OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P.
Romero (2015 - 2016)
8) De jure corporations requisites, powers, liabilities, validity
One created in strict or substantial conformity with the mandatory statutory requirements for
incorporation and whose right to exist as a corporation cannot be successfully question by any
party even in a direct proceeding for that purpose by the State
9) De facto corporations Sec. 20
(requisites, basis, powers, rights, liabilities, validity )
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. (n)
What is a de facto corporation?
A de facto corporation is a defectively organized corporation, which has all
the powers and liabilities of a de jure corporation and, except as to the State,
has a juridical personality distinct and separate from its shareholders, provided
that the following requisites are concurrently present:
(1) That there is an apparently valid statute under which the
corporation with its purposes may be formed;
(2) That there has been colorable compliance with the legal
requirements in good faith; and,
(3) That there has been use of corporate powers, i.e., the transaction
of business in some way as if it were a corporation.
Can a corporation transact business as a de facto corporation while
application is still pending with SEC?
No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed
corporation transacted business as a corporation pending action by the SEC
on its articles of incorporation, the Court held that there was no de facto
corporation on the ground that the corporation cannot claim to be in good
faith to be a corporation when it has not yet obtained its certificate of
incorporation.
REQUISITES
1. A valid law under which a corporation with power
assumed might be incorporated
2. A bona fide attempt to organize a corporation under such
law
3. Actual user or exercise in good faith of corporate powers
conferred upon it by law
USER OR EXERCISE OF CORPORATE POWERS IN GOOD FAITH
1. User contemplated user must be corporate acts. The act or business
must be transacted as a corporation and under the corporate forms
2. Duty to correct defect if discovered must act in good faith.
2013400036
Pioneer Insurance v. CA (GR 84157) 175 SCRA 668 (1989)
THIRD DIVISION
[G.R. No. 84197. July 28, 1989.]
PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE
HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents.
[G.R. No. 84157. July 28, 1989.]
JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER
INSURANCE AND SURETY CORPORATION, BORDER MACHINERY
and HEAVY EQUIPMENT CO., INC., FRANCISCO and MODESTO
CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
SYLLABUS
1. CIVIL LAW; DAMAGES; INSURANCE; AN INSURER IS SURROGATED TO THE RIGHTS OF
THE INSURED AGAINST THE WRONGDOER UPON RECEIPT OF THE INDEMNITY. The
petitioner's argument that the respondents had no interest in the reinsurance contract as this is
strictly between the petitioner as insured and the reinsuring company pursuant to Section 91
(should be Section 98) of the Insurance Code has no basis. Under the provisions of Article 2207 of
the Civil Code if a property is insured and the owner receives the indemnity from the insurer, the
insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount
paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to
the portion of the indemnity paid is the insurer and not the insured. (PAL v. Heald Lumber Co., 101
Phil. 1031; Manila Mahogany Manufacturing Corporation v. Court of Appeals, 154 SCRA 650
[1987]
2. REMEDIAL LAW; ACTIONS; PARTIES; ONLY THE REISURER OF THE INSURER ACTING
AS AN ATTORNEY-IN-FACT OF THE REINSURER CAN COLLECT AGAINST THE INDEMNITY
AGREEMENT. The appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was not the real
party in interest in the complaint and, therefore, has no cause of action against the respondents.
3. ID.; EVIDENCE; FINDINGS OF FACT OF THE TRIAL COURT UPHELD ON APPEAL. We
find the trial court's findings on the matter replete with evidence to substantiate its finding that the
counter-indemnitors are not liable to the petitioner. Pioneer, having foreclosed the chattel mortgage
on the planes and spare parts, no longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they make payments to the latter.
(Articles 2067 and 2080, New Civil Code)
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
4. CIVIL LAW; CONTRACTS; A DE FACTO PARTNERSHIP IS CREATED WHERE PERSONS
ASSOCIATE THEMSELVES BUT FAILED TO FORM A CORPORATION. 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 (Smith v. Schoodoc Pond Packing Co., 84 A
268, 109 Me. 555; Whipple v. Parker, 29 Mich. 369).
5. ID.; ID.; ID.; DOCTRINE NOT APPLICABLE WHERE THERE WAS REALLY NO INVENTION
TO FORM A CORPORATION; PARTIES NEED NOT SHARE IN LOSSES; CASE AT BAR. 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 contributions to a proposed corporation
which was never formed because the petitioner reneged on their agreement. Applying 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.
PIONEER INSURANCE vs. CA
G.R. No. 84197; July 28, 1989
FACTS:
Lim is an owner-operator of Southern Airlines (SAL), a single proprietorship. Japan Domestic
Airlines (JDA) and Lim entered into 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. Pioneer Insurance and Surety Corp. as surety executed its
surety bond in favor of JDA on behalf of its principal Lim. Border Machinery and Heavy Equipment
Co, Inc., Francisco and Modesto Cervantes, and Constancio Maglana contributed funds based on
the misrepresentation of Lim that they will form a new corporation to expand his business. They
executed two 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 Pioneer from and against any/all damages, losses, etc. of whatever
kind and nature may incur in consequence of having become surety. Lim executed in favor of
Pioneer a deed of chattel mortgage as security. Upon default on the payments, Pioneer paid for
him and filed a petition for the foreclosure of chattel mortgage as security.
Maglana, Bormaheco and the Cervantess filed cross-claims against Lim alleging that they were
not privies to the contracts signed by Lim and for recovery of the sum of money they advanced to
Lim for the purchase of the aircrafts. The decision was rendered holding Lim liable to pay.
ISSUE:
1. Whether or not Pioneer has a cause of action against respondents.
2. Whether or not failure to incorporate automatically resulted to de facto partnership.
HELD:
2013400036
1. NO. Pioneer has no right to institute and maintain in its own name an action for the benefit of the
reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name instead of
that of the principal will not prosper, and this is so even where the name of the principal is
disclosed in the complaint. An attorney-in-fact is not a real party in interest, that there is no law
permitting an action to be brought by an attorney-in-fact.
2. NO. Partnership inter se 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.
Municipality of Malabang v. Benito (1969) 27 SCRA 533
EN BANC
[G.R. No. L-28113. March 28, 1969.]
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR and AMER
MACAORAO BALINDONG, petitioners, vs. PANGANDAPUN BENITO,
HADJI NORODIN MACAPUNUNG, HADJI HASAN MACARAMPAD,
FREDERICK V. DUJERTE, MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO,respondents.
L. Amores and R. Gonzales for petitioners.
Jose W . Diokno for respondents.
SYLLABUS
1.ADMINISTRATIVE LAW; MUNICIPAL CORPORATIONS; RIGHT OF INDIVIDUAL TO ATTACK
CORPORATION COLLATERALLY. It is indeed true that, generally, an inquiry into the legal
existence of a municipality is reserved to the State in a proceeding for quo warranto or other direct
proceeding, and that only in a few exceptions may a private person exercise this
function of government. But the rule disallowing collateral attacks applies only where the municipal
corporation is at least a de facto corporation. For where it is neither a corporation de jure nor de
facto, but a nullity, the rule is that its existence may be questioned collaterally or directly in any
action or proceeding by any one whose rights or interests are affected thereby, including the
citizens of the territory incorporated unless they are estopped by their conduct from doing so.
2.ID.; ID.; MUNICIPALITY IN QUESTION IS NOT A DE FACTO CORPORATION. In the cases
where a de facto municipal corporation was recognized as such despite the fact that the statute
creating it was later invalidated, the decisions could fairly be made to rest on the consideration that
there was some other valid law giving corporate validity to the organization. Hence, in the case at
bar, the mere fact that Balabagan was organized at a time when the statute had not been
invalidated cannot conceivably make it a de facto corporation, as, independently of Section
68 of the Administrative Code, there is no other valid statute to give color of authority to its
creation.
3.ID.; ID.; EFFECT OF NULLITY OF EXECUTIVE ORDER CREATING MUNICIPALITY UPON
ACTS THEREOF BEFORE DECLARATION OF NULLITY. Executive Order 386creating
the municipality in question is a nullity pursuant to the ruling in Pelaez vs. Auditor General
and Municipality of San Joaquin vs. Siva. The executive order therefore "created no office." This is
not to say, however, that the acts done by the municipality of Balabagan in the exercise of its
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
corporate powers are a nullity because the executive order "is, in legal contemplation, as a.)been upheld for a time by the courts or
inoperative as though it had never been passed." For the existence of Executive Order 386 is "an
operative fact which cannot justly be ignored." There is then no basis for the respondents' b.) not yet been declared void
apprehension that the invalidation of the executive order creating Balabagan would have the
effect of unsettling many an act done in reliance upon the validity of the
provided that a warrant for its creation can be found in some other valid law or in the recognition of
creation of that municipality.
its potential existence by the general laws or constitution of the State.
Municipality of Malabang vs Benito
Hence, such municipality is not a de facto corp.

Hall v. Piccio (1950) 86 Phil. 603

Facts: Municipality of Balabagan was once part of Municipality of Malabang before it was created
into a separate municipality thru an executive order. The municipality Malabang filed a suit against SECOND DIVISION
Municipality Balabagan for having been created under an invalid EO 386 and to restrain the [G.R. No. L-2598. June 29, 1950.]
respondent municipal officials fron performing their functions. Petitioner relied on the ruling of the
Pelaez case that Sec. 68 of Admin Code in unconstitutional because: C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs. EDMUNDO
S. PICCIO, Judge of the Court of First Instance of Leyte, FRED
BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as
a.) it constitutes an undue delegation of legislative power
receiver of the Far Eastern Lumber and Commercial Co.,
Inc., respondent.
b.) because it offends against Section 10 (1) of Article VII of the Constitution which limits
President's power over local govt to mere supervision Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
Sec. 68 of revised Admin Code must be deemed repealed by the subsequent adoption of the
Constitution, in 1935, which is incompatible with said statutory enactment. Respondents argue that SYLLABUS
the Mun. of Balabagan is at least a de facto corporation for having been organized under color of a 1. CORPORATION "DE FACTO"; DISSOLUTION BY SUIT OF STOCKHOLDERS;
statute before this was declared unconstitutional, its officers having been either elected or JURISDICTION OF COURT. An entity whose certificate of incorporation had not been
appointed, and the municipality itself having disxharged its corporate functions for the past five obtained may be terminated in a private suit for its dissolution between stockholders, without
years preceding the institution of this action. it is contended thst as a de facto corporation, its the intervention of the state. The question as to the right of minority stockholders to sue for
existence cannot be collaterally attacked, although it may be inquired into directly in an action for dissolution does not affect the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal by the aggrieved party at the proper time.
quo warranto at the instance of the State and not of an individual. The method of challenging the
existence of a municipal corporation is reserved to the State in a proceeding for quo warranto or 2. ID.; RIGHTS OF. Persons acting as corporation may not claim rights of "de
other direct proceeding. But the rule disallowing collateral attacks applies only where the municipal facto" corporation if they have not obtained certificate of incorporation.
corp is at least a de facto corpo. For where it is neither a corporation de jure or de facto, but a C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
nullity, the rule is that its existence may be questioned collaterally or directly in any action or
proceeding by any one whose rights or interests are affected thereby, including thr citizens of the vs.
territory incorporated unless they are estopped by their conduct from doing so. EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc., respondents.
