directors had not consented to the
issuance of the franchise applied for, such consent being
mandatory as set forth in Section 47 of PD 198 , which
regulates local water utilities.;
2. the proposed waterworks would interfere with the
petitioners water supply which it has the right to protect;
3. the water needs of the residents in the subject area was
already being well served by the petitioner.
NWRB dismissed the petitioners opposition and found that the
respondent was qualified to operate a waterworks system.
The Petitioner appealed the case but the same was dismissed by the
RTC of Cebu City.
The respondent, on the other hand, averred that the petitioners
General Manager Engr. Paredes who filed the present petition and
signed the accompanying verification and certification of non- forum
shopping, was not specifically authorized by the Board of Directors for
that purpose and that the resolution only stated that Engr. Paredes was
authorized to file in behalf of the MCWD expropriation and other cases
and this did not include the signing of the certificate of non- forum
shopping. Petition must be dismissed.

1.) Whether or not the term to file in behalf of the Metropolitan Cebu
Water District expropriation and other cases include the grant of
authority to sign the certificate of non- forum shopping for and in
behalf of the MCWD.
2.) Whether or not the consent of the Board of Directors of the Water
District is a condition sine qua non to the grant of CPC by the NWRB
upon operators of waterworks within the service area of the Water
District.
Ruling:
1. The term to file in behalf of the Metropolitan Cebu Water District
expropriation and other cases did not include the grant of power to
sign the certificate of non- forum shopping for and in behalf of the
MCWD.
While the questioned resolution sufficiently identifies the kind of cases
which Engr. Paredes may file in petitioners behalf, the same does not
authorize him for the specific act of signing verifications and
certifications against forum- shopping for it merely authorizes him to
file cases in behalf of the corporation. There is no mention of signing
verifications or for that matter, any document of whatever nature.
A board resolution purporting to authorize a person to sign documents
in behalf of the corporation must explicitly vest such authority.
Under Rule 13, Section 2 of the Rules of Court, filing is the act of
presenting the pleading or other paper to the clerk of court. Since the
signing of verifications and certifications against forum- shopping is
not integral to the act of filing, this may not be deemed as necessarily
included in an authorization merely to file cases.
Engr. Paredes not having been authorized to sign the verification and
certification of non- forum shopping, the instant petition may be
dismissed outright.
2. The consent of the Board of Directors of MCWD was needed in
granting a CPC to the respondent based on the express provision of
Section 47 of PD 198.
However, this cannot be the basis of MCWD in opposing against the
application of respondent Adala because Section 47 of PD 198 was held
by the Court to be unconstitutional since this provision vests an
exclusive franchise upon public utilities. This is found by the Court to
be repugnant to Article XIV Section 5 of the 1973 Constitution that
franchise, certificate or authorization for public utility which is
exclusive in character shall not be granted (the 1973 Constitution was
the basis of declaring the provision unconstitutional because PD 198
was enacted into law when the 1973 Constitution was still in force).
Therefore, Section 47 of PD 198 cannot be relied upon by the petitioner
in support of its opposition against respondents application.
Manila Metal Container Vs. PNB (511 SCRA 444)
Facts:
Petitioner was the owner of a 8,015 square meter parcel of land located
in Mandaluyong (now a City), Metro Manila.
The property was
covered by Transfer Certificate of Title (TCT) No. 332098 of the
Registry of Deeds of Rizal. To secure a P900,000.00 loan it had
obtained from respondent Philippine National Bank (PNB), petitioner
executed a real estate mortgage over the lot. Respondent PNB later
granted petitioner a new credit accommodation of P1,000,000.00;
and, on November 16, 1973, petitioner executed an Amendment of
Real Estate Mortgage over its property. On March 31, 1981, petitioner
secured another loan of P653,000.00 from respondent PNB, payable in
quarterly installments of P32,650.00, plus interests and other charges.
On August 5, 1982, respondent PNB filed a petition for extrajudicial
foreclosure of the real estate mortgage and sought to have the property
sold at public auction for P911,532.21, petitioners outstanding

Issue/s:

55

obligation to respondent PNB as of June 30, 1982, plus interests and

attorneys fees.
After due notice and publication, the property was sold at public
auction on September 28, 1982 where respondent PNB was declared
the winning bidder for P1,000,000.00. The Certificate of Sale issued
in its favor was registered with the Office of the Register of Deeds of
Rizal, and was annotated at the dorsal portion of the title on February
17, 1983. Thus, the period to redeem the property was to expire on
February 17, 1984.
Since petitioner failed to redeem the property, the Register of Deeds
cancelled TCT No. 32098 on June 1, 1984, and issued a new title in
favor of respondent PNB. Petitioners offers had not yet been acted
upon by respondent PNB.
Meanwhile, the Special Assets Management Department (SAMD) had
prepared a statement of account, and as of June 25, 1984 petitioners
obligation amounted to P1,574,560.47. This included the bid price of
P1,056,924.50, interest, advances of insurance premiums, advances on
realty taxes, registration expenses, miscellaneous expenses and
publication cost. When apprised of the statement of account, petitioner
remitted P725,000.00 to respondent PNB as deposit to repurchase,
and Official Receipt No. 978191 was issued to it.
Notwithstanding SAMD recommendation to the management of PNB
that petitioner be allowed to repurchase the property for
P1,574,560.00, the PNB management informed petitioner that it was
rejecting the offer and the recommendation of the SAMD. It was
suggested that petitioner purchase the property for P2,660,000.00, its
minimum market value. Respondent PNB gave petitioner until
December 15, 1984 to act on the proposal; otherwise, its P725,000.00
deposit would be returned and the property would be sold to other
interested buyers.
On June 4, 1985, respondent PNB informed petitioner that the PNB
Board of Directors had accepted petitioners offer to purchase the
property, but for P1,931,389.53 in cash less the P725,000.00 already
deposited with it. On page two of the letter was a space above the
typewritten name of petitioners President, Pablo Gabriel, where he
was to affix his signature. However, Pablo Gabriel did not conform to
the letter but merely indicated therein that he had received it.
Petitioner did not respond, so PNB requested petitioner in a letter
dated June 30, 1988 to submit an amended offer to repurchase.
Meanwhile, on June 17, 1993, petitioners Board of Directors approved
Resolution No. 3-004, where it waived, assigned and transferred its
rights over the property covered by TCT No. 33099 and TCT No. 37025
in favor of Bayani Gabriel, one of its Directors. Thereafter, Bayani
Gabriel executed a Deed of Assignment over 51% of the ownership and
management of the property in favor of Reynaldo Tolentino, who later
moved for leave to intervene as plaintiff-appellant. On July 14, 1993,
the CA issued a resolution granting the motion, and likewise granted
the motion of Reynaldo Tolentino substituting petitioner MMCC, as
plaintiff-appellant, and his motion to withdraw as intervenor.
The CA rendered judgment on May 11, 2000 affirming the decision of
the RTC. It declared that petitioner obviously never agreed to the
selling price proposed by respondent PNB (P1,931,389.53) since
petitioner had kept on insisting that the selling price should be lowered
to P1,574,560.47. Clearly therefore, there was no meeting of the minds
between the parties as to the price or consideration of the sale.
The CA ratiocinated that petitioners original offer to purchase the
subject property had not been accepted by respondent PNB. In fact, it
made a counter-offer through its June 4, 1985 letter specifically on the
selling price; petitioner did not agree to the counter-offer; and the
negotiations did not prosper. Moreover, petitioner did not pay the
balance of the purchase price within the sixty-day period set in the
June 4, 1985 letter of respondent PNB. Consequently, there was no
perfected contract of sale, and as such, there was no contract to
rescind.

Petitioner rejected respondents proposal in a letter dated July 14,

1988. It maintained that respondent PNB had agreed to sell the
property for P1,574,560.47, and that since its P725,000.00
downpayment had been accepted, respondent PNB was proscribed
from increasing the purchase price of the property. Petitioner averred
that it had a net balance payable in the amount of P643,452.34.
Respondent PNB, however, rejected petitioners offer to pay the
balance of P643,452.34 in a letter dated August 1, 1989.
Issue:
W/N petitioner and respondent PNB had entered into a perfected
contract for petitioner to repurchase the property from respondent
Ruling:
In this case, petitioner had until February 17, 1984 within which to
redeem the property. However, since it lacked the resources, it
requested for more time to redeem/repurchase the property under
such terms and conditions agreed upon by the parties. The request,
which was made through a letter dated August 25, 1983, was referred
to the respondents main branch for appropriate action.
When the petitioner was told that respondent did not allow partial
redemption, it sent a letter to respondents President reiterating its
offer to purchase the property. There was no response to petitioners
letters dated February 10 and 15, 1984.
The statement of account prepared by the SAMD stating that the net
claim of respondent as of June 25, 1984 was P1,574,560.47 cannot be
considered an unqualified acceptance to petitioners offer to purchase
the property. The statement is but a computation of the amount which
petitioner was obliged to pay in case respondent would later agree to
sell the property, including interests, advances on insurance premium,
advances on realty taxes, publication cost, registration expenses and
miscellaneous expenses.
There is no evidence that the SAMD was authorized by respondents
Board of Directors to accept petitioners offer and sell the property for
P1,574,560.47. Any acceptance by the SAMD of petitioners offer
would not bind respondent. As this Court ruled in AF Realty
Development, Inc. vs. Diesehuan Freight Services, Inc.:
Section 23 of the Corporation Code expressly provides that
the corporate powers of all corporations shall be exercised by
the board of directors. Just as a natural person may
authorize another to do certain acts in his behalf, so may the
board of directors of a corporation validly delegate some of
its functions to individual officers or agents appointed by it.
Thus, contracts or acts of a corporation must be made either by the
board of directors or by a corporate agent duly authorized by the board.
Absent such valid delegation/authorization, the rule is that, the
declarations of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with the
performance of authorized duties of such director, is held not binding
on the corporation.
Thus, a corporation can only execute its powers and transact its
business through its Board of Directors and through its officers and
agents when authorized by a board resolution or its by-laws.
It appears that the SAMD had prepared a recommendation for
respondent to accept petitioners offer to repurchase the property even
beyond the one-year period; it recommended that petitioner be allowed
to redeem the property and pay P1,574,560.00 as the purchase price.
Respondent later approved the recommendation that the property be
sold to petitioner. But instead of the P1,574,560.47 recommended by
the SAMD and to which petitioner had previously conformed,
respondent set the purchase price at P2,660,000.00. In fine,
respondents acceptance of petitioners offer was qualified, hence can

56

be at most considered as a counter-offer. If petitioner had accepted

this counter-offer, a perfected contract of sale would have arisen; as it
turns out, however, petitioner merely sought to have the counter-offer
reconsidered. This request for reconsideration would later be rejected
by respondent.
We do not agree with petitioners contention that the
P725,000.00 it had remitted to respondent was earnest money which
could be considered as proof of the perfection of a contract of sale
under Article 1482 of the New Civil Code.
Thus, the P725,000.00 was merely a deposit to be applied as part of
the purchase price of the property, in the event that respondent would
approve the recommendation of SAMD for respondent to accept
petitioners offer to purchase the property for P1,574,560.47. Unless
and until the respondent accepted the offer on these terms, no
perfected contract of sale would arise. Absent proof of the concurrence
of all the essential elements of a contract of sale, the giving of earnest
money cannot establish the existence of a perfected contract of sale.
It appears that although respondent requested petitioner to conform to
its amended counter-offer, petitioner refused and instead requested
respondent to reconsider its amended counter-offer. Petitioners
request was ultimately rejected and respondent offered to refund its
P725,000.00 deposit.
In sum, then, there was no perfected contract of sale between
petitioner and respondent over the subject property.

corporation, PROVIDED THAT Philippine sovereignty over natural

resources and full control over the enterprise undertaking the EDU
activities remain firmly in the State.
BPI Leasing Vs. CA (416 SCRA 4)
Facts:
BLC is a corporation engaged in the business of leasing properties. For
the calendar year 1986, BLC paid the Commissioner of Internal
Revenue (CIR) a total of P1,139,041.49 representing 4% "contractors
percentage tax" then imposed by Section 205 of the National Internal
Revenue Code (NIRC), based on its gross rentals from equipment
leasing for the said year amounting to P27,783,725.42.
The CIR issued Revenue Regulation which provided that finance and
leasing companies registered under Republic Act 5980 shall be subject
to gross receipt tax of 5%-3%-1% on actual income earned. This means
that companies registered under Republic Act 5980, such as BLC, are
not liable for "contractors percentage tax" under Section 205 but are,
instead, subject to "gross receipts tax" under Section 260 (now Section
122) of the NIRC. Since BLC had earlier paid the aforementioned
"contractors percentage tax," it re-computed its tax liabilities under
the "gross receipts tax" and arrived at the amount of P361,924.44.
BLC filed a claim for a refund with the CIR for the amount of
P777,117.05, representing the difference between the P1,139,041.49 it
had paid as "contractors percentage tax" and P361,924.44 it should
have paid for "gross receipts tax." Four days later, to stop the running
of the prescriptive period for refunds, petitioner filed a petition for
review with the CTA.

La Bugal-Blaan Vs. Ramos (421 SCRA 158)

Ruling:
We shall now look closer at the plain language of the Charter and
examining the logical inferences. The drafters chose to emphasize and
highlight agreements x x x involving either technical or financial
assistance in relation to foreign corporations participation in largescale EDU. The inclusion of this clause on technical or financial
assistance recognizes the fact that foreign business entities and
multinational corporations are the ones with the resources and knowhow to provide technical and/or financial assistance of the magnitude
and type required for large-scale exploration, development and
utilization of these resources.
Definitely, as business persons well know and as a matter of judicial
notice, this matter is not just a question of signing a promissory note or
executing a technology transfer agreement. Foreign corporations
usually require that they be given a say in the management, for
instance, of day-to-day operations of the joint venture. They would
demand the appointment of their own men as, for example, operations
managers, technical experts, quality control heads, internal auditors or
comptrollers. Furthermore, they would probably require seats on the
Board of Directors -- all these to ensure the success of the enterprise
and the repayment of the loans and other financial assistance and to
make certain that the funding and the technology they supply would
not go to waste. Ultimately, they would also want to protect their
business reputation and bottom lines.
In short, the drafters will have to be credited with enough pragmatism
and savvy to know that these foreign entities will not enter into such
agreements involving assistance without requiring arrangements for
the protection of their investments, gains and benefits.
Thus, by specifying such agreements involving assistance, the
drafters necessarily gave implied assent to everything that these
agreements necessarily entailed; or that could reasonably be deemed
necessary to make them tenable and effective, including management
authority with respect to the day-to-day operations of the enterprise
and measures for the protection of the interests of the foreign

The CTA dismissed the petition and denied BLCs claim of refund. The
CTA held that Revenue Regulation 19-86, as amended, may only be
applied prospectively such that it only covers all leases written on or
after January 1, 1987, as stated under Section 7 of said revenue
regulation.
The CTA ruled that, since BLCs rental income was all received prior to
1986, it follows that this was derived from lease transactions prior to
January 1, 1987, and hence, not covered by the revenue regulation.
A motion for reconsideration of the CTAs decision was filed, but was
denied in a resolution dated July 26, 1995. BLC then appealed the case
to the Court of Appeals, which issued the aforementioned assailed
decision and resolution. Hence, the present petition.
The respondents argue that the petition should be dismissed on the
ground that the Verification/Certification of Non-Forum Shopping was
signed by the counsel of record and not by BLC, through a duly
authorized representative, in violation of Supreme Court Circular 2891.
Issue:
W/N BLC complies with the requirement on Verification/Certification
of Non-Forum Shopping
Ruling:
In BA Savings Bank v. Sia , it was held that the certificate of nonforum shopping may be signed, for and on behalf of a corporation, by a
specifically authorized lawyer who has personal knowledge of the facts
required to be disclosed in such document. This ruling, however, does
not mean that any lawyer, acting on behalf of the corporation he is
representing, may routinely sign a certification of non-forum shopping.
The Court emphasizes that the lawyer must be "specifically authorized"
in order validly to sign the certification.

57

Corporations have no powers except those expressly conferred upon

them by the Corporation Code and those that are implied by or are
incidental to its existence. These powers are exercised through their
board of directors and/or duly authorized officers and agents. Hence,
physical acts, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate bylaws or
by specific act of the board of directors.
The records are bereft of the authority of BLCs counsel to institute the
present petition and to sign the certification of non-forum shopping.
While said counsel may be the counsel of record for BLC, the
representation does not vest upon him the authority to execute the
certification on behalf of his client. There must be a resolution issued
by the board of directors that specifically authorizes him to institute
the petition and execute the certification, for it is only then that his
actions can be legally binding upon BLC.
BLC however insists that there was substantial compliance with SC
Circular No. 28-91 because the verification/certification was issued by
a counsel who had full personal knowledge that no other petition or
action has been filed or is pending before any other tribunal. According
to BLC, said counsels law firm has handled this case from the very
beginning and could very well attest and/or certify to the absence of an
instituted or pending case involving the same or similar issues.
The argument of substantial compliance deserves no merit, given the
Courts ruling in Mendigorin v. Cabantog :
The CA held that there was substantial compliance with the Rules of
Court, citing Dimagiba vs. Montalvo, Jr. [202 SCRA 641] to the effect
that a lawyer who assumes responsibility for a client's cause has the
duty to know the entire history of the case, especially if any litigation is
commenced. This view, however, no longer holds authoritative value in
the light of Digital Microwave Corporation vs. CA [328 SCRA 286],
where it was held that the reason the certification against forum
shopping is required to be accomplished by petitioner himself is that
only the petitioner himself has actual knowledge of whether or not he
has initiated similar actions or proceedings in other courts or tribunals.
Even counsel of record may be unaware of such fact. To our mind, this
view is more in accord with the intent and purpose of Revised Circular
No. 28-91.
Clearly, therefore, the present petition lacks the proper certification as
strictly required by jurisprudence and the Rules of Court.
Kwok Vs. Phil. Carpet (457 SCRA 465)
Facts:
Donald Kwok and his father-in-law Patricio L. Lim, along with some
other stockholders, established a corporation, the Philippine Carpet
Manufacturing Corporation (PCMC). The petitioner became its general
manager, executive vice-president and chief operations officer. Lim,
on the other hand, was its president and chairman of the board of
directors. When the petitioner retired 36 years later or on October 31,
1996, he was receiving a monthly salary of P160,000.00. He demanded
the cash equivalent of what he believed to be his accumulated vacation
and sick leave credits during the entire length of his service with the
respondent corporation, i.e., from November 16, 1965 to October 31,
1996, in the total amount of P7,080,546.00 plus interest. However, the
respondent corporation refused to accede to the petitioners demands,
claiming that the latter was not entitled thereto.
The respondent corporation denied all these, claiming that upon the
petitioners retirement, he received the amount of P6,902,387.19
representing all the benefits due him. Despite this, the petitioner again
demanded P7,080,546.00, which demand was without factual and
legal basis. The respondent corporation asserted that the chairman of
its board of directors and its president/vice-president had unlimited
discretion in the use of their time, and had never been required to file
applications for vacation and sick leaves; as such, the said officers were
not entitled to vacation and sick leave benefits. The respondent

corporation, likewise, pointed out that even if the petitioner was

entitled to the said additional benefits, his claim had already
prescribed. It further averred that it had no policy to grant vacation
and sick leave credits to the petitioner.
In his Affidavit dated May 19, 1998, Lim denied making any such
verbal promise to his son-in-law on the grant of unlimited vacation and
sick leave credits and the cash conversion thereof. Lim averred that
the petitioner had received vacation and sick leave benefits from 1994
to 1996. Moreover, assuming that he did make such promise to the
petitioner, the same had not been confirmed or approved via resolution
of the respondent corporations board of directors.
It was further pointed out that as per the Memorandum dated
November 6, 1981, only regular employees and managerial and
confidential employees falling under Category I were entitled to
vacation and sick leave credits. The petitioner, whose position did not
fall under Category I, was, thus, not entitled to the benefits under the
said memorandum. The respondent corporation alleged that this was
admitted by the petitioner himself and affirmed by Raoul Rodrigo, its
incumbent executive vice-president and general manager.
The Labor Arbiter ruled in favor of the petitioner.
The NLRC, by majority vote, rendered judgment granting the appeal of
the respondent corporation, reversing and setting aside the decision of
the Labor Arbiter.
Also the CA rendered judgment affirming the decision of the NLRC and
dismissing the petition.
Issue:
W/N the petitioner is entitled, based on the documentary and
testimonial evidence on record, to the cash value of his vacation and
sick leave credits in the total amount of P7,080,546.00
Ruling:
While the petitioner was unequivocal in claiming that the respondent
corporation, through its president and chairman of the board of
directors, obliged itself, as a matter of policy, to grant him the cash
value of his vacation and sick leave credits upon his retirement, he was
burdened to prove his claim by substantial evidence. The petitioner
failed to discharge this burden.
For a contract to be binding on the parties thereto, it need not be in
writing unless the law requires that such contract be in some form in
order that it may be valid or enforceable or that it be executed in a
certain way, in which case that requirement is absolute and
independent. Indeed, corporate policies need not be in writing.
Contracts entered into by a corporate officer or obligations or
prestations assumed by such officer for and in behalf of such
corporation are binding on the said corporation only if such officer
acted within the scope of his authority or if such officer exceeded the
limits of his authority, the corporation has ratified such contracts or
obligations.
In the present case, the petitioner relied principally on his testimony to
prove that Lim made a verbal promise to give him vacation and sick
leave credits, as well as the privilege of converting the same into cash
upon retirement. The Court agrees that those who belong to the upper
corporate echelons would have more privileges. However, the Court
cannot presume the existence of such privileges or benefits. The
petitioner was burdened to prove not only the existence of such
benefits but also that he is entitled to the same, especially considering
that such privileges are not inherent to the positions occupied by the
petitioner in the respondent corporation, son-in-law of its president or
not.

58

Even assuming that PCMC President Patricio Lim did promise

petitioner the cash conversion of his leaves, we agree with respondent
that this cannot bind the company in the absence of any Board
resolution to that effect. We must stress that the personal act of the
company president cannot bind the corporation. As explicitly stated by
the Supreme Court in Peoples Aircargo and Warehousing Co., Inc. v.
Court of Appeals:
The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a
corporation. A corporation is a juridical person, separate and distinct
from its stockholders and members, having xxx powers, attributes and
properties expressly authorized by law or incident to its existence.
the power and the responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in
the board, subject to the articles of incorporation, by-laws, or relevant
provisions of law.
Petitioner maintains that the PCMC Board of Directors has granted its
President, Patricio Lim, awesome powers to grant benefits to its
employees, adding that the Board has always given its consent to the
way Lim ran the affairs of the company especially on matters relating
to the benefits that its corporate officers enjoyed.
True, jurisprudence holds that the president of a corporation possesses
the power to enter into a contract for the corporation when the
conduct on the part of both the president and corporation [shows] that
he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had
recognized, approved and ratified his former and similar actions.
In the case at bar, however, there is no showing that PCMC had either
recognized, approved or ratified the cash conversion of petitioners
leave credits as purportedly promised to him by Lim. On the contrary,
PCMC has steadfastly maintained that the Company, through the
Board, has long adopted the policy of granting its earlier mentioned
corporate officers unlimited leave benefits denying them the privilege
of converting their unused vacation or sick leave benefits into their
cash equivalent.

refundable within two weeks should AF Realty disapprove Ranullo's

action on the matter.
AF Realty confirmed its intention to buy the lot. Hence, Ranullo asked
Polintan for the board resolution of Dieselman authorizing the sale of
the property. However, Polintan could only give Ranullo the original
copy of TCT No. 39849, the tax declaration and tax receipt for the lot,
and a photocopy of the Articles of Incorporation of Dieselman.
Manuel F. Cruz, Sr., President of Dieselman, acknowledged receipt of
the said P300,000.00 as "earnest money" but required AF Realty to
finalize the sale at P4,000.00 per square meter. AF Realty replied
that it has paid an initial down payment of P300,000.00 and is willing
to pay the balance.
However, Mr. Cruz, Sr. terminated the offer and demanded from AF
Realty the return of the title of the lot earlier delivered by Polintan.
Claiming that there was a perfected contract of sale between them, AF
Realty filed with the Regional Trial Court, Branch 160, Pasig City a
complaint for specific performance against Dieselman and Cruz, Jr..
The complaint prays that Dieselman be ordered to execute and deliver
a final deed of sale in favor of AF Realty. In its amended complaint, AF
Realty asked for payment of P1,500,000.00 as compensatory damages;
P400,000.00 as attorney's fees; and P500,000.00 as exemplary
damages.
Meanwhile, on July 30, 1988, Dieselman and Midas Development
Corporation (Midas) executed a Deed of Absolute Sale 13 of the same
property. The agreed price was P2,800.00 per square meter. Midas
delivered to Dieselman P500,000.00 as down payment and deposited
the balance of P5,300,000.00 in escrow account with the PCIBank.
Constrained to protect its interest in the property, Midas filed on April
3, 1989 a Motion for Leave to Intervene in Civil Case No. 56278. Midas
alleged that it has purchased the property and took possession thereof,
hence Dieselman cannot be compelled to sell and convey it to AF
Realty. The trial court granted Midas' motion.
Issue:

AF Realty Vs. Dieselman (373 SCRA 385)

Facts:
Dieselman Freight Service Co. is a domestic corporation and a
registered owner of a parcel of commercial lot consisting of 2,094
square meters, located at 104 E. Rodriguez Avenue, Barrio Ugong,
Pasig City, Metro Manila. The property is covered by Transfer
Certificate of Title No. 39849 issued by the Registry of Deeds of the
Province of Rizal.
Manuel C. Cruz, Jr., a member of the board of directors of Dieselman,
issued a letter denominated as "Authority To Sell Real Estate" to
Cristeta N. Polintan, a real estate broker of the CNP Real Estate
Brokerage. Cruz, Jr. authorized Polintan "to look for a buyer/buyers
and negotiate the sale" of the lot at P3,000.00 per square meter, or a
total of P6,282,000.00. Cruz, Jr. has no written authority from
Dieselman to sell the lot.
In turn, Cristeta Polintan, through a letter dated May 19, 1988,
authorized Felicisima ("Mimi") Noble to sell the same lot.
Felicisima Noble then offered for sale the property to AF Realty &
Development, Inc. (AF Realty) at P2,500.00 per square meter. Zenaida
Ranullo, board member and vice-president of AF Realty, accepted the
offer and issued a check in the amount of P300,000.00 payable to the
order of Dieselman. Polintan received the check and signed an
"Acknowledgement Receipt" indicating that the amount of
P300,000.00 represents the partial payment of the property but

Who between petitioner AF Realty and respondent Midas has a right

over the subject lot
Ruling:
Section 23 of the Corporation Code expressly provides that the
corporate powers of all corporations shall be exercised by the board of
directors. Just as a natural person may authorize another to do certain
acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed
by it. Thus, contracts or acts of a corporation must be made either by
the board of directors or by a corporate agent duly authorized by the
board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with, the
performance of authorized duties of such director, is held not binding
on the corporation.
In the instant case, it is undisputed that respondent Cruz, Jr. has no
written authority from the board of directors of respondent Dieselman
to sell or to negotiate the sale of the lot, much less to appoint other
persons for the same purpose. Respondent Cruz, Jr.'s lack of such
authority precludes him from conferring any authority to Polintan
involving the subject realty. Necessarily, neither could Polintan
authorize Felicisima Noble. Clearly, the collective acts of respondent
Cruz, Jr., Polintan and Noble cannot bind Dieselman in the purported
contract of sale.
Petitioner AF Realty maintains that the sale of land by an unauthorized
agent may be ratified where, as here, there is acceptance of the benefits

59

involved. In this case the receipt by respondent Cruz, Jr. from AF

Realty of the P300,000.00 as partial payment of the lot effectively
binds respondent Dieselman.

The Chief State Prosecutor dismissed the appeal for having been filed
out of time. Petitioner's lawyer received a copy of the letter-resolution
dismissing the appeal on January 20, 1995.

Involved in this case is a sale of land through an agent . Thus, the

law on agency under the Civil Code takes precedence. This is well
stressed in Yao Ka Sin Trading vs. Court of Appeals :

The Trial Court denied and dismissed the petition for mandamus of
petitioner.
Issue:

"Since a corporation, such as the private respondent, can act only

through its officers and agents, all acts within the powers of said
corporation may be performed by agents of its selection ; and,
except so far as limitations or restrictions may be imposed by special
charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a
natural person govern the officer or agent of a corporation,
of whatever status or rank, in respect to his power to act for
the corporation ; and agents when once appointed , or
members acting in their stead , are subject to the same rules,
liabilities, and incapacities as are agents of individuals and
private persons ." (Emphasis supplied)
Pertinently, Article 1874 of the same Code provides:
"ART. 1874. When a sale of piece of land or any interest therein is
through an agent , the authority of the latter shall be in writing ;
otherwise, the sale shall be void ." (Emphasis supplied)
Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima
Ranullo were not authorized by respondent Dieselman to sell its lot,
the supposed contract is void. Being a void contract, it is not
susceptible of ratification by clear mandate of Article 1409 of the Civil
Code., thus:
"ART. 1409. The following contracts are inexistent and void from
the very beginning :
x x x (7) Those expressly prohibited or declared void by law
" These contracts cannot be ratified . Neither can the right to set
up the defense of illegality be waived." (Emphasis supplied)
Upon the other hand, the validity of the sale of the subject lot to
respondent Midas is unquestionable. As aptly noted by the Court of
Appeals, the sale was authorized by a board resolution of respondent
Dieselman dated May 27, 1988.
Tam Wing Tak Vs. Makasiar (350 SCRA 475)
Facts:
Tam Wing Tak, in his capacity as director of Concord-World
Properties, Inc., a domestic corporation, filed an affidavit-complaint
with the Quezon City Prosecutor's Office, charging Vic Ang Siong with
violation of B.P. Blg. 22. Docketed by the Prosecutor as I.S. No. 9315886, the complaint alleged that a check for the amount of
P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was
dishonored when presented for encashment.

W/N mandamus will lie

Ruling:
No.
Chief State Prosecutor in refusing to order the filing of information for
violation of B.P. Blg. 22 against Vic Ang Siong did not act without or in
excess of jurisdiction or with grave abuse of discretion.
First, with respect to the agreement between Concord and Victor Ang
Siong to amicably settle their difference, we find this resort to an
alternative dispute settlement mechanism as not contrary to law,
public policy, or public order. Efforts of parties to solve their disputes
outside of the courts are looked on with favor, in view of the clogged
dockets of the judiciary.
Second, it is not disputed in the instant case that Concord, a domestic
corporation, was the payee of the bum check, not petitioner. Therefore,
it is Concord, as payee of the bounced check, which is the injured party.
Since petitioner was neither a payee nor a holder of the bad check, he
had neither the personality to sue nor a cause of action against Vic Ang
Siong. Under Section 36 of the Corporation Code, read in relation to
Section 23, it is clear that where a corporation is an injured party, its
power to sue is lodged with its board of directors or turstees.
Petitioner failed to show any proof that he was authorized or deputized
or granted specific powers by Concord's board of director to sue Victor
And Siong for and on behalf of the firm. Clearly, petitioner as a
minority stockholder and member of the board of directors had no
such power or authority to sue on Concord's behalf. Nor can we uphold
his act as a derivative suit. For a derivative suit to prosper, it is
required that the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the suit.
There is no showing that petitioner has complied with the foregoing
requisites. It is obvious that petitioner has not shown any clear legal
right which would warrant the overturning of the decision of public
respondents to dismiss the complaint against Vic Ang Siong. A public
prosecutor, by the nature of his office, is under no compulsion to file
criminal information where no clear legal justification has been shown,
and no sufficient evidence of guilt nor prima facie case has been
presented by the petitioner. No reversible error may be attributed to
the court a quo when it dismissed petitioner's special civil action for
mandamus.
BA Savings Bank Vs. Sia (336 SCRA 484)
Facts:

Vic Ang Siong sought the dismissal of the case on two grounds: First,
that petitioner had no authority to file the case on behalf of Concord,
the payee of the dishonored check, since the firm's board of directors
had not empowered him to act on its behalf. Second, he and Concord
had already agreed to amicably settle the issue after he made a partial
payment of P19,000,000.00 on the dishonored check.
The City Prosecutor dismissed the complaint on the following grounds:
(1) that petitioner lacked the requisite authority to initiate the criminal
complaint for and on Concord's behalf; and (2) that Concord and Vic
Ang Siong had already agreed upon the payment of the latter's balance
on the dishonored check.

The Court of Appeals issued a Resolution denying due course to a

Petition for Certiorari filed by BA Savings Bank, on the ground that
the Certification on anti-forum shopping incorporated in the petition
was signed not by the duly authorized representative of the petitioner,
as required under Supreme Court Circular No. 28-91, but by its
counsel, in contravention of said circular x x x.
A Motion for Reconsideration was subsequently filed by the petitioner,
attached to which was a BA Savings Bank Corporate Secretarys
Certificate, dated August 14, 1997. The Certificate showed that the

60

petitioners Board of Directors approved a Resolution on May 21, 1996,

authorizing the petitioners lawyers to represent it in any action or
proceeding before any court, tribunal or agency; and to sign, execute
and deliver the Certificate of Non-forum Shopping, among others.
On October 24, 1997, the Motion for Reconsideration was denied by
the Court of Appeals on the ground that Supreme Court Revised
Circular No. 28-91 requires that it is the petitioner, not the counsel,
who must certify under oath to all of the facts and undertakings
required therein.

position to verify the truthfulness and the correctness of the allegations

in the Complaint and to know and to certify if an action x x x had
already been filed and pending with the courts.
Circular 28-91 was prescribed by the Supreme Court to prohibit and
penalize the evils of forum shopping. We see no circumvention of this
rationale if the certificate was signed by the corporations specifically
authorized counsel, who had personal knowledge of the matters
required in the Circular. In Bernardo v. NLRC, we explained that a
literal interpretation of the Circular should be avoided if doing so
would subvert its very rationale. Said the Court:

Issue:
W/N Supreme Court Revised Circular No. 28-91 allows a corporation
to authorize its counsel to execute a certificate of non-forum shopping
for and on its behalf
Ruling:
A corporation, such as the petitioner, has no powers except those
expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly
authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly authorized
for the purpose by corporate bylaws or by a specific act of the board of
directors. All acts within the powers of a corporation may be
performed by agents of its selection; and, except so far as limitations or
restrictions which may be imposed by special charter, by-law, or
statutory provisions, the same general principles of law which govern
the relation of agency for a natural person govern the officer or agent of
a corporation, of whatever status or rank, in respect to his power to act
for the corporation; and agents once appointed, or members acting in
their stead, are subject to the same rules, liabilities and incapacities as
are agents of individuals and private persons.
In the present case, the corporations board of directors issued a
Resolution specifically authorizing its lawyers to act as their agents in
any action or proceeding before the Supreme Court, the Court of
Appeals, or any other tribunal or agency; and to sign, execute and
deliver in connection therewith the necessary pleadings, motions,
verification, affidavit of merit, certificate of non-forum shopping and
other instruments necessary for such action and proceeding. The
Resolution was sufficient to vest such persons with the authority to
bind the corporation and was specific enough as to the acts they were
empowered to do.
In the case of natural persons, Circular 28-91 requires the parties
themselves to sign the certificate of non-forum shopping. However,
such requirement cannot be imposed on artificial persons, like
corporations, for the simple reason that they cannot personally do the
task themselves. As already stated, corporations act only through their
officers and duly authorized agents. In fact, physical actions, like the
signing and the delivery of documents, may be performed, on behalf of
the corporate entity, only by specifically authorized individuals.
It is noteworthy that the Circular does not require corporate officers to
sign the certificate. More important, there is no prohibition against
authorizing agents to do so.
In fact, not only was BA Savings Bank authorized to name an agent to
sign the certificate; it also exercised its appointing authority reasonably
well. For who else knows of the circumstances required in the
Certificate but its own retained counsel. Its regular officers, like its
board chairman and president, may not even know the details required
therein.
Consistent with this rationale, the Court en banc in Robern
Development Corporation v. Judge Jesus Quitain has allowed even an
acting regional counsel of the National Power Corporation to sign,
among others, the certificate of non-forum shopping required by
Circular 28-91. The Court held that the counsel was in the best

x x x. Indeed, while the requirement as to certificate of non-forum

shopping is mandatory, nonetheless the requirements must not be
interpreted too literally and thus defeat the objective of preventing the
undesirable practice of forum-shopping.
Finally, we stress that technical rules of procedure should be used to
promote, not frustrate, justice. While the swift unclogging of court
dockets is a laudable objective, the granting of substantial justice is an
even more urgent ideal.
MWSS Vs. CA (297 SCRA 287)
Facts:
MWSS leased around one hundred twenty eight (128) hectares of its
land to CHGCCI for twenty five (25) years and renewable for another
fifteen (15) years or until the year 2005, with the stipulation allowing
the latter to exercise a right of first refusal should the subject property
be made open for sale. The terms and conditions of respondent
CHGCCI's purchase thereof shall nonetheless be subject to presidential
approval.
Pursuant to Letter of instruction (LOI) issued on July 29,1976 by then
President Ferdinand E. Marcos directing MWSS to negotiate the
cancellation of the MWSS-CHGCCI lease agreement for the disposition
of the subject property, Oscar Ilustre, then General Manager of MWSS,
sometime in November of 1980 informed respondent CHGCCI,
through its president herein respondent Pablo Roman, Jr., of its
preferential right to buy the subject property which was up for sale.
Valuation thereof was to be made by an appraisal company of
petitioner MWSS' choice, the Asian Appraisal Co., Inc. which, on
January 30, 1981, pegged a fair market value of P40.00 per square
meter or a total of P53,800,000.00 for the subject property.
Upon being informed that petitioner MWSS and respondent CHGCCI
had already agreed in principle on the purchase of the subject property,
President Marcos expressed his approval of the sale as shown in his
marginal note on the letter sent by respondents Jose Roxas and Pablo
Roman, Jr. dated December 20, 1982.
The Board of Trustees of petitioner MWSS thereafter passed
Resolution 36-83, approving the sale of the subject property in favor of
respondent SILHOUETTE, as assignee of respondent CHGCCI, at the
appraised value given by Asian Appraisal Co., Inc.
The MWSS-SILHOUETTE sales agreement eventually pushed through.
Per the Agreement dated May 11, 1983 covering said purchase, the total
price for the subject property is P50,925,200, P25 Million of which was
to be paid upon President Marcos' approval of the contract and the
balance to be paid within one (1) year from the transfer of the title to
respondent SILHOUETTE as vendee with interest at 12% per annum.
The balance was also secured by an irrevocable letter of credit. A
Supplemental Agreement was forged between petitioner MWSS and
respondent SILHOUETTE on August 11, 1983 to accurately identify the
subject property.
Subsequently, respondent SILHOUETTE, under a deed of sale dated
July 26, 1984, sold to respondent AYALA about sixty-seven (67)
hectares of the subject property at P110.00 per square meter. Of the

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total price of around P74 Million, P25 Million was to be paid by

respondent AYALA directly to petitioner MWSS for respondent
SILHOUETTE's account and P2 Million directly to respondent
SILHOUETTE. P11,600,000 was to be paid upon the issuance of title in
favor of respondent AYALA, and the remaining balance to be payable
within one (1) year with 12% per annum interest.
Respondent AYALA developed the land it purchased into a prime
residential area now known as the Ayala Heights Subdivision.
Almost a decade later, petitioner MWSS on March 26, 1993 filed an
action against all herein named respondents before the Regional Trial
Court of Quezon City seeking for the declaration of nullity of the
MWSS-SILHOUETTE sales agreement and all subsequent conveyances
involving the subject property, and for the recovery thereof with
damages.
Respondent AYALA filed its answer pleading the affirmative defenses
of (1) prescription, (2) laches, (3) waiver/estoppel/ratification, (4) no
cause of action, (5) non-joinder of indispensable parties, and (6) nonjurisdiction of the court for non-specification of amount of damages
sought.
On June 10, 1993; the trial court issued an Order dismissing the
complaint of petitioner MWSS on grounds of prescription, laches,
estoppel and non-joinder of indispensable parties.
Issue:
W/N the MWSS-SILHOUETTE sales agreement and all subsequent
conveyances involving the questioned property was valid
Ruling:
Yes.
It is the claim of petitioner MWSS that Mr. Ilustre was never given the
authority by its Board of Trustees to enter into the "initial agreement"
of December 20, 1982 and therefore, the sale of the subject property is
invalid.
Petitioner MWSS misses the point. The perceived infirmity in the
"initial agreement" can be cured by ratification. So settled is the
precept that ratification can be made by the corporate board either
expressly or impliedly. Implied ratification may take various forms
like silence or acquiescence; by acts showing approval or adoption of
the contract; or by acceptance and retention of benefits flowing
therefrom. Both modes of ratification have been made in this case.
There was express ratification made by the Board of petitioner MWSS
when it passed Resolution No. 36-83 approving the sale of the subject
property to respondent SILHOUETTE and authorizing Mr. Ilustre, as
General Manager, "to sign for and in behalf of the MWSS the contract
papers and other pertinent documents relative thereto." Implied
ratification by "silence or acquiescence" is revealed from the acts of
petitioner MWSS in (a) sending three (3) demand letters for the
payment of the purchase price, (b) accepting P25 Million as
downpayment, and (c) accepting a letter of credit for the balance, as
hereinbefore mentioned. It may well be pointed out also that nowhere
in petitioner MWSS' complaint is it alleged that it returned the
amounts, or any part thereof, covering the purchase price to any of the
respondents-vendees at any point in time. This is only indicative of
petitioner MWSS' acceptance and retention of benefits flowing from
the sales transactions which is another form of implied ratification.
Section 24
Election of directors or trustees. - At all elections of directors or
trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of a majority of the

outstanding capital stock, or if there be no capital stock, a majority of

the members entitled to vote. The election must be by ballot if
requested by any voting stockholder or member. In stock corporations,
every stockholder entitled to vote shall have the right to vote in person
or by proxy the number of shares of stock standing, at the time fixed in
the by-laws, in his own name on the stock books of the corporation, or
where the by-laws are silent, at the time of the election; and said
stockholder may vote such number of shares for as many persons as
there are directors to be elected or he may cumulate said shares and
give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal, or he may
distribute them on the same principle among as many candidates as he
shall see fit: Provided, That the total number of votes cast by him shall
not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be
elected: Provided, however, That no delinquent stock shall be voted.
Unless otherwise provided in the articles of incorporation or in the bylaws, members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more
than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any meeting of the
stockholders or members called for an election may adjourn from day
to day or from time to time but not sine die or indefinitely if, for any
reason, no election is held, or if there not present or represented by
proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member
entitled to vote.
Bataan Shipyard Vs. PCGG (150 SCRA 181)
Facts:
BASECO describes itself in its petition as "a shiprepair and
shipbuilding company * * incorporated as a domestic private
corporation * * (on Aug. 30, 1972) by a consortium of Filipino
shipowners and shipping executives. Its main office is at Engineer
Island, Port Area, Manila, where its Engineer Island Shipyard is
housed, and its main shipyard is located at Mariveles Bataan." Its
Articles of Incorporation disclose that its authorized capital stock is
P60,000,000.00 divided into 60,000 shares, of which 12,000 shares
with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the
incorporators. The same articles Identify the incorporators, numbering
fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3)
Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6)
Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9)
Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12)
Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and
(15) Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased
to be stockholders, namely: (1) Generoso Tanseco, (2) Antonio
Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw
Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty
(20) stockholders listed in BASECO's Stock and Transfer Book.
Barely six months after its incorporation, BASECO acquired from
National Shipyard & Steel Corporation, or NASSCO, a governmentowned or controlled corporation, the latter's shipyard at Mariveles,
Bataan, known as the Bataan National Shipyard (BNS), and except
for NASSCO's Engineer Island Shops and certain equipment of the
BNS, consigned for future negotiation all its structures, buildings,
shops, quarters, houses, plants, equipment and facilities, in stock or in
transit. This it did in virtue of a "Contract of Purchase and Sale with
Chattel Mortgage" executed on February 13, 1973. The price was
P52,000,000.00. As partial payment thereof, BASECO delivered to
NASSCO a cash bond of P11,400,000.00, convertible into cash within
twenty-four (24) hours from completion of the inventory undertaken
pursuant to the contract. The balance of P41,600,000.00, with interest
at seven percent (7%) per annum, compounded semi-annually, was
stipulated to be paid in equal semi-annual installments over a term of
nine (9) years, payment to commence after a grace period of two (2)
years from date of turnover of the shipyard to BASECO.

62

Subsequently, the price of P52,000,000.00 was reduced by more than

one-half, to P24,311,550.00, about eight (8) months later. A document
to this effect was executed. This agreement bore the intervention of
President Marcos. Certain other transactions of BASECO bore the
intervention of President Marcos.
In September, 1977, two (2) reports were submitted to President
Marcos regarding BASECO. The first was contained in a letter dated
September 5, 1977 of Hilario M. Ruiz, BASECO president. The second
was embodied in a confidential memorandum dated September 16,
1977 of Capt. A.T. Romualdez. They further disclose the fine hand of
Marcos in the affairs of BASECO, and that of a Romualdez, a relative by
affinity.
In the context of the proceedings at bar, the actuality of the control by
President Marcos of BASECO has been sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves
that President Marcos not only exercised control over BASECO, but
also that he actually owns well nigh one hundred percent of its
outstanding stock.
Thus, BASECO was sequestered by the government through the PCGG.
Pursuant to the order of sequestration, the PCGG was ordered to
ensure the continuity of these companies as going concerns, the care
and maintenance of these assets until such time that the Office of the
President through the Commission on Good Government should
decide otherwise, to report to the Commission on Good Government
periodically. The order includes also the production of certain
documents such as including 1. Stock Transfer Book 2. Legal
documents, such as: 2.1. Articles of Incorporation; 2.2. By-Laws; 2.3.
Minutes of the Annual Stockholders Meeting from 1973 to 1986; 2.4.
Minutes of the Regular and Special Meetings of the Board of Directors
from 1973 to 1986; 2.5. Minutes of the Executive Committee Meetings
from
1973
to
1986;
2.6.Existing
contracts
with
suppliers/contractors/others.
Thereafter, some BASECO Officers Hilario M. Ruiz, Manuel S.
Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R.
Cuesta I, advising of the termination of their services by the PCGG.

vote sequestered stock of corporations, granted to it by the President of

the Philippines through a Memorandum dated June 26, 1986. That
Memorandum authorizes the PCGG, "pending the outcome of
proceedings to determine the ownership of * * (sequestered) shares of
stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a
manner as to be consistent with, and not contradictory of the Executive
Orders earlier promulgated on the same matter. There should be no
exercise of the right to vote simply because the right exists, or because
the stocks sequestered constitute the controlling or a substantial part of
the corporate voting power. The stock is not to be voted to replace
directors, or revise the articles or by-laws, or otherwise bring about
substantial changes in policy, program or practice of the corporation
except for demonstrably weighty and defensible grounds, and always in
the context of the stated purposes of sequestration or provisional
takeover, i.e., to prevent the dispersion or undue disposal of the
corporate assets. Directors are not to be voted out simply because the
power to do so exists. Substitution of directors is not to be done
without reason or rhyme, should indeed be shunned if possible, and
undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstances as assure
that the replacements are truly possessed of competence, experience
and probity.
In the case at bar, there was adequate justification to vote the
incumbent directors out of office and elect others in their stead because
the evidence showed prima facie that the former were just tools of
President Marcos and were no longer owners of any stock in the firm, if
they ever were at all. This is why, in its Resolution of October 28, 1986;
this Court declared that
Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders'
meeting for the election of directors as authorized by the Memorandum
of the President * * (to the PCGG) dated June 26, 1986, particularly,
where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear
to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of
BASECO have failed to show any right or even any shareholding in said
corporation.

Issue:
What is the scope and extent of the powers that may be wielded by the
PCGG with regard to the properties or businesses placed under
sequestration or provisionally taken over
Ruling:
The PCGG cannot exercise acts of dominion over property sequestered,
frozen or provisionally taken over. AS already earlier stressed with no
little insistence, the act of sequestration; freezing or provisional
takeover of property does not import or bring about a divestment of
title over said property; does not make the PCGG the owner thereof. In
relation to the property sequestered, frozen or provisionally taken over,
the PCGG is a conservator, not an owner. Therefore, it can not
perform acts of strict ownership; and this is especially true in the
situations contemplated by the sequestration rules where, unlike cases
of receivership, for example, no court exercises effective supervision or
can upon due application and hearing, grant authority for the
performance of acts of dominion.
The PCGG may thus exercise only powers of administration over the
property or business sequestered or provisionally taken over, much like
a court-appointed receiver, such as to bring and defend actions in its
own name; receive rents; collect debts due; pay outstanding debts; and
generally do such other acts and things as may be necessary to fulfill its
mission as conservator and administrator.
So, too, it is within the parameters of these conditions and
circumstances that the PCGG may properly exercise the prerogative to

It must however be emphasized that the conduct of the PCGG

nominees in the BASECO Board in the management of the company's
affairs should henceforth be guided and governed by the norms herein
laid down. They should never for a moment allow themselves to forget
that they are conservators, not owners of the business; they are
fiduciaries, trustees, of whom the highest degree of diligence and
rectitude is, in the premises, required.
Section 25
Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided for in the bylaws. Any two (2) or more positions may be held concurrently by the
same person, except that no one shall act as president and secretary or
as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in
the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the members of
the board.

63

Directors or trustees cannot attend or vote by proxy at board meetings.

Cagayan Valley Vs. CIR (545 SCRA 10)
Facts:
Petitioner, a corporation duly organized and existing under Philippine
laws, is a duly licensed retailer of medicine and other pharmaceutical
products. It operates two drugstores one in Tuguegarao and other in
Roxas, Isabela, under the name and style of Mercury Drug.
Petitioner alleged that in 1995, it granted 20% sales discounts to
qualified senior citizens on purchases of medicine pursuant to RA 7432
and its implementing rules and regulations. That same year, the
company operated at a loss. Also, instead of treating the sales discounts
as tax credit, they were made deductions to gross sales.
The following year, petitioner filed with the BIR a claim for tax
refund/tax credit. The latters inaction compelled petitioner to file on
March 18, 1998 a petition for review before the CTA in order to
forestall the 2-year prescriptive period provided by the tax code.
Subsequently, the case was elevated to the CA. The court issued a
resolution dismissing the petition on procedural grounds. The CA held
that the person who signed the verification and certification of absence
of forum shopping, a certain Jacinto J. Concepcion, President of
petitioner-corporation, failed to adduce proof that he was duly
authorized by the board of directors to do so.

The case arose from a Complaint-Affidavit filed by petitioner Marietta

K. Ilusorio (Marietta) for robbery, qualified trespass to dwelling, and
violation of Presidential Decree (P.D.) No. 1829 against private
respondents Sylvia K. Ilusorio (Sylvia), Cristina A. Ilusorio (Cristina),
Jovito Castro (Jovito), and five (5) John Does.
Petitioner alleges:

that she, Erlinda K. Ilusorio (Erlinda), Ramon K. Ilusorio,

and Shereen K. Ilusorio, owns and controls the majority of
the shares of stock of Lakeridge Corporation (Lakeridge), the
registered owner of Penthouse Unit 43-C (Penthouse Unit
43-C) of the Pacific Plaza Condominium (Pacific Plaza) in
Ayala Avenue, Makati City

that Erlinda as Chairperson and President of Lakeridge, for 8

years has been the present and lawful occupant of Penthouse
Unit 43-C;

that, sometime in October 1999, Erlinda left for USA, giving

Marietta full authority to take care and oversee, and secure
Penthouse Unit 43-C through a letter addressed to the
management of the Pacific Plaza;

that on November 2, 1999, Sylvia and Cristina, with several

unidentified persons, with the consent of Jovito, Chief
Security of the Pacific Plaza, forcibly entered Penthouse Unit
43-C by breaking its door and locks and allegedly caused the
loss of documents and jewelry (this incident was subject of a
robbery case before the Office of the City Prosecutor of
Makati City);

that on November 6, 1999, five (5) unidentified persons, with

Jovitos permission, forcibly entered Penthouse Unit 43-C by
breaking its door and locks, replacing it with new ones, and
thus preventing her entrance;

Issue:
W/N a president of a corporation may sign a verification and
certification without need of a board resolution?
Ruling:
Yes.
The Court had held, in a line of cases, that the following officials may
sign the verification and certification without need of a board
resolution.
1.
the Chairperson of the Board of Directors;
2. the President of a corporation;
3. the General Manager or Acting General
Manager;
4. the Personnel Officer; and
5. an Employment Specialist in a labor case.
While the above list is not exclusive, the determination of the
sufficiency and the authority was done on a case to case basis. The
rationale is to justify the authority of corporate officers or
representatives of the corporation to sign the verification or certificate
against forum shopping, being in a position to verify the
truthfulness and correctness of the allegations in the
petition. The required submission of the board resolution is
grounded on the basic precept that corporate powers are exercised by
the board directors, and not solely by an officer of the corporation.

Private Respondents answer:

agreed hat the registered owner of Penthouse Unit 43-C is

Lakeridge Development Corporation,

denied that petitioner and the other persons named in the

Complaint-Affidavit own and control the majority shares and
that Erlinda is the chairperson and president of Lakeridge.

To buttress this allegation, they submitted copies of the

updated General Information Sheet filed with the Securities
and Exchange Commission (SEC), Secretarys Certification
dated November 8, 1999, and SEC Certificate of Corporate
Filing/Information dated November 3, 1999, all showing the
stockholders, the officers, and the members of the board of
directors of Lakeridge.

They also alleged that the authority given by Erlinda to

Marietta was without force and effect, being ultra vires, in
the absence of any board resolution to support it.

They also noted that the letter of authority, while dated

October 7, 1999, was received by the management of the
Pacific Plaza only on November 3, 1999, which was after the
November 2, 1999 incident described in the ComplaintAffidavit.

They also submitted a copy of Lakeridges letter dated

October 20, 1999 to the Pacific Plaza Condominium
Association, Inc., received by the latter on October 29, 1999,
stating that Lakeridge had not authorized any lease or sale of
Penthouse Unit 43-C.

They also averred that Marietta was not authorized by the

board of directors of Lakeridge to institute the criminal case
and that Erlindas residence was not at the Pacific Plaza but
in Antipolo, Rizal.

The Court ruled that petitioner substantially complied with Sec 4 and 5
Rule 7 of the 1997 Revised Rules of Civil Procedure, as regards the
certificate on non-forum shopping.
First, the requisite board resolution has been submitted albeit belatedly
by petitioner.
Second, the President of petitioner is in a position to verify the
truthfulness and correctness of the allegations in the petition.
Third, the President of petitioner has signed the complaint before the
CTA at the inception of this judicial claim for refund or tax credit.
Ilusorio Vs. Ilusorio (540 SCRA 182)
Facts:

64

More importantly, they alleged that there could not be

robbery and qualified trespass to dwelling because, as
officers of Lakeridge, they had the right to enter Penthouse
Unit 43-C.

Jovito on his part said that the breaking of the door and locks was
really an act of maintenance on the property upon the written request
of Sylvia as one of the legitimate owners of the unit.
The Prosecutor dismissed the charges for lack of probable cause. He
found that, Sylvia, being among the legitimate owners of and who had
on several occasions visited the unit, had the authority to do so for the
effective maintenance of the unit. Mariettas motion for
reconsideration of the Resolution was denied. She elevated the case to
the Department of Justice; however, the DOJ Secretary denied the
same. Finally, petitioner sought recourse in the Court of Appeals which
denied her petition for lack of merit. Hence, the petition to the
Supreme Court.
Issue:
WN the private respondents were representatives of LAKERIDGE and
are authorized to break open the doors of Penthouse Unit 43-C of
Pacific Plaza Condominium and gain entry thereto?
Ruling:
Yes, the private respondents has authority to break open the doors of
the unit and gain entry thereto.
In this case, the Court found no compelling reason to deviate from our
policy of non-interference with the investigating prosecutors findings
of absence of probable cause. It is admitted by both parties that the
registered owner of Penthouse Unit 43-C is Lakeridge. Aside from the
allegation of Marietta, there is no sufficient evidence on record that
Erlinda was indeed the lawful occupant of the unit. In fact, the letter
dated October 7, 1999, by which she claimed Erlinda gave her authority
to occupy, oversee, and secure Penthouse Unit 43-C, and belatedly
received by the management of the Pacific Plaza on November 3, 1999,
was signed by Erlinda for LAKERIDGE without the appropriate
resolution of Lakeridges board of directors to support it. Likewise,
Marietta is not armed with any board resolution authorizing her to
institute the criminal charges against the private respondents.
Furthermore, Sylvia and Cristina were able to establish by competent
evidence that they were then the Vice-President and the Assistant VicePresident of Lakeridge, respectively. As such officers, they would,
ostensibly, have the right and authority to freely enter and perform acts
of maintenance of Penthouse Unit 43-C. The right could include
breaking open the door and replacing its locks, apparently due to loss
of the keys.
As to the criminal charges filed, the Supreme Court said that:
We hold that the evidence adduced does not support a finding of
probable cause for the offenses defined in the provisions cited (Article
293 and 299 of the RPC and PD 1829. Marietta failed to prove, by
competent evidence, that: (1) Penthouse Unit 43-C was the dwelling
place of Erlinda; (2) she has authority over the said unit; (3) Sylvia and
Cristina had no authority to enter the unit and conduct acts of
maintenance thereon; and (4) Sylvia and Cristina were armed when
they effected entrance. Based on these circumstances, the charges of
robbery and qualified trespass to dwelling must inevitably fail.
Perforce, the charge against Jovito for violation of P.D. No. 1829
should also be dismissed.
Elcee Farms Vs. NLRC (512 SCRA 602)
Facts:
Pampelo Semillano and one hundred forty-three (143) other
complainants, represented by the labor union, Sugar Agricultural
Industrial Labor Organization (SAILO), filed this complaint for illegal
dismissal with prayer for reinstatement with back wages, or in the
alternative, separation pay, with damages against Elcee Farms,
Corazon Saguemuller, Hilla Corporation (HILLA), Rey Hilado, and

Roberto Montao. Private respondents alleged that they were all

regular farm workers in Hacienda Trinidad, which was owned and
operated by petitioner corporation Elcee Farms. Complainants alleged
that petitioner Corazon Saguemuller was the president of Elcee Farms,
but records disclosed that it was her son, Konrad Saguemuller, who
was the president thereof. Some of the complainants allegedly worked
in Hacienda Trinidad as early as 1960. On 27 April 1987, Elcee Farms
entered into a Lease Agreement with Garnele Aqua Culture
Corporation (Garnele). Nevertheless, most of the private respondents
continued to work in Hacienda Trinidad. On appeal, they presented
payrolls and Social Security System (SSS) Forms E-4 issued during the
period that Garnele leased the hacienda, naming Elcee Farms as their
employer.
Subsequently, Garnele sub-leased Hacienda Trinidad to Daniel Hilado,
who operated HILLA. The contract of lease executed between Garnele
and Daniel Hilado stipulated the continued employment of 120 of
the formers employees by the latter, but the contract was silent as to
the benefits which may accrue to the employees as a consequence of
their employment with Elcee Farms. Thus, private respondents were
allowed to continue working in Hacienda Trinidad, under the
management of HILLA. Soon after HILLA took over, Daniel Hilado
entered into a Collective Bargaining Agreement (CBA) with the United
Sugar Farmers Organization (USFO).
Due to their refusal to join the labor union, the private respondents
were terminated by HILLA.
On 26 December 1990, SAILO and 144 complainants, including the 131
private respondents herein, filed against Elcee Farms, Corazon
Saguemuller, HILLA and its officers, Ray Hilado and Roberto
Montao, a complaint for illegal dismissal with reinstatement with
back wages and separation pay with damages before the Labor Arbiter.
The Labor Arbiter dismissed their claim for damages and denied all
claims made against Elcee Farms, Corazon Saguemuller, Rey Hilado
and Roberto Montao.
Complainants appealed and argued that they had an employeremployee relationship with Elcee Farms before HILLA took possession
of the hacienda in November 1990. They pointed out that Elcee Farms
failed to present proof that they were employed by Garnele to
substantiate the existence of a valid lease agreement between Elcee
Farms and Garnele. They also pleaded that the closed shop provision
of the CBA between HILLA and USFO cannot be made to apply to the
complainants, who were members of another union.
Issue:
W/N the private respondents are entitled to the award of separation
pay and moral damages
Ruling:
Moral damages are recoverable when the dismissal of an employee is
attended by bad faith or fraud or constitutes an act oppressive to labor,
or is done in a manner contrary to good morals, good customs or public
policy. Exemplary damages, on the other hand, are recoverable when
the dismissal was done in a wanton, oppressive, or malevolent manner.
Bad faith on the part of Elcee Farms is shown by the act of simulating a
lease agreement with Garnele in order to evade paying private
respondents the proper amount of separation benefits based on the
number of years they worked in the hacienda, as provided by the Labor
Code. Records show that Elcee Farms did not pay any separation
benefits to the private respondents when they allegedly leased the
hacienda to Garnele, and again when the hacienda was leased to Daniel
Hilado. When the employees filed their complaint with the Labor
Arbiter, Elcee Farms, using the simulated lease agreement with
Garnele, tried to deny liability by claiming that their claims had already
prescribed. It claimed that the lease agreement with Garnele, which
was allegedly executed in 1987, effectively terminated the employer-

65

employee relationship before the complaint was filed in 1990, or more

than three years after. These unlaudable acts undermine the workers
statutory rights for which moral damages may be awarded.
Liability for separation pay is provided under Article 283 of the
Labor Code. From this provision, three requirements are
enumerated in cases of cessation of business operations of an
employer company not due to business reverses: (1) service of a
written notice to the employees and to the MOLE (now the
Secretary of Labor and Employment) at least one month before
the intended date thereof; (2) the cessation of or withdrawal from
business operations must be bona fide in character; and (3)
payment to the employees of termination pay amounting to at
least one-half month pay for each year of service, or one month
pay, whichever is higher.
In the present case, Elcee Farms effectively ceased to operate and
manage Hacienda Trinidad when, through Garnele, it leased the
hacienda to Daniel Hilado. The validity of the aforementioned lease
was not questioned by any of the parties. There is no question that
the lease to Daniel Hilado effectively terminated the employeremployee relationship between Elcee Farms and the farmworkers.
Private respondents Pampelo Semillano and Roel Benignos testified
that HILLA took possession of the hacienda in 1990 and managed the
same. Clearly, there was a cessation of operations of Elcee Farms,
which renders it liable for separation pay to its employees, under
Section 283 of the Labor Code.
This Court, nonetheless, finds merit in the petitioners allegation that
Corazon Saguemuller should not be subsidiarily liable with Elcee
Farms for separation pay and damages. It is basic that a corporation is
invested by law with a personality separate and distinct from those of
the persons composing it as well as from that of any other legal entity
to which it may be related. Mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. In the case of Santos v. National Labor
Relations Commission, a corporate officer was not held liable for the
obligations incurred by the corporation, where the corporate officer
was not even shown to have had a direct hand in the dismissal of the
employee enough to attribute to him an unlawful act.
In the case of Malayang Samahan ng mga Manggagawa sa M.
Greenfield. v. Ramos, the Court restated the rule that corporate
directors and officers are solidarily liable with the corporation for the
termination of employees done with malice or bad faith. Bad faith was
defined by the Court thus: It has been held that bad faith does not
connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it means breach of
a known duty through some motive or interest or ill will; it partakes of
the nature of fraud.
In A.C. Ransom, the corporate entity was a family corporation and
execution against it could not be implemented because of the
disposition post-haste of its leviable assets evidently in order to evade
its just and due obligations. The doctrine of piercing the veil of
corporate fiction was thus clearly appropriate. Chua likewise involved
another family corporation, and this time the conflict was between two
brothers occupying the highest ranking positions in the company.
There were incontrovertible facts which pointed to extreme personal
animosity that resulted, evidently in bad faith, in the easing out from
the company of one of the brothers by the other.
In the case of Naguiat v. National Labor Relations Commission, the
Court applied the doctrine found in the case of A. C. Ransom Labor
Untion- CCLU v. National Labor Relations Commission. There was a
cessation of the operations of the employer-corporation and, thus, a
problem as to who shall pay the employees. In holding the president
solidarily liable, the Court considered that he had actively engaged in
the management and operations of the corporation. Nevertheless, it
absolved from liability the vice-president, since no evidence on the
extent of his participation in the management or operation of the
business was proffered.

In the present case, the employees believed that petitioner Corazon

Saguemuller was the president of Elcee Farms because the employees
would approach her if they needed help, as well as the fact that her
sons were the officers of Elcee Farms and Garnele. Beyond these bare
suppositions, no evidence, oral or documentary, was presented to
prove that Corazon Saguemuller was truly the President of Elcee
Farms. Nor was there even proof that she was in active management of
the corporation and had dictated policies for implementation by the
corporation. Extending help to private respondents certainly did not
automatically vest upon her the position of President of the
corporation. There, likewise, appears to be no evidence on record that
she acted maliciously or in bad faith in terminating the services of the
private respondents; nor has it been shown that she has in any way
consented to the simulated lease contract executed by her sons which
effectively terminated the services of the private respondents.
Pamplona Vs. Acosta (510 SCRA 249)
Facts:
There were originally 66 complainants in the case before the Labor
Arbiter for underpayment, overtime pay, premium pay for rest day and
holiday, service incentive leave pay, damages, attorneys fees, and 13th
month pay. The complainants claimed that they were regular rank and
file employees of the Pamplona Plantation Co., Inc. (petitioner) with
different hiring periods, work designations, and salary rates.
Petitioner, however, denied this, alleging that some of the
complainants are seasonal employees, some are contractors, others
were hired under the pakyaw system, while the rest were hired by the
Pamplona Plantation Leisure Corporation, which has a separate and
distinct entity from it.
In a Decision dated September 30, 1998, the Labor Arbiter (LA) held
petitioner and its manager, Jose Luis Bondoc, liable for underpayment
as complainants were regular employees of petitioner. They were also
held guilty of illegal dismissal with regard to complainants Joselito
Tinghil and Pedro Emperado.
On appeal to the National Labor Relations Commission (NLRC), the
LAs Decision was reversed and another one was entered dismissing all
the complaints per Decision dated June 30, 2000. It was the NLRCs
finding that the complaint should have been directed against the
Pamplona Plantation Leisure Corporation since complainants
individual affidavits contained the allegations that their tasks pertained
to their work in the golf course.
Issue:
W/N Petitioners Manager is personally liable for corporate acts which
is not in accord with law
Ruling:
The rule is that officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their
authority. However, the legal fiction that a corporation has a
personality separate and distinct from stockholders and members may
be disregarded if it is used as a means to perpetuate fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
Moreover, a corporate officer is not personally liable for the money
claims of discharged corporate employees unless he acted with evident
malice and bad faith in terminating their employment.
Under Section 25 of the Corporation Code, three officers are
specifically provided for which a corporation must have: president,
secretary, and treasurer. The law, however, does not limit corporate
officers to these three. Section 25 gives corporations the widest
latitude to provide for such other offices, as they may deem necessary.

66

The by-laws may and usually do provide for such other officers, e.g.,
vice-president, cashier, auditor, and general manager.
In this case, there is no basis from which it may be deduced that
Bondoc, as manager of petitioner, is also a corporate officer such that
he may be held liable for the money claims awarded in favor of
respondents. Even assuming that he is a corporate officer, still, there is
no showing that he acted with evident malice and bad faith. Bondoc
may have signed and approved the payrolls; nevertheless, it does not
follow that he had a direct hand in determining the amount of
respondents corresponding salaries and other benefits. Bondoc,
therefore, should not have been held liable together with petitioner.
BPI Family Vs.First Metro (429 SCRA 30)
Facts:
First Metro Investment Corporation (FMIC), respondent, is an
investment house organized under Philippine laws. Petitioner, Bank of
Philippine Islands Family Savings Bank, Inc. is a banking corporation
also organized under Philippine laws.
FMIC, through its Executive Vice President Antonio Ong, opened
current account no. 8401-07473-0 and deposited METROBANK check
no. 898679 of P100 million with BPI Family Bank(BPI-FB) San
Francisco del Monte Branch (Quezon City). Ong made the deposit upon
request of his friend, Ador de Asis, a close acquaintance of Jaime
Sebastian, then Branch Manager of BPI-FB San Francisco del Monte
Branch. Sebastians aim was to increase the deposit level in his
Branch.

While it may be true that barely one month and seven days from the
date of deposit, respondent FMIC demanded the withdrawal of
P86,057,646.72 through the issuance of a check payable to itself, the
same was made as a result of the fraudulent and unauthorized transfer
by petitioner BPI FB of its P80 million deposit to Tevestecos savings
account. Certainly, such was a normal reaction of respondent as a
depositor to petitioners failure in its fiduciary duty to treat its account
with the highest degree of care.
Under this circumstance, the withdrawal of deposit by respondent
FMIC before the one-year maturity date did not change the nature of
its time deposit to one of demand deposit.
In its attempt to evade any liability therefor, petitioner now impugns
the validity of the subject agreement on the ground that its Branch
Manager, Jaime Sebastian, overstepped the limits of his authority in
accepting respondents deposit with 17% interest per annum. We have
held that if a corporation knowingly permits its officer, or any other
agent, to perform acts within the scope of an apparent authority,
holding him out to the public as possessing power to do those acts, the
corporation will, as against any person who has dealt in good faith with
the corporation through such agent, be estopped from denying such
authority.
Significantly, the transaction was actually acknowledged and ratified by
petitioner when it paid respondent in advance the interest for one year.
Thus, petitioner is estopped from denying that it authorized its Branch
Manager to enter into an agreement with respondents Executive Vice
President concerning the deposit with the corresponding 17% interest
per annum.
Martinez Vs. CA (438 SCRA 130)

BPI-FB, through Sebastian, guaranteed the payment of P14,667,687.01

representing 17% per annum interest of P100 million deposited by
FMIC. The latter, in turn, assured BPI-FB that it will maintain its
deposit of P100 million for a period of one year on condition that the
interest of 17% per annum is paid in advance.
This agreement between the parties was reached through their
communications in writing.
Subsequently, BPI-FB paid FMIC 17% interest or P14,667,687.01 upon
clearance of the latters check deposit.
However, on August 29, 1989, on the basis of an Authority to Debit
signed by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI
FB transferred P80 million from FMICs current account to the savings
account of Tevesteco Arrastre Stevedoring, Inc. (Tevesteco).
FMIC denied having authorized the transfer of its funds to Tevesteco,
claiming that the signatures of Ong and David were falsified.
Thereupon, to recover immediately its deposit, FMIC, on September
12, 1989, issued BPI FB check no. 129077 for P86,057,646.72 payable
to itself and drawn on its deposit with BPI FB SFDM branch. But
upon presentation for payment on September 13, 1989, BPI FB
dishonored the check as it was drawn against insufficient funds
(DAIF).
Consequently, FMIC filed with the Regional Trial Court, Branch 146,
Makati City Civil Case No. 89-5280 against BPI FB. FMIC likewise
caused the filing by the Office of the State Prosecutors of an
Information for estafa against Ong, de Asis, Sebastian and four others.
However, the Information was dismissed on the basis of a demurrer to
evidence filed by the accused.
Issue:
W/N BPI-FB clothed its Branch Manager with apparent authority to
enter into such a patently illegal arrangement
Ruling:

Facts:
BPI International Finance is a foreign corporation not doing business
in the Philippines, with office address at the Bank of America Tower, 12
Harcourt Road, Central Hongkong. It was a deposit-taking company
organized and existing under and by virtue of the laws of Hongkong,
and was also engaged in investment banking operations therein.
Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in
Hongkong, with a paid-up capital of HK$10,000. The registered
shareholders of the CLL in Hongkong were the Overseas Nominee, Ltd.
and Shares Nominee, Ltd., which were mainly nominee shareholders.
In Hongkong, the nominee shareholder of CLL was Baker & McKenzie
Nominees, Ltd., a leading solicitor firm. However, beneficially, the
company was equally owned by Messrs. Ramon Siy, Ricardo Lopa,
Wilfrido C. Martinez, and Miguel J. Lacson. The registered office
address of CLL in Hongkong was 22/F, Princes Building, also the
office address of Price Waterhouse & Co., a large accounting firm in
Hongkong.
The bulk of the business of the CLL was the importation of molasses
from the Philippines, principally from the Mar Tierra Corporation, and
the resale thereof in the international market. However, Mar Tierra
Corporation also sold molasses to its customers. Wilfrido C. Martinez
was the president of Mar Tierra Corporation, while its executive vicepresident was Blamar Gonzales. About 42% of the capital stock of Mar
Tierra Corporation was owned by RJL Martinez Fishing Corporation
(RJL), the leading tuna fishing outfit in the Philippines.
BPI International Finance (then AIFL) granted CLL a letter of credit in
the amount of US$3,000,000. Wilfrido Martinez signed the letter
agreement with the respondent for the CLL.
The CLL opened a money market placement with the respondent
bearing MMP No. 063, with an initial placement of US$390,000. The
CLL also opened and maintained a foreign currency account and a
deposit account with the respondent. The authorized signatory in both
accounts of CLL was Wilfrido C. Martinez. Some instructions also
came from Gonzales, to be confirmed by Wilfrido Martinez. Ruben

67

Martinez and/or his son Wilfrido C. Martinez and/or Miguel J. Lacson

became joint account holders of the said money market placements.
On October 10, 1980, Blamar Gonzales, acting for Mar Tierra
Corporation, sent to the respondent a telex confirming his telephone
conversation with Michael Sung/Bing Matoto requesting the
respondent to transfer US$340,000 to Account No. FCD SA 18402-7,
registered in the name of Mar Tierra Corporation, Philippine Banking
Corporation, Union Cement Building, Port Area, Manila, as payee, with
the following specific instructions: (a) there should be no mention of
Wilfrido Martinez or Mar Tierra Corporation; (b) the telex instruction
should be signed only by Wilfrido Martinez and sent only through the
telex machine of Mar Tierra Corporation; and, (c) the final
confirmation of the transfer should be made by telephone call.
Gonzales requested the respondent, in the same telex, to confirm its
total available account so that instructions on the transfer of the funds
to FCD SA 18402-7 could be formalized.
Sung informed Gonzales that the account available was approximately
US$340,000, considering the CLL deposit account and the money
market placements. On October 14, 1980, the respondent received a
telex from Wilfrido C. Martinez requesting that the transfer of
US$340,000 from the deposit account of the CLL or any deposit
available be effected by telegraphic transfer as soon as possible to their
account, payee FCD SA 18402-7, Philippine Banking Corporation, Port
Area, Manila. On October 21, 1980, Wilfrido Martinez wrote the
respondent confirming his request for the transfer of US$340,000 to
their account, FCD SA 18402-7, with the Philippine Banking
Corporation, through Wells Fargo Bank of New York, Philippine
Banking Corporation Account No. FCDU SA No. 003-019205.
The respondent complied with the request of the CLL, through Wilfrido
Martinez and Gonzales, and remitted US$340,000 as instructed.
However, instead of deducting the amount from the funds in the CLL
foreign currency or deposit accounts and/or MMP Nos. 063 and 084,
the respondent merely posted the US$340,000 as an account
receivable of the CLL since, at that time, the money market placements
had not yet matured. When the money market placements matured,
however, the respondent did not collect the US$340,000 therefrom.
Instead, the respondent allowed the CLL and/or Wilfrido C. Martinez
to withdraw, up to July 3, 1981, the bulk of the CLL deposit account
and MMP Nos. 084 and 063; hence, it failed to secure reimbursement
for the US$340,000 from the said deposit account and/or money
market placements.
In the meantime, the respondent demanded from the CLL, Wilfrido
Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, the
payment of the US$340,000 remitted by it to FCD SA 18402-7, per
instructions of Gonzales and Wilfrido Martinez. No remittance was
made to the respondent. Petitioner Ruben Martinez denied knowledge
of any such remittance, as well as any liability for the amount thereof.
On June 17, 1983, the respondent filed a complaint against the CLL,
Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez,
with the RTC of Kaloocan City for the collection of the principal
amount of US$340,000, with a plea for a writ of preliminary
attachment.
Issue:
W/N the petitioner is obliged to reimburse to the respondent the
principal amount of US$340,000
Ruling:
In this case, the respondent failed to adduce the quantum of evidence
necessary to prove any valid ground for the piercing of the veil of
corporate entity of Mar Tierra Corporation, or of RJL for that matter,
and render the petitioner liable for the respondents claim, jointly and
severally, with Wilfrido Martinez and Lacson.

The mere fact that the majority stockholder of Mar Tierra Corporation
is the RJL, and that the petitioner, along with Jose and Luis Martinez,
owned about 42% of the capital stock of RJL, do not constitute
sufficient evidence that the latter corporation, and/or the petitioner
and his brothers, had complete domination of Mar Tierra Corporation.
It does not automatically follow that the said corporation was used by
the petitioner for the purpose of committing fraud or wrong, or to
perpetrate an injustice on the respondent.
There is no evidence on record that the petitioner had any involvement
in the purchases of molasses by Wilfrido Martinez, Gonzales and
Lacson, and the subsequent sale thereof to the CLL, through Mar
Tierra Corporation. On the contrary, the evidence on record shows
that the CLL purchased molasses from Mar Tierra Corporation and
paid for the same through the credit facility granted by the respondent
to the CLL. The CLL, thereafter, made remittances to Mar Tierra
Corporation from its deposit account and MMP Nos. 063 and 084 with
the respondent. The close business relationship of the two
corporations does not warrant a finding that Mar Tierra Corporation
was but a conduit of the CLL.
Likewise, the respondent failed to adduce preponderant evidence to
prove that the Mar Tierra Corporation and the RJL were so organized
and controlled, its affairs so conducted as to make the latter
corporation merely an instrumentality, agency, conduit or adjunct of
the former or of Wilfrido Martinez, Gonzales, and Lacson for that
matter, or that such corporations were organized to defraud their
creditors, including the respondent. The mere fact, therefore, that the
businesses of two or more corporations are interrelated is not a
justification for disregarding their separate personalities, absent
sufficient showing that the corporate entity was purposely used as a
shield to defraud creditors and third persons of their rights.
Also, the mere fact that part of the proceeds of the sale of molasses
made by Mar Tierra Corporation to the CLL may have been used by the
latter as deposits in its deposit account with the respondent or in the
money market placements in MMP Nos. 063 and 084, or that the
funds of Mar Tierra Corporation and the CLL with the respondent were
mingled, and their disposition controlled by Wilfrido Martinez, does
not constitute preponderant evidence that the petitioner, Wilfrido
Martinez and Lacson used the Mar Tierra Corporation and the RJL to
defraud the respondent. The respondent treated the CLL and Mar
Tierra Corporation as separate entities and considered them as one and
the same entity only when Wilfrido C. Martinez and/or Blamar
Gonzales failed to pay the US$340,000 remitted by the respondent to
FCD SA 18402-7. This being the case, there is no factual and legal
basis to hold the petitioner liable to the respondent for the said
amount.
Section 26
Report of election of directors, trustees and officers. - Within
thirty (30) days after the election of the directors, trustees and officers
of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange Commission,
the names, nationalities and residences of the directors, trustees, and
officers elected. Should a director, trustee or officer die, resign or in
any manner cease to hold office, his heirs in case of his death, the
secretary, or any other officer of the corporation, or the director,
trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission.
Premium Marble Vs. CA (264 SCRA 11)
Facts:
On July 18, 1986, Premium Marble Resources, Inc. (Premium),
assisted by Atty. Arnulfo Dumadag as counsel, filed an action for
damages against International Corporate Bank:
Sometime in August to October 1982, Ayala Investment and
Development Corporation issued three (3) checks.

68

On August to October 1982, former officers of the plaintiff corporation

headed by Saturnino G. Belen, Jr., without any authority from the
plaintiff deposited the above-mentioned checks to the current account
of his conduit corporation, Intervest Merchant Finance (Intervest)
The plaintiff has demanded upon the defendant to restitute the amount
representing the value of the checks but defendant refused.
Premium prayed that judgment be rendered ordering defendant bank
to pay the amount of P31,663.88 representing the value of the checks.
Meantime, the same corporation, i.e., Premium, but this time
represented by Siguion Reyna, Montecillio and Ongsiako Law Office as
counsel, filed a motion to dismiss on the ground that the filing of the
case was without authority from its duly constituted board of directors
as shown by the excerpt of the minutes of the Premium's board of
directors' meeting.

in their General Information Sheet with the SEC, as of 1986 appears to

be the set of officers elected in March 1981.
We agree with the finding of public respondent Court of Appeals, that
"in the absence of /any board resolution from its board of directors
the [sic] authority to act for and in behalf of the corporation, the
present action must necessarily fail. The power of the corporation to
sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers. Thus, the issue of authority and the
invalidity of plaintiff-appellant 's subscription which is still pending,
is a matter that is also addressed, considering the premises, to the
sound judgment of the Securities & Exchange Commission."
By the express mandate of the Corporation Code (Section 26), all
corporations duly organized pursuant thereto are required to submit
within the period therein stated (30 days) to the Securities and
Exchange Commission the names, nationalities and residences of the
directors, trustees and officers elected.

In its opposition, Premium thru Atty. Dumadag contended that the

persons who signed the board resolution namely Belen, Jr., Nograles &
Reyes, are not directors of the corporation and were allegedly former
officers and stockholders of Premium who were dismissed for various
irregularities and fraudulent acts; that Siguion Reyna Law office is the
lawyer of Belen and Nograles and not of Premium and that the Articles
of Incorporation of Premium shows that Belen, Nograles and Reyes are
not majority stockholders.
On the other hand, Siguion Reyna Law firm as counsel of Premium
asserted that it is the general information sheet filed with the Securities
and Exchange Commission, among others, that is the best evidence
that would show who are the stockholders of a corporation and not the
Articles of Incorporation since the latter does not keep track of the
many changes that take place after new stockholders subscribe to
corporate shares of stocks.
Issue:
Whether or not the filing of the case for damages against private
respondent was authorized by a duly constituted Board of Directors of
the petitioner corporation.
Ruling:
Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar
Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo
Millare, presented the Minutes of the meeting of its Board of Directors
held on April 1, 1982, as proof that the filing of the case against private
respondent was authorized by the Board. On the other hand, the
second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles
and Jose L.R. Reyes, presented a Resolution dated July 30, 1986, to
show that Premium did not authorize the filing in its behalf of any suit
against the private respondent International Corporate Bank.
However, it appears from the general information sheet and the
Certification issued by the SEC on August 19, 1986 that as of March 4,
1981, the officers and members of the board of directors of the
Premium Marble Resources, Inc. were:
Alberto C. Nograles - President/Director
Fernando
D.
Hilario
Vice
President/Director
Augusto
I.
Galace
Treasurer
Jose L.R. Reyes - Secretary/Director
Pido
E.
Aquilar
Director
Saturnino G. Belen, Jr. - Chairman of
the Board.
While the Minutes of the Meeting of the Board on April 1, 1982 states
that the newly elected officers for the year 1982 were Oscar Gan, Mario
Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show
proof that this election was reported to the SEC. In fact, the last entry

Sec. 26 of the Corporation Code provides, thus:

Sec. 26. Report of election of directors, trustees
and officers. Within thirty (30) days after the
election of the directors, trustees and officers of
the corporation, the secretary, or any other officer
of the corporation, shall submit to the Securities
and
Exchange
Commission,
the
names,
nationalities and residences of the directors,
trustees and officers elected. . . .
Evidently, the objective sought to be achieved by Section 26 is to give
the public information, under sanction of oath of responsible officers,
of the nature of business, financial condition and operational status of
the company together with information on its key officers or managers
so that those dealing with it and those who intend to do business with
it may know or have the means of knowing facts concerning the
corporation's financial resources and business responsibility.
The claim, therefore, of petitioners as represented by Atty. Dumadag,
that Zaballa, et al., are the incumbent officers of Premium has not been
fully substantiated. In the absence of an authority from the board of
directors, no person, not even the officers of the corporation, can
validly bind the corporation.
Monfort Hermanos Vs. Antonio Monfort (434 SCRA 27)
Facts:
Monfort Hermanos Agricultural Development Corporation, a domestic
private corporation, is the registered owner of a farm, fishpond and
sugar cane plantation known as Haciendas San Antonio II, Marapara,
Pinanoag and Tinampa-an, all situated in Cadiz City. It also owns one
unit of motor vehicle and two units of tractors. The same allowed
Ramon H. Monfort, its Executive Vice President, to breed and maintain
fighting cocks in his personal capacity at Hacienda San Antonio.
In 1997, the group of Antonio Monfort III, through force and
intimidation, allegedly took possession of the 4 Haciendas, the produce
thereon and the motor vehicle and tractors, as well as the fighting
cocks of Ramon H. Monfort.
Two cases were filed pursuant to such act by Antonio.
First, the Corporation, represented by its President, Ma. Antonia M.
Salvatierra, and Ramon H. Monfort, in his personal capacity, filed
against the group of Antonio Monfort III, a complaint for delivery of
motor vehicle, tractors and 378 fighting cocks, with prayer for
injunction and damages.

69

The group of Antonio Monfort III contended that Ma. Antonia M.

Salvatierra has no capacity to sue on behalf of the Corporation because
the Board Resolution authorizing Ma. Antonia M. Salvatierra and/or
Ramon H. Monfort to represent the Corporation is void as the
purported Members of the Board who passed the same were not validly
elected officers of the Corporation.

In the instant case, the six signatories to the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation, were: Ma. Antonia M.
Salvatierra, President; Ramon H. Monfort, Executive Vice President;
Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M.
Yusay; and Ester S. Monfort, Secretary.

Second, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a

complaint for forcible entry, preliminary mandatory injunction with
temporary restraining order and damages against the group of Antonio
Monfort III. It contended that the latter through force and
intimidation, unlawfully took possession of the 4 Haciendas and
deprived the Corporation of the produce thereon.

However, the names of the last four (4) signatories to the said Board
Resolution do not appear in the 1996 General Information Sheet
submitted by the Corporation with the SEC. Under said General
Information Sheet the composition of the Board is as follows:

Antonio Monfort III alleged that they are possessing and controlling
the Haciendas and harvesting the produce therein on behalf of the
corporation and not for themselves.
They likewise raised the
affirmative defense of lack of legal capacity of Ma. Antonia M.
Salvatierra to sue on behalf of the Corporation.

Issue:
W/N Ma. Antonia M. Salvatierra has the legal capacity to sue on behalf
of the Corporation
Ruling:
A corporation has no power except those expressly conferred on it by
the Corporation Code and those that are implied or incidental to its
existence. In turn, a corporation exercises said powers through its
board of directors and/or its duly authorized officers and agents. Thus,
it has been observed that the power of a corporation to sue and be sued
in any court is lodged with the board of directors that exercises its
corporate powers. In turn, physical acts of the corporation, like the
signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a specific act of
the board of directors.
Corollary thereto, corporations are required under Section 26 of the
Corporation Code to submit to the SEC within thirty (30) days after the
election the names, nationalities and residences of the elected
directors, trustees and officers of the Corporation. In order to keep
stockholders and the public transacting business with domestic
corporations properly informed of their organizational operational
status, the SEC issued the following rules:
xxx

Ma. Antonia M. Salvatierra (Chairman);

Ramon H. Monfort (Member);
Antonio H. Monfort, Jr., (Member);
Joaquin H. Monfort (Member);
Francisco H. Monfort (Member) and
Jesus Antonio H. Monfort (Member).

There is thus a doubt as to whether Paul M. Monfort, Yvete M.

Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed duly
elected Members of the Board legally constituted to bring suit in behalf
of the Corporation.

These two cases were consolidated.

xxx

1.
2.
3.
4.
5.
6.

xxx

2.
A General Information Sheet shall be filed with this
Commission within thirty (30) days following the date of the annual
stockholders meeting. No extension of said period shall be allowed,
except for very justifiable reasons stated in writing by the President,
Secretary, Treasurer or other officers, upon which the Commission may
grant an extension for not more than ten (10) days.

In the case at bar, the fact that four of the six Members of the Board
listed in the 1996 General Information Sheetare already dead at the
time the March 31, 1997 Board Resolution was issued, does not
automatically make the four signatories (i.e., Paul M. Monfort, Yvete
M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said
Board Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the Board.
This is because it was not established that they were duly elected to
replace the said deceased Board Members.
A corporation is mandated to inform the SEC of the names and the
change in the composition of its officers and board of directors within
30 days after election if one was held, or 15 days after the death,
resignation or cessation of office of any of its director, trustee or officer
if any of them died, resigned or in any manner, ceased to hold office.
This, the Corporation failed to do. The alleged election of the directors
and officers who signed the March 31, 1997 Board Resolution was held
on October 16, 1996, but the SEC was informed thereof more than two
years later, or on November 11, 1998. The 4 Directors appearing in the
1996 General Information Sheet died between the years 1984 1987,
but the records do not show if such demise was reported to the SEC.
What further militates against the purported election of those who
signed the March 31, 1997 Board Resolution was the belated
submission of the alleged Minutes of the October 16, 1996 meeting
where the questioned officers were elected. The issue of legal capacity
of Ma. Antonia M. Salvatierra was raised before the lower court by the
group of Antonio Monfort III as early as 1997, but the Minutes of said
October 16, 1996 meeting was presented by the Corporation only in its
September 29, 1999 Comment before the Court of Appeals.
Moreover, the Corporation failed to prove that the same October 16,
1996 Minutes was submitted to the SEC. In fact, the 1997 General
Information Sheet submitted by the Corporation does not reflect the
names of the 4 Directors claimed to be elected on October 16, 1996.

2.A.
Should a director, trustee or officer die, resign or in any
manner, cease to hold office, the corporation shall report such fact to
the Commission with fifteen (15) days after such death, resignation or
cessation of office.

Considering the foregoing, we find that Ma. Antonia M. Salvatierra

failed to prove that four of those who authorized her to represent the
Corporation were the lawfully elected Members of the Board of the
Corporation. As such, they cannot confer valid authority for her to sue
on behalf of the corporation.

