Albert v. University Publishing Co.

Facts: UP Co. through Jose Aruego, its President, entered into a contract with Mariano Albert for
the exclusive right to publish his revised Commentaries on the Revised Penal Code. Because of
UP Co.s failure to pay its installments to Albert, the latter sued UP Co. alleging that it was a
corporation duly organized and existing under the laws of the Philippines. UP Co. also admitted to
Alberts allegation of its corporate existence as well as to the execution and terms of the contract
but alleged that it was Albert who breached their contract. Albert won the case, and thereafter
petitioned for a writ of execution against Aruego as the real defendant because it was recently
discovered that there is no such entity as University Publishing Co., Inc. The SEC records show
that UP Co. was never registered either as a corporation or partnership. Aruego claimed he is not
a party to the case.

Issue: Whether or not the judgment may be executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as the real defendant.

Held: YES. On account of the non-registration UP Co. 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. It is patently clear that Jose M. Aruego, acting as representative of
a non-existent principal, was the real party to the contract sued upon, reaping the benefits
resulting from it. Responsibility under the judgment falls on him since partial payments of the
consideration were made by him, he violated its terms, which precipitated the previous suit in
question.

NOTE: Doctrine of corporation by estoppel did not apply to this case.

Doctrine: In a suit against a corporation with no valid existence, the person who had and
exercised the rights to control the proceedings, to make defense, to adduce and to cross-
examine witnesses, and to appeal from a decision, is the real defendant, and the enforcement of
a judgment against the corporation upon him is substantial observance of due process of law.

NTC vs Court of Appeals, 311 SCRA 508(1999)

Facts: Sometimes in 1988, NTC served on the PLDT assessment notices and demands for
payment. PLDT challenged the said assessments alleging that it was made only (1)to raise
revenues and not as mere reimbursements (2) it should been based on the par values of the
outstanding capital stock of pldt (3) NTC has no authority to compel PLDT for the payment.

The NTC rendered a decision denying the protest of the PLDT.

PLDT filed a motion for reconsideration which was denied by NTC.

PLDT appealed to the CA modifying the desicion of the NTC, ordering NTC to recompute its
assessments and demands for payment from PLDT.

NTC moved for partial reconsideration with respect to the assessment of par value of the
subscribed capital stock and the fifty centavos for the issuance or increasing of the capital stock
but it was denied.

Hence the present petition.

ISSUE: Whether the computation should be based on the par value of the subscribed capital
stock.

HELD: NO, the court ruled that, the computation should be based on PLDT's capital stock
subscribed or paid. The trust fund doctrine considers the subscribed capital stock 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 stock may be turned over
or released to the stockholder (except in the redemption of the redeemable shares) without
violating this principle. Thus dividends must never impair the subscribed capital stock;
subscription commitments cannot be condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the consideration therefore

Ong Yong v. Tiu

Facts: The Tiu family members are the owners of First Landlink Asia Development Corporation
(FLADC). One of the corporations projects is the construction of Masagana Citimall in Pasay City.
However, due to financial difficulties (they were indebted to PNB for P190 million), the Tius feared
that the construction would not be finished. So to prevent the foreclosure of the mortgage on the
two lots where the mall was being built, they invited the Ongs to invest in FLADC. The two parties
entered into a Presubscription Agreement whereby each of them would hold 1,000,000 shares
each and be entitled to nominate certain officers. The Tius contributed a building and two lots,
while the Ongs contributed P100M.

Two years later, the Tuis filed for rescission of the Presubscription Agreement before the Security
Exchange Commission (SEC) on the ground that the Ong family refused to issue them their
shares of stock and from assuming positions of VP and Treasurer to which they were entitled to
nominate which were agreed upon.The Ongs contended that they could not issue the new shares
to the Tius because the latter did not pay the capital gains tax and the documentary stamp tax of
the lots. And because of this, the SEC would not approve the valuation of the property
contribution of the Tius.

The SEC ruled in favor of the petitioner.

On motion of both parties the decision was partially reconsidered .

Both parties appealed to the SEC en banc which rendered a decision affirming the SEC decision.

On appeal,The Court of Appeals ordered the liquidation of FLADC to enforce rescission of the
contract.
Their motions for reconsideration having been denied, both parties filed separate petitions for
review.

Issue: Whether or not the liquidation of FLADC violated the Trust Fund Doctrine

Held: YES. In this case, the rescission would certainly be a violation of the doctrine and also of
the Corporation Code because the rescission would result in the unauthorized distribution of the
assets of the corporation. Rescission based on a breach in the terms of a subscription agreement
is not one of the instances when distribution of a corporations assets and property is allowed
(Section 122). It would not only be unlawful but it would also be prejudicial to the corporate
creditors who enjoy absolute priority of payment over any individual stockholder.