G.R. No. L-2598. June 29, 1950
issue: WON Mun. Balabagan is a de facto corpo

FACTS:

Held: NO. There is no other valid statute to give color of authority to its creation when EO 386 was
subsequently declared unconstitutional. the color of authoroty requisite to the organization of a de In 1947, the petitioners and the respondents signed and acknowledged in Leyte, the
facto municipal corpo may be: article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage
in a general lumber business to carry on as general contractors, operators and managers, etc.
1.) a valid law enacted by legislature Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the corporation described in a list
2.) an unconstitutional law, valid on its face which has either: appended thereto.
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
Immediately after the execution of said articles of incorporation, the corporation
proceeded to do business with the adoption of by-laws and the election of its officers.
3. A year later, the Board of Directors adopted a resolution to sell the 4 parcels of land to
In 1947, the said articles of incorporation were filed in the office of the SEC for the defendant Teodoro Sandiko. Respondent executed a promissory note in favor of
issuance of the corresponding certificate of incorporation. Thereafter, pending action on the articles defendant.
of incorporation by the SEC, the respondents filed before the Court of First Instance of Leyte a civil
case, alleging among other things that the Far Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to have it dissolved because of bitter dissension among 4. When the defendant failed to pay the sum in the PN, Cagayan Fishing brought an action
the members, mismanagement and fraud by the managers and heavy financial losses. The against Sandiko for the payment of the sum.
petitioners alleged that the court had no jurisdiction over the civil case decree the dissolution of the
company, because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.
5. The lower court absolved the defendant on the basis of vice in the consent. Cagayan
ISSUES: Whether or not the Far Eastern Lumber and Commercial Co., Inc. is a de facto Fishing appealed.
corporation.

RULING: NO. Inasmuch as the Far Eastern Lumber and Commercial Co., is a de facto ISSUE:
corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction WON, the Deed of Sale to Sandiko is valid.
to take cognizance of said civil case.
HELD:
There are least two reasons why this section does not govern the situation. (1) First, not
having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. NO. SC affirmed not on the basis of vice in consent but on the basis that Cagayan
even its stockholders may not probably claim "in good faith" to be a corporation. Fishing had no capacity.
Under our statue it is to be noted that it is the issuance of a certificate of incorporation by
the Director of the Bureau of Commerce and Industry (now SEC) which calls a corporation into The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was
corporation under this act." Such a claim is compatible with the existence of errors and affected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five
irregularities; but not with a total or substantial disregard of the law. Unless there has been an months before the incorporation of the company.
evident attempt to comply with the law the claim to be a corporation "under this act" could not be
made "in good faith." In the case before us it cannot be denied that the plaintiff was not yet incorporated when
it entered into a contract of sale, Exhibit A. Not being in legal existence then, it did not possess
(2) Second, this is not a suit in which the corporation is a party. This is a litigation juridical capacity to enter into the contract.
between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even
the existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state. FACTS:

Manuel Tabora is the registered owner of four parcels of land situated in the barrio of
Cagayan Fishing. v. Sandiko GR L-43350 (12/23/1937) Linao, town of Aparri, Province of Cagayan. To guarantee the payment of a loan in the sum of
P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a
EN BANC
first mortgage on the four parcels of land above-mentioned. Tabora executed a public document
G.R. No. L-43350 December 23, 1937 entitle`d "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant, parcels of land owned by him was sold to Cagayan Fishing Development Co., Inc, said to under
vs. process of incorporation, in consideration of one peso (P1) subject to the mortgages in favor of the
TEODORO SANDIKO, defendant-appellee. Philippine National Bank and Severina Buzon and, to the condition that the certificate of title to said
lands shall not be transferred to the name of Cagayan Fishing Development Co., Inc until the latter
FACTS:
has fully and completely paid Tabora's indebtedness to the Philippine National Bank.

1. Manuel Tabora owns 4 parcels of land in Aparri, Cagayan. As a guarantee for his 2 loans The board of directors of said company adopted a resolution authorizing its president,
from PNB, he executed in favor of PNB 2 mortgages over the 4 parcels. A third mortgage Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. The
was executed in favor of Severina Buzon to whom he was also indebted. (April 1930)
defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in

2. Thereafter Manuel Tabora sold the 4 parcels to Cagayan Fishing on May 1930 which at the Court of First Instance of Manila praying that judgment be rendered against the defendant for
that time was still in the process of incorporation. The Articles of Incorporation were filed the sum of P25,300, with interest at legal rate from the date of the filing of the complaint, and the
only on October 1930. costs of the suits. After trial, the court below rendered judgment absolving the defendant, with costs
against the plaintiff
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
ISSUE: WON the contract of sale entered between Tabora and Cagayan Fishing Development is constitute such a corporation de facto as will exempt
valid. thosewho actively and knowingly use s name to incur legalobligations from their individual liability
to pay them. There could be no incorporation or color of it under the law until the articles were filed
HELD: (requisites for valid incorporation)

No. The transfer was made on May 31 1930 and the actual incoroporation of said
company was affected later on October 22, 1930 which means that the transfer was made almost
five months before the incorporation of the company. Unquestionably, a duly organized corporation
has the power to purchase and hold such real property as the purposes for which such corporation
was formed may permit and for this purpose may enter into such contracts as may be necessary
(sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be
lawfully organized, many things have to be done. Among other things, the law requires the filing of
articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all
the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in
the case before us it can not be denied that the plaintiff was not yet incorporated when it entered
into a contract of sale. The contract itself referred to the plaintiff as "una sociedad en vias de
incorporacion." It was not even a de facto corporation at the time. Not being in legal existence then,
it did not possess juridical capacity to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their provisions;
and if conditions precedent are prescribed in the statute, or certain acts are required to be done,
they are terms of the offer, and must be complied with substantially before legal corporate
existence can be acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as an

entity before it can enter into any kind of a contract or transact any business, would seem to be self
10 ) Corporation by Estoppel Sec. 21 (rationale, liabilities, validity)
evident.. A corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless so authorized by the Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to
charter there is not a corporation nor does it possess franchise or faculties for it or others to be without authority to do so shall be liable as general partners for all debts, liabilities and damages
exercise, until it acquires a complete existence 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.
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale to the On who assumes an obligation to an ostensible corporation as such, cannot resist performance
defendant, Teodoro Sandiko. thereof on the ground that there was in fact no corporation.

Harill v. Davis (1909) 168 F. 187 RATIONALE:
168 F. 187; 1909 o Estoppel is essentially a common law practice theory that an admission or
representation is rendered conclusive upon the person making it, and cannot be
FACTS: The constitutive documents were filed with the clerk of the Court of Appeals but not with
denied or disproved as against the person relying thereon and having changed his
the clerk of court in the judicial district where the business was located. Arkansas law requires
position based on such reliance
filing in both offices.
o Based on equity
ISSUE: Was there colorable compliance enough to give the supposed corporation at least the
status of a de facto corporation? o To hold contractual parties to their representations or expectations at the time the
contract was perfected
HELD: NO. Neither the hope, the belief, nor the statement by parties that they are incorporated,
nor the signing of the articles of incorporation which are not filed, where filing is requisite to create
the corporation, nor the use of the pretended franchise of the nonexistent corporation, will
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
Asia Banking Corp. v. Std. Products Co. (1924) 46 Phil. 145
ASIA BANKING CORPORATION vs. STANDARD PRODUCTS, CO., INC
G.R. No. 22106 September 11, 1924
FACTS: Standard Products, Co., Inc., was indebted to Asia Banking Corporation for the amount of
P37,757.22. To secure its indebtedness, it executed a promissory note in favor of plaintiff-appellee.
Upon demand for the balance due, the respondent-appellant failed to pay. Hence an action was
brought by plaintiff-appellee to recover the sum of P24,736.47. The court rendered judgment in
favor of the plaintiff-appellee for the sum demanded in the complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate of 10 per cent per annum, and the costs. Hence
this appeal by the respondent-appellant. At the trial of the case the plaintiff failed to prove
affirmatively the corporate existence of the parties and the appellant insists that under these
circumstances the court erred in finding that the parties were corporations with juridical personality
and assigns same as reversible error.
ISSUE: Whether or not respondent is estopped from denying the corporate existence of the
plaintiff.
RULING: The general rule is that in the absence of fraud a 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 cause which
have arisen since making the contract or other dealing relied on as an estoppel and this applies to
foreign as well as to domestic corporations. The defendant having recognized the corporate
existence of the plaintiff by making a promissory note in its favor and making partial payments on
the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also
estopped from denying its own corporate existence. Under these circumstances it was
unnecessary for the plaintiff to present other evidence of the corporate existence of either of the
parties. It may be noted that there is no evidence showing circumstances taking the case out of the
rules stated. J
NOTE: The name of parties as plaintiff/respondent in this case was not changed. They remained
as such even on appeal.
Cranson v. IBM Corp.(1964) 234 Md. 477; 200 A. 2d 33
CRANSON v. I.B.M. CORP.