3.
If for any justifiable reason, the annual meeting has to be
postponed, the company should notify the Commission in writing of
such postponement.

Section 27

The General Information Sheet shall state, among others, the

names of the elected directors and officers, together with
their corresponding position title

Disqualification of directors, trustees or officers. - No person

convicted by final judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of this Code
committed within five (5) years prior to the date of his election or

70

appointment, shall qualify as a director, trustee or officer of any

corporation.
Cojuangco Vs. Roxas (195 SCRA 797)
Issue:
W/N the Presidential Commission on Good Government (PCGG) may
vote the sequestered shares of stock of San Miguel Corporation (SMC)
and elect its members of the board of directors
Ruling:
Representatives of the corporate shares present at the meeting claimed
that the shares are not under sequestration; or that if they are under
sequestration, the PCGG had no right to vote the same.
The PCGG claimed it represented 85,756,279 shares at the meeting
including the corporate shares which corresponded to 1,286,744,185
votes which in turn were distributed equally among the fifteen (15)
candidates who were declared elected.
Petitioners allege that the 27,211,770 shares or a total of 408,176,550
votes representing the corporate shares, were illegally cast by PCGG
and should be counted in favor of petitioners. The petitioners assert
that is they were allowed to vote their corresponding shares
accordingly, then they would obtain enough votes to be elected.
The PCGG has no right to vote the sequestered shares of petitioners
including the sequestered corporate shares. Only their owners, duly
authorized representatives or proxies may vote the said shares.
Consequently, the election of private respondents Adolfo Azcuna,
Edison Coseteng and Patricio Pineda as members of the board of
directors of SMC for 1990-1991 should be set aside.
However, petitioners cannot be declared duly elected members of the
board of directors thereby. An election for the purpose should be held
where the questioned shares may be voted by their owners and/or their
proxies. Such election may be held at the next shareholders' meeting in
April 1991 or at such date as may be set under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto
officers who in good faith assumed their duties and responsibilities as
duly elected members of the board of directors of the SMC. They are
thereby legally entitled to the emoluments of the office including
salary, fees and other compensation attached to the office until they
vacate the same.
Nevertheless, the right of the Government, represented by the PCGG,
as conservator of sequestered assets must be adequately protected.
The important rights of stockholders are the following:
a) the right to vote;
b) the right to receive dividends;
c) the right to receive distributions upon liquidation of the corporation;
and d) the right to inspect the books of the corporation.
It is through the right to vote that the stockholder participates in the
management of the corporation. The right to vote, unlike the rights to
receive dividends and liquidating distributions, is not a passive thing
because management or administration is, under the Corporation
Code, vested in the board of directors, with certain reserved powers
residing in the stockholders directly. The board of directors and
executive committee (or management committee) and the corporate
officers selected by the board may make it very difficult if not

impossible for the PCGG to carry out its duties as conservator if the
Board or officers do not cooperate, are hostile or antagonistic to the
conservator's objectives.
Thus, it is necessary to achieve a balancing of or reconciliation between
the stockholder's right to vote and the conservator's statutory duty to
recover and in the process thereof, to conserve assets, thought to be illgotten wealth, until final judicial determination of the character of such
assets or until a final compromise agreement between the parties is
reached.
In BASECO, the court ruled that, there should be no exercise of the
right to vote simply because the right exists, or because the stocks
sequestered constitute the controlling or a substantial part of the
corporate voting power. The stock is not to be voted to replace
directors, or revise the articles or by-laws, or otherwise bring about
substantial changes in policy, program of practice of the corporation
except for demonstrably weighty and defensible grounds, and always in
the context of the stated purposes of sequestration or provisional
takeover, i e ., to prevent the dispersion or undue disposal of the
corporate assets. Directors are not to be voted out simply because the
power to do so exists. Substitution of directors is not to be done
without reason or rhyme, should indeed be shunned if at all possible,
and undertaken only when essential to prevent disappearance or
wastage of corporate property, and always under such circumstances
as to assure that the replacements are truly possessed of competence,
experience and probity.
In the case at bar, there was adequate justification to vote the
incumbent directors out of office and elect others in their stead because
the evidence showed prima facie that the former were just tools of
President Marcos and were no longer owners of any stock in the firm, if
they ever were at all.
Section 28
Removal of directors or trustees. - Any director or trustee of a
corporation may be removed from office by a vote of the stockholders
holding or representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock corporation, by a vote
of at least two-thirds (2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be
called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority
of the outstanding capital stock, or, if it be a non-stock corporation, on
the written demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary,
the call for the meeting may be addressed directly to the stockholders
or members by any stockholder or member of the corporation signing
the demand. Notice of the time and place of such meeting, as well as of
the intention to propose such removal, must be given by publication or
by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used
to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this
Code.
Raniel Vs. Jochico (517 SCRA 221)
Facts:
Petitioners are Ma. Victoria Pag-ong director of Nephro and
Nectarina Raniel director and acting corporate secretary and
administrator of Nephro.

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Respondents are Paul Jochico, John Steffens, Surya Viriya

incorporators and directors of Nephro.
The conflict started when petitioners questioned respondents' plan to
enter into a joint venture with the Butuan Doctors' Hospital and
College, Inc. sometime in December 1997. Because of this, petitioners
claim that respondents tried to compel them to waive and assign their
shares with Nephro but they refused. Thereafter, Raniel sought an
indefinite leave of absence due to stress, but this was denied by
Jochico, as Nephro President. Raniel, nevertheless, did not report for
work, causing Jochico to demand an explanation from her why she
should not be removed as Administrator and Corporate Secretary.
Raniel replied, expressing her sentiments over the disapproval of her
request for leave and respondents' decision with regard to the Butuan
venture.
On January 30, 1998, Jochico issued a Notice of Special Board Meeting
on February 2, 1998. Despite receipt of the notice, petitioners did not
attend the board meeting. In said meeting, the Board passed several
resolutions ratifying the disapproval of Raniel's request for leave,
dismissing her as Administrator of Nephro, declaring the position of
Corporate Secretary vacant, appointing Otelio Jochico as the new
Corporate Secretary and authorizing the call of a Special Stockholders'
Meeting on February 16, 1998 for the purpose of the removal of
petitioners as directors of Nephro.
Otelio Jochico issued the corresponding notices for the Special
Stockholders' Meeting to be held on February 16, 1998 which were
received by petitioners on February 2, 1998. Again, they did not attend
the meeting. The stockholders who were present removed the
petitioners as directors of Nephro. Thus, petitioners filed a case before
the SEC.
Both the SEC and the CA held that Pag-ong's removal as director and
Raniel's removal as director and officer of Nephro were valid. For its
part, the SEC ruled that the Board of Directors had sufficient ground to
remove Raniel as officer due to loss of trust and confidence, as her
abrupt and unauthorized leave of absence exhibited her disregard of
her responsibilities as an officer of the corporation and disrupted the
operations of Nephro.
The CA upheld the SEC's conclusions, adding further that the special
stockholders' meeting on February 16, 1998 was likewise validly held.
The CA also ruled that Pag-ong's removal as director of Nephro was
justified as it was due to her "undenied delay in the release of Nephro's
medical supplies from the warehouse of the Fly-High Brokerage where
she was an officer, on top of her and her co-petitioner Raniel's absence
from the aforementioned directors' and stockholders' meetings of
Nephro despite due notice."
Issue:
W/N only the stockholders or members have the power to remove the
directors or trustees elected by them

removal of directors or trustees or any of them, must be called by the

secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the
outstanding capital stock, or if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. x x x
Notice of the time and place of such meeting, as well as of the intention
to propose such removal, must be given by publication or by written
notice as prescribed in this Code. x x x Removal may be with or
without cause: Provided, That removal without cause may not be
used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this
Code. (Emphasis supplied)
Petitioners do not dispute that the stockholders' meeting was held in
accordance with Nephro's By-Laws. The ownership of Nephro's
outstanding capital stock is distributed as follows: Jochico - 200
shares; Steffens - 100 shares; Viriya - 100 shares; Raniel - 75 shares;
and Pag-ong - 25 shares, or a total of 500 shares. A two-thirds vote of
Nephro's outstanding capital stock would be 333.33 shares, and during
the Stockholders' Special Meeting held on February 16, 1998, 400
shares voted for petitioners' removal. Said number of votes is more
than enough to oust petitioners from their respective positions as
members of the board, with or without cause.
Section 29
Vacancies in the office of director or trustee. - Any vacancy
occurring in the board of directors or trustees other than by removal by
the stockholders or members or by expiration of term, may be filled by
the vote of at least a majority of the remaining directors or trustees, if
still constituting a quorum; otherwise, said vacancies must be filled by
the stockholders in a regular or special meeting called for that purpose.
A director or trustee so elected to fill a vacancy shall be elected only or
the unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in the
number of directors or trustees shall be filled only by an election at a
regular or at a special meeting of stockholders or members duly called
for the purpose, or in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the meeting.
Section 30
Compensation of directors. - In the absence of any provision in
the by-laws fixing their compensation, the directors shall not receive
any compensation, as such directors, except for reasonable pre diems:
Provided, however, That any such compensation other than per diems
may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%)
percent of the net income before income tax of the corporation during
the preceding year.
Western Institute Vs. Salas (278 SCRA 216)

Ruling:
Facts:
Only stockholders or members have the power to remove the directors
or trustees elected by them, as laid down in Section 28 of the
Corporation Code, which provides in part:
SEC. 28. Removal of directors or trustees. -- Any director or
trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing at least twothirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, that such removal
shall take place either at a regular meeting of the corporation or at a
special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting. A special meeting of
the stockholders or members of a corporation for the purpose of

Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad SalasTubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same
family, are the majority and controlling members of the Board of
Trustees of Western Institute of Technology, Inc. (WIT, for short), a
stock corporation engaged in the operation, among others, of an
educational institution. According to petitioners, the minority
stockholders of WIT, sometime on June 1, 1986 in the principal office
of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In
attendance were other members of the Board including one of the
petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting,
copies of notice thereof, dated May 24, 1986, were distributed to all
Board Members. The notice allegedly indicated that the meeting to be
held on June 1, 1986 included Item No. 6 which states:

72

Possible implementation of Art. III, Sec. 6 of the Amended

By-Laws of Western Institute of Technology, Inc. on
compensation of all officers of the corporation.
In said meeting, the Board of Trustees passed Resolution granting
monthly compensation to the private respondents as corporate officers
retroactive June 1, 1985
Issue:
W/N the private respondents are entitled to compensation
Ruling:
Section of the Corporation Code provides:
Sec. 30. Compensation of directors In the absence of any provision
in the by-laws fixing their compensation, the directors shall not receive
any compensation, as such directors , except for reasonable per diems:
Provided, however , That any such compensation (other than per
diems) may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors , exceed ten (10%)
percent of the net income before income tax of the corporation during
the preceding year. [Emphasis ours]
There is no argument that directors or trustees, as the case may be, are
not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office. This
rule is founded upon a presumption that directors/trustees render
service gratuitously, and that the return upon their shares adequately
furnishes the motives for service, without compensation. Under the
foregoing section, there are only two (2) ways by which members of the
board can be granted compensation apart from reasonable per diems:
(1) when there is a provision in the by-laws fixing their compensation;
and (2) when the stockholders representing a majority of the
outstanding capital stock at a regular or special stockholders' meeting
agree to give it to them.
This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of
note is the clear phraseology of Section 30 which states: ". . . [T]he
directors shall not receive any compensation, as such directors , . . . ."
The phrase as such directors is not without significance for it delimits
the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render
services to the corporation in a capacity other than as
directors/trustees.
In the case at bench, Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as members
of the board, but rather as officers of the corporation, more particularly
as Chairman, Vice-Chairman, Treasurer and Secretary of Western
Institute of Technology.
Clearly, therefore, the prohibition with respect to granting
compensation to corporate directors/trustees as such under Section 30
is not violated in this particular case. Consequently, the last sentence of
Section 30 which provides:
. . . . . . . In no case shall the total yearly compensation of directors, as
such directors , exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. (Emphasis
ours]
does not likewise find application in this case since the compensation is
being given to private respondents in their capacity as officers of WIT
and not as board members.

Section 31
Liability of directors, trustees or officers. - Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members
and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect
of any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the
profits which otherwise would have accrued to the corporation.
Cebu Country Club Vs. Elizagaque (542 SCRA 65)
Facts:
Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation
operating as a non-profit and non-stock private membership club,
having its principal place of business in Banilad, Cebu City.
Petitioners herein are members of its Board of Directors. Sometime in
1987, San Miguel Corporation, a special company proprietary member
of CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice
President and Operations Manager for the Visayas and Mindanao, as a
special non-proprietary member. The designation was thereafter
approved by the CCCIs Board of Directors. In 1996, respondent filed
with CCCI an application for proprietary membership.
The
application was indorsed by CCCIs two (2) proprietary members,
namely: Edmundo T. Misa and Silvano Ludo.

As the price of a proprietary share was around the P5 million range,

Benito Unchuan, then president of CCCI, offered to sell respondent a
share for only P3.5 million. Respondent, however, purchased the
share of a certain Dr. Butalid for only P3 million. Consequently, on
September 6, 1996, CCCI issued Proprietary Ownership Certificate No.
1446 to respondent. During the meetings dated April 4, 1997 and May
30, 1997 of the CCCI Board of Directors, action on respondents
application for proprietary membership was deferred.
In another
Board meeting held on July 30, 1997, respondents application was
voted upon. Subsequently, or on August 1, 1997, respondent received
a letter from Julius Z. Neri, CCCIs corporate secretary, informing him
that the Board disapproved his application for proprietary
membership. On August 6, 1997, Edmundo T. Misa, on behalf of
respondent, wrote CCCI a letter of reconsideration. As CCCI did not
answer, respondent, on October 7, 1997, wrote another letter of
reconsideration. Still, CCCI kept silent.
On November 5, 1997,
respondent again sent CCCI a letter inquiring whether any member of
the Board objected to his application. Again, CCCI did not reply.
Consequently, on December 23, 1998, respondent filed with the
Regional Trial Court (RTC), Branch 71, Pasig City a complaint for
damages against petitioners, docketed as Civil Case No. 67190. After
trial, the RTC rendered its Decision dated February 14, 2001 in favor of
respondent.

Issue:
W/N in disapproving respondents application for proprietary
membership with CCCI, petitioners are liable to respondent for
damages, and if so, whether their liability is joint and several
Ruling:

73

Obviously, the CCCI Board of Directors, under its Articles of

Incorporation, has the right to approve or disapprove an application
for proprietary membership. But such right should not be exercised
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on
Human Relations provide restrictions, thus:

Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.

Article 21. Any person who willfully causes loss or injury to

another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for the damage.
In rejecting respondents application for proprietary membership, we
find that petitioners violated the rules governing human relations, the
basic principles to be observed for the rightful relationship between
human beings and for the stability of social order. The trial court and
the Court of Appeals aptly held that petitioners committed fraud and
evident bad faith in disapproving respondents applications. This is
contrary to morals, good custom or public policy. Hence, petitioners
are liable for damages pursuant to Article 19 in relation to Article 21 of
the same Code.

It is thus clear that respondent was left groping in the dark wondering
why his application was disapproved. He was not even informed that a
unanimous vote of the Board members was required. When he sent a
letter for reconsideration and an inquiry whether there was an
objection to his application, petitioners apparently ignored him.
Certainly, respondent did not deserve this kind of treatment. Having
been designated by San Miguel Corporation as a special nonproprietary member of CCCI, he should have been treated by
petitioners with courtesy and civility. At the very least, they should
have informed him why his application was disapproved.

The exercise of a right, though legal by itself, must nonetheless be in

accordance with the proper norm.
When the right is exercised
arbitrarily, unjustly or excessively and results in damage to another, a
legal wrong is committed for which the wrongdoer must be held
responsible. It bears reiterating that the trial court and the Court of
Appeals held that petitioners disapproval of respondents application
is characterized by bad faith.

As to petitioners reliance on the principle of damnum absque injuria

or damage without injury, suffice it to state that the same is misplaced.
In Amonoy v. Gutierrez, we held that this principle does not apply
when there is an abuse of a persons right, as in this case.

As to the appellate courts award to respondent of moral damages, we

find the same in order. Under Article 2219 of the New Civil Code,
moral damages may be recovered, among others, in acts and actions
referred to in Article 21. We believe respondents testimony that he
suffered mental anguish, social humiliation and wounded feelings as a
result of the arbitrary denial of his application. However, the amount
of P2,000,000.00 is excessive. While there is no hard-and-fast rule
in determining what would be a fair and reasonable amount of moral
damages, the same should not be palpably and scandalously excessive.
Moral damages are not intended to impose a penalty to the wrongdoer,
neither to enrich the claimant at the expense of the defendant. Taking
into consideration the attending circumstances here, we hold that an
award to respondent of P50,000.00, instead of P2,000,000.00, as
moral damages is reasonable.

Anent the award of exemplary damages, Article 2229 allows it by way

of example or correction for the public good. Nonetheless, since
exemplary damages are imposed not to enrich one party or impoverish
another but to serve as a deterrent against or as a negative incentive to
curb socially deleterious actions, we reduce the amount from
P1,000,000.00 to P25,000.00 only.

On the matter of attorneys fees and litigation expenses, Article 2208 of

the same Code provides, among others, that attorneys fees and
expenses of litigation may be recovered in cases when exemplary
damages are awarded and where the court deems it just and equitable
that attorneys fees and expenses of litigation should be recovered, as in
this case. In any event, however, such award must be reasonable, just
and equitable.
Thus, we reduce the amount of attorneys fees
(P500,000.00) and litigation expenses (P50,000.00) to P50,000.00
and P25,000.00, respectively.

Lastly, petitioners argument that they could not be held jointly and
severally liable for damages because only one (1) voted for the
disapproval of respondents application lacks merit.

SEC. 31. Liability of directors, trustees or officers. Directors or

trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence
or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors, or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
Garcia Vs. Social Security (540 SCRA 456)
Facts:
Petitioner Immaculada L. Garcia, Eduardo de Leon, Ricardo de Leon,
Pacita Fernandez, and Consuelo Villanueva were directors of Impact
Corporation. The corporation was engaged in the business of
manufacturing aluminum tube containers and operated two factories.
One was a slug foundry-factory located in Cuyapo, Nueva Ecija, while
the other was an Extrusion Plant in Cainta, Metro Manila, which
processed the slugs into aluminum collapsible tubes and similar
containers for toothpaste and other related products.
Records show that around 1978, Impact Corporation started
encountering financial problems. By 1980, labor unrest besieged the
corporation. In March 1983, Impact Corporation filed with the
Securities and Exchange Commission (SEC) a Petition for Suspension
of Payments.
On 8 May 1985, the union of Impact Corporation filed a Notice of
Strike with the Ministry of Labor which was followed by a declaration
of strike on 28 July 1985. Subsequently, the Ministry of Labor certified
the labor dispute for compulsory arbitration to the National Labor
Relations Commission (NLRC) in an Order dated 25 August 1985. The
Ministry of Labor, in the same Order, noted the inability of Impact
Corporation to pay wages, 13th month pay, and SSS remittances due to
cash liquidity problems.
The Social Security System (SSS), through its Legal and Collection
Division (LCD), filed a case before the SSC for the collection of
unremitted SSS premium contributions withheld by Impact
Corporation from its employees.
In her Answer with Counterclaim dated 20 May 1999, petitioner
averred that Impact Corporation had ceased operations in 1980. In her
defense, she insisted that she was a mere director without managerial

74

functions, and she ceased to be such in 1982. Even as a stockholder

and director of Impact Corporation, petitioner contended that she
cannot be made personally liable for the corporate obligations of
Impact Corporation since her liability extended only up to the extent of
her unpaid subscription, of which she had none since her subscription
was already fully paid.
Issue:
W/N Garcia is liable for the unremitted SSS premiums of the
employees

The situation of petitioner, as a director of Impact Corporation when

said corporation failed to remit the SSS premium contributions falls
exactly under the fourth situation. Section 28(f) of the Social Security
Law imposes a civil liability for any act or omission pertaining to the
violation of the Social Security Law, to wit:

(f) If the act or omission penalized by this Act be

committed by an association, partnership, corporation
or any other institution, its managing head, directors or
partners shall be liable to the penalties provided in this
Act for the offense.

Ruling:
Section 31 of the Corporation Code, stipulating on the liability of
directors, trustees, or officers, provides:

In fact, criminal actions for violations of the Social Security Law

are also provided under the Revised Penal Code. The Social
Security Law provides, in Section 28 thereof, to wit:

SEC. 31. Liability of directors, trustees or officers. - Directors or

trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence
or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors, or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
Basic is the rule that a corporation is invested by law with a personality
separate and distinct from that of the persons composing it as well as
from that of any other legal entity to which it may be related. A
corporation is a juridical entity with legal personality separate and
distinct from those acting for and in its behalf and, in general, from the
people comprising it. Following this, the general rule applied is that
obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer, and
employee of a corporation are generally not held personally liable for
obligations incurred by the corporation.
Being a mere fiction of law, however, there are peculiar situations or
valid grounds that can exist to warrant the disregard of its independent
being and the lifting of the corporate veil. This situation might arise
when a corporation is used to evade a just and due obligation or to
justify a wrong, to shield or perpetrate fraud, to carry out other similar
unjustifiable aims or intentions, or as a subterfuge to commit injustice
and so circumvent the law.
Taking a cue from the above provision, a corporate director, a trustee
or an officer, may be held solidarily liable with the corporation in the
following instances:

(h) Any employer who, after deducting the

monthly contributions or loan amortizations from
his employees compensation, fails to remit the
said deductions to the SSS within thirty (30) days
from the date they became due shall be presumed
to have misappropriated such contributions or
loan amortizations and shall suffer the penalties
provided in Article Three hundred fifteen of the
Revised Penal Code.
(i) Criminal action arising from a violation of the
provisions of this Act may be commenced by the
SSS or the employee concerned either under this
Act or in appropriate cases under the Revised
Penal Code: x x x.

Respondents would like this Court to apply another exception to the

rule that the persons comprising a corporation are not personally liable
for acts done in the performance of their duties.
The rationale cited by respondents in the two preceding paragraphs
need not have been applied because the personal liability for the
unremitted SSS premium contributions and the late penalty thereof
attaches to the petitioner as a director of Impact Corporation during
the period the amounts became due and demandable by virtue of a
direct provision of law.
Carag Vs. NLRC (520 SCRA 28)
Facts:

When directors and trustees or, in appropriate cases, the officers of a

corporation
1.
2.
3.
4.

5.

6.

vote for or assent to patently unlawful acts of the

corporation;
act in bad faith or with gross negligence in
directing the corporate affairs;
are guilty of conflict of interest to the prejudice of
the corporation, its stockholders or members, and
other persons.
When a director or officer has consented to the
issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto.
When a director, trustee or officer has
contractually agreed or stipulated to hold himself
personally and solidarily liable with the
Corporation.
When a director, trustee or officer is made, by
specific provision of law, personally liable for his
corporate action.

National Federation of Labor Unions (NAFLU) and Mariveles Apparel

Corporation Labor Union (MACLU) (collectively, complainants), on
behalf of all of MACs rank and file employees, filed a complaint against
MAC for illegal dismissal brought about by its illegal closure of
business. Complainants alleged that on July 8, 1993, without notice
of any kind filed in accordance with pertinent provisions of
the Labor Code, MAC ceased operations with the intention of
completely closing its shop or factory. Such intention was manifested
in a letter, allegedly claimed by MAC as its notice filed only on the
same day that the operations closed.
Complainants moved to implead Carag and David. Atty. Joshua L.
Pastores (Atty. Pastores), as counsel for respondents, submitted a
position paper dated 21 February 1994 and stated that complainants
should not have impleaded Carag and David because MAC is actually
owned by a consortium of banks. Carag and David own shares in MAC
only to qualify them to serve as MACs officers.
Arbiter Ortiguerra rendered her Decision dated 17 June 1994 granting
the motion to implead Carag and David. In the same Decision, Arbiter

75

Ortiguerra declared Carag and David solidarily liable with MAC to

complainants.

requirements, but it is not illegal in the sense that it constitutes an

unlawful or criminal act.

Issue:

For a wrongdoing to make a director personally liable for debts of the

corporation, the wrongdoing approved or assented to by the director
must be a patently unlawful act. Mere failure to comply with the
notice requirement of labor laws on company closure or dismissal of
employees does not amount to a patently unlawful act.
Patently
unlawful acts are those declared unlawful by law which imposes
penalties for commission of such unlawful acts. There must be a law
declaring the act unlawful and penalizing the act.

W/N Carag and David be held personally liable for the closure of MAC
Ruling:
Carag was not issued summons, not accorded a conciliatory
conference, not ordered to submit a position paper, not accorded a
hearing, not given an opportunity to present his evidence, and not
notified that the case was submitted for resolution. Thus, we hold that
Arbiter Ortiguerras Decision is void as against Carag for utter absence
of due process.
The rule is that a director is not personally liable for the debts of the
corporation, which has a separate legal personality of its own. Section
31 of the Corporation Code lays down the exceptions to the rule, as
follows:
Liability of directors, trustees or officers. Directors or trustees who wilfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence
or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the
corporation, its stockholders or members and
other persons.

Section 31 makes a director personally liable for corporate debts if he

wilfully and knowingly votes for or assents to patently
unlawful acts of the corporation. Section 31 also makes a director
personally liable if he is guilty of gross negligence or bad faith in
directing the affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully and
knowingly voted for or assented to any patently unlawful act of MAC.
Complainants did not present any evidence showing that Carag wilfully
and knowingly voted for or assented to any patently unlawful act of
MAC. Neither did Arbiter Ortiguerra make any finding to this effect in
her Decision.
Complainants did not also allege that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC. Complainants
did not present any evidence showing that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC. Neither did
Arbiter Ortiguerra make any finding to this effect in her Decision.
Arbiter Ortiguerra stopped there and did not make any finding that
Carag is guilty of bad faith or of wanton violation of labor standard
laws. Arbiter Ortiguerra did not specify what act of bad faith Carag
committed, or what particular labor standard laws he violated.
To hold a director personally liable for debts of the corporation, and
thus pierce the veil of corporate fiction, the bad faith or wrongdoing of
the director must be established clearly and convincingly. Bad faith is
never presumed. Bad faith does not connote bad judgment or
negligence. Bad faith imports a dishonest purpose. Bad faith means
breach of a known duty through some ill motive or interest. Bad faith
partakes of the nature of fraud. Neither does bad faith arise
automatically just because a corporation fails to comply with the notice
requirement of labor laws on company closure or dismissal of
employees. The failure to give notice is not an unlawful act because the
law does not define such failure as unlawful. Such failure to give notice
is a violation of procedural due process but does not amount to an
unlawful or criminal act.
Such procedural defect is called illegal
dismissal because it fails to comply with mandatory procedural

Arbiter Ortiguerras asserted that when the company had already

ceased operations and there is no way by which a judgment in favor of
employees could be satisfied, corporate officers can be held jointly and
severally liable with the company. This assertion echoes the
complainants claim that Carag is personally liable for MACs debts to
complainants on the basis of Article 212(e) of the Labor Code, as
amended, which says:
Employer includes any person
acting in the interest of an employer,
directly or indirectly. The term shall not
include any labor organization or any of its
officers or agents except when acting as
employer. (Emphasis supplied)
Indeed, complainants seek to hold Carag personally liable for the debts
of MAC based solely on Article 212(e) of the Labor Code. This is the
specific legal ground cited by complainants, and used by Arbiter
Ortiguerra, in holding Carag personally liable for the debts of MAC.
We have already ruled in McLeod v. NLRC and Spouses Santos v.
NLRC that Article 212(e) of the Labor Code, by itself, does not
make a corporate officer personally liable for the debts of the
corporation. The governing law on personal liability of directors for
debts of the corporation is still Section 31 of the Corporation Code.
The ruling in A.C. Ransom Labor Union-CCLU v. NLRC, which the
Court of Appeals cited, does not apply to this case. We quote pertinent
portions of the ruling, thus:
The foregoing was culled from Section 2 of RA 602, the Minimum
Wage Law. Since RANSOM is an artificial person, it must have an
officer who can be presumed to be the employer, being the person
acting in the interest of (the) employer RANSOM. The corporation,
only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held
personally, not to say even criminally, liable for non-payment of back
wages. That is the policy of the law. x x x x
(c) If the policy of the law were otherwise, the corporation employer
can have devious ways for evading payment of back wages. In the
instant case, it would appear that RANSOM, in 1969,
foreseeing the possibility or probability of payment of back
wages to the 22 strikers, organized ROSARIO to replace
RANSOM, with the latter to be eventually phased out if the 22
strikers win their case. RANSOM actually ceased operations on
May 1, 1973, after the December 19, 1972 Decision of the Court of
Industrial Relations was promulgated against RANSOM.
Clearly, in A.C. Ransom, RANSOM, through its President, organized
ROSARIO to evade payment of backwages to the 22 strikers. This
situation, or anything similar showing malice or bad faith on the part of
Patricio, does not obtain in the present case.
Thus, the rule is still that the doctrine of piercing the corporate veil
applies only when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. In the
absence of malice, bad faith, or a specific provision of law making a

76

corporate officer liable, such corporate officer cannot be made

personally liable for corporate liabilities. Neither Article 212[e]
nor Article 273 (now 272) of the Labor Code expressly makes
any corporate officer personally liable for the debts of the
corporation.
Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of
Appeals to hold Carag personally liable for the separation pay owed by
MAC to complainants based alone on Article 212(e) of the Labor Code.
Article 212(e) does not state that corporate officers are personally liable
for the unpaid salaries or separation pay of employees of the
corporation. The liability of corporate officers for corporate debts
remains governed by Section 31 of the Corporation Code.
Pet Plans Vs. CA (443 SCRA 510)
Facts:
Petitioner PET PLANS, Incorporated is a company engaged in the
business of selling educational, pension and memorial plans while copetitioner Adrian V. Ocampo is its President.
PET PLANS employed Jaime M. Abad as its Sales Operations
Manager/District Manager, assigning him to its branch office in Aparri,
Cagayan. Later Abad was reassigned as a Trust Manager, a position
which is next lower in rank than the one he was then occupying. The
reasons for his demotion are his failure to comply with the sales quota
for the years 1998 and 1999, to recruit manpower and to develop his
agency. Thus, Abad filed a complaint with the National Labor
Relations Commission (NLRC), Regional Arbitration Branch No. 02,
Tuguegarao, Cagayan for illegal dismissal/demotion, damages, nonpayment of basic wages, 13th month pay and other monetary incentives
against PET PLANS and Ocampo.
The Executive Labor Arbiter Ricardo N. Olairez rendered a decision,
declaring complainant illegally dismissed and ordering respondents
jointly and severally to reinstate him to his former position without
loss of seniority rights with full backwages and other benefits
computed at P26,533.00 basic pay including 13 th month pay and
allowances from June 16 to December 31, 1999, and P144, 910.35
unpaid basic wages including 13th month pay for 1996 to 1998 plus ten
percent attorneys fees. The reinstatement aspect is immediately
executory even pending appeal. In case reinstatement is no longer
feasible complainant shall be paid separation pay of one month
compensation pay including allowances for every year of service. All
other claims are hereby dismissed.
Issue:
W/N the Court of Appeals acted with grave abuse of discretion when it
dismissed petitioners special civil action for certiorari on the ground
that petitioners failed to comply with the provisions of the Rules of
Court on verification and certificate of non-forum shopping
Ruling:
Section 1. Petition for certiorari. When any tribunal, board or officer
exercising judicial or quasi-judicial functions has acted without or in
excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal, or
any plain, speedy, and adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in the proper
court, alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings of such tribunal,
board or officer, and granting such incidental reliefs as law and justice
may require.
The petition shall be accompanied by a certified true copy of
the judgment, order or resolution subject thereof, copies of
all pleadings and documents relevant and pertinent thereto,

and a sworn certification of non-forum shopping as provided

in the third paragraph of section 3, Rule 46.
Pertinent portions of Section 3, Rule 46 provides:
Section 3. Contents and filing of petition; effect of non-compliance
with requirements. . . .
The petitioner shall also submit together with the petition a sworn
certification that he has not theretofore commenced any other action
involving the same issues in the Supreme Court, the Court of Appeals
or different divisions thereof, or any other tribunal or agency; if there is
such other action or proceeding, he must state the status of the same;
and if he should thereafter learn that a similar action or proceeding has
been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any other tribunal or agency,
he undertakes to promptly inform the aforesaid courts and other
tribunal or agency thereof within five (5) days therefrom.
. . .
The failure of the petitioner to comply with any of the foregoing
requirements shall be sufficient ground for the dismissal of the
petition.
In CA-G.R. SP No. 62410, a certain Rolando M. Espino signed the
Verification and Certification attached to the petition for certiorari, as
the duly authorized representative of petitioners. However, no proof
was presented to show that Espino is indeed the authorized
representative of petitioners. As a consequence, CA-G.R. SP No. 62410
was dismissed by the Court of Appeals.
Subsequent to such dismissal, however, petitioners filed a motion for
reconsideration attaching thereto a certificate issued by Espino, who is
also the corporate secretary of PET PLANS, indicating that on
December 2, 2000, the Board of Directors of petitioner corporation
issued a resolution authorizing him to represent the corporation in all
cases filed by or against it, giving him full authority to enter into an
amicable settlement, to submit to alternative modes of dispute
resolution, and to enter into stipulations or admissions of facts and of
documents, as well as to sign, execute and deliver all pleadings,
agreements, papers and documents and do all those necessary to carry
into effect the herein resolution. The Secretarys Certificate was
accompanied by a certification issued by herein petitioner Ocampo, the
President/CEO of petitioner corporation, attesting to the fact that
Espino is indeed the Corporate Secretary of petitioner corporation, and
that he is authorized to represent petitioner corporation in all cases
filed by or against it, which includes the authority to sign, execute and
deliver all pleadings, agreements, papers and documents.
In the present case, a reading of the subject resolution issued by the
Board of Directors of PET PLANS, shows that it authorizes Espino to
represent only PET PLANS, not its co-petitioner, Ocampo. Nothing in
the records at hand indicates that Espino is clothed with special
authority to represent Ocampo. Hence, Espino does not represent
Ocampo, in the filing of CA-G.R. SP No. 62410. As such, Ocampo,
being a petitioner in his own right, should have also signed the
verification and certificate of non-forum shopping attached to the
petition of CA-G.R. SP No. 62410. Ordinarily, Ocampo should have
been considered a nominal party as he was merely impleaded by
complainant in his capacity as the president of PET PLANS and no
specific claim or charge against him, in his personal capacity, was
alleged in the complaint filed with the NLRC, Regional Arbitration
Branch. However, considering that the Labor Arbiters decision made
him jointly and solidarily liable with PET PLANS, he has become a real
party-in-interest whose stake, subsequent to the Labor Arbiters
decision, have become distinct from those of Petitioner Corporation.
As such, it becomes inevitable for him to sign the verification and
certificate of non-forum shopping.
Section 3, Rule 46 of the Rules of Court requires that the petitioner
shall sign the certificate of non-forum shopping. In the case of

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corporations, the physical act of signing may be performed in behalf of

the corporate entity by specifically authorized individuals for the
simple reason that corporations, as artificial persons, cannot do the
task themselves. However, in the case of natural persons, the Rule
requires the parties themselves to sign the certificate of non-forum
shopping. The reason for such a requirement is that the petitioner
himself, or in case of a corporation, its duly authorized representative,
knows better than anyone else whether a separate case has been filed
or pending which involves substantially the same issues.
In the present case, it cannot be said with certainty that Espino knows
beyond doubt that Ocampo has not filed before any court or tribunal a
separate case related to the present petition and the petition in CA-G.R.
SP No. 62410. In Loquias vs. Office of the Ombudsman, we held that
failure of one of the petitioners to sign the verification and certificate
against forum shopping constitutes a defect in the petition, which is a
ground for dismissing the same. While we have held in rulings
subsequent to Loquias that this rule may be relaxed, petitioners must
comply with two conditions: first, petitioners must show justifiable
cause for their failure to personally sign the certification and; second,
they must also be able to prove that the outright dismissal of the
petition would seriously impair the orderly administration of justice. In
the present case, we find that petitioners failed to prove the presence of
these conditions. The dismissal by the Court of Appeals of CA-G.R. SP
No. 62410 should have put petitioners on guard as to the basic
procedural requirements in filing the petition. Notwithstanding such
dismissal and their subsequent filing of a motion for reconsideration,
petitioners still failed to substantially comply with the requirements of
the Rules by the failure of Ocampo to sign the certificate of non-forum
shopping. In the present petition filed before us, PET PLANS once
again failed to submit proof that it has authorized Espino to file the
present petition or to sign the verification and certificate against forum
shopping attached thereto. Likewise, petitioner Ocampo again failed to
sign the certificate of non-forum shopping. We cannot allow a party to
gain an advantage from its flagrant disregard of the Rules.
RN Symaco Vs. Santos (467 SCRA 312)
Facts:
Respondent Malabon Fish Brokers Association, Inc. (MFBAI) was a
non-stock corporation established to erect and operate the Malabon
Fish Brokers Association Fish Market, aimed at promoting the
economic welfare of its members in their business of buying and selling
fish and other marine products. Linda Sioson was elected as treasurer
of the corporation.
On April 30, 1980, Mariano Guison, as lessor, and the MFBAI, as
lessee, executed a contract of lease over a portion of five parcels of land
located in Malabon, Metro Manila. Included in the lease agreement
was a portion of his property occupied by Rudy Symaco along Estrella
Street, Malabon, Metro Manila.
The MFBAI, thus, constructed the market on the leased property where
its members installed their respective stalls.
On August 13, 1983, a group of MFBAI members, led by Marcos Valle,
Jr., approved the corporations By-Laws.
On August 18, 1983, another set of MFBAI members, led by Lino
Buhain, met and amended the By-Laws which the Securities and
Exchange Commission (SEC) approved on September 7, 1983.
However, Valle, Jr. and ten others filed a petition with the SEC against
Buhain, et al. for the nullification of the amended By-Laws; to give due
course to the By-Laws approved on August 13, 1983; and to declare
them (Valle, Jr., et al.) as the duly-established members of the
corporations Board of Directors. The case was docketed as SEC Case
No. 2521.
The SEC Hearing Officer rendered a Decision ordering the dismissal of
the petition, and directing the hold-over officers to call for a
membership meeting to elect the new Board of Directors and Officers

of the Malabon Fish Brokers Association, Inc. within 30 days from

finality of the decision. According to the hearing officer, from its
incorporation, the MFBAI had only 35 legitimate members, and
respondent Luisito T. Santos was not listed as one of them.
The decision was appealed to the SEC which was, however, dismissed.
This prompted Valle, Jr., et al. to elevate the decision to the Court of
Appeals (CA) via petition for review.
Meanwhile, Mariano Guison died intestate. On April 30, 1990, the
Heirs of Mariano Guison and petitioner Norma Symaco, then President
and Chairman of the Board of Directors of petitioner R.N. Symaco
Trading Corporation (Symaco Corporation), executed an unnotarized
contract of lease over a portion of the property previously leased to
MFBAI.
Norma Symaco was then also a member of the MFBAI Board of
Directors.
Symaco Corporation had the stallholders evicted from the market, and
filed a complaint for forcible entry against them with the Metropolitan
Trial Court which the MeTC issued a writ of preliminary mandatory
injunction against the defendants. It rendered judgment in favor of the
plaintiff corporation on October 11, 1990.
On May 31, 1990, the CA rendered judgment affirming the SEC
decision in SEC Case No. 2521. The decision became final and
executory.
On October 29, 1990, respondent Santos, for and in behalf of the
MFBAI, filed a complaint for the annulment of the April 30, 1990
Contract of Lease between the Heirs of Mariano Guison and defendant
Symaco Corporation, with injunctive relief, against petitioners Estate
of Mariano Guison, Symaco Corporation, and Norma Symaco in the
Regional Trial Court (RTC) of Malabon.
Respondent Santos alleged, inter alia, that as an MFBAI member, he
was a nominal party; he filed the derivative suit for and in behalf of
MFBAI. He further alleged that the April 30, 1990 Contract of Lease
executed by the defendants was null and void since it was executed by
Symaco Corporation, through Norma Symaco, who was the president
and chairman of the Board of Directors of the said corporation and still
a member of the MFBAI Board of Directors; hence, the contract was
executed in violation of the principle of corporate opportunity under
Sections 31 and 34 of the Corporation Code of the Philippines.
Issue:
W/N Norma Symaco and/or R.N. Symaco Trading Corp. violates the
doctrine of corporate opportunity
Ruling:
No.
Santos was not a legitimate MFBAI member; hence, he had no
standing to file a derivative suit for and in its behalf. One of the
requisites of a derivative suit is that the party bringing the suit should
be a stockholder/member at the time of the action or transaction
complained of. The right to sue derivatively is an attribute of corporate
ownership which, to be exercised, requires that the injury alleged be
indirect as far as the stockholders/members are concerned, and direct
only insofar as the corporation is concerned. The whole purpose of the
law authorizing a derivative suit is to allow the stockholder/member to
enforce rights which are derivative (secondary) in nature. A derivative
action is a suit by a shareholder/member to enforce a corporate cause
of action.
All the MFBAI members are not indispensable parties in a derivative
suit. It is enough that a member or a minority of such members file a

78

derivative suit for and in behalf of the corporation. After all, the
members/stockholders who filed a derivative suit are merely nominal
parties, the real party-in-interest being the corporation itself for and in
whose behalf the suit is filed. Any monetary benefits under the decision
of the court shall pertain to the corporation.

Corporation failed to comply with the demand of the Bank. On

November 23, 1992, the Bank sent another letter to the [Corporation]
demanding payment of its account which, by November 23, 1992, had
amounted to P7,283,913.33. The Corporation again failed to comply
with the demand of the Bank.

In light of the foregoing, there is no longer a need for the Court to still
resolve the other issues on whether Symaco violated the doctrine of
corporate opportunity.

On January 6, 1993, the Bank filed a complaint against the

Corporation Sps. Jong-Won Hong and the Sps. Teresita R. Cu, for Sum
of Money with a plea for the issuance of a writ of preliminary
attachment.

Solid Bank Vs. Mindanao Ferro (464 SCRA 409)

Facts:
The Maria Cristina Chemical Industries (MCCI) and three (3) Korean
corporations, namely, the Ssangyong Corporation, the Pohang Iron and
Steel Company and the Dongil Industries Company, Ltd., decided to
forge a joint venture and establish a corporation, under the name of the
Mindanao Ferroalloy Corporation (Corporation for brevity) with
principal offices in Iligan City. Ricardo P. Guevara was the President
and Chairman of the Board of Directors of the Corporation. Jong-Won
Hong, the General Manager of Ssangyong Corporation, was the VicePresident of the Corporation for Finance, Marketing and
Administration. So was Teresita R. Cu. On November 26, 1990, the
Board of Directors of the Corporation approved a Resolution
authorizing its President and Chairman of the Board of Directors or
Teresita R. Cu, acting together with Jong-Won Hong, to secure an
omnibus line in the aggregate amount of P30,000,000.00 from the
Solidbank.
In the meantime, the Corporation started its operations sometime in
April, 1991. Its indebtedness ballooned to P200,453,686.69 compared
to its assets of only P65,476,000.00. On May 21, 1991, the Corporation
secured an ordinary time loan from the Solidbank in the amount of
P3,200,000.00. Another ordinary time loan was granted by the Bank
to the Corporation on May 28, 1991, in the amount of P1,800,000.00
or in the total amount of P5,000,000.00, due on July 15 and 26, 1991,
respectively.
However, the Corporation and the Bank agreed to consolidate and, at
the same time, restructure the two (2) loan availments, the same
payable on September 20, 1991. The Corporation executed Promissory
Note No. 96-91-00865-6 in favor of the Bank evidencing its loan in the
amount of P5,160,000.00, payable on September 20, 1991. Teresita Cu
and Jong-Won Hong affixed their signatures on the note. To secure
the payment of the said loan, the Corporation, through Jong-Won
Hong and Teresita Cu, executed a Deed of Assignment in favor of the
Bank covering its rights, title and interest to The entire proceeds of
drafts drawn under Irrevocable Letter of Credit No. M-S-041-2002080
opened with The Mitsubishi Bank Ltd. Tokyo dated June 13, 1991 for
the account of Ssangyong Japan Corporation, 7F. Matsuoka-TamuraCho Bldg., 22-10, 5-Chome, Shimbashi, Minato-Ku, Tokyo, Japan up to
the extent of US$197,679.00
The Corporation likewise executed a Quedan, by way of additional
security, under which the Corporation bound and obliged to keep and
hold, in trust for the Bank or its Order, Ferrosilicon for
US$197,679.00. Jong-Won Hong and Teresita Cu affixed their
signatures thereon for the Corporation. The Corporation, also, through
Jong-Won Hong and Teresita Cu, executed a Trust Receipt
Agreement, by way of additional security for said loan, the Corporation
undertaking to hold in trust, for the Bank, as its property, the
following: 1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S041-2002080 for account of Ssangyong Japan Corporation, Tokyo,
Japan for US$197,679.00 Ferrosilicon to expire September 20, 1991.
2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the
following: Ferrosilicon for US$197,679.00
However, shortly after the execution of the said deeds, the
Corporation stopped its operations. The Corporation failed to pay its
loan availments from the Bank inclusive of accrued interest. On
February 11, 1992, the Bank sent a letter to the Corporation demanding
payment of its loan availments inclusive of interests due. The

In dismissing the complaint against the individual [respondents], the

Court a quo found and declared that [petitioner] failed to adduce a
morsel of evidence to prove the personal liability of the said
[respondents] for the claims of [petitioner] and that the latter
impleaded the [respondents], in its complaint and amended complaint,
solely to put more pressure on the Defendant Corporation to pay its
obligations to [petitioner].
Issue:
W/N the individual respondents can be held jointly and solidary liable
Ruling:
Basic is the principle that a corporation is vested by law with a
personality separate and distinct from that of each person composing
or representing it. Equally fundamental is the general rule that
corporate officers cannot be held personally liable for the consequences
of their acts, for as long as these are for and on behalf of the
corporation, within the scope of their authority and in good faith. The
separate corporate personality is a shield against the personal liability
of corporate officers, whose acts are properly attributed to the
corporation.
Respondent Guevara was not personally liable for the contracts. First,
it is beyond cavil that he was duly authorized to act on behalf of the
corporation; and that in negotiating the loans with petitioner, he did so
in his official capacity. Second, no sufficient and specific evidence was
presented to show that he had acted in bad faith or gross negligence in
that negotiation. Third, he did not hold himself personally and
solidarily liable with the corporation. Neither is there any specific
provision of law making him personally answerable for the subject
corporate acts.
On the other hand, Respondents Cu and Hong signed the Promissory
Note without the word by preceding their signatures, atop the
designation Maker/Borrower and the printed name of the
corporation, as follows:
__(Sgd) Cu/Hong__
(Maker/Borrower)
MINDANAO FERROALLOY
While their signatures appear without qualification, the inference that
they signed in their individual capacities is negated by the following
facts: 1) the name and the address of the corporation appeared on the
space provided for Maker/Borrower; 2) Respondents Cu and Hong
had only one set of signatures on the instrument, when there should
have been two, if indeed they had intended to be bound solidarily -- the
first as representatives of the corporation, and the second as
themselves in their individual capacities; 3) they did not sign under the
spaces provided for Co-maker, and neither were their addresses
reflected there; and 4) at the back of the Promissory Note, they signed
above the words Authorized Representative.
Moreover, it is axiomatic that solidary liability cannot be lightly
inferred. Under Article 1207 of the Civil Code, there is a solidary
liability only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity. Since solidary
liability is not clearly expressed in the Promissory Note and is not

79

required by law or the nature of the obligation in this case, no

conclusion of solidary liability can be made.
Furthermore, nothing supports the alleged joint liability of the
individual petitioners because, as correctly pointed out by the two
lower courts, the evidence shows that there is only one debtor: the
corporation. In a joint obligation, there must be at least two debtors,
each of whom is liable only for a proportionate part of the debt; and the
creditor is entitled only to a proportionate part of the credit.
Moreover, it is rather late in the day to raise the alleged joint liability,
as this matter has not been pleaded before the trial and the appellate
courts. Before the lower courts, petitioner anchored its claim solely on
the alleged joint and several (or solidary) liability of the individual
respondents. Petitioner must be reminded that an issue cannot be
raised for the first time on appeal, but seasonably in the proceedings
before the trial court.

On due dates, Caltex presented the said checks for payment. However,
Three (3) checks were dishonored by the drawee bank, for the reason
that they were drawn against insufficient funds. Another check was,
likewise, dishonored with the notation account closed. Hence, Caltex,
through Dalao, made verbal demands to INSURECO for the
replacement of the dishonored checks with either managers checks or
cash, to no avail. On May 6, 1992, Caltex sent a confirmation telegram
informing INSURECO of the dishonor of the said checks, and again
demanded their replacement, but received no reply.
On July 6, 1992, Caltex filed criminal complaints for violation of B.P.
Blg. 22 against Marigomen and Dalao with the Office of the City
Prosecutor of Bacolod City. They were, thereafter, charged with three
counts of violation of B.P. Blg. 22 in three separate Informations filed
with the RTC of Bacolod City, and docketed as Criminal Case Nos.
13012 to 13014.
Issue:

So too, the Promissory Note in question is a negotiable instrument.

Under Section 19 of the Negotiable Instruments Law, agents or
representatives may sign for the principal. Their authority may be
established, as in other cases of agency. Section 20 of the law provides
that a person signing for and on behalf of a [disclosed] principal or in
a representative capacity x x x is not liable on the instrument if he was
duly authorized.
The authority of Respondents Cu and Hong to sign for and on behalf of
the corporation has been amply established by the Resolution of
Minfacos Board of Directors, stating that Atty. Ricardo P. Guevara
(President and Chairman), or Ms. Teresita R. Cu (Vice President),
acting together with Mr. Jong Won Hong (Vice President), be as they
are hereby authorized for and in behalf of the Corporation to: 1.
Negotiate with and obtain from (petitioner) the extension of an
omnibus line in the aggregate of P30 million x x x; and 2. Execute and
deliver all documentation necessary to implement all of the foregoing.
Further, the agreement involved here is a contract of adhesion, which
was prepared entirely by one party and offered to the other on a take it
or leave it basis. Following the general rule, the contract must be read
against petitioner, because it was the party that prepared it, more so
because a bank is held to high standards of care in the conduct of its
business.
In the totality of the circumstances, we hold that Respondents Cu and
Hong clearly signed the Note merely as representatives of Minfaco.
Marigomen Vs. People (459 SCRA 169)
Facts:
Caltex Philippines, Inc. (Caltex) is engaged in the sale of gasoline and
oil products to its customers, one of which was the Industrial Sugar
Resources, Inc. (INSURECO), with offices at the Bacolod Murcia
Milling Corporation Compound in Bacolod City. Caltex had granted a
credit line to INSURECO, and the latter purchased gasoline and
lubricants from Caltex through its sales representative in Negros
Occidental and Bacolod City. The finance officer of INSURECO was
Ofelia Marigomen, while John V. Dalao was the assistant to the general
manager. They were authorized to draw and sign checks against the
account of INSURECO at the Far East Bank and Trust Company,
Bacolod City Branch. Caltex had agreed for INSURECO to pay its
purchases via postdated checks, which were delivered to Caltex upon
the release of the purchased oil products.
As evidenced by separate delivery receipts, INSURECO bought and
took delivery of oil products from Caltex. In payment thereof,
postdated checks drawn and signed by Marigomen and Dalao against
its account with the Far East Bank and Trust Company, Bacolod City
Branch, were issued in favor of Caltex.

W/N Marigomen could be held civilly liable for the bouncing checks
issued to Caltex
Ruling:
For violation of B.P. Blg. 22 to be committed, the prosecution must
prove the following essential elements:
(1)

the making, drawing, and issuance of any check to apply

for account or for value;

(2)

the knowledge of the maker, drawer, or issuer that at the

time of issue there are no sufficient funds in or credit
with the drawee bank for the payment of such check in
full upon its presentment; and

(3)

the subsequent dishonor of the check by the drawee bank

for insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.

It is difficult for the prosecution to prove the second element of the

crime because the knowledge on the part of the maker, drawer or issuer
that at the time of issue he does not have sufficient funds or credit with
the drawee bank for the payment of such checks in full upon its
presentation is a state of the mind. However, Section 2 of B.P. Blg. 22
provides that if the prosecution proves that the making, drawing and
issuing of a check, payment of which is refused by the drawee bank
because of insufficiency of funds or credit with the said bank within 90
days from the date of the check, such shall be prima facie evidence of
the second element of the crime. The drawee or maker of the check
may overcome the prima facie evidence, either by paying the amount
of the check, or by making arrangements for its payment in full within
five banking days after receipt of notice that such check was not paid by
the drawee bank.
Contrary, to the respondents contention, the ruling of the Court in Lao
v. Court of Appeals is applicable in this case. In acquitting the
petitioner therein, the Court explained:
The absence of a notice of dishonor necessarily deprives an accused an
opportunity to preclude a criminal prosecution. Accordingly,
procedural due process clearly enjoins that a notice of dishonor be
actually served on petitioner. Petitioner has a right to demand and
the basic postulates of fairness require - that the notice of dishonor be
actually sent to and received by her to afford her the opportunity to
avert prosecution under B.P. Blg. 22.
Moreover, the notice of dishonor must be in writing; a verbal notice is
not enough. The rationale for this was explained by the Court in
Domagsang v. Court of Appeals, to wit:

80

Petitioner counters that the lack of a written notice of dishonor is fatal.

The Court agrees.
While, indeed, Section 2 of B.P. Blg. 22 does not state that the notice of
dishonor be in writing, taken in conjunction, however, with Section 3
of the law, i.e., that where there are no sufficient funds in or credit
with such drawee bank, such fact shall always be explicitly stated in
the notice of dishonor or refusal, a mere oral notice or demand to pay
would appear to be insufficient for conviction under the law.
Thus, if the drawer or maker is an officer of a corporation, the notice of
dishonor to the said corporation is not notice to the employee or officer
who drew or issued the check for and in its behalf. The Court explained
in Lao v. Court of Appeals, to wit:
In this light, the postulate of Respondent Court of Appeals that
(d)emand on the Corporation constitutes demand on appellant
(herein petitioner), is erroneous. Premiere has no obligation to
forward the notice addressed to it to the employee concerned,
especially because the corporation itself incurs no criminal liability
under B.P. Blg. 22 for the issuance of a bouncing check. Responsibility
under B.P. Blg. 22 is personal to the accused; hence, personal
knowledge of the notice of dishonor is necessary. Consequently,
constructive notice to the corporation is not enough to satisfy due
process. Moreover, it is petitioner, as an officer of the corporation, who
is the latters agent for purposes of receiving notices and other
documents, and not the other way around. It is but axiomatic that
notice to the corporation, which has a personality distinct and separate
from the petitioner, does not constitute notice to the latter.
In this case, the prosecution failed to present any employee of the
PT&T to prove that the telegrams from the offended party were in fact
transmitted to INSURECO and that the latter received the same.
Furthermore, there is no evidence on record that the petitioner ever
received the said telegrams from INSURECO, or that separate copies
thereof were transmitted to and received by the petitioner.
In fine, the respondent failed to prove the second element of the crime.
Hence, the petitioner should be acquitted of the crimes charged.
Chua Vs. CA (443 SCRA 259)
Facts:
Lydia Hao, treasurer of Siena Realty Corporation, filed a complaintaffidavit with the City Prosecutor of Manila charging Francis Chua and
his wife, Elsa Chua, of four counts of falsification of public documents
pursuant to Article 172 in relation to Article 171 of the Revised Penal
Code. The charge reads:
Said accused prepared, certified, and falsified the Minutes of
the Annual Stockholders meeting of the Board of Directors of
the Siena Realty Corporation, duly notarized before a Notary
Public, Atty. Juanito G. Garcia and entered in his Notarial
Registry as Doc No. 109, Page 22, Book No. IV and Series of
1994, and therefore, a public document, by making or
causing it to appear in said Minutes of the Annual
Stockholders Meeting that one LYDIA HAO CHUA was
present and has participated in said proceedings, when in
truth and in fact, as the said accused fully well knew that said
Lydia C. Hao was never present during the Annual
Stockholders Meeting held on April 30, 1994 and neither has
participated in the proceedings thereof to the prejudice of
public interest and in violation of public faith and
destruction of truth as therein proclaimed.
Petitioner had argued before the Court of Appeals that respondent had
no authority whatsoever to bring a suit in behalf of the Corporation
since there was no Board Resolution authorizing her to file the suit.

For her part, respondent Hao claimed that the suit was brought under
the concept of a derivative suit. Respondent maintained that when the
directors or trustees refused to file a suit even when there was a
demand from stockholders, a derivative suit was allowed.
Issue:
W/N the Lydia Haos filing of criminal case no. 285721 was in the
nature of a derivative suit
Ruling:
In Western Institute, we said:
Here, however, the case is not a derivative suit but is merely an appeal
on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with
the RTC of Iloilo for estafa and falsification of public document.
Among the basic requirements for a derivative suit to prosper is that
the minority shareholder who is suing for and on behalf of the
corporation must allege in his complaint before the proper forum that
he is suing on a derivative cause of action on behalf of the corporation
and all other shareholders similarly situated who wish to join. . . .This
was not complied with by the petitioners either in their complaint
before the court a quo nor in the instant petition which, in part, merely
states that this is a petition for review on certiorari on pure questions
of law to set aside a portion of the RTC decision in Criminal Cases Nos.
37097 and 37098 since the trial courts judgment of acquittal failed to
impose civil liability against the private respondents. By no amount of
equity considerations, if at all deserved, can a mere appeal on the civil
aspect of a criminal case be treated as a derivative suit.
Moreover, in Western Institute, we said that a mere appeal in the civil
aspect cannot be treated as a derivative suit because the appeal lacked
the basic requirement that it must be alleged in the complaint that the
shareholder is suing on a derivative cause of action for and in behalf of
the corporation and other shareholders who wish to join.
Under Section 36 of the Corporation Code, read in relation to Section
23, where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees. An individual stockholder is
permitted to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the
ones to be sued, or hold the control of the corporation. In such actions,
the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest.
A derivative action is a suit by a shareholder to enforce a corporate
cause of action. The corporation is a necessary party to the suit. And
the relief which is granted is a judgment against a third person in favor
of the corporation. Similarly, if a corporation has a defense to an action
against it and is not asserting it, a stockholder may intervene and
defend on behalf of the corporation.
In Criminal Case No. 285721, the complaint was instituted by
respondent against petitioner for falsifying corporate documents whose
subject concerns corporate projects of Siena Realty Corporation.
Clearly, Siena Realty Corporation is an offended party. Hence, Siena
Realty Corporation has a cause of action. And the civil case for the
corporate cause of action is deemed instituted in the criminal action.
However, the board of directors of the corporation in this case did not
institute the action against petitioner. Private respondent was the one
who instituted the action. Private respondent asserts that she filed a
derivative suit in behalf of the corporation. This assertion is inaccurate.
Not every suit filed in behalf of the corporation is a derivative suit. For
a derivative suit to prosper, it is required that the minority stockholder
suing for and on behalf of the corporation must allege in his complaint
that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish
to join him in the suit. It is a condition sine qua non that the
corporation be impleaded as a party because not only is the

81

corporation an indispensable party, but it is also the present rule that it

must be served with process. The judgment must be made binding
upon the corporation in order that the corporation may get the benefit
of the suit and may not bring subsequent suit against the same
defendants for the same cause of action. In other words, the
corporation must be joined as party because it is its cause of action that
is being litigated and because judgment must be a res adjudicata
against it.
In the criminal complaint filed by herein respondent, nowhere is it
stated that she is filing the same in behalf and for the benefit of the
corporation. Thus, the criminal complaint including the civil aspect
thereof could not be deemed in the nature of a derivative suit
The recourse of the complainant to the respondent Court of Appeals
was, however, proper. The petition was brought in her own name and
in behalf of the Corporation. Although, the corporation was not a
complainant in the criminal action, the subject of the falsification was
the corporations project and the falsified documents were corporate
documents. Therefore, the corporation is a proper party in the petition
for certiorari because the proceedings in the criminal case directly and
adversely affected the corporation.
Heirs of Trinidad de Leon Vs. CA (422 SCRA 101)
Facts:
This is a petition to cite for indirect contempt the officers of
Meycauayan Central Realty Corporation (Meycauayan) for defying
the final and executory Decision and Resolution of this Court in G.R.
No. 118436 entitled Heirs of Manuel A. Roxas and Trinidad de Leon
Vda. De Roxas v. Court of Appeals and Maguesun Management &
Development Corporation (G.R. No. 118436).
This petition stems from a case filed by Trinidad de Leon Vda. De
Roxas to set aside the decree of registration over two unregistered
parcels of land in Tagaytay City granted to Maguesun Management and
Development Corporation (Maguesun) before the Regional Trial
Court on the ground of actual fraud. The trial court dismissed the
petition to set aside the decree of registration. On appeal, the Court of
Appeals denied the petition for review and affirmed the findings of the
trial court. On 21 March 1997, this Court reversed the appellate courts
decision in G.R. No. 118436.
On 22 May 1997, Meycauayan filed a Petition for Intervention in G.R.
No. 118436. Meycauayan alleged that on 14 May 1992, it purchased
three parcels of land from Maguesun which form part of the property
awarded to the heirs of Trinidad de Leon Vda. De Roxas (Roxas
heirs). Meycauayan contended that since it is a purchaser in good
faith and for value, the Court should afford it the opportunity to be
heard. Meycauayan contends that the adverse decision in G.R. No.
118436 cannot impair its rights as a purchaser in good faith and for
value.
The Court resolves to GRANT petitioners Motion for Clarification
together with the Supplement theretoordering the Register of Deeds
shall CANCEL OCT No. 0-515 and all its derivative titles,
namely, TCT Nos. T-25625, T-25626, T-25627, T-25628, T-25688, T25689, and T-25690, the latter three being already in the
name of Meycauayan Realty and Development Corporation
(also designated as Meycauayan Central Realty, Inc. and
Meycauayan Realty Corporation).
On 20 April 1999, Meycauayan filed a Complaint for reconveyance,
damages and quieting of title with the trial court entitled Meycauayan
Central Realty Corp. v. Heirs of Manuel A. Roxas and Trinidad de Leon
Vda. de Roxas, Maguesun Management and Development Corp.,
Register of Deeds of Tagaytay City, City Assessor of Tagaytay City and
Land Registration Authority. The Complaint is almost an exact
reproduction of the Petition for Intervention filed by Meycauayan
before this Court.

Issue:
W/N the offcers of Meycauyan may be held for indirect contempt
Ruling:
Meycauayans Executive Vice-President Juan M. Lamson, Jr. guilty of
indirect contempt. We also find that Meycauayan committed forum
shopping, and thus Meycauayan and its Executive Vice President Juan
M. Lamson, Jr. are guilty of direct contempt.
Meycauayans obstinate refusal to abide by the Courts Decision in G.R.
No. 118436 has no basis in view of this Courts clear pronouncement to
the contrary. The fact that this Court specifically ordered the
cancelation of Meycauayans titles to the disputed parcels of land in the
Resolution dated 29 July 1998 should have laid to rest the issue of
whether the Decision and Resolution in G.R. No. 118436 is binding on
Meycauayan. Clearly, Meycauayans defiance of this Courts Decision
and Resolution by filing an action for reconveyance, quieting of title
and damages involving the same parcels of land which this Court
already decided with finality constitutes indirect contempt under
Section 3(d), Rule 71 of the Rules of Civil Procedure. Section 3(d) of
Rule 71 reads:
SEC. 3. Indirect contempt to be punished after charge and hearing.
After a charge in writing has been filed, and an opportunity given to the
respondent to comment thereon within such period as may be fixed by
the court and to be heard by himself or counsel, a person guilty of any
of the following acts may be punished for indirect contempt:
xxx
(d)
Any improper conduct tending, directly or indirectly, to
impede, obstruct, or degrade the administration of justice;
In Halili, et al. v. CIR, et al., this Court explained the concept of
contempt of court:
Contempt of court is a defiance of the authority, justice or dignity of the
court; such conduct as tends to bring the authority and administration
of the law into disrespect or to interfere with or prejudice parties
litigant or their witnesses during litigation.
Contempt of court is defined as a disobedience to the Court by acting in
opposition to its authority, justice and dignity. It signifies not only a
willful disregard or disobedience of the courts orders, but such
conduct as tends to bring the authority of the court and the
administration of law into disrepute or in some manner to impede the
due administration of justice.
Meycauayans continuing resistance to this Courts judgment is an
affront to the Court and to the sovereign dignity with which it is
clothed. Meycauayans persistent attempts to raise issues long since
laid to rest by a final and executory judgment of no less than the
highest tribunal of the land constitute contumacious defiance of the
authority of this Court and impede the speedy administration of
justice.
In this case, Meycauayan Executive Vice President Juan M. Lamson,
Jr. caused the preparation and the filing of the Petition for Intervention
in G.R. No. 118436 and the Complaint for Reconveyance, Damages and
Quieting of Title with the trial court. Juan M. Lamson, Jr. signed the
verification and certification of non-forum shopping for the Petition for
Intervention and the Complaint for Reconveyance, Damages and
Quieting of Title. Even though a judgment, decree, or order is
addressed to the corporation only, the officers, as well as the
corporation itself, may be punished for contempt for disobedience to
its terms, at least if they knowingly disobey the courts mandate, since a
lawful judicial command to a corporation is in effect a command to the
officers. Thus, for improper conduct tending to impede the orderly

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administration of justice, Meycauayan Executive Vice President Juan

M. Lamson, Jr. should be fined ten thousand pesos (P10,000).
Moreover, Meycauayans act of filing a Complaint for Reconveyance,
Quieting of Title and Damages raising the same issues in its Petition for
Intervention, which this Court had already denied, also constitutes
forum shopping.
In this case, the Court had already rejected Meycauayans claim on the
subject lots when the Court denied Meycauayans Petition for
Intervention in G.R. No. 118436. The Court ruled that there had been
no intervening rights of an innocent purchaser for value involving the
lots in dispute. The Decision of this Court in G.R. No. 118436 is already
final and executory. The filing by Meycauayan of an action to relitigate the title to the same property, which this Court had already
adjudicated with finality, is an abuse of the courts processes and
constitutes direct contempt.
Section 5 of Rule 7 of the Rules of Court provides that if the acts of the
party or his counsel clearly constitute willful and deliberate forum
shopping, the same shall be a ground for summary dismissal with
prejudice and shall constitute direct contempt, as well as a cause for
administrative sanctions. The fact that Meycauayan did mention in its
certification of non-forum shopping its attempt to intervene in G.R.
No. 118436, which this Court denied, does not negate the existence of
forum shopping. This disclosure does not exculpate Meycauayan for
deliberately seeking a friendlier forum for its case and re-litigating an
issue which this Court had already decided with finality.
The general rule is that a corporation and its officers and agents may
be held liable for contempt. A corporation and those who are officially
responsible for the conduct of its affairs may be punished for contempt
in disobeying judgments, decrees, or orders of a court made in a case
within its jurisdiction.
Under Section 1 of Rule 71 of the Rules of Court, direct contempt is
punishable by a fine not exceeding two thousand pesos (P2,000) or
imprisonment not exceeding ten (10) days, or both, if committed
against a Regional Trial Court or a court of equivalent or higher rank.
Hence, Meycauayan and its Executive Vice President Juan M. Lamson,
Jr. are each fined P2,000 for direct contempt of court for forum
shopping.

Issue:
W/N respondents Jesus Typoco and Tan Yu are solidarily liable with
MPC
Ruling:
These two respondents are not liable.
Section 31 of the Corporation Code (Batas Pambansa Blg. 68) provides:
Section 31. Liability of directors, trustees or officers. Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence
or bad faith x x x shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders and
other persons.
The personal liability of corporate officers validly attaches only when
(a) they assent to a patently unlawful act of the corporation; or (b) they
are guilty of bad faith or gross negligence in directing its affairs; or (c)
they incur conflict of interest, resulting in damages to the corporation,
its stockholders or other persons.
The records are bereft of any evidence that Typoco acted in bad faith
with gross or inexcusable negligence, or that he acted outside the scope
of his authority as company president. The unilateral termination of
the Contract during the existence of the TRO was indeed contemptible
-- for which MPC should have merely been cited for contempt of court
at the most -- and a preliminary injunction would have then stopped
work by the second contractor. Besides, there is no showing that the
unilateral termination of the Contract was null and void.
Respondent Tan is not an officer or a director of MPC. His
participation is limited to an alleged conversation between him and
Engineer Mario Cornista, petitioners project manager. Supposedly,
the former verbally agreed therein to guarantee the payment of the
latters progress billings. We find no satisfactory evidence to show
respondents alleged solidary liability to petitioner.
Section 32

HL Carlos Vs. MARINA (421 SCRA 428)

Facts:
MARINA PROPERTIES CORPORATION is engaged in the business of
real estate development. On May 10, 1988, MPC entered into a
contract with H.L. CARLOS CONSTRUCTION, INC. to construct Phase
III of a condominium complex called MARINA BAYHOMES
CONDOMINIUM PROJECT, consisting of townhouses and villas,
totaling 31 housing units, for a total consideration of P38,580,609.00,
within a period of 365 days from receipt of Notice to Proceed. The
original completion date of the project was May 16, 1989, but it was
extended to October 31, 1989 with a grace period until November 30,
1989.
The contract was signed by Jovencio F. Cinco, president of MPC, and
Honorio L. Carlos, president of HLC.
On December 15, 1989, HLC instituted this case for sum of money
against not only MPC but also against the latters alleged president,
Jesus K. Typoco, Sr. and Tan Yu, seeking the payment of various sums
with an aggregate amount of P14 million pesos.
The trial court rendered for H.L. CARLOS CONSTRUCTION, INC. and
as against MARINA PROPERTIES CORPORATION, TAN YU, and
JESUS K. TYPOCO, SR., who are hereby ordered to pay, jointly and
severally, the petitioner.

Dealings of directors, trustees or officers with the

corporation. - A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances;
and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances.

83

Mead Vs. McCullough (21 Phil 95)

assets to one of its members was made by the unanimous consent of all
the directors in the corporation at that time.

Facts:
Mead and the "Philippine Engineering and Construction Company,"
the incorporators being the only stockholders and also the directors of
said company, with general ordinary powers. Each of the stockholders
paid into the company $2,000 Mexican currency in cash, with the
exception of Mead, who turned over to the company personal property
in lieu of cash.
Shortly after the organization, the directors held a meeting and elected
the Mead as general manager. He held this position with the company
for nine months, when he resigned to accept the position of Engineer of
the Canton and Shanghai Railway Company.
Under the organization the company began business about April 1, 102.
The contract and work undertaken by the company during the
management of Mead were the wrecking contract with the Navy
Department at Cavite for the raising of the Spanish ships sunk by
Admiral Dewey; the contract for the construction of certain warehouses
for the quartermaster department; the construction of a wharf at Fort
McKinley for the Government; The supervision of the construction of
the Pacific Oriental Trading Company's warehouse; and some other
odd jobs not specifically set out in the record.
Shortly after Mead left the Philippine Islands for China, the other
directors, the defendants in this case, held a meeting on December 24,
1903, for the purpose of discussing the condition of the company at
that time and determining what course to pursue.
The PECC, Mccullough as the President, entered into a contract
reffered to in the foregoing document was known as the wrecking
contract with the naval authorities.
On the 28th of the same month, McCullough executed and signed the
transfer of his right, title, and interest in the within contract, with the
exception of one sixth, which he hereby retain, to R. W. Brown, H. D. C.
Jones, John T. Macleod, and T. H. Twentyman.
The assignees of the wrecking contract, including McCullough, formed
was not known as the "Manila Salvage Association." This association
paid to McCullough $15,000 Mexican Currency cash for the
assignment of said contract. In addition to this payment, McCullough
retained a one-sixth interest in the new company or association.
Issue:
W/N a majority of the stockholders, who were at the same time a
majority of the directors of a corporation, have the power under the law
and its Articles of Agreement, to sell or transfer to one of its members
the assets of said corporation
Ruling:
When the sale or transfer heretofore mentioned took place, there were
present four directors, all of whom gave their consent to that sale or
transfer. The plaintiff was then about and his express consent to make
this transfer or sale was not obtained. He was, before leaving, one of
the directors in this corporation, and although he had resigned as
manager, he had not resigned as a director. He accepted the position of
engineer of the Canton and Shanghai Railway Company, knowing that
his duties as such engineer would require his whole time and attention
and prevent his returning to the Philippine Islands for at least a year or
more. The new position which he accepted in China was incompatible
with his position as director in the Philippine Engineering and
Construction Company, a corporation whose sphere of operations was
limited to the Philippine Islands. These facts are sufficient to constitute
an abandoning or vacating of hid position as director in said
corporation. Consequently, the transfer or sale of the corporation's

There were only five stockholders in this corporation at any time, four
of whom were the directors who made the sale, and the other the
plaintiff, who was absent in China when the said sale took place. The
sale was, therefore, made by the unanimous consent of four-fifths of all
the stockholders. Under the articles of incorporation, the stockholders
and directors had general ordinary powers. There is nothing in said
articles which expressly prohibits the sale or transfer of the corporate
property to one of the stockholders of said corporation.
Articles 1700 to 1708 of the Civil Code deal with the manner of
dissolving a corporation. There is nothing in these articles which
expressly or impliedly prohibits the sale of corporate property to one of
its members, nor a dissolution of a corporation in this manner. Neither
is there anything in articles 151 to 174 of the Code of Commerce which
prohibits the dissolution of a corporation by such sale or transfer.
Article XIII of the corporation's statutes expressly provides that "in all
the meetings of the stockholders, a majority vote of the stockholders
present shall be necessary to determine any question discussed."
The sale or transfer to one of its members was a matter which a
majority of the stockholders could very properly consider. But it i said
that if the acts and resolutions of a majority of the stockholders in a
corporation are binding in every case upon the minority, the minority
would be completely wiped out and their rights would be wholly at the
mercy of the abuses of the majority.
Generally speaking, the voice of a majority of the stockholders is the
law of the corporation, but there are exceptions to this rule. There must
necessarily be a limit upon the power of the majority. Without such a
limit the will of the majority would be absolute and irresistible and
might easily degenerate into an arbitrary tyranny. The reason for these
limitations is that in every contract of partnership (and a corporation
can be something fundamental and unalterable which is beyond the
power of the majority of the stockholders, and which constitutes the
rule controlling their actions. this rule which must be observed is to be
found in the essential compacts of such partnership, which gave served
as a basis upon which the members have united, and without which it
is not probable that they would have entered not the corporation.
Notwithstanding these limitations upon the power of the majority of
the stockholders, their (the majority's) resolutions, when passed in
good faith and for a just cause, deserve careful consideration and are
generally binding upon the minority.
The resolutions of the boards passed by a majority vote are valid . . .
and authority for passing such resolutions is unlimited, provided that
the original contract is not broken by them, the partnership funds not
devoted to foreign purposes, or the partnerships transformed, or
changes made which are against public policy or which infringe upon
the rights of third persons.
McCullough did not represent the corporation in this transaction. It
was represented by a quorum of the board of directors, who were at the
same time a majority of the stockholders. Ordinarily, McCullough's
duties as president were to preside at the meetings, rule on questions
of order, vote in case of a tie, etc. He could not have voted in this
transaction because there was no tie.
The acts of Hilbert, Green, Hartigan, and McCullough in this
transaction, in view of the relations which they bore to the corporation,
are subject to the most severe scrutiny. They are obliged to establish
that they acted with the utmost candor and fair dealing for the interest
of the corporation, and without taint motives. We have subjected their
conduct to this test, and, under the evidence, we believe it has safely
emerged from the ordeal.
Transaction which only accomplish justice, which are done in good
faith and operate legal injury to no one, lack the characteristics of fraud

84

and are not to be upset because the relations of the parties give rise to
suspicions which are fully cleared away. (Hancock vs. Holbrook,supra)
We therefore conclude that the sale or transfer made by the quorum of
the board of directors a majority of the stockholders is valid and
binding upon the majority-the plaintiff. This conclusion is not in
violation of the articles of incorporation of the Philippine Engineering
and Construction Company. Nor do we here announce a doctrine
contrary to that announced by the supreme court of Spain in its
decisions dated April 2, 1862, and July 8, 1903.
Section 33
Contracts
between
corporations
with
interlocking
directors. - Except in cases of fraud, and provided the contract is fair
and reasonable under the circumstances, a contract between two or
more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the
interlocking director in one corporation is substantial and his interest
in the other corporation or corporations is merely nominal, he shall be
subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.
Palting Vs. San Jose (18 SCRA 924)
SAN JOSE PETROLEUM filed with the Philippine Securities and
Exchange Commission a sworn registration statement, for the
registration and licensing for sale in the Philippines Voting Trust
Certificates representing 2,000,000 shares of its capital stock of a par
value of $0.35 a share, at P1.00 per share. It was alleged that the entire
proceeds of the sale of said securities will be devoted or used
exclusively to finance the operations of San Jose Oil Company, Inc. (a
domestic mining corporation hereafter to be referred to as SAN JOSE
OIL) which has 14 petroleum exploration concessions covering an area
of a little less than 1,000,000 hectares, located in the provinces of
Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and
Agusan. It was the express condition of the sale that every purchaser of
the securities shall not receive a stock certificate, but a registered or
bearer-voting-trust certificate from the voting trustees named therein
James L. Buckley and Austin G.E. Taylor, the first residing in
Connecticut, U.S.A., and the second in New York City.
While this application for registration was pending consideration by
the Securities and Exchange Commission, SAN JOSE PETROLEUM
filed an amended Statement on June 20, 1958, for registration of the
sale in the Philippines of its shares of capital stock, which was
increased from 2,000,000 to 5,000,000, at a reduced offering price of
from P1.00 to P0.70 per share. At this time the par value of the shares
has also been reduced from $.35 to $.01 per share.
Pedro R. Palting and others, allegedly prospective investors in the
shares of SAN JOSE PETROLEUM, filed with the Securities and
Exchange Commission an opposition to registration and licensing of
the securities on the grounds that (1) the tie-up between the issuer,
SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE
OIL, a domestic corporation, violates the Constitution of the
Philippines, the Corporation Law and the Petroleum Act of 1949; (2)
the issuer has not been licensed to transact business in the Philippines;
(3) the sale of the shares of the issuer is fraudulent, and works or tends
to work a fraud upon Philippine purchasers; and (4) the issuer as an
enterprise, as well as its business, is based upon unsound business
principles.
SAN JOSE PETROLEUM claimed that it was a "business enterprise"
enjoying parity rights under the Ordinance appended to the
Constitution, which parity right, with respect to mineral resources in
the Philippines, may be exercised, pursuant to the Laurel-Langley
Agreement, only through the medium of a corporation organized under

the laws of the Philippines. Thus, registrant which is allegedly qualified

to exercise rights under the Parity Amendment, had to do so through
the medium of a domestic corporation, which is the SAN JOSE OIL. It
refused the contention that the Corporation Law was being violated, by
alleging that Section 13 thereof applies only to foreign corporations
doing business in the Philippines, and registrant was not doing
business here. The mere fact that it was a holding company of SAN
JOSE OIL and that registrant undertook the financing of and giving
technical assistance to said corporation did not constitute transaction
of business in the Philippines. Registrant also denied that the offering
for sale in the Philippines of its shares of capital stock was fraudulent
or would work or tend to work fraud on the investors. On August 29,
1958, and on September 9, 1958 the Securities and Exchange
Commissioner issued the orders object of the present appeal.
Issue:
W/N the sale of San Jose's securities is fraudulent, or would work or
tend to work fraud to purchasers of such securities in the Philippines
Ruling:
The relationship of these corporations involved or affected in this case
is admitted and established through the papers and documents which
are parts of the records: SAN JOSE OIL, is a domestic mining
corporation, 90% of the outstanding capital stock of which is owned by
respondent SAN JOSE PETROLEUM, a foreign (Panamanian)
corporation, the majority interest of which is owned by OIL
INVESTMENTS, Inc., another foreign (Panamanian) company. This
latter corporation in turn is wholly (100%) owned by PANTEPEC OIL
COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A.,
both organized and existing under the laws of Venezuela. As of
September 30, 1956, there were 9,976 stockholders of PANCOASTAL
PETROLEUM found in 49 American states and U.S. territories, holding
3,476,988 shares of stock; whereas, as of November 30, 1956,
PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by
12,373 stockholders scattered in 49 American state. In the two lists of
stockholders, there is no indication of the citizenship of these
stockholders, or of the total number of authorized stocks of each
corporation, for the purpose of determining the corresponding
percentage of these listed stockholders in relation to the respective
capital stock of said corporation.
Some of the provisions of the Articles of Incorporation of respondent
SAN JOSE PETROLEUM are noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director may be
represented and may vote through a proxy who also need not be a
director or stockholder; and
(3) that no contract or transaction between the corporation and any
other association or partnership will be affected, except in case of
fraud, by the fact that any of the directors or officers of the corporation
is interested in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of the
corporation with any other person or persons, firm, association or
partnership shall be affected by the fact that any director or officer of
the corporation is a party to or has an interest in, such contract or
transaction, or has in anyway connected with such other person or
persons, firm, association or partnership; and finally, that all and any
of the persons who may become director or officer of the corporation
shall be relieved from all responsibility for which they may otherwise
be liable by reason of any contract entered into with the corporation,
whether it be for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation law and
corporate practices in this country. These provisions alone would
outlaw any corporation locally organized or doing business in this
jurisdiction. Consider the unique and unusual provision that no

85

contract or transaction between the company and any other association

or corporation shall be affected except in case of fraud, by the fact that
any of the directors or officers of the company may be interested in or
are directors or officers of such other association or corporation; and
that none of such contracts or transactions of this company with any
person or persons, firms, associations or corporations shall be affected
by the fact that any director or officer of this company is a party to or
has an interest in such contract or transaction or has any connection
with such person or persons, firms associations or corporations; and
that any and all persons who may become directors or officers of this
company are hereby relieved of all responsibility which they would
otherwise incur by reason of any contract entered into which this
company either for their own benefit, or for the benefit of any person,
firm, association or corporation in which they may be interested.
The impact of these provisions upon the traditional judiciary
relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are called
upon to protect the interest of investors. The directors and officers of
the company can do anything, short of actual fraud, with the affairs of
the corporation even to benefit themselves directly or other persons or
entities in which they are interested, and with immunity because of the
advance condonation or relief from responsibility by reason of such
acts. This and the other provision which authorizes the election of nonstockholders as directors, completely disassociate the stockholders
from the government and management of the business in which they
have invested.
To assure continuity of the management and stability of SAN JOSE
PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed
stock of the former corporation and acting "on behalf of all future
holders of voting trust certificates," entered into a voting trust
agreement with James L. Buckley and Austin E. Taylor, whereby said
Trustees were given authority to vote the shares represented by the
outstanding trust certificates (including those that may henceforth be
issued) in the following manner:
(a) At all elections of directors, the Trustees will designate a suitable
proxy or proxies to vote for the election of directors designated by the
Trustees in their own discretion, having in mind the best interests of
the holders of the voting trust certificates, it being understood that
any and all of the Trustees shall be eligible for election as directors ;
(b) On any proposition for removal of a director , the Trustees shall
designate a suitable proxy or proxies to vote for or against such
proposition as the Trustees in their own discretion may determine,
having in mind the best interest of the holders of the voting trust
certificates ;
(c) With respect to all other matters arising at any meeting of
stockholders, the Trustees will instruct such proxy or proxies attending
such meetings to vote the shares of stock held by the Trustees in
accordance with the written instructions of each holder of voting trust
certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be binding
upon the parties thereto, their successors, and upon all holders of
voting trust certificates.
And these are the voting trust certificates that are offered to investors
as authorized by Security and Exchange Commissioner. It can not be
doubted that the sale of respondent's securities would, to say the least,
work or tend to work fraud to Philippine investors.
Gokongwei Vs. SEC (89 SCRA 336)
Facts:
Gokongwei, as stockholder of respondent San Miguel Corporation,
filed with the Securities and Exchange Commission (SEC) a petition for
"declaration of nullity of amended by-laws, cancellation of certificate of
filing of amended by-laws, injunction and damages with prayer for a

preliminary injunction" against the majority of the members of the

Board of Directors and San Miguel Corporation as an unwilling
petitioner.
Petitioner filed with the SEC a Manifestation stating that he intended
to run for the position of director of respondent corporation.
Thereafter, respondents filed a Manifestation with respondent
Commission, submitting a Resolution of the Board of Directors of
respondent corporation disqualifying and precluding petitioner from
being a candidate for director unless he could submit evidence on May
3, 1977 that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case No. 1375. By
reason thereof, petitioner filed a manifestation and motion to resolve
pending incidents in the case and to issue a writ of injunction, alleging
that private respondents were seeking to nullify and render ineffectual
the exercise of jurisdiction by the respondent Commission, to
petitioner's irreparable damage and prejudice. Allegedly despite a
subsequent Manifestation to prod respondent Commission to act,
petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted
inability on the part of the SEC to act, hence petitioner came to this
Court.
Petitioner likewise alleges that, having discovered that respondent
corporation has been investing corporate funds in other corporations
and businesses outside of the primary purpose clause of the
corporation, in violation of section 17-1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition
seeking to have private respondents Andres M. Soriano, Jr. and Jose
M. Soriano, as well as the respondent corporation declared guilty of
such violation, and ordered to account for such investments and to
answer for damages.
With respect to the afore-mentioned SEC cases, it is petitioner's
contention before this Court that respondent Commission gravely
abused its discretion when it failed to act with deliberate dispatch on
the motions of petitioner seeking to prevent illegal and/or arbitrary
impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioner's rights to property and due
process. He prayed that this Court direct respondent SEC to act on
collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order
restraining private respondents from disqualifying or preventing
petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or
from causing the ratification or confirmation of Item 6 of the Agenda of
the annual stockholders' meeting on May 10, 1977, or from making
effective the amended by-laws of respondent corporation, until further
orders from this Court or until the Securities and Exchange
Commission acts on the matters complained of in the instant petition.
Issues:
W/N the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of
Directors are valid and reasonable
Ruling:
In this jurisdiction under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications, duties and
compensation of directors, officers and employees . . ." This must
necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director
must own in his right at least one share of the capital stock of the stock
corporation of which he is a director . . ."
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by law."

86

To this extent, therefore, the stockholder may be considered to have

"parted with his personal right or privilege to regulate the disposition
of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow
incorporators. . . . It can not therefore be justly said that the contract,
express or implied, between the corporation and the stockholders is
infringed . . . by any act of the former which is authorized by a
majority . . ."
Pursuant to section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock of the corporation. If the amendment changes, diminishes or
restricts the rights of the existing shareholders, then the dissenting
minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law, the
owners of the majority of the subscribed capital stock may amend or
repeal any by-law or adopt new by-laws. It cannot be said, therefore,
that petitioner has a vested right to be elected director, in the face of
the fact that the law at the time such right as stockholder was acquired
contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification.
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be
considered is whether the disqualification of a competitor from being
elected to the Board of Directors is a reasonable exercise of corporate
authority.
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt
that their character is that of a fiduciary insofar as the corporation and
the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." "
It is not denied that a member of the Board of Directors of the San
Miguel Corporation has access to sensitive and highly confidential
information, such as: (a) marketing strategies and pricing structure;
(b) budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of
a competing corporation, from taking advantage of the information
which he acquires as director to promote his individual or corporate
interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
The offer and assurance of petitioner that to avoid any possibility of his
taking unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running for
board membership which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would
be against all accepted principles underlying a director's duty of fidelity
to the corporation, for the policy of the law is to encourage and enforce
responsible corporate management.
Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation
would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the
strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to
his advantage.

There is another important consideration in determining whether or

not the amended by-laws are reasonable. The Constitution and the law
prohibit combinations in restraint of trade or unfair competition. Thus,
section 2 of Article XIV of the Constitution provides: "The State shall
regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition
shall be allowed."
Article 186 of the Revised Penal Code also provides:
"Art. 186.Monopolies and combinations in restraint of trade. The
penalty of prision correccional in its minimum period or a fine ranging
from two hundred to six thousand pesos, or both, shall be imposed
upon.
Obviously, if a competitor has access to the pricing policy and cost
conditions of the products of San Miguel Corporation, the essence of
competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated. The
competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out
of the consumers. Where the two competing firms control a substantial
segment of the market this could lead to collusion and combination in
restraint of trade. Reason and experience point to the inevitable
conclusion that the inherent tendency of interlocking directorates
between companies that are related to each other as competitors is to
blunt the edge of rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate competition. As
respondent SMC aptly observes, knowledge by CFC-Robina of SMC's
costs in various industries and regions in the country will enable the
former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups
and change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most profitable
volume at which it could produce for every product line in which it
competes with SMC. Access to SMC pricing policy by CFC-Robina
would in effect destroy free competition and deprive the consuming
public of opportunity to buy goods of the highest possible quality at the
lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent,
engaged in agriculture, then the election of petitioner to the Board of
SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any
stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely
for investment and not for the purpose of bringing about or attempting
to bring about a combination to exercise control of such
corporation)."
Neither are We persuaded by the claim that the by-law was intended to
prevent the candidacy of petitioner for election to the Board. If the bylaw were to be applied in the case of one stockholder but waived in the
case of another, then it could be reasonably claimed that the by-law
was being applied in a discriminatory manner. However, the by-law, by
its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible
to run for director, there must be hearing and evidence must be
submitted to bring his case within the ambit of the disqualification.
Sound principles of public policy and management, therefore, support
the view that a by-law which disqualifies a competition from election to
the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide
latitude may be accorded to the corporation in adopting measures to
protect legitimate corporate interests. Thus, "where the reasonableness
of a by-law is a mere matter of judgment, and upon which reasonable
minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have expressed their authority."
Section 34
Disloyalty of a director. - Where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the

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corporation, thereby obtaining profits to the prejudice of such

corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the
venture.