Doctrine: This doctrine enunciates 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.

Pea v. Court of Appeals

Facts: Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots. The lots were
foreclosed and were sold to Rosita Pea, as highest bidder. PAMBUSCO through 3 of 5 directors
(the only ones present at that meeting) resolved to authorize Briones (one of the directors) to
execute a deed of assignment of their right of redemption in favor of Marcelino Enriquez, who
thereafter sold the same to Spouses Yap. Pea contends that there could be no valid sale to the
spouses Yap because the deed of assignment in favor of Enriquez was void for being executed
ultra vires and against the by-laws of the corporation which provided that a quorum requires that
at least 4 directors be present at the meeting, otherwise the meeting may be invalidated by failure
or irregularity of notice.

Issue: Whether or not the act of the board was against the corporations by- laws, and
consequently, void.

Held: YES. Section 4 of PAMBUSCOs by- laws provided that at least four directors should be
present to constitute a quorum. According to the Corporation Code any action resolved by the
board with less than the number provided in the by- laws of the corporation to constitute a
quorum would not bind the corporation. When a quorum is not reached, all the present directors
could do is to adjourn. Moreover, the purported directors who attended the meeting and voted in
favor of the assignment were bogus directors as they were not listed in the SEC as directors, nor
were they stockholders of the company.

Doctrine: The by-laws of a corporation are its own private laws which substantially have the
same effect as the laws of the corporation. In this sense they become part of the fundamental law
of the corporation with which the corporation and its directors and officers must comply.
China Banking Corp. v. Court of Appeals

Facts: Galicano Calapatia, Jr. is a stockholder of private respondent Valley Golf & Country Club,
Inc. (VGCCI). He pledged his Stock Certificate to petitioner China Banking Corp. (CBC) to secure
a debt. This was recorded in the corporate books with VGCCIs consent. Calapatia failed to pay
his obligations, so CBC filed a petition for extrajudicial foreclosure and informed VGCCI asking
that the pledged stock be transferred to CBCs name. However, VGCCI also informed CBC that it
will not be able to do so because Calapatia has unsettled accounts with the club. Subsequently,
because of Calapatias unsettled accounts with the club, VGCCI sold the stocks in a public
auction in accordance with Section 3, Article VIII of its By- Laws. Three years after, CBC informed
VGCCI that it was the new owner by virtue of the auction sale, however, VGCCI replied that for
reason of delinquency, the same share of stock was sold at the public auction. So of course, CBC
protested and filed a case with the RTC of Makati for the nullification of the auction sale and the
issuance of a new stock certificate in its name.

Issue: Whether or not the by-laws of VGCCI can affect CBC.

Held: NO. VGCCI only began sending notices of delinquency to Calapatia after it was informed by
CBC of its foreclosure proceedings. Also, even though VGCCI acknowledged the pledge
agreement between Calapatia and CBC, it completely disregarded CBCs rights as a pledgee by
not informing it of the public auction it initiated.

VGCCI contended that CBC had actual knowledge of the clubs by- laws and therefore must be
bound. However, in order to be bound, the third party must have acquired knowledge of the by-
laws at the time the agreement was entered into between him and the shareholder. In the case at
bar, CBC was only informed of the by- laws after it informed VGCCI of the public auction. Also,
VGCCI could have easily informed petitioner of its by- laws when it sent notice formally
recognizing CBC as pledge of one of its shares registered in Calapatias name.

Doctrine: General Rule: Third persons are not bound by the by- laws of a corporation since they
are not privy thereto. Exception: When third persons have actual knowledge or constructive
knowledge of the same. However, this knowledge of the by- laws must be present at the time of
the perfection of the contract, and not only during the proceedings.

De la Rama v. Ma-ao Sugar Central Co.

Facts: De La Rama and 3 other minority stockholders of Ma- Ao Sugar Central filed a derivative
suit against the Ma-Ao Sugar Central Co., Inc., and Amado Araneta and 3 other directors. De La
Rama claims that the directors made an illegal investment in Phil. Fibers Processing Co., Inc. He
contends that since the investment was made NOT in pursuance of the corporate purpose and
without the requisite authority of 2/3 of the stockholders, then the investment was thus illegal for
being in violation of Section 17-1/2 of the Corporation Law.
Araneta claims that the investment was not illegal as it was subsequently ratified by the Board of
Directors in a resolution. Also since the company was engaged in the manufacture of sugar bags,
it was thus perfectly legitimate for Ma- Ao Sugar either to manufacture sugar bags or invest in
another corporation engaged in said manufacture.