234 Md. 477 (1964)
200 A.2d 33
CRANSON v. INTERNATIONAL BUSINESS MACHINES CORPORATION
Court of Appeals of Maryland.
Decided April 30, 1964.
William J. Brannan, Jr., with whom were Kardy, Brannan & Neumann on the brief, for the appellant.
Henry J. Noyes for the appellee.
The cause was argued before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT,
JJ.
2013400036
HORNEY, J., delivered the opinion of the Court.
On the theory that the Real Estate Service Bureau was neither a de jure nor ade facto corporation
and that Albion C. Cranson, Jr., was a partner in the business conducted by the Bureau and as
such was personally liable for its debts, the International Business Machines Corporation brought
this action against Cranson for the balance due on electric typewriters purchased by the Bureau. At
the same time it moved for summary judgment and supported the motion by affidavit. In due
course, Cranson filed a general issue plea and an affidavit in opposition to summary judgment in
which he asserted in effect that the Bureau was a de facto corporation and that he was not
personally liable for its debts.
The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new
business corporation which was about to be created. Towards this purpose he met with other
interested individuals and an attorney and agreed to purchase stock and become an officer and
director. Thereafter, upon being advised by the attorney that the corporation had been formed
under the laws of Maryland, he paid for and received a stock certificate evidencing ownership of
shares in the corporation, and was shown the corporate seal and minute book. The business of the
new venture was conducted as if it were a corporation, through corporate bank accounts, with
auditors maintaining corporate books and records, and under a lease
[234 Md. 480]
entered into by the corporation for the office from which it operated its business. Cranson was
elected president and all transactions conducted by him for the corporation, including the dealings
with I.B.M., were made as an officer of the corporation. At no time did he assume any personal
obligation or pledge his individual credit to I.B.M. Due to an oversight on the part of the attorney, of
which Cranson was not aware, the certificate of incorporation, which had been signed and
acknowledged prior to May 1, 1961, was not filed until November 24, 1961. Between May 17 and
November 8, the Bureau purchased eight typewriters from I.B.M., on account of which partial
payments were made, leaving a balance due of $4,333.40, for which this suit was brought.
Although a question is raised as to the propriety of making use of a motion for summary judgment
as the means of determining the issues presented by the pleadings, we think the motion was
appropriate. Since there was no genuine dispute as to the material facts, the only question was
whether I.B.M. was entitled to judgment as a matter of law. The trial court found that it was, but we
disagree.
1
The fundamental question presented by the appeal is whether an officer of a defectively
incorporated association may be subjected to personal liability under the circumstances of this
case. We think not.
Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively
incorporated association with the corporate attribute of limited liability. The first, often referred to as
the doctrine of de factocorporations, has been applied in those cases where there are elements
showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to incorporate
under the existing law; and (3) actual user or exercise of corporate powers. Ballantine, Private
Corporations, 23; 8 Fletcher, Cyclopedia of the Law of Private
[234 Md. 481]
Corporations, 3777; 13 Am. Jur., Corporations, 49-56; 18 C.J.S.,Corporations, 99. The
second, the doctrine of estoppel to deny the corporate existence, is generally employed where the
person seeking to hold the officer personally liable has contracted or otherwise dealt with the
association in such a manner as to recognize and in effect admit its existence as a corporate body.
Ballantine, op.cit., 29; Machen, Modern Law of Corporations, 278-282; 18 C.J.S., op.cit.,
109.
It is not at all clear what Maryland has done with respect to the two doctrines. There have been no
recent cases in this State on the subject and some of the seemingly irreconcilable earlier cases
2
offer little to clarify the problem.
In one line of cases, the Court, in determining the rights and liabilities of a defectively organized
corporation, or a member or stockholder thereof, seems to have drawn a distinction between those
acts or requirements which are a condition precedent to corporate existence and those acts
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
prescribed by law to be done after incorporation. In so doing, it has been generally held that where
there had been a failure to comply with a requirement which the law declared to be a condition
precedent to the existence of the corporation, the corporation was not a legal entity and was
therefore precluded from suing or being sued as such. Boyce v. M.E. Church, 46 Md. 359
(1877); Regester v. Medcalf, 71 Md. 528, 18 Atl. 966 (1889); Bonaparte v. Lake Roland R.R.
Co., 75 Md. 340, 23 Atl. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 Atl. 76
(1894); Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 Atl. 620 (1898); Cleaveland v.
Mullin, 96 Md. 598,
[234 Md. 482]
54 Atl. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 Atl. 19 (1909). These
cases appear to stand for the proposition that substantial compliance with those formalities of the
corporation law, which are made a condition precedent to corporate existence, was not only
necessary for the creation of a corporation de jure, but was also a prerequisite to the existence of
a de facto corporation or a corporation by estoppel.
In the Boyce case, an action in assumpsit against a defectively incorporated religious society, the
Court (at p. 373 and p. 374), in holding that the society was not estopped to deny its corporate
existence, said:
We think it would be extending the doctrine of estoppel to an extent, not justified by the principles
of public policy, to allow it to operate through the conduct of the parties concerned, to create
substantially a de facto corporation, with just such powers as the parties may by their acts give to
it.* * *The statute law of the State, expressly requiring certain prescribed acts to be done to
constitute a corporation, to permit parties indirectly, or upon the principle of estoppel, virtually to
create a corporation for any purpose, or to have acts so construed, would be in manifest opposition
to the statute law, and clearly against its policy, and justified upon no sound principle in the
administration of justice.
In the Maryland Tube case, an action by a corporation for specific performance of a contract to
convey land which it had entered into prior to its becoming a legal entity, the Court, having cited (at
3
p. 217) the statements inJones v. Aspen Hardware Co., 40 Pac. 457 (Colo. 1895), with approval
for the
[234 Md. 483]
proposition that "`the doctrine of estoppel cannot be successfully invoked, unless the corporation
has at least a de facto existence,'" that "`a de factocorporation can never be recognized in violation
of a positive law'" and that "`there is a broad distinction between those acts made necessary by the
statute as a prerequisite to the exercise of corporate powers, and those acts required of individuals
seeking incorporation but not made prerequisite to the exercise of such powers,'" went on to say
(at p. 218) that "these principles were clearly recognized and applied" in the Boyce case.
In the National Shutter Bar case, an action by a corporation for an alleged libel which had occurred
before the performance of a condition precedent necessary for legal incorporation, it was held
citing the Maryland Tubecase for the proposition that statutory conditions precedent must have
been complied with to give existence to corporations formed under general laws that the
corporation had no legal existence at the time of the alleged libel. In referring to the Boyce case, it
was said (at p. 320) that "it has been held by our predecessors that a corporation cannot be
actually or virtually created by estoppel in Maryland." And, on the basis of the statements in Jones
v. Aspen Hardware Co., supra (also relied on in the Maryland Tube case), it was concluded that
the corporation could not maintain the action.
On the other hand, where the corporation has obtained legal existence but has failed to comply
with a condition subsequent to corporate existence, this Court has held that such nonperformance
afforded the State the right to institute proceedings for the forfeiture of the charter, but that such
neglect or omission could never be set up by the corporation itself, or by its members and
stockholders, as a defense to an action to enforce their liabilities. C. & O. Canal Co. v. B. & O.
Railroad Co., 4 G. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102
Md. 501, 63 Atl. 62 (1906).
2013400036
[234 Md. 484]
In the Hammond case, an action by a creditor against a stockholder of a state bank on his statutory
liability, the Court, after stating that a corporation or a stockholder could not defeat an action by
showing noncompliance with the requirements of the corporation law unless the acts required are
conditions precedent to corporate existence, said (at p. 15):
By holding otherwise, parties might avail themselves of the powers and privileges of a corporation,
without in any manner subjecting themselves to its duties and obligations, and might set up their
own neglect of duty, of wilful omission to comply with the requirements of the statute, as means of
discharge from all their just obligations under the law. This is forbidden by every principle of law
and justice, and hence such a defense could never be tolerated.
It seems clear therefore that when a defect in the incorporation process resulted from a failure to
comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit of a
creditor to estop the corporation, or the members or stockholders thereof, from denying its
corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and Practice (rev.
ed.), 339.
In another line of Maryland cases which determined the rights and liabilities of a defectively
organized corporation, or a member or stockholder thereof, the Court, apparently disregarding the
distinction made between those requirements which are conditions precedent and those which are
conditions subsequent to corporate existence, has generally precluded, on the grounds of estoppel
or collateral attack, inquiry into the question of corporate existence.Maltby v. Northwestern Va.
R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building Asso., 24 Md. 259 (1866); Grape Sugar &
Vinegar Mfg. Co. v. Small,40 Md. 395 (1874); Laflin & Rand Powder Co. v. Sinsheimer, 46 Md. 315
(1877);Keene v. Van Reuth, 48 Md. 184 (1878); Bartlett v. Wilbur, 53 Md. 485 (1880);Pott & Co. v.
Schmucker, 84 Md. 535, 36 Atl. 592 (1897). In the Grape Sugarcase, an action against a
defectively organized corporation to
[234 Md. 485]
recover the balance due for work done and materials furnished, the Court said (at p. 400):
The second prayer proceeds upon the assumption that the [corporation] is not liable, provided the
work was done prior to the recording of the certificate of incorporation. It is true, that under the
general incorporation law of this State, the recording of the certificate was necessary to constitute
the [corporation] a body politic. If, however, the contract was made with the [creditor] through * * *
[the] President of the [corporation], after the certificate had been signed by the members of the
proposed corporation, but before it was recorded, and the company, after its incorporation was
complete, accepted the work done under the contract, it will be estopped, both in law and equity,
from denying its liability, on account of the same.
Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which might
be distinguishable in that it involved an effort to impose liability on a religious society and not a
business corporation.