Section 35
Executive committee. - The by-laws of a corporation may create an
executive committee, composed of not less than three members of the
board, to be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters within the
competence of the board, as may be delegated to it in the by-laws or on
a majority vote of the board, except with respect to: (1) approval of any
action for which shareholders' approval is also required; (2) the filing
of vacancies in the board; (3) the amendment or repeal of by-laws or
the adoption of new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express terms is not so amendable
or repealable; and (5) a distribution of cash dividends to the
shareholders.
Filipinas Port Services Vs. Go (518 SCRA 453)
Facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filports president
from 1968 until he lost his bid for reelection as Filports president
during the general stockholders meeting in 1991, wrote a letter to the
corporations Board of Directors questioning the boards creation of the
following positions with a monthly remuneration of P13,050.00 each,
and the election thereto of certain members of the board.
In his aforesaid letter, Cruz requested the board to take necessary
action/actions to recover from those elected to the aforementioned
positions the salaries they have received.
On 14 June 1993, Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal
and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition
which he describes as a derivative suit against the herein respondents
who were then the incumbent members of Filports Board of Directors,
for alleged acts of mismanagement detrimental to the interest of the
corporation and its shareholders at large, namely, amomg others the
creation of an executive committee in 1991 composed of seven (7)
members of the board with compensation of P500.00 for each member
per meeting, an office which, to Cruz, is not provided for in the by-laws
of the corporation and whose function merely duplicates those of the
President and General Manager;
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz
alleged that despite demands made upon the respondent members of
the board of directors to desist from creating the positions in question
and to account for the amounts incurred in creating the same, the
demands were unheeded. Cruz thus prayed that the respondent
members of the board of directors be made to pay Filport, jointly and
severally, the sums of money variedly representing the damages
incurred as a result of the creation of the offices/positions complained
of and the aggregate amount of the questioned increased salaries.
Issue:
W/N CA erred in holding that Filports Board of Directors acted within
its powers in creating the executive committee and the positions of
AVPs for Corporate Planning, Operations, Finance and Administration,
and those of the Special Assistants to the President and the Board
Chairman, each with corresponding remuneration, and in increasing
the salaries of the positions of Board Chairman, Vice-President,
Treasurer and Assistant General Manager

Ruling:
The governing body of a corporation is its board of directors. Section
23 of the Corporation Code explicitly provides that unless otherwise
provided therein, the corporate powers of all corporations formed
under the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a board of
directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation within
the scope of its charter, i.e., its articles of incorporation, by-laws and
relevant provisions of law. Verily, the authority of the board of
directors is restricted to the management of the regular business affairs
of the corporation, unless more extensive power is expressly conferred.
The raison detre behind the conferment of corporate powers on the
board of directors is not lost on the Court. Indeed, the concentration in
the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a corporation to conduct
its business directly. And so the plan of corporate organization is for
the stockholders to choose the directors who shall control and
supervise the conduct of corporate business.
In the present case, the boards creation of the positions of Assistant
Vice Presidents for Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to the President
and the Board Chairman, was in accordance with the regular business
operations of Filport as it is authorized to do so by the corporations
by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section
25 of the Code. Also, the amended Bylaws of Filport provides that
Officers of the corporation, as provided for by the by-laws,
shall be elected by the board of directors at their first meeting
after the election of Directors.
Likewise, the fixing of the corresponding remuneration for the
positions in question is provided for in the same by-laws of the
corporation, that xxx The Board of Directors shall fix the
compensation of the officers and agents of the corporation.
Unfortunately, the bylaws of the corporation are silent as to the
creation by its board of directors of an executive committee. Under
Section 35 of the Corporation Code, the creation of an executive
committee must be provided for in the bylaws of the corporation.
Notwithstanding the silence of Filports bylaws on the matter, we
cannot rule that the creation of the executive committee by the board of
directors is illegal or unlawful. One reason is the absence of a showing
as to the true nature and functions of said executive committee
considering that the executive committee, referred to in Section 35 of
the Corporation Code which is as powerful as the board of directors
and in effect acting for the board itself, should be distinguished from
other committees which are within the competency of the board to
create at anytime and whose actions require ratification and
confirmation by the board. Another reason is that, ratiocinated by
both the two (2) courts below, the Board of Directors has the power to
create positions not provided for in Filports bylaws since the board is
the corporations governing body, clearly upholding the power of its
board to exercise its prerogatives in managing the business affairs of
the corporation.
As well, it may not be amiss to point out that, as testified to and
admitted by petitioner Cruz himself, it was during his incumbency as
Filport president that the executive committee in question was
created, and that he was even the one who moved for the creation of
the positions of the AVPs for Operations, Finance and Administration.
By his acquiescence and/or ratification of the creation of the aforesaid
offices, Cruz is virtually precluded from suing to declare such acts of
the board as invalid or illegal. And it makes no difference that he sues

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in behalf of himself and of the other stockholders. Indeed, as his voice

was not heard in protest when he was still Filports president, raising a
hue and cry only now leads to the inevitable conclusion that he did so
out of spite and resentment for his non-reelection as president of the
corporation.
With regard to the increased emoluments of the Board Chairman, VicePresident, Treasurer and Assistant General Manager which are
supposedly disproportionate to the volume and nature of their work,
the Court, after a judicious scrutiny of the increase vis--vis the value
of the services rendered to the corporation by the officers concerned,
agrees with the findings of both the trial and appellate courts as to the
reasonableness and fairness thereof.

The Members of Tramo Wakas Neighborhood Association, represented

by Dominga Magno, lodged before the Presidential Action Center a
petition praying that ownership over three (3) parcels of land situated
in Barangay San Dionisio, Paraaque, Metro Manila with an aggregate
area of 35,195 square meters be awarded to them. In their petition,
respondents alleged that petitioner claims ownership of the subject lots
which they have openly, peacefully and continuously occupied since
1957.

Section 36

The petition was referred to the Land Management Bureau (LMB) for
investigation and hearing. Director Abelardo G. Palad, Jr. of the LMB
found for respondents declaring that the claim of Pascual and Santos,
Inc., over the three lots is, dismissed and the individual members of
TRAMO WAKAS NEIGHBORHOOD ASSOCIATION, now represented
by Dominga Magno, if qualified may file appropriate public land
applications over the land they actually possessed and occupied. An
individual survey shall be conducted on the land at their own expense
and after approval of the said survey the same shall be given due
course.

Corporate powers and capacity. - Every corporation

incorporated under this Code has the power and capacity:

Issue:

TITLE IV
POWERS OF CORPORATION

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and
to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to
the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction
of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public welfare
or for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of
incorporation.
Pascual & Santos Vs. Members of Tramo (442 SCRA 438)
Facts:

W/N the persons who executed the verification and certification of

non-forum shopping attached to PSIs manifestation/petition for
review filed with the court of appeals were authorized to do so
Ruling:
The requirement that the petitioner should sign the certificate of nonforum shopping applies even to corporations, considering that the
mandatory directives of the Rules of Court make no distinction
between natural and juridical persons.
In the case at bar, the CA dismissed the petition before it on the ground
that Lombos and Pascual, the signatories to the verification and
certification on non-forum shopping, failed to show proof that they
were authorized by petitioners board of directors to file such a
petition.
Except for the powers which are expressly conferred on it by the
Corporation Code and those that are implied by or are incidental to its
existence, a corporation has no powers. It exercises its powers through
its board of directors and/or its duly authorized officers and agents.
Thus, its power to sue and be sued in any court is lodged with the
board of directors that exercises its corporate powers. Physical acts,
like the signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate by-laws or by a
specific act of the board of directors.
It is undisputed that when the petition for certiorari was filed with the
CA, there was no proof attached thereto that Lombos and Pascual were
authorized to sign the verification and non-forum shopping
certification. Subsequent to the CAs dismissal of the petition,
however, petitioner filed a motion for reconsideration to which it
attached a certificate issued by its board secretary stating that on
February 11, 2000 or prior to the filing of the petition, Lombos and
Pascual had been authorized by petitioners board of directors to file
the petition before the CA.
This Court has ruled that the subsequent submission of proof of
authority to act on behalf of a petitioner corporation justifies the
relaxation of the Rules for the purpose of allowing its petition to be
given due course.
It must also be kept in mind that while the requirement of the
certificate of non-forum shopping is mandatory, nonetheless the
requirements must not be interpreted too literally and thus defeat the
objective of preventing the undesirable practice of forum shopping.
LIDECO Vs. CA (272 SCRA 256)

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presumed to know by which name it is registered, and the legal

provisions on the use of its corporate name.
Facts:
Spouses Reynaldo Laureano and Florence Laureano are majority
stockholders of petitioner Corporation who entered into a series of loan
and credit transactions with Philippine National Cooperative Bank
(PNCB for short). To secure payment of the loans, they executed Deeds
of Real Estate Mortgage. In view of their failure to pay their
indebtedness, PNCB applied for extrajudicial foreclosure of the real
estate mortgages. The bank was the purchaser of the properties in
question in the foreclosure sale and titles thereof were consolidated in
PNCB's name. PNCB did not secure a writ of possession nor did it file
ejectment proceedings against the Laureano spouses, because there
were then pending cases, such as . . . involving the titles of ownership
of subject two lots, which are situated at Bel-Air Subdivision, Makati,
Metro Manila.
Bormaheco, Inc. became the successor of the obligations and liabilities
of PNCB over subject lots by virtue of a Deed of Sale/Assignment
wherein Bormaheco bought from PNCB under a bulk sale titled and
untitled properties including the two parcels of land in question,
formerly registered in the name of the Laureano spouses. Transfer
Certificate of Title over the lots in question was issued in the name of
Bormaheco.
Five (5) days after securing titles over the said properties, Bormaheco
filed an "Ex-Parte Petition for the Issuance of Writ of Possession of the
2 lots situated at Bel-Air Village, Makati, Metro Manila. Petitioner
Corporation filed its Motion for Intervention and to Admit Attached
Complaint in Intervention in said case.
Bormaheco filed its Motion to Strike out the Complaint in Intervention
and all related pleadings filed by LIDECO Corporation.
Petitioner contends that private respondent is estopped from, and is in
bad faith for, denying its knowledge that "Lideco Corporation" and
Laureano Investment and Development Corporation are one and the
same entity since it has previously used LIDECO as an acronym for the
latter corporation.
Petitioner contends that it was private respondent which first made use
of LIDECO as a shorter term for Laureano Investment and
Development Corporation when it filed its first motion to strike dated
January 9, 1989, prior to the filing by "Lideco Corporation" of its
motion for intervention and complaint in intervention on January 18,
1989. Hence, private respondent should be considered estopped from
denying that petitioner and "Lideco Corporation" are one and the same
corporation.

Section 1, Rule 3 of the Rules of Court provides that only natural or

juridical persons or entities authorized by law may be parties to a civil
action. Under the Civil Code, a corporation has a legal personality of its
own (Article 44), and may sue or be sued in its name, in conformity
with the laws and regulations of its organization (Article 46).
Additionally, Article 36 of the Corporation Code similarly provides:
Art. 36. Corporate powers and capacity . Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name ;
"Lideco Corporation" had no personality to intervene since it had not
been duly registered as a corporation. If petitioner legally and truly
wanted to intervene, it should have used its corporate name as the law
requires and not another name which it had not registered. Indeed,
nowhere in the motion for intervention and complaint in intervention
does it appear that "Lideco Corporation" stands for Laureano
Investment and Development Corporation. Bormaheco, Inc., thus, was
not estopped from questioning the juridical personality of "Lideco
Corporation," even after the trial court had allowed it to intervene in
the case.
Granting arguendo that the name "Lideco Corporation" could be used
by petitioner corporation in its motion, there is an even more cogent
reason for denying the petition. The trial court concluded, and we have
no reason to disagree, that the intervention of Lideco or petitioner
corporation was not proper because neither had any legal interest in
the subject of litigation. The evidence (tax declarations) attached to the
petition for intervention and the complaint for intervention pertained
to properties not being litigated in the instant case. Lideco and
Petitioner Corporation both claimed to have an interest in two houses
constructed in Lot 3, Block 4 in Bel Air Village, Makati. The subject
matter of the instant petition, on the other hand, are Lots 4 and 5,
Block 4, of Bel Air Village.
Special Services Vs. Centro la Paz (272 SCRA 256)
Facts:
Judgment was rendered in favor of petitioner Special Services
Corporation by the Court of First Instance, Branch IV, Manila, against
one Alejandro Estudillo in the amount of P94,727.52, more or less, in
an action for Replevin with Sum of Money. A writ of execution was
thereafter issued but which has remained unsatisfied.

Issue:
Whether Respondent Bormaheco, Inc. is estopped from contesting the
legal personality to sue of "Lideco Corporation"

Ruling:
Examining the records of the case, we observe that the motion adverted
to indeed made use of LIDECO as an acronym for Laureano
Investment and Development Corporation. But said motion distinctly
specified that LIDECO was the shorter term for Laureano Investment
and Development Corporation. It is obvious that no false
representation or concealment can be attributed to private respondent.
Neither can it be charged with conveying the impression that the facts
are other than, or inconsistent with, those which it now asserts since
LIDECO, as an acronym, is clearly different from "Lideco Corporation"
which represented itself as a corporation duly registered and organized
in accordance with law. Nor can it be logically inferred that petitioner
relied or acted upon such representation of private respondent in
thereafter referring to itself as "Lideco Corporation;" for petitioner is

By virtue of an alias writ of execution, the Sheriff of Manila caused the

annotation of a notice of levy on Transfer Certificate of Title No. 51837,
in respect of the rights, interest and participation of said Alejandro
Estudillo, one of the registered owners indicated in said title. The title
covers two parcels of land situated in Sampaloc, Manila, consisting of
three hundred forty eight (348) square meters and registered in the
names of Alejandro Estudillo, married to Primitiva Victoria; Joaquina
de la Rosa, widow; Pedro Paguio, married to Amor Jose and Maximo
Victoria, married to Juliana Roberto, all Chapter members.
The public auction sale of Estudillo's rights and interests in said
properties was then scheduled on July 23, 1973.
Alejandro Estudillo filed a Motion to Dissolve and/or Cancel the
Notice of Levy alleging that he and the other registered owners
indicated on the title merely held in trust the properties and
improvements thereon in favor of respondent Centro La Paz
(Samahang Espiritista Sa Lunduyang La Paz) a Chapter of Union
Espiritista Cristiana de Filipinas, Inc.

90

On July 21, 1973, CENTRO submitted a third party claim to the Sheriff
of Manila likewise averring exclusive ownership of the properties in
question.
Issue:

diminution of the capital stock or the incurring or increasing of any

bonded indebtedness is to be considered, must be addressed to each
stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.

W/N Centro La Paz which is merely a Chapter of Union Espiritista de

Filipinas, Inc. has a juridical personality of its own in accordance with
the provisions of our laws

A certificate in duplicate must be signed by a majority of the directors

of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth:

Ruling:
Although it was CENTRO that was actively prosecuting the case, in
substance, it was representing the mother organization, the Union
Espiritista Cristiana de Filipinas, Inc., which is the real party in interest
and is itself named in the Complaint. It is an organization that is duly
registered with the Securities and Exchange Commission, and thus
possessed of a juridical personality to sue and be sued.
The evidence sufficiently establishes that the registered owners of the
parcels of land, all of whom are members of CENTRO, hold the
properties in trust for CENTRO by virtue of the indubitable documents
executed even before the institution of suit. The fact of registration in
the name of Alejandro Estudillo and others does not bar evidence to
show that the registered owners hold the properties in trust for
CENTRO.
Admittedly, the trust was not registered in accordance with section 65
of Act 496 (the former Land Registration Law). The absence of said
registration, however, cannot be taken against CENTRO inasmuch as,
if the public auction sale had actually been held, with petitioner as the
successful buyer, petitioner could not have been considered a
purchaser for value and in good faith at said sale since it had
knowledge of CENTRO's claim, particularly when the latter had filed a
third-party-claim with the Sheriff of Manila before the scheduled
auction sale, which knowledge was equivalent to registration of the
several "Acknowledgments" in the Registry of Deeds.
The conclusion follows that inasmuch as Estudillo has no interest in
the properties in question, there is nothing that petitioner can levy
upon. The power of a Court in the execution of its judgment extends
only over properties unquestionably belonging to the judgment debtor.
Section 37
Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of
directors or trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under
the conditions provided in this code.
Section 38
Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the time and place of
the stockholder's meeting at which the proposed increase or

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property, or
the amount of capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the purpose of
making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has
been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription: Provided, further,
That no decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the members in a meeting
duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
Ong Yong Vs. Tiu (401 SCRA 1)
Facts:

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The construction of the Masagana Citimall in Pasay City was

threatened with stoppage and incompletion when its owner, the First
Landlink Asia Development Corporation (FLADC), which was owned
by the Tius, encountered dire financial difficulties. It was heavily
indebted to the Philippine National Bank (PNB) for P190 million.
To stave off foreclosure of the mortgage on the two lots where the mall
was being built, the Tius invited the Ongs, to invest in FLADC. Under
the Pre-Subscription Agreement they entered into, the Ongs and the
Tius agreed to maintain equal shareholdings in FLADC: the Ongs were
to subscribe to 1,000,000 shares at a par value of P100.00 each while
the Tius were to subscribe to an additional 549,800 shares at P100.00
each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus five directors while
the Ongs were entitled to nominate the President, the Secretary and six
directors (including the chairman) to the board of directors of FLADC.
Moreover, the Ongs were given the right to manage and operate the
mall.
Accordingly, the Ongs paid P100 million in cash for their subscription
to 1,000,000 shares of stock while the Tius committed to contribute to
FLADC a four-storey building and two parcels of land respectively
valued at P20 million (for 200,000 shares), P30 million (for 300,000
shares) and P49.8 million (for 49,800 shares) to cover their additional
549,800 stock subscription therein. The Ongs paid in another P70
million to FLADC and P20 million to the Tius over and above their
P100 million investment, the total sum of which (P190 million) was
used to settle the P190 million mortgage indebtedness of FLADC to
PNB.
The business harmony between the Ongs and the Tius in FLADC,
however, was shortlived because the Tius rescinded the PreSubscription Agreement. The Tius accused the Ongs of (1) refusing to
credit to them the FLADC shares covering their real property
contributions; (2) preventing David S. Tiu and Cely Y. Tiu from
assuming the positions of and performing their duties as VicePresident and Treasurer, respectively, and (3) refusing to give them the
office spaces agreed upon.
The Tius went to Securities and Exchange Commission (SEC) seeking
confirmation of their rescission of the Pre-Subscription Agreement.
After hearing, the SEC, through then Hearing Officer Rolando G.
Andaya, Jr., issued a decision on May 19, 1997 confirming the
rescission sought by the Tius.
Issue:
W/N the Tius could legally rescind the Pre-Subscription Agreement
Ruling:
No, they could not.
FLADC was originally incorporated with an authorized capital stock of
500,000 shares with the Tius owning 450,200 shares representing the
paid-up capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became
necessary to give each group equal (50-50) shareholdings as agreed
upon in the Pre-Subscription Agreement. The authorized capital stock
was thus increased from 500,000 shares to 2,000,000 shares with a
par value of P100 each, with the Ongs subscribing to 1,000,000 shares
and the Tius to 549,800 more shares in addition to their 450,200
shares to complete 1,000,000 shares. Thus, the subject matter of the
contract was the 1,000,000 unissued shares of FLADC stock allocated
to the Ongs. Since these were unissued shares, the parties' PreSubscription Agreement was in fact a subscription contract as defined
under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall
be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract

A subscription contract necessarily involves the corporation as one of

the contracting parties since the subject matter of the transaction is
property owned by the corporation its shares of stock. Thus, the
subscription contract (denominated by the parties as a PreSubscription Agreement) whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one
between the Ongs and FLADC, not between the Ongs and the Tius.
Otherwise stated, the Tius did not contract in their personal capacities
with the Ongs since they were not selling any of their own shares to
them. It was FLADC that did.
Considering therefore that the real contracting parties to the
subscription agreement were FLADC and the Ongs alone, a civil case
for rescission on the ground of breach of contract filed by the Tius in
their personal capacities will not prosper. Only FLADC had the legal
personality to file suit rescinding the subscription agreement with the
Ongs inasmuch as it was the real party in interest therein.
However, although the Tius were adversely affected by the Ongs'
unwillingness to let them assume their positions, rescission due to
breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the
Rules of Court provide for appropriate and adequate intracorporate remedies, other than rescission, in situations like
this. Rescission is certainly not one of them, especially if the party
asking for it has no legal personality to do so and the requirements of
the law therefor have not been met. A contrary doctrine will tread on
extremely dangerous ground because it will allow just any stockholder,
for just about any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the corporate
assets to him without complying with the requirements of the
Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate
and extraordinary remedy of rescission of the subject agreement based
on a less than substantial breach of subscription contract. Not only are
they not parties to the subscription contract between the Ongs and
FLADC; they also have other available and effective remedies under the
law.
Rescission will still not prosper since it will violate the Trust Fund
Doctrine and the procedures for the valid distribution of assets and
property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923
case of Philippine Trust Co. vs. Rivera, provides that subscriptions to
the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims. This
doctrine is the underlying principle in the procedure for the
distribution of capital assets, embodied in the Corporation Code, which
allows the distribution of corporate capital only in three instances: (1)
amendment of the Articles of Incorporation to reduce the authorized
capital stock, (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained earnings, and (3)
dissolution and eventual liquidation of the corporation. Furthermore,
the doctrine is articulated in Section 41 on the power of a corporation
to acquire its own shares and in Section 122 on the prohibition against
the distribution of corporate assets and property unless the stringent
requirements therefor are complied with.
In the instant case, the rescission of the Pre-Subscription Agreement
will effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis,
result in the premature liquidation of the corporation without the
benefit of prior dissolution in accordance with Sections 117, 118, 119
and 120 of the Corporation Code.

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The Tius' case for rescission cannot validly be deemed a petition to

decrease capital stock because such action never complied with the
formal requirements for decrease of capital stock under Section 38 of
the Corporation Code. No majority vote of the board of directors was
ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds (2/3) of the
outstanding capital stock was secured. There was no revised treasurer's
affidavit and no proof that said decrease will not prejudice the
creditors' rights.
Furthermore, it is an improper judicial intrusion into the internal
affairs of the corporation to compel FLADC to file at the SEC a petition
for the issuance of a certificate of decrease of stock. Decreasing a
corporation's authorized capital stock is an amendment of the Articles
of Incorporation. It is a decision that only the stockholders and the
directors can make, considering that they are the contracting parties
thereto. In this case, the Tius are actually not just asking for a review
of the legality and fairness of a corporate decision. They want this
Court to make a corporate decision for FLADC. We decline to
intervene and order corporate structural changes not voluntarily
agreed upon by its stockholders and directors.
A judicial order to decrease capital stock without the assent of FLADC's
directors and stockholders is a violation of the "business judgment
rule" which states that:

Commission for unfair labor practice against petitioner. In due time,

the petitioner filed its position paper, alleging operational losses.
Issue:
W/N the reduction of the companys capital stock was proper
Ruling:
While the reduction in capital stock created an apparent need for
retrenchment, it was, by all indications, just a mask for the purge of
union members, who, by then, had agitated for wage increases. In the
face of the petitioner company's piling profits, the unionists had the
right to demand for such salary adjustments.
That the petitioner made quite handsome profits is clear from the
records. A clear scrutiny of the financial reports of the petitioner
reveals that it had been making substantial profits in the operation.
In 1972, when it still had 765,000 common shares, of which 305,000
were
unissued
and
459,000
outstanding
capitalized
at
P16,830,000.00, the respondent made a net profit of P2,403,211.58.
Its total assets were P70,821,317.81.

xxx xxx xxx (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere
unless such contracts are so unconscionable and oppressive as to
amount to wanton destruction to the rights of the minority, as when
plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious
injury to the plaintiffs stockholders.

In 1973, based on the same capitalization, its profit increased to

P2,724,465.33. Its total assets increased to P83,240,473.73.

Apparently, the Tius do not realize the illegal consequences of seeking

rescission and control of the corporation to the exclusion of the Ongs.
Such an act infringes on the law on reduction of capital stock. Ordering
the return and distribution of the Ongs' capital contribution without
dissolving the corporation or decreasing its authorized capital stock is
not only against the law but is also prejudicial to corporate creditors
who enjoy absolute priority of payment over and above any individual
stockholder thereof.

The reduction in its assets by P4,398,297.98 was due to the fact that its
capital stock was reduced by the amount of P5,599,540.54.

The unilateral rescission by the Tius of the subject Pre-Subscription

Agreement, dated August 15, 1994, is hereby declared as null and void.
Madrigal & Co. Vs. Zamora (151 SCRA 355)
Facts:
The petitioner was engaged, among several other corporate objectives,
in the management of Rizal Cement Co., Inc. Admittedly, the petitioner
and Rizal Cement Co., Inc. are sister companies. Both are owned by the
same or practically the same stockholders. The Madrigal Central Office
Employees Union, sought for the renewal of its collective bargaining
agreement with the petitioner, which was due to expire on February
28, 1974. Specifically, it proposed a wage increase of P200.00 a month,
an allowance of P100.00 a month, and other economic benefits. The
petitioner, however, requested for a deferment in the negotiations.
On July 29, 1974, by an alleged resolution of its stockholders, the
petitioner reduced its capital stock from 765,000 shares to 267,366
shares. This was effected through the distribution of the marketable
securities owned by the petitioner to its stockholders in exchange for
their shares in an equivalent amount in the corporation.
On August 22, 1975, by yet another alleged stockholders' action, the
petitioner reduced its authorized capitalization from 267,366 shares to
110,085 shares, again, through the same scheme.
After the petitioner's failure to sit down with the respondent union, the
latter, commenced a complaint with the National Labor Relations

In 1974, although its capitalization was reduced from P16,830,000.00

to P11,230,459.36, its profits were further increased to P2,922,349.70.
Its assets were P78,842,175.75.

In 1975, for the period of only six months, the respondent reported a
net profit of P547,414.72, which when added to the surplus of
P5,591.214.19, makes a total surplus of P6,138,628.91 as of June 30,
1975.
The petitioner would, however, have us believe that it in fact sustained
losses. Whatever profits it earned, so it claims were in the nature of
dividends "declared on its shareholdings in other companies in the
earning of which the employees had no participation whatsoever."
"Cash dividends," according to it, "are the absolute property of the
stockholders and cannot be made available for disposition if only to
meet the employees' economic demands."
There is no merit in this contention. We agree with the National Labor
Relations Commission that "[t]he dividends received by the company
are corporate earnings arising from corporate investment." Indeed, as
found by the Commission, the petitioner had entered such earnings in
its financial statements as profits, which it would not have done if they
were not in fact profits.
Moreover, it is incorrect to say that such profits in the form of
dividends are beyond the reach of the petitioner's creditors since the
petitioner had received them as compensation for its management
services in favor of the companies it managed as a shareholder thereof.
As such shareholder, the dividends paid to it were its own money,
which may then be available for wage increments. It is not a case of a
corporation distributing dividends in favor of its stockholders, in which
case, such dividends would be the absolute property of the
stockholders and hence, out of reach by creditors of the corporation.
Here, the petitioner was acting as stockholder itself, and in that case,
the right to a share in such dividends, by way of salary increases, may
not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital
reduction efforts were, to begin with, a subterfuge, a deception as it
were, to camouflage the fact that it had been making profits, and

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consequently, to justify the mass layoff in its employee ranks, especially

of union members. They were nothing but a premature and plain
distribution of corporate assets to obviate a just sharing to labor of the
vast profits obtained by its joint efforts with capital through the years.
Surely, we can neither countenance nor condone this. It is an unfair
labor practice.

During the tenure of the Maggay Board, from June 22, 1979 to March
10, 1980, it did not reform the contract of April 12, 1977, and entered
into another contract with CSI for the supply and installation of
additional equipment but also issued to CSI 113,800 shares of common
stock.
Issue:

Section 39
Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such preemptive right shall not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.

W/N Natelco stockholders have a right of preemption to the 113,800

shares in question
Ruling:
While the group of Luciano Maggay was in control of Natelco, the
Maggay Board issued 113,800 shares of stock to CSI. Petitioner said
that the Maggay Board, in issuing said shares without notifying Natelco
stockholders, violated their right of pre-emption to the unissued
shares.
This Court in Benito vs SEC, et al .(123 SCRA 722), has ruled that:

Dee Vs. SEC (199 SCRA 238)

Facts:
Naga Telephone Company, Inc. was organized in 1954, the authorized
capital was P100,000.00. In 1974 Natelco decided to increase its
authorized capital to P3,000,000.00. As required by the Public Service
Act, Natelco filed an application for the approval of the increased
authorized capital with the then Board of Communications. A decision
was rendered in said case, approving the said application subject to
certain conditions, among which was:
3. That the issuance of the shares of stocks will be for a
period of one year from the date hereof, "after which no
further issues will be made without previous authority from
this Board."
Pursuant to the approval given by the then Board of Communications,
Natelco filed its Amended Articles of Incorporation with the SEC.
When the amended articles were filed with the SEC, the original
authorized capital of P100,000.00 was already paid. Of the increased
capital of P2,900,000.00 the subscribers subscribed to P580,000.00
of which P145,000 was fully paid.
Natelco entered into a contract with Communication Services, Inc. for
the "manufacture, supply, delivery and installation" of telephone
equipment. In accordance with this contract, Natelco issued 24,000
shares of common stocks to CSI on the same date as part of the
downpayment. Another 12,000 shares of common stocks were issued
to CSI. In both instances, no prior authorization from the Board of
Communications, now the National Telecommunications Commission,
was secured pursuant to the conditions imposed by the decision of the
BOC.
Later, the stockholders of the Natelco held their annual stockholders'
meeting to elect their seven directors to their Board of Directors, for
the year 1979-1980. In this election Pedro Lopez Dee was unseated as
Chairman of the Board and President of the Corporation, but was
elected as one of the directors, together with his wife, Amelia Lopez
Dee.
In the election CSI was able to gain control of Natelco when the latter's
legal counsel, Atty. Luciano Maggay won a seat in the Board with the
help of CSI. In the reorganization Atty. Maggay became president.
The last three named directors including the Dee spouses never
attended the meetings of the Maggay Board. The members of the
Maggay Board who attended its meetings were Maggay. Federis,
Ramos and Javalera. The last two were and are CSI representatives.

Petitioner bewails the fact that in view of the lack of notice to him of
such subsequent issuance, he was not able to exercise his right of preemption over the unissued shares. However, the general rule is that
pre-emptive right is recognized only with respect to new issues of
shares, and not with respect to additional issues of originally
authorized shares. This is on the theory that when a corporation at its
inception offers its first shares, it is presumed to have offered all of
those which it is authorized to issue. An original subscriber is deemed
to have taken his shares knowing that they form a definite
proportionate part of the whole number of authorized shares. When
the shares left unsubscribed are later re-offered, he cannot therefore
claim a dilution of interest.
The questioned issuance of the 113,800 stocks is not invalid even
assuming that it was made without notice to the stockholders as
claimed by the petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders
meeting is required to consider it because additional issuance of shares
of stocks does not need approval of the stockholders. Consequently, no
pre-emptive right of Natelco stockholders was violated by the issuance
of the 113,800 shares to CSI.
Section 40
Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation
may, by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon such terms
and conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or other
property or consideration, as its board of directors or trustees may
deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be deemed to cover substantially all
the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.

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After such authorization or approval by the stockholders or members,

the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary in the
usual and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section. (28 1/2a)

Esguerra Vs. CA (267 SCRA 380)

Facts:
Julieta Esguerra filed a complaint for administration of conjugal
partnership or separation of property against her husband Vicente
Esguerra, Jr. before the trial court. The said complaint was later
amended impleading V. Esguerra Construction Co., Inc. (VECCI) and
other family corporations as defendants.
The parties entered into a compromise agreement which was
submitted to the court. On the basis of the said agreement, the court
rendered two partial judgments: one between Vicente and Julieta and
the other as between the latter and VECCI.
VECCI shall sell/alienate/transfer or dispose of in any lawful and
convenient manner, and under the terms and conditions recited in the
enabling resolutions of its Board of Directors and stockholders VECCI
properties.
After the properties shall have been sold/alienated/transferred or
disposed of and funds are realized therefrom, and after all the financial
obligations of defendant VECCI are completely paid and/or settled,
defendant VECCI shall cause to be paid and/or remitted to the plaintiff
such amount/sum equivalent to fifty percent (50%) of the (net)
resulting balance of such funds.

Petitioner contends that VECCI violated the condition in the

compromise agreement requiring that the sale be made "under the
terms and conditions recited in the enabling resolutions of its Board of
Directors and stockholders. She rues that no shareholders' or directors'
meeting, wherein these resolutions were passed, was actually held. She
thus bewails this sale as improper for not having complied with the
requirements mandated by Section 40 of the Corporation Code.
Petitioner's contention is plainly unmeritorious.
The compromise agreement clearly showed that the "enabling
resolutions of its (VECCI's) board of directors and stockholders"
referred to were those then already existing; to wit: (1) "the resolution
of the stockholders of VECCI dated November 9, 1989 , (where) the
stockholders authorized VECCI to sell and/or disposed all or
substantially all its property and assets upon such terms and
conditions and for such consideration as the board of directors may
deem expedient ." (2) the "resolution dated 9 November 1989 , (where)
the board of directors of VECCI authorized VECCI to sell and/or
dispose all or substantially all the property and assets of the
corporation, at the highest available price/s they could be sold or
disposed of in cash, and in such manner as may be held convenient
under the circumstances, and authorized the President Vicente B.
Esguerra. Jr. to negotiate. contract, execute and sign such sale for and
in behalf of the corporation."
VECCI's sale of all the properties mentioned in the judicially-approved
compromise agreement was done on the basis of its Corporate
Secretary's Certification of these two resolutions. The partial decision
did not require any further board or stockholder resolutions to make
VECCI's sale of these properties valid. Being regular on its face, the
Secretary's Certification was sufficient for Sureste Properties, Inc. to
rely on. It did not have to investigate the truth of the facts contained in
such certification. Otherwise, business transactions of corporations
would become tortuously slow and unnecessarily hampered.
Ineluctably, VECCI's sale of Esguerra Building II to Sureste was not
ultra vires but a valid execution of the trial court's partial decision.
Based on the foregoing, the sale is also deemed to have satisfied the
requirements of Section 40 of the Corporation Code.
Furthermore, petitioner Julieta Esguerra is estopped from contesting
the validity of VECCI's corporate action in selling Esguerra Building II
on the basis of said resolutions and certification because she never
raised this issue in VECCI's prior sales of the other properties sold
including the Esguerra Building I. The same identical resolutions and
certification were used in such prior sales.
Nell & Co. Vs. Pacific Farms (15 SCRA 415)
Facts:

The controversy arose with respect to Esguerra Building II. Julietta

started claiming one-half of the rentals of the said building which
VECCI refused. Thus, Julietta filed a motion praying that VECCI be
ordered to remit one-half of the rentals to her effective January 1990
until the same be sold. VECCI opposed said motion.

Nell Co. secured against Insular Farms, Inc. a judgment for the sum of
P1,853.80 representing the unpaid balance of the price of a pump sold
by Nell to Insular Farms with interest on said sum, plus P125.00 as
attorney's fees and P84.00 as costs. A writ of execution was returned
unsatisfied, stating that Insular Farms had no leviable property.

Meanwhile, Esguerra Bldg. II was sold to Sureste Properties. Inc. for

P150,000,000.00. Julieta V. Esguerra filed a motion seeking the
nullification of the sale on the ground that VECCI is not the lawful and
absolute owner thereof and that she has not been notified nor
consulted as to the terms and conditions of the sale.

Soon thereafter Nell filed with the present action against Pacific Farms,
Inc. for the collection of the judgment aforementioned, upon the theory
that it is the alter ego of Insular Farms. In due course, the Municipal
Court rendered judgment dismissing Nell's complaint. Upon appeal to
CA, the same was denied.

Issue:

Hence this appeal by certiorari , upon the ground that the Court of
Appeals had erred: (1) in not holding the Pacific liable for said unpaid
obligation of the Insular Farms.

W/N VECCI's sale of Esguerra BuildingII a valid exercise of corporate

power
Ruling:

Issue:
W/N Pacific Farms is liable to Nell Co.

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Ruling:
Generally where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor, except: (1) where the purchaser expressly or
impliedly agrees to assume such debts; (2) where the transaction
amounts to a consolidation or merger of the corporations; (3) where
the purchasing corporation is merely a continuation of the selling
corporation; and (4) where the transaction is entered into fraudulently
in order to escape liability for such debts.
In the case at bar, there is neither proof nor allegation that Pacific had
expressly or impliedly agreed to assume the debt of Insular Farms in
favor of appellant herein, or that the it is a continuation of Insular
Farms, or that the sale of either the shares of stock or the assets of
Insular Farms to the Pacific has been entered into fraudulently, in
order to escape liability for the debt of the Insular Farms in favor of
appellant herein. In fact, these sales took place (March, 1958) not only
over six (6) months before the rendition of the judgment (October 9,
1958) sought to be collected in the present action, but, also, over a
month before the filing of the case (May 29, 1958) in which said
judgment was rendered. Moreover, Pacific purchased the shares of
stock of Insular Farms as the highest bidder at an auction sale held at
the instance of a bank to which said shares had been pledged as
security for an obligation of Insular Farms in favor of said bank. It has,
also, been established that the it had paid P285,126.99 for said shares
of stock, apart from the sum of P10,000.00 it, likewise, paid for the
other assets of Insular Farms.

Gregorio Velasco, President, Felix del Castillo, Vice-president, Andres

L. Navallo, Secretary-Treasurer, and Rufino Manuel, Director of the
Trading Company, at a meeting of the board of directors approved and
authorized various lawful purchases already made of a large portion of
the capital stock of the company from its various stockholders.
Pursuant to such resolution, the corporation purchased from S. R.
Ganzon 100 shares of its capital stock of the par value of P10, from
Felix D. Mendaros 100 shares of the par value of P10, and 100 shares of
the par value of P10, each, more, from Dionisio Saavedra 10 shares of
the same par value, and from Valentin Matias 20 shares of like value.
The total amount of the capital stock purchased was P3,300. At the
time of such purchase, the corporation had accounts payable
amounting to P13,807.50, most of which were unpaid at the time
petition for the dissolution of the corporation was filed due to financial
condition, in contemplation of an insolvency and dissolution.
Steinberg prays judgment for the sum of P3,300 from the Gregorio
Velasco, Felix del Castillo, Andres L. Navallo and Rufino Manuel,
personally as members of the Board of Directors, or for the recovery
from S. R. Ganzon, of the sum of P1,000, from Felix D. Mendaros,
P2,000, and from Dionisio Saavedra, P100.
Issue:
W/N Sibuguey Trading Company, Incorporated, could legally purchase
its own stock
Ruling:

Neither is it claimed that these transactions have resulted in the

consolidation or merger of the Insular Farms and appellee herein. On
the contrary, appellant's theory to the effect that appellee is an alter
ego of the Insular Farms negates such consolidation or merger, for a
corporation cannot be its own alter ego.
It is urged, however, that said P10,000.00 paid by Pacific for other
assets of Insular Farms is a grossly inadequate price, because, Nell now
claims, said assets were worth around P285,126.99, and that,
consequently, the sale must be considered fraudulent. However, the
sale was submitted to and approved by the Securities and Exchange
Commission. It must be presumed, therefore, that the price paid was
fair and reasonable. Moreover, the only issue raised in the court of
origin was whether or not appellee is an alter ego of Insular Farms.
The question of whether the aforementioned sale of assets for
P10,000.00 was fraudulent or not, had not been put in issue in said
court. Hence, it may, not be raised on appeal.
Section 41
Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising 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; and
3. To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code.
Steinberg Vs. Velasco (52 Phil 953)
Facts:
Steinberg is the receiver of the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of the Philippine Islands.

No.
It appears that the board of directors of the corporation authorized the
purchase of 330 shares of the capital stock of the corporation at the
agreed price of P3,300 and at the time the purchase was made, the
corporation was indebted in the sum of P13,807.50. According to its
books, it had accounts receivable in the sum of P19,126.02. When the
petition was filed for its dissolution upon the ground that it was
insolvent, its accounts payable amounted to P9,241.19, and its accounts
receivable P12,512.47, or an apparent asset of P3,271.28 over and above
its liabilities.
But it will be noted that there is no stipulation or finding of facts as to
what was the actual cash value of its accounts receivable. Neither is
there any stipulation that those accounts or any part of them ever have
been or will be collected, and it does appear that after his appointment
Steinberg made a diligent effort to collect them, and that he was unable
to do so.
If in truth and in fact the corporation had an actual bona fide surplus
of P3,000 over and above all of its debt and liabilities, the payment of
the P3,000 in dividends would not in the least impair the financial
condition of the corporation or prejudice the interests of its creditors.
In the purchase of its own stock to the amount of P3,300 and in
declaring the dividends to the amount of P3,000, the real assets of the
corporation were diminished P6,300. It also appears from paragraph 4
of the stipulation that the corporation had a "surplus profit" of
P3,314.72 only. It is further stipulated that the dividends should "be
made in installments so as not to effect financial condition of the
corporation." In other words, that the corporation did not then have an
actual bona fide surplus from which the dividends could be paid, and
that the payment of them in full at the time would "affect the financial
condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the
stock from the corporation and in declaring the dividends on the stock
was all done at the same meeting of the board of directors, and it
appears in those minutes that the both Ganzon and Mendaros were
formerly directors and resigned before the board approved the
purchase and declared the dividends, and that out of the whole 330
shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of
300 shares out of the 330, which were purchased by the corporation,

96

and for which it paid P3,300. In other words, the directors were
permitted to resign so that they could sell their stock to the
corporation. As stated, the authorized capital stock was P20,000
divided into 2,000 shares of the par value of P10 each, which only
P10,030 was subscribed and paid. Deducting the P3,300 paid for the
purchase of the stock, there would be left P7,000 of paid up stock, from
which deduct P3,000 paid in dividends, there would be left P4,000
only. In this situation and upon this state of facts, it is very apparent
that the directors did not act in good faith or that they were grossly
ignorant of their duties.
Section 42
Power to invest corporate funds in another corporation or
business or for any other purpose. - Subject to the provisions of
this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary
purpose for which it was organized when approved by a majority of the
board of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed investment and the time
and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code:
Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in
the articles of incorporation, the approval of the stockholders or
members shall not be necessary.
De la Rama Vs. Ma-ao Sugar Central (27 SCRA 247)
Facts:
This was a representative or derivative suit commenced on October 20,
1953, in the Court of First Instance of Manila by four minority
stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado
Araneta and three other directors of the corporation.
The complaint comprising the period November, 1946 to October,
1952, stated five causes of action, to wit: (1) for alleged illegal and ultravires acts consisting of self-dealing irregular loans, and unauthorized
investments; (2) for alleged gross mismanagement; (3) for alleged
forfeiture of corporate rights warranting dissolution; (4) for alleged
damages and attorney's fees; and (5) for receivership.
Sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc.
and delivered to these affiliated companies, and vice versa, without the
approval of the Ma-ao Board of Directors, in violation of Sec. III, Art.
6-A of the by-laws.
The Lower Court dismisses the petition for dissolution but condemns J.
Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount
of P46,270.00 with 8% interest from the date of the filing of this
complaint, plus the costs; the Court reiterates the preliminary
injunction restraining the Ma-ao Sugar Central Co., Inc. management
to give any loans or advances to its officers and orders that this
injunction be as it is hereby made, permanent; and orders it to refrain
from making investments in Acoje Mining, Mabuhay Printing, and any
other company whose purpose is not connected with the Sugar Central
business; costs of plaintiffs to be borne by the Corporation and J.
Amado Araneta.
Issue:
W/N the investment of corporate funds of the Ma-ao Sugar Central
Co., Inc., in the Philippine Fiber Processing Co., Inc. was not a
violation of section 17-1/2 of the Corporation Law

Ruling:
As to the Philippine Fiber, Ma-ao admits having invested P655,000.00
in shares of stock of this company but that this was ratified by the
Board of Directors, more than that, Ma-ao contends that since said
company was engaged in the manufacture of sugar bags it was perfectly
legitimate for Ma-ao Sugar either to manufacture sugar bags or invest
in another corporation engaged in said manufacture, and they quote
authorities for the purpose.
The Court is persuaded to believe that Ma-ao on this point is correct,
because while Sec. 17-1/2 of the Corporation Law provides that:
No corporation organized under this act shall invest its funds
in any other corporation or business or for any purpose other
than the main purpose for which it was organized unless its
board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of
the voting power on such proposal at the stockholders'
meeting called for the purpose.
The Court is convinced that that law should be understood to mean as
the authorities state, that it is prohibited to the Corporation to invest in
shares of another corporation unless such an investment is authorized
by two-thirds of the voting power of the stockholders, if the purpose of
the corporation in which investment is made is foreign to the purpose
of the investing corporation because surely there is more logic in the
stand that if the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its purpose,
to require authority of the stockholders would be to unduly curtail the
Power of the Board of Directors.
The only trouble here is that the investment was made without any
previous authority of the Board of Directors but was only ratified
afterwards; this of course would have the effect of legalizing the
unauthorized act but it is an indication of the manner in which
corporate business is transacted by the Ma-ao Sugar administration,
the fact that off and on, there would be passed by the Board of
Directors, resolutions ratifying all acts previously done by the
management.
Section 43
Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall first be applied
to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for
the purpose.
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies.
PLDT Vs. NTC (539 SCRA 365)

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Facts:
This case pertains to Section 40 (e) of the Public Service Act (PSA), as
amended on March 15, 1984, pursuant to Batas Pambansa Blg. 325,
which authorized the NTC to collect from public telecommunications
companies Supervision and Regulation Fees (SRF) of PhP 0.50 for
every PhP 100 or a fraction of the capital and stock subscribed or paid
for of a stock corporation, partnership or single proprietorship of the
capital invested, or of the property and equipment, whichever is higher.
Under Section 40 (e) of the PSA, the NTC sent SRF assessments to
Philippine Long Distance Telephone Company (PLDT) starting
sometime in 1988. The SRF assessments were based on the market
value of the outstanding capital stock, including stock dividends, of
PLDT. PLDT protested the assessments contending that the SRF ought
to be based on the par value of its outstanding capital stock. Its protest
was denied by the NTC and likewise, its motion for reconsideration.
PLDT appealed before the CA. The CA modified the disposition of the
NTC by holding that the SRF should be assessed at par value of the
outstanding capital stock of PLDT, excluding stock dividends.
With the denial of the NTCs partial reconsideration of the CA
Decision, the issue of the basis for the assessment of the SRF was
brought before this Court wherein we ruled that the SRF should be
based neither on the par value nor the market value of the outstanding
capital stock but on the value of the stocks subscribed or paid including
the premiums paid therefor, that is, the amount that the corporation
receives, inclusive of the premiums if any, in consideration of the
original issuance of the shares. We added that in the case of stock
dividends, it is the amount that the corporation transfers from its
surplus profit account to its capital account, that is, the amount the
stock dividends represent is equivalent to the value paid for its original
issuance.
PLDT argues that in our Decision in G.R. No. 127937 we have excluded
from the coverage of the SRF the capital stocks issued as stock
dividends. Petitioner argues that G.R. No. 127937 clearly delineates
between capital subscribed and stock dividends to the effect that the
latter are not included in the concept of capital stock subscribed
because subscribers or shareholders do not pay for their subscriptions
as no amount is received by the corporation in consideration of such
issuances since these are effected as mere book entries, that is, the
transfer from the retained earnings account to the capital or stock
account. To bolster its position, PLDT repeatedly used the phrase
actual payments received by a corporation as a consideration for
issuances of shares which do not apply to stock dividends.
Issue:
W/N stock dividends are part of the outstanding capital stocks of a
corporation insofar as it is subject to the SRF so that all the stock
dividends that are part of the outstanding capital stock of PLDT are
subject to the SRF
Ruling:
In National Telecommunications Commission v. Honorable Court of
Appeals, which we quote:
The term capital and other terms used to describe the capital
structure of a corporation are of universal acceptance and their usages
have long been established in jurisprudence. Briefly, capital refers to
the value of the property or assets of a corporation. The capital
subscribed is the total amount of the capital that persons
(subscribers or shareholders) have agreed to take and pay
for, which need not necessarily by, and can be more than, the par
value of the shares. In fine, it is the amount that the corporation
receives, inclusive of the premiums if any, in consideration
of the original issuance of the shares. In the case of stock
dividends, it is the amount that the corporation transfers
from its surplus profit account to its capital account. It is the

same amount that can be loosely termed as the trust fund of the
corporation. The Trust Fund doctrine considers this subscribed
capital as a trust fund for the payment of the debts of the corporation,
to which the creditors may look for satisfaction. Until the liquidation
of the corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of redeemable
shares) without violating this principle. Thus, dividends must never
impair the subscribed capital; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own shares
using the subscribed capital as the considerations therefor.
Two concepts can be gleaned from the above. First, what constitutes
capital stock that is subject to the SRF. Second, such capital stock is
equated to the trust fund of a corporation held in trust as security for
satisfaction to creditors in case of corporate liquidation.
PLDTs contention, that stock dividends are not similarly situated as
the subscribed capital stock because the subscribers or shareholders do
not pay for their issuances as no amount was received by the
corporation in consideration of such issuances since these are effected
as a mere book entry, is erroneous.
Dividends, regardless of the form these are declared, that is, cash,
property or stocks, are valued at the amount of the declared dividend
taken from the unrestricted retained earnings of a corporation. Thus,
the value of the declaration in the case of a stock dividend is the actual
value of the original issuance of said stocks. In the case of stock
dividends, it is the amount that the corporation transfers from its
surplus profit account to its capital account or it is the amount that
the corporation receives in consideration of the original issuance of the
shares. It is the distribution of current or accumulated earnings to
the shareholders of a corporation pro rata based on the number of
shares owned. Such distribution in whatever form is valued at the
declared amount or monetary equivalent.
Thus, it cannot be said that no consideration is involved in the issuance
of stock dividends. In fact, the declaration of stock dividends is akin to
a forced purchase of stocks.
By declaring stock dividends, a
corporation ploughs back a portion or its entire unrestricted retained
earnings either to its working capital or for capital asset acquisition or
investments. It is simplistic to say that the corporation did not receive
any actual payment for these. When the dividend is distributed, it
ceases to be a property of the corporation as the entire or portion of its
unrestricted retained earnings is distributed pro rata to corporate
shareholders.
When stock dividends are distributed, the amount declared ceases to
belong to the corporation but is distributed among the shareholders.
Consequently, the unrestricted retained earnings of the corporation are
diminished by the amount of the declared dividend while the
stockholders equity is increased. Furthermore, the actual payment is
the cash value from the unrestricted retained earnings that each
shareholder foregoes for additional stocks/shares which he would
otherwise receive as required by the Corporation Code to be given to
the stockholders subject to the availability and conditioned on a certain
level of retained earnings. Elsewise put, where the unrestricted
retained earnings of a corporation are more than 100% of the paid-in
capital stock, the corporate Board of Directors is mandated to declare
dividends which the shareholders will receive in cash unless otherwise
declared as property or stock dividends, which in the latter case the
stockholders are forced to forego cash in lieu of property or stocks.
In essence, therefore, the stockholders by receiving stock dividends are
forced to exchange the monetary value of their dividend for capital
stock, and the monetary value they forego is considered the actual
payment for the original issuance of the stocks given as dividends.
Therefore, stock dividends acquired by shareholders for the monetary
value they forego are under the coverage of the SRF and the basis for
the latter is such monetary value as declared by the board of directors.
Anent stock dividends, the value transferred from the unrestricted
retained earnings of PLDT to the capital stock account pursuant to the

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issuance of stock dividends is the proper basis for the assessment of the
SRF, which the NTC correctly assessed.
CIR Vs. CA (301 SCRA 154)
Facts:
Don Andres Soriano, a citizen and resident of the United States,
formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR,
with a P1,000,000.00 capitalization divided into 10,000 common
shares at a par value of P100/share. ANSCOR is wholly owned and
controlled by the family of Don Andres, who are all non-resident aliens.
Don Andres subscribed to 4,963 shares of the 5,000 shares originally
issued.
By 1947, ANSCOR declared stock dividends. Then, Don Andres died.
As of that date, the records revealed that he has a total shareholdings of
185,154 shares 50,495 of which are original issues and the balance of
134,659 shares as stock dividend declarations. Correspondingly, onehalf of that shareholdings or 92,577 shares were transferred to his wife,
Doa Carmen Soriano, as her conjugal share. The other half formed
part of his estate.
Pursuant to a Board Resolution, ANSCOR redeemed 28,000 common
shares from the Don Andres' estate. The Board further increased
ANSCOR's capital stock to P75M divided into 150,000 preferred shares
and 600,000 common shares. About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres' estate, further
reducing the latter's common shareholdings to 19,727. As stated in the
Board Resolutions, ANSCOR's business purpose for both redemptions
of stocks is to partially retire said stocks as treasury shares in order to
reduce the company's foreign exchange remittances in case cash
dividends are declared.
Subsequently, the Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-source pursuant
to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and
the second quarter of 1969 based on the transactions of exchange and
redemption of stocks. The Bureau of Internal Revenue (BIR) made the
corresponding assessments despite the claim of ANSCOR that it
availed of the tax amnesty under Presidential Decree (P.D.) 23 which
were amended by P.D.'s 67 and 157. However, petitioner ruled that the
invoked decrees do not cover Sections 53 and 54 in relation to Article
83(b) of the 1939 Revenue Act under which ANSCOR was assessed.
ANSCOR's subsequent protest on the assessments was denied in 1983
by petitioner.
Subsequently, ANSCOR filed a petition for review with the CTA
assailing the tax assessments on the redemptions and exchange of
stocks. In its decision, the Tax Court reversed petitioner's ruling, after
finding sufficient evidence to overcome the prima facie correctness of
the questioned assessments. In a petition for review the CA as
mentioned, affirmed the ruling of the CTA. Hence, this petition.
Issue:
W/N ANSCOR's redemption of stocks from its stockholder as well as
the exchange of common with preferred shares can be considered as
"essentially equivalent to the distribution of taxable dividend" making
the proceeds thereof taxable

Ruling:
The redemption converts into money the stock dividends which
become a realized profit or gain and consequently, the stockholder's
separate property. Profits derived from the capital invested cannot

escape income tax. As realized income, the proceeds of the redeemed

stock dividends can be reached by income taxation regardless of the
existence of any business purpose for the redemption. Otherwise, to
rule that the said proceeds are exempt from income tax when the
redemption is supported by legitimate business reasons would defeat
the very purpose of imposing tax on income. Such argument would
open the door for income earners not to pay tax so long as the person
from whom the income was derived has legitimate business reasons. In
other words, the payment of tax under the exempting clause of Section
83(b) would be made to depend not on the income of the taxpayer, but
on the business purposes of a third party (the corporation herein) from
whom the income was earned.
After considering the manner and the circumstances by which the
issuance and redemption of stock dividends were made, there is no
other conclusion but that the proceeds thereof are essentially
considered equivalent to a distribution of taxable dividends. As
"taxable dividend" under Section 83(b), it is part of the "entire income"
subject to tax under Section 22 in relation to Section 21 of the 1939
Code. Moreover, under Section 29(a) of said Code, dividends are
included in "gross income". As income, it is subject to income tax
which is required to be withheld at source. The 1997 Tax Code may
have altered the situation but it does not change this disposition.
ANSCOR's redemption of 82,752.5 stock dividends is herein
considered as essentially equivalent to a distribution of taxable
dividends for which it is LIABLE for the withholding tax-at-source.
On the other hand, the exchange of common stocks with preferred
stocks, or preferred for common or a combination of either for both,
may not produce a recognized gain or loss, so long as the provisions of
Section 83(b) is not applicable. This is true in a trade between two (2)
persons as well as a trade between a stockholder and a corporation. In
general, this trade must be parts of merger, transfer to controlled
corporation, corporate acquisitions or corporate reorganizations. No
taxable gain or loss may be recognized on exchange of property, stock
or securities related to reorganizations.
Both shares are part of the corporation's capital stock. Both
stockholders are no different from ordinary investors who take on the
same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profits and
losses of the enterprise. Moreover, under the doctrine of equality of
shares all stocks issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.
In this case, the exchange of shares, without more, produces no
realized income to the subscriber. There is only a modification of the
subscriber's rights and privileges which is not a flow of wealth for tax
purposes. The issue of taxable dividend may arise only once a
subscriber disposes of his entire interest and not when there is still
maintenance of proprietary interest.
Section 44
Power to enter into management contract. - No corporation
shall conclude a management contract with another corporation unless
such contract shall have been approved by the board of directors and
by stockholders owning at least the majority of the outstanding capital
stock, or by at least a majority of the members in the case of a nonstock corporation, of both the managing and the managed corporation,
at a meeting duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than
one-third (1/3) of the total outstanding capital stock entitled to vote of
the managing corporation; or (2) where a majority of the members of
the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in the case of a non-stock

99

corporation. No management contract shall be entered into for a

period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods
as may be provided by the pertinent laws or regulations. (n)
Section 45
Ultra vires acts of corporations. - No corporation under this
Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of the powers so
conferred.
Aguenza Vs. Metrobank (271 SCRA 1)
Facts:
The Board of Directors of Intertrade, through a Board Resolution,
authorized and empowered Aguenza, Intertrade's President and
Arrieta, Executive Vice-President, respectively, to jointly apply for and
open credit lines with private respondent Metrobank. Pursuant to such
authority, Aguenza and Arrieta executed several trust receipts from
May to June, 1977, the aggregate value of which amounted to
P562,443.46, with Intertrade as the entrustee and Metrobank as the
entruster.
Aguenza and Arrieta executed a Continuing Suretyship Agreement
whereby both bound themselves jointly and severally with Intertrade to
pay Metrobank whatever obligation Intertrade incurs, but not
exceeding the amount P750,000.00.
In this connection, Metrobank's Debit Memo to Intertrade showed full
settlement of the letters of credit covered by said trust receipts in the
total amount P562,443.46.
Arrieta and Lilia P. Perez, bookkeeper in the employ of Intertrade,
obtained P500,000.00 loan from private respondent Metrobank. Both
executed Promissory Note in favor or said bank in the amount of
P500,000,00. Under said note, private respondents Arrieta and Perez
promised to pay said amount, jointly and severally, in twenty five (25)
equal installments of P20,000.00 each starting on April 20, 1979 with
interest of 18.704% per annum , and in case of default, a further 8 %
per annum
Arrieta and Perez defaulted in the payment of several installments thus
resulting in the entire obligation becoming due and demandable. Thus,
Metrobank instituted suit against Intertrade, Vitaliado Arrieta, Lilia
Perez and her husband, Patricio Perez, to collect not only the unpaid
principal obligation, but also interests, fees and penalties, exemplary
damages, as well as attorney's fees and costs of suit.
More than a year after Metrobank filed its original complaint, it filed
an Amended Complaint for the sole purpose of impleading petitioner
as liable for the loan made by Arrieta and Perez, notwithstanding the
fact that such liability is being claimed on account of a Continuing
Suretyship Agreement executed by Aguenza and Arrieta especifically to
guarantee the credit line applied for by and granted to, Intertrade,
through petitioner and Arrieta who were specially given authority by
Intertrade to open credit lines with Metrobank. The obligations
incurred by Intertrade under such credit lines were completely paid as
evidenced by private respondent Metrobank's debit memo in the full
amount of P562,443.46.

Issue:
W/N the loan of P500,000.00 procured byVitaliado Arrieta and Lilia
Perez is a corporate liability of Intertrade and that Aguenza is liable
thereon under the "Continuing Suretyship Agreement"
Ruling:
The only document to evidence the subject transaction was the
promissory note signed by Arrieta and Lilia Perez. There is no
indication in said document as to what capacity the two signatories had
in affixing their signatures thereon.
The subject transaction is a loan contract for P500,000.00 under terms
and conditions which are stringent, if not onerous. The power to
borrow money is one of those cases where even a special power of
attorney is required. In the instant case, there is invariably a need of an
enabling act of the corporation to be approved by its Board of
Directors. The records of this case is bereft of any evidence that
Intertrade through its Board of Directors, conferred upon Arrieta and
Lilia Perez the authority to contract a loan with Metrobank and execute
the promissory note as a security therefor. Neither a board resolution
nor a stockholder's resolution was presented by Metrobank to show
that Arrieta and Lilia Perez were empowered by Intertrade to execute
the promissory note.
The bank may argue that the actuation of Arrieta and Lilia Perez was in
accordance with the ordinary course of business usages and practices
of Intertrade. However, this contention is devoid of merit because the
prevailing practice in Intertrade was to explicitly authorize an officer to
contract loans in behalf of the corporation. This is evidenced by the fact
that previous to the controversy, the Intertrade Board of Directors,
through a board resolution, jointly empowered and authorized
Aguenza and Arrieta to negotiate, apply for, and open credit lines with
Metrobank's. The participation of these two was mandated to be joint
and not separate and individual.
In the case at bench, only respondent Arrieta, together with a
bookkeeper of the corporation, signed the promissory notes, without
the participation and approval of Aguenza. Moreover, the enabling
corporate act on this particular transaction has not been obtained.
Neither has it been shown that any provision of the charter or any
other act of the Board of Directors exists to confer power on the
Executive Vice President acting alone and without the concurrence of
its President, to execute the disputed document.
Thus, preceding from the premise that the subject loan was not the
responsibility of Intertrade, it follows that the undertaking of Arrieta
and the bookkeeper was not an undertaking covered by the Continuing
Suretyship Agreement. The rule is that a contract of surety is never
presumed; it must be express and cannot extend to more than what is
stipulated, It is strictly construed against the creditor, every doubt
being resolved against enlarging the liability of the surety.
The present obligation incurred in subject contract of loan, as secured
by the Arrieta and Perez promissory note, is not the obligation of the
corporation and petitioner Aguenza, but the individual and personal
obligation of private respondents Arrieta and Lilia Perez.

Lopez Realty Vs. Fontecha (246 SCRA 183)

Facts:
Lopez Realty, Inc., is a corporation engaged in real estate business,
while Asuncion Lopez Gonzales is one of its majority shareholders.
Except for Arturo F. Lopez, the rest of the shareholders also sit as
members of the Board of Directors.

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On August 17, 1981, except for Asuncion Lopez Gonzales who was then
abroad, the remaining members of the Board of Directors, namely:
Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, convened a
special meeting and passed a resolution which reads:
Resolved, as it is hereby resolved that the gratuity (pay) of the
employees be given as follows:
(a) Those who will be laid off be given the full amount of gratuity; (b)
Those who will be retained will receive 25% of their gratuity (pay) due
on September 1 , 1981, and another 25% on January 1, 1982, and 50%
to be retained by the office in the meantime .
Private respondents were the retained employees of the corporation.
The private respondents requested for the full payment of their gratuity
pay. Their request was granted in a special meeting held on September
1, 1981.
At that, time, however, Asuncion Lopez Gonzales was still abroad.
Allegedly, while she was still out of the country, she sent a cablegram to
the corporation, objecting to certain matters taken up by the board in
her absence, such as the sale of some of the assets of the corporation.
Upon her return, she flied a derivative suit with the Securities and
Exchange Commission (SEC) against majority shareholder Arturo F.
Lopez.
Notwithstanding the "corporate squabble" between petitioner
Asuncion Lopez Gonzales and Arturo Lopez, the first two (2)
installments of the gratuity pay of private respondents Florentina
Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were
paid by petitioner corporation.

Despite the alleged lack of notice to petitioner Asuncion Lopez

Gonzales at that time the assailed resolutions were passed, we can
glean from the records that she was aware of the corporation's
obligation under the said resolutions. More importantly, she
acquiesced thereto. As pointed out by private respondents, petitioner
Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos.
81-10-510 and 81-10-506, both dated October 15, 1981, evidencing the
2nd installment of the gratuity pay of private respondents Mila
Refuerzo and Florentina Fontecha.
The conduct of petitioners after the passage of resolutions dated
August, 17, 1951 and September 1, 1981, had estopped them from
assailing the validity of said board resolutions.
Assuming, arguendo , that there was no notice given to Asuncion
Lopez Gonzalez during the special meetings held on August 17, 1981
and September 1, 1981, it is erroneous to state that the resolutions
passed by the board during the said meetings were ultra vires . In legal
parlance, "ultra vires "act refers to one which is not within the
corporate powers conferred by the Corporation Code or Articles of
Incorporation or not necessary or incidental in the exercise of the
powers so conferred.
The assailed resolutions before us cover a subject which concerns the
benefit and welfare of the company's employees. To stress, providing
gratuity pay for its employees is one of the express powers of the
corporation under the Corporation Code, hence, petitioners cannot
invoke the doctrine of ultra vires to avoid any liability arising from the
issuance the subject resolutions.
TITLE V
BY LAWS

The vouchers for the third installments of gratuity pay of said private
respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril
and Perfecto Bautista) were cancelled by petitioner Asuncion Lopez
Gonzales. Likewise, the first, second and third installments of gratuity
pay of the rest of private respondents, particularly, Edward Mamaril,
Marissa Pascual and Allan Pimentel, were prepared but cancelled by
petitioner Asuncion Lopez Gonzales. Despite private respondents'
repeated demands for their gratuity pay, corporation refused to pay the
same.
Issue:
W/N the board resolutions granting gratuity pay to their retained
employees, are ultra vires on the ground that Asuncion Lopez Gonzales
was not duly notified of the said special meetings
Ruling:
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed
by its charter or by the general law. Thus, directors must act as a body
in a meeting called pursuant to the law or the corporation's by-laws,
otherwise, any action taken therein may be questioned by any objecting
director or shareholder.
Be that as it may, jurisprudence tells us that an action of the board of
directors during a meeting, which was illegal for lack of notice, may be
ratified either expressly, by the action of the directors in subsequent
legal meeting, or impliedly, by the corporation's subsequent course of
conduct.
In the case at bench, it was established that petitioner corporation did
not issue any resolution revoking nor nullifying the board resolutions
granting gratuity pay to private respondents. Instead, they paid the
gratuity pay, particularly, the first two (2) installments thereof, of
private respondents Florentina Fontecha, Mila Refuerzo, Marcial
Mamaril and Perfecto Bautista.

Section 46
Adoption of by-laws. - Every corporation formed under this Code
must, within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of
the directors or trustees countersigned by the secretary of the
corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or
amendments are in accordance with law.

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Loyola Grand Villas Vs. CA (276 SCRA 681)

Facts:
LGVHAI was organized on February 8, 1983 as the association of
homeowners and residents of the Loyola Grand Villas. It was registered
with the Home Financing Corporation, the predecessor of herein
respondent HIGC, as the sole homeowners' organization in the said
subdivision under Certificate of Registration No. 04-197. It was
organized by the developer of the subdivision and its first president
was Victorio V. Soliven, himself the owner of the developer. For
unknown reasons, however, LGVHAI did not file its corporate by-laws.
When Soliven inquired about the status of LGVHAI, Atty. Joaquin A.
Bautista, the head of the legal department of the HIGC, informed him
that LGVHAI had been automatically dissolved for two reasons. First,
it did not submit its by-laws within the period required by the
Corporation Code and, second, there was non-user of corporate charter
because HIGC had not received any report on the association's
activities. Apparently, this information resulted in the registration of
the South Association with the HIGC. It filed its by-laws on July 26,
1989.
These developments prompted the officers of the LGVHAI to lodge a
complaint with the HIGC. They questioned the revocation of LGVHAI's
certificate of registration without due notice and hearing and
concomitantly prayed for the cancellation of the certificates of
registration of the North and South Associations by reason of the
earlier issuance of a certificate of registration in favor of LGVHAI.

Organization and commencement of transaction of corporate business

are but conditions subsequent and not prerequisites for acquisition of
corporate personality. The adoption and filing of by-laws is also a
condition subsequent. Under Section 19 of the Corporation Code, a
Corporation commences its corporate existence and juridical
personality and is deemed incorporated from the date the Securities
and Exchange Commission issues certificate of incorporation under its
official seal. This may be done even before the filing of the by-laws,
which under Section 46 of the Corporation Code, must be adopted
"within one month after receipt of official notice of the issuance of its
certificate of incorporation."
Sawadjaan Vs. CA (459 SCRA 516)

Facts:
Sappari K. Sawadjaan was among the first employees of the Philippine
Amanah Bank (PAB) when it was created by virtue of Presidential
Decree No. 264 on 02 August 1973. He rose through the ranks,
working his way up from his initial designation as security guard, to
settling clerk, bookkeeper, credit investigator, project analyst,
appraiser/ inspector, and eventually, loans analyst.
While still designated as appraiser/investigator, Sawadjaan was
assigned to inspect the properties offered as collaterals by Compressed
Air Machineries and Equipment Corporation (CAMEC) for a credit line
of Five Million Pesos (P5,000,000.00). The properties consisted of
two parcels of land. On the basis of his Inspection and Appraisal
Report, the PAB granted the loan application.
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01
July 1989.

Issue:
W/N LGVHAI's failure to file its by-laws within the period prescribed
by Section 46 of the Corporation Code resulted in the automatic
dissolution of LGVHAI
Ruling:
Section 46 aforequoted reveals the legislative intent to attach a
directory, and not mandatory, meaning for the word "must" in the first
sentence thereof. Note should be taken of the second paragraph of the
law which allows the filing of the by-laws even prior to incorporation.
This provision in the same section of the Code, rules out mandatory
compliance with the requirement of filing the by-laws "within one (1)
month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission." It
necessarily follows that failure to file the by-laws within that period
does not imply the "demise" of the corporation. By-laws may be
necessary for the "government" of the corporation but these are
subordinate to the articles of incorporation as well as to the
Corporation Code and related statutes. There are in fact cases where
by-laws are unnecessary to corporate existence or to the valid exercise
of corporate powers.
Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to
"suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation" on the ground inter alia of
"failure to file by-laws within the required period." It is clear from this
provision that there must first of all be a hearing to determine the
existence of the ground, and secondly, assuming such finding, the
penalty is not necessarily revocation but may be only suspension of the
charter. In fact, under the rules and regulations of the SEC, failure to
file the by-laws on time may be penalized merely with the imposition of
an administrative fine without affecting the corporate existence of the
erring firm.
It should be stressed in this connection that substantial compliance
with conditions subsequent will suffice to perfect corporate personality.

Subsequently, Congress passed Republic Act 6848 creating the AlAmanah Islamic Investment Bank (AIIBP) and repealing P.D. No. 264
(which created the PAB). All assets, liabilities and capital accounts of
the PAB were transferred to the AIIBP, and the existing personnel of
the PAB were to continue to discharge their functions unless
discharged. In the ensuing reorganization, Sawadjaan was among the
personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the Islamic
Bank, discovered that the title to one of the property was spurious, the
property described therein non-existent, and that the other property
had a prior existing mortgage in favor of one Divina Pablico.
The Board of Directors of the AIIBP created an Investigating
Committee to look into the CAMEC transaction, which had cost the
bank Six Million Pesos (P6,000,000.00) in losses. Sawadjaan received
a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De
Ocampo charging him with Dishonesty in the Performance of Official
Duties. Upon recommendation of the Investigating Committee, the
Board of Directors of the Islamic Bank finds Sawadjaan guilty of
Dishonesty in the Performance of Official Duties and/or Conduct
Prejudicial to the Best Interest of the Service and imposing the penalty
of Dismissal from the Service. On reconsideration, the Board of
Directors reduced the penalty imposed on petitioner from dismissal to
suspension for a period of six (6) months and one (1) day.
Sawadjaan, by himself, filed a Motion for New Trial in the Court of
Appeals based on the following grounds: fraud, accident, mistake or
excusable negligence and newly discovered evidence. He claimed that
he had recently discovered that at the time his employment was
terminated, the AIIBP had not yet adopted its corporate by-laws. He
attached a Certification by the Securities and Exchange Commission
(SEC) that it was only on 27 May 1992 that the AIIBP submitted its
draft by-laws to the SEC, and that its registration was being held in
abeyance pending certain corrections being made thereon. Sawadjaan
argued that since the AIIBP failed to file its by-laws within 60 days
from the passage of Rep. Act No. 6848, as required by Sec. 51 of the
said law, the bank and its stockholders had already forfeited its
franchise or charter, including its license to exist and operate as a

102

corporation, and thus no longer have the legal standing and

personality to initiate an administrative case.
Issue:
W/N the failure of the Islamic Bank to file its by-laws within 60 days
from the passage of Rep. Act No. 6848, as required by Sec. 51 of the
said law, the bank and its stockholders had already forfeited its
franchise or charter, including its license to exist and operate as a
corporation, and thus no longer have the legal standing and
personality to initiate an administrative case.
Ruling:
The AIIBP was created by Rep. Act No. 6848. It has a main office
where it conducts business, has shareholders, corporate officers, a
board of directors, assets, and personnel. It is, in fact, here
represented by the Office of the Government Corporate Counsel, the
principal law office of government-owned corporations, one of which is
respondent bank. At the very least, by its failure to submit its by-laws
on time, the AIIBP may be considered a de facto corporation whose
right to exercise corporate powers may not be inquired into collaterally
in any private suit to which such corporations may be a party.
Moreover, a corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such. The SEC
Rules on Suspension/Revocation of the Certificate of Registration of
Corporations, details the procedures and remedies that may be availed
of before an order of revocation can be issued. There is no showing
that such a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not
a corporate controversy, but a labor dispute; and it is an employers
basic right to freely select or discharge its employees, if only as a
measure of self-protection against acts inimical to its interest.
Regardless of whether AIIBP is a corporation, a partnership, a sole
proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP
is the petitioners employer. AIIBP chose to retain his services during
its reorganization, controlled the means and methods by which his
work was to be performed, paid his wages, and, eventually, terminated
his services.
And though he has had ample opportunity to do so, the petitioner has
not alleged that he is anything other than an employee of AIIBP. He
has neither claimed, nor shown, that he is a stockholder or an officer of
the corporation. Having accepted employment from AIIBP, and
rendered his services to the said bank, received his salary, and accepted
the promotion given him, it is now too late in the day for petitioner to
question its existence and its power to terminate his services. One,
who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no
corporation.
China Banking Vs. CA (270 SCRA 503)
Facts:
Galicano Calapatia, Jr., a stockholder of private Valley Golf & Country
Club, Inc., pledged his Stock Certificate No. 1219 to China Banking
Corporation.
CBC wrote VGCCI requesting that the aforementioned pledge
agreement be recorded in its books which VGCCI replied that the deed
of pledge executed by Calapatia in CBC's favor was duly noted in its
corporate books.
Calapatia obtained a loan of P20,000.00 from CBC, payment of which
was secured by the aforestated pledge agreement still existing between
Calapatia and CBC. Due to Calapatia's failure to pay his obligation,
CBC, filed a petition for extrajudicial foreclosurere questing the latter
to conduct a public auction sale of the pledged stock.

CBC informed VGCCI of the above-mentioned foreclosure proceedings

and requested that the pledged stock be transferred to its CBC's name
and the same be recorded in the corporate books. However, VGCCI
wrote petitioner expressing its inability to accede to petitioner's request
in view of Calapatia's unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction and
CBC emerged as the highest bidder at P20,000.00 for the pledged
stock. Consequently, petitioner was issued the corresponding
certificate of sale.
VGCCI sent Calapatia a notice demanding full payment of his overdue
account in the amount of P18,783.24. Subsequently, VGCCI caused to
be published in the newspaper Daily Express a notice of auction sale of
a number of its stock certificates included therein was Calapatia's own
share of stock.
CBC protested the sale by VGCCI of the subject share of stock and
thereafter filed a case with for the nullification of the auction and for
the issuance of a new stock certificate in its name.
Issue:
W/N VGCCI had the right to sell the share in question in accordance
with the express provision found in its by-laws
Ruling:
The purpose of a by-law is to regulate the conduct and define the duties
of the members towards the corporation and among themselves. They
are self-imposed and, although adopted pursuant to statutory
authority, have no status as public law.
Therefore, it is the generally accepted rule that third persons are not
bound by by-laws, except when they have knowledge of the provisions
either actually or constructively. In the case of Fleisher v . Botica
Nolasco , 47 Phil. 584, the Supreme Court held that the by-law
restricting the transfer of shares cannot have any effect on the
transferee of the shares in question as he "had no knowledge of such
by-law when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy to the
contract created by the by-law between the shareholder . . and the
Botica Nolasco, Inc . Said by-law cannot operate to defeat his right as a
purchaser.
In order to be bound, the third party must have acquired knowledge of
the pertinent by-laws at the time the transaction or agreement between
said third party and the shareholder was entered into, in this case, at
the time the pledge agreement was executed. VGCCI could have easily
informed petitioner of its by-laws when it sent notice formally
recognizing petitioner as pledgee of one of its shares registered in
Calapatia's name. Petitioner's belated notice of said by-laws at the time
of foreclosure will not suffice.
Finally, Sec. 63 of the Corporation Code which provides that "no shares
of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation" cannot be utilized by
VGCCI. The term "unpaid claim" refers to "any unpaid claim arising
from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any
other transaction." In the case at bar, the subscription for the share in
question has been fully paid as evidenced by the issuance of
Membership Certificate No. 1219. What Calapatia owed the corporation
were merely the monthly dues. Hence, the aforequoted provision does
not apply.
Section 47

103

Contents of by-laws. - Subject to the provisions of the Constitution,

this Code, other special laws, and the articles of incorporation, a
private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and
the manner of voting therein;
4. The form for proxies of stockholders and members and the manner
of voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and
the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;

Enrique Salafranca started working with Philamlife Village

Homeowners Association as administrative officer for a period of six
months. He was then reappointed to his position three more times. As
administrative officer, he was generally responsible for the
management of the village's day to day activities. After his term of
employment expired, he still continued to work in the same capacity,
albeit, without the benefit of a renewed contract.
Thereafter, Philamlife decided to amend its by-laws. Included therein
was a provision regarding officers, specifically, the position of
administrative officer under which said officer shall hold office at the
pleasure of the Board of Directors. In view of this development, the
association, informed Salafranca that his term of office shall be
coterminus with the Board of Directors which appointed him to his
position. Furthermore, until he submits a medical certificate showing
his state of health, his employment shall be on a month-to-month
basis. Notwithstanding the failure of herein petitioner to submit his
medical certificate, he continued working until his termination in
December 1992.
Claiming that his services had been unlawfully and unceremoniously
dispensed with, petitioner filed a complaint for illegal dismissal with
money claims and for damages.
Issue:

8. The penalties for violation of the by-laws;

W/N the dismissal of Salafranca is valid on the theory that the latter's
position is coterminus with that of the Village's Board of Directors, as
provided for in its amended by-laws

9. In the case of stock corporations, the manner of issuing stock

certificates; and

Ruling:

10. Such other matters as may be necessary for the proper or

convenient transaction of its corporate business and affairs. (21a)
Section 48
Amendments to by-laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the members of a
non-stock corporation, at a regular or special meeting duly called for
the purpose, may amend or repeal any by-laws or adopt new by-laws.
The owners of two-thirds (2/3) of the outstanding capital stock or twothirds (2/3) of the members in a non-stock corporation may delegate to
the board of directors or trustees the power to amend or repeal any bylaws or adopt new by-laws: Provided, That any power delegated to the
board of directors or trustees to amend or repeal any by-laws or adopt
new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a
majority of the members in non-stock corporations, shall so vote at a
regular or special meeting.
Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws in
the office of the corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the directors or
trustees, shall be filed with the Securities and Exchange Commission
the same to be attached to the original articles of incorporation and
original by-laws.
The amended or new by-laws shall only be effective upon the issuance
by the Securities and Exchange Commission of a certification that the
same are not inconsistent with this Code.

Admittedly, the right to amend the by-laws lies solely in the discretion
of the employer, this being in the exercise of management prerogative
or business judgment. However this right, extensive as it may be,
cannot impair the obligation of existing contracts or rights.
Prescinding from these premises, Philam's insistence that it can legally
dismiss petitioner on the ground that his tenure has expired is
untenable. To reiterate, petitioner, being a regular employee, is entitled
to security of tenure, hence, his services may only be terminated for
causes provided by law. A contrary interpretation would not find
justification in the laws or the Constitution. If we were to rule
otherwise, it would enable an employer to remove any employee from
his employment by the simple expediency of amending its by-laws and
providing that his/her position shall cease to exist upon the occurrence
of a specified event.
If private respondent wanted to make the petitioner's position coterminus with that of the Board of Directors, then the amendment
must be effective after petitioner's stay with the private respondent, not
during his term. Obviously, the measure taken by the private
respondent in amending its by-laws is nothing but a devious, but
crude, attempt to circumvent petitioner's right to security of tenure as a
regular employee guaranteed under the Labor Code.
TITLE VI
MEETINGS
Section 49
Kinds of meetings. - Meetings of directors, trustees, stockholders, or
members may be regular or special. (n)
Section 50

Salafranca Vs. Philamlife (300 SCRA 469)

Facts:

Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on
a date fixed in the by-laws, or if not so fixed, on any date in April of
every year as determined by the board of directors or trustees:

104

Provided, That written notice of regular meetings shall be sent to all

stockholders or members of record at least two (2) weeks prior to the
meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the by-laws: Provided, however,
That at least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
Whenever, for any cause, there is no person authorized to call a
meeting, the Secretaries and Exchange Commission, upon petition of a
stockholder or member on a showing of good cause therefor, may issue
an order to the petitioning stockholder or member directing him to call
a meeting of the corporation by giving proper notice required by this
Code or by the by-laws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or members
present have been chosen one of their number as presiding officer.
BOD Vs. Tan (105 Phil 426)
Facts:
John Castillo et al., commenced a suit in the court of First Instance of
Manila to declare null and void election of the members of the board of
directors of the SMB Workers Savings and Loan Association, Inc. and
of the members of the board of directors of the association to call for
and hold another election in accordance with its constitution and bylaws and the Corporation Law; to restain the defendants who had been
illegally elected as members of the board of directors from exercising
the functions of their office; to order the defendants to pay the
plaintiffs attorney's fees and costs of the suit; and to grant them other
just and equitable relief.
The Court rendered judgment declaring the election held null and void,
ordering the BOD to call for and hold another election in accordance
with the constitution and by-laws of the association and the
Corporation Law, and sentencing the defendants to pay the plaintiffs
the sum of P1,500 as attorney's fees, and to pay the cost of the suit
In compliance with the judgment rendered by the Court, the election
committee composed of Quintin Tesalona, Manuel Dumaup and Jose'
Capinio Santos set the meeting of the members of the association for
28 March at 5:30 o'clock in the afternoon to elect the new members of
the board of directors.
The plaintiff filed an ex-parte motion alleging that the election
committee that had called the meeting of members of the association is
composed of the same members that had conducted and supervised the
election of the members of the board of directors that was declared null
and void by the Court. In view thereof it would be inequitable to allow
them to conduct and supervise again the forthcoming election. The
election to be conducted and supervised by the said committee would
not be held in accordance with the constitution and by laws of the
association providing for five days notice to the members before the
election, since the notice was posted and sent out only on 26 March,
and the election would be held on 28 March, or two days after notice.
The notice that beginning 26 March any member could secure his
ballot and proxy from the office of the association is in violation of
section 5, Article III of the Constitution and By-laws, which prohibits
voting by proxy in the election of members of the board of directors,
and that the defendant did not show that arrangement is being made
"to guarantee that the election will be held in accordance with the
constitution and by laws."
They prayed that the Court appoint its representative or
representatives, whose compensation shall be paid out of the funds of
the association, to supervise and conduct the election ordered by it.

Ruling:
Section 3, Article III, of the Constitution and By-laws of the association
provides:
Notice of the time and place of holding of any annual
meeting, or any special meeting, the members, shall be given
either by posting the same in a postage prepaid envelope,
addressed to each member on the record at the address left
by such member with the Secretary of the Association, or at
his known post-office address or by delivering the same
person at least (5) days before the date set for such meeting. .
. . In lieu of addressing or serving personal notices to the
members, notice of the members, notice of a regular annual
meeting or of a special meeting of the members may be given
by posting copies of said notice at the different departments
and plants of the San Miguel Brewery Inc., not less than five
(5) days prior to the date of the meeting.
Notice of a special meeting of the members should be given at leasts
five days before the date of the meeting. Therefore, the five days
previous notice required would not be complied with.
As regards the creation of a committee of three vested with the
authority to call, conduct and supervise the election, and the
appointment thereto of Candido C. Viernes as chairman and the
representative of the court and one representative each from the
parties, the Court in the exercise of its equity jurisdiction may
appointment such committee, it having been shown that the Election
Committee provided for in section 7 of the By-laws of the association
that conducted the election annulled by the respondent court if allowed
to act as such may jeopardise the rights of the respondents.
In a proper proceeding a court for equity may direct the holding of a
stockholders' meeting under the control of a special master, and the
action taken at such a meeting will not be set aside because of a
wrongful use of the court' interlocutory decree, where not brought to
the attention of the court prior to the meeting.
A court of equity may, on showing of good reason, appoint a master to
conduct and supervise an election of directors when it appears that a
fair election cannot make directions contrary to statute and public
policy with respect to the conduct of such election.
Section 51
Place and time of meetings of stockholders or members. Stockholders' or members' meetings, whether regular or special, shall
be held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation are
present or duly represented at the meeting.
Section 52
Quorum in meetings. - Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority of
the members in the case of non-stock corporations.
Lanuza Vs. CA (454 SCRA 54)

105

Facts:
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
incorporated, with seven hundred (700) founders shares and seventysix (76) common shares as its initial capital stock subscription reflected
in the articles of incorporation. However, Onrubia et. al. and their
predecessors who were in control of PMMSI registered the companys
stock and transfer book for the first time in 1978, recording thirty-three
(33) common shares as the only issued and outstanding shares of
PMMSI. In 1979, a special stockholders meeting was called and held
on the basis of what was considered as a quorum of twenty-seven (27)
common shares, representing more than two-thirds (2/3) of the
common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan,
filed a petition with the Securities and Exchange Commission (SEC) for
the registration of their property rights over one hundred (120)
founders shares and twelve (12) common shares owned by their
father. The SEC hearing officer held that the heirs of Acayan were
entitled to the claimed shares and called for a special stockholders
meeting to elect a new set of officers. The SEC En Banc affirmed the
decision. As a result, the shares of Acayan were recorded in the stock
and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a
new set of directors. Private respondents thereafter filed a petition with
the SEC questioning the validity of the 06 May 1992 stockholders
meeting, alleging that the quorum for the said meeting should not be
based on the 165 issued and outstanding shares as per the stock and
transfer book, but on the initial subscribed capital stock of seven
hundred seventy-six (776) shares, as reflected in the 1952 Articles of
Incorporation. The petition was dismissed. Appeal was made to the
SEC En Banc, which granted said appeal, holding that the shares of the
deceased incorporators should be duly represented by their respective
administrators or heirs concerned. The SEC directed the parties to call
for a stockholders meeting on the basis of the stockholdings reflected
in the articles of incorporation for the purpose of electing a new set of
officers for the corporation.

interest of the said shares. This case is one instance where resort to
documents other than the stock and transfer books is necessary. The
stock and transfer book of PMMSI cannot be used as the sole basis for
determining the quorum as it does not reflect the totality of shares
which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book.
At the time the corporation was set-up, there were already seven
hundred seventy-six (776) issued and outstanding shares as reflected in
the articles of incorporation. No proof was adduced as to any
transaction effected on these shares from the time PMMSI was
incorporated up to the time the instant petition was filed, except for the
thirty-three (33) shares which were recorded in the stock and transfer
book in 1978, and the additional one hundred thirty-two (132) in 1982.
But obviously, the shares so ordered recorded in the stock and transfer
book are among the shares reflected in the articles of incorporation as
the shares subscribed to by the incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by
the corporation merely because the corporate officers failed to keep its
records accurately. A corporations records are not the only evidence of
the ownership of stock in a corporation. In an American case, persons
claiming shareholders status in a professional corporation were listed
as stockholders in the amendment to the articles of incorporation. On
that basis, they were in all respects treated as shareholders. In fact, the
acts and conduct of the parties may even constitute sufficient evidence
of ones status as a shareholder or member. In the instant case, no less
than the articles of incorporation declare the incorporators to have in
their name the founders and several common shares. Thus, to
disregard the contents of the articles of incorporation would be to
pretend that the basic document which legally triggered the creation of
the corporation does not exist and accordingly to allow great injustice
to be caused to the incorporators and their heirs.
Section 53

Issue:

Regular and special meetings of directors or trustees. Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide
otherwise.

W/N the basis the outstanding capital stock and accordingly also for
determining the quorum at stockholders meetings it should be the
1978 stock and transfer book or it should be the 1952 articles of
incorporation

Special meetings of the board of directors or trustees may be held at

any time upon the call of the president or as provided in the by-laws.

Ruling:
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this
Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or majority of
the members in the case of non-stock corporation.

Meetings of directors or trustees of corporations may be held anywhere

in or outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of
the meeting must be sent to every director or trustee at least one (1)
day prior to the scheduled meeting, unless otherwise provided by the
by-laws. A director or trustee may waive this requirement, either
expressly or impliedly.

Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term outstanding
capital stock as used in this code, means the total shares of stock
issued to subscribers or stockholders whether or not fully or partially
paid (as long as there is binding subscription agreement) except
treasury shares.
Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders shares or common
shares. In the instant case, two figures are being pitted against each
other those contained in the articles of incorporation, and those
listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if
not inaccurate stock and transfer book, and completely disregarding
the issued and outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or successors in

Expertravel Vs. CA (459 SCRA 147)

Facts:
Korean Airlines is a corporation established and registered in the
Republic of South Korea and licensed to do business in the
Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
while its appointed counsel was Atty. Mario Aguinaldo and his law
firm.