Issue: Whether or not the affirmative vote of the stockholders representing 2/3 of the voting power
is necHeld: NO. The court held that the affirmative vote of the stockholders representing 2/3 of
the voting power is not necessary.

Doctrine: The corporation code allows a corporation to invest its funds in another corporation for
any other purpose other than the main purpose. Provided that the board has been authorized by
affirmative vote of the stockholders representing 2/3 of the voting power. BUT if the investment
is made in a corporation whose business is important to the investing corporation and would aid it
in its purpose, then to require authority of the stockholders would be to unduly curtail the power of
the board of directors. BUT when the purchase of shares of another corporation is done solely
for investment and not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary.

Tuason & Co. v. Bolanos

Facts: J.M. Tuason & Co. brought an action for the recovery of possession of real property
against Bolanos. Bolanos alleges ownership of the land by prescription. The case was ruled in
favor of Tuason (prescription does not run against registered property).

On appeal, Bolanos alleges, among others, that the complaint by Tuason should have been
dismissed for not having been brought by the real party in interest. This is because the action is
brought in behalf of JM Tuason & Co. Inc. by Gregorio Araneta Inc., its managing partner.

Issue: Whether or not the case should have been dismissed on the ground that the case was not
brought by the proper party in interest

Held: NO. What Section 2, Rule 2 of the Rules of Court provide is that the action be brought in
the name of, but not necessarily by the real party in interest. While the complaint states that the
plaintiff is represented herein by its Managing Partner Gregorio Araneta, Inc., another
corporation, there is nothing against one corporation being represented by another person,
natural or juridical, in a suit in court.

The contention that Gregorio Araneta, Inc. cannot act as managing partner for plaintiff on the
theory that it is illegal for two corporations to enter into a partnership is without merit. There is
nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio
Araneta, Inc. as its managing partner is not in line with the corporate business of either of them.

Doctrine: The true rule is that though a corporation has no power to enter into a partnership, it
may nevertheless enter into a joint venture with another where the nature of that venture is in line
with the business authorized by its charter. A joint venture is essentially a partnership
arrangement, although of a special type, since it pertains to a particular project or undertaking. 1
Although Tuason does not elaborate on why a corporation may become a co- venturer or partner
in a joint venture arrangement, it would seem that the policy behind the prohibition on why a
corporation cannot be made a partner do not apply in a joint venture arrangement. Being for a
particular project or undertaking, when the board of directors of a corporation evaluate the risks
and responsibilities involved, they can more or less exercise their own business judgment is
determining the extent by which the corporation would be involved in the project and the likely
liabilities to be incurred. Unlike in an ordinarily partnership arrangement which may expose the
corporation to any and various liabilities and risks which cannot be evaluated and anticipated by
the board, the situation therefore in a joint venture arrangement, allows the board to fully bind the
corporation to matters essentially within the boards business appreciation and anticipation.

Harden v. Benguet Consolidated Mining Co.

Facts: Benguet Consolidated, a sociedad anonima, and Balatoc Mining Co., a corporation, were
engaged in the business of mining gold. During its early years, Balatoc was underdeveloped so it
entered into a contract with Benguet Consolidated wherein Benguet will erect power plants and
develop a milling plant for Balatoc. In return, Balatoc gave Benguet shares with a par value of
P600K. The contract was a result of a general stockholders meeting held by Balatoc. The project
soon after turned out well, with Benguet profiting from their shares.

Harden, a stockholder of Balatoc, as well as other stockholders filed a case against Benguet and
Balatoc praying that the contract be declared unlawful, and subsequently annulled, and that the
shares of stock issued to Benguet be obliterated. They based their complaint on a provision in the
then Corporation Law (adopted from the Act of Congress of 1916) which states that it shall be
unlawful for any member of a corporation engaged in agriculture or mining (...) to be in any wise
interested in any other corporation engaged in agriculture or in mining.

Issue: Whether or not the contract should be annulled for illegality.

Held: NO. The provision was enacted based on public policy which dictates the need to regulate
mining rights. The penalties imposed in what is now section 190 (A) of the Corporation Law for
the violation of the prohibition in question are of such nature that they can be enforced only by a
criminal prosecution or by an action of quo warranto. But these proceedings can be maintained
only by the Attorney-General in representation of the Government. Moreover, Benguet Company
has committed no civil wrong against the plaintiffs. In this case, Harden has no legal standing.

Doctrine: Even where corporate contracts are illegal per se, when only public or government
policy is at stake and no private wrong is committed, the courts will leave the parties as they are,
in accordance with their original contractual expectations.