In the Laflin & Rand case, decided in the same year (1877) as the Boyce case, the Court, in an
action against certain members of a corporation to make them individually liable for goods sold and
delivered to the corporation, said (at p. 321):
[The company] has been clothed with all the forms of a corporation by the laws of a neighboring
State, and was in the exercise and use of the franchises conferred upon it. It was a corporation de
facto at the time the goods were sold and delivered to it * * * and its existence as a corporation
cannot be collaterally drawn into question.To permit a recovery against the defendants, and
thereby to say that they are to be regarded in law as a voluntary unincorporated association, would
be a departure from all the cases. The debt was not created with them individually, but with a
company acting under a formal incorporation, and in the exercise of its corporate powers. This
[creditor] dealt with it and gave it credit as a corporation. If its assets are not ample to pay, it is the
misfortune of the creditor.4
See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for similar
statements of the law. From these cases it appears that where the parties have assumed corporate
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
existence and dealt with each other on that basis, the Court will apply the estoppel doctrine on the
theory that the parties by recognizing the organization as a corporation were thereafter prevented
from raising a question as to its corporate existence.
When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals
that the cases seem to fall into one or the other of two categories. In one line of cases, the Court,
choosing to disregard the nature of the dealings between the parties, refused to recognize both
doctrines where there had been a failure to comply with a condition precedent to corporate
existence, but, whenever such noncompliance concerned a condition subsequent to incorporation,
the Court often applied the estoppel doctrine. In the other line of cases, the Court, choosing to
make no distinction between defects which
[234 Md. 487]
were conditions precedent and those which were conditions subsequent, emphasized the course of
conduct between the parties and applied the estoppel doctrine when there had been substantial
dealings between them on a corporate basis.
Whether or not the decisions in the Boyce and Maryland Tube cases had the effect of repudiating
the de facto doctrine in this state, as some of the text writers seem to think, is a question we do not
reach in this case and therefore need not consider at this time. On the other hand, since it is clear
that theMaryland Tube and National Shutter Bar cases are inconsistent with other Maryland cases
insofar as they held (in relying on the statements in Jones v. Aspen Hardware Co., supra) that the
doctrine of estoppel cannot be invoked unless a corporation has at least a de facto existence, both
cases Maryland Tube and National Shutter Bar should be, and are hereby, overruled to the
extent of the inconsistency. There is, as we see it, a wide difference between creating a
corporation by means of the de facto doctrine and estopping a party, due to his conduct in a
particular case, from setting up the claim of no incorporation. Although some cases tend to
assimilate the doctrines of incorporation de facto and by estoppel, each is a distinct theory and
they are not dependent on one another in their application. See 8 Fletcher, op.cit., 3763; France
on Corporations (2nd ed.), 29; 18 C.J.S., op.cit., 111h. Where there is a concurrence of the
three elements necessary for the application of the de facto corporation doctrine, there exists an
entity which is a corporationde jure against all persons but the state. On the other hand, the
estoppel theory is applied only to the facts of each particular case and may be invoked even where
there is no corporation de facto. Accordingly, even though one or more of the requisites of a de
facto corporation are absent, we think that this factor does not preclude the application of the
5
estoppel doctrine in a proper case, such as the one at bar.
[234 Md. 488]
I.B.M. contends that the failure of the Bureau to file its certificate of incorporation
debarred all corporate existence. But, in spite of the fact that the omission might have prevented
6
the Bureau from being either a corporation de jure or de facto, Jones v. Linden Building Asso.,
supra, we think that I.B.M. having dealt with the Bureau as if it were a corporation and relied on its
credit rather than that of Cranson, is estopped to assert that the Bureau was not incorporated at
the time the typewriters were purchased.Laflin & Rand Powder Co. v. Sinsheimer, supra. See
also Tulane Improvement Co. v. S.A. Chapman & Co., 56 So. 509 (La. 1911). In 1 Clark and
Marshall,Private Corporations, 89, it is stated:
The doctrine in relation to estoppel is based upon the ground that it would generally be inequitable
to permit the corporate existence of an association to be denied by persons who have represented
it to be a corporation, or held it out as a corporation, or by any persons who have recognized it as a
corporation by dealing with it as such; and by the overwhelming weight of authority, therefore, a
person may be estopped to deny the legal incorporation of an association which is not even a
corporation de facto.
In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts of
other jurisdictions have held that where one has recognized the corporate existence of an
association, he is estopped to assert the contrary with respect to a claim arising out of such
dealings. See, for example, Tarbell v. Page, 24 Ill. 46 (1860); Magnolia Shingle Co. v. J. Zimmern's
2013400036
Co., 58 So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John Lucas Co. v.
Bernhardt's Estate, 100 So. 399 (La. 1924).
Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson was
not liable for the balance due on account of the typewriters.
Judgment reversed; the appellee to pay the costs.
Salvatierra v. Garlitos et al.(1958) 103 Phil. 757
EN BANC
[G.R. No. L-11442. May 23, 1958.]
MANUELA T. VDA. DE SALVATIERRA, petitioner, vs. HON. LORENZO C.
GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.
Jimenez, Tantuico, Jr. & Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
SYLLABUS
1. PLEADING AND PRACTICE; PETITION FOR RELIEF; WHEN TO FILE
PETITION. Rule 38, Section 3, of the Rules of Court treats of 2 periods within which a
petition for relief may be filed. The petition must be filed within 60 days after the petitioner
learns of the judgment and not more than 6 months after the judgment or order was rendered,
both of which must be satisfied.
2. CORPORATION LAW; LIABILITY OF PERSON DEALING WITH ASSOCIATION
AS A CORPORATE BODY; WHEN ESTOPPEL MAY NOT BE INVOKED. While as a
general rule, a person who deals with an association in such a way to recognize its existence
as a corporate body is estopped from denying the same in an action arising out of such
transaction, yet this doctrine may not be held to be applicable where fraud takes a part in the
said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that
the defendant corporation had no juridical personality, its president gave no confirmation or
denial of the same and the circumstance surrounding the execution of the contract lead to the
inescapable conclusion that plaintiff was really made to believe that such corporation was duly
organized in accordance with law.
3. ID.; LIABILITY OF MEMBERS WHO ACT AS AGENTS OF AN
UNINCORPORATED ASSOCIATION. A corporation when registered has a juridical
personality separate and distinct from its component members or stockholders and officers,
such that a corporation cannot be held liable for the personal in indebtedness of a stockholder
even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G. R. No. 42420) and
conversely, a stockholder cannot be held personally liable for any financial obligation by the
corporation in excess of his unpaid subscription. But this rule is understood to refer merely to
registered corporations and cannot be made applicable to the liability of members of an
unincorporated association. 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 (Fay vs. Noble, 7
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., p.
689-690).
D E C I S I O N
FACTS
Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Poblacion, Burauen,
Teyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers
Producers Co., Inc., allegedly a corporation "duly organized and existing under the laws of
the Philippines, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was
provided in said contract, among other things, that the lifetime of the lease would be for a period of
10 years; that the land would be planted to kenaf, ramie or other crops suitable to the soil; that the
lessor would be entitled to 30 % of the net income accruing from the harvest of any crop
without being responsible for the cost of production thereof; and that after every harvest, the lessee
was bound to declare at the earliest possible time the income derived therefrom and to deliver the
corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were not complied
with because on April 5, 1955, Salvatierra filed with the Court of First Instance of Leyte a complaint
against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting,
rescission and damages (Civil Case No. 1912). She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of the
commencement of the action, already harvested, processed and sold by defendants; that
notwithstanding that fact, defendants refused to render an accounting of the income derived
therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the
deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was
in violation of the terms of the covenant entered into between the plaintiff and defendant
corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they were allegedly
notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June
8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to
render a complete accounting of the harvest of the land subject of the proceeding within 15 days
from receipt of the decision and to deliver 30% of the net income realized from the last harvest to
plaintiff, with legal interest from the date defendants received payment for said crop. It was further
provide that upon defendants' failure to abide by the said requirement, the gross income would be
fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30 per cent
of which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of lease,
which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon motion
of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the
attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the
Philippine Fibers Producers Co., Inc., was found available for attachment.
On January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision
rendered was null and void with respect to him, there being no allegation in the complaint
pointing to his personal liability and thus prayed that an order be issued limiting such liability to
defendant corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered
the Provincial Sheriff of Leyte to release all properties belonging to the movant that might have
already been attached, after finding that the evidence on record made no mention or referred to
any fact which might hold movant personally liable therein.
ISSUE:Whether or not Refuerzo can be held personally liable for the acts of the Corporation which
he was the president and the signatory in the contract.
RULING: YES.
Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that
2013400036
the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so in
his capacity as president of the corporation. And this allegation was found by the Court a quo to be
supported by the records. Plaintiff on the other hand tried to refute this averment by contending
that her failure to specify defendant's personal liability was due to the fact that all the time she was
under the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was
a duly registered corporation as appearing in the contract, but a subsequent inquiry from the
Securities and Exchange Commission yielded otherwise.
While as a general rule a person who has contracted or dealt with an association in such a way as
to recognize its existence as a corporate body is estopped from denying the same in an action
arising out of such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46
Phil.,), yet this doctrine may not be held to be applicable where fraud takes a part in the said
transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that
the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo
gave no confirmation or denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff Salvatierra was really made to
believe that such corporation was duly organized in accordance with law.
There can be no question that a corporation with registered has a juridical personality
separate and distinct from its component members or stockholders and officers such that a
corporation cannot be held liable for the personal indebtedness of a stockholder even if he
should be its president and conversely, a stockholder or member cannot be held personally
liable for any financial obligation be, the corporation in excess of his unpaid subscription.
But this rule is understood to refer merely to registered corporations and cannot be made
applicable to the liability of members of an unincorporated association.
The reason behind this doctrine is obvious-since an organization which before the law is non-
existent has no personality and would be incompetent to act and appropriate for itself the powers
and attribute 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 rights 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 comes personally liable for contracts entered into or for other acts performed
as such, agent
Considering that defendant Refuerzo, as president of the unregistered corporation Philippine
Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement
by acting as its representative, his liability cannot be limited or restricted that imposed upon
corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he
assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of
such transaction.
Albert v. University Publishing Co., Inc. (1965) 13 SCRA 84
EN BANC
[G.R. No. L-19118. January 30, 1965.]
MARIANO A. ALBERT, plaintiff-
appellant, vs. UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
Aruego, Mamaril & Associates for defendant-appellee.
SYLLABUS
1. CORPORATION; PRINCIPLE OF CORPORATION BY ESTOPPEL; NOT INVOCABLE BY ONE
WHO MISREPRESENTED CORPORATION AS DULY ORGANIZED AGAINST HIS VICTIM.