106

In 1999, KAL, through Atty. Aguinaldo, filed a Complaint against ETI

for the collection of the principal amount of P260,150.00, plus
attorneys fees and exemplary damages. The verification and
certification against forum shopping was signed by Atty. Aguinaldo,
who indicated therein that he was the resident agent and legal counsel
of KAL and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty.
Aguinaldo was not authorized to execute the verification and certificate
of non-forum shopping as required by Section 5, Rule 7 of the Rules of
Court. KAL opposed the motion, contending that Atty. Aguinaldo was
its resident agent and was registered as such with the Securities and
Exchange Commission (SEC) as required by the Corporation Code of
the Philippines. It was further alleged that Atty. Aguinaldo was also the
corporate secretary of KAL. Appended to the said opposition was the
identification card of Atty. Aguinaldo, showing that he was the lawyer
of KAL.
Atty. Aguinaldo claimed that he had been authorized to file the
complaint through a resolution of the KAL Board of Directors approved
during a special meeting. KAL was given a period of 10 days within
which to submit a copy of the said resolution.
Finally, KAL submitted on March 6, 2000 an Affidavit of even date,
executed by its general manager Suk Kyoo Kim, alleging that the board
of directors conducted a special teleconference on June 25, 1999, which
he and Atty. Aguinaldo attended. It was also averred that in that same
teleconference, the board of directors approved a resolution
authorizing Atty. Aguinaldo to execute the certificate of non-forum
shopping and to file the complaint. Suk Kyoo Kim also alleged,
however, that the corporation had no written copy of the aforesaid
resolution.
Issue:
W/N KALs holding of a special meeting through teleconferencing
authorizing Atty. Aguinaldo to execute and sign the verification and
certificate of non-forum shopping is valid

file the complaint and execute the required certification against forum
shopping.
It is settled that the requirement to file a certificate of non-forum
shopping is mandatory and that the failure to comply with this
requirement cannot be excused. The certification is a peculiar and
personal responsibility of the party, an assurance given to the court or
other tribunal that there are no other pending cases involving basically
the same parties, issues and causes of action. Hence, the certification
must be accomplished by the party himself because he has actual
knowledge of whether or not he has initiated similar actions or
proceedings in different courts or tribunals. Even his counsel may be
unaware of such facts. Hence, the requisite certification executed by
the plaintiffs counsel will not suffice.
In a case where the plaintiff is a private corporation, the certification
may be signed, for and on behalf of the said corporation, by a
specifically authorized person, including its retained counsel, who has
personal knowledge of the facts required to be established by the
documents.
The records show that the petitioner filed a motion to dismiss the
complaint on the ground that the respondent failed to comply with
Section 5, Rule 7 of the Rules of Court. The respondent opposed the
motion on December 1, 1999, on its contention that Atty. Aguinaldo, its
resident agent, was duly authorized to sue in its behalf. The
respondent, however, failed to establish its claim that Atty. Aguinaldo
was its resident agent in the Philippines. Even the identification card
of Atty. Aguinaldo which the respondent appended to its pleading
merely showed that he is the company lawyer of the respondents
Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of
the teleconference only during the hearing of January 28, 2000; Atty.
Aguinaldo then prayed for ten days, or until February 8, 2000, within
which to submit the board resolution purportedly authorizing him to
file the complaint and execute the required certification against forum
shopping. The respondent, however, failed to comply to submit the
said board resolution authorizing him to verify and sign the certificate
of NFS.

Ruling:
A teleconference represents a unique alternative to face-to-face (FTF)
meetings. It was first introduced in the 1960s with American
Telephone and Telegraphs Picturephone. At that time, however, no
demand existed for the new technology. Travel costs were reasonable
and consumers were unwilling to pay the monthly service charge for
using the picturephone, which was regarded as more of a novelty than
as an actual means for everyday communication. In time, people found
it advantageous to hold teleconferencing in the course of business and
corporate governance, because of the money saved, among other
advantages
Indeed, teleconferencing can only facilitate the linking of people; it
does not alter the complexity of group communication. Although it
may be easier to communicate via teleconferencing, it may also be
easier to miscommunicate. Teleconferencing cannot satisfy the
individual needs of every type of meeting.
In the Philippines, teleconferencing and videoconferencing of members
of board of directors of private corporations is a reality, in light of
Republic Act No. 8792. The Securities and Exchange Commission
issued SEC Memorandum Circular No. 15, on November 30, 2001,
providing the guidelines to be complied with related to such
conferences. Thus, the Court agrees with the RTC that persons in the
Philippines may have a teleconference with a group of persons in South
Korea relating to business transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim
participated in a teleconference along with the respondents Board of
Directors, the Court is not convinced that one was conducted; even if
there had been one, the Court is not inclined to believe that a board
resolution was duly passed specifically authorizing Atty. Aguinaldo to

Section 54
Who shall preside at meetings. - The president shall preside at all
meetings of the directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise.
Section 55
Right to vote of pledgors, mortgagors, and administrators. In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at
meetings of stockholders, unless the pledgee or mortgagee is expressly
given by the pledgor or mortgagor such right in writing which is
recorded on the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote in behalf of the
stockholders or members without need of any written proxy.
Republic Vs. Sandiganbayan (402 SCRA 84)
Facts:
The Presidential Commission on Good Government conducted an ETPI
(Eastern Telecommunications, Phil. Inc.) stockholders meeting during
which a PCGG controlled board of directors was elected. A special
stockholders meeting was later convened by the registered ETPI
stockholders wherein another set of board of directors was elected, as a
result of which two sets of such board and officers were elected.

107

Africa, a stockholder of ETPI, alleging that the PCGG had since

January 29, 1988 been "illegally 'exercising' the rights of stockholders
of ETPI," especially in the election of the members of the board of
directors, filed the above-said motion before the Sandiganbayan.
Ruling:
(1) The PCGG cannot vote sequestered shares to elect the ETPI Board
of Directors or to amend the Articles of Incorporation for the purpose
of increasing the authorized capital stock unless there is a prima facie
evidence showing that said shares are ill-gotten and there is an
imminent danger of dissipation.
(2) The ETPI Stock and Transfer Book should be the basis for
determining which persons have the right to vote in the stockholders
meeting for the election of the ETPI Board of Directors.
(3) The PCGG is entitled to vote the shares ceded to it by Roberto S.
Benedicto and his controlled corporations under the Compromise
Agreement, provided that the shares are first registered in the name of
the PCGG. The PCGG may not register the transfer of the Malacaang
and the Nieto shares in the ETPI Stock and Transfer Book; however, it
may vote the same as conservator provided that the PCGG satisfies the
two-tiered test devised by the Court in Cojuangco v. Calpo , whether
PCGG may vote the sequestered shares in SMC necessitates a
determination of at least two factual matters: 1. whether there is prima
facie evidence showing that the said shares are ill-gotten and thus
belong to the state; and 2. whether there is an immediate danger of
dissipation thus necessitating their continued sequestration and voting
by the PCGG while the main issue pends with the Sandiganbayan.
(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be
incorporated in the ETPI Articles of Incorporation substantially
contemporaneous to, but not before, the election of the ETPI Board of
Directors.
(5) Members of the Sandiganbayan shall not participate in the
stockholders meeting for the election of the ETPI Board of Directors.
Neither shall a Clerk of Court be appointed to call such meeting and
issue notices thereof. The Sandiganbayan shall appoint, or the parties
may agree to constitute, a committee of competent and impartial
persons to call, send notices and preside at the meeting for the election
of the ETPI Board of Directors; and (6) This Court has no jurisdiction
over the motion to cite the PCGG and "its accomplices" in contempt
and to nullify the stockholders meeting of March 17, 1997.
Section 56
Voting in case of joint ownership of stock. - In case of shares of
stock owned jointly by two or more persons, in order to vote the same,
the consent of all the co-owners shall be necessary, unless there is a
written proxy, signed by all the co-owners, authorizing one or some of
them or any other person to vote such share or shares: Provided, That
when the shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a
proxy therefor.

proxy shall be valid and effective for a period longer than five (5) years
at any one time.
Section 59
Voting trusts. - One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any time: Provided, That in the
case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities
and Exchange Commission; otherwise, said agreement is ineffective
and unenforceable. The certificate or certificates of stock covered by
the voting trust agreement shall be canceled and new ones shall be
issued in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Provided, That both the
transferor and the trustee or trustees may exercise the right of
inspection of all corporate books and records in accordance with the
provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be deemed canceled and
new certificates of stock shall be reissued in the name of the
transferors.
The voting trustee or trustees may vote by proxy unless the agreement
provides otherwise.
National Investment Vs. Aquino (163 SCRA 153)
Facts:

Section 57
Voting right for treasury shares. - Treasury shares shall have no
voting right as long as such shares remain in the Treasury.
Section 58
Proxies. - Stockholders and members may vote in person or by proxy
in all meetings of stockholders or members. Proxies shall in writing,
signed by the stockholder or member and filed before the scheduled
meeting with the corporate secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting for which it is intended. No

Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan)

is a Filipino-American corporation organized under the laws of the
Philippines, primarily engaged in the manufacture of coconut oil and
copra cake for export. In 1965, Batjak's financial condition deteriorated
to the point of bankruptcy. As of that year, Batjak's indebtedness to
some private banks and to the Philippine National Bank (PNB)
amounted to P11,915,000.00,
As security for the payment of its obligations and advances against
shipments, Batjak mortgaged its three (3) coco-processing oil mills in
Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte to
Manila Banking Corporation (Manila Bank), Republic Bank (RB), and
Philippine Commercial and Industrial Bank (PCIB), respectively. In

108

need for additional operating capital to place the three (3) cocoprocessing mills at their optimum capacity and maximum efficiency
and to settle, pay or otherwise liquidate pending financial obligations
with the different private banks, Batjak applied to PNB for additional
financial assistance. On 5 October 1965, a Financial Agreement was
submitted by PNB to Batjak for acceptance.
The terms and conditions of the Financial Agreement were duly
accepted by Batjak. Under said Agreement, NIDC would, as it actually
did, invest P6,722,500.00 in Batjak in the form of preferred shares of
stock convertible within five (5) years at par into common stock, to
liquidate Batjak's obligations to Republic Bank (RB), Manufacturers
Bank and Trust Company (MBTC) and Philippine Commercial &
Industrial Bank (PCIB), and the balance of the investment was to be
applied to Batjak's past due account of P 5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of
PNB the first and any mortgages they held on the properties of Batjak.
Next, a Voting Trust Agreement was executed on 26 October 1965 in
favor of NIDC by the stockholders representing 60% of the outstanding
paid-up and subscribed shares of Batjak. This agreement was for a
period of five (5) years and, upon its expiration, was to be subject to
negotiation between the parties.
In July 1967, forced by the insolvency of Batjak, PNB instituted
extrajudicial foreclosure proceedings against the oil mills of Batjak
located in Tanauan, Leyte and Jimenez, Misamis Occidental. The
properties were sold to PNB as the highest bidder. One year thereafter,
or in September 1968, final Certificates of Sale were issued by the
provincial sheriffs of Leyte 6 and Misamis Occidental 7 for the two (2)
oil mills in Tanauan and Jimenez in favor of PNB, after Batjak failed to
exercise its right to redeem the foreclosed properties within the
allowable one year period of redemption. Subsequently, PNB
transferred the ownership of the two (2) oil mills to NIDC which, as
aforestated, was a wholly-owned PNB subsidiary.

Batjak nor its stockholders have instituted any legal proceedings to

annul the mortgage foreclosure aforementioned.
Under the aforecited provision, what was to be returned by NIDC as
trustee to Batjak's stockholders, upon the termination of the
agreement, are the certificates of shares of stock belonging to Batjak's
stockholders, not the properties or assets of Batjak itself which were
never delivered, in the first place to NIDC, under the terms of said
Voting Trust Agreement.
In any event, a voting trust transfers only voting or other rights
pertaining to the shares subject of the agreement or control over the
stock. The law on the matter is Section 59, Paragraph 1 of the
Corporation Code (BP 68) which provides:
Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of confering upon
a trustee or trusties the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: ...
The acquisition by PNB-NIDC of the properties in question was not
made or effected under the capacity of a trustee but as a foreclosing
creditor for the purpose of recovering on a just and valid obligation of
Batjak.
Moreover, the prevention of imminent danger to property is the
guiding principle that governs courts in the matter of appointing
receivers. Under Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary
in granting the relief of receivership that the property or fired be in
danger of loss, removal or material injury.
In the case at bar, Batjak in its petition for receivership, or in its
amended petition therefor, failed to present any evidence, to establish
the requisite condition that the property is in danger of being lost,
removed or materially injured unless a receiver is appointed to guard
and preserve it.

As regards the oil mill located at Sasa, Davao City, the same was
similarly foreclosed extrajudicial by NIDC. It was sold to NIDC as the
highest bidder. After Batjak failed to redeem the property, NIDC
consolidated its ownership of the oil mill.
Three (3) years thereafter, Batjak represented by majority
stockholders, through Atty. Amado Duran, legal counsel of private
respondent Batjak, wrote a letter to NIDC inquiring if the latter was
still interested in negotiating the renewal of the Voting Trust
Agreement. Batjak wrote another letter to NIDC informing the latter
that Batjak would now safely assume that NIDC was no longer
interested in the renewal of said Voting Trust Agreement and, in view
thereof, requested for the turn-over and transfer of all Batjak assets,
properties, management and operations.

TITLE VII
STOCKS AND STOCKHOLDERS
Section 60
Subscription contract. - Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or
some other contract.

Issue:

Section 61

W/N the NIDC constituted as trustee of the assets, management and

operations of Batjak, that due to the expiration of the Voting Trust
Agreement, NIDC should turn over the assets of the three (3) oil mills
to Batjak

Pre-incorporation subscription. - A subscription for shares of

stock of a corporation still to be formed shall be irrevocable for a period
of at least six (6) months from the date of subscription, unless all of the
other subscribers consent to the revocation, or unless the incorporation
of said corporation fails to materialize within said period or within a
longer period as may be stipulated in the contract of subscription:
Provided, That no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the Securities and
Exchange Commission.

Ruling:
PNB acquired ownership of two (2) of the three (3) oil mills by virtue of
mortgage foreclosure sales. NIDC acquired ownership of the third oil
mill also under a mortgage foreclosure sale. Certificates of title were
issued to PNB and NIDC after the lapse of the one (1) year redemption
period. Subsequently, PNB transferred the ownership of the two (2) oil
mills to NIDC. There can be no doubt, therefore, that NIDC not only
has possession of, but also title to the three (3) oil mills formerly owned
by Batjak. The interest of Batjak over the three (3) oil mills ceased
upon the issuance of the certificates of title to PNB and NIDC
confirming their ownership over the said properties. More so, Batjak
does not impugn the validity of the foreclosure proceedings. Neither

Section 62
Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration
for the issuance of stock may be any or a combination of any two or
more of the following:

109

1. Actual cash paid to the corporation;

Ruling:

2. Property, tangible or intangible, actually received by the corporation

and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;

The stipulation is invalid.

3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation thereof
shall initially be determined by the incorporators or the board of
directors, subject to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange for promissory notes or
future service.
The same considerations provided for in this section, insofar as they
may be applicable, may be used for the issuance of bonds by the
corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority
conferred upon it by the articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called for
the purpose.
National Exchange Vs. Dexter (51 Phil 601)
Facts:
I. B. Dexter, signed a written subscription to the corporate stock of C.
S. Salmon & Co. in the following form:
I hereby subscribe for three hundred (300) shares of the
capital stock of C. S. Salmon and Company, payable from the
first dividends declared on any and all shares of said
company owned by me at the time dividends are declared,
until the full amount of this subscription has been paid.
Upon this subscription the sum of P15,000 was paid in January, 1920,
from a dividend declared at about that time by the company,
supplemented by money supplied personally by the subscriber. Beyond
this nothing has been paid on the shares and no further dividend has
been declared by the corporation. There is therefore a balance of
P15,000 still paid upon the subscription.
The National Exchange Co., Inc., as assignee (through the Philippine
National Bank) of C. S. Salmon & Co., instituted an action for the
purpose of recovering from I. B. Dexter a balance of P15,000, the par
value of one hundred fifty shares of the capital stock of C. S. Salmon &
co., with interest and costs.
Issue:
W/N the stipulation contained in the subscription to the effect that the
subscription is payable from the first dividends declared on the shares
has the effect of relieving the subscriber from personal liability in an
action to recover the value of the shares

In the absence of restrictions in its charter, a corporation, under its

general power to contract, has the power to accept subscriptions upon
any special terms not prohibited by positive law or contrary to public
policy, provided they are not such as to require the performance of acts
which are beyond the powers conferred upon the corporation by its
character, and provided they do not constitute a fraud upon other
subscribers or stockholders, or upon persons who are or may become
creditors of the corporation.
The Philippine Commission inserted in the Corporation Law, enacted
March 1, 1906, the following provision: ". . . no corporation shall issue
stock or bonds except in exchange for actual cash paid to the
corporation or for property actually received by it at a fair valuation
equal to the par value of the stock or bonds so issued." (Act No. 1459,
sec. 16 as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except
for actual cash to the par value of the stock to its full equivalent in
property is thus enshrined in both the organic and statutory law of the
Philippine; Islands; and it would seem that our lawmakers could
scarcely have chosen language more directly suited to secure absolute
equality stockholders with respect to their liability upon stock
subscriptions. Now, if it is unlawful to issue stock otherwise than as
stated it is self-evident that a stipulation such as that now under
consideration, in a stock subscription, is illegal, for this stipulation
obligates the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that
dividends are not paid, there is no liability at all. This is discrimination
in favor of the particular subscriber, and hence the stipulation is
unlawful.
The general doctrine of corporation law is in conformity with this
conclusion, as may be seen from the following proposition taken from
the standard encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription upon such
terms as will operate as a fraud upon the other subscribers or
stockholders by subjecting the particular subscriber to lighter burdens,
or by giving him greater rights and privileges, or as a fraud upon
creditors of the corporation by withdrawing or decreasing the capital.
It is well settled therefore, as a general rule, that an agreement between
a corporation and a particular subscriber, by which the subscription is
not to be payable, or is to be payable in part only, whether it is for the
purpose of pretending that the stock is really greater than it is, or for
the purpose of preventing the predominance of certain stockholders, or
for any other purpose, is illegal and void as in fraud of other
stockholders or creditors, or both, and cannot be either enforced by the
subscriber or interposed as a defense in an action on the subscription.
Section 63
Certificate of stock and transfer of shares. - The capital stock of
stock corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by
delivery of the certificate or certificates endorsed by the owner or his
attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.

110

Pacific Basin Vs. Oriental Petroleum (531 SCRA 667)

however, shall be valid except as between the

parties, until the transfer is recorded in the books
of the corporation x x x.

Facts:
Pacific Basin Securities, Inc. (Pacific Basin), through the stock
brokerage firm First Resources Management and Securities
Corporation (FRMSC), purchased 308,300,000 Class A shares of
Oriental Petroleum and Minerals Corporation (OPMC). Pacific Basin
fully paid for the OPMC shares in the total amount of P17,727,000.00
or P.05750 per share. The shares were listed and traded in the Makati
Stock Exchange.
The OPMC shares turned out to be owned by Piedras Petroleum
Mining Corporation (Piedras Petroleum), a sequestered company
controlled by the nominees of the Presidential Commission on Good
Government (PCGG). PCGG sent a letter to Equitable Banking
Corporation (EBC), OPMCs stock and transfer agent, confirming
Piedras Petroleums sale of the OPMC shares in favor of Pacific Basin
through FRMSC. In the same letter, PCGG requested EBC to record
the acquisition of said shares and to issue the corresponding
certificates of stock in favor of Pacific Basin.
The requests were left unheeded. EBC informed FRMSC that it cannot
effect the transfer of the OPMC s hares to Pacific Basin on the following
grounds: first, that the endorser of the stock certificate, a certain Mr.
Clemente Madarang, was not among the authorized signatories of
Piedras Petroleum; and second, there was no board resolution from
Piedras Petroleum which authorized the sale of the OPMC shares.
OPMC and EBC argue that the OPMC shares are government-owned
and, as government property, these can be disposed of only through
public bidding. Hence, the sale by Piedras Petroleum of the OPMC
shares to Pacific Basin through the stock market is not valid, since it
does not comply with the public bidding requirement.
Issue:
W/N the sale between Pacific and OPMC is valid
Ruling:

Clearly, the right of a transferee/ assignee to have stocks transferred to

his name is an inherent right flowing from his ownership of the stocks.
The Court had ruled in Rural Bank of Salinas, Inc. v. Court of Appeals
that the corporations obligation to register is ministerial, citing
Fletcher, to wit:
In transferring stock, the secretary of a
corporation acts in purely ministerial capacity, and
does not try to decide the question of ownership.
The duty of the corporation to transfer is a
ministerial one and if it refuses to make such
transaction without good cause, it may be
compelled to do so by mandamus.
The Court further held in Rural Bank of Salinas that the only
limitation imposed by Section 63 of the Corporation Code is when the
corporation holds any unpaid claim against the shares intended to be
transferred.
Pacific Basin satisfied the condition of full payment of the OPMC
shares as evidenced by the FRMC Buy Invoice No. 14200 dated May 31,
1991. This fact was never denied by both OPMC and EBC. Therefore,
upon Pacific Basins full payment of the OPMC shares, it became a
ministerial duty on the part of OPMC to record the transfer in the stock
and transfer book of OPMC and issue new stock certificates in favor of
Pacific Basin. Thus, OPMCs and EBCs refusal to record the transfer is
violative of Section 63 of the Corporation Code and OPMCs own
amended by-laws which states that Certificate of stock shall be
issued to each holder of fully paid stock in numerical order from
the stock certificate book, and shall be signed by the President and
countersigned by the Secretary and sealed with the corporate seal. A
record of each certificate issued shall be kept on the stub thereof and
upon the stock register of the company.
Republic Vs. Estate of Hans Menzi (476 SCRA 20)
Facts:

The sale of the subject shares through the stock exchange is valid and
binding, as there is no law which mandates that listed shares which are
owned by the government be sold only through public bidding.
As conceded by both Pacific Basin and OPMC, the subject OPMC
shares are listed and traded in the stock exchange. OPMC is a listed
corporation in the Philippine Stock Exchange (PSE). As a listed
corporation, it shall be bound by the provisions of the Revised Listing
Rules of the PSE the objective of which is to provide a fair, orderly,
efficient, and transparent market for the trading of securities.
Moreover, even if the law indeed requires that the sale of the subject
shares undergo public bidding, the Court finds that sale through the
stock exchange is already a substantial compliance with the public
bidding requirement.
It is beyond dispute that OPMC holds no unpaid claim against Pacific
Basin for the value of the shares acquired by the latter. The Court sees
no reason why OPMC and EBC consistently and continuously refused
to record the transfer in the stock and transfer books of OPMC and
issue new certificates in favor of Pacific Basin.
Section 63 of the Corporation Code provides:
Sec. 63. x x x Shares of stock so issued are personal
property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or
his attorney-in-fact or other person legally
authorized to make the transfer. No transfer,

In 1957, Menzi purchased the entire interest in Bulletin from its

founder and owner, Mr. Carson Taylor. In 1961, Yap, owner of US
Automotive, purchased Bulletin shares from Menzi and became one of
the corporations major stockholders.
On April 2, 1968, a stock option was executed by and between Menzi
and Menzi and Co. on the one hand, and Yap and US Automotive on
the other, whereby the parties gave the each other preferential right to
buy the others Bulletin shares.
On April 22, 1968, the stockholders of Bulletin approved certain
amendments to Bulletins Articles of Incorporation, consisting of some
restrictions on the transfer of Bulletin shares to non-stockholders. The
amendments were approved by the Board of Directors of Bulletin and
by the Securities and Exchange Commission (SEC).
Several years later, Atty. Amorsolo V. Mendoza, Vice President of US
Automotive, executed a promissory note with his personal guarantee in
favor of Menzi, promising to pay the latter the sum of P21,304,921.16
with interest at 18% per annum as consideration for Menzis sale of his
154 block on or before December 31, 1984.
One day after Menzis death, a petition for the probate of his last will
and testament was filed by the named executor, Atty. Montecillo.
Atty. Montecillo received from US Automotive two (2) checks in the
amounts of P21,304,778.24 and P3,664,421.85 in full payment of the
agreed purchase price and interest for the sale of the 154 block. On the

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same day, Atty. Montecillo signed a company voucher acknowledging

receipt of the payment for the shares, indicating on the dorsal portion
thereof the certificate numbers of the 12 stock certificates covering the
154 block, the number of shares covered by each certificate and the
date of issuance thereof.

The Corporation Code acknowledges that the delivery of a duly

indorsed stock certificate is sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of transfer is valid between the
parties. In order to bind third persons, however, the transfer must be
recorded in the books of the corporation.

Atty. Montecillo also wrote on the lower portion of the promissory note
executed by Atty. Mendoza the words Paid May 15, 1985 (signed) M.G.
Montecillo, Executor of the Estate of Hans M. Menzi.

Clearly then, the absence of a deed of assignment is not a fatal flaw

which renders the transfer invalid as the Republic posits.

The Sandiganbayan ruled that the sale of the 154 block to US

Automotive is valid and legal. According to the Sandiganbayan, the
sale was made pursuant to the stock option executed in 1968 between
the parties to the sale. Negotiations took place and were concluded
before Menzis death, and full payment was made only after the
probate court had judicially confirmed the sale.
Now, the Republic questioned the validity of such sale. They claim that
the requirements for a valid transfer of stocks, namely: (1) there must
be delivery of the stock certificate; (2) the certificate must be indorsed
by the owner or his attorney-in-fact or other persons legally authorized
to make the transfer; and (3) the transfer must be recorded in the
books of the corporation in order to be valid against third parties, have
all been met.

There appears to be no dispute in this case that the stock certificates

covering the 154 block were duly indorsed and delivered to the buyer,
US Automotive. The parties to the sale, in fact, do not question the
validity and legality of the transfer.
At any rate, the Sandiganbayans factual findings that the 154 block was
sold to US Automotive while Menzi was still alive, and that Atty.
Montecillo merely accepted payment by virtue of the authority
conferred upon him by Menzi himself are conclusive upon this Court,
supported, as they are, by the evidence on record.
Therefore, the sale of the 154 block to US Automotive was valid and
legal.
Ponce Vs. Alsons Cement (393 SCRA 602)

Issue:
Facts:
W/N the sale between Menzi and US Automotive was valid
The late Fausto G. Gaid was an incorporator of Victory Cement
Corporation (VCC), having subscribed to and fully paid 239,500 shares
of said corporation.

Ruling:
The absence of a deed of sale evidencing the sale is allegedly not
irregular because the law itself does not require any deed for the
validity of the transfer of shares of stock, it being sufficient that such
transfer be effected by delivery of the stock certificates duly indorsed.
At any rate, a duly notarized Receipt covering the sale was executed.

Ponce and Fausto Gaid executed a "Deed of Undertaking" and

"Indorsement" whereby the latter acknowledges that the former is the
owner of said shares and he was therefore assigning/endorsing the
same to the plaintiff. Later, VCC was renamed Floro Cement
Corporation. Thereafter, FCC was renamed Alsons Cement Corporation
as shown by the Amended Articles of Incorporation of ACC.

Moreover, the BIR certified that the Estate of Menzi paid the final tax
on capital gains derived from the sale of the 154 block and authorized
the Corporate Secretary to register the transfer of the said shares in the
name of US Automotive. Further, a stock certificate covering the 154
block was issued to US Automotive by Quimson himself as Corporate
Secretary.

From the time of incorporation of VCC up to the present, no certificates

of stock corresponding to the 239,500 subscribed and fully paid shares
of Gaid were issued in the name of Fausto G. Gaid and/or of Ponce.

Sec. 63 of the Corporation Code provides the requisites for a valid

transfer of shares:

Despite repeated demands, ACC refused and continued to refuse

without any justifiable reason to issue to Ponce the certificates of
stocks corresponding to the 239,500 shares of Gaid, in violation of
plaintiffs right to secure the corresponding certificate of stock in his
name.

Sec. 63. Certificate of stock and transfer of

shares.The capital stock of stock corporations
shall be divided into shares for which certificates
signed by the president or vice-president,
countersigned by the secretary or assistant
secretary, and sealed with the seal of the
corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are
personal property and may be transferred
by delivery of the certificate or certificates
indorsed by the owner or his attorney-infact or other person legally authorized to
make the transfer. No transfer, however,
shall be valid, except as between the
parties, until the transfer is recorded in the
books of the corporation showing the
names of the parties to the transaction, the
date of the transfer, the number of the
certificate or certificates and the number of
shares transferred.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
books of the corporation.

Ponce filed a petition for mandamus against ACC. Attached to the

complaint was the Deed of Undertaking and Indorsement. Petitioner
prayed that judgment be rendered ordering respondents (a) to issue in
his name certificates of stocks covering the 239,500 shares of stocks
and its legal increments and (b) to pay him damages.
Issue:
W/N the indorsement by Gaid to Ponce of the shares of stock in
questionassuming that the indorsement was in fact a transfer of
stockswas valid against third persons such as ALSONS under Section
63 of the Corporation Code
Ruling:
There is no question that Fausto Gaid was an original subscriber of
respondent corporations 239,500 shares. This is clear from the
numerous pleadings filed by either party. It is also clear from the
Amended Articles of Incorporation approved on August 9, 1995 that
each share had a par value of P 1.00 per share. And, it is undisputed
that petitioner had not made a previous request upon the corporate

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secretary of ALSONS, respondent Francisco M. Giron Jr., to record the

alleged transfer of stocks.

stock certificates. With more reason, in our view, a corporate secretary

may not be compelled to issue stock certificates without such
registration.

The Corporation Code states that:

SEC. 63. Certificate of stock and transfer of shares.The
capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the bylaws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and
the number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
Pursuant to the foregoing provision, a transfer of shares of stock not
recorded in the stock and transfer book of the corporation is nonexistent as far as the corporation is concerned. As between the
corporation on the one hand, and its shareholders and third persons on
the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has
been recorded in the stock and transfer book that a corporation may
rightfully regard the transferee as one of its stockholders. From this
time, the consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to recognize arises.
Hence, without such recording, the transferee may not be regarded by
the corporation as one among its stockholders and the corporation may
legally refuse the issuance of stock certificates in the name of the
transferee even when there has been compliance with the requirements
of Section 64 of the Corporation Code. This is the import of Section 63
which states that "No transfer, however, shall be valid, except between
the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the
number of shares transferred." The situation would be different if the
petitioner was himself the registered owner of the stock which he
sought to transfer to a third party, for then he would be entitled to the
remedy of mandamus.
From the corporations point of view, the transfer is not effective until
it is recorded. Unless and until such recording is made the demand for
the issuance of stock certificates to the alleged transferee has no legal
basis. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only
to its books for the purpose of determining who its shareholders are. In
other words, the stock and transfer book is the basis for ascertaining
the persons entitled to the rights and subject to the liabilities of a
stockholder. Where a transferee is not yet recognized as a stockholder,
the corporation is under no specific legal duty to issue stock certificates
in the transferees name.
The deed of undertaking with indorsement presented by petitioner
does not establish, on its face, his right to demand for the registration
of the transfer and the issuance of certificates of stocks. In Hager vs.
Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus
fails to state a cause of action where it appears that the petitioner is not
the registered stockholder and there is no allegation that he holds any
power of attorney from the registered stockholder, from whom he
obtained the stocks, to make the transfer.
It has been made clear, thus far, that before a transferee may ask for
the issuance of stock certificates, he must first cause the registration of
the transfer and thereby enjoy the status of a stockholder insofar as the
corporation is concerned. A corporate secretary may not be compelled
to register transfers of shares on the basis merely of an indorsement of

Absent an allegation that the transfer of shares is recorded in the stock

and transfer book of respondent ALSONS, there appears no basis for a
clear and indisputable duty or clear legal obligation that can be
imposed upon the respondent corporate secretary, so as to justify the
issuance of the writ of mandamus to compel him to perform the
transfer of the shares to petitioner. Where the corporate secretary is
under no clear legal duty to issue stock certificates because of the
petitioners failure to record earlier the transfer of shares, one of the
elements of the cause of action for mandamus is clearly missing.
Bitong Vs. CA (292 SCRA 503)
Facts:
These twin cases originated from a derivative suit filed by Nora A.
Bitong before the SEC allegedly for the benefit of Mr. & Ms. Publishing
Co., Inc., among others, to hold spouses Eugenia D. Apostol and Jose
A. Apostol liable for fraud, misrepresentation, disloyalty, evident bad
faith, conflict of interest and mismanagement in directing the affairs of
Mr. & Ms. to the damage and prejudice of Mr. & Ms. and its
stockholders, including petitioner.
Alleging before the SEC that she had been the Treasurer and a Member
of the Board of Directors of Mr. & Ms. from the time it was
incorporated on 29 October 1976 to 11 April 1989, and was the
registered owner of 1,000 shares of stock out of the 4,088 total
outstanding shares, Bitong complained of irregularities committed
from 1983 to 1987 by Eugenia D. Apostol, President and Chairperson of
the Board of Directors. Petitioner claimed that except for the sale of the
name Philippine Inquirer to Philippine Daily Inquirer all other
transactions and agreements entered into by Mr.& Ms. with PDI were
not supported by any bond and/or stockholders' resolution. And, upon
instructions of Eugenia D. Apostol, Mr. & Ms. made several cash
advances to PDI on various occasions amounting to P3.276 million. On
some of these borrowings PDI paid no interest whatsoever. Despite the
fact that the advances made by Mr. & Ms. to PDI were booked as
advances to an affiliate, there existed no board or stockholders'
resolution, contract nor any other document which could legally
authorize the creation of and support to an affiliate.
Petitioner further alleged that Eugenia and Jose Apostol were
stockholders, directors and officers in both Mr. & Ms. and PDI. In fact
on 2 May 1986 Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion
G. Nuyda subscribed to PDI shares of stock at P50,000.00 each or a
total of P150,000.00. The stock subscriptions were paid for by Mr. &
Ms. and initially treated, as receivables from officers and employees.
But, no payments were ever received from respondents, Magsanoc and
Petitioner then contends that she was a holder of the proper certificates
of shares of stock and that the transfer was recorded in the Stock and
Transfer Book of Mr. & Ms. She invokes Sec. 63 of The Corporation
Code which provides that no transfer shall be valid except as between
the parties until the transfer is recorded in the books of the
corporation, and upon its recording the corporation is bound by it and
is estopped to deny the fact of transfer of said shares. Petitioner alleges
that even in the absence of a stock certificate, a stockholder solely on
the strength of the recording in the stock and transfer book can
exercise all the rights as stockholder, including the right to file a
derivative suit in the name of the corporation. And, she need not
present a separate deed of sale or transfer in her favor to prove
ownership of stock.
Ruling:
Sec. 63 of The Corporation Code envisions a formal certificate of stock
which can be issued only upon compliance with the following
requisites:

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a.

b.

c.
d.

First , the certificates must be signed by the president or

vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation. A mere
typewritten statement advising a stockholder of the extent of
his ownership in a corporation without qualification and/or
authentication cannot be considered as a formal certificate of
stock.
Second, delivery of the certificate is an essential element of
its issuance. Hence, there is no issuance of a stock certificate
where it is never detached from the stock books although
blanks therein are properly filled up if the person whose
name is inserted therein has no control over the books of the
company.
Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully
paid.
Fourth , the original certificate must be surrendered where
the person requesting the issuance of a certificate is a
transferee from a stockholder.

The certificate of stock itself once issued is a continuing affirmation or

representation that the stock described therein is valid and genuine
and is at least prima facie evidence that it was legally issued in the
absence of evidence to the contrary. However, this presumption may be
rebutted. Similarly, books and records of a corporation which include
even the stock and transfer book are generally admissible in evidence
in favor of or against the corporation and its members to prove the
corporate acts, its financial status and other matters including one's
status as a stockholder. They are ordinarily the best evidence of
corporate acts and proceedings.
However, the books and records of a corporation are not conclusive
even against the corporation but are prima facie evidence only. Parol
evidence may be admitted to supply omissions in the records, explain
ambiguities, or show what transpired where no records were kept, or in
some cases where such records were contradicted. The effect of entries
in the books of the corporation which purport to be regular records of
the proceedings of its board of directors or stockholders can be
destroyed by testimony of a more conclusive character than mere
suspicion that there was an irregularity in the manner in which the
books were kept.
The foregoing considerations are founded on the basic principle that
stock issued without authority and in violation of law is void and
confers no rights on the person to whom it is issued and subjects him
to no liabilities. Where there is an inherent lack of power in the
corporation to issue the stock, neither the corporation nor the person
to whom the stock is issued is estopped to question its validity since an
estopped cannot operate to create stock which under the law cannot
have existence.
In the case at bar, there is overwhelming evidence that despite what
appears on the certificate of stock and stock and transfer book,
petitioner was not a bona fide stockholder of Mr. & Ms. before March
1989 or at the time the complained acts were committed to qualify her
to institute a stockholder's derivative suit against private respondents.
Aside from petitioner's own admissions, several corporate documents
disclose that the true party-in-interest is not petitioner but JAKA.
In fine, the records are unclear on how petitioner allegedly acquired
the shares of stock of JAKA. Petitioner being the chief executive officer
of JAKA and the sole person in charge of all business and financial
transactions and affairs of JAKA was supposed to be in the best
position to show convincing evidence on the alleged transfer of shares
to her, if indeed there was a transfer. Considering that petitioner's
status is being questioned and several factual circumstances have been
presented by private respondents disproving petitioner's claim, it was
incumbent upon her to submit rebuttal evidence on the manner by
which she allegedly became a stockholder. Her failure to do so taken in
the light of several substantial inconsistencies in her evidence is fatal to
her case.
The rule is that the endorsement of the certificate of stock by the owner
or his attorney-in-fact or any other person legally authorized to make

the transfer shall be sufficient to effect the transfer of shares only if the
same is coupled with delivery. The delivery of the stock certificate duly
endorsed by the owner is the operative act of transfer of shares from
the lawful owner to the new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (a)
There must be delivery of the stock certificate; (b) The certificate must
be endorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and, (c) to be valid against
third parties, the transfer must be recorded in the books of the
corporation. At most, in the instant case, petitioner has satisfied only
the third requirement. Compliance with the first two requisites has not
been clearly and sufficiently shown.
Considering that the requirements provided under Sec. 63 of The
Corporation Code should be mandatorily complied with, the rule on
presumption of regularity cannot apply. The regularity and validity of
the transfer must be proved. As it is, even the credibility of the stock
and transfer book and the entries thereon relied upon by petitioner to
show compliance with the third requisite to prove that she was a
stockholder since 1983 is highly doubtful.
Lim Tay Vs. CA (293 SCRA 634)
Facts:
Sy Guiok and Sy Lim secured a loan from the Lim Tay in the amount of
P40,000 payable within six (6) months. To secure the payment of the
aforesaid loan and interest thereon, each of them executed a Contract
of Pledge in favor of the petitioner whereby they respectively pledged
three hundred (300) shares of stock in the Go Fay & Company Inc.,
each. Guiok and Lim obliged themselves to pay interest on said loan at
the rate of 10% per annum from the date of said contract of pledge.
Under said "Contracts of Pledge," Guiok and Sy Lim covenanted, inter
alia , that:
3. In the event of the failure of the PLEDGOR to pay the amount within
a period of six (6) months from the date hereof, the PLEDGEE is
hereby authorized to foreclose the pledge upon the said shares of stock
hereby created by selling the same at public or private sale with or
without notice to the PLEDGOR, at which sale the PLEDGEE may be
the purchaser at his option; and the PLEDGEE is hereby authorized
and empowered at his option to transfer the said shares of stock on the
books of the corporation to his own name and to hold the certificate
issued in lieu thereof under the terms of this pledge, and to sell the said
shares to issue to him and to apply the proceeds of the sale to the
payment of the said sum and interest, in the manner hereinabove
provided;
4. In the event of the foreclosure of this pledge and the sale of the
pledged certificate, any surplus remaining in the hands of the
PLEDGEE after the payment of the said sum and interest, and the
expenses, if any, connected with the foreclosure sale, shall be paid by
the PLEDGEE to the PLEDGOR;
5. Upon payment of the said amount and interest in full, the PLEDGEE
will, on demand of the PLEDGOR, redeliver to him the said shares of
stock by surrendering the certificate delivered to him by the PLEDGOR
or by retransferring each share to the PLEDGOR, in the event that the
PLEDGEE, under the option hereby granted, shall have caused such
shares to be transferred to him upon the books of the issuing
company."
Guiok and Sy Lim endorsed their respective shares of stock in blank
and delivered the same to the [p]etitioner.
However, Guiok and Sy Lim failed to pay their respective loans and the
accrued interests thereon to the petitioner. In October, 1990, the
petitioner filed a "Petition for Mandamus" against Respondent
Corporation, praying that an order be issued directing the corporate

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secretary of Respondent Go Fay & Co., Inc. to register the stock

transfers and issue new certificates in favor of Lim Tay. It is likewise
prayed that Respondent Go Fay & Co., Inc. be ordered to pay all
dividends due and unclaimed on the said certificates to Lim Tay.
Issue:
W/N pursuant to the contracts of pledge, Lim Tay became the owner of
the shares when the term for the loans expired
Ruling:
The contractual stipulation shows that plaintiff was merely authorized
to foreclose the pledge upon maturity of the loans, not to own them.
Such foreclosure is not automatic, for it must be done in a public or
private sale. Nowhere did the Complaint mention that petitioner had in
fact foreclosed the pledge and purchased the shares after such
foreclosure. His status as a mere pledgee does not, under civil law,
entitles him to ownership of the subject shares. It is also noteworthy
that petitioner's Complaint did not aver that said shares were acquired
through extraordinary prescription, novation or laches. Moreover,
petitioner's claim, subsequent to the filing of the Complaint, that he
acquired ownership of the said shares through these three modes is not
indubitable and still has to be resolved. Manifestly, the Complaint by
itself did not contain any prima facie showing that petitioner was the
owner of the shares of stocks. Quite the contrary, it demonstrated that
he was merely a pledgee, not an owner.
Petitioner's ownership over the shares in this case was not yet
perfected when the Complaint was filed. The contract of pledge
certainly does not make him the owner of the shares pledged. Further,
whether prescription effectively transferred ownership of the shares,
whether there was a novation of the contracts of pledge, and whether
laches had set in were difficult legal issues, which were unpleaded and
unresolved when herein petitioner asked the corporate secretary of Go
Fay to effect the transfer, in his favor, of the shares pledged to him.
Neugene Vs. CA (303 SCRA 295)
Facts:

NEUGENE. Prior thereto, the private respondents had divested

themselves of their stockholdings when they endorsed their stock
certificates in blank and delivered the same to the Uy Family, the
beneficial owners of NEUGENE. In view of the said transfers of shares
of stock, Arsenio Yang, Jr., and Charles O. Sy (each the holder of only
700 shares or 10% each of the outstanding capital stock of NEUGENE)
and Lok Chun Suen (who had ceased to be a stockholder as July 1,
1987) could no longer validly vote for the dissolution of EUGENE,
under Section 118 of the Corporation Code, and all the proceedings of
the meetings held which were improperly called and held without a
quorum, are null void.
On the other hand, the private respondents, Charles O. Sy, Arsenio
Yang, Jr. and Lok Chun Suen, theorized that the alleged assignments of
shares of stock in favor of petitioners were simulated and fraudulently
effected, as there never was any agreement entered into by the Uy
family to award NEUGENE'S stock certificates to Johnny K. H. Uy,
because subject stock certificates of the private respondents covering
their shares of stock were endorsed in blank by them and delivered to
the Uy family, who were the beneficial owners of NEUGENE, for safe
keeping. The private respondents never sold their shares of stock in
NEUGENE to any of the petitioners or other stockholders of record,
prior to the dissolution of the corporation, so that they (private
respondents) represented at least two-thirds (2/3) of the outstanding
capital stock of NEUGENE when they voted to dissolve NEUGENE.
Issue:
W/N the transfers of stock in question to Uy Family is valid and
effective
Ruling:
The transfers of stock in question could not be valid and effective for
the simple reason that there is a complete absence of proof that the
alleged transfers were recorded in the books of the corporation. It
relied on Section 63 of the Corporation Code of the Philippines which
provides that no transfer shall be valid except as between the parties,
until the transfer is recorded in the books of the corporation.

NEUGENE was duly registered with SEC to engage in trading business

for a term of fifty (50) years with 5 incorporators/directors.

At the time of dissolution of NEUGENE, Lok Chun Suen, Charles O. Sy

and Arsenio Yang, Jr., owned at least two-thirds (2/3) of NEUGENE's
outstanding capital stock, in sufficient compliance with the germane
provision of Section 118 of the Corporation Code of the Philippines.

The authorized capital stock of NEUGENE is P3,000.000.00 divided

into P30,000 shares with a par value of ONE HUNDRED PESOS
P100.00 each. Out of this authorized capital stock, P600.000.00 had
been subscribed.

As shown in the Stock and Transfer Book of NEUGENE, Lok Chun

Suen is the holder of a total of 1,400 shares of stock, Charles O. Sy is
the holder of a total of 2,800 shares of stock and Arsenio Yang, Jr. is
the holder of 1,050 shares.

The outstanding capital stock of NEUGENE was increased to

P700,000.00 represented by 7,000 shares through a declaration of
dividends made by the board of directors.

Therefore, the entries on the NEUGENE'S Stock and Transfer Book,

record the private respondents as the holders of 5,250 shares,
constituting at least two-thirds (2/3) of NEUGENE's outstanding
capital stock of 7,000 shares.

Eugenio Flores, Jr. assigned transferred and conveyed his entire

shareholdings of 2,450 shares in NEUGENE to Sonny Moreno 1,050
shares, Arsenio Yang, Jr., 700 share and Charles O. Sy 700 shares.
Thus, immediately after the assignment of the entire shareholdings of
Eugenio Flores, Jr, the same was recorded in the stockholders of record
of NEUGENE.
Later, a board resolution approving the dissolution of NEUGENE was
passed. And acting upon the Petition for Dissolution, SEC issued a
Certificate of Dissolution of NEUGENE.
Thus, the petitioners brought an action to annul or set aside the said
SEC Certification on the Dissolution of Neugene. They contended that
they are the majority stockholders of NEUGENE, owning eighty
percent (80%) of its outstanding capital stock, at the time of the
adoption and approval of the Resolution for the Dissolution of

Thus, the certificates of stock of the private respondents were stolen

and therefore not validly transferred, and the transfers of stock relied
upon by petitioners were fraudulently recorded in the Stock and
Transfer Book of NEUGENE .
The true nature of the relationship between the stockholders of
NEUGENE and the Uy family, who had the understanding that the
beneficial ownership of NEUGENE would remain with the Uy family,
such that subject shares of stock were, immediately upon issuance,
endorsed in blank by the shareholders and entrusted to the Uy family,
through Ban Ha Chua, for safekeeping.
Both the Johnson Lee and Sony Moreno, the corporate secretary, were
aware of the real import or significance of the indorsements in blank
on the stock certificates of the private respondent. Obviously, then,
they acted in bad faith in assigning subject certificates of stock to the

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petitioners, Nicanor Martin and Leoncio Tan, and in recording the said
transfers in dispute in the Stock and Transfer book of NEUGENE.

absolutely void; not because they are without notice or fraudulent in

law or fact, but because they are made so void by statute.

Then, too, as nominees of the Uy family, the approval by the private

respondents, Charles O. Sy, Lok Chun Suen and Arsenio Yang, Jr., Jr.,
was necessary for the validity and effectivity of the transfer of the stock
certificates registered under their names. In the case under
consideration, not only did the transfers of stock in question lack the
requisite approval, the private respondents categorically declared
under oath that subject certificates of stock of theirs were stolen from
the confidential vault of the Uy family and illegally transferred to the
names of petitioners in the Stock and Transfer Book of NEUGENE.

Thus, the transfer of the subject certificate made by Dico to Garcia was
not valid as to the spouses Atinon, the judgment creditors, as the same
still stood in the name of Dico, the judgment debtor, at the time of the
levy on execution. In addition, the entry in the minutes of the meeting
of the Club's board of directors noting the resignation of Dico as
proprietary member thereof does not constitute compliance with
Section 63 of the Corporation Code. Said provision of law strictly
requires the recording of the transfer in the books of the corporation,
and not elsewhere, to be valid as against third parties.

Therefore, the private respondents herein are the legitimate holders

and owners of at least-two-thirds (2/3) of the outstanding capital stock
of NEUGENE, with the corresponding right to vote for its dissolution,
in accordance with Section 118 of the Corporation Code of the
Philippines.

BLT Bus Co. Vs. Bitanga (362 SCRA 635)

Garcia Vs. Jomouad (323 SCRA 424)

Facts:
These cases involve the Batangas Laguna Tayabas Bus Company, Inc.,
which has been owned by four generations of the Potenciano family.
Immediately prior to the events leading to this controversy, the
Potencianos owned 87.5% of the outstanding capital stock of BLTB.

Facts:
Dico, was employed as manager of his Young Auto Supply. In order to
assist him in entertaining clients, Garcia "lent" his Proprietary
Ownership Certificate (POC), in the Cebu Country Club to Dico so the
latter could enjoy the "signing" privileges of its members. The Club
then issued POC in the name of Dico. Thereafter, Dico resigned as
manager of Garcia's business. Upon demand Dico returned their POC.
Dico then executed a Deed of Transfer covering the subject certificate
in favor of petitioner. The Club was furnished with a copy of said deed
but the transfer was not recorded in the books of the Club because
Garcia failed to present proof of payment of the requisite capital gains
tax.
In the meantime, the spouses Atinon filed a case for collection of sum
of money against Jaime Dico. The trial court rendered judgment
ordering Dico to pay the spouses Atinon the sum of P900,000.00 plus
interests. After said judgment became final and executory, Sheriff
Jomouad proceeded with its execution. In the course thereof, the
Proprietary Ownership Certificate in the Cebu Country Club, which was
in the name of Dico, was levied on and scheduled for public auction.
Claiming ownership over the subject certificate, Garcia filed the
aforesaid action for injunction with prayer for preliminary injunction
to enjoin respondents from proceeding with the auction.
The trial court dismissed petitioner's complaint for injunction for lack
of merit. On appeal, the CA affirmed in toto the decision of the RTC
upon finding that it committed no reversible error in rendering the
same.
Hence, this petition.

Dolores A. Potenciano, Max Joseph A. Potenciano, Mercedelin A.

Potenciano, Delfin C. Yorro, and Maya Industries, Inc., entered into a
Sale and Purchase Agreement, whereby they sold to BMB Property
Holdings, Inc., represented by its President, Benjamin Bitanga, their
21,071,114 shares of stock in BLTB. The said shares represented
47.98% of the total outstanding capital stock of BLTB.
The purchase price for the shares of stock was P72,076,425.00, the
downpayment of which, in the sum of P44,354,723.00, was made
payable upon signing of Agreement, while the balance of
P27,721,702.00 was payable on November 26, 1997.
Furthermore, the buyer guaranteed that it shall take over the
management and operations of BLTB but shall immediately surrender
the same to the sellers in case it fails to pay the balance of the purchase
price on November 26, 1997.
Barely a month after the Agreement was executed, at a meeting of the
stockholders of BLTB, Benjamin Bitanga and Monina Grace Lim were
elected as directors of the corporation, replacing Dolores and Max
Joseph Potenciano. Subsequently, another stockholders' meeting was
held, wherein Laureano A. Siy and Renato L. Leveriza were elected as
directors, replacing Candido Potenciano and Delfin Yorro who had
both resigned as such.
The annual stockholders' meeting was scheduled on May 19, 1998.
Before the scheduled meeting, on May 16, 1998, Michael Potenciano
wrote Benjamin Bitanga, requesting for a postponement of the
stockholders' meeting due to the absence of a thirty-day advance
notice. However, there was no response from Bitanga on whether or
not the request for postponement was favorably acted upon.

Issue:
W/N whether a bona fide transfer of the shares of a corporation, not
registered or noted in the books of the corporation, is valid as against a
subsequent lawful attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or not.
Ruling:

On the scheduled date of the meeting, May 19, 1998, a notice of

postponement of the stockholders' meeting was published in the
Manila Bulletin. Inasmuch as there was no notice of postponement
prior to that, a total of two hundred eighty six stockholders,
representing 87% of the shares of stock of BLTB, arrived and attended
the meeting. The majority of the stockholders present rejected the
postponement and voted to proceed with the meeting. The Potenciano
group was re-elected to the Board of Directors, and a new set of officers
was thereafter elected.

The attachment prevails over the unrecorded transfer.

All transfers of shares not so entered in the book of corporation are
invalid as to attaching or execution creditors of the assignors, as well as
to the corporation and to subsequent purchasers in good faith, and,
indeed, as to all persons interested, except the parties to such transfers.
All transfers not so entered on the books of the corporation are

However, the Bitanga group refused to relinquish their positions and

continued to act as directors and officers of BLTB. The conflict between
the Potencianos and the Bitanga group escalated to levels of unrest and
even violence among laborers and employees of the bus company.
The Bitanga group filed with the Securities and Exchange Commission
a Complaint for Damages and Injunction, which was denied. Then, the

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Bitanga group filed another complaint with application for a writ of

preliminary injunction and prayer for temporary restraining order,
seeking to annul the May 19, 1998 stockholders' meeting.
The SEC Hearing Panel granted the Bitanga group's application for a
writ of preliminary injunction upon the posting of a bond in the
amount of P20,000,000.00. It declared that the May 19, 1998
stockholders' meeting was void on the grounds that, first, Michael
Potenciano had himself asked for its postponement due to improper
notice; and, second, there was no quorum, since BMB Holdings, Inc.,
represented by the Bitanga group, which then owned 50.26% of BLTB's
shares having purchased the same from the Potenciano group, was not
present at the said meeting. The Hearing Panel further held that the
Bitanga Board remains the legitimate Board in a hold-over capacity.
Issue:
W/N there was a valid transfer of the shares of the group of Dolores
Potenciano to the Bitanga group
Ruling:
The transfer of the shares of the group of Dolores Potenciano to the
Bitanga group has not yet been recorded in the books of the
corporation. Hence, the group of Dolores Potenciano, in whose names
those shares still stand, was the ones entitled to attend and vote at the
stockholders' meeting of the BLTB on 19 May 1998. This being the
case, the Hearing Panel committed grave abuse of discretion in holding
otherwise and in concluding that there was no quorum in said meeting.
Indeed, until registration is accomplished, the transfer, though valid
between the parties, cannot be effective as against the corporation.
Thus, the unrecorded transferee, the Bitanga group in this case, cannot
vote nor be voted for. The purpose of registration, therefore, is
two-fold: to enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for, and to
inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities
of a stockholder.

December 31 of that same year; otherwise, the Bank would be entitled

to liquidate their shareholdings, including those under their control. In
such an event, should the proceeds of the sale of said shares fail to
satisfy in full the obligation, the unpaid balance shall be secured by
other collateral sufficient therefor.
When the Villanueva spouses failed to settle their obligation to the
Bank on the due date, the Board sent them a letter demanding: (1) the
surrender of all the stock certificates issued to them; and (2) the
delivery of sufficient collateral to secure the balance of their debt
amounting to P3,346,898.54. The Villanuevas ignored the bank's
demands, whereupon their shares of stock were converted into
Treasury Stocks. Later, the Villanuevas, through their counsel,
questioned the legality of the conversion of their shares.
Thereafter, the stockholders of the Bank met to elect the new directors
and set of officers for the year 1994. The Villanuevas were not notified
of said meeting. Atty. Amado Ignacio, counsel for the Villanueva
spouses, questioned the legality of the said stockholders' meeting and
the validity of all the proceedings therein. In reply, the new set of
officers of the Bank informed Atty. Ignacio that the Villanuevas were
no longer entitled to notice of the said meeting since they had
relinquished their rights as stockholders in favor of the Bank.
Consequently, the Villanueva spouses filed with the Securities and
Exchange Commission (SEC), a petition for annulment of the
stockholders' meeting and election of directors and officers on January
15, 1994, with damages and prayer for preliminary injunction
The Villanuevas' main contention was that the stockholders' meeting
and election of officers and directors held on January 15, 1994 were
invalid because: (1) they were conducted in violation of the by-laws of
the Rural Bank; (2) they were not given due notice of said meeting and
election notwithstanding the fact that they had not waived their right to
notice; (3) they were deprived of their right to vote despite their being
holders of common stock with corresponding voting rights; (4) their
names were irregularly excluded from the list of stockholders; and (5)
the candidacy of petitioner Avelina Villanueva for directorship was
arbitrarily disregarded by respondent Bernardo Bautista and company
during the said meeting.

Until challenged in a proper proceeding, a stockholder of record has a

right to participate in any meeting; his vote can be properly counted to
determine whether a stockholders' resolution was approved, despite
the claim of the alleged transferee. On the other hand, a person who
has purchased stock, and who desires to be recognized as a stockholder
for the purpose of voting, must secure such a standing by having the
transfer recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider.

Issue:

Rural Bank of Lipa City Vs. CA (366 SCRA 188)

While it may be true that there was an assignment of private

respondents' shares to the petitioners, said assignment was not
sufficient to effect the transfer of shares since there was no
endorsement of the certificates of stock by the owners, their attorneysin-fact or any other person legally authorized to make the transfer.
Moreover, petitioners admit that the assignment of shares was not
coupled with delivery, the absence of which is a fatal defect. The rule is
that the delivery of the stock certificate duly endorsed by the owner is
the operative act of transfer of shares from the lawful owner to the
transferee. Thus, title may be vested in the transferee only by delivery
of the duly indorsed certificate of stock.

Facts:
The instant controversy arose from a dispute between the Rural Bank
of Lipa City, Incorporated (hereinafter referred to as the Bank),
represented by its officers and members of its Board of Directors, and
certain stockholders of the said bank.
Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City,
executed a Deed of Assignment, wherein he assigned his shares, as well
as those of eight (8) other shareholders under his control with a total of
10,467 shares, in favor of the stockholders of the Bank represented by
its directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak.
Sometime thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina,
executed an Agreement wherein they acknowledged their indebtedness
to the Bank in the amount of P4,000,000.00, and stipulated that said
debt will be paid out of the proceeds of the sale of their real property
described in the Agreement.
At a meeting of the Board of Directors of the Bank the Villanueva
spouses assured the Board that their debt would be paid on or before

W/N by virtue of the Deed of Assignment, the Villanueva spouses had

relinquished to the Bank any and all rights they may have had as
stockholders of the Bank
Ruling:

We have uniformly held that for a valid transfer of stocks, there must
be strict compliance with the mode of transfer prescribed by law. The
requirements are: (a) There must be delivery of the stock certificate:
(b) The certificate must be endorsed by the owner or his attorney-infact or other persons legally authorized to make the transfer; and (c) To
be valid against third parties, the transfer must be recorded in the
books of the corporation. As it is, compliance with any of these
requisites has not been clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite
endorsement and delivery, the assignment was valid between the

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parties, meaning the private respondents as assignors and the

petitioners as assignees. While the assignment may be valid and
binding on the petitioners and private respondents, it does not
necessarily make the transfer effective. Consequently, the petitioners,
as mere assignees, cannot enjoy the status of a stockholder, cannot vote
nor be voted for, and will not be entitled to dividends, insofar as the
assigned shares are concerned Parenthetically, the private respondents
cannot, as yet, be deprived of their rights as stockholders, until and
unless the issue of ownership and transfer of the shares in question is
resolved with finality.
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet
and elect their directors, private respondents shall be notified of the
meeting and be allowed to exercise their rights as stockholders thereat.
Rural Bank of Salinas Vs. CA (210 SCRA 510)
Facts:
Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc.,
executed a Special Power of Attorney in favor of his wife, Melania
Guerrero, giving and granting the latter full power and authority to sell
or otherwise dispose of and/or mortgage 473 shares of stock of the
Bank registered in his name to execute the proper documents therefor,
and to receive and sign receipts for the dispositions.
Pursuant to said Special Power of Attorney, Melania Guerrero, as
Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of
the 473 shares, in favor of private respondents Luz Andico (457
shares), Wilhelmina Rosales (10 shares), the remaining one (1) share of
stock in favor of Francisco Guerrero, Sr.
Subsequently, Melania Guerrero presented to Rural Bank of Salinas the
two (2) Deeds of Assignment for registration with a request for the
transfer in the Bank's stock and transfer book of the 473 shares of stock
so assigned, the cancellation of stock certificates in the name of
Clemente G. Guerrero, and the issuance of new stock certificates
covering the transferred shares of stocks in the name of the new
owners thereof. However, petitioner Bank denied the request of
Melania Guerrero.
Thus, Melania Guerrero filed with the Securities and Exchange
Commission an action for mandamus against Rural Bank of Salinas, its
President and Corporate Secretary.
Petitioners filed their Answer with counterclaim alleging that upon the
death of Clemente G. Guerrero, his 473 shares of stock became the
property of his estate, and his property and that of his widow should
first be settled and liquidated in accordance with law before any
distribution can be effected so that petitioners may not be a party to
any scheme to evade payment of estate or inheritance tax and in order
to avoid liability to any third persons or creditors of the late Clemente
G. Guerrero.
Issue:
W/N an action for mandamus against the bank to record the transfer of
stock is proper
Ruling:
Sec. 63 of the Corporation Code provides that . . . Shares of stock so
issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact
or other person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the transfer
is recorded in the books of the corporation . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
interpreted Sec. 63 in his wise:

Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation

Code]) contemplates no restriction as to whom the stocks may be
transferred. It does not suggest that any discrimination may be created
by the corporation in favor of, or against a certain purchaser. The
owner of shares, as owner of personal property, is at liberty, under said
section to dispose them in favor of whomever he pleases, without
limitation in this respect, than the general provisions of law. . .
The only limitation imposed by Section 63 of the Corporation Code is
when the corporation holds any unpaid claim against the shares
intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers,
cannot create restrictions in stock transfers, because:
. . . Restrictions in the traffic of stock must have their source in
legislative enactment, as the corporation itself cannot create such
impediment. By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the
absence of such power, cannot ordinarily inquire into or pass upon the
legality of the transactions by which its stock passes from one person to
another, nor can it question the consideration upon which a sale is
based. . . .
The right of a transferee/assignee to have stocks transferred to his
name is an inherent right flowing from his ownership of the stocks.
Thus:
Whenever a corporation refuses to transfer and register stock in cases
like the present, mandamus will lie to compel the officers of the
corporation to transfer said stock in the books of the corporation"
The corporation's obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of
ownership. The duty of the corporation to transfer is a ministerial one
and if it refuses to make such transaction without good cause, it may be
compelled to do so by mandamus.
For the petitioner Rural Bank of Salinas to refuse registration of the
transferred shares in its stock and transfer book, which duty is
ministerial on its part, is to render nugatory and ineffectual the spirit
and intent of Section 63 of the Corporation Code. Thus, the registration
of the 473 shares in the stock and transfer book in the names of private
respondents is proper. At all events, the registration is without
prejudice to the proceedings in court to determine the validity of the
Deeds of Assignment of the shares of stock in question.
Section 64
Issuance of stock certificates. - No certificate of stock shall be
issued to a subscriber until the full amount of his subscription together
with interest and expenses (in case of delinquent shares), if any is due,
has been paid.
Section 65
Liability of directors for watered stocks. - Any director or
officer of a corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a consideration in
any form other than cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be
solidarily, liable with the stockholder concerned to the corporation and
its creditors for the difference between the fair value received at the
time of issuance of the stock and the par or issued value of the same.
Section 66

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Interest on unpaid subscriptions. - Subscribers for stock shall

pay to the corporation interest on all unpaid subscriptions from the
date of subscription, if so required by, and at the rate of interest fixed
in the by-laws. If no rate of interest is fixed in the by-laws, such rate
shall be deemed to be the legal rate.

should not collect any more from the defendants the balance of their
subscriptions to the capital stock of the Philippine Lumber Distributing
Agency, Inc.

Section 67

W/N non-compliance with a plain statutory command, considering the

persuasiveness of the plea that defendants-appellees would "not have
subscribed to the capital stock" of the Philippine Lumber Distributing
Agency "were it not for the assurance of the then President of the
Republic of the Philippines that the Government would back it up by
investing P9.00 for every peso" subscribed, a condition which was not
fulfilled, such commitment not having been complied with, be justified

Payment of balance of subscription. - Subject to the provisions

of the contract of subscription, the board of directors of any stock
corporation may at any time declare due and payable to the
corporation unpaid subscriptions to the capital stock and may collect
the same or such percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.

Issue:

Ruling:
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the date
specified in the contract of subscription or on the date stated in the call
made by the board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder liable for
interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is
made, all stocks covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided, unless
the board of directors orders otherwise.
PNB Vs. Bitulok Sawmill (23 SCRA 1366)
Facts:
The Philippine Lumber Distributing Agency, Inc., was organized
sometime in the early part of 1947 upon the initiative and insistence of
the late President Manuel Roxas who had called several conferences
between him and the subscribers and organizers of the Philippine
Lumber Distributing Agency, Inc. to insure a steady supply of lumber,
which could be sold at reasonable prices to enable the war sufferers to
rehabilitate their devastated homes. He convinced the lumber
producers to form a lumber cooperative and to pool their sources
together in order to wrest, particularly, the retail trade from aliens who
were acting as middlemen in the distribution of lumber. As an
inducement he promised and agreed to finance the agency by making
the Government invest P9.00 by way of counterpart for every peso that
the members would invest therein.
The amount thus contributed by such lumber producers was not
enough for the operation of its business especially having in mind the
primary purpose of putting an end to alien domination in the retail
trade of lumber products. Nor was there any appropriation by the
legislature of the counterpart fund to be put up by the Government,
namely, P9.00 for every peso invested by defendant lumber producers.
Accordingly, the late President Roxas instructed the Hon. Emilio
Abello, then Executive Secretary and Chairman of the Board of
Directors of the Philippine National Bank, for the latter to grant said
agency an overdraft in the original sum of P250,000.00 which was
later increased to P350,000.00, which was approved by said Board of
Directors of the Philippine National Bank with interest at the rate of
6% per annum, and secured by the chattel mortgages on the stock of
lumber of said agency." The Philippine Government did not invest the
P9.00 for every peso coming from defendant lumber producers.
The loan extended to the Philippine Lumber Distributing Agency by the
Philippine National Bank was not paid.
The lower court with full recognition that the case for the plaintiff
creditor, Philippine National Bank, "is meritorious strictly from the
legal standpoint" but apparently unable to "close its eyes to the equity
of the case" dismissed nine (9) cases filed by it, seeking "to recover
from the defendant lumber producers. Consequently, viewing from all
considerations of equity in the case, the Court finds that plaintiff bank

In Philippine Trust Co. v. Rivera , 9 citing the leading case of Velasco v.

Poizat , 10 this Court held: "It is established doctrine that subscriptions
to the capital of a corporation constitute a fund to which creditors have
a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debt.... A corporation
has no power to release an original subscriber to its capital stock from
the obligation of paying for his shares, without a valuable consideration
for such release; and as against creditors a reduction of the capital
stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of incorporation.
Moreover, strict compliance with the statutory regulations is
necessary...."
It would be unwarranted to ascribe to the late President Roxas the view
that the payment of the stock subscriptions, as thus required by law,
could be condoned in the event that the counterpart fund to be
invested by the Government would not be available. Even if such were
the case, however, and such a promise were in fact made, to further the
laudable purpose to which the proposed corporation would be devoted
and the possibility that the lumber producers would lose money in the
process, still the plain and specific wording of the applicable legal
provision as interpreted by this Court must be controlling. It is a wellsettled principle that with all the vast powers lodged in the Executive,
he is still devoid of the prerogative of suspending the operation of any
statute or any of its terms.
The emphatic and categorical language of an American decision cited
by the late Justice Laurel, in People v. Vera , comes to mind: "By the
twentieth article of the declaration of rights in the constitution of this
commonwealth, it is declared that the power of suspending the laws, or
the execution of the laws, ought never to be exercised but by the
legislature, or by authority derived from it, to be exercised in such
particular cases only as the legislature shall expressly provide for...."
Nor could it be otherwise considering that the Constitution specifically
enjoins the President to see to it that all laws be faithfully executed.
There may be a discretion as to what a particular legal provision
requires; there can be none whatsoever as to the enforcement and
application thereof once its meaning has been ascertained. What it
decrees must be followed; what it commands must be obeyed. It must
be respected, the wishes of the President, to the contrary
notwithstanding, even if impelled by the most worthy of motives and
the most persuasive equitable considerations. To repeat, such is not the
case here. For at no time did President Roxas ever give defendant
lumber producers to understand that the failure of the Government for
any reason to put up the counterpart fund could terminate their
statutory liability.
Such is not the law. Unfortunately, the lower court was of a different
mind. That is not to pay homage to the rule of law. Its decision then,
one it is to be repeated influenced by what it considered to be the
"equity of the case", is not legally impeccable.

Section 68

119

Delinquency sale. - The board of directors may, by resolution, order

the sale of delinquent stock and shall specifically state the amount due
on each subscription plus all accrued interest, and the date, time and
place of the sale which shall not be less than thirty (30) days nor more
than sixty (60) days from the date the stocks become delinquent.

As security for COB Group Marketing's credit purchases up to the

amount of P35,000, one Asuncion Manahan mortgaged her land to
Keller. Manahan assumed solidarily with COB Group Marketing, the
faithful performance of all the terms and conditions of the sales
agreement (Exh. D).

Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The
same shall furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the province
or city where the principal office of the corporation is located.

The parties executed a second sales agreement whereby COB Group

Marketing's territory was extended to Northern and Southern Luzon.
As security for the credit purchases up to P25,000 of COB Group
Marketing for that area, Tomas C. Lorenzo, Jr. and his father Tomas,
Sr. executed a mortgage on their land in Nueva Ecija. Like Manahan,
the Lorenzos were solidarily liable with COB Group Marketing for its
obligations under the sales agreement.

Unless the delinquent stockholder pays to the corporation, on or before

the date specified for the sale of the delinquent stock, the balance due
on his subscription, plus accrued interest, costs of advertisement and
expenses of sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at public auction to such bidder who
shall offer to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share. The stock
so purchased shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor.
The remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the issuance of
a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the
full amount of the balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation may, subject to
the provisions of this Code, bid for the same, and the total amount due
shall be credited as paid in full in the books of the corporation. Title to
all the shares of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of this Code.
Section 69
When sale may be questioned. - No action to recover delinquent
stock sold can be sustained upon the ground of irregularity or defect in
the notice of sale, or in the sale itself of the delinquent stock, unless the
party seeking to maintain such action first pays or tenders to the party
holding the stock the sum for which the same was sold, with interest
from the date of sale at the legal rate; and no such action shall be
maintained unless it is commenced by the filing of a complaint within
six (6) months from the date of sale.
Section 70
Court action to recover unpaid subscription. - Nothing in this
Code shall prevent the corporation from collecting by action in a court
of proper jurisdiction the amount due on any unpaid subscription, with
accrued interest, costs and expenses.
Edward Keller Vs. COB Group Marketing (141 SCRA 86)
Facts:
This case is about the liability of a marketing distributor under its sales
agreements with the owner of the products. The petitioner presented
its evidence before Judges Castro Bartolome and Benipayo.
Respondents presented their evidence before Judge Tamayo who
decided the case.
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as
exclusive distributor of its household products, Brite and Nuvan in
Panay and Negros. Under that agreement Keller sold on credit its
products to COB Group Marketing.

The board of directors of COB Group Marketing were apprised by Jose

E. Bax the firm's president and general manager, that the firm owed
Keller about P179,000. Bax was authorized to negotiate with Keller for
the settlement of his firm's liability. Bax and R. Oefeli of Keller signed
the conditions for the settlement of COB Group Marketing's liability.
Later, Keller sued on September 16, 1971 COB Group Marketing, its
stockholders and the mortgagors, Manahan and Lorenzo.
The lower court (1) dismissed the complaint; (2) ordered Keller to pay
COB Group Marketing the sum of P100,596.72 with 6% interest a year
from August 1, 1971 until the amount is fully paid: (3) ordered Keller to
pay P100,000 as moral damages to be allocated among the
stockholders of COB Group Marketing in proportion to their unpaid
capital subscriptions; (4) ordered the petitioner to pay Manahan
P20,000 as moral damages; (5) ordered the petitioner to pay P20,000
as attomey's fees to be divided among the lawyers of all the answering
defendants and to pay the costs of the suit; (6) declared void the
mortgages executed by Manahan and Lorenzo and the cancellation of
the annotation of said mortgages on the Torrens titles thereof, and (7)
dismissed Manahan's cross-claim for lack of merit.
The Appellate Court affirmed said judgment except the award of
P20,000 as moral damages which it eliminated. Thus, petitioner
appealed to this Court.
Issue:
W/N COB Group Marketing is liable to Edward Keller
Ruling:
The lower courts erred in nullifying the admissions of liability made in
1971 by Bax as president and general manager of COB Group
Marketing and in giving credence to the alleged overpayment
computed by Bax. It did not only allow Bax to nullify his admissions as
to the liability of COB Group Marketing but they also erroneously
rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72, in spite of the fact that COB
Group Marketing was declared in default and did not file any
counterclaim for the supposed overpayment.
There was a conference on the COB Group Marketing's liability. Bax in
that discussion did not present his reconciliation statements to show
overpayment. Bax admitted that Keller sent his company monthly
statements of accounts but he could not produce any formal protest
against the supposed inaccuracy of the said statements. He lamely
explained that he would have to dig up his company's records for the
formal protest. He did not make any written demand for reconciliation
of accounts.
As to the liability of the stockholders, it is settled that a stockholder is
personally liable for the financial obligations of a corporation to the
extent of his unpaid subscription.
Thus, COB Group marketing, Inc. is ordered to pay Edward A. Keller &
Co., Ltd. the sum of P182,994.60 with 12% interest per annum from

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August 1, 1971 up to the date of payment plus P20,000 as attorney's

fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay
solidarity with COB Group Marketing the sums of P35,000 and
P25,000, respectively.
The following respondents are solidarity liable with COB Group
Marketing up to the amounts of their unpaid subscription to be applied
to the company's liability herein: Jose E. Bax P36,000; Francisco C. de
Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C. Ordonez,
P12,000; Trinidad C. Ordonez, P3,000; Magno C. Ordonez, P3,000;
Adoracion C. Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz
M. Aguilar-Adao, P6,000.
If after ninety (90) days from notice of the finality of the judgment in
this case the judgment against COB Group Marketing has not been
satisfied fully, then the mortgages executed by Manahan and Lorenzo
should be foreclosed and the proceeds of the sales applied to the
obligation of COB Group Marketing. Said mortgage obligations should
bear six percent legal interest per annum after the expiration of the
said 90-day period.
Section 71
Effect of delinquency. - No delinquent stock shall be voted for be
entitled to vote or to representation at any stockholder's meeting, nor
shall the holder thereof be entitled to any of the rights of a stockholder
except the right to dividends in accordance with the provisions of this
Code, until and unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of advertisement, if any.
Section 72
Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.
Section 73
Lost or destroyed certificates. - The following procedure shall be
followed for the issuance by a corporation of new certificates of stock in
lieu of those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his
legal representative shall file with the corporation an affidavit in
triplicate setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. He shall also
submit such other information and evidence which he may deem
necessary;
2. After verifying the affidavit and other information and evidence with
the books of the corporation, said corporation shall publish a notice in
a newspaper of general circulation published in the place where the
corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed. The notice
shall state the name of said corporation, the name of the registered
owner and the serial number of said certificate, and the number of
shares represented by such certificate, and that after the expiration of
one (1) year from the date of the last publication, if no contest has been
presented to said corporation regarding said certificate of stock, the
right to make such contest shall be barred and said corporation shall
cancel in its books the certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu thereof as may be
required, effective for a period of one (1) year, for such amount and in
such form and with such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued even before the
expiration of the one (1) year period provided herein: Provided, That if

a contest has been presented to said corporation or if an action is

pending in court regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the final
decision by the court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure above-described.

TITLE VIII
CORPORATE BOOKS AND RECORDS
Section 74
Books to be kept; stock transfer agent. - Every corporation shall
keep and carefully preserve at its principal office a record of all
business transactions and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be set
forth in detail the time and place of holding the meeting, how
authorized, the notice given, whether the meeting was regular or
special, if special its object, those present and absent, and every act
done or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any director,
trustee, stockholder or member entered or left the meeting must be
noted in the minutes; and on a similar demand, the yeas and nays must
be taken on any motion or proposition, and a record thereof carefully
made. The protest of any director, trustee, stockholder or member on
any action or proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the
minutes of any meetings shall be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours
on business days and he may demand, writing, for a copy of excerpts
from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted
for such refusal: and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any
other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock
and transfer book", in which must be kept a record of all stocks in the
names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, and by and
to whom made; and such other entries as the by-laws may prescribe.
The stock and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the corporation at
reasonable hours on business days.

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No stock transfer agent or one engaged principally in the business of

registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from
the Securities and Exchange Commission and pays a fee as may be
fixed by the Commission, which shall be renewable annually: Provided,
That a stock corporation is not precluded from performing or making
transfer of its own stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of a license fee
herein provided, shall be applicable.
Torres Jr. Vs. CA (278 SCRA 793)
Facts:
The late Manuel A. Torres, Jr.
majority stockholder of Tormil
while private respondents who
deceased brother Antonio A.
stockholders.

(Judge Torres for brevity) was the

Realty & Development Corporation
are the children of Judge Torres'
Torres, constituted the minority

It is precisely the brewing family discord between Judge Torres and

private respondents his nephew and nieces that should have placed
Judge Torres on his guard. He should have been more careful in
ensuring that his actions (particularly the assignment of qualifying
shares to his nominees) comply with the requirements of the law.
Petitioners cannot use the flimsy excuse that it would have been a vain
attempt to force the incumbent corporate secretary to register the
aforestated assignments in the stock and transfer book because the
latter belonged to the opposite faction. It is the corporate secretary's
duty and obligation to register valid transfers of stocks and if said
corporate officer refuses to comply, the transferor-stockholder may
rightfully bring suit to compel performance. In other words, there are
remedies within the law that petitioners could have availed of, instead
of taking the law in their own hands, as the cliche goes.
In interpreting Section 74 of the Corporation Code, as follows:
In the absence of any provision to the contrary, the corporate secretary
is the custodian of corporate records. Corollarily, he keeps the stock
and transfer book and makes proper and necessary entries therein.

In 1984, Judge Torres, in order to make substantial savings in taxes,

adopted an "estate planning" scheme under which he assigned to
Tormil Realty & Development Corporation (Tormil for brevity) various
real properties he owned and his shares of stock in other corporations
in exchange for 225,972 Tormil Realty shares. Hence, on various dates
in July and August of 1984, ten (10) deeds of assignment were executed
by the late Judge Torres.

Contrary to the generally accepted corporate practice, the stock and

transfer book of TORMIL was not kept by Ms. Maria Cristina T. Carlos,
the corporate secretary but by respondent Torres, the President and
Chairman of the Board of Directors of TORMIL. In contravention to
the above cited provision, the stock and transfer book was not kept at
the principal office of the corporation either but at the place of
respondent Torres.

Consequently, the said properties were duly recorded in the inventory

of assets of Tormil Realty and the revenues generated by the said
properties were correspondingly entered in the corporation's books of
account and financial records. Likewise, all the assigned parcels of land
were duly registered with the respective Register of Deeds in the name
of Tormil Realty, except for the ones located in Makati and Pasay City.

These being the obtaining circumstances, any entries made in the stock
and transfer book on March 8, 1987 by respondent Torres of an alleged
transfer of nominal shares to Pabalan and Co. cannot therefore be
given any valid effect. Where the entries made are not valid, Pabalan
and Co. cannot therefore be considered stockholders of record of
TORMIL. Because they are not stockholders, they cannot therefore be
elected as directors of TORMIL. To rule otherwise would not only
encourage violation of clear mandate of Sec. 74 of the Corporation
Code that stock and transfer book shall be kept in the principal office of
the corporation but would likewise open the flood gates of confusion in
the corporation as to who has the proper custody of the stock and
transfer book and who are the real stockholders of records of a certain
corporation as any holder of the stock and transfer book, though not
the corporate secretary, at pleasure would make entries therein.

At the time of the assignments and exchange, however, only 225,000

Tormil Realty shares remained unsubscribed, all of which were duly
issued to and received by Judge Torres
Due to the insufficient number of shares of stock issued to Judge
Torres and the alleged refusal of private respondents to approve the
needed increase in the corporation's authorized capital stock (to cover
the shortage of 972 shares due to Judge Torres under the "estate
planning" scheme), on 11 September 1986, Judge Torres revoked the
two (2) deeds of assignment covering the properties in Makati and
Pasay City.
Noting the disappearance of the Makati and Pasay City properties from
the corporation's inventory of assets and financial records, private
respondents were constrained to file a complaint with the Securities
and Exchange Commission (SEC) to compel Judge Torres to deliver to
Tormil corporation the two (2) deeds of assignment covering the
aforementioned Makati and Pasay City properties which he had
unilaterally revoked and to cause the registration of the corresponding
titles in the name of Tormil. Private respondents alleged that following
the disappearance of the properties from the corporation's inventory of
assets, they found that Judge Torres, together with Edgardo Pabalan
and Graciano Tobias, then General Manager and legal counsel,
respectively, of Tormil, formed and organized a corporation named
"Torres-Pabalan Realty and Development Corporation" and that as
part of Judge Torres' contribution to the new corporation, he executed
in its favor a Deed of Assignment conveying the same Makati and Pasay
City properties he had earlier transferred to Tormil.
Issue:
W/N it is proper for the late judge to have personal custody of
corporate records, as president, chairman and majority stockholder
Ruling:

The fact that respondent Torres holds 81.28% of the outstanding

capital stock of TORMIL is of no moment and is not a license for him to
arrogate unto himself a duty lodged to ( sic ) the corporate secretary.
All corporations, big or small, must abide by the provisions of the
Corporation Code. Being a simple family corporation is not an
exemption. Such corporations cannot have rules and practices other
than those established by law.
Capitol College of Iligan Vs. CA (302 SCRA 349)
Facts:
On August 7, 1975, the Court of First Instance (now Regional Trial
Court) of Iligan City rendered judgment in a Civil Case, entitled
"Aranas vs. Iligan Capitol College, et . al .," ordering CCI to deliver to
Spouses Aranas their share of the profits and/or dividends by virtue of
their investment in the corporation, and to pay them P5,000.00 as
moral damages and P1,000.00 as attorney's fees. This judgment was
affirmed in toto by the Court of Appeals but was later modified by
eliminating the award of P5,000.00 as moral damages. Appeal to this
Court from the modified judgment proved unavailing and the case was
remanded for execution.
In the course of the execution of the judgment the RTC issued an Order
directing the examination of the property and income of CCI. This
order of the RTC was challenged by the petitioner before the Court of
Appeals. The Court of Appeals affirmed the RTC order but with a

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qualification that the examination of petitioner's books of account be

"limited only to the determination if the corporation had declared
dividends from 1964 and private respondent's share thereof, for, unless
dividends are declared, the stockholders of a corporation are not
entitled to any share in the profits of the corporation."
The RTC issued another order requiring the physical inventory of the
assets of the petitioner. The validity of this order was questioned by the
petitioner before the Court of Appeals. The Court of Appeals, thru then
Associate Justice Justo P. Torres, nullified and set aside the challenged
order and reiterated the appellate court's earlier ruling. It ratiocinated
that the determination of corporate profits and the declaration of
dividends are corporate powers vested in the board of directors which
cannot be exercised by the court. In addition, the appellate court ruled
that the execution of the final judgment of the RTC should be placed
under the supervision of the Securities and Exchange Commission
(SEC) in view of the enactment of P.D. 902-A.
Issue:
W/N the court erred in ordering CCI to submit to the SEC for
inspection all its records/books of account dating back in 1964 to the
present, for the purpose of determining whether profits have been
earned by petitioner and whether private respondents have been
unjustly deprived of their share therein.
Ruling:
The courts order was proper.
The respondent court, in requiring petitioner to pay private
respondent's their unrealized profits and/or dividends, merely
complied with the decision of this Court in Aranas vs. Court of
Appeals , which ruled:
The Securities and Exchange Commission is ordered to cause the
execution of the final judgment, This will include, among others, the
issuance of certificate of stock in favor of petitioners, inspection of the
books of accounts of respondent corporation (now petitioner) for the
purpose of determining whether profits have indeed been earned by
the corporation and whether herein petitioners (now private
respondents) have been unjustly deprived of their share therein.

In article 10 of the By-laws of the corporation it is declared that "Every

shareholder may examine the books of the company and other
documents pertaining to the same upon the days which the board of
directors shall annually fix." At the directors' meeting of the
corporation held on February 16, 1924, the board passed a resolution to
the following effect that the books of the company are at their
disposition from the 15th to 25th of the same month for examination,
in appropriate hours.
The contention for the respondent is that this resolution of the board
constitutes a lawful restriction on the right conferred by statute; and it
is insisted that as the petitioner has not availed himself of the
permission to inspect the books and transactions of the company
within the ten days thus defined, his right to inspection and
examination is lost, at least for this year.
Issue;
W/N the refusal of the company to Pardo to inspect the books and
transactions of the company is valid
Ruling:
No.
The general right given by the statute may not be lawfully abridged to
the extent attempted in this resolution. It may be admitted that the
officials in charge of a corporation may deny inspection when sought at
unusual hours or under other improper conditions; but neither the
executive officers nor the board of directors have the power to deprive
a stockholder of the right altogether. A by-law unduly restricting the
right of inspection is undoubtedly invalid. Authorities to this effect are
too numerous and direct to require extended comment.
It will be noted that our statute declares that the right of inspection can
be exercised "at reasonable hours." This means at reasonable hours on
business days throughout the year, and not merely during some
arbitrary period of a few days chosen by the directors.
Philpotts Vs. Phil. Mfg. Co. (40 Phil 471)
Facts:

Based on the above-quoted ruling of this Court, it is clear that the

purpose of the inspection of petitioner's books of account is not only to
determine whether dividends have been declared by the petitioner but
also to ascertain whether profits have been earned by the latter and
whether private respondents have been unjustly deprived of their share
therein. Such determination is possible only after factual examination
by the board of directors of petitioner of the existence of such profits
and their declaration of dividends.
After the determination of the existence of any such profits, private
respondents may then avail themselves of the proper legal remedies
authorized by the governing laws and pertinent rules for the
declaration of dividends and demand their appropriate participation
therein.
Pardo Vs. Hercules Lumber (47 Phil 964)
Facts:
Pardo is a stockholder in the Hercules Lumber Company, Inc., and
Ignacio Ferrer, as acting secretary of the said company, has refused to
permit the petitioner or his agent to inspect the records and business
transactions of the said Hercules Lumber Company, Inc., at times
desired by the petitioner.
The main ground upon of the companys refusal has reference to the
time, or times, within which the right of inspection may be exercised.

W. G. Philpotts, a stockholder in the Philippine Manufacturing

Company, one of the respondents herein, seeks by this proceeding to
obtain a writ of mandamus to compel the respondents to permit the
plaintiff, in person or by some authorized agent or attorney, to inspect
and examine the records of the business transacted by said company
since January 1, 1918. The petition is filed originally in this court under
the authority of section 515 of the Code of Civil Procedure, which gives
to this tribunal concurrent jurisdiction with the Court of First Instance
in cases, among others, where any corporation or person unlawfully
excludes the plaintiff from the use and enjoyment of some right to
which he is entitled.
Issue:
W/N the right which the law concedes to a stockholder to inspect the
records can be exercised by a proper agent or attorney of the
stockholder as well as by the stockholder in person
Ruling:
There is no pretense that the respondent corporation or any of its
officials has refused to allow the petitioner himself to examine anything
relating to the affairs of the company, and the petition prays for a
peremptory order commanding the respondents to place the records of
all business transactions of the company, during a specified period, at
the disposal of the plaintiff or his duly authorized agent or attorney, it
being evident that the petitioner desires to exercise said right through

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an agent or attorney. In the argument in support of the demurrer it is

conceded by counsel for the respondents that there is a right of
examination in the stockholder granted under section 51 of the
Corporation Law, but it is insisted that this right must be exercised in
person.
The pertinent provision of our law is found in the second paragraph of
section 51 of Act No. 1459, which reads as follows: "The record of all
business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours."
This provision is to be read of course in connecting with the related
provisions of sections 51 and 52, defining the duty of the corporation in
respect to the keeping of its records.
Thus, the right of inspection given to a stockholder in the provision
above quoted can be exercised either by himself or by any proper
representative or attorney in fact, and either with or without the
attendance of the stockholder. This is in conformity with the general
rule that what a man may do in person he may do through another; and
we find nothing in the statute that would justify us in qualifying the
right in the manner suggested by the respondents.
"That stockholders have the right to inspect the books of the
corporation, taking minutes from the same, at all reasonable times, and
may be aided in this by experts and counsel, so as to make the
inspection valuable to them, is a principle too well settled to need
discussion."
There are some things which a corporation may undoubtedly keep
secret, notwithstanding the right of inspection given by law to the
stockholder; as for instance, where a corporation, engaged in the
business of manufacture, has acquired a formula or process, not
generally known, which has proved of utility to it in the manufacture of
its products. It is not our intention to declare that the authorities of the
corporation, and more particularly the Board of Directors, might not
adopt measures for the protection of such process form publicity.
There is, however, nothing in the petition which would indicate that
the petitioner in this case is seeking to discover anything which the
corporation is entitled to keep secret; and if anything of the sort is
involved in the case it may be brought out at a more advanced stage of
the proceedings.
Section 75
Right to financial statements. - Within ten (10) days from receipt
of a written request of any stockholder or member, the corporation
shall furnish to him its most recent financial statement, which shall
include a balance sheet as of the end of the last taxable year and a
profit or loss statement for said taxable year, showing in reasonable
detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or members a
financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and certified
by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than
P50,000.00, the financial statements may be certified under oath by
the treasurer or any responsible officer of the corporation.