One who has induced another to act upon his wilful 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.
2. ID.; PERSON ACTING FOR CORPORATION WITH NO VALID EXISTENCE IS PERSONALLY
LIABLE FOR CONTRACTS ENTERED INTO AS SUCH AGENT. A person acting or purporting
to act on behalf of a corporation which has no valid existence assumes each privileges and
obligations and becomes personally liable for contracts entered into or for other acts performed as
such agent.
3. PARTIES TO ACTION; SUIT AGAINST CORPORATION WITH NO VALID EXISTENCE; REAL
DEFENDANT IS PERSON WHO WAS CONTROL OF ITS PROCEEDINGS. 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 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.
4. ID.; REAL PARTY IN INTEREST: PERSON WHO ACTED AS REPRESENTATIVE OF NON-
EXISTENT PRINCIPAL AND WHO REAPED BENEFITS FROM ITS CONTRACTS. A person
who acted as representative of a non-existent principal, who reaped the benefits resulting from a
contract entered into by him as such, and who violated its terms, thereby precipitating a suit, is the
real party to the contract sued upon.
5. DUE PROCESS OF LAW; PURPOSE IS TO SECURE JUSTICE AND NOT TO SACRIFICE IT
BY TECHNICALITIES. The "due process" clause of the Constitution is designed to secure
justice as a living reality, not to sacrifice it by paying undue homage to formality.
For substance must prevail over form.
6. PARTIES IN INTEREST; REAL LITIGANT MAY BE HELD LIABLE. Since the purpose of
formally impleading a party is to assure him a day in court, once the protective mantle of due
process of law has in fact been accorded a litigant, whatever the imperfection in form, the real
litigant may be held liable as a party.
7. PLEADINGS AND PRACTICE; LITIGANT NOT ALLOWED TO SPECULATE ON DECISION OF
COURT. A litigant is not allowed to speculate on the decision the court may render. Where it
was only after the receipt of the adverse decision of the Supreme Court that a party disclosed its
registration papers, it is held that the same can no longer be considered.
8. ID.; ORIGINAL PAPERS NOT PRESENTED BEFORE COURT CANNOT BE TRANSMITTED
ON APPEAL; SEC. 7, RULE 48, RULES OF COURT NOT APPLICABLE. Sec. 7 of Rule 48,
Rules of Court, refers to papers the originals of which are of record in the lower court, which the
appellate court may require to be transmitted for inspection. Where the original papers have not
been presented in the lower court as part of its record, the same cannot be transmitted on appeal
under the aforesaid section.
9. ID.; ORIGINAL PAPERS IN POSSESSION AND CONTROL OF PARTY MOVANT NOT NEWLY
DISCOVERED EVIDENCE. For original papers not part of the lower court's record, the
applicable rule is Sec 1 of Rule 58 on New Trial. Where the papers could with due diligence have
been presented in the lower court, since they were in movant's possession and control all the time
it is held that under said Rule said papers cannot be admitted because they are not newly
discovered evidence.
MARIANO A. ALBERT
vs.
2013400036
UNIVERSITY PUBLISHING CO., INC.
G.R. No. L-19118, January 30, 1965
FACTS:
In the original case, the court had awarded P P15,000.00 in favor of the petitioner for
damages arising out of a breach of contract. Such breach of contract arose when the publishing
company failed to pay the petitioner the agreed amount for latter to have 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. The order became final and executory. A writ of execution was issued
against the company, however the petitioner petitioned for a writ of execution against Jose M.
Aruego, as the real defendantstating, plaintiff's counsel and the Sheriff of Manila discovered that
there is no such entity as University Publishing Co., Inc. and no such entity is registered with the
SEC.
This case asks the court whether or not the judgment may be executed against Jose M.
Aruego, supposed President of University Publishing Co., Inc., as the real defendant.
ISSUE:
Whether or not the judgment may be executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as the real defendant.
RULING:
NO.
The Court ruled that the doctrine of corporation by estoppel was not applicable. Although
the rule is that 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, in this case, Aruego was not named as a
defendant. Since he was not named, he could not be served and be made liable for the claim
because to do so would violate his right to due process. He was not given the chance to defend
himself and be heard during trial.
Wherefore, the order was reversed and set aside and was remanded lower court to hold
supplementary proceedings for the purpose of carrying the judgment into effect against University
Publishing Co., Inc. and/or Jose M. Aruego.
Chiang Kai Shek School v. CA (1989) 172 SCRA 389
FIRST DIVISION
[G.R. No. 58028. April 18, 1989.]
CHIANG KAI SHEK SCHOOL, petitioner, vs. COURT OF APPEALS and
FAUSTINA FRANCO OH, respondents.
SYLLABUS
1.REMEDIAL LAW; PARTIES IN A CIVIL ACTION; FAILURE OF SCHOOL TO INCORPORATE
DOES NOT EXEMPT IT FROM SUIT AS A JURIDICAL ENTITY. It is true that Rule 3, Section
1, of the Rules of Court clearly provides that "only natural or juridical persons may be parties in a
civil action." It is also not denied that the school has not been incorporated. However, this omission
should not prejudice the private respondent in the assertion of her claims against the school. As
a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which
provided as follows: Unless exempted for special reasons by the Secretary of Public Instruction,
any private school or college recognized by the government shall be incorporated under the
provisions of Act No. 1459 known as the Corporation Law, within 90 days after the date of
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
recognition, and shall file with the Secretary of Public Instruction a copy of its incorporation papers
and by-laws. Having been recognized by the government, it was under obligation to incorporate
under the Corporation Law within 90 days from such recognition. It appears that it had not done so
at the time the complaint was filed notwithstanding that it had been in existence even earlier than
1932. The petitioner cannot now invoke its own non-compliance with the law to immunize it from
the private respondent's complaint.
2.ID.; ID.; SCHOOL HAVING REPRESENTED ITSELF AS POSSESSED OF JURIDICAL
PERSONALITY ESTOPPED FROM DENYING THE SAME. There is no question that having
contracted with the private respondent every year for thirty two years and thus represented itself as
possessed of juridical personality to do so, the petitionerChiang Kai Shek School is now estopped
from denying such personality to defeat her claim against it. According to Article 1431 of the Civil
Code, "through estoppel an admission or representation is rendered conclusive upon the person
making it and cannot be denied or disproved as against the person relying on it."
3.LABOR LAW; CHARITABLE INSTITUTIONS COVERED THEREIN. It is clear now that a
charitable institution is covered by the labor laws although the question was still unsettled when
this case arose in 1968. At any rate, there was no law even then exempting such institutions from
the operation of the labor laws (although they were exempted by the Constitution from ad
valorem taxes). Hence, even assuming that the petitioner was a charitable institution as it claims,
the private respondent was nonetheless still entitled to the protection of the Termination Pay Law,
which was then in force.
4.ID.; TERMINATION OF EMPLOYMENT; DISMISSAL OF PERMANENT EMPLOYEE WITHOUT
CAUSE AND DUE NOTICE NOT PROPER. The Court holds, after considering the particular
circumstance of Oh's employment, that she had become a permanent employee of the school and
entitled to security of tenure at the time of her dismissal. Since no cause was shown and
established at an appropriate hearing, and the notice then required by law had not been given,
such dismissal was invalid. The private respondent's position is no different from that of the rank-
and-file employees involved in Gregorio Araneta University Foundation v. NLRC, of whom the
Court had the following to say: Undoubtedly, the private respondents' positions as deans and
department heads of the petitioner university are necessary in its usual business. Moreover, all the
private respondents have been serving the university from 18 to 28 years. All of them rose from the
ranks starting as instructors until they became deans and department heads of the university. A
person who has served the University for 28 years and who occupies a high administrative position
in addition to teaching duties could not possibly be a temporary employee or a casual.
5.ID.; ID.; ILLEGAL DISMISSAL DONE IN WANTON AND OPPRESSIVE MANNER, AWARD OF
MORAL AND EXEMPLARY DAMAGES PROPER. We find that the private respondent was
arbitrarily treated by the petitioner, which has shown no cause for her removal nor had it given her
the notice required by the Termination Pay Law. As the respondent court said, the contention that
she did not report one week before the start of classes is a flimsy justification for replacing her. She
had been in its employ for all of thirty-two years. Her record was apparently unblemished. There is
no showing of any previous strained relations between her and the petitioner. Oh had every reason
to assume, as she had done in previous years, that she would continue teaching as usual. It is
easy to imagine the astonishment and hurt she felt when she was flatly and without warning told
she was dismissed. There was not even the amenity of a formal notice of her replacement, with
perhaps a graceful expression of thanks for her past services. She was simply informed she was
no longer in the teaching staff. To put it bluntly, she was fired. For the wrongful act of the petitioner,
the private respondent is entitled to moral damages. As a proximate result of her illegal dismissal,
she suffered mental anguish, serious anxiety, wounded feelings and even besmirched reputation
as an experienced teacher for more than three decades. We also find that the respondent court did
not err in awarding her exemplary damages because the petitioner acted in a wanton and
oppressive manner when it dismissed her.
D E C I S I O N
CRUZ, J p:
2013400036
An unpleasant surprise awaited Fausta F. Oh when she reported for work at
the Chiang Kai Shek School in Sorsogon on the first week of July, 1968. She was told she had no
assignment for the next semester. Oh was shocked. She had been teaching in the school since
1932 for a continuous period of almost 33 years. And now, out of the blue, and for no apparent or
given reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity
benefits and moral and exemplary damages. 1 The original defendant was
the Chiang Kai Shek School but when it filed a motion to dismiss on the ground that it could not be
sued, the complaint was amended. 2 Certain officials of theschool were also impleaded to make
them solidarily liable with the school.
The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was set
aside by the respondent court, which held the school suable and liable while absolving the other
defendants. 4 The motion for reconsideration having been denied, 5 the school then came to this
Court in this petition for review on certiorari.
The issues raised in the petition are:
1.Whether or not a school that has not been incorporated may be sued by reason alone of its long
continued existence and recognition by the government.
2.Whether or not a complaint filed against persons associated under a common name will justify a
judgment against the association itself and not its individual members.
3.Whether or not the collection of tuition fees and book rentals will make a school profit-making and
not charitable.
4.Whether or not the Termination Pay Law then in force was available to the private respondent
who was employed on a year-to-year basis.
5.Whether or not the awards made by the respondent court were warranted.
We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules of
Court clearly provides that "only natural or juridical persons may be parties in a civil action." It is
also not denied that the school has not been incorporated. However, this omission should not
prejudice the private respondent in the assertion of her claims against the school. LLphil
As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which
provided as follows:
Unless exempted for special reasons by the Secretary of Public Instruction,
any private school or college recognized by the government shall be
incorporated under the provisions of Act No. 1459 known as the Corporation
Law, within 90 days after the date of recognition, and shall file with the
Secretary of Public Instruction a copy of its incorporation papers and by-
laws.
Having been recognized by the government, it was under obligation to incorporate under
the Corporation Law within 90 days from such recognition. It appears that it had not done so at the
time the complaint was filed notwithstanding that it had been in existence even earlier than 1932.
The petitioner cannot now invoke its own non-compliance with the law to immunize it from the
private respondent's complaint.
There should also be no question that having contracted with the private respondent every year for
thirty two years and thus represented itself as possessed of juridical personality to do so, the
petitioner is now estopped from denying such personality to defeat her claim against it. According
to Article 1431 of the Civil Code, "through estoppel an admission representation is rendered
conclusive upon the person making it and cannot be denied or disproved as against the person
relying on it."
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15,
under which the persons joined in an association without any juridical personality may be sued with
such association. Besides, it has been shown that the individual members of the board of trustees
are not liable, having been appointed only after the private respondent's dismissal. 6
It is clear now that a charitable institution is covered by the labor laws 7 although the question was
still unsettled when this case arose in 1968. At any rate, there was no law even
then exempting such institutions from the operation of the labor laws (although they were
exempted by the Constitution from ad valorem taxes). Hence, even assuming that the petitioner
was a charitable institution as it claims, the private respondent was nonetheless still entitled to the
protection of the Termination Pay Law, which was then in force.
While it may be that the petitioner was engaged in charitable works, it would not necessarily follow
that those in its employ were as generously motivated. Obviously, most of them would not have the
means for such charity. The private respondent herself was only a humble school teacher receiving
a meager salary of P180.00 per month.
At that, it has not been established that the petitioner is a charitable institution, considering
especially that it charges tuition fees and collects book rentals from its students. 8 While this alone
may not indicate that it is profit-making, it does weaken its claim that it is a non-profit entity. llcd
The petitioner says the private respondent had not been illegally dismissed because her teaching
contract was on a yearly basis and the school was not required to rehire her in 1968. The argument
is that her services were terminable at the end of each year at the discretion of the school.
Significantly explanation was given by the petitioner, and no advance notice either, of her relief.
After teaching year in and year out for all of thirty-two years, the private respondent was simply told
she could not teach any more.
The Court holds, after considering the particular circumstance of Oh's employment, that she had
become a permanent employee of the school and entitled to security of tenure at the time of her
dismissal. Since no cause was shown and established at an appropriate hearing, and the notice
then required by law had not been given, such dismissal was invalid.
The private respondent's position is no different from that of the rank-and-file employees involved
in Gregorio Araneta University Foundation v. NLRC, 9 of whom the Court had the following to say:
Undoubtedly, the private respondents' positions as deans and department
heads of the petitioner university are necessary in its usual business.
Moreover, all the private respondents have been serving the university from
18 to 28 years. All of them rose from the ranks starting as instructors until
they became deans and department heads of the university. A person who
has served the University for 28 years and who occupies a high
administrative position in addition to teaching duties could not possibly be a
temporary employee or a casual.
The applicable law is the Termination Pay Law, which provided:
SECTION 1.In cases of employment, without a definite period, in a
commercial, industrial, or agricultural establishment or enterprise, the
employer or the employee may terminate at any time the employment with
just cause; or without just cause in the case of an employee by serving
written notice on the employer at least one month in advance, or in the case
of an employer, by serving such notice to the employee at least one month
in advance or one-half month for every year of service of the employee,
whichever, is longer, a fraction of at least six months being considered as
one whole year.
2013400036
The employer, upon whom no such notice was served in case of termination
of employment without just cause may hold the employee liable for
damages.
The employee, upon whom no such notice was served in case of
termination of employment without just cause shall be entitled to
compensation from the date of termination of his employment in an amount
equivalent to his salaries or wages corresponding to the required period of
notice. . . .
The respondent court erred, however, in awarding her one month pay instead of only one-half
month salary for every year of service. The law is quite clear on this matter. Accordingly, the
separation pay should be computed at P90.00 times 32 months, for a total of P2,880.00. Cdpr
Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School Teachers,
confers security of tenure on the teacher upon appointment as long as he possesses the required
qualification. 10 And under the present policy of the Department of Education, Culture and Sports,
a teacher becomes permanent and automatically acquires security of tenure upon completion of
three years in the service. 11
While admittedly not applicable to the case at bar, these rules nevertheless reflect the attitude of
the government on the protection of the worker's security of tenure, which is now guaranteed by no
less than the Constitution itself. 12
We find that the private respondent was arbitrarily treated by the petitioner, which has shown no
cause for her removal nor had it given her the notice required by the Termination Pay Law. As the
respondent court said, the contention that she did not report one week before the start of classes is
a flimsy justification for replacing her.13 She had been in its employ for all of thirty-two years. Her
record was apparently unblemished. There is no showing of any previous strained relations
between her and the petitioner. Oh had every reason to assume, as she had done in previous
years, that she would continue teaching as usual.
It is easy to imagine the astonishment and hurt she felt when she was flatly and without warning
told she was dismissed. There was not even the amenity of a formal notice of her replacement,
with perhaps a graceful expression of thanks for her past services. She was simply informed she
was no longer in the teaching staff. To put it bluntly, she was fired.
For the wrongful act of the petitioner, the private respondent is entitled to moral damages. 14 As a
proximate result of her illegal dismissal, she suffered mental anguish, serious anxiety, wounded
feelings and even besmirched reputation as an experienced teacher for more than three decades.
We also find that the respondent court did not err in awarding her exemplary damages because the
petitioner acted in a wanton and oppressive manner when it dismissed her. 15
The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are
always at the forefront in the battle against illiteracy and ignorance. If only because it is they who
open the minds of their pupils to an unexplored world awash with the magic of letters and numbers,
which is an extraordinary feat indeed, these humble mentors deserve all our respect and
appreciation.
WHEREFORE, the petition is DENIED. The appealed decision is AFFIRMED except for the award
of separation pay, which is reduced to P2,880.00. All the other awards are approved. Costs against
the petitioner.
This decision is immediately executory.
SO ORDERED.
||| (Chiang Kai Shek School v. Court of Appeals, G.R. No. 58028, [April 18, 1989], 254 PHIL 394-
403)
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
Lim Tong Lim v. Phil. Fishing Gear (1999) 317 SCRA 728
THIRD DIVISION
[G.R. No. 136448. November 3, 1999.]
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES,
INC., respondent.
Roberto A. Abad for petitioner.
Benjamin S. Benito & Associates for private respondent.
SYNOPSIS
Antonio Chua and Peter Yao entered into a contract in behalf of Ocean Quest Fishing Corporation
for the purchase of fishing nets from respondent Philippine FishingGear Industries, Inc. Chua and
Yao claimed that they were engaged in business venture with petitioner Lim Tong Lim, who,
however, was not a signatory to the contract. The buyers failed to pay the fishing nets. Respondent
filed a collection against Chua, Yao and petitioner Lim in their capacities as general partners
because it turned out that Ocean Quest Fishing Corporation is a non-existent corporation. The trial
court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching
thefishing nets. The trial court rendered its decision ruling that respondent was entitled to the Writ
of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent. Lim appealed to the Court of Appeals, but the appellate court affirmed the decision of
the trial court that petitioner Lim is a partner and may thus be held liable as such. Hence, the
present petition. Petitioner claimed that since his name did not appear on any of the contracts and
since he never directly transacted with the respondent corporation, ergo, he cannot be held
liable. cIaCTS
The Supreme Court denied the petition. The Court ruled that having reaped the benefits of the
contract entered into by Chua and Yao, with whom he had an existing relationship, petitioner Lim is
deemed a part of said association and is covered by the doctrine of corporation by estoppel. The
Court also ruled that under the principle of 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.
SYLLABUS
1. CIVIL LAW; PARTNERSHIP; AGREEMENT THAT ANY LOSS OR PROFIT FROM THE SALE
AND OPERATION OF THE BOATS WOULD BE DIVIDED EQUALLY AMONG THEM SHOWS
THAT THE PARTIES HAD INDEED FORMED A PARTNERSHIP. From the factual findings of
both lower courts, it is clear that 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 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
2013400036
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.
2. ID.; ID.; COMPROMISE AGREEMENT OF THE PARTIES NOT THE SOLE BASIS OF
PARTNERSHIP. Petitioner argues that the appellate court's sole basis for assuming the
existence of a partnership was the Compromise Agreement. He also claims that the settlement
was entered into only to end the dispute among them, but not to adjudicate their preexisting rights
and obligations. His arguments are baseless. The Agreement was but an embodiment of the
relationship extant among the parties prior to its execution. A proper adjudication of claimants'
rights mandates that courts must review and thoroughly appraise all relevant facts. Both lower
courts have done so and have found, correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of one piece of document alone, petitioner
fails to appreciate that the CA and the RTC delved into the history of the document and explored all
the possible consequential combinations in harmony with law, logic and fairness. Verily, the two
lower courts' factual findings mentioned above nullified petitioner's argument that the existence of a
partnership was based only on the Compromise Agreement.
3. ID.; ID.; PETITIONER WAS A PARTNER, NOT A LESSOR. Verily, as found by the lower
courts, 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.
4. MERCANTILE LAW; PRIVATE CORPORATIONS; HAVING REAPED THE BENEFITS OF THE
CONTRACT ENTERED INTO BY PERSONS WITH WHOM HE PREVIOUSLY HAD AN EXISTING
RELATIONSHIP, PETITIONER IS DEEMED TO BE PART OF SAID ASSOCIATION AND IS
COVERED BY THE DOCTRINE OF CORPORATION BY ESTOPPEL. 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. It is difficult to disagree with
the RTC and the CA thatLim, Chua and Yao decided to form a corporation. 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.