TITLE IX

Section 76
Plan or merger of consolidation. - Two or more corporations may
merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which
shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying
the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of
the surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements
required to be set forth in the articles of incorporation for corporations
organized under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
Section 77
Stockholder's or member's approval. - Upon approval by
majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation, the
same shall be submitted for approval by the stockholders or members
of each of such corporations at separate corporate meetings duly called
for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations, at least two
(2) weeks prior to the date of the meeting, either personally or by
registered mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or
consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least two-thirds
(2/3) of the members in the case of non-stock corporations shall be
necessary for the approval of such plan. Any dissenting stockholder in
stock corporations may exercise his appraisal right in accordance with
the Code: Provided, That if after the approval by the stockholders of
such plan, the board of directors decides to abandon the plan, the
appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the
respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
Section 78
Articles of merger or consolidation. - After the approval by the
stockholders or members as required by the preceding section, articles
of merger or articles of consolidation shall be executed by each of the
constituent corporations, to be signed by the president or vicepresident and certified by the secretary or assistant secretary of each
corporation setting forth:

MERGER AND CONSOLIDATION

1. The plan of the merger or the plan of consolidation;

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2. As to stock corporations, the number of shares outstanding, or in the

case of non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for
and against such plan, respectively.
Section 79
Effectivity of merger or consolidation. - The articles of merger
or of consolidation, signed and certified as herein above required, shall
be submitted to the Securities and Exchange Commission in
quadruplicate for its approval: Provided, That in the case of merger or
consolidation of banks or banking institutions, building and loan
associations, trust companies, insurance companies, public utilities,
educational institutions and other special corporations governed by
special laws, the favorable recommendation of the appropriate
government agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the corporations
concerned is not inconsistent with the provisions of this Code and
existing laws, it shall issue a certificate of merger or of consolidation, at
which time the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has
reason to believe that the proposed merger or consolidation is contrary
to or inconsistent with the provisions of this Code or existing laws, it
shall set a hearing to give the corporations concerned the opportunity
to be heard. Written notice of the date, time and place of hearing shall
be given to each constituent corporation at least two (2) weeks before
said hearing. The Commission shall thereafter proceed as provided in
this Code.

Poliand Vs. Natl Devt Co. (467 SCRA 500)

Facts:
Asian Hardwood Limited, a Hong Kong corporation, extended credit
accommodations in favor of GALLEON totaling US$3,317,747.32. At
that time, GALLEON, a domestic corporation organized in 1977 and
headed by its president, Roberto Cuenca, was engaged in the maritime
transport of goods. The advances were utilized to augment GALLEONs
working capital depleted as a result of the purchase of five new vessels
and two second-hand vessels in 1979 and competitiveness of the
shipping industry. GALLEON had incurred an obligation in the total
amount of US$3,391,084.91 in favor of Asian Hardwood.
To finance the acquisition of the vessels, GALLEON obtained loans
from Japanese lenders, namely, Taiyo Kobe Bank, Ltd., Mitsui Bank
Ltd. and Marubeni Benelux. GALLEON, through Cuenca, and DBP
executed a Deed of Undertaking whereby DBP guaranteed the prompt
and punctual payment of GALLEONs borrowings from the Japanese
lenders. To secure DBPs guarantee under the Deed of Undertaking,
GALLEON promised, among others, to secure a first mortgage on the
five new vessels and on the second-hand vessels. Thus, GALLEON
executed a mortgage contract over five of its vessels.
Meanwhile, President Ferdinand Marcos issued Letter of Instruction
(LOI) No. 1155, directing NDC to acquire the entire shareholdings of
GALLEON for the amount originally contributed by its shareholders
payable in five (5) years without interest cost to the government. In the
same LOI, DBP was to advance to GALLEON within three years from
its effectivity the principal amount and the interest thereon of
GALLEONs maturing obligations.
LOI No. 1195 was issued directing the foreclosure of the mortgage on
the five vessels. For failure of GALLEON to pay its debt despite
repeated demands from DBP, the vessels were extrajudicially
foreclosed on various dates and acquired by DBP for the total amount
of P539,000,000.00. DBP subsequently sold the vessels to NDC for the
same amount.

Asian Hardwood assigned its rights over the outstanding obligation of

GALLEON of US$2,315,747.32 to World Universal Trading and
Investment Company, S.A. (World Universal), embodied in a Deed of
Assignment which in turn, assigned the credit to petitioner POLIAND.
POLIAND made written demands on GALLEON, NDC, and DBP for
the satisfaction of the outstanding balance in the amount of
US$2,315,747.32. For failure to heed the demands POLIAND instituted
a collection suit against NDC, DBP and GALLEON. POLIAND claimed
that under LOI No. 1155 and the Memorandum of Agreement between
GALLEON and NDC, defendants GALLEON, NDC, and DBP were
solidarily liable to POLIAND as assignee of the rights of the credit
advances/loan accommodations to GALLEON.
Issue:
W/N upon the effectivity of LOI No. 1155, NDC ipso facto acquired the
interests in GALLEON
Ruling:
Ordinarily, in the merger of two or more existing corporations, one of
the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties
and liabilities are acquired by the surviving corporation. The merger,
however, does not become effective upon the mere agreement of the
constituent corporations.
As specifically provided under Section 79 of said Code, the merger shall
only be effective upon the issuance of a certificate of merger by the
Securities and Exchange Commission (SEC), subject to its prior
determination that the merger is not inconsistent with the Code or
existing laws. Where a party to the merger is a special corporation
governed by its own charter, the Code particularly mandates that a
favorable recommendation of the appropriate government agency
should first be obtained. The issuance of the certificate of merger is
crucial because not only does it bear out SECs approval but also marks
the moment whereupon the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights, and properties as well as
liabilities shall be taken and deemed transferred to and vested in the
surviving corporation.
The records do not show SEC approval of the merger. POLIAND
cannot assert that no conditions were required prior to the assumption
by NDC of ownership of GALLEON and its subsisting loans.
Compliance with the statutory requirements is a condition precedent to
the effective transfer of the shareholdings in GALLEON to NDC. In
directing NDC to acquire the shareholdings in GALLEON, the
President could not have intended that the parties disregard the
requirements of law. In the absence of SEC approval, there was no
effective transfer of the shareholdings in GALLEON to NDC. Hence,
NDC did not acquire the rights or interests of GALLEON, including its
liabilities.
PNB Vs. Andrada Electric (381 SCRA 244)
Facts:
National Sugar Development Corporation is a semi-government
corporation and the sugar arm of the PNB, while Pampanga Sugar
Mills is a corporation organized, existing and operating under the 1975
laws of the Philippines. Andrada Electric is engaged in the business of
general construction for the repairs and/or construction of different
kinds of machineries and buildings. PNB acquired the assets of
PASUMIL that were earlier foreclosed by the Development Bank of the
Philippines (DBP) under LOI No. 311. PNB organized NASUDECO to
take ownership and possession of the assets and ultimately to
nationalize and consolidate its interest in other PNB controlled sugar
mills.

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Prior to the acquisition of PNB, engaged the services of Andrada for

electrical rewinding and repair, most of which were partially paid by
the PASUMIL, leaving several unpaid accounts with the plaintiff.
Andrada and PASUMIL entered into a contract for the Andrada to
perform some works construction and mechanical works to PASUMIL.
Out of the total obligation of P777,263.80, PASUMIL had paid only
P250,000.00, leaving an unpaid balance amounting to P527,263.80.
PASUMIL made a partial payment of P14,000.00, in broken amounts
leaving an unpaid balance of P513,263.80.
Andrada contended that since PNB and NASUDECO now owned and
possessed the assets of the defendant PASUMIL, they all benefited
from the works, and the electrical, as well as the engineering and
repairs, performed by the plaintiff. However, PASUMIL, PNB, and
NASUDECO, failed and refused to pay the plaintiff their just, valid and
demandable obligation.

known as Associated Citizens Bank, the surviving bank. And on March

10, 1981, the Associated Citizens Bank changed its corporate name to
Associated Bank by virtue of the Amended Articles of Incorporation.
On September 7, 1977, Sarmiento executed in favor of Associated Bank
a promissory note whereby the former undertook to pay the latter the
sum of P2,500,000.00 payable on or before March 6, 1978. As per said
promissory note, the he agreed to pay interest at 14% per annum, 3%
per annum in the form of liquidated damages, compounded interests,
and attorney's fees, in case of litigation equivalent to 10% of the
amount due. The defendant, to date, still owes plaintiff bank the
amount of P2,250,000.00 exclusive of interest and other charges.
Despite repeated demands the defendant failed to pay the amount due.
The defendant contended that Associated Bank is not the proper party
in interest because the promissory note was executed in favor of
Citizens Bank and Trust Company.

Issue:

Issue:

W/N PNB should be held liable for the unpaid obligations of PASUMIL
by virtue of LOI Nos. 189-A and 311, which expressly authorized
PASUMIL and PNB to merge or consolidate

W/N Associated Bank, the surviving corporation, may enforce the

promissory note made by Sarmiento in favor of CBTC, the absorbed
company, after the merger agreement had been signed

Ruling:

Ruling:

As a rule, a corporation that purchases the assets of another will not be

liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where
the purchaser expressly or impliedly agrees to assume the debts, (2)
where the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the transaction
is fraudulently entered into in order to escape liability for those debts.

Ordinarily, in the merger of two or more existing corporations, one of

the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties
and liabilities are acquired by the surviving corporation. Although
there is dissolution of the absorbed corporations, there is no winding
up of their affairs or liquidation of their assets, because the surviving
corporation automatically acquires all their rights, privileges and
powers, as well as their liabilities.

A consolidation is the union of two or more existing entities to form a

new entity called the consolidated corporation. A merger, on the other
hand, is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the
combined business.
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. Since a merger or
consolidation involves fundamental changes in the corporation, as well
as in the rights of stockholders and creditors, there must be an express
provision of law authorizing them. For a valid merger or consolidation,
the approval by the Securities and Exchange Commission (SEC) of the
articles of merger or consolidation is required. These articles must
likewise be duly approved by a majority of the respective stockholders
of the constituent corporations.
In the case at bar, we hold that there is no merger or consolidation with
respect to PASUMIL and PNB. The procedure prescribed under Title
IX of the Corporation Code was not followed.
In fact, PASUMILs corporate existence had not been legally
extinguished or terminated. Neither did petitioner expressly or
impliedly agree to assume the debt of PASUMIL to respondent. LOI
No. 11 explicitly provides that PNB shall study and submit
recommendations on the claims of PASUMILs creditors. Clearly, the
corporate separateness between PASUMIL and PNB remains, despite
respondents insistence to the contrary.

The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be
followed is prescribed under the Corporation Code. Section 79 of said
Code requires the approval by the Securities and Exchange
Commission (SEC) of the articles of merger which, in turn, must have
been duly approved by a majority of the respective stockholders of the
constituent corporations. The same provision further states, that the
merger shall be effective only upon the issuance by the SEC of a
certificate of merger. The effectivity date of the merger is crucial for
determining when the merged or absorbed corporation ceases to exist;
and when its rights, privileges, properties as well as liabilities pass on
to the surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975
Agreement of Merger, which Associated Banking Corporation (ABC)
and Citizens Bank and Trust Company (CBTC) entered into, provided
that its effectivity "shall, for all intents and purposes, be the date when
the necessary papers to carry out this [m]erger shall have been
approved by the Securities and Exchange Commission."
The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of
the agreement itself, which was September 16, 1975. Private
respondent contends that, since he issued the promissory note to CBTC
on September 7, 1977 two years after the merger agreement had
been executed CBTC could not have conveyed or transferred to
petitioner its interest in the said note, which was not yet in existence at
the time of the merger. Therefore, petitioner, the surviving bank, has
no right to enforce the promissory note on private respondent; such
right properly pertains only to CBTC.

Associated Bank Vs. CA (291 SCRA 511)

Facts:
On September 16, 1975 Associated Banking Corporation and Citizens
Bank and Trust Company merged to form just one banking corporation

Assuming that the effectivity date of the merger was the date of its
execution, we still cannot agree that petitioner no longer has any
interest in the promissory note. A closer perusal of the merger
agreement leads to a different conclusion. The provision quoted earlier
has this other clause:

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Upon the effective date of the [m]erger, all references to [CBTC] in any
deed, documents, or other papers of whatever kind or nature and
wherever found shall be deemed for all intents and purposes,
references to [ABC], the SURVIVING BANK, as if such references
were direct references to [ABC] . . . .
Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner. The
agreement itself clearly provides that all contracts irrespective of the
date of execution entered into in the name of CBTC shall be
understood as pertaining to the surviving bank, herein petitioner.
Since, in contrast to the earlier aforequoted provision, the latter clause
no longer specifically refers only to contracts existing at the time of the
merger, no distinction should be made. The clause must have been
deliberately included in the agreement in order to protect the interests
of the combining banks; specifically, to avoid giving the merger
agreement a farcical interpretation aimed at evading fulfillment of a
due obligation.
Thus, although the subject promissory note names CBTC as the payee,
the reference to CBTC in the note shall be construed, under the very
provisions of the merger agreement, as a reference to petitioner bank,
"as if such reference was a direct reference to" the latter "for all intents
and purposes."
Section 80
Effects or merger or consolidation.
consolidation shall have the following effects:

- The

merger

or

1. The constituent corporations shall become a single corporation

which, in case of merger, shall be the surviving corporation designated
in the plan of merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises
of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every
other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the surviving
or consolidated corporation. The rights of creditors or liens upon the
property of any of such constituent corporations shall not be impaired
by such merger or consolidation.
Babst Vs. CA (350 SCRA 341)
Facts:
Elizalde Steel Consolidated, Inc. (ELISCON) obtained from
Commercial Bank and Trust Company (CBTC) a loan in the amount of
P8,015,900.84, with interest at the rate of 14% per annum, evidenced
by a promissory note. ELISCON defaulted in its payments, leaving an
outstanding indebtedness in the amount of P2,795,240.67.

The letters of credit, on the other hand, were opened for ELISCON by
CBTC using the credit facilities of Pacific Multi-Commercial
Corporation (MULTI) with the said bank, pursuant to the Resolution of
the Board of Directors of MULTI adopted that since at least 90% of the
Company's gross sales is generated by the sale of tin-plates
manufactured by Elizalde Steel Consolidated, Inc. it is to the best
interests of the Company to continue handling said tin-plate line and
because Elizalde Steel Consolidated, Inc. has requested the assistance
of the Company in obtaining credit facilities to enable it to maintain the
present level of its tin-plate manufacturing output and the Company is
willing to extend said requested assistance, MULTI allow and authorize
ELICON to avail and make use of the Credit Line of MULTI with CBCT.
MULTI likewise guarantee, solidarily, the payment of the
corresponding Letters of Credit upon maturity of the same.
Subsequently, Antonio Roxas Chua and Chester G. Babst executed a
Continuing Suretyship, whereby they bound themselves jointly and
severally liable to pay any existing indebtedness of MULTI to CBTC to
the extent of P8,000,000.00 each.
CBTC opened for ELISCON in favor of National Steel Corporation
three (3) domestic letters of credit which ELISCON used to purchase
tin black plates from National Steel Corporation. ELISCON defaulted
in its obligation to pay the amounts of the letters of credit, leaving an
outstanding account in the total amount of P3,963,372.08.
On December 22, 1980, the Bank of the Philippine Islands (BPI) and
CBTC entered into a merger, wherein BPI, as the surviving corporation,
acquired all the assets and assumed all the liabilities of CBTC.
Meanwhile, ELISCON encountered financial difficulties and became
heavily indebted to the Development Bank of the Philippines (DBP). In
order to settle its obligations, ELISCON proposed to convey to DBP by
way of dacion en pago all its fixed assets mortgaged with DBP, as
payment for its total indebtedness in the amount of P201,181,833.16.
On December 28, 1978, ELISCON and DBP executed a Deed of Cession
of Property in Payment of Debt.
DBP formally took over the assets of ELISCON, including its
indebtedness to BPI. Thereafter, DBP proposed formulas for the
settlement of all of ELISCON's obligations to its creditors, but BPI
expressly rejected the formula submitted to it for not being acceptable.
Consequently, BPI, as successor-in-interest of CBTC, instituted a
complaint for sum of money against ELISCON, MULTI and Babst.
ELISCON argued that the complaint was premature since DBP had
made serious efforts to settle its obligations with BPI.
Babst also alleged that he signed the Continuing Suretyship on the
understanding that it covers only obligations which MULTI incurred
solely for its benefit and not for any third party liability, and he had no
knowledge or information of any transaction between MULTI and
ELISCON.
MULTI, for its part, denied knowledge of the merger between BPI and
CBTC, and averred that the guaranty under its board resolution did not
cover purchases made by ELISCON in the form of trust receipts. It set
up a cross-claim against ELISCON alleging that the latter should be
held liable for any judgment which the court may render against it in
favor of BPI.
Issue:
W/N BPI has legal capacity to recover the obligations of ELISCON,
MULTI and Babst to CBTC
Ruling:

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There is no question that there was a valid merger between BPI and
CBTC. It is settled that in the merger of two existing corporations, one
of the corporations survives and continues the business, while the
other is dissolved and all its rights, properties and liabilities are
acquired by the surviving corporation. Hence, BPI has a right to
institute the case a quo.
Notwithstanding such right, BPI cannot recover from the petitioner.
Article 1293 of the Civil Code provides:
Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him the rights mentioned in articles 1236 and
1237.
BPI contends that in order to have a valid novation, there must be an
express consent of the creditor. However, there exist clear indications
that BPI was aware of the assumption by DBP of the obligations of
ELISCON. Due to the failure of BPI to register its objection to the takeover by DBP of ELISCON's assets, at the creditors' meeting held in
June 1981 and thereafter, it is deemed to have consented to the
substitution of DBP for ELISCON as debtor.

He alleged that he is an expert in textile manufacturing process. As

early as 1956 he was hired as the Assistant Spinning Manager of
Universal Textiles, Inc. (UTEX). Then he was promoted to Senior
Manager and worked for UTEX till 1980 under its President, Patricio
Lim. In 1978 Patricio Lim formed Peggy Mills, Inc. with Filsyn having
controlling interest. He was absorbed by Peggy Mills as its Vice
President and Plant Manager. At the time of his retirement he was
receiving P60,000.00 monthly with vacation and sick leave benefits,
13th month pay, holiday pay and two round trip business class tickets
on a Manila-London-Manila itinerary every three years which is
convertible to cash if unused.
In 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as
per agreement and this was renamed as Sta. Rosa Textile with Patricio
Lim as Chairman and President. He worked for Sta. Rosa until
November 30 and that from time to time the owners of Far Eastern
consulted with him on technical aspects of reoperation of the plant as
per correspondence.
Issue:
W/N Peggy Mills Inc. (PMI) and Sta. Rosa Textile Inc. (SRTI) are the
same entity, so that the latter will be liable to McLeod
Ruling:

BPI gives no cogent reason in withholding its consent to the

substitution, other than its desire to preserve its causes of action and
legal recourse against the sureties of ELISCON. It must be
remembered, however, that while a surety is solidarily liable with the
principal debtor, his obligation to pay only arises upon the principal
debtor's failure or refusal to pay. A contract of surety is an accessory
promise by which a person binds himself for another already bound,
and agrees with the creditor to satisfy the obligation if the debtor does
not. A surety is an insurer of the debt; he promises to pay the
principal's debt if the principal will not pay.

As a rule, a corporation that purchases the assets of another will not be

liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where
the purchaser expressly or impliedly agrees to assume the debts, (2)
where the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the selling
corporation fraudulently enters into the transaction to escape liability
for those debts.

In the case at bar, there was no indication that the principal debtor will
default in payment. In fact, DBP, which had stepped into the shoes of
ELISCON, was capable of payment. Its authorized capital stock was
increased by the government. More importantly, the National
Development Company took over the business of ELISCON and
undertook to pay ELISCON's creditors, and earmarked for that
purpose the amount of P4,015,534.54 for payment to BPI.

None of the foregoing exceptions is present in this case.

BPI's conduct evinced a clear and unmistakable consent to the

substitution of DBP for ELISCON as debtor. Hence, there was a valid
novation which resulted in the release of ELISCON from its obligation
to BPI, whose cause of action should be directed against DBP as the
new debtor.

There was also no merger or consolidation of PMI and SRTI.

Moreover, novation, would have dual functions one to extinguish an

existing obligation, the other to substitute a new one in its place
requiring a conflux of four essential requisites, (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract;
(3) the extinguishment of the old obligation; and (4) the birth of a valid
new obligation.
Thus, the original obligation having been extinguished, the contracts of
suretyship executed separately by Babst and MULTI, being accessory
obligations, are likewise extinguished.
McLeod Vs. NLRC (512 SCRA 222)
Facts:
John F. McLeod filed a complaint for retirement benefits, vacation and
sick leave benefits, non-payment of unused airline tickets, holiday pay,
underpayment of salary and 13 th month pay, moral and exemplary
damages, attorneys fees plus interest against Filipinas Synthetic
Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles,
Inc., Patricio Lim and Eric Hu.

Here, PMI transferred its assets to SRTI to settle its obligation to SRTI
in the sum of P210,000,000. We are not convinced that PMI
fraudulently transferred these assets to escape its liability for any of its
debts. PMI had already paid its employees, except McLeod, their
money claims.

Consolidation is the union of two or more existing corporations to form

a new corporation called the consolidated corporation. It is a
combination by agreement between two or more corporations by which
their rights, franchises, and property are united and become those of a
single, new corporation, composed generally, although not necessarily,
of the stockholders of the original corporations.
Merger, on the other hand, is a union whereby one corporation
absorbs one or more existing corporations, and the absorbing
corporation survives and continues the combined business.
The parties to a merger or consolidation are called constituent
corporations. In consolidation, all the constituents are dissolved and
absorbed by the new consolidated enterprise.
In merger, all
constituents, except the surviving corporation, are dissolved. In both
cases, however, there is no liquidation of the assets of the dissolved
corporations, and the surviving or consolidated corporation acquires
all their properties, rights and franchises and their stockholders usually
become its stockholders.
The surviving or consolidated corporation assumes automatically the
liabilities of the dissolved corporations, regardless of whether the
creditors have consented or not to such merger or consolidation.

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In the present case, there is no showing that the subject dation in

payment involved any corporate merger or consolidation. Neither is
there any showing of those indicative factors that SRTI is a mere
instrumentality of PMI.
Moreover, SRTI did not expressly or impliedly agree to assume any of
PMIs debts.
Also, McLeod did not present any evidence to show the alleged
renaming of Peggy Mills, Inc. to Sta. Rosa Textiles, Inc.
Hence, it is not correct for McLeod to treat PMI and SRTI as the same
entity.

TITLE X
APPRAISAL RIGHT
Section 81
Instances of appraisal right. - Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of
his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term
of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Section 82
How right is exercised. - The appraisal right may be exercised by
any stockholder who shall have voted against the proposed corporate
action, by making a written demand on the corporation within thirty
(30) days after the date on which the vote was taken for payment of the
fair value of his shares: Provided, That failure to make the demand
within such period shall be deemed a waiver of the appraisal right. If
the proposed corporate action is implemented or affected, the
corporation shall pay to such stockholder, upon surrender of the
certificate or certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in anticipation of such
corporate action.
If within a period of sixty (60) days from the date the corporate action
was approved by the stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested persons, one of
whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings of the majority of
the appraisers shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is made: Provided,
That no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover
such payment: and Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation.
Section 83

Effect of demand and termination of right. - From the time of

demand for payment of the fair value of a stockholder's shares until
either the abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all rights accruing to
such shares, including voting and dividend rights, shall be suspended
in accordance with the provisions of this Code, except the right of such
stockholder to receive payment of the fair value thereof: Provided, That
if the dissenting stockholder is not paid the value of his shares within
30 days after the award, his voting and dividend rights shall
immediately be restored.
Section 84
When right to payment ceases. - No demand for payment under
this Title may be withdrawn unless the corporation consents thereto.
If, however, such demand for payment is withdrawn with the consent
of the corporation, or if the proposed corporate action is abandoned or
rescinded by the corporation or disapproved by the Securities and
Exchange Commission where such approval is necessary, or if the
Securities and Exchange Commission determines that such stockholder
is not entitled to the appraisal right, then the right of said stockholder
to be paid the fair value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid to him.
Section 85
Who bears costs of appraisal. - The costs and expenses of
appraisal shall be borne by the corporation, unless the fair value
ascertained by the appraisers is approximately the same as the price
which the corporation may have offered to pay the stockholder, in
which case they shall be borne by the latter. In the case of an action to
recover such fair value, all costs and expenses shall be assessed against
the corporation, unless the refusal of the stockholder to receive
payment was unjustified.
Section 86
Notation on certificates; rights of transferee. - Within ten (10)
days after demanding payment for his shares, a dissenting stockholder
shall submit the certificates of stock representing his shares to the
corporation for notation thereon that such shares are dissenting
shares. His failure to do so shall, at the option of the corporation,
terminate his rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and the certificates
consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all
the rights of a regular stockholder; and all dividend distributions which
would have accrued on such shares shall be paid to the transferee.

TITLE XI
NON-STOCK CORPORATIONS
Section 87
Definition. - For the purposes of this Code, a non-stock corporation is
one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of this Code on
dissolution: Provided, That any profit which a non-stock corporation
may obtain as an incident to its operations shall, whenever necessary
or proper, be used for the furtherance of the purpose or purposes for
which the corporation was organized, subject to the provisions of this
Title.
The provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title.

129

Section 88
Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic service, or similar purposes, like trade,
industry, agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing particular
classes of non-stock corporations.
Republic Vs. Sunlife (473 SCRA 129)
Facts:
Sun Life is a mutual life insurance company organized and existing
under the laws of Canada. It is registered and authorized by the
Securities and Exchange Commission and the Insurance Commission
to engage in business in the Philippines as a mutual life insurance
company.
Sun Life filed with the Commissioner of Internal Revenue (CIR) its
insurance premium tax return for the third quarter of 1997 and paid
the premium tax in the amount of P31,485,834.51. For the period
covering August 21 to December 18, 1997, it filed with the CIR its
documentary stamp tax (DST) declaration returns and paid the total
amount of P30,000,000.00.
Meanwhile, the Court of Tax Appeals (CTA) rendered its decision in
Insular Life Assurance Co. Ltd. v. CIR, which held that mutual life
insurance companies are purely cooperative companies and are exempt
from the payment of premium tax and DST. This pronouncement was
later affirmed by this court in CIR v. Insular Life Assurance Company,
Ltd.
Sun Life surmised that being a mutual life insurance company, it was
likewise exempt from the payment of premium tax and DST. Hence,
Sun Life filed with the CIR an administrative claim for tax credit of its
alleged erroneously paid premium tax and DST for the aforestated tax
periods.
For failure of the CIR to act upon the administrative claim for tax credit
and with the 2-year period to file a claim for tax credit or refund
dwindling away and about to expire, Sun Life filed with the CTA a
petition for review. In its petition, it prayed for the issuance of a tax
credit certificate in the amount of P61,485,834.51 representing
P31,485,834.51 of erroneously paid premium tax for the third quarter
of 1997 and P30,000,000.00 of DST on policies of insurance from
August 21 to December 18, 1997. Sun Life stood firm on its contention
that it is a mutual life insurance company vested with all the
characteristic features and elements of a cooperative company or
association as defined in Section 121 of the Tax Code. Primarily, the
management and affairs of Sun Life were conducted by its members;
secondly, it is operated with money collected from its members; and,
lastly, it has for its purpose the mutual protection of its members and
not for profit or gain.
Issue:
W/N Sunlife is a purely cooperative company or association under
Section 121 of the National Internal Revenue Code and a fraternal or
beneficiary society, order or cooperative company on the lodge system
or local cooperation plan and organized and conducted solely by the
members thereof for the exclusive benefit of each member and not for
profit under Section 199 of the National Internal Revenue Code.
Ruling:
The Tax Code defines a cooperative as an association conducted by the
members thereof with the money collected from among themselves and
solely for their own protection and not for profit. Without a doubt,
Sunlife is a cooperative engaged in a mutual life insurance business.

First, it is managed by its members. Both the CA and the CTA found
that the management and affairs of Sunlife were conducted by its
member-policyholders.
A stock insurance company doing business in the Philippines may
alter its organization and transform itself into a mutual insurance
company. Sunlife has been mutualized or converted from a stock life
insurance company to a nonstock mutual life insurance corporation
pursuant to Section 266 of the Insurance Code of 1978. On the basis of
its bylaws, its ownership has been vested in its member-policyholders
who are each entitled to one vote; and who, in turn, elect from among
themselves the members of its board of trustees. Being the governing
body of a nonstock corporation, the board exercises corporate powers,
lays down all corporate business policies, and assumes responsibility
for the efficiency of management.
Second, it is operated with money collected from its members. Since
respondent is composed entirely of members who are also its
policyholders, all premiums collected obviously come only from them.
The member-policyholders constitute both insurer and insured who
contribute, by a system of premiums or assessments, to the creation of
a fund from which all losses and liabilities are paid. The premiums
pooled into this fund are earmarked for the payment of their indemnity
and benefit claims.
Third, it is licensed for the mutual protection of its members, not for
the profit of anyone.
As early as October 30, 1947, the director of commerce had already
issued a license to Sunlife -- a corporation organized and existing
under the laws of Canada -- to engage in business in the Philippines.
Pursuant to Section 225 of Canadas Insurance Companies Act, the
Canadian Minister of State (for finance and privatization) also declared
in its Amending Letters Patent that Sunlife would be a mutual
company effective June 1, 1992. In the Philippines, the Insurance
Commissioner also granted it annual Certificates of Authority to
transact life insurance business, the most relevant of which were dated
July 1, 1997 and July 1, 1998.
A mutual life insurance company is conducted for the benefit of its
member-policyholders, who pay into its capital by way of premiums.
To that extent, they are responsible for the payment of all its losses.
The cash paid in for premiums and the premium notes constitute their
assets x x x. In the event that the company itself fails before the terms
of the policies expire, the member-policyholders do not acquire the
status of creditors. Rather, they simply become debtors for whatever
premiums that they have originally agreed to pay the company, if they
have not yet paid those amounts in full, for mutual companies x x x
depend solely upon x x x premiums. Only when the premiums will
have accumulated to a sum larger than that required to pay for
company losses will the member-policyholders be entitled to a pro
rata division thereof as profits.
Contributing to its capital, the member-policyholders of a mutual
company are obviously also its owners. Sustaining a dual relationship
inter se, they not only contribute to the payment of its losses, but are
also entitled to a proportionate share and participate alike in its profits
and surplus.
Sharing in the common fund, any member-policyholder may choose to
withdraw dividends in cash or to apply them in order to reduce a
subsequent premium, purchase additional insurance, or accelerate the
payment period. Although the premium made at the beginning of a
year is more than necessary to provide for the cost of carrying the
insurance, the member-policyholder will nevertheless receive the
benefit of the overcharge by way of dividends, at the end of the year
when the cost is actually ascertained. The declaration of a dividend
upon a policy reduces pro tanto the cost of insurance to the holder of
the policy. That is its purpose and effect.

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The so-called dividend that is received by member-policyholders is

not a portion of profits set aside for distribution to the stockholders in
proportion to their subscription to the capital stock of a corporation.
One, a mutual company has no capital stock to which subscription is
necessary; there are no stockholders to speak of, but only members.
And, two, the amount they receive does not partake of the nature of a
profit or income. The quasi-appearance of profit will not change its
character. It remains an overpayment, a benefit to which the memberpolicyholder is equitably entitled.

Sec. 91. Termination of membership. - Membership shall be

terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws. Termination of membership shall have
the effect of extinguishing all rights of a member in the corporation or
in its property, unless otherwise provided in the articles of
incorporation or the by-laws. (n)

Verily, a mutual life insurance corporation is a cooperative that

promotes the welfare of its own members. It does not operate for
profit, but for the mutual benefit of its member-policyholders. They
receive their insurance at cost, while reasonably and properly guarding
and maintaining the stability and solvency of the company. The
economic benefits filter to the cooperative members. Either equally or
proportionally, they are distributed among members in correlation
with the resources of the association utilized.

Facts:

It does not follow that because respondent is registered as a nonstock

corporation and thus exists for a purpose other than profit, the
company can no longer make any profits. Earning profits is merely its
secondary, not primary, purpose. In fact, it may not lawfully engage in
any business activity for profit, for to do so would change or contradict
its nature as a non-profit entity. It may, however, invest its corporate
funds in order to earn additional income for paying its operating
expenses and meeting benefit claims. Any excess profit it obtains as an
incident to its operations can only be used, whenever necessary or
proper, for the furtherance of the purpose for which it was organized.
The Tax Code is clear. On the one hand, Section 121 of the Code
exempts cooperative companies from the 5 percent percentage tax on
insurance premiums. On the other hand, Section 199 also exempts
from the DST, policies of insurance or annuities made or granted by
cooperative companies. Being a cooperative, respondent is thus
exempt from both types of taxes.
It is worthy to note that while RA 8424 amending the Tax Code has
deleted the income tax of 10 percent imposed upon the gross
investment income of mutual life insurance companies -- domestic and
foreign -- the provisions of Section 121 and 199 remain unchanged.
Having been seasonably filed and amply substantiated, the claim for
exemption in the amount of P61,485,834.51, representing percentage
taxes on insurance premiums and documentary stamp taxes on policies
of insurance or annuities that were paid by respondent in 1997, is in
order. Thus, the grant of a tax credit certificate to respondent as
ordered by the appellate court was correct.
Chapter I - MEMBERS
Sec. 89. Right to vote. - The right of the members of any class or
classes to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member, regardless of class, shall
be entitled to one vote.

Chinese YMCA Vs. Ching (71 S 460)

Victor Ching filed an action for mandamus with preliminary injunction

against Chinese Young Men's Christian Association of the Philippine
Islands (Chinese YMCA for short), William Golangco, in his capacity as
Director and President of the Chinese YMCA, and Juanito K. Tan, in
his capacity as Recording Secretary of the Chinese YMCA.
Ching anchored his action in the Court of First Instance of Manila upon
the claim that the Membership Campaign of the Chinese YMCA for
1966 held from September 27, 1965, up to November 26, 1965, only 175
applications for membership were submitted, canvassed and accepted
on the last day of the membership campaign, which was November 26,
1965 at 5:00 p.m.
The herein petitioners, on the other hand, alleged that 249
membership applications, including the 106 submitted through
respondent Ching, were filed during the campaign period. Further, the
petitioners denied that there was any counting and/or approval of
membership applications that took place on November 26, 1965, as
under the Constitution and By-Laws of the Chinese YMCA membership
applications had to be screened by its Membership Committee,
endorsed favorably to its Board of Directors and approved by the latter
body by two-thirds majority vote.
It is claimed by the petitioners that of the 249 applications submitted,
174 were favorably endorsed by the Membership Committee to the
Board of Directors and subsequently approved by the latter. Seventyfive applications, which were among those submitted by respondent
Ching were not approved for the reason that said respondent had given
"stop-payment" orders on the checks submitted by him and some
others to cover payment of the fees corresponding to these 75
applications. Accordingly, petitioners contend that the 1966
membership of the Chinese YMCA should be constituted as they are
constituted, only by those 174 applicants whose applications were
approved by the Chinese YMCA Board of Directors.
The Court of First Instance of Manila rendered its decision annulling
the 1966 annual membership campaign of the respondent Chinese
YMCA of the Philippine Islands, without prejudice to the holding of
another one in lieu thereof; declaring as without legal effect the results
of the same, including the approval of 174 applications to constitute the
present active membership of the association; making permanent the
preliminary injunction issued in this case enjoining the respondents
from holding the annual election of the respondent association, until
such time that a new list of members shall have been finalized; and
dismissing the counterclaim of the respondents.
Issue:

Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by proxy in accordance with the provisions of
this Code. (n)
Voting by mail or other similar means by members of non-stock
corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which
may be prescribed by, the Securities and Exchange Commission.
Sec. 90. Non-transferability of membership. - Membership in a
non-stock corporation and all rights arising therefrom are personal and
non-transferable, unless the articles of incorporation or the by-laws
otherwise provide. (n)

W/N respondent Court of Appeals erred in annulling the 1966 annual

membership campaign of YMCA and in declaring invalid the approval
by YMCA of 174 applications for membership
Ruling:
The position adopted by both the trial court and the Court of Appeals
on the basis of the trial court's conjecture and speculation is not
justified.
The documentary evidence itself as cited by the trial court, consisting
of the applications and the receipts for payment of the membership
fees show that they were filed and paid not later than the November 26,
1965 deadline, and this was further supported by the bank statement of

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the petitioner YMCA deposit account with the China Banking

Corporation and the checks paid by certain members to the YMCA
which show that the application fees corresponding to the questioned
74 applications (that raised the total to 249 from 175) were already paid
to petitioner YMCA as the time of the said deadline. No evidence could
be cited by the trial court to rebut this well nigh conclusive
documentary evidence other than respondent's unsupported suspicion
which the trial court adopted in a negative manner with its statement
that it is "not improbable" that" some of those applications filed after
said deadline". If there were indeed any applications filed after the
deadline, they certainly should have been positively pin-pointed and
specifically annulled.
What is worse, 175 membership applications were undisputedly filed
within the deadline (including the 75 withdrawn by respondent) and
yet the 100 remaining unquestioned memberships were nullified by the
questioned decision without the individuals concerned ever having
been impleaded or heard (except the individual petitioners president
and secretary).
The appealed decision thus contravened the established principle that
the courts cannot strip a member of a non-stock non-profit corporation
of his membership therein without cause. Otherwise, that would be an
unwarranted and undue interference with the well established right of
a corporation to determine its membership, as announced by Fletcher,
as follows:
Compliance with provisions of charter, constitution or bylaws. In order that membership may be acquired in a nonstock corporation and valid by-laws must be complied with,
except in so far as they may be and are waived. *** But
provisions in the by-laws as to formal steps to be taken to
acquire membership may be waived by the corporation, or it
may be estopped to assert that they have not been taken.
Finally, the appealed decision did not give due importance to the
undisputed fact therein stated that "at the board meeting of the
association held on December 7, 1965, a list of 174 applications for
membership, old and new, was submitted to the board and approved
by the latter, over the objection of the petitioner [therein private
respondent] who was present at said meeting." Such action of the
petitioner association's board of directors approving the 174
membership applications of old and new members constituting its
active membership as duly processed and screened by the authorized
committee just be deemed a waiver on its part of any technicality or
requirement of form, since otherwise the association would be
practically paralyzed and deprived of the substantial revenues from the
membership dues of P17,400.00 (at P100.00 per application).
Chapter II - TRUSTEES AND OFFICERS
Sec. 92. Election and term of trustees. - Unless otherwise
provided in the articles of incorporation or the by-laws, the board of
trustees of non-stock corporations, which may be more than fifteen
(15) in number as may be fixed in their articles of incorporation or bylaws, shall, as soon as organized, so classify themselves that the term of
office of one-third (1/3) of their number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3) of the
board of trustees shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter elected to fill
vacancies occurring before the expiration of a particular term shall
hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the
corporation.
Unless otherwise provided in the articles of incorporation or the bylaws, officers of a non-stock corporation may be directly elected by the
members. (n)
Lions Club Vs. Amores (121 S 621)

Facts:
The principal adversaries in this controversy are respondent Vicente
Josefa of the Manila Traders Lions Club and petitioner James L. So of
the Manila Centrum Lions Club, which Lions clubs are duly organized,
chartered, and affiliated with Lions Clubs International having its
International offices at 300 22nd Street, Oakbrook, Illinois 60570,
U.S.A. The Manila Traders Lions Club and the Manila Centrum Lions
Club, together with other Lions clubs, are embraced and constituted
into the newly organized District 301-Al. The Lions districts in the
country form the so-called Multiple District 301,Philippines. All clubs
so organized and chartered under the Constitution of Lions Clubs
International are under the exclusive supervision of the International
Board of Directors.
Josefa and So were properly nominated candidates for the office of
District Governor, District 301-Al, for the fiscal year 1982-83. One hour
after the designated convening time, District Governor Huang
transferred the election meeting from the designated site to the
Admiral Royal Hotel. After the announcement of District Governor
Huang transferring the election meeting, a majority of the delegates of
the newly authorized District 301-Al remained at the designated site
and convened an election for District Governor between the two
candidates, Lion So and Lion Josefa. So that there were two elections
held on June 6, 1982 for the office of District Governor of District 301Al.
One election was held as a part of the official District Convention at the
designated election meeting site, the Little Theater Olongapo National
High School, at which Lion So received 147 votes and Lion Josefa
received 3 votes. And the other election was held at the Admiral Royale
Hotel at which Lion Josefa received 115 votes.
The action of District Governor Huang in transferring the election
meeting away from the convention site was without approval of a
majority of the delegates and was without any clear authority and
justification. The said election meeting held at the Little Theatre
Olongapo National High School was properly conducted and resulted
in the election of Lion So. Said election of Lion So was duly certified by
the official Election Committee Chairman Lion Ernesto Castaeda,
appointed by District Governor Huang and District Governor Beleno of
District 301-E, the official Multiple District Council representative.
Vicente Josefa filed a complaint for Quo Warranto, Injunction,
Damages with writ of preliminary injunction and prayer for temporary
restraining order in the Court of First Instance of Manila against Lions
Clubs International and James L. So.
Finding the foregoing allegations of the complaint to be sufficient in
form and substance, the Court of First Instance on the same date, July
1, 1982, issued a temporary restraining order enjoining So from
assuming the powers and prerogatives of the office of Governor of
District 301-Al, and Lions Clubs International, represented by Antonio
Ramos, from recognizing and proclaiming So as the Governor of
District 301-Al for the fiscal year 1982- 1983.
On July 8, 1982, defendants So and Lions Club International filed a
Motion to Dismiss and to Lift Restraining Order.
The Court of First Instance issued an Order denying defendants'
motion to dismiss. Finding the Motion to lift restraining order to be
meritorious, the Court set aside said restraining order.
Herein petitioners Lions Clubs International and James L. So now
come to this Court attributing grave abuse of discretion to the Court of
First Instance of Manila for the denial of their Motion to Dismiss dated
July 6, 1982, and contending that the Court of Appeals acted in excess
of its jurisdiction in issuing its temporary restraining order of July 29,
1982. As prayed for by said petitioners, We issued on August 4, 1982 a
temporary restraining order enjoining the enforcement of the assailed
temporary restraining order of the Court of Appeals.

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It is petitioners' submission that the subject matter of the instant case

is purely an internal affair of the Lions organization and, therefore, is
beyond judicial review. On the other hand, private respondent
maintains that court intervention is warranted when, as he alleges in
this case, there is fraud, oppression. bad faith, when the proceedings in
question are violative of the laws of the association, or where the
proceedings are illegal.
Issue:
W/N there is the justiciability of the election dispute between herein
petitioner James L. So and private respondent Vicente Josefa for the
position of District Governor of District 301-Al Philippines

to the International Board of Directors through the Constitution and

By-Laws Committee of Lions Clubs International, 300 22nd Street,
Oakbrook, Illinois 60570, U.S.A.
At the meeting of the International Board of Directors held on June 27,
1982, the election of petitioner James L. So to serve as District
Governor of District 301-Al for the fiscal year 1982-83 was approved
and said petitioner was duly informed thereof by Richard G. Rice,
Manager, District Operations Department, Lions Clubs International in
his letter dated July 8, 1982. Petitioner attended and completed the
District Governors' Executive Seminar as District Governor of 301-Al.
On June 29, 1982, petitioner So was proclaimed, sworn to and installed
to office as District Governor of District 301-Al by the President of
Lions International at the close of the 65th Lions Clubs International
Convention held in Atlanta, Georgia, U.S.A.

Ruling:
The general rule is that "... the courts will not interfere with the
internal affairs of an unincorporated association so as to settle disputes
between the members, or questions of policy, discipline, or internal
government, so long as the government of the society is fairly and
honestly administered in conformity with its laws and the law of the
land, and no property or civil rights are invaded. Under such
circumstances, the decision of the governing body or established
private tribunal of the association is binding and conclusive and not
subject to review or collateral attack in the courts. "
The general rule of non-interference in the internal affairs of
associations is, however, subject to exceptions, but the power of review
is extremely limited. Accordingly, the courts have and will exercise
power to interfere in the internal affairs of an association where law
and justice so require, and the proceedings of the association are
subject to judicial review where there is fraud, oppression, or bad faith,
or where the action complained of is capricious, arbitrary, or unjustly
discriminatory. Also, the courts will usually entertain jurisdiction to
grant relief in case property or civil rights are invaded, although it has
also been held that the involvement of property rights does not
necessarily authorize judicial intervention, in the absence of
arbitrariness, fraud or collusion. Moreover, the courts will intervene
where the proceedings in question are violative of the laws of the
society, or the law of the land, as by depriving a person of due process
of law. Similarly, judicial intervention is warranted where there is a
lack of jurisdiction on the part of the tribunal conducting the
proceedings, where the organization exceeds its powers, or where the
proceedings are otherwise illegal.
In accordance with the general rules as to judicial interference cited
above, the decision of an unincorporated association on the question of
an election to office is a matter peculiarly and exclusively to be
determined by the association, and, in the absence of fraud, is final and
binding on the courts. (7 C.J.S., p. 44).
The instant controversy between petitioner So and respondent Josefa
falls squarely within the ambit of the rule of judicial non-intervention
or non- interference. The elections in dispute, the manner by which it
was conducted and the results thereof, is strictly the internal affair that
concerns only the Lions association and/or its members, and We find
from the records that the same was resolved within the organization of
Lions Clubs International in accordance with the Constitution and ByLaws which are not immoral, unreasonable, contrary to public policy,
or in contravention of the laws of the land.
It is of judicial notice that a Lions club is a voluntary association of
civic-minded men whose general purpose and aim is to serve the
people and the community. It appears from the records that duly
organized and chartered Lions clubs all over the world are under the
supervision of the mother club known as The International Association
of Lions Clubs for Lions Clubs International) which holds international
offices in Illinois, U.S.A., and is governed by its constitution and bylaws.
The records disclose that the election dispute between petitioner James
L. So and respondent Vicente Josefa was brought before and elevated

The Report of the Constitution and By-laws Committee duly approved

and adopted by the International Board of Directors clearly belies the
claim of injustice alleged by respondent Josefa in his complaint in Civil
Case No. 82-10588 that petitioner So was illegally and arbitrarily
nominated; that the latter's election was illegal and that he (Josefa)
was legally elected in a valid election held at the new venue and was
duly proclaimed by the State Council of Governors and that Lions
International unlawfully recognized So as the winner on the basis of his
illegal election. These findings upon the evidence submitted and
examined at the hearing of the election protest before the Committee
personally attended by both So and Josefa may not be disturbed by the
courts. The decision of the Association's tribunal, the International
Board of Directors, is controlling since respondent Josefa alleges no
invasion of this property or civil rights and neither is it claimed that the
government of the Association is not fairly and honestly administered
in conformity with its laws and the law of the land.
And since the disputed election to the position of District Governor is
within the peculiar province and function of Lions International
through its established tribunal to decide and determine in accordance
with its governing laws, its resolution may not be questioned
elsewhere, much less in the courts.
In essence, the courts, considering the nature of the action or suit at
bar, are without jurisdiction and authority to review and reverse the
decision of the International Board of Directors, Lions Clubs
International, approving and recognizing the petitioner as duly elected
District Governor of District 301-A1 for the fiscal year 1982-1983.
Sec. 93. Place of meetings. - The by-laws may provide that the
members of a non-stock corporation may hold their regular or special
meetings at any place even outside the place where the principal office
of the corporation is located: Provided, That proper notice is sent to all
members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the
Philippines.

Chapter III - DISTRIBUTION OF ASSETS IN

NON-STOCK CORPORATIONS
Sec. 94. Rules of distribution. - In case dissolution of a non-stock
corporation in accordance with the provisions of this Code, its assets
shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid,
satisfied and discharged, or adequate provision shall be made
therefore;
2. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance
with such requirements;

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3. Assets received and held by the corporation subject to limitations

permitting their use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one or more corporations, societies
or organizations engaged in activities in the Philippines substantially
similar to those of the dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;

San Juan Structural and Steel Fabricators, Inc.'s entered into an

agreement with Motorich Sales Corporation for the transfer to it of a
parcel of land identified as Lot 30, Block 1 of the Acropolis Greens
Subdivision located in the District of Murphy, Quezon City, Metro
Manila, containing an area of Four Hundred Fourteen (414) square
meters. As stipulated in the Agreement of 14 February 1989, San Juan
paid the downpayment in the sum of One Hundred Thousand
(P100,000.00) Pesos, the balance to be paid on or before March 2,
1989.

4. Assets other than those mentioned in the preceding paragraphs, if

any, shall be distributed in accordance with the provisions of the
articles of incorporation or the by-laws, to the extent that the articles of
incorporation or the by-laws, determine the distributive rights of
members, or any class or classes of members, or provide for
distribution; and

San Juan Structural and Steel Fabricators, Inc. alleges that on

February 14, 1989, it entered through its president, Andres Co, into the
disputed Agreement with Motorich Sales Corporation, which was in
turn allegedly represented by its treasurer, Nenita Lee Gruenberg.

5. In any other case, assets may be distributed to such persons,

societies, organizations or corporations, whether or not organized for
profit, as may be specified in a plan of distribution adopted pursuant to
this Chapter. (n)
Sec. 95. Plan of distribution of assets. - A plan providing for the
distribution of assets, not inconsistent with the provisions of this Title,
may be adopted by a non-stock corporation in the process of
dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members having
voting rights. Written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time and place of such
meeting shall be given to each member entitled to vote, within the time
and in the manner provided in this Code for the giving of notice of
meetings to members. Such plan of distribution shall be adopted upon
approval of at least two-thirds (2/3) of the members having voting
rights present or represented by proxy at such meeting. (n)
TITLE XII
CLOSE CORPORATIONS
Sec. 96. Definition and applicability of Title. - A close
corporation, within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding twenty (20); (2) all
the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any public offering of any
of its stock of any class. Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when at least two-thirds (2/3)
of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the
provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.

San Juan Structural Vs. CA (296 S 631)

Facts:

Petitioner also argues that the veil of corporate fiction of Motorich

should be pierced, because the latter is a close corporation. Since
"Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all
or almost all or 99.866% to be accurate, of the subscribed capital stock"
of Motorich, petitioner argues that Gruenberg needed no authorization
from the board to enter into the subject contract. It adds that, being
solely owned by the Spouses Gruenberg, the company can treated as a
close corporation which can be bound by the acts of its principal
stockholder who needs no specific authority.
Issue:
W/N Motorich is a close corporation
Ruling:
It is not. Section 96 of the Corporation Code defines a close corporation
as follows:
Sec. 96. Definition and Applicability of Title . A close corporation,
within the meaning of this Code, is one whose articles of incorporation
provide that:
(1) All of the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of record by not
more than a specified number of persons, not exceeding
twenty (20);
(2) All of the issued stock of all classes shall be subject to one
or more specified restrictions on transfer permitted by this
Title; and
(3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall be deemed not a
close corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which is
not a close corporation within the meaning of this Code. . . .
The articles of incorporation of Motorich Sales Corporation does not
contain any provision stating that (1) the number of stockholders shall
not exceed 20, or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited. From
its articles, it is clear that Motorich is not a close corporation. Motorich
does not become one either, just because Spouses Reynaldo and Nenita
Gruenberg owned 99.866% of its subscribed capital stock. The "mere
ownership by a single stockholder or by another corporation of all or
capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities." So, too, a narrow
distribution of ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals
wherein the Court ruled that ". . . petitioner corporation is classified as

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a close corporation and, consequently, a board resolution authorizing

the sale or mortgage of the subject property is not necessary to bind the
corporation for the action of its president." But the factual milieu in
Dulay is not on all fours with the present case. In Dulay, the sale of
real property was contracted by the president of a close corporation
with the knowledge and acquiescence of its board of directors. In the
present case, Motorich is not a close corporation, as previously
discussed, and the agreement was entered into by the corporate
treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where "an
action by a director, who singly is the controlling stockholder, may be
considered as a binding corporate act and a board action as nothing
more than a mere formality." The present case, however, is not one of
them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own
"almost 99.866%" of Respondent Motorich. Since Nenita is not the sole
controlling stockholder of Motorich, the aforementioned exception
does not apply. Granting arguendo that the corporate veil of Motorich
is to be disregarded, the subject parcel of land would then be treated as
conjugal property of Spouses Gruenberg, because the same was
acquired during their marriage. There being no indication that said
spouses, who appear to have been married before the effectivity of the
Family Code, have agreed to a different property regime, their property
relations would be governed by conjugal partnership of gains. As a
consequence, Nenita Gruenberg could not have effected a sale of the
subject lot because "there is no co-ownership between the spouses in
the properties of the conjugal partnership of gains. Hence, neither
spouse can alienate in favor of another his/her interest in the
partnership nor in any property belonging to it; neither spouse can ask
for a partition of the properties before the partnership has been legally
dissolved."
Assuming further, for the sake of argument, that the spouses' property
regime is the absolute community of property, the sale would still be
invalid. Under this regime, "alienation of community property must
have the written consent of the other spouse or he authority of the
court without which the disposition or encumbrance is void." Both
requirements are manifestly absent in the instant case.
Sec. 97. Articles of incorporation. - The articles of incorporation
of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as may
be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of
whom may be voted for and elected solely by a particular class of stock;
and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.

The articles of incorporation may likewise provide that all officers or

employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
Sec. 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares must appear in the articles
of incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in
good faith. Said restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder with such reasonable terms,
conditions or period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to
any third person.
Sec. 99. Effects of issuance or transfer of stock in breach of
qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person
who is not entitled under any provision of the articles of incorporation
to be a holder of record of its stock, and if the certificate for such stock
conspicuously shows the qualifications of the persons entitled to be
holders of record thereof, such person is conclusively presumed to have
notice of the fact of his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the
number of persons, not exceeding twenty (20), who are entitled to be
holders of record of its stock, and if the certificate for such stock
conspicuously states such number, and if the issuance or transfer of
stock to any person would cause the stock to be held by more than such
number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition violates
the restriction.
4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this
section to have, notice either (a) that he is a person not eligible to be a
holder of stock of the corporation, or (b) that transfer of stock to him
would cause the stock of the corporation to be held by more than the
number of persons permitted by its articles of incorporation to hold
stock of the corporation, or (c) that the transfer of stock is in violation
of a restriction on transfer of stock, the corporation may, at its option,
refuse to register the transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall not applicable if the transfer of
stock, though contrary to subsections (1), (2) of (3), has been consented
to by all the stockholders of the close corporation, or if the close
corporation has amended its articles of incorporation in accordance
with this Title.

The articles of incorporation of a close corporation may provide that

the business of the corporation shall be managed by the stockholders of
the corporation rather than by a board of directors. So long as this
provision continues in effect:

6. The term "transfer", as used in this section, is not limited to a

transfer for value.

1. No meeting of stockholders need be called to elect directors;

7. The provisions of this section shall not impair any right which the
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.

2. Unless the context clearly requires otherwise, the stockholders of the

corporation shall be deemed to be directors for the purpose of applying
the provisions of this Code; and

Sec. 100. Agreements by stockholders.

3. The stockholders of the corporation shall be subject to all liabilities

of directors.

1. Agreements by and among stockholders executed before the

formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and
shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such agreements
are not inconsistent with the articles of incorporation, irrespective of

135

where the provisions of such agreements are contained, except those

required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and
signed by the parties thereto, may provide that in exercising any voting
rights, the shares held by them shall be voted as therein provided, or as
they may agree, or as determined in accordance with a procedure
agreed upon by them.
3. No provision in any written agreement signed by the stockholders,
relating to any phase of the corporate affairs, shall be invalidated as
between the parties on the ground that its effect is to make them
partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to
the conduct of the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who
are parties thereto the liabilities for managerial acts imposed by this
Code on directors.
5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance.
Sec. 101. When board meeting is unnecessary or improperly
held. - Unless the by-laws provide otherwise, any action by the
directors of a close corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written consent thereto is signed
by all the directors; or
2. All the stockholders have actual or implied knowledge of the action
and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in
question and none of them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or notice, an action
taken therein within the corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge
thereof.
Sec. 102. Pre-emptive right in close corporations. - The preemptive right of stockholders in close corporations shall extend to all
stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services, or in payment of corporate debts,
unless the articles of incorporation provide otherwise.
Sec. 103. Amendment of articles of incorporation. - Any
amendment to the articles of incorporation which seeks to delete or
remove any provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall not be valid or effective
unless approved by the affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock, whether with or without voting rights, or
of such greater proportion of shares as may be specifically provided in
the articles of incorporation for amending, deleting or removing any of
the aforesaid provisions, at a meeting duly called for the purpose.
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in
the articles of incorporation or by-laws or agreement of stockholders of

a close corporation, if the directors or stockholders are so divided

respecting the management of the corporation's business and affairs
that the votes required for any corporate action cannot be obtained,
with the consequence that the business and affairs of the corporation
can no longer be conducted to the advantage of the stockholders
generally, the Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to arbitrate the
dispute. In the exercise of such power, the Commission shall have
authority to make such order as it deems appropriate, including an
order: (1) canceling or altering any provision contained in the articles
of incorporation, by-laws, or any stockholder's agreement; (2)
canceling, altering or enjoining any resolution or act of the corporation
or its board of directors, stockholders, or officers; (3) directing or
prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action; (4)
requiring the purchase at their fair value of shares of any stockholder,
either by the corporation regardless of the availability of unrestricted
retained earnings in its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving the corporation; or (7)
granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary or
affiliate of the corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is not a
receiver of the corporation and does not have the title and powers of a
custodian or receiver. A provisional director shall have all the rights
and powers of a duly elected director of the corporation, including the
right to notice of and to vote at meetings of directors, until such time as
he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement
between him and the corporation subject to approval of the
Commission, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional
director and the corporation.
Sec. 105. Withdrawal of stockholder or dissolution of
corporation. - In addition and without prejudice to other rights and
remedies available to a stockholder under this Title, any stockholder of
a close corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their
par or issued value, when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock:
Provided, That any stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of acts of the directors,
officers or those in control of the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are being misapplied or
wasted.
TITLE XIII
SPECIAL CORPORATIONS
Chapter I - Educational Corporations
Sec. 106. Incorporation. - Educational corporations shall be
governed by special laws and by the general provisions of this Code. (n)
Sec. 107. Pre-requisites to incorporation. - Except upon
favorable recommendation of the Ministry of Education and Culture,
the Securities and Exchange Commission shall not accept or approve
the articles of incorporation and by-laws of any educational institution.
(168a)
Sec. 108. Board of trustees. - Trustees of educational institutions
organized as non-stock corporations shall not be less than five (5) nor
more than fifteen (15): Provided, however, That the number of trustees
shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the bylaws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number

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shall expire every year. Trustees thereafter elected to fill vacancies,

occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the number and term
of directors shall be governed by the provisions on stock corporations.
(169a)

65686; and more than 39 years with respect to the fourth parcel
described in plan PSU-112592 (at least from the date of the survey in
1940) have been open, public, continuous, peaceful, adverse against the
whole world, and in the concept of owner.
Accordingly, the court ordered the registration of the four parcels
together with the improvements thereon "in the name of the ROMAN
CATHOLIC BISHOP OF LUCENA, INC., a religious corporation sole
duly registered and existing under the laws of the Republic of the
Philippines."
Issue:

Chapter II - RELIGIOUS CORPORATIONS

Sec. 109. Classes of religious corporations. - Religious
corporations may be incorporated by one or more persons. Such
corporations may be classified into corporations sole and religious
societies.
Religious corporations shall be governed by this Chapter and by the
general provisions on non-stock corporations insofar as they may be
applicable. (n)
Sec. 110. Corporation sole. - For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any
religious denomination, sect or church, a corporation sole may be
formed by the chief archbishop, bishop, priest, minister, rabbi or other
presiding elder of such religious denomination, sect or church. (154a)
Republic Vs. IAC (168 S 165)
Facts:
On February 2, 1979, the ROMAN CATHOLIC BISHOP of Lucena,
represented by Msgr. Jose T. Sanchez, filed an application for
confirmation of title to four (4) parcels of land. Three of said parcels,
denominated as Lots 1, 2 and 3, respectively, are situated in Barrio
Masin, Municipality of Candelaria, Quezon Province. The fourth parcel
is located in Barrio Bucal (Taguan), same municipality and province.
As basis for the application, the applicant claimed title to the various
properties through either purchase or donation dating as far back as
1928.
The legal requirements of publication and posting were duly complied
with, as was the service of copies of notice of initial hearing on the
proper government officials.
In behalf of the Director of Lands and the Director of the Bureau of
Forest Development, the Solicitor General filed an Opposition on April
20, 1979, alleging therein among others, that the applicant did not have
an imperfect title or title in fee simple to the parcel of land being
applied for.
At the initial hearing held on November 13, 1979, only the Provincial
Fiscal in representation of the Solicitor General appeared to interpose
personal objection to the application. Hence, an Order of General
Default against the whole world was issued by the Court a quo except
for the Director of Lands and the Director of the Bureau of Forest
Development.
Evaluating the applicant's submitted proofs, the court a quo concluded,
on the basis of acquisitive prescription at the very least, that the former
had adequately shown title to the parcels of land being claimed.
Since the acquisition of these four (4) lots by the applicant, it has been
in continuous possession and enjoyment thereof, and such possession,
together with its predecessors-in interest, covering a period of more
than 52 years (at least from the date of the survey in 1928) with respect
to lots 1 and 2, about 62 years with respect to lot 3, all of plan PSU-

W/N the Roman Catholic Bishop of Lucena, as a corporation sole is

qualified to apply for confirmation of its title to the four (4) parcels of
land subject of this case
Ruling:
Petitioner argues that considering such constitutional prohibition,
private respondent is disqualified to own and register its title to the lots
in question. Further, it argues that since the application for registration
was filed only on February 2, 1979, long after the 1973 Constitution
took effect on January 17, 1973, the application for registration and
confirmation of title is ineffectual because at the time it was filed,
private corporation had been declared ineligible to acquire alienable
lands of the public domain pursuant to Art. XIV, Sec. 11 of the said
constitution.
The questioned posed before this Court has been settled in the case of
DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA
509 [1986]) which reversed the ruling first enunciated in the 1982 case
of Manila Electric Co. vs. CASTRO BARTOLOME , (114 SCRA 789
[1982]) imposing the constitutional ban on public land acquisition by
private corporations which ruling was declared emphatically as res
judicata on January 7, 1986 in Director of Lands vs. Hermanos y
Hermanas de Sta. Cruz de Mayo, Inc ., (141 SCRA 21 [1986]). In said
case, (Director of Lands v. IAC, supra), this Court stated that a
determination of the character of the lands at the time of institution of
the registration proceedings must be made. If they were then still part
of the public domain, it must be answered in the negative.
If, on the other hand, they were already private lands, the
constitutional prohibition against their acquisition by private
corporation or association obviously does not apply. In affirming the
Decision of the Intermediate Appellate Court in said case, this Court
adopted the vigorous dissent of the then Justice, later Chief Justice
Claudio Teehankee, tracing the line of cases beginning with CARINO,
in 1909, thru SUSI, in 1925, down to HERICO, in 1980, which
developed, affirmed and reaffirmed the doctrine that open, exclusive
and undisputed possession of alienable public land for the period
prescribed by law creates the legal fiction whereby the land, upon
completion of the requisite period ipso jure and without the need of
judicial or other sanction, ceases to be public land and becomes' private
property. (DIRECTOR OF LANDS vs. IAC, supra , p. 518).
It must be emphasized that the Court is not here saying that a
corporation sole should be treated like an ordinary private corporation.
A corporation sole consists of one person only, and his successors (who
will always be one at a time), in some particular station, who are
incorporated by law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in their natural
persons they could not have had. In this sense, the King is a sole
corporation; so is a bishop, or deans distinct from their several
chapters.
Pertinent to this case is the provision of Sec. 113 Batas Pambansa Blg.
68 which reads as follows:

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Sec. 113. Acquisition and alienation of property . Any corporation

sole may purchase and hold real estate and personal property for its
church, charitable, benevolent or educational purposes, and may
receive bequests or gifts for such purposes. Such corporation may
mortgage or sell real property held by it upon obtaining an order for
that purpose from the Court of First Instance of the province where the
property is situated; but before the order is issued, proof must be made
to the satisfaction of the Court that notice of the application for leave to
mortgage or sell has been given by publication or otherwise in such
manner and for such time as said court may have directed, and that it
is to the interest of the corporation that leave to mortgage or sell
should be granted. The application for leave to mortgage or sell must
be made by petition, duly verified by the chief archbishop, bishop,
priest, minister, rabbi or presiding elder acting as corporation sole, and
may be opposed by any member of the religious denomination, sect or
church represented by the corporation sole: Provided, That in cases
where the rules, regulations and discipline of the religious
denomination, sect or church religious society or order concerned
represented by such corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and personal property, such
rules, regulations and discipline shall control and the intervention of
the courts shall not be necessary.
There is no doubt that a corporation sole by the nature of its
Incorporation is vested with the right to purchase and hold real estate
and personal property. It need not therefore be treated as an ordinary
private corporation because whether or not it be so treated as such, the
Constitutional provision involved will, nevertheless, be not applicable.
In the light of the facts obtaining in this case and the ruling of this
Court in Director of Lands vs. IAC , ( supra , 513), the lands subject of
this petition were already private property at the time the application
for confirmation of title was filed in 1979. There is therefore no cogent
reason to disturb the findings of the appellate court.
Republic Vs. Villanueva (114 S 875)
Facts:
Lots Nos. 568 and 569, located at Barrio Dampol, Plaridel, Bulacan,
with an area of 313 square meters and an assessed value of P1,350 were
acquired by the Iglesia Ni Cristo on January 9, 1953 from Andres Perez
in exchange for a lot with an area of 247 square meters owned by the
said church.
The said lots were already possessed by Perez in 1933. They are not
included in any military reservation. They are inside an area which was
certified as alienable or disposable by the Bureau of Forestry in 1927.
The lots are planted to santol and mango trees and banana plants. A
chapel exists on the said land. The land had been declared for realty tax
purposes. Realty taxes had been paid therefor.
On September 13, 1977, the Iglesia Ni Cristo, a corporation sole, duly
existing under Philippine laws, filed with the Court of First Instance of
Bulacan an application for the registration of the two lots. It alleged
that it and its predecessors-in-interest had possessed the land for more
than thirty years. It invoked section 48(b) of the Public Land Law.
The Republic of the Philippines, through the Director of Lands,
opposed the application on the grounds that applicant, as a private
corporation, is disqualified to hold alienable lands of the public
domain, that the land applied for is public land not susceptible of
private appropriation and that the applicant and its predecessors-ininterest have not been in the open, continuous, exclusive and notorious
possession of the land since June 12, 1945.
Issue:
W/N the INC as a private corporation is disqualified to hols alienable
lands of the public domain

Ruling:
The Iglesia Ni Cristo, as a corporation sole or a juridical person, is
disqualified to acquire or hold alienable lands of the public domain,
like the two lots in question, because of the constitutional prohibition
already mentioned and because the said church is not entitled to avail
itself of the benefits of section 48(b) which applies only to Filipino
citizens or natural persons. A corporation sole has no nationality
(Roman Catholic Apostolic Adm. of Davao, Inc. vs. Land Registration
Commission, 102 Phil. 596. See Register of Deeds vs. Ung Siu Si
Temple, 97 Phil. 58 and sec. 49 of the Public Land Law).
The contention in the comments of the Iglesia Ni Cristo that the two
lots are private lands, following the rule laid down in Susi vs. Razon
and Director of Lands, 48 Phil. 424, is not correct. What was
considered private land in the Susi case was a parcel of land possessed
by a Filipino citizen since time immemorial, as in Cario vs. Insular
Government, 212 U.S. 449, 53 L. ed. 594, 41 Phil. 935 and 7 Phil. 132.
The lots sought to be registered in this case do not fall within that
category. They are still public lands. A land registration proceeding,
under section 48(b), "presupposes that the land is public" (Mindanao
vs. Director of Lands, L-19535, July 10, 1967, 20 SCRA 641, 644).
As held in Oh Cho vs. Director of Lands , 75 Phil. 890, "all lands that
were not acquired from the Government, either by purchase or by
grant, belong to the public domain. An exception to the rule would be
any land that should have been in the possession of an occupant and of
his predecessors-in-interest since time immemorial, for such
possession would justify the presumption that the land had never been
part of the public domain or that it had been a private property even
before the Spanish conquest. "
In Uy Un vs. Perez , 71 Phil. 508, it was noted that the right of an
occupant of public agricultural land to obtain a confirmation of his title
under section 48(b) of the Public Land Law is a "derecho dominical
incoativo" and that before the issuance of the certificate of title the
occupant is not in the juridical sense the true owner of the land since it
still pertains to the State.
Roman Catholic Vs. LRC (102 Phil 595)
Facts:
On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of
the City of Davao, executed a deed of sale of a parcel of land located in
the same city, in favor of the Roman Catholic Apostolic Administrator
of Davao Inc., a corporation sole organized and existing in accordance
with Philippine Laws, with Msgr. Clovis Thibault, a Canadian citizen,
as actual incumbent. When the deed of sale was presented to Register
of Deeds of Davao for registration, the latter, having in mind a previous
resolution of the Fourth Branch of the Court of First Instance of Manila
wherein the Carmelite Nuns of Davao were made to prepare an
affidavit to the effect that 60 per cent of the members of their
corporation were Filipino citizens when they sought to register in favor
of their congregation of deed of donation of a parcel of land required
said corporation sole to submit a similar affidavit declaring that 60 per
cent of the members thereof were Filipino citizens.
The vendee in the letter dated June 28, 1954, expressed willingness to
submit an affidavit, both not in the same tenor as that made the
Progress of the Carmelite Nuns because the two cases were not similar,
for whereas the congregation of the Carmelite Nuns had five
incorporators, the corporation sole has only one; that according to
their articles of incorporation, the organization of the Carmelite Nuns
became the owner of properties donated to it, whereas the case at bar,
the totality of the Catholic population of Davao would become the
owner of the property bought to be registered.
As the Register of Deeds entertained some doubts as to the
registerability if the document, the matter was referred to the Land
Registration Commissioner en consulta for resolution. A resolution
was rendered on September 21, 1954, holding that in view of the

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provisions of Section 1 and 5 of Article XIII of the Philippine

Constitution, the vendee was not qualified to acquire private lands in
the Philippines in the absence of proof that at least 60 per centum of
the capital, property, or assets of the Roman Catholic Apostolic
Administrator of Davao, Inc., was actually owned or controlled by
Filipino citizens, there being no question that the present incumbent of
the corporation sole was a Canadian citizen. It was also the opinion of
the Land Registration Commissioner that section 159 of the
corporation Law relied upon by the vendee was rendered operative by
the aforementioned provisions of the Constitution with respect to real
estate, unless the precise condition set therein that at least 60 per
cent of its capital is owned by Filipino citizens be present, and,
therefore, ordered the Registered Deeds of Davao to deny registration
of the deed of sale in the absence of proof of compliance with such
condition.
Issue:
W/N the Universal Roman Catholic Apostolic Church in the
Philippines, or better still, the corporation sole named the Roman
Catholic Apostolic Administrator of Davao, Inc., is qualified to acquire
private agricultural lands in the Philippines pursuant to the provisions
of Article XIII of the Constitution
Ruling:
The Roman Catholic Bishop of Zamboanga was incorporated (as a
corporation sole) in September, 1912, principally to administer its
temporalities and manage its properties. Probably due to the ravages
of the last war, its articles of incorporation were reconstructed in the
Securities and Exchange Commission on April 8, 1948. At first, this
corporation sole administered all the temporalities of the church
existing or located in the island of Mindanao. Later on, however, new
dioceses were formed and new corporations sole were created to
correspond with the territorial jurisdiction of the new dioceses, one of
them being petitioner herein, the Roman Catholic Apostolic
Administrator of Davao, Inc., which was registered with the Securities
and Exchange Commission on September 12, 1950, and succeeded in
the administrative for all the "temporalities" of the Roman Catholic
Church existing in Davao.
According to our Corporation Law, Public Act No. 1549, approved April
1, 1906, a corporation sole is organized and composed of a single
individual, the head of any religious society or church, for the
ADMINISTRATION of the temporalities of such society or church. By
"temporalities" is meant estate and properties not used exclusively for
religious worship. The successor in office of such religious head or chief
priest incorporated as a corporation sole shall become the corporation
sole on ascension to office, and shall be permitted to transact business
as such on filing with the Securities and Exchange Commission a copy
of his commission, certificate of election or letter of appointment duly
certified by any notary public or clerk of court of record (Guevara's The
Philippine Corporation Law, p. 223).
The Corporation Law also contains the following provisions:
SECTION 159. Any corporation sole may purchase and hold real estate
and personal; property for its church, charitable, benevolent, or
educational purposes, and may receive bequests or gifts of such
purposes. Such corporation may mortgage or sell real property held by
it upon obtaining an order for that purpose from the Court of First
Instance of the province in which the property is situated; but before
making the order proof must be made to the satisfaction of the Court
that notice of the application for leave to mortgage or sell has been
given by publication or otherwise in such manner and for such time as
said Court or the Judge thereof may have directed, and that it is to the
interest of the corporation that leave to mortgage or sell must be made
by petition, duly verified by the bishop, chief priest, or presiding elder
acting as corporation sole, and may be opposed by any member of the
religious denomination, society or church represented by the
corporation sole: Provided, however, That in cases where the rules,
regulations, and discipline of the religious denomination, society or
church concerned represented by such corporation sole regulate the

methods of acquiring, holding, selling and mortgaging real estate and

personal property, such rules, regulations, and discipline shall control
and the intervention of the Courts shall not be necessary.
It can, therefore, be noticed that the power of a corporation sole to
purchase real property, like the power exercised in the case at bar, it is
not restricted although the power to sell or mortgage sometimes is,
depending upon the rules, regulations, and discipline of the church
concerned represented by said corporation sole. If corporations sole
can purchase and sell real estate for its church, charitable, benevolent,
or educational purposes, can they register said real properties? As
provided by law, lands held in trust for specific purposes me be subject
of registration (section 69, Act 496), and the capacity of a corporation
sole, like petitioner herein, to register lands belonging to it is
acknowledged, and title thereto may be issued in its name (Bishop of
Nueva Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed it is
absurd that while the corporations sole that might be in need of
acquiring lands for the erection of temples where the faithful can pray,
or schools and cemeteries which they are expressly authorized by law
to acquire in connection with the propagation of the Roman Catholic
Apostolic faith or in furtherance of their freedom of religion they could
not register said properties in their name.
Even before the establishment of the Philippine Commonwealth and of
the Republic of the Philippines every corporation sole then organized
and registered had by express provision of law the necessary power
and qualification to purchase in its name private lands located in the
territory in which it exercised its functions or ministry and for which it
was created, independently of the nationality of its incumbent unique
and single member and head, the bishop of the dioceses. It can be also
maintained without fear of being gainsaid that the Roman Catholic
Apostolic Church in the Philippines has no nationality and that the
framers of the Constitution, as will be hereunder explained, did not
have in mind the religious corporations sole when they provided that
60 per centum of the capital thereof be owned by Filipino citizens.
There could be no controversy as to the fact that a duly registered
corporation sole is an artificial being having the right of succession and
the power, attributes, and properties expressly authorized by law or
incident to its existence (section 1, Corporation Law).
Even assuming that petitioner had at the time of the enactment of the
Constitution the right to purchase real property or right could not be
exercised after the effectivity of our Constitution, because said power
or right of corporations sole, like the herein petitioner, conferred in
virtue of the aforequoted provisions of the Corporation Law, could no
longer be exercised in view of the requisite therein prescribed that at
least 60 per centum of the capital of the corporation had to be Filipino.
It has been shown before that: (1) the corporation sole, unlike the
ordinary corporations which are formed by no less than 5
incorporators, is composed of only one persons, usually the head or
bishop of the diocese, a unit which is not subject to expansion for the
purpose of determining any percentage whatsoever; (2) the corporation
sole is only the administrator and not the owner of the temporalities
located in the territory comprised by said corporation sole; (3) such
temporalities are administered for and on behalf of the faithful residing
in the diocese or territory of the corporation sole; and (4) the latter, as
such, has no nationality and the citizenship of the incumbent Ordinary
has nothing to do with the operation, management or administration of
the corporation sole, nor effects the citizenship of the faithful
connected with their respective dioceses or corporation sole.
In view of these peculiarities of the corporation sole, it would seem
obvious that when the specific provision of the Constitution invoked by
respondent Commissioner (section 1, Art. XIII), was under
consideration, the framers of the same did not have in mind or
overlooked this particular form of corporation. If this were so, as the
facts and circumstances already indicated tend to prove it to be so, then
the inescapable conclusion would be that this requirement of at least
60 per cent of Filipino capital was never intended to apply to
corporations sole, and the existence or not a vested right becomes
unquestionably immaterial.

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In Ung Siu Si Temple case, the fact that the appellant religious
organization has no capital stock does not suffice to escape the
Constitutional inhibition, since it is admitted that its members are of
foreign nationality. The purpose of the sixty per centum requirement is
obviously to ensure that corporation or associations allowed to acquire
agricultural land or to exploit natural resources shall be controlled by
Filipinos; and the spirit of the Constitution demands that in the
absence of capital stock, the controlling membership should be
composed of Filipino citizens
In that case respondent-appellant Ung Siu Si Temple was not a
corporation sole but a corporation aggregate, i.e., an unregistered
organization operating through 3 trustees, all of Chinese nationality,
and that is why this Court laid down the doctrine just quoted. With
regard to petitioner, which likewise is a non-stock corporation, the case
is different, because it is a registered corporation sole, evidently of no
nationality and registered mainly to administer the temporalities and
manage the properties belonging to the faithful of said church residing
in Davao. But even if we were to go over the record to inquire into the
composing membership to determine whether the citizenship
requirement is satisfied or not, we would find undeniable proof that the
members of the Roman Catholic Apostolic faith within the territory of
Davao are predominantly Filipino citizens. As indicated before,
petitioner has presented evidence to establish that the clergy and lay
members of this religion fully cover the percentage of Filipino citizens
required by the Constitution. These facts are not controverted by
respondents and our conclusion in this point is sensibly obvious.
Sec. 111. Articles of incorporation. - In order to become a
corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church must file
with the Securities and Exchange Commission articles of incorporation
setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of his religious denomination, sect or church and that
he desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and properties
of his religious denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is
required to be filled, according to the rules, regulations or discipline of
the religious denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.

estate and properties of the religious denomination, sect or church

theretofore administered or managed by him as such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held in trust
by him as a corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages and
cemeteries thereof. (n)
Sec. 113. Acquisition and alienation of property. - Any
corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent or educational purposes,
and may receive bequests or gifts for such purposes. Such corporation
may sell or mortgage real property held by it by obtaining an order for
that purpose from the Court of First Instance of the province where the
property is situated upon proof made to the satisfaction of the court
that notice of the application for leave to sell or mortgage has been
given by publication or otherwise in such manner and for such time as
said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The
application for leave to sell or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop, priest, minister, rabbi or
presiding elder acting as corporation sole, and may be opposed by any
member of the religious denomination, sect or church represented by
the corporation sole: Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or
church, religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such rules, regulations
and discipline shall control, and the intervention of the courts shall not
be necessary. (159a)
Sec. 114. Filling of vacancies. - The successors in office of any
chief archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession
to office and shall be permitted to transact business as such on the
filing with the Securities and Exchange Commission of a copy of their
commission, certificate of election, or letters of appointment, duly
certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest,
minister, rabbi or presiding elder of any religious denomination, sect
or church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of the
religious denomination, sect or church represented by the corporation
sole to administer the temporalities and manage the affairs, estate and
properties of the corporation sole during the vacancy shall exercise all
the powers and authority of the corporation sole during such vacancy.
(158a)
Sec. 115. Dissolution. - A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to the Securities and Exchange
Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;

The articles of incorporation may include any other provision not

contrary to law for the regulation of the affairs of the corporation. (n)
Sec. 112. Submission of the articles of incorporation. - The
articles of incorporation must be verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied by a copy of the
commission, certificate of election or letter of appointment of such
chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly
certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission
of the said articles of incorporation, verified by affidavit or affirmation,
and accompanied by the documents mentioned in the preceding
paragraph, such chief archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and all temporalities,

2. The reason for dissolution and winding up;

3. The authorization for the dissolution of the corporation by the
particular religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs. (n)
Sec. 116. Religious societies. - Any religious society or religious
order, or any diocese, synod, or district organization of any religious

140

denomination, sect or church, unless forbidden by the constitution,

rules, regulations, or discipline of the religious denomination, sect or
church of which it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a meeting called for
the purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management of its
affairs, properties and estate by filing with the Securities and Exchange
Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of
the religious denomination, sect or church, setting forth the following:

Uy Siu Si Temple has appealed to this Court, claiming: (1) that the
acquisition of the land in question, for religious purposes, is authorized
and permitted by Act No. 271 of the old Philippine Commission,
providing as follows:
SECTION 1. It shall be lawful for all religious associations, of whatever
sort or denomination, whether incorporated in the Philippine Islands
or in the name of other country, or not incorporated at all, to hold land
in the Philippine Islands upon which to build churches, parsonages, or
educational or charitable institutions.

1. That the religious society or religious order, or diocese, synod, or

district organization is a religious organization of a religious
denomination, sect or church;

SEC. 2. Such religious institutions, if not incorporated, shall hold the

land in the name of three Trustees for the use of such associations; . . ..
(Printed Rec. App. p. 5.) and (2) that the refusal of the Register of
Deeds violates the freedom of religion clause of our Constitution [Art.
III, Sec. 1(7)].

2. That at least two-thirds (2/3) of its membership have given their

written consent or have voted to incorporate, at a duly convened
meeting of the body;

Issue:

3. That the incorporation of the religious society or religious order, or

diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church
of which it forms a part;

Ruling:

4. That the religious society or religious order, or diocese, synod, or

district organization desires to incorporate for the administration of its
affairs, properties and estate;
5. The place where the principal office of the corporation is to be
established and located, which place must be within the Philippines;
and
6. The names, nationalities, and residences of the trustees elected by
the religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of
the diocese, synod, or district organization, the board of trustees to be
not less than five (5) nor more than fifteen (15). (160a)
Register of Deeds Vs. Ung Siu Si Temple (97 Phil 261)
Facts:
The Register of Deeds for the province of Rizal refused to accept for
record a deed of donation executed in due form on January 22, 1953,
by Jesus Dy, a Filipino citizen, conveying a parcel of residential land, in
Caloocan, Rizal, known as lot No. 2, block 48-D, PSD-4212, G.L.R.O.
Record No. 11267, in favor of the unregistered religious organization
"Ung Siu Si Temple", operating through three trustees all of Chinese
nationality. The donation was duly accepted by Yu Juan, of Chinese
nationality, founder and deaconess of the Temple, acting in
representation and in behalf of the latter and its trustees.
The refusal of the Registrar was elevated en Consultato the IVth
Branch of the Court of First Instance of Manila. On March 14, 1953, the
Court upheld the action of the Rizal Register of Deeds that UNG SIU SI
TEMPLE is a religious organization whose deaconess, founder, trustees
and administrator are all Chinese citizens, this Court is of the opinion
and so hold that in view of the provisions of the sections 1 and 5 of
Article XIII of the Constitution of the Philippines limiting the
acquisition of land in the Philippines to its citizens, or to corporations
or associations at least sixty per centum of the capital stock of which is
owned by such citizens adopted after the enactment of said Act No. 271,
and the decision of the Supreme Court in the case of Krivenko vs. the
Register of Deeds of Manila, the deed of donation in question should
not be admitted for registration.