5. REMEDIAL LAW; PROVISIONAL REMEDIES; ATTACHMENT; ISSUE OF VALIDITY
THEREOF, MOOT AND ACADEMIC. Petitioner claims that the Writ of Attachment was
improperly issued against the nets. We agree with the Court of Appeals that this issue is now moot
and academic. As previously discussed, F/B Lourdes was an asset of the partnership and that it
was placed in the name of petitioner, only to assure payment of the debt he and his partners owed.
The nets and the floats were specifically manufactured and tailor-made according to their own
design, and were bought and used in the fishing venture they agreed upon. Hence, the issuance of
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
the Writ to assure the payment of the price stipulated in the invoices is proper. Besides, by specific
agreement, ownership of the nets remained with Respondent PhilippineFishing Gear, until full
payment thereof.
LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
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. However, they were unable to pay PFGI and hence
were sued in their own names as Ocean Quest Fishing Corporation is a non-existent corporation.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting
a reasonable time within which to pay. He also turned over to respondent some of the nets which
were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his
right to cross-examine witnesses and to present evidence on his behalf, because of his failure to
appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.
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. On appeal, the CA affirmed the RTCs decision.
ISSUE: Whether Lim Tong Lim is liable as a partner
HELD:
Yes. From the factual findings of both lower courts, it is clear that 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 (brother of Lim Tong Lim). 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 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.
2013400036
Lim Tong Lim cannot argue that the principle of corporation by estoppels can only be imputed to
Yao and Chua. Unquestionably, Lim Tong Lim benefited from the use of the nets found in his
boats, the boat which has earlier been proven to be an asset of the partnership. Lim, Chua and
Yao decided to form a corporation. 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.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
Separate Opinions
VITUG, J., concurring opinion;
I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim
have incurred the liabilities of general partners. I merely would wish to elucidate a bit, albeit briefly,
the liability of partners in a general partnership.
When a person by his act or deed represents himself as a partner in an existing partnership or with
one or more persons not actual partners, he is deemed an agent of such persons consenting to
such representation and in the same manner, if he were a partner, with respect to persons who rely
1
upon the representation. The association formed by Chua, Yao and Lim, should be, as it has
been deemed, a de facto partnership with all the consequent obligations for the purpose of
enforcing the rights of third persons. The liability of general partners (in a general partnership as so
2
opposed to a limited partnership) is laid down in Article 1816 which posits that all partners shall
be liable pro rata beyond the partnership assets for all the contracts which may have been entered
into in its name, under its signature, and by a person authorized to act for the partnership. This rule
is to be construed along with other provisions of the Civil Code which postulate that the partners
can be held solidarily liable with the partnership specifically in these instances (1) where, by any
wrongful act or omission of any partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is caused to any person, not being
a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act; (2) where one partner acting within the scope of
his apparent authority receives money or property of a third person and misapplies it; and (3)
where the partnership in the course of its business receives money or property of a third person
and the money or property so received is misapplied by any partner while it is in the custody of the
3
partnership consistently with the rules on the nature of civil liability in delicts and quasi-delicts.
Intl Express Travel v. CA (2000) 343 SCRA 674
FIRST DIVISION
[G.R. No. 119020. October 19, 2000.]
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petition
er, vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINES
FOOTBALL FEDERATION, respondents.
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
International Express Travel and Tour Services, Inc. vs. Court of Appeals
FACTS:
1. Petitioner 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.
2. Petitioner offered its services as a travel agency to the latter.
3. The offer was accepted.
4. Petitioner secured the airline tickets for the trips of the athletes and officials of the
Federation to the South East Asian Games
5. For the tickets received, the Federation made two partial payments, both in
September of 1989, in the total amount of P176,467.50.
6. petitioner wrote the Federation, through the private respondent a demand letter
requesting for the amount of P265,894.33
7. the Federation, through the Project Gintong Alay, paid the amount of P31,603.00.
8. Henri Kahn issued a personal check in the amount of P50,000 as partial payment
for the outstanding balance of the Federation.
9. Thereafter, no further payments were made despite repeated demands.
10. This prompted petitioner to file a civil case before the Regional Trial Court of
Manila. Petitioner sued Henri Kahn in his personal capacity and as President of the
Federation
11. 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.
12. Henri Kahn filed his answer with counterclaim: he 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.
13. 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.
14. In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of
the Federation. It rationalized that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not be held liable for the
same as said entity has a separate and distinct personality from its officers.
ISSUE:
Whether or not the Philippine Football Federation may be considered as a juridical
person.
RULING:
2013400036
The powers and functions granted to national sports associations clearly indicate that
these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national sports associations may
be accorded corporate status, such does not automatically take place by the mere passage of
these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling act. We cannot
agree with the view of the appellate court and the private respondent that the Philippine Football
Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A.
3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided the manner by which these
entities may acquire juridical personality.
Clearly the above cited provisions require that 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.
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.
11) Corps. that are neither de jure, de facto, nor by estoppel
o When both parties knew that the corporate party to the contract did not exist
o The doctrine that could be applied is IN PARI DELICTO doctrine problem is that
there should be ollegality of the cause or object of the contract
o Salvatierra Ruling since a non-existed corporation has no personality, and is
incompetent to act and appropriate for itself the powers and attributes of a
corporation
It cannot create agents or confer authority on another to act in its behalf
In contracts entered the law considere such agents as principles,
possessed of all the rights and subject to all the liability of the principles
Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. and Y-I
CLUBS AND RESORTS, INC., petitioners, vs. JAMES YU, respondent.
FACTS:
Mt. Arayat Development Co., Inc. (MADCI) was a real estate development
corporation, which was registered on February 7, 1996 before the Security and Exchange
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
Commission (SEC). On the other hand, respondent James Yu (Yu) was a businessman,
interested in purchasing golf and country club shares.
Sometime in 1997, MADCI offered for sale shares of a golf and country club located
in the vicinity of Mt. Arayat in Arayat, Pampanga, for the price of P550.00 per share. Relying
on the representation of MADCI's brokers and sales agents, Yu bought 500 golf and 150
country club shares for a total price of P650,000.00 which he paid by installment with fourteen
(14) Far East Bank and Trust Company (FEBTC) checks.
Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf
and country club and discovered that it was non-existent. Yu demanded from MADCI that his
payment be returned to him. MADCI recognized that Yu had an investment of P650,000.00,
but the latter had not yet received any refund.
RTC:
On August 14, 2000, Yu filed with the RTC a complaint for collection of sum of
money and damages with prayer for preliminary attachment against MADCI and its president
Rogelio Sangil (Sangil) to recover his payment for the purchase of golf and country club
shares. In his transactions with MADCI, Yu alleged that he dealt with Sangil, who used
MADCI's corporate personality to defraud him.
In his Answer, Sangil alleged that Yu dealt with MADCI as a juridical person and
that he did not benefit from the sale of shares. He added that the return of Yu's money was no
longer possible because its approval had been blocked by the new set of officers of MADCI,
which controlled the majority of its board of directors.
In its Answer, MADCI claimed that it was Sangil who defrauded Yu. It invoked the
Memorandum of Agreement (MOA), entered into by MADCI, Sangil and petitioner Yats
International Ltd. (YIL). Under the MOA, Sangil undertook to redeem MADCI proprietary
shares sold to third persons or settle in full all their claims for refund of payments. Thus, it was
MADCI's position that Sangil should be ultimately liable to refund the payment for shares
purchased.
After the pre-trial, Yu filed an Amended Complaint, wherein he also impleaded YIL,
Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he
discovered in the Registry of Deeds of Pampanga that, substantially, all the assets of MADCI
were sold to YIL, YILPI and YICRI. The transfer was done in fraud of MADCI's creditors, and
without the required approval of its stockholders and board of directors under Section 40 of
the Corporation Code. IHTE
In their Answer, YIL, YILPI and YICRI alleged that they only had an interest in
MADCI in 1999 when YIL bought some of its corporate shares pursuant to the MOA. This
occurred two (2) years after Yu bought his golf and country club shares from MADCI. As a
mere stockholder of MADCI, YIL could not be held responsible for the liabilities of the
corporation. As to the transfer of properties from MADCI to YILPI and subsequently to
YICRI, they averred that it was not undertaken to defraud MADCI's creditors and it was done
in accordance with the MOA. In fact, it was stipulated in the MOA that Sangil undertook to
settle all claims for refund of third parties.
The RTC Ruling
In its August 31, 2010 Decision, the RTC ruled that because MADCI did not deny its
contractual obligation with Yu, it must be liable for the return of his payments. The trial court
also ruled that Sangil should be solidarily liable with MADCI because he used the latter as a
mere alter ego or business conduit. The RTC was convinced that Sangil had absolute control
over the corporation and he started selling golf and country club shares under the guise of
MADCI even without clearance from SEC.
2013400036
The RTC, however, exonerated YIL, YILPI and YICRI from liability because they
were not part of the transactions between MADCI and Sangil, on one hand and Yu, on the
other hand
The CA Ruling
In its assailed Decision, dated January 30, 2012, the CA partly granted the appeals
and modified the RTC decision by holding YIL and its companies, YILPI and YICRI, jointly and
severally, liable for the satisfaction of Yu's claim.
The CA held that the sale of lands between MADCI and YIL must be upheld
because Yu failed to prove that it was simulated or that fraud was employed. This did not
mean, however, that YIL and its companies were free from any liability for the payment of Yu's
claim.
The CA explained that YIL, YILPI and YICRI could not escape liability by simply
invoking the provision in the MOA that Sangil undertook the responsibility of paying all the
creditors' claims for refund. The provision was, in effect, a novation under Article 1293 of
the Civil Code, specifically the substitution of debtors. Considering that Yu, as creditor of
MADCI, had no knowledge of the "change of debtors," the MOA could not validly take effect
against him. Accordingly, MADCI remained to be a debtor of Yu. DETA
The sale by MADCI of all its corporate assets to YIL and its companies necessarily
included the assumption of the its liabilities. Otherwise, the assets were put beyond the reach
of the creditors, like Yu. The CA stated that the liability of YIL and its companies was
determined not by their participation in the sale of the golf and country club shares, but by the
fact that they bought the entire assets of MADCI and its creditors might not have other means
of collecting the amounts due to them, except by going after the assets sold.