W/N a deed of donation of a parcel of land executed in favor of a

religious organization whose founder, trustees and administrator are
Chinese citizens should be registered or not

In view of the absolute terms of section 5, Title XIII, of the

Constitution, the provisions of Act No. 271 of the old Philippine
Commission must be deemed repealed since the Constitution was
enacted, in so far as incompatible therewith. In providing that,
Save in cases of hereditary succession, no private agricultural land shall
be transferred or assigned except to individuals, corporations or
associations qualified to acquire or hold lands of the public domain in
the Philippines, the Constitution makes no exception in favor of
religious associations. Neither is there any such saving found in
sections 1 and 2 of Article XIII, restricting the acquisition of public
agricultural lands and other natural resources to "corporations or
associations at least sixty per centum of the capital of which is owned
by such citizens" (of the Philippines).
The fact that the appellant religious organization has no capital stock
does not suffice to escape the Constitutional inhibition, since it is
admitted that its members are of foreign nationality. The purpose of
the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to
exploit natural resources shall be controlled by Filipinos; and the spirit
of the Constitution demands that in the absence of capital stock, the
controlling membership should be composed of Filipino citizens.
To permit religious associations controlled by non-Filipinos to acquire
agricultural lands would be to drive the opening wedge to revive alien
religious land holdings in this country. We can not ignore the historical
fact that complaints against land holdings of that kind were among the
factors that sparked the revolution of 1896.
As to the complaint that the disqualification under article XIII is
violative of the freedom of religion guaranteed by Article III of the
Constitution, we are by no means convinced (nor has it been shown)
that land tenure is indispensable to the free exercise and enjoyment of
religious profession or worship; or that one may not worship the Deity
according to the dictates of his own conscience unless upon land held
in fee simple.
TITLE XIV
DISSOLUTION
Sec. 117. Methods of dissolution. - A corporation formed or
organized under the provisions of this Code may be dissolved
voluntarily or involuntarily. (n)

141

Sec. 118. Voluntary dissolution where no creditors are

affected. - If dissolution of a corporation does not prejudice the rights
of any creditor having a claim against it, the dissolution may be
effected by majority vote of the board of directors or trustees, and by a
resolution duly adopted by the affirmative vote of the stockholders
owning at least two-thirds (2/3) of the outstanding capital stock or of
at least two-thirds (2/3) of the members of a meeting to be held upon
call of the directors or trustees after publication of the notice of time,
place and object of the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal office of said
corporation is located; and if no newspaper is published in such place,
then in a newspaper of general circulation in the Philippines, after
sending such notice to each stockholder or member either by registered
mail or by personal delivery at least thirty (30) days prior to said
meeting. A copy of the resolution authorizing the dissolution shall be
certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and
Exchange Commission shall thereupon issue the certificate of
dissolution. (62a)
Daguhoy Enterprise Vs. Ponce (96 Phil 15)
Facts:
In the year 1950, Domingo Ponce was Chairman and Manager and his
son Buhay M. Ponce was Secretary-Treasurer, of Daguhoy Enterprises,
Inc. On June 24th of said year Rita L. Ponce, wife of Domingo,
executed in favor of corporation a deed of mortgage over a parcel of
land including the improvements thereon, situated in Manila, to secure
the payment of a loan of P5,000 granted to her by said corporation,
payable within six years with interest at 12 per cent per annum. On
March 10, 1951, Rita L. Ponce with the consent of her husband
Domingo executed another mortgage deed amending the first one,
whereby the loan was increased from P5,000 to P6,190, the terms and
conditions of the mortgage remaining the same. Rita and Domingo
presented the two mortgage deeds for registration in the office of the
register of deeds, but the said register after going over the papers noted
defects and deficiencies and advised Rita and Domingo to cure the
defects and furnish the necessary data. Instead of complying with the
suggestion and requirements, the two withdrew the two mortgage
deeds and then mortgaged the same parcel of land in favor of the
Rehabilitation Finance Corporation (RFC) to secure a loan.
Potenciano Gapol was the majority stockholder in the Daguhoy
Enterprises, Inc., and naturally was interested in the security of the
payment of the loan aforesaid. Upon learning that the deeds of
mortgage were not registered and what is more, that they were
withdrawn from the office of the register of deeds and the land covered
by the two deeds was again mortgaged to the RFC, he filed a case
entitled "Potenciano Gapol, for and on behalf of Daguhoy Enterprises,
Inc. vs. Domingo Ponce and Buhay M. Ponce " for accounting, not only
for the amount of the loan of P6,190 but apparently for other sums,
possibly on the theory that the loan in question was granted by
Domingo and Buhay acting as Chairman-Manager and SecretaryTreasurer, respectively of the corporation.
Thereafter, the Daguhoy Enterprises, Inc. filed the present action
against Rita and her husband Domingo to collect the amount of the
loan, including interests.
The defendants alleged that the plaintiff corporation had no legal
capacity to sue for the reason that as a corporation it no longer was in
existence because on April 16, 1951, at a meeting held by the
stockholders and attended by Potenciano Gapol, the majority
stockholder, a resolution was adopted dissolving the said corporation,
and that as a matter of fact, Gapol was designated Assignee.
Issue:
W/N the corporation has no capacity to sue by reason of the
dissolution

Ruling:
A mere resolution by the stockholders or by the Board of Directors of a
corporation to dissolve the same does not effect the dissolution but that
some other step, administrative or judicial, is necessary. Furthermore,
under section 77 of the Corporation Law, a corporation dissolved will
continue in existence as a judicial entity for a period of three years after
the declaration of its dissolution, to windup its affairs and protect its
interests during the period of liquidation.
Vesagas Vs. CA (371 S 508)
Facts:
The respondent spouses Delfino and Helenda Raniel are members in
good standing of the Luz Villaga Tennis Clud, Inc. (club). They alleged
that petitioner Teodoro B. Vesagas, who claims to be the club's duly
elected president, in conspiracy with petitioner Wilfred D. Asis, who, in
turn, claims to be its duly elected vice-president and legal counsel,
summarily stripped them of their lawful membership, without due
process of law. Thereafter, respondent spouses filed a Complaint with
the Securities and Exchange Commission (SEC) on March 26, 1997
against the petitioners. In this case, respondents asked the
Commission to declare as illegal their expulsion from the club as it was
allegedly done in utter disregard of the provisions of its by-laws as well
as the requirements of due process. They likewise sought the
annulment of the amendments to the by-laws made on December 8,
1996, changing the annual meeting of the club from the last Sunday of
January to November and increasing the number of trustees from nine
to fifteen. Finally, they prayed for the issuance of a Temporary
Restraining Order and Writ of Preliminary Injunction. The application
for TRO was denied by SEC Hearing Officer Soller in an Order dated
April 29, 1997.
The petioners claim in gratia argumenti that while the club may have
been considered a corporation during a brief spell, still, at the time of
the institution of this case with the SEC, the club was already dissolved
by virtue of a Board resolution.
Issue:
W/N the club was already dissolved by virtue of a Board resolution
Ruling:
The Corporation Code establishes the procedure and other formal
requirements a corporation needs to follow in case it elects to dissolve
and terminate its structure voluntarily and where no rights of creditors
may possibly be prejudiced, thus:
Sec. 118. Voluntary dissolution where no creditors are affected. - If
dissolution of a corporation does not prejudice the rights of any
creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees and by a resolution
duly adopted by the affirmative vote of the stockholders owning at least
two-thirds (2/3) of the outstanding capital stock or at least two-thirds
(2/3) of the members at a meeting to be held upon call of the directors
or trustees after publication of the notice of time, place and object of
the meeting for three (3) consecutive weeks in a newspaper published
in the place where the principal office of said corporation is located;
and if no newspaper is published in such place, then in a newspaper of
general circulation in the Philippines, after sending such notice to each
stockholder or member either by registered mail or by personal
delivery at least 30 days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board
of directors or trustees and countersigned by the secretary of the
corporation. The Securities and Exchange Commission shall thereupon
issue the certificate of dissolution.
We note that to substantiate their claim of dissolution, petitioners
submitted only two relevant documents: the Minutes of the First Board

142

Meeting held on January 5, 1997, and the board resolution issued on

April 14, 1997 which declared "to continue to consider the club as a
non-registered or a non-corporate entity and just a social association of
respectable and respecting individual members who have associated
themselves, since the 1970's, for the purpose of playing the sports of
tennis x x x." Obviously, these two documents will not suffice. The
requirements mandated by the Corporation Code should have been
strictly complied with by the members of the club. The records reveal
that no proof was offered by the petitioners with regard to the notice
and publication requirements. Similarly wanting is the proof of the
board members' certification. Lastly, and most important of all, the
SEC Order of Dissolution was never submitted as evidence.
Sec. 119. Voluntary dissolution where creditors are affected.
- Where the dissolution of a corporation may prejudice the rights of
any creditor, the petition for dissolution shall be filed with the
Securities and Exchange Commission. The petition shall be signed by a
majority of its board of directors or trustees or other officers having the
management of its affairs, verified by its president or secretary or one
of its directors or trustees, and shall set forth all claims and demands
against it, and that its dissolution was resolved upon by the affirmative
vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members
at a meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission
shall, by an order reciting the purpose of the petition, fix a date on or
before which objections thereto may be filed by any person, which date
shall not be less than thirty (30) days nor more than sixty (60) days
after the entry of the order. Before such date, a copy of the order shall
be published at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality or city
where the principal office of the corporation is situated, or if there be
no such newspaper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three (3) consecutive
weeks in three (3) public places in such municipality or city.
Upon five (5) day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall
proceed to hear the petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the material allegations
of the petition are true, it shall render judgment dissolving the
corporation and directing such disposition of its assets as justice
requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation. (Rule 104, RCa)
China Banking Vs. Michelin (58 Phil 261)
Facts:
George O' Farrell & Cie., Inc., is a domestic corporation organized in
1925 and registered in the same year in the mercantile register of the
Bureau of Commerce and Industry, one of its purposes being that of
acting as the agent and representative of foreign firms for the sale and
distribution of their products in the Philippines. And for a number of
years prior to its dissolution, acting as agent of the appellee M.
Michelin & Cie., in the Philippine Islands for the sale and distribution
of the rubber tires for motor cars produced by the appellee and broadly
known as "Michelin tires".
These business relations between the appellee and the corporation
lasted until the month of May, 1930, when the appellee decided to
discontinue them, and upon settlement of accounts between both
concerns it was found that the corporation failed to account for the
sum of P23,268.83, the sale price of a number of rubber tires sold by
the corporation. Prior to the filing of the petition for dissolution to the
corporation made a partial payment of P1,300 leaving an unpaid
balance of P21,968.83.
On July 9, 1930, the board of directors filed the petition for its
dissolution and for the appointment of its president and general
manager, Gaston, O' Farrell as receiver and liquidator to wind up the

affairs of the corporation which, according to the petition had a balance

of P57,601.24 over and above its just debts and liabilities.
The appellee, M. Michelin & Cie., filed its claim against the corporation
for the aforesaid balance of P21,968.83 with a prayer that the claim be
allowed as a preferred one against the corporation on the ground that
the said amount represented the proceeds from the sale of a number of
rubber tires which were on deposit with and sold by the corporation.
The court rendered a judgment allowing the claim as a preferred claim
against the corporation and directing the receiver to pay the amount
thereof out of any funds in his possession.
On September 30, 1931, China Banking Corporation, filed a motion
praying that the orders of November 8, and November 26, 1930, be set
aside as null and void, that appellee's claim be allowed as an ordinary
claim and that the sum P5,000 paid by the receiver to the appellee on
account of the latter's claim be refunded to the funds of the corporation
in the liquidation for the benefit of the rest of the creditors. In support
of said motion and with the permission of the court of the appellant,
Leopoldo Kahn, submitted a memorandum, arguing on the nullity of
the said orders on the ground of want of the notice and on the
proposition that under the provisions of the Insolvency Law appellee's
claim could not and should not have been allowed as a preferred claim
under the allegations contained therein.
Issue:
W/N Michelins claim can legally be allowed on its face as a preferred
claim
Ruling:
A close examination of the record in this case fails to disclose the
reasons which led the corporation to resort to the court for a decree of
voluntary dissolution. If the corporation was under such a financial
condition as alleged in its petition for dissolution and did not desire to
continue doing business because of failing conditions or of any other
reason, we are unable to understand the necessity of its seeking judicial
intervention in the winding up of its affairs coupled with the
appointment for a receiver to deal with its creditors as though they
were the creditors of an insolvent corporation.
Statutes authorizing voluntary dissolutions are generally held to apply
only to a dissolution brought about by the stockholders themselves,
and while the appointment of a receiver rests within the sound judicial
discretion of the court, such discretion must however, always be
exercised with caution and governed by legal and equitable principles,
the violation of which will amount to its abuse, and in making such
appointment the court should take into consideration all the facts and
weigh the relative advantages and disadvantages of appointing a
receiver to wind up the corporate business. The court should only act
on facts which have been proved by competent legal evidence.
The appointment of a receiver by the court to wind up the affairs of the
corporation upon petition of voluntary dissolution does not empower
the court to hear and pass on the claims of the creditors of the
corporation at first hand. In such cases the receiver does not act as a
receiver of an insolvent corporation. Since "liquidation" as applied to
the settlement of the affairs of a corporation consists of adjusting the
debts and claims, that is, of collecting all that is due the corporation,
the settlement and adjustment of claims against it and the payment of
its just debts, all claims must be presented for allowance to the receiver
or trustee or other proper or persons during the winding up proceeding
which in this jurisdiction would be within the three years provided by
sections 77 and 78 of the Corporation Law as the term of the corporate
existence of the corporation, and if a claim is disputed or unliquidated
so that the receiver cannot safely allow the same, it should be
transferred to the proper court for trial and allowance, and the amount
so allowed then presented to the receiver or trustee for payment. The
rulings of the receiver on the validity of claims submitted are subject to
review by the court appointing such receiver though no appeal is taken
to the latter's ruling, and during the winding up proceedings after
dissolution, no creditor will be permitted by legal process or otherwise

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to acquire priority, or to enforce his claim against the property held for
distribution as against the rights of other creditors.
The decree of dissolution in the case at bar having been entered on
August 22, 1930, and the motion of the appellant, China Banking
Corporation , appearing to have been filed on September 30, 1931, or
about thirteen months later, it follows that the motion was filed on
time to have the appellee's claim reviewed by the court under the
provisions of the said section of the Corporation Law, and the trial
court, therefore, erred in finding that the order of November 8, 1930
allowing appellee's claim was final and unappealable under the
provisions of section 133 of the Code of Civil Procedure.
The record in this case shows that Gaston O' Farrell, the receiver
herein, besides being the principal promoter of the corporation and the
holder of the largest number of shares was elected president and
general manager and that he held the said offices ever since the
organization of the corporation and his conduct in executing a
mortgage on his own house and giving a pledge on his shares of stock
and on those of Rosario Sanchez represented by him as attorney in fact,
in favor of the appellee to guarantee the latter's claim, lends itself to a
serious suspicion. The facts appearing of record leave no room for
doubt that his administration of the business of the corporation left
much to be desired and that he alone ought to be blamed for the
shortage claimed by the appellee, but to save himself from personal
liability he made the corporation shoulder the burden of the obligation
in exchange for a simulated conveyance of his house to the corporation.
No sooner had the corporation become delinquent in the payment of
the obligation under the terms of the written agreement than he
resorted to a judicial proceeding of voluntary dissolution in an attempt
to settle appellee's claim and to free himself from all harm, but fearing
that the alleged preference of appellee's claim might be defeated, in
collusion with the appellee they had the claim allowed summarily as a
preferred claim ignoring the rest of the world.
Appellants' contention that appellee's claim cannot be lowed as a
preferred claim is well taken for even admitting for the sake of
argument that the merchandise which sale price is the subject of
appellee's claim was shipped to the corporation under a commission
agreement or any other agreement carrying the obligation to return
either the goods on its price, the fact is that the merchandise in the case
at bar was no longer in the corporation's possession nor could the
appellee trace the proceeds from its sale, and this is made manifest by
the very fact of the written agreement entered into between the
appellee and the corporation whereby the appellee accepted payment
of the obligation by installments duly secured with a mortgaged of
property to guarantee its payment. But such is not the case, however,
for the very agreement of May 31, 1930 mentioned in paragraph 5 of
the appellee's claim, shows that the rubber tires consigned to the
corporation were to be sold by the latter "por orden, cuenta y riesgo de
los Sres. M. Michelin & Cie." and that the customers' accounts were
opened "por orden, cuenta y riesgo de M. Michelin & Cie." , and so
much is this true that the uncollected accounts were turned over to and
received by the appellee, M. Michelin & Cie. Under such circumstances
the amount of the appellee's claim appears to be in the nature of a
balance of a current account between the two firms more than anything
else.
The order appealed from is reversed, and the appellee's claim is hereby
declared to be an ordinary claim. The appellee is ordered to refund to
the corporation the sum of P5,000 erroneously paid by the receiver,
with costs against the appellee.

Sec. 120. Dissolution by shortening corporate term. - A

voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the provisions
of this Code. A copy of the amended articles of incorporation shall be
submitted to the Securities and Exchange Commission in accordance
with this Code. Upon approval of the amended articles of incorporation
of the expiration of the shortened term, as the case may be, the
corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on liquidation. (n)

Sec. 121. Involuntary dissolution. - A corporation may be

dissolved by the Securities and Exchange Commission upon filing of a
verified complaint and after proper notice and hearing on the grounds
provided by existing laws, rules and regulations. (n)
Republic Vs. Security Credit (19 S 58)
Facts:
The Articles of Incorporation of Security Credit were registered with
the Securities and Exchange Commission on March 27, 1961. The next
day, the Board of Directors of the corporation adopted a set of by-laws,
which were filed with said Commission on April 5, 1961. The Central
Bank of the Philippines opined that said corporation is a banking
institution. Thus, the corporation through its president, Rosendo T.
Resuello, sought a reconsideration of the aforementioned opinion,
which reconsideration was denied on March 16, 1962. The Commission
advised the corporation on December 5, 1961, to comply with the
requirements of the General Banking Act.
In the meantime, the Municipal Court of Manila issued Search Warrant
No. A-1019 and pursuant thereto, members of the intelligence division
of the Central Bank and of the Manila Police Department searched the
premises of the corporation and seized documents and records thereof
relative to its business operations.Upon the return of said warrant, the
seized documents and records were, with the authority of the court,
placed under the custody of the Central Bank of the Philippines. Upon
examination and evaluation of said documents and records, the
intelligence division of the Central Bank submitted, to the Acting
Deputy Governor thereof, a memorandum finding that the corporation
is performing banking functions, without requisite certificate of
authority from the Monetary Board of the Central Bank.
Issue:
W/N the dissolution of the Security and Acceptance Corporation for
allegedly engaging in banking operations without the authority
required therefor by the General Banking Act is proper
Ruling:
Yes.
Although, admittedly, Security has not secured the requisite authority
to engage in banking, defendants deny that its transactions partake of
the nature of banking operations. It is conceded, however, that, in
consequence of a propaganda campaign therefor, a total of 59,463
savings account deposits have been made by the public with the
corporation and its 74 branches, with an aggregate deposit of
P1,689,136.74, which has been lent out to such persons as the
corporation deemed suitable therefor. It is clear that these transactions
partake of the nature of banking, as the term is used in Section 2 of the
General Banking Act.
Accordingly, defendant corporation has violated the law by engaging in
banking without securing the administrative authority required in
Republic Act No. 337.
That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing
misuser of the corporate funds and franchise affects the essence of its
business, that it is willful and has been repeated 59,463 times, and that
its continuance inflicts injury upon the public, owing to the number of
persons affected thereby.
It is urged, however, that this case should be remanded to the Court of
First Instance of Manila upon the authority of Veraguth vs. Isabela
Sugar Co . (57 Phil. 266). In this connection, it should be noted that
this Court is vested with original jurisdiction, concurrently with courts
of first instance, to hear and decide quo warranto cases and, that,

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consequently, it is discretionary for us to entertain the present case or

to require that the issues therein be taken up in said Civil Case No.
52342. The Veraguth case cited by herein defendants, in support of the
second alternative, is not in point, because in said case there were
issues of fact which required the presentation of evidence, and courts
of first instance are, in general, better equipped than appellate courts
for the taking of testimony and the determination of questions of fact.
In the case at bar, there is, however, no dispute as to the principal facts
or acts performed by the corporation in the conduct of its business. The
main issue here is one of law, namely, the legal nature of said facts or
of the aforementioned acts of the corporation. For this reason, and
because public interest demands an early disposition of the case, we
have deemed it best to determine the merits thereof.
Therefore, the defendant corporation is, accordingly, ordered
dissolved. The appointment of receiver herein issued pendente lite is
hereby made permanent, and the receiver is, accordingly, directed to
administer the properties, deposits, and other assets of defendant
corporation and wind up the affairs thereof conformably to Rules 59
and 66 of the Rules of Court.
Sec. 122. Corporate liquidation. - Every corporation whose
charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued as a
body corporate for three (3) years after the time when it would have
been so dissolved, for the purpose of prosecuting and defending suits
by or against it and enabling it to settle and close its affairs, to dispose
of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate affairs, any asset distributable to
any creditor or stockholder or member who is unknown or cannot be
found shall be escheated to the city or municipality where such assets
are located.
Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a)
Reburiano Vs.CA (301 S 342)
Facts:
In a Civil Case entitled "Pepsi Cola Bottling Company of the Philippines
Inc. v. Urbano (Ben) Reburiano and James Reburiano," the Regional
Trial Court, rendered on June 1, 1987 a decision, in favor of plaintiff
Pepsi Cola Bottling Co. of the Philippines Inc. ordering Urbano (Ben)
Reburiano and James Reburiano to pay jointly and severally the
plaintiff the sum of P55,000.00 less whatever empties (cases and
bottles) may be returned by said defendants valued at the rate of
P55.00 per empty case with bottles and costs against the defendants in
case of execution.
Pepsi Cola Bottling Company of the Philippines Inc. appealed to the
Court of Appeals seeking the modification of the portion of the
decision, which stated the value of the cases with empty bottles as
P55.00 per case and obtained a favorable decision. On June 26, 1990,
judgment was rendered where the decision appealed from is SET
ASIDE and another one is rendered, ordering the defendant appellees
to pay jointly and severally the plaintiff-appellant the sum of

P55,000.00 with interest at the legal rate from January 1982 with costs
against defendants-appellees.
It appears that prior to the promulgation of the decision of the trial
court, Pepsi Cola has amended its articles of incorporation to shorten
its term of existence to July 8, 1983. The amended articles of
incorporation was approved by the Securities and Exchange
Commission on March 2, 1984. The trial court was not notified of this
fact.
Petitioners moved to quash the writ of execution alleging that when the
decision was rendered by this Honorable Court, when the said decision
was appealed to the Court of Appeals, and when the Court of Appeals
rendered its decision, Pepsi Cola was no longer in existence and had no
more juridical personality and so, as such, it no longer had the capacity
to sue and be sued.
Pepssi Cola argued that the jurisdiction of the court as well as the
respective parties capacity to sue had already been established during
the initial stages of the case; and that when the complaint was filed in
1982, private respondent was still an existing corporation so that the
mere fact that it was dissolved at the time the case was yet to be
resolved did not warrant the dismissal of the case or oust the trial court
of its jurisdiction. Private respondent further claimed that its
dissolution was effected in order to transfer its assets to a new firm of
almost the same name and was thus only for convenience.
Issue:
W/N a dissolved and non-existing corporation could no longer be
represented by a lawyer and concomitantly a lawyer could not appear
as counsel for a non-existing judicial person
Ruling:
Sec. 122 of the Corporation Code provides in part:
122. Corporate Liquidation. Every Corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for
three (3) years after the time when it would have been so dissolved, for
the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the purpose of
continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized
the empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and
others in interests, all interests which the corporation had in the
property in terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other
persons in interest.
Petitioners argue that while private respondent Pepsi Cola Bottling
Company of the Philippines, Inc. undertook a voluntary dissolution on
July 3, 1983 and the process of liquidation for three (3) years
thereafter, there is no showing that a trustee or receiver was ever
appointed. They contend that 122 of the Corporation Code does not
authorize a corporation, after the three-year liquidation period, to
continue actions instituted by it within said period of three years.
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be
sued as a corporation is limited to three years from the time the period
of dissolution commences: but there is no time limit within which the
trustees must complete a liquidation placed in their hands. It is
provided only that the conveyance to the trustees must be made within

145

the three-year period. It may be found impossible to complete the work

of liquidation within the three-year period or to reduce disputed claims
to judgment. The authorities are to the effect that suits by or against a
corporation abate when it ceased to be an entity capable of suing or
being sued but trustees to whom the corporate assets have been
conveyed pursuant to the authority of Sec. 78 [now Sec. 122] may sue
and be sued as such in all matters connected with the liquidation. . . .

corporation on July 24, 1989 and that it has winded up its corporate
affairs in accordance with law. It also averred that it was now owned by
PCPPI.
On February 11, 1992, the NLRC issued a Resolution dismissing the
complaint of the PCEWU for the reason that, with the cessation and
dissolution of the corporate existence of the PCDP, rendering any
judgment against it is incapable of execution and satisfaction.

Furthermore, the Corporation Law provides:

Issue:
145. Amendment or repeal. No right or remedy in favor of or
against any corporation, its stockholders, members, directors, trustees,
or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or
of any part thereof.
This provision safeguards the rights of a corporation which is dissolved
pending litigation.
There is, therefore, no reason why the suit filed by private respondent
should not be allowed to proceed to execution. It is conceded by
petitioners that the judgment against them and in favor of private
respondent in C.A. G.R. No. 16070 had become final and executory.
The only reason for their refusal to execute the same is that there is no
existing corporation to which they are indebted. Such argument is
fallacious. As previously mentioned, the law specifically allows a
trustee to manage the affairs of the corporation in liquidation.
Consequently, any supervening fact, such as the dissolution of the
corporation, repeal of a law, or any other fact of similar nature would
not serve as an effective bar to the enforcement of such right.
Pepsi Cola Vs. CA (443 S 580)
Facts:
Pepsi-Cola Products Philippines, Inc. Employees and Workers Union
(PCEWU) is a duly- registered labor union of the employees of the
Pepsi-Cola Distributors of the Philippines (PCDP). On July 14, 1986,
PCEWU, through its local union president, Arisedes T. Bombeo, filed a
Complaint against PCDP for payment of overtime services rendered by
fifty-three (53) of its members, who were employed as salesmen,
warehousemen, truck helpers, route salesmen, route sales workers,
distributors, conductors and forklift operators, on the eight (8) days
duly- designated as Muslim holidays for calendar year 1985, in their
respective places of assignment, namely: Iligan City, Tubod, Lanao del
Norte and Dipolog City.
The PCEWU alleged, inter alia, that in previous years, they had been
paid overtime pay for services rendered during the eight (8) Muslim
holidays in their places of assignment, including Dipolog City.
The PCDP maintained that there were only five (5) legal Muslim
holidays under the Muslim Code. It asserted that under the law, the
cities of Cagayan de Oro and Dipolog were not included in the areas
that officially observed the Muslim holidays, and that the said holidays
were only applicable to Muslims. It also argued that even assuming
that the employees were entitled to such overtime pay, only the rankand-file employees and not the managerial employees should be given
such benefit.
On May 26, 1987, the Executive Labor Arbiter (ELA) rendered a
Decision in favor of PCEWU, ordering PCDP to pay the claims of its
workers.
Pending resolution of the case, ownership of various Pepsi-Cola
bottling plants was transferred to petitioner Pepsi-Cola Products
Philippines, Inc. (PCPPI). The NLRC directed the parties to file their
respective pleadings concerning the respondents existence as a
corporate entity. The PCDP alleged that it had ceased to exist as a

W/N with the cessation and dissolution of the corporate existence of

PCDP, any judgment against it is incapable of execution and
satisfaction
Ruling:
The NLRC committed a grave abuse of its discretion amounting to lack
of jurisdiction in dismissing the case. The NLRC clearly erred in
perceiving that, upon the petitioners acquisition of the PCDP, the
latter lost its corporate personality.
Under Section 122 of the Corporation Code, a corporation whose
corporate existence is terminated in any manner continues to be a body
corporate for three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it and to enable it to
settle and close its affairs, culminating in the disposition and
distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period.
At any time during the said three (3) years, the corporation is
authorized and empowered to convey all of its properties to trustees for
the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its
properties in trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which the corporation had
in the properties terminates the legal interest vests in the trustees, and
the beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to
any creditor or stockholder or member, who is unknown or cannot be
found, shall be escheated to the city or municipality where such assets
are located.
Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities.
The termination of the life of a corporate entity does not by itself cause
the extinction or diminution of the rights and liabilities of such entity.
If the three-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation, within that
period, the board of directors (or trustees) itself, may be permitted to
so continue as "trustees" by legal implication to complete the corporate
liquidation.
Gelano Vs. CA (103 S 90)
Facts:
Insular Sawmill, Inc. is a corporation organized on September 17, 1945
with a corporate life of fifty (50) years, or up to September 17, 1995,
with the primary purpose of carrying on a general lumber and sawmill
business. To carry on this business, it leased the paraphernal property
of petitioner-wife Guillermina M. Gelano at the corner of Canonigo and
Otis, Paco, Manila for P1,200.00 a month. It was while it was leasing
the aforesaid property that its officers and directors had come to know
petitioner-husband Carlos Gelano who received from the corporation

146

cash advances on account of rentals to be paid by the corporation on

the land.
Between November 19, 1947 to December 26, 1950 Gelano obtained
from private respondent cash advances of P25,950.00. The said sum
was taken and received by Carlos Gelano on the agreement that Insular
could deduct the same from the monthly rentals of the leased premises
until said cash advances are fully paid. Carlos Gelano was able to pay
only P5,950.00 thereby leaving an unpaid balance of P20,000.00
which he refused to pay despite repeated demands by Insular.
On various occasions from May 4, 1948 to September 11, 1949
petitioners husband and wife also made credit purchases of lumber
materials from private respondent with a total price of P1,120.46 in
connection with the repair and improvement of petitioners' residence.
The amount due private respondent on account of credit purchases of
lumber materials is P946.46 which petitioners failed to pay.
On July 14, 1952, in order to accommodate and help petitioners renew
previous loans obtained by them from the China Banking Corporation,
Insular, through Joseph Tan Yoc Su, executed a joint and several
promissory note with Carlos Gelano in favor of said bank in the
amount of P8,000.00 payable in sixty (60) days. For failure of Carlos
Gelano to pay the promissory note upon maturity, the bank collected
from the respondent corporation the amount of P9,106.00 including
interests, by debiting it from the corporation's current account with the
bank. Petitioner Carlos Gelano was able to pay private respondent the
amount of P5,000.00 but the balance of P4,106.00 remained
unsettled.
Thus, the corporation, filed a complaint for collection against herein
petitioners.
In the meantime, Insular amended its Articles of Incorporation to
shorten its term of existence up to December 31, 1960 only. The
amended Articles of Incorporation was filed with, and approved by the
Securities and Exchange Commission, but the trial court was not
notified of the amendment shortening the corporate existence and no
substitution of party was ever made. On November 20, 1964 and
almost four (4) years after the dissolution of the corporation, the trial
court rendered a decision in favor of Insular.
After petitioners received a copy of the decision on August 24, 1973,
they came to know that the Insular Sawmill Inc. was dissolved way
back on December 31, 1960. Hence, petitioners filed a motion to
dismiss the case and/or reconsideration of the decision of the Court of
Appeals on grounds that the case was prosecuted even after dissolution
of private respondent as a corporation and that a defunct corporation
cannot maintain any suit for or against it without first complying with
the requirements of the winding up of the affairs of the corporation and
the assignment of its property rights within the required period.
Issue:
W/N a corporation, whose corporate life had ceased by the expiration
of its term of existence, could still continue prosecuting and defending
suits after its dissolution and beyond the period of three years provided
for under Act No. 1459, otherwise known as the Corporation law, to
wind up its affairs, without having undertaken any step to transfer its
assets to a trustee or assignee
Ruling:
In American corporate law, upon which our Corporation Law was
patterned, it is well settled that, unless the statutes otherwise provide,
all pending suits and actions by and against a corporation are abated
by a dissolution of the corporation.
Section 77 of the Corporation Law provides that the corporation shall
"be continued as a body corporate for three (3) years after the time
when it would have been ... dissolved, for the purpose of prosecuting

and defending suits By or against it ...," so that, thereafter, it shall no

longer enjoy corporate existence for such purpose. For this reason,
Section 78 of the same law authorizes the corporation, "at any time
during said three years ... to convey all of its property to trustees for the
benefit of members, Stockholders, creditors and other interested,"
evidently for the purpose, among others, of enabling said trustees to
prosecute and defend suits by or against the corporation begun before
the expiration of said period.
When Insular Sawmill, Inc. was dissolved on December 31, 1960,
under Section 77 of the Corporation Law, it still has the right until
December 31, 1963 to prosecute in its name the present case. After the
expiration of said period, the corporation ceased to exist for all
purposes and it can no longer sue or be sued.
However, a corporation that has a pending action and which cannot be
terminated within the three-year period after its dissolution is
authorized under Section 78 to convey all its property to trustees to
enable it to prosecute and defend suits by or against the corporation
beyond the Three-year period.
In the case at bar, although Insular did not appoint any trustee, yet the
counsel who prosecuted and defended the interest of the corporation in
the instant case and who in fact appeared in behalf of the corporation
may be considered a trustee of the corporation at least with respect to
the matter in litigation only. Said counsel had been handling the case
when the same was pending before the trial court until it was appealed
before the Court of Appeals and finally to this Court. We therefore hold
that there was a substantial compliance with Section 78 of the
Corporation Law and as such, Insular Sawmill, Inc. could still continue
prosecuting the present case even beyond the period of three (3) years
from the time of its dissolution.
From the above quoted commentary of Justice Fisher, the trustee may
commence a suit which can proceed to final judgment even beyond the
three-year period. No reason can be conceived why a suit already
commenced By the corporation itself during its existence, not by a
mere trustee who, by fiction, merely continues the legal personality of
the dissolved corporation should not be accorded similar treatment
allowed to proceed to final judgment and execution thereof.
The word "trustee" as sued in the corporation statute must be
understood in its general concept which could include the counsel to
whom was entrusted in the instant case, the prosecution of the suit
filed by the corporation. The purpose in the transfer of the assets of the
corporation to a trustee upon its dissolution is more for the protection
of its creditor and stockholders. Debtors like the petitioners herein may
not take advantage of the failure of the corporation to transfer its assets
to a trustee, assuming it has any to transfer which petitioner has failed
to show, in the first place. To sustain petitioners' contention would be
to allow them to enrich themselves at the expense of another, which all
enlightened legal systems condemn.
Clemente Vs. CA (242 S 717)
Facts:
In an action entitled "Declaration of Ownership with Receivership,"
instituted, the petitioners sought to be declared the owners of a piece of
land so described as Lot No. 148-New of the subdivision plan Pls-502D being a portion of Lot No. 148 of the cadastral survey of Calamba
G.L.RO, Records No. 8418, situated in the Barrio of Lecheria,
Municipality of Calamba, Province of Laguna, island of Luzon.
The private respondents likewise claimed ownership of the property by
virtue of acquisitive prescription.
The trial court dismissed the complaint not merely on what it
apparently perceived to be an insufficiency of the evidence that firmly
could establish plaintiffs' claim of ownership over the property in
dispute but also on its thesis that, absent a corporate liquidation, it is
the corporation, not the stockholders, which can assert, if at all, any

147

title to the corporate assets. The court, even then, expressed some
reservations on the corporation's being able to still validly pursue such
a claim.
Issue:
W/N the petitioners can be held to have succeeded in establishing for
themselves a firm title to the property in question
Ruling:
Petitioners' evidence is direly wanting; all that appear to be certain are
that the "Sociedad Popular Calambea," believed to be a "sociedad
anonima" and for a while engaged in the operation and management of
a cockpit, has existed some time in the past; that it has acquired the
parcel of land here involved; and that the plaintiffs' predecessors,
Mariano Elepao and Pablo Clemente, had been original stockholders
of the sociedad . Except in showing that they are the successors-ininterest of Elepao and Clemente, petitioners have been unable to
come up with any evidence to substantiate their claim of ownership of
the corporate asset.
If, indeed, the sociedad has long become defunct, it should behoove
petitioners, or anyone else who may have any interest in the
corporation, to take appropriate measures before a proper forum for a
peremptory settlement of its affairs. We might invite attention to the
various modes provided by the Corporation Code (see Sees. 117-122)
for dissolving, liquidating or winding up, and terminating the life of the
corporation. Among the causes for such dissolution are when the
corporate term has expired or when, upon a verified complaint and
after notice and hearing, the Securities and Exchange Commission
orders the dissolution of a corporation for its continuous inactivity for
at least five (5) years. The corporation continues to be a body corporate
for three (3) years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle and close
its affairs, culminating in the disposition and distribution of its
remaining assets. It may, during the three-year term, appoint a trustee
or a receiver who may act beyond that period. The termination of the
life of a juridical entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity (see Gonzales vs.
Sugar Regulatory Administration, 174 SCRA 377) nor those of its
owners and creditors. If the three-year extended life has expired
without a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or trustees)
itself, following the rationale of the Supreme Court's decision in
Gelano vs. Court of Appeals (103 SCRA 90) may be permitted to so
continue as "trustees" by legal implication to complete the corporate
liquidation. Still in the absence of a board of directors or trustees, those
having any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation, acting for
and in its behalf, might make proper representations with the
Securities and Exchange commission, which has primary and
sufficiently broad jurisdiction in matters of this nature, for working out
a final settlement of the corporate concerns.
TITLE XV
FOREIGN CORPORATIONS

condition of its license, subject to the provisions of this Code and other
special laws. (n)
Sec. 125. Application for a license. - A foreign corporation
applying for a license to transact business in the Philippines shall
submit to the Securities and Exchange Commission a copy of its
articles of incorporation and by-laws, certified in accordance with law,
and their translation to an official language of the Philippines, if
necessary. The application shall be under oath and, unless already
stated in its articles of incorporation, shall specifically set forth the
following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of
the corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept
summons and process in all legal proceedings and, pending the
establishment of a local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to
operate;
5. The specific purpose or purposes which the corporation intends to
pursue in the transaction of its business in the Philippines: Provided,
That said purpose or purposes are those specifically stated in the
certificate of authority issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the
corporation;
7. A statement of its authorized capital stock and the aggregate number
of shares which the corporation has authority to issue, itemized by
classes, par value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate
number of shares which the corporation has issued, itemized by
classes, par value of shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in
order to enable the Securities and Exchange Commission to determine
whether such corporation is entitled to a license to transact business in
the Philippines, and to determine and assess the fees payable.
Attached to the application for license shall be a duly executed
certificate under oath by the authorized official or officials of the
jurisdiction of its incorporation, attesting to the fact that the laws of the
country or state of the applicant allow Filipino citizens and
corporations to do business therein, and that the applicant is an
existing corporation in good standing. If such certificate is in a foreign
language, a translation thereof in English under oath of the translator
shall be attached thereto.

Sec. 123. Definition and rights of foreign corporations. - For

the purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to
do business in its own country or state. It shall have the right to
transact business in the Philippines after it shall have obtained a
license to transact business in this country in accordance with this
Code and a certificate of authority from the appropriate government
agency. (n)

The application for a license to transact business in the Philippines

shall likewise be accompanied by a statement under oath of the
president or any other person authorized by the corporation, showing
to the satisfaction of the Securities and Exchange Commission and
other governmental agency in the proper cases that the applicant is
solvent and in sound financial condition, and setting forth the assets
and liabilities of the corporation as of the date not exceeding one (1)
year immediately prior to the filing of the application.

Sec. 124. Application to existing foreign corporations. - Every

foreign corporation which on the date of the effectivity of this Code is
authorized to do business in the Philippines under a license therefore
issued to it shall continue to have such authority under the terms and

Foreign banking, financial and insurance corporations shall, in

addition to the above requirements, comply with the provisions of
existing laws applicable to them. In the case of all other foreign
corporations, no application for license to transact business in the

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Philippines shall be accepted by the Securities and Exchange

Commission without previous authority from the appropriate
government agency, whenever required by law. (68a)
Sec. 126. Issuance of a license. - If the Securities and Exchange
Commission is satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and regulations,
the Commission shall issue a license to the applicant to transact
business in the Philippines for the purpose or purposes specified in
such license. Upon issuance of the license, such foreign corporation
may commence to transact business in the Philippines and continue to
do so for as long as it retains its authority to act as a corporation under
the laws of the country or state of its incorporation, unless such license
is sooner surrendered, revoked, suspended or annulled in accordance
with this Code or other special laws.
Within sixty (60) days after the issuance of the license to transact
business in the Philippines, the license, except foreign banking or
insurance corporation, shall deposit with the Securities and Exchange
Commission for the benefit of present and future creditors of the
licensee in the Philippines, securities satisfactory to the Securities and
Exchange Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political
subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186, shares of
stock in domestic corporations registered in the stock exchange, or
shares of stock in domestic insurance companies and banks, or any
combination of these kinds of securities, with an actual market value of
at least one hundred thousand (P100,000.) pesos; Provided, however,
That within six (6) months after each fiscal year of the licensee, the
Securities and Exchange Commission shall require the licensee to
deposit additional securities equivalent in actual market value to two
(2%) percent of the amount by which the licensee's gross income for
that fiscal year exceeds five million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall also require deposit of
additional securities if the actual market value of the securities on
deposit has decreased by at least ten (10%) percent of their actual
market value at the time they were deposited. The Securities and
Exchange Commission may at its discretion release part of the
additional securities deposited with it if the gross income of the
licensee has decreased, or if the actual market value of the total
securities on deposit has increased, by more than ten (10%) percent of
the actual market value of the securities at the time they were
deposited. The Securities and Exchange Commission may, from time to
time, allow the licensee to substitute other securities for those already
on deposit as long as the licensee is solvent. Such licensee shall be
entitled to collect the interest or dividends on the securities deposited.
In the event the licensee ceases to do business in the Philippines, the
securities deposited as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the satisfaction of the Securities
and Exchange Commission that the licensee has no liability to
Philippine residents, including the Government of the Republic of the
Philippines. (n)
Sec. 127. Who may be a resident agent. - A resident agent may
be either an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided,
That in the case of an individual, he must be of good moral character
and of sound financial standing. (n)
Sec. 128. Resident agent; service of process. - The Securities
and Exchange Commission shall require as a condition precedent to
the issuance of the license to transact business in the Philippines by
any foreign corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney designating
some person who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting that
service upon such resident agent shall be admitted and held as valid as
if served upon the duly authorized officers of the foreign corporation at
its home office. Any such foreign corporation shall likewise execute and
file with the Securities and Exchange Commission an agreement or
stipulation, executed by the proper authorities of said corporation, in
form and substance as follows:

"The (name of foreign corporation) does hereby stipulate and agree, in

consideration of its being granted by the Securities and Exchange
Commission a license to transact business in the Philippines, that if at
any time said corporation shall cease to transact business in the
Philippines, or shall be without any resident agent in the Philippines on
whom any summons or other legal processes may be served, then in
any action or proceeding arising out of any business or transaction
which occurred in the Philippines, service of any summons or other
legal process may be made upon the Securities and Exchange
Commission and that such service shall have the same force and effect
as if made upon the duly-authorized officers of the corporation at its
home office."
Whenever such service of summons or other process shall be made
upon the Securities and Exchange Commission, the Commission shall,
within ten (10) days thereafter, transmit by mail a copy of such
summons or other legal process to the corporation at its home or
principal office. The sending of such copy by the Commission shall be
necessary part of and shall complete such service. All expenses
incurred by the Commission for such service shall be paid in advance
by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its
duty to immediately notify in writing the Securities and Exchange
Commission of the new address. (72a; and n)
Sec. 129. Law applicable. - Any foreign corporation lawfully doing
business in the Philippines shall be bound by all laws, rules and
regulations applicable to domestic corporations of the same class,
except such only as provide for the creation, formation, organization or
dissolution of corporations or those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members, or officers of
corporations to each other or to the corporation. (73a)
Sec. 130. Amendments to articles of incorporation or bylaws of foreign corporations. - Whenever the articles of
incorporation or by-laws of a foreign corporation authorized to
transact business in the Philippines are amended, such foreign
corporation shall, within sixty (60) days after the amendment becomes
effective, file with the Securities and Exchange Commission, and in the
proper cases with the appropriate government agency, a duly
authenticated copy of the articles of incorporation or by-laws, as
amended, indicating clearly in capital letters or by underscoring the
change or changes made, duly certified by the authorized official or
officials of the country or state of incorporation. The filing thereof shall
not of itself enlarge or alter the purpose or purposes for which such
corporation is authorized to transact business in the Philippines. (n)
Sec. 131. Amended license. - A foreign corporation authorized to
transact business in the Philippines shall obtain an amended license in
the event it changes its corporate name, or desires to pursue in the
Philippines other or additional purposes, by submitting an application
therefor to the Securities and Exchange Commission, favorably
endorsed by the appropriate government agency in the proper cases.
(n)
Sec. 132. Merger or consolidation involving a foreign
corporation licensed in the Philippines. - One or more foreign
corporations authorized to transact business in the Philippines may
merge or consolidate with any domestic corporation or corporations if
such is permitted under Philippine laws and by the law of its
incorporation: Provided, That the requirements on merger or
consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home
country or state as permitted by the law of its incorporation, such
foreign corporation shall, within sixty (60) days after such merger or
consolidation becomes effective, file with the Securities and Exchange
Commission, and in proper cases with the appropriate government
agency, a copy of the articles of merger or consolidation duly
authenticated by the proper official or officials of the country or state
under the laws of which merger or consolidation was effected:

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Provided, however, That if the absorbed corporation is the foreign

corporation doing business in the Philippines, the latter shall at the
same time file a petition for withdrawal of it license in accordance with
this Title. (n)

In the present controversy, petitioner is a foreign corporation which

claims that it is not doing business in the Philippines. As such, it needs
no license to institute a collection suit against respondent before
Philippine courts.

Sec. 133. Doing business without a license. - No foreign

corporation transacting business in the Philippines without a license,
or its successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency
of the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws. (69a)

Under Section 3(d) of Republic Act No. 7042 (RA 7042) or The
Foreign Investments Act of 1991, the phrase doing business
includes:

B. Van Zuiden Vs. GTVL Mfg. (523 S 233)

Facts:
ZUIDEN, is a corporation, incorporated under the laws of Hong Kong.
ZUIDEN is not engaged in business in the Philippines, but is suing
before the Philippine Courts, for the reasons hereinafter stated.
ZUIDEN is engaged in the importation and exportation of several
products, including lace products. On several occasions, GTVL
purchased lace products from ZUIDEN. The procedure for these
purchases, as per the instructions of GTVL, was that ZUIDEN delivers
the products purchased by GTVL, to a certain Hong Kong corporation,
known as Kenzar Ltd. (KENZAR), and the products are then
considered as sold, upon receipt by KENZAR of the goods purchased by
GTVL. KENZAR had the obligation to deliver the products to the
Philippines and/or to follow whatever instructions GTVL had on the
matter.
Insofar as ZUIDEN is concerned, upon delivery of the goods to
KENZAR in Hong Kong, the transaction is concluded; and GTVL
became obligated to pay the agreed purchase price. However,
commencing October 31, 1994 up to the present, GTVL has failed and
refused to pay the agreed purchase price for several deliveries ordered
by it and delivered by ZUIDEN, as above-mentioned. In spite of said
demands and in spite of promises to pay and/or admissions of liability,
GTVL has failed and refused, and continues to fail and refuse, to pay
the overdue amount of U.S.$32,088.02 inclusive of interest.
Thus, on 13 July 1999, petitioner filed a complaint for sum of money
against respondent. Instead of filing an answer, respondent filed a
Motion to Dismiss on the ground that petitioner has no legal capacity
to sue. Respondent alleged that petitioner is doing business in the
Philippines without securing the required license. Accordingly,
petitioner cannot sue before Philippine courts.
Issue:
W/N petitioner, an unlicensed foreign corporation, has legal capacity
to sue before Philippine courts
Ruling:
Section 133 of the Corporation Code provides:
Doing business without license. No foreign corporation transacting
business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit
or proceeding in any court or administrative agency of the Philippines;
but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of
action recognized under Philippine laws.
The law is clear. An unlicensed foreign corporation doing business in
the Philippines cannot sue before Philippine courts. On the other
hand, an unlicensed foreign corporation not doing business in the
Philippines can sue before Philippine courts.

x x x soliciting orders, service contracts, opening offices, whether

called liaison offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totalling one hundred eighty
(180) days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase doing business
shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such corporation; nor
appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account.
The series of transactions between petitioner and respondent cannot be
classified as doing business in the Philippines under Section 3(d) of
RA 7042. An essential condition to be considered as doing business
in the Philippines is the actual performance of specific commercial acts
within the territory of the Philippines for the plain reason that the
Philippines has no jurisdiction over commercial acts performed in
foreign territories. Here, there is no showing that petitioner performed
within the Philippine territory the specific acts of doing business
mentioned in Section 3(d) of RA 7042. Petitioner did not also open an
office here in the Philippines, appoint a representative or distributor,
or manage, supervise or control a local business. While petitioner and
respondent entered into a series of transactions implying a continuity
of commercial dealings, the perfection and consummation of these
transactions were done outside the Philippines.
As earlier stated, the series of transactions between petitioner and
respondent transpired and were consummated in Hong Kong. We also
find no single activity which petitioner performed here in the
Philippines pursuant to its purpose and object as a business
organization. Moreover, petitioners desire to do business within the
Philippines is not discernible from the allegations of the complaint or
from its attachments. Therefore, there is no basis for ruling that
petitioner is doing business in the Philippines.
An exporter in one country may export its products to many foreign
importing countries without performing in the importing countries
specific commercial acts that would constitute doing business in the
importing countries. The mere act of exporting from ones own
country, without doing any specific commercial act within the territory
of the importing country, cannot be deemed as doing business in the
importing country.
The importing country does not acquire
jurisdiction over the foreign exporter who has not performed any
specific commercial act within the territory of the importing country.
Without jurisdiction over the foreign exporter, the importing country
cannot compel the foreign exporter to secure a license to do business in
the importing country.
Otherwise, Philippine exporters, by the mere act alone of exporting
their products, could be considered by the importing countries to be
doing business in those countries. This will require Philippine
exporters to secure a business license in every foreign country where
they usually export their products, even if they do not perform any
specific commercial act within the territory of such importing
countries. Such a legal concept will have a deleterious effect not only
on Philippine exports, but also on global trade.

150

To be doing or transacting business in the Philippines for purposes of

Section 133 of the Corporation Code, the foreign corporation must
actually transact business in the Philippines, that is, perform specific
business transactions within the Philippine territory on a continuing
basis in its own name and for its own account. Actual transaction of
business within the Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine business license.
If a foreign corporation does not transact such kind of business in the
Philippines, even if it exports its products to the Philippines, the
Philippines has no jurisdiction to require such foreign corporation to
secure a Philippine business license.

Eriks Pte. Ltd. Vs. CA (2676 S 567)

Considering that petitioner is not doing business in the Philippines, it

does not need a license in order to initiate and maintain a collection
suit against respondent for the unpaid balance of respondents
purchases.

Delfin Enriquez, Jr., doing business under the name and style of
Delrene EB Controls Center and/or EB Karmine Commercial, ordered
and received from petitioner various elements used in sealing pumps,
valves, pipes and control equipment, PVC pipes and fittings. The
ordered materials were delivered via airfreight.

Facts:
Petitioner Eriks Pte. Ltd. is a non-resident foreign corporation engaged
in the manufacture and sale of elements used in sealing pumps, valves
and pipes for industrial purposes, valves and control equipment used
for industrial fluid control and PVC pipes and fittings for industrial
uses. It is a corporation duly organized and existing under the laws of
the Republic of Singapore. It is not licensed to do business in the
Philippines and is not so engaged.

Mavest Vs. Sampaguita (470 S 440)

Facts:
MAVEST (U.S.A.), Inc. (MAVEST, U.S.A., for short) is a corporation
duly organized and existing under the laws of the United States of
America but registered with the Philippine Board of Investments, while
co-petitioner MAVEST Manila Liaison Office is MAVEST U.S.A.s
representative in the Philippines. On the other hand, Sampaguita
Garment Corporation is a domestic corporation engaged in the
business of manufacturing and exporting garments.
Mavest U.S.A. and Mavest Manila Liaison Office entered into a series
of transactions with Sampaguita Garment Corporation, whereby the
former would furnish from abroad raw materials to be manufactured
by the latter into finished products, for shipment to petitioners foreign
buyers, Sears Roebuck and JC Penney.
Each transaction was embodied in a purchase order the style and
description as well as the quantity, mode and date of delivery. The
orders of Sears Roebuck were duly paid in full by way of letter of credit.
The JC Penney orders consisting of 8,000 pcs Cotton Woven Pants
with total amount of $29,200.00 were not covered by a letter of credit.
Despite shipment and receipt by JC Penney of said orders, no payment
was made, thus prompting Sampaguita to send demand letters which
remained unheeded.
On April 27, 1990, Sampaguita filed a complaint for collection of a sum
of money amounting to US$29,200.00 with damages against MAVEST
International Co., LTD and Patrick Wang, former General Manager of
MLO.
The trial court rendered judgment in favor of Sampaguita and against
the petitioners and their co-defendants.
Issue:
W/N Mavest Manila Liaison Office (MLO), being merely an agent of
Mavest U.S.A, should not be held solidarily liable with the principal
Ruling:
MLO is solidarily liable with Mavest U.S.A., since MLO is the liaison
office of Mavest U.S.A and the extension office of both Mavest U.S.A.
and MILC.
Mavest U.S.A. appears to have constituted MLO as its representative
and its fully subsidized extension office in the Philippines. As such,
MLO can be charged for the liabilities incurred by Mavest U.S.A. in the
country. And if MLO can be so charged, there is no rhyme or reason
why it cannot be adjudged, as solidarily liable with head office, Mavest
U.S.A.

The transfers of goods were perfected in Singapore, for Enriquez's

account, F.O.B. Singapore, with a 90-day credit term. Subsequently,
demands were made by petitioner upon private respondent to settle his
account, but the latter failed/refused to do so.
Thus, the corporation filed with a complaint for the recovery of
S$41,939.63 or its equivalent in Philippine currency, plus interest
thereon and damages. Enriquez responded with a Motion to Dismiss,
contending that petitioner corporation had no legal capacity to sue. In
an Order, the trial court dismissed the action on the ground that
petitioner is a foreign corporation doing business in the Philippines
without a license.
Issue:
W/N Eriks may maintain an action in Philippine courts considering
that it has no license to do business in the country
Ruling:
The resolution of this issue depends on whether petitioner's business
with private respondent may be treated as isolated transactions.
The sale by petitioner of the items covered by the receipts, which are
part and parcel of its main product line, was actually carried out in the
progressive prosecution of commercial gain and the pursuit of the
purpose and object of its business, pure and simple. Further, its grant
and extension of 90-day credit terms to private respondent for every
purchase made, unarguably shows an intention to continue transacting
with private respondent, since in the usual course of commercial
transactions, credit is extended only to customers in good standing or
to those on whom there is an intention to maintain long-term
relationship. This being so, the existence of a distributorship
agreement between the parties, as alleged but not proven by private
respondent, would, if duly established by competent evidence, be
merely corroborative, and failure to sufficiently prove said allegation
will not significantly affect the finding of the courts below. It is
precisely upon the set of facts above detailed that we concur with
respondent Court that petitioner corporation was doing business in the
country.
Equally important is the absence of any fact or circumstance which
might tend even remotely to negate such intention to continue the
progressive prosecution of petitioner's business activities in this
country. Had private respondent not turned out to be a bad risk, in all
likelihood petitioner would have indefinitely continued its commercial
transactions with him, and not surprisingly, in ever increasing
volumes.
Thus, we hold that the series of transactions in question could not have
been isolated or casual transactions. What is determinative of "doing
business" is not really the number or the quantity of the transactions,
but more importantly, the intention of an entity to continue the body of

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its business in the country. The number and quantity are merely
evidence of such intention. The phrase "isolated transaction" has a
definite and fixed meaning, i.e. a transaction or series of transactions
set apart from the common business of a foreign enterprise in the sense
that there is no intention to engage in a progressive pursuit of the
purpose and object of the business organization. Whether a foreign
corporation is "doing business" does not necessarily depend upon the
frequency of its transactions, but more upon the nature and character
of the transactions.
Given the facts of this case, we cannot see how petitioner's business
dealings will fit the category of "isolated transactions" considering that
its intention to continue and pursue the corpus of its business in the
country had been clearly established. It has not presented any
convincing argument with equally convincing evidence for us to rule
otherwise.
Accordingly and ineluctably, petitioner must be held to be
incapacitated to maintain the action a quo against private respondent.
It was never the intent of the legislature to bar court access to a foreign
corporation or entity which happens to obtain an isolated order for
business in the Philippines. Neither, did it intend to shield debtors
from their legitimate liabilities or obligations. But it cannot allow
foreign corporations or entities which conduct regular business any
access to courts without the fulfillment by such corporations of the
necessary requisites to be subjected to our government's regulation and
authority. By securing a license, the foreign entity would be giving
assurance that it will abide by the decisions of our courts, even if
adverse to it.
Avon Insurance Vs. CA (278 S 312)
Facts:
Yupangco Cotton Mills engaged to secure with Worldwide Security and
Insurance Co. Inc., several of its properties for the periods July 6, 1979
to July 6, 1980 for a coverage of P100,000,000.00 and from October 1,
1980 to October 1, 1981, also for P100,000,000.00. Both contracts
were covered by reinsurance treaties between Worldwide Surety and
Insurance and several foreign reinsurance companies, including Avon
Insurance. The reinsurance arrangements had been made through
international broker C.J. Boatwright and Co. Ltd., acting as agent of
Worldwide Surety and Insurance.
On December 16, 1979 and May 2, 1981, within the respective
effectivity periods of the two policies, the properties therein insured
were razed by fire, thereby giving rise to the obligation of the insurer to
indemnify the Yupangco Cotton Mills. Partial payments were made by
Worldwide Surety and Insurance and some of the reinsurance
companies.
On May 2, 1983, Worldwide Surety and Insurance, in a Deed of
Assignment, acknowledged a remaining balance of P19,444,447.75 still
due Yupangco Cotton Mills, and assigned to the latter all reinsurance
proceeds still collectible from all the foreign reinsurance companies.
Thus, in its interest as assignee and original insured, Yupangco Cotton
Mills instituted this collection suit against the petitioners.
Issue:
W/N the petitioners were determined to be "doing business in the
Philippines" or not
Ruling:
There is no exact rule or governing principle as to what constitutes
doing or engaging in or transacting business. Indeed, such case must
be judged in the light of its peculiar circumstances, upon its peculiar
facts and upon the language of the statute applicable. The true test,
however, seems to be whether the foreign corporation is continuing the

body or substance of the business or enterprise for which it was

organized.
Article 44 of the Omnibus Investments Code of 1987 defines the phrase
to include:
soliciting orders, purchases, service contracts, opening offices, whether
called "liaison" offices or branches; appointing representatives or
distributors who are domiciled in the Philippines or who in any
calendar year stay in the Philippines for a period or periods totaling
one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business firm,
entity or corporation in the Philippines, and any other act or acts that
imply a continuity or commercial dealings or arrangements and
contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and
object of the business organization.
The term ordinarily implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of the functions normally incident to and
in progressive prosecution of the purpose and object of its
organization.
A single act or transaction made in the Philippines, however, could
qualify a foreign corporation to be doing business in the Philippines, if
such singular act is not merely incidental or casual, but indicates the
foreign corporation's intention to do business in the Philippines.
There is no sufficient basis in the records which would merit the
institution of this collection suit in the Philippines. More specifically,
there is nothing to substantiate the private respondent's submission
that the petitioners had engaged in business activities in this country.
This is not an instance where the erroneous service of summons upon
the defendant can be cured by the issuance and service of alias
summons, as in the absence of showing that petitioners had been doing
business in the country, they cannot be summoned to answer for the
charges leveled against them.
As it is, private respondent has made no allegation or demonstration of
the existence of petitioners' domestic agent, but avers simply that they
are doing business not only abroad but in the Philippines as well. It
does not appear at all that the petitioners had performed any act which
would give the general public the impression that it had been engaging,
or intends to engage in its ordinary and usual business undertakings in
the country. The reinsurance treaties between the petitioners and
Worldwide Surety and Insurance were made through an international
insurance broker, and not through any entity or means remotely
connected with the Philippines. Moreover, there is authority to the
effect that a reinsurance company is not doing business in a certain
state merely because the property or lives which are insured by the
original insurer company are located in that state. The reason for this is
that a contract of reinsurance is generally a separate and distinct
arrangement from the original contract of insurance, whose contracted
risk is insured in the reinsurance agreement. Hence, the original
insured has generally no interest in the contract of reinsurance.
Hutchison Parts Vs. SBMA (339 S 434)
Facts:
The Subic Bay Metropolitan Authority (or SBMA) advertised in leading
national daily newspapers and in one international publication, an
invitation offering to the private sector the opportunity to develop and
operate a modern marine container terminal within the Subic Bay
Freeport Zone. Three were declared by the SBMA as qualified bidders
after passing the pre-qualification evaluation conducted by the SBMAs
Technical Evaluation Committee (or SBMA-TEC). These are: (1)
International Container Terminal Services, Inc. (or ICTSI); (2) a
consortium consisting of Royal Port Services, Inc. and HPC Hamburg
Port Consulting GMBH (or RPSI); and (3) Hutchison Ports Philippines

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Limited (or HPPL), representing a consortium composed of HPPL,

Guoco Holdings (Phils.), Inc. and Unicol Management Services, Inc.
Thereafter, the services of three (3) international consultants
recommended by the World Bank for their expertise were hired by
SBMA to evaluate the business plans submitted by each of the bidders,
and to ensure that there would be a transparent and comprehensive
review of the submitted bids. The consultants, after such review and
evaluation unanimously concluded that HPPLs Business Plan was far
superior to that of the two other bidders.
However, even before the sealed envelopes containing the bidders
proposed royalty fees could be opened at the appointed time and place,
RPSI formally protested that ICTSI is legally barred from operating a
second port in the Philippines based on Executive Order No. 212 and
Department of Transportation and Communication (DOTC) Order 95863. Nevertheless, the opening of the sealed financial bids proceeded
under advisement relative to the protest signified by RPSI.

While the case before the trial court was pending litigation, on August
4, 1997, the SBMA sent notices to plaintiff HPPL, ICTSI and RPSI
requesting them to declare their interest in participating in a rebidding
of the proposed project. On October 20, 1997, plaintiff HPPL received a
copy of the minutes of the pre-bid conference which stated that the
winning bidder would be announced on December 5, 1997. Then on
November 4, 1997, plaintiff HPPL learned that the SBMA had accepted
the bids of ICTSI and RPSI who were the only bidders who qualified.
Hence, this petition filed by petitioner (plaintiff below) HPPL against
respondents SBMA, ICTSI, RPSI and the Executive Secretary seeking
to obtain a prohibitory injunction.
Issue:
W/N HPPL has the legal capacity to even seek redress from this Court
Ruling:

The SBMA-PBAC decided to suspend the announcement of the

winning bid, however, and instead gave ICTSI seven (7) days within
which to respond to the letter-protest lodged by RPSI. The HPPL
joined in RPSIs protest, stating that ICTSI should be disqualified
because it was already operating the Manila International Container
Port (or MICP), which would give rise to inevitable conflict of interest
between the MICP and the Subic Bay Container Terminal facility.
On August 15, 1996, the SBMA-PBAC issued a resolution rejecting the
bid of ICTSI because said bid does not comply with the requirements
of the tender documents and the laws of the Philippines. The said
resolution also declared that the winning bid be awarded to
HUTCHISON PORTS PHILIPPINES LIMITED (HPPL) and that
negotiations commence immediately with HPPL (HUTCHISON) with a
view to concluding an acceptable agreement within 45 days of this date
failing which negotiations with RPSI (ROYAL) will commence with a
view to concluding an acceptable agreement within 45 days thereafter
failing which there will be declared a failure of bids.
The following day, ICTSI filed a letter-appeal with SBMAs Board of
Directors requesting the nullification and reversal of the above-quoted
resolution rejecting ICTSIs bid while awarding the same to HPPL. But
even before the SBMA Board could act on the appeal, ICTSI filed a
similar appeal before the Office of the President. On August 30, 1996,
then Chief Presidential Legal Counsel (CPLC) Renato L. Cayetano
submitted a memorandum to then President Fidel V. Ramos,
containing the following recommendations that the President direct
SBMA Chairman Gordon to consider option number 4 that is to reevaluate the financial bids submitted by the parties, taking into
consideration all the following factors which includes reinstatement of
ICTSIs bid.
SBMA, through the unanimous vote of all the Board Members,
excluding the Chairman of the Board who voluntarily inhibited himself
from participating in the re-evaluation, selected the HPPL bid as the
winning bid, being: the conforming bid with a realistic Business Plan
offering the greatest financial return to the SBMA; the best possible
offer in the market, and the most advantageous to the government in
accordance with the Tender Document.
Notwithstanding the SBMA Boards recommendations and action
awarding the project to HPPL, then Executive Secretary Ruben Torres
submitted a memorandum to the Office of the President
recommending that another rebidding be conducted. Consequently,
the Office of the President issued a Memorandum directing the SBMA
Board of Directors to refrain from signing the Concession Contract
with HPPL and to conduct a rebidding of the project.
July 7, 1997, the HPPL, feeling aggrieved by the SBMAs failure and
refusal to commence negotiations and to execute the Concession
Agreement despite its earlier pronouncements that HPPL was the
winning bidder, filed a complaint
against SBMA for specific
performance, mandatory injunction and damages.

Admittedly, petitioner HPPL is a foreign corporation, organized and

existing under the laws of the British Virgin Islands. While the actual
bidder was a consortium composed of petitioner, and two other
corporations, namely, Guoco Holdings (Phils.) Inc. and Unicol
Management Servises, Inc., it is only petitioner HPPL that has brought
the controversy before the Court, arguing that it is suing only on an
isolated transaction to evade the legal requirement that foreign
corporations must be licensed to do business in the Philippines to be
able to file and prosecute an action before Philippines courts.
The maelstrom of this issue is whether participating in the bidding is a
mere isolated transaction, or did it constitute engaging in or
transacting business in the Philippines such that petitioner HPPL
needed a license to do business in the Philippines before it could come
to court.
Participating in the bidding process constitutes doing business
because it shows the foreign corporations intention to engage in
business here. The bidding for the concession contract is but an
exercise of the corporations reason for creation or existence. Thus, it
has been held that a foreign company invited to bid for IBRD and ADB
international projects in the Philippines will be considered as doing
business in the Philippines for which a license is required. In this
regard, it is the performance by a foreign corporation of the acts for
which it was created, regardless of volume of business, that determines
whether a foreign corporation needs a license or not.
If a foreign corporation operates a business in the Philippines without
a license, and thus does not submit itself to Philippine laws, it is only
just that said foreign corporation be not allowed to invoke them in our
courts when the need arises. While foreign investors are always
welcome in this land to collaborate with us for our mutual benefit, they
must be prepared as an indispensable condition to respect and be
bound by Philippine law in proper cases, as in the one at bar. The
requirement of a license is not intended to put foreign corporations at a
disadvantage, for the doctrine of lack of capacity to sue is based on
considerations of sound public policy. Accordingly, petitioner HPPL
must be held to be incapacitated to bring this petition for injunction
before this Court for it is a foreign corporation doing business in the
Philippines without the requisite license.
SBMA Vs. UIG of Taiwan (340 S 359)
Facts:
On 25 May 1995, a Lease and Development Agreement was executed
by UIG and SBMA under which UIG shall lease from SBMA the
Binictican Golf Course and appurtenant facilities thereto to be
transformed into a world class 18-hole golf course, golf club/resort,
commercial tourism and residential center. The contract in pertinent
part contains pre-termination clauses.

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On 4 February 1997, SBMA sent a letter to UIG calling its attention to

its alleged several contractual violations in view of UIGs failure to
deliver its various contractual obligations, primarily its failure to
complete the rehabilitation of the Golf Course in time for the APEC
Leaders Summit, and to pay accumulated lease rentals and utilities,
and to post the required performance bond. UIG interposed as an
excuse the alleged default of its main contractor FF Cruz, resulting in
their filing of suit against the latter, and committed itself to comply
with its obligations within a few days. UIG, however, failed to comply
with its undertakings. On 7 March 1997, SBMA sent a letter to UIG
declaring the latter in default of its contractual obligations to SBMA
under Section 22.1 of the Lease and Development Agreement and
required it to show cause why petitioner SBMA should not preterminate the agreement. UIG paid the rental arrearages but the other
obligations remained unsatisfied.
Thus, on 8 September 1997, a letter of pre-termination was served by
SBMA requiring UIG to vacate the premises. On 12 September 1997,
SBMA served the formal notice of closure of Subic Bay Golf Course and
took over possession of the subject premises. On even date, UIG filed a
complaint against petitioner SBMA for Injunction and Damages with
prayer for a writ of temporary restraining order and writ of preliminary
injunction.
Issue:
W/N UIG has the capacity to sue
Ruling:
As a general rule, unlicensed foreign non-resident corporations cannot
file suits in the Philippines. Section 133 of the Corporation Code
specifically provides:
Sec. 133. No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in
any court or administrative agency of the Philippines, but such
corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized
under Philippine laws.
A corporation has legal status only within the state or territory in which
it was organized. For this reason, a corporation organized in another
country has no personality to file suits in the Philippines. In order to
subject a foreign corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license from the SEC and
appoint an agent for service of process. Without such license, it cannot
institute a suit in the Philippines.
It should be stressed, however, that the licensing requirement was
never intended to favor domestic corporations who enter into solitary
transactions with unwary foreign firms and then repudiate their
obligations simply because the latter are not licensed to do business in
this country. After contracting with a foreign corporation, a domestic
firm is estopped from denying the formers capacity to sue.

In this case, SBMA is estopped from questioning the capacity to sue of

UIG. In entering into the LDA with UIG, SBMA effectively recognized
its personality and capacity to institute the suit before the trial court.
Agilent Vs. Integrated Silicon (427 S 593)
Facts:
Agilent Technologies Singapore (Pte.), Ltd. is a foreign corporation,
which, by its own admission, is not licensed to do business in the
Philippines. Integrated Silicon Technology Philippines Corporation is a
private domestic corporation, 100% foreign owned, which is engaged in
the business of manufacturing and assembling electronics components.
Teoh Kiang Hong, Teoh Kiang Seng and Anthony Choo, Malaysian
nationals, are current members of Integrated Silicons board of
directors, while Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz, and
Rolando T. Nacilla are its former members.
A 5-year Value Added Assembly Services Agreement (VAASA) was
entered into between Integrated Silicon and the Hewlett-Packard
Singapore (Pte.) Ltd., Singapore Components Operation. Under the
terms of the VAASA, Integrated Silicon was to locally manufacture and
assemble fiber optics for export to HP-Singapore. HP-Singapore, for
its part, was to consign raw materials to Integrated Silicon; transport
machinery to the plant of Integrated Silicon; and pay Integrated Silicon
the purchase price of the finished products. The VAASA had a five-year
term, beginning on April 2, 1996, with a provision for annual renewal
by mutual written consent. On September 19, 1999, with the consent of
Integrated Silicon, HP-Singapore assigned all its rights and obligations
in the VAASA to Agilent.
On May 25, 2001, Integrated Silicon filed a complaint for Specific
Performance and Damages against Agilent and its officers Tan Bian
Ee, Lim Chin Hong, Tey Boon Teck and Francis Khor. It alleged that
Agilent breached the parties oral agreement to extend the VAASA.
Integrated Silicon thus prayed that defendant be ordered to execute a
written extension of the VAASA for a period of five years as earlier
assured and promised; to comply with the extended VAASA; and to pay
actual, moral, exemplary damages and attorneys fees.
On July 2, 2001, Agilent filed a separate complaint against Integrated
Silicon, Teoh Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne
Kate M. dela Cruz, Jean Kay M. dela Cruz and Rolando T. Nacilla, for
Specific Performance, Recovery of Possession, and Sum of Money with
Replevin, Preliminary Mandatory Injunction, and Damages. Agilent
prayed that a writ of replevin or, in the alternative, a writ of
preliminary mandatory injunction, be issued ordering defendants to
immediately return and deliver to plaintiff its equipment, machineries
and the materials to be used for fiber-optic components which were left
in the plant of Integrated Silicon. It further prayed that defendants be
ordered to pay actual and exemplary damages and attorneys fees.
Silicon filed a Motion to Dismiss on the grounds of lack of Agilents
legal capacity to sue; litis pendentia; forum shopping; and failure to
state a cause of action.
Issue:

Hence, in Merril Lynch Futures v. CA, the Court ruled:

W/N Agilent has a legal capacity to sue
The rule is that a party is estopped to challenge the personality of a
corporation after having acknowledged the same by entering into a
contract with it. And the doctrine of estoppel to deny corporate
existence applies to foreign as well as to domestic corporations; one
who has dealt with a corporation of foreign origin as a corporate entity
is estopped to deny its existence and capacity. The principle will be
applied to prevent a person contracting with a foreign corporation from
later taking advantage of its noncompliance with the statutes, chiefly in
cases where such person has received the benefits of the contract x x
x.

Ruling:
In a number of cases, however, we have held that an unlicensed foreign
corporation doing business in the Philippines may bring suit in
Philippine courts against a Philippine citizen or entity who had
contracted with and benefited from said corporation. Such a suit is
premised on the doctrine of estoppel. A party is estopped from
challenging the personality of a corporation after having acknowledged
the same by entering into a contract with it. This doctrine of estoppel
to deny corporate existence and capacity applies to foreign as well as
domestic corporations. The application of this principle prevents a

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person contracting with a foreign corporation from later taking

advantage of its noncompliance with the statutes chiefly in cases where
such person has received the benefits of the contract.
The principles regarding the right of a foreign corporation to bring suit
in Philippine courts may thus be condensed in four statements: (1) if a
foreign corporation does business in the Philippines without a license,
it cannot sue before the Philippine courts; (2) if a foreign corporation is
not doing business in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a cause of action
entirely independent of any business transaction; (3) if a foreign
corporation does business in the Philippines without a license, a
Philippine citizen or entity which has contracted with said corporation
may be estopped from challenging the foreign corporations corporate
personality in a suit brought before Philippine courts; and (4) if a
foreign corporation does business in the Philippines with the required
license, it can sue before Philippine courts on any transaction.

involved, such that, as stated in Communication Materials,

Philippine entity is reduced to a mere extension or instrument of
foreign corporation. For example, in Communication Materials,
Court deemed the No Competing Product provision of
Representative Agreement therein restrictive.

the
the
the
the

By the clear terms of the VAASA, Agilents activities in the Philippines

were confined to (1) maintaining a stock of goods in the Philippines
solely for the purpose of having the same processed by Integrated
Silicon; and (2) consignment of equipment with Integrated Silicon to
be used in the processing of products for export. As such, we hold that,
based on the evidence presented thus far, Agilent cannot be deemed to
be doing business in the Philippines. Silicons contention that
Agilent lacks the legal capacity to file suit is therefore devoid of merit.
As a foreign corporation not doing business in the Philippines, it
needed no license before it can sue before our courts.
Lorenzo Shipping Vs. Chubb & Sons (431 S 266)

The challenge to Agilents legal capacity to file suit hinges on whether

or not it is doing business in the Philippines. However, there is no
definitive rule on what constitutes doing, engaging in, or
transacting business in the Philippines, as this Court observed in the
case of Mentholatum v. Mangaliman. The Court discoursed on the two
general tests to determine whether or not a foreign corporation can be
considered as doing business in the Philippines. The first of these is
the substance test, thus:
The true test for doing business, however, seems to be whether the
foreign corporation is continuing the body of the business or enterprise
for which it was organized or whether it has substantially retired from
it and turned it over to another.
The second test is the continuity test, expressed thus:
The term doing business implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally
incident to, and in the progressive prosecution of, the purpose and
object of its organization.
Although each case must be judged in light of its attendant
circumstances, jurisprudence has evolved several guiding principles for
the application of these tests. For instance, considering that it
transacted with its Philippine counterpart for seven years, engaging in
futures contracts, this Court concluded that the foreign corporation in
Merrill Lynch Futures, Inc. v. Court of Appeals and Spouses Lara, was
doing business in the Philippines. In Commissioner of Internal
Revenue v. Japan Airlines (JAL), the Court held that JAL was doing
business in the Philippines, i.e., its commercial dealings in the country
were continuous despite the fact that no JAL aircraft landed in the
country as it sold tickets in the Philippines through a general sales
agent, and opened a promotions office here as well.
In General Corp. of the Phils. v. Union Insurance Society of Canton
and Firemans Fund Insurance, a foreign insurance corporation was
held to be doing business in the Philippines, as it appointed a settling
agent here, and issued 12 marine insurance policies. We held that
these transactions were not isolated or casual, but manifested the
continuity of the foreign corporations conduct and its intent to
establish a continuous business in the country. In Eriks PTE Ltd. v.
Court of Appeals and Enriquez, the foreign corporation sold its
products to a Filipino buyer who ordered the goods 16 times within an
eight-month period. Accordingly, this Court ruled that the corporation
was doing business in the Philippines, as there was a clear intention on
its part to continue the body of its business here, despite the relatively
short span of time involved. Communication Materials and Design,
Inc., et al. v. Court of Appeals, ITEC, et al. and Top-Weld
Manufacturing v. ECED, IRTI, et al. both involved the License and
Technical Agreement and Distributor Agreement of foreign
corporations with their respective local counterparts that were the
primary bases for the Courts ruling that the foreign corporations were
doing business in the Philippines. In particular, the Court cited the
highly restrictive nature of certain provisions in the agreements

Facts:
Lorenzo Shipping Corporation, a domestic corporation engaged in
coastwise shipping, was the carrier of 581 bundles of black steel pipes,
the subject shipment, from Manila to Davao City. From Davao City,
Gearbulk, Ltd., a foreign corporation licensed as a common carrier
under the laws of Norway and doing business in the Philippines
through its agent, Philippine Transmarine Carriers, Inc., a domestic
corporation, carried the goods on board its vessel M/V San Mateo
Victory to the United States, for the account of Sumitomo Corporation.
The latter, the consignee, is a foreign corporation organized under the
laws of the United States of America. It insured the shipment with
Chubb and Sons, Inc., a foreign corporation organized and licensed to
engage in insurance business under the laws of the United States of
America.
Due to its heavily rusted condition, the consignee Sumitomo rejected
the damaged steel pipes and declared them unfit for the purpose they
were intended. It then filed a marine insurance claim with respondent
Chubb and Sons, Inc. which the latter settled in the amount of
US$104,151.00.
On December 2, 1988, Chubb and Sons, Inc. filed a complaint for
collection of a sum of money against Lorenzo Shipping, Gearbulk, and
Transmarine. Chubb and Sons, Inc. alleged that it is not doing
business in the Philippines, and that it is suing under an isolated
transaction.
Issue:
W/N Chubb and Sons has capacity to sue before the Philippine courts
Ruling:
In the first place, petitioner failed to raise the defense that Sumitomo is
a foreign corporation doing business in the Philippines without a
license. It is therefore estopped from litigating the issue on appeal
especially because it involves a question of fact which this Court cannot
resolve. Secondly, assuming arguendo that Sumitomo cannot sue in
the Philippines, it does not follow that respondent, as subrogee, has
also no capacity to sue in our jurisdiction.
In the instant case, the rights inherited by the insurer, Chubb and Sons,
pertain only to the payment it made to the insured Sumitomo as
stipulated in the insurance contract between them, and which amount
it now seeks to recover from petitioner Lorenzo Shipping which caused
the loss sustained by the insured Sumitomo. The capacity to sue of
Chubb and Sons could not perchance belong to the group of rights,
remedies or securities pertaining to the payment insurer made for the
loss which was sustained by the insured Sumitomo and covered by the
contract of insurance. Capacity to sue is a right personal to its holder.
It is conferred by law and not by the parties.

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Lack of legal capacity to sue means that the plaintiff is not in the
exercise of his civil rights, or does not have the necessary qualification
to appear in the case, or does not have the character or representation
he claims. It refers to a plaintiffs general disability to sue, such as on
account of minority, insanity, incompetence, lack of juridical
personality, or any other disqualifications of a party. Respondent
Chubb and Sons who was plaintiff in the trial court does not possess
any of these disabilities. On the contrary, respondent Chubb and Sons
has satisfactorily proven its capacity to sue, after having shown that it
is not doing business in the Philippines, but is suing only under an
isolated transaction, i.e., under the one (1) marine insurance policy
issued in favor of the consignee Sumitomo covering the damaged steel
pipes.

German Consortium, stating that the German Consortiums contract

with DMWAI, LBV&A and ERTI has been terminated or extinguished
on the following grounds: (a) the CDC did not give its approval to the
Consortiums request for the approval of the assignment or transfer by
the German Consortium in favor of ERTI of its rights and interests
under the Contract for Services; (b) the parties failed to prepare and
finalize the Shareholders Agreement pursuant to the provision of the
MOU; (c) there is no more factual or legal basis for the joint venture to
continue; and (d) with the termination of the MOU, the MOA is also
deemed terminated or extinguished.

The law on corporations is clear in depriving foreign corporations

which are doing business in the Philippines without a license from
bringing or maintaining actions before, or intervening in Philippine
courts.

Attached to the letter was a copy of the letter of the CDC, stating that
the German Consortiums assignment of an eighty-five percent (85%)
majority interest to another party violated its representation to
undertake both the financial and technical aspects of the project. The
dilution of the Consortiums interest in ERTI is a substantial
modification of the Consortiums representations which were used as
bases for the award of the project to it.

The law does not prohibit foreign corporations from performing single
acts of business. A foreign corporation needs no license to sue before
Philippine courts on an isolated transaction.

On February 20, 2001, petitioner ERTI, through counsel, sent a letter

to CDC requesting for the reconsideration of its disapproval of the
agreement between ERTI and the German Consortium.

We reject the claim of petitioner Lorenzo Shipping that respondent

Chubb and Sons is not suing under an isolated transaction because the
steel pipes, subject of this case, are covered by two (2) bills of lading;
hence, two transactions. The stubborn fact remains that these two (2)
bills of lading spawned from the single marine insurance policy that
Chubb and Sons issued in favor of the consignee Sumitomo, covering
the damaged steel pipes. The execution of the policy is a single act, an
isolated transaction. This Court has not construed the term isolated
transaction to literally mean one or a mere single act.

Facts:

Before CDC could act upon petitioner ERTIs letter, the German
Consortium filed a complaint for injunction against herein petitioners.
The German Consortium claimed that ERTIs continued
misrepresentation as to their right to accept solid wastes from third
parties for processing at the waste management center will cause
irreparable damage to the Consortium and its exclusive right to operate
the waste management center at the CSEZ. Moreover, petitioner
ERTIs acts destroy the Consortiums credibility and undermine
customer confidence in it. Hence, the German Consortium prayed that
a writ of temporary restraining order be issued against petitioner ERTI
and, after hearing, a writ of preliminary injunction be likewise issued
ordering petitioner ERTI to cease and desist from misrepresenting to
third parties or the public that it has any right or interest in the waste
management center at CSEZ.

European Resources and Technologies Inc., a corporation organized

and existing under the laws of the Republic of the Philippines, is joined
by Delfin J. Wenceslao as petitioner in this case. Ingenieuburo
Birkhan + Nolte Ingiurgesellschaft mbh and Heers & Brockstedt Gmbh
& Co. are German corporations who are respondents in this case and
shall be collectively referred to as the German Consortium.

At the hearings on the application for injunction, petitioners objected

to the presentation of evidence on the ground that the trial court had
no jurisdiction over the case since the German Consortium was
composed of foreign corporations doing business in the country
without a license. Moreover, the MOA between the parties provides
that the dispute should be referred to arbitration.

The German Consortium tendered and submitted its bid to the Clark
Development Corporation to construct, operate and manage the
Integrated Waste Management Center at the Clark Special Economic
Zone (CSEZ). CDC accepted the German Consortiums bid and
awarded the contract to it. On October 6, 1999, CDC and the German
Consortium executed the Contract for Services which embodies the
terms and conditions of their agreement.

Issue:

The Contract for Services provides that the German Consortium shall
be empowered to enter into a contract or agreement for the use of the
integrated waste management center by corporations, local
government units, entities, and persons not only within the CSEZ but
also outside.

We have held that the act of participating in a bidding process

constitutes doing business because it shows the foreign corporations
intention to engage in business in the Philippines. In this regard, it is
the performance by a foreign corporation of the acts for which it was
created, regardless of volume of business, that determines whether a
foreign corporation needs a license or not.

European Resources Vs. Ingenieuburo (435 S 246)

Article VIII, Section 7 of the Contract for Services provides that the
German Consortium shall undertake to organize a local corporation as
its representative for this project. Pursuant to this, petitioner
European Resources and Technologies, Inc. was incorporated. The
parties likewise agreed to prepare and finalize a Shareholders
Agreement within one (1) month from the execution of the MOU,
which shall provide that the German Consortium shall own fifteen
percent (15%) of the equity in the joint venture corporation, DMWAI
shall own seventy percent (70%) and LBV&A shall own fifteen percent
(15%). In the event that the parties fail to execute the Shareholders
Agreement, the MOU shall be considered null and void.
On December 11, 2000, ERTI received a letter from BN Consultants
Philippines, Inc., signed by Mr. Holger Holst for and on behalf of the

W/N ERTI are estopped from assailing the capacity of the German to
institute the suit for injunction
Ruling:

Consequently, the German Consortium is doing business in the

Philippines without the appropriate license as required by our laws. By
participating in the bidding conducted by the CDC for the operation of
the waste management center, the German Consortium exhibited its
intent to transact business in the Philippines. Although the Contract
for Services provided for the establishment of a local corporation to
serve as respondents representative, it is clear from the other
provisions of the Contract for Services as well as the letter by the CDC
containing the disapproval that it will be the German Consortium
which shall manage and conduct the operations of the waste
management center for at least twenty-five years. Moreover, the
German Consortium was allowed to transact with other entities outside
the CSEZ for solid waste collection. Thus, it is clear that the local

156

corporation to be established will merely act as a conduit or extension

of the German Consortium.
As a general rule, unlicensed foreign non-resident corporations cannot
file suits in the Philippines. Section 133 of the Corporation Code
specifically provides. However, there are exceptions to this rule. In a
number of cases, we have declared a party estopped from challenging
or questioning the capacity of an unlicensed foreign corporation from
initiating a suit in our courts. In the case of Communication Materials
and Design, Inc. v. Court of Appeals, a foreign corporation instituted
an action before our courts seeking to enjoin a local corporation, with
whom it had a Representative Agreement, from using its corporate
name, letter heads, envelopes, sign boards and business dealings as
well as the foreign corporations trademark. The case arose when the
foreign corporation discovered that the local corporation has violated
certain contractual commitments as stipulated in their agreement. In
said case, we held that a foreign corporation doing business in the
Philippines without license may sue in Philippine Courts a Philippine
citizen or entity that had contracted with and benefited from it.
Hence, the party is estopped from questioning the capacity of a foreign
corporation to institute an action in our courts where it had obtained
benefits from its dealings with such foreign corporation and thereafter
committed a breach of or sought to renege on its obligations. The rule
relating to estoppel is deeply rooted in the axiom of commodum ex
injuria sua non habere debetno person ought to derive any
advantage from his own wrong.
In the case at bar, petitioners have clearly not received any benefit from
its transactions with the German Consortium. In fact, there is no
question that petitioners were the ones who have expended a
considerable amount of money and effort preparatory to the
implementation of the MOA. Neither do petitioners seek to back out
from their obligations under both the MOU and the MOA by
challenging respondents capacity to sue. The reverse could not be any
more accurate. Petitioners are insisting on the full validity and
implementation of their agreements with the German Consortium.
To rule that the German Consortium has the capacity to institute an
action against petitioners even when the latter have not committed any
breach of its obligation would be tantamount to an unlicensed foreign
corporation gaining access to our courts for protection and redress.
We cannot allow this without violating the very rationale for the law
prohibiting a foreign corporation not licensed to do business in the
Philippines from suing or maintaining an action in Philippine courts.
Sec. 134. Revocation of license. - Without prejudice to other
grounds provided by special laws, the license of a foreign corporation
to transact business in the Philippines may be revoked or suspended by
the Securities and Exchange Commission upon any of the following
grounds:
1. Failure to file its annual report or pay any fees as required by this
Code;
2. Failure to appoint and maintain a resident agent in the Philippines
as required by this Title;
3. Failure, after change of its resident agent or of his address, to submit
to the Securities and Exchange Commission a statement of such change
as required by this Title;
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or
by-laws or of any articles of merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such corporation
pursuant to this Title;

6. Failure to pay any and all taxes, imposts, assessments or penalties, if

any, lawfully due to the Philippine Government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of the purpose or
purposes for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and
in behalf of any foreign corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines. (n)
Sec. 135. Issuance of certificate of revocation. - Upon the
revocation of any such license to transact business in the Philippines,
the Securities and Exchange Commission shall issue a corresponding
certificate of revocation, furnishing a copy thereof to the appropriate
government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the
corporation at its registered office in the Philippines a notice of such
revocation accompanied by a copy of the certificate of revocation. (n)
Sec. 136. Withdrawal of foreign corporations. - Subject to
existing laws and regulations, a foreign corporation licensed to transact
business in the Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of license. No certificate
of withdrawal shall be issued by the Securities and Exchange
Commission unless all the following requirements are met;
1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to
the Philippine Government or any of its agencies or political
subdivisions have been paid; and
3. The petition for withdrawal of license has been published once a
week for three (3) consecutive weeks in a newspaper of general
circulation in the Philippines.
TITLE XVI
MISCELLANEOUS PROVISIONS
Sec. 137. Outstanding capital stock defined. - The term
"outstanding capital stock", as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares. (n)
Sec. 138. Designation of governing boards. - The provisions of
specific provisions of this Code to the contrary notwithstanding, nonstock or special corporations may, through their articles of
incorporation or their by-laws, designate their governing boards by any
name other than as board of trustees. (n)
Sec. 139. Incorporation and other fees. - The Securities and
Exchange Commission is hereby authorized to collect and receive fees
as authorized by law or by rules and regulations promulgated by the
Commission. (n)
Sec. 140. Stock ownership in certain corporations. - Pursuant
to the duties specified by Article XIV of the Constitution, the National
Economic and Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any
corporation or by business or industry to frustrate the provisions
thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings,
including recommendations for their prevention or correction.

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Maximum limits may be set by the Batasang Pambansa for

stockholdings in corporations declared by it to be vested with a public
interest pursuant to the provisions of this section, belonging to
individuals or groups of individuals related to each other by
consanguinity or affinity or by close business interests, or whenever it
is necessary to achieve national objectives, prevent illegal monopolies
or combinations in restraint or trade, or to implement national
economic policies declared in laws, rules and regulations designed to
promote the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, business or
industries to be declared vested with a public interest and in
formulating proposals for limitations on stock ownership, the National
Economic and Development Authority shall consider the type and
nature of the industry, the size of the enterprise, the economies of
scale, the geographic location, the extent of Filipino ownership, the
labor intensity of the activity, the export potential, as well as other
factors which are germane to the realization and promotion of business
and industry.
Sec. 141. Annual report or corporations. - Every corporation,
domestic or foreign, lawfully doing business in the Philippines shall
submit to the Securities and Exchange Commission an annual report of
its operations, together with a financial statement of its assets and
liabilities, certified by any independent certified public accountant in
appropriate cases, covering the preceding fiscal year and such other
requirements as the Securities and Exchange Commission may require.
Such report shall be submitted within such period as may be prescribed
by the Securities and Exchange Commission. (n)
Sec. 142. Confidential nature of examination results. - All
interrogatories propounded by the Securities and Exchange
Commission and the answers thereto, as well as the results of any
examination made by the Commission or by any other official
authorized by law to make an examination of the operations, books and
records of any corporation, shall be kept strictly confidential, except
insofar as the law may require the same to be made public or where
such interrogatories, answers or results are necessary to be presented
as evidence before any court. (n)
Sec. 143. Rule-making power of the Securities and Exchange
Commission. - The Securities and Exchange Commission shall have
the power and authority to implement the provisions of this Code, and
to promulgate rules and regulations reasonably necessary to enable it
to perform its duties hereunder, particularly in the prevention of fraud
and abuses on the part of the controlling stockholders, members,
directors, trustees or officers. (n)
Sec. 144. Violations of the Code. - Violations of any of the
provisions of this Code or its amendments not otherwise specifically
penalized therein shall be punished by a fine of not less than one
thousand (P1,000.00) pesos but not more than ten thousand
(P10,000.00) pesos or by imprisonment for not less than thirty (30)
days but not more than five (5) years, or both, in the discretion of the
court. If the violation is committed by a corporation, the same may,
after notice and hearing, be dissolved in appropriate proceedings
before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action
against the director, trustee or officer of the corporation responsible for
said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation
provided in this Code. (190 1/2 a)
Sec. 145. Amendment or repeal. - No right or remedy in favor of
or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or
of any part thereof. (n)
Knecht Vs. United Cigarette (384 S 45)

Facts:
Rose Packing Company, Inc., a domestic corporation, owns three (3)
parcels of land with a total area of 31, 842 square meters situated in
Sto. Domingo, Cainta, Rizal. The largest among these parcels w/ an
area of 31,447 square meters is mortgaged with the Philippine
Commercial and Industrial Bank (PCIB). The other two remaining
parcels are unregistered.
On October 26, 1965, Rose Packing, through its President Rene Knecht,
sold to the United Cigarette Corporation (UCC), a domestic
corporation, the said parcels of land, with all the buildings and
improvements thereon, for P800,000.00. Rose Packing made a
warranty that the lots are free from all liens and encumbrances, except
the real estate mortgage constituted over one area covered by TCT No.
73620. For its part, UCC promised to pay the purchase price under the
following terms and conditions: (a) a P250,000.00 down payment
must be made upon signing of the deed of sale with mortgage; (b) it
will assume Rose Packings P250,000.00 overdraft line obligation with
the PCIB, subject to the latters approval; and (c) the balance of
P300,000.00 shall be paid in two annual installments at P150,000.00
each (within 12 and 14 months) from the date of sale, with 10% annual
interest. To secure the deal, UCC initially paid Rose Packing
P80,000.00 as earnest money.
Before the deed of sale could be executed, the parties found that Rose
Packings actual obligation with the PCIB far exceeded the
P250,000.00 which UCC assumed to pay under their agreement. So
the PCIB demanded additional collateral from UCC as a condition
precedent for the approval of the sale of the mortgaged property.
However, UCC did not comply.
Meanwhile, Rose Packing again offered to sell the same lots to other
prospective buyers without the knowledge of UCC and without
returning to the latter the earnest money it earlier paid.
Aggrieved, UCC, filed a complaint against Rose Packing and Rene
Knecht for specific performance and recovery of damages.
Eventually, on July 19, 1990, UCC, through its liquidator Alberto
Wong, filed with the CFI, Branch 2 a motion for leave to intervene and
to admit its complaint-in-intervention. Rose Packing, through its
liquidator/trustee, Knecht, Inc., opposed the motion claiming that the
Decision in Civil Case No. 9165 which became final on March 23, 1977
can no longer be enforced since more than ten (10) years had elapsed
from its finality.
While it nullified the Orders dated December 10, 1990 and October 10,
1991, the CA nonetheless stressed that UCCs right to execute the
judgment in Civil Case No. 9165 has not yet prescribed
insofar as the parcel of land covered by TCT No. 73620 is
concerned because this land was involved in Civil Case No. 11015.
Its execution can be availed of in Branch 151, not in Branch 152, of the
RTC, Pasig City. As regards the two other unregistered parcels of
land, the judgment has already prescribed because these
properties were not involved in Civil Case No. 11015, hence,
UCC should have then sought the execution of the judgment
with respect to said properties.
Issue:
W/N UCCs right to enforce that judgment had already prescribed
Ruling:
There is no doubt that the judgment in Civil Case No. 9165 became
final and executory on March 23, 1977. That this judgment is still
enforceable was decided with finality by this Court in G.R. No. 109385.
In Reburiano vs. Court of Appeals, a case with similar facts, this Court
held:
the trustee (of a dissolved corporation) may commence a
suit which can proceed to final judgment even beyond
the three-year period (of liquidation) x x x, no
reason can be conceived why a suit already
commenced by the corporation itself during its
existence, not by a mere trustee who, by fiction, merely
continues the legal personality of the dissolved

158

corporation, should not be accorded similar

treatment to proceed to final judgment and
execution thereof. (Emphasis ours)
Indeed, the rights of a corporation (dissolved pending litigation) are
accorded protection by law. This is clear from Section 145 of the
Corporation Code, thus:
Section 145. Amendment or repeal. No right or remedy
in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor
any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the
subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this Code or of
any part thereof. (Emphasis ours)
The dissolution of UCC itself, or the expiration of its three-year
liquidation period, should not be a bar to the enforcement of its rights
as a corporation. One of these rights, to be sure, includes the UCCs
right to seek from the court the execution of a valid and final judgment
in Civil Case No. 9165 through its trustee/liquidator Encarnacion
Gonzales Wong for the benefit of its stockholders, creditors and any
other person who may have legal claims against it. To hold otherwise
would be to allow petitioners to unjustly enrich themselves at the
expense of UCC. This, in effect, renders nugatory all the efforts and
expenses of UCC in its quest to secure justice, not to mention the
undue delay in disposing of this case prejudicial to the administration
of justice.
Sec. 146. Repealing clause. - Except as expressly provided by this
Code, all laws or parts thereof inconsistent with any provision of this
Code shall be deemed repealed. (n)
Sec. 147. Separability of provisions. - Should any provision of
this Code or any part thereof be declared invalid or unconstitutional,
the other provisions, so far as they are separable, shall remain in force.
(n)
Sec. 148. Applicability to existing corporations. - All
corporations lawfully existing and doing business in the Philippines on
the date of the effectivity of this Code and heretofore authorized,
licensed or registered by the Securities and Exchange Commission,
shall be deemed to have been authorized, licensed or registered under
the provisions of this Code, subject to the terms and conditions of its
license, and shall be governed by the provisions hereof: Provided, That
if any such corporation is affected by the new requirements of this
Code, said corporation shall, unless otherwise herein provided, be
given a period of not more than two (2) years from the effectivity of this
Code within which to comply with the same. (n)
Sec. 149. Effectivity. - This Code shall take effect immediately upon
its approval.

INTRA-CORPORATE DISPUTE

Speed Distributing Vs. CA (425 S 691)

Facts:
Pastor Y. Lim married Rufina Luy Lim. During the early part of their
marriage Pastor organized some family corporations using their
conjugal funds. Among these corporations was Skyline International
Corporation which was engaged in the importation and sale of
Hankook Brand Korean Tires and the acquisition of real estate. The
spouses were incorporators and major stockholders of the corporation
and were also employed therein.

Thereafter, the properties of Skyline were levied upon motion of

Rufina. Skyline appealed to CA, but the Court ruled that Skyline
International, Inc. was a conjugal enterprise before its incorporation in
December 1970 when it was still a proprietorship. The Court found
that the only assets of the corporation are the conjugal properties.
Thus, it is safe to assume that Skyline International Corporation is
another name for Mr. and Mrs. Pastor Y. Lim in person. Skyline, then,
filed a petition for review before this Court, but the petition was
dismissed.
Sometimes later, the Speed Distributing Corporation was registered
with the Securities and Exchange Commission, with Pastor Lim as one
of the incorporators. He owned ten shares, valued at P100.00 per
share. Lita Lim-Marcelo was elected treasurer of the corporation.
Also, another corporation, Leslim Corporation, was registered with the
Securities and Exchange Commission with a capital stock of
P12,000,000.00, divided into 120,000 shares at par value of P100.00
per share. Pastor Lim subscribed to 95,700 shares valued at
P9,570,000.00. Under the articles of incorporation, Pastor Lim was the
treasurer-in-trust of the corporation. The Vice-President and Treasurer
of the corporation was Lita Lim-Marcelo, now married to Ireneo
Marcelo.
Sometimes in1994, Leslim Corporation executed a deed of absolute
sale in favor of the Speed, represented by its Vice-President, Ireneo
Marcelo, over the parcel of lot located at Diliman Quezon City, for the
price of P3,900,000.00. Lita Lim-Marcelo, the Vice-President of
Leslim signed in the deed for and in behalf of the corporation. Lita
Lim-Marcelo was authorized by the Board of Directors in a Resolution
August 19, 1994 to sign the said deed and to receive the purchase price
for and in behalf of Leslim. The said Resolution was certified by
corporate secretary Pedro Aquino on August 22, 1994. Consequently,
TCT No. 36617 which was in the name of Leslim, was cancelled and a
new one, TCT No. T-116716, was issued to and in the name of Speed.
Prior to that sale, Pastor Lim died intestate and was survived by his
wife, Rufina Lim.
Rufina filed a complaint against Speed, and the petitioners with the
RTC of Quezon City, for the nullification of the Deed of Absolute Sale
executed by Leslim in favor of Speed over the property covered by TCT
No. T-36617, and the cancellation of TCT No. T-11676 with damages
before the RTC of Quezon City.
On November 25, 1995, the RTC issued an order dismissing the
complaint, real party-in-interest. According to the court, she had no
cause of action against the petitioners as she was not privy to the
contract of sale between Leslim and Speed. Neither was she a
stockholder of the defendant corporation; as such, she could not sue
for the corporation. According to the court, Rufina could not file the
complaint in behalf of her deceased husband Pastor as she was unable
to show that she was the authorized representative of his estate; even if
she was so authorized, her claim was limited to the shares owned by
Pastor, which could not extend to the properties of Leslim. The court
also ruled that the action involved intra-corporate controversies over
which the SEC had original and exclusive jurisdiction.
Issue:
W/N the CA is correct in remanding the case to the RTC and directing
it to decide and hear the complaint on its merits, in view of Rep. Act
No. 8799 which took effect on August 8, 2000, during the pendency of
the case before it, effectively transferring jurisdiction over cases
involving intra-corporate controversies from the SEC to the RTC
Ruling:
The CA is correct in remanding the case to the RTC.

159

Jurisdiction over the subject matter is conferred by law. The nature of

an action, as well as which court or body has jurisdiction over it, is
determined based on the allegations contained in the complaint of the
plaintiff, irrespective of whether or not plaintiff is entitled to recover
upon all or some of the claims asserted therein. It cannot depend on
the defenses set forth in the answer, in a motion to dismiss, or in a
motion for reconsideration by the defendant.
Section 5 of P.D. No. 902-A provides that the SEC shall have original
and exclusive jurisdiction over complaints, to hear and decide cases
involving the following:
(a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest
of the public and/or stockholders, partners, members of associations
registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or associates;
between any or all of them and the corporation, partnership or
association and the State insofar as it concerns their individual
franchise or right as such entity;
(c) Controversies in the election or appointment of directors, trustees,
officers or managers of such corporations, partnership or associations;
(d) Petitioners of corporations, partnerships or associations to be
declared in the state of suspension of payment in cases where the
corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when
they fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities but is under
the management of a rehabilitation receiver or management committee
created pursuant to this Decree.
However, Section 5.2 of Rep. Act No. 8799 transferred the erstwhile
exclusive and original jurisdiction of the SEC over actions involving
intra-corporate controversies to the courts of general jurisdiction, or
the appropriate RTC. All intra-corporate cases pending in the SEC
were to be transferred to the appropriate RTC. Congress thereby
recognized the expertise and competence of the RTC to take cognizance
of and resolve cases involving intra-corporate controversies. In
compliance with the law, the Court issued, on November 21, 2000 a
Resolution designating certain branches of the RTC in the National
Capital Region to try and decide cases enumerated in Section 5 of P.D.
No. 902-A. For Quezon City cases, the Court designated Branches 46
and 93 of the RTC. Branch 222 of the Quezon City RTC, which
dismissed the complaint of the Rufina Lim was not so designated by
the Court. On March 13, 2001, the Court approved the Interim Rules of
Procedure for Intra-Corporate Controversies, which took effect on
April 1, 2001.
To determine whether a case involves an intra-corporate controversy,
and is to be heard and decided by the Branches of the RTC specifically
designated by the Court to try and decide such cases, two elements
must concur: (a) the status or relationship of the parties; and (2) the
nature of the question that is the subject of their controversy.
The first element requires that the controversy must arise out of intracorporate or partnership relations between any or all of the parties and
the corporation, partnership or association of which they are
stockholders, members or associates; between any or all of them and
the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it
concerns their individual franchises. The second element requires that
the dispute among the parties be intrinsically connected with the
regulation of the corporation. If the nature of the controversy involves
matters that are purely civil in character, necessarily, the case does not
involve an intra-corporate controversy. The determination of whether a
contract is simulated or not, is an issue that could be resolved by
applying pertinent provisions of the Civil Code.

In the present recourse, it is clear that Rufina Lims complaint in the

RTC is not an intra-corporate case. For one thing, she has never been a
stockholder of Leslim, or of Speed for that matter. The complaint is
one for the nullification of the deed of absolute sale executed by Leslim
in favor of Speed over the property covered by TCT No. T-36617 in the
name of Leslim, the cancellation of TCT No. T-116716 in the name of
Speed, as well as the Secretarys Certificate dated August 22, 1994. She
alleged that since her deceased husband, Pastor Lim, acquired the
property during their marriage, the said property is a conjugal in
nature, although registered under the name of Leslim under TCT No.
T-36617. She asserted that the petitioners connived to deprive the
estate of Pastor Lim and his heirs of their possession and ownership
over the said property using a falsified Secretarys Certificate stating
that the Board of Directors of Leslim had a meeting on August 19, 1994,
when, in fact, no such meeting was held. Lita Lim was never a
stockholder of Leslim or a member of its Board of Directors; her
husband, Ireneo Marcelo was the Vice-President of Speed; and, Pedro
Aquino was Leslims corporate secretary. She further averred that the
amount of P3,900,000.00, the purchase price of the property under
the deed of absolute sale, was not paid to Leslim, and that the Spouses
Marcelo and petitioner Pedro Aquino contrived the said deed to
consummate their devious scheme and chicanery.
The private
respondent concluded that the Deed of Absolute Sale was simulated;
hence, null and void.
Thus, on the basis of the material allegations of the complaint, the
court a quo had jurisdiction over the case.
Sy Chim Vs. Sy Siy Ho (480 S 465)
Facts:
The Sy Siy Ho & Sons, Inc. is a domestic corporation which was
organized in the 1940s, engaged primarily in importing, buying and
selling hardware, machineries, spare parts, supplies and other allied
products and merchandise to be sold exclusively on wholesale basis. It
was doing business under the name and style Guan Yiac Hardware.
The corporation was owned and controlled by Sy Chim and his
children. Sometime in 1990, a controversy ensued between Sy Chims
two sons, Sy Tiong Shiou and Sy Tiong Bio who was then the Vice
President for Finance. Sy Chim sided with Sy Tiong Shiou. The intracorporate dispute reached the Securities and Exchange Commission
(SEC). Later, the parties agreed to divide and distribute the assets and
liabilities of the corporation.
Some of the shares of stocks were assigned to Felicidad Chan Sy, wife
of Sy Chim. The spouses Sy Chim and Felicidad Chan Sy, and spouses
Sy Tiong Shiou and Juanita Tan Sy, and their children, Charlie, Romer
and Jesse James Tan, then became stockholders and members of the
Board of Directors of the corporation.
After almost a decade later, another intra-corporate dispute ensued,
this time between Sy Chim and his wife, on the one hand, and their son
Sy Tiong Shiou, on the other.
The complaint for accounting and damages against the spouses Sy
Chim was filed on May 6, 2003. The complaint alleged that Felicidad
Chan Sy, as custodian of all cash collections, had been depositing
amounts less than those appearing in the financial statements which
are in the defendants custody and that no deposits were made in the
corporations account from November 1, 2002 to January 31, 2003.
Based on the accountants report, Felicidad Chan Sy failed to account
for P67,117,230.30.
Now, petitioners aver that the CA erred in strictly applying the
requisites under Section 1, Rule 9 of the Interim Rules regarding the
creation of a management committee. The petitioners posit that the
word and in Section 1(1), Rule 9 should be interpreted as or, since a
literal interpretation of the provision would frustrate the plain
intention of the Rule. They point out that the appellate courts strict
interpretation of the rule is contrary to the spirit of Presidential Decree

160

No. 902-A. They further assert that the RTC is empowered to act and
put a stop to misappropriation of a corporations funds and thus
prevent business operations from being paralyzed. According to the
petitioners, for the Court to idly wait and watch as assets of the
corporation are plundered until the business is paralyzed, would
render inutile Section 1, Rule 9 of the Interim Rules.
Issue:
W/N the RTC committed grave abuse of its discretion amounting to
excess or lack of jurisdiction in creating a management committee
Ruling:
Section 1, Rule 9 of the Interim Rules provides:

SECTION 1. Creation of a management committee. As an

incident to any of the cases filed under these Rules or the
Interim Rules on Corporate Rehabilitation, a party may
apply for the appointment of a management committee for
the corporation, partnership or association, when there is
imminent danger of:
(1)

Dissipation, loss, wastage or destruction of assets or other

properties; and

(2)

Paralyzation of its business operations which may be prejudicial

to the interest of the minority stockholders, parties-litigants or
the general public.

We do not agree with petitioners contention that the word and in

Section 1, Rule 9 of the Interim Rules should be interpreted to mean
or. While it is true that in Section 6(d) of Presidential Decree No.
902-A an applicant for the appointment of a management committee is
mandated to prove only one of the two requisites provided therein, the
Court, in Jacinto v. First Womens Credit Corporation ruled that the
two requisites should be present before a management committee may
be created and a receiver appointed by the RTC:
A reading of the aforecited legal provision reveals that for a
minority stockholder to obtain the appointment of an
interim management committee, he must do more than
merely make a prima facie showing of a denial of his right to
share in the concerns of the corporation; he must show that
the corporate property is in danger of being wasted and
destroyed; that the business of the corporation is being
diverted from the purpose for which it has been organized;
and that there is serious paralyzation of operations all to his
detriment.
The rationale for the need to establish the confluence of the two (2)
requisites under Section 1, Rule 9 by an applicant for the appointment
of a management committee is primarily based upon the fact that such
committee and receiver appointed by the court will immediately take
over the management of the corporation, partnership or association,
including such power as it may deem appropriate, and any of the
powers specified in Section 5 of the Rule.
Indeed, upon the appointment of a receiver, the duly elected/appointed
officers of the corporation are divested of the management of such
corporation in favor of the management committee/receiver. Such
transference of the corporations management will certainly have a
negative, if not crippling effect, on the operations/affairs of the
corporation not only with banks and other business institutions
including those abroad which it deals business with.
A wall of
uncertainty is erected; the short and long-term plans of the
management of the corporation are disrupted, if not derailed.
Thus, the creation and appointment of a management committee and a
receiver is an extraordinary and drastic remedy to be exercised with
care and caution; and only when the requirements under the Interim

Rules are shown. It is a drastic course for the benefit of the minority
stockholders, the parties-litigants or the general public are allowed
only under pressing circumstances and, when there is inadequacy,
ineffectual or exhaustion of legal or other remedies. The power to
intervene before the legal remedy is exhausted and misused when it is
exercised in aid of such a purpose. The power of the court to continue a
business of a corporation, partnership or association must be exercised
with the greatest care and caution. There should be a full consideration
of all the attendant facts, including the interest of all the parties
concerned.
Neither Presidential Decree No. 902-A and Republic Act No. 8799 nor
the Interim Rules of Procedure define imminent danger. Danger is
a general term, including peril, jeopardy, hazard and risk; as used in
the Rule, it refers to exposure or liability to injury. Imminent refers
to something which is threatening to happen at once, something close
at hand, something to happen upon the instant, close although not yet
happening, and on the verge of happening.
In the present case, petitioners failed to make a strong showing that
there was an imminent danger of dissipation, loss, wastage or
destruction of assets or other properties of respondent corporation
and paralysis of its business operations which may be prejudicial to
the interest of the parties-litigants, petitioners, or the general public.
The RTC thus committed grave abuse of its discretion amounting to
excess of jurisdiction in creating a management committee and the
subsequent appointment of a comptroller.
The bone of contention between the parties is whether there was a
shortage or unaccounted funds of the corporation, including
P67,117,230.30 allegedly incurred from 1993 (when petitioner Sy Chim
assumed office as President, Felicidad Chan Sy as Assistant Treasurer,
Sy Tiong Shiou as General Manager, and Juanita Tan Sy as Corporate
Treasurer); and who should be held accountable therefor. Petitioners
blame Sy Tiong Shiou and Juanita Tan Sy, while the latter pin liability
on petitioners based on the financial report of the Banaria Banaria and
Company and the claim of Juanita Tan Sy. However, these issues of
fact have yet to be determined by the trial court after due proceedings.
Petitioners failed to adduce a shred of evidence during the hearing of
their motion to prove their claim that there was imminent danger of
dissipation, loss, wastage or destruction of the assets or other
properties of respondent ever since Sy Tiong Shiou became president
and Juanita Tan Sy continued discharging her duties as corporate
treasurer; nor is there proof that there was imminent danger of
paralyzing the business operations of the corporation.
We have reviewed the records and find that, contrary to the findings of
the RTC, there is no imminent danger of dissipation or total loss of the
assets, funds, properties and records of respondent corporation, or
paralysis of business operations. In fact, records show that there has
been no slack in the business operations of respondent corporation.
Petitioners were divested of their corporate positions, and thus
stockholdings in the corporation were reduced. Petitioners claim that
Sy Tiong Shiou and Juanita Tan Sy (third-party defendants below) and
their children unlawfully ousted them from their positions and reduced
their shareholdings in the corporation. They posit that the formers
claim that they (petitioners) misappropriated the funds and assets of
respondent was designed to justify the unlawful ouster of petitioners
from the management of respondent corporation. Such claims,
however, have yet to be proven.
While the allegation that Sy Tiong Shiou and Juanita Tan Sy abused
their positions and mismanaged the affairs of respondent corporation
is a distinct possibility, petitioners failed to adduce proof thereon.
Mere possibility without proof of abusing corporate positions and
dissipation of assets and properties of the corporation is not a valid
ground for the appointment of a management committee/receiver.
We agree that past conduct and condition of the corporation may be
considered in determining the present situation and what the future
will be. However, a management committee or receiver will not be

161

appointed merely because of things done or attempted at a past time

when the present situation and the prospects for the future
are not such as to warrant taking the control of the property
out of the hands of its owners. The circumstances to justify the
appointment of a management committee/ receiver must be
extraordinary and something more must be shown than past
misconduct and a mere apprehension based thereon of future
wrongdoing. To repeat, in the absence of a strong showing of an
imminent danger of dissipation, loss, wastage or destruction of assets
or other properties of a corporation and paralysis of its business
operations, the mere apprehension of future misconduct based upon
prior mismanagement will not authorize the appointment of a
management committee/receiver.
Yujuico Vs. Quiambao (513 S 243)
Facts:
Strategic Alliance Development Corporation (STRADEC) is a domestic
corporation engaged in the business of providing financial and
investment advisory services and investing in projects through
consortium or joint venture information. On July 27, 1998, the
Securities and Exchange Commission (SEC) approved the amendment
of STRADECs Articles of Incorporation authorizing the change of
its principal office from Pasig City to Bayambang, Pangasinan.
On March 1, 2004, STRADEC held its annual stockholders meeting in
its Pasig City office as indicated in the notices sent to the stockholders.
At the said meeting, the following were elected members of the Board
of Directors: Alderito Z. Yujuico, Bonifacio C. Sumbilla, Dolney S.
Sumbilla (petitioners herein), Cesar T. Quiambao, Jose M. Magno
III and Ma. Christina Ferreros (respondents herein). Petitioners
Alderito Yujuico was elected Chairman and President, while Bonifacio
Sumbilla was elected Treasurer.
All of them then discharged the
duties of their office. After five (5) months, or on August 16, 2004,
respondents filed a Complaint against STRADEC (represented by
herein petitioners as members of its Board of Directors).
The
complaint prays that: (1) the March 1, 2004 election be nullified on the
ground of improper venue, pursuant to Section 51 of the
Corporation Code; (2) all ensuing transactions conducted by the
elected directors be likewise nullified; and (3) a special stockholders
meeting be held anew.

An intra-corporate controversy is one which pertains to any of the

following relationships: (1) between the corporation, partnership or
association and the public; (2) between the corporation, partnership or
association and the State in so far as its franchise, permit or license to
operate is concerned; (3) between the corporation, partnership or
association and its stockholders, partners, members or officers; and (4)
among the stockholders, partners or associates themselves.
There is thus no dispute that respondents complaint involves an intracorporate controversy, the contending parties being stockholders
and officers of a corporation.
Upon the enactment of R.A. No. 8799, otherwise known as The
Securities Regulation Code which took effect on August 8, 2000, the
jurisdiction of the SEC over intra-corporate controversies and other
cases enumerated in Section 5 of P.D. No. 902-A has been
transferred to the courts of general jurisdiction, or the appropriate
RTC.
Pursuant to R.A. No. 8799, the Court issued a Resolution dated
November 21, 2000 in A.M. No. 00-11-03-SC designating certain
branches of the RTC to try and decide cases enumerated in Section 5 of
P.D. No. 902-A. Branch 48 of RTC, Urdaneta City, the court a quo, is
among those designated as a Special Commercial Court. On March 13,
2001, the Court approved the Interim Rules of Procedure Governing
Intra-Corporate Controversies under R.A. No. 8799 which took effect
on April 1, 2001.
Clearly, the RTC has the power to hear and decide the intra-corporate
controversy of the parties herein. Concomitant to said power is
the authority to issue orders necessary or incidental to the
carrying out of the powers expressly granted to it. Thus, the
RTC may, in appropriate cases, order the holding of a special
meeting of stockholders or members of a corporation involving an
intra-corporate dispute under its supervision.
One of the reliefs sought by respondents in the complaint is the
nullification of the election of the Board of Directors and corporate
officers held during the March 1, 2004 annual stockholders meeting on
the ground of improper venue, in violation of the Corporation Code.
Hence, the action involves an election contest, falling squarely under
the Interim Rules of Procedure Governing Intra-Corporate
Controversies under R.A. No. 8799. Sections 1 and 2, Rule 6 of the
Interim Rules provide:

As the controversy involves an intra-corporate dispute, the trial court,

issued an Order transferring said Civil Case to RTC, Branch 48,
Urdaneta City, being a designated Special Commercial Court.
On November 2, 2004, petitioners filed their Answer with
Counterclaim in Civil (SEC) Case No. U-14.
They prayed for the
dismissal of the complaint on the following grounds, among others: (a)
the complaint does not state a cause of action; (b) the action is
barred by prescription for it was filed beyond the 15-day
prescriptive period provided by Section 2, Rule 6 of the Interim Rules
and Procedure Governing Intra-Corporate Controversies under
Republic Act (R.A.) No. 8799; (c) respondents prayer that a special
stockholders meeting be held in Bayambang, Pangasinan is
premature pending the establishment of a principal office of
STRADEC in said municipality; and (d) respondents waived their
right to object to the venue as they attended and participated in
the said March 1, 2004 meeting and election without any protest.
Petitioners likewise opposed the application for a writ of preliminary
injunction as respondents have no right that was violated, hence, are
not entitled to be protected by law. They further prayed for damages
by way of counterclaim.
Issue:
W/N only the SEC, not the RTC, has jurisdiction to order the holding of
a special stockholders meeting involving an intra-corporate
controversy and W/N the action has prescribed
Ruling:

SEC. 1. Cases covered. The provisions of this

rule shall apply to election contests in stock and
non-stock corporations.
SEC. 2. Definition. An election contest refers
to any controversy or dispute involving title
or claim to any elective office in a stock or nonstock corporation, the validation of proxies, the
manner and validity of elections, and the
qualifications of candidates, including the
proclamation of winners, to the office of director,
trustee or other officer directly elected by the
stockholders in a close corporation or by members
of a non-stock corporation where the articles of
incorporation
or
by-laws
so
provide.
(Underscoring supplied)
As pointed out by petitioners in their answer with counterclaim, under
Section 3, Rule 6 of the Interim Rules of Procedure Governing IntraCorporate Controversies under R.A. No. 8799, an election contest must
be filed within 15 days from the date of the election. It was only on
August 16, 2004 that respondents instituted an action questioning the
validity of the March 1, 2004 stockholders election, clearly beyond the
15-day prescriptive period.
Vesagas Vs. CA (371 S 508)
Facts:

162

The respondent spouses Delfino and Helenda Raniel are members in

good standing of the Luz Villaga Tennis Clud, Inc. (club). They alleged
that petitioner Teodoro B. Vesagas, who claims to be the club's duly
elected president, in conspiracy with petitioner Wilfred D. Asis, who, in
turn, claims to be its duly elected vice-president and legal counsel,
summarily stripped them of their lawful membership, without due
process of law. Thereafter, respondent spouses filed a Complaint with
the Securities and Exchange Commission (SEC) on March 26, 1997
against the petitioners. In this case, respondents asked the
Commission to declare as illegal their expulsion from the club as it was
allegedly done in utter disregard of the provisions of its by-laws as well
as the requirements of due process. They likewise sought the
annulment of the amendments to the by-laws made on December 8,
1996, changing the annual meeting of the club from the last Sunday of
January to November and increasing the number of trustees from nine
to fifteen. Finally, they prayed for the issuance of a Temporary
Restraining Order and Writ of Preliminary Injunction. The application
for TRO was denied by SEC Hearing Officer Soller in an Order dated
April 29, 1997.
The petioners claim in gratia argumenti that while the club may have
been considered a corporation during a brief spell, still, at the time of
the institution of this case with the SEC, the club was already dissolved
by virtue of a Board resolution.

x x x b) Controversies arising out of intra-corporate or

partnership relations, between and among stockholders, members
or associates; between any or all of them and the corporation,
partnership or association of which they are the stockholders, members
or associates, respectively; and between such corporation, partnership
or association and the state insofar as it concerns their individual
franchise or right to exist as such entity;
The enactment of R.A. 8799, otherwise known as the Securities
Regulation Code, however, transferred the jurisdiction to resolve intracorporate controversies to courts of general jurisdiction or the
appropriate Regional Trial Courts, thus:
"5.2. The Commission's jurisdiction over all cases
enumerated under Section 5 of Presidential Decree No. 902A is hereby transferred to the Court of general jurisdiction or
the appropriate Regional Trial Court: Provided, that the
Supreme Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction over these
cases. The Commission shall retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code.
The Commission shall retain jurisdiction over pending suspension of
payments/ rehabilitation cases filed as of 30 June 2000 until finally
disposed."

Issue:
W/N the dispute between the respondents and petitioners is a
corporate matter within the exclusive competence of the SEC to decide
Ruling:
In order that the commission can take cognizance of a case, the
controversy must pertain to any of the following relationship: a)
between the corporation, partnership or association and its
stockholders, partners, members, or officers; c) between the
corporation, partnership, or association and the state as far as its
franchise, permit or license to operate is concerned; and d) among the
stockholders, partners or associates themselves. The fact that the
parties involved in the controversy are all stockholders or that the
parties involved are the stockholders and the corporation, does not
necessarily place the dispute within the loop of jurisdiction of the SEC.
Jurisdiction should be determined by considering not only the status or
relationship of the parties but also the nature of the question that is the
subject of their controversy.
We rule that the present dispute is intra-corporate in character. In the
first place, the parties here involved are officers and members of the
club. Respondents claim to be members of good standing of the club
until they were purportedly stripped of their membership in illegal
fashion. Petitioners, on the other hand, are its President and VicePresident, respectively. More significantly, the present conflict relates
to, and in fact arose from, this relation between the parties. The subject
of the complaint, namely, the legality of the expulsion from
membership of the respondents and the validity of the amendments in
the club's by-laws are, furthermore, within the Commission's
jurisdiction.

On August 22, 2000, we issued a resolution, in A.M. No. 00-8-10-SC,

wherein we "DIRECT(ed) the Court Administrator and the Securities
and Exchange Commission to cause the actual transfer of the records of
such cases and all other SEC cases affected by R.A. No. 8799 to the
appropriate Regional trial Courts x x x." We also issued another
resolution designating certain branches of the Regional Trial Court to
try and decide cases formerly cognizable by the SEC. Consequently, the
case at bar should now be referred to the appropriate Regional Trial
Court.

CORPORATE REHABILITATION

Banco De Oro Vs. JAPRL (551 S 342)

Facts:
After evaluating the financial statements of respondent JAPRL
Development Corporation (JAPRL) for fiscal years 1998, 1999 and
2000, petitioner Banco de Oro-EPCI, Inc. extended credit facilities to it
amounting to P230,000,000 on March 28, 2003. Respondents Rapid
Forming Corporation (RFC) and Jose U. Arollado acted as JAPRLs
sureties.

Well to underscore is the date when the original complaint was filed at
the SEC, which was March 26, 1997. On that date, the SEC still
exercised quasi-judicial functions over this type of suits. It is axiomatic
that jurisdiction is conferred by the Constitution and by the laws in
force at the time of the commencement of the action. In particular, the
Commission was thereupon empowered, under Sec. 5 of P.D. 902-A, to
hear and decide cases involving intra-corporate disputes, thus:

Despite its seemingly strong financial position, JAPRL defaulted in the

payment of four trust receipts soon after the approval of its loan.
Petitioner later learned from MRM Management, JAPRLs financial
adviser, that JAPRL had altered and falsified its financial statements. It
allegedly bloated its sales revenues to post a big income from
operations for the concerned fiscal years to project itself as a viable
investment. The information alarmed petitioner. Citing relevant
provisions of the Trust Receipt Agreement, it demanded immediate
payment of JAPRLs outstanding obligations amounting to
P194,493,388.98.

"SEC. 5. In addition to the regulatory and adjudicative functions of the

Securities and Exchange Commission over corporations, partnerships
and other forms of association registered with it as expressly granted
under existing laws and decrees, it shall have original and
exclusive jurisdiction to hear and decide cases involving:

On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition
for rehabilitation in the Regional Trial Court (RTC) of Quezon City,
Branch 90 (Quezon City RTC). It disclosed that it had been
experiencing a decline in sales for the three preceding years and a
staggering loss in 2002.

163

Because the petition was sufficient in form and substance, a stay order
was issued on September 28, 2003. However, the proposed
rehabilitation plan for JAPRL and RFC was eventually rejected by the
Quezon City RTC in an order dated May 9, 2005.
Because JAPRL ignored its demand for payment, petitioner filed a
complaint for sum of money with an application for the issuance of a
writ of preliminary attachment against respondents in the RTC of
Makati City, Branch 145 (Makati RTC) on August 21, 2003. Petitioner
essentially asserted that JAPRL was guilty of fraud because it (JAPRL)
altered and falsified its financial statements.
On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a petition
for rehabilitation in the RTC of Calamba, Laguna, Branch 34 (Calamba
RTC). Finding JAPRLs petition sufficient in form and in substance, the
Calamba RTC issued a stay order on March 13, 2006.
In view of the said order, respondents hastily moved to suspend the
proceedings in Civil Case No. 03-991 pending in the Makati RTC.
On July 7, 2006, the Makati RTC granted the motion with regard to
JAPRL and RFC but ordered Arollado to file an answer. It ruled that,
because he was jointly and solidarily liable with JAPRL and RFC, the
proceedings against him should continue. Respondents moved for
reconsideration but it was denied.
Issue:
W/N JAPRLs petition for corporate rehabilitation may prosper
Ruling:
We withhold judgment for the moment on the July 7, 2006 order of the
Makati RTC suspending the proceedings in Civil Case No. 03-991
insofar as JAPRL and RFC are concerned.
Under the Interim Rules of Procedure on Corporate Rehabilitation, a
stay order defers all actions or claims against the corporation seeking
rehabilitation from the date of its issuance until the dismissal of the
petition or termination of the rehabilitation proceedings.

The protective remedy of rehabilitation was never intended to be a

refuge of a debtor guilty of fraud.
Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03991 against the three respondents guided by Section 40 of the General
Banking Law.
Under this provision, banks have the right to annul any credit
accommodation or loan, and demand the immediate payment thereof,
from borrowers proven to be guilty of fraud. Petitioner would then be
entitled to the immediate payment of P194,493,388.98 and other
appropriate damages.
Finally, considering that respondents failed to pay the four trust
receipts, the Makati City Prosecutor should investigate whether or not
there is probable cause to indict respondents for violation of Section 13
of the Trust Receipts Law.
Pryce Corp Vs. CA (543 S 657)
Facts:
Pryce Corporation, petitioner, was incorporated under Meippine laws
on September 7, 1989. Its primary purpose was to develop real estate
in Mindanao.
It engaged in the development of memorial parks,
operated a major hotel in Cagayan de Oro City, and produced
industrial gases.
The 1997 Asian financial crisis, however, badly affected petitioners
operations, resulting in heavy losses. It could not meet its obligations
as they became due. It incurred losses of P943.09 million in 2001,
P479.05 million in 2002, and P125.86 million in 2003.
Thus, on July 12, 2004, petitioner filed a petition for rehabilitation.
Petitioner prayed for the appointment of a Rehabilitation Receiver
from among the nominees named therein and the staying of the
enforcement of all claims, monetary or otherwise against it. Petitioner
also prayed that after due hearing, its proposed Rehabilitation Plan be
approved.

The Makati RTC may proceed to hear Civil Case No. 03-991 only
against Arollado if there is no ground to go after JAPRL and RFC (as
will later be discussed). A creditor can demand payment from the
surety solidarily liable with the corporation seeking rehabilitation.

On July 13, 2004, the RTC issued a Stay Order directing that: all
claims against petitioner be deferred; the initial hearing of the petition
for rehabilitation be set on September 1, 2004; and all creditors and
interested parties should file their respective comments/oppositions to
the petition. In the same Order, the RTC then appointed Gener T.
Mendoza as Rehabilitation Receiver.

Respondents abused procedural technicalities (albeit unsuccessfully)

for the sole purpose of preventing, or at least delaying, the collection of
their legitimate obligations. Their reprehensible scheme impeded the
speedy dispensation of justice. More importantly, however, considering
the amount involved, respondents utterly disregarded the significance
of a stable and efficient banking system to the national economy.

The petition was opposed by petitioners bank-creditors. The Bank of

the Philippine Islands claimed that the petition and the proposed
Rehabilitation Plan are coercive and violative of the contract. The
Land Bank of the Philippines contended, among others, that the
petition is unacceptable because of the unrealistic valuation of the
properties subject of the dacion en pago.

Protecting the integrity of the banking system has become, by large, the
responsibility of banks. The role of the public, particularly individual
borrowers has not been emphasized. Nevertheless, we are not unaware
of the rampant and unscrupulous practice of obtaining loans without
intending to pay the same.

The China Banking Corporation, respondent herein, alleged in its

opposition that petitioner is solvent and that it filed the petition to
force its creditors to accept dacion payments.
In effect, petitioner
passed on to the creditors the burden of marketing and financing
unwanted memorial lots, while exempting it (petitioner) from paying
interests and penalties.

In this case, petitioner alleged that JAPRL fraudulently altered and

falsified its financial statements in order to obtain its credit facilities.
Considering the amount of petitioners exposure in JAPRL, justice and
fairness dictate that the Makati RTC to hear whether or not
respondents indeed committed fraud in securing the credit
accommodation.
A finding of fraud will change the whole picture. In this event,
petitioner can use the finding of fraud to move for the dismissal of the
rehabilitation case in the Calamba RTC.

On September 13, 2004, the RTC give due course to the petition.
Upon petition for review, the Court of Appeals rendered its Decision
granting respondents petition and reversing the assailed Orders of the
RTC.
Issue:

164

W/N the Court of Appeals erred in denying the petition for

rehabilitation of petitioner Pryce Corporation

Hence, a remand of the records of this case to the RTC is imperative.

Uniwide Holdings Vs. Jandecs Transpo (541 S 158)

Ruling:
Facts:
Section 6 of the Interim Rules of Procedure on Corporate
Rehabilitation provides:
SEC. 6. Stay Order. If the court finds the petition to be
sufficient in form and substance, it shall, not later than five (5)
days from the filing of the petition, issue an Order (a) appointing a
Rehabilitation Receiver and fixing his bond; (b) staying enforcement of
all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its
guarantors and sureties not solidarily liable with the debtor; (c)
prohibiting the debtor from selling, encumbering, transferring, or
disposing in any manner any of its properties except in the ordinary
course of business; (d) prohibiting the debtor from making any
payment of its liabilities outstanding as of the date of filing of the
petition; (e) prohibiting the debtors suppliers of goods or services from
withholding supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services and
goods supplied after the issuance of the stay order; (f) directing the
payment in full of all administrative expenses incurred after the
issuance of the stay order; (g) fixing the initial hearing on the
petition not earlier than forty five (45) days but not later
than sixty (60) days from the filing thereof; (h) directing the
petitioner to publish the Order in a newspaper of general circulation in
the Philippines once a week for two (2) consecutive weeks; (i) directing
all creditors and all interested parties (including the Securities and
Exchange Commission) to file and serve on the debtor a verified
comment on or opposition to the petition, with supporting
affidavits and documents, not later than ten (10) days before the date
of the initial hearing and putting them on notice that their failure to do
so will bar them from participating in the proceedings; and (j)
directing the creditors and interested parties to secure from
the court copies of the petition and its annexes within such time
as to enable themselves to file their comment on or opposition to the
petition and to prepare for the initial hearing of the petition.
Section 6 provides that the petition must be sufficient in form and
substance.
In Rizal Commercial Banking Corporation v.
Intermediate Appellate Court, this Court held that under Section 6(c)
of P.D. No. 902-A, receivers may be appointed whenever: (1)
necessary in order to preserve the rights of the partieslitigants; and/or (2) protect the interest of the investing public and
creditors. The situations contemplated in these instances are
serious in nature. There must exist a clear and imminent
danger of losing the corporate assets if a receiver is not
appointed. Absent such danger, such as where there are sufficient
assets to sustain the rehabilitation plan and both investors and
creditors are amply protected, the need for appointing a receiver does
not exist. Simply put, the purpose of the law in directing the
appointment of receivers is to protect the interests of the
corporate investors and creditors.
We agree with the Court of Appeals that the petition for rehabilitation
does not allege that there is a clear and imminent danger that
petitioner will lose its corporate assets if a receiver is not appointed.
In other words, the serious situation test laid down by Rizal
Commercial Banking Corporation has not been met or at least
substantially complied with. Significantly, the Stay Order dated July
13, 2004 issued by the RTC does not state any serious situation
affecting petitioners corporate assets. We observe that in appointing
Mr. Gener T. Mendoza as Rehabilitation Receiver, the only basis of
the lower court was its finding that the petition is sufficient
in form and substance. However, it did not specify any reason or
ground to sustain such finding. Clearly, the petition failed to
comply with the serious situation test.
In determining whether petitioners financial situation is serious and
whether there is a clear and imminent danger that it will lose its
corporate assets, the RTC, acting as commercial court, should conduct
a hearing wherein both parties can present their respective evidence.

In January 1997, petitioner and respondent Jandecs Transportation

Co., Inc. entered into a contract of Assignment of Leasehold Rights
under which the latter was to operate food and snack stalls at
petitioner's Uniwide Coastal Mall in Paraaque City. The contract was
for a period of 18 years, commencing October 1, 1997 up to September
30, 2015, for a consideration of P2,460,630.15. The parties also agreed
that respondent's stalls would be located near the movie houses and
would be the only stalls to sell food and beverages in that area.
On February 7, 1997, respondent paid the contract price in full.
Petitioner, however, failed to turn over the stall units on October 1,
1997 as agreed upon. Respondent sought the rescission of the
contract and the refund of its payment. Petitioner refused both.
On July 23, 1999, respondent filed a complaint in the Regional Trial
Court (RTC), Branch 257 of Paraaque City, for breach of contract,
rescission of contract, damages and issuance of a writ of preliminary
attachment. In the complaint, respondent claimed that, despite full
payment, petitioner (1) failed to deliver the stall units on the stipulated
date; (2) opened its own food and snack stalls near the cinema area and
(3) refused to accommodate its request for the rescission of the
contract and the refund of payment.
In its answer, petitioner admitted respondent's full payment of the
contract price but denied that it was bound to deliver the stalls on
October 1, 1997. According to petitioner, the contract was clear that it
was to turn over the units only upon completion of the mall. It likewise
claimed that, under the contract, it had the option to offer substitute
stalls to respondent which the latter, however, rejected.
After trial, the RTC ruled in favor of respondent.
Aggrieved, petitioner appealed the decision to the CA. Except for the
award of attorney's fees which it found to be bereft of any basis the CA
upheld the RTC decision.
Petitioner filed a partial motion for reconsideration (MR) of the CA
decision but it was denied as well. Hence, it filed the petition for review
on certiorari which we denied on August 17, 2005. Thereafter,
petitioner filed the Motion to Suspend Proceedings with Motion for
Reconsideration.
In its motion to suspend the proceedings, petitioner prays that the
action in this Court be held in abeyance in view of the SEC's order of
suspension of payments and approval of its rehabilitation plan. In its
MR, on the other hand, it insists that we should find (1) the rescission
decreed by the lower courts erroneous and (2) the order for refund of
the P2,460,630.15 (with legal interest) to respondent unwarranted.
Issue:
W/N the motion to suspend the proceedings is warranted in the case at
bar
Ruling:
The relevant law dealing with the suspension of payments for money
claims against corporations under rehabilitation is Presidential Decree
(PD) No. 902-A, as amended. The term claim under said law refers
to debts or demands of pecuniary nature. It is the assertion of rights for
the payment of money. The raison d' tre behind the suspension of
claims pending rehabilitation was explained in the case of BF Homes,
Inc. v. CA:

165

...the reason for suspending actions for claims against the

corporation should not be difficult to discover. It is not really to enable
the management committee or the rehabilitation receiver to substitute
the [corporation] in any pending action against it before any court,
tribunal, board or body. Obviously, the real justification is to enable the
management committee or the rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extra-judicial
interference that might unduly hinder or prevent the rescue of the
debtor [corporation]. To allow such other action to continue would
only add to the burden of the management committee or rehabilitation
receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed
toward its restructuring and rehabilitation.
In Philippine Air Lines [(PAL)], Incorporated v. Zamora, we said that
all actions for claims against a corporation pending before any court,
tribunal or board shall ipso jure be suspended in whatever stage such
actions may be found upon the appointment by the SEC of a
management committee or a rehabilitation receiver.
However, we would still find no cogent reason to reverse our August
17, 2005 resolution denying petitioner's appeal even if the proceedings
here were to be suspended in the meantime. And such suspension
would not at all affect our position that the MR should be denied as
well.
PAL Vs. PALEA (525 S 29)

On appeal to the NLRC, the assailed decision of the Labor Arbiter was
reversed.
On 30 April 1999, the Court of Appeals promulgated its Decision
dismissing the petition filed by PAL. It affirmed the 28 January 1998
NLRC Resolution.
Hence, this Petition for Review on Certiorari filed under Rule 45 of the
Rules of Court, as amended.
Te Securities and Exchange Commission (SEC) had mandated the
rehabilitation of PAL. On 17 May 1999, the SEC approved the
Amended and Restated Rehabilitation Plan of PAL and appointed a
permanent rehabilitation receiver for the latter. To date, PAL is still
undergoing rehabilitation.
Issue:
W/N the suspension of claims pending rehabilitation proceedings is
proper
Ruling:
The pertinent law concerning the suspension of actions for claims
against corporations is Presidential Decree No. 902-A, as amended.
Particularly, Section 5(d) provides:

Facts:
This case arose from a labor Complaint, filed by herein PALEA against
herein PAL and one Mary Anne del Rosario, Director of Personnel,
PAL, on 1 March 1989, charging them with unfair labor practice for the
non-payment of 13th month pay of employees who had not been
regularized as of the 30 th of April 1988, as allegedly stipulated in the
Collective Bargaining Agreement (CBA) entered into by herein parties.

SECTION 5.
In
addition
to
the
regulatory
adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered
with it as expressly granted under existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide cases
involving:
xxx

On 6 February 1987, herein parties, PAL and PALEA, the collective

bargaining agent of the rank and file employees of PAL, entered into a
CBA that was to cover the period of 1986 1989. Part of said
agreement required PAL to pay its rank and file employees the 13th
Month Pay (Mid-year Bonus) and Christmas Bonus.
PALEA assailed the implementation of the foregoing guideline. It is of
the view that all employees of PAL, whether regular or non-regular,
should be paid their 13th month pay. In response to the above, PAL
informed PALEA that rank and file employees who were regularized
after 30 April 1988 were not entitled to the 13 th month pay as they were
already given the Christmas bonus in December of 1988, per the
Implementing Rules of Presidential Decree No. 851.
PALEA, disagreeing with PAL, filed a Complaint for unfair labor
practice before the NLRC on 1 March 1989. The union argued that the
cut-off period for regularization should not be used as the parameter
for granting [the] 13th month pay considering that the law does not
distinguish the status of employment but (sic) the law covers all
employees.
In its Position Paper submitted before the labor arbiter, PAL countered
that those rank and file employees who were not regularized by 30
April of a particular year are, in principle, not denied their 13 th month
pay, considering they receive said mandatory bonus in the form of the
Christmas Bonus; that the Christmas Bonus given to all its employees
is deemed a compliance with Presidential Decree No. 851 and the
latters implementing rules; and that the foregoing has been the
practice and has been formally adopted in the previous CBAs as early
as 1970.
On 12 March 1990, the Labor Arbiter rendered his decision dismissing
the complaint for lack of merit.

d)
Petitions of corporations, partnerships or
associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or
association possesses property to cover all its debts but
foresees the impossibility of meeting them when they
respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its
liabilities, but is under the [management of a rehabilitation
receiver or] management committee created pursuant to this
Decree.
Likewise, Section 6(c), to wit:
SECTION 6.
In order to effectively exercise such jurisdiction,
the Commission shall possess the following:
xxxx
c)
To appoint one or more receivers of the property,
real or personal, which is the subject of the action pending
before the Commission in accordance with the pertinent
provisions of the Rules of Court in such other cases
whenever necessary in order to preserve the rights of the
parties-litigants and/or protect the interest of the investing
public and creditors: x x x Provided, finally, That upon
appointment of a management committee, the rehabilitation
receiver, board or body, pursuant to this Decree, all actions
for claims against corporations, partnerships or
associations under management or receivership pending
before any court, tribunal, board or body shall be suspended
accordingly. (Emphasis supplied.)

166

The term claim, as contemplated in Sec. 6(c) of Presidential Decree

No. 902-A, refers to debts or demands of a pecuniary nature. It
means the assertion of a right to have money paid. In the case at bar,
in the event that the present petition is found to be without merit, PAL
will be obliged to satisfy the pecuniary claims of PALEA the payment
of the 13th Month Pay for the particular year to all rank and file
employees whether or not regularized by 30 April 1988.
In Philippine Airlines, Inc. v. National Labor Relations Commission,
the Court ruled that:
In Rubberworld (Phils.), Inc. v. NLRC, we held that workers
claims before the NLRC and labor arbiters are included
among the actions suspended upon the placing under
receivership of the employer-corporations. Although strictly
speaking, the ruling in Rubberworld dealt with actions for
claims pending before the NLRC and labor arbiters, we find
that the rationale for the automatic suspension therein set
out would apply to the instant case where the employees
claim was elevated on certiorari before this Court, x x x.
xxxx
The Court holds that rendition of judgment while petitioner
is under a state of receivership could render violence to the
rationale for suspension of payments in Section 6 (c) of P.D.
902-A, if the judgment would result in the granting of
private respondents claim to separation pay, thus defeating
the basic purpose behind Section 6 (c) of P.D. 902-A which is
to prevent dissipation of the distressed companys resources.
(Emphasis supplied.)
In another PAL case, specifically, Philippine Airlines, Inc. v. Court of
Appeals, this Court again resolved to grant PALs Motion for
Suspension of Proceedings by reason of the SEC Orders dated 23 June
1998 and 1 July 1998, appointing an Interim Rehabilitation Receiver
and enjoining the suspension of all claims for payment against PAL,
respectively. Therein it was declared that this Court is not prepared to
depart from the well-established doctrines essentially maintaining
that all actions for claims against a corporation pending before any
court, tribunal or board shall ipso jure be suspended in whatever stage
such actions may be found upon the appointment by the SEC of a
management committee or a rehabilitation receiver.
And, most recently, is the case of Philippine Airlines v. Zamora, we
held in simple terms that:
Otherwise stated, no other action may be taken in, including
the rendition of judgment during the state of suspension
what are automatically stayed or suspended are the
proceedings of an action or suit and not just the payment of
claims during the execution stage after the case had become
final and executory.(Citation omitted)
The suspension of action for claims against a corporation
under rehabilitation receiver or management committee
embraces all phases of the suit, be it before the trial court or
any tribunal or before this Court. Furthermore, actions that
are suspended cover all claims against a distressed
corporation whether for damages founded on a breach of
contract of carriage, labor cases, collection suits or any other
claims of a pecuniary nature.

Cordova Vs. Reyes Daway Law Offices (526 S 300)

Facts:
Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from
Philippine Underwriters Finance Corporation (Philfinance) certificates
of stock of Celebrity Sports Plaza Incorporated (CSPI) and shares of
stock of various other corporations. He was issued a confirmation of
sale. The CSPI shares were physically delivered by Philfinance to the
former Filmanbank and Philtrust Bank, as custodian banks, to hold
these shares in behalf of and for the benefit of petitioner.
On June 18, 1981, Philfinance was placed under receivership by public
respondent Securities and Exchange Commission (SEC). Thereafter,
private respondents Reyes Daway Lim Bernardo Lindo Rosales Law
Offices and Atty. Wendell Coronel (private respondents) were
appointed as liquidators. Sometime in 1991, without the knowledge
and consent of petitioner and without authority from the SEC, private
respondents withdrew the CSPI shares from the custodian banks. On
May 27, 1996, they sold the shares to Northeast Corporation and
included the proceeds thereof in the funds of Philfinance. Petitioner
learned about the unauthorized sale of his shares only on September
10, 1996. He lodged a complaint with private respondents but the
latter ignored it prompting him to file, on May 6, 1997, a formal
complaint against private respondents in the receivership proceedings
with the SEC, for the return of the shares.
Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery
for Philfinances creditors and investors. On May 13, 1997, the
liquidators began the process of settling the claims against Philfinance,
from its assets.
On April 14, 1998, the SEC rendered judgment dismissing the petition.
However, it reconsidered this decision in a resolution dated September
24, 1999 and granted the claims of petitioner. It held that petitioner
was the owner of the CSPI shares by virtue of a confirmation of sale
(which was considered as a deed of assignment) issued to him by
Philfinance. But since the shares had already been sold and the
proceeds commingled with the other assets of Philfinance, petitioners
status was converted into that of an ordinary creditor for the value of
such shares. Thus, it ordered private respondents to pay petitioner the
amount of P5,062,500 representing 15% of the monetary value of his
CSPI shares plus interest at the legal rate from the time of their
unauthorized sale.
On October 27, 1999, the SEC issued an order clarifying its September
24, 1999 resolution. While it reiterated its earlier order to pay
petitioner the amount of P5,062,500, it deleted the award of legal
interest. It clarified that it never meant to award interest since this
would be unfair to the other claimants.
On appeal, the CA affirmed the SEC. It agreed that petitioner was
indeed the owner of the CSPI shares but the recovery of such shares
had become impossible. It also declared that the clarificatory order
merely harmonized the dispositive portion with the body of the
resolution. Petitioners motion for reconsideration was denied.
Hence this petition.
Issue:
W/N Cordova becomes an ordinary creditor of Philfinance

In actual fact, allowing such actions to proceed would only

increase the work-load of the management committee or the
rehabilitation receiver, whose precious time and effort would
be dissipated and wasted in defending suits against the
corporation, instead of being channeled toward restructuring
and rehabilitation.
All told, this Court is constrained to suspend the progress,
development and other proceedings in the present petition.

Ruling:
There is no dispute that petitioner was the owner of the CSPI shares.
However, private respondents, as liquidators of Philfinance, illegally
withdrew said certificates of stock without the knowledge and consent
of petitioner and authority of the SEC. After selling the CSPI shares,
private respondents added the proceeds of the sale to the assets of

167

Philfinance. Under these circumstances, did the petitioner become a

creditor of Philfinance? We rule in the affirmative.
However, Petitioner is seeking the return of his CSPI shares which, for
the present, is no longer possible, considering that the same had
already been sold by the respondents, the proceeds of which are
ADMITTEDLY commingled with the assets of PHILFINANCE. This
being the case, [petitioner] is now but a claimant for the value of those
shares. As a claimant, he shall be treated as an ordinary creditor in so
far as the value of those certificates is concerned.
The return of petitioners CSPI shares is well-nigh impossible, if not
already an utter impossibility, inasmuch as the certificates of stocks
have already been alienated or transferred in favor of Northeast
Corporation, as early as May 27, 1996, in consequence whereof the
proceeds of the sale have been transmuted into corporate assets of
Philfinance, under custodia legis, ready for distribution to its creditors
and/or investors. Case law holds that the assets of an institution under
receivership or liquidation shall be deemed in custodia legis in the
hands of the receiver or liquidator, and shall from the moment of such
receivership or liquidation, be exempt from any order, garnishment,
levy, attachment, or execution.
Concomitantly, petitioners filing of his claim over the subject CSPI
shares before the SEC in the liquidation proceedings bound him to the
terms and conditions thereof. He cannot demand any special treatment
[from] the liquidator, for this flies in the face of, and will contravene,
the Supreme Court dictum that when a corporation threatened by
bankruptcy is taken over by a receiver, all the creditors shall stand on
equal footing. Not one of them should be given preference by paying
one or some [of] them ahead of the others. This is precisely the
philosophy underlying the suspension of all pending claims against the
corporation under receivership. The rule of thumb is equality in
equity.
Thus, petitioner had become an ordinary creditor of Philfinance.
Petitioners right of action against Philfinance was a claim properly to
be litigated in the liquidation proceedings.
We note that there is an undisputed finding by the SEC and CA that
private respondents sold the subject shares without authority from the
SEC. Petitioner evidently has a cause of action against private
respondents for their bad faith and unauthorized acts, and the
resulting damage caused to him.
Landbank Vs. Ascot Holdings (537 S 396)
Facts:
Sometime in March 1992, after the Philippine Airlines (PAL) was
privatized, Land Bank purchased from the National Government some
75,000,000 PAL shares at P14.3925 per share or for a total
consideration of P1,079,437,485.01.
Meanwhile, respondents, together with the Philippine National Bank
(PNB), the Development Bank of the Philippines (DBP), the AFP
Retirement and Separation Benefits System (AFP-RSBS), all
stockholders of PAL, and several other parties, formed a consortium in
order to purchase 67% of PALs capital stocks which were then being
sold by public bidding. For this purpose, the aforesaid consortium
organized a holding company the PR Holdings Inc. (PR Holdings) to hold the PAL shares of stock.

Bank, PNB, DBP, GSIS, AFP-RSBS and the Republic of the Philippines,
praying that they be released from the obligation to buy the PAL shares
of petitioner and other defendants therein at P5.00 per share, as earlier
agreed upon under the Stockholders' Agreement, on ground of alleged
radical change in the conditions prevailing at the time the said
agreement was entered and the present.
Land Bank and the other defendants in Civil Case No. 02-843
contended that the events or circumstances cited by the respondents
were not valid grounds for the latter to be released from their
obligation under the doctrine of rebus sic stantibus.
The trial court rendered judgment in favor of the plaintiffs and against
the defendants, declaring plaintiffs released from the obligation to
comply with defendants' option to sell their shares in Philippine
Airlines, Inc.
On July 4, 2006, the trial court denied Land Bank's motion for
reconsideration. Therefrom, Land Bank decided to go to the CA on a
petition for review. For the purpose, it filed with the CA, on July 25,
2006, a motion for extension of time to file the intended petition
for review.
Unfortunately, the motion was denied by the CA.
On August 16, 2006, petitioner Land Bank filed a motion for
reconsideration of the above resolution urging that even though a
motion for reconsideration of the March 15, 2006 Judgment of the
trial court is not allowed under the Interim Rules of Procedure
Governing Intra-Corporate Controversies under R.A. No. 8799,
nonetheless it implored the appellate court to consider the filing
thereof as sufficient, in the interest of substantial justice, to suspend
the running of the reglementary period to appeal. Petitioner hastens to
add that the March 15, 2006 Judgment and the July 4, 2006 Order of
the trial court had created a dangerous precedent when said court
upheld respondents' contention that the occurrence of the fleet
expansion and re-equiptment of PAL, pilot strike, Asian economic
downturn, the devaluation of the peso and the purported reduced
demand for air travel have absolved them from their obligation to
comply with the Stockholders Agreement.
With its motion for reconsideration having been denied by the CA in its
equally challenged resolution of September 11, 2006, petitioner is now
with this Court via the present recourse, urging the Court to compel the
CA to approve its motion for extension of time to file petition for
review, and, ultimately, to give due course to its intended petition for
review.
Ruling:
It is beyond quibbling that the assailed Judgment in Civil Case No.
02-843 was issued by the RTC in the exercise of its special jurisdiction
over intra-corporate controversies under R.A. No. 8799. Civil Case No.
02-843 was, therefore, governed by the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing IntraCorporate Controversies under R.A. No. 8799, as well as A.M. No. 049-07-SC of this Court prescribing the mode of appeal from decisions of
the RTC in intra-corporate controversies.

As it were, Land Bank, with the Government Service Insurance System

(GSIS) and the National Government, owned 33% of the issued and
outstanding shares of stock of PAL, while respondents and other
stockholders of PR Holdings owned the other 67%.

Under Section 8(3), Rule 1 of the Interim Rules of Procedure Governing

Intra-Corporate Controversies Under R.A. No. 8799, motion for new
trial, or for reconsideration of judgment or order, or for re-opening of
trial are prohibited pleadings in said cases. Hence, the filing by
petitioner of a motion for reconsideration before the trial court did not
toll the reglementary period to appeal the judgment via a petition for
review under Rule 43 of the 1997 Rules of Civil Procedure, as amended.
As a consequence, the CA has no more jurisdiction to entertain the
petition for review which Land Bank intended to file before it, much
less to grant the motion for extension of time for the filing thereof.

On July 23, 2002, instead of honoring the Stockholders' Agreement,

respondents filed with the RTC of Makati a complaint against Land

The prohibited motion for reconsideration filed by the petitioner with

the trial court did not suspend the period to appeal the RTCs

168

Judgment of March 15, 2006. Consequently, that Judgment became

final and executory 15-days thereafter. When petitioner filed a motion
for extension to file a petition for review in the CA on July 25, 2006, or
one hundred twenty four (124) days after it received the RTC
Judgment, there was no more period to extend. Given these
undeniable facts, the CA cannot be faulted for denying petitioners
motion for extension. There is no abuse, much less grave abuse, of
discretion, to speak of.
Petitioner insists, however, that the CA committed grave abuse of
discretion in denying its motion for extension because the prohibited
pleading it filed in the trial court was still sufficient to suspend the
running of the reglementary period to appeal in the interest of
substantial justice. Unfortunately, there is a scarcity of law or
jurisprudence to support petitioners novel theory. It is obvious that a
prohibited pleading cannot toll the running of the period to appeal
since such pleading cannot be given any legal effect precisely because of
its being prohibited.
Procedural rules setting the period for perfecting an appeal or filing an
appellate petition are generally inviolable. It is doctrinally entrenched
that appeal is not a constitutional right but a mere statutory privilege.
Hence, parties who seek to avail of the privilege must comply with the
statutes or rules allowing it. The requirements for perfecting an appeal
within the reglamentary period specified in the law must, as a rule, be
strictly followed. Such requirements are considered indispensable
interdictions against needless delays, and are necessary for the orderly
discharge of the judicial business. For sure, the perfection of an appeal
in the manner and within the period set by law is not only mandatory,
but jurisdictional as well. Failure to perfect an appeal renders the
judgment appealed from final and executory.
We must stress that the bare invocation of the interest of substantial
justice is not a magic wand that will automatically compel this Court
to suspend procedural rules. Procedural rules are not to be belittled or
dismissed simply because their non-observance may have resulted in
prejudice to a party's substantive rights. Like all rules, they are
required to be followed except only for the most persuasive of reasons
when they may be relaxed to relieve a litigant of an injustice not
commensurate with the degree of his thoughtlessness in not complying
with the procedure prescribed. The Court reiterates that rules of
procedure, especially those prescribing the time within which certain
acts must be done, have oft been held as absolutely indispensable to
the prevention of needless delays and to the orderly and speedy
discharge of business. Indeed, in no uncertain terms, the Court held
that the said rules may be relaxed only in exceptionally meritorious
cases. This case is not one of those.
Petitioners claim that it supposedly stands to lose its substantial
investment in shares of stock amounting to P1,079,437,485.61 just
because it filed a motion for reconsideration, is unfounded. As we see
it, the so-called loss of substantial investment that petitioner
complains about is more imaginary than real. As it is, petitioners
shares in PAL have not been taken away from it; neither has petitioner
been deprived of any of its proprietary rights vis--vis the said shares
of stock. Petitioner continues to hold and own the shares in its name.
Respondents, who own the majority of the shares in PAL, have all the
more reason to keep the company afloat and thriving since they have
more to lose. Any benefit that respondents may derive from the
continued profitable operations of PAL will likewise benefit petitioner.
The Court may deign to veer away from the general rule only if, in its
assessment, the appeal on its face appears absolutely meritorious.
Indeed, the Court has, in a number of instances, relaxed procedural
rules in order to serve and achieve substantial justice. In the
circumstances obtaining in this case, however, the occasion does not
warrant the desired relaxation.
PAL Vs. Heirs of Zamora (538 S 456)
Facts:

Zamora was a cargo representative assigned at the International Cargo

Operations - Import Operations Division (ICO-IOD) of petitioner
Philippine Airlines, Inc.
On March 12, 1996, Zamora filed an action for illegal dismissal, unfair
labor practice, non-payment of wages, and damages.
On September 28, 1998, the Labor Arbiter dismissed the complaint for
lack of merit.
On July 26, 1999, the NLRC reversed the Labor Arbiters decision and
declared Zamoras transfer illegal. It ruled that there was no valid and
legal reason for the transfer other than Zamoras report of the
smuggling and pilferage activities.
On appeal, the Court of Appeals affirmed the decision of the NLRC.
Hence, this instant petition.
Issue:
W/N the Court of Appeals erred in ordering respondent to present his
monetary claim to petitioners rehabilitation receiver
Ruling:
In resolving the petition, the Court noted that petitioner had been
placed by the Securities and Exchange Commission (SEC) under a
Permanent Rehabilitation Receiver. Such being the case, a suspension
of all actions for claims against petitioner pending before any court,
tribunal or board was, ipso jure, in order. The Court likewise took note of
the fact that such suspension of actions was observed in some other cases
against petitioner.
We shall defer to these determinations. To reiterate, the suspension of
all actions for claims against a corporation embraces all phases of the
suit, be it before the trial court or any tribunal or before this Court. No
other action may be taken, including the rendition of judgment during
the state of suspension. It must be stressed that what are automatically
stayed or suspended are the proceedings of a suit and not just the
payment of claims during the execution stage after the case had
become final and executory. Once the process of rehabilitation,
however, is completed, this Court will proceed to complete the
proceedings on the suspended actions.
Furthermore, the actions which were suspended cover all claims
against the corporation whether for damages founded on a breach of
contract of carriage, labor cases, collection suits or any other claims of
a pecuniary nature. No exception in favor of labor claims is mentioned
in the law.
More importantly, as the instant case involves essentially the same
facts, parties, and issues as G.R. No. 166996 entitled Philippine
Airlines, Inc., et al. v. Bernardin J. Zamora, we find it unnecessary to
make further pronouncements which might otherwise conflict with the
disposition made by the Courts Third Division therein.
Garcia Vs. PAL (531 S 574)
Facts:
Since petitioners claim against PAL is a money claim for their wages
during the pendency of PALs appeal to the NLRC, the same should
have been suspended pending the rehabilitation proceedings. The
Labor Arbiter, the NLRC, as well as the Court of Appeals should have
abstained from resolving petitioners case for illegal dismissal and
should instead have directed them to lodge their claim before PALs
receiver.

169

However, to still require petitioners at this time to re-file their labor

claim against PAL under the peculiar circumstances of the case that
their dismissal was eventually held valid with only the matter of
reinstatement pending appeal being the issue this Court deems it
legally expedient to suspend the proceedings in this case.
Leca Realty Vs. Manuela (534 S 97)
Facts:

Reconsideration; d) Petition for Relief; e) Motion for Extension; f)

Memorandum; g) Motion for Postponement; h) Reply or Rejoinder; i)
Third Party Complaint; j) Intervention;
xxx xxx xxx
The prohibited pleadings enumerated above are those filed in the
rehabilitation proceedings. Once the trial court decides the case and
the aggrieved party appeals, the procedure to be followed is that
prescribed by the Rules of Court as mandated by Section 5, Rule 3, of
the same Interim Rules, thus:

On January 31, 2002, Manuela filed a Petition for Rehabilitation. The

petition alleges inter alia that respondent is a corporation primarily
engaged in the business of leasing to retailers commercial spaces in
shopping malls.
Respondent is the owner and operator of the following malls
strategically located in Metro Manila. Respondent has assets valued at
P12.43 billion and total liabilities of P4.87 billion as of December 31,
2001.
In order to finance the costs of building the Metropolis Star and the
Pacific Mall, respondent obtained several loans from two syndicates of
lenders. Respondents total outstanding loan from the syndicates (e.g.,
principal plus interest) is P2.174 billion as of December 31, 2001. These
loans are secured by a mortgage over M Star One and M Star, both
located in Las Pias City.
Respondent also has liabilities to the Hero Holdings, Inc. and its trade
suppliers and other parties in the sum of P1.476 billion as of December
31, 2001.

The review of any order or decision of the court or on appeal

therefrom shall be in accordance with the Rules of Court.
In this connection, Section 11, Rule 11, of the Rules of Court (now the
1997 Rules of Civil Procedure, as amended), states:
Extension of time to plead. Upon motion and on such
terms as may be just, the court may extend the time to plead
provided in these Rules.
The court may also, upon like terms, allow an answer or
other pleading to be filed after the time fixed by these Rules.
Verily, the trial court erred in denying petitioners motion for extension
of time to file record on appeal.
2.

On February 5, 2002, the trial court issued a Stay Order. In the same
Stay Order, the trial court appointed Marilou Adea, also a respondent,
as Rehabilitation Receiver.

Petitioner contends that the approved Rehabilitation Plan drastically

altered the terms of its lease contract with respondent Manuela, hence,
should be declared void.

On July 28, 2003, the trial court issued an Order approving the
Rehabilitation Plan.

There is a gross discrepancy between the amounts of rent agreed upon

by the parties and those provided in the Rehabilitation Plan.

The trial court issued an Order denying the Motion for Extension of
Time to File Record on Appeal filed by Leca Realty on the ground that
under Rule 3, Section 1 of the Interim Rules of Procedure on
Corporate Rehabilitation, a motion for extension is a prohibited
pleading.

In The Insular Life Assurance Company, Ltd., v. Court of Appeals, et

al., we held:

Issue:
1. W/N the trial court erred in ruling that a motion for extension of
time to file record on appeal is a prohibited pleading under Section 1 of
the Interim Rules of Procedure on Corporate Rehabilitation
2. W/N Manuelas Rehabilitation Plan violates petitioners
constitutional right to non-impairment of contract and the Interim
Rules of Procedure on Corporate Rehabilitation
Ruling:
1.
Section 1. Nature of Proceedings. Any proceeding initiated under
these Rules shall be considered in rem. Jurisdiction over all those
affected by the proceedings shall be considered as acquired upon
publication of the notice of the commencement of the proceedings in
any newspaper of general circulation in the Philippines in the manner
prescribed by these Rules.
The proceedings shall also be summary and non-adversarial in nature.
The following pleadings are prohibited: a) Motion to Dismiss; b)
Motion for Bill of Particulars; c) Motion for New Trial or For

When the language of the contract is explicit leaving no

doubt as to the intention of the drafters thereof, the courts
may not read into it any other intention that would
contradict its plain import. The Court would be rewriting the
contract of lease between Insular and Sun Brothers under
the guise of construction were we to interpret the option to
renew clause as Sun Brothers propounds it, despite the
express provision in the original contract of lease and the
contracting parties subsequent acts. As the Court has held in
Riviera Filipina, Inc. vs. Court of Appeals, a court, even the
Supreme Court, has no right to make new contracts for the
parties or ignore those already made by them, simply to
avoid seeming hardships. Neither abstract justice nor the
rule of liberal construction justifies the creation of a contract
for the parties, which they did not make themselves nor the
imposition upon one party to a contract of an obligation not
assumed.
The amount of rental is an essential condition of any lease contract.
Needless to state, the change of its rate in the Rehabilitation Plan is not
justified as it impairs the stipulation between the parties. We thus rule
that the Rehabilitation Plan is void insofar as it amends the rental rates
agreed upon by the parties.
It must be emphasized that there is nothing in Section 5 (c) of P.D. No.
902-A authorizing the change or modification of contracts entered into
by the distressed corporation and its creditors.

170

Moreover, the Stay Order issued by the trial court directed respondent
Manuela to pay in full, after the issuance of such Order, all
administrative expenses incurred. Administrative expenses are costs
associated with the general administration of an organization and
include such items as utilities, rents, salaries, postages, furniture, and
housekeeping charges.
Inasmuch as rents are considered administrative expenses and
considering that the Stay Order directed respondent Manuela to pay
the rents in full, then it must comply at the rates agreed upon.
Respondent Manuela, therefore, must update its payment of rental
arrears and continue to pay current rentals at the rate stipulated in the
lease contract.

Meanwhile, on account of Rubberworlds failure to upgrade or

complete its appeal bond as indicated in the NLRCs January 22, 1996
Order, the Commission, in a decision dated June 28, 1996, did dismiss
Rubberworlds appeal.
Eventually, in the herein assailed Decision dated January 18, 2002, the
CA granted Rubberworlds petition in CAG.R. SP. No. 53356 on the
finding that the Labor Arbiter had indeed committed grave abuse of
discretion when it proceeded with the ULP case despite the SECs
suspension order of December 28, 1994, and accordingly declared the
proceedings before it, including the subsequent orders by the NLRC
dismissing Rubberworlds appeal and the writ of execution, null and
void.
Issue:

Lingkod ng Manggagawa Vs. Rubberworld (513 S 208)

W/N the CA is correct in annulling the decision of the NLRC
Facts:

Ruling:

Petitioner Lingkod Manggagawa sa Rubberworld, Adidas-Anglo is a

legitimate labor union whose members were employees of the principal
respondent, Rubberworld Philippines, Inc.(Rubberworld, for short), a
domestic corporation engaged in the manufacture of footwear, bags
and garments.

While posting an appeal bond is indeed a requirement for the

perfection of an appeal from the decision of the Labor Arbiter to the
NLRC, Rubberworlds failure to upgrade its appeal bond cannot bar, in
this particular instance, the review by the CA of the lower court
proceedings.

On August 26, 1994, Rubberworld filed with the Department of Labor

and Employment (DOLE) a Notice of Temporary Partial Shutdown
due to severe financial crisis, therein announcing the formal actual
company shutdown to take effect on September 26, 1994. A copy of
said notice was served on the recognized labor union of
Rubberworld, the Bisig Pagkakaisa-NAFLU, the union with which the
corporation had a collective bargaining agreement.

Given the factual milieu obtaining in this case, it cannot be said

that the decision of the Labor Arbiter, or the decision/dismissal
order and writ of execution issued by the NLRC, could ever attain final
and executory status. The Labor Arbiter completely disregarded and
violated Section 6(c) of Presidential Decree 902-A, as amended,
which categorically mandates the suspension of all actions for claims
against a corporation placed under a management committee by the
SEC. Thus, the proceedings before the Labor Arbiter and the order and
writ subsequently issued by the NLRC are all null and void for having
been undertaken or issued in violation of the SEC suspension Order
dated December 28, 1994. As such, the Labor Arbiters decision,
including the dismissal by the NLRC of Rubberworls appeal, could not
have achieved a final and executory status.

On September 1, 1994, Bisig Pagkakaisa-NAFLU staged a strike. It

set up a picket line in front of the premises of Rubberworld and even
welded its gate. As a result, Rubberworld's premises closed
prematurely even before the date set for the start of its temporary
partial shutdown.
On September 9, 1994, herein petitioner union, the Lingkod
Manggagawa Sa Rubberworld, Adidas-Anglo (Lingkod, for brevity),
represented by its President, Sonia Esperanza, filed a complaint
against Rubberworld and its Vice Chairperson, Mr. Antonio Yang, for
unfair labor practice (ULP), illegal shutdown, and non-payment of
salaries and separation pay.
On November 22, 1994, while the aforementioned complaint was
pending with Labor Arbiter Dinopol, Rubberworld filed with the SEC a
Petition for Declaration of a State of Suspension of Payments with
Proposed Rehabilitation Plan which was granted by the SEC.
Notwithstanding the SEC's aforementioned suspension order and
despite Rubberworld's submission on January 10, 1995 of a Motion to
Suspend Proceedings, Labor Arbiter Dinopol went ahead with the ULP
case and rendered his decision.
On September 21, 1995, Rubberworld went on appeal to the NLRC,
posting therefor a temporary appeal bond in the amount of
P500,000.00 as tentatively fixed by the Labor Arbiter.
Its motion for reconsideration of the same Order having been denied
by the NLRC in its Resolution of March 29, 1996, Rubberworld directly
went to this Court on a Petition for Certiorari, interposing the sole
issue of whether or not the NLRC acted without or in excess of
jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction in requiring the corporation to post the upgraded
appeal bond of P27,506,255.70 based on the computation of Mr.
Atienza.

Acts executed against the provisions of mandatory or prohibitory laws

shall be void, except when the law itself authorizes their validity. The
Labor Arbiter's decision in this case is void ab initio, and therefore,
non-existent. A void judgment is in effect no judgment at all. No rights
are divested by it nor obtained from it. Being worthless in itself, all
proceedings upon which the judgment is founded are equally
worthless. It neither binds nor bars anyone. All acts performed under
it and all claims flowing out of it are void. In other words, a void
judgment is regarded as a nullity, and the situation is the same as it
would be if there were no judgment. It accordingly leaves the partylitigants in the same position they were in before the trial.
In fact, it is immaterial whether an appeal from the Labor Arbiter's
decision was perfected or not, since a judgment void ab initio is nonexistent and cannot acquire finality. The judgment is vulnerable to
attack even when no appeal has been taken. Hence, such judgment
does not become final in the sense of depriving a party of his right to
question its validity. Hence, no grave abuse of discretion attended the
CA's taking cognizance of the petition in CA-G.R. SP No. 53356.
Besides, the Labor Arbiter, by simultaneously ruling in his decision of
August 16, 1995 on both the merits of the ULP case and the motion of
Rubberworld to suspend the proceedings thereon, effectively required
the respondent corporation to post a surety bond before the same
respondent could have questioned the arbiters action in not
suspending the proceedings before him.
New Frontier Vs. RTC (513 S 601)
Facts:

171

New Frontier Sugar Corporation (petitioner) is a domestic corporation

engaged in the business of raw sugar milling. Foreseeing that it cannot
meet its obligations with its creditors as they fell due, petitioner filed a
Petition for the Declaration of State of Suspension of Payments with
Approval of Proposed Rehabilitation Plan under the Interim Rules of
Procedure on Corporate Rehabilitation (2000) some time in August
2002. Finding the petition to be sufficient in form and substance, the
RTC issued a Stay Order dated August 20, 2002, appointing Manuel B.
Clemente as rehabilitation receiver, ordering the latter to put up a
bond, and setting the initial hearing on the petition.
One of petitioners creditors, the Equitable PCI Bank (respondent
bank), filed a Comment/Opposition with Motion to Exclude Property,
alleging that petitioner is not qualified for corporate rehabilitation, as
it can no longer operate because it has no assets left. Respondent bank
also alleged that the financial statements, schedule of debts and
liabilities, inventory of assets, affidavit of general financial condition,
and rehabilitation plan submitted by petitioner are misleading and
inaccurate since its properties have already been foreclosed and
transferred to respondent bank before the petition for rehabilitation
was filed, and petitioner, in fact, still owes respondent bank deficiency
liability.
On January 13, 2003, the RTC issued an Omnibus Order terminating
the proceedings and dismissing the case. Petitioner filed an Omnibus
Motion but this was denied by the RTC in its Order dated April 14,
2003.
Petitioner then filed with the CA a special civil action for certiorari,
which was denied by the CA.
In dismissing the petition, the CA sustained the findings of the RTC
that since petitioner no longer has sufficient assets and properties to
continue with its operations and answer its corresponding liabilities it
is no longer eligible for rehabilitation.
Issue:
W/N Petitioner has no substantial property left to make corporate
rehabilitation feasible
Ruling:
Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency. Presently, the
applicable law on rehabilitation petitions filed by corporations,
partnerships or associations, including rehabilitation cases transferred
from the Securities and Exchange Commission to the RTCs pursuant to
Republic Act No. 8799 or the Securities Regulation Code, is the Interim
Rules of Procedure on Corporate Rehabilitation (2000).
Under the Interim Rules, the RTC, within five (5) days from the filing
of the petition for rehabilitation and after finding that the petition is
sufficient in form and substance, shall issue a Stay Order appointing a
Rehabilitation Receiver, suspending enforcement of all claims,
prohibiting transfers or encumbrances of the debtors properties,
prohibiting payment of outstanding liabilities, and prohibiting the
withholding of supply of goods and services from the debtor. Any
transfer of property or any other conveyance, sale, payment, or
agreement made in violation of the Stay Order or in violation of the
Rules may be declared void by the court upon motion or motu proprio.
Further, the Stay Order is effective both against secure and unsecured
creditors. This is in harmony with the principle of "equality is equity"
first enunciated in Alemars Sibal & Sons, Inc. v. Elbinias, thus:
During rehabilitation receivership, the assets are held in
trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by
the expediency of an attachment, execution or otherwise. For

what would prevent an alert creditor, upon learning of the

receivership, from rushing posthaste to the courts to secure
judgments for the satisfaction of its claims to the prejudice of
the less alert creditors.
As between creditors, the key phrase is "equality is equity."
When a corporation threatened by bankruptcy is taken over by a
receiver, all the creditors should stand on an equal footing. Not anyone
of them should be given any preference by paying one or some of them
ahead of the others. This is precisely the reason for the suspension of
all pending claims against the corporation under receivership. Instead
of creditors vexing the courts with suits against the distressed firm,
they are directed to file their claims with the receiver who is a duly
appointed officer of the SEC. (Emphasis supplied)
Nevertheless, the suspension of the enforcement of all claims against
the corporation is subject to the rule that it shall commence only
from the time the Rehabilitation Receiver is appointed. Thus,
in Rizal Commercial Banking Corporation v. Intermediate Appellate
Court, the Court upheld the right of RCBC to extrajudicially foreclose
the mortgage on some of BF Homes properties, and reinstated the trial
courts judgment ordering the sheriff to execute and deliver to RCBC
the certificate of auction sale involving the properties. The Court
vacated its previous Decision rendered on September 14, 1992 in the
same case, finding that RCBC can rightfully move for the extrajudicial
foreclosure of the mortgage since it was done on October 16, 1984,
while the management committee was appointed only on March 18,
1985. The Court also took note of the SECs denial of the petitioners
consolidated motion to cite the sheriff and RCBC for contempt and to
annul the auction proceedings and sale.
In this case, respondent bank instituted the foreclosure proceedings
against petitioners properties on March 13, 2002 and a Certificate of
Sale at Public Auction was issued on May 6, 2002, with respondent
bank as the highest bidder. The mortgage on petitioners chattels was
likewise foreclosed and the Certificate of Sale was issued on May 14,
2002. It also appears that titles over the properties have already been
transferred to respondent bank.
On the other hand, the petition for corporate rehabilitation was filed
only on August 14, 2002 and the Rehabilitation Receiver appointed on
August 20, 2002. Respondent bank, therefore, acted within its
prerogatives when it foreclosed and bought the property, and had title
transferred to it since it was made prior to the appointment of a
rehabilitation receiver.
The fact that there is a pending case for the annulment of the
foreclosure proceedings and auction sales is of no moment. Until a
court of competent jurisdiction, annuls the foreclosure sale of the
properties involved, petitioner is bereft of a valid title over the
properties. In fact, it is the trial courts ministerial duty to grant a
possessory writ over the properties.
Consequently, the CA was correct in upholding the RTCs dismissal of
the petition for rehabilitation in view of the fact that the titles to
petitioners properties have already passed on to respondent bank and
petitioner has no more assets to speak of, specially since petitioner
does not dispute the fact that the properties which were foreclosed by
respondent bank comprise the bulk, if not the entirety, of its assets.
It should be stressed that the Interim Rules was enacted to provide for
a summary and non-adversarial rehabilitation proceedings. This is in
consonance with the commercial nature of a rehabilitation case, which
is aimed to be resolved expeditiously for the benefit of all the parties
concerned and the economy in general.
As provided in the Interim Rules, the basic procedure is as follows:
(1) The petition is filed with the appropriate Regional Trial Court;
(2) If the petition is found to be sufficient in form and substance, the
trial court shall issue a Stay Order, which shall provide, among others,

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for the appointment of a Rehabilitation Receiver; the fixing of the

initial hearing on the petition; a directive to the petitioner to publish
the Order in a newspaper of general circulation in the Philippines once
a week for two (2) consecutive weeks; and a directive to all creditors
and all interested parties (including the Securities and Exchange
Commission) to file and serve on the debtor a verified comment on or
opposition to the petition, with supporting affidavits and documents.
3) Publication of the Stay Order;
4) Initial hearing on any matter relating to the petition or on any
comment and/or opposition filed in connection therewith. If the trial
court is satisfied that there is merit in the petition, it shall
give due course to the petition;
5) Referral for evaluation of the rehabilitation plan to the rehabilitation
receiver who shall submit his recommendations to the court;
6) Modifications or revisions of the rehabilitation plan as necessary;
7) Submission of final rehabilitation plan to the trial court for approval;
8) Approval/disapproval of rehabilitation plan by the trial court;
In the present case, the petition for rehabilitation did not run its full
course but was dismissed by the RTC after due consideration of the
pleadings filed before it. On this score, the RTC cannot be faulted for
its summary dismissal, as it is tantamount to a finding that there is no
merit to the petition. This is in accord with the trial courts authority
to give due course to the petition or not under Rule 4, Section 9 of the
Interim Rules. Letting the petition go through the process only to be
dismissed later on because there are no assets to be conserved will not
only defeat the reason for the rules but will also be a waste of the trial
courts time and resources.
The CA also correctly ruled that petitioner availed of the wrong remedy
when it filed a special civil action for certiorari with the CA under Rule
65 of the Rules of Court.
The Omnibus Order dated January 13, 2003 issued by the RTC is a
final order since it terminated the proceedings and dismissed the case
before the trial court; it leaves nothing more to be done. As such,
petitioners recourse is to file an appeal from the Omnibus Order.
In this regard, A.M. No. 00-8-10-SC promulgated by the Court on
September 4, 2001 provides that a petition for rehabilitation is
considered a special proceeding given that it seeks to establish the
status of a party or a particular fact. Accordingly, the period of appeal
provided in paragraph 19 (b) of the Interim Rules Relative to the
Implementation of Batas Pambansa Blg. 129 for special proceedings
shall apply. Under said paragraph 19 (b), the period of appeal shall be
thirty (30) days, a record of appeal being required.
However, it should be noted that the Court issued A.M. No. 04-9-07-SC
on September 14, 2004, clarifying the proper mode of appeal in cases
involving corporate rehabilitation and intra-corporate controversies. It
is provided therein that all decisions and final orders in cases falling
under the Interim Rules of Corporate Rehabilitation and the Interim
Rules of Procedure Governing Intra-Corporate Controversies under
Republic Act No. 8799 shall be appealed to the CA through a petition
for review under Rule 43 of the Rules of Court to be filed within fifteen
(15) days from notice of the decision or final order of the RTC.
In any event, as previously stated, since what petitioner filed was a
petition for certiorari under Rule 65 of the Rules, the CA rightly
dismissed the petition and affirmed the assailed Orders.

from their pilgrimage to the Holy City of Mecca, Saudi Arabia, on

board a Philippines Airlines (PAL) flight. Respondents claimed that
they were unable to retrieve their checked-in luggages.
On 05 January 1998, respondents filed a complaint with the Regional
Trial Court (RTC) of Marawi City against PAL for breach of contract
resulting in damages due to negligence in the custody of the missing
luggages.
On 02 March 1998, PAL filed its answer invoking, among its defenses,
the limitations under the Warsaw Convention. On 19 June 1998, before
the case could be heard on pre-trial, PAL, claiming to have suffered
serious business losses due to the Asian economic crisis, followed by a
massive strike by its employees, filed a petition for the approval of a
rehabilitation plan and the appointment of a rehabilitation receiver
before the Securities and Exchange Commission (SEC).
On 23 June 1998, the SEC issued an order granting the prayer for an
appointment of a rehabilitation receiver, and it constituted a threeman panel to oversee PALs rehabilitation. On 25 September 1998, the
SEC created a management committee conformably with Section 6(d)
of Presidential Decree (P.D.) 902, as amended, declaring the
suspension of all actions for money claims against PAL pending before
any court, tribunal, board or body. Thereupon, PAL moved for the
suspension of the proceedings before the Marawi City RTC. On 11
January 1999, the trial court issued an order denying the motion for
suspension of the proceedings on the ground that the claim of
respondents was only yet to be established. PALs motion for
reconsideration was denied by the trial court.
PAL went to the Court of Appeals via a petition for certiorari. On 16
April 1999, the appellate court dismissed the petition for the failure of
PAL to serve a copy of the petition on respondents. PAL moved for a
reconsideration. In its resolution, dated 08 October 1999, the appellate
court denied the motion.
Thus, PAL went to this Court via a petition for review on certiorari
under Rule 45 of the Rules of Court.
Issue:
W/N the proceedings before the trial court should have been
suspended after the court was informed that a rehabilitation receiver
was appointed over the petitioner by the Securities and Exchange
Commission under Section 6(c) of Presidential Decree No. 902-A
Ruling:
On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC,
adopted the Interim Rules of Procedure on Corporate Rehabilitation
and directed to be transferred from the SEC to Regional Trial Courts,
all petitions for rehabilitation filed by corporations, partnerships, and
associations under P.D. 902-A in accordance with the amendatory
provisions of Republic Act No. 8799. The rules require trial courts to
issue, among other things, a stay order in the enforcement of all
claims, whether for money or otherwise, and whether such
enforcement is by court action or otherwise, against the corporation
under rehabilitation, its guarantors and sureties not solidarily liable
with it. Specifically, Section 6, Rule 4, of the Interim Rules of
Procedure on Corporate Rehabilitation.
The stay order is effective from the date of its issuance until the
dismissal of the petition or the termination of the rehabilitation
proceedings.

Facts:

The interim rules must likewise be read and applied along with Section
6(c) of P.D. 902-A, as so amended, directing that upon the
appointment of a management committee, rehabilitation receiver,
board or body pursuant to the decree, all actions for claims against
the distressed corporation pending before any court, tribunal, board
or body shall be suspended accordingly.

In April 1997, respondents, all Muslim Filipinos, returned to Manila

A claim is said to be a right to payment, whether or not It is

PAL Vs. Kurangking (389 S 588)

173

reduced to judgment, liquidated or unliquidated, fixed or contingent,

matured or unmatured, disputed or undisputed, legal or equitable, and
secured or unsecured. In Finasia Investments and Finance
Corporation this Court has defined the word claim, contemplated in
Section 6(c) of P.D. 902-A, as referring to debts or demands of a
pecuniary nature and the assertion of a right to have money paid as
well.

Issue:

Verily, the claim of private respondents against petitioner PAL is a

money claim for the missing luggages, a financial demand that the law
requires to be suspended pending the rehabilitation proceedings.

Rule 4, Section 2(k), of the Interim Rules on Corporate Rehabilitation

provides:

Chas Realty Vs. Talavera (397 S 84)

Facts:
Petitioner Chas Realty and Development Corporation (CRDC) is a
domestic corporation engaged in property development and
management. It is the owner and developer of a three-hectare
shopping complex, also known as the Megacenter Mall (Megacenter),
in Cabanatuan City.
The construction of Megacenter commenced in January 1996, but by
the time of its so-called soft opening in July 1998, it was only partly
completed due to lack of funds, said to have been brought about by
construction overages due to the massive devaluation of the peso
during the economic crisis in 1997, low occupancy, and rental
arrearages of tenants. The opening of the upper ground floor and the
second floor of the building followed, respectively, in August 1998 and
towards the end of 1998. Eventually, Megacenter opened its third floor
in 1999.
Purportedly on account of factors beyond the control of CRDC, such as
high interest rates on its loans, unpaid rentals of tenants, low
occupancy rate, sluggishness of the economy and the freezing of its
bank account by its main creditor, the Land Bank of the Philippines,
CRDC encountered difficulty in paying its obligations as and when they
fell due and had to contend with collection suits and related cases.
On 04 June 2001, CRDC filed a petition for rehabilitation attaching
thereto a proposed rehabilitation plan, accompanied by a secretarys
certificate, consonantly with paragraph 2(k), Section 2, Rule 4, of the
Interim Rules of Procedure on Corporate Rehabilitation. CRDC
claimed that it had sufficient assets and a workable rehabilitation plan
both of which showed that the continuance of its business was still
feasible. It alleged that, prior to the filing of the petition for
rehabilitation, a special meeting of its stockholders was held on 18
April 2001 during which the majority of the outstanding capital stock
of CRDC approved the resolution authorizing the filing of a petition for
rehabilitation.
On 08 June 2001, the Regional Trial Court, Branch 28, of Cabanatuan
City, to which the petition was assigned, issued an order staying all
claims against CRDC and prohibited it from making any payment on
its outstanding obligations and selling, or otherwise disposing or
encumbering, its property.
Forthwith, the court appointed a
rehabilitation receiver.
On 20 July 2001, Angel D. Concepcion, Sr., herein private respondent,
filed a complaint in intervention opposing the appointment of CRDCs
nominee for the post of rehabilitation receiver. He belied CRDCs
factual allegations and claimed that the predicament of the corporation
was due to serious mismanagement, fraud, embezzlement,
misappropriation and gross/evident violation of the fiduciary duties of
CHAS officers. Concepcion moved to dismiss and/or to deny the
petition for rehabilitation on the ground that there was no approval by
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock which, according to him, would be essential
under paragraph 2(k), Section 2, Rule 4, of the Interim Rules on
Corporate Rehabilitation.
Concepcion further asserted that the
supposed approval of the directors of the filing of the petition for
rehabilitation was inaccurate considering that the membership of
petitioner CRDCs board of directors was still then being contested and
pending final resolution.