YIL and its companies, YILPI and YICRI, moved for reconsideration, but their
motion was denied by the CA.
ISSUE
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT
PETITIONERS YATS GROUP SHOULD BE HELD JOINTLY AND SEVERALLY
LIABLE TO RESPONDENT YU DESPITE THE ABSENCE OF FRAUD IN THE SALE
OF ASSETS AND BAD FAITH ON THE PART OF PETITIONERS YATS GROUP. 29
HELD
The petition lacks merit.
Background on the corporate assumption of liabilities
Nell Doctrine:
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.
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016)
The Nell Doctrine states the general rule that the transfer of all the assets of a
corporation to another shall not render the latter liable to the liabilities of the transferor. If any
of the above-cited exceptions are present, then the transferee corporation shall assume the
liabilities of the transferor.
Legal bases of the Nell Doctrine
The general rule expressed by the doctrine reflects the principle of relativity
under Article 1311 of the Civil Code. Contracts, including the rights and obligations arising
therefrom, are valid and binding only between the contracting parties and their successors-in-
interest. Thus, despite the sale of all corporate assets, the transferee corporation cannot be
prejudiced as it is not in privity with the contracts between the transferor corporation and its
creditors.
1. The first exception under the Nell Doctrine, where the transferee corporation
expressly or impliedly agrees to assume the transferor's debts, is provided under
Article 2047 of the Civil Code. When a person binds himself solidarily with the
principal debtor, then a contract of suretyship is produced. Necessarily, the
corporation which expressly or impliedly agrees to assume the transferor's debts
shall be liable to the same.
2. The second exception under the doctrine, as to the merger and consolidation of
corporations, is well-established under Sections 76 to 80, Title X of the
Corporation Code. If the transfer of assets of one corporation to another
amounts to a merger or consolidation, then the transferee corporation must take
over the liabilities of the transferor.
3. Another exception of the doctrine, where the sale of all corporate assets is
entered into fraudulently to escape liability for transferor's debts, can be found
under Article 1388 of the Civil Code. It provides that whoever acquires in bad
faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered. Thus, if there is fraud in the transfer of all the assets of the
transferor corporation, its creditors can hold the transferee liable.
4. For the exception that a corporation merely a continuation of the selling
corporation, the book Philippine Corporate Law, by Dean Cesar Villanueva
explained that this exception contemplates the "business-enterprise transfer." In
such transfer, the transferee corporation's interest goes beyond the assets of the
transferor's assets and its desires to acquire the latter's business enterprise,
including its goodwill. In other words, in this last exception, the transferee
purchases not only the assets of the transferor, but also its business. As a result
of the sale, the transferor is merely left with its juridical existence, devoid of its
industry and earning capacity. Fittingly, the proper provision of law that is
contemplated by this exception would be Section 40 of the Corporation Code.
To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or
substantially all of the corporation's assets, including its goodwill. The sale under this
provision does not contemplate an ordinary sale of all corporate assets; the transfer must be
of such degree that the transferor corporation is rendered incapable of continuing its business
or its corporate purpose.
Section 40 suitably reflects the business-enterprise transfer under the exception of
the Nell Doctrine because the purchasing or transferee corporation necessarily continued the
business of the selling or transferor corporation. Given that the transferee corporation
acquired not only the assets but also the business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the former.
It must be clarified, however, that not every transfer of the entire corporate assets
would qualify under Section 40. It does not apply
2013400036
(1) if the sale of the entire property and assets is necessary in the usual and
regular course of business of corporation, or
(2) if the proceeds of the sale or other disposition of such property and
assets will be appropriated for the conduct of its remaining business.
Thus, the litmus test to determine the applicability of Section 40 would be the capacity of the
corporation to continue its business after the sale of all or substantially all its assets.
Jurisprudential recognition of the business-enterprise transfer
Jurisprudence has held that in a business-enterprise transfer, the transferee is
liable for the debts and liabilities of his transferor arising from the business enterprise
conveyed. Many of the application of the business-enterprise transfer have been related by
the Court to the application of the piercing doctrine.
Perhaps the most telling jurisprudence which recognized the business-enterprise
transfer would be the assailed case of Caltex. In that case, under an agreement of
assumption of obligations, LUSTEVECO transferred, conveyed and assigned to respondent
PSTC all of its business, properties and assets pertaining to its tanker and bulk business
together with all the obligations, properties and assets. Meanwhile, petitioner Caltex, Inc.
obtained a judgment debt against LUSTEVECO, and it sought to enforce the same against
PSTC. The Court ruled that PSTC was bound by its agreement with LUSTEVECO and the
former assumed all of the latter's obligations pertaining to such business.
More importantly, the Court held that, even without the agreement, PSTC was still
liable to Caltex, Inc. based on Section 40
...The acquisition by the assignee of all or substantially all
of the assets of the assignor necessarily includes the assumption of
the assignor's liabilities, unless the creditors who did not consent to the
transfer choose to rescind the transfer on the ground of fraud]
The Caltex case, thus, affirmed that the transfer of all or substantially all the
proper from one corporation to another under Section 40 necessarily entails the
assumption of the assignor's liabilities, notwithstanding the absence of any agreement
on the assumption of obligations. The transfer of all its business, properties and assets
without the consent of its creditors must certainly include the liabilities; or else, the
assignment will place the assignor's assets beyond the reach of its creditors. Caltex justifiably
concluded that the transfer of assets of a corporation under Section 40 must likewise carry
with it the transfer of its liabilities.
Fraud is not an essential consideration in a business-enterprise transfer
The exception of the Nell doctrine, which finds its legal basis under Section 40,
provides that the transferee corporation assumes the debts and liabilities of the transferor
corporation because it is merely a continuation of the latter's business. A cursory reading of
the exception shows that it does not require the existence of fraud against the creditors before
it takes full force and effect. Indeed, under the Nell Doctrine, the transferee corporation may
inherit the liabilities of the transferor despite the lack of fraud due to the continuity of the
latter's business.
The purpose of the business-enterprise transfer is to protect the creditors of the
business by allowing them a remedy against the new owner of the assets and business
enterprise. Otherwise, creditors would be left "holding the bag," because they may not be able
to recover from the transferor who has "disappeared with the loot," or against the transferee
who can claim that he is a purchaser in good faith and for value.
Applicability of the business-enterprise transfer in the present case
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
Synthesizing Section 40 and the previous rulings of this Court, it is apparent and the transferee. These stipulations, though, are not binding on the creditors of the
that the business-enterprise transfer rule applies when two requisites concur: business enterprise who can still go after the transferee for the enforcement of the liabilities.
(a) the transferor corporation sells all or substantially all of its assets to another In the present case, the MOA stated that Sangil undertook to redeem MADCI
entity; and proprietary shares sold to third persons or settle in full all their claims for refund of payments.
While this free and harmless clause cannot affect respondent as a creditor, the petitioners
(b) the transferee corporation continues the business of the transferor may resort to this provision to recover damages in a third-party complaint. Whether the
corporation. Both requisites are present in this case. petitioners would act against Sangil under this provision is their own option.
Based on these factual findings, the Court is convinced that MADCI indeed had WHEREFORE, the petition is DENIED. The January 30, 2012 Decision and the
assets consisting of 120 hectares of landholdings in Magalang, Pampanga, to be developed April 29, 2013 Resolution of the Court of Appeals in CA-G.R. CV No. 96036 are
into a golf course, pursuant to its primary purpose. Because of its alleged violation of the hereby AFFIRMED in toto.
MOA, however, MADCI was made to transfer all its assets to the petitioners. No evidence
existed that MADCI subsequently acquired other lands for its development projects. Thus,
MADCI, as a real estate development corporation, was left without any property to develop
eventually rendering it incapable of continuing the business or accomplishing the purpose for
which it was incorporated.
Section 40 must apply.
Consequently, the transfer of the assets of MADCI to the petitioners should have
complied with the requirements under Section 40. Nonetheless, the present petition is not
concerned with the validity of the transfer; but the respondent's claim of refund of his
P650,000.00 payment for golf and country club shares. Both the CA and the RTC ruled that
MADCI and Sangil were liable.
On the question of whether the petitioners must also be held solidarily liable to Yu,
the Court answers in the affirmative.
While the Corporation Code allows the transfer of all or substantially all of the
assets of a corporation, the transfer should not prejudice the creditors of the assignor
corporation. Under the business-enterprise transfer, the petitioners have consequently
inherited the liabilities of MADCI because they acquired all the assets of the latter corporation.
The continuity of MADCI's land developments is now in the hands of the petitioners, with all its
assets and liabilities. There is absolutely no certainty that Yu can still claim its refund from
MADCI with the latter losing all its assets. To allow an assignor to transfer all its business,
properties and assets without the consent of its creditors will place the assignor's assets
beyond the reach of its creditors. Thus, the only way for Yu to recover his money would be to
assert his claim against the petitioners as transferees of the assets.
The MOA cannotprejudice respondent
The MOA, which contains a provision that Sangil undertook to redeem MADCI
proprietary shares sold to third persons or settle in full all their claims for refund of payments,
should not prejudice respondent Yu. The CA correctly ruled that such provision constituted
novation under Article 1293 of the Civil Code. When there is a substitution of debtors, the
creditor must consent to the same; otherwise, it shall not in any way affect the creditor. In this
case, it was established that Yu's consent was not secured in the execution of the MOA.
Thus, insofar as the respondent was concerned, the debtor remained to be MADCI. And given
that the assets and business of MADCI have been transferred to the petitioners, then the
latter shall be liable.
Free and Harmless Clause
The petitioners, however, are not left without recourse as they can invoke the free
and harmless clause under the MOA. In business-enterprise transfer, it is possible that the
transferor and the transferee may enter into a contractual stipulation stating that the
transferee shall not be liable for any or all debts arising from the business which were
contracted prior to the time of transfer. Such stipulations are valid, but only as to the transferor