W/N petition for rehabilitation and the proposed rehabilitation plan do

not require extraordinary corporate actions
Ruling:

Sec. 2. Contents of the Petition. The petition filed

by the debtor must be verified and must set forth with
sufficient particularity all the following material facts: (a)
the name and business of the debtor; (b) the nature of the
business of the debtor; (c) the history of the debtor; (d) the
cause of its inability to pay its debts; (e) all the pending
actions or proceedings known to the debtor and the courts
or tribunals where they are pending; (f) threats or
demands to enforce claims or liens against the debtor; and
(g) the manner by which the debtor may be rehabilitated
and how such rehabilitation may benefit the general body
of creditors, employees, and stockholders.
The petitioner shall be accompanied by the
following documents:
x x x

xxx

x x x.

k.
A Certificate attesting, under oath, that (a)
the filing of the petition has been duly authorized; and (b)
the directors and stockholders have irrevocably approved
and/or consented to, in accordance with existing laws, all
actions or matters necessary and desirable to rehabilitate
the debtor including, but not limited to, amendments to
the articles of incorporation and by-laws or articles of
partnership; increase or decrease in the authorized capital
stock; issuance of bonded indebtedness; alienation,
transfer, or encumbrance of assets of the debtor; and
modification of shareholders rights.
Observe that Rule 4, Section 2(k), prescribes the need for a
certification; one, to state that the filing of the petition has been duly
authorized, and two, to confirm that the directors and stockholders
have irrevocably approved and/or consented to, in accordance with
existing laws, all actions or matters necessary and desirable to
rehabilitate the corporate debtor, including, as and when called for,
such extraordinary corporate actions as may be marked out. The
phrase, in accordance with existing laws, obviously would refer to
that which is, or to those that are, intended to be done by the
corporation in the pursuit of its plan for rehabilitation. Thus, if any
extraordinary corporate action (mentioned in Rule 4, Section 2(k), of
the Interim Rules on Corporate Rehabilitation) are to be done under
the proposed rehabilitation plan, the petitioner would be bound to
make it known that it has received the approval of a majority of the
directors and the affirmative votes of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock of the corporation.
Where no such extraordinary corporate acts (or one that under the law
would call for a two-thirds (2/3) vote) are contemplated to be done in
carrying out the proposed rehabilitation plan, then the approval of
stockholders would only be by a majority, not necessarily a two-thirds
(2/3), vote, as long as, of course, there is a quorum a fact which is not
here being disputed.
Nowhere in the aforequoted paragraph can it be inferred that an
affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding stock is invariably necessary for the filing of a
petition for rehabilitation regardless of the corporate action that the
plan envisions. Just to the contrary, it only requires in the filing of the
petition that the corporate actions therein proposed have been duly
approved or consented to by the directors and stockholders in
consonance with existing laws. The requirement is designed to avoid
a situation where a rehabilitation plan, after being developed and
judicially sanctioned, cannot ultimately be seen through because of the
refusal of directors or stockholders to cooperate in the full
implementation of the plan. In fine, a certification on the approval of
stockholders is required but the question, whether such approval
should be by a majority or by a two-thirds (2/3) vote of the outstanding

174

capital stock, would depend on the existing law vis--vis the corporate
act or acts proposed to be done in the rehabilitation of the distressed
corporation.

in its audited financial statements. The banks do not hold any assets of
Maynilad that would be material to the rehabilitation proceedings nor
is Maynilad liable to the banks at this point.

The rehabilitation plan submitted by petitioner merely consists of a

repayment or re-structuring scheme of CRDCs bank loans to Land
Bank of the Philippines and Equitable-PCI Bank and of leasing out
most of the available spaces in the Megacenter, including the
completion of the construction of the fourth floor, to increase rental
revenues. None of the proposed corporate actions would require a vote
of approval by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock.

Respondent Maynilads Financial Statement as of December 31, 2001

and 2002 do not show the Irrevocable Standby Letter of Credit as part
of its assets or liabilities, and by respondent Maynilads own admission
it is not. In issuing the clarificatory order of November 27, 2003,
enjoining petitioner from claiming from an asset that did not belong to
the debtor and over which it did not acquire jurisdiction, the
rehabilitation court acted in excess of its jurisdiction.

MWSS Vs. Daway (432 S 559)

Facts:
MWSS granted Maynilad under a Concession Agreement a twenty-year
period to manage, operate, repair, decommission and refurbish the
existing MWSS water delivery and sewerage services in the West Zone
Service Area, for which Maynilad undertook to pay the corresponding
concession fees on the dates agreed upon in said agreement which,
among other things, consisted of payments of petitioners mostly
foreign loans.
To secure the concessionaires performance of its obligations under the
Concession Agreement, Maynilad was required under Section 6.9 of
said contract to put up a bond, bank guarantee or other security
acceptable to MWSS.
However, on November 5, 2002, Maynilad served upon MWSS a
Notice of Event of Termination, claiming that MWSS failed to comply
with its obligations under the Concession Agreement and Amendment
No. 1 regarding the adjustment mechanism that would cover
Maynilads foreign exchange losses. On December 9, 2002, Maynilad
filed a Notice of Early Termination of the concession, which was
challenged by MWSS. This matter was eventually brought before the
Appeals Panel on January 7, 2003 by MWSS.
MWSS, thereafter, submitted a written notice on November 24, 2003,
to Citicorp International Limited, as agent for the participating banks,
that by virtue of Maynilads failure to perform its obligations under the
Concession Agreement, it was drawing on the Irrevocable Standby
Letter of Credit and thereby demanded payment in the amount of
US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a
petition for rehabilitation before the court a quo which resulted in the
issuance of the Stay Order of November 17, 2003 and the disputed
Order of November 27, 2003.
Issue:
W/N the rehabilitation court sitting as such, act in excess of its
authority or jurisdiction when it enjoined herein petitioner from
seeking the payment of the concession fees from the banks that issued
the Irrevocable Standby Letter of Credit in its favor and for the account
of respondent Maynilad
Ruling:
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on
Corporate Rehabilitation to support its jurisdiction over the
Irrevocable Standby Letter of Credit and the banks that issued it. The
section reads in part that jurisdiction over those affected by the
proceedings is considered acquired upon the publication of the notice
of commencement of proceedings in a newspaper of general
circulation and goes further to define rehabilitation as an in rem
proceeding. The reference to all those affected by the proceedings
covers creditors or such other persons or entities holding assets
belonging to the debtor under rehabilitation which should be reflected

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of

the Interim Rules that supports its claim that the commencement of
the process to draw on the Standby Letter of Credit is an enforcement
of claim prohibited by and under the Interim Rules and the order of
public respondent.
We disagree.
First, the claim is not one against the debtor but against an entity that
respondent Maynilad has procured to answer for its non-performance
of certain terms and conditions of the Concession Agreement,
particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the
enforcement of all claims against guarantors and sureties, but only
those claims against guarantors and sureties who are not
solidarily liable with the debtor. Respondent Maynilads claim
that the banks are not solidarily liable with the debtor does not find
support in jurisprudence.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not
apply to herein petitioner as the prohibition is on the enforcement of
claims against guarantors or sureties of the debtors whose obligations
are not solidary with the debtor. The participating banks obligation are
solidary with respondent Maynilad in that it is a primary, direct,
definite and an absolute undertaking to pay and is not conditioned on
the prior exhaustion of the debtors assets. These are the same
characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from
and independently of the rehabilitation case, as held in Traders Royal
Bank v. Court of Appeals and reiterated in Philippine Blooming Mills,
Inc. v. Court of Appeals, where we said that property of the surety
cannot be taken into custody by the rehabilitation receiver (SEC) and
said surety can be sued separately to enforce his liability as surety for
the debts or obligations of the debtor. The debts or obligations for
which a surety may be liable include future debts, an amount which
may not be known at the time the surety is given.
The public respondent, therefore, exceeded his jurisdiction, in holding
that he was competent to act on the obligation of the banks under the
Letter of Credit under the argument that this was not a solidary
obligation with that of the debtor. Being a solidary obligation, the
letter of credit is excluded from the jurisdiction of the rehabilitation
court and therefore in enjoining petitioner from proceeding against the
Standby Letters of Credit to which it had a clear right under the law
and the terms of said Standby Letter of Credit, public respondent acted
in excess of his jurisdiction.
Union Bank Vs. CA (290 S 198)
Facts:
On September 16, 1997, EYCO Group of Companies, Eulogio O.
Yutingco, Caroline Yutingco-Yao, and Theresa T. Lao (the "Yutingcos"),
all of whom are controlling stockholders of the aforementioned
corporations, jointly filed with the SEC a Petition for the Declaration of
Suspension of Payment[s], Formation and Appointment of
Rehabilitation Receiver/Committee, Approval of Rehabilitation Plan

175

with Alternative
Corporations.

Prayer

for

Liquidation

and

Dissolution

of

Upon finding the above petition to be sufficient in form and substance,

the SEC Hearing Panel issued an order setting its hearing on October
22, 1997. At the same time, said panel also directed the suspension of
all actions, claims and proceedings against private respondents
pending before any court, tribunal, office, board and/or commission.
Meanwhile, some of private respondents' creditors, composed mainly
of twenty-two (22) domestic banks (the "consortium") including herein
petitioner Union Bank of the Philippines, also convened on September
19, 1997 for the purpose of deciding their options in the event that
private respondents invoke the provisions of Presidential Decree No.
902-A, as amended. The minutes embodying the terms agreed upon by
the consortium in said meeting provided.
Without notifying the members of the consortium, petitioner, however,
decided to break away from the group by suing private respondents in
the regular courts.
In the meantime, the SEC issued an order on appointing interim
receivers of the distressed corporations.
Aside from commencing suits in the regular courts, petitioner also
vehemently opposed private respondents' petition for suspension of
payments in the SEC by filing a Motion to Dismiss on October 22, 1997.
It contended that the SEC was bereft of jurisdiction over such petition
on the ground that the inclusion of the Yutingcos in the petition
"cannot be allowed since the authority and power of the Commission
under the virtue of the law applies only to corporations, partnership[s]
and other forms of associations , and not to individual petitioners who
are not clearly covered by P.D. 902-A as amended." According to
petitioner, what should have been applied instead was the provision on
suspension of payments under Act No. 1956, otherwise known as the
"Insolvency Law," which mandated the filing of the petition in the
Regional Trial Court and not in the SEC. Finally, petitioner disputed
private respondents' recourse to suspension of payments alleging that
the latter prejudiced their creditors by fraudulently disposing of
corporate properties within the 30-day period prior to the filing of such
petition.

that the petition with respect to EYCO shall subsist and may be validly
acted upon by the SEC. The Yutingcos, on the other hand, shall be
dropped from the petition and be required to pursue their remedies in
the regular courts of competent jurisdiction.
Petitioner's allegations of fraudulent dispositions of private
respondents' assets and the supposed insolvency of the latter are
hardly of any consequence to the assumption of jurisdiction by the SEC
over the nature or subject matter of the petition for suspension of
payments. Aside from the fact that these allegations are evidentiary in
nature and still remains to be proved, we have likewise consistently
ruled that what determines the nature of an action, as well as which
court or body has jurisdiction over it, are the allegations of the
complaint, or a petition as in this case, and the character of the relief
sought. That the merits of the case after due proceedings are later
found to veer away from the claims asserted by EYCO in its petition, as
when it is shown later that it is actually insolvent and may not be
entitled to suspension of payments, does not divest the SEC at all of its
jurisdiction already acquired at its inception through the allegations
made in the petition.
Neither are we convinced by petitioner's reasoning that the Yutingcos
and the corporate entities making up the EYCO Group, on the basis of
the footnote that the former were filing the petition because they
bound themselves as surety to the corporate obligations, should be
considered as mere individuals who should file their petition for
suspension of payments with the regular courts pursuant to Section 2
of the Insolvency Law. We do not see any legal ground which should
lead one to such conclusion. The doctrine of piercing the veil of
corporate fiction heavily relied upon by petitioner is entirely misplaced,
as said doctrine only applies when such corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime.

Subsequently, a creditors' meeting was again convened pursuant to

SEC's earlier order dated September 19, 1997, wherein the matter of
creating a management committee (the "Mancom") was submitted for
resolution. Apparently, only petitioner opposed the creation of said
Mancom as it filed earlier with the SEC its Motion to Dismiss.
Issue:
W/N the SEC can validly acquire jurisdiction over a petition for
suspension of payments filed pursuant to Section 5 (d) of P.D. No. 902
A, as amended, when such petition joins as co-petitioners the
petitioning corporate entities AND individual stockholders thereof
Ruling:
Section 5 (d) of P.D. No. 902-A, as amended] clearly does not allow a
mere individual to file the petition which is limited to "corporations,
partnerships or associations." Administrative agencies like the SEC
are tribunals of limited jurisdiction and, as such, can exercise only
those powers which are specifically granted to them by their enabling
statutes. Consequently, where no authority is granted to hear petitions
of individuals for suspension of payments, such petitions are beyond
the competence of the SEC.
In a case of misjoinder of parties which in this case is the co-filing of
the petition for suspension of payments by both the Yutingcos and the
EYCO group the remedy has never been to dismiss the petition in its
entirety but to dismiss it only as against the party upon whom the
tribunal or body cannot acquire jurisdiction. The result, therefore, is

SECURITIES REGULATION CODE

Orendain Vs. BF Homes (506 S 254)

Facts:
BF Homes, Inc. is a domestic corporation operating under Philippine
laws and organized primarily to develop and sell residential lots and
houses and other related realty business.
Records show that respondent BF Homes had to avail itself of financial
assistance from various sources to enable it to buy properties and
convert them into residential subdivisions. This resulted in its
incurring liabilities amounting to PhP 1,542,805,068.23 as of July 31,
1984. On the other hand, during its business operations, it was able to
acquire properties and assets worth PhP 2,482,843,358.81 as of July
31, 1984, which, if liquidated, were more than enough to pay all its
creditors.

176

Despite its solvent status, respondent filed a Petition for Rehabilitation

and for Declaration in a State of Suspension of Payments under Section
4 of PD No. 1758 before the Securities and Exchange Commission.

body has jurisdiction over a case would be to consider not only [1] the
status or relationship of the parties but also [2] the nature of the
question that is the subject of their controversy.

The SEC subsequently issued an order creating Management

Committee Chaired by Atty. Florencio Orendain as Chairman

However, Section 5 of PD No. 902-A does not apply in the instant case.
The LSFSIPI is neither an officer nor a stockholder of BF Homes, and
this case does not involve intra-corporate proceedings. In addition, the
seller, petitioner Orendain, is being sued in his individual capacity for
the unauthorized sale of the property in controversy. Hence, we find
no cogent reason to sustain petitioners manifestation that the
resolution of the instant controversy depends on the ratification by the
SEC of the acts of its agent or the receiver because the act of Orendain
was allegedly not within the scope of his authority as receiver.
Furthermore, the determination of the validity of the sale to LSFSIPI
will necessitate the application of the provisions of the Civil Code on
obligations and contracts, agency, and other pertinent provisions.

Thereafter, on February 2, 1988, the SEC ordered the appointment of a

rehabilitation receiver, FBO Management Networks, Inc., with
petitioner Orendain as Chairman to prevent paralyzation of BF Homes
business operations.
On October 8, 1993, a Deed of Absolute Sale was executed by and
between BF Homesrepresented by petitioner Orendainas absolute
and registered owner, and the Local Superior of the Franciscan Sisters
of the Immaculate Phils., Inc. (LSFSIPI) over a parcel of land situated
at Barangay Pasong Papaya, BF International, Municipality of Las
Pias, Metro Manila.
Meanwhile, on November 7, 1994, the SEC hearing panel released an
Omnibus Order which admitted and confirmed the Closing Report
submitted by the receiver, petitioner Orendain. It further appointed a
new Committee of Receivers composed of the eleven (11) members of
the Board of Directors of BF Homes with Albert C. Aguirre as the
Chairman of the Committee. Consequently, receiver Orendain was
relieved of his duties and responsibilities.
On January 23, 1996, BF Homes filed a Complaint before the Las Pias
RTC against LSFSIPI and petitioner Orendain, in Civil Case No. LP-960022, for reconveyance of the property covered by TCT No. T-36482
alleging, inter alia, that the LSFSIPI transacted with Orendain in his
individual capacity and therefore, neither FBO Management, Inc. nor
Orendain had title to the property transferred.
On June 14, 1996, Florencio B. Orendain filed a Motion to Dismiss
stating that (1) the RTC had no jurisdiction over the reconveyance suit;
(2) the Complaint was barred by the finality of the November 7, 1994
Omnibus Order of the SEC hearing panel; and (3) BF Homes, acting
through its Committee of Receivers, had neither the interest nor the
personality to prosecute the said action, in the absence of SECs clear
and actual authorization for the institution of the said suit.
Issue:
W/N the RTC or SEC has jurisdiction over the action for reconveyance

In addition, jurisdiction over the case for reconveyance is clearly vested

in the RTC.
The passage of RA 8799 has put to rest petitioner Orendains claim that
it is the SEC and not the RTC that has jurisdiction over Civil Case No.
LP-96-0022. At present, the instant petition has nothing to stand on
and perforce must fail.
1.

TIME SHARES

Timeshare Realty Vs. Lao (544 S 254)

Facts:
On October 6, 1996, Timeshare Realty sold to Ceasar M. Lao and
Cynthia V. Cortez, one timeshare of Laguna de Boracay for
US$7,500.00 payable in eight months and fully paid by the
respondents.
Sometime in February 1998, the SEC issued a resolution to the effect
that petitioner was without authority to sell securities, like timeshares,
prior to February 11, 1998. It further stated in the resolution/order that
the Registration Statement of petitioner became effective only on
February 11, 1998. It also held that the 30 days within which a
purchaser may exercise the option to unilaterally rescind the purchase
agreement and receive the refund of money paid applies to all purchase
agreements entered into by petitioner prior to the effectivity of the
Registration Statement.
Petitioner sought a reconsideration of the aforesaid order but the SEC
denied the same in a letter dated March 9, 1998.

Ruling:
In the case at bench, the BF Homes Complaint for reconveyance was
filed on January 23, 1996 against LSFSIPI and Florencio B. Orendain,
in Civil Case No. LP-96-002.
In 1996, Section 5 of PD No. 902-A, which was approved on March 11,
1976, was still the law in forcewhereby the SEC still had original and
exclusive jurisdiction to hear and decide cases involving:
b) controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members, or associates; between any
and/or all of them and the corporation,
partnership, or association of which they are
stockholders, members or associates, respectively;
and between such corporation, partnership or
association and the state insofar as it concerns
their individual franchise or right to exist as such
entity.
Clearly, the controversy involves matters purely civil in character and is
beyond the ambit of the limited jurisdiction of the SEC. As held in
Viray v. Court of Appeals, [t]he better policy in determining which

On March 30, 1998, respondents wrote petitioner demanding their

right and option to cancel their Contract, as it appears that Laguna de
Boracay is selling said shares without license or authority from the
SEC. But despite repeated demands, petitioner failed and refused to
refund or pay respondents.
Respondents directly filed with SEC En Banc a Complaint against
petitioner and the Members of its Board of Directors - Julius S.
Strachan, Angel G. Vivar, Jr. and Cecilia R. Palma - for violation of
Section 4 of Batas Pambansa Bilang (B.P. Blg.) 178.
On March 25, 2002, the SEC En Banc rendered a Decision in favor of
respondents, ordering petitioner, together with Julius S. Strachan,
Angel G. Vivar, Jr., and Cecilia R. Palma, to pay respondents the
amount of US$7,500.00.
Petitioner filed a Motion for Reconsideration which the SEC En Banc
denied in an Order dated June 24, 2002.
Petitioner received a copy of the June 24, 2002 SEC En Banc Order on
July 4, 2002 and had 15 days or until July 19, 2002 within which to
appeal. However, on July 10, 2002, petitioner sought from the CA an

177

extension of 30 days, counted from July 19, 2002, or until August 19,
2002, within which to appeal. The CA partly granted the motion in an
Order dated July 24, 2002, to wit:
As prayed for, but conditioned on the timeliness of its filing, the
Motion for Extension to File Petition for Review dated 09 July 2002
and filed before this Court on 10 July 2002 is GRANTED and
petitioners are given a non-extendible period of fifteen (15) days from
10 July 2002 or until 25 July 2002 within which to file the desired
petition, otherwise, the above-entitled case will be dismissed.
Petitioner purportedly received the July 24, 2002 CA Order on July 29,
2002, but filed a Petition for Review with the CA on August 19, 2002.
In the assailed October 30, 2002 Resolution, the CA dismissed the
Petition for Review and denied petitioner's Motion for Reconsideration
in the assailed Resolution dated July 4, 2003.
Petitioner filed the present petition.
Issue:
Whether or not the eventual approval or issuance of license has
retroactive effect and therefore ratifies all earlier transactions

petitioners original period to appeal. While such computation of the

CA appears to be erroneous, petitioner did not question it in the
present petition. But even if we do reckon the 15-day extension period
from July 19, 1999, the same would have ended on August 3, 1999,
making petitioners appeal still inexcusably tardy by 16 days. Either
way we reckon it, therefore, petitioners appeal was not perfected
within the period prescribed under Rule 43.Nevertheless, the Court
opts to resolve the substantive issues raised by petitioner in its appeal
so as to determine the lawful rights of the parties and put an end to the
litigation.
Petitioner claims that at the time it entered into a timeshare purchase
agreement with respondents on October 6, 1996, it already possessed
the requisite license and marketing agreement to engage in such
transactions, as evidenced by its registration with the SEC as a
corporation. Petitioner argues that when it was registered and
authorized by the SEC as broker of securities - such as the Laguna de
Boracay timeshares - this had the effect of ratifying its October 6, 1996
purchase agreement with respondents, and removing any cause for the
latter to rescind it.
The Court is not persuaded.
As cited by the SEC En Banc in its March 25, 2002 Decision, as early as
February 13, 1998, the SEC, through Director Linda A. Daoang, already
rendered a ruling on the effectivity of the registration statement of
petitioner, viz:

Ruling:
Section 70 of Republic Act No. 8799, which was enacted on July 19,
2000, is the law which governs petitioners appeal from the orders of
the SEC En Banc. It prescribes that such appeal be taken to the CA by
petition for review in accordance with the pertinent provisions of the
Rules of Court, specifically Rule 43.
Section 4 of Rule 43 is restrictive in its treatment of the period within
which a petition may be filed:
Section 4. Period of appeal. - The appeal shall be taken within fifteen
(15) days from notice of the award, judgment, final order or resolution,
or from the date of its last publication, if publication is required by law
for its effectivity, or of the denial of petitioners motion for new trial or
reconsideration duly filed in accordance with the governing law of the
court or agency a quo. Only one (1) motion for reconsideration shall be
allowed. Upon proper motion and the payment of the full amount of
the docket fee before the expiration of the reglementary period, the
Court of Appeals may grant an additional period of fifteen (15) days
only within which to file the petition for review. No further extension
shall be granted except for the most compelling reason and in no case
to exceed fifteen (15) days.
Petitioners Motion for Extension of Time to File Petition for Review
flouted the foregoing restriction: it sought, not a 15-day, but a 30-day
extension of the appeal period; and it did not even bother to cite a
compelling reason for such extension, other than its counsels caseload
which, as we have repeatedly ruled, hardly qualifies as an imperative
cause for moderation of the rules.
Its motion for extension being inherently flawed, petitioner should not
have presumed that the CA would fully grant the same. Instead, it
should have exercised due diligence by filing the proper petition within
the allowable period, or at the very least, ascertaining from the CA
whether its motion for extension had been acted upon. As it were,
petitioners counsel left the country, unmindful of the possibility that
his clients period to appeal was about to lapse - as it indeed lapsed on
July 25, 1999, after the CA allowed them a 15-day extension only, in
view of the restriction under Section 4, Rule 43. Thus, petitioner has
only itself to blame that the Petition for Review it filed on August 19,
1999 was late by 25 days. The CA cannot be faulted for dismissing it.
The Court notes that the CA reckoned the 15-day extension it granted
to petitioner from July 10, 1999, the date petitioner filed its Motion for
Extension, rather than from July 19, 1999, the date of expiration of

This has reference to your registration statement which was rendered

effective 11 February 1998. The 30 days within which a purchaser may
exercise the option to unilaterally rescind the purchase agreement and
receive the refund of money paid, applies to all purchase agreements
entered into by the registrant prior to the effectivity of the registration
statement. The 30-day rescission period for contracts signed before
the Registration Statement was rendered effective shall commence on
11 February 1998. The rescission period for contracts after 11
February 1998 shall commence on the date of purchase agreement.
Petitioner sought a reconsideration of said ruling but the same was
denied by Director Daoang in an Order dated March 9, 1998. However,
petitioner did not resort to any other administrative remedy against
said ruling, such as by questioning the same before the SEC En Banc.
Having failed to exhaust the administrative remedies available to it,
petitioner is already bound by said ruling and can no longer question
the same through a direct and belated recourse to us.
Finally, the provisions of B.P. Blg. 178 do not support the contention of
petitioner that its mere registration as a corporation already authorizes
it to deal with unregistered timeshares. Corporate registration is just
one of several requirements before it may deal with timeshares:
Section 8. Procedure for registration. - (a) All securities required to be
registered under subsection (a) of Section four of this Act shall be
registered through the filing by the issuer or by any dealer or
underwriter interested in the sale thereof, in the office of the
Commission, of a sworn registration statement with respect to such
securities, containing or having attached thereto, the following:
x

(36) Unless previously filed and registered with the Commission and
brought up to date:
(a)A copy of its articles of incorporation with all amendments thereof
and its existing by-laws or instruments corresponding thereto,
whatever the name, if the issuer be a corporation.
Prior to fulfillment of all the other requirements of Section 8, petitioner
is absolutely proscribed under Section 4 from dealing with
unregistered timeshares, thus:

178

Section 4. Requirement of registration of securities. - (a) No securities,

except of a class exempt under any of the provisions of Section five
hereof or unless sold in any transaction exempt under any of the
provisions of Section six hereof, shall be sold or offered for sale or
distribution to the public within the Philippines unless such securities
shall have been registered and permitted to be sold as hereinafter
provided.
2.

INVESTMENT CONTRACT

People Vs. Petralba (439 S 158)

definition of the law. When the investor is relatively uninformed and

turns over his money to others, essentially depending upon their
representations and their honesty and skill in managing it, the
transaction generally is considered to be an investment contract. The
touchtone is the presence of an investment in a common venture
premised on a reasonable expectation of profits to be derived from the
entrepreneurial or managerial efforts of others.
Dr. Bailey testified on this matter but no contract was submitted by the
prosecution. The prosecution failed to prove by sufficient evidence that
indeed, the amount delivered by Dr. Bailey to Lansdale, through
appellant, is an investment contemplated by the Revised Securities Act
and not a mere act of buying and selling foreign exchange.

Facts:
Elvira Petralba was convicted for violating Sections 4, 19 and 29 of
Batas Pambansa Bilang (B.P. Blg.) 178, otherwise known as The
Revised Securities Act.
Under the three Informations, appellant is charged with conniving and
confederating together with her three co-accused, and mutually
helping one another, with deliberate intent to gain and defraud
complainant by: (1) offering for sale, together with her co-accused,
securities which were not registered in violation of Section 4 of the law;
(2) representing and acting as broker or dealer to induce complainant
as in fact she delivered the subject amount, not having been registered
with the Securities and Exchange Commission, in violation of Section
19 of the same law; and (3) assuring the complainant that Lansdale is
duly licensed to engage in foreign exchange trading when in fact said
company is not duly-licensed, as a consequence of which complainant
invested the amount of $6,000.00, thereby engaging in fraudulent
transactions in foreign exchange trading, in violation of Section 29 of
the law.

Moreover, the receipt merely shows that Dr. Bailey remitted the
amount of US$6,000.00 to Lansdale through appellant, as account
executive. It contained a request for appellant to follow-up proper
remittance and credit of her trading account as well as the issuance of
the receipt of said amount which is confirmed by appellant as shown by
her signature. The receipt did not prove that appellant committed any
of the offenses charged against her. The receipt merely established
that appellant received the amount from Dr. Bailey for the purpose of
remitting the same to Lansdale and to follow-up the crediting thereof
to her trading account. The brochure, given by appellant to Dr. Bailey,
does not prove appellants guilt beyond reasonable doubt in the
absence of direct and specific proof on the (1) actual participation of
appellant in the alleged offer and sale of securities to the public within
the Philippines which were not registered in violation of Section 4 of
B.P. Blg. 178; (2) manner by which appellant misrepresented to Dr.
Bailey that Lansdale is duly licensed to engage in foreign exchange
trading in violation of Section 29 of said law; and (3) manner by
which appellant misrepresented to Dr. Bailey that she was a licensed
broker, dealer or salesperson of securities when in fact she was not,
thereby inducing Dr. Bailey to invest and deliver the amount of
US$6,000.00, in violation of Section 19 of said law.

Issue:
W/N the prosecution has established the guilt of appellant beyond
reasonable doubt for violating Sections 4, 19 and 29 of B.P. Blg. 178
Ruling:
After a careful examination of the prosecution evidence, we find that
the findings of both lower courts were grounded on mere surmises or
conjectures; the inferences they made were manifestly mistaken,
bordering on absurdity; and the judgment of the appellate court was
based on misapprehension of facts or mere conclusions without
citation of specific, competent evidence.
The Court of Appeals erred in affirming the RTCs decision. The
prosecution failed to establish the guilt of appellant beyond reasonable
doubt.
Appellant claims that the transaction that transpired between
complainant and her employer Lansdale was a mere foreign exchange
trading which is not covered by the term securities of B.P. Blg. 178,
the prevailing law at the time of the commission of the alleged crimes.

Furthermore, while it is established by the prosecution that Lansdale

was not duly registered and appellant was not licensed as a broker, the
manner by which appellant connived with her co-accused and induced
her to invest her $6,000.00, not $9,000.00 as erroneously stated in
the Information are too sketchy, devoid of any certainty as to the actual
participation of appellant in the commission of the offenses charged
against her.
The testimony of complainant read in its entirety does not sufficiently
establish that appellant herself had uttered any words of assurance or
committed a particular act as specified under the aforequoted
provision of law. Neither did complainants testimony show her specific
participation in the alleged conspiracy to defraud complainant. Dr.
Baileys testimony did not prove the guilt of appellant beyond
reasonable doubt.
Moreover, the RTC made mention of a brochure, marked as Exhibit B
but the same is not offered as evidence by the prosecution as shown by
its Written Offer of Evidence.
In fine, there is no proof beyond reasonable doubt to hold appellant
guilty of all the offenses charged against her under the three
Informations.

Section 2 of B.P. Blg. 178 provides:

PowerHomes Vs. SEC (546 S 567)
Section 2. Definitions. For purposes of this Act:
Facts:
Securities shall include bonds, debentures, notes, evidences of
indebtedness, shares in a company, pre -organization certificates or
subscription, investment contracts, certificates of interest or
participation in a profit sharing agreement, xxxxxxx
Clearly therefrom, as pointed out by the Office of the Solicitor General,
the foreign exchange trading transaction that transpired between
complainant and Lansdale appears to be an investment contract or
participation in a profit sharing agreement that falls within the

Petitioner is a domestic corporation duly registered with public

respondent SEC.
Its primary purpose is to engage in the transaction of promoting,
acquiring, managing, leasing, obtaining options on, development, and
improvement of real estate properties for subdivision and allied
purposes, and in the purchase, sale and/or exchange of said
subdivision and properties through network marketing.

179

Later, the Commission ordered POWER HOMES UNLIMITED, CORP.,

its officers, directors, agents, representatives and any and all persons
claiming and acting under their authority to immediately CEASE AND
DESIST from further engaging in the sale, offer or distribution of the
securities upon the receipt of this order.
In accordance with the provisions of Section 64.3 of Republic Act No.
8799, otherwise known as the Securities Regulation Code, the parties
subject of this Cease and Desist Order may file a request for the lifting
thereof within five (5) days from receipt.
On February 5, 2001, petitioner moved for the lifting of the CDO,
which public respondent SEC denied for lack of merit on February 22,
2001.
Aggrieved, petitioner went to the Court of Appeals imputing grave
abuse of discretion amounting to lack or excess of jurisdiction on
public respondent SEC for issuing the order. It also applied for a
temporary restraining order, which the appellate court granted.
On June 18, 2004, the Court of Appeals denied petitioners motion for
reconsideration; hence, this petition for review.

An investment contract is defined in the Amended Implementing Rules

and Regulations of R.A. No. 8799 as a contract, transaction or scheme
(collectively contract) whereby a person invests his money in a
common enterprise and is led to expect profits primarily from the
efforts of others.
We therefore rule that the business operation or the scheme of
petitioner constitutes an investment contract that is a security under
R.A. No. 8799. Thus, it must be registered with public respondent SEC
before its sale or offer for sale or distribution to the public. As
petitioner failed to register the same, its offering to the public was
rightfully enjoined by public respondent SEC. The CDO was proper
even without a finding of fraud. As an investment contract that is
security under R.A. No. 8799, it must be registered with public
respondent SEC, otherwise the SEC cannot protect the investing public
from fraudulent securities. The strict regulation of securities is founded
on the premise that the capital markets depend on the investing
publics level of confidence in the system.

3.

PONZI SCHEME

People Vs. Balasa (295 S 49)

Facts:
Issue:
W/N petitions business constitutes an investment contract which
should be registered with public respondent SEC before its sale or offer
for sale or distribution to the public
Ruling:
Section 8. Requirement of Registration of Securities. 8.1. Securities
shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission
may prescribe, shall be made available to each prospective purchaser.
Public respondent SEC found the petitioner as a marketing company
that promotes and facilitates sales of real properties and other related
products of real estate developers through effective leverage marketing.
It also described the conduct of petitioners business as follows:
The scheme of the [petitioner] corporation requires an investor to
become a Business Center Owner (BCO) who must fill-up and sign its
application form. The Terms and Conditions printed at the back of the
application form indicate that the BCO shall mean an independent
representative of Power Homes, who is enrolled in the companys
referral program and who will ultimately purchase real property from
any accredited real estate developers and as such he is entitled to a
referral bonus/commission. Paragraph 5 of the same indicates that
there exists no employer/employee relationship between the BCO and
the Power Homes Unlimited, Corp.
The BCO is required to pay US$234 as his enrollment fee. His
enrollment entitles him to recruit two investors who should pay
US$234 each and out of which amount he shall receive US$92. In case
the two referrals/enrollees would recruit a minimum of four (4)
persons each recruiting two (2) persons who become his/her own down
lines, the BCO will receive a total amount of US$1f7.20 after deducting
the amount of US$36.80 as property fund from the gross amount of
US$184. After recruiting 128 persons in a period of eight (8) months
for each Left and Right business groups or a total of 256 enrollees
whether directly referred by the BCO or through his down lines, the
BCO who receives a total amount of US$11,412.80 after deducting the
amount of US$363.20 as property fund from the gross amount of
US$11,776, has now an accumulated amount of US$2,700 constituting
as his Property Fund placed in a Property Fund account with the
Chinabank. This accumulated amount of US$2,700 is used as
partial/full down payment for the real property chosen by the BCO
from any of petitioners accredited real estate developers.

The Panata Foundation of the Philippines, Inc., a non-stock, non-profit

corporation with principal address at San Miguel, Puerto Princesa,
Palawan, was registered with the securities and Exchange Commission,
under S.E.C. Reg. No. 165565. Its ten incoporators were Priscilla
Balasa, Normita Visaya, Analina Francisco, Lolita Gelilang, Cynthia
Ang, Norma Francisco, Purabel Espidol, Melinda Mercado, Rodolfo
Ang, Jr. and Teresa G. Carandang. Five incorporators, namely, Priscilla
Balasa, Normita Visaya, Analina Francisco, Lolita Gelilang and Cynthia
Ang were named first trustees.
In addition, the management of the foundation was entrusted to
Priscilla Balasa, as president and general manager; Normita Visaya as
corporate secretary and head comptroller; Norma Francisco as cashier;
Guillermo Francisco as the disbursing officer; and Analina Francisco as
treasurer. The latter also doubled as a typist of the Foundation.
On the other hand, the employees of the foundation were the tellers
Rosemarie Balasa, Sylvia Magnaye, Judith Ponciano, Jessica Buaya,
Rosario Arciaga, Paul Francisco, Enriquita Gabayan and Anita
Macmac. The comptrollers, Ruth Jalover, Amarino Agayo, and Avelina
Yan were under the supervision of Normita Visaya. Nelia Daco, one of
the clerks assigned outside, was the one in direct contact with the
depositors.
The Foundation's purposes, as stated in its by-laws, were as follows:
1. Uplift members' economic condition by way of financial or
consultative basis ( sic );
2. To encourage members in a self-help program;
3. To grant educational assistance;
4. To implement the program on the Anti-Drug campaign;
5. To acquire facilities either by or through purchase, lease, bequest of
donations, equipments ( sic ), machineries ( sic ) and supplies for
purposes of carrying out its business operation or hold such real or
personal properties as may be convenient and proper in order to
achieve the purpose of this corporation;
6. To cooperate with other organizations, institutions with similar
activities for purposes of carrying out its business; and 7. To organize
seminars or conferences specially in the rural areas and other selected
cities. 2

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After obtaining its SEC registration, the foundation immediately swung

into operation. It sent out brochures soliciting deposits from the public,
assuring would-be depositors that their money would either be doubled
after 21 days or trebled after 30 days. Priscilla Balasa also went around
convincing people to make deposits with the foundation at their office
at the Diaz Apartment, Puerto Princesa.
The modus operandi for investing with the foundation was as follows:
When a person would deposit an amount, the amount would be taken
by a clerk to be given to the teller. The teller would then fill up a
printed form called a "slot." These "slots" were part of a booklet, with
one booklet containing one hundred "slots."

The control number indicated the number of the "slot" in a booklet,

while the space after "date" would contain the date when the slot was
acquired, as well as the date of its maturity. The amount deposited
determined the number of shares, one share being equivalent to one
hundred pesos. The depositor had the discretion when to affix his
signature on the space provided therefor. Some would sign their slot
only after payment on maturity, while others would sign as soon as
they were given the slot. However, without the control number and the
stamp of the teller, duly signed or initialed, no depositor could claim
the proceeds of his deposit upon maturity. 4
After the slot had been filled up by the teller, he would give it to the
clerk assigned outside. The clerk would then give the slot to the
depositor. Hence, while it was the teller who prepared and issued the
slot, he had no direct contact with the depositor. The slots handed to a
depositor were signed beforehand by the president of the foundation.
Every afternoon, the comptrollers would take the list of depositors
made by the tellers with the amounts deposited by each, and have these
typed. Norma Francisco would then receive from the tellers the
amounts deposited by the public. It was also her job to pay the salaries
of the foundation's employees. For his part, Guillermo Francisco would
release money whenever a deposit would mature as indicated in the
slots.
According to the foundations rules, an investor could deposit up to
P5,000.00 only, getting a slot corresponding thereto. Anyone who
deposited more than that amount would, however, be given a slot but
the slot had to be in he name of another person or several other
persons, depending upon the amount invested. According to Sylvia
Magnaye, a foundation teller, all deposits maturing in August 1989
were to be tripled. For such deposits, the slots issued were colored
yellow to signify that the depositor would have his deposit tripled.
Deposits that would mature subsequent to August were only given
double the amount deposited. However, there were times when it was
the depositor who would choose that his deposit be tripled, in which
case, the deposit would mature later.
The amounts received by the foundation were deposited in banks.
Thus, a foundation teller would, from time to time, go to PNB, PCI
Bank, DBP and the Rural Bank of Coron to deposit the collections in a
joint account in the names of Priscilla Balasa and Norma Francisco.
Initially, the operation started with a few depositors, with most
depositors investing small amounts to see whether the foundation
would make good on its promise. When the foundation paid double or
triple the amounts of their investment at maturity, most not only
reinvested their earnings but even added to their initial investments.
As word got around that deposits could be doubled within 21 days, or
tripled if the period lasted for more than 30 days, more depositors were
attracted. Blinded by the prospect of gaining substantial profits for
nothing more than a minuscule investment, these investors, like
previous ones, were lured to reinvest their earnings, if not to invest
more.
Most would invest more than P5,000.00, the investment limit set by
the foundation. Priscilla Balasa would, however, encourage depositors

to invest more than P5,000.00, provided that the excess was deposited
under the name of others. She assured the depositors that this was safe
because as long as the depositor was holding the slots, he was the
"owner" of the amount deposited. Most investors then deposited
amounts in the names of their relatives.
At the outset, the foundation's operations proceeded smoothly, as
satisfied investors collected their investments upon maturity. On
November 29, 1989, however, the foundation did not open. Depositors
whose investments were to mature on said date demanded payments
but none was forthcoming. On December 2, 1989, Priscilla Balasa
announced that since the foundation's money had been invested in the
stock market, it would resume operations on December 4, 1989. On
that date, the foundation remained closed. Depositors began to
demand reimbursement of their deposits, but the foundation was
unable to deliver.
Consequently, sixty-four informations, all charging the offense of
estafa, as defined in Presidential Decree No. 1689, were filed against
Priscilla Balasa, Normita Visaya, Norma Francisco, Guillermo
Francisco, Analina Francisco and eight other persons, mostly
incorporators and employees of the Panata Foundation, before the
Regional Trial Court of Palawan. Fourteen cases, including Criminal
Case Nos. 8429 and 8751, were raffled off to Branch 52. Two more
cases, Criminal Case Nos. 8704 and 8749, were similarly assigned to it.
Of the sixteen casts assigned to Branch 52, eight were, with the consent
of the accused, provisionally dismissed for lack of evidence.
Ruling:
It has been held that where one states that the future profits or income
of an enterprise shall be a certain sum, but he actually knows that there
will be none, or that they will be substantially less than he represents,
the statement constitutes actionable fraud where the hearer believes
him and relies on the statement to his injury. That there was no profit
forthcoming can be clearly deduced from the fact that the foundation
was not engaged nor authorized to engage in any lucrative business to
finance its operation. It was not shown that it was the recipient of
donations or bequest with which to finance its "double or triple your
money" scheme, nor did it have any operating capital to speak of when
it started operations.
Parenthetically, what appellants offered the public was a "Ponzi
scheme," an investment program that offers impossibly high returns
and pays these returns to early investors out of the capital contributed
by later investors. Named after Charles Ponzi who promoted the
scheme in the 1920s, the original scheme involved the issuance of
bonds which offered 50% interest in 45 days or a 100% profit if held for
90 days. Basically, Ponzi used the money he received from later
investors to pay extravagant rates of return to early investors, thereby
inducing more investors to place their money with him in the false
hope of realizing this same extravagant rate of return themselves. This
was the very same scheme practiced by the Panata Foundation.
However, the Ponzi scheme works only as long as there is an everincreasing number of new investors joining the scheme. To pay off the
50% bonds Ponzi had to come up with a one-and-a-half times increase
with each round. To pay 100% profit he had to double the number of
investors at each stage, and this is the reason why a Ponzi scheme is a
scheme and not an investment strategy. The progression it depends
upon is unsustainable. The pattern of increase in the number of
participants in the system explains how it is able to succeed in the short
run and, at the same time, why it must fail in the long run. This game is
difficult to sustain over a long period of time because to continue
paying the promised profits to early investors, the operator needs an
ever larger pool of later investors. The idea behind this type of swindle
is that the "con-man" collects his money from his second or third
round of investors and then absconds before anyone else shows up to
collect. Necessarily, these schemes only last weeks, or months at most.
Note should also be taken of the fact that appellants used "slots" in
their operation. These slots are actually securities, the issuance of
which needs the approval of the Securities and Exchange Commission.

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Knowing fully well that the S.E.C. would not approve the issuance of
securities by a non-stock, non-profit organization, the operators of the
Ponzi scheme, nevertheless, applied for registration as a foundation, an
entity not allowed to engage in securities.

On July 15, 2003, petitioner filed with the Department of Justice

(DOJ), a complaint charging the above-named officers and members of
the SCB Board of Directors and other SCB officials, with syndicated
estafa.

Finally, if the foundation were indeed legitimate, the incorporators,

outside of the members of the Francisco family, would not have
escaped from the clutches of the law. If the foundation and its
investment scheme were legal, then it behooved them to come out and
testify for their own exoneration. The wicked flee when no man
pursueth: but the righteous are bold as a lion.

On February 7, 2004, petitioner filed with the DOJ a complaint for

violation of Section 8.1 of the Securities Regulation Code against
private respondents, docketed as I.S. No. 2004-229.

4.

VIOLATION OF SRC

Baviera Vs. Paglinawan (515 S 170)

Facts:
Manuel Baviera, petitioner in these cases, was the former head of the
HR Service Delivery and Industrial Relations of Standard Chartered
Bank-Philippines (SCB), one of herein respondents. SCB is a foreign
banking corporation duly licensed to engage in banking, trust, and
other fiduciary business in the Philippines.
As early as 1996, it acted as a stock broker, soliciting from local
residents foreign securities called GLOBAL THIRD PARTY MUTUAL
FUNDS (GTPMF), denominated in US dollars. These securities were
not registered with the Securities and Exchange Commission (SEC).
These were then remitted outwardly to SCB-Hong Kong and SCBSingapore.
SCB was able to sell GTPMF securities worth around P6 billion to some
645 investors.
However, SCBs operations did not remain unchallenged. On July 18,
1997, the Investment Capital Association of the Philippines (ICAP) filed
with the SEC a complaint alleging that SCB violated the Revised
Securities Act, particularly the provision prohibiting the selling of
securities without prior registration with the SEC; and that its actions
are potentially damaging to the local mutual fund industry.
In its answer, SCB denied offering and selling securities, contending
that it has been performing a purely informational function without
solicitations for any of its investment outlets abroad; that it has a trust
license and the services it renders under the Custodianship
Agreement for offshore investments are authorized by Section 72 of
the General Banking Act; that its clients were the ones who took the
initiative to invest in securities; and it has been acting merely as an
agent or passive order taker for them.
On September 2, 1997, the SEC issued a Cease and Desist Order against
SCB, holding that its services violated Sections 4(a) and 19 of the
Revised Securities Act.
Meanwhile, the BSP directed SCB not to include investments in global
mutual funds issued abroad in its trust investments portfolio without
prior registration with the SEC. SCB sent a letter to the BSP confirming
that it will withdraw third-party fund products which could be directly
purchased by investors.
However, notwithstanding its commitment and the BSP directive, SCB
continued to offer and sell GTPMF securities in this country. This
prompted petitioner to enter into an Investment Trust Agreement with
SCB wherein he purchased US$8,000.00 worth of securities upon the
banks promise of 40% return on his investment and a guarantee that
his money is safe. After six (6) months, however, petitioner learned
that the value of his investment went down to US$7,000.00.
Meanwhile, on November 27, 2000, the BSP found that SCB failed to
comply with its directive of August 17, 1998. Consequently, it was fined
in the amount of P30,000.00.

Issue:
W/N the petitioners complaint for violation of Securities Regulation
Code with the DOJ is proper
Ruling:
Section 53.1 of the Securities Regulation Code provides:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses.
53. 1. The Commission may, in its discretion, make such investigation
as it deems necessary to determine whether any person has violated or
is about to violate any provision of this Code, any rule, regulation or
order thereunder, or any rule of an Exchange, registered securities
association, clearing agency, other self-regulatory organization, and
may require or permit any person to file with it a statement in writing,
under oath or otherwise, as the Commission shall determine, as to all
facts and circumstances concerning the matter to be investigated. The
Commission may publish information concerning any such violations
and to investigate any fact, condition, practice or matter which it may
deem necessary or proper to aid in the enforcement of the provisions of
this Code, in the prescribing of rules and regulations thereunder, or in
securing information to serve as a basis for recommending further
legislation concerning the matters to which this Code relates:
Provided, however, That any person requested or subpoenaed to
produce documents or testify in any investigation shall simultaneously
be notified in writing of the purpose of such investigation: Provided,
further, That all criminal complaints for violations of this
Code and the implementing rules and regulations enforced
or administered by the Commission shall be referred to the
Department of Justice for preliminary investigation and
prosecution before the proper court: Provided, furthermore,
That in instances where the law allows independent civil or criminal
proceedings of violations arising from the act, the Commission shall
take appropriate action to implement the same: Provided, finally; That
the investigation, prosecution, and trial of such cases shall be given
priority.
The Court of Appeals held that under the above provision, a criminal
complaint for violation of any law or rule administered by the SEC
must first be filed with the latter. If the Commission finds that there is
probable cause, then it should refer the case to the DOJ. Since
petitioner failed to comply with the foregoing procedural requirement,
the DOJ did not gravely abuse its discretion in dismissing his
complaint in I.S. No. 2004-229.
A criminal charge for violation of the Securities Regulation Code is a
specialized dispute.
Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under the
doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge
and expertise of said administrative tribunal to determine technical
and intricate matters of fact. The Securities Regulation Code is a
special law. Its enforcement is particularly vested in the SEC. Hence,
all complaints for any violation of the Code and its implementing rules
and regulations should be filed with the SEC. Where the complaint is
criminal in nature, the SEC shall indorse the complaint to the DOJ for
preliminary investigation and prosecution as provided in Section 53.1
earlier quoted.
We thus agree with the Court of Appeals that petitioner committed a
fatal procedural lapse when he filed his criminal complaint directly

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with the DOJ. Verily, no grave abuse of discretion can be ascribed to

the DOJ in dismissing petitioners complaint.
5.

FUTURES TRADING

W/N the Trading Contract on "futures" is a specie of gambling and

therefore null and void
Ruling:

Onapal Vs. CA (218 S 281)

Facts:
ONAPAL Philippines Commodities, Inc. (petitioner), a duly organized
and existing corporation, was licensed as commission merchant/broker
by the SEC, to engage in commodity futures trading in Cebu City.
Onapal and Chua concluded a "Trading Contract". Like all customers
of the petitioner, private respondent was furnished regularly with
"Commodities Daily Quotations" showing daily movements of prices of
commodity futures traded and of market reports indicating the volume
of trade in different future exchanges in Hongkong, Tokyo and other
centers. Every time a customer enters into a trading transaction with
petitioner as broker, the trading order is communicated by telex to its
principal, Frankwell Enterprises of Hongkong. If the transaction, either
buying or selling commodity futures, is consummated by the principal,
the petitioner issues a document known as "Confirmation of Contract
and Balance Sheet" to the customer. An order of a customer of the
petitioner is supposed to be transmitted from Cebu to petitioner's
office in Manila. From Manila, it should be forwarded to Hongkong
and from there, transmitted to the Commodity Futures Exchange in
Japan.
There were only two parties involved as far as the transactions covered
by the Trading Contract are concerned the petitioner and the private
respondents.
Sometime in April of 1983, Chua was invited by Onapal's Account
Executive Elizabeth Diaz to invest in the commodity futures trading by
depositing the amount of P500,000.00; She was further told that the
business is "profitable" and that she could withdraw her money
anytime; she was furthermore instructed to go to the Onapal Office
where she met the Manager, Mr. Ciam, and the Account Executive
Elizabeth Diaz who told her that they would take care of how to trade
business and her account. She was then made to sign the Trading
Contract and other documents without making her aware/understand
the risks involved; that at the time they let her sign "those papers" they
were telling her that those papers were for "formality sake"; that when
she was told later on that she made a profit of P20,480.00 in a span of
three days in the first transaction, they told her that the business is
"very profitable".
On June 2, 1983, Chua was informed by Miss Diaz that she had to
deposit an additional amount of P300,000.00 "to pay the difference"
in prices, otherwise she will lose her original deposit of P500,000.00;
Fearing the loss of her original deposit, she was constrained to deposit
an additional amount of P300,000.00; Since she was made to
understand that she could withdraw her deposit/investment anytime,
she not knowing how the business is operated/managed as she was not
made to understand what the business was all about, she wanted to
withdraw her investment; but Elizabeth Diaz, told her she could not get
out because there are some accounts hanging on the transactions.
Chua further testified that she understood the transaction of buying
and selling as speculating in prices, and her paying the difference
between gains and losses without actual delivery of the goods to be
gambling, and she would like to withdraw from this kind of business,
the risk of which she was not made aware of. She further testified that
she stopped trading in commodity futures in September, 1983 when
she realized she was engaged in gambling. She was able to get only
P470,000.00 out of her total deposit of P800,000.00. In order to
recover the loss of P330,000.00, she filed this case and engaged the
services of counsel for P40,000.00 and expects to incur expenses of
litigation in the sum of P20,000.00."
Issue:

A commodity futures contract is a specie of securities included in the

broad definition of what constitutes securities under Section 2 of the
Revised Securities Act.
Sec. 2 . . .:
(a) Securities shall include bonds, . . ., commodity futures contracts, . . .
The Revised Rules and Regulations on Commodity Futures Trading
issued by the SEC and approved by the Monetary Board of the Central
bank defines such contracts as follows:
"Commodity Futures Contract" shall refer to an agreement to buy or
sell a specified quantity and grade of a commodity at a future date at a
price established at the floor of the exchange.
The petitioner is a duly licensed commodity futures broker as defined
under the Revised Rules and Regulations on Commodity Futures
Trading as follows:
"Futures Commission Merchant/Broker" shall refer to a corporation or
partnership, which must be registered and licensed as a Futures
Commission Merchant/Broker and is engaged in soliciting or in
accepting orders for the purchase or sale of any commodity for future
delivery on or subject to the rules of the contract market and that, in
connection with such solicitation or acceptance of orders, accepts any
money, securities or property (or extends credit in lieu thereof) to
margin, guarantee or secure any trade or contract that results or may
result therefrom.
At the time private respondent entered into the transaction with the
petitioner, she signed a document denominated as "Trading Contract"
in printed form as prepared by the petitioner represented by its Branch
Manager, Albert Chiam, incorporating the Rules for Commodity
Trading. A copy of said contract was furnished to the private
respondent but the contents thereof were not explained to the former,
beyond what was told her by the petitioner's Account Executive
Elizabeth Diaz. Private respondent was also told that the petitioner's
principal was Frankwell Enterprises with offices in Hongkong but the
private respondent's money which was supposed to have been
transmitted to Hongkong, was kept by petitioner in a separate account
in a local bank.
The evidence of Chua tend to show that in her transactions with the
Onapal, the parties never intended to make or accept delivery of any
particular commodity but the parties merely made a speculation on the
rise or fall in the market of the contract price of the commodity, subject
of the transaction, on the pretended date of delivery so that if the
forecast was correct, one party would make a profit, but if the forecast
was wrong, one party would lose money. Under this scheme, Chua was
only able to recover P470,000.00 out of her original and "additional"
deposit of P800,000.00 with the defendant.
Petitioner admits that in all the transactions that it had with Chua,
there was no actual deliveries and that it has made no arrangement
with the Central Bank for the remittance of its customer's money
abroad but contends in its defense that the mere fact that there were no
actual deliveries made in the transactions which Chua had with
petitioner, did not mean that no such actual deliveries were intended
by the parties since paragraph 10 of the rules for commodity trading,
attached to the trading contract which Chua signed before she traded
with the petitioner amply provides for actual delivery of the commodity
subject of the transaction.

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The trading contract signed by private respondent and Albert Chiam,

representing petitioner, is a contract for the sale of products for future
delivery, in which either seller or buyer may elect to make or demand
delivery of goods agreed to be bought and sold, but where no such
delivery is actually made. By delivery is meant the act by which the res
or subject is placed in the actual or constructive possession or control
of another. It may be actual as when physical possession is given to the
vendee or his representative; or constructive which takes place without
actual transfer of goods, but includes symbolic delivery or substituted
delivery as when the evidence of title to the goods, the key to the
warehouse or bill of lading/warehouse receipt is delivered. As a
contract in printed form, prepared by petitioner and served on private
respondent, for the latter's signature, the trading contract bears all the
indicia of a valid trading contract because it complies with the Rules
and Regulations on Commodity Futures Trading as prescribed by the
SEC. But when the transaction which was carried out to implement the
written contract deviates from the true import of the agreement as
when no such delivery, actual or constructive, of the commodity or
goods is made, and final settlement is made by payment and receipt of
only the difference in prices at the time of delivery from that prevailing
at the time the sale is made, the dealings in futures become mere
speculative contracts in which the parties merely gamble on the rise or
fall in prices. A contract for the sale or purchase of goods/commodity
to be delivered at future time, if entered into without the intention of
having any goods/commodity pass from one party to another, but with
an understanding that at the appointed time, the purchaser is merely to
receive or pay the difference between the contract and the market
prices, is a transaction which the law will not sanction, for being illegal.
The facts clearly establish that the petitioner is a direct participant in
the transaction, acting through its authorized agents. It received the
customer's orders and private respondent's money. As per terms of the
trading contract, customer's orders shall be directly transmitted by the
petitioner as broker to its principal, Frankwell Enterprises Ltd. of
Hongkong, being a registered member of the International Commodity
Clearing House, which in turn must place the customer's orders with
the Tokyo Exchange. There is no evidence that the orders and money
were transmitted to its principal Frankwell Enterprises Ltd. in
Hongkong nor were the orders forwarded to the Tokyo Exchange. We
draw the conclusion that no actual delivery of goods and commodity
was intended and ever made by the parties. In the realities of the
transaction, the parties merely speculated on the rise and fall in the
price of the goods/commodity subject matter of the transaction. If
private respondent's speculation was correct, she would be the winner
and the petitioner, the loser, so petitioner would have to pay private
respondent the "margin". But if private respondent was wrong in her
speculation then she would emerge as the loser and the petitioner, the
winner. The petitioner would keep the money or collect the difference
from the private respondent. This is clearly a form of gambling
provided for with unmistakeable certainty under Article 2018
abovestated. It would thus be governed by the New Civil Code and not
by the Revised Securities Act nor the Rules and Regulations on
Commodity Futures Trading laid down by the SEC.

respondent had been transmitted. But petitioner failed to prove this

point.
Queensland-Tokyo Vs. Matsuda (512 S 276)
Facts:
This is a case for recovery of investments with damages filed by the
Margie Matsuda against Queensland-Tokyo Commodities, Inc., a
corporation then engaged as a commodity futures broker, and its
officers and directors, citing as grounds therefor the alleged nullity of
complainants spot/futures contracts for having been allegedly traded
and supervised by unlicensed employees of QTCI, in violation of
Section 20 and 33-A of the Revised Rules and Regulations on
Commodity Futures Trading.
On July 13, 1995, Matsuda agreed to invest with QTCI on the basis of
its officers representations that investments in currency contracts are
very profitable, and that her account would be handled by licensed
investment consultants. Charlie Collado induced her to immediately
sign the Customers Agreement and Risk Disclosure Statement without
explaining the contents thereof; that she made investments in QTCI on
July 13, 1995 in the amount of P150,000.00 and an additional amount
of P2,000,000.00 on July 24, 1995; that she was required to execute a
Special Power of Attorney authorizing Felix Sampaga and that within
the same period complainants account incurred substantial losses; and
that sometime in April 1996, upon verification with the Securities and
Exchange Commission (SEC), complainant learned for the first time
that Felix Sampaga and Charlie Collado were not licensed by the SEC;
that she demanded the return of her investments but the petitioners
refused to comply, and that since her currency contracts are null and
void for having been traded and supervised by unlicensed employees,
she is entitled to the return of her investments in the total amount of
P2,150,000.00.
Petitioners denied having made misrepresentations and false pretenses
to the complainant, alleging, among others, that it was the complainant
together with her Japanese husband who came to the office of QTCI on
July 13, 1995 to pen an account with an initial deposit of P150,000.00.
The petitioners further alleged that Charlie Collado did not induce the
complainant to sign the Customers Agreement and Risk Disclosure
Statement; that Collado is not involved in the marketing of investments
because he is only in charge of operations; that Collado did not
misrepresent himself as a licensed consultant and that he signed in
behalf of QTCI on the Customers Agreement as part of his official
function which does not however require a license; that complainant
deposited P2,000,000.00 on July 24, 1995 to open a second account
after she made a profit in the amount of P67,978.61 under her first
account; and that the attorney-in-fact of the complainant is Jose Joel
Colmenar and not Felix Sampaga; that Jose Joel Colmenar was duly
licensed by the SEC as Commodity Futures salesman.
Issue:

After considering all the evidence in this case, it appears that petitioner
and private respondent did not intend, in the deals of purchasing and
selling for future delivery, the actual or constructive delivery of the
goods/commodity, despite the payment of the full price therefor. The
contract between them falls under the definition of what is called
"futures". The payments made under said contract were payments of
difference in prices arising out of the rise or fall in the market price
above or below the contract price thus making it purely gambling and
declared null and void by law.
Under Article 2018, the private respondent is entitled to refund from
the petitioner what she paid. There is no evidence that the orders of
private respondent were actually transmitted to the petitioner's
principal in Hongkong and Tokyo. There was no arrangement made by
petitioner with the Central Bank for the purpose of remitting the
money of its customers abroad. The money which was supposed to be
remitted to Frankwell Enterprises of Hongkong was kept by petitioner
in a separate account in a local bank. Having received the money and
orders of private respondent under the trading contract, petitioner has
the burden of proving that said orders and money of private

W/N the Commission en banc erred in dismissing petitioners appeal

Ruling:
The commission en banc did not err in dismissing the petitioners
appeal.
Petitioners argument is that pursuant to the August 31, 1999 New
Rules of Procedure, particularly Sec. 1 of Rule XV it had fifteen (15)
days from December 6, 1999 the date they received the denial of their
Motion for Reconsideration or up to December 21, 1999. And since
they filed their appeal on December 20, 1999, [so] then it was filed on
time.
Such argument is misplaced. Petitioners would invoke the new rules if
favorable to them but would disregard a clear one if adverse to their
stand. Petitioners should be consistent. If they want to have the July
15, 1999 rule apply to them, then they should not be selective in its
application. Under Sec. 8, Rule XV of the same rule a Motion for
Reconsideration is a prohibited pleading. Such being the case, the

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judgment of the Hearing Officer has become final and executory

pursuant to Sec. 1 of Rule XVI of said Rule.
More so under the old rule, Under Sec. 3, Rule XVI of the old rules, the
time during which [the] Motion for Reconsideration is pending shall be
deducted from the period for perfecting an appeal. Pursuant to said
Rule petitioners were twelve (12) days late in filing the appeal. Either
way, therefore, under the old or the new Rule, the dismissal of the
appeal by the respondent Commission is proper and valid.
The other grounds relied upon questions of the finding of facts and
conclusions of the Hearing Officer. Petitioners ought to be minded
that in reviewing administrative decisions, the findings of fact made
therein must be respected as long as they are supported by substantial
evidence. (Lo v. CA, 321 SCRA 190). We have carefully read the
decision sought to be [reviewed] and We are convinced that the same is
supported by substantial evidence. In fact the issues raised herein are
the same issues raised by Petitioners in its Motion for Reconsideration
filed with the Hearing Officer.
In sum, it was sufficiently proven that only respondent Charlie Collado
and Felix Sampaga had in fact, assented to the unlawful acts of
respondent corporation, [and they] should jointly and severally [be]
liable for the payment of all damages sustained and which are
sufficiently proven by the complainant.
6.

TENDER OFFER

Osmena III Vs. SSS (533 S 313)

Facts:
Sometime in 2003, SSS, a government financial institution (GFI)
created pursuant to Republic Act (RA) No. 1161 and placed under the
direction and control of SSC, took steps to liquefy its long-term
investments and diversify them into higher-yielding and less volatile
investment products. Among its assets determined as needing to be
liquefied were its shareholdings in EPCIB. The principal reason behind
the intended disposition, as explained by respondent Dela Paz during
the February 4, 2004 hearing conducted by the Senate Committee on
Banks, Financial Institutions and Currencies, is that the shares in
question have substantially declined in value and the SSS could no
longer afford to continue holding on to them at the present level of
EPCIBs income.
Albeit there were other interested parties, only Banco de Oro Universal
Bank (BDO) and its investment subsidiary, respondent BDO Capital,
appeared in earnest to acquire the shares in question. Following talks
between them, BDO and SSS signed, on December 30, 2003, a LetterAgreement, for the sale and purchase of some 187.8 million EPCIB
common shares (the Shares, hereinafter), at P43.50 per share, which
represents a premium of 30% of the then market value of the EPCIB
shares. At about this time, the Shares were trading at an average of
P34.50 @ share.
On April 19, 2004, the Commission on Audit (COA), in response to
respondent Dela Pazs letter-query on the applicability of the public
bidding requirement under COA Circular No. 89-296 on the
divestment by the SSS of its entire EPICB equity holdings, stated that
the circular covers all assets of government agencies except those
merchandize or inventory held for sale in the regular course of
business. And while it expressed the opinion that the sale of the
subject Shares are subject to guidelines in the Circular, the COA
qualified its determination with a statement that such negotiated sale
would partake of a stock exchange transaction and, therefore, would be
adhering to the general policy of public auction.
On July 14, 2004, SSC passed Res. No. 428 approving, as earlier stated,
the sale of the EPCIB shares through the Swiss Challenge method. A
month later, the equally assailed Res. No. 485 was also passed.
On August 23, 24, and 25, 2004, SSS advertised an Invitation to Bid
for the block purchase of the Shares. The Invitation to Bid expressly

provided that the result of the bidding is subject to the right of BDO
Capital to match the highest bid. October 20, 2004 was the date set
for determining the winning bid.
The records do not show whether or not any interested group/s
submitted bids. The bottom line, however, is that even before the bid
envelopes, if any, could be opened, the herein petitioners commenced
the instant special civil action for certiorari, setting their sights
primarily on the legality of the Swiss Challenge angle and a provision
in the Instruction to Bidders under which the SSS undertakes to offer
the Shares to BDO should no bidder or prospective bidder qualifies.
And as earlier mentioned, the Court, via a status quo order, effectively
suspended the proceedings on the proposed sale.
Under the Swiss Challenge format, one of the bidders is given the
option or preferential right to match the winning bid.
Petitioners assert, in gist, that a public bidding with a Swiss Challenge
component is contrary to COA Circular No. 89-296 and public policy
which requires adherence to competitive public bidding in a
government-contract award to assure the best price possible for
government assets. Accordingly, the petitioners urge that the planned
disposition of the Shares through a Swiss Challenge method be
scrapped. As argued, the Swiss Challenge feature tends to discourage
would-be-bidders from undertaking the expense and effort of bidding
if the chance of winning is diminished by the preferential right to
match clause. Pushing the point, petitioners aver that the Shares are
in the nature of long-term or non-current assets not regularly traded or
held for sale in the regular course of business. As such, their
disposition must be governed by the aforementioned COA circular
which, subject to several exceptions, prescribes public auction as a
primary mode of disposal of GFIs assets. And obviously finding the
proposed purchase price to be inadequate, the petitioners expressed
the belief that if properly bidded out in accordance with [the] COA
Circular , the Shares could be sold at a price of at least Sixty Pesos
(P60.00) per share. Other supporting arguments for allowing
certiorari are set forth in some detail in the basic petition.
Pending consideration of the petition, supervening events and
corporate movements transpired that radically altered the factual
complexion of the case. Some of these undisputed events are: BDO
made public its intent to merge with EPCIB, the GSIS publicly
announced receiving from an undisclosed entity an offer to buy its
stake in EPCIB 12% of the banks outstanding capital stock at
P92.00 per share, and SM Investments Corporation, an affiliate of
BDO and BDO Capital, a mandatory tender offer (Tender Offer)
covering the purchase of the entire outstanding capital stock of
EPCIB at P92.00 per share.
Owing to the foregoing developments, the Court, on October 3, 2006,
issued a Resolution requiring the parties to CONFIRM news reports
that price of subject shares has been agreed upon at P92; and if so, to
MANIFEST whether this case has become moot.
First to comply with the above were public respondents SSS et al., by
filing their Compliance and Manifestation, therein essentially stating
that the case is now moot in view of the SM-BDO Groups Tender Offer
at P92.00 @ unit share, for the subject EPCIB common shares,
inclusive of the SSS shares subject of the petition. They also stated the
observation that the petitioners Manifestation and Motion to Take
Judicial Notice, never questioned the Tender Offer, thus confirming
the dispensability of a competitive public bidding in the disposition of
subject Shares.
Ruling:
The case, with the view we take of it, has indeed become moot and
academic for interrelated reasons.
We start off with the core subject of this case. As may be noted, the
Letter-Agreement, the SPA, the SSC resolutions assailed in this
recourse, and the Invitation to Bid sent out to implement said

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resolutions, all have a common subject: the Shares the 187.84

Million EPCIB common shares.
It cannot be overemphasized,
however, that the Shares, as a necessary consequence of the BDOEPCIB merger which saw EPCIB being absorbed by the surviving BDO,
have been transferred to BDO and converted into BDO common
shares under the exchange ratio set forth in the BDO-EPCIB Plan of
Merger. As thus converted, the subject Shares are no longer equity
security issuances of the now defunct EPCIB, but those of BDO-EPCI,
which, needless to stress, is a totally separate and distinct entity from
what used to be EPCIB. In net effect, therefore, the 187.84 Million
EPCIB common shares are now lost or inexistent. And in this regard,
the Court takes judicial notice of the disappearance of EPCIB stocks
from the local bourse listing. Instead, BDO-EPCI Stocks are presently
listed and being traded in the PSE.
With the above consideration, respondent SSS or SSC cannot, under
any circumstance, cause the implementation of the assailed
resolutions, let alone proceed with the planned disposition of the
Shares, be it via the traditional competitive bidding or the challenged
public bidding with a Swiss Challenge feature.
At any rate, the moot-and-academic angle would still hold sway even if
it were to be assumed hypothetically that the subject Shares are still
existing. This is so, for the supervening BDO-EPCIB merger has so
effected changes in the circumstances of SSS and BDO/BDO Capital as
to render the fulfillment of any of the obligations that each may have
agreed to undertake under either the Letter-Agreement, the SPA or the
Swiss Challenge package legally impossible. When the service has
become so difficult as to be manifestly beyond the contemplation of the
parties, total or partial release from a prestation and from the counterprestation is allowed.
Under the theory of rebus sic stantibus, the parties stipulate in the
light of certain prevailing conditions, and once these conditions cease
to exist, the contract also ceases to exist. Upon the facts obtaining in
this case, it is abundantly clear that the conditions in which SSS and
BDO Capital and/or BDO executed the Letter-Agreement upon which
the pricing component at P43.50 per share of the Invitation to Bid
was predicated, have ceased to exist. Accordingly, the implementation
of the Letter- Agreement or of the challenged Res. Nos. 428 and 485
cannot plausibly push through, even if the central figures in this case
are so minded.
Lest it be overlooked, BDO-EPCI, in a manner of speaking, stands now
as the issuer of what were once the subject Shares. Consequently,
should SSS opt to exit from BDO and BDO Capital, or BDO Capital, in
turn, opt to pursue SSSs shareholdings in EPCIB, as thus converted
into BDO shares, the sale-purchase ought to be via an Issuer Tender
Offer -- a phrase which means a publicly announced intention by an
issuer to acquire any of its own class of equity securities or by an
affiliate of such issuer to acquire such securities . In that eventuality,
BDO or BDO Capital cannot possibly exercise the right to match
under the Swiss Challenge procedure, a tender offer being wholly
inconsistent with public bidding. The offeror or buyer in an issue
tender offer transaction proposes to buy or acquire, at the stated price
and given terms, its own shares of stocks held by its own stockholder
who in turn simply have to accept the tender to effect the sale. No
bidding is involved in the process.
For perspective, a tender offer is a publicly announced intention by a
person acting alone or in concert with other persons to acquire equity
securities of a public company, i.e., one listed on an exchange, among
others. The term is also defined as an offer by the acquiring person to
stockholders of a public company for them to tender their shares
therein on the terms specified in the offer Tender offer is in place to
protect the interests of minority stockholders of a target company
against any scheme that dilutes the share value of their investments. It
affords such minority shareholders the opportunity to withdraw or exit
from the company under reasonable terms, a chance to sell their shares
at the same price as those of the majority stockholders.
7.

SEC Vs. CA (246 S 738)

Facts:
Cualoping Securities Corporation is a stockbroker, Fidelity Stock
Transfer, Inc., on the other hand, is the stock transfer agent of Philex
Mining Corporation.
On or about the first half of 1988, certificates of stock of PHILEX
representing one million four hundred [thousand] (1,400,000) shares
were stolen from the premises of FIDELITY. These stock certificates
consisting of stock dividends of certain PHILEX shareholders had been
returned to FIDELITY for lack of forwarding addresses of the
shareholders concerned.
Later, the stolen stock certificates ended in the hands of a certain
Agustin Lopez, a messenger of New World Security Inc ., an entirely
different stock brokerage firm. In the first half of 1989, Agustin Lopez
brought the stolen stock certificates to CUALOPING for trading and
sale with the stock exchange. When the said stocks were brought to
CUALOPING, all of the said stock certificates bore the "apparent"
indorsement ( signature ) in blank of the owners (the stockholders to
whom the stocks were issued by PHILEX) thereof. At the side of these
indorsements (signatures), the words "Signature Verified" apparently
of FIDELITY were stamped on each and every certificate. Further, on
the words "Signature Verified" showed the usual initials of the officers
of FIDELITY.
Upon receipt of the said certificates from Agustin Lopez, CUALOPING
stamped each and every certificate with the words "Indorsement
Guaranteed," and thereafter traded the same with the stock exchange.
After the stock exchange awarded and confirmed the sale of the stocks
represented by said certificates to different buyers, the same were
delivered to FIDELITY for the cancellation of the stocks certificates
and for issuance of new certificates in the name of the new buyers.
Agustin Lopez on the other hand was paid by CUALOPING with several
checks for Four Hundred Thousand (P400,000.00) Pesos for the value
of the stocks.
After acquiring knowledge of the pilferage, FIDELITY conducted an
investigation with assistance of the National Bureau of Investigation
(NBI) and found that two of its employees were involved and signed
the certificates.
After two (2) months from receipt of said stock certificates, FIDELITY
rejected the issuance of new certificates in favor of the buyers for
reasons that the signatures of the owners of the certificates were
allegedly forged and thus the cancellation and new issuance thereof
cannot be effected.
On 11 August 1988, FIDELITY sought an opinion on the matter from
SEC, which, on 06 October 1988, summoned FIDELITY and
CUALOPING to a conference.
The Brokers and Exchange Department ("BED") of the SEC ordered
Fidelity Stock Transfers, Inc., to replace all the subject shares and to
cause the transfer thereof in the names of the buyers within ten days
from actual receipt hereof. Cualoping Securities, INC., for having
violated Section 29 a(3) of the Revised Securities Act is hereby ordered
to pay a fine of P50,000.00 within five (5) days from actual receipt
hereof. Henceforth, all brokers are required to make out checks in
payment of shares transacted only in the name of the registered owners
thereof.
From the above resolution, as well as that which denied a motion for
reconsideration, both CUALOPING and FIDELITY appealed to the
Commission En Banc.

IMPOSITION OF FINES
The Commission rendered its decision finding both Cualoping
Securities Corporation and Fidelity Stock Transfers, Inc. equally

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negligent in the performance of their duties hereby orders them to (1)

jointly replace the subject shares and for Fidelity to cause the transfer
thereof in the names of the buyers and (2) to pay a fine of P50,000,00
each for hav[ing] violated Section 29 (a) of the Revised Securities Act.
The decision was appealed to the Court of Appeals. In a consolidated
decision, dated 22 July 1992, the appellate court reversed the SEC and
set aside SEC's order "without prejudice to the right of persons injured
to file the proper action for damages."
The Commission has brought the case to this Court in the instant
petition for review on certiorari, contending that the appellate court
erred in setting aside the decision of the SEC which had (a) ordered the
replacement of the certificates of stock of Philex and (b) imposed fines
on both FIDELITY and CUALOPING.

private respondents would not at all be actionable; upon the other

hand, as we have earlier intimated, such an action belongs not to the
SEC but to those whose rights have been injured.
Our attention is called by the Solicitor General on the violation by
FIDELITY of SEC-BED Memorandum Circular No. 9, series of 1987,
which reads:
To expedite the release of Certificates of Securities to the buyers, the
Commission reiterates the following rules in delivery of stock
certificates:
1. Deadlines for Delivery of Documents All requirements must be
complied with the certificates of stock, as well as necessary documents
required for the transfer of shares shall be delivered within the
following periods:

Issue:
W/N SECs imposition of fines on Fidelity and Cualoping is proper
Ruling:
The Revised Securities Act (Batas Pambansa Blg. 178) is designed, in
main, to protect public investors from fraudulent schemes by
regulating the sale and disposition of securities, creating, for this
purpose, a Securities and Exchange Commission to ensure proper
compliance with the law. Here, the SEC has aptly invoked the
provisions of Section 29, in relation to Section 46, of the Revised
Securities Act. This law provides:
Sec. 29. Fraudulent transactions. (a) It shall be unlawful for any
person, directly or indirectly, in connection with the purchase or sale of
any securities
xxx xxx xxx (3) To engage in any act, transaction practice, or course
of business which operates or would operate as a fraud or deceit upon
any person
Sec. 46. Administrative sanctions. If, after proper notice and
hearing, the Commission finds that there is a violation of this Act, its
rules, or its orders or that any registrant has, in a registration
statement and its supporting papers and other reports required by law
or rules to be filed with the Commission, made any untrue statement of
a material fact, or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, or refused to permit any unlawful examination into its
affairs, it shall, in its discretion, impose any or all of the following
sanctions :

xxx xxx xxx d. From transfer agent back to clearing house and/or
broker not longer than ten (10) days from receipt of documents
provided there is a "good delivery," where there is no " good delivery ,"
the certificate and the accompanying documents shall be returned to
the clearing house or broker not later than two (2) days after receipt
thereof, except when defects can be readily remedied, in which case the
clearing house or the broker shall instead be notified of the
requirements within the same period. The notice to the clearing house
or broker shall indicate that the Securities and Exchange Commission
has been notified of such defective delivery.
FIDELITY is candid enough to admit that it has truly failed to promptly
notify CUALOPING and the clearing house of the pilferage of the
certificates of stock. FIDELITY strongly asserts, however, that it has
been fined by the SEC not by virtue of Memorandum Circular No. 9 but
for a violation of Section 29(a)(3) of the Revised Securities Act, and
that the memorandum circular is only now being raised for the first
time in the instant petition.
In Insular Life Assurance Co., Ltd. , Employees Association-NATU vs.
Insular Life Assurance Co. , Ltd. , this Court has ruled that when issues
are not specifically raised but they bear relevance and close relation to
those properly raised, a court has the authority to include all such
issues in passing upon and resolving the controversy. In Bank of
America , NT & SA vs. Court of Appeals , 228 SCRA 357, we have said
that "the rule that only issues or theories raised in the initial
proceedings may be taken up by a party thereto on appeal should only
refer to independent, not concomitant matters, to support or oppose
the cause of action or defense." In this case at bench, particularly, it is
not a new issue that is being raised but a memorandum-circular having
the force and effect of law that has been cited to support a position that
relates to the very subject matter of the controversy. On this point,
accordingly, we must rule in favor of petitioner SEC.

(a) Suspension, or revocation of its certificate of registration and

permit to offer securities;
(b) A fine of no less than two hundred (P200.00) pesos nor more than
fifty thousand (P50,000.00) pesos plus not more than five hundred
(P500.00) pesos for each day of continuing violation.
There is, to our mind, no question that both FIDELITY and
CUALOPING have been guilty of negligence in the conduct of their
affairs involving the questioned certificates of stock. To constitute,
however, a violation of the Revised Securities Act that can warrant an
imposition of a fine under Section 29(3), in relation to Section 46 of the
Act, fraud or deceit, not mere negligence, on the part of the offender
must be established. Fraud here is akin to bad faith which implies a
conscious and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity; it is unlike that of the negative idea of
negligence in that fraud or bad faith contemplates a state of mind
affirmatively operating with furtive objectives. Given the factual
circumstances found by the appellate court, neither FIDELITY nor
CUALOPING, albeit indeed remiss in the observance of due diligence,
can be held liable under the above provisions of the Revised Securities
Act. We do not imply, however, that the negligence committed by

8.

ANTI-MONEY LAUNDERING ACT

Republic of the Philippines Vs. Glasgow Credit (542 S 95)

Facts:
On July 18, 2003, the Republic filed a complaint in the RTC Manila for
civil forfeiture of assets with urgent plea for issuance of temporary
restraining order TRO and/or writ of preliminary injunction against
the bank deposits in account number maintained by Glasgow in CSBI.
The case, filed pursuant to RA 9160 the Anti-Money Laundering Act of
2001.
Acting on the Republics urgent plea for the issuance of a TRO, the
executive judge of RTC Manila issued a 72-hour TRO dated July 21,
2003. The case was thereafter raffled to Branch 47 and the hearing on
the application for issuance of a writ of preliminary injunction was set
on August 4, 2003.

187

After hearing, the trial court (through then Presiding Judge Marivic T.
Balisi-Umali) issued an order granting the issuance of a writ of
preliminary injunction. The injunctive writ was issued on August 8,
2003.
Meanwhile, summons and alias summons to Glasgow was returned
"unserved" as it could no longer be found at its last known address.

(b) A description with reasonable particularity of the monetary

instrument, property, or proceeds, and their location; and
(c) The acts or omissions prohibited by and the specific provisions of
the Anti-Money Laundering Act, as amended, which are alleged to be
the grounds relied upon for the forfeiture of the monetary instrument,
property, or proceeds; and

On August 12, 2005, the OSG received a copy of Glasgos "Motion to

Dismiss (By Way of Special Appearance)" dated August 11, 2005. It
alleged that (1) the court had no jurisdiction over its person as
summons had not yet been served on it; (2) the complaint was
premature and stated no cause of action as there was still no conviction
for estafa or other criminal violations implicating Glasgow and (3)
there was failure to prosecute on the part of the Republic.

[(d)] The reliefs prayed for.

The Republic opposed Glasgows motion to dismiss. It contended that

its suit was an action quasi in rem where jurisdiction over the person of
the defendant was not a prerequisite to confer jurisdiction on the court.
It asserted that prior conviction for unlawful activity was not a
precondition to the filing of a civil forfeiture case and that its complaint
alleged ultimate facts sufficient to establish a cause of action. It denied
that it failed to prosecute the case.

(b) a description of the proceeds of Glasgows unlawful activities with

particularity, as well as the location thereof, account no. CA-005-10000121-5 in the amount of P21,301,430.28 maintained with CSBI;

On October 27, 2005, the trial court issued the assailed order. It
dismissed the case on the following grounds: (1) improper venue as it
should have been filed in the RTC of Pasig where CSBI, the depository
bank of the account sought to be forfeited, was located; (2)
insufficiency of the complaint in form and substance and (3) failure to
prosecute. It lifted the writ of preliminary injunction and directed CSBI
to release to Glasgow or its authorized representative the funds in CA005-10-000121-5.
Issue:
W/N the complaint for civil forfeiture was correctly dismissed on
grounds of improper venue, insufficiency in form and substance and
failure to prosecute
Ruling:
1. At any rate, the trial court was a proper venue.
The order dismissing the Republics complaint for civil forfeiture of
Glasgows account in CSBI has not yet attained finality on account of
the pendency of this appeal. Thus, the Rule of Procedure in Cases of
Civil Forfeiture applies to the Republics complaint. Moreover, Glasgow
itself judicially admitted that the Rule of Procedure in Cases of Civil
Forfeiture is "applicable to the instant case."
Under Section 3, Title II of the Rule of Procedure in Cases of Civil
Forfeiture, therefore, the venue of civil forfeiture cases is any RTC of
the judicial region where the monetary instrument, property or
proceeds representing, involving, or relating to an unlawful activity or
to a money laundering offense are located. Pasig City, where the
account sought to be forfeited in this case is situated, is within the
National Capital Judicial Region (NCJR). Clearly, the complaint for
civil forfeiture of the account may be filed in any RTC of the NCJR.
Since the RTC Manila is one of the RTCs of the NCJR, it was a proper
venue of the Republics complaint for civil forfeiture of Glasgows
account.
2. Section 4, Title II of the Rule of Procedure in Cases of Civil
Forfeiture provides:
Sec. 4. Contents of the petition for civil forfeiture. - The petition for
civil forfeiture shall be verified and contain the following allegations:
(a) The name and address of the respondent;

Here, the verified complaint of the Republic contained the following

allegations:
(a) the name and address of the primary defendant therein, Glasgow;

(c) the acts prohibited by and the specific provisions of RA 9160, as

amended, constituting the grounds for the forfeiture of the said
proceeds. In particular, suspicious transaction reports showed that
Glasgow engaged in unlawful activities of estafa and violation of the
Securities Regulation Code (under Section 3(i)(9) and (13), RA 9160, as
amended); the proceeds of the unlawful activities were transacted and
deposited with CSBI in account no. CA-005-10-000121-5 thereby
making them appear to have originated from legitimate sources; as
such, Glasgow engaged in money laundering (under Section 4, RA
9160, as amended); and the AMLC subjected the account to freeze
order and
(d) the reliefs prayed for, namely, the issuance of a TRO or writ of
preliminary injunction and the forfeiture of the account in favor of the
government as well as other reliefs just and equitable under the
premises.
The form and substance of the Republics complaint substantially
conformed with Section 4, Title II of the Rule of Procedure in Cases of
Civil Forfeiture.
Moreover, Section 12(a) of RA 9160, as amended, provides:
SEC. 12. Forfeiture Provisions.
(a) Civil Forfeiture. When there is a covered transaction report made,
and the court has, in a petition filed for the purpose ordered seizure of
any monetary instrument or property, in whole or in part, directly or
indirectly, related to said report, the Revised Rules of Court on civil
forfeiture shall apply.
RA 9160, as amended, and its implementing rules and regulations lay
down two conditions when applying for civil forfeiture:
(1) when there is a suspicious transaction report or a covered
transaction report deemed suspicious after investigation by the AMLC
and
(2) the court has, in a petition filed for the purpose, ordered the seizure
of any monetary instrument or property, in whole or in part, directly or
indirectly, related to said report.
It is the preliminary seizure of the property in question which brings it
within the reach of the judicial process. It is actually within the courts
possession when it is submitted to the process of the court. The
injunctive writ issued on August 8, 2003 removed account no. CA-00510-000121-5 from the effective control of either Glasgow or CSBI or
their representatives or agents and subjected it to the process of the
court.

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Since the account of Glasgow in CSBI was (1) covered by several

suspicious transaction reports and (2) placed under the control of the
trial court upon the issuance of the writ of preliminary injunction, the
conditions provided in Section 12(a) of RA 9160, as amended, were
satisfied. Hence, the Republic, represented by the AMLC, properly
instituted the complaint for civil forfeiture.
Rule 6.1 of the Revised Implementing Rules and Regulations of RA
9160, as amended, states:
Rule 6.1. Prosecution of Money Laundering
(a) Any person may be charged with and convicted of both the offense
of money laundering and the unlawful activity as defined under Rule
3(i) of the AMLA.
(b) Any proceeding relating to the unlawful activity shall be given
precedence over the prosecution of any offense or violation under the
AMLA without prejudice to the application ex-parte by the AMLC
to the Court of Appeals for a freeze order with respect to the monetary
instrument or property involved therein and resort to other
remedies provided under the AMLA, the Rules of Court and
other pertinent laws and rules.
Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture
provides:
Sec. 27. No prior charge, pendency or conviction necessary. No prior
criminal charge, pendency of or conviction for an unlawful
activity or money laundering offense is necessary for the
commencement or the resolution of a petition for civil forfeiture.
Thus, regardless of the absence, pendency or outcome of a criminal
prosecution for the unlawful activity or for money laundering, an
action for civil forfeiture may be separately and independently
prosecuted and resolved.
3. The Republic cannot be faulted for failure to prosecute the
complaint for civil forfeiture. While there was admittedly a delay in the
proceeding, it could not be entirely or primarily ascribed to the
Republic. That Glasgows whereabouts could not be ascertained was
not only beyond the Republics control, it was also attributable to
Glasgow which left its principal office address without informing the
Securities and Exchange Commission or any official regulatory body
(like the Bureau of Internal Revenue or the Department of Trade and
Industry) of its new address. Moreover, as early as October 8, 2003,
the Republic was already seeking leave of court to serve summons by
publication.
In Marahay v. Melicor,18 this Court ruled:
While a court can dismiss a case on the ground of non prosequitur, the
real test for the exercise of such power is whether, under the
circumstances, plaintiff is chargeable with want of due diligence in
failing to proceed with reasonable promptitude. In the absence of a
pattern or scheme to delay the disposition of the case or a
wanton failure to observe the mandatory requirement of the
rules on the part of the plaintiff, as in the case at bar, courts
should decide to dispense with rather than wield their
authority to dismiss. (emphasis supplied)
We see no pattern or scheme on the part of the Republic to delay the
disposition of the case or a wanton failure to observe the mandatory
requirement of the rules. The trial court should not have so eagerly
wielded its power to dismiss the Republics complaint.